Federal District Court in Pennsylvania refused to dismiss conspiracy and monopolization claims against Comcast arising out of transactions in which Comcast had both purchased and sold geographically separate local cable television systems to competitors in exchange for other systems. Glaberson, et al. v. Comcast, et al., Civil Action No. 03-6604 (E.D. Pa. August 31, 2006). The rapidly consolidating cable television industry frequently uses transactions in which large cable companies "swap" cable systems in different geographic areas with the goal of assembling larger contiguous areas in which each cable company provides services. The economic motivation is that assembling larger contiguous areas makes administering such contiguous cable systems cheaper and more efficient. Such swaps are also done on the basis of swapping subscribers, rather than entire cable systems, again in an effort to increase the effective economic size of contiguous service areas.

In the transaction which prompted the Glaberson litigation, Comcast swapped cable systems and cable subscribers in various parts of the United States for competitors' cable systems and subscribers in Philadelphia and Chicago. Comcast then swapped certain Chicago area subscribers for AT&T Broadband's Philadelphia area subscribers. Finally, as part of the 2002 merger between Comcast and AT&T, Comcast acquired AT&T's cable monopoly and cable subscribers in the Chicago area. Plaintiffs sued, and alleged that the ultimate result of these various swap agreements was that Comcast willfully obtained monopoly power in relevant geographic markets, defined as Comcast cable franchises located in Philadelphia and Chicago, and geographically contiguous areas, in certain designated counties. Plaintiffs alleged that after the transactions complained of, Comcast controlled 94% and 92% of the cable markets in areas referred to as the Philadelphia and Chicago "clusters," respectively, and that Comcast used its monopoly power acquired thereby to raise cable prices to artificially high supra-competitive levels.

Count 1 accused Comcast of conspiring with horizontal competitors to allocate markets through swap agreements, and that such horizontal market allocations were per se illegal violations of Section 1 of the Sherman Act. Counts 2 and 3 alleged that Comcast had monopolized, or attempted to monopolize, the product market for multi-channel video programming services within the Philadelphia and Chicago clusters in violation of Section 2 of the Sherman Act. Comcast moved to dismiss. 

Comcast's first argument was that plaintiffs lacked antitrust standing because the face of plaintiffs' complaint did not demonstrate a direct causal connection between the transactions complained of and plaintiffs' alleged injury of paying higher cable prices. This argument was based upon Comcast's assertion that plaintiffs failed to allege any facts suggesting actual or likely future competition between Comcast and the transacting cable companies in the relevant markets prior to the transactions at issue. Given the nature of local cable system municipal monopolies, this argument could have had some force. Instead, the District Court first observed that, under Third Circuit law, it was required to assume the existence of a violation in determining whether plaintiff suffered injury as a result of the alleged violation. In this case, the court felt that it was required to assume as true that Comcast's actions had reduced competition in the relevant markets, since plaintiffs had pleaded a reduction of actual and prospective competition in the Philadelphia and Chicago clusters that was the intended result of the challenged swap agreements. Having made that assumption, the court concluded that the alleged injury suffered by plaintiffs, payment of higher prices, resulted from Comcast's ability to raise its cable prices as a result of the purported deliberate lessening of competition achieved through the transactions at issue. Having concluded that antitrust injury existed, the court had no problem quickly determining that plaintiffs were direct victims because they purchased cable services straight from Comcast at allegedly inflated prices, and that their alleged injury of higher cable prices was directly traceable to Comcast allegedly anticompetitive acquisitions.

Assuming the existence of a violation to test whether standing exists has threatened to create an arguably incorrect result in the Glaberson case. Comcast made the commonsense argument that substitution of Comcast as the exclusive provider of cable services in a given franchise area in the place of a pre-existing exclusive provider is a "competition neutral" transaction because no competition existed to begin with. This would seem to preclude a "conspiracy" from reducing actual competition in a particular local franchise area.

Comcast also attacked the sufficiency of plaintiffs' Section 1 allegation. Comcast began by asserting that plaintiffs' allegations of per se illegality were insufficient. Again, the District Court refused to accept the argument, holding again that it was required at the motion to dismiss stage to assume the correctness of the allegations. In so doing, the Court refused to take notice of swap agreements between AT&T and Adelphia which Comcast argued demonstrated that the swap agreement did not impose restrictions on the ability of any counter-party to re-enter or compete directly in the affected markets.

Comcast also argued that allegations of per se illegality were improper given that the transactions at issue were approved by government authorities at the federal, state and local levels. The District Court disagreed, relying instead on cases holding that approval by regulatory agencies did not make activities immune to the antitrust laws. Finally, given the Court's ruling on antitrust standing, the Court then refused to consider Comcast's arguments that the rule of reason allegations were insufficient because the relevant market allegations critical to the assertion of a rule of reason violation made no sense. Instead, the Court ruled that it need not consider Comcast's arguments about the insufficiency of the Section 1 rule of reason claim due to failure to plead anticompetitive affect in a relevant product or geographic market because the Court had already ruled that the complaint stated a per se claim.

The Court then moved on to Comcast's Section 2 arguments, and made it clear that even Section 2 would not cause the Court to examine plaintiffs' relevant market allegations. Although the Court acknowledged that Third Circuit law required some inquiry into the relevant product and geographic markets at the pleading stage, the Court nevertheless found the relevant market allegations sufficient. The market definition deemed acceptable consisted of Philadelphia and Chicago Comcast "clusters," defined as "those areas covered by Comcast able franchises or any of its subsidiaries or affiliates located in Philadelphia, Pennsylvania, and Chicago, Illinois, and geographically contiguous areas or areas in close geographic proximity to Philadelphia, Pennsylvania, and Chicago, Illinois." The Court then noted that because of the commercial realities of the cable market, it is peculiarly local in nature. Citing cases holding that the relevant geographic market is the area in which a potential buyer looks for goods or services he seeks, not in which the seller sells, the Court felt compelled to hold that the alleged relevant market was economically plausible. Beyond that, the Court stated that further analysis would require factual examination inappropriate to a motion to dismiss.

It is hard to know whether the Glaberson decision is simply an aggressive application of certain procedural rules making motions to dismiss more difficult to win, or a genuine substantive aberration challenging long held conventional wisdom about how competition in the cable television space should be assessed. This case will have to be watched by all involved in evaluating competitive issues in the cable television industry to see whether it is just an outlier, or one of those decisions which requires recalibration of conventional wisdom about antitrust risk attendant to cable television swap transactions.

Authored by

David Garcia

(310) 228-3747

drgarcia@sheppardmullin.com

In a recent opinion, the District Court for the District of Delaware dismissed AMD's antitrust claims against Intel that arose out of Intel's alleged foreign-related conduct that affected AMD's foreign sales. Advanced Micro Devices, Inc. v. Intel Corp. (AMD), Civ. Action No. 05-441-JJF, --- F.Supp.2d ----, 2006 WL 2742297 (D. Del. Sept. 26, 2006). In that case, AMD had alleged that Intel willfully maintained a monopoly in the x86 microprocessor market, which AMD alleged to constitute a world-wide market, by engaging in such exclusionary conduct as, among other things, "forcing major customers into exclusive or non-exclusive deals, conditioning rebates and other monetary incentives on customers' agreement to limit or forego purchases from AMD, forcing PC makers and technology partners to boycott AMD product launches and promotions and threatening retaliation against customers introducing AMD computer platforms." Id. at *1. 

Intel moved to dismiss, contending that AMD's complaint did not satisfy the jurisdictional requirements of the Foreign Trade Antitrust Improvements Act of 1982 ("FTAIA"), under which non-import activity involving foreign commerce is actionable under the Sherman Act only if it "both (1) sufficiently affects American commerce, i.e . . [sic] it has a 'direct, substantial, and reasonably foreseeable effect' on American domestic, import or (certain) export commerce, and has an affect of a kind that antitrust law considers harmful[]  . . . ." Id. at *2 (quoting from F. Hoffmann-La Roche Ltd. v. Empagran S.A., 542 U.S. 155 (2004) (emphasis and brackets in original).¹

Intel argued that AMD was seeking relief "for alleged business practices of Intel that affect the sale of AMD's microprocessors in foreign countries." Id. at *3. According to Intel, although AMD is an American corporation, it manufactures its microprocessors in Germany, and these "German-made microprocessors" are then assembled into final products in Malaysia, Singapore and China. Id. Intel contended that AMD was seeking recovery for "lost sales of these foreign-made microprocessors to foreign countries" and that AMD also was "seeking redress through the Japanese courts, the European Commission and the Korean Fair Trade Commission for the same business practices of Intel that are alleged here." Id. According to Intel, because AMD's alleged harm occurred outside of the United States and AMD already was seeking relief for the same harm in the foreign tribunals, the court lacked jurisdiction over AMD's "foreign commerce claims" under both the FTAIA and principles of foreign comity. AMD, 2006 WL 2742297, at *3.

AMD responded that Intel has kept AMD "from selling microprocessors abroad with the purpose and effect of weakening AMD as a domestic rival" and that "Intel's ability to coerce U.S. customers from giving AMD more business depends on keeping AMD economically powerless to make these customers whole for the costs that Intel can impose on them. To so marginalize AMD, Intel has necessarily had to cut AMD off from business opportunities throughout the market, including opportunities with foreign customers." Id. at *4 (internal quotation marks and citations omitted). AMD further argued, "Intel's foreign conduct and the foreign harm it caused are inextricably bound with Intel's domestic conduct restraining trade and the resulting domestic antitrust injury to AMD," id. at *3, because "the individual instances of lost sales by AMD, whether in the United States or abroad, do not give rise to their own monopolization claim, but rather, that the individual incidents taken together constitute a single monopolization having a foreseeable and substantial effect on U.S. commerce," id. at *6. Accordingly, AMD argued that "it is this single global effect that gives rise to AMD's claim for damages." Id.

Essentially adopting Intel's arguments, the District Court dismissed AMD's claims arising out of Intel's alleged exclusionary conduct oversees that adversely affected AMD's foreign sales. Id.at *3. The court explained that the "'direct effects' requirement of the FTAIA  . . . means that there must be an 'immediate consequence' of the alleged anticompetitive conduct with no 'intervening developments.'" Id. at 4 (citing United States v. LSL Biotechnologies, 379 F.3d 672, 680 (9th Cir.2004)). In the Court's view, however, "AMD's chain of effects [was] full of twists and turns, which themselves [were] contingent upon numerous developments." Id. 

Borrowing from Intel's arguments, the court explained,

[U]nder AMD's logic, a deal between Intel and a German retailer to promote Intel-based systems  . . . directly affect U.S. commerce because it reduces AMD's German subsidiary's sales of German-made microprocessors in Germany, which in turn affects the profitability of the U.S. AMD parent, which in turn affects the funds that AMD has for discounting to U.S. customers, which in turn affects the discounts that it offers in particular U.S. transactions, which in turn affects its competitiveness in the United States, and which in turn affects U.S. commerce.

Id. The Court noted, "reduced income flowing from a foreign subsidiary to a domestic parent is not a direct domestic effect or injury." Id. Further addressing AMD's alleged chain of effects, the court stated:

AMD's primary contention that its lost foreign sales have resulted in lost profitability which in turn, has resulted in lost revenues to shareholders and missed opportunities to invest and compete in the United States is premised on a multitude of speculative and changing factors affecting business and investment decisions, including market conditions, the cost of financing, supply and demand, the success or failure of research and development efforts, the availability of funds and world-wide economic and political conditions.

AMD, 2006 WL 2742297, at *4.

The court noted, while it understood "the nature of a global market, the allegations of foreign conduct here result in nothing more than what courts have termed a 'ripple effect' on the United States domestic market, and the FTAIA prevents the Sherman Act from reaching such 'ripple effects.'" Id. at *5 (citing Latino Quimica-Amtex v. Akzo Nobel Chems. B.V., 2005 WL 2207017, at *3, 5-7 (S.D.N.Y. Sept. 8, 2005)). While acknowledging that AMD's allegations may establish that Intel's alleged foreign restraints were the "but-for" cause of AMD's domestic losses and injury, the Court held that those allegations failed to satisfy the required "proximate causation" under the FTAIA:

The FTAIA requires a plaintiff to allege that its claims were directly caused by the domestic effects of the conduct and not the foreign effects. Stated another way, the "statutory language 'gives rise to'-- indicates a direct causal relationship, that is, proximate causation, and is not satisfied by the mere but-for 'nexus.'" . . . In this case, any alleged harm suffered by AMD has been directly caused by the foreign effects of Intel's alleged conduct, namely lost foreign sales. The other "ripple effects" of Intel's foreign conduct on the U.S. market may not have arisen "but for" Intel's alleged conduct; however, "but for" causation is not the type of direct causation contemplated by the FTAIA.

Id. at *5 (internal citation omitted). 

The court also rejected AMD's reliance on a line of cases, including Continental Ore Co. v. Union Carbide, 370 U.S. 690 (1962) and United States v. Aluminum Co. of Am., 148 F.2d 416 (2d Cir.1945), to supports its claim that a defendant's foreign restraints which makes the plaintiff less likely to compete domestically falls within the scope of the Sherman Act. In this regard, the Court noted that these cases were decided before the enactment of the FTAIA, the purpose of which was to strip the jurisdiction of federal courts over certain foreign commerce claims under the antitrust laws. Id. at *6. 

Finally, in addition to holding that it lacked subject matter jurisdiction over AMD's "foreign commerce claims," the court also alternatively held that AMD lacked standing to assert such claims under the Sherman Act. The court noted, "To establish standing to bring an antitrust claim, the plaintiff "must have suffered an injury the antitrust laws were intended to prevent, and the injury must flow from that which makes the defendants' acts unlawful." Id. at *7 (internal citation and quotation marks omitted). The court explained, under the relevant Third Circuit precedent, "this analysis implicates many of the same jurisdictional issues under the FTAIA." Id. Accordingly, the court dismissed AMD's claims for lack of standing for the same reasons it rejected those claims under the FTAIA. Id.

Authored by

Mona Solouki

(415) 774-3210

msolouki@sheppardmullin.com

District Court Schedules Tunney Act Hearing

• On November 30, 2006 at 2pm, the U.S. District Court for the District of Columbia will hold a hearing on the government's Motion for Entry of Final Judgments in deciding whether to approve the merger of AT&T and SBC and the merger of MCI and Verizon. Judge Sullivan surprised many observers by demanding that the Department of Justice and the merging parties submit much of the evidence that the Antitrust Division had reviewed during the second request it had issued during both mergers.

The court had ordered hearings in response to complaints that the proposed consent degree did not go far enough in remedying the anticompetitive effects of the mergers. In its initial proposed final judgment, the Antitrust Division had found that the mergers posed problems in a few hundred buildings around the country, where the number of providers would decrease from 2 to 1, and there was no realistic possibility of entry by another carrier, due to the low number of potential customers or the distance from the other lines or both. ACTel and COMPTel, two organizations opposed to the merger, had used the Tunney Act hearing to argue that the Division should have forced divestitures in other buildings, including those where the number of competitors decreased from 3 to 2 and those where the number of competitors decreased from 4 to 3. The Division had argued that 1) the Court did not have the constitutional authority to review problems not listed in the complaint and 2) even if it did, the bulk of the evidence showed that the merging parties would not have pricing power over other buildings.

In the most recent filings with the court, the division has presented large volumes of evidence, including expert reports along with affidavits and declarations of industry participants, stating that the mergers do not pose a problem. ACTel and COMPTel have argued that the Division is still not in compliance with the Court's order; that the evidence shows a continued problem; and that the Division's recent approval of the acquisition of BellSouth by AT&T with no conditions is an attempt to avoid the Court's review.

Whether the hearing on November 30th will result in a final decision is anyone's guess. Judge Sullivan has surprised most of the antitrust legal community around the country by undertaking such an extensive review process, which has taken more than a year since the initial complaint and proposed final judgment were first filed. There are fears that if Judge Sullivan orders a more extensive evidentiary process, including the cross-examination of witnesses and further document submissions, the Antitrust Division and the Federal Trade Commission will find it more difficult to negotiate consent decrees with merging parties in the future.

FTC Supports Narrow Interpretation of Noerr-Pennington for Ministerial Requests

• On November 2, 2006, the FTC released a Staff Report, in which the FTC clarified its position on the use of the Noerr-Pennington Doctrine as a defense in antitrust actions. Parties invoking the Noerr-Pennington Doctrine generally argue that the First Amendment immunizes conduct aimed at influencing the outcome of a government process, such as the enactment of a law or extent of a regulation. 

The FTC recommended that the Noerr-Pennington doctrine not be applied to the following three areas: "[1] filings, outside of the political arena, that seek no more than a ministerial government act. . . . [2] misrepresentations, outside of the political arena, that meet the standards set forth in the Commission’s Unocal decision. . . . [and] [3] patterns of repetitive petitioning, outside of the political arena, filed without regard to merit that employ government processes, rather than the outcome of those processes, to harm competitors in an attempt to suppress competition." 

The FTC highlighted the Second Circuit's decision in Litton Systems v. American Telephone & Telegraph Co., 700 F.2d 785 (2d Cir. 1983) for the distinction between petitioning for a discretionary act and petitioning for a ministerial act. In Litton Systems, AT&T had filed a request for a tariff with the Federal Communications Commission that had included a provision that required that carriers using non-AT&T equipment use an AT&T supplied interface. AT&T had defended its actions by arguing that its filing was protected under the Noerr-Pennington Doctrine as an attempt to influence government action. The Second Circuit, however, disagreed, holding that just because AT&T had to file and disclose its rates did not mean that it had the right to leverage a monopoly in one product market into another. In addition, the Second Circuit had emphasized that the content of the filings were not generally reviewed. The FTC emphasized that with ministerial acts, "there is little check on the truth or falsity of parties’ representations," whereas with discretionary acts, the government had a more robust review process. 

The FTC also emphasized that misrepresentation in a petition for a discretionary act could eliminate a Noerr-Pennington defense. The FTC highlighted its suit against Union Oil of California, in which the FTC had filed charges against the company alleging that it had illegally obtained a monopoly in the sale of low-emission reformulated gasoline sold in California. Union Oil had told the California Air Resources Board that the technology for production of the new standard was non-proprietary, but had then asserted its patents to force all refiners to use Union Oil's methods. The FTC sued, arguing that Union Oil's filings before the Board were not protected, because it had made misrepresentations to obtain its monopoly. The FTC and Union Oil later entered into a consent decree settling the charges. In its report, the FTC distinguished the misrepresentation exception from the Sham Litigation exception. "[M]isrepresentations differ from traditional sham activities, such as the initiation of baseless litigation, in that the purpose of making the misrepresentations likely is to obtain government action." To determine if the misrepresentation exception applies, the misrepresentation (1) must occur outside of the political process, where "there is generally little governmental expectation of truthful petitioning," (2) be deliberate, (3) subject to factual verification; and (4) central to the legitimacy of the affected governmental proceeding. 

Finally, the FTC addressed the Sham Litigation exception to the Noerr-Pennington Doctrine. Although the Supreme Court's decision in Professional Real Estate Investors, Inc. v. Columbia Pictures Industries, Inc., 508 U.S. 49 (1993) had given a two part test for determining if a company's initiation of litigation had been meant solely for the purpose of hampering a rival, the FTC noted that questions remain. The two part test required that 1) the litigation be objectively baseless and 2) initiated with the intent to hamper a rival's competitiveness. The FTC, however, argued that the decision had left open whether repeated petitioning could constitute sham litigation, even if some of the petitions could have had some conceivable merit. The FTC advocated an approach that would focus on whether the repetitive petitions were valuable to the government, or only meant to hinder rivals. "Logically, a pattern of invoking government processes for anticompetitive purposes need not be confined to repetitive litigation or to a series of identical filings to justify an exception to Noerr protection. Rather, a 'pattern' exception to Noerr should apply when a party invokes administrative processes, judicial processes, or a combination thereof, to hinder marketplace rivals." The FTC, therefore, argued that other courts should not require that every suit filed by a defendant have been objectively baseless, but rather "apply a more flexible standard when a pattern of petitioning is involved, recognizing that such cases may present more complex fact patterns and, in some instances, graver antitrust harm." 

This report is important, as it indicates that the FTC will challenge parties when they seek to use Noerr-Pennington. The cases emphasized in the report indicate that the FTC will be looking especially closely at filings and lawsuits related to patents and at filings meant to influence the Food and Drug Administration.

Authored by

Christopher Bowen

(202) 772-5348

cbowen@sheppardmullin.com