Introduction

On May 21, 2007, the United States Supreme Court issued a significant 7-2 decision tightening the requirements for pleading antitrust conspiracies under Sherman Act § 1, Bell Atlantic Corp. v. Twombly (No. 05-1126) 2007 U.S. LEXIS 5901.  The Court held that to satisfy the pleading requirements of FRCP 8 and survive a motion to dismiss pursuant to FRCP 12(b)(6), allegations of parallel conduct and bare assertions of conspiracy will not suffice.  Id. at *23 ("Without more, parallel conduct does not suggest conspiracy, and a conclusory allegation of agreement at some unidentified point does not supply facts adequate to show illegality.")  Thus, the Court found, when allegations of parallel conduct are set out as the basis of a Section 1 claim, "they must be placed in a context that raises a suggestion of a preceding agreement, not merely parallel conduct that could just as well be independent action."  Id. at *24.

In reaching this conclusion, the Supreme Court explicitly rejected the longstanding formulation for deciding motions to dismiss set forth in Conley v. Gibson, 355 U.S. 41 at 45-46 (1957) – "that a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief."  See Twombly, 2007 U.S. LEXIS 5901 at *31-35.  Now, under Twombly, a Section 1 plaintiff may not rely on the possibility that she might later establish some "some set of undisclosed facts to support recovery," but instead must plead "enough facts to state a claim to relief that is plausible on its face," and not merely "conceivable."  Id. at *33, *47.

The District Court Decision

In Twombly, plaintiff consumers claimed that defendant incumbent local exchange carriers – the four "Baby Bells" – conspired to exclude competitors from, and not to compete against each other in, their respective geographic markets.  See id. at *13-15.  Plaintiffs relied on allegations of parallel conduct (e.g., that the Baby Bells were not competing in each others' territories), and a conclusory allegation on information and belief that defendants entered into an conspiratorial agreement.  Id. at *13-15, *37.  The district court granted defendants' motion to dismiss for failure to state a claim because the complaint failed to allege sufficient "plus" factors that would tend to exclude independent self-interested conduct as an explanation for defendants' alleged parallel behavior.  Bell Atlantic Corp. v. Twombly, 313 F. Supp.2d 174, 179-180 (S.D.N.Y. 2003) ("In the context of parallel conduct allegations, simply stating that defendants engaged in parallel conduct, and that this parallelism must have been due to an agreement, would be equivalent to a [insufficient] conclusory, 'bare bones' allegation of conspiracy.").

The Second Circuit Reverses

The Second Circuit reversed, holding that the District Court tested the complaint by the wrong standard and that "plus factors are not required to be pleaded to permit an antitrust claim based on parallel conduct to survive dismissal."  Twombly v. Bell Atlantic Corp., 425 F.3d 99, 114 (2d Cir. 2005).  Although the Second Circuit acknowledged that plaintiffs must plead facts that "include conspiracy among the realm of 'plausible' possibilities in order to survive a motion to dismiss," it adopted the Conley-based formulation that "to rule that allegations of parallel anticompetitive conduct fail to support a plausible conspiracy claim, a court would have to conclude that there is no set of facts that would permit a plaintiff to demonstrate that the particular parallelism asserted was the product of collusion rather than coincidence."  Id.

The Supreme Court's 7-2 Decision

The Supreme Court, in turn, reversed the Second Circuit, finding that "nothing contained in the complaint invests either the action or inaction alleged with a plausible suggestion of conspiracy."  Twombly, 2007 U.S. LEXIS 5901 at *39.  While acknowledging that a showing of parallel business behavior can be admissible circumstantial evidence from which courts may infer agreement, the Court emphasized that such evidence falls short of "conclusively establishing agreement or itself constituting a Sherman Act offense."  Id. at *18.  Writing for the majority, Justice Souter opined that factual allegations must be enough to raise a right to relief "above the speculative level," and that a Section 1 complaint must state "enough factual matter (taken as true) to suggest that an agreement was made."  Id. at *21, *23.

The Supreme Court made clear that to comply with Rule 8's requirement of a short and plain statement of the claim showing entitlement to relief, Section 1 plaintiffs must plead plausible, not just conceivable, grounds to infer an agreement.  As explained by the Court:

An allegation of parallel conduct is thus much like a naked assertion of conspiracy in a § 1 complaint:  it gets the complaint close to stating a claim, but without some further factual enhancement it stops short of the line between possibility and plausibility of "entitlement to relief."

Id. at *25.  The Court noted that asking for plausible grounds to infer an agreement "does not impose a probability requirement at the pleading stage; it simply calls for enough fact to raise a reasonable expectation that discovery will reveal evidence of illegal agreement."  Id. at *23.

The Court defended its pleading "plausibility" requirement by recognizing the enormous expense often associated with antitrust discovery proceedings and the efficiency of eliminating "largely groundless claim[s]" as early in the pretrial process as possible.  Noting the enormity of the case before it (involving a putative class of 90% of all subscribers to local telephone and high-speed Internet service in the U.S. with claims against the largest telecommunications companies in the country over a seven-year period), the Court was unpersuaded that careful case management and the availability of summary judgment proceedings would avoid the in terrorem effect of discovery in largely baseless antitrust actions.  Id. at *27-30 ("the threat of discovery expense will push cost-conscious defendants to settle even anemic cases before reaching [summary judgment] proceedings").  Justice Souter opined that "it is only by taking care to require allegations that reach the level suggesting conspiracy that we can hope to avoid the potentially enormous expense of discovery in cases with no 'reasonably founded hope that the discovery process will reveal relevant evidence' to support a § 1 claim."  Id. at *30, citing Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 347 (2005).

These discovery cost concerns no doubt contributed to the majority's abrogation of the Conley "no set of facts" motion to dismiss standard, a literal reading of which the Court concluded would allow "a wholly conclusory statement of claim [that] would survive a motion to dismiss whenever the pleadings left open the possibility that a plaintiff might later establish some set of undisclosed facts to support recovery."  See id. at *33 (likening such process to the unfulfilled hopeful expectations of David Copperfield's Wilkins Micawber).  Listing criticisms of the Conley "no set of facts" standard and explaining that the quote seldom is read properly in the context of the full Conley opinion, the Court stated that "this famous observation has earned its retirement."  Id. at *35.  The Court concluded that the passage relied on by the Second Circuit "is best forgotten as an incomplete, negative gloss on an accepted pleading standard:  once a claim has been stated adequately, it may be supported by showing any set of facts consistent with the allegations in the complaint."  Id.

Justice Stevens, joined by Justice Ginsburg in all but a short concluding discussion, wrote an impassioned dissent, arguing that the Twombly plaintiffs had stated a claim for relief under Section 1.  The dissenting justices challenged the majority's conclusion that "a judicial opinion that the charge is not 'plausible' [could] provide a legally acceptable reason for dismissing the complaint."  Id. at *48-49 (Stevens, J., dissenting).  Arguing that "the pleading standard the Federal Rules meant to codify does not require, or even invite, the pleading of facts" (id. at *62), Justice Stevens wrote that the Conley "no set of facts" holding "reflects a philosophy that, unlike in the days of code pleading, separating the wheat from the chaff is a task assigned to the pretrial and trial process."  Id. at *67-68.

In addition, Justice Stevens took the majority to task for applying a "heightened pleading standard" to antitrust conspiracy claims while steadfastly denying doing so.  See id. at *74-76.  In rejoinder, Justice Souter stated that the majority's concern was not that the allegations in the complaint were insufficiently "particularized," as might be addressed under the "heightened" pleading standards of Rule 9, but that "the complaint warranted dismissal because it failed in toto to render plaintiffs' entitlement to relief plausible."  Twombly, 2007 U.S. LEXIS 5901 at *45, n.14.  Thus, according to the majority, "we do not require heightened fact pleading of specifics, but only enough facts to state a claim to relief that is plausible on its face."  Id. at *47.

The Post-Twombly World

Obviously Twombly raises the bar for plaintiffs pleading antitrust cases.  With the "retirement" of the Conley standard, no longer can plaintiffs rely on conclusions in a complaint simply because there is some hypothetical set of facts that could justify them.  Pleading parallel conduct with a conclusory allegation that defendants conspired will no longer pass muster.  But how the decision will be applied in cases where plaintiffs attempt to fix these deficiencies, such as by pleading "plus" factors, is far from clear – the Supreme Court did not elaborate on exactly how plaintiffs can "nudge[] their claims across the line from conceivable to plausible."

Indeed, Twombly may have the biggest impact of the Supreme Court's many antitrust opinions this term.  Within hours of its release, the decision began surfacing in pleading motions and case management proceedings across the country.  It provides a platform not only to increase scrutiny of existing pleadings, but to argue for stays of discovery pending pleading challenges.  Perhaps most importantly, its logic is not limited to antitrust cases, and it may find application quickly in a variety of complex civil litigation contexts.

Authored By:

Michael W. Scarborough

(415) 774-2963

mscarborough@sheppardmullin.com

On March 13, 2007, United States District Court Chief Judge Vaughn Walker decided summary judgment motions in a complex group boycott case arising out of alleged efforts by Federated Department Stores (“Federated”), May Department Stores (“May”), Lenox Incorporated (“Lenox”) and Waterford Wedgwood (“Waterford”) to boycott Bed Bath & Beyond, a competitor of May and Federated.  In Re: Tableware Antitrust Litigation (No. 04-3514 VRW, N.D. Cal.).  Judge Walker's typically painstaking opinion provides a textbook quality overview of an area of antitrust law not currently known for its clarity: the interplay between horizontal group boycott allegations, the per se rule and application of the Matsushita standard for analyzing summary judgment where no direct evidence of the horizontal group boycott exists.

The case arises out of efforts by Waterford and Lenox in early 2000 to expand the distribution channels for their high-end tableware lines to include Bed Bath & Beyond and other specialty retailers.  In early 2001, Bed Bath & Beyond agreed with Waterford and Lenox to participate in a test roll-out of Waterford and Lenox high-end housewares at a limited number of Bed Bath & Beyond stores.  Lenox and Waterford high-end tableware and other houseware items had traditionally been distributed only through better department stores, and not through specialty retailers and discounters.  Allegedly, upon finding out that Lenox and Waterford intended to commence distribution through Bed Bath & Beyond, executives at both Federated and May actively attempted to persuade Waterford and Lenox not to distribute through Bed Bath & Beyond, and threatened retribution, including assertedly refusing to carry Lenox or Waterford products.  The test was cancelled, with Lenox and Waterford then refusing to supply goods to Bed Bath & Beyond, even on a test basis.  Approximately a year later, Waterford did begin to sell Wedgwood table products through Bed Bath & Beyond.  Lenox followed suit, also in late 2002.

A putative class of retail consumers who shopped at Bed Bath & Beyond sued, alleging various violations of the antitrust laws, including three interrelated but distinct boycott cases:

1)         A horizontal agreement between Federated and May,

2)         A horizontal agreement between Waterford and Lenox, and

3)         Vertical agreements among all defendants designed to achieve a boycott by Waterford and Lenox of Bed Bath & Beyond.

Defendants ultimately moved for summary judgment, asserting that (1) the plaintiffs, as indirect purchasers, lack standing to challenge certain of the alleged conspiracies, (2) the alleged boycotts were not per se illegal, which was plaintiffs' only alleged theory of illegality, and (3) in any event, no direct evidence of conspiracy had been discovered and circumstantial evidence proffered by plaintiffs was insufficient to preclude summary judgment under the Supreme Court's decision in Matsushita.

Before moving to the merits, Judge Walker had to decide the extent to which the plaintiff class of retail purchasers had standing to make the claims asserted.  He used the five-factor test for determining whether plaintiffs have antitrust standing articulated by the Supreme Court in Associated Federal Contractors of California, Inc. v. California State Council of Carpenters, 459 U.S. 519, 530-35 (1983).  He ultimately concluded that (1) the retail purchasers were consumers in the restrained market for high-end tableware, (2) their injuries were clearly a product of the allegedly illegal conduct if it occurred, (3) damages were ascertainable, though might be somewhat speculative, (4) recovery would not be duplicative, and (5) the apportionment of damages would not be exceedingly complicated.

However, the Court went on to caution that insofar as plaintiffs complained about a horizontal agreement between Waterford and Lenox, the upstream manufacturers of the goods in question, the retail purchasers were indirect purchasers of those goods since they dealt only with the department stores and Bed Bath & Beyond, not with the manufacturers.  As a result, the class of retail purchasers were "indirect purchasers" and so were precluded from bringing that claim under the Supreme Court's decision in Illinois Brick Co. v. Illinois, 431 US 720 (1977).  Judge Walker went on to explicitly hold that Illinois Brick was equally applicable in the group boycott context as it was in the price fixing context.

Judge Walker then moved to the first substantive ground in defendants’ summary judgment motions – that plaintiffs exclusive reliance on a per se claim required dismissal of their case because the alleged group boycott conspiracies should be judged under the rule of reason, not per se illegality.  Judge Walker then made a detailed historical survey of the Supreme Court and Ninth Circuit cases discussing the application of the per se rule in the group boycott context.  He noted, citing a number of recent Supreme Court cases, that the tendency has increasingly been to restrict rather than expand the per se rule.  This has prompted commentators and some lower courts to conclude that the per se analysis is inappropriate unless the boycotting party or parties possesses market power, or exclusive access to an element essential to effective competition.  But after reviewing additional Supreme Court authority, in particular FTC v. Superior Court Trial Lawyers Association, 493 U.S. 411 (1990) and NYNEX Corp. v. Discon Inc., 525 U.S. 128 (1998), Judge Walker concluded that the current state of federal law does not require market power to condemn a horizontal agreement to injure another direct horizontal competitor.

He then moved on to determine whether the of alleged restraint at issue, assuming it occurred, was the sort of "naked restraint" on competition which merits per se condemnation.  He focused on the three-factor test created by the Ninth Circuit in Adaptive Power Solutions, LLC v .Hughes Missile Systems Co, 141 F. 3d 947, 950 (9th Cir. 1998).  The three Adaptive Power per se criteria are whether the restraint:

1)         cuts off access to a supply, facility, or market necessary to enable the victim firm to compete,

2)         is engaged in by firms possessing a dominant market position, and

3)         is not justified by plausible arguments that the agreement enhanced overalll efficiency or competition.

Ultimately, Judge Walker concluded that group boycott alleged here is a classic commercial agreement between horizontal competitors to injure another direct trade competitor.  In this regard, he distilled current existing boycott law to conclude that plausible arguments about enhanced overall efficiency or competition have been confined to circumstances where the alleged boycott activity occurred in the context of "industry self regulation, sports leagues, health care, non-economic boycotts and access to joint venture facilities."

Accordingly, he rejected Defendants' summary judgment motion to the extent that it relieed upon claiming that the conduct at issue should be judged by the rule of reason rather than the per se rule.  However, Judge Walker noted that to the extent plaintiffs complain about a vertical boycott agreement, such vertical agreements are entitled to rule of reason treatment under settled Supreme Court law.  Since plaintiffs rely exclusively on the per se rule, their claims alleging illegal vertical arrangements must be dismissed.

Judge Walker then dealt with defendants' central ground for summary judgment – that there is insufficient evidence of concerted action for plaintiffs’ claim to survive summary judgment.  He begins by noting the now accepted Monsanto standard for determining the existence of concerted action as requiring "evidence that tends to exclude the possibility of independent action" in the form of "direct or circumstantial evidence that reasonably tends to prove that [defendants] had a conscious commitment to a common scheme designed to achieve an unlawful objective."

Judge Walker then concluded that the plaintiffs have presented no direct evidence of such a horizontal agreement, and so the Court was required to analyze plaintiffs’ circumstantial evidence to determine whether reasonable inferences from that circumstantial evidence could defeat summary judgment under the Supreme Court's decision in Matsushita Electric Industrial Co. v Zenith Radio Corp, 475 U.S. 574 (1986).  The balance of the decision constitutes a textbook example of how to apply the Matsushita analysis for evaluating circumstantial evidence in the context of a horizontal group boycott case.  Most importantly, it dramatically illustrates the critical importance of certain nuances in the Matsushita analysis, especially the importance of determining whether particular defendants have any objectively rational economic motive to join the alleged conspiracy.  Judge Walker proceeded to analyze the same evidence in the context of the two distinct alleged horizontal conspiracies between Federated and May, and Waterford and Lenox, and reached completely different conclusions.

Judge Walker began by observing that the Supreme Court in Matsushita required a particular view of potentially ambiguous circumstantial evidence in a Sherman Acts Section 1 horizontal conspiracy case because “conduct that is as consistent with permissible competition as an illegal conspiracy does not, standing alone, support an inference of any antitrust conspiracy.”  475 U.S. F. at 588.  As a result, plaintiffs had to show that the inference of conspiracy was reasonable in light of (1) competing inferences of independent action which in turn required determining “whether the Defendant had any rational motive” to join the alleged conspiracy and (2) whether the defendant’s conduct “was consistent with the defendant’s independent interest.”  Matsushita, 475 US at 596-97.  In turn, Judge Walker went on to note that the Ninth Circuit has crafted its own complementary analysis permitting defendants to “rebut an allegation of conspiracy by showing a plausible and justifiable reason for its conduct that is consistent with proper business practice.”  In Re: Citric Acid Litigation, 191 F. 3d, 1090, 1094 (9^th Cir. 1999)  If the defendant does so, then the burden shifts back to plaintiffs to provide specific evidence tending to show the defendants were not engaging in permissible competitive behavior.

With these basic principles in mind, Judge Walker reviewed circumstantial evidence proffered by plaintiffs in the case.  It is unnecessary to discuss that review in detail here, except to observe that the type of circumstantial evidence adduced by the plaintiffs reflects communications between the department stores on the one hand, and the suppliers of high-end tableware on the other, discussing in general terms the advisability of the proposed Bed Bath and Beyond test.  While there were general expressions of disagreement with the test by the department stores, there was no direct evidence of threats or promises to cease doing business.

A noteworthy aspect of evidentiary analysis is the way the Court used the test of economic rationality to evaluate the same body of evidence but reach different conclusions about the two alleged conspiracies.  On the one hand, the Court found the circumstantial evidence to be sufficient to defeat a summary judgment motion by the department stores, Federated and May.  In so doing, Judge Walker focused on what he characterized as the heart of Matsushita, which was the insight that as a conspiracy allegation seemed to be more economically implausible, more persuasive evidence of conspiracy would be necessary to defeat summary judgment on a sliding scale.  Here, the Court viewed the alleged conspiracy between the department stores to injure their specialty retailer direct competitor, Bed Bath and Beyond, as completely economically plausible.  In fact, it mirrored the classic group boycott fact pattern in which direct competitors ban together and seek to deny critical competitive inputs (the high-end tableware produced by Lenox and Waterford) to another direct horizontal competitor.

In sharp contrast, Judge Walker stated that the “same economic intuition fails to account for the alleged conspiracy between Lenox and Waterford.”  Nothing in the record established an economic motive for a conspiracy between Waterford and Lenox to back out of the Bed Bath and Beyond rollout.  There was no articulated reason why the two high-end tableware suppliers harbored particular animosity towards Bed Bath and Beyond.  The alleged conspiracy thus did not appear to be economically rational.  Such manufacturers would have every reason to establish ties with newcomer competitors who offered additional mechanisms for distribution.  As a consequence, plaintiffs’ evidence, would not be sufficient to meet their burden of presenting circumstantial evidence which tended to “exclude the possibility that the alleged conspirators acted independently” for Lenox and Waterford.  Monsanto, 465 U.S. 768.

In summary, Chief Judge Walker’s decision serves as a useful primer for analyzing the interplay between alleged horizontal group boycotts, the per se rule, and the Matsushita structure for analyzing summary judgment in horizontal conspiracy cases dependent upon circumstantial evidence, especially in the Ninth Circuit.

Authored By:

David R. Garcia

(310) 228-3747

drgarcia@sheppardmullin.com

On May 22, the European Commission (EC) approved the proposed acquisition of the music publishing business of Bertelsmann Music Group (BMG) of Germany by the US-based Universal.  The EC held that the proposed merger, as initially notified, raised serious doubts as regards adverse effects on competition in the market for music publishing rights for online applications.  However, following an in-depth investigation, the EC held that its concerns would be removed by the remedies package proposed by the parties concerning the divestiture of a number of publishing catalogues.  In the light of these commitments, the EC concluded that the proposed operation would not significantly impede effective competition in the European Economic Area (EEA) or any substantial part of it.  EC Competition Commissioner, Neelie Kroes, stated, "Digital music has the potential to change the face of the music industry in Europe. I am satisfied that the significant remedies will keep these markets competitive and ensure that consumers will not be harmed by the merger".

On May 18, 2007, British Airways (BA) announced that it has made a £350 million (approx. US$700 million) provision in its accounts in relation to potential government fines which could result from antitrust investigations in the US, Europe, Australia, Canada, New Zealand and South Africa relating to cargo fuel surcharges, and in the USA and the UK in relation to long haul passenger fuel surcharges.  The provision also relates to civil claims in the USA, Australia and Canada.  BA stated that antitrust investigations by the US Department of Justice, the European Commission, and the UK Office of Fair Trading, into potential anticompetitive activity on long haul passenger and cargo fuel surcharges are continuing.  However, it has completed the information gathering required by these authorities.  BA confirmed that it has a "long-standing, clear and comprehensive competition compliance policy" but that it had "become apparent that there have been breaches of this policy in relation to discussions about these surcharges with competitors".  BA also stated that the £350 million provision represented the company's best estimate of the amount that could be required to settle all known claims in relation to these matters.

On May 16, the New Zealand High Court granted New Zealand's Commerce Commission leave to serve proceedings against three European companies for an alleged global cartel that affected the New Zealand electricity industry.  The alleged cartel supplied gas insulated switchgear, which is used to control the flow of electricity in substations.  The allegations are against French companies Alstom Holdings SA and Schneider Electric Industries SA, and German company Siemens AG.  In a Statement of Claim filed in the Auckland High Court on April 20, 2007, the Commission alleges that between 1988 and 2004 the companies gave effect and conspired to give effect in New Zealand to a global cartel for the supply of gas insulated switchgear.  Earlier this year, the European Commission fined the defendants and other companies over €750 million for conduct allegedly based on the same cartel agreement.  It is alleged that the defendants implemented the price-fixing and bid-rigging cartel through their wholly-owned subsidiaries in New Zealand.  Because the defendants in this case are all based overseas, the Commission was required to seek and obtain leave from the Court to serve the proceedings abroad.

On May 30, the Italian antitrust agency fined eight chipboard manufacturers a total of €31 million for allegedly participating in a cartel which fixed prices, and engaged in other collusive market practices.  The antitrust agency stated that the alleged conspirators controlled approximately 80% of the total market, and that the level of the fine was commensurate to the serious nature of the offence.  A ninth company, was also alleged to be part of the conspiracy but received amnesty from the fines under the Italian antitrust agency's new leniency program.

On May 28, the Irish Competition Authority agreed settlement terms with the Irish Medical Organization (IMO) in relation to legal proceedings initiated in the Irish High Court by the Competition Authority. In February 2005, the Competition Authority began an investigation into allegations of price-fixing by the IMO in relation to the provision of Private Medical Attendant Reports (PMARs) to life assurance companies.  It was further alleged that the IMO threatened to withdraw these services if the life assurance companies did not pay a proposed increase in fees.  Arising from that investigation, the Competition Authority initiated proceedings in the High Court against the IMO on July 3, 2006, alleging that the IMO’s conduct had as its object the prevention, restriction or distortion of competition in the market for medical information provided to life insurance companies and/or had as its effect the prevention, restriction or distortion of competition in the market for medical information provided to life insurance companies and the downstream market for life insurance.  The Settlement Agreement is in full and final settlement of all claims arising out of the alleged facts and matters pleaded in these proceedings but, does not constitute any admission of a breach of Section 4 of the Competition Act 2002 or of any of the alleged facts.  Dr Stanley Wong, Member and Director of the Monopolies Division of the Competition Authority stated, “The terms and subject matter of this settlement have much wider reaching implications than simply affecting the cost of medical reports to insurance companies. It further demonstrates the continuing commitment of the [Irish] Competition Authority to take enforcement action where appropriate against co-ordination by individual undertakings or their representative bodies with respect to price and other dimensions of competition in any sector of the Irish economy”.

On June 1, competition authorities from around the world agreed to work on a new set of recommendations on key substantive merger issues, produce guidance in the area of unilateral conduct, and promote further co-operation in anti-cartel enforcement. The decisions were made at the International Competition Network’s (ICN) 6th Annual Conference which was held in Moscow, Russia.  The ICN was created in October 2001 by 16 competition agencies from around the world.  It now includes 100 member agencies from 88 jurisdictions.  The ICN is a project-oriented and consensus-based organization, with members from developed and developing economies.  Its Recommended Practices provide benchmarks which form a baseline for competition enforcement and advocacy practices worldwide.  “I’m very proud of how much the ICN has accomplished over the past year, and the path ahead promises to be equally exciting,” said Sheridan Scott, Chairperson of the ICN Steering Group. “We will continue our efforts in several areas, and we are also adding a new emphasis on outreach and implementation of the excellent work the ICN generates”.

On May 28, the Mexican antitrust agency, the Comisión Federal de Competencia (CFC) fined Coca-Cola Export and its bottlers approximately $1 million for alleged anticompetitive behavior.  The agency's investigation was prompted by a complaint from Pepsi Cola Mexico.  The CFC held that Coca-Cola and its bottlers should no longer use exclusive contracts and discounts with distribution and retailing companies.  The agency focused its concerns, in particular, on the supply of refrigerators branded with the Coca-Cola label to small retailers.

On May 31, the Australian Federal Court rejected the Australian Competition and Consumer (ACCC) Commission Complaint alleging that 15 petrol retailers engaged in price-fixing in the Geelong petrol market between 1999 and 2000 in contravention of the Trade Practices Act 1974. A number of respondents made admissions prior to the trial, and some did not contest the allegations.  Mr. Graeme Samuel, ACCC Chairman, stated, "There was no dispute by many of the respondents in the Geelong proceedings that they communicated about petrol prices. What was disputed in court was whether those communications amounted to an 'arrangement or understanding' being reached between the parties as to how they would price their petrol. The decision highlights the difficulty of witnesses' exact recall to events of some years previously. Witnesses were required to give exact rendition of events, conversations and their effect on prices."  Mr. Graeme added that while disappointed with the judgment, it would not deter the ACCC from investigating allegations of price collusion in the petrol and related markets.

On May 2, the French Conseil de la Concurrence issued a press release announcing that it had fined a number of companies for their alleged participation in illegal market sharing and information exchanges with respect to public building projects.  Due to the serious nature of the alleged collusion, the fines were set at 5% of annual turnover for most of the companies involved which is the maximum allowed under French law.  The fines by the Conseil de la Concurrence follow a decision of the Court of Paris of February 2007 which confirmed an earlier judgment by the Paris County Court in October 2006.

On May 8, the European Commission confirmed that it issued a Statement of Objections to a number of companies regarding their alleged role in a cartel for chloroprene rubber which is mainly used for the production of technical rubber parts, for adhesives in the shoe and furniture industries and in the production of diving equipment.  The EC did not name the companies that are affected by the investigation.

Authored By:

Neil Ray

(415) 774-3269

nray@sheppardmullin.com

Subject to the restrictions on technology monopoly as set forth under Article 329 of the Contract Law of the PRC, a covenant not to sue clause (“CNS”) in a Software Development Agreement is feasible under the current laws and regulations of the People’s Republic of China (“the PRC”).

As more and more software companies enter China’s hot economy, many of them are planning to use China’s rich human talent pool to develop software based upon open source platforms.  As a part of the general practice for the open source development community, the owner of the software (“Software Owner”) generally requires participants to sign an agreement containing the so-called standard CNS, which is drafted very broadly.  In a CNS, the participants promise not to sue the Software Owner in exchange for access to the software object component, such as services and process.

In order to ascertain the legality of a CNS under the current laws and regulations of the PRC, one needs to first ensure that the particular CNS is feasible under the General Civil Principles of the PRC and the Contract Law of the PRC, and then make sure it will not trigger any technology monopoly restrictions.

In the PRC, when the participant and the Software Owner decide to adopt a CNS, such action will be deemed a contractual action, which is also a type of civil action.  Consequently, the legality of a CNS (a civil action) will be judged under the relevant clauses of the General Civil Principles of the PRC and the Contract Law of the PRC.

The General Civil Principles of the PRC and the Contract Law of the PRC enumerated conditions and actions that constitute unlawful civil actions.  Based upon our understanding, a CNS does not constitute an unlawful civil action for the following reasons: (i) it meets the elements of a lawful civil action under Article 55 of the General Civil Principles of the PRC; (ii) it does not fall under any of the civil actions as deemed null or void in Article 58 of the General Civil Principle of the PRC; (iii) it does not fall under any of the facts for finding a null or voidable contract as defined in Article 52 of the Contract Law; and (iv) it should be a fair action, and not bound by Article 59 of the General Civil Principles of the PRC and Article 54 of the Contract Law of the PRC.  Based upon the aforementioned analysis, a CNS should be feasible under the General Civil Principles of the PRC and the Contract Law of the PRC.

However, the scope of a CNS may be limited by technology monopoly restrictions.  Article 329 of the Contract Law of the PRC (“Article 329”) states:

“Technology contract which monopolizes the technology or impedes the technological progress, or which infringes upon the technological achievement of others shall be null and void.”nterpretation Concerning the Several Issues in the Application of Law in Hearing Technology Contract Disputes (“Technology Interpretation”), which identifies actions that are deemed to be illegal technology monopolies.  In particular, Article 10(6) of the Technology Interpretation (“Article 10(6)”) identifies the following as an act of technology monopoly:

The element of “technology monopoly” of the Article 329 is further interpreted in Article 10 of the I

“Prohibit the receiver of technology from challenging the validity of the intellectual property of the said technology or from inserting clauses for objection relating to the same.”

Thus, according to Article 10(6) and Article 329, any clause with the effect of restricting the technology receiver from challenging the validity of the intellectual property of the technology would render the technology contract void or null.

Applying the aforementioned rules to the CNS, when it is drafted broadly to include the prevention of the participants from challenging the validity of intellectual property rights of the software, such CNS is deemed to be technology monopoly according to Article 329, and could cause the related agreement to be null or void.  However, if there is carve out in the CNS making the aforementioned prevention an exclusion, the CNS would be legally feasible without running afoul of Article 329.

Although the aforementioned carve out is legally feasible, it may not be practicable.  In practice, having explicit wording on this exclusion could raise alarm for the participant to question the remaining CNS clause and its validity, which could lead to further negotiation and is time consuming.  Based upon our experience in this field, a CNS is best to be drafted broadly while sweeping in the requirements of Article 329 without alarming the participant.  A sample language of CNS is as follows:

“The participants shall waive the right to bring any lawsuit, claim or action against the Software Owner subject to any restriction under the relevant laws and regulations of the PRC.”

Our comments and analysis herein were made based on our research and experience in handling similar matters and consultations with the relevant authorities of the PRC.  However, it is important to point out that, because China is not a case law system, a case decided by one judge will not have any binding effect on later cases.  This is important as at the current time there exists no case law challenging CNS in the PRC courts, due to the sensitive nature of these issues, it is likely that a judge in China could hold opinion different than what is said herein.

Relevant Laws and Regulations

1.         General Principles of the Civil Law of the PRC

2.         Contract Law of the PRC

3.          Interpretation Concerning the Several Issues in the Application of Law in Hearing Technology Contract Disputes

Authored By:

William Zheng

(86 21) 5175 7165

wzheng@sheppardmullin.com

Michael X.Y. Zhang

(86 21) 5175 7165

mzhang@sheppardmullin.com

The air in a taxicab company's Sherman Act Section 1 challenge to an exclusive operating agreement between an airport authority and a competing taxicab company went flat when the U.S. District court for the Middle District of Pennsylvania held the company failed to state a claim.  Capital City Cab Service, Inc. v. Susquehanna Area Regional Airport Authority, No. 1:06-CV-671 (M.D. Pa. filed Apr. 18, 2007).

Plaintiff filed its complaint after a competitor, American Taxi, and defendant, Susquehanna Area Regional Airport Authority (SARAA), entered into an exclusive operating contract at Harrisburg International Airport after a competitive bidding process.  The court dismissed plaintiff's first amended complaint and allowed plaintiff to file a second amended complaint.  Plaintiff's proposed second amended complaint included the Section 1 cause of action and a cause of action for violation of the Fourteenth Amendment.

For its Section 1 cause of action, plaintiff alleged that the exclusive operating agreement gave American Taxi exclusive access to garage facilities and the taxi queue at Harrisburg International Airport, thereby limiting plaintiff's ability to compete.  Plaintiff also alleged that SARAA's Director of Aviation and American Taxi colluded to ensure that American Taxi would win the contract by manipulating insurance requirements during the bidding process.

In hearing plaintiff's motion for leave, the court first laid out the appropriate standard of review.  That is that leave must generally be granted unless equitable considerations such as undue delay, bad faith, dilatory motive, prejudice or futility, render it otherwise unjust.  No. 1:06-cv-00671-YK at 3, citing Arthur v. Maersk, Inc., 434 F.3d 196,204 (3d Cir. 2006) and In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1434 (3d Cir. 1997).  If, under any reasonable reading of the complaint, the plaintiff may be entitled to relief, the court should permit a party to amend its pleading.

Plaintiff did not meet this standard.  Section 1 provides that every contract, combination or conspiracy in restraint of trade is illegal.  To state a cause of action for a nonprice restraint such as exclusive dealing, a party must allege that the conduct unreasonably restrained competition in the relevant antitrust market.  However, throughout its briefs, Plaintiff's arguments missed the mark by focusing on a different issue, whether Pennsylvania state law allowed SARAA to enter into the exclusive contract.  The court noted that it had already decided that it does.  A necessary step to alleging that an exclusive agreement unreasonably restrains trade is to define the relevant product and geographic markets in which the restraint occurred.  Plaintiff did not do so.  In its reply to defendant's opposition brief, it claimed that its proposed second amended complaint identified Harrisburg International Airport as the relevant market.  Plaintiff did not allege how competition in its alleged relevant market would be affected and its allegations did not refer to other markers of a relevant antitrust market such as reasonable interchangeability of substitute products and cross-elasticity of demand.  Thus, the court found, plaintiff did not meet the minimum requirements to alleging that the exclusive agreement violated Section 1.

Moreover, even if Harrisburg International Airport constituted a cognizable relevant market, the court continued, plaintiff did not allege that the exclusive agreement between American Taxi and SARAA was unreasonable.  Plaintiff merely alleged that the agreement substantially limited its ability to compete for outbound fares from Harrisburg International Airport.  Plaintiff thus alleged injury to a competitor, not to competition in a properly defined relevant market.  The court therefore found plaintiff's Section 1 claim insufficient as a matter of law and that amendment of plaintiff's antitrust cause of action would be futile.

The court did grant plaintiff leave to amend its remaining cause of action, violation of the Fourteenth Amendment.  Plaintiffs company is owned by a Muslim and its drivers are Muslim.  Plaintiff's proposed amendments to this cause of action include allegations that American Taxi was the only Caucasian-owned taxicab company in the metropolitan market, that SARAA's director discriminated against it by not allowing its drivers to conduct prayer rituals at Harrisburg International Airport, and that the director said "he wanted no Arabs at his airport".  The court found these allegations sufficient to state a claim of intentional discrimination proscribed by the Fourteenth Amendment.

Authored By:

Heather M. Cooper

(213) 617-5457

hcooper@sheppardmullin.com

A jury examining a series of giant trades in the mid-1990s copper derivatives market might reasonably conclude that one of the country's biggest banks, which financed the trades, conspired with its customer to manipulate the market, a U.S. district judge has ruled in rejecting a summary judgment motion by defendants J.P. Morgan Chase & Co. and Morgan Guaranty Trust Company of New York in Southwire Co. v. J.P. Morgan Chase & Co., MDL Docket No. 1303 (W.D. Wis. April 24, 2007).

Defendants had argued that the evidence merely shows legitimate transactions executed on behalf of a client.  But U.S. District Court Judge Barbara B. Crabb held that a jury could reasonably interpret the trades as part of a conspiracy with Sumitomo Corp., one of Japan's oldest trading houses, to "squeeze" the copper futures market.

"I conclude that the evidence is sufficiently disputed to allow a jury to find reasonably that defendants 'know that Sumitomo intended to restrain trade, intended that trade be restrained, and materially contributed to that restraint,'" Judge Crabb wrote, quoting from an appeals court opinion in a related case, Loeb Industries, Inc. v. Sumitomo Corp., 306 F.3d 469, 497 (7^th Cir. 2002).

Judge Crabb also rejected defendants' alternative theory that plaintiffs cannot prove antitrust injury because their damages expert did not determine whether the allegedly manipulative trades actually affected the price of copper traded on public metal exchanges.  Finally, the judge rejected defendant's argument that plaintiffs lacked standing to sue because their experts hopelessly botched their damages analysis by failing to distinguish between plaintiff's direct purchases from copper producers and indirect purchases made through merchants.  The judge scheduled a hearing before the May 29 trial date to determine exactly which copper purchases were direct and which were downstream.

The case centers around Yasuo Hamanaka, a Sumitomo copper trader who lost $6.5 billion yen in copper transactions in the mid-1980s.  Hamanaka covered up those losses through a variety of derivative transactions in the copper futures market, executed outside the scope of Sumitomo's internal regulations and facilitated with counterfeit documents and forged signatures, according to the court's summary judgment opinion.

In August 1993 Kevin Murphy, head of defendants' base metal activities, approached Hamanaka to establish a copper trading relationship.  Between November 1993 and June 1996, defendants executed 149 trades on the London Metal Exchange, accounting for tens of millions of tons of copper, on Sumitomo's behalf.

Several regulatory agencies eventually investigated this activity, including the Commodities Futures Trading Commission, the London Metal Exchange, the Securities and Investment Board and the U.S. Federal Reserve.  Hamanaka disclosed his unauthorized trading in June 1996, accelerating a sharp decline in the copper market, which fell from highs of around $2800 per ton to below $2000 per ton.  Hamanaka admitted guilt of fraud and forgery and was sentenced to eight years in prison.

Plaintiffs, integrated producers of copper or makers of copper wire or tubing, allege that defendants conspired with Hamanaka in violation of Sherman Act Section 1 by "squeezing" the copper market, effectively raising prices for Sumitomo's copper holdings by causing a lack of supply.  Plaintiffs claim that defendants knew Sumitomo was manipulating copper futures prices and knowingly financed illegal trades.

Defendants, in their summary judgment motion, claim that the evidence is just as consistent with legitimate transactions and thus plaintiffs failed to meet their burden under Monsanto Co. v. Spray-Rite Service Corp., 465 U.S. 752, 764 (1984) to present evidence "that tends to exclude the possibility that the alleged conspirators acted independently." (internal quotations omitted).

Judge Crabb agreed that much of the circumstantial evidence offered by plaintiffs is indeed ambiguous, such as defendants' promise to Sumitomo that their dealings be kept confidential; defendants' acquiescence to Hamanaka's practice of confirming his own trades; or Murphy's intimate personal relationship with Hamanaka.

If plaintiffs' case relied solely on such evidence, Judge Crabb said, defendants may be entitled to summary judgment.  But the court found that the trades themselves provided sufficient evidence to survive summary judgment.  The transactions might reasonably be seen as part of a conspiracy, the court found, and any jury that deemed them innocent trades must first "sort out a plethora of disputed issues of fact" aided by experts on either side with radically different opinions about whether the transactions could have a rational, legitimate economic purpose.

"I conclude that if the jury were to find plaintiffs' expert more believable than defendants', if it were to find that defendants knew the Sumitomo transactions were so commercially irrational as to be obvious disguises for financing manipulative conduct, and if it were to disbelieve defendants' evidence of the steps they took to confirm Sumitomo's awareness of the scope and volume of Hamanaka's dealings, it could find reasonably for plaintiffs on the question of defendants' involvement in Sumitomo's scheme to manipulate the market," the court wrote.  Southwire Co. at 37.

As an alternative theory, defendants argued that plaintiffs' claims should be dismissed for lack of standing.  Defendants claim that plaintiffs' damages experts failed to distinguish between transactions in which plaintiffs were "first purchasers" of copper and indirect purchases by plaintiffs that cannot provide a basis for recovery under Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977).  Defendants argued that this flaw renders the expert reports inadmissible.

The court disagreed.  "It is difficult to understand why plaintiffs chose to have their experts go through the fruitless task of tabulating many purchases for which they will not be able to recover damages and failed to take more care in separating out qualifying purchases from nonqualified ones …." the court wrote.  Nonetheless, the reports are not rendered inadmissible merely because they include calculation that cannot provide a basis for damages.

The court noted, however, that it was disinclined to foist upon the jury the task of determining exactly which copper purchases can provide a basis for damages and which cannot.  While plaintiffs may recover only for first-time purchases of copper cathode and rod, the court noted that this begs the question: are purchases made through merchants "first-time" purchases?  Plaintiffs claim that such merchants are merely service providers who arrange for the order and delivery of products to be sent from a producer to a purchaser.

The court characterized the issue as a simple one: "Did the merchants purchase the cathode they passed along to plaintiffs?  If so, it is they who have the standing to recover for those purchases, not plaintiffs."  But if the merchants merely took orders, the plaintiffs "are the first purchasers and may recover for the cathode purchases they made from the integrated producers with the assistance of the merchants."  The court set a pretrial hearing to address these issues.

Authored By:

Tyler M. Cunningham

(415) 774-3208

tcunningham@sheppardmullin.com

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