China has been working on an Anti-Monopoly Law (“AML”) for almost a decade, and the latest draft is expected to be finalized and to come into effect during the later part of 2007. 

During the interim period, companies should not assume that China lacks an antitrust framework.  In April 2003, a law entitled the Provisions on Takeover of Domestic Enterprise by Foreign Parties (the “Takeover Provisions”) was promulgated.  That law provides, for the first time, a legal basis for the Chinese government to review the antitrust impact of both international and domestic mergers or acquisitions, even for transactions taking place entirely outside of China.   Thus, the Takeover Provisions have been viewed by some scholars as restricting foreign investments by the Chinese government.

Details of implementation of the antitrust provisions of the Takeover Provisions were not set forth or explained, however.  Thus, foreign companies faced numerous uncertainties due to a lack of guidance from the Ministry of Commerce (“MOFCOM”).  

In order to solve this uncertainty problem, on March 8, 2007, MOFCOM issued the Guideline on Filing of Anti-Monopoly Notification (“Guideline”) detailing the necessary filing procedures for premerger notification, which solved many of the uncertainties previously encountered.  However, even with the Guideline, many of the key terms of the Takeover Provisions remain obviously vague and uncertain, and how they are to be defined and applied will be determined in the future.

Requirements for Premerger Notification

Pursuant to the Takeover Provisions and the Guideline, China now has a domestic legal basis for intervening in mergers or acquisitions outside of China.  For any mergers or acquisitions that meet at least one of the following circumstances, the overseas acquiring party is required to submit its acquisition plan to the relevant Chinese government authorities for approval:

1.      The value of the assets in China owned by either the acquiring party or the acquired party is more than RMB3,000,000,000 (approximately USD388,601,046);

2.      The business volume in China of the acquiring party or the acquired party is more than RMB1,500,000,000 (approximately USD194,300,518) in the same year;

3.      The market share in China of the acquiring party or the acquired party and its affiliated enterprises has reached 20%;

4.      The market share in China of the acquiring party or the acquired party and its affiliated enterprises will reach 25% after the merger or acquisition; or

5.      There will be more than 15 foreign-invested enterprises in China in the relevant industries owned by the acquiring party or acquired party directly or indirectly after the merger or acquisition.

It is important to emphasize that as long as one of the circumstances mentioned above is triggered, regardless of whether the mergers or acquisitions take place in China or entirely outside of China, the acquiring party shall be subject to the required premerger notification.  For example, in a merger or acquisition involving a U.S. company and a European company, if either company triggers any of the above-mentioned circumstances, the premerger notification is mandatory.

Documents required for Premerger Notification

The Takeover Provisions set forth an extensive list of documents to be submitted in the premerger notification, including an application for the establishment of the foreign-funded enterprise, the articles of association of the foreign-funded enterprise to be established after the takeover, and the prior year financial audit report of the company to be taken over.

However, the Guideline goes further and requires much more documentation, such as copies of the certificate of approval and business licenses for all Chinese subsidiaries and representative offices of the parties to the transaction; an accounting of annual revenues in the relevant China product market(s) during the past two years; copies of certificates of incorporation or the equivalent of the parties to the transaction; and extensive information on the relevant markets(s) including but not limited to market entry costs, legal and practical barriers of market entry, restrictions caused by intellectual property, and information on the status of the parties in the relevant product market.  Based upon our experience in premerger notification in China, the documentation requirement is the biggest challenge faced by an applicant due to the lengthy amount of time required for preparation.

Submission and Approval of Premerger Notification Application

The completed application for premerger notification must be submitted to the Antitrust Review Office of the Ministry of Commerce in Beijing, located at #2 Dong Changan Road, Room 3516.  The application can be submitted by the applicant on its own or through an attorney licensed in China.

The Antitrust Review Office must make a decision within 30 business days from the date of the submission of a complete and acceptable application. The silence of the MOFCOM after the expiration of the 30-day window shall be deemed to be successful clearance of the premerger notification.  However, in case of inquiries by the Antitrust Review Office during the 30-day window, the application period will be extended to 90 days, and the applicant must timely provide the requested information. 

To ensure a smooth approval of the premerger notification application, it is recommended that the applicant communicate with the Antitrust Review Office prior to the submission of the application so that what is filed is “accepted” and triggers no inquiries.

Exemption for Premerger Notification

China does allow for exemptions to premerger notification, and the acquiring party or the acquired party may apply to MOFCOM and the State Administration of Industry and Commerce for exemption under any of the following circumstances:

1.      The merger or acquisition may improve the conditions for fair market competition;

2.      An under-performing enterprise is taken over, and the employment position of the workers of such enterprise are preserved;

3.      The merger or acquisition may introduce into China advanced technologies or skilled management personnel and improve a domestic enterprise’s international competitiveness; or

4.      The merger or acquisition may improve the natural environment.

The relevant government authorities have full discretion making decisions regarding the aforementioned exemptions.  In applying for an exemption, a party must provide supporting evidence simultaneously with the application for premerger notification.

Failure to Apply for Premerger Notification

Premerger notification is currently deemed to be an administrative provision in China.  Generally, under the current legal system of China, any non-compliance with administrative provisions will subject the breaching party to administrative penalty.

At the present time, the relevant laws and regulations are silent on the consequences of non-compliance with the legal requirements for premerger notification by either the acquiring party or the acquired party.   Under existing general legal principles and precedents, the Chinese government authorities are likely to assess administrative penalties on the breaching party in various forms, including warnings and fines.

The recent creation of the Antitrust Review Office of MOFCOM and the issuance of the Guideline indicate the greater attention from the Chinese government on premerger notification.  It further confirms the likely importance of the AML once it becomes effective.  Based upon our experience, the Takeover Provisions and the Guideline will likely serve as the foundation for the implementation of the AML.

***

For more information, please contact:

William Zheng

Special Counsel

Email: wzheng@sheppardmullin.com

Michael Zhang

Senior Legal Consultant

Email: mzhang@sheppardmullin.com

Direct:  (8621) 5175 7765

Fax:      (8621) 5175 1561

On April 3, the European Commission ("EC") announced that it sent a Statement of Objections to a number of major record companies and Apple, alleging that the agreements between each record company and Apple restrict music sales (via iTunes on-line stores), and infringe Article 81 of the EC Treaty by imposing territorial restrictions which prevent consumers from buying music downloads from the iTunes on-line store in their country of residence.  The EC alleges that this restriction is imposed by verification by iTunes of a customer's country of residence from consumers' credit card details.  The EC further alleges that the territorial sales restrictions in the agreements between Apple and the major record companies restrict consumers' choice as to where to buy music, what music is available and at what price.  The EC has given the undertakings involved two months to respond to the Statement of Objections in writing.  The undertakings will be given access to the EC's file, other than business secrets, other confidential information and internal documents of the EC or member state competition authorities. The undertakings can also request an oral hearing at which to present their defense.  The Statement of Objections does not allege that Apple is in a dominant market position, and does not concern Apple's use of its proprietary Digital Rights Management (DRM) to control usage rights for downloads from the iTunes on-line store.

On April 17, the French Conseil de la Concurrence issued a revised notice concerning its handling of leniency applications, making it the first national competition agency in Europe to follow the EC in updating its leniency program.  The new notice is aimed at providing greater certainty to companies by making more explicit the conditions for immunity and reduction of fines. It also introduces a marker system comparable to that operated by the European Commission.

On April 25, it was reported that Schneider Electric, the French electrical equipment maker, filed a €1.6 billion damages suit against the EC to recoup the losses it suffered as a result of a failed attempt to take over rival Legrand.  The €5.4 billion deal was blocked by the Brussels regulator in October 2001, but the following year the European Court of First Instance found that the EC's economic reasoning was flawed, and annulled the ruling.  Schneider alleges that the EC's investigation of the merger was so riddled with errors that the eventual ruling “manifestly and seriously” exceeded the limits of the EC's regulatory discretion.  The majority of the damages claimed by the French group is linked to the fact that it was forced to unwind the already completed take­over of Legrand, and sell the shares at a loss.  A judgment is expected in the coming months.

On April 18, the UK's Office of Fair Trading published for consultation a discussion paper on how private actions for breaches of competition law can be made more effective.  The purpose of the paper is to inform ongoing debate on this issue.  It sets out the principles that the OFT believes should inform improvements to the current framework in the UK in order to ensure that it allows for effective redress and enhanced compliance.  The OFT also makes certain suggestions in relation to issues such as representative actions, funding and costs, evidential issues and settlements.  The OFT intends to use this document, and the comments received, as the basis for recommendations to the UK Government as to possible changes to domestic law to improve the effectiveness of private actions.  It will also form the basis of the OFT's response to the anticipated EC White Paper on damages actions for breach of EU competition rules.

On April 23, the EC announced that it sent a Statement of Objections to a number of companies that it suspects have infringed Article 81(1) of the EC Treaty by their participation in an alleged price-fixing and market-sharing cartel in the car glass sector.  Car glass is a type of safety glass which does not shatter into sharp pieces on impact, and can be produced in different shapes, degrees of thickness and colors. There are a number of car glass products, including windscreens, sidelights, backlights, quarter lights and sunroofs.  On February 24, 2005, the EC announced that its officials had carried out unannounced inspections at the premises of a number of manufacturers of flat and car glass in Belgium, France, Germany, the United Kingdom, Sweden and Italy.  As a result of information uncovered during these inspections (and, further ones in March 2005), and information provided by certain companies as part of their applications under the EC's 2002 Leniency Notice, the EC alleges that a number of undertakings in the car glass sector allocated customers and agreed on supply quotas and prices for most of the motor vehicle manufacturers in Europe, so restricting competition in the EEA market in breach of Article 81(1) of the EC Treaty.

On April 23, the European Union Committee of the UK's House of Lords published a report on whether the creation of a specialist European Competition Court would be a way to resolve the problem of delays associated with appeals against European Commission merger decisions, currently heard by the Court of First Instance (CFI).  The Committee concluded that, at the present time, the creation of a Competition Court would not be desirable.  It held that it would unlikely to achieve significant time savings and any such Court would be faced with the same litigation complexities as the CFI.  Further, the Committee held that the establishment of a Competition Court would increase the number of levels of appeal.  The Committee considered, instead, that there is scope for reducing delay by improving the procedures of the CFI, reducing the CFI's work load (by transferring trademark cases to a judicial panel), and reducing the number of appeals against fines in cartel cases (by the use of settlements by the EC).

On April 18, the EC fined the Dutch brewers Heineken, Grolsch and Bavaria a total of €274 million for allegedly operating a cartel on the beer market in The Netherlands, in violation of EC Treaty rules that outlaw restrictive business practices.  The EC's decision named the Heineken group, Grolsch and Bavaria, together with the InBev group which also allegedly participated in the cartel.  The EC alleged that, the four brewers held numerous unofficial meetings between at least 1996 and 1999, during which they coordinated prices and price increases of beer in The Netherlands.  The EC announced that InBev received no fines as it had provided decisive information about the alleged cartel under the EC's leniency program. EC Competition Commissioner, Neelie Kroes, said: "It is unacceptable that the major beer suppliers colluded to hike up prices and carve up the market between themselves. The highest management of these companies knew very well that their behavior was illegal, but they went ahead anyway, and tried to cover their tracks".

On April 25, it was reported that India's cabinet discussed the introduction of a revised amendment bill to the country's competition law.  The bill, which draws on the proposed competition law changes that the government had previously submitted to the Supreme Court, is intended to male the Competition Commission of India fully functional, and give it powers to deal with mergers and acquisitions.  India's Finance Minster, Mr. Chidambaram highlighted the urgency of amending the country's competition law, indicating that some industries, such the cement industry are allegedly suffering from cartelization.

On April 11, the EC confirmed sending Statement of Objections to a number of undertakings regarding their alleged role in cartel arrangements for shipping liquids in bulk on deep sea routes.  The Statement of Objections alleges that the undertakings concerned were involved in customer allocation, bid-rigging, price-fixing, and the exchange of confidential market information concerning the maritime transport of bulk liquids on deep sea routes, thereby restricting competition in the EU market in violation of EC Treaty rules outlawing restrictive business practices.  The EC's preliminary conclusions outlined in the Statement of Objections were based on information gathered during unannounced inspections by the EC carried out on February 19 and 20, 2003, and information supplied both subsequently under the Commission's Leniency Notice, and resulting from the EC's subsequent investigation.

On April 2, 2007, the Antitrust Modernization Commission[1] issued its Report and Recommendation to the President and to Congress ("Report").  In its three years of existence, AMC held 17 public hearings and 16 meetings.  First, in its summary to the President and the Congress, AMC states "the report is fundamentally an endorsement of free-market principles.  These principles have driven the success of the U.S. economy and will continue to fuel the investment and innovation that are essential to ensuring our continued welfare."  Second, AMC reports that the state of the US antitrust laws is "sound".  Third, AMC reported that it did not believe that new or different rules are needed to address the so-called "new economy" issues.  Rather, consistent application of the principles in focus of free market principles, in conjunction with current antitrust law and policy, will ensure that the antitrust laws remain relevant in today's environment as well as the environment of the future.  The AMC also noted that differentiated rules for different industries would be unnecessary and unwise.  This is particularly the case  as to antitrust immunities, exemptions, or special industry-specific standards.

Having stated the above, the introduction to the Report then summarized a series of "significant changes" recommended by the Commission.  These may be summarized as follows;

Mergers and Monopoly.  The Commission did not recommend legislative change to either the Sherman Act or Section 7 of the Clayton Act.  Its general consensus was that while there may be disagreement about specific enforcement decisions, the basic legal standards governing the conduct of firms in the merger and monopoly area are "sound".  It nevertheless made several recommendations in the area of merger enforcement.  The purpose of these recommendations is to ensure that policy is appropriately sensitive to the needs of companies to innovate and compete while continuing to protect the interest of consumers.  In particular, AMC urges that "substantial weight" be given to evidence demonstrating that a merger will achieve efficiencies, including innovation-related efficiencies.  It also recommends that the federal enforcement agencies continue to examine the basis for, and efficacy of, merger enforcement policy, including further study of the economic foundations for merger policy, including the relationship between market performance and concentration.

As to monopoly conduct, AMC noted that there is a need for greater clarity and improvement to enforcement standards relating to the offering of bundled discounts or rebates, and unilateral refusals to deal with rivals in the same market.  It believes that "clarity" will be best achieved in the courts, rather than through legislation.  It recommended a specific standard for the courts to apply in determining whether bundled discounts or rebates would violate current antitrust law.

Robinson-Patman Act Repeal.

The Commission recommends that Congress repeal the Robinson-Patman Act (RPA).  Enacted in 1936 as an amendment to the Clayton Act, RPA is "antithetical" to core antitrust principles.  It notes that its repeal, or substantial overhaul, has been recommended in three prior reports, including 1955, 1969 and 1977.  This is because RPA protects competitors against competition and punishes the very price discounting and innovation and distribution methods that the antitrust otherwise encourage.  It also noted that it is not clear that RPA actually protects the small business constituents that it was enacted to benefit.  It concluded that small businesses are adequately protected from "truly anticompetitive behavior" by the Sherman Act.[1]

Patents and Antitrust.

AMC noted that patent protection and the antitrust laws are generally complimentary, with both being designed to promote innovation that benefits consumer welfare.  It urged Congress to give serious consideration to recommendations by the Federal Trade Commission and National Academy of Sciences designed to improve the quality of the patent process, and patents.  It also recommended joint negotiation of license terms with standard-setting bodies to be treated under a rule of reason standard.

Enforcement Process Improvement Recommendations.

(a)        Inefficiencies Resulting From Dual Federal Enforcement.  AMC does not believe that it would be feasible or wise to eliminate the dual antitrust enforcement role of the Department of Justice Antitrust Division, and the Federal Trade Commission.  However, it recommended a number of steps to eliminate "inconsistencies" that may result from dual enforcement.  These included (1) merger clearance procedures, (2) Hart Scott Redino Act ("HSR") premerger review process improvements, (3) improved coordination between state and federal antitrust law enforcement, and the "delinking" of agency funding and HSR Act filing fees.

(b)        Private Litigation Recommendations.  The Report noted that while defendants in private antitrust litigation matters are jointly and severally liable for alleged conspiracies, there is no right to contribution.  There is also only a limited right of claim reduction, when one or more defendants settle.  The combined effect may be substantially greater than the treble damages provided for under Section 4 of the Clayton Act.  The Report recognized that while the rules can maximize deterrents and encourage the resolution of claims through quick settlements, they can also over-deter conduct that may not be anticompetitive.  The Commission recommends that Congress enact legislation that would permit non-settling defendants to obtain a more equitable reduction of the judgment against them, and allow for contribution.  The Commission provided a suggested statute in its Annex A, originally proposed as a substitute/alternative to S.995, originally proposed by Assistant Attorney General William F. Baxter, in 1981.

(c)        Indirect and Direct Purchaser Litigation.  After a thorough discussion of the different rules at the federal and state level as to whether both direct and indirect purchasers of price-fixed goods may sue to recover damages, the Ccommission recommended the over-ruling of Illinois Brick, which had precluded suits by indirect purchasers, as well as Hanover Shoe, which prevented defendants from arguing that an antitrust overcharge had been passed on to a subsequent purchaser in the chain of distribution.

Recommendations Re Criminal Penalties.  Noting the strong worldwide consensus favoring vigorous enforcement against cartels, the Commission recommended that the U.S. Sentencing Commission evaluate whether it remains reasonable to assume an overcharge of ten percent, or a higher or lower percentage, in lieu of the ability to prove actual damages.  It also recommended amending the Sentencing Guidelines to make it clear that the current twenty percent proxy test may be rebutted by proof of by a preponderance of the evidence that the actual amount of overcharge was higher or lower.

Recommendations Relating to International Antitrust Enforcement.  Noting that today more than one hundred countries have adopted competition laws, and further recognizing that this development has assisted the United States in its fight against international cartel activity, the proliferation of competition authorities has increased the risk of burden, inconsistency, and even conflict among sovereign states.  In particular, there is concern about the potential effect on U.S. based companies on differences in the way that other countries treat so-called "dominant firm behavior".

Accordingly, the Commission recommended a number of steps, including, as a first priority, enforcement agency study and report to Congress on the possibility of developing a centralized international pre-merger notification system.  Second, the enforcement agency should seek procedural and substantive convergence throughout the world.  Third, the United States should pursue bilateral and multilateral cooperation agreements with the aid of its trading partners.  Finally, the Commission recommends that purchases made outside the United States from sellers outside of the United States should not give rise to a cause of action in United States courts.

Recommendations Relating to Immunities and Exemptions.

While recognizing that free-market competition is the foundation of the United States economy, and that the antitrust laws are an integral part of preserving such competition, the Commission identified thirty separate statutory immunities from the antitrust laws.  It stated that it is skeptical about the value of these immunities, and that many were vestiges of earlier antitrust enforcement policies that were deemed to be insufficiently sensitive to the benefits of certain types of conduct.  Others are fairly characterized, the Report stated, as special interest legislation, that sacrifices general consumer welfare.

The Report states that the Commission believes that statutory immunity from the antitrust laws should be disfavored.  It recommends a framework for a review of statutory immunity and recommends further that Congress consult with the enforcement agencies about likely competitive effects of existing and proposed immunities.  It recommends that immunities should be limited in scope, and contain "sunset" provisions that will provide for termination of the granted immunity at the end of the specified period, absent renewal.  Finally it recommends that the enforcement agencies report to Congress on the effects of the immunity before any vote on renewal is taken.

In discussing the judicial state action doctrine, immunizing private action undertaken pursuant to a clearly articulated state policy deliberately intended to displace competition, the Commission noted a recent report by the Federal Trade Commission staff raising concerns that courts have been applying the doctrine without sufficient care to ensure that private anticompetitive conduct has actually been authorized by a state pursuant to a clearly articulated policy to displace competition, as well as that it be "actively supervised".  Finally, it recommends that a state action doctrine should not apply where the effects of conduct are not predominantly intrastate.  In addition, the doctrine should equally apply to governmental entities when they are acting as participants in the market place.

Recommendations Relating to Regulated Industries.

The Report noted that technological advancement and changing economic perspectives have led to substantial deregulation in industries once thought to be either natural monopolies, or at risk of "excessive competition", or both.  The Report recognizes that antitrust enforcement is an important counterpart to deregulation.  Where government regulation still exists, the antitrust law should continue to apply to the maximum extent consistent with the regulatory regime.  Statutes should clearly state whether and to what extent, Congress intended to displace the antitrust laws with regulation.  The Commission specifically noted that the filed-rate doctrine, which prohibits private treble damage actions where industry rates are approved by a regulatory regime, is out of sync.  It notes that today, few filed rates are actually reviewed by regulators as to their competition implications.  While this has been recognized by the United States Supreme Court, the Court has continued to conclude that it was for Congress to make such determination.  The Commission recommends that Congress should re-evaluate the filed-rate doctrine and consider overruling it where the regulator no longer specifically reviews and approves proposed rates agreed to among industry members.

Finally, the Commission recommends that the antitrust enforcement agencies, pursuant to the HSR Act, share merger review authority with a regulatory agency that reviews the merger under a "public interest" standard.

With the Report now on file with the President and with the Congress, let's see if a second shoe now drops.

As previously reported in the Blog, Judge Sullivan in the United States District Court for the District of Columbia, surprised many antitrust lawyers by granting applications from a number of competitors and consumer groups and commencing extensive proceedings under the amended Tunney Act to review the consent decree reflecting Department of Justice approval of the merger between SBC and AT&T.  On March 29, 2007 Judge Sullivan finally granted the Antitrust Division's motion to approve the consent decrees between the United States and SBC and AT&T, and between the United States and MCI and Verizon.  SBC and Verizon can now sell off the assets of AT&T and MCI, respectively, listed in the consent decrees, ending the limbo in which the assets had been since December, 2005.

In December 2005, the Antitrust Division announced that it had reached an agreement with SBC and Verizon, resolving the anticompetitive issues it had found would arise if SBC were permitted to purchase AT&T and if Verizon were allowed to purchase MCI.  Pursuant to its standard practices, the Antitrust Division filed a complaint and posted the competitive impact statement on its website, so that the public could comment upon it.  Although normally courts approve such proposed final judgments shortly after they are filed, and often without any formal proceedings, Judge Sullivan responded to intervenors and chose to consider the consent decree much more closely, leaving the divestitures in limbo.

Interveners, including industry groups such as ACTel and CompTel, and state authorities, such as the New York Attorney General's office, argued that the Antitrust Division had erred in only requiring divestitures in so few buildings and that the proposed divestitures in those buildings were not sufficient, because customers would gravitate towards established entities and none of the proposed purchasers could match the size and services of the companies that were being purchased.  In addition, the interveners argued that the Antitrust Division had misapplied its own antitrust guidelines in determining the extent of the competitive harm, as it had not followed its traditional concentration analysis and focused on only two of the five factors to calculate the likelihood of entry.  In three hearings, two in July 2006 and one in November 2006, Judge Sullivan asked the Antitrust Division to justify its decision to have the merging parties only divest certain local private lines connecting a few hundred buildings when the merger potentially affected hundreds of cities throughout the country.  In addition, in what some characterized as an unprecedented decision, Judge Sullivan required the Division to produce a large amount of the evidence and the expert reports on which it had relied when reviewing the merger. 

No doubt to the Division's enormous relief, Judge Sullivan first held that his review of the proposed remedy was limited to the problems listed in the complaint, citing the D.C. Court of Appeals decision in United States v. Microsoft, 56 F.3d 1448 (D.C. Cir. 1995).  Although the amici argued that the 2004 amendments to the Tunney Act had overturned the Microsoft decision and had expanded the scope of the court's review, Judge Sullivan held that a "close reading of the law demonstrates that the 2004 amendments effected minimal changes, and that this Court’s scope of review remains sharply proscribed by precedent and the nature of Tunney Act proceedings." 

The Court did hold, however, that the 2004 Amendments had overturned Massachusetts School of Law at Andover, Inc. v. United States, 118 F.3d 776 (D.C. Cir. 1997), which had cited Microsoft for the proposition that the correct standard of review for the proposed remedies in the complaint was whether the proposed remedy was a "mockery of justice."  The Court, however, found that Microsoft stood only for the proposition that a court may look beyond the complaint for unaddressed anticompetitive issues if approving the judgment without looking at those issues would make a "mockery of justice."  "[I]t is only if the complaint underlying the consent decree is drafted so narrowly as to make a mockery of judicial power can the district court reject a consent decree due to matters outside the scope of the underlying complaint.  In all other cases, a court cannot do so."  Outside of a "rare case", "the Court cannot reject the proposed settlements merely because the government failed to address antitrust issues not raised in its complaints.  Further, the Court must accord deference to the government’s predictions about the efficacy of its remedies, and may not require that the remedies perfectly match the alleged violations because this may only reflect underlying weakness in the government’s case or concessions made during negotiation."

The Court then held that the correct standard for evaluating the proposed remedies for the harms alleged in the complaint was the "public interest" standard, but that prior decisions had not provided any guidance on how courts were to apply that standard.  "The Microsoft court was aware that Congress sought to foreclose 'judicial rubber-stamping,' and require an 'independent' determination of whether a proposed settlement is in the public interest.  The great difficulty with the 'public interest' standard was that there was 'virtually no useful precedent.'  At the very least, no appellate court had ever approved a district court’s rejection of a settlement as outside the public interest.  This assessment appears just as true today as it did in 1995." 

The Court also rejected the amici's arguments that the Court should evaluate the proposed remedy under the same standards as applied to a remedy imposed after a full trial.  The limitations of the government's proposed remedy "'may well reflect an underlying weakness in the government’s case, and for the district judge to assume that the allegations in the complaint have been formally made out is quite unwarranted.'"  Instead, the government needed only to show that its proposed remedy was reasonable, rather than capable of fully restoring competition to the pre-merger levels.  "[T]he question is not whether a proposed remedy is the best one, but only whether it is 'within the reaches of the public interest.' . . . [T]he relevant inquiry is whether there is a factual foundation for the government’s decisions such that its conclusions regarding the proposed settlements are reasonable."

The Court looked over the government's explanation of its procedures and the proposed remedy, and found that the government had met the public interest standard.  The Court held that the government had not erred by not relying upon the Herfindahl-Hirschman Index as the primary indicator of concentration, as the government provided a reasonable explanation for its decision to permit higher levels of concentration.

The Court next held that the government had carried its burden on the two more substantive issues: that customers generally preferred carriers who could offer bundled services over those that only offered voice services, and that customers often trusted more well-known carriers than they did new entrants.  Although the Court held that the amici had raised valid issues, it held that the government had satisfied its burden of proving that the proposed remedies were reasonable.  "While these shortcomings could reduce the effectiveness of the proposed settlements, they do not completely undermine the settlements.  Even accounting for these issues, the government has presented a reasonable basis for concluding that the proposed settlements will replace much of the competition lost to the mergers, if perhaps not all of it.  Therefore, the Court finds that the proposed settlements are reasonably adequate, and thus within the reaches of the public interest." 

Finally, the Court held that the government had adequately supported its decision to judge the likelihood of a competing carrier entering a building based on only customer demand and distance from existing lines, even though the government's formula had not looked at the other factors.  "While the government’s entry algorithm does not account for all relevant factors, it is a reasonable, practical prediction of likely entry.  Quite reasonably, the algorithm is based on the two most important and easily measured factors — customer demand, a proxy for potential revenue, and distance, a proxy for overall cost."  The court then granted the government's motion.

Although the hearings and factual inquiry undoubtedly generated consternation at the Antitrust Division, the final decision should prove satisfactory on balance.  Judge Sullivan reiterates that the "public interest" standard is a fairly deferential standard of review, as he describes the government's burden as providing a "reasonable basis" for a court to find that the proposed remedy is "reasonably adequate".  In addition, the decision clarifies that Microsoft is still valid despite the 2004 amendments to the Tunney Act, and that a court cannot look beyond the complaint unless the limitations of the remedy make a "mockery of justice."  Finally, the decision emphasizes that older decisions that had required a remedy to completely restore competition to pre-merger levels are not relevant for looking at the efficacy of the proposed remedy in a Tunney Act hearing.  Under the decision, therefore, courts will continue to give fairly substantial deference to the Department of Justice.  However, merging parties and the Division, while appreciative of the deferential standard, will hope that future courts will not require the same length of time prior to approving mergers.

Unlike other areas of antitrust law and policy, Canada is less lenient than United States law when it comes to refusals to deal and resale price maintenance.  Since January 2004, Canada's Competition Act has included a private right of action for refusals to deal.[1]  Attempting to use this relatively new right, one of Canada's largest retailers, Sears Canada, filed suit against Givenchy and Christian Dior's perfume affiliates earlier this year when Givenchy and Dior advised Sears that they would stop supplying Sears after fourteen years of doing business with it.  Unlike under U.S. law, where firms generally may lawfully refuse to deal to anyone they choose provided the refusal is unilateral, Canada's Competition Act restricts refusals to deal when the refusal is causes a person's business to be "substantially affected" and has or is likely to have "an adverse effect on competition in a market"

Sears speculated that the refusals to supply were prompted by the discounts Sears offered in December 2006 on all cosmetic products sold in its stores, including Givenchy's and Dior's.[1]  It is a criminal offense in Canada to refuse to deal with retailers because of the low prices they offer.  Section 61(1)(b) of the Act provides that no person shall refuse to supply a product to or otherwise discriminate against any other person engaged in business in Canada because of the low pricing policy of that other person.  Presumably, evidence that Givenchy and Dior refused to deal further to Sears because of Sears' discounting practices was lacking, otherwise the Commissioner of Competition might have prosecuted Givenchy and Dior under the Act's resale price maintenance provisions.

The Act requires all private parties that wish to institute a refusal to deal suit to first obtain leave from the Competition Tribunal.[2]  The Tribunal will grant leave if has reason to believe that the applicant is "directly and substantially affected in the applicant's  business or is precluded from carrying on business" due to a refusal to deal on usual trade terms.[3]  The same showing is necessary to prevail on the merits of a refusal to deal claim.[4]  Sears' application for leave, like an alluring fragrance, initially attracted attention in Canada.  But when Sears failed to establish that its business was directly and substantially affected due to Givenchy's and Dior's refusals to deal, its case, like all perfumes, evaporated. 

The key issue that resulted in this outcome was whether Sears’ entire department store business, its cosmetics and fragrance business, or its sales of Dior and Givenchy cosmetics and fragrances constituted the "business" for purposes of assessing whether Sears' business was substantially affected.  Surprisingly, Sears did not provide any written representations on this issue in its application for leave with the Competition Tribunal.[5]  During oral argument, Sears' counsel represented that the appropriate "business" was the sale of Dior and Givenchy products.  Dior and Givenchy countered that the appropriate business was Sears' entire department store business.  The Tribunal reviewed four previous decisions on applications for leave for refusal to deal actions and found that it "has consistently taken the position that a substantial effect on a business is measured in the context of the entire business".[6]  The Tribunal acknowledged that unlike sections 103.1(7) and 75(1)(a) of the Act which refer only to a substantial effect on the applicant's business, section 75(1)(b) refers to a substantial effect in the applicant's ability to "carry on business in that class of articles".[7]  However, the Tribunal concluded that if Canada's Parliament intended the effect in sections 103(1)(7) and 75(1)(a) to be on a business in a class of articles, such as the Dior and Givenchy products, it would have said so.  Thus, the Tribunal used Sears' entire department store business as the benchmark for measuring whether the effect of Dior's and Givenchy's refusals on that business was substantial. 

On the issue of substantial effect, Sears argued that the French version of section 75(1)(a) of the Act differed from the English because the French phrase, "sensiblement gênée" did not have the same meaning as the English phrase "substantial effect."  While "sensiblement" is defined in some French-English dictionaries as "appreciably", "noticeably", and "markedly", and "gênée" is defined as to "bother", "disturb" or "be in the way", the Tribunal found that these translations did not detract from the notion that the effect should be important and significant.  The Tribunal thus rejected Sears' linguistic argument.  Sears also argued that it would lose $16 million in business because customers would not substitute an alternate brand but instead shop elsewhere for the Dior and Givenchy products.  The Tribunal expressed some doubt about this and said that regardless, $16 million (CDN) was not substantial when compared to Sears' annual overall revenues of $6 billion (CDN).  The Tribunal also rejected Sears' allegation that another $14 million of cross-over sales would be lost because Sears did not have adequate evidence to back this up and even if it did, the Tribunal said, a $24 billion loss would neither be "substantial" when the overall revenues were $6 billion annually.  The Tribunal did accept Sears' allegation that the loss of Dior's and Givenchy's products would mean it would lose additional business to its department store competitor, The Bay, and that Sears will lose the marketing message that its fragrance and cosmetics are a "destination category" for "prestige" products, but this did not change the Tribunal's conclusions.  Sears may be directly affected by the refusals to deal, but the effect will not be substantial, the Tribunal explained.

In the press, Sears alleged that the refusal to deal to Sears would give The Bay monopoly power as a department store cosmetics and fragrance retailer.[8]  However Givenchy only has a 3-4% market share and the Tribunal itself noted that the Dior and Givenchy products represented a modest percentage of Sears' total cosmetics business.

What the Tribunal's order means for Canadian department stores, big box and other multiple product category retailers is that such firms will likely have a difficult time challenging a supplier's decision not to deal to them unless the refusal leads to a significant loss to its overall business and not just a portion of it.  On the other hand, Canadian retailers that specialize in a category of products, such as cosmetics, sporting goods, and automobile parts, may have a relatively easier time challenging refusals to deal.  For suppliers, this means that the greater the share of the market their products have, the more they should exercise caution and consult counsel before refusing to deal to customers, particularly since a refusal to deal may also serve as the basis of a prosecution for resale price maintenance.[9]

Antitrust Division Finds No Problem with Pork Merger

On May 4, 2007, the Antitrust Division issued a press release announcing that it had decided not to challenge Smithfield Foods acquisition of Premium Standard Farms.  In its press release, the Division indicated that it found that the acquisition would not pose a competitive problem for either consumers of fresh and processed pork, nor for pork farmers in the Midwest or in Virginia or the Carolinas.

Smithfield, the largest pork producer in the United States, had announced the transaction in September, agreeing to purchase Premium, the second largest pork producer, for $810 million in stock and cash.  Almost immediately, the merger ran into opposition from organizations such as the United Food and Commercial Workers International Union, the National Family Farm Coalition, and the United Stockgrowers of America.  In addition to lobbying the Department of Justice, they also urged state attorney generals to investigate the merger, expressing concern over the market power Smithfield would have over farmers looking to sell their pigs. 

The Antitrust Division issued a second request to investigate concerns that the merged company would be able to increase the price consumers paid for pork products, while simultaneously decreasing the price paid to pork farmers for pigs sold to packing plants.  The parties certified substantial compliance with the second request on February 5, and simultaneously announced that they had entered into a timing agreement with the Division that would permit the Division 60 days to review the transaction, as opposed to the usual 30 days that the Division has by statute.  In addition, the agreement gave the Division another 30 days to review the agreement if necessary.  On March 30, the Division took the option of the additional 30 days, giving it until May 7 to review the transaction, but approved it without conditions on May 4, finding that in each product and geographic market, Smithfield would still face competition from Tyson, Swift, Excel/Cargill, Hormel and Seaboard Foods.

The timing agreement between the Division and the parties, and the subsequent approval without conditions, highlights the benefits of working cooperatively rather than competitively with the antitrust enforcement agencies.  As with most large mergers, the parties complied with the second request fairly quickly, but did not force the Division to make a decision on whether to sue for a preliminary injunction.  The timing agreement gave the Division the flexibility to review the materials for a comparatively long time, but provided Smithfield and Premium with the assurance that the investigation would either terminate or result in litigation by a date certain.  With good preparation, Smithfield and Premium were able to overcome competitive worries and should be able to close the transaction soon.

Antitrust Division Approves IEEE's Procedure on IP Licensing

On April 30, 2007, the Antitrust Division, in response to a business review letter from the Institute of Electrical and Electronics Engineers, Inc. ("IEEE"), approved the new IEEE procedure for preventing companies that hold patents from secretly introducing their patented technology into a standard.  The Division and other antitrust enforcement authorities had worried that companies could insert requirements into the standards set by the standard setting organizations, and then exclude other manufacturers by charging exorbitant royalties.

The IEEE sets the standards for a variety of products that require interoperability.  To set a standard, a working group meets for four years, develops a standard, and submits it to the vote of the members.  Currently, the chair of the working group will ask the participants in the standard setting committee to disclose any essential patents and, if so, for the patent holders to state 1) that they will not enforce the patent, or 2) that they will license the patent on reasonable and nondiscriminatory terms to other manufacturers.  The working group participants may not discuss licensing terms.  However, the IEEE has found that the current system leads to 1) vague commitments that are difficult to enforce and lead to litigation with respect to the definition of "reasonable and non-discriminatory", and 2) the lack of discussion of the licensing terms prevents "sensible cost-benefit comparisons."

To remedy the current defects in the problem, the IEEE proposed a new system.  If the working group chairman determines that a participant may hold a patent that could be essential to the licensed technology, the chairman will send the patent holder a letter seeking a response about the extent of the patent and how the holder will enforce it if the patent is part of the standard that is adopted.  In response to the letter, the patent holder may:

1) do nothing, although this will earn it a referral to the patent committee, and the working group will inform the members at the time of the vote of the lack of a commitment;

2) send a Letter of Assurance ("LOA") that it does not have any patents essential to the proposed standard, although it may only do so after "contacting individuals within the company who are involved with the development of the standard";

3) send a LOA stating that it will not assert a patent claim against anyone who uses the patent to implement the standard;

4) send a LOA stating that it will license the patent to those implementing the standard for either no charge or a reasonable rate with all other conditions also set on a "reasonable and nondiscriminatory standard" or

5) send an LOA stating that it will charge reasonable rates, but also include the terms of the licensing agreement and details.

Once the working group has the information from the patent holder, the working group members will need to discuss the "relative costs of the proposed technological alternatives" without discussing "specific licensing terms."  If the standard is adopted, the patent holder is bound by the terms of the LOA, but, if the patent holder begins demanding more onerous terms as a condition of licensing, the IEEE will have no enforcement mechanism. 

The Antitrust Division approved the new standard setting procedure, stating that "a policy that requires patent holders to disclose and commit to their most restrictive licensing terms would permit SDO [Standard Development Organization] members to make more informed decisions when setting a standard because they would be able to compare alternative technologies based on differences in cost in addition to technological merit."  The Division found that allowing the patent holders to disclose their most restrictive terms would encourage them to compete and offer better terms.  The Division, however, stated that it was not passing on the legality of joint negotiations at the standard setting stage, and that any attempt to fix the prices paid by consumers would result in a suit by the Division.

The proposed changes and the Division's stance are interesting.  It may prove difficult for members of the standard setting working group to "compare alternative technologies based on cost" without discussing specific licensing terms amongst themselves.  In addition, although it does provide an avenue for future standards adopted by the IEEE to avoid any patent issues arising from the adoption of a standard, the Division does not discuss the fact that the proposed procedure does not provide any enforcement mechanism against a company that sends an LOA stating it has no patents essential to the standard, but, after the adoption, brings suit claiming that it does.  The proposed standard states explicitly that the company does not need to go through all of its patents, but only needs to contact it members who are involved with the working group.  Would a court enforce an LOA against a company that certified it had no patents if the company claimed that its employees were merely ignorant of other patents at the time of the LOA?