On June 15, the European Commission ("Commission") announced that it had fined Anglo-Swedish pharmaceutical company, AstraZeneca, €60 million (approx. US$73 million) for misusing the patent system, and the procedures for marketing pharmaceuticals, to block or delay market entry for generic competitors to its ulcer drug Losec. The Commission decided that AstraZeneca's actions constituted serious abuses of its dominant market position in violation of the European Union's competition rules. The level of the fine took into account that some features of the abuses were considered novel by EU standards.
Losec pioneered a new generation of medicines, known as proton pump inhibitors, to treat stomach ulcers and other acid-related diseases. Losec initially received patent protection in Europe in 1979. However, the Commission held that for a seven year period, between 1993 and 2000, AstraZeneca had infringed the EU's competition laws by blocking or delaying market access for generic versions of Losec, and preventing parallel imports of Losec. During part of this period, Losec was the world's best-selling prescription medicine.
In particular, the Commission's statement alleged that AstraZeneca had provided misleading information to several national patent offices resulting in the company gaining extended patent protection for Losec through so-called supplementary protection certificates (SPCs). The patent offices were not obliged, as in normal patent assessments, to consider whether the products were innovative, and had essentially relied on the information supplied by the company. The Commission believes that company's alleged misleading conduct amounted to an abuse in Belgium, Denmark, Germany, the Netherlands, Norway and the United Kingdom.
The Commission also alleged that AstraZeneca had misused the rules and procedures applied by Europe's national medicines agencies which issue market authorizations for medicines, by selectively deregistering the market authorizations for Losec capsules in Denmark, Norway and Sweden, with the intent of blocking or delaying entry by generic firms and parallel traders.
The Commission stated that at the time, generic products could only be marketed and parallel importers only obtain import licenses if there was an existing reference market authorization for the original corresponding product (Losec). The purpose of a market authorization is the right to sell a medicine, and not to exclude competitors. Unlike patents, SPCs and data exclusivity, market authorizations are not intended to reward innovation, and the finding of an abuse should not, therefore, affect incentives to innovate. The relevant European rules on marketing authorizations have since changed so that such an abuse cannot be repeated.
In announcing its decision, European Competition Commissioner, Ms. Neelie Kroes, stated that, "I fully support the need for innovative products to enjoy strong intellectual property protection so that companies can recoup their R & D expenditure and be rewarded for their innovative efforts. However, it is not for a dominant company but for the legislator to decide which period of protection is adequate. Misleading regulators to gain longer protection acts as a disincentive to innovate, and is a serious infringement of EU competition rules. Health care systems throughout Europe rely on generic drugs to keep costs down. Patients benefit from lower prices. By preventing generic competition, AstraZeneca kept Losec prices artificially high. Moreover, competition from generic products after a patent has expired itself encourages innovation in pharmaceuticals."
On the same day as the Commission's decision, AstraZeneca announced, in a press release, that it does not accept the European Commission's decision that it infringed the European competition rules by its marketing of Losec in the 1990s, and will appeal the decision to fine the company to the European Courts. In particular, AstraZeneca argues that companies are entirely within their rights to withdraw products; to introduce new products; and to deal with product registrations as may be necessary. In this case, its new Losec tablet formulation offered benefits over the previous formulation. Moreover, the Commission failed to recognize that generic companies could have obtained their own registrations of Losec on the basis of the extensive published literature already available at that time.
AstraZeneca also argues that the Commission failed to properly define the relevant market, and incorrectly assessed the company as holding a dominant position on the relevant market. The company believes that the Commission's interpretation in this case could mean that any innovative product may be considered dominant retrospectively, and hence subject to the 'special responsibility' of a dominant company under EU competition rules. This, the company argues, could impose unnecessary additional burdens, which will adversely affect industry competitiveness.
Sir Tom McKillop, Chief Executive of AstraZeneca, said: "AstraZeneca has not made misrepresentations or behaved inappropriately. We believe that a proper evaluation on appeal of all the facts and legal position will confirm that the Commission's analysis is fundamentally flawed".
Authored by:
Neil Ray
415-774-3269
nray@sheppardmullin.com
In an unusual "predatory buying" case, the Ninth Circuit held that to succeed on a Sherman Act Section 2 claim, a plaintiff complaining of predatory buying need not meet the high standard of liability applicable to predatory pricing claims. Confederated Tribes of Siletz Indians of Oregon v. Weyerhaeuser Co., Nos. 03-35669, 03-35984, 2005 WL 1269668 (9th Cir. May 31, 2005). According to the Ninth Circuit, a plaintiff does not have to prove that the defendant operated at a loss and that a dangerous probability of the defendant's recoupment of those losses existed to establish antitrust liability for predatory buying.
Weyerhaeuser Company operates, and Ross-Simmons Hardwood Lumber Company formerly operated until it went out of business in 2001, saw mills in the Pacific Northwest. Ross-Simmons, a pioneer in the alder-lumber business since 1962, brought suit against Weyerhaeuser, one of the world's largest hardwood lumber manufacturers, alleging that Weyerhaeuser monopolized and attempted to monopolize the Pacific Northwest input market for alder saw logs through its purchases of saw logs. Id. at 2-3. At trial, Ross-Simmons proved with testimonial and other evidence that Weyerhaeuser attempted to eliminate competitors by driving up saw log prices and restricting access to saw logs through (1) predatory overbidding (i.e., paying a higher price on saw logs than necessary); (2) overbuying (i.e., buying more saw logs than it needed); (3) entering restrictive or exclusive agreements with saw log suppliers; and (4) making misrepresentations to state officials in order to obtain saw logs from state forests. Id. at 4-5. Ross-Simmons was awarded $78,769,218 in trebled damages at the jury trial.
On appeal, Weyerhaeuser challenged the denials of Weyerhaeuser's motions for judgment as a matter of law or for a new trial on the basis that the court erred in not applying the prerequisites for establishing liability set forth in Brooke Group or by allowing the jury's verdict to stand where there was insufficient evidence to prove the claims made against it. See Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993). The Ninth Court disagreed and held that Brooke Group does not control in the buy-side predatory bidding context.
Brooke Group's Prerequisites for Liability in Predatory Pricing Claims Do Not Apply to Predatory Bidding Claims
In lower court, Judge Panner recognized that the recoupment standard used in Brooke Group was appropriate in sell-side predatory pricing cases because it prevents false positives and avoids deterrence of aggressive price competition that promotes consumer welfare. Confederated Tribes of Siletz Indians v. Weyerhaeuser, 340 F. Supp. 2d 1118 (D. Or. 2003)
These standards would not be appropriate however, Judge Panner held, in this case where Weyerhaeuser's predatory conduct created a scarcity for essential inputs into Ross-Simmons' sawmill operation. He observed that the antitrust laws are violated when its outbidding conduct goes beyond satisfying the defendant's legitimate needs and is undertaken for the purpose of preventing competitors from obtaining the necessary inputs at reasonable prices. On the facts, by purchasing more logs than it needed for its business, Weyerhaeuser's conduct, Judge Panner found, could not be considered legitimate. Judge Panner further observed that if actual recoupment were applied to a predatory buying case, a monopolist would only be subjected to liability if its scheme succeeds and competitors would be required to wait until they have already been driven out of the market before they could seek judicial relief.
The Ninth Circuit affirmed Judge Panner's decision but focused on whether predatory buying could benefit consumer welfare or stimulate competition. It noted preliminarily that both the buy and sell sides of the market affect allocative efficiency and consumer welfare, and that antitrust law is just as concerned about the buy-side as the sell-side of the market. It observed that the high standard of liability set in Brooke Group takes into account that predatory pricing, which results in low prices, benefits consumers and can stimulate competition. The same effects do not result, it found, from predatory buying. In a predatory buying scheme, the court observed, a firm pays more for materials in the short term and thereby attempts to squeeze out those competitors who cannot remain profitable when the price of inputs increases. Id. at 14. No consumer benefit results during this predation period if the firm raises or maintains the same price level for its finished products. Even if consumers might temporarily benefit if the firm lowers prices during the predation period, the court noted, such a reduction in prices would place even greater pressure on competitors and thereby threaten competition in the relevant market. In the long run, the court surmised, the firm will charge consumers a higher price to recoup the higher costs it paid for its materials.
The court also took into account that, while it was possible that raising input prices could encourage new firms to enter the supply side of the market and expand output so that consumers benefit in the long run through price decreases and product improvements, these effects would not be seen in this case. As a natural resource of limited annual supply, the supply of alder saw logs could not increase significantly. The court thus proceeded to find that buy-side of the alder saw log market was relatively inelastic. Id. at 16. Having made these findings, the court held that the higher standard for establishing liability for predatory pricing articulated in Brooke Group did not apply to predatory buying. Thus, Ross-Simmons did not have to satisfy the Brooke Group prerequisites whereby a plaintiff must first prove that a defendant operated at a loss and that a dangerous probability of the defendant's recoupment of those losses existed.
Thus, in cases where a plaintiff seeks relief for a defendant's buy-side predatory buying. no extra measures are needed to ensure that lawful, aggressive competition is not unduly restrained by the application of the antitrust laws.
The Jury Verdict Condemning Weyerhaeuser to Liability Under Section 2 of the Sherman Act Was Based on Sufficient Evidence
Having found that the Brooke Group prerequisites to liability did not apply in this case, the Ninth Circuit considered Weyerhaeuser's claim that Ross-Simmons' evidence was insufficient to support the jury's verdict.
To establish attempted monopolization under Section 2 of the Sherman Act, a plaintiff must show that the defendant (1) engaged in predatory or anticompetitive conduct; (2) had a specific intent to onopolize; and (3) a dangerous probability of the defendant's achievement of monopoly power in the relevant market existed. Id. at 24-25, citing Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 456; Rebel Oil Co. v. Atlantic Richfield Co., 51 F.3d 1421, 1432-33 (9th Cir. 1995). Applying a Ninth Circuit decision, the court stated that a plaintiff must additionally prove causal antitrust injury. Rebel Oil, Id. at 1433.
While there were other indicators of anticompetitive conduct, the court held that the evidence of overbidding was itself sufficient to support the jury's finding that Weyerhaeuser engaged in anticompetitive conduct.
Unlike other courts, however, the Ninth Circuit did not appear have any qualms in applying specific intent to the attempted monopolization claim. See A.A. Poultry Farms, Inc. v Rose Acre Farms, Inc. 881 F.2d 1396, 1402 (7th Cir. 1989) (affirming grant of defendant's motion for judgment notwithstanding the verdict on Robinson-Patman claims). For example, in Rose Acre Farms, Judge Posner held that "intent is not a basis of liability (or a ground for inferring the existence of such a basis) with respect to an alleged predator," since, among other reasons, "a desire to extinguish one's rivals is entirely consistent with, often is the motive behind, competition." Id. Without addressing this issue, the Ninth Circuit found that evidence of Weyerhaeuser's anticompetitive conduct, testimony of its employees, and business projections regarding saw log prices showed that Weyerhaeuser specifically intended to monopolize.
As to the third element, dangerous probability of achieving monopoly power, the court observed that monopoly power is the power to control prices or exclude competition. In this instance, the court found that the direct evidence - testimony of Weyerhaeuser's employees showing that Weyerhaeuser had the power to influence prices and had used its power to raise the price of saw logs - was by itself sufficient to support the jury's finding of a dangerous probability of achieving monopoly power. Weyerhaeuser at 32-33. In addition, the circumstantial evidence of Weyerhaeuser's 65 percent market share and barriers to entry and expansion (31 competitors had gone out of business during the relevant time period and capital costs and limited availability of supply barred would-be entrants or expansion in the industry) supported the jury's finding. Id. at 34-38.
Since substantial evidence supported the jury's finding of attempted monopolization, the court did not address the jury's finding of actual monopolization.
Review of Damages Award and Attorneys' Fees and Costs
A damages award that is based on a reasonable estimate of damages, not on speculation, the court stated, will be upheld. Id. at 39. Ross-Simmons' damages models properly relied upon the fundamental assumption that Weyerhaeuser maintained artificially high costs in the saw log market during the damages period" Id. at 40. Testimony about lost profits and data regarding Weyerhaeuser's average profit margin prior to the predatory period supported Ross-Simmons' estimate. The court thus upheld Ross-Simmons' damages award.
The court also upheld the award of attorneys' fees. Unless a lower court abuses its discretion or committed a clear error of law, the court held, attorneys' fees awards will not overturned. Id. at 41. As the prevailing party, Ross-Simmons was entitled to attorneys' fees and costs.
Authored by:
Heather M. Cooper
213-617-5457
hcooper@sheppardmullin.com
On June 13, the European Commission ("Commission") announced the launch of detailed antitrust investigations of the European Union's ("EU") financial services and energy markets. In particular, the Commission will focus on the retail banking and business insurance sectors, and the gas and electricity markets. The Commission is concerned with growing evidence suggesting that EU consumers are not benefiting from fully competitive and integrated financial markets, and the lack of genuinely competitive offers and significant price increases in the energy sector.
Under Article 17 of Regulation 1/2003, the Commission may conduct an investigation of a particular sector of the economy when it suspects that a particular market is not competing effectively. The Commission benefits from a range of investigative powers, including the power to request information, take statements, conduct inspections, request national antitrust agencies to conduct inspections for it, and to impose sanctions for non-compliance.
Retail financial markets have largely showed a lack of integration, despite the introduction of the Euro. Prices for comparable products in retail banking appear to vary considerably across the European Union. For example, the Commission notes that there are substantial differences in domestic interchange fees and merchant service charges in the Member States' payment card scheme. There is also a variation in profitability of banks across Europe, indicative of perhaps a lack of competition and high entry barriers in some domestic markets. Finally, as recently reported in the European financial press, cross-border mergers in the banking sectors have been limited in number possibly due to protectionist tendencies by national banking agencies.
The Commission will also investigate the possible competitive distortions brought about by the lack of integration in the business insurance sector. The Commission will examine the way the industry is organized, in particular, the setting of standard policy conditions, the extent of cooperation within insurers' association, and coinsurance arrangements between insurers. The Commission also has concerns about barriers to entry, including the lack of access to risk data and distribution channels, and its effect on cross-border entry.
We expect that the Commission will contact Member State authorities, users of financial services, consumer organizations, financial services intermediaries, as well as banking institutions, insurance companies, insurance services and products, and other providers of retail banking services and products.
The Commission is also determined to see that Member States follow through on their commitment to create competitive energy markets given their importance to European industry. Both gas and electricity prices have risen during 2005, and are expected to rise again in the future, especially for gas. The Commission believes that cross-border flows seem insufficient to constrain price differences between most Member States, and integration between national markets has been slow in many regions. In addition, new market entry has been limited, and market concentration remains very high.
The focus of the gas and electricity investigations will slightly differ since the sectors are at different stages of development, and have a different supply-side structure. The gas inquiry will address concerns on access issues, such as access to large-volume gas supply, flexibility resources, networks and customer markets. The electricity inquiry will focus on price formation in the electricity wholesale markets, which also involves looking at electricity generation and supply, barriers to entry (including long-term agreements), inter-connectors and how companies use them, as well as relations between network operators and their affiliates. The general focus of both gas and electricity investigations is on supply markets (rather than transport), and issues that have pan-European implications.
The Commission will shortly be issuing a questionnaire to a large number of participants in the energy industry, including gas producers, electricity generators, gas importers, electricity and gas wholesalers, transmission system operators and customers, gas storage system operators, gas and electricity retailers and industrial customers.
The results of the Commission's financial services and energy industry investigations are expected in 2006. They will seek to identify possible distortions of competition, and other market conditions that permit anticompetitive behavior. Accordingly, individual companies, whose anticompetitive practices are revealed by the investigations, may face enforcement action under the EU's competition laws, either by the Commission or national antitrust agencies. EU Competition Commissioner, Neelie Kroes, acknowledged that these inquiries "are not quick fixes, but show my commitment to using the competition rules to effect long-term structural improvements to the EU economy."
Authored by:
Neil Ray
415-774-3269
nray@sheppardmullin.com
Plaintiffs, promoters of "A" Hunter-Jumper Competitions on the Florida Winter Horse Show circuit, filed an action against USA Equestrian, Inc., ("USAE"), United States Equestrian Federation Inc. ("USEF"), an affiliate, and incumbent horse show promoters, granted exclusive rights to produce "A" horse shows within a 250 mile radius ("mileage rule"), of the incumbant venue. USEF is the successor of the American Horse Show Association.
Plaintiffs brought a three count complaint alleging claims of unreasonable restraint of trade under Section 1 of the Sherman Act, monopolization and attempt of monopolization under Section 2 of the Sherman Act, and claims of substantially lessening competition under Section 7 of the Clayton Act.
Amended complaints added claims for violation of Florida's Antitrust Act, and violation of its Deceptive and Unfair Trade Practices Act. Subsequent amended complaints added additional defendants, including the North Florida Hunter & Jumper Association, Inc.
In the amended complaint before the court upon its granting of motion for summary judgment on implied antitrust immunity grounds, plaintiffs had alleged that the rules of USEF, specifically its mileage rule violated Section 1 of the Sherman Act, and raised claims of monopolization, attempted monopolization and conspiracy to monopolize in violation of Section 2 of the Sherman Act. Defendant USEF is the current "National Governing Body" ("NGB") for equestrian sport in the United States. It has been so designated under the Ted Stevens Olympics and Amateur Sports Act ("Amateur Sports Act"), 36 USC Section 220501, et seq. USEF has over 80,000 members in 27 horse breeds and disciplines. It is not a promoter, operator or manager of horse shows. The mileage rule was first implemented in 1975. Pursuant to the mileage rule, an incumbent promoter of an "A" show is insulated from competition by competing promoters, in that USEF will not sanction a competing show within a 250 mile radius during the dates of the incumbent show.1 Plaintiffs allege that the relevant product market is "Hunter & Jumper Equestrian Competitions recognized by USEF as Hunter & Jumper Competitions "A" rated and above." The relative geographic market is defined as the "state of Florida, between December 1 and March 31 of each year." ("Winter Months").
Of significance, is that until January, 2004, the USEF left it to the incumbent promoter to waive or require adherence to the 250 mileage rule. In January 2005, USEF promulgated a rule change that granted USEF ultimate control over granting or denying waivers under the mileage rule.2
On a motion for summary judgment by defendants, the United States District Court, Middle District of Florida held that the mileage rule was exempt from antitrust liability pursuant to the doctrine of implied antitrust immunity, under the Amateur Sports Act. 36 USC Section 220501, et seq. (JES Properties, Inc., et al. v. USA Equestrian, Inc., Case No. 8:02-cv-1585-T-24 MAP, United States District Court, Middle District of Florida, Tampa Division, May 9, 2005.)
The court held that the Amateur Sports Act was enacted "to correct the disorganization and serious factional disputes that seem to plague amateur sports in the United States".3 Under the Amateur Sports Act, the United States Olympic Commission is authorized to recognize one "National Governing Body", or "NGB" for each sport included in the program of the Olympic Games. As the recognized NGB for equestrian sport in the United States, USEF has a mandate to regulate the sport, pursuant to 36 USC Section 220523(2). As the Amateur Sports Act confers upon USEF an obligation to minimize scheduling conflicts, USEF is entitled to implied antitrust immunity with respect to its mileage rule. The court noted that "the monolithic control exerted by an NGB over its amateur sport is a direct result of a congressional intent expressed in the Amateur Sports Act."4 In the case before the court, USEF, as the NGB for equestrian sport, specifically approved the mileage rule, and was aware that it may preclude a promoter from obtaining a recognized competition approval on a desired date.
In the alternative, the court found that there was no agreement under Section 1 of the Sherman Act and that even if there were, it was not unreasonable, and assuming that it had anti-competitive effects in a definable relevant market, it was justified by lawful pro-competitive purposes for the improvement of horse show competition, by pitting the best horses and riders against each other on a given show date, rather than reducing the level of competition by disbursal of better horses and riders in additional venues.
In addition, the court found that the plaintiffs had waived any right to bring an action by participating in USEF activities, and by participating in the promulgation of the mileage rule. Finally, the court found that the plaintiffs had failed to show "antitrust injury" or that there was injury to the competitive process, as opposed to mere injury to the plaintiffs themselves as individual competitors.
But in a nutshell, the initial and controlling holding of the court, in dismissing the amended complaint is that USEF enjoys implied antitrust immunity in promulgating rules that reduce scheduling conflicts, as the NGB for equestrian sports.
Authored by:
Don T. Hibner, Jr.
213-617-4115
dhibner@sheppardmullin.com
On May 25, 2005, United States District Judge, Central District of California, denied the defendant supermarkets' motion for summary judgment, and held that a revenue sharing agreement between three large supermarket chains, alleged to be ancillary to the promotion of employer solidarity within the structure of a multiemployer bargaining unit, was not subject to the nonstatutory labor exemption, and is not immune from scrutiny as a potential antitrust violation. State of California v. Safeway, Inc., United States District Court, Central District of California, CV04-0687-GHK (SSx), 52505.
Vons, Albertsons, and Ralphs operate supermarket chains in southern California. They are members of a multiemployer collective bargaining unit, formed to negotiate a new labor agreement with the United Food and Commercial Workers unions. In order to combat "whipsaw" economic action by the unions, the markets entered into a Mutual Strike Assistance Agreement ("MSAA"), which provided that the markets would lock out union employees at all three chains if one of them were struck to the exclusion of others. In addition, the markets agreed to share revenue according to a fixed formula, in order to compensate the markets for loss of revenue, where targeted by union "whipsaw" selective economic action.1 The revenue sharing was to continue until two weeks after the end of the strike or lock out. The MSAA revenue sharing formula also included Food 4 Less, a subsidiary of one of the bargaining unit members, but not a prior signatory to the collective bargaining agreement.
The unions struck the markets on October 11, 2003, and engaged in persuader activities to induce customers and suppliers not to deal with all three chains. However, on October 31, the unions halted economic action against Ralphs, while continuing to selectively picket and interfere with the customer and supplier relationships of the remaining two chains. The strike ended in February, 2004. Under the revenue sharing provisions of the MSAA, Ralphs and Food 4 Less paid Vons and Albertsons, pursuant to the negotiated formula, approximately $142 million for the period of the strike, and an additional $4 million for the two week "tail" period following the unions economic action.
While the California Attorney General did not challenge the MSAA as such, he filed an action in the United States District Court challenging its revenue sharing provision, as well as inclusion of Food 4 Less in the revenue formula. The complaint alleged that these provisions violated federal antitrust law. The defendants argued that the MSAA was in furtherance of the integrity of the multiemployer bargaining unit, and that the revenue sharing provision and the inclusion of Food 4 Less in the formula was reasonably ancillary to the multiemployer bargaining unit, and as such, entitled to the protection of the nonstatutory labor exemption, as articulated in Brown v. Pro Football, Inc. 518 US 231 (1996).
In a Memorandum and Order that did not discuss the underlying antitrust liability issues, Judge George H. King denied defendants' motion for summary judgment. The court stated that the nonstatutory labor exemption is intended to reconcile antitrust and labor law, where there is a conflict between their respective public policy goals. In essence, the nonstatutory labor exemption is a form of implied antitrust immunity. It requires that the constitutional breath of antitrust law reconcile itself to the detailed and congressionally mandated regime for even handedly resolving conflicts between labor and management, particularly where there is a propensity for work stoppages and other interference with commercial enterprise. However, the court determined that there is no such conflict in the present case. A revenue sharing agreement that reallocates receipts among competitors, both during and after a strike, implicates a core concern of antitrust law. The court found no corresponding conflict with federal labor law, administered by the National Labor Relations Board. Thus, defendants have failed to show that there would be any impairment to national labor policy, should antitrust law be applied to the MSAA.
The court found that Brown v. Pro Football, Inc., 518 U.S. 231 (1996) was inapplicable. In Brown, the conduct took place during and immediately after the collective bargaining negotiation. It grew out of, and was directly related to, the lawful operation of the bargaining process. The court also noted that it concerned only the parties to the collective bargaining relationship, and not as here, a wholly owned subsidiary of one of the defendants, which was subject to a separate collective bargaining agreement with its unions. The court held that the criteria set forth in Brown may be an analytical tool, but not applied rigidly.
The court found that the nonstatutory labor exemption is not applicable because the MSAA "is not sufficiently connected to the subject matter of the collective bargaining process, or to matters required to be negotiated collectively." In the alternative, it found that the nonstatutory labor exemption was not applicable because of the involvement of Food 4 Less and because of the two week "tail" period. This was so notwithstanding the defendants' argument that the replenishment of an income stream diminished by whipsaw union tactics was sufficiently related to the collective bargaining process, and therefore necessary or implied by the efficient functioning of that process. Again, the court pointed to the inclusion of a nonmultiemployer bargaining unit member, namely Food 4 Less, and the fact that the revenue sharing continued two weeks after the end of the strike. In a nutshell, the court holds that national labor policy cannot justify anticompetitive conduct which occurs after the cessation of a work stoppage.
The court also noted that the MSAA does not concern a mandatory subject of bargaining, which generally include wages, hours, and other terms and conditions of employment. Thus, the court stated, revenue sharing is not connected to a core concern of national labor policy.
Finally, the court declined the defendants invitation to adopt a "parity" rule, that would extend the nonstatutory labor exemption to any multiemployer agreement that was designed to counter a union economic tactic. The court declined to apply the doctrine of ancillary restraints or to find that the MSAA was thus sufficiently close in time and circumstances to be in aid of the collective bargaining process itself, and the multiemployer bargaining unit. The court was not persuaded by opinion letters from the National Labor Relations Board, finding that mutual strike assistance agreements are lawful.
The court should now address the "core" antitrust issues, including a characterization of the restraint, and the purposes, and net competitive effects within a relevant product and geographic market.
Authored by:
Don T. Hibner, Jr.
213-617-4115
dhibner@sheppardmullin.com
Conspiracy is a basic theory of antitrust liability. It is a theory favored by antitrust plaintiffs and the government, pled often by each, and can form the legal basis of private and public enforcement. Plaintiffs win or lose on its proof. Conspiracy rarely, if ever, enhances efficiency; and competition and consumer welfare often suffer in its presence. In June, the Ninth Circuit limited its use by broadening the circumstances under which two groups can be considered one entity, and therefore, incapable of forming a horizontal agreement. The court held that a national trade association was incapable of conspiring with its affiliated local groups to exclude competition because all parties shared a common unified interest. Only disparate, competing, independent entities with unique economic incentives, motives, and actions are able to unlawfully conspire. Jack Russell Network of Northern California v. American Kennel Club, Inc., 9th Cir., No. 02-17264.
In 1998, the American Kennel Club recognized Jack Russell Terriers as an official breed. Shortly thereafter the Jack Russell Terrier Club of America ("JRTCA") adopted a "Conflicting Organizations Rule" ("COR"), disallowing members from registering their dogs with any organization other than the JRTCA. JRTCA terminated the membership of those who violated the rule. When two of its members of a local affiliate, the Jack Russell Terrier Network of Northern California ("JRTNNC"), threatened legal action, JRTNNC declined to follow the COR and the JRTCA terminated its charter. Membership in the JRTCA allows members to compete in JRTCA sanctioned events and win awards and thereby promote their kennels in future commerce. JRTNNC and the two members brought suit against the JRTCA.
The plaintiffs alleged that exclusion based on a violation of the COR manipulated the market unreasonably because the exclusion of their dogs was not based on merit. They contended that the local affiliates and the JRTCA were colluding to exclude members that registered with alternate organizations in violation of the Sherman Act. The defendants, on the other hand, believed that an AKC listing of the Jack Russell Terrier was not in the best interest of the breed because the AKC emphasizes aesthetic characteristics while JRTCA values "working dog" traits. JRTCA claimed the COR was part of a campaign to discourage members and the public from participating with AKC and protect the Jack Russell breed.
The Supreme Court has held that a corporation and its wholly owned subsidiaries are incapable of conspiring under the Sherman Act. Copperweld Corp. v. Independence Tube Corp., 467 U.S. 742 (1984). The Ninth Circuit has previously applied Copperweld's reasoning to a broad variety of economic relationships and elected to do so in the instant case, saying that in order to conspire, "[t]he crucial question is whether the entities alleged to have conspired maintain an 'economic unity', and whether the entities were either actual or potential competitors." JRTNNC. at 5293. The court found both JRTCA and its local affiliates had the same economic interest, namely protecting the value of the Jack Russell breed. The court also found that the local affiliates' sole purpose is to promote the JRTCA breed standard and they in no way compete with the national club.
This decision broadened the definition of what constitutes a single entity under Copperweld. As a result of this decision, the existence of an overarching common goal may exonerate groups which work together to exclude another entity from involvement. The court does not address what limits, if any, there are on the type of common objectives which are sufficient to render two groups incapable of conspiracy. In the instant case, the two groups are very closely intertwined, in fact, the local chapters exist solely "to be affiliated with the national club and to promote the JRTCA breed standard and philosophy." The court easily concludes that the groups are not competitors, but offers little guidance on how to determine their status when the evidence is not so clear. How courts further interpret those two issues, i.e., what may constitute a common goal and what will determine if two groups are competitors, will determine just how broad the Ninth Circuit's definition of a single entity has become.
Authored by:
Robert W. Doyle, Jr.
202-218-0030
rdoyle@sheppardmullin.com
and
Case L. Collard
202-218-6876
ccollard@sheppardmullin.com
The Federal Trade Commission has proposed consent orders that will approve Chevron's acquisition of the voting securities of Unocal, which will then merge into a Chevron subsidiary, and continue as a single entity. In Re Chevron Corp., FTC, File No. 051 0125, 6/10/05. The consent orders require Chevron to release all of its patent rights to CARB reformulated gasoline, required in the California market.
In March, 2003, the FTC staff filed an administrative complaint against Unocal alleging anti-competitive conduct relating to its CARB patents. Unocal allegedly misrepresented that its research into CARB gasoline was non-proprietary, and in the public domain. However, it was contemporaneously pursuing patent protection, which would enable it to charge substantial royalties should its proprietary intellectual property be incorporated into the standards adopted for CARB gasoline in the state of California's reformulated gasoline regulations.
The administrative complaint also alleged that Unocal engaged in deceptive acts and practices by participating in two private standard settings groups, while pursuing patent protection in CARB reformulated gasoline. Staff asserted that Unocal's conduct had led to the acquisition of monopoly power for the technology to produce and market CARB gasoline in California. According to staff, absent the deceptive and exclusionary conduct, CARB would not have adopted RFG standards that overlapped with Unocal's patent claims.
The complaint was dismissed in November, 2003. However, it was reinstated by the Commission in July, 2004, and remanded for an adjudicative hearing. It was subsequently withdrawn for adjudication to consider the proposed consent orders.
The complaint alleged that the acquisition of Unocal by Chevron would violate Section 7 of the Clayton Act and Section 5 of the FTC Act. The complaint also alleged that the acquisition was projected to substantially lessen competition in the market for CARB reformulated gasoline, because Chevron would be able to use its position as the acquirer of the CARB patents to coordinate downstream competition in CARB gasoline. The enforcement of royalty rights by Chevron in the Unocal CARB patents would enable the merged entity to coordinate interaction among downstream refiners and marketers.
The proposed consent orders would settle the complaint against Unocal by requiring that Chevron and Unocal refrain from enforcing Unocal's CARB patents. Chevron and Unocal would also be required to cease all attempts to collect damages, royalties or other payments relating to the use of any of the CARB patents. In addition, the consent orders require that Chevron and Unocal dismiss all pending litigation relating to alleged infringement of the CARB patents, including two actions currently pending before the district courts in California.
The Commission vote to accept the proposed consent orders was 4-0-1, with Chairman Majoras recused.
Authored by:
Don T. Hibner, Jr.
213-617-4115
dhibner@sheppardmullin.com
In a unanimous decision, the Supreme Court opened the door for generic drug manufacturers to conduct pre-clinical drug testing on patented drugs. Integra brought the case, Merck KGaA v. Integra Lifesciences I, Ltd., against Merck for using patented tripeptide sequences that show promise in combating certain types of cancer. Integra alleged that Merck's research of the patented compounds constituted patent infringement and sued Merck for damages. Integra prevailed both at trial and on appeal to the Federal Circuit by convincing the court that Merck had infringed Integra's patent when they conducted pre-clinical research. But the Supreme Court's opinion, which was widely supported by both the Bush Administration and the AARP, stated that Merck's use of patented material was protected by a statutory safe harbor that allows generic drug manufacturers to conduct research using patented information.
Integra owns five patents to a tripeptide sequence that promotes cell adhesion and may reverse the effects of certain types of cancer. Beginning in 1988, Merck funded research of Integra's tripeptide compound at the Scripps Research Center. Early trials showed promising results as the institute succeeded in reversing tumor growth in chicken embryos. Based upon their success, Scripps entered into an agreement with Merck to conduct pre-clinical testing to identify suitable drug compounds that could eventually lead to clinical studies that would determine the efficacy and safety of the drug. After learning of Merck's research using their patents, Integra filed a patent infringement suit against Merck in 1996. Integra alleged that Merck had willfully infringed Integra's patents and sought damages and declaratory judgment. After a jury awarded damages to Integra, Merck appealed to the Federal Circuit. The Federal Circuit also ruled in favor of Integra, finding that the safe harbor is available only to clinical testing. The Supreme Court reversed.
In general, the use of patented inventions is barred by federal law. However, the Federal Food, Drug, and Cosmetic Act ("FDCA"), 21 U.S. C. Section 301 et seq., provides a safe harbor for generic manufacturers to conduct research using patented information. 35 U.S.C. Section 271(e)(1) states:
"It shall not be an act of infringement to make, use, offer to sell, or sell within the United States or import into the United States a patented invention . . . solely for uses reasonably related to the development and submission of information under a Federal law which regulates the manufacture, use, or sale of drugs . . ."
Congress passed Section 271(e)(1) in 1984 as part of the Drug Price Competition and Patent Term Restoration Act. The Act was passed for two reasons. First, Congress sought to restore patent terms to pharmaceutical companies that must often endure a lengthy procedure for FDA approval of new drugs. Second, they sought to increase competition in the market by creating a safe harbor for generic drug manufacturers. Section 271(e)(1) protects generic manufacturers by allowing them to conduct drug testing while the original patent is still enforceable. This allows generic drugs to enter the market as soon as the original patent expires.
Much of the argument in the Merck case revolved around the exact meaning of Section 271(e)(1)'s directive that research may be done "solely for uses reasonably related to the development and submission of information." Construed narrowly, the statute only applies to experimentation conducted late in the process where drugs are tested to determine efficacy and safety. Such information would later be submitted to the FDA as part of an Abbreviated New Drug Application ("ANDA") for approval as a generic drug. But construed broadly the statute applies to all levels of testing that are "reasonably related" to submitting information to the FDA. A broad interpretation extends not only to the development of generic drugs, but also to the possible development of new drugs while the patent is in force.
A divided panel for the Federal Circuit initially interpreted the statute narrowly, construing it to apply only to clinical trials that would ultimately be submitted to the Food and Drug Administration ("FDA") for approval. The Federal Circuit believed that the safe harbor provision applies only to clinical trials that will eventually be submitted to the FDA for approval of a new drug. In its analysis, the Federal Circuit focused on the use of the word "solely", concluding that it restricts the safe harbor to a limited class of experiments that are only designed to test the efficacy and safety of a new generic drug. Furthermore, the Federal Circuit believed that the legislative record supported their interpretation of the statute. As they noted, Congress intended the safe harbor to have only a de minimus impact on the patentee's right to exclude other competitors. Thus, they believed that the exception applied only to clinical tests - those that determine the efficacy and safety of a generic drug.
But Merck conducted pre-clinical trials as opposed to clinical trials. While clinical trials are designed to test the safety and efficacy of a drug, Merck's pre-clinical trials were focused on discovering new uses for the tripeptide sequences and the most effective compounds for administering them. Thus, the Federal Circuit determined that Merck was infringing on Integra's patent and could not seek shelter from Section 271(e)(1)'s safe harbor.
In a unanimous opinion, the Supreme Court reversed the Federal Circuit's decision and agreed with Merck. They found that the safe harbor provision is much broader than the Federal Circuit believed. According to the Supreme Court, Section 271(e)(1)'s safe harbor extends beyond clinical testing and the creation of generic drugs. "Rather, it exempted from infringement all uses of patented compounds "reasonably related" to the process of "developing information for submission under any federal law regulating the manufacture, use, or distribution of drugs."
The Supreme Court recognized that drug research is a process of trial and error. Accordingly, results cannot be guaranteed at any stage of testing. Section 271(e)(1) was designed to account for this uncertainty. Therefore, any tests designed to reach the goal of submitting any information to the FDA for approval must only be "reasonably related" to that purpose. By construing the Section 271(e)(1)'s safe harbor broadly, the Supreme Court left "adequate space for experimentation and failure on the road to regulatory approval." They went on to say that "at least where a drugmaker has a reasonable basis for believing that a patented compound may work, . . . that use is 'reasonably related' to the 'development and submission of information under . . . Federal law.'" Accordingly, all research reasonably related to any submission of information to the FDA is exempted.
The FDA requires information that summarizes the pharmacological, toxicological, pharmacokinetic, and biological qualities of the drug in animals. Thus, the exemption extends well beyond the clinical trials necessary to create a generic drug. It extends to all stages of research provided the drugmaker has a reasonable basis for believing that the information will be submitted to the Federal Government for regulation by the FDA. This information can be discovered in pre-clinical trials, before clinical trials that determine the efficacy and safety of a drug are fully determined.
The Supreme Court's decision enables generic drug manufactures to begin their research of patented compounds earlier in the process than was previously understood. As the Court noted:
"Congress did not limit Section 271(e)(1)'s safe harbor to the development of information for inclusion in a submission to the FDA; nor did it create an exemption applicable only to the research relevant to filing an ANDA for approval of a generic drug."
So long as the research is "reasonably related" to the goal of submitting information to the FDA, then the safe harbor applies and a generic manufacturer cannot be sued for patent infringement.
Authored by:
Robert M. Ziff
202-772-5327
rziff@sheppardmullin.com
The Antitrust Division continues to send a strong message to businesses, executives, and individuals engaged in potential bid rigging and price fixing schemes. Recent investigations of the ready mixed concrete industry, glyphosate industry, and roofing products industry have resulted in guilty pleas and indictments. The recent activity indicates that the Antitrust Division continues to make criminal enforcement a priority.
Ready Mixed Concrete Investigation
On June 29, the DOJ announced that Irving Materials Inc., a ready mixed concrete producer in Greenfield, Indiana, pleaded guilty and was sentenced to pay a $29.2 million criminal fine for fixing the price of ready mixed concrete in the Indianapolis, Indiana metropolitan area. The fine is the largest ever in a domestic antitrust investigation. Additionally, four executives have agreed to plead guilty, pay criminal fines, and serve time in prison for their roles in the same conspiracy. All of the executives have agreed to assist the government in its ongoing investigation.
Irving Materials Inc., Daniel C. Butler, John Huggins, Fred R. "Pete" Irving, and Price Irving were charged with conspiring with their competitors to fix the price of ready mixed concrete sold in the Indianapolis metropolitan area from approximately July 2000 until May 2004. One of the executives, Pete Irving, has agreed to pay a $200,000 fine and the other three executives have agreed to pay $100,000 fines each for their role in the conspiracy. The four executives charged have also agreed to serve five months in prison, followed by five months of home detention.
The charges resulted from the Antitrust Division's ongoing investigation of the ready mixed concrete industry being conducted by its Chicago Field Office in conjunction with the Indianapolis office of the FBI.
Anthraquinone/Glyphosate Investigation
On June 23, the DOJ announced that Patrick J. Crowe III, a former salesman for Chemical Products Technologies, LLC ("CPT"), a Georgia-based chemical manufacturer, agreed to plead guilty to participating in two conspiracies to defraud his former employer. While employed as a salesman by CPT, Mr. Crowe allegedly received kickback payments from the owner and operator of an independent Tennessee trucking company in exchange for ensuring that the trucking company received business from CPT. In addition to the kickback payments, Mr. Crowe allegedly diverted profits from CPT and used the money for his own personal benefit.
From approximately July 2000 to October 2003, Mr. Crowe and his co-conspirators allegedly participated in a kickback scheme involving the hauling of anthraquinone, a pulping additive used to increase production in the pulp and paper industry. Kickback payments were allegedly made to Mr. Crowe's shell corporation at an agreed-upon rate for each load of anthraquinone hauled for CPT. In order to facilitate this scheme, Mr. Crowe and his co-conspirators mailed and/or caused to be mailed inflated invoices, kickback checks, and other documents pertaining to the fraudulent scheme.
According to the second conspiracy charge, from April 2002 to December 2002, Mr. Crowe and his co-conspirators misled CPT to believe that CDFD Inc., a Wyoming corporation owned by Mr. Crowe, was an escrow agent with no ownership connection to Mr. Crowe or anyone else employed by CPT. CPT was also led to believe by Mr. Crowe and his co-conspirators that funds generated by CPT's glyphosate business and placed in a CDFD Inc. business account would be used to pay CPT's suppliers. Glyphosate is a herbicide used to control grasses and weeds. Mr. Crowe and his co-conspirators then allegedly diverted funds from the CDFD Inc. business account for their own personal use.
Mr. Crowe is charged with conspiracy, a violation of 18 U.S.C. Section 371, which carries a maximum term of imprisonment of five years and a maximum fine of $250,000 for an individual for each count. The charges are the first to arise out of an ongoing investigation in the Northern District of Georgia being conducted by the Antitrust Division's Atlanta Field Office. The Antitrust Division is investigating possible price fixing, bid rigging or kickback schemes in the anthraquinone or glyphosate industries.
Roofing Products Investigation
On June 7, Paul Sleasman, pleaded guilty to rigging bids and conspiring to commit mail fraud. His guilty plea is the fourth obtained in the government's ongoing investigation of the roofing industry in the Albany area.
According to the charge, Mr. Sleasman participated in a conspiracy to rig bids for, and allocate roofing contracts awarded by, the General Electric Company's Waterford, New York facility, the Albany Medical Center, and other purchasers of roofing products and services in the State of New York, from sometime in 1995 until June 2002.
Mr. Sleasman and co-conspirators are charged with carrying out the conspiracy by: discussing the submission of prospective bids on certain roofing contracts; agreeing among themselves which company would be the low bidder; and arranging for co-conspirators to submit bids that were intentionally higher.
With the guilty plea of Mr. Sleasman, the Division has now obtained four guilty pleas relating to its investigation of the roofing industry in the Albany area. In April of 2005, Sean Moran pleaded guilty to rigging bids. In June 2004, Waterblock Roofing and Sheetmetal Inc. and its president, Walter J. Vivenzio, pleaded guilty to bid rigging and fraud charges. Mr. Sleasman, Moran, and Mr. Vivenzio have agreed to cooperate with the Antitrust Division's ongoing investigation of the alleged bid rigging and allocation of contract activity for roofing products and services in the Albany, New York area.
Authored by:
Andre P. Barlow
202-218-0026
abarlow@sheppardmullin.com
- On June 24, United Defense Industries, Inc. ("UDI") and BAE Systems, Inc., the North American subsidiary of BAE Systems plc announced that the DOJ closed its investigation of BAE's acquisition of UDI by allowing the Hart-Scott-Rodino waiting period to expire. With expiration of the waiting period, the deal formally closed. London-based BAE Systems says it will merge its existing land systems divisions in the U.K, Sweden (Bofors Defence), and South Africa with UDI. The newly formed BAE Systems Land and Armaments will be headquartered in Arlington, VA and will be led by CEO Thomas W. Rabaut.
- On June 24, the DOJ filed a lawsuit against the Federation of Physicians and Dentists ("Federation"), a Florida-based organization, which provides negotiating and consulting services to physician practice groups and simultaneously filed a consent agreement that resolves the antitrust concerns. The lawsuit also names Lynda Odenkirk, a Federation employee, and three Cincinnati obstetrician-gynecologist ("OB-GYN") physicians: Dr. Warren Metherd, Dr. Michael Karram, and Dr. James Wendel. The lawsuit results from the DOJ's investigation into allegations that the Federation had unlawfully coordinated its Cincinnati-area OB-GYN member physicians' negotiations with insurers. The Complaint alleges that a large percentage of Cincinnati-area OB-GYNs joined the Federation to coordinate renegotiation of higher fees in their contracts with Cincinnati-area healthcare insurers. Allegedly, the Federation coordinated and helped implement its members' demands to insurers for higher fees and more favorable related terms, accompanied by threats of contract terminations. The Complaint alleges that these actions caused Cincinnati-area health care insurers to raise fees paid to Federation OB-GYN members above the levels that the OB-GYNs likely would have obtained if they had negotiated competitively with those insurers.
- On June 24, the DOJ announced that it reached a settlement that will require Professional Consultants Insurance Company Inc. ("PCIC"), and its actuarial consulting firm members, to stop sharing among themselves and with other actuarial consulting firms certain information on the use of contractual limitations of liability ("LOL") in their dealings with clients. The Antitrust Division was concerned that PCIC, its members, and other actuarial consulting firms exchanged competitively sensitive information about their use of LOL in providing actuarial consulting services to employee benefit plans, in violation of Section 1 of the Sherman Act. According to the Antitrust Division's complaint, actuarial consulting firms historically served their clients under terms that did not limit the consultants' liability for damages due to actuarial mistakes, which can result in substantial monetary losses or other damages to pension funds or other employee benefit clients. The complaint alleges that as early as 1999, PCIC's members began to consider requiring clients to accept LOL, which would contractually limit the amount of damages recoverable by the clients to a specified dollar amount, multiple of fees paid by a client, or certain types of damages sustained by a client. The complaint further alleges that PCIC unlawfully enabled and facilitated communications among its members and other actuarial consulting firms with respect to competitively sensitive information about firms' implementation and planned usage of LOL; that these communications facilitated decisions of PCIC members and other competitors to implement LOL; and that as a result, employee benefit clients were denied significant competition among the actuarial consultants in their setting of contract terms. Besides preventing the parties from sharing competitively sensitive information, the decree requires PCIC and its members to establish antitrust compliance programs.
- On June 24, America West Holdings Corp. and US Airways Group Inc. confirmed that the airlines have been informed by the Antitrust Division that it has completed its review of the proposed merger of the two airlines and that the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act expired on June 23 without a formal request from the DOJ for additional information (commonly referred to as a "second request").
- On June 22, Attorney General Alberto R. Gonzales announced that Thomas O. Barnett will serve as Acting Assistant Attorney General for the Antitrust Division following the departure of Assistant Attorney General R. Hewitt Pate. Mr. Barnett has served as the Deputy Assistant Attorney General for civil enforcement at the Antitrust Division since April 2004.
Authored by:
Andre P. Barlow
202-218-0026
abarlow@sheppardmullin.com
- On June 22, in a unanimous opinion, the Federal Trade Commission upheld a July 2004 initial decision by Administrative Law Judge ("ALJ") D. Michael Chappell, ruling that Kentucky Households Goods Carriers Association, Inc. ("Kentucky Association") engaged in illegal horizontal price-fixing in violation of the FTC Act, and that the state action doctrine does not immunize its collective rate-making from prosecution under federal antitrust laws. Chairman Deborah Platt Majoras wrote, "The principal issue here is whether the state agency responsible for supervising Respondent's ratemaking engaged in the necessary 'active supervision.' . . . [W]e find that the state has fallen far short of the conduct needed to satisfy the active supervision requirement, and therefore the state action doctrine does not apply." Accordingly, the Commission ruled that the Kentucky Association must cease and desist from collective rate-making, and that it be required to cancel and withdraw all existing tariffs and tariff supplements on file with the state.
The Commission's opinion states that the ALJ concluded that "the Respondent's ratemaking activities constitute unlawful horizontal price-fixing, and that Respondent is not entitled to the state action defense. We agree, and affirm the decision of the ALJ." The opinion continues by stressing the importance of the state action doctrine, but states that, "By enabling the displacement of the antitrust laws, however, the doctrine can also allow the implementation of programs that produce powerful anticompetitive effects, including higher prices and fewer choices for consumers."
"In this case," the Commission writes, "the statute that authorizes the [Kentucky Transportation Cabinet] to establish collective ratemaking expressly provides that these procedures must 'assure that respective revenues and costs of carriers . . . are ascertained.'" Under Kentucky law, the KTC is responsible for ensuring that every rate charged by carriers is "just and reasonable. . . The KTC, however, has no formula or methodology for determining whether the Kentucky Association's collective rates comply with the statutory standards." The KTC "does not even obtain data - including the cost and revenue data specified in the statute - that would enable it to assess the reasonableness of the Kentucky Association's rates . . . [and] lacks the procedural elements - such as public input, hearings, and written decisions - that courts have found to be important indicators of active state supervision." Accordingly, the FTC wrote that it agreed with the ALJ that KTC had fallen "far short of the active supervision required by Ticor, Patrick, Midcal, and other relevant cases" to support a state action defense.
- On June 21, the Commission received an application for approval of a proposed divestiture from Cytec Industries, Inc., related to Cytec's recent acquisition of the Surface Specialties Division of UCB S.A. Under the terms of a consent order with the FTC, Cytec was required to divest certain assets related to its purchase of UCB. Through this application, Cytec has requested Commission approval to divest the UCB Amino Resins Business and the Fechenheim Additives Business, as those terms are defined in the order, to wholly owned subsidiaries of INEOS Group Limited and affiliates of INEOS Capital Limited. The Commission is accepting public comments on the proposed divestiture for 30 days, until July 20, 2005.
- On June 16, the FTC announced that it closed its investigation of the proposed tender offer by Omnicare, Inc. for NeighborCare, Inc., the largest and likely second-largest institutional pharmacies ("IP"s) in the United States, respectively. IPs deliver prescription drugs to residents of long-term care facilities - primarily skilled nursing facilities ("SNF"s) - and provide SNFs with pharmacy and related products and consulting services, including drug regimen reviews and a variety of compliance and oversight functions.
The Commission issued a unanimous statement that presents the reasons it chose to close the year-long investigation. According to the statement, in multiple states Omnicare has a greater than 50 percent share of SNF beds under contract. In certain states, the acquisition of NeighborCare would cause these market shares to grow significantly. This market structure prompted the FTC's staff to conduct a thorough investigation of the proposed transaction.
The Commission stated that the evidence obtained during the investigation indicates that, under current market conditions, Omnicare's acquisition of NeighborCare would not likely result in anticompetitive impacts, arising either from Omnicare's exercise of unilateral market power, or from coordinated interaction among remaining IPs. As most of the remaining SNFs have three or more independent IPs within 100 miles of them, the vast majority have multiple rivals within their service areas, according to the statement. In addition, relatively easy entry into the IP marketplace would further reduce the likelihood of post-merger coordinated interaction. The Commission further stated that the transaction had to be evaluated in light of the significant changes that will occur in the health care market next year as a result of the Medicare Modernization Act, which will "profoundly affect the payment structure for the IP market." As such, the staff investigated whether, as a result of the changes brought by this Act, Omnicare would be able to leverage its market position to extract above-market rates from prescription drug plans as a condition of their joining their networks. The Commission stated that, ""We have concluded that the available facts, on balance, do not validate such a theory at this time." If facts do arise to indicate that the transaction "has reduced competition substantially," the Commission can open an investigation in the future.
- On June 15, Federal Trade Commission Chairman Deborah Platt Majoras named Michael Salinger to be Director of the agency's Bureau of Economics. Mr. Salinger is a Professor of Economics at the Boston University School of Management, where he has served as Chairman of the Department of Finance and Economics. Prior to joining Boston University in 1990, he was an associate professor at Columbia University Business School. From 1985 to 1986, he was a staff economist in the Bureau of Economics. Salinger has published extensively in areas of interest to the Commission's mission, including the competitive effects of tying and of vertical mergers, the structural determinants of market power, and the statistical properties of firm growth. He serves on the editorial boards of the Journal of Industrial Economics and the Review of Industrial Organization. He has been a consultant for the FTC, the Environmental Protection Agency, the Australian Competition and Commerce Commission, and private clients. Mr. Salinger has a Ph.D. in Economics from the Massachusetts Institute of Technology and an undergraduate degree from Yale University.
- On June 15, the FTC announced that Valero L.P. ("Valero") agreed to make three major divestitures to settle a Commission complaint that its proposed $2.8 billion acquisition of Kaneb Services LLC ("KSL") and Kaneb Pipe Line Partners ("KPP") would violate federal law. The divestitures will preserve existing competition for petroleum transportation and terminaling in Northern California, Pennsylvania, and Colorado, and avoid a potential increase in bulk gasoline and diesel prices. The order also requires Valero, the largest petroleum terminal operator and second-largest operator of liquid petroleum pipelines in the United States, to develop an information firewall and maintain open, non-discriminatory access to two retained Northern California terminals, in order to ensure access to ethanol terminaling in Northern California following its acquisition of Kaneb.
Under the terms of agreements between Valero and the Kaneb companies, Valero will pay $525 million for all partnership units of KSL, and will exchange $1.7 billion in Valero partnership units for all outstanding units of KPP. As a result, both KSL and KPP will become wholly owned subsidiaries of Valero, and Valero Energy, which currently owns 46 percent of Valero L.P.'s common units, will continue to own the general partner and maintain a 23 percent equity stake in Valero L.P. Valero Energy's key businesses will continue to be concentrated in the refining, transportation, and marketing of petroleum and other petrochemical products nationwide.
- On June 13, the FTC announced that it is closing its investigation into Arch Coal, Inc.'s ("Arch") acquisition of the Triton Coal Company's ("Triton") North Rochelle coal mine, saying that it will not continue with administrative litigation challenging the deal. The vote to close the investigation and discontinue administrative action was 4-1, with Commissioner Pamela Jones Harbour dissenting. The Commission majority issued a statement, Commissioner Harbour issued a dissenting statement, and Commissioner Thomas B. Leary issued an additional statement. In its statement, the Commission said that "the public interest would not be benefitted by an administrative trial in this instance." The Commission based its decision on application of the criteria set forth in the 1995 Statement of the Federal Trade Commission Policy Regarding Administrative Matter Litigation Following the Denial of Preliminary Injunction. These criteria are: the district court's factual findings and conclusions of law; any new evidence developed during the preliminary injunction proceeding; whether the transaction raises important issues of fact, law, or merger injunction policy that need resolution in administrative litigation; the costs and benefits of further proceedings; and any additional relevant factor. The Commission concluded that each of these criteria support a decision not to pursue administrative litigation.
Commissioner Harbour dissented. In a very well reasoned opinion, Commissioner Harbour stated, "The Commission should take advantage of this opportunity to conduct a thorough, independent review of the evidence, to determine whether an antitrust violation has occurred, and to write an opinion clarifying the law relating to coordinated interaction." More than a year after the Commission voted to file its complaint in this matter, she said, "The evidence still supports - and, if anything, more strongly supports - a 'reason to believe' that Arch's acquisition of Triton's North Rochelle mine may substantially lessen competition in the [SPRB] coal market, and therefore may have violated the antitrust laws."
Commissioner Harbour's argument continued. She said that, "My disagreement with the majority's position has both substantive and procedural dimensions. Substantively, I believe that there remains a strong factual and legal basis for an antitrust challenge, regardless of the district court and appellate court findings. I base this conclusion not only on the existing evidentiary record, but also on substantial new evidence that tends to further support the likelihood of coordinated interaction. I further believe that the district court made numerous errors of fact and economic inference, and also applied the law incorrectly. If the Commission does not continue its enforcement action, we run the risk that the district court opinion will impose an unnecessarily high burden of proof for future merger challenges predicated on coordinated effects."
Commissioner Harbour concluded by stating, "I believe that the pursuit of administrative litigation would fulfill our Congressionally-mandated responsibility - as expert antitrust fact finders and adjudicators - to further develop the factual record, clarify the law of mergers with respect to coordinated effects, and offer much-needed guidance to the legal and business communities."
- On June 10, the Commission received an application for approval of proposed divestiture from Cemex, S.A. de C.V. ("Cemex") related to its recent acquisition of RMC Group PLC ("RMC"). Under the terms of the consent order allowing the acquisition, Cemex was required to divest RMC's ready-mix concrete assets in the Tucson, Arizona area to a Commission-approved buyer within six months of signing the order. Through this application, Cemex has requested approval to divest these assets to California Portland Cement Company, pursuant to an asset purchase agreement and related agreements dated May 23, 2005. The FTC is accepting public comments on the proposed divestiture for 30 days, until July 9, 2005.
- On June 9, the FTC announced that it closed its investigation of the proposed acquisition of Caesars Entertainment, Inc. by Harrah's Entertainment, Inc. Commission staff analyzed the likely competitive effects of this transaction in several geographic markets. The Commission ultimately concluded that no enforcement action is warranted at this time. As part of its review of the Harrah's/Caesars transaction, the Commission determined that relief was not required in south Lake Tahoe, California, because the acquisition of Caesars by Harrah's was unlikely to harm competition in the area that included south Lake Tahoe.
Separately, Caesars Entertainment proposed to sell its south Lake Tahoe casino to Columbia Sussex Corp. Commission staff also investigated the likely competitive effects of that acquisition. The Commission announced today that it has closed its investigation of the Caesars/Columbia Sussex transaction without taking enforcement action.
- The International Competition Network ("ICN") held its fourth annual conference in Bonn, Germany. The conference was the largest gathering ever of competition officials, with more than 400 representatives of 80 competition agencies and competition experts from international organizations and the legal, business, consumer, and academic communities. Founded in 2001 by 13 agencies, the ICN now includes almost every competition agency in the world. At the conclusion of the conference, members approved recommendations designed to improve their merger review processes, commended the success of ICN's anti-cartel work, and showcased the significant progress member jurisdictions have made in implementing ICN recommendations. ICN members also approved a new work agenda that includes a working group on competition issues in telecommunications services, study of agency cooperation in anti-cartel enforcement, and merger investigation and analysis. Federal Trade Commission Chairman Deborah Platt Majoras and R.Hewitt Pate, Assistant Attorney General in charge of the Department of Justice's Antitrust Division, participated in the conference, which took place from June 6-8, 2005.
- On June 3, a consent order announced by the Federal Trade Commission which will allow Occidental Chemical Company's ("OxyChem") proposed purchase of the chemical assets of Vulcan Materials Company ("Vulcan"), provided OxyChem divests Vulcan's Port Edwards, Wisconsin, chemical facility and related assets within 10 days of its acquisition. The purchase price for the Vulcan assets is approximately $214 million, subject to adjustment for changes in net working capital, plus future contingent payments projected to equal $145 million. The consent order will alleviate the alleged anticompetitive impact of the proposed acquisition, as OxyChem and Vulcan are direct competitors in the markets for three chemicals: KOH (potassium hydroxide) and APC (anhydrous potassium carbonate), which are produced at the Port Edwards facility, and potassium carbonate (potcarb), which includes APC and liquid potassium carbonate. The Port Edwards facility will be divested to ERCO Worldwide (USA), or to another Commission-approved buyer within six months if a problem is encountered with the ERCO sale.
Authored by:
Robert W. Doyle, Jr.
202-218-0030
rdoyle@sheppardmullin.com
*On June 23, the FTC released a report titled "Peer-to-Peer File-Sharing Technology: Consumer Protection and Competition Issues," which analyzes the consumer protection, competition, and intellectual property issues discussed at the FTC's December 2004 workshop on P2P file sharing. P2P technology is used by a variety of personal and commercial interests for legitimate purposes, but the most common application by far is the exchange of copyrighted music and movie files between users. The report recommends that the industry develop necessary technology and take steps to regulate itself; concurrently, the government should investigate violations and work with industry to encourage self-regulation. The report failed to make specific recommendations regarding intellectual property because the FTC conference took place before the Supreme Court's recent opinion in P2P file-sharing in Metro-Goldwyn Mayer Studios v. Grokster, Ltd.
*The operator of a Canadian business directory scam was ordered on June 22 to pay $2.9 million to the FTC in consumer redress. Terrence Croteau scammed small businesses and charities in the United States out of millions of dollars by billing them for directory services they neither ordered nor authorized. The defendants refused consumers' requests to cancel the services and used an in-house collections department to harass consumers who were allegedly past due. Croteau violated the freeze on his assets and remained at large until he was arrested by federal marshals at the Newark, New Jersey airport. Croteau and his companies are permanently barred from the "business directory" business, barred from making deceptive or misleading claims, barred from selling or sharing customer lists, and ordered to give up $2.9 million. The U.S. attorney for the Southern District of Illinois indicted Croteau on charges of conspiracy, twenty counts of wire fraud, four counts of mail fraud, one count of use of a false and fictitious name in furtherance of mail fraud, two counts of mailing or transmitting threatening communications, and one count of making harassing telephone calls.
*On June 21, the FTC released the details of a $710,000 settlement against New York-based Scholastic Inc. ("Scholastic") - a provider of children's books that ran negative-option clubs. According to the FTC, consumers who did not know how the clubs operated complained that the companies sent them books they did not order, and that the companies would not cancel their club memberships. The FTC charged Scholastic with five counts: two violations of the FTC Act, one violation of the Unordered Merchandise Rule, one violation of the Prenotification Negative Option Rule, and one violation of the Telemarketing Sales Rule.
*The FTC announced on June 15, that Creaghan A. Harry will pay $485,000 in consumer redress to settle charges that he used millions of illegal spam messages to promote untrue anti-aging properties of Human Growth Hormone herbal supplements. Some 40,000 of Harry's spam messages ended up in the FTC's spam database claiming that his products would reverse the aging process, cause weight loss, increase muscle, or regrow hair and remove wrinkles. The FTC filed the claim in July 2004 for violations of the FTC ACT and the CAN-SPAM Act of 2003 because he made bogus claims regarding his product, did not allow for an opt-out of future messages, and did not give a valid physical postal address. Harry was fined and barred from making claims about any products sold over the internet, including health and weight-loss claims without scientific evidence.
*On June 13, the Northern District of Illinois signed a final judgment and order fining the suppliers of "Himalayan Diet Breakthrough" ("Himalayan") and prohibiting them from marketing their product. According to the FTC, Himalayan used seven of the "Red-Flag" weight loss claims. Advertising in several widely circulated newspapers and magazines, Himalayan claimed their product caused rapid and substantial weight loss without dieting or exercise, caused users to lose substantial weight while still consuming unlimited amounts of food, caused substantial weight loss by preventing the formation of body fat, caused substantial weight loss for all users, and enabled users to lose as much as 37 pounds in eight weeks safely. Himalayan was fined $4.9 million, the total amount of sales for the product at issue.
*The FTC settled a complaint on June 2 against Tropicana Products, Inc. ("Tropicana"), who allegedly misled consumers into believing that drinking two to three cups of its "Healthy Heart" orange juice would lead to substantial improvement in health. Specifically, the Commission's complaint charged Tropicana with making unsubstantiated claims that drinking three cups of orange juice per day would improve cholesterol levels, increase blood levels of folate and decrease homocysteine levels, and lower systolic blood pressure. The consent order prohibits Tropicana from making the challenged claims or other health related claims unless the company can substantiate the claim with competent and reliable scientific evidence.
*On June 1, the FTC announced a settlement with a Canadian manufacturer of HIV test kits sold over the internet. The kits were advertised as 99.4% accurate. However, testing conducted by the Centers for Disease Control and Prevention determined that 59.3% of tested kits provided inaccurate results, including both inaccurate HIV-positive results and inaccurate HIV-negative results. The final judgment order bars the defendants from advertising or selling HIV test kits that are not first approved by the FDA for sale in the United States. The Defendants are also barred from making false or misleading statements about any device marketed to assist in the diagnosis of any disease or health condition. The FTC is authorized to notify past purchasers of the test that the agency believes that the defendants misrepresented the efficacy of the product.
*At the request of the FTC, on June 1, a U.S. District Court judge issued a preliminary injunction that froze the assets of a bogus operation claiming to market an anti-spyware program. The FTC alleges that the program "Spykiller" attracted consumers to their website through aggressive marketing practices such as pop-up ads and e-mail messages warning consumers that their computers contained spyware. Once lured to the site, Spykiller performed a free scan that automatically told consumers that they had spyware on their computer. In fact, the program tagged virus scanning programs, word processing programs, and other legitimate files. Though the scan was free, consumers were then asked to pay $39.95 to enable Spykiller's "removal" capabilities. The FTC complaint alleges that the software failed to remove significant amounts of spyware, including spyware that the defendants claimed their program would remove. The agency alleges that the deceptive claims and aggressive marketing techniques violated the FTC Act and the CAN-SPAM Act.
Authored by:
Camelia Mazard
202-218-0028
cmazard@sheppardmullin.com
and
Robert M. Ziff
202-772-5327
rziff@sheppardmullin.com
- On June 24, the French newspaper, Le Figaro, reported that the French financial markets regulator, Autorité des Marches Financiers (AMF), was investigating allegations of insider dealing by members of the European Competition Commission regarding Alcan Inc.'s acquisition of Pechiney in 2003. A spokesman for the European Commission commented, "There's an inquiry going on by the French authorities on possible insider trading. In the Commission's view, the suspicions are not founded." The Commission is reported to have provided AMF with the names of seven EU Commission officials, who were informed of the bid before the deal was made public in July 2003. While it is routine for companies to contact competition officials at the European Commission to discuss the potential antitrust issues associated with a proposed acquisition, this is the first reported investigation of insider dealing accusations against Commission competition officials in over 3,500 merger cases.
- On June 24, the European Commission cleared the proposed acquisition of Allied Domecq plc by Pernod Ricard SA. The Commission's clearance is conditional on the sale by Pernod Ricard of the Scotch whisky brands "Glen Grant", "Old Smuggler" and "Braemer" and the Portuguese brandy brands "1920" and "CR&F". It is also conditional upon the termination of certain distribution agreements relating to the '"Tullamore Dew" Irish whiskey brand and, for Portugal only, distribution of "Moët & Chandon" Champagne. In the light of these commitments, the Commission concluded that the transaction would not significantly impede effective competition. Competition Commissioner, Ms. Neelie Kroes, stated, "Whilst this transaction strengthens Pernod Ricard's general position in the wines and spirits sector, the proposed remedies will reduce the direct overlaps, and, therefore, maintain effective competition on all affected markets."
- On June 22, the European Commission accepted legally binding commitments from Coca-Cola concerning its distribution of carbonated soft drinks. The commitments are an attempt by the Commission to increase European consumer choice in shops and pubs by, for example, preventing Coca-Cola from entering into exclusive agreements, offering retailers target or growth rebates, or forcing them to take less popular products with its stronger brands. European Competition Commissioner, Ms. Neelie Kroes, commented, "This decision will benefit consumers by improving competition in the markets for carbonated soft drinks in Europe. Thanks to the Commission's decision, consumers will be able to choose from a larger range of fizzy drinks at competitive prices."
- On June 22, OFCOM, the UK's Communications Regulator, accepted legally binding commitments from British Telecom plc, to set up a new, and operationally separate business unit, provisionally entitled Access Services, to provide network services on equal conditions to all retailer providers of UK telecommunication services. By offering these undertakings, BT avoids a reference by OFCOM to the UK's Competition Commission, and a detailed antitrust investigation, which was widely predicted to require the formal break-up of the company. The Financial Times reported that many rival operators approve of this structural separation arrangement in favor of a protracted antitrust investigation, and also suggested that OFCOM's solution serve as a model for providing non-discriminatory telecommunications access in other countries.
- On June 21, the Italian Competition Authority adopted its first interim measures decision based on EU competition law against Merck & Co, Inc., the US pharmaceuticals company, by ordering the company to license the production of imipenem cilastatina (an active ingredient in an antibiotic called Tienam, used for the treatment of particularly serous infections, most often contracted in hospitals) for export sales. Although Merck has a patent for Tienam in Italy, the patent has expired in all other European countries. The decision follows an investigation opened in February 2005, following Merck's alleged refusal to grant a license for the Italian production and export of the active ingredient for the manufacture of generic drugs in other European countries.
- On June 20, it was reported that Bo Vesterdorf, head of the European Court of First Instance ("CFI"), had proposed changing the composition of the court set to hear Microsoft's appeal against the European Commission's landmark antitrust ruling last year. Mr. Versterdorf has supposedly suggested that the case be transferred from the current five member panel headed by Judge Hubert Legal, to the CFI's Grand Chamber panel, which includes heads of the CFI's other chambers, and four senior judges. The move to change the composition of the court comes following comments published by Judge Legal in a French antitrust journal, where it was reported he wrote that the CFI's law clerks saw themselves as "ayatollahs of free enterprise", and held undue influence on some of the judges. The move to extend the number of judges may delay the hearing of Microsoft's appeal, which was scheduled for mid-2006.
- On June 14, German antitrust officials raided the offices of four leading domestic airlines companies following allegations that the companies had colluded to end contracts with various travel agents based on the level of their commission fees. The German Cartel Office, the Bundeskartellamt, was assisted in its search operation by staff of the criminal investigation departments of the respective German Länders. Although the Bundeskartellamt did not name the four airlines, TUI AG, Thomas Cook AG, Air Berlin, and Lufttransport Unternehmen GmbH all later confirmed that their respective offices had been raided, and rejected the accusations. The Bundeskartellamt's suspicion is based on several tip-offs from travel agencies affected, and on reports in the specialist press. The travel agencies fear that the aim of the letters of termination, which were sent off at the same time, is to jointly cancel or reduce the commission paid to them for the sale of charter flights as from November 1, 2005.
- On June 10, Humax Pty Ltd was fined AU$150,000 by the Australian Federal Court after the company admitted that it attempted to induce a number of small retailers not to sell Humax high-definition digital set top boxes at a price less than $599.00, in breach of the resale price maintenance provisions of the Australian Trade Practices Act. In determining the appropriate penalty to recommend to the court, the ACCC noted Humax's cooperation in resolving the case, and avoiding the expenses and time of a full trial. Ms Sylvan, Australian Competition and Consumer Commission, Acting Chair, stated: "Following the ACCC first raising the issue with Humax, the company offered to undertake trade practices training for its staff. The company also willingly agreed to court orders requiring the company to undertake compliance training. The ACCC also recognizes that the conduct occurred for a short duration of only four days."
- On June 8, the European Commission sent a statement of objections detailing antitrust concerns to a number of synthetic rubber producers accused of operating a cartel. The Commission declined to confirm which companies were involved in the inquiry, which concerns alleged price-fixing in butadiene, a synthetic rubber used in the manufacture of flooring, car tires and shoes. The companies now have two months to respond to the Commission's antitrust concerns.
- On June 7, the European Commission outlined a comprehensive five year reform of state aid policy which is aimed to promote European growth, and jobs. In particular, the Commission intends to use the EC Treaty's state aid rules to encourage Member States to focus government financial aid on improving the competitiveness of EU industry, and creating sustainable jobs, by investing in R D, innovation and risk capital for small firms. The Commission also aims to rationalize the procedurally complex rules, so that they are clearer and less government aid has to be notified, and cleared by the Commission.
- On June 6, the European Commission announced that it would market test new proposals it had received from Microsoft outlining how the company intended to implement the Commission's antitrust decision. The Commission's decision required Microsoft to disclose interface documentation which would allow non-Microsoft work group servers to achieve interoperability with Windows PCs and servers. The Commission noted that Microsoft had recognized the need to enhance the options available to recipients by creating a range of packages of information from which they could choose according to their needs. Furthermore, there will be a category of interoperability information that will be royalty-free.
- On June 3, the European Commission raided the offices of major fruit companies in Belgium, Ireland, Germany and the UK, and later confirmed that it is conducting an investigation into producers and distributors of bananas and pineapples for possible cartel activity. The same day, Chiquita Brands International announced that the European Commission had granted the company immunity from any fines related to the conduct that it had uncovered following an internal compliance program, which had revealed that certain of its employees had shared pricing and volume information over many years with competitors in Europe, and may have engaged in other conduct, in violation of the European competition laws. The company stated that it had promptly stopped the conduct and, after consultation with the board of directors, notified the European Commission. The company's antitrust immunity is conditioned, among other things, on the company's continued cooperation with the Commission's investigation.
Authored by:
Neil Ray
415-774-3269
nray@sheppardmullin.com
- The Supreme Court overturned a ruling that cable high-speed Internet lines must be opened to rival online service providers, handing a victory to the Federal Communications Commission. In a 6-3 decision, authored by Justice Clarence Thomas, the high court sustained the FCC's authority to classify broadband offered over cable modems as an "information service" and not a "telecommunications service." The former category is largely unregulated, while the latter is subject to extensive regulation. The decision, National Cable and Telecommunications Association v. Brand X Internet Service, relied principally on the doctrine that federal agencies are owed deference in making regulatory decisions, even when agencies reverse themselves on key matters. The 9th U.S. Circuit Court of Appeals disagreed with the FCC, ruling in October 2003 that cable modems should have been classified as both an information service and a telecom service. The appeals court relied on its prior 2000 decision in AT&T Corp. v. Portland. The Supreme Court majority opinion relies heavily on the landmark case in administrative law, the 1984 Chevron USA v. Natural Resources Defense Council, which holds that disputes over federal statutes should be decided by the agency delegated with the task of resolving ambiguities. The Supreme Court held that the 9th circuit failed to apply Chevron. Justice Antonin Scalia, joined by Ruth Bader Ginsburg and David Souter, disagreed, comparing the package of cable-modem service to be a combination of both telecom and information services. The cable industry has about 21 million high-speed Internet access subscribers.
- FCC Chairman Kevin Martin said that with the Supreme Court sanctioning his agency's decision to liberalize rules governing high-speed Internet service over cable modems, he plans to turn now to relaxing rules for other high-speed communications services. "This decision provides much-needed regulatory clarity and a framework for broadband that can be applied to all providers," Martin said in a statement. "We can now move forward quickly to finalize regulations that will spur the deployment of broadband services for all Americans." An FCC official said the agency is going to act soon to clarify that broadband distributed over the digital subscriber lines ("DSL"), typically offered by telephone companies, also can be classified as "information services." Such a proceeding could happen by the end of the summer, a source familiar with the agency said. In February 2002, one month after its cable-modem decision, the FCC began a proceeding to also grant DSL service the same classification. That matter has been on hold pending the Supreme Court's decision.
- The major problem with the 1996 Telecommunications Act was that it presumed the viability of long-distance communications as a viable business, AT&T CEO David Dornan said Tuesday at the Telecommunications Industry Association's gathering at the SuperComm telecommunications convention in Chicago. "Long distance is a feature; it is not a business," said Dornan, whose company has agreed to merge with SBC Communications and is awaiting regulatory approval. Dornan said, "The watershed event" in the decision to sell AT&T was the change in network-sharing rules implemented by the FCC after it had been reversed by a federal appeals court. Inconsistent policy also created havoc for the company, he said. "I did not think we could continue to fight a battle predicated on a regulatory ruling that had changed so many times; we made a decision to exit the consumer market where we had more control of our destiny. Regulatory actions have consequences to business."
- Three consumer groups called for the FCC and Justice Department to reject the proposed mergers of AT&T with SBC Communications and MCI with Verizon Communications. The four companies have a "track record of flagrant disregard of their own promises to compete," Janee Briesemeister, a senior policy analyst for the Consumers Union, said in a statement. She acknowledged that the FCC and Justice have the authority to stop the companies from abusing their power but said that all four have a "record of misleading actions and broken promises." The Consumer Federation of America ("CFA") said the combined companies would dominate 90 percent of the local, residential telephone business, 70 percent of the long-distance market and up to 50 percent of the wireless industry. "The remaining competitors would be minuscule in comparison," CFA Research Director Mark Cooper said. The U.S. Public Interest Research Group also voiced its opposition.
- The debate over how much media conglomerates can grow without undermining news diversity in local communities may reignite soon thanks to a Supreme Court decision. The Supreme Court declined to consider appeals from several media companies regarding a Third U.S. Circuit Court of Appeals decision in June 2004 that overturned portions of the nation's media-ownership rules. The rules, which the FCC issued in July 2003, loosened the restrictions on how many companies media conglomerates could own in local and national markets. The Third Circuit Court concluded that the FCC's rule on ownership of broadcast and print or radio and television outlets in the same markets was not supported by "reasoned analysis." The Third Circuit Court also criticized the FCC's use of its "diversity index" to make decisions about ownership limits in local media markets. In particular, FCC made "unrealistic assumptions about media outlets' relative contributions to viewpoint Third Circuit diversity in local markets" and "gave too much weight to the Internet as a media outlet." The Third Circuit Court further rejected the FCC's rules on local-television ownership and asked it to rework the rules with a better analysis and rationale.
- The Internet governing body the Internet Corporation for Assigned Names and Numbers ("ICANN") formally selected VeriSign to continue managing for six years Web sites that end in .net, the group announced Thursday. The move comes after independent auditor Telcordia Technologies recommended in March and again last month that ICANN retain VeriSign as its .net handler. VeriSign beat four other applicants for the job, which is estimated to be worth about $150 million. The other applicants were Afilias, CORE++, DeNIC and Sentan. ICANN Chairman Vinton Cerf said at an April meeting that "security and stability" are a major factor in determining who runs domains under ICANN's control.
- At its monthly meeting, the FCC took action to expedite the relocation of federal agencies to new airwave space in order to clear 90 megahertz of spectrum at auction for commercial wireless services. President Bush signed a law on the matter last December 23, and former FCC Chairman Michael Powell took action one week later, indicating the agency's intent to auction the frequencies in June 2006, the earliest possible date under the statute. The Commerce Department's National Telecommunications and Information Administration is managing the efforts to reallocate frequencies in the 1710-1755-megahertz range by December. Those airwaves will be paired with another 45 megahertz for the auction. "We are on target for a June 2006 auction date," said Katherine Seidel, acting bureau chief of the Wireline Telecommunication Bureau.
Authored by
Gregg Mendenhall
202-218-0025
gmendenhall@sheppardmullin.com
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