In an effort to market its generic version of Pfizer's blockbuster drug Zoloft, Teva Pharmaceuticals USA, Inc. ("Teva") sued Pfizer Inc. ("Pfizer") challenging a patent on that drug. Specifically, Teva sued Pfizer for a declaratory judgment that its generic version of sertraline hydrochloride would not infringe Pfizer's patents on the drug Zoloft. Pfizer moved to dismiss for lack of subject matter jurisdiction, arguing that there was no actual controversy between the parties as required for such jurisdiction. The district court granted the motion to dismiss.

The district court applied the two-prong test for determining whether there is jurisdiction over an action brought under the Declaratory Judgment Act, 28 U.S.C. §2201. For an actual controversy to exist, this test requires that there must be: 1) an explicit threat or other action by the patentee, which creates a reasonable apprehension on the part of the declaratory plaintiff that it will face an infringement suit; and, 2) present activity which could constitute infringement or concrete steps taken with the intent to conduct such activity. The district court readily found that Teva satisfied the second prong of this test, noting that Teva filed an abbreviated new drug application ("ANDA") seeking the Food and Drug Administration's approval to market its generic version of sertraline hydrochloride and explained that the filing of an ANDA constitutes a technical act of infringement sufficient to create case or controversy jurisdiction to enable a court to resolve infringement and validity disputes. However, as to the first prong, the district court rejected Teva's arguments that the actions by Pfizer created a reasonable apprehension of suit.

The Federal Circuit followed the district court's analysis and affirmed the ruling of the district court on January 21, 2005 in Teva Pharmaceuticals USA, Inc. v. Pfizer, Inc., Case No. 04-1186 (Fed. Cir.). In a 2-1 decision, the Court of Appeals panel decided that a declaratory judgment plaintiff in a patent case must demonstrate a "reasonable apprehension" of suit to establish Article III jurisdiction. The case involved the Hatch-Waxman Act. In essence, the court held that the fact that there was an Orange Book filing did not create a reasonable apprehension of suit. Hatch-Waxman requires listing all patents in the Orange Book, which is essentially a listing of patents, to which claims of infringement "could be reasonably asserted". However, the court held that more is required for an actual controversy than the existence of an adversely held patent.

The Federal Circuit also examined whether the Medicare Amendments by Congress in the Medicare Prescription Drug, Improvement and Modernization Act of 2003 altered the test in the Hatch-Waxman setting. The court ruled, however, that because the district court did not issue its opinion until December 8, 2003, the date these amendments were enacted, the declaratory judgment provisions applied. The Court said that the amendments by Congress did not contain language automatically conferring subject matter jurisdiction anytime a patent is listed in the Orange Book, a Paragraph IV certification is filed, and a patentee fails to sue within 45 days of receiving notice of the certification. The statute is clear that courts shall have subject matter jurisdiction "to the extent consistent with the Constitution."

Last year, the Federal Trade Commission ("Commission or FTC"), the AARP, the Generic Pharmaceutical Association and IVAX Corporation filed amicus briefs in support of Teva's appeal. The FTC filed a very interesting amicus brief suggesting that in particular circumstances under Hatch-Waxman, the court should accept jurisdiction because the generic firm suffers injury independent of the threat of infringement suit as the 180 day period has economic significance. The courts rejected that argument.

Last month, on February 11, the Commission authorized the staff to file a brief as amicus curiae in support of Teva's petition for rehearing or rehearing en banc. The FTC's brief stated that the panel majority's decision conflicted with two prior decisions of the Federal Circuit and one decision of the U.S. Supreme Court. The Commission vote authorizing the staff to file the amicus brief was 4-0-1, with Commissioner Pamela Jones Harbour recused.

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

On February 15, 2005, the European Court of Justice ("ECJ") rejected an appeal by the European Commission against the judgment of the Court of First Instance ("CFI"), annulling the Commission's decision prohibiting the merger between Tetra Laval and Sidel.

On October 30, 2001 the Commission had prohibited Tetra Laval's acquisition of Sidel under the old EC Merger Regulation. The Commission had concluded that the combination of Tetra's dominant position in the market for carton packaging, with Sidel's leading position in polyethylene terephthalate ("PET") plastic packaging equipment, would potentially create a dominant position in the market for SBM machines in the European Economic Area. The Commission relied on the economic theory of leveraging to hold that Tetra's dominance in one market (the market for equipment and consumables for carton packaging) could be used to pressure customers into purchasing products (Sidel's SBM machines) in another distinct, but closely related and potentially converging market.

Tetra had offered a package of remedies to try to address the Commission's concerns (including a commitment that it would not engage in abusive conduct) but these had been rejected. Tetra had already acquired about 95% of Sidel's shares in reliance on the public bid exception to the suspensory provisions of the EC Merger Regulation. Therefore, under a second decision in January 2002, the Commission had ordered Tetra to dispose of its shareholding. Tetra appealed both the Commission's decisions to the European Court CFI.

On October 25, 2002, the CFI annulled the Commission's decisions (Cases T-5/02 and T-80/02, Tetra Laval BV v. Commission). The CFI found that the Commission had made manifest errors of assessment with regard to the conglomerate effects of the merger. The CFI confirmed that while the Merger Regulation allowed, in principle, the prohibition of conglomerate mergers, the Commission's analysis of such mergers requires a particularly close examination of the relevant circumstances and the effects on competition, and it must produce "convincing evidence" of the creation or strengthening of a dominant position. In this case, the Commission had not provided sufficient evidence of the leveraging methods that Tetra would be able to use to acquire a dominant position in the relevant markets or of the potential consequences of any such action. It had also not taken sufficient account of the impact of the proposed commitments.
The Commission brought an appeal against the CFI's judgment alleging that the CFI had committed various errors of law in applying the standard of proof, and in not upholding the Commission's findings in relation to market definition and dominance.

The ECJ rejected all the grounds of appeal raised by the Commission. In particular, it held that although the Commission has a margin of discretion in assessing economic matters, it does not prevent the Courts from reviewing the Commission's interpretation of economic information. A Court must determine whether the evidence relied on:

• Is factually accurate, reliable and consistent;
• Contains all the information which must be taken into account in order to assess a complex situation; and
• Is capable of substantiating the conclusions drawn from it.

The ECJ held that such a review is all the more necessary in the case of a prospective analysis conducted in respect of a merger with conglomerate effects (paragraph 39). The CFI was correct, therefore, to find that the analysis of a merger producing a conglomerate effect requires a close examination of the relevant circumstances. The analysis of a conglomerate type merger (like the analysis of a collective dominance situation) involves a prospective analysis of the reference market including, in this case, both future market conditions and the necessary leveraging. As such, the chains of cause and effect are "dimly discernible, uncertain and difficult to establish" (paragraph 44). Accordingly, the Commission must produce convincing evidence of anticompetitive effects before it can prohibit a merger.

The ECJ held that the CFI was also right to hold that the likelihood of Tetra engaging in conduct essential to leveraging must be examined comprehensively, taking into account the incentives to adopt such conducts and factors (including the possibility that such conduct would be unlawful) liable to reduce or eliminate those incentives. However, it was not necessary for the Commission to examine the extent to which the incentives to adopt anti-competitive conduct would be reduced or eliminated as a result of its unlawfulness, the likelihood of detection, the action taken by regulatory authorities or by the possibility of financial penalties. This would require the Commission to engage in a speculative assessment.

Finally, the ECJ confirmed the CFI's holding that the Commission's annulment decision had failed to take into account the commitments submitted by Tetra with regard to its future conduct. The ECJ held that the Commission has a duty to consider both structural and behavioral remedies proposed by merging parties in order to alleviate any competition concerns arising from the transaction.

The result of the ECJ decision is that the Commission will exercise much greater care in the examination of complex mergers raising potential conglomerate effects. If there are no horizontal issues arising from merging the parties' businesses, the Commission will need robust economic evidence in order to block a merger based on this novel, and much criticized theory. Conglomerate effect concerns were also at the heart of the Commission's merger prohibition decision in General Electric/Honeywell, which is currently on appeal to the CFI, and a decision is expected later this year.

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

In Newcal Indus., Inc. v. IKON Office Solutions, Inc., 2004 U.S. Dist. LEXIS 26229 (N.D. Cal. December 23, 2004), plaintiff suppliers and service providers of copiers alleged that defendant IKON, also a supplier and service provider of copiers, fraudulently obtains amendments to its existing contracts with customers that extend the period of time that these customers are under contract with IKON. According to the plaintiffs, these fraudulently obtained contract extensions reduced the ability of plaintiffs to make deals with IKON customers to replace IKON copier equipment. Such a foreclosure of competition for the business of IKON customers, the plaintiffs contended, violated Sections 1 and 2 of the Sherman Act. IKON moved for dismissal for failure to state a claim, arguing that the plaintiffs failed to allege a legally sufficient market.

In considering IKON's motion, Judge Fern Smith of the District Court first noted that plaintiffs asserting claims under Sections 1 and 2 of the Sherman Act must show that the defendant has market power in the relevant product market. The court also took notice of the long-recognized principle that products are in the same market if there is reasonable interchangeability of use between the products. The plaintiffs in this case proposed four relevant markets: (1) the interbrand market for copier equipment; (2) the market for the sale and financing of additional copier equipment with customers for whom IKON has similar equipment placed; (3) the market for the sale and financing of replacement copier equipment previously placed, serviced, financed, and administered by IKON pursuant to a multi-year IKON contract; and (4) the markets for parts, service and supplies for each brand of copier equipment placed, serviced, financed, and administered by IKON pursuant to a multi-year IKON contract.

With respect to the plaintiffs' first proposed market, Judge Smith noted that the plaintiffs' complaint failed to allege that IKON had market power in the interbrand market for copier equipment. The court also observed that plaintiffs' allegations were actually based on the second, third and fourth markets proposed by the plaintiffs. As such, plaintiffs' allegation of an interbrand market for copier equipment was not sufficient to defeat a motion to dismiss for failure to state a claim.

The remaining proposed markets were all limited to customers that have contracts with IKON. The court rejected these proposed markets, citing Queen City Pizza, Inc. v. Domino's Pizza, Inc., 124 F.3d 430 (3rd Cir. 1997), for the proposition that "[a] court making a relevant market determination looks not to the contractual constraints assumed by a particular plaintiff when determining whether a product is interchangeable, but to the uses to which the product is put by consumers in general." Judge Smith observed that the copier equipment and services offered by IKON's competitors were reasonably interchangeable with the copier equipment and services provided by IKON to its customers. Since customers of IKON could have chosen any one of several competing companies to contract with for copier equipment and the only restraints on their ability to contract with other companies are the contractual obligations they elected to undertake with IKON, the relevant market must include IKON's competitors and cannot be defined based only on customers who are under contract with IKON.

The plaintiffs cited Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S. 451 (1992), for the proposition that a relevant market may be defined by the customers of a single company. The court, however, distinguished that case, observing that a separate market may have existed for replacement parts of Kodak-brand copier machines because the replacement parts were unique whereas the copier equipment and services provided by IKON are interchangeable with the copier equipment and services of other companies. In other words, unlike the situation in Eastman Kodak, it is only the contract itself that requires IKON's customers to purchase from IKON, not the market power over a unique, non-substitutable product enjoyed by Kodak.

The plaintiffs also argued that IKON customers, like Kodak's customers, do not have sufficient information to assess the lifetime cost of buying and servicing equipment sold by IKON because of the fraudulent way in which IKON extends the terms of customer contracts and face high switching costs once they become contractually bound as a result of IKON's fraud. Judge Smith dismissed this argument by citing Queen City Pizza's observation that switching and information costs alone do not create market power; rather, it is the lack of a competitive market that gives a company market power. To the extent IKON obtained the contractual rights that prevent its customers from purchasing from other copier companies through fraud, Judge Smith observed, the proper remedy is in contract law.

Finally, the court added that other circuits besides the Third Circuit have rejected attempts to define relevant markets in terms of customers under contract. In Forsyth v. Humana, Inc., 114 F.3d 1467 (9th cir. 1997), for example, the Ninth Circuit rejected the plaintiffs' attempt to limit the relevant market to acute care hospitals that the insureds used because of contractual restrictions in their policies. Similarly, in Hack v. Yale College, 237 F.3d 81 (2nd Cir. 2000), the Second Circuit rejected a market definition based on "a contractually created class of customers: unmarried freshmen and sophomores below the age of 21."

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

The Southern District of New York granted the motions of defendant booking agencies and concert promoters for summary judgment against Sherman Act Section 1 claims brought by plaintiff African American concert promoters alleging conspiracies to engage in group boycotts and market allocation. Rowe Entertainment, Inc. v. The William Morris Agency, Inc., 2005 U.S. Dist. LEXIS 75 (S.D.N.Y. Jan. 5, 2005).

Plaintiffs alleged violations of the antitrust laws in connection with the promotion of live concert performances throughout the United States of pop, rock and "urban" music. Concert artists retain booking agencies to procure engagements. The agencies, in turn, select which promoters to use at particular geographic locations to present the concerts. The promoters secure the venue where a concert will take place, advertise the concert, arrange security and perform other tasks, such as selling tickets to the public. Promoters are responsible for all financial aspects of the show, including the payments guaranteed to the artists, the building deposit, production cost and advertising, and bear the risk of financial loss.

Plaintiffs alleged that they specialized in "urban" music, consisting of R&B, hip-hop and rap. They asserted that white promoters dominated the promotion of such concerts due to the booking agencies exercising their control and power to exclude plaintiffs from competing in the concert industry and defendant promoters entering into conspiracies to exclude plaintiffs, thereby preventing concerts from being promoted at lower prices.

Plaintiff's asserted a market for live performances of contemporary music concerts in venues with more than 3,000 seats throughout the United States. The court first rejected the contention that concert promotion for venues with 3,000 or more seats were not reasonably interchangeable with concerts conducted at smaller venues. The court also stated that the market shares of defendants were too small to enable them to dominate such a market in any event, and rejected the contention that defendants had made entry more difficult. Thus, "no evidence has been presented to suggest market injury and, accordingly, antitrust standing has not been established."

The court also held that plaintiffs provided no evidence of a conspiracy in restraint of trade. The court rejected the contention that there was an agreement to allocate the market among the promoter defendants, or that the booking agency defendants agreed together or with any promoter that the market should be so divided. The court also stated that none of the defendants had an economic rationale to participate in the alleged conspiracy, and that defendants' acts were consistent with permissible competition. For example, the court viewed the defendant promoters' promoting of concerts of the agencies' less popular artists as an effort to obtain the agencies' more popular artists that was consistent with permissible competition, rather than as evidence of actions against economic self-interest.

Plaintiffs' civil rights claims were also dismissed on summary judgment.

Authored by:
Thomas D. Nevins
415-774-3284
tnevins@sheppardmullin.com

A federal trial has cleared the way for an Italian drug manufacturer - Chemi SpA - to sue drug maker GlaxoSmithKline ("GSK") for unlawful monopolization of the market for nabumetone, an anti-inflammatory drug. Chemi SpA v. GlaxoSmithKline, 2005 WL 300067 (E.D. Pa. February 8, 2005). The court rejected the defendant's arguments that Chemi lacked standing and that its claims were barred by the statute of limitations.

Defendant was the assignee of a drug patent for nabumetone. Because GSK had listed the patent in the FDA's "Orange Book," would-be sellers of competing drugs needed to file abbreviated drug approval applications with FDA certifying that the GSK patent was invalid, or that the new drug would not infringe the patent. Upon such filings, the FDA would be enjoined from granting approval for the new drug for 30 months. 21 U.S.C. § 355(j)(2)(A)(vii)(IV).

After Chemi made plans to market its competing nabumetone product in the United States through Teva Pharmaceuticals and Eon Labs Manufacturing, all three companies made filings with the FDA to obtain approval. New applications filed by Teva, Eon and other manufacturers certified that GSK's nabumetone patent was invalid. GSK then filed patent infringement actions against, Teva, Eon and others, which caused the automatic 30-month injunction to go into effect. Ultimately, the court held that the nabumetone patent was invalid because it was obtained through fraudulent misrepresentations to the Patent and Trademark Office.

Chemi then filed suit for unlawful monopolization, contending that GSK (1) obtained the patent unlawfully in order to maintain its monopoly on the sale of nabumetone, and (2) filed the infringement actions to trigger the 30-month injunction and thereby frustrate Chemi's sales of nabumetone in the United States.

1. Chemi's Standing under the Antitrust Laws

For standing to exist in an antitrust case the plaintiff must prove (1) injury of the type the antitrust laws were intended to prevent, and (2) injury that flows from that which makes the defendants' acts unlawful. In concluding that Chemi had standing, the trial court applied the following five-factor test used by the Third Circuit Court of Appeals: (a) the causal connection between the antitrust violation and the harm to the plaintiff and the intent by the defendant to cause that harm, with neither factor alone conferring standing, (b) whether the plaintiff's alleged injury is of the type for which the antitrust laws were intended to provide redress, (c) the directness of the injury, which addresses the concerns that liberal application of standing principles might produce speculative claims, (d) the existence of more direct victims of the alleged antitrust violations, and (e) the potential for duplicative recovery or complex apportionment of damages.

The first factor was met based on Chemi's contention that its injury was directly caused by GSK's anticompetitive action in filing a baseless patent infringement suit. The second factor existed because the extension of the nabumetone monopoly through sham patent infringement litigation allegedly prevented competition and thereby thwarted the antitrust law's central interest in protecting the economic freedom of participants in the relevant market. The third and fourth factors applied because the injury suffered by Chemi was not merely an indirect or remote consequence of GSK's actions. "Even though Chemi was not a direct competitor of GSK, its alleged injury was 'inextricably intertwined with the injury [GSK] sought to inflict on [the nabumetone] market.'" (Citation omitted). Assuming Chemi's allegations were true, Chemi was prevented from selling nabumetone to these vendors when GSK brought a bogus patent infringement suit against them with the very purpose of perpetuating its monopoly with respect to nabumetone. Therefore, "Chemi's injury is direct, and its claim is not speculative." Finally, the fifth factor was met because Chemi's alleged damages were distinct from those suffered by GSK's direct U.S. competitors, Eon and Teva. Specifically, any suit Eon or Teva brought against GSK to recover lost profits would necessarily exclude the amount they would have paid Chemi for the nabumetone.

2. Action Not Barred by 4-Year Statute of Limitations

The statute of limitations for antitrust claims is four years. 15 U.S.C. § 15(b). However, the limitations period does not commence until the damages are inflicted and ascertainable. Moreover, each time a plaintiff is injured by an act of defendants, a cause of action accrues and the statute of limitations runs from the commission of the act. The court held that the limitations period did not commence until the underlying court held GSK's patent to be invalid. The court reasoned that an antitrust action based on a prior sham litigation is analogous to the common law tort of malicious prosecution. Such claims do not accrue for statute of limitations purposes until the underlying litigation has terminated. Similarly, an antitrust claim based on baseless litigation requires proof that the litigation was unsuccessful, which can only be determined upon the termination of the initial action. In rejecting GSK's contention that the action accrued when GSK filed its sham patent infringement actions or upon expiration of the 30-month injunction against FDA acting on the new drug applications, the court emphasized that "Chemi should have been clairvoyant at an earlier point in time about the invalidity of GSK's patent and its fraudulent misrepresentations."

Authored by:
Roy Goldberg
202-218-0007
rgoldberg@sheppardmullin.com

In January, the Court of Appeals for the Federal Circuit issued an opinion in Independent Ink Inc. v. Illinois Tool Works, Inc. ¹ Addressing the issue whether, in a Section 1 tying case, a rebuttable presumption arises from the possession of a patent over the tying product, the court answers in the affirmative. It concludes that it was bound to follow Supreme Court precedent in International Salt and Loew's, which have not been expressly overruled by Jefferson Parish, or more recent case law. Because International Salt and Loew's are not dispositive on the rebuttable nature of the presumption, however, the court looks to Supreme Court dicta, and concludes that on remand, the defendants may offer expert testimony or other credible economic evidence of cross-elasticity of demand, which, would negate the presumption.

Independent Ink involves an alleged unlawful tie by Trident, a subsidiary of Illinois Tool Works. The alleged tying product was patented printhead technology, used to place bar codes on cartons. The alleged tied product was unpatented ink, used in the printing process.

On cross motions for summary judgment, the district court² held that the fact that the defendant held a patent did not, without more, establish the market power necessary to find an illegal tie under Section 1 of the Sherman Act. Plaintiff argued that a tying arrangement involving a patent as the tying product is conclusively presumed to be illegal per se, notwithstanding "that there are substitutable products that are in competition." In denying plaintiff's motion, and in granting defendant's cross-motion for summary judgment, the district court held that in light of the Supreme Court decision in Jefferson Parish Hosp. Dist. No. 2 v. Hyde³, a plaintiff asserting that a patent confers market power must demonstrate the lack of close substitutes for the patented product.⁴ In an alternative holding, the district court held that if there is a presumption of market power, it is subject to rebuttal, and on the record before the district court, was rebutted.⁵

The Court of Appeals reversed, and held that the district court was bound to follow decisions by the United States Supreme Court, even generally considered to be "vintage", or economically outmoded. Absent explicit reversal by the Supreme Court, inferior courts must apply the law that remains on the books. The Court of Appeals held that while Jefferson Parish has drastically modified the law relative to tying, it is only applicable to tying cases that do not involve patents. The court held that in light of such cases as International Salt Co. v. United States,⁶ and United States v. Loew's, Inc.,⁷ where the tying product is patented or copyrighted, market power may be presumed, rather than proven.

Defendants argued that International Salt and Loew's were distinguishable on the ground that they were cases brought by the government. The Court of Appeals found this unpersuasive. Defendants argued in the alternative that International Salt and Loew's were no longer "good law", and had been severely criticized by leading antitrust commentators, including Professors Areeda, Elhauge, and Hovenkamp. The Court of Appeals, cited Richard Posner's decision in Khan v. State Oil Company⁸ where the court held that even where a Supreme Court precedent contains many "infirmities" and rests upon "wobbly, moth-eaten foundations," it is nevertheless the sole prerogative of the Supreme Court, and not the inferior courts, to overrule a precedent. Thus, in Khan, Judge Posner dutifully applied Albrecht v. Herald Co.⁹ notwithstanding the fact that the court considered Albrecht to be "unsound when decided" and "inconsistent with later decisions". Judge Posner was nevertheless constrained to follow the decision.¹⁰ Thus, the Court of Appeals felt constrained to apply International Salt and Loew's and thus hold that the district court erred in dismissing plaintiff's motion, even where the record contained evidence that the market for the patented product was competitive, and substitutable. The court held further that evidence in the record of a competitive market was insufficient rebuttal. It held:

"The presumption can only be rebutted by expert testimony or other credible economic evidence of the cross-elasticity of demand, the area of effective competition, or other evidence of lack of market power." … "On the present record there is not sufficient evidence to rebut the presumption of market power resulting from the patent itself, or to create a genuine issue of material facts on the issue."¹¹

However, the court held that while not overruled, the body of law developed in Independent Salt and Loew's, was inconclusive on the question whether the presumption of market power is conclusive or subject to rebuttal. The court then looked to Supreme Court dicta to determine whether the presumption is conclusive or rebuttable. It noted that in Jefferson Parish itself, the Supreme Court confirmed that International Salt created only a presumption of market power, but that it would stretch the language of the phrase "fair to presume" "beyond the breaking point" to conclude that such a presumption is irrebuttable. Accordingly, the court held that "we are obliged to follow such clearly articulated Supreme Court dicta."¹² The court also noted that in Digidyne Corp. v. Data Gen Corp.,¹³ the Ninth Circuit held that a presumption arising from a copyright is rebuttable.

Notwithstanding the district court's finding that, assuming a presumption, it had been rebutted, it was necessary for the Court of Appeals to remand the case to the district court for better rebuttal. This would include "expert testimony or other credible economic evidence of the cross-elasticity of demand, the area of effective competition, or other evidence of lack of market power.¹⁴

While much of the legal commentary since Jefferson Parrish would place a patent on the same analytical level as any other tangible or intangible property, the Court of Appeals was, as were Judges Posner and Easterbrook, obeying the mandate of the Supreme Court in Khan. In applauding Judge Posner's judicial restraint, Justice O'Connor, writing for a unanimous court stated:

"Despite what Chief Judge Posner aptly described as Albrecht's "infirmaties, [and] its increasingly wobbly, moth-eaten foundations," … there remains the question whether Albrecht deserves continuing respect under the doctrine of stare decisis. The Court of Appeals was correct in applying that principal despite disagreement with Albrecht, for it is this Court's prerogative alone to overrule one of its precedents."¹⁵

Since the increased emphasis on the use of economic analysis in antitrust cases since Continental T.V. and Brunswick,¹⁶ the Court of Appeals' decision may seen pedantic. Nevertheless, it is carefully crafted. Indeed, it is representative of an earlier era where it was generally understood that presumptions were legal constructs to take the place of evidence that was otherwise, at no fault of the offering party, unavailable. When both parties are present and able to present evidence, the need for the presumption ceases, and accordingly, so does the presumption. As recognized and stated in the seminal case of Mackowik v. Kansas City, St. J & C.B.R. Co.:¹⁷

"Presumptions", as happily stated by a scholarly counselor, ore tenus, in another case, "may be looked on as the bats of law, flitting in the twilight, but disappearing in the sunshine of actual facts."¹⁸

Thus, as in Independent Ink, if there need be a presumption at all, it is surely a rebuttable presumption, and one that should be litigated by the parties to the action in the good old fashioned way: by the presentation of evidence. The presumption of market power arising from the grant of a patent may be alive, awaiting burial by the Supreme Court. Meanwhile, it may flitter in the twilight, but will more likely than not, succumb to the sunshine of actual facts in a properly augmented record.

1. ___ F.3d ____, 2005 WL 147399, 2005-1 Trade Cas. (CCH) ¶741680 (Fed. Cir. 2005).
2. Independent Ink, Inc. v. Trident, Inc., 210 F. Supp. 2d 1155 (C.D. Cal. 2002).
3. 466 U.S. 2 (1984).
4. Citing Northern Pacific Ry. Co. v. United States, 356 U.S. 1, 10 N. 8 (1958).
5. 210 F. Supp. 2d at 1166. The district court noted that the Ninth Circuit decision of Digidyne Corp. v. Data Gen. Corp., 734 (9th Cir. 1984) holds that a copyright creates only a rebuttable presumption of economic power.
6. 332 U.S. 392 (1947).
7. 371 U.S. 38 (1962). The court stated "the Loew's court also stated that it needed not inquire into whether the distributors had market power. "The mere presence of competing substitutes for the tying product … is insufficient to destroy the legal, and indeed the economic, distinctiveness of the copyrighted product". Id. at 49.
8. 93 F. 3d 1358 (2^d Cir. 1996), reversed sub nom State Oil Co. v. Khan, 522 U.S. 3 (1997).
9. 390 U.S. 145 (1968).
10. Judge Easterbrook made the same analysis in A.A. Poultry Farms, Inc. v. Rose Acre Farms, Inc. 881 F.2d 1396 (7th Cir. 1989). ("Separating a case that is dead but unburied from a case that is living on borrowed time is hard yet important.") Id. at 1405.
11. Independent Ink, Inc. at 17.
12. Id. at 15.
13. 734 F.2d 1336, 1344 (9th Cir. 1984) (copyright "created a presumption of economic power sufficient to render the tying arrangement illegal per se. The burden to rebut the presumption shifted to defendant.")
14. Id. at 17.
15. State Oil Co. v. Khan at 20. See, 1995 Department of Justice and Federal Trade Commission Antitrust Guidelines for the Licensing of Intellectual Property, Section 2.1 ("the agencies apply the same general antitrust principals to conduct involving intellectual property that they apply to conduct involving any other form of tangible or intangible property." (Compare also, Abbott Laboratories v. Brennan, 952 F.2d 1346, 1354-55 (Fed. Cir. 1991) (no presumption of market power from intellectual property.)
16. Continental T.V., Inc. v. GTE Sylvannia, Inc., 433 U.S. 36 (1977); Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477 (1977).
17. 94 S.W. 256, 262 (Mo. Sup. Ct. 1906).
18. Id. at 262. With thanks to Suzanne Drennon in locating quote.

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

• On March 3, ALLTEL and Western Wireless Corporation ("Western Wireless") jointly announced that they have received a request from the Department of Justice for additional information (commonly referred to as a "second request") in connection with ALLTEL's pending acquisition of Western Wireless. The companies expect to comply with the second request as soon as possible. ALLTEL has more than 13 million customers and $8 billion in annual revenues. ALLTEL provides wireless, local telephone, long-distance, Internet and broadband services to residential and business customers in 26 states. Western Wireless, owner of the Cellular One brand, is a leading provider of rural wireless communications services to more than 1.4 million customers in the western United States.

  Headquartered in Bellevue, Washington, Western Wireless operates wireless cellular phone systems and company-owned retail stores in 19 western states under the Western Wireless and Cellular One brand names and licenses the Cellular One name in 16 additional states and the Caribbean. Cellular One has been one of America's most recognized wireless brands for more than 20 years. The DOJ is investigating the competition concerns presented by the acquisition.

• On February 28, Polo Linen Service Inc. ("Polo Linen"), a New York linen supply company, and Anthony Lamprpoulos, its owner pleaded guilty to participating in a conspiracy to allocate customers for linen supply services in the New York City metropolitan area. Linen supply companies primarily supply restaurants, cafeterias, and caterers with laundered items such as table linens, napkins, chef's uniforms, and aprons. Linen supplies are a significant cost of business for these establishments. According to the charges, Polo Linen and other linen supply companies carried out the conspiracy by agreeing not to compete for each other's customers, meeting to discuss and affirm their agreement, notifying each other when such customers were contemplating switching linen suppliers, and submitting intentionally high, non-competitive price quotes or refraining from submitting price quotes to such customers. Allegedly, they participated in a conspiracy from 1994 until September 2002 to allocate customers for linen supply services in New York City; portions of Westchester, Suffolk, and Nassau Counties, New York; portions of northern New Jersey; and portions of Fairfield County, Connecticut.

• On February 27, Yellow Roadway Corporation ("Yellow Roadway") announced that it was acquiring USF Corporation ("USF") for a transaction value of approximately $1.37 billion (based on the Yellow Roadway trailing 90-day closing stock price as of February 18, 2005). Yellow Roadway will also assume an expected $99 million in net USF debt, resulting in a total enterprise value of approximately $1.47 billion. The combined business would have more than $9 billion in annual revenue, more than 70,000 employees and 1,000 service locations. The DOJ reviewed the combination of Yellow and Roadway in 2003, but closed the investigation without requiring any divestitures.

• On February 23, the DOJ issued a second request regarding Sprint Corporation's ("Sprint"), the number three wireless carrier in the United States, planned acquisition of rival Nextel Communications Inc. ("Nextel"). The second request for information was expected in part because of the size of the deal in a rapidly consolidating telecommunications industry. Nextel's proposed acquisition by Sprint, which also is a traditional local and long-distance provider, is currently valued at $33.8 billion.

• On February 10, Carlton Gary Walker, the former vice president of Harriet & Henderson Yarns, Inc., a North Carolina based yarn spinner company, agreed to plead guilty to participating in a conspiracy to fix the prices of spun yarn used to manufacture hosiery such as athletic socks and printed T-shirts. The alleged conspiracy occurred from October 2000 until June 15, 2001. Mr. Walker has agreed to assist the government in its ongoing investigation. Allegedly, Mr. Walker participated in a meeting and in conversations to discuss fixing the prices of 10 and 18 count open-end spun yarn to be sold in the United States; agreed, during that meeting and those conversations, to charge prices at certain levels and otherwise to increase and maintain prices of 10 and 18 count open-end spun yarn to be sold in the United States; issued price announcements and price quotations in accordance with the agreements reached; and exchanged information on sales of 10 and 18 count open-end spun yarn in the United States for the purpose of monitoring and enforcing adherence to the agreed-upon prices. The DOJ continues to deter price fixing because it harms businesses and consumers by depriving them of the benefits of fair and competitive pricing.

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

• On March 4, the Federal Trade Commission filed a motion in U.S. District Court for the District of Columbia, pursuant to Section 7A(g)(2) of the Clayton Act, 15 U.S.C. § 18a(g)(2), to require Blockbuster, Inc. to comply with the statutory rules of the Hart-Scott-Rodino Act ("HSR").

  In its motion, the FTC asked the court to act before March 11, 2005, the date on which Blockbuster contends that it is free to consummate its acquisition of Hollywood Entertainment Corporation. The Commission's filing states that Blockbuster has not yet substantially complied with the Second Request because it provided insufficient and inaccurate pricing data. The HSR Act prohibits Blockbuster from proceeding with the acquisition until 30 days from the date it has substantially complied with the Second Request.

  The Commission is not asking the court to rule on whether the transaction would violate the antitrust laws. The Commission vote authorizing the staff to file the motion was 5-0.

• Under a consent order announced on March 2 by the FTC, Preferred Health Services, Inc. ("Preferred Health"), a physician-hospital organization consisting of more than 100 doctors and the Oconee Memorial Hospital in northwestern South Carolina, has been barred from collectively negotiating and fixing the prices it charges payors on behalf of its doctor members.

  According to the FTC, Preferred Health acts as a "contracting representative" for its member doctors, developing pricing contracts that it then presents to health plans and other payors. Because the organization's doctors make up approximately 70 percent of the independently practicing physicians in and around Seneca, South Carolina, health plans must have access to many of its members to provide services for consumers. Accordingly, the FTC contends, the plans are forced to pay higher, collectively negotiated prices for health care services.

  The Commission's consent order remedies the illegal conduct alleged in the complaint by prohibiting Preferred Health from entering into or facilitating any agreement between or among any physicians: 1) to negotiate with payors on any physician's behalf; 2) to deal, or not to deal, or threaten not to deal with payors; 3) to designate the terms on which to deal with any payor; or 4) to refuse to deal individually with any payor, or to deal with any payor only through an arrangement involving Preferred Health. To reinforce these provisions, the order also bars Preferred Health from helping physicians exchange information regarding whether, or on which terms, to deal with a payor, and contains "fencing-in" relief that will be imposed for three years. This fencing-in relief prohibits Preferred Health from: 1) acting as an agent for any physicians in connection with health plan contracting; or 2) using an agent with respect to contracting.

• On March 1, the FTC announced it has allowed Cytec Industries, Inc.'s ("Cytec") proposed $1.8 billion acquisition of the Surface Specialties Business of Belgium's UCB S.A., provided Cytec divests UCB's Amino Resins Business to a Commission-approved buyer within six months. According to the FTC's complaint in this matter, for many years Cytec and UCB have been direct and substantial competitors in the market for amino resins, and absent the relief the consent order ensures, this competition would be lost and not easily replaced. The result, the FTC contends, would be higher prices for consumers in the markets for amino resins for industrial liquid coatings and adhesion promotion in rubber.

  Both Cytec and UCB manufacture and sell amino resins used for industrial liquid coatings and rubber adhesion promotion. The resins the companies make are used as cross-linking agents in thermoset surface coatings for a range of applications, including automotive coatings, coil coatings, can coatings, appliance coatings, and general maintenance coatings. Amino resins also are used, primarily in tires, to promote the adhesion of rubber to materials such as steel or fiber.

  According to the FTC's complaint, the proposed acquisition would violate Section 5 of the FTC Act and Section 7 of the Clayton Act, as amended, in the relevant markets for amino resins for industrial liquid coatings and adhesion promotion in rubber. The complaint states that for many years Cytec and UCB have been the two major competitors in these markets, competing with each other across a wide range of amino resin grades and applications. In addition, the markets for these products already are highly concentrated, and would become more so without the relief provided by the order.

• On February 28, FTC Chairman Deborah Platt Majoras announced that William Blumenthal will join the agency as General Counsel. Blumenthal, currently a partner in the antitrust and trade regulation practice at King & Spalding LLP, will replace John D. Graubert, who has served as Acting General Counsel since January.

• On February 23, the Commission, by a vote of 5-0, authorized publication of a notice of final rulemaking effecting amendments to the Hart-Scott-Rodino Rules ("HSR") (16 C.F.R. Parts 801 - 803). This rulemaking finalizes the proposed rules published April 8, 2004, and responds to public comments addressing those proposed rules. The amendments reconcile, as far as practicable, treatment of unincorporated entities with treatment of corporate entities under the HSR rules. In particular, the amendments address acquisitions of interests in unincorporated entities; formations of unincorporated entities; and the application of certain exemptions, including the intraperson exemption. There are also minor ministerial changes to certain rules to adapt their application to both corporations and unincorporated entities.

• On February 18, the Commission approved the filing of an amicus brief jointly with the U.S. Department of Justice in the matter concerning Empagran, S.A. v. Hoffmann-LaRoche, Ltd., No. 01-7115 (D.C. Cir.). This brief has been filed in response to an order issued by the D.C. Circuit, which calls for the parties to address an issue not addressed by the Supreme Court's decision in this case. The Commission vote approving the filing of the amicus brief was 4-0-1, with Chairman Deborah Platt Majoras recused.

• On February 17, Federal Trade Commission Chairman Deborah Platt Majoras announced two major staff changes within the FTC's Bureau of Competition. First, Jeffrey Schmidt, formerly a partner of the Washington office of Pillsbury Winthrop LLP, will bring his antitrust expertise to the Commission as Deputy Director of the Bureau of Competition. Second, Jeffrey Brennan, most recently Assistant Director in charge of the Health Care Services and Products Division, has been promoted to Associate Director.

• On February 15, the FTC released a study on the strength of competition in the sale of prescription contact lenses. Congress required the study under the Fairness to Contact Lens Consumers Act ("FCLCA"), which was enacted to promote competition in the contact lens market by enhancing consumers' ability to buy contact lenses from sellers other than their eye care practitioners ("ECP"s).

  The FTC's study examines a variety of issues, including: 1) various types of manufacturer-seller relationships and their impact on competition; 2) the prices charged by contact lens sellers in different retail channels; 3) the effect of state regulations on competition in the sale of contact lenses; and 4) the impact of the FTC's Eyeglass Rule on competition.

  The FTC's study finds that consumers have the ability to choose between several retail options, other than their prescribing ECP, when purchasing contact lenses, due in part to the standardization of disposable soft contact lenses, along with the FCLCA-required prescription portability. The study concludes that independent ECPs account for the majority of sales, followed by national optical chains and mass merchandisers. The FTC's study also examines several other issues that may affect competition in the contact lens market. According to the study, state licensing requirements that restrict consumers' ability to buy contact lenses from out-of-state sellers or non-ECP sellers may limit competition and harm public health. The FTC's study also notes that state restrictions on truthful advertising are likely to inhibit competition and limit consumers' ability to make informed choices about their contact lens purchases. The FTC's study additionally concludes that, by making it easier for consumers to comparison shop, the FTC's Eyeglass Rule has had a positive impact on competition in the eyeglass market, which has lowered prices and increased consumer choice.

• On February 14, the FTC conditionally approved the $5.8 billion acquisition of RMC Group PLC ("RMC") by Cemex, S.A. de C.V. ("Cemex"), subject to a proposed consent order that preserves competition in the highly concentrated ready-mix concrete market in metropolitan Tucson, Arizona. Under the proposed consent order, Cemex is required to divest RMC's ready-mix concrete assets in the Tucson area to a Commission-approved buyer within six months of signing the consent order. If Cemex does not divest these assets, the FTC may appoint a monitor to oversee the sale.

  According to the FTC's complaint, the proposed acquisition would violate Section 5 of the FTC Act and Section 7 of the Clayton Act, as amended, by substantially lessening competition in the metropolitan Tucson, Arizona market for the manufacture and sale of ready-mix concrete. There are no close substitutes for ready-mix cement in its principle uses, which include the construction of building foundations.

  The complaint states that there are only three ready-mix concrete manufacturers in the highly concentrated metropolitan Tucson market. If the acquisition were allowed to proceed as proposed, the FTC contends, the market would become even more concentrated, with only two independent suppliers of ready-mix concrete remaining. As a result, the agreement likely would facilitate coordinated anticompetitive conduct between Cemex and its remaining competitor. Accordingly, the FTC contends that the acquisition, as originally proposed, would increase the likelihood that ready-mix concrete buyers in Tucson would be forced to pay higher prices and receive diminished service. In addition, the FTC believes that entry into the metropolitan Tucson ready-mix concrete market on a level sufficient to deter the likely anticompetitive effects of the proposed transaction is unlikely to occur in a timely manner. Among other reasons, entry into the ready-mix concrete market is difficult due to the limited availability of the raw materials that would be required to sustain new concrete operations at a sufficient scale to attract most customers. No new entry into the Tucson ready-mix concrete market has occurred in more than 10 years.

• On February 11, the Commission authorized the staff to file a brief as amicus curiae in Teva Pharmaceuticals USA, Inc. v. Pfizer, Inc., Case No. 04-1186 (Fed. Cir.) in support of Teva's petition for rehearing or rehearing en banc. The case, which was recently ruled upon by a panel of the U.S. Court of Appeals for the Federal Circuit, involves the Hatch-Waxman Act. In an effort to market its generic version of Pfizer's blockbuster drug Zoloft, Teva sued Pfizer challenging a patent on that drug. The district court dismissed Teva's complaint for a declaratory judgment against Pfizer, and the Court of Appeals panel affirmed the ruling of the district court.

  Last year, the Commission filed an amicus brief in support of Teva's appeal. The Commission's brief, in support of Teva's rehearing petition, states that the panel majority's decision conflicts with two prior decisions of the Federal Circuit and one decision of the U.S. Supreme Court. The Commission vote authorizing the staff to file the amicus brief was 4-0-1, with Commissioner Pamela Jones Harbour recused. See lead article in March 2005 Edition of Antitrust Law Blog.

• On February 3, the FTC's Bureau of Economics released an Economic Issues paper entitled, "Transparency at the Federal Trade Commission: The Horizontal Merger Review Process, 1996-2003." The paper, which is available now as a link to this press release on the Commission's Web site, supplements the FTC's 2004 release of its horizontal merger investigations data and presents an econometric analysis of the agency's merger review process between 1996 and 2003, using data from 151 transactions evaluated during that time.

  According to the paper, the Commission's enforcement policy has been stable during the eight years studied. Using learning from concentration-based models, as well as models incorporating additional factors when data are available, the paper adds to the insights from the FTC's 2004 data release. Further detail is provided for the review of the agency's data-collection processes, including a presentation of summary statistics for the merger transparency data. The estimates produced by the models suggest that, in addition to the market structure variables, verified consumer complaints, market entry considerations, and in some cases, "hot" documents (documents associated with the merging parties that imply the merger is likely to be anticompetitive) affect the Commission's enforcement decisions.

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

• The Federal Trade Commission ("FTC") released a staff report on March 7 summarizing the issues and drawing some conclusions from its April 2004 workshop, "Monitoring Software on Your PC: Spyware, Adware, and Other Software." The report, a transcript of the day-long session, a list of participants and their presentations, and comments filed with the Commission can be found at http://www.ftc.gov/bcp/workshops/spyware/index.htm. Based on discussions at the workshop and more than 750 comments submitted to supplement the workshop record, the FTC staff has concluded that spyware is a real and growing problem and that spyware can impair the operation of computers and create substantial privacy and security risks for consumers' information. According to the report, the FTC staff also concluded that the problems caused by spyware can be reduced if the private sector and the government take action. The report suggests that technological solutions - firewalls, anti-spyware software, and improved browsers and operating systems - can provide significant protection to consumers from the risks related to spyware. The report recommends that industry identify what constitutes spyware and how information about spyware should be disclosed to consumers; expand efforts to educate consumers about spyware risks; and assist law enforcement. The report further recommends that the government increase criminal and civil prosecution under existing laws of those who distribute spyware and increase efforts to educate consumers about the risks of spyware.

• A mortgage company identified during a nationwide sweep monitoring compliance with federal privacy laws settled FTC charges on March 4 that it failed to adequately protect customers' personal and financial information. In late 2004, the FTC charged the company with violating the Gramm-Leach-Bliley ("GLB") Safeguards Rule. This rule requires financial institutions to implement policies and procedures to ensure the security of customer information. This is the second FTC settlement resolving alleged violations of the GLB Safeguards Rule. According to the FTC's complaint, Nationwide Mortgage Group, Inc. failed to assess risks to sensitive customer information; implement safeguards to control these risks; train employees on information security issues; oversee loan holders' handling of customer information; or monitor its computer network for vulnerabilities. The FTC also alleged that the company violated the GLB Privacy Rule by failing to provide required privacy notices to consumers explaining how their personal information may be used or disclosed. The Safeguards Rule requires financial institutions to implement a written program to secure customers' information. In addition to mortgage companies and other traditional financial institutions, the Rule covers entities such as payday lenders, tax preparers, auto dealers, credit counselors, and retailers that issue credit cards. To accommodate the wide range of institutions covered, the Rule allows each institution to develop a program that is appropriate to its size and complexity, the sensitivity of the information it handles, and the nature and scope of its business.

• California infomercial producer Modern Interactive Technology, Inc. ("MIT"), and its two principals, Mark Levine and David Richmond, agreed to settle FTC charges on March 1 that they had an active role in developing the deceptive claims made to sell "The Enforma System" weight-loss products. The settlement requires, among other things, that the defendants have competent and reliable scientific evidence to substantiate future claims for any dietary supplement, food, drug, or device. This is the last case growing out of the sales of the Enforma System, a weight-loss product consisting of two dietary supplements - "Fat Trapper" and "Exercise In A Bottle." In April 2000, the FTC announced that it had settled charges against Enforma Natural Products, Inc., the vendor of the Enforma System. The order in that case required Enforma Natural Products and its principal Andrew Grey to pay $10 million in consumer redress. Thereafter, in August 2000, the FTC filed a complaint in federal district court against MIT and its officers, alleging that they played an active role in writing, editing, and producing the infomercials for the Enforma System. In September 2001, however, the district court issued an order ruling that the Commission's settlement order with Enforma Natural Products was "res judicata" as to MIT, Levine, and Richmond, meaning that the FTC had no right to bring a separate action against them. The FTC appealed this ruling to the Ninth Circuit Court, and in September 2004, the Ninth Circuit reversed the district court's res judicata decision. It held that Enforma Natural Products was not sufficiently connected to MIT, Levine, and Richmond to justify barring the FTC's claims against them, and remanded the matter to the district court for litigation.

• The FTC and Spain's Agencia Española de Protección de Datos ("AEPD") signed a bilateral Memorandum of Understanding ("MOU") on February 24 to promote enhanced cooperation and information-sharing on spam enforcement activities. Officials from both agencies will cooperate to address the problem of illegal spam. FTC Chairman Deborah Platt Majoras and AEPD Director Jose Luis Piñar Mañas signed the MOU at a ceremony in Washington, DC. The MOU is a "best efforts" agreement intended to enhance cooperation between the two agencies - it is not legally binding and does not alter either country's existing protection laws. The AEPD is Spain's data protection authority. Since Spain's anti-spam law took effect last year, the AEPD also has authority to conduct spam investigations. The FTC continues to promote international cooperation on spam and other consumer protection issues. In July 2004, the Commission signed a similar MOU with the United Kingdom and Australia. In October 2004, the FTC, the AEPD, and other enforcement agencies from countries around the world met in London to develop greater international enforcement cooperation against illegal spam. Under the "London Action Plan," 26 agencies from 19 different countries, along with numerous private sector representatives, agreed to use best efforts to share information about spam enforcement, participate in investigative training sessions, and undertake joint education and enforcement projects. With their MOU, the FTC and the AEPD will strengthen the links they have developed both bilaterally and through the London Action Plan. The FTC vote to approve the MOU and publish the accompanying Federal Register notice was 5-0.

• In a massive criminal and civil crackdown on promoters of illegal business opportunity and work-at-home schemes, the FTC, the Department of Justice ("DOJ"), the U.S. Postal Inspection Service, and law enforcement agencies from 14 states took action against more than 200 operations for engaging in fraud and/or violating consumer protection laws on February 22. Business opportunity and work-at-home fraud causes substantial consumer injury. In the FTC's cases alone, the defendants caused tens of thousands of consumers to lose a total of more than $100 million. The enforcement sweep, known as "Project Biz Opp Flop," contains four key components: 1) criminal prosecutions against business opportunity fraud artists; 2) civil enforcement actions filed by the FTC; 3) civil penalty actions filed by the DOJ on behalf of the FTC; and 4) enforcement actions filed by state enforcement agencies.

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

• On March 2, the Canadian Competition Bureau that Robert J. Hart, a former senior vice president of UCAR International Inc. (now GrafTech International Ltd.), pleaded guilty, and was fined $50,000 by the Canadian Federal Court for his role in an alleged conspiracy to fix the price of graphite electrodes. "This conviction sends a message that executives involved in price fixing conspiracies that harm the Canadian marketplace are personally accountable under the Competition Act," said John Pecman, Acting Deputy Commissioner of Competition. "The Competition Bureau will continue to aggressively pursue corporations and individuals involved in cartels to ensure Canadians can enjoy the benefits of competition." Mr. Hart, a U.S. citizen, is the second individual, and the fifth party, to plead guilty in Canada to participating in the graphite electrodes cartel.

• On February 25, the European Commission confirmed that it was starting an investigation into the pricing of Apple Computer's iTunes following a referral from the UK's Office of Fair Trading ("OFT"). Which?, the UK's consumers association had requested the OFT to investigate the pricing since it appeared that downloading song tracks in the UK was more expensive than on the rest of continental Europe. The case will examine whether the alleged differential pricing, and potential restricting of access to the same tracks through foreign websites, is compatible with EU antitrust law.

• On February 24, the UK's OFT has suggested that it is due to take action against a number of cartels in the construction industry, as it welcomed the news that the Competition Appeals Tribunal ("CAT") had upheld the OFT's decision against nine contractors in the West Midlands and the fine imposed on Apex Asphalt. The OFT Chairman, John Vickers, stated that, "Evidence of cartel activity in the construction industry - from leniency applications and site visits is mounting." According to the Financial Times, the new round of "cartel-busting activity" in the sector will include large fines, and also raise the possibility of the UK's first criminal cartel prosecution, or, director disqualification, resulting from cartel behavior.

• On February 22-23, the European Commission, assisted by officials from Member State competition authorities, launched simultaneous "dawn raids" at the premises of some of the major European manufacturers of flat and car glass in the UK, Germany, Belgium and France. Dawn raids are the first step in a Commission investigation into suspected cartel activity. The Commission stated that it was looking for evidence of co-ordination of price-increases, agreement on the introduction of an "energy surcharge" in the flat glass sector, the allocation of customers, and agreement on supply quotas and prices by car glass producers. Flat glass is used mainly in the manufacture of glass products used by the building sector, and in a processed form by the car industry. Pilkington Plc, the world's largest maker of car windshields, French glass producer, Saint-Goblain, Glaverbel of Belgium, and Guardian of the US, were amongst the companies raided.

• On February 22, the Swedish Market Court fined five multinational oil companies a total of SEK112 million. The Market Court established that StatOil, OKQ8, Shell, Preem, and Hydro, had operated an alleged cartel in a serious infringement of the law, warranting the heavy fines. The companies had allegedly met in 1999 to collaborate on environmental matters, but had allegedly colluded on prices and rebates. The Swedish Competition Authority had raided the firms in December that year. The Director-General of the Swedish Competition Authority, Claes Norgen, welcomed the decision to fine the firms heavily, stating that it would significantly improve the Authority's chances of combating and prosecuting cartels in the future. Decisions by the Swedish Market Court cannot be appealed.

• On February 16, the UK's Office of Fair Trading ("OFT") decided not to transfer to the European Commission jurisdiction to examine the bids for London Stock Exchange plc ("LSE") by Deutsche Börse AG and Euronext NV. Neither bid met the threshold for merger notification to Brussels. Both bids are notifiable in the UK, and the bid by Deutsche Börse AG has also been notified in Germany. The OFT nevertheless carefully considered whether to ask the European Commission to examine the bids. A national competition authority may make such a request, under Article 22 of the EC Merger Regulation, if it considers that the European Commission is better placed to deal with the case. However, the OFT concluded that the UK was the appropriate forum to retain jurisdiction over both bids for a number of reasons, including the fact that on preliminary assessment, the primary competitive impact of the proposed transactions appears to be in the UK, which is where the majority of the LSE's customers are located, and the OFT has considerable experience in the markets concerned. As the case proceeds, the OFT will work closely with European counterparts, in particular with the Competition Directorate of the European Commission in Brussels and the Bundeskartellamt in Bonn..

• On February 16, it was reported that sixteen German gas suppliers in the German state of Bavaria agreed to freeze price rises until June 2005, in exchange for the state's economy ministry, which acts as the state's cartel office, dropping its investigation. The investigation had been prompted by allegations that the gas suppliers were over-charging the companies, had the most expensive rates in the states out of 110 companies, and that had planned to further raise their prices by 10%. The state ministry stated that closing the case was the most consumer-friendly solution.

• On February 14, the South African Competition Commission held that the country's leading tobacco manufacturer, British American Tobacco (BAT), used anti-competitive practices to maintain its dominant position on the market. It recommended a fine to the Competition Tribunal of up to 10% of the company's turnover, and to declare various incentives schemes to be declared void. The decision followed a complaint by Japan Tobacco International (JTI) that alleged that BAT had entered into illegal exclusive retail agreements and incentive schemes to promote its brands irrespective of the price of competitors' products.

• On February 10, the European Commission sent 'statements of objections' to the German mobile network operators ("MNOs"), T-Mobile and Vodafone, because the Commission believes the companies' practices may be contrary to EU's competition rules on abuse of monopoly power (EC Treaty, Article 82). In particular, the Commission has challenged the high rates that T-Mobile and Vodafone have charged other MNOs for international roaming services at the wholesale level. The Commission's investigation suggested that T-Mobile and Vodafone abused their dominant positions in the German market for the provision of international roaming services at wholesale level on their own networks. The abuse consisted of charging unfair and excessive prices to European MNOs. The Commission action aims to ensure that European consumers are not overcharged when they use their mobile phones on their travels around the EU.

• On February 8, it was reported that six Japanese manufacturers of aluminum foil - Mitsubishi Aluminum, Nippon Foil Manufacturing, Tokia Aluminum Foil, Toyo Aluminum, Sumikei Aluminum Foil and Sun Aluminum - had been "raided" by the Japanese Fair Commission on suspicion of price fixing. The Aluminum Foil Industry Association was also raided.

• On February 7, the Mexican antitrust authority (Comisión Federal de Competencia) ("CFC") closed its investigation of a complaint filed by pharmaceutical company, Rimsa, against Roche, for monopolization practices in the distribution of Filgrastim. Filgrastim is an analgesic drug, which Roche imports from its manufacturer, and markets through its own Mexican distribution company. Rimsa alleged that Roche had agreed with Filgrastim's drug manufacturer to restrict the number of licensed distributors in the country. The CFC concluded that the allegations alone were not enough to establish that Roche had attempted to drive out its competitors out of the market.

• China Business Weekly, a state-run media company, reported that efforts to introduce a new Chinese anti-monopoly law have accelerated because of concerns that foreign multinationals are dominating certain industries. The report in China Business Weekly claimed that the draft of the new anti-monopoly rules could be turned into law by the end of 2005 (see also Legal update, Chinese Anti-monopoly Law will be issued this year). The draft of the anti-monopoly law has been a work in progress for over a decade but has not yet moved beyond the drafting stage. The report says that one reason for this is the existence of state monopolies. In addition, the report sheds light on the issue of which government department will oversee compliance with this law.

• On February 4, Reuters reported that Japan's Fair Trade Commission is close to notifying Intel that its alleged business practice of paying rebates to computer manufacturers to limit their purchase of rival competitor computer processors violates Japanese antitrust law.

• On February 3, the Slovak Parliament approved an amendment creating the Antimonopoly Office of the Slovak Republic ("AO") increased competencies in the field of assessing ,and deciding upon abusive pricing by companies having a dominant position on a market. The amendment expressly includes unfair pricing as one of the categories of potential abuse by a dominant undertaking listed in the statute. Effective March 1, 2005, AO will be entitled to investigate and adopt decisions in cases where dominant players have imposed unfair prices, and impose a fine amounting to 10% of the turnover.

• On February 2, the Australian Federal Government announced that it would introduce criminal penalties for serious cartel conduct. The proposed criminal cartel offence will prohibit a person from making or giving effect to a contract, arrangement or understanding between competitors that contains a provision to fix prices, restrict output, divide markets or rig bids, where the contract, arrangement or understanding is made or given effect to with the intention of dishonestly obtaining a gain from customers who fall victim to the cartel. The maximum penalties for the offence will be a term of imprisonment of five years and a fine of $220,000 for individuals and a fine for corporations that is the greater of $10 million or three times the value of the benefit from the cartel, or where the value cannot be determined, 10 per cent of annual turnover. The Government will discuss the proposal with the Australian States and Territories over the next three months.

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

• An array of technology firms, including major computer and TV-set manufacturers, is pressing federal regulators to enforce new set-top-box rules against the cable industry. Cable operators are resisting implementation of an FCC rule that would ban the deployment of new integrated set-tops after July 1, 2006, effectively meaning that all new boxes would need to function with the CableCARD conditional-access device. The CableCARD mandate is designed to establish a retail set-top market, and the technology firms maintained that the creation of such a market requires that cable operators support the CableCARD in all new boxes that they provide their customers. Cable insists that the mandate would drive up box costs without creating new value for consumers. In a separate letter, Hewlett-Packard joined 11 other companies, including Sharp Electronics Corp. and Dell Inc., in urging the FCC to reject cable's proposal that the agency should eliminate the ban or postpone its effective date by 18 months. "The only way to ensure that consumers enjoy the benefits of a competitive marketplace is to maintain the requirement that devices supplied by cable operators rely on the same CableCARDs for security that must be used by equipment supplied through competitive retail outlets," the companies told the FCC in a Feb. 18 letter. One proposal under review calls for retaining the ban but exempting low-cost boxes, but a price level defining "low-cost" was not provided. FCC member Jonathan Adelstein has said it is important for the agency to move quickly on this matter because if the ban is affirmed, cable operators need time to place orders to meet the July 1 deadline.

• On February 22, at least two federal judges indicated that the FCC likely exceeded its authority by imposing rules designed to protect broadcast-TV programming from rampant Internet piracy. The FCC's broadcast-flag rules - adopted in August 2003 at the urging of Hollywood studios and others - required a wide range of receiver equipment to recognize codes within TV signals that determine the extent to which the programming can be copied and transmitted over the Internet. In doing so, the FCC, for the first time, relied on its "ancillary authority," rather than on a clear directive from Congress, to impose technical requirements for the design of equipment that receives digital-TV signals. Judge Harry T. Edwards of the U.S. Court of Appeals for the D.C. Circuit stated several times that the FCC's reliance on its ancillary authority was not only unprecedented, but also far-reaching in terms of expanding the agency's power over all kinds of industries. FCC attorney Jacob Lewis said the agency's broadcast-flag rules were tied to its authority to regulate digital-TV stations, both to ensure that digital-TV programming wasn't stolen and that "high-value" content owners, fearing theft, didn't prefer cable and satellite because those technologies scramble programming. Lewis said failure to protect digital-TV programming would frustrate the agency's effort to promote the transition to digital television. The three-judge panel, which also included Judge Judith Rogers, heard 50 minutes of oral arguments in an appeal filed by the American Library Association ("ALA"), the Consumer Federation of America, the Electronic Frontier Foundation and others. These groups are concerned that in its broadcast-flag rules, the FCC, without congressional endorsement, decided to amend copyright law in a way that tightens the fair use of copyrighted material. But the case might not be decided on the merits. Sentelle questioned whether the ALA and other groups had legal standing to challenge the FCC rules, claiming that courts usually don't extend review to cases that fail to demonstrate specific injury. ALA lawyer Pantelis Michalopoulos said the groups had standing because the FCC's rules would increase consumer prices and encroach on fair-use rights protected by copyright law. He added that the FCC does not have copyright jurisdiction.

• Also on February 22, SBC Communications Ins. ("SBC") and AT&T Corp. ("AT&T") submitted joint filings with the FCC and U.S. Department of Justice, kicking off the formal federal review process aimed at determining that their merger is in the public interest. On January 31, SBC, the second-largest regional phone company in the nation, announced it would buy AT&T, the biggest U.S. long-distance carrier, for about $16 billion. The transaction will make SBC the largest U.S. telecommunications company and ends AT&T's independence after suffering a two-decade decline after losing its U.S. monopoly. SBC will become the largest U.S. provider of landline and wireless communications service to homes and businesses with about $90 billion in annual revenues.

• On February 10, the FCC resolved two significant issues related to digital cable carriage in a Second Report and Order and First Order on Reconsideration (CS Docket No. 98-120) ("Order"). According to the FCC press release, the Order: (1) affirms the Commission's tentative conclusion not to impose a "dual carriage" requirement on cable operators (which would have required them to simultaneously carry broadcasters' analog and digital signals); and (2) affirms the Commission's prior determination that cable operators are not required to carry more than a single digital programming stream from any particular broadcaster. The Order found that mandatory dual carriage is not necessary either to advance the governmental interests as identified by Congress and the Supreme Court, or to achieve the digital television transition. Regarding the digital multicasting issue, the Commission affirmed its earlier conclusion and declined to require cable operators to carry any more than one programming stream of a digital television station. Although the Commission found that the operative statutory language at issue is ambiguous on the subject of multicast must carry, it also found on the current record, that such a requirement is not necessary to further the purposes of the must carry statute, as defined by the Supreme Court. In the First Report and Order and Further Notice of Proposed Rulemaking (CS Docket No. 98-120) adopted January 2001, the Commission concluded that the statute neither requires nor prohibits the carriage of both a television station's digital and analog signals, but left the issue of dual carriage to the discretion of the FCC. The FCC sought comment on its tentative conclusion that a dual carriage requirement would violate the First Amendment rights of cable operators. In the First Report and Order the Commission also found that the statutory requirement that cable providers carry the 'primary video' of broadcasters meant that broadcasters were entitled to carriage of one digital programming stream, and not multiple programming streams (i.e. "multicasting").

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