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In light of the continued globalization of business activities, and the increasing number of mergers that are subject to review under merger laws in more than one jurisdiction, the Organization for Economic Co-operation and Development ("OECD") published on March 23, 2005, a Council Recommendation, on merger review best practices.

The OECD Council Recommendation builds on work conducted by the OECD Competition Committee which is made up of the heads of the world's major antitrust authorities, as well as the work of other international bodies, such as the International Competition Network, in the area of merger review. In particular, the Council recommends that the governments of member countries (which include most European countries states, the U.S., Australia, New Zealand, Japan, Korea, Turkey and Mexico) should:

• Conduct merger review procedures in an effective, efficient and timely manner. They should, in particular, avoid imposing unnecessary costs and burdens on businesses by asserting jurisdiction appropriately, using clear and objective criteria to determine whether a merger requires notification or qualifies for review, setting reasonable information requests, enabling mergers that do not raise material competition concerns to be reviewed and cleared expeditiously, and providing merging parties with a reasonable degree of flexibility in determining when they can notify a proposed merger.
• Ensure that merger rules, policies, practices and procedures are transparent and publicly available, and antirust authorities issue publicly available reasoned decisions.
• Ensure procedural fairness for merging parties, in particular, by providing the opportunity to comment on material concerns and the right to seek timely review of decisions by a separate adjudicative body. Merging parties should also have the opportunity to consult with the competition authorities about significant legal and practical issues at key stages in the investigation.
• Allow third parties with a legitimate interest to comment on proposed mergers.
• Treat foreign firms no less favorably than domestic firms.
• Protect business secrets and confidential information, including those obtained from another antitrust authority.
• Seek to cooperate and to coordinate their reviews of international mergers in appropriate cases. National laws should be aimed at resolving domestic competition concerns, and inconsistencies with any remedies imposed by other jurisdictions should be avoided. This cooperation and coordination should be facilitated by national laws and by bilateral and multilateral agreements. Merging parties should also be encouraged to facilitate this in the timing of their notifications, and by waiving their confidentiality rights.
• Ensure that competition authorities have sufficient powers and resources to conduct merger reviews efficiently and effectively and to cooperate with other authorities.
• Review their merger laws and practices on a regular basis to seek improvement and convergence towards recognized best practices.

Finally, the OECD Council instructs its Competition Committee to conduct further work to enhance the effectiveness of merger review, reduce costs, and strengthen cooperation and coordination between antitrust authorities. The Committee will also review the experiences of member countries and report on any further action that should be taken to strengthen cooperation and to achieve greater convergence towards recognized best practices.

Mergers with an international dimension can impose substantial costs on antitrust authorities and the merging parties, and the OECD's Recommendation recognizes that it is important to address these costs without limiting the effectiveness of national merger laws. It is hoped that the Recommendation encourages cooperation and coordination among foreign antitrust authorities with respect to international mergers, and will lead to reduced transaction costs, promote efficiency and, achieve consistent, or at least non-conflicting, decisions.

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

Ms. Nellie Kroes, the European Competition Commissioner, delivered a speech on April 7, 2005, on the effective enforcement of European Community competition law. Speaking at the International Forum on Competition Law in Brussels, the Commissioner focused on cartel enforcement, in particular, which she has highlighted in previous speeches as one of her highest priorities during her time in office.

Over the past five years, the Commissioner noted that the European Commission has adopted 31 decisions against cartels, and imposed nearly €4 billion (approx. $5.3 billion) in fines. This represents an unprecedented crackdown on cartels, amounting to 35% of all cartel decisions since the Commission's first cartel decision back in 1969. She was confident that deeper cooperation between the Commission and national European antitrust authorities, and the new investigative tools allowed by the EC's modernized regulatory framework, would lead to even more vigorous cartel enforcement. However, she highlighted several emerging trends that would have to be addressed if the European Commission's cartel enforcement policy is to remain effective.

For example, Commissioner Kroes noted that the growth in number of cartel decisions has brought a corresponding growth in the number of legal challenges to the Commission's decisions. On average, one cartel decision gives rise to three or four court cases. Accordingly, defending its decisions before the European courts will become an implicit element of the Commission's cartel enforcement process. Second, the growing number of immunity applications under the leniency program has increased the Commission's workload and limited their ability to conduct "dawn raids", or inspections on suspect companies/individuals. The need to fully investigate every leniency application submitted under the current leniency program has also increased the risk that applicants will not receive a prompt response, leaving them in a uncertain situation.

Commissioner Kroes acknowledged that responding to these challenges will be central to the maintenance of an effective European antitrust policy. She noted that the Commission had undertaken a reorganization which had led to the creation of a dedicated cartel directorate to achieve economies of scale, and a pooling of anti-cartel knowledge. More importantly, she discussed five wider systematic changes in the cartel area that may in the future contribute towards a more effective European cartel policy.

First, the weaknesses in the existing leniency regime need to be addressed. In particular, she cited the need for a one-stop shop for European leniency applications. She noted that detailed work is being undertaken with assistance from the European Competition Network comprising of all national antitrust authorities. She suggested that a system based on one central body for applications may not be the best solution, and indicated a preference for a solution that would allow a leniency application to any national antitrust authority.

Second, and based on U.S. practice, Commissioner Kroes suggested that the Commission may look into developing some form of plea bargaining power with a view to negotiating direct settlement agreements with alleged cartel members. Currently, there is no arrangement for the simplified handling of European cartel cases, and the introduction of some form of plea bargaining would remove the need for the Commission to investigate every last substantive detail of each and every case, and lead to faster enforcement decisions.

Third, Commissioner Kroes highlighted an emergent problem caused by the interaction of the EC leniency program, and civil procedures in other non-EU jurisdictions. Specifically, she noted that rules of discovery in some other jurisdictions, in particular, the U.S., can require evidence submitted under the EC leniency program to be disclosed in court actions for related civil damages claims. This threatens the credibility of the EC leniency program, and also limits the willingness of companies to come forward to expose potentially illegal activities to the Commission. She explained that the Commission was working on practical solutions to this problem, which would ultimately be incorporated in a revised Leniency Notice.

Fourth, the Commissioner expressed frustration that companies that were clearly guilty of antitrust violations could escape liability on purely procedural grounds. She explained that the Notice on access to the file is being reviewed in order to offer greater clarity on defense issues, and expects a new Notice to be published later in 2005.

Fifth, she acknowledged that there has been some criticism of the 1998 Guidelines on fines for a lack of transparency. However, the Guidelines have been endorsed by the European Court of First Instance, and, as a matter of principle, allowing infringers to calculate the cost/benefit ratio of cartel participation in advance would not lead to a sustained policy of cartel deterrence and zero tolerance. She accepted, however, that the current Guidelines are rigid. In particular, they appear to apply disproportionate fines to small and medium sized companies. She suggested that the Commission may look at amending the guidelines in this particular respect.

Ms. Kroes ended her speech by emphasizing the importance of international cooperation between antitrust authorities. She cited the achievements of the International Competition Network, and the OECD, and reiterated the need to achieve a global commitment to ban hard-core cartels. She stated that the Commission is currently investigating the possibility of entering a 'second generation' cooperation agreement with U.S. antitrust authorities to allow for a deeper degree of cooperation in cartel enforcement.

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

Canada's Commissioner of Competition has sought leave to intervene in an appeal by Apotex Inc. in Eli Lilly and Co. v. Apotex Inc., [2004] FC 1445, a decision of the Federal Court delivered last fall. Apotex holds that a mere assignment of patents does not constitute a cause of action under Section 45 of Canada's Competition Act, R.S.C. 1985, c. C-34, even when it results in a monopoly.

Procedural Background

In 1997, Eli Lilly and Company and Eli Lilly Canada Inc. (collectively "Lilly"), the holder of eight patents for processes relating to the antibiotic drug cefaclor, brought suit against Apotex Inc. ("Apotex") for infringement of these patents. Four of the eight allegedly infringed patents were assigned to Lilly by Shionogi & Co. Ltd. ("Shionogi"), a Japanese company.

Apotex amended its defense and counterclaimed that the assignment of the four patents to Lilly by Shionogi constitutes an agreement that resulted in an undue lessening of competition contrary to Section 45 of the Competition Act, thereby entitling Apotex to damages under Section 36 of that Act. Section 45(1) of the Act makes conspiracies that unduly restrain trade unlawful. Lilly and Shionogi sought summary judgment of Apotex's counterclaim as to the anticompetitive agreement. The court followed Molnlycke AB v. Kimberly-Clark of Canada Ltd (1991), 36 C.P.R. (3d) 493 ("Molnlycke") which holds that an undue impairment of competition cannot be inferred from evidence of the exercise of the patent alone. In addition, the court construed Section 50 of the Patent Act as specifically authorizing transactions including the assignment of patent rights and that with such authorization by Parliament, any lessening of competition could not be considered "undue" as required by Section 45. The court thus concluded that Apotex failed to state a claim and granted summary judgment on the counterclaim.

Apotex appealed. The Federal Court of Appeal found that the lower court erred in not considering whether the facts of Molnlycke pertained to those in the instant case and remanded the case for reconsideration of three issues:

• Whether Section 45(1) can ever apply to an agreement involving the exercise of patent rights;
• Whether the facts in the case at bar are sufficient to prove that Lilly and Shionogi's conduct violated Section 45; and
• Assuming Section 45 applies and that Lilly and Shionogi's conduct is contrary to Section 45, whether Apotex is unable to prevail because:
• Apotex's cause of action is statute-barred;
• Apotex did not suffer damages; or
• Lilly and Shionogi are exempt under the research and development exemption in Section 45(3)(e) of the Competition Act.

Holdings

On reconsideration, the Federal Court again struck Apotex's Section 45 claim. The court found that although there was obviously a lessening of competition, such lessening was not "undue" because it was authorized by Section 50 of the Patents Act which permits transfers of patents. The court commented that this is "fully compatible" with the Intellectual Property Enforcement Guidelines issued by the Bureau of Competition in 2000 and that it had harmoniously construed the two statutes.¹

Discussion

As to the first issue, whether an agreement that merely provides for the exercise of patent rights can constitute conduct contrary to Section 45 of the Competition Act, the court noted that although the Patents Act does not insulate any and every agreement concerning patent rights from liability under the Competition Act, so long as the agreement falls within the purview of the Patents Act, any lessening of competition by virtue of the agreement will be a lessening of competition that is authorized by Parliament. In other words, the court determined that an agreement authorized by the Patents Act is an agreement authorized by Parliament and as such, cannot constitute conduct that unduly lessens competition for the purposes of Section 45 of the Competition Act. Only restrictions on competition that are not specifically authorized by Parliament, the court stated, are actionable under Section 45. The court again applied Molynycke to hold that agreements involving the mere exercise of patent rights are exempt from Section 45(1).

As to the second issue, whether the facts were sufficient to prove that Lilly and Shionogi's conduct violated Section 45, the court took into account the fact that Lilly's patent on cefaclor itself had already expired, but that Lilly, with Shionogi's assignment, controlled all of the commercially viable processes for making cefaclor. The court observed that prior to the assignment, two companies, not just one, controlled the processes for cefaclor. The assignment therefore increased Lilly's monopoly power and substantially lessened competition. However, because the only agreement that could constitute a conspiracy was the assignment agreement and because the assignment of patents is a transaction specifically authorized by Parliament under Section 50 of the Patents Act, the agreement could not be found to unduly lessen competition.

Having answered "yes" to the first issue and "no" to the second issue, the court declined to adjudicate on the third issue relating to whether Apotex would not prevail because either (a) its claim was statute-barred, (b) it did not show damages, or (c) Lilly and Shionogi were exempt under the Research and Development exemption. The court nevertheless indicated briefly why none of these defenses would succeed. As to (b), the court noted that while Apotex's admission that it was not delayed in successfully bringing its version of cefaclor to market, the court found that it was not clear that Apotex could not succeed if it were otherwise successful and that it was inappropriate to dismiss its claim at the summary judgment stage on that basis alone. In addition, as to (a) and (c), Lilly's and Shionogi's arguments that the Apotex claim is either prescribed or is saved by the research and development defense, the court noted that "there is sufficient conflict and lack of clarity in the relevant evidence on the questions of foreseeability and the reach of the 1975 research and development agreement between Lilly and Shionogi that those questions are not suitable for summary judgment and should only be resolved after a full trial." (at para. 25).

Intervention by Commissioner of Competition

The Commissioner of Competition has intervened with respect to the specific questions of whether Section 50 of the Patents Act precludes the application of Section 45 of the Competition Act, and whether such interpretation is fully compatible with the Intellectual Property Enforcement Guidelines. The Competition Bureau has not pressed the courts to decide competition matters involving intellectual property rights before. Its intervention in Apotex marks what may be the first judicial consideration of the Intellectual Property Enforcement Guidelines.

The Guidelines provide that the circumstances in which the Bureau may apply the Competition Act to conduct involving IP or IP rights fall into two broad categories: those involving something more than the mere exercise of the IP right, and those involving the mere exercise of the IP right and nothing else. The Guidelines state that the Bureau will use the general provisions of the Competition Act to address the former circumstances and Section 32 (special remedies) to address the latter. More particularly, the Bureau applies the general provisions of the Competition Act when IP rights form the basis of arrangements between independent entities, whether in the form of a transfer, licensing arrangement or agreement to use or enforce IP rights, and when the alleged competitive harm stems from such an arrangement and not just from the mere exercise of the IP right and nothing else. The Bureau's intervention in Apotex will be highly interesting in that it will offer a chance to see how the Bureau will challenge what the Federal Court has reiterated is a mere exercise of a patent right.

1. The Bureau's Intellectual Property Enforcement Guidelines may be viewed online at http://cb-bc.gc.ca/epic/internet/incb-bc.nsf/en/ct01992e.html.

Authored by:
Heather M. Cooper
213-617-5457
hcooper@sheppardmullin.com

In the aftermath of the entry of the Multistate Tobacco Settlement Agreement ("MSA"), and enactment by the California Legislature of legislation to implement the terms of the MSA, a class of California consumers, who purchased cigarettes manufactured by one or more of the settling defendant tobacco manufacturers, claimed that the MSA and the state legislation constituted an "anticompetitive hybrid agreement", in violation of Section 1 of the Sherman Act and the California Cartwright Act and Unfair Competition Act.¹

In granting motions to dismiss by the California Attorney General, and the MSA defendants, (Sanders v. Lockyer, N.D. Cal., No. C 04-02281 Si,) 3/28/05, the U.S. District Court, Northern District of California held that the action was barred by the state action doctrine of Parker v. Brown,² and was also immune under the Noerr-Pennington doctrine.³ Of interest is the district court's determination that contrary to decisions by the Second and Third circuits, the participation of the settling MSA tobacco defendants in the market structure, created by the MSA and the state legislation, did not require application of the "actively supervised" standard of Midcal Aluminum, Inc.⁴ The district court held that pursuant to the subsequent United States Supreme Court decision in Hoover v. Ronwin,⁵ and the Ninth Circuit's state action decision in Charlie's Taxi,⁶ state supervision is not necessary where the challenged conduct is that of the sovereign itself.⁷

The MSA was entered into in 1998 between 46 states, including California, and the four leading domestic cigarette manufacturers. It resolved the states' claims that deceptive advertising had increased the states' health expenditures for smoking related illnesses. The settling defendants (OPMs) agreed to numerous restrictions regarding sales, marketing, advertising, lobbying, research, education and disclosure. The settling OPMs also agreed to make annual payments to the settling states.

The MSA also encouraged other cigarette manufactures to participate by signing on as "subsequent participating manufacturers" ("SPM"s). An SPM was required to make payments if its market share increased from its 1998 level, or 125% of its 1997 level. Finally, cigarette manufacturers who opted not to participate in the MSA ("NPM"s), while not subject to the marketing restrictions of the MSA, were subject to the "Enabling Laws" passed by the settling states, which required the NPMs to make flat fee payments to the states, based upon sales. The complaint alleged that the MSA was an "anticompetitive hybrid agreement" that permitted the OPMs and SPMs to utilize the market structure resulting from the MSA to prevent price competition and to raise prices. The plaintiff class sought injunctive relief under Section 1 of the Sherman Act, declaratory relief, and damages for violations of California Business and Professions Code Sections 16720 and 17200, and common law unfair competition and restitution. Plaintiffs alleged that the challenged state legislation, California's Qualifying Act and Contraband Amendment,⁸ created a barrier to market entry, as it required NPMs to escrow a percentage of each unit sold, and thus required them to charge higher prices than SPMs.⁹

Judge Illston ruled that California's enabling legislation is shielded from antitrust attack under the state action doctrine of Parker.¹⁰ The court held that the conduct in issue is the act of California as a sovereign state, and not the conduct of private parties. In addition, the enabling legislation is "direct legislative activity".¹¹ Under Hoover,¹² the court held that Midcal¹³ is inapplicable, and neither appropriate nor required where the complained of conduct consists of "direct acts of the sovereign".¹⁴

While the complaint seemingly challenged only the enabling statutes enacted to implement the MSA, rather than the MSA itself, the court agreed with Attorney General Lockyer that to the extent that the MSA is implicated, the claims asserted are barred by the petitioning activity immunity provided by Noerr.¹⁵ The court rejected the plaintiff's argument that while Noerr might be applicable to the petitioning activity itself, it did not apply to the governmental action that resulted from successful petitioning. The court held, that Noerr immunity "would mean nothing if a petitioner were then subjected to antitrust liability for his success.¹⁶ Accordingly, the court held that as to all defendants, each was protected by the state action doctrine of Parker v. Brown as well as the Noerr-Pennington doctrine. The MSA and the enabling statutes are state action, and not "hybrid" restraints which delegated regulatory power to private parties to enforce private marketing decisions. So long as the settling MSA defendants acted independently within the confines of the modified market structure created by the MSA and the enabling statutes, the complaint did not state a claim upon which relief could be granted.

1. Plaintiffs claim that California's Qualifying Act and a Contraband Amendment created a cartel that would allow participating settling defendants to engage in anticompetitive collusive activity.


2. 317 U.S. 341 (1943).


3. Eastern R.R. Presidents Conf. v. Noerr Motor Freight, Inc., 365 U.S., 127 (1961); United Mine Workers v. Pennington, 381 U.S. 657 (1965).


4. California Retail Liquor Dealers Ass'n v. Midcal Aluminum, Inc., 445 U.S. 97 (1980).


5. 466 U.S. 558 (1984).


6. Charlie's Taxi Radio Dispatch Corp. v. SIDA of Hawaii, Inc., 810 F.2d 869 (1987).


7. The Third Circuit denied Parker immunity on the "actively supervised" ground in A.D. Bedell Wholesale Co. v. Phillip Morris, Inc., 263 F.3d 239 (3d. Cir. 2001), cert. denied, 534 U.S. 1081 (2002), but granted a motion to dismiss based upon the Noerr-Pennington lobbying exemption. In the Second Circuit, the Court of Appeals denied state action immunity in Freedom Holdings, Inc. v, Spitzer, 357 F.3d 205 (2004), reh'g denied, 363 F.3d 149 (2004).


8. California's Qualifying Act is Calif. Health & Safety Code Section 104557. The Contraband Amendment is Calif. Bus. & Prof. Code Section 22979.


9. The Contraband Amendment authorized the State Attorney General to prevent a tobacco manufacturer from selling cigarettes in California, if it was not in compliance with the Qualifying Act.


10. Parker v. Brown, 317 U.S. 341 (1943).


11. Slip Opinion, page 7, lines 18-19.


12. Hoover v. Ronwin, 466 U.S. 558 (1984).


13. California Retail Liquor Dealers Association v. Midcal Aluminum, Inc., 445 U.S. 97 (1980).


14. Slip Opinion, page 7, line 24.


15. Supra, n.3.


16. Slip Opinion, page 12, lines 21-22. The court noted further that there was no allegation in the case that the MSA was a "sham", and exempted from the Noerr exemption.

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

Amendments to United States Sentencing Guidelines Which Increase Antitrust Penalties Submitted to Congress

On April 15, 2005, the United States Sentencing Commission ("USSC"), an independent agency in the judicial branch of the federal government, voted unanimously to adopt amendments to the United States Sentencing Guidelines (the "Guidelines").¹ The amendments, which follow a series of major developments in the sentencing system, increase the advised penalties for antitrust offenses in response to the Antitrust Criminal Penalty Enhancement and Reform Act of 2004 (the "Antitrust Penalty Enhancement Act")² which increased the maximum sentences for individuals convicted of Sherman Act offenses from three years to ten years.

The Guidelines set out minimum and maximum penalties and include factors to be used by sentencing judges in sentencing to determine the ranges of appropriate penalties within statutory limits. The USSC amendments do not revise the Guidelines with respect to fines, as the increases in the Sherman Act statutory maximum fines established in the Antitrust Penalty Enhancement Act are intended to permit courts to impose fines for antitrust violations at current Guideline levels without the need to engage in damages litigation during the criminal sentencing process.³

How Application of the Guidelines Changed in 2005

The Supreme Court held in the January 2005 Booker-Fanfan case that the Guidelines offended the Sixth Amendment right to jury trial to the extent that they mandated sentence enhancements based on facts found by the sentencing judge rather than the jury.⁴ Rather than invalidating them entirely, however, the Court severed the provision of the Sentencing Reform Act ("SRA") that requires judges to impose sentences in accordance with the Guidelines. This relegated the Guidelines to "advisory" status. While they still may be consulted and taken into account, judges need only apply the Guidelines in an advisory manner in exercising their sentencing discretion.

Since Booker-Fanfan, judges have differed amongst themselves as to how much weight to afford the Guidelines relative to 18 U.S.C. Section 3553 which requires judges to consider other factors in calculating a sentence. The USSC's amendments do not change the advisory nature of the Guidelines or urge judges to follow them, as some had hoped. Rather, they simply increase the penalties that judges are directed to take into account, but yet, are not required to follow in calculating sentences for antitrust offenses.

The Developments Which Led to the Downgraded Status of the Guidelines

The procession of developments in sentencing law began in June 2000 with Apprendi where Sixth Amendment issues were raised by a sentence that had been increased beyond the statutory maximum for the offense pursuant to a state hate crime statute in the absence of a jury trial.⁵ On review of the judge's sentencing order, the Supreme Court held that "any fact that increases the penalty for a crime beyond the prescribed statutory maximum must be [proved] to a jury…beyond a reasonable doubt".⁶

This development in sentencing law was followed by the Antitrust Penalty Enhancement Act, signed by the President on June 22, 2004. Section 215 of the Act increases both the fines and statutory maximum terms of imprisonment for Sections 1, 2, and 3 of the Sherman Antitrust Act. The Act increased the maximum term of imprisonment from 3 years to 10 years, increased the maximum fine for corporations from $10,000,000 to $100,000,000, and increased the maximum fine for individuals from $350,000 to $1,000,000.

Just two days later, Sixth Amendment concerns again led the Supreme Court to invalidate a state's sentencing guidelines system in United States v. Blakely.⁷ The Supreme Court held that "the statutory maximum for Apprendi purposes is the maximum sentence a judge may impose solely [based on] the facts reflected in the jury verdict or admitted by the defendant."⁸ It thus found the enhancements in Washington State's guidelines must be proven to a jury or admitted by the defendant.

Having attacked two state sentencing systems on Sixth Amendment grounds, the Supreme Court heard two appeals, United States v. Booker and United States v. Fanfan, to answer the then-outstanding question of whether the Court would come to the same conclusion with respect to the federal Guidelines.⁹

As to Booker, the jury, based on evidence that Booker possessed at least 92.5 grams of crack cocaine, found the defendant guilty of intent to distribute at least 50 grams of cocaine. The statutory maximum penalty for this offense is a life sentence and the Guidelines prescribe a sentence of up to 21 years, 10 months in jail. At the sentencing hearing, the judge found Booker had possessed 566 additional grams of crack and that he had obstructed justice. Under the Guidelines, these facts increased the range to 20 years to life. The judge followed the Guidelines and sentenced Booker to 30-years in prison. On appeal, the sentence was invalidated on the basis of Blakely. The Court held that the Sixth Amendment right to a jury trial is violated by the imposition of an enhanced sentence under the Guidelines based on the sentencing judge's determination of a fact, other than a prior conviction, that was not found by the jury or admitted by the defendant."¹⁰

Fanfan was convicted by a jury of conspiracy to distribute and to possess with intent to distribute at least 500 grams of cocaine. Under the Guidelines, without any additional factors, this offense carried a maximum sentence of 78 months. As in Booker, the judge at the sentencing hearing found that the defendant possessed a greater quantity of cocaine than had been found at trial. The Guidelines required a sentence of 188-235 months for this amount. The Fanfan judge relied on Blakely and held that the enhancements could not be applied in light of these facts. The judge imposed a sentence calculated solely based on the facts reflected in the guilty verdict. The Court held that the Sixth Amendment did not require that juries determine Guidelines factors and that the Guidelines could still be applied by judges, in an advisory rather than mandatory manner.¹¹

Booker-Fanfan thus directs that judges may take into account, in the exercise of their sentencing discretion, the ranges set forth in the Guidelines, as well as the factors in 18 U.S.C. Section 3553(a), provided that necessary facts are found by the jury or admitted by the defendant. This means that the increased penalties for antitrust offenses included in the USSC's amendments will in fact be considered by the courts in federal cases.

Amended Guidelines Likely to Come into Force November 1, 2005

The amendments to the Guidelines will be submitted to Congress no later than May 1, 2005. They will become effective November 1, 2005, unless Congress disapproves them. It is possible that Congress will reject advisory guidelines and change the Guidelines - and the federal sentencing system itself. As the Supreme Court observed in Booker-Fanfan, the "ball now lies in Congress' court" to devise a sentencing scheme that passes constitutional muster."¹²

1. The Guidelines, as they now are, may be viewed online at http://www.ussc.gov/GUIDELIN.HTM. The USSC published proposed amendments to the Guidelines for the purpose of soliciting public comments on them. This publication of the proposed amendments may be viewed at http://www.ussc.gov/FEDREG/fedr0205.htm.


2. Pub. L. 108-237.


3. Supplemental Legislative History, Cong. Rec. H 3658, June 2, 2004.


4. United States v. Booker, 125 S. Ct. 738 (2005) ("Booker-Fanfan").


5. United States v. Apprendi, 530 U.S. 466 (2000).


6. Id. at 490.


7. United States v. Blakely, 124 S. Ct. 2531 (2004).


8. Id. at 2537.


9. Supra note 4.


10. Booker-Fanfan, supra note 4 at 756.


11. Id. at 750.


12. Id. at 768 (Stevens J.).

Authored by:
Heather M. Cooper
213-617-5457
hcooper@sheppardmullin.com

California State Senator Figueroa (D-Fremont), Chair of the California Senate's Business and Professions Committee, has introduced SB 582, a bill that would require retailers to disclose "slotting allowances" paid by suppliers. Slotting allowances are payments a supplier makes to a retailer for placement of the supplier's product on the retailer's shelves.

SB 582 is described by the California Legislative Counsel's Digest as follows:

"This bill would require a retailer to disclose to a qualified supplier or manufacturer, upon its request, the placement fees or arrangements and trade information, as defined, relating to products of other suppliers or manufacturers that are placed on the retailer's premises and are similar in character to the product of the qualified suppler or manufacturer. The bill would authorize the assessment of a civil penalty in the amount of $10,000 in an action brought by the Attorney General or by a qualified supplier or manufacturer for the violation of these provisions."

As originally proposed, SB 582 would have added a section to California's Unfair Practices Act (Business and Profession Code § 17001, et seq.), which provides for treble damages and attorneys' fees. The bill has now been amended to remove it from the Unfair Practices Act and to add a Chapter to the Unfair Competition Law (proposed Section 17300, et seq.), that provides for a penalty of $10,000 and an award of attorneys' fees and costs.

The bill would require that retailers disclose "placement fees or arrangements" and "trade information."

"Placement fees or arrangements" are defined as "a promise of shelf space, specific shelf placement, guaranteed advertising, payment to maintain a product on a shelf, slotting fees, or any other benefit provided by either the retailer or the supplier or manufacturer of a product for reasons other than the volume of sales of the product. A free product or a product discounted below 75 percent of its standard wholesale price is a placement fee unless a free or discounted product is provided in proportion to the amount of the product sold at its standard wholesale price." Section 17300(a).

"Trade information" is defined as "all retail pricing, sales volume and promotion information for all similar products within specific stores, a grouping of stores, or stores owned by either the retailer or other parties." Section 17300(f).

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

The Antitrust Division continues to send a strong message to businesses, executives, and individuals engaged in potential bid rigging and price fixing schemes. Recent investigation of ready mixed concrete industry, roofing products industry, and the E-rate program have resulted in guilty pleas and indictments. The recent activity indicates that the Antitrust Division continues to make criminal enforcement a priority.

Ready Mixed Concrete Investigation

On April 28, Larry Lee, the former president of an Indiana ready mixed concrete company, agreed to plead guilty, to serve eight months in prison and two months of home confinement, and to pay a $70,000 criminal fine for his role in a conspiracy to fix the price of ready mixed concrete sold in certain counties in Indiana.

Allegedly, Mr. Larry Lee conspired with an unnamed co-conspirator executive from another ready mixed concrete producer to fix specific price increases and the specific timing of those price increases at which ready mixed concrete was sold in Bartholomew, Jackson, and Jennings, Indiana beginning in or about February 2003 and continuing until approximately June 2004. During the period covered by the conspiracy, Mr. Lee's company allegedly sold at least $7 million worth of ready mixed concrete that was affected by the conspiracy to its customers using the agreed-upon prices.

The charge resulted from the Antitrust Division's ongoing investigation of the ready mixed concrete industry being conducted by its Chicago Field Office in conjunction with the Indianapolis office of the FBI.

Roofing Products Investigation

On April 1, Sean Moran, a former representative of a New York roofing products manufacturer pleaded guilty to rigging bids and allocating contracts for roofing products and services in the Albany, New York area.

According to the charge, Mr. Moran participated in a conspiracy to rig bids for, and allocate roofing contracts awarded by, the General Electric Company's Waterford, New York facility, the Albany Medical Center, and other purchasers of roofing products and services in the State of New York, from sometime in 1996 until at least July 2001.
Mr. Moran and co-conspirators are charged with carrying out the conspiracy by: discussing the submission of prospective bids on certain roofing contracts; agreeing among themselves which company would be the low bidder; and arranging for co-conspirators to submit bids that were intentionally higher.

With the guilty plea by Mr. Moran, the Division has now obtained three guilty pleas relating to its investigation of the roofing industry in the Albany area. In June 2004, Waterblock Roofing and Sheetmetal Inc. and its president, Walter J. Vivenzio, pleaded guilty to bid rigging and fraud charges. Mr. Moran and Mr. Vivenzio have agreed to cooperate with the Antitrust Division's ongoing investigation of the alleged bid rigging and allocation of contract activity for roofing products and services in the Albany, New York area.

E-Rate Investigation

On April 7, a federal grand jury in San Francisco returned a 22-count indictment against six companies and five individuals on charges of fraud, collusion, aiding and abetting, and conspiracy in connection with E-Rate projects at schools in seven states: Arkansas, California, Michigan, New York, Pennsylvania, South Carolina, and Wisconsin.

The E-Rate program subsidizes the provision of Internet access and telecommunications services, as well as internal computer and communications networks, to economically disadvantaged schools and libraries. The E-Rate program fosters connectivity between the Internet and schools or libraries and is funded by monies collected from telephone users. Under the E-Rate program, schools apply for monies to provide cabling, internet backbone equipment (i.e. servers, PBX, and switches), and for reimbursement of monthly connectivity service fees.

The six companies and five individuals charged with participating in the schemes to defraud the E-Rate program are: Video Network Communications Inc. ("VNCI"); Howe Electric Inc.; Sema4 Inc.; Digital Connect Communications; Expedition Networks, Ltd.; ADJ Consultants Inc.; Judy Green, former sales representative for VNCI, co-owner of ADJ; Allan Green, co-owner of ADJ; George Marchelos, former sales representative for VNCI; Steven Newton, former vice president at Premio Computer Inc.; and Earl Nelson, former Branch Manager for Inter-Tel Technologies Inc.

According to the 22-count indictment, the defendants charged with wire fraud and aiding and abetting in counts 1 through 11 entered into schemes to defraud the FCC and USAC on E-Rate projects at 11 school districts in California, Michigan, South Carolina, Arkansas, and Wisconsin from about November 1998 through at least sometime in November 2003. Counts 12 through 20 of the indictment charged certain defendants with participating in, and aiding and abetting, separate conspiracies to rig bids and allocate projects at school districts in California, Michigan, South Carolina, Arkansas, and Wisconsin during the same time period.

The defendants charged with Counts 12 through 20 of the indictment and co-conspirators allegedly carried out the conspiracy by: discussing prospective bids for the project; agreeing who would be the lead contractor on the project and who would participate on the project as subcontractors to the designated lead contractor; submitting fraudulent and non-competitive bids; and engaging with Judy Green and George Marchelos who took steps to ensure the success of the conspiracy by eliminating and disqualifying bids from non-conspirators and by ensuring that the projects were awarded to the defendants and co-conspirators. In return, some of the defendants and co-conspirators allegedly agreed to pay and paid Judy Green and VNCI, a fee and agreed to purchase and purchased and installed VNCI's equipment on the project. Count 21 also charges three companies and three individuals with a single conspiracy to rig bids and allocate projects for 15 E-Rate projects at school districts in California, Pennsylvania, New York, South Carolina and Arkansas. The conspiracy allegedly began in October 2002 and continued through at least January 2004.

The investigation of the E-Rate program is still ongoing and is being conducted jointly by the U.S. Attorney's Office for the Northern District of California along with the Antitrust Division, with the assistance of the FBI.

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

• On April 22, NASDAQ announced that it would merge with Instinet and prior to that the New York Stock Exchange announced that it would merge with Archipelago Exchange. The Antitrust Division is expected to investigate these transactions.

• On April 21, the DOJ and the FTC jointly issued a letter urging the Texas Real Estate Commission to reject a proposed regulation that would impose new restrictions on the ability of Texas real estate professionals to offer flexibility in brokerage services. The agencies expressed concern that the proposed regulation would not only cause Texas consumers to pay more for real estate services, but also would reduce consumer choice by restricting the ability of real estate brokers to provide services tailored to customer needs. Currently, Texas real estate brokers can offer the level of service that a customer wants and needs. Full-service brokers charge consumers a single price for a bundle of individual real estate services and limited-service brokers offer consumers the option to pick and choose from a menu of different real estate services according to each respective consumer's individual needs. For example, a seller can decide just to purchase multi-list services from a broker and to represent himself or herself in negotiating with buyers. Under the proposed new regulation, limited-service brokers would be required to bundle together certain of their service offerings into a mandatory package and would no longer be able to offer services separately. The agencies believe that if accepted, customers will be forced to purchase additional services that they may not want or need so they believe that the Texas Real Estate Commission should reject it.

• On April 11, Wilhelm DerMinassian, the former Associate Director in charge of the District of Columbia's Department of Transportation ("DC DOT") and Dunn Engineering Associates P.C., a New York-based traffic engineering firm were charged separately in connection with subverting the competitive process for federally-funded contracts let by the DC DOT by seeking, paying, and receiving of a gratuity in exchange for future favorable treatment of Dunn by Mr. DerMinassian in his administration and oversight of the five year Integrated Traffic Management System contract. These cases are the first to arise out of an ongoing investigation being conducted by the Antitrust Division's National Criminal Enforcement Section with the assistance of the Washington Field Offices of the United States Department of Transportation, Office of the Inspector General, and the FBI.

• On April 8, the DOJ issued a letter urging the Oklahoma state legislature to reject proposed legislation that would change current state law to eliminate the ability of Oklahoma real estate professionals to offer a selection of real estate services. The change in legislation would undoubtedly raise prices to consumers of real estate brokerage services. In Oklahoma, real estate brokers started offering selected services rather than providing a bundle of services. The legislation seeks to eliminate the offering of selected services. Accordingly, the DOJ has recommended that the state legislature reject the legislation.

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

• On April 22, the FTC filed a petition with the Court of Appeals for the Eleventh Circuit, in Atlanta, Georgia, requesting that the Court vacate its March 8, 2005 decision in the matter of FTC v. Schering-Plough Corporation and re-hear the case en banc. In April 2001, the FTC filed an administrative complaint against Schering-Plough Corporation, Upsher Smith Laboratories and American Home Products ("AHP") alleging that they had entered into anticompetitive agreements aimed at keeping a low-cost generic version of K-Dur 20 potassium chloride supplement off the U.S. market. AHP settled with the Commission in April 2002. In July 2002, an administrative law judge issued an initial decision dismissing the FTC's complaint. The staff appealed this initial decision to the full Commission, which ruled in its favor in December 2003. Schering and Upsher then appealed the case to the Eleventh Circuit, which issued a decision by a three-judge panel reversing the Commission's ruling and dismissing the charges against the companies.

• On April 22, the staff of the Bureau of Competition advised Stevens Hospital, in Edmonds, Washington, that its purchase of pharmaceuticals to be dispensed to patients treated by its clinic physicians is covered by the Non-Profit Institutions Act ("NPIA"). That statute exempts from the Robinson-Patman Act "purchases of their supplies for their own use by schools, colleges, universities, public libraries, churches, hospitals, and charitable institutions not operated for profit."

  Stevens is a non-profit hospital that owns a number of clinics. The physicians who work at the clinic are all Stevens employees, and all medical services provided at the hospital and at the clinic are billed under Stevens' tax identification number. Stevens also maintains liability insurance for the clinics and staff. Stevens currently purchases pharmaceuticals at reduced pricing from a drug wholesaler and uses these pharmaceuticals for its hospitalized patients for inpatient needs, for periodic discharge prescriptions, and to supply its emergency department. Stevens asked for an opinion on whether it also can use these pharmaceuticals purchased pursuant to the NPIA for patients receiving treatment from its clinic physicians. The staff opinion letter, signed by David Pender, Acting Assistant Director of the Health Care Services and Products Division of the FTC's Bureau of Competition, concluded that pharmaceuticals used in the ways described in the request letter would be purchased for Stevens' "own use" within the meaning of the statute.

• On April 19, the Commission approved a petition from Aventis S.A. ("Aventis"), the successor company to Hoechst AG and Rhone-Poulenc S.A. (RP) (the "respondents"), to reopen and modify a final consent order regarding the 1999 merger of the two companies. Under the terms of the Commission order, which became final on January 20, 2000, Aventis was required to reduce to five percent its holdings in Rhodia, a French-based chemical company in which RP held a 67 percent share at the time of the merger. The respondents were given approximately five years to complete their sale of Rhodia shares. Commission approval of petition to reopen and modify final order: The Commission has approved a petition from Aventis S.A., the successor company to Hoechst AG and Rhone-Poulenc S.A. (RP) (the respondents), to reopen and modify a final consent order regarding the 1999 merger of the two companies. Under the terms of the Commission order, which became final on January 20, 2000, Aventis was required to reduce to five percent its holdings in Rhodia, a French-based chemical company in which RP held a 67 percent share at the time of the merger. The respondents were given approximately five years to complete their sale of Rhodia shares.

  In the petition, announced by the FTC on December 21, 2004, Aventis requested that the Commission reopen the final order to modify and set aside certain provisions regarding the sale of Aventis' holdings of shares in Rhodia. The Commission has determined that changed factual circumstances have eliminated the continuing need for these provisions. Kuwait Petroleum has sold its shares in Celanese, and thus severed the common link between Celanese and Rhodia that was the basis of the Commission's original concern. Through this action, the FTC has approved Aventis' request. The Commission vote granting the petition to reopen and modify the decision and order was 4-0-1, with Chairman Deborah Platt Majoras recused.

• Commission approval of final consent order, hold separate agreement, and hold separate trustee: The Commission has approved and issued a final consent order in the matter concerning Cytec Industries, Inc.'s ("Cytec") acquisition of the Surface Specialties Group ("SurfaceSpecialties") of UCB, S.A. Under the terms of the consent order, Cytec must divest, by August 27, 2005, assets related to the research, manufacture, and sale of amino resins to a buyer approved by the Commission. As previously announced on March 1, 2005, the Commission issued an order requiring Cytec to hold and operate those assets separately until they are divested, and appointed Richard M. Klein as the hold separate trustee to monitor Cytec's performance of its obligations under that order. In addition to issuing the order, the Commission has approved a hold separate trustee agreement between Cytec and Klein. The Commission votes approving the final consent order and hold separate trustee agreement were 5-0.

• On April 7, the Commission authorized the submission of a response to the U.S. Food and Drug Administration ("FDA") regarding a citizen petition filed with the FDA by IVAX Pharmaceuticals, Inc. ("IVAX") on January 5, 2005. The petition relates to IVAX's attempt to gain approval for, and market a generic version of, Merck & Co.'s drug Zocor, which contains the active ingredient simvastatin and is used to treat high cholesterol. (See lead article in May 2005 Antitrust Law Blog.)

• Under the terms of a consent order with the FTC announced on April 5 a Chicago-area physicians' group agreed to stop collectively bargaining on behalf of its members, as such joint negotiations allegedly led to reduced competition and higher prices paid by health plans and other payors to the group's salaried and independent doctors.

  The order settles the FTC's complaint against Evanston Northwestern Healthcare Corporation ("ENH") and ENH Medical Group, Inc. ("ENH Medical Group"). The allegations against the respondents are contained in Count III of the Commission's larger complaint concerning ENH's acquisition of Highland Park Hospital in Highland Park, Illinois. Counts I and II of the complaint, which charge that the hospital acquisition was illegal and anticompetitive, have not been settled. A hearing on the merits of these charges is currently pending before an independent administrative law judge.

  According to the Commission's complaint, the respondent violated Section 5 of the FTC Act by facilitating and implementing agreements among rival physicians to fix prices and other terms of dealing with health plans and other third-party payors, and by refusing to deal with such payors except on jointly determined terms. There was no physician practice integration that may have led to increased efficiency, the complaint states. As a result, the FTC contends, ENH Medical Group deprived payors, employers, and individuals of the benefits of physician competition. By eliminating this competition, ENH Medical Group was able to increase the prices that payors paid to the salaried and independent physicians in the Group.

  The consent order settles all allegations in Count III of the Commission's complaint against ENH and ENH Medical Group. It bars the respondent from entering into or facilitating any agreement between or among physicians: 1) to negotiate with payors on any physician's behalf; 2) to deal, 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 the respondent's arrangements.

  The Commission vote to place the consent order on the public record for comment and publish a copy in the Federal Register was 4-0-1, with Chairman Deborah Platt Majoras not participating. The Commission is accepting comments on the order for 30 days, until May 2, 2005, after which it will decide whether to make it final.

• On April 5, the Commission has approved a proposed divestiture from Enterprise Products Partners L.P. ("Enterprise") and Dan L. Duncan related to the FTC's decision and order concerning the merger of Enterprise and GulfTerra Energy Partners. Under the terms of the order, Enterprise is required to divest by March 31, 2005, either its 100 percent interest in the High Island Offshore System and its accompanying East Breaks lateral or its 50 percent interest in the Starfish Pipeline Company, LLC, owner of the Stingray/Triton pipeline system in the Western Gulf of Mexico offshore. Through a petition filed in January 2005, Enterprise and Duncan requested Commission approval to divest Enterprise's Starfish Pipeline Interest to MarkWest Energy Partners, L.P. ("MarkWest") to meet the terms of the order. The Commission vote to approve the proposed divestiture to MarkWest was 5-0.

• On April 4, Federal Trade Commission Chairman Deborah Platt Majoras issued the agency's annual report at the Spring Meeting of the American Bar Association's Section of Antitrust Law in Washington, DC. The report, entitled "The FTC in 2005: Standing Up for Consumers and Competition," is available on the Commission's Web site and includes sections on the agency's competition and consumer protection missions, as well as the policy tools used to coordinate its law enforcement and international outreach efforts. The report highlights the symmetry and synergy between the FTC's competition and consumer protection missions, calling them "two parts of a greater whole, complementing each other in maximizing benefits for consumers."

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

• On April 29, the Federal Trade Commission ("FTC") announced Integrated Capital, doing business as National Student Financial Aid ("NSFA"), and its principal, Alan Wilson, had been found in contempt for violating terms of an August 2003 stipulated final order requiring them to make certain disclosures in connection with the marketing and sale of academic goods or services. In a ruling from the U.S. District Court for the District of Nevada, Judge David Hagen ordered NSFA and Wilson to offer full refunds to all consumers who purchased NSFA's services between August 6, 2003 and July 17, 2004. In August 2003, the FTC filed a complaint and stipulated order settling charges that NSFA misrepresented its college financial aid services. The order, approved by the court, required the defendants to make certain affirmative disclosures in their oral sales presentations, including: (1) purchasing NSFA's services did not guarantee that a consumer will get financial aid or get more financial aid than the consumer otherwise could have obtained without purchasing NSFA's services; (2) purchasing NSFA's services did not guarantee that a consumer's child will be accepted by any college or university; (3) NSFA provided no services until it received a completed questionnaire, that certain services had to be specifically requested, and that failure to utilize any services did not entitle consumers to a refund; (4) consumers might not realize the full benefit of NSFA's services if their children were within six months of graduating from high school, had not made reasonable efforts to complete necessary paperwork for admissions and financial aid, or were only considering attending community college; and (5) consumers who were not U.S. citizens might not be eligible for federal or state financial aid. In its order finding the defendants in contempt, the court found that they failed miserably to make the affirmative disclosures during NSFA's sales presentation. The court stated that the affirmative disclosures were included in the stipulated final order because they related to the core areas of the defendants' business practices that attracted the FTC's attention in the first place.

• The FTC issued its eighth quarterly announcement summarizing the agency's enforcement efforts against telemarketing fraud and abuse. The quarterly enforcement update lists significant case developments in 21 federal district court cases occurring between February and April 2005. A Web page containing the "Quarterly Update for April 2005" also contains a list of enforcement actions involving telemarketing that have seen developments since October 1, 2002, with links to press releases related to each of these actions. The Web page also contains information about 148 actions involving the use of the telephone to market goods or services. This information covers cold-call outbound telemarketing, as well as inbound calls generated from advertisements or other solicitations to purchase products or services. The quarterly enforcement update and the telemarketing fraud and abuse enforcement links are, respectively: http://www.ftc.gov/bcp/conline/edcams/telemark fraudenforcement/update05apr.htm and http://www.ftc.gov/bcp/conline/edcams/telemarkfraudenforcement/ index.html. In addition to helping consumers learn about the Commission's enforcement actions, the Web page and the quarterly enforcement update provide consumers with easy access to information about the specific frauds and abuses perpetrated using telephone calls and the types of matters prosecuted by the Commission, including matters brought under the Telemarketing Sales Rule and its National Do Not Call Registry.

• On April 26, the FTC filed two proposed stipulated orders in federal court resolving charges that the marketers of AB Energizer, an electronic abdominal exercise belt, falsely advertised that using the AB Energizer caused weight loss, inch loss, and six-pack abs without exercise. These orders are part of a global settlement resolving the FTC's lawsuit and related actions brought by county and city prosecutors in California. Under the settlements, AB Energizer marketers and certain retailers collectively will pay over $2 million, of which over $1.4 million will be for consumer redress. The balance will go to the California prosecutors for costs and civil penalties. The FTC and California orders bar the defendants from making the challenged false advertising claims for the AB Energizer or any similar device, and contain other injunctive relief to prevent future deceptive advertising. The stipulated final orders settle the Commission's court actions against the following defendants: Electronic Products Distribution, L.L.C.; AB Energizer Products, Inc.; Abflex USA, Inc.; AB Energizer, L.L.C.; Thomas C. Nelson; Martin Van Der Hoeven; Douglas Gravink; and, Gary Hewitt. The defendants are based in Southern California, with most located in San Diego. An amended complaint filed with the stipulated orders adds Gravink and Hewitt to the FTC's original complaint. The FTC recognizes the invaluable role of prosecutors from the City of San Diego and the California counties of Napa, Solano, and Sonoma in reaching a settlement that maximized the amount of redress available for AB Energizer purchasers.

• The FTC announced on April 21 that it is seeking public comment on its implementation of the Children's Online Privacy Protection Act ("COPPA") through the Children's Online Privacy Protection Rule. The FTC is also seeking additional comment on the COPPA Rule's sliding scale approach to obtaining parental consent, which takes into account how information gathered from children will be used. As COPPA requires, the FTC is conducting a review of the COPPA Rule five years after its effective date and is seeking public comment on its implementation of COPPA through the Rule. The Rule imposes certain requirements on operators of Web sites or online services directed to children under 13 years old and other Web sites or online services that have actual knowledge that they are collecting personal information from a child under 13 years old. The Commission requests comment on the costs and benefits of the Rule as well as on whether it should be retained, eliminated, or modified. Public comment will be accepted on all aspects of the Rule during the 60-day comment period.

• On April 13, the FTC and the Attorney General of California asked a U.S. District Court Judge to order a halt to an operation that sent millions of spam messages touting mortgage loans and other products and services. The agencies charge that the operation violates federal and state laws, and have asked the court to freeze the defendants' assets pending trial and order a permanent halt to the illegal spamming. According to papers filed with the court, the defendants use third-party affiliates or button pushers to send spam hawking mortgage loans and other products and services. Hyperlinks in the spam take consumers to Web sites operated by the defendants. Consumers fill in data and the information is passed along to lead companies and by them to lenders. One mortgage broker sought, and was given assurances by the defendants that they were complying with provisions of the CAN-SPAM Act. In fact, most of the 1.8 million e-mail messages sent to the FTC by the public demonstrate that they were violating almost every provision of the Act.

• According to a FTC staff report released April 11, the number of obviously false weight-loss claims in television, radio, and print advertisements for dietary supplements, topical creams, and diet patches appears to have dropped from almost 50 percent in 2001 to 15 percent in 2004. With the rapid increase in obesity in America, many Americans look to weight-loss ads for products to trim pounds. Industry sources estimate that consumers spend billions of dollars each year on products and services that purport to promote weight loss. Many of these products, however, do not deliver what they promise. In a 2002 report, the FTC staff found that nearly half of weight-loss ads surveyed in 2001 made claims that clearly were false. To help stem this tide of deceptive weight-loss advertising, in 2003, the FTC asked the media not to run ads containing obviously false weight-loss claims. To judge the effectiveness of its call for media screening, the FTC staff conducted the non-scientific Weight-Loss Advertising Survey: 2004. Although the decline in deceptive ad claims is significant, the survey results show there are still areas for improvement. The FTC will continue its efforts to encourage the media voluntarily to screen out clearly false weight-loss advertisements. The survey reviewed the nature and frequency of weight-loss advertising for certain products available over-the-counter running on television and radio or in newspapers and magazines - all media that can screen out ads before running them.

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

• On April 22, the European Commission launched an investigation into the planned $24 billion acquisition by Johnson & Johnson of Guidant. The Commission's initial market investigation found that the proposed acquisition may create significant competition problems given the two companies' horizontal overlaps in markets for medical devices for the treatment of coronary and peripheral artery diseases and for cardiac surgery. The decision to open an in-depth inquiry does not prejudge the final result of the investigation. The Commission now has 90 working days to take a final decision on whether the concentration would significantly impede effective competition within the European Single Market. The Commission is actively cooperating with the U.S. Federal Trade Commission, which is also investigating the merger.

• On April 21, Norwegian press reported that Microsoft may be investigated for the special deals it concludes with local authorities for software installation in the country's schools. The SV Party has asked for an examination of Microsoft's agreements complaining that it is difficult for rival software companies to gain a foothold.

• On April 21, it was reported that the Irish Competition Authority had visited the office of the Irish Medical Organization ("IMO") as part of an investigation into alleged price-fixing on fees for insurance medicals. The IMO stated that it is cooperating with the investigation.

• On April 20, the Japanese Diet passed a bill to amend Japan's Anti Monopoly Act which significantly expand the antitrust investigation and enforcement authority of Japan's Fair Trade Commission ("JFTC") by effecting significant changes in Japanese antitrust law. The amendments increase by as much as 100% the applicable administrative fines for certain types of unreasonable restraints of trade, such as price fixing, bid rigging or conspiracy to limit supply. The amendments introduce a "leniency" or "amnesty" program similar to the programs in place in the US and EU. For example, the proposed Japanese program exempts from administrative fines the first member of a cartel who voluntarily, independently reports its violation, and provides relevant information to the JFTC. The second and the third reporting companies will be exempt from 50% and 30%, respectively, of the relevant fines. The amendments also abolish the JFTC's current hearing process that permits companies to challenge, in an adversarial hearing before a JFTC examiner, allegations of unlawful conduct. The amendments permit the JFTC to issue cease-and-desist orders to alleged offenders after a much simpler hearing process, and affected companies will be permitted to challenge the allegations only after issuance of the cease-and-desist order. Finally, the amendments expand significantly the JFTC's criminal investigative powers by authorizing the JFTC to seize documents, with a court-issued warrant, directly from corporate offices or even from the homes of company executives, just as the police do in criminal investigations.

• On April 18, the European Commission launched an online survey on why there is little cross-border consolidation in the financial sector. The survey will be open until June 15, 2005. The responses received will serve as an input for a report that the Commission will submit to the Ministers of the ECOFIN Council in September. Empirical data shows a low level of cross-border consolidation in the European financial sector. The survey seeks to establish what are the underlying factors and obstacles inhibiting financial companies from exploiting the full range of cross-border opportunities available in the European internal market.

• On April 13, the French cabinet adopted a bill which will revise relations between supermarket groups and suppliers. The Bill is scheduled to be fast-tracked through the French Parliament in order to take effect at the start of 2006. The legislation aims to solve the problem of back margins or off-invoice rebates which are granted in exchange for promotional services. The legislation will cap back margins at 20% of invoiced net producer prices in an attempt to reduce supermarket prices by 5%. The burden of proof that promotional services have been provided will be reversed from the supplier to the retailer. The existing legislation, known as the Galland law, has been criticized for inflating retail prices, pressurizing suppliers, and allowing high levels of back margins.

• On April 13, the European Court of First Instance (CFI) held in Verin für Konsumeteninformation v. Commission, that when the European Commission receives a request to access information held on its administrative files, it is required to carry out a concrete, individual assessment of the content of the documents referred to in that request in order to determine whether any exceptions to the information request are applicable, or whether, at least, partial access can be granted. In this case, the Commission refused a request from a German consumer group to access its file relating to a cartel decision against eight Austrian banks to assist the consumer group in its civil damages action in the Austrian courts. The CFI held that only in exceptional cases, and only where the administrative burden entailed by a concrete, individual examination of the documents proves to be particularly heavy, that derogation from the obligation to examine the documents may be permissible. Without ruling definitively on whether the examination required of the Commission in this case was unreasonable, the CFI held that the Commission had not exhaustively considered the various options available to offer the consumer group, at least in respect of part of its request, access to the requested documents.

• On April 11, it was reported that the Ukraine's Anti-Monopoly Committee ("AMC") had started an investigation into the potential collusion between various oil companies in the country's wholesale diesel and petrol markets. The AMC has requested information from various oil companies which demonstrates that effective competitions exists on these two markets, and that a situation of collective dominance does not exist as between the companies. If the AMC holds that the companies colluded to raise process, they can face a fine of up to 10% of their 2004 earnings.

• On April 7, the Australian Competition and Consumer Commission ("ACCC") announced that it had succeeded in imposing penalties totaling AUS $95,000 on RM Hall Pty Ltd and its directors, Peter Hall and John Hall, for engaging in an alleged resale price maintenance scheme in relation to Florence Sculture D'Arte Armani figurines supplied by the company to a number of dealers throughout Australia. The penalties were imposed by Justice Mansfield of the Federal Court, Adelaide, following ACCC legal action. In 2003, RM Hall allegedly entered into approximately 120 dealership agreements for the supply of the Armani figurines. Fourteen dealers were issued with catalogues which, together with the dealership agreements, contained statements of price such that the dealers were alleged to have understood that they could not sell, or advertise, the figurines below that price.

• On April 7, the UK's OFT cleared the way for a new afternoon or evening newspaper to be distributed to London commuters. The OFT investigated the exclusive rights of Associated Newspapers Ltd ("ANL"), publishers of the London free morning newspaper the 'Metro' and paid-for afternoon/evening newspaper the 'Evening Standard', to distribute the 'Metro' via London Underground, Network Rail and various train operating companies' (TOC) stations in and around London. The OFT had concerns that, by excluding rivals' newspapers from stations 24 hours a day, despite the fact that the 'Metro' is only distributed in the morning, the exclusivity granted by these agreements went beyond what could be objectively justified. ANL offered to give up its rights to the afternoon/evening distribution slots, allowing London Underground, Network Rail and the relevant TOCs to re-tender those rights. ANL has also agreed that it will allow third party access to its distribution racks in stations, and make reasonable room for third party branding.

• On April 6, the South Korean Fair Trade Commission, fined a group of construction firm about $71 million for allegedly price fixing in the heavy excavation equipment and wheel loader markets during 2001 and 2004. The FTC had initiated the investigation after one of the companies involved in the alleged cartel volunteered information to the antitrust authority under its leniency program.

• On April 5, the Greek Competition Commission fined a Greek supermarkets' association, SESME, and seven of its members for alleged adhering to price-fixing policies during 2001. SESME is expected to appeal the fine.

• On April 5, the UK's Office of Fair Trading ("OFT") referred the $1.3 billion classified directory advertising services market to the UK Competition Commission for an antitrust investigation. The OFT is concerned that competition in the market is not operating effectively, and the referral follows a seven month OFT study of the market which revealed that Yellow Pages and Thomson Local directories account for over 90% of the supply in the UK, and that there are high barriers to entry due to strong branding and network effects.

• On April 4, the South Korean Fair Trade Commission ("SKFTC") reformed its cartel leniency program. "The measure is expected to destabilize existing cartels, and raise the level of fear of getting caught so that companies will give up trying to form illicit alliances," said Hur Seon, chief of the Competition Bureau at the SKFTC. The first member of an alleged cartel to voluntarily approach the SKFTC, and provide valuable information regarding the alleged cartel's behavior will not be fined. The second company to provide information will be eligible for a 30% discount on fines levied, while those that come forward afterwards will be eligible for up to a 15% discount if they make a positive contribution to the SKFTC's investigation. The reform addresses criticism of the previous rules which permitted cartels to approach the commission as a group, admit to any illegal activities, and receive collective punishment, with any fines levied on the cartel as a whole. The FTC has also introduced an Amnesty Plus system that will further act as a inducement to discourage cartel activities. Mr. Seon stated that, "The Amnesty Plus gives companies implicated in cartel activity and facing stiff fines a means to reduce fines or receive a full pardon if it provides detailed information on past price riggings." The amended South Korean cartel policy conforms with similar leniency programs in the United States, European Union and Canada.

• On April 4, the UK's Competition Appeals Tribunal ("CAT") published its decision which ordered the UK's Office of Fair Trading ("OFT") to reconsider its decision not to refer the proposed merger between Phoenix Healthcare Distribution and East Anglia Pharmaceuticals. The merged entity would be the second largest full-line wholesale supplier of prescription-only medicines in East Anglia, reducing the number of competitors from four to three. The CAT concluded although the OFT had conducted a full inquiry, it had made findings of primary fact about the logistics and economics of a third party's complaint's ("UniChem") distribution system, its past pattern of success in East Anglia and its service levels, based on information supplied largely by the merging parties, without checking or discussing the facts with UniChem. UniChem disputed many of the facts relied on by the OFT and as a result, the CAT held that material matters in the OFT decision were insufficiently supported by the evidence. On this basis, the CAT stated that it had no alternative but to quash the decision, and remit the matter to the OFT to reconsider its decision.

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

• Groups opposing consolidation in the telecom sector asked the Federal Communications Commission to reject the planned acquisition of AT&T Corp. by SBC Communications Inc. ("SBC"). "Having leveraged their local monopoly to drive many small competitors out of business, and their largest competitor to its knees, SBC now seeks clearance to swallow their biggest rival, leaving consumers at their mercy," CompTel/ALTS, which represents carriers known as CLECs, wrote in its FCC filing. CompTel/ALTS was joined in a briefing with reporters by the Alliance for Competition in Telecommunications, the National Association of Utility Advocates, and the eCommerce & Telecommunications Users Group. Monday, April 25th was the deadline for comments on the proposed $16 billion deal, which was announced in January. SBC and AT&T have until May 10 to respond officially to public comments. The FCC is expected to rule on the merger in the fall.

• MCI's board on April 23 declared a $9.74 billion takeover bid from Qwest Communications International as superior to one from Verizon Communications, The Washington Post reports. Verizon has until Friday to increase its bid, which is currently about $2 billion less than Qwest's. The FCC had set May 9 as the deadline for comment on a Verizon-MCI tie-up, but XO Communications, a competitive exchange carrier, has asked the agency to suspend the comment schedule until the bidding battle for MCI is resolved.

• Other proposed telecom mergers under review by the Federal Communications Commission include Nextel Communications Inc. and Sprint Corp. In filings before the FCC, opponents of a proposed Sprint-Nextel merger warned, in a reply to oppositions last week, that the companies tried to divert the FCC's attention from key issues. (Sprint and Nextel said most objections didn't relate to their merger review and should be addressed elsewhere, if at all.) The opponents cited excessive market concentration, roaming agreements, spectrum aggregation and spin-off of the Sprint local wireline business as major concerns. U.S. Cellular said it's "entirely appropriate for the FCC to establish important policies in ruling" on the merger, as it did in evaluating the Cingular-AT&T Wireless transaction, where it established criteria for evaluating wireless mergers.

• The United States has dropped even further in the international high-speed Internet race. Statistics released this month by the International Telecommunication Union ("ITU") show that U.S. global broadband penetration dropped last year from 13th place to 16th. The ITU figures show the United States at 11.4 broadband subscribers per 100 inhabitants as of December 31, 2004. That percentage of broadband is less than half of what South Korea boasts; the latter country is the global leader with 24.9 broadband subscribers per 100 inhabitants. Behind South Korea, filling out the top five nations are Hong Kong at 20.9 broadband subscribers per 100 inhabitants; the Netherlands, with 19.4 per 100; Denmark, 19.3; and Canada, 17.6. Telecommunications officials at the ITU and the OECD attributed the U.S. slide to the lack of vibrant competition in the broadband marketplace in this country and the absence of public policy that promotes broadband. "A lot of European countries [have grown] because they have fairly vibrant local loop unbundling," said Ypsilanti, referring to the practice of requiring the dominant telecom provider to share high-speed wires. He added, "The U.S. is basically [digital subscriber lines] from incumbent [telecom companies] versus cable from incumbents, and that doesn't seem to be generating that much competition."

Authored by
Gregg Mendenhall
202-218-0025
gmendenhall@sheppardmullin.com