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On September 30, the FTC (with only 2 Commissioners sitting) announced that it reached a settlement that would allow Procter & Gamble Co.'s ("P&G") proposed $57 billion acquisition of a rival consumer products manufacturer, Gillette Co., to proceed. By a 2-0-2 vote, the Commission approved the merger so long as the companies divest assets ranging from toothbrushes to antiperspirants/deodorants. The divestitures are required to satisfy the FTC that competition will not be harmed following the transaction.
As is typical in merger reviews, the FTC staff focused on specific product overlaps to determine what assets needed to be divested to resolve the antitrust concerns. The specific assets to be divested include: Gillette's Rembrandt at-home teeth whitening business to a Commission approved buyer; P&G's Crest SpinBrush battery-powered and rechargeable toothbrush business to Church and Dwight; and Gillette's Right Guard men's deodorant business to a Commission approved buyer. In addition, P&G would be required to amend its joint venture agreement with Philips Oral Health Care, Inc. ("Philips") regarding the Crest Sonicare IntelliClean System rechargeable toothbrush.
Up-Front Buyer
Interestingly, the FTC did not require up-front buyers for Gillette's Rembrandt at-home teeth whitening business or Gillette's Right Guard men's deodorant business. In the recent past, the FTC has used up-front buyers as a vital tool in assuring that a buyer will successfully enter and restore competition fully. Up-front buyers are typically required when the FTC is concerned about whether the proposed asset package is adequate to maintain or restore competition or whether the asset package is sufficient to attract an acceptable buyer or buyers. For some time, however, it seemed as though the FTC was always requiring up-front buyers even in routine cases. Undoubtedly, the FTC will continue to require up-front buyers in many situations, but this decision demonstrates the FTC's willingness to approve mergers without requiring up-front buyers when they are not deemed necessary by the FTC. In those situations in which the FTC is concerned about the adequacy of the asset package or the possible lack of an acceptable buyer, the FTC will require an up-front buyer to minimize the risk that the divestiture remedy will be ineffective. When the merging parties can show that a good buyer will likely emerge, that the assets to be divested have been operated as a stand-alone business so that the buyer can maintain and restore competition after acquiring it, and that interim competition and the viability of the assets will be preserved pending divestiture, the FTC may not require an up-front buyer.
Category Captain
The other noteworthy issue regarding the FTC's evaluation of P&G's acquisition of Gillette is that the FTC analyzed portfolio effects and category management roles for the potential to increase the anticompetitive effects of the combination at the retail level. The retail practices of category management have come under increased antitrust scrutiny over the past several years in the context of monopolization cases. While the FTC has analyzed these issues in the past through workshops and investigations, this is the first time that the FTC has publicly acknowledged that category management practices are a potential concern in a merger review.
The FTC's press release and the Commission's Analysis to Aid Public Comment indicate that the FTC staff investigated whether the combined entity would have an increased ability to take advantage of its position as a "category manager" or "category captain" for retailers. A category manager is chosen by a retailer to assist in providing a plan for shelf space positioning of a certain category of products. Typically, a retailer chooses a number manufacturers to help manage a given retail product category by providing information about shelf space position and in-store marketing. Moreover, the category manager assists in the stocking, selection, and display of a certain category of products.
In this merger review, the FTC staff investigated whether P&G through its acquisition of Gillette would have an increased ability to exploit its position as a category manager in order to obtain premium retailer shelf space and potentially exclude or disadvantage competitors in various broad categories, like oral care or deodorants. The FTC staff concluded that most retailers do not look at broad categories, like oral care and deodorants when they decide which products to stock and sell. Retailers make decisions on individual products and the FTC staff found that retailers choose different suppliers for different products. The FTC staff also discovered that most retailers employ different category captains to assist them on a product by product basis within broad categories and that retailers normally do not choose one supplier to be a category captain of a broad category of products.
Observations
The merger investigation of P&G's acquisition of Gillette indicates that the FTC staff is willing to work with merging parties and does not always require an up-front buyer. Although it appears as if the FTC always requires up-front buyers in merger review of certain industries, the decision to require an up-front buyer is dependent upon the circumstances of each individual case so merging parties have the opportunity to make their case of why an up-front buyer should not be required. The investigation also indicates that the FTC staff will listen to complainants regarding anticompetitive theories relating to portfolio effects and category management issues in future merger reviews. However, the conclusions from the investigation indicate that complainants continue to face an uphill battle when making these arguments. That being said, every merger review is fact specific and now the FTC has indicated a willingness to evaluate whether a merger could increase a category manager's power to exploit its position. This means that merging parties and third parties potentially harmed by mergers that arguably increase the power of a category captain must evaluate these issues as part of the overall competition assessment.
Authored by:
Andre P. Barlow
202-218-0026
abarlow@sheppardmullin.com
Pursuant to a proposed consent judgment, filed by the Department of Justice on behalf of the Federal Trade Commission, in the U.S. District Court for the District of Columbia, a Connecticut-based hedge fund manager will be required to pay $350,000 in civil penalties to settle charges that he failed to make four premerger notification filings required by the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act").
The HSR Act established a premerger notification system which requires the parties to acquisitions meeting certain size tests to file premerger notifications with the Federal Trade Commission and the Antitrust Division of the Department of Justice and to observe a waiting period before consummating the acquisition. The notification and waiting period are intended to give the federal antitrust agencies prior notice of and information about such acquisitions, and an opportunity to investigate and determine whether or not to challenge the proposed transaction before it is closed.
The federal antitrust agencies have promulgated Rules to carry out the purposes of the HSR Act. Among other things, the HSR Rules contain several reporting thresholds. A person who specifies a lower reporting threshold in an HSR notification form must comply with the Act's notice and waiting period requirements again before crossing a higher threshold. The HSR Act provides that any person who fails to comply with any provisions of the Act is liable for a civil penalty of up to $11,000 per day for each day of the violation.
According to the government's complaint, Scott R. Sacane controlled Durus Capital Management (N.A.), LLC ("Management") because he was entitled to more than 50% of the profits of Management. In turn, Management controlled Durus Life Science Master Fund Ltd. ("Master Fund") by reason of having the contractual power to designate a majority of the board of directors of Master Fund. Thus, Sacane was an "ultimate parent entity" of Master Fund within the meaning of the HSR Act Rules.
As can happen under the HSR Rules, the government alleged that Master Fund had a second ultimate parent entity, Durus Life Sciences Fund, LLC ("Durus"), which was managed by Management. According to the complaint, Durus held more than 50% of the voting securities of Master Fund, thus making it also an ultimate parent entity of Master Fund.
The Government's complaint alleged that, on February 24, 2003, Master Fund acquired voting securities of Aksys, Ltd. ("Aksys") valued at approximately $51.4 million, exceeding the HSR Rules then in effect $50 million reporting threshold, without either Sacane or Durus filing the required notification form or observing the waiting period. On April 24, 2005, Master Fund acquired additional voting securities of Aksys bringing its holdings to approximately 50.1%, thus exceeding another reporting threshold of the HSR Rules. Again, neither Sacane nor Durus filed the required notification form or complied with the HSR Act's mandatory waiting period.
About July 23, 2003, Sacane's counsel raised questions with him regarding the reportability of the Aksys acquisitions under the HSR Act. As a result, on August 29, 2003, Sacane submitted two HSR Act notifications on behalf of Durus, but none on behalf of himself. In January, 2005, the FTC informed Sacane that he also was an ultimate parent entity of Master Fund and Sacane submitted two premerger notification forms for the Aksys acquisitions on April 1, 2005. Therefore, the complaint charged Sacane with being continuously in violation of the HSR Act from February 25, 2003 through May 2, 2005.
On March 24, 2003, Master Fund acquired voting securities of Esperion Therapeutics, Inc. ("Esperion") valued at approximately $50.4 million, exceeding the HSR Rules' then $50 million reporting threshold. Master Fund continued acquiring additional shares of Esperion, and on June 3, 2003, its holdings totaled approximately $102.3 million, exceeding the HSR Rules' then $100 million threshold. In neither case did Sacane or Durus file a premerger notification form or observe the HSR Act's mandatory waiting period.
As with the Aksys acquisitions, Sacane's counsel raised questions regarding the reportability of the Esperion acquisitions under the HSR Act. On August 29 2003, Sacane submitted two HSR notifications on behalf of Durus, but none on behalf of himself. As previously noted, in January, 2005, the FTC informed Sacane that he also was an ultimate parent entity of Master Fund and, on April 1, 2005, Sacane submitted two premerger notification forms for the Esperion acquisitions. The complaint alleged that Sacane was in continuous violation of the HSR Act with regard to the Esperion acquisitions from March 24, 2003 through May 2, 2005.
In commenting upon the proposed consent judgment, the Director of the FTC's Bureau of Competition stated that the civil penalty imposed upon Sacane should put hedge funds, their managers, and securities traders on notice that they are not exempt from the premerger notification requirements of the HSR Act. She noted that Sacane "is an experienced fund manager who should have known and fulfilled his obligations" under the HSR Act.
This case also is an excellent example of why anyone who is a party to an acquisition that approaches the HSR Act's minimum reporting threshold (now $53.1 million) should seek the advice of experienced HSR counsel. For it appears that, while Sacane's counsel apparently recognized that the Aksys and Esperion transactions were required to be reported under the HSR Act, counsel failed to recognize that Sacane was an ultimate parent entity of Master Fund and had to comply with the report and waiting period requirements of the Act. It was an oversight that cost Sacane $350,000 in civil penalties.
Authored by:
Robert L. Magielnicki
202-218-0002
rmagielnicki@sheppardmullin.com
People's Choice Wireless, Inc. v. Verizon Wireless, B175179.
In a case building upon the definition of "unfair" as defined in the California Unfair Practices Act1, plaintiffs, independent dealers of cellular phones ("Independent Dealers") alleged that defendant Verizon Wireless ("Verizon") engaged in unfair competition within the meaning of Business and Professions Code Section 17200 by (1) refusing to sell popular, new cellular telephone models to the Independent Dealers during an extended "holdback" period, and (2) selling cellular telephones to customers below cost in certain circumstances, where because of a change in Verizon's sales policies, the Independent Dealers could not afford to compete. The Independent Dealers brought an action for injunctive relief pursuant to California Business and Professions Code Section 17203.
The trial court sustained a demurrer to an amended complaint without leave to amend, and the Court of Appeals, 2d Appellate District affirmed. The court held that while the practices alleged to be "unfair" may have injured the Independent Dealers as competitors, the practices were lawful unilateral refusals to deal, and thus protected by the Colgate doctrine.2 The court cited Verizon Communications, Inc. v. Law Offices of Curtis V. Trinko, LLP3 as having "revisited" Colgate, and having extended broad approval to the "long recognized right of [a] trader or manufacturer engaged in an entirely private business, freely to exercise its own independent discretion as to parties with whom he will deal."4 In Trinko, the Supreme Court explained that the "opportunity to charge monopoly prices - at least for a short period - is what attracts business acumen in the first place; it induces risk taking that produces innovation and economic growth."5 In effect, the Court of Appeals considered the Independent Dealers to be "free riders" on the unilateral business endeavors of Verizon and its wholly-owned and operated stores. Thus, while Verizon's trade policies, and its changes of position, may have injured the Independent Dealers, as competitors, Verizon had an almost unfettered right to do so, and accordingly, may have injured competitors, but did not injure competition. Through its analysis of Trinko, Colgate has been elevated to a new level, as a limitation on the duty of an alleged monopolist to deal with competitors.
Verizon sells cellular telephones through wholly-owned and operated stores to consumers below cost, if the consumer agrees to purchase telephone service for a set period of time, usually one to three years. Verizon also subsidizes the cost of the purchase of cellular telephones, if the customer wishes to upgrade to a new phone. At Verizon's request, the providers of the cellular telephones, including Motorola, Nokia and Sony, manufactured phones exclusively for Verizon, to be solely compatible with its telephone network. The manufacturers agree to sell new models to Verizon on an exclusive basis for a specified period of time, normally three to six months. During this period, the Independent Dealers could not purchase new models from the manufacturers. However, they could purchase the same phones directly from Verizon. Most consumer purchases occur within the exclusivity period.
The Independent Dealers can only match the prices being charged for cellular telephones in the Verizon stores by giving away accessories, including headsets and carrying cases, at no charge to the consumer.
However, even during the exclusivity period, Verizon imposed a two-week "holdback" period, whereby it would refuse to make its most popular new models available to the Independent Dealers. During the "holdback" period, Verizon released these models to its wholly-owned and operated retail stores, but not to the Independent Dealers.
When the Motorola T720 and the Blackberry 6750 came to market, however, Verizon extended the "holdback" period from two months to in excess of four months. Plaintiffs alleged that the "holdback" period was intended to and had the effect of preventing price competition. Therefore, they alleged, it was "unfair" under Cel-Tech.
Verizon had a commission structure which treated the Independent Dealers relatively equally within its wholly-owned stores. Verizon subsidized the cost of new cellular telephones only for customers who have fulfilled at least one year of the service contract. On a parallel basis, Verizon paid a commission to the Independent Dealers whenever they obtained a service contract renewal from customers who had fulfilled at least one year of their existing service contract.
In December 2002, however, Verizon began to subsidize all new cellular phones sales, notwithstanding that the customer had not fulfilled at least one year of his or her service contract. However, it did not change the commission schedule applicable to the Independent Dealers. Thus, the Independent Dealers were at a disadvantage, and were unable to engage in price competition with the Verizon operated stores. The Independent Dealers urged that the changes in business practices were tantamount to the "lock-in" feature of Eastman Kodak Co. v. Image Technical Services, Inc.6 It also analogized the practices to the changes in position in Aspen Skiing Co. v. Aspen Highlands Skiing Corp.7
In People's Choice Wireless, Inc. v. Verizon Wireless, California Court of Appeals (2d Dist.), No. B175179, issued on July 28, 2005, the court rejected the Eastman Kodakand Aspen Skiing analogies. It noted that in Trinko, Justice Scalia identified Aspen Skiing as being "at or near" the outer boundary of [Section 2] liability.8 The Court of Appeal noted further that in Eastman Kodak, the original equipment purchasers of Kodak equipment were "locked-in", as there were no substitutes for Kodak parts used in Kodak equipment. Thus, Kodak controlled nearly 100% of the parts market and 80% - 95% of the service market of its own "installed base". There were no readily available substitutes, and this was sufficient to suggest that Kodak was able to exercise market power over the purchase of parts and service for its own line of xerographic equipment.
Here, however, the Court of Appeals found no corresponding market power that could have been enjoyed by Verizon to foreclose competition, gain a competitive advantage, or to destroy a competitor. In contrast, the relevant market was comprised of all cellular telephones, and there was no allegation that Verizon had monopolized that market or any related market. There were service providers other than Verizon, including T-Mobile and Cingular, and phone manufactures such as Motorola, Nokia and Sony. The only meaningful allegation in the complaint was that the Independent Dealers were denied the ability to sell the most popular new Verizon models for a limited period of time.
Thus, the Court of Appeals inferred from the complaint that plaintiffs' ability to sell other brands was unfettered, and that consumers still had a wide variety of choices on what and where to buy. On this basis, the Court of Appeal held that the only complaint that the Independent Dealers had was on "intrabrand" and not "interbrand" price competition. The court concluded that it was a "logical deduction" from the complaint that while the Independent Dealers could not undercut Verizon's prices on popular new Verizon cellular telephone models during the limited "holdback" period, they could still undercut Verizon's prices with respect to the competing brand models acquired from other manufacture and service providers.
However, the lynch-pin of the court's decision is that in the absence of an abuse of monopoly power in a relevant market, the case involved nothing more than a permissible unilateral refusal to deal with the Independent Dealers, protected by Colgate. The court held that "boiled down," the Independent Dealers position was that the trial court failed to limit the application of Colgate, as against other antitrust policies. Again, borrowing from Justice Scalia's opinion in Trinko, the court held that the Independent Dealers had failed to appreciate that antitrust policy attempts to balance the benefits of protecting and fostering economic incentives for entrepreneurs to pursue innovative business practices, with the benefits procured for consumers. The court held that the trial court had found the "right balance", and held further that based upon the "special heed" of Trinko, "we should be cautious before creating exceptions to the conduct allowed by Colgate.9
The court agreed with the Independent Dealers that Cel-Tech does not require that there be an antitrust violation in order to state a cause of action for injunctive relief pursuant to Business and Professions Code Section 17203. Nevertheless, the court held that it was constrained to look at the alleged impact of the conduct on competition, and to consider any "counter vailing policies".10
Even assuming that the Independent Dealers were correct that Verizon's conduct reduced both consumer choice and price competition, there was no perceived threat or harm to the competitive process. The court stated:
"[T]here may be a reduction in intrabrand competition regarding some Verizon cellular telephones for short periods of time, but there is no reduction in interbrand competition.… What shines through more clearly … is that Verizon's conduct has injured the independent dealers. But as Cel-Tech teaches, injury to competitors is not the same thing as injury to competition, and we may only consider the latter."11
As a final death-knell to the Independent Dealers amended complaint, the court noted that:
"The bottom line is, the Independent Dealers want to prevent Verizon from discounting in situations where they themselves could not discount. This means that if the Independent Dealers cannot share the wealth, they want a court to force certain Verizon customers to pay higher prices. What antitrust policy would be in play here?"12
Finally, the court noted that Section 1 of the Sherman Act was not implicated in the decision. This is because the conduct involving Verizon and its wholly-owned and operated cellular telephone stores was "wholly unilateral", and thus governed by the single entity standard of Copperweld.13 The court thus distinguishes Eiberger v. Sony Corp.,14 and cases involving discrimination between competing downstream distributors. As independent downstream distributors are lacking, Eiberger is inapplicable, and the case is governed by Copperweld. The court notes that a single firm must pose a danger of actual monopolization in a properly defined relevant market. Here, there is no such danger, and accordingly, there is nothing that would trigger the application of Cel-Tech.15 In the last analysis, the court finds that Justice Scalia's elevation of Colgate, in Trinko, and its limitation of the duty of even an alleged monopolist to deal with its rivals, drives the analysis, and accordingly, the amended complaint failed to state a cause of action under the California Unfair Competition Act.
Authored by:
Don T. Hibner, Jr.
213-617-4115
dhibner@sheppardmullin.com
On September 23, 2005, the European Competition Commissioner, Ms. Neelie Kroes, delivered a speech to the Fordham Corporate Law Institute, New York, on the policy review of Article 82 of the EC Treaty. Article 82 deals with unilateral conduct by a corporation with market power which restricts competition on the market, and is the EU's equivalent of Section 2 of the Sherman Act in the US.
The European Commission, in its policy review of Article 82, does not intend to propose a radical shift in enforcement policy, but rather to develop and explain theories of harm on the basis of a sound economic assessment for the most frequent types of abusive behavior, in order to make it easier to understand Commission policy.
Going forward, Article 82 enforcement will focus on behavior that has actual or likely restrictive effects on the market, which harm consumers. European enforcement agencies will be cautioned at the national level about intervening in the functioning of markets unless there is clear evidence that they are not functioning well. Ms. Kroes stated that national enforcement agencies don't have unlimited resources, and need to focus their efforts on what makes a real difference.
The speech set out a number of issues that are being considered in the policy review debate. With respect to assessing dominance and market power, the Commission will conduct a detailed analysis of key issues such as the market position of the allegedly dominant company, the market position of competitors, barriers to expansion and entry, and the market position of buyers. Ms. Kroes recognizes that high market shares are not on their own sufficient to conclude that a dominant position exists and risks failing to take proper account of the degree to which competitors can constrain the behavior of the allegedly dominant companies.
The Commission's first round policy review will focus on exclusionary abuses since exclusion is often at the basis of later exploitation of customers, and will leave exploitary abuses for the second round of its review. The Commissioner declared her philosophy as being that it is competition, and not competitors, that should be protected.
I like aggressive competition - including by dominant companies - and I don't care if it may hurt competitors - as long as it ultimately benefits consumers. That is because the main and ultimate objective of Article 82 is to protect consumers, and this does, of course, require the protection of an undistorted competitive process on the market.
Ms. Kroes confirmed that exclusionary abuses may be both price based and non-price based. Examples of non-price based abuses include contractual tying, "naked" refusals to supply, and single-branding obligations. In these cases, the question is whether such exclusion may be characterized as anticompetitive, namely, impacting not only competitors, but also competition in the market.
Similar exclusionary effects may be achieved through pricing. High stand-alone prices in comparison to a low bundled price for two products may "tie" these two products together as effectively as contractual tying. Predatory pricing is meant to exclude competitors, but low prices and rebates will be accepted if they are beneficial to consumers. Ms. Kroes mentioned that one possible Commission approach to pricing abuses may be based on the premise that only the exclusion of "equally efficient" competitors is abusive. The benchmark for "as efficient" will be the costs of the dominant company except where it is not possible to determine such costs, or when the dominant company, for instance in a newly liberalized market, has some "first-mover advantages" that later entrants cannot be expected to match.
Finally, Ms. Kroes discussed the widely-debated issue of whether there should be an "efficiency defense" under Article 82. Currently, efficiencies are taken into account under Article 81 of the EC Treaty and under the EC Merger Regulation, but not under Article 82. The Commissioner stated her view that efficiencies should be taken into account under Article 82, and that it is for a dominant company to demonstrate that four conditions are fulfilled. First, the claimed efficiencies should be realized or be likely to be realized as a result of the conduct concerned. Second, the unilateral conduct should be indispensable to realize the efficiencies. Third, the efficiencies should outweigh the negative effects of the conduct concerned. Finally, competition in respect of a substantial part of the products concerned must not be eliminated.
The Commissioner concluded her speech by remarking that the above approach will have the advantage of being based on solid economic thinking. At the same time it will give a clear indication to companies as to when they are on safe ground, and maintain workable enforcement rules.
Authored by:
Neil Ray
415-774-3269
nray@sheppardmullin.com
A lawsuit brought by MFS Securities Corp. and its owner, Marco Savarese, against the New York Stock Exchange was properly dismissed, the Second Circuit recently held, where plaintiffs failed to state an antitrust claim when they failed to allege any anticompetitive effects of the NYSE's termination of MFS's membership in the Exchange.
Plaintiffs filed their complaint in 2000, following the arrests of MFS's brokers, Savarese's two sons, for their alleged role in a scheme involving "trading ahead" of MFS's customers. On May 20, 1999, the brokers pleaded guilty to a conspiracy to violate federal securities laws. U.S. v. The Oakford Corporation, 79 F.Supp. 2d 357, 359 (S.D.N.Y. 1999). Following the arrests, the Exchange summarily suspended the brokers, the sole members affiliated with MFS, and terminated MFS's membership in the Exchange.
MFS's antitrust claim was that the Exchange's termination of MFS's membership constituted an illegal group boycott. The district court granted the Exchange's motion to dismiss the antitrust claim on the grounds that antitrust claims against self-regulating securities exchanges are evaluated under the "rule of reason" and MFS failed to state any facts showing the Exchange's action to be an unreasonable restraint on competition. MFS Sec. Corp. v. New York Stock Exch., No. 00 Civ. 5600, 2001 WL55736, 2001 U.S. Dist. Lexis 420 (S.D.N.Y. Jan. 23, 2001). On initial review, the Second Circuit vacated the district court's holding based on the "primary jurisdiction" doctrine, and remanded to the district court and instructed it to stay proceedings pending the Exchange's review of MFS's termination. MFS Sec. Corp. v. New York Stock Exch., 277 F.3d 613 (2d Cir. 2002).
On remand, the Exchange dismissed MFS's application for review of its termination on the grounds that MFS failed to exhaust all administrative remedies provided by the Exchange. MFS then unsuccessfully petitioned the Second Circuit for review and then proceeded to renew its antitrust claim before the district court. The Exchange, for its part, renewed its motion to dismiss which the court granted.
On review, the Second Circuit affirmed the district court's dismissal. Quoting from the district court's decision, the Second Circuit wrote in its unpublished decision that "[w]hile in many circumstances allegations of a group boycott state a 'per se' violation of the antitrust laws, the statutorily imposed 'anticompetitive' obligation of a self-regulating securities exchange under the Securities Exchange Act to define and limit membership and enforce Exchange rules against members mandate application of the 'rule of reason,' rather than a per se analysis, when a group boycott is alleged against a securities exchange." 2001 WL55736, at *1, 2001 U.S. Dist. Lexis 420, at *1-*2. This holding relies on the Supreme Court's decision in Silver v. New York Stock Exch., 373 U.S. 341, 360 (1963). In Silver, the Supreme Court held that although the statutory scheme of the Securities Exchange Act of 1934 is not sufficiently persuasive to create a total exemption from the antitrust laws, particular instances of Exchange self-regulation that fall within the scope of purposes of the Act may be regarded as justified in answer to the assertion of an antitrust claim. Id. at 360-61.
Applying the rule of reason and in the absence of allegations by MFS of the anticompetitive effects of the alleged illegal group boycott, the Second Circuit held that MFS failed to state a claim under the antitrust laws. Dismissal of MFS's antitrust claim, the Second Circuit held, was proper.
Authored by:
Heather M. Cooper
213-617-5457
hcooper@sheppardmullin.com
In the magazine distribution business, wholesalers purchase magazines from distributors and resell them to retailers. In the early 1990's, magazine wholesalers operated in defined geographic territories, facing little competition from other wholesalers. Large chain retailers with businesses in many territories, however, desired wholesalers who were capable of serving multiple or all of their retail outlets across geographic territories. The chains began shifting business to such wholesalers and inviting bids from them for contracts wherein the chains would agree to a multi-year commitment in exchange for discounted prices. One wholesaler, Charles Levy Circulating Co. ("Levy"), allegedly gained a large share of the market by entering into such contracts with the chains. Many other wholesalers, however, either went out of business or experienced declining profits as this new trend took hold.
Some of the wholesalers competing with Levy brought suit against the magazine distributors, alleging that the distributors engaged in price discrimination in violation of Robinson-Patman Act §2(a) by providing secret discounts, rebates, other payments, services of value and other benefits to Levy. In December 2004, on a motion for summary judgment, the Southern District of New York dismissed all of the plaintiffs' theories of price discrimination except plaintiffs' claim that the defendant distributors' magazine return polices resulted in price discrimination with Levy as the favored purchaser and the plaintiffs as the disfavored purchasers. The court stated that the plaintiffs would prevail on their return policy claim if they showed that the defendants' return policies affected the price for magazines, that the policies in fact resulted in discriminatory prices, and that any such discriminatory pricing is attributable to the distributors and not the publishers. On September 22, 2005, however, the Southern District, in United Magazine Co. v. Murdoch Magazines Distribution, Inc., S.D.N.Y., No. 00 civ. 3367 (PKC), dismissed plaintiffs' return policy theory on a motion for summary judgment.
The plaintiffs' return policy theory was essentially that the distributors allocated more magazines to the plaintiffs than Levy with knowledge of what percentage of these magazines would sell so that the plaintiffs would have a higher proportion of unsold magazines they would have to return. The plaintiffs argued that this damaged them because they had to absorb the cost of laying out these extra magazines and returning them when they didn't sell. The defendants responded with evidence that they did not discriminate in the allocation of magazines they made to wholesalers and that differences between wholesalers in what proportion of magazines they were able to sell were not attributable to the distributors. The plaintiffs responded that the distributors gave Levy "assistance so that its labor would be less by handling fewer magazines…which resulted in substantial savings over what Plaintiffs were required to spend thereby increasing Plaintiffs' costs for the same magazine titles."
The court held that plaintiffs' return policy theory simply did not state a viable claim under Section 2(a) of the Robinson-Patman Act. The Act forbids price discrimination and "price" has been defined as the "'net price received by the seller from the two buyers in question'" (quoting Conoco, Inc. v. Inman Oil Co., 774 F.2d 895, 902 (8th Cir. 1985)). In the words of the court, "The fact that a purchaser may incur expenses not incurred by a competitor may increase the purchaser's costs, or reduce their profits, but it does not change the net price paid by either the purchaser or the competitor to the seller." Further, the plaintiffs' claim could not be sustained under the theory that there was "indirect" price discrimination. The "indirect" price discrimination that is actionable under the Robinson-Patman Act is limited to rebates, discounts, free goods, promotional payments, or some form of compensation given by the seller to the buyer. In this case, the purported assistance given to Levy did not appear to be a form of compensation. In fact, the court observed, even if the plaintiffs' theory was legally cognizable, the plaintiffs offered no evidence at all as to the form of the purported assistance given to Levy to reduce its handling costs. Thus, the defendants were entitled to summary judgment.
An alternative ground for the court's ruling was that the plaintiffs failed to raise a triable issue of fact as to whether they suffered antitrust injury. In Robinson-Patman Act cases, the plaintiff must show a causal connection between the illegal price discrimination and the injury suffered. There must be some direct evidence of this relationship. Plaintiff's theory in this case was that the discriminatory pricing policy caused "price erosion," which the plaintiffs defined as "'decline of Plaintiffs' margins.'" The only evidence proffered by the plaintiffs for this theory was a declaration of the Vice Chairman of one of the plaintiff wholesalers, David Thompson. In his declaration, Thompson stated that the competitive nature of the industry required the plaintiffs to always meet Levy's price because they had to assume Levy was an actual or prospective competitor and that, in doing so, plaintiffs had to lower their profit margins on all of their bids since 1996 in order to offset the Levy's discriminatory price advantage. The court noted that a self-serving affidavit that reiterates conclusory allegations is insufficient to survive a summary judgment motion. The court also noted that Thompson's statement that the plaintiffs had been lowering their profit margins since 1996 to offset Levy's discriminatory price advantage directly contradicted his own prior deposition testimony that the plaintiffs did not know that Levy was obtaining a lower price until 2003. Finally, the plaintiffs did not refute evidence produced by defendants that the declining margins throughout the magazine wholesaling industry were attributable to substantial unrelated factors. Indeed, Thompson's affidavit acknowledged that the profit margins on the plaintiffs' bids were falling even in the absence of any knowledge that Levy was competing in their markets or receiving favorable pricing from the defendant. Thus, in light of the lack of any serious evidence in support of a causal relationship between the alleged price discrimination and plaintiffs' declining profit margins, the court was confident in its conclusion that dismissal of plaintiffs' claim on summary judgment was proper.
Authored by:
Anik Banerjee
213-617-4124
abanerjee@sheppardmullin.com
- On October 18, the DOJ announced a settlement in connection with Cal Dive International's acquisition of assets from Stolt Offshore, Inc., which requires Cal Dive to make certain divestitures to preserve competition in the market for saturation diving services in the U.S. Gulf of Mexico. According to the DOJ's complaint, Cal Dive and Stolt are two of only three major providers of saturation diving services in the Gulf. The proposed transaction would have eliminated Stolt as a competitor and given Cal Dive more than half of the capacity in the market. Under the terms of the proposed consent decree, Cal Dive must divest two vessels and a separate saturation diving system.
- On October 25, the Sixth Circuit reversed the District Court's grant of summary judgment in favor of defendant Dairy Farmers of America, Inc. ("DFA") in the DOJ's challenge to DFA's partial acquisition of Southern Belle Diary Co. The Sixth Circuit held that the district court was required to rule on the legality of the parties' original agreement because defendants had not met their burden of demonstrating that such a claim was moot. In assessing the partial acquisition claim, the Sixth Circuit explicitly rejected the lower court's conclusion that a lack of control or influence precludes a Section 7 violation, and held that the government had presented sufficient evidence to raise a genuine issue of material fact regarding whether DFA's acquisition of Southern Belle violated Section 7 under both the original and revised agreements. The key proposition is that a 50% passive ownership interest in a competitor may raise anticompetitive concerns even if the passive interest has no voting rights. Here, even though the partial acquisition does not give the buyer control, the Sixth Circuit ruled that the government should be able to show evidence that the aligned interests between the DFA and Southern Belle could result in anticompetitive effects.
- On October 27, the DOJ approved the SBC/AT&T and Verizon/MCI mergers after SBC and Verizon each agreed to divest connections to more than 350 buildings in their respective territories in order to remedy the Division's concerns about competition for certain business customers. The DOJ's press release highlights the agency's conclusion that, other than limited divestitures in various markets, the transactions were procompetitive and promised "exceptionally large merger-specific efficiencies."
Authored by:
Andre P. Barlow
202-218-0026
abarlow@sheppardmullin.com
- Under the terms of an initial decision and order issued by Chief Administrative Law Judge Stephen J. McGuire on October 17, 2005, and announced by the Federal Trade Commission on that day, Evanston Northwestern Healthcare Corporation ("ENH"), located in Evanston, Illinois, must sell Highland Park Hospital ("Highland Park") within 180 days. ENH was formed in January 2000, as a result of Evanston Hospital ("Evanston") and Glenbrook Hospital's ("Glenbrook") acquisition of Highland Park, which is located on Chicago's North Shore. According to Judge McGuire's decision, which upheld Count I of an administrative complaint issued by the FTC in February 2004, ENH's acquisition of Highland Park has resulted in "substantially lessened competition" and higher prices for insurers and healthcare consumers for general acute care inpatient services sold to managed care organizations in the geographic market defined by the ALJ.
In January 2000, ENH acquired Highland Park in a transaction valued at more than $200 million. The acquisition combined ENH's Evanston and Glenbrook Hospitals - located in Cook County, Ill. - with Highland Park, the nearest hospital to the north. With Highland Park added to its existing hospitals, ENH became a more significant provider of health care services to payers who needed hospital access in northeast Cook County and southeast Lake County, Ill. The administrative complaint alleged that following the acquisition, ENH was able to raise its prices far above price increases of other comparable hospitals as a result of the transaction. According to the complaint, ENH's acquisition of Highland Park resulted in significantly higher prices charged to health insurers, and therefore higher costs to insurance purchasers and hospital services consumers. The complaint alleged that the merger violated the Clayton Act, based on an analysis conducted under the Horizontal Merger Guidelines and on the actual competitive effects, in the form of higher prices actually charged by ENH after the merger. The complaint contemplated a remedy to restore competition to the benefit of consumers seeking competitively priced health care.
The judge's initial decision in this matter is subject to review by the full Commission on its own motion, or at the request of any party. If an appeal from the initial decision is not received within 30 days after it is served, or 30 days after a timely notice of appeal is filed, whichever is later, and the Commission does not take certain other actions detailed in its Rules, the initial decision will become the decision of the Commission.
- On October 25, the Federal Trade Commission and the Department of Justice's Antitrust Division held a one-day joint workshop entitled "Competition Policy and the Real Estate Industry." Prompted by the substantial changes in the real estate brokerage marketplace and consumers' interest in a competitive real estate brokerage industry, the workshop covered such topics as new and innovative brokerage business models, multiple listing services, and the implications of state-imposed minimum-service requirements.
- On October 20, the Federal Trade Commission and U.S. Department of Justice issued a joint letter urging the Michigan Senate Committee on Economic Development, Small Business, and Regulatory Reform to reject House Bill 4849 as currently drafted, as the legislation would reduce consumer choice and cause Michigan consumers to pay more for real estate brokerage services. According to the letter, the bill would change current law to restrict the ability of licensed real estate brokers to offer consumers the option to pick the specific brokerage services they want. Currently, Michigan home sellers and buyers can choose between a traditional, full-service package of real estate brokerage services and a fee-for-service option that allows home sellers and buyers to purchase individual services from an a lá carte menu. If the bill becomes law, customers will be forced to buy potentially unwanted additional services. The joint FTC/DOJ letter stated the bill would likely harm competition in two ways. First, consumers who live in areas where real estate professionals are required to enter into exclusive brokerage agreements before they can post listings on the MLS will have to purchase these additional services, and can expect to pay more. Second, without competition from fee-for-service brokers, the prices for traditional, full-service packages likely will increase.
- On October 19, an interagency task force requested comments from the public pertinent to a study of competition in wholesale and retail electric energy markets required by the Energy Policy Act of 2005. The task force, comprised of representatives from the Federal Trade Commission, Federal Energy Regulatory Commission, the Department of Energy , the Department of Justice, and the Department of Agriculture, is to deliver its report to Congress in August 2006.
A notice from the task force, requesting public comments, appeared in the Federal Register on or about October 19, 2005. The notice invites interested parties to respond to questions pertaining to participation in wholesale electricity markets, generation ownership, generation adequacy, transmission investment and regulation, and the transparency and availability of information concerning wholesale electricity markets. The notice also invites responses to questions concerning experiences with retail choice, retail service providers, demand-side participation, and the impacts of changing fuel prices on retail markets. The task force will draw upon these responses to prepare a report that will analyze and report to Congress on the critical elements for effective wholesale and retail competition, the status of each element, impediments to realizing each element, and suggestions for overcoming these impediments.
The members of the task force are:
- Michael Bardee, Associate General Counsel, Federal Energy Regulatory Commission
- J. Bruce McDonald, Deputy Assistant Attorney General, Antitrust Division, U.S. Department of Justice
- Karen Larsen, Office of Assistant Administrator, Electric Programs, Rural Utilities Service, U.S. Department of Agriculture
- David Meyer, Deputy Director, Division of Permitting, Siting, and Analysis, Office of Electricity Delivery and Energy Reliability, U.S. Department of Energy
- Michael Wroblewski, Assistant General Counsel for Policy Studies, Federal Trade Commission
- On October 4, the Federal Trade Commission accepted for public comment an order resolving the competitive issues raised by DaVita, Inc.'s ("DaVita") proposed $3.1 billion purchase of rival outpatient dialysis clinic operator Gambro Healthcare Inc. ("Gambro") from Gambro AB. Pursuant to the order, DaVita will sell 69 dialysis clinics and end two management services contracts in 35 markets across the United States within 10 days of consummating its purchase of Gambro. The Commission has approved Renal Advantage Inc. as the buyer of most of the clinics to be divested, and entered into an order to maintain assets with DaVita to ensure that the assets are maintained as competitive and viable entities pending their sale and transfer.
The consent agreement is designed to remedy the alleged illegal anticompetitive impact of DaVita's acquisition of Gambro. It requires DaVita - within ten days of acquiring Gambro - to divest 68 outpatient dialysis clinics to Renal Advantage and one outpatient dialysis clinic to its medical directors and their partners. The agreement also requires DaVita to end two management services agreements through which it manages outpatient dialysis clinics on behalf of third-party owners. Ending such agreements will result in the clinics remaining viable independent competitors after the acquisition of Gambro.
In addition, DaVita is required to ensure that the medical directors affiliated with the divested clinics will continue providing physician services after the assets are transferred to Renal Advantage, and to take other steps to ensure Renal Advantage will have the necessary assets to operate the divested clinics in a competitive manner. Specifically, to ensure the divestitures are successful, the consent agreement provides Renal Advantage with the opportunity to interview and hire employees affiliated with the divested clinics and prevents DaVita from offering the employees incentives to keep them from joining Renal Advantage. The agreement also prevents DaVita from contracting with the medical directors (or their practice groups) affiliated with the divested clinics for three years, which will provide Renal Advantage with the time necessary to build goodwill and working relationships with these directors.
To ensure the continuity of patient care and records as Renal Advantage implements its new systems, the agreement allows DaVita to provide transition services to Renal Advantage for one year. It also requires DaVita to provide Renal Advantage with a license to use DaVita's policies and procedures, as well as the option to obtain DaVita's medical protocols, which will further enhance Renal Advantage's ability to provide continuity of patient care. The agreement also provides that after the divestitures, DaVita is prohibited for two years from directly soliciting Renal Advantage clinic patients and from attempting to hire the Renal America clinic employees. Finally, the agreement requires DaVita to alert the FTC before it buys any dialysis clinics in the 35 markets addressed in the consent order to ensure continued competition in these markets in the future.
- On May 6, Magellan Midstream Partners, L.P. ("Magellan") filed a petition requesting the Commission's approval of the proposed divestiture of certain assets recently acquired from Shell Oil Company ("Shell"). Under the terms of the FTC's consent order concerning Magellan's acquisition of certain pipeline and terminal assets from Shell, Magellan is required to divest a refined petroleum products terminal in Oklahoma City, Oklahoma. Through this application, Magellan requested Commission approval to divest the former Shell Oklahoma City Terminal, as that asset is defined in the order, to TransMontaigne, Inc. The Commission approved the divestiture on or around November 4, 2005.
- On November 2, the Federal Trade Commission announced a consent agreement that will protect competition and consumers in three significant medical device product markets affected by Johnson & Johnson's ("J&J") proposed $25.4 billion acquisition of Guidant Corporation ("Guidant"). The agreement will allow the transaction to proceed, provided the parties comply with its terms. Under the terms of the order conditionally approving the transaction, J&J is required to 1) grant to a third party a fully paid-up, non-exclusive, irrevocable license, enabling that third party to make and sell drug eluting stents ("DESs") with the Rapid Exchange ("RX") delivery system, 2) divest to a third party J&J's endoscopic vessel harvesting ("EVH") product line, and 3) end its agreement to distribute Novare Surgical System, Inc.'s ("Novare") proximal anastomotic assist device ("AAD").
The Commission's consent order is designed to remedy the alleged anticompetitive impact of J&J's acquisition of Guidant, not to improve pre-transaction competition in the relevant product markets. First, it requires J&J to license Guidant's intellectual property surrounding the RX delivery system at no minimum price to an up-front buyer with a DES program in development within 10 days of the acquisition's consummation. The parties proposed Abbott Laboratories ("Abbott"), one of the two companies best positioned to replicate the competition provided by Guidant in this market in the relevant time frame, as the up-front buyer of this divestiture package. The Commission believes Abbott's experience with both drugs and vascular stents will enable it to become a strong competitor in the DES market at its time of expected entry in late 2007, the same time Guidant would have entered with its DES on an RX delivery system. Still, the RX license defined in the agreement is transferable, so if Abbott's DES program is unsuccessful, Abbott will have the incentive and ability to transfer the license to another firm to ensure continued competition with J&J/Guidant.
Second, the order remedies the acquisition's potential anticompetitive effects in the market for EVH devices by requiring J&J to divest its EVH product line to a Commission-approved buyer within 15 days of its acquisition of Guidant. J&J has reached an agreement to sell these assets to Datascope, which currently has a line of products used in cardiac surgery, including products used in CABG procedures. The order allows Datascope to enter into a supply agreement with J&J for up to two years to ensure Datascope has time to receive required regulatory approvals and to begin manufacturing and/or packaging EVH device kits in its own facility.
Finally, the order will remedy the competitive concerns in the market for proximal AADs by requiring J&J to end its distribution agreement with Novare for Novare's proximal AAD, eNclose. The FTC expects Novare will be able to find a new eNclose distribution partner within the next couple of months.
Authored by:
Robert W. Doyle, Jr.
202-218-0030
rdoyle@sheppardmullin.com
- On October 19, a District Court judge halted the deceptive ads of a Web operation that claimed membership in MP3DownloadCity.com would allow users of peer-to-peer ("P2P") file-sharing programs to transfer copyrighted materials without violating the law. The FTC will seek a permanent bar on the deceptive claims, redress for consumers, and a requirement that the defendant notify consumers who signed up for membership that the programs he promotes to share copyrighted files may subject them to civil or criminal liability. According to the FTC, the defendant markets and sells a tutorial and referral service that promotes the use of P2P file-sharing software programs to download digital music, movies and computer games. Unlike a licensed subscription service, the defendant's service does not provide its paying customers with a license to download and share copyrighted music, movies, or games. Instead, for $24.95, the defendant instructs consumers on the use of free P2P file-sharing software provided by others, such as Kazaa. According to the FTC's complaint, consumers are lured to become members by deceptive claims that subscribing to the defendant's service makes P2P file sharing legal. But, according to the FTC complaint, the defendant's customers who use P2P file-sharing programs to download copyrighted material, or who make it available to others, without the copyright owner's permission, are engaged in copyright infringement and could face civil and criminal liability. The FTC charged that the defendant violated the FTC Act by falsely claiming that membership in its service made P2P file sharing legal.
- A top distributor in a multilevel-marketing program, who deceptively led prospective recruits to believe they would be applying for marketing jobs and that they would make a substantial income, was banned from the multilevel marketing industry and paid $5,000 to settle FTC charges on October 20. In addition, the defendant is further prohibited from making any material misrepresentations about other business opportunities she may promote in the future. The defendant, Sandra Lee Jacobson, was a high-level distributor for Trek Alliance (Trek), a multilevel-marketing company that sold water filters, cleaning supplies, nutritional supplements, and beauty aids. Jacobson had previously been a distributor for Equinox International, a company operating an alleged pyramid scheme that the FTC sued in 1999. The FTC sued Trek and its principals in December 2002. That case is still in litigation. Jacobson helped start and manage numerous Trek training centers, which functioned primarily as recruitment centers. Distributors who worked in these training centers often used classified ads, in the Help Wanted section, to solicit new recruits. The FTC's complaint alleged that, in numerous instances, prospective recruits were deceptively told that they could expect to receive substantial income, and that salaried employment positions were being offered. The complaint further alleged that Jacobson participated in making these misrepresentations and provided the means and instrumentalities for other distributors to make these misrepresentations. It also alleged that Jacobson participated in Trek's marketing of an illegal pyramid scheme. In addition to the ban on multilevel marketing and the prohibition against making future material misrepresentations, the order also prohibits Jacobson from helping others make misrepresentations when selling business opportunities. As part of the stipulated final order, a judgment was entered against Jacobson in the amount of $804,813 - the amount Trek paid her in commissions. The amount was reduced to $5,000 based on financial documentation provided by the defendant. If it is found those documents were falsified, she will be responsible for the full amount. Finally, the order contains standard monitoring and record-keeping provisions.
- A group of U.S. and Canadian telemarketers will pay $415,000 to settle FTC charges they were selling nonexistent credit cards to U.S. consumers, the agency announced on October 24. The defendants are banned from selling credit-related products through telemarketing and must stop their attempts to deceive consumers into giving out their personal financial information. According to the Commission, the defendants targeted consumers with poor credit, offering major credit cards with a $2,500 limit for an advance fee of $197 to $300. The telemarketers claimed to have information showing that the consumers recently had been denied credit, and pitched the credit card offer as a means of improving their credit rating. Implying that they were merely verifying data, the defendants requested information about the consumer's bank accounts, such as account numbers, routing numbers, and the account holder's name, as well as personal identifying information, such as date of birth, mother's maiden name, and Social Security number. They also allegedly misrepresented that they had the ability and authority to issue major credit cards. Consumers who paid the fees never received credit cards. At best, some got a package containing a credit repair book with coupons, a list of banks that issue credit cards, and other materials with little or no value. The defendants, who ran their operation from Palm Beach, Florida, and Montreal, Canada, are three Florida corporations (Sun Spectrum Communications Organization, Inc.; North American Communications Organization, Inc.; and WWCI2002, Inc.) and their principals, William H. Martell and Tracey A. Bascove, and one Canadian corporation (9106-7843 Quebec, Inc.) and its principals, Mitchel Kastner, Ronald Corber, and Jason Kastner. As part of the settlement, the defendants are banned from telemarketing credit-related products and from assisting others involved in the industry. They also are prohibited from using false or misleading statements when marketing any product and from violating any provision of the FTC's TSR. The court's order also prohibits the defendants from violating the Gramm-Leach-Bliley Act by using false representations to get consumers to divulge personal financial information. They also are subject to a suspended judgment of just over $9 million.
- As law enforcement officials, consumer groups, and Hispanic leaders met in Los Angeles on October 25 to discuss new ways to fight fraud in the community, the FTC announced five law enforcement actions against scammers targeting Hispanic consumers. The actions announced at the Hispanic Law Enforcement and Outreach Forum involved a range of products and services, including advance-fee credit cards, at-home English-language and auto-mechanic training programs, a medical-discount plan, weight-loss products, music CDs, and credit-repair services. The FTC also released new consumer information about medical discount plans. The workshop was sponsored by the FTC, the U.S. Postal Inspection Service ("USPIS"), the U.S. Attorney's Office in Los Angeles, and the Department of Consumer Affairs for the County of Los Angeles. It is the latest in a series of workshops by the FTC and the USPIS that aim to identify local problems and discuss ways to address them; facilitate open dialogue with local government, consumer groups, and members of the Hispanic community on issues affecting Hispanic consumers; and share consumer education resources to help local communities conduct outreach about fraud, how to prevent it, and where to report it. Workshops already have been held in Chicago, Dallas, Miami, and Phoenix. Events in Cleveland, Las Vegas, and San Diego, among other cities, are planned for next year.
- The Federal Trade Commission issued its tenth quarterly summary on October 27 of the agency's enforcement actions against telemarketing fraud and abuse, listing significant developments in 19 federal district court cases between August and October 2005. These cases include new actions filed by the Commission; amendments to complaints; final resolutions of enforcement actions such as settlements, default and summary judgments; contempt proceedings; and redress distribution information. Some of the complaints filed in these cases allege violations of the Telemarketing Sales Rule ("TSR"). All of the cases involve the use of the telephone to market goods or services, including outbound and inbound calls generated from advertisements or other solicitations to purchase products or services. The quarterly enforcement update issued today can be found on the FTC's Web site at: www.ftc.gov/bcp/conline/edcams/telemarkfraudenforcement/
update05oct.htm. The FTC's telemarketing fraud and abuse enforcement Web page,www.ftc.gov/bcp/conline/edcams/
telemarkfraudenforcement/index.html, contains a list of the 174 enforcement actions announced since October 1, 2002, with links to related press releases. In addition to helping consumers learn about the Commission's enforcement actions, the Web page and the quarterly enforcement update provide consumers with easy access to information about the specific frauds and abuses perpetrated using telephone calls and the types of matters prosecuted by the Commission, including matters brought under the TSR and its National Do Not Call Registry.
Authored by:
Camelia Mazard
202-218-0028
cmazard@sheppardmullin.com
- On October 5, the German Antitrust Authorities imposed fines for the first time with respect to the provision of false information in connection with a merger notification. The Bundeskartellamt imposed fines of €250,000 against INVISTA Resins & Fibers GmbH, Hattersheim, a subsidiary of the American Koch group based in Kansas, for allegedly submitting incorrect information in the notification of a merger in 2004. The President of the Bundeskartellamt, Ulf Böge stated: "The Bundeskartellamt cannot allow the clearance of a merger project in preliminary examination proceedings on the basis of deliberately false information".
- On October 7, the European Commission cleared under the EU Merger Regulation the proposed acquisition of MCI by Verizon Communications. After carefully examining the transaction, the Commission concluded that the merger would not significantly impede effective competition in the European Economic Area or any substantial part of it. As Verizon is active as a local US ISP, the transaction did not give rise to direct horizontal concerns in the market for global internet connectivity. Its network would nevertheless add to the scope of MCI's Internet network. The Commission's assessment of the transaction showed that this overlap between the activities of Verizon and MCI was, however, very limited, and that the combined firm would continue to face several strong and effective competitors. The Commission also examined the vertical effects which would result from the combination of Verizon's activities at the local loop level in a number of areas in the US with MCI's upstream global telecommunication or international voice telephony activities. However, the Commission's investigation showed that the effect of this integration would not materially affect competitors' ability to provide such services.
- On October 13, the European Commission cleared under the EU Merger Regulation the proposed acquisition by Finnish winter sport hard goods manufacturer Amer Group of the Salomon business segment of Germany's Adidas-Salomon AG. The Commission's clearance is conditional upon substantial modifications of the current cooperation agreement between Salomon and the Austrian ski manufacturer Fischer GmbH. In light of these commitments, the Commission concluded that the transaction would not significantly impede effective competition in the European Economic Area or any substantial part of it. Competition Commissioner, Neelie Kroes said: "Consolidation in the skiing equipment industry cannot be allowed to lead to higher prices, lower quality or less innovative products. However, the commitments given by Amer will ensure that the merged entity will face sufficient competition pressure in all winter sport equipment markets".
- On October 13, the Portuguese Competition Authority fined five pharmaceutical companies a total of €16 million for alleged bid-rigging in 36 tenders to supply blood glucose monitoring reagents to 22 hospitals nationwide. The Authority's investigations revealed that the alleged aim of the cooperation was also to influence the negotiating basis for the price agreed between the state and pharmaceutical companies for the sale of blood glucose monitoring reagents to the public. The investigation was launched following a complaint by one hospital that all five firms had quoted the same price for a particular drug.
- On October 17, the European Association of Euro-Pharmaceutical Companies ("EAEPC") filed a complaint with the European Commission alleging that Pfizer is breaking EU competition law by implementing a strategy aimed at preventing the export of medicines from Spain to other EU countries. Hans Bøgh-Sørensen, EAEPC President said: "Pfizer's actions are in clear breach of EU competition rules. We are submitting to the Commission a simple open and shut case. This is a straight-forward case for the Commission to uphold competition in the pharmaceutical sector." The EAEPC press release states that Pfizer's actions amount to an alleged dual-pricing system and an export ban, and are part of a long-term Pfizer strategy to partition the EU market for medicines.
- On October 17, the Canadian Competition Bureau issued a series of Responses to Frequently Asked Questions about its Immunity Program. The Bureau's Immunity Program, first introduced in 2000, encourages parties to admit their participation in offences under the Canadian Competition Act as early as possible. The updated Responses replace the 2003 version of the document, and address in greater detail the process involved in an immunity application as well as the timelines and guidelines for providing information to the Bureau. The Bureau is currently undertaking a broad review of its Immunity Program. It plans to initiate public consultations on a range of topics relevant to the Immunity Program, including: confidentiality, Revocation, leniency, the proffer practice treatment of instigators and restitution.
- On October 17, European Competition Commissioner, Neelie Kroes, stated that the European Commission is examining ways to encourage private-action antitrust lawsuits. A earlier study produced for the Commission showed that there are numerous obstacles which prevent potential plaintiffs from bringing an action for damages. The Commission is currently preparing a Green Paper which will set out a number of possible means to modify the current European framework for antitrust damages claims where that framework is considered to hamper litigation. The Green Paper will outline various alternatives and assess their potential impact on antitrust damages litigation.
- On October 19, the Italian antitrust authority held that a regulation which requires that the Regions fix a minimum of amount shelving space (normally 20%) in large stores for the exclusive sale of regional agricultural and food products is a breach of domestic and EU competition laws. According to the Italian antitrust authority, the introduction of stringent curbs on the freedom of large supermarket businesses in pursuing their purchasing policies will lead to a reduction in levels of competition between companies in the distribution sector. There will also be a loss of efficiency with serious repercussions on prices and the range of products available in stores. In the agricultural and food sectors, the amendment also risks being counterproductive since the assurance of a market opening will reduce incentives to realize economies of scale in production and distribution, cost reductions, quality control etc. The guaranteed sales channel for local producers is also seen as an unjustified discrimination against the producers of other Regions, whether Italian or foreign, who may have already invested in improving their efficiency and competitive ability, and who could find possible market openings for their products closed off by the law.
- On October 19, the Canadian Competition Bureau issued a draft Information Bulletin on Merger Remedies for public comment. The document states how the Bureau will seek, design and implement remedies to resolve competition concerns arising from a merger, It reflects the Bureaus approach to remedies, for example, with respect to requirements for short divestiture deadlines, no minimum price provisions and, when necessary, crown jewels. Interested parties are invited to provide comments and/or suggestions on the information bulletin by January 20, 2006.
- On October 20, the European Commission fined four Italian tobacco processors a total of €56 million for allegedly colluding over a period of more than six years on the prices paid to growers and other intermediaries and on the allocation of suppliers. Such collusion is outlawed by the EC Treaty's ban on restrictive business practices (Article 81). The processors concerned were Deltafina, Dimon (which has now changed its name to Mindo), Transcatab and Romana Tabacchi. The Commission also imposed small fines on APTI and UNITAB (respectively the Italian trade associations of processors and tobacco growers) for engaging in collective price negotiations. Neelie Kroes commented: "Cartel culture must be eradicated from all sectors and agriculture is no exception. Last year the Commission fined 5 processors on the Spanish tobacco market. As Italy is the largest producer of raw tobacco in Europe, today's decision is all the more significant".
- On October 21, the European Commission published the results of a study which will help it analyze the likely effectiveness of merger remedies under the EU Merger Regulation. The study looked at the design, implementation and effectiveness of 96 remedies imposed in 40 cases under the EU Merger Regulation from 1996 to 2000. The conclusions of the study indicate that care is needed, in particular, in defining the right scope of a divested business, ensuring its interim preservation until divestiture, approving adequate purchasers, and ensuring effective monitoring of the implementation of the remedies. Neelie Kroes said: "The findings of this important study will influence our future action in the field of merger remedies. It demonstrates the Commission's commitment to evaluate critically and transparently its past policy and practice in order to draw lessons from it. We should only accept remedies that clearly and unambiguously eliminate the identified threats to competition. It is the merging companies, not their customers, who should bear the risks of potentially inadequate remedies".
- On October 26, the UK's Office of Fair Trading ("OFT") referred the completed acquisition by Heinz of the HP Foods Group to the Competition Commission ("CC"). The OFT decided that the UK merger reference test was met in relation to the supply of tomato ketchup and brown sauce, barbecue sauce and tinned baked bean and pasta products to retail customers. Vincent Smith, Director of Competition Enforcement at the OFT, said: "This transaction brings together two of the largest branded sauce suppliers in the UK who compete in a number of product categories. As a result of the merger, retail customers and consumers could suffer from less competition resulting in higher prices for products such as HP brown sauce, tomato ketchup and baked beans". The OFT has asked the CC to explore these concerns. The CC is expected to report by April 11, 2006.
- On November 2, the UK's Office of Fair Trading ("OFT") launched a campaign to promote the benefits of its leniency program to small and medium sized enterprises ("SMEs") in order to encourage them to reveal anti-competitive practices in their industries. The OFT notes that it has received 88 approaches under its leniency program to date. OFT research reveals that a quarter of SMEs in the UK feel that they have been a victim of anti-competitive practices and a third are aware of such practices in their own industry. Philip Collins, OFT Chairman, said: "November is 'Come Clean on Cartels' month. We want to urge businesses, especially SMEs, to make a clean break with any anti-competitive agreements they may be involved in. 'SME's form the dominant part of the economy and we want to ensure that they operate in competitive markets".
- On November 3, the Wall Street Journal reported that Chinese Authorities are preparing to finalize the details of a new Antimonopoly Law which will likely be enacted sometime in early 2006. It reports that, "Beijing is on its way to joining Washington and Brussels as a required stop on the round of antitrust approvals for global merger deals". Under the current draft, merging parties will have to notify the China's government and seek approval for any global transaction with a value of more than 200 million yuan ($25 million), and in which one party has at least 1.5 billion yuan ($186 million) in sales or assets in China. Foreign businesses are concerned that the relatively low thresholds in China's draft law will mean that they will have to seek Chinese approval for deals with little impact on China from authorities with little expertise or training in the application of antirust principles.
Authored by:
Neil Ray
415-774-3269
nray@sheppardmullin.com
- On September 30, 2005, the FCC adopted its Tenth Annual Report to Congress on the state of competition in the mobile telephone - or Commercial Mobile Radio Services ("CMRS") - industry. This report examines the conditions prevailing in the CMRS marketplace as of the end of 2004 and the first half of 2005 (the report acknowledges that the Sprint-Nextel and ALLTEL-Western Wireless mergers have occurred, these transactions closed too recently for their effects to be reflected in the indicators of market structure, carrier conduct, and market performance). The FCC concluded that there continues to be effective competition in the CMRS marketplace based on its analysis of several measures of competition, including: the number of competing carriers providing service in an area, the extent of service deployment, prices, technological and product innovations, subscriber growth, usage patterns, churn, and investment. Although consolidation during the period covered by the report has reduced the number of nationwide mobile telephone carriers, the FCC found that none of the remaining carriers has a dominant share of the market and that the market continues to behave and perform in a competitive manner. The report notes that 97 percent of the total U.S. population lives in counties with three or more different operators providing mobile telephone service, the same level as in the previous year, and up from 88 percent in 2000 (the first year for which these statistics were kept); 93 percent of the U.S. population lives in counties with four or more different mobile telephone operators; and 87 percent lives in counties with five or more; both figures are roughly the same as in the previous year. Indicators of market performance show that competition continues to afford many significant benefits to consumers. During 2004, the number of mobile telephone subscribers in the United States rose from 160.6 million to 184.7 million, increasing the nationwide penetration rate to approximately 62 percent at the end of 2004. The amount of time mobile subscribers spend talking on their mobile phones has also increased, with the average minutes of use per subscriber per month rising to more than 580 in the second half of 2004, up from 507 in 2003 and 427 in 2002. Two indicators of mobile pricing - revenue per minute ("RPM") and the cellular Consumer Price Index ("Cellular CPI") - showed a continued decline in the price of mobile telephone service during 2004. The RPM, which can be used to measure the per-minute price of mobile telephone service, fell 12 percent during 2004, and the Cellular CPI declined 1.0 percent during 2004 while the overall CPI increased 2.7 percent. Finally, the volume of text messaging traffic grew to 4.7 billion messages per month in December 2004, more than double the 2 billion messages per month reported in December 2003.
- The FCC, on October 31, 2005, approved two major telecommunications mergers after the companies involved agreed to conditions, which the agency's chairman said were not all necessary. "I do not believe that all of the conditions imposed today are necessary," FCC Chairman Kevin Martin said in a statement. "I believe that the affected markets would remain vibrantly competitive absent these conditions." Commissioner Kathleen Abernathy supported the mergers and also criticized the conditions applied by the agency as "micromanaged regulatory oversight." "I would have had less conditions and more embracing the competitive world in which we live," she said. By a 4-0 vote, the agency's four commissioners agreed to approve the acquisitions of AT&T by SBC Communications and of MCI by Verizon Communications. The FCC's analysis of the competitive effects of the mergers focused on six key services: (1) special access competition, (2) retail enterprise competition, (3) mass market competition, (4) internet backbone competition, (5) wholesale interexchange (long distance) competition and (6) international competition. The Commission also adopted in its Order, as enforceable conditions, certain voluntary commitments made by the applicants. Some of those conditions are: (i) to not seek an increase in state-approved rates for unbundled network elements (UNEs) for two years (except for rates that are subject to current appeals in specific states), (ii) to implement a "Service Quality Measurement Plan," which will provide the Commission with quarterly performance results for interstate special access services, (iii) to commit for 30 months not to increase the rates paid by existing in-region customers of AT&T in SBC's region or MCI in Verizon's region for wholesale DS1 and DS3 local private line services, (iv) to not provide special access services to themselves, their interexchange affiliates, or each other or their affiliates, that are not generally available to other similarly situated customers for a period of 30 months, (v) to commit for a period of 30 months not to increase rates set forth in SBC's and Verizon's interstate tariffs for special access services, including contract tariffs, that they provide in their in-region territory that are on file with the Commission on the Merger Closing Dates (vi) to provide, within 12 months of the Merger Closing Dates, DSL service to in-region customers without requiring them to also purchase circuit-switched voice telephone service, and (vii) to maintain for a period of three years peering arrangements with at least as many providers of Internet backbone services as they did in combination on the merger closing dates. The Justice Department approved the deals on October 27th, attaching only minor requirements that Verizon and SBC lease fiber lines to about 350 buildings apiece in their territories.
Authored by:
Gregg Mendenhall
202-218-0025
gmendenhall@sheppardmullin.com
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