The antitrust litigation against Rambus for failing to disclose patents to JEDEC, a standard setting body (SSO), took another twist last week.  In Rambus v. FTC, No. 07-1086 (D.C. Cir. 2008), the court unanimously set aside the FTC decision holding that Rambus' conduct constituted monopolization under Section 2 of the Sherman Act.  The D.C. Circuit held that the FTC failed to carry its burden to show the conduct was exclusionary.  In dicta, the court also suggested that the FTC had taken "an aggressive interpretation of rather weak evidence" to conclude that the failure to disclose was a violation of JEDEC disclosure rules.

Rambus was a member of JEDEC in the mid-90s when JEDEC was in the process of developing standards for certain dynamic random access (DRAM) technology.  Under JEDEC rules, members were to disclose patents and patent applications relating to a technology being standardized.  Assuming proper disclosure, JEDEC could either adopt a standard which did not utilize such proprietary data, or require the member to license its proprietary data on a reasonable, non-discriminatory (RAND) terms.

According to the FTC, Rambus engaged in deceptive conduct which violated JEDEC disclosure rules by either failing to disclose patent related data, or making misleading statements about such data.  This led JEDEC to adopt standards allegedly utilizing Rambus patents, thereby permitting Rambus to acquire a monopoly and seek high licensing fees.  The FTC remedial order required Rambus to license its patents for reasonable royalty rates for three years, but thereafter forbid any royalty collection.

On appeal Rambus did not dispute the FTC findings that it had monopoly power in the markets identified by the FTC.  Rather, it focused on the conduct element of monopolization.  First, Rambus asserted the FTC erred in finding that it violated any JEDEC disclosure rules.  Second, it argued that the FTC found consequences of nondisclosure only in the alternative, ie,  it prevented JEDEC from either adopting a non-proprietary standard, or from extracting a RAND commitment from Rambus. Since the latter does not violate the antitrust laws, there is, according to Rambus,  an insufficient basis for liability.  The DC Circuit found this second argument persuasive, and cautioned that the evidence was weak on the first point.

The Court noted that the plaintiff – here the FTC – had the burden to show that the conduct is exclusionary.  Deceptive conduct, said the Court, is exclusionary only when it harms competition.  Since the FTC made its findings on this issue  in the alternative, and did not determine which of these outcomes was the more likely, it had to prove that both outcomes – the failure to adopt a non-proprietary standard or to extract a RAND licensing commitment – harmed competition.  The FTC failed to do so.  While deception can form the basis for exclusionary conduct, the Court concluded that "… an otherwise lawful monopolist's use of deception simply to obtain higher prices normally has no particular tendency to exclude rivals and thus to diminish competition."

To reach this conclusion, the Court relied heavily on NYNEX Corp. v. Discon, Inc., 525 U.S. 128 (1998).  In Discon, a lawful monopoly provider of local telephone services entered into a fraudulent scheme to accept rebates from a supplier and thereby increase its costs to justify higher rates that regulators approved.  Such conduct, however, was not found to violate Section 2 since the high prices were the result of the exercise of lawful monopoly power and thus did not harm the competitive process.

Applying Discon here, the Court concluded that the failure to extract a RAND licensing commitment from Rambus, and its consequent ability to extract higher licensing fees, likewise did not harm the competitive process.  In fact, said the Court, with RAND licensing there may well have been less competition from alternative technologies.  Since the FTC was unable to show that JEDEC would have selected a nonproprietary technology had Rambus made the required disclosures, its reliance on the absence of RAND licensing to show harm to competition was insufficient.  Harm to competition, said the Court, required an antitrust plaintiff to prove the SSO would not have adopted the standard but for the misrepresentation or ommission.  If JEDEC would have standardized the same technology despite Rambus deception, then that deception cannot be said to have any effect on competition.  JEDEC's loss of opportunity to seek favorable licensing terms, said the Court, is not an antitrust harm.

Although it did not rest its decision on this ground, the Court also expressed "serious concerns" about the strength of the evidence relied on by the FTC to support its crucial findings regarding the scope of JEDEC's disclosure policies and Rambus' violation of those policies.  It did so since, on remand, the FTC may evaluate the conduct under § 5 of the FTC Act, a broader standard than Section 2.  The Court conceded that JEDEC rules required disclosure of patents and patent applications, but it expressed skepticism that those rules required disclosure of potential amendments, or work in progress on those amendments.  It also questioned the FTC's conclusion that Rambus engaged in deceptive conduct with respect to a standard adopted more than 2 years after Rambus stopped attending meetings related to that standard.  The FTC presumably will consider these comments when and if it considers the case further on remand.

While the D.C. Circuit's opinion was not unexpected, certain aspects of its reasoning were surprising.  The use of Discon, for example, to conclude that high prices by a monopolist caused in part by fraud is not harm to competition is a bit of a stretch.  There the defendant NYNEX was already a monopolist at the time of the alleged fraud whereas here Rambus allegedly used the fraud to gain the monopoly in the first place.  Discon also involved no standard setting issues, no SSO, and no licensing issues at all, RAND or otherwise.  This latest decision in the Rambus saga may well find its way to the Supreme Court.

Authored by:

Carlton A. Varner

213.617.4146

cvarner@sheppardmullin.com

Competitors of a copier equipment provider, IKON Office Solution ("IKON") alleged that defendant IKON used "fraudulent practices" to secure and lengthen its customer contracts, and thus reducing the ability of competing copier equipment providers to contest for "aftermarket" business.  The district court granted a motion to dismiss pursuant to FRCP 12(b)(6), on the ground that IKON did not have market power over a "unique" product or service, and that any control that it had acquired over its customers was a function of contract, and not market power.  The district court distinguished Eastman Kodak Co. v. Image Technical Services, Inc.,[1] and relied on the decision of the Third Circuit in Queen City Pizza, Inc. v. Domino's Pizza, Inc.[2]  The court held that the parties copier equipment was interchangeable, and thus within the same relevant market.  It was only the defendant's customer contracts that prevented plaintiffs from attempting to gain aftermarket business from defendant's customers.

The Ninth Circuit reversed, and held that pursuant to Kodak, the allegations of market imperfections, and IKON's alleged conduct of fraudulently inducing customers to extend their contracts through amendments, which they could not have reasonably foreseen or perceived, was a closer factual analogy to Kodak, rather than Queen City Pizza.  Thus, there was a genuine issue of fact whether the alleged market power flowed from the contractual terms between defendant and its customers, or from traditional acts of exclusionary conduct, that differentiated the single product market from a broader market of interchangeable, competing products.  Newcal Industries, Inc. v. IKON Office Solution, No. 05-16208, January 23, 2008 (9^th Cir. 2008).

In a first amended complaint, Newcal listed four product markets, which included (1) replacement copier equipment for IKON and GE customers, with "flexed IKON contracts", (2) copier service for these contracts, (3) copier service for Cannon and RICOH brand copier equipment, and (4) copier equipment.  While the court found the latter two markets were implausible, because Newcal did not allege that IKON held market power in the nationwide market for copier equipment leases, it nevertheless stated a claim upon which relief could be granted in replacement copier equipment for IKON and GE flexed IKON contracts, and copier service on these contracts.  In essence, the fraudulent acts that extended the agreements were "Kodak" changes that mutated the relevant market from a competitive product and services market, to a monopolistic aftermarket.  The court held that the first amended complaint properly alleged a relevant market consisting of a derivative aftermarket for replacement equipment.  In Queen City Pizza, the court adapted the Klein & Saft analysis that the relevant market must be viewed as of the time of the formation of a franchise contract, and that the relevant market must therefore include all plausibly foreseeable economic franchise opportunities available to the potential franchisee.[1]  While the relevant market analysis set forth in Queen City Pizza has been widely followed in franchise antitrust cases, there is a window of a "Kodak moment" where the factual allegations of a complaint are on "all fours" with Kodak and where there are proper allegations of post contract formation "opportunism", that were not reasonably foreseeable or in contemplation at the time of formation.[2]  Here, the allegations of aftermarket opportunism led the Ninth Circuit to conclude that the case read on Kodak, and not on Queen City Pizza.[3]  And here, there were purchase and service contracts, but no "franchise."[4]

In an enigmatic and somewhat metaphysical analysis, the court held that allegations of fraudulent contract opportunism warranted the conclusion that the defendant's market power was a function of market imperfection and the lack of substitutability, rather than from a contract itself.  Noting that the new lease on life for the complaint may be somewhat fleeting, the court noted that nothing in its decision, guaranties that – or even speaks of whether – Newcal's complaint will "survive" summary judgment.  Thus, the application of Kodak may indeed be a "Kodak moment."  An issue that may be decided on summary judgment is whether the contract opportunism allegations are such that they could not have been anticipated at the time of formation.  We will see.[5]

Authored by:

Don T. Hibner, Jr.

213.617.4115

dhibner@sheppardmullin.com

On March 31, 2008, a federal district court in Ohio granted summary judgment after finding insufficient evidence to support a claim that Respironics, Inc., a manufacturer of positive airway pressure devices ("PAPs") and masks used to treat obstructive sleep apnea ("OSA"), entered into exclusive deals with sleep labs and durable medical equipment suppliers ("DMEs") to prescribe Respironics' products to the exclusion of others.  Invacare Corp. v. Respironics, Inc., No. 1:04 CV 1580 (N.D. Ohio 3-31-2008). 

Plaintiff, a manufacturer and competitor in the sleep mask and PAP markets, initially sued Respironics in August 2004 on the following claims: 1) monopolization; 2) attempted monopolization; 3) restraint of trade in violation of Section 1 of the Sherman Act; 4) price discrimination; 5) violations of Ohio's Valentine Act; and 6) unfair competition.  After an earlier round of partial summary judgment, the only claims remaining before the court were plaintiff's restraint of trade claims under both the Sherman Act and Ohio's Valentine Act.  A restraint of trade claim under Ohio's Valentine Act is subject to the same analysis as a restraint of trade claim under the Sherman Act.  Richter Concrete Corp. v. Hilltop Basic Res., 547 F.Supp. 893, 920 (S.D. Ohio. 1981). 

Plaintiff alleged that Respironics and sleep labs entered into agreements whereby Respironics agreed to sell its products to the sleep labs at predatorily low prices in exchange for the sleep labs' prescribing Respironics' products to the exclusion of others'.  The court recognized that plaintiff alleged a vertical restraint of trade because it involved agreements among actors at different levels of market structure to restrain trade.  The "rule of reason" applies to allegations of vertical restraints.  Care Heating & Cooling, Inc. v. Am. Std., Inc., 427 F.3d 1008, 1013 (6th Cir. 2005).  Under a rule of reason analysis, plaintiff first had to show the existence of an agreement.

Existence of Agreements with Sleep Labs

Plaintiff did not offer any direct evidence of exclusive agreements with sleep labs, thus plaintiff instead relied on circumstantial evidence to establish such agreements.  To survive a motion for summary judgment, plaintiff needed to present evidence that would tend to exclude the possibility that Respironics and the sleep labs acted independently.

Plaintiff pointed out that Respironics gave away an estimated 591,254 free masks to sleep labs from 2000 to 2004, under a "Mask Maintenance Program," at a cost of approximately $1.5 million.  Respironics' sales training materials further indicated that the goal in giving away the masks was to obtain brand-specific prescriptions for its masks and PAPs, and to keep customers from seeking competitive alternatives.  The court found that this evidence merely demonstrated permissible internal company goals and did not, by itself, indicate a conspiracy with sleep labs.  The court also disagreed with plaintiff's argument that Respironics' practice of giving away free masks was against Respironics' economic self-interest because Respironics could have achieved the same results by selling their masks to the labs.  Evidence that some sleep labs received free masks from multiple companies and that plaintiff itself had admitted to providing either free or below-cost masks to sleep labs tended to show that Respironics' practice was consistent with its economic self-interest.

Plaintiff also challenged other practices such as Respironics' providing preprinted prescription pads to sleep labs which made it easy for a physician to check a box for Respironics rather than writing out a prescription for a competitor and Respironics' practice of providing certain sleep labs with resources and tools to help them identify new patients.  As with the free sleep mask program, the court again found that plaintiff had not provided evidence to create a genuine issue of material fact as to whether the programs evidenced exclusive agreements between Respironics and sleep labs to prescribe only Respironics-brand products.

Foreclosure/Anticompetitive Effects

Although the court could have ended its analysis at plaintiff's failure to prove the first prong of its claim, the court further explained "for the sake of completeness" that even assuming for the sake of argument that plaintiff could have proven the existence of exclusive agreements between Respironics and sleep labs for Respironics-brand prescriptions, plaintiff nonetheless failed to show that those agreements had an adverse effect on competition, as required by the second prong of the rule of reason analysis. 

The court subsequently explained various reasons why plaintiff failed to show anticompetitive effects in the relevant market.  First the court found insufficient evidence to show that Respironics "foreclosed competitors from gaining a foothold in the market" given that a number of companies compete in the OSA field and that two companies other than Respironics enjoy significant shares of the market.  Second, the court found that the percentage of sleep labs receiving Respironics' resources and tools to identify new patients was only between 3.25% and 4.88% and much too small to show foreclosure.  Finally, the court found that the survey on which plaintiff relied to show anticompetitive effects was flawed.

Existence of Agreements with DMEs

Plaintiff also argued that there was evidence of agreements between Respironics and DMEs and/or outlets that restrained trade by locking in business and foreclosing competitors.  Plaintiff submitted direct evidence of two agreements: one in which a provider promised to purchase 100% of its sleep disorder products from Respironics, and another agreement in which a provider promised to purchase 90%.  Both agreements rewarded the provider with a 4% rebate on Respironics' products.  The court, however, found that this claim bared little resemblance to the claim plaintiff pled in its complaint, which alleged a bundling practice that forced outlets to purchase Respironics' PAPs in order to purchase the masks at an economically viable price.  Therefore, the court found that the claim plaintiff pursued on summary judgment was not properly pled.

The court went further and stated that even if the claim was properly pled, plaintiff had not presented sufficient evidence to demonstrate foreclosure or other anticompetitive effects.  Plaintiff presented evidence of only two isolated agreements between Respironics and DMEs or outlets and Respironics further presented evidence that these agreements involved at most 100 to 125 DMEs out of 3,000 to 5,000 providers or 2% to 4.17% of the relevant market.  The court found this percentage too small to show any anticompetitive effects on the relevant market.

Authored By:

John S. Whittaker

415.774.2938

jwhittaker@sheppardmullin.com

Over the last several months, Canada's head federal antitrust enforcer, the Commissioner of Competition, has lost three rounds of disputes with Labatt Brewing Company Limited.  Labatt is the second largest brewery in Canada.  The first two losses relate to the Commissioner's attempt to temporarily block Labatt from completing its merger with Lakeport Brewing Limited Partnership in order to give the Commissioner more time to review the deal.  The third involved a Federal Court quashing "enormous" document subpoenas the Commissioner obtained against Labatt, Lakeport and fifteen other breweries.  This marked the first time a "section 11" order has been struck down in a merger case.

Round One: Tribunal Rejects Commissioner's Application to Enjoin the Closing

In February 2007, Labatt, announced its intention to acquire the operations of Lakeport Brewing Limited Partnership.  Lakeport beer is marketed as a lower priced alternative to other brands of beer.  The same month, the parties filed a "long-form" premerger notification with the Competition Bureau, triggering a 42 day waiting period.  Before the waiting period expired, the Commissioner informed Labatt and Lakeport that it would not complete its review of the transaction by the end of the period.  The Commissioner was concerned that Lakeport's lower priced beer would be eliminated from the market, leaving consumers with fewer, higher-priced choices.  Influenced by a prior experience where it lost a deal because of the time it took the Competition Bureau to complete its review, Labatt proposed to the Commissioner that the deal close at the end of the waiting period subject to a hold-separate arrangement.  Under the hold-separate arrangement, Labatt would acquire Lakeport but delay integrating it in its business for thirty days.  Instead of accepting Labatt's proposal, the Commissioner filed with the Competition Tribunal an application under Section 100 of the Competition Act to obtain a temporary injunction blocking Labatt from completing the deal.

In considering the application, the key issue before the Tribunal was whether allowing the merger to close would substantially impair the Tribunal's ability to order effective relief post-merger.  Commissioner of Competition v. Labatt Brewing Company Limited et al., 2007 Comp. Trib. 8. The Commissioner tried to show this by arguing that the Competition Act gives the Tribunal fewer remedies to use once a merger has been completed, and that it is often more difficult to effectively remedy the anticompetitive effects of a merger after the merger has been effected.  Labatt and Lakeport replied there was no evidence that the merger would impair the Tribunal's ability to order divestiture or dissolution, especially given that the parties had offered to enter into a hold-separate agreement, which the Tribunal has accepted in the past.  The Tribunal interpreted Section 100 to mean that the Commissioner has the burden of showing that if it did not block the merger, it would impede its ability later to order a post-merger remedy that would "restore competition to a level not substantially less than it was before" the merger.  The Tribunal found the Commissioner did not sufficiently demonstrate this and denied the application.  Additionally, it stated that it did not have jurisdiction under Section 100 to order a hold-separate arrangement and that regardless, the arrangement was not necessary.

Round Two:  Commissioner Appeals and Loses

With this victory, Labatt and Lakeport closed the deal in late March 2007.  The Commissioner, however, appealed the Tribunal's decision to the Federal Court of Appeal.  The Commissioner argued the Tribunal misinterpreted section 100 and imposed too high an evidentiary burden to obtain relief.  The Commissioner alleged that relief under section 100 should be nearly automatic, unless the merging parties show that the Commissioner's application constitutes an abuse of process.  The FCA rejected the Commissioner's arguments, stating in its January 2008 decision, "[w ]e do not agree that Parliament intended the role of the Tribunal to be so limited."  Commissioner of Competition v. Labatt Brewing Company Limited, 2008 FCA 22.  The FCA found the Tribunal correctly applied the test under Section 100 and that the Tribunal's finding that the Commissioner had not satisfied the test was reasonable.  Offering the Commissioner some guidance, the FCA advised that in a Section 100 application, the Commissioner should show the nature of the potential lessening of competition that the merger will allegedly cause, the kinds of remedies the Commissioner might seek, and the potential effectiveness of those remedies with, and without, an interim order in place.

The Commissioner's losses in the Labatt case has not stopped her from seeking Section 100 applications.  But the Commissioner appears to be following the FCA's guidance and including the type of information the FCA outlined for the Commissioner in the Labatt decision.  There is however a sign that the Commissioner may begin to accept proposals to close a deal pending review subject to a hold-separate arrangement.  After losing the appeal, the Commissioner agreed to a hold-separate agreement in the merger of scrap metal firms American Iron & Metal Company Inc. and SNF Inc.  Some commentators have observed that the Commissioner's Section 10 losses should not change the way mergers are reviewed in Canada all that much because most firms that learn that the Commissioner needs more time to study their deal will opt not to close.  Rather, most firms choose to obtain substantive clearance of a deal before completing it.

Round Three:  Commissioner Suffers Aftereffects of Omitting Facts in Subpoena Application

The Commissioner's difficulties with the Labatt-Lakeport merger did not end there.  In February 2007, in connection with its ongoing investigation of the merger, the Commissioner obtained document production orders from the Federal Court ex parte (i.e. without notice to responding parties) under Section 11 of the Act.  The orders required Labatt and Lakeport, and eleven others in the beer industry, to produce voluminous information to the Commissioner.  Many of the same entities had been subject to similar orders in 2003 when the Commissioner conducted an inquiry into a bottling agreement among the brewers, and in 2006, when the Commissioner was reviewing the sale of another Canadian brewery, Sleeman's.  Labatt reportedly produced close to 140,000 pages of documents in response to the February 2007 subpoena, costing it $750,000 in external legal costs alone.  This was in addition to some 10,000 pages of records and other information the Commissioner received in the parties' long-form premerger filing.  Nevertheless, in November 2007, the Commissioner obtained yet even more production orders, again ex parte, against Labatt, Lakeport and fifteen others in the beer industry.  The Federal Court described these orders as "enormous" in complexity and scope.  Labatt, Lakeport and one other brewery, Moosehead, filed motions with the Federal Court to set aside the November 2007 orders.  They alleged these orders were substantially duplicative to the February orders and called for records and information irrelevant to the Labatt-Lakeport merger.

Justice Mactavish, the same judge who had issued the November orders, decided the motion.  In her reasons for her order quashing the November 11 orders, Justice Mactavish said that had the Commissioner provided her with complete disclosure, she would not have granted the orders.  Commissioner of Competition v. Labatt Brewing Company Limited, 2008 FC 59. She sharply criticized the Commissioner's disclosures in its ex parte application as "misleading, inaccurate or incomplete." A party seeking ex parte relief, she wrote, has the duty of ensuring that the court is apprised of all of the relevant facts.  The reason why this is so, she added, is self-evident, the judge and the party against whom the order is sought are literally at the mercy of the party seeking relief.  In this instance, the Commissioner's disclosures were unsatisfactory in three ways. As the first time that Section 11 orders have been struck down in the context of a merger, the Labatt decision is an important precedent. For the Commissioner, the decision may be hard to shake like a bad hangover, raising the bar the Commissioner must meet to obtain a section 11 subpoena.  For parties on whom such subpoenas are imposed, the decision, like a cold Labatt Blue in mid-July, may offer some relief.

First, although the Commissioner disclosed in her November application the orders she had obtained in February, she did not disclose that she had previously represented to the Court in seeking the February orders that the information she sought would likely be sufficient for the purposes of her inquiry into the merger.  Justice Mactavish held The Commissioner's failure to disclose  this representation or indicate what had changed since February 2007 were material omissions which justified setting aside the November order.  "In order to properly exercise the discretion conferred on the Court by section 11 of the Competition Act, and for the Court to be able to control its own processes, and to guard against the abuse of those processes, the Court must also be fully apprised of the relevant circumstances surrounding the request."

Second, the Commissioner represented in her November application that "none of the records or information sought has previously been requested from the respondents.”  In fact, Justice Mactavish found, there was obvious overlap between the subject matter of the orders.  The Commissioner argued this was made known to the Court by including the February orders in the November application.  Justice Mactavish disagreed.  "The fact that a document is before the Court, "given the volume of exhibits and the time which an ex parte judge has to deal with such matters, does not relieve the moving party of its duty to make full and fair disclosure. "

Third, the Commissioner failed to bring the concerns Labatt had articulated about the burdensome nature of the Commissioner’s prior demands to the Court’s attention.  More particularly, the Commissioner should have disclosed counsel for Labatt's letters sent the Commissioner's office after Labatt was served the February, 2007 order, expressing dismay over the Commissioner’s failure to advise the Court of the large volume of material already in the possession of the Commissioner with respect to the state of the beer industry in Ontario.  Labatt's counsel also advised the Commissioner that the February order required Labatt to waive privilege by disclosing a high level of detail in documents over which the privilege was claimed, required disclosure of irrelevant information, and that efforts to comply with the orders caused Labbat's file server to crash, and would have cost Labatt over half a million dollars to restore the lost data.  Justice Mactavish observed that the duty of full and frank disclosure requires a party seeking ex parte relief to inform the Court of any points of fact or law known to it which favor the other side, so that a balanced consideration of the issues can occur.  The Commissioner breached this duty.

Following this rebuke, the Minister of Industry announced he intended to investigate the matter and appointed a third party to review it.  On March 3, 2008, the Commissioner announced that a former executive legal officer of the Ontario Supreme Court and prosecutor would conduct the review.  Since its inception, Section 11 has been widely criticized by practitioners, academics, the Canadian Bar Association and others.  See Canadian Bar Association Letter Re: Information Bulletin on Section 11 of the Competition Act; D. Assaf, E. Lefebvre & H. Cooper, "Section 11 of the Competition Act: Time to Revisit and Reset the Balance in Criminal Investigations," Canadian Competition Record, Spring 2004.

Authored by:

Heather M. Cooper

213.617.5457

hcooper@sheppardmullin.com

On May 5, the European Commission announced that it had sent a statement of objections to a number of suppliers of marine hoses.  Marine hoses are used by customers in the oil and defense industries to transport oil and petroleum products between tankers and storage facilities.  The statement of objections sets out the Commission's allegations that the companies have participated in a cartel in breach of Article 81 of the EC Treaty and Article 53 of the EEA Agreement.  It follows the Commission's announcement that it carried out dawn raids in the sector in May 2007.  The companies will now have an opportunity to respond to the allegations and evidence set out in the statement of objections. They will have access to the Commission's file and may request an oral hearing.  The Commission's dawn raids were coordinated with the US Department of Justice (DOJ) in the context of a suspected worldwide cartel concerning marine hoses and, in the UK, the Office of Fair Trading (OFT) has also been carrying out a criminal cartel investigation under the Enterprise Act 2002.  In December 2007, DOJ announced that three UK individuals had agreed to plead guilty to their participation in a cartel in the supply of marine hoses in the US, and the OFT announced that it had brought criminal charges under the Enterprise Act against those individuals on their return to the UK.

On April 28, the Canadian Competition Bureau (the Bureau) released its Draft Information Bulletin on Sentencing and Leniency in Cartel Cases (the Draft Bulletin) for public consultation. The Draft Bulletin outlines the factors that the Bureau will consider when making sentencing recommendations to the Director of Public Prosecutions (the DPP) and the process for seeking a lenient sentence. Interested parties have been asked to provide comments no later than July 25, 2008.  Various aggravating and mitigating factors that may affect the recommended sentence are enumerated in the Draft Bulletin. According to the Draft Bulletin, aggravating factors include: recidivism; coercion or instigation; large corporate size or market share; the degree of planning, covertness and complexity of the cartel activity; obstruction; lengthy duration of the illegal activity; the nature of the victims; and high level of senior officer involvement. Mitigating factors include: co-operation with authorities; acceptance of responsibility; and restitution for victims. With respect to the Bureau’s Leniency Program, the Draft Bulletin provides that the Bureau’s recommendation for leniency will be directly proportionate to the contribution a leniency applicant makes to the Bureau’s investigation and the eventual prosecution.  Leniency may be available when the DPP has not yet filed charges and where the party has terminated its participation in the illegal activity; co-operates fully with the Bureau’s investigation and any subsequent prosecution by the DPP; and admits that it has engaged in the anticompetitive conduct which may constitute an offence under the Act and agrees, if charged by the DPP, to plead guilty and be sentenced for its participation in the illegal activity.

On April 30, the Scottish Government announced that Scottish Ministers and the Scottish Health Boards had reached settlement with Norton Healthcare Limited and Norton Pharmaceuticals Limited in relation to civil claims brought against the companies' alleged anti-competitive cartel conduct in connection with the supply to the National Health Service (NHS) of generic drugs.  In February 2005, Scottish Ministers and Scottish Health Boards lodged claims in the English civil courts against a number of companies, in connection with their participation in alleged price-fixing cartels in respect of certain generic drugs: warfarin, ranitidine and penicillin-based drugs.  Norton Healthcare Limited and Norton Pharmaceuticals Limited have now agreed with Scottish Ministers and Scottish Health Boards, on a full and final basis and without admission of liability, to pay £2,837,500 in compensation.  They will also provide co-operation in connection with the continuing civil claims against a number of other companies regarding the alleged price-fixing arrangements for a number of generic drugs.  The Scottish Ministers and Scottish Health Boards reached a similar settlement with Goldshield Group Plc, Goldshield Pharmaceuticals Ltd and Forley Generics Ltd in March 2008.  These companies also reached settlements with the Department of Health in relation to similar price-fixing allegations in England.

On April 25, the UK's Office of Fair Trading (OFT) announced that it had issued a statement of objections alleging that certain tobacco manufacturers and retailers have engaged in unlawful practices in relation to retail prices for tobacco products in the UK.  The allegations relate to arrangements between the manufacturers and retailers to link retail prices of a manufacturer's brand to that of a competing brand and, in relation to some of the companies only, the indirect exchange of retail pricing information. The OFT sent a statement of objections to two tobacco manufacturers (Imperial Tobacco and Gallaher) and 11 retailers (Asda, the Co-operative Group, First Quench (trading as Threshers), Morrisons, Safeway, Sainsbury, Shell, Somerfield, T&S Stores, Tesco and TM Retail).  The OFT notes that where it is seeking to attribute liability to other companies, such as parent companies within the same corporate group, it has also addressed the statement of objections to them.  The OFT alleges that certain tobacco manufacturers and retailers variously engaged in one or more unlawful practices in relation to retail prices for some or all of a number of tobacco products in breach of the Chapter I prohibition of the Competition Act 1998.  Its allegations relate to two practices.  First, arrangements between each manufacturer and each retailer to link the retail price of a manufacturer's brand to the retail price of a competing brand of another manufacturer.  The OFT considers that this restricted the ability of each of these retailers to determine its selling prices independently.  Second, in the case of Gallaher, Imperial Tobacco, Asda, Sainsbury, Shell, Somerfield and Tesco, the indirect exchange of proposed future retail prices between competitors.  The companies will now have the opportunity to make written and oral representations in response to the alleged case set out by the OFT in the statement of objections. Any such representations will be considered by the OFT before any final decision is made.

On April 17, the OFT announced that it had issued a statement of objections to 112 English construction companies.  The OFT alleges that the companies breached the Chapter I prohibition of the Competition Act 1998 by engaging in bid-rigging activities in response to tenders issued by both the public and private sector.  In particular, the companies are alleged to have engaged in cover pricing (colluding with competing bidders to obtain a price that is too high to win the contract) and, in some cases, compensation was paid to unsuccessful tenderers.  The OFT stated that it has received 37 leniency applications and that 40 other companies have also admitted participation in some alleged bid-rigging activities.

On April 4, the Belgian Competition Council imposed a total fine of €487,755 on participants in an alleged price-fixing and market-sharing cartel for the chemical BBP.  All alleged cartel participants were granted a reduction in fines under Belgium's Leniency Notice. This is the first time that the Belgian Competition Council has imposed a fine for a cartel in a case based on a leniency application.  According to the Competition Council's press release, the alleged cartel involved regular meetings lasting from 1994 to 2002.

On April 10, the Chilean Antitrust Court (Tribunal de Defensa de la Libre Competencia) fined Almacenes París and Falabella, two of the three major Chilean retailers, for alleged collusion and abuse of dominance, following charges filed by the National Economic Prosecutors Office (Fiscalía Nacional Económica) and Banco de Chile, the second most important bank.  This case started in 2006 when Banco de Chile alleged that both Falabella and Almacenes París applied unlawful pressure on several technology companies to prevent their participation in a highly publicized technology event organized by Banco de Chile.  At this event, clients of Banco de Chile would be offered substantial discounts and free of interest installment payment terms for purchasing technology products, prior to the beginning of the World Cup in Germany.  The event was ultimately cancelled by Banco de Chile on the basis that several providers declined to participate, despite their initial confirmation.  The main evidence relied on by the Antitrust Court included copies of several e-mails between the providers and the accused retailers, and phone calls registers that showed an increase in the total amount of traffic between executives of the two companies and between them and the providers.  Both companies were sentenced to pay fines which are high in terms of historic antitrust Chilean practice.  Falabella was fined approximately with U$8,000,000 and Almacenes París was fined U$5,000,000.  One of the main reasons given by the Antitrust Court for imposing such amounts was that the companies were repeat offenders. They have been convicted in the past for colluding to prevent the use in their stores of bank credit cards on items sold on free of interest installment conditions, in the context of a 2003 Christmas promotion.  Both companies have appealed the case to the Chilean Supreme Court.

On April 2, the French Competition Council, which had received a complaint from a consumers association, fined seven doctors' unions for alleged concerted practices between their members in order to raise the price of medical consultations.  These alleged practices occurred between the end of 2001 and the beginning of 2005.  The Council alleged that the trade unions  circulated instructions in order to encourage "sector 1" specialists (specialists subject to government price control as opposed to "sector 2" specialists who are not subject to such a control) to increase their fees by improperly using the so-called "exceptional exceeding" procedure (a procedure allowing sector 1 specialists, in particular and justified circumstances, to charge fees exceeding the price caps imposed by the State).  The "exceptional exceeding" procedure, normally has to be used with "tact and temperance".  According to the Competition Council, "sector 1" specialists have been able to compensate the lack of revaluation of the price caps fixed by the State Sickness Insurance Fund.  The Council held that the circulation by a medical union of collective instructions recommending doctors to resort to the "exceptional exceeding" procedure with the aim of increasing the fees amounted to price collusion.  It held that these alleged practices harmed the French national health system, and that the excessive fees to be borne by the patients added up to €180 million over the period.  The Competition Council fined the unions a total amount of €814 000.

Authored by:

Neil Ray

415.774.3269

nray@sheppardmullin.com