In early 2003, California's San Joaquin County decided to establish zones within the county which would be provided ambulance services by one exclusive provider. American Medical Response, Inc. ("AMR"), a corporation that provides ambulance services throughout the nation, the City of Stockton (the "City"), and the City of Lodi entered into what they entitled a "Joint Venture Agreement," in which they agreed to submit a joint bid to the county to provide exclusive ambulance services. The agreement contained a provision stating that any party that withdrew from the agreement could not submit an independent bid to the county. Over the course of the next year, the relationship between AMR and the City deteriorated and AMR withdrew from the agreement and announced its intention to submit its own bid to the county. The City brought breach of contract and breach of fiduciary duty claims against AMR. AMR moved for summary judgment on those claims on the ground that the Joint Venture Agreement was null and void because it violated Section 1 of the Sherman Act. In American Medical Response, Inc. v. City of Stockton, No. CIV-S-05-1316 DFL PAN (E.D. Cal. March 29, 2006), the Eastern District of California denied this motion.

The court first held that there were genuine issues of material fact as to whether a bona fide joint venture was actually formed. Citing California case law, the court listed the elements of a valid joint venture as: (1) joint interest in a common business; (2) an understanding to share profits and losses; and (3) a right to joint control. Both parties agreed that the Joint Venture Agreement did not specify key aspects of a typical joint venture, such as how the parties would combine resources, share profits and losses, or contribute capital. AMR asserted that no joint venture was formed because the Joint Venture Agreement only anticipated the forming of a joint venture that could submit a bid, the parties never agreed on how such a joint bidding entity would function, and each party continued to operate its own ambulance service exactly as it had before entering into the Joint Venture Agreement. The court, however, noted several facts that tended to support the existence of joint venture such as the fact that the parties made their respective offices available to each other for bid work, the repeated references by AMR executives to the relationship between the parties a joint venture, and memoranda and a draft LLC agreement that evinced an intent by the parties to integrate and combine resources if they received the contract. In sum, based on the evidence before the court, the existence of a bona fide joint venture was uncertain and not resolvable on a motion for summary judgment.

AMR argued that even if a valid joint venture existed, it contained a per se illegal horizontal market allocation. The court observed that the Joint Venture Agreement did indeed allocate emergency and non-emergency ambulance service between the parties. However, the court also stated that it would avoid the overly simplistic and literal application a per se standard without "some knowledge of the competitive landscape and effect of the allegedly pernicious provision." In this particular case, the court opined, "the determination of whether the market allocation provision is anti-competitive is intertwined with the question of how the joint venture would have affected competition." Since there was no evidence in the record that the allocation between the parties excluded other competitors from bidding and, in fact, two other companies submitted letters of intent to bid, genuine issues of material fact remained as to whether the allocation provision in the Joint Venture Agreement was in fact anticompetitive.

AMR also argued that a Joint Venture Agreement provision forbidding the parties from bidding independently was per se illegal under Section 1 because it amounted to an attempt by competitors to fix the amount of the bid. The City argued that this restraint was necessary to the procompetitive joint venture because it put "teeth" into the parties' fiduciary obligations to one another and because it provided consideration to the parties for entering into the joint venture. As such, the City contended, it should be reviewed under the rule of reason. The court noted that it had little evidence on the ambulance service bidding market, what type of joint ventures, if any, would best serve it, or the competitive effects of such a restraint. Thus, the court was not in a position to decide whether per se or rule of reason analysis was appropriate and summary judgment as to this provision of the Joint Venture Agreement was denied.

The precise nature, contours, and effects of the relationship between the parties to this case, as set out in the Joint Venture Agreement, were, in the view of the Eastern District of California, uncertain and ambiguous. The existence of a legitimate, bona fide joint venture was unclear because, though the parties had not precisely delineated how they would integrate their resources and capital, they did appear to have undertaken some joint work on the bid and evidenced their intent to combine their resources and form a joint operating company in the event they received a contract from San Joaquin County. The anticompetitive effect, if any, of the Joint Venture Agreement's provision allocating emergency and non-emergency ambulance service between the parties was uncertain in light of the fact that other competitors were not foreclosed by it from bidding and in fact did intend to bid. Finally, the court could not dismiss the City's argument that the provision forbidding independent bidding by the Joint Venture Agreement participants was necessary to the procompetitive joint bidding venture because it simply did not have adequate evidence regarding the nature of the ambulance service bidding market and what joint bidding arrangements might most efficiently and adequately meet the San Joaquin County's needs.


Authored by:

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

The extent to which private arbitration agreements can be used to restrict the availability of class actions is currently a topic of enormous interest and a rapidly evolving body of federal and state law. In Kristian, et al. v. Comcast Corporation, et al., case number 04-2619 (1st Cir. 2006), the United States Court of Appeal for the First Circuit recently decided a potentially very influential case challenging efforts by Comcast Corporation to compel arbitration of antitrust claims by its cable television subscribers, and to enforce contractual prohibitions on various kinds of procedural and substantive remedies, including that the antitrust claims could not proceed as a class action. The Comcast arbitration agreement required all disputes relating to cable television service, including federal statutory claims, to be arbitrated. It also restricted discovery, barred the recovery of treble damages, established contractual statutes of limitations, barred the recovery of attorneys fees and costs and barred the arbitration from proceeding as a class action or on anything other than an individual basis.

The First Circuit began its analysis by discussing certain factual issues relating to whether Comcast had given its subscribers sufficient notice of the change in its policies concerning arbitration of disputes, and whether the notice was sufficient to create retroactive affect for the arbitration clause. After a detailed and fact specific analysis, the First Circuit concluded that Comcast's change of its rules to require arbitration was effective, and reversed the lower court finding that it was not. This then required the Court of Appeals to consider the substantive challenges by the plaintiffs below to various portions of the arbitration provisions.

The First Circuit began by concluding that in order to assess challenges to specific aspects of the Comcast arbitration agreement, it first had to determine whether enforceability of any of the disputed prohibitions should be decided by a court or by the arbitrator in the first instance. This in turn required, in the First Circuit's view, determining whether there were factual issues which an arbitrator must first decide, or whether the disputed contractual prohibition was clearly so potentially at odds with specific guaranteed statutory rights that it "implicated arbitrability," and so a court could determine initially on the merits whether that portion of the arbitration contract should survive. After having determined in the case of each disputed limitation whether a federal court or the arbitrator should rule in the first instance, the court then turned to the merits of whether each prohibition was enforceable. For ease of organization, the First Circuit's threshold procedural discussion and the substantive determination on the merits for each of the specific disputed prohibitions in the Comcast arbitration agreement are combined below.

1. Limited Discovery

The arbitration provision in the Comcast contract warned subscribers that participating in arbitration "may result in limited discovery." The putative plaintiffs' class argued that this restriction would prevent the vindication of statutory rights. Applying the analysis laid out above, the First Circuit concluded that this argument did not clearly raise a threshold issue of arbitrability. Instead, it raised only procedural issues about the potential scope of discovery which meant that, under settled Supreme Court precedent, enforceability should be resolved in the first instance by the arbitrator.

2. Reduced Statute of Limitations

Comcast's arbitration provisions also contain a requirement that any subscriber with a potential claim had to contact Comcast "within one year of the date of the occurrence of the event or facts giving rise to the dispute." Such provisions are now routinely included in arbitration provisions, driven by the growing body of law that, at least with respect to contractual disputes and tort claims directly related to a contract, contracting parties can agree to their own shorter statutes of limitations. The putative plaintiffs' class argued that this attempt to shorten the limitations period threatened their ability to vindicate their statutory rights under the Sherman Act and the Massachusetts Antitrust Act, both of which contain four year statutes of limitations for antitrust claims. The First Circuit again concluded that whether ongoing injury and the conduct at issue tolled applicable statutes of limitations created factual questions that would have to be answered by an arbitrator to determine what statute of limitations actually applied. The potential tension between the state and federal antitrust statutes of limitations and the contractual statute of limitations did not raise a "threshold issue of arbitrability" given open factual issues, and therefore had to be presented to the arbitrator in the first instance.

3. Treble Damages

The Comcast arbitration provision reflected a growing trend to limit the scope of damages which could be awarded in an arbitration, and attempted to eliminate liability for "punitive, treble, exemplary, special, indirect, incidental or consequential damages." Again, the putative class argued that this provision would directly preclude their ability to vindicate statutory rights provided under both federal and state antitrust law. Comcast responded that questions concerning the applicability of remedy stripping provisions do not present basic questions of arbitrability, and so should be addressed by the arbitrator in the first instance. The First Circuit began its analysis by noting that the requirement of awarding treble damages under the Sherman Act is compulsory by virtue of the use of the word "shall," while the award of treble damages under the Massachusetts Antitrust Statute is discretionary because the statute provides only that such damages "may" be awarded.

The different wordings in the statutes proved pivotal to the First Circuit's analysis. In considering the mandatory award of treble damages under the Sherman Act, the First Circuit reached one of what will likely be remembered as a pivotal ruling in this decision, and concluded that the Sherman Act's unequivocal grant of treble damages was a statutory right that could not be abrogated. Since the effort to preclude the right was unambiguous, the First Circuit distinguished some prior cases in which initial ambiguity caused federal courts to defer to the arbitrator in the first instance. Here, finding a direct conflict between the Sherman Act and the Comcast contract, the First Circuit concluded that a threshold issue of arbitrability was created which permitted court intervention, and precluded deferring to the arbitrator. The First Circuit then announced that its decision was one of first impression, and ruled unequivocally that the award of treble damages under federal antitrust statutes cannot be waived by contract.

However, the First Circuit then reached a different conclusion with respect to Massachusetts state antitrust law, because the award of treble damages under Massachusetts antitrust law is discretionary rather than mandatory. Since such an award is discretionary, an ambiguity exists about whether the vindication of statutory rights is necessarily an issue and so a threshold issue of arbitrability is not presented. The First Circuit therefore concluded that with respect to Massachusetts state law, it would defer to the arbitrator in the first instance to decide enforceability.

4. Attorney Fee Shifting

Again, as is now routinely the case in consumer arbitration clauses, the Comcast arbitration agreements stated that Comcast would pay for reasonable arbitration filing fees and arbitrators' costs, but that each side would be responsible for its own attorney's and expert witness fees. In effect, this contractual provision seeks to restrict fee shifting to the prevailing party which is available under both federal and Massachusetts antitrust law. The First Circuit embarked on an extensive review of prior precedent, focusing on the Supreme Court's decision in Greentree Financial Corp. v. Randolph, 531 U.S. 79 (2000). In Greentree, the Supreme Court concluded that an ambiguous arbitration clause, which was silent on fees, created only the possibility of prohibitive arbitration costs for a federal Truth In Lending Act claim ("TILA"), and therefore did not by itself render the arbitration clause at issue there unenforceable. The First Circuit reasoned that, although the ambiguous clause in Greentree survived, Greentree represented recognition by the Supreme Court that excessive arbitration costs could imperil a plaintiff's ability to vindicate federal statutory rights. On this basis, the First Circuit concluded preliminarily that the putative class of Comcast subscribers had in fact raised a threshold issue of arbitrability by challenging the enforceability of the arbitration agreement's prohibition against an award of attorneys fees in direct contravention to federal and state statutes.

Then, the court observed that in the case of a complex antitrust claim, regardless of whether it was litigated in court or in arbitration, precluding fee shifting would have the very likely affect of preventing as a practical matter the ability of any plaintiff to prosecute the claim. Under that circumstance, a threshold issue of arbitrability was clearly presented and, in the First Circuit's view, the prohibition on fee shifting contained in the Comcast arbitration agreement placed the entire arbitration clause at risk. It then concluded that the clause could be saved by invoking a severance provision also contained in the arbitration agreement, which provided that the arbitration clause could survive even if certain portions were found unenforceable. On that basis, the First Circuit concluded that the ban on fee shifting was unenforceable as an impermissible interference with the ability to vindicate statutory rights, but preserved the arbitration clause by severing the fee shifting prohibition.

5. Class Action Arbitrability Prohibition

The Comcast arbitration agreement explicitly prohibited class actions by attempting to restrict the arbitrator's authority to arbitrate a class action or on a consolidated basis. Analyzing prior Supreme Court and Federal Circuit court precedent nationwide, the First Circuit concluded that this issue clearly presented a threshold question of basic arbitrability. As a result, it could not be deferred to the arbitrator for decision, and must be decided by the federal court in the first instance. In so doing, it distinguished some prior cases involving factual situations where the arbitration clause at issue was silent or ambiguous about a class action prohibition. Here the issue was squarely presented because the contract clearly contained an attempt to prohibit class actions. Turning to the merits, the First Circuit noted that the Third, Fourth, Seventh and Eleventh Circuits have enforced consumer arbitration clauses which in effect barred class actions in federal TILA claims. The Court distinguished these cases in two ways. First, it noted that some of them arguably turned on the preclusion of attorney's fee shifting as well, and that issue had already been dealt with by finding the prohibition on fee shifting in the Comcast agreement to be unenforceable and severing it from the arbitration provision.

Second, and likely to be remembered as the MOST significant aspect of this decision, the First Circuit made a fundamental distinction between TILA claims and antitrust claims for purposes of analyzing the enforceability of the class action prohibition. Essentially, the First Circuit concluded that without the ability to proceed on a class action basis, consumer driven federal antitrust cases would not be brought because of the complexity and expense of such claims relative to the very small potential recoveries by individual consumers, even with fee shifting. The First Circuit engaged in a fascinating comparative analysis and concluded that TILA claims are ultimately individually based, relatively simple and would continue to be brought if attorney's fees were available. Antitrust claims, in contrast, typically implicate corporate conduct affecting large numbers of consumers, involve highly complex facts and require years of sophisticated attorney and expert time costing millions of dollars. As a consequence, the First Circuit ruled that the attempt to bar the class action procedure impermissibly interfered with the plaintiff's ability to vindicate their statutory rights under federal and state antitrust law, and held that they could not be compelled to arbitrate with that prohibition in place.

This then created an interesting follow on issue, which should be an education to all out there drafting arbitration agreements. Comcast argued before the Court of Appeal that if in fact the class action prohibition were found unenforceable, it did not want to arbitrate. The First Circuit rejected the notion. Instead, it enforced the general severance provision in the Comcast arbitration agreement, holding in effect that Comcast was now forced to arbitrate an antitrust class action. The result dramatically illustrates the necessity for drafters of arbitration clauses to decide in advance what they want to have happen if and when class action waivers are struck down and explicitly so provide in the agreement.


Authored by:

David R. Garcia
310-228-3747
drgarcia@sheppardmullin.com

The House of Representatives, faced with pressures to take "action" on escalating gasoline prices, in the wake of the Katrina disaster, has enacted the Federal Energy Price Protection Act of 2006. The bill was introduced on May 2, 2006 by Representative Heather Wilson (R-N.M.), and passed on May 3, 2006 by a vote of 389 to 34.

The bill provides that not later than six months after enactment, the Federal Trade Commission shall promulgate, pursuant to the Administrative Procedures Act,¹ any rules necessary, including a definition of the term "price gouging",² to enforce the rule as violations of Section 5 of the Federal Trade Commission Act.

As the bill declares "price gouging", as to be defined, a violation of Section 5 of the Federal Trade Commission Act, there is no private right of action for private plaintiffs. However, enforcement actions may be brought by not only the Federal Trade Commission, but by the United States Department of Justice, and States Attorneys General. Attorneys General are authorized as parens patriae to bring civil actions on behalf of the residents of their respective states in a United States District Court. In such actions, however, the Federal Trade Commission is granted rights of intervention.³

The bill would provide for civil penalties, including three times the difference between the total amount charged in a wholesale sale and the total amount that would be charged in such a wholesale sale at a "fair market price", plus an amount not to exceed $3 million per day, for a continuing violation. In the case of a retail sale in violation of the bill, a civil penalty is to be three times the difference between the total amount charged in the sale and the total amount that would have been charged at a "fair market price."

In addition, the bill provides for criminal penalties for a wholesale sale, by a fine of not to exceed $150 million, or imprisonment for not more than 2 years, or both. In the case of a retail sale violation, a fine may not exceed $2 million, or imprisonment for more than 2 years, or both.

H.R. 5253 is in addition to the enactment by Congress of the Energy Policy Act of 2005.⁴ Section 632 of the Energy Act directs the Federal Trade Commission to identify price gouging as

"Any finding that the average price of gasoline available for sale to the public in September, 2005, or hereafter in a market area located in an area designated as a State or National disaster area because of Hurricane Katrina, or in any other area where price-gouging complaints have been filed because of Hurricane Katrina with a federal or state consumer protection agency, exceeding the average price of such gasoline in that area for the month of August, 2005."

Pursuant to the Energy Act, the Federal Trade Commission, on May 22, 2006, released its report on "Investigation of Gasoline Price Manipulation and Post-Katrina Gasoline Price Increases ("Report")." While it is not yet know whether the Federal Trade Commission will use the Energy Act definition of "price gouging" in performing its obligations under H.R. 5253, should that bill be enacted into law, it was mandated to use this definition in issuing its Report.

The Report details the result of an intensive, congressionally-mandated Commission investigation into whether gasoline prices nationwide were "artificially manipulated by reducing refinery capacity or by any other form of market manipulation or price gouging practices."

In its investigation, the FTC found no instances of illegal market manipulation leading to higher prices during the relevant time period. However, it found 15 examples of pricing at the refining , wholesale, or retail level that fit the Energy Act's definition of "price gouging."⁵

In its May 22, 2006 Report, the Federal Trade Commission found no evidence to suggest that refiners had manipulated prices. Nor, did if find any evidence that indicated that refiners produced less gasoline than was economically feasible, using computer models to determine their most profitable slate of products. Nor, did it find any evidence to suggest that refinery expansion decisions over the past 20 years resulted from either unilateral or coordinated attempts to manipulate prices. Rather, the pace of capacity output resulted from competitive market forces.

The Report also examined state and federal perspectives on "price gouging." It describes investigative activity by various states and the effects of state price gouging laws on gasoline retailers. It concludes by presenting the Commission's views on calls for federal gasoline price gouging legislation. It identifies the difficulty of distinguishing "gougers" from those who are reacting in an economically rationale manner to a temporary disconnect between demand, and a shortfall in available supplies during an emergency. The policy section concludes that if natural price signals are distorted by price controls, consumers may ultimately be worse off, as a result of gasoline hording at an artificially mandated lower price, and a resulting disincentive for additional supplies of scarce product to flow into an affected market.

A quick check of the internet discloses numerous articles relating to what is generically described as "price gouging." For example, the United States Department of Energy has posted a "Gas Price Watch Reporting Form for consumers who believe that they may be victimized by "price-gouging", or price-fixing."⁶ Deborah Pryce, Chairman of the House Republican Conference has posted a website listing each of the Attorneys General of states that have consumer protection laws that would implicate "price gouging", however defined.⁷

A search of the web also discloses postings by a number of economists advising that "price gouging" legislation will exacerbate consumer shortages, and thus disadvantage the very persons whom "price gouging" legislation would be designed to protect. As stated by economist Thomas Sowell:

"'Price gouging' is one of those emotionally powerful but economically meaningless expressions that most economists pay no attention to, because it seems too confused to bother with. But a distinguished economist named Joseph Schumpeter once pointed out that it is a mistake to dismiss some ideas as being too silly to discuss, because that only allows fallacies to flourish – and their consequences can be very serious."

"What do prices do? They not only allow sellers to recover their costs, they force buyers to restrict how much they demand. More generally, prices cause goods and the resources that produce goods to flow in one direction through the economy rather than in a different direction …

"When either supply or demand changes, prices change. When the law prevents this, as with … anti-price-gouging laws, that reduces the flow of resources to where they would be most in demand. At the same time, price control reduces the need for the consumer to limit his demands on existing goods and services."⁸

This "Econ 101" analysis has been trumpeted by none other than Michael A. Salinger, Director, Bureau of Economics of the Federal Trade Commission. In an address to the Antitrust Committee of the Boston Bar Association, given on February 27, 2006, Dr. Salinger, in stating his own views, and not necessarily reflecting the views of the Federal Trade Commission or any individual Commissioner, stated:

"Price gouging legislation, in my view, be an example of a bad decision resulting from focusing on the wrong statistics. The wrong statistics to focus on are the price of gasoline and the profits of the oil companies. … From the standpoint of energy policy, the problem created by Katrina is that it shut down 95% of the crude oil production in the Gulf Coast, 13% of the refining capacity in the United States, and major pipelines, particularly those bringing supplies from the Gulf Coast to the mid-Atlantic seaboard. … The statistic to focus on was not the price, but rather, the shortfall of energy relative to demand."

He states further

"By allowing the price of gasoline to rise, individuals have an incentive to buy just the gasoline they really need rather than to make sure to have a full tank in every car and a few gallons of inventory to boot. … The other predictable consequence of price caps is to blunt the incentives to divert supplies from less effected to more effected areas. … What I have said so far about price gouging is straight out of econ 101. To me, and I believe to all or virtually all of the very talented people who worked in the Bureau of Economics, the answers to these questions seem obvious."⁹

Finally, Dr. Salinger advises

"Price gouging legislation … would be a tragic mistake."¹⁰

It will be with interest to watch what definition of "price gouging" is adopted by the Federal Trade Commission, and what actions, if any, flow from the implementation of the House bill, should it become law.

1. 5 U.S.C. § 1553 (2006).
2. The term is undefined in the bill itself.
3. Section 2 of the bill declares it to be an unfair and deceptive act or practice, under Section 5 of the Federal Trade Commission Act, for any person to sell crude oil, gasoline, diesel fuel, home heating oil, or any biofuel at a price that "constitutes price gouging." Under Section 2(b), the Federal Trade Commission is directed to promulgate a definition of the term, "price gouging." In addition, States Attorneys General are precluded from instituting civil actions for violations, during the pendency of an action brought by the Federal Trade Commission against any defendants named in a Federal Trade Commission complaint. See, Section 2(d)(2)(B).
4. Pub. L. No. 109-58 & 1809, 119 Stat. 594 (2005). (Hereinafter "Energy Act")
5. Numerous State consumer protection laws have defined "price gouging" in one manner or another. For example, California Penal Code Section 396 defines the practice of charging "excessive and unjustified increases" as an offer to sell or sell any consumer food items or goods, including gasoline and other motor fuels for a price of more than ten percent above the price charged for those goods or services immediately prior to a proclamation of an emergency declared by the President of the United States or the Governor of the State of California. However, a price increase is not unlawful if that person can prove that the increase in price was directly attributable to additional costs imposed upon it by the supplier of the goods or directly attributable to additional costs for labor or materials.
6. See United States Department of Energy, http://gaswatch.energy.gov/
7. Pryce, Hurricane Aid Update, www.gop.gov/Katrina, Sept. 6, 2005.
8. Thomas Sowell, "Price Gouging in Florida," http://www.townhall.com/opinion/column/thomassowell/2004/09/14/12996.html, March 8, 2006. See also, Ed Lotterman "What is 'Price Gouging' and Do We Need Pricing Laws?," http://www.edlotterman.com/pricegouging.htm, March 8, 2006. ("Price controls lead to wasted resources and even greater unfairness than the market … Punishing price "gouging", defined after the fact, introduces greater uncertainty into business that can only be overcome with average higher cost to consumers. If potential producers know that their prices may be lowered arbitrarily at times in a certain sector such as oil, they will be less inclined to enter that sector.")
9. Emphasis supplied.
10. Michael A. Salinger, "Moneyball and Price Gouging", www.ftc.gov/speeches/salinger/060227moneyballandpricegouging.pdf

Authored by:

Don T. Hibner, Jr.
213-617-4115
dhibner@sheppardmullin.com

A question arising from end-user license agreements ("EULAs"), which accompany applications software programs that have been preinstalled on personal computers, is whether they are sufficient to create the type of direct economic relationship between the end-users and the software maker that could support an action under the federal antitrust laws. See Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977) (barring indirect purchasers claims for recovery of illegal overcharges under the federal antitrust laws). A related question is whether such end-users would have standing to allege antitrust damages claims under the Associated General Contractors v. California State Council of Carpenters, 459 U.S. 519 (1983) (barring remote claims when more direct victims existed who could sue). The Fourth Circuit recently addressed both issues and upheld the District Court's dismissal of federal antitrust claims on behalf of 26 end-user licensees pursuant to Fed. R. Civ. P. 12(b)(6). Kloth v. Microsoft, 444 F.3d 312 (2006).

Kloth was filed in the aftermath of the United States' civil action against Microsoft in which Microsoft was found to have maintained an illegal monopoly in the worldwide market for licensing Intel-compatible PC operating systems. 444 F.3d at 317; United States v. Microsoft, 253 F.3d 34 (D.C. Cir. 2001). In Kloth, plaintiffs alleged that, subsequent to eliminating other competitors from the operating systems software market and obtaining a monopoly in that market, Microsoft "used this monopoly power to raise prices and to leverage its power into other markets, including markets for applications software such as word processing, spreadsheet, and office suite software," thereby "achieving market shares approaching 90 percent" in the market for those applications software. Id. Plaintiffs thus alleged that, since the mid-1990s, Microsoft has had monopoly power in four product markets relating to Intel-compatible personal computers: (1) operating systems software, (2) word processing applications software, (3) spreadsheet applications software, and (4) office suite applications software. Id.

Plaintiffs maintained that Microsoft illegally advanced its monopoly by "refusing to sell its software to manufacturers, retailers and consumers" and by using a "two-tier" licensing system. Id. (emphasis in original). First, Microsoft entered into licensing arrangements with original equipment manufacturers ("OEMs") which allegedly forced them to preinstall software on the personal computers that the OEMs in turn sold to "consumers or 'end users.'" Id. Then, allegedly acting as "Microsoft's agents," the OEMs purportedly were required to offer EULAs for acceptance or rejection by consumers who purchased their computers. Id. at 318. If an end-user rejected the EULA, it could obtain a refund directly from Microsoft. Id. Plaintiffs alleged that the EULAs imposed significant restrictions on licensees' use of the software, and that Microsoft dictated the terms under which retailers and distributors could sell EULAs to end-users. Id. None of the plaintiffs had purchased software licenses directly from Microsoft. Rather, they bought computers from OEMs or retailers with preinstalled software that incorporated Microsoft's offer to issue an end-user license. Id. Plaintiffs alleged that, through its restrictive practices, Microsoft harmed them "by charging them supra-competitive prices for operating systems software and applications software, by denying them the benefit of new and superior technologies, and by preventing them from reselling Microsoft software products." Id. They also claimed that, by integrating its Internet Explorer web browser with its operating system, Microsoft deprived them of alternative search engines and degraded the performance of their computers, making them more susceptible to security breaches. Kloth, 444 F.3d at 318.

In January 2001, The District Court dismissed Plaintiffs' damages claims under both Illinois Brick and Associated General Contractors. The District Court also later dismissed Plaintiff's equitable relief claims in November of 2004 on grounds that "plaintiffs . . . were not pursuing injunctive claims with diligence" and "[t]he focus was on monetary damages." Id. at 319. The court also concluded that resurrecting the injunctive claims at that late point would be prejudicial to Microsoft and against public policy. Id.

On appeal, the Fourth Circuit rejected each of plaintiffs' arguments as to why Illinois Brick did not bar their federal antitrust damages claims. As a preliminary matter, the Court noted that, for Illinois Brick to apply, "Plaintiffs have to be (1) indirect purchasers (2) seeking recovery for illegal overcharges. 'Indirect purchasers' are those purchasers in the distribution chain, [who] are not the immediate buyers from the alleged antitrust violators." Id. at 320 (quoting Kansas v. UtiliCorp United, Inc., 497 U.S. 199, 207 (1990)).

Plaintiffs first contended that Illinois Brick did not apply because the EULAs "functioned as contracts directly between them and Microsoft" and constituted "the relevant economic transaction." Id. at 320. The Court rejected that contention, noting that, although Plaintiffs could have purchased licenses directly from Microsoft, they instead acquired them from OEMs and retailers, "paying them, not Microsoft, for their licenses at prices set by the OEMs and retailers." Id. at 321. Accordingly, Plaintiffs were indirect purchasers, and their claims implicated all of the concerns voiced in Illinois Brick and its progeny. Id.

Plaintiffs next contended that, because the EULAs entitled them to a refund directly from Microsoft in the event they declined a license, "the meaningful transaction is between them and Microsoft." Id. Rejecting that argument, the Court noted, "it does not follow from this observation that the plaintiffs were direct purchasers of Microsoft's licenses." Id. (emphasis in original). Accordingly, "even though Microsoft might be required by the EULA to provide refunds or other reimbursement, that obligation did not give Microsoft the ability to control retail prices set by OEMs and retailers for the sale of the license agreements." Id. The Court then observed, "Were we to accept plaintiffs' argument, we would have to consider the very complex price adjustments within Microsoft's distribution chain that Illinois Brick sought to avoid." Id.

Plaintiffs' third argument was based on the doctrine of judicial estoppel. They argued that, because, in certain past litigation, Microsoft had denied making a "first sale" to OEMs, it was now estopped "from asserting that it sells software to OEMs or other retailers." Id. The Court rejected that argument, holding that, "[a]lthough Microsoft may have argued in the past that it did not sell title to its software, plaintiffs have not shown that Microsoft ever denied selling OEMs the right to charge consumers for licenses or the options to enter into licenses." Id. (emphasis in original). Because Microsoft did not rely on "mutually inconsistent positions," the Court found no basis for applying the judicial estoppel doctrine. Id.

Plaintiffs next argued that they should not be treated as indirect purchasers because of the "so-called 'market forces' exception referred to in Illinois Brick." Id. The Court explained that the Supreme Court stated in Illinois Brick that a "'situation in which market forces have been superseded and the pass-on defense might be permitted is where the direct purchaser is owned or controlled by its customer.'" Kloth, 444 F.3d at 321 (quoting Illinois Brick, 431 U.S. at 736). However, as the Court noted, Plaintiffs had not alleged such facts, and so the Court of Appeals could not "overlook the Supreme Court's admonition against enlarging market-based exceptions that would undermine the indirect-purchaser rule." Id. at 321.

The Court then addressed Plaintiff's "more serious argument for bypassing Illinois Brick," i.e., "whether the damages that plaintiffs claim resulted from an illegal overcharge passed on to them by the intermediaries." Id. at 322. Relying on Blue Shield of Virginia v. McCready, 457 U.S. 465 (1982), Plaintiffs argued that "the Illinois Brick rule does not require that consumers have made payments directly to antitrust defendants." Id. In McCready, the Court allowed plaintiffs to pursue antitrust claims against their healthcare insurers when their insurers implemented a boycott of psychologists and refused to reimburse insurers for payments to psychologists under the plans. However, as the Court of Appeal explained, McCready was distinguishable because, in that case, "there was no intermediary threatening duplicative recovery. The psychologists were paid by the plaintiffs and therefore had no claim against the insurer based on its failure to reimburse. Nor did the case present difficulties in 'disentangling overlapping damages claims,' since McCready's 'damages were fixed . . . they could be ascertained to the penny.'" Kloth, 444 F.3d at 322; Blue Shield, 457 U.S. at 475 n.11. By contrast, Plaintiffs in Kloth stood "at the end of a distribution chain in which the intermediaries have independently set prices and passed on alleged overcharges." 444 F.3d at 322.

The Court also rejected Plaintiffs' claims that Microsoft nonetheless caused them direct injuries "by (1) suppressing competitive technologies, (2) restricting the terms of end-user licenses, and (3) degrading computer performance." Id. As for the first two reasons, the Court noted that they basically boiled down to a claim that plaintiffs paid supra competitive prices, and thus fell within the Illinois Brick rule. Id. at 322-23. As for degradation in computer performance claim, the Court explained that this was basically a products liability claim, not an antitrust claim. Id. at 323.

The Court next addressed plaintiff's standing to sue for antitrust injuries. Here, the Court stated, "When considering the three types of injury that plaintiffs claim to have sustained directly—injuries other than supra competitive prices—we conclude, by applying Associated General Contractors factors, that plaintiffs' injuries were too generalized or speculative; that some injuries were not of the type covered by the antitrust law; that there were more direct victims [i.e., OEMs and retailers]; and that plaintiffs' claims raise insuperable problems in measuring and allocating damages." Id. at 324. The Court agreed with the District Court's reasoning that, with respect to claims that Microsoft deprived Plaintiffs of competitive technology, "[i]t would be entirely speculative and beyond the competence of a judicial proceeding to create in hindsight a technological universe that never came into existence," and "even more speculative to determine the relevant benefits and detriments that non-Microsoft products would have brought to the market and the relative monetary value . . . to a diffuse population of end users." Id. at 324. The Court explained, "At bottom, the harms that the plaintiffs have alleged with respect to the loss of competitive technologies are so diffuse that they could not possibly be adequately measured. The problem is not one of discovery and specific evidence, but of the nature of the injury claimed. Where the purported injuries amount to generalized or abstract societal harms, the plaintiffs cannot claim that they, as distinct from others in society, were specifically injured in their business or property by the alleged antitrust violation as required by § 4." Kloth, 444 F.3d at 324. With respect to the impact of EULA restrictions, the Court noted that there were more direct victims—"i.e., the retailers and OEMs—and . . . it is too costly for courts to discern the allocation of such damages." Id. at 325. With respect to Plaintiffs' third and final rationale, computer performance degradation, the Court once again noted that "[t]o the extent that these claims are for actual injury to plaintiffs' computers, the plaintiffs' claims amount to claims for defective products. This type of injury is simply not a type for which plaintiffs can recover under the antitrust law." Id. at 325.

Finally, the Court upheld the District Court's discretion to dismiss the equitable claims when plaintiffs failed to prosecute those claims for nearly four years after the District Court dismissed their damages claims. Id. at 325-26.

Authored by:

Mona Solouki
415-774-3210
msolouki@sheppardmullin.com

Antitrust Division Allows Mittal's Bid for Arcelor to Proceed

• On May 12, the Antitrust Division announced that it had reached a settlement with Mittal Steel which would allow it to continue its hostile bid for Arcelor. In January, Mittal, the largest steel manufacturer in the world, announced its hostile bid for Arcelor, the second largest steel manufacturer. Arcelor and its chairman, Guy Dolle, have fiercely resisted the hostile bid, arguing that the two companies have clashing corporate cultures and that Mittal would cut jobs in Europe after the acquisition. Guy Dolle also argued that the two companies concentrate on different varieties of steel, comparing Arcelor's steel to perfume and Mittal's steel to Eau de Cologne.
  
  Prior to the hostile bid from Mittal, Arcelor had outbid ThyssenKrupp for Dofasco, one of Canada's top steel makers. Arcelor had made a final bid of C$71 per share, which ThyssenKrupp had decline to match. This had raised antitrust concerns for the Mittal deal, as Arcelor had a limited presence in the North American steel market prior to the acquisition of Dofasco, while Mittal is the largest steel manufacturer in the North America. Mittal had announced that it would divest Dofasco to ThyssenKrupp for C$68 per share if it bought Arcelor, but Arcelor had then attempted to make this impossible by attaching penalties to any divestiture of Dofasco.
  
  As part of the deal with the Antitrust Division, Mittal agreed to allow the Division to continue to investigate the competitive implications of the acquisition of Arcelor. If the Division then finds that the acquisition would pose competitive problems, Mittal will divest Dofasco to ThyssenKrupp. If Mittal is unable to divest Dofasco, however, then Mittal will have to divest "certain alternative assets" to ThyssenKrupp or another buyer deemed acceptable by the Antitrust Division. Although not listed, the alternative assets would probably include current Mittal facilities specializing in the production of automobile steel, as that was the primary product overlap between Dofasco and Mittal.
  
  The deal is intriguing for two reasons. First, the agreement establishes a remedy prior to establishing an antitrust problem, thus giving Mittal and Arcelor's shareholders some level of certainty as the hostile tender offer moves forward. Generally, the antitrust agencies will first investigate whether there is an antitrust problem before deciding upon a remedy. Second, it undoes the result of the sale of Dofasco, allowing ThyssenKrupp to obtain Dofasco at a discount to what Arcelor paid. This agreement, therefore, could serve as a useful model to future strategic buyers trying to purchase a rival through a hostile takeover.

Antitrust Division Asks for Microsoft Extension

• On May 12, the Antitrust Division filed a report asking Judge Colleen Kollar-Kotelly to extend the provisions of the Microsoft antitrust settlement agreement relating to technical documents. Under the settlement agreement, Microsoft is required to improve the documentation it provides to licensees of its products, specifically the details that programmers need to write programs that interact with the Windows operating system. In its prior reports filed as part of its Joint Status Report with Microsoft, the Division had noted that Microsoft was having trouble providing sufficient information for the licensees, a problem which could run the risk of violating the agreement. Microsoft had then proposed resetting its policies entirely, rather than amending them piecemeal as it had previously done. Although the Division agreed, it required an extension from 2007 to 2009 of those portions of the settlement agreement. In asking for the extension, the Division emphasized that "the request for an extension is not a result of any belief that Microsoft has willfully violated the final judgment."

Authored by:

Christopher Bowen
202-772-5384
cbowen@sheppardmullin.com

FTC Finds No "Gas-Gouging"; Does Not Recommend Federal Price Gouging Legislation

• On May 22, the Federal Trade Commission issued the results of its investigation into gasoline prices after Hurricanes Katrina and Rita. Looking into both allegations of price gouging and energy price manipulation, the FTC concluded that there had been no instances of energy price manipulation nor any instances of price gouging. Under § 632 of the Commission’s 2006 appropriations legislation, the Commission was directed to find gouging where "the average price of gasoline . . . in September, 2005 . . . exceeded the average price of such gasoline in that area for the month of August, 2005.'" In examining the financial data for 30 refiners, 23 wholesalers, and 24 single-location retailers, the FTC found 15 instances where the increase in prices met the definition under § 632. The FTC, however, concluded that these increases in prices were attributable to local pricing factors. In addition, the FTC also found no evidence that energy companies had manipulated prices over the past few years, finding that refiners had not artificially lowered production, shipped products overseas, deliberately lowered expansion plans, or lowered inventories to increase the prices of crude and refined petroleum products.
  
  The report emphasized the difficulty of determining what is and is not price gouging under the act, and that attempts to limit the financial impact of disasters could hurt consumers. "[I]f natural price signals are distorted by price controls, consumers ultimately might be worse off, as gasoline shortages could result. . . A temporary price cap may have an especially adverse effect on incentives as producers withhold supply in order to wait out the capped period." The FTC concluded by refusing to recommend that Congress enact a federal price gouging statute, as states have found similar statutes difficult to enforce. "[T]hroughout antitrust jurisprudence, one area into which the courts have refused to tread is the question of what constitutes a 'reasonable price.' Ultimately, the lack of consensus on which conduct should be prohibited could yield a federal statute that would leave businesses with little guidance on how to comply and would run counter to consumers' best interest."

Authored by:

Christopher Bowen
202-772-5384
cbowen@sheppardmullin.com

• On May 18, the European Court of Justice ("ECJ") rejected Archer Daniels Midland's ("ADM") appeal in respect of the Amino Acids cartel. The ECJ rejected ADM’s claim that in calculating the fine, the European Commission should have taken account of penalties paid by ADM in other jurisdictions, in particular, the United States and Canada, in respect of the Amino Acids cartel. The ECJ confirmed that, when setting the level of fines, the European Commission does not have to take into account fines paid by a company in other jurisdictions. The ECJ also confirmed that the European Commission may decide at any time to generally raise the level of fines. The European Commission is thus free to exceed the level of fines previously imposed in other cases, and also to change the methodology of calculating the fines. In this context, European Competition Commissioner, Neelie Kroes, has previously announced that she is reviewing the terms of the European Commission’s Notice on Fines.

• On May 31, the European Commission imposed fines of €344.5 million (US$440m) on producers of acrylic glass for price fixing. The European Commission alleged that Arkema (formerly Atofina), Degussa, ICI, Lucite and Quinn Barlo (formerly Barlo) violated the EC Treaty rules’ ban on restrictive business practices (Article 81) by participating in a cartel on the market for acrylic glass. Degussa received full immunity from fines under the Commission’s leniency regime for being first to provide information about the cartel. The Commission alleged that the five companies agreed, fixed and monitored (target) prices for acrylic glass and exchanged commercially important and confidential information in the European Economic Area ("EEA") between 1997 and 2002. Acrylic glass is widely used, inter alia, in cars, DVDs, lenses, household appliances, electronics, baths and showers. Competition Commissioner, Neelie Kroes, said “Cartels are a scourge. I will ensure that cartels will continue to be tracked down, and punished."

• On May 16, European Commission officials confirmed that its investigators had carried out unannounced inspections of 20 energy companies in the EU including companies located in Germany, Italy, France, Belgium and Austria. The Commission suspects that the firms may have violated EC Treaty antitrust rules that prohibit restrictive business practices and/or abuse of a dominant position (Articles 81 and 82 respectively). The Commission has previously announced that the European energy markets requires further liberalization, and certain market characteristics and practices may be subject to antitrust investigation. According to the Financial Times, some analysts view the Commission's investigation as marking an increased emphasis on the Commission's intention to fully liberalize Europe's energy markets, and predicts that energy companies will implement new business practices to preempt any Commission enforcement action.

• On May 23, the South Korean Fair Trade Commission ("KFTC") rejected Microsoft's formal objection to a fine of $34 million, and its request that the KFTC reconsider its decision last December which mandates the unbundling of its media player and messaging service from its Window software. From August 24, Microsoft will be required to sell two versions of its Windows operating system: one with Media Player and instant messaging included; and, one without the programs but that has links to websites that sell similar software. Microsoft said it would continue the appeals process, and issued a press release stating: "Microsoft firmly believes it has complied with Korean competition laws, and has conducted business for the benefit of consumers in Korea."

• On May 20, the Italian Competition Authority imposed fines of €56.9m (US$73m) on eight industrial gas companies. The Authority alleged that the companies implemented a market-sharing agreement between 1991 and 2004 "by way of meetings and contacts during which a balance was maintained in terms of the suppliers' respective client bases: the value of any customers taken away would be compensated by the offer of other customers of equivalent value. The exchange of information also extended to the various companies' pricing policies." The companies fined represent 90% of the Italian market for the production and sale of numerous gases used in the food industry, in electronics, in metallurgy, in mechanical manufacturing and in healthcare (both in hospitals and in home care), including oxygen, nitrogen, carbon dioxide, hydrogen and specialty gases.

• On May 19, the UK's OFT agreed a resolution of its investigation into an agreement between fifty independent schools to exchange information about intended fee levels. Under the terms of the settlement, the schools have admitted that their participation in the exchange of sensitive information through the ‘Sevenoaks Survey’ involved a distortion of competition, and infringed competition law. Each school will pay a nominal penalty of £10,000 which will be collected by the OFT on behalf of the UK Treasury. The schools do not, however, make any admission that the agreement had any effect upon fees. The schools have also agreed to make an ex-gratia payment totaling £3 million into an educational, charitable trust to benefit the pupils who attended the schools between 2001/02 and 2003/04. Vincent Smith, Director of Competition Enforcement at the OFT, said: "This is a fair outcome in a case where the parties have accepted there has been an infringement of competition law, but are also charitable, not-for-profit organizations."

• On May 24, the French Conseil de la Concurrence published undertakings offered by a number of companies in the hi-fi and home cinema industry. Several companies, including Bose, JM Lab, and Triangle have proposed changes to their distribution contracts, which are under scrutiny because of several restrictions on retailers, for example, with respect to internet sales. The undertakings were agreed with the French antitrust agency who became involved after a complaint was filed with the French Ministry of the Economy in 2001.

• On May 10, the European Commission sent on a Statement of Objections to Distrigas, part of the Suez Group, alleging that Distrigas is preventing new suppliers from entering the Belgian gas market, in violation of EC Treaty rules on abuse of a dominant market position (Article 82). The Statement of Objections alleges that a significant proportion of the Belgian gas market is unavailable for competition for long periods because Distrigas, the dominant gas supplier in Belgium, concluded long term gas supply contracts with many of its industrial customers. This practice allegedly distorts competition because a large proportion of other gas sales in Belgium are intra-group sales within the Suez group, and are not accessible to potential new market entrants. Distrigas has four weeks to reply in writing to the Statement of Objections.

• On May 10, the Bundeskartellamt, Germany's Cartel Office, imposed a €250,00 (US$320,000) fine against the German Fuchs group. The Bundeskartellamt alleged that Fuchs, Europe's largest spice drove out smaller rivals from the market by engaging in practices that included contributing to marketing costs, and placing free products with retailers in exchange for exclusive dealing. This practice allegedly continued despite an earlier ruling by the Bundeskartellamt in 2002. On May 11, Spain's Tribunal de Defensa de la Competencia ("TDC") imposed a €13m (US$17m) fine on the Spanish subsidiaries of five major film distribution companies who hold a combined market share totaling 70% of the Spanish market. The TDC alleged that Walt Disney, Sony Pictures, Hispano Foxfilm, United International, and Warner Sogefilms, colluded over their commercial policies with film exhibitors, and engaged in market partitioning in an effort to weaken competition.

• On May 8, Korea's Supreme Court ruled that Korea's Fair Trade Commission can impose sanctions on companies that violate antitrust laws, even if they are incorporated in other countries. This followed the Supreme Court's ruling that upheld a US$4.5m fine against Showa Denko KK for alleged price fixing in the graphite electrode market. The Supreme Court had originally imposed US$8.5 million worth of fines against six graphite electrode producers for fixing prices between 1992 and 1998. None of the producers were domestic companies. The action lodged against the foreign companies was the first extra-territorial application of Korean antitrust law.

Authored by:

Neil Ray
415-774-3269
nray@sheppardmullin.com