Federal Circuit Holds That Patent Pools Without Anticompetitive Effects Are Lawful In U.S. Philips Corp. v. International Trade Commission.

On September 21, 2005, the Court of Appeals for the Federal Circuit reversed a ruling of the International Trade Commission ("ITC") which had found that U.S. Philips Corp. ("Philips") had committed "per se" patent misuse by "tying" the license of "essential" compact disk patents to the license of "nonessential" patents in a package licensing pool. The ITC found misuse both under a "per se" standard, and under the rule of reason.

As a threshold matter, the Federal Circuit sustained the ITC's holding that Philips was not entitled to the statutory "safe harbor" of 35 U.S.C. Sec. 271(d)(5). This section, added in 1988 requires that in order to establish a claim of patent misuse, a defendant in a patent infringement action must show that the patentee had market power in the tying item, in the same fashion that it must be shown in a non-patent antitrust case. Commentators have suggested that the section was a Congressional repudiation of venerable pronouncements by the United States Supreme Court that economic power is presumed, where the alleged tying product is patented or copyrighted, and that proof of market power or economic effects is therefore unnecessary.¹ Until informed by the Supreme Court that these pronouncements have been abrogated, the Federal Circuit acknowledges a doctrine of "per se" patent misuse. The issue of whether a presumption of market power is appropriate in patent cases is before the United States Supreme Court in Independent Ink., Inc. v. Illinois Tool Works, Inc.²

Section 271(d)(5) was inapplicable because, as the ITC found, and the Federal Circuit affirmed, Philips had market power in the market for computer data storage disks, at least by the late 1990's, when it licensed the respondents. In adopting and affirming the ITC's holding of market power, however, the Federal Circuit rejected the ITC analysis that Philips package licensing arrangement constituted "per se" patent misuse, under the "block booking" authorities of Paramount and Loew's.

The court discussed the distinction between cases, such as Loew's and Paramount, where the alleged tie was of a product to a patent, rather than a tie of one patent license to another patent license. While the tied products in Paramount and Loew's were indeed copyrighted intellectual property, they were akin to the "staples" found in other venerable cases, including International Salt Co. v. United States,³ and United States v. U.S. Gypsum Co.⁴ The court found a "patent to product" tie to be much more "propitious" than a patent-to-patent tie, because the former practice forces a buyer to purchase and use an unwanted product, and forecloses opportunities to competitors in the market for the tied product. The court made it clear, however, that it indulges the concept of "per se patent misuse" in cases that have the vestigial blessing of the Supreme Court in Paramount and Loew's. However, the "per se" patent issues doctrine will be limited to those specific fact patterns recognized by the Supreme Court.⁵

The court noted that the Philips package license did not require a licensee to practice or use any of the "nonessential" patents included in the pool. Accordingly, there would be no foreclosure of competitors in the art practiced by the nonessential patents. Rather the license merely conferred a covenant not to sue as to the "nonessential" patents in the pool. Nor, was there any evidence that Philips would have priced its licenses differently, had it been required to license the "essential" patents separately from the "nonessential" patents. The value of the package was largely, if not entirely, based upon the "essential" patents. Essentially, the "nonessential" patents were "free goods". As such, they could have no anticompetitive effects in a downstream tied product market.

The court recognized that the ITC application of a "per se" misuse standard ignored the procompetitive effects of package licensing, including reduced transaction costs, avoidance of costly infringement litigation, and the elimination of uncertainty associated with technology investment decisions.

The Federal Circuit also agreed with Philips that the ITC had failed to properly analyze the factual issue of "essentiality" in determining whether there were "commercially feasible" substitute technologies for the teachings of the "nonessential" patents. Absent "commercially feasible" substitutable technologies, there could be no foreclosure of competitive opportunities in any downstream market. The evidence failed to disclose that there were any commercially viable substitutes for these patents that could impact the manufacture or sale of compact disk by manufactures who would have an interest in practicing the "nonessential" patents. Again, the Federal Circuit pointed out that the very concept of "essentiality" is one that is ephemeral and time-bound. The subsequent emergence of alternative technologies may render the patents that were originally considered "essential" to be something less than "essential", if not "nonessential". The application of a rigid "per se" misuse standard would therefore encourage licensees to opportunistically challenge package licenses after entering into them, in the hope of having all of the patents declared nonenforceable.

Finally, the court held that the ITC's finding of misuse under the rule of reason was similarly flawed. This was because there was no evidence to support a claim that there could be any anticompetitive foreclosure as to any commercially viable alternative technologies relative to the "nonessential" patents in the packaged license. Again, the ITC had failed to credit the procompetitive efficiencies in Broadcast Music.⁶

The panel acknowledged the grant of certiorari in Independent Ink., but reasoned that it should go ahead and decide the case rather than waiting for the Supreme Court to determine whether or not Paramount and Loew's were venerable, vestigial, void, or voidable.

1. See, United States v. Loew's, Inc., 371 U.S. 38, 45 (1962); United States v. Paramount Pictures, Inc., 334 U.S. 131 (1948).


2. 396 F.3d 1342 (Fed. Cir. 2005), cert. granted, No. 04-1329 (United States Supreme Court, 2005).


3. 332 U.S. 392, 395 (1947).


4. 333 U.S. 364 400 (1948).


5. See, e.g., Zenith Radio Corp. v. Hazeltine Res., Inc., 395 U.S. 100, 135-36 (1969) ("key inquiry is whether by imposing conditions that derive their force from the patent, the patentee has impermissibly broadened the scope of the patent grant with anticompetitive effects.") C.R. Bard, Inc. v. The M3 Sys., Inc., 157 F.3d 1340, 1372 (Fed. Cir. 1998); Windsurfing Int'l, Inc. v. AMF, Inc., 782 F.2d 995 (1001) (Fed. Cir. 1986).


6. Broadcast Music, Inc. v. CBS, 441 U.S. 1 (1979).




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

In a case concerning competition between would-be entrants to a generic drug market and competition between generic pharmaceutical firms and a patentee, the Eleventh Circuit held that a patentee's infringement action is immune from antitrust challenge, but the same patentee's settlement of infringement proceedings with a third party may give rise to liability under Sections 1 and 2 of the Sherman Act. Andrx Pharmaceuticals, Inc. v. Elan Corp., PLC, 11th Cir., No. 03-13605, 8/29/05.

1. Infringement Actions Shielded from Antitrust Liability under Noerr-Pennington

The context of Andrx Pharmaceuticals is the process of obtaining FDA approval to market a generic version of a patented drug and the dealings between such applicants and the patentee itself. To obtain FDA approval to market and sell a generic version of a patented drug, the applicant must follow the procedures set forth in § 355(b) of the U.S. Food, Drug and Cosmetic Act, 21 U.S.C., known commonly as the Hatch Waxman Act. This requires the filing of an abbreviated new drug application ("ANDA"). If the patent covering the generic version is listed in the FDA Orange Book, the applicant must make one of four certifications in its ANDA. A Paragraph IV certification states that the listed patent is either invalid or not infringed. The applicant must also notify the patentee of the Paragraph IV filing, and the patentee has forty-five days to file an infringement suit against the applicant. An infringement proceeding stays the FDA's approval of the generic for up to thirty months unless the patent is found by a court earlier to be invalid or not infringed.

In this instance, Andrx had filed an ANDA to manufacture and sell a generic form of Elan's patented controlled release naproxen medication followed by a Paragraph IV certification. Pursuant to Hatch Waxman, Elan sued Andrx for infringement of its patented naproxen medication. Andrx in turn sued Elan on antitrust grounds, alleging that Elan brought its patent infringement action against Andrx to improperly protect its monopoly on the market for the naproxen drug since its patent was invalid.

In its defense, Elan argued it was immune to Andrx's action by virtue of the Noerr-Pennington doctrine. The Noerr-Pennington doctrine protects a party's First Amendment right to petition the government for a redress of grievances, and this right to petition extends to court proceedings. Both the district court and the Eleventh Circuit agreed with Elan, with the Eleventh Circuit citing the Supreme Court's holdings in Prof'l Real Estate Investors v. Columbia Pictures Indus., Inc., 508 U.S. 49 (1993) (judicial proceedings brought by defendant protected by Noerr-Pennington doctrine); and Cal. Motor Transp. Co. v. Trucking Unlimited, 404 U.S. 508, 510 (1972).

Andrx's attempt to thwart Elan's use of the Noerr-Pennington doctrine by invoking the "sham litigation exception" failed in both district court and the Eleventh Circuit. Applying Prof'l Real Estate's two part test for sham litigation, the Eleventh Circuit found that Elan's infringement suit against Andrx was neither objectively baseless, nor that Elan was shown to have brought the proceedings with a subjective motivation to interfere directly with Andrx's business relationships. Andrx's "sham" argument hinged on the finding that Elan's patent was invalid due to the on-sale bar found in 35 U.S.C. § 102. Two courts, however, had previously rejected this argument as did the Eleventh Circuit. With Elan's patent likely to be found valid, the court stated that while Elan's separate infringement action against Andrx has not yet been adjudicated, Elan's infringement suit could not be considered objectively baseless under the Prof'l Real Estate standard.

In addition, the Eleventh Circuit affirmed the district court's holding refusing to grant Andrx leave to amend. It found that Andrx had been on notice of the insufficiency of its pleadings of the "sham litigation exception" theory for more than one year before it filed leave to amend. Andrx's explanations for its delay did not, the court held, demonstrate that justice required the grant of the motion to amend. (Citing to Carruthers v. BSA Adver., Inc., 357 F.3d 1213, 1218 (11th Cir. 2004) (per curiam).) Likewise, the court rejected Andrx's attempt to inject a "sham litigation exception" theory based on Walker Process Equipment, Inc. v. Food Machinery & Chemical Corp., 382 U.S. 172 (1965), which it had not pled in its first amended complaint. The district court did not, the court held, abuse its discretion in denying Andrx's motion for leave to amend.

2. Patent License Agreement May Give Rise to Sherman Act §§ 1 and 2 Liability

Andrx's antitrust complaint also alleged that a license agreement entered into by Elan and another drug manufacturer, Skye Pharma, Inc., violated both §§ 1 and 2 of the Sherman Act. The agreement was entered into as part of a settlement between Elan and Skye Pharma after Skye Pharma, like Andrx, filed a Paragraph IV ANDA for a generic form of controlled release naproxen followed by an infringement suit brought by Elan.

The district court held that Andrx's claims regarding the settlement and license arrangements between Elan and Skye Pharma failed to state a claim as necessary for these claims to survive a motion for judgment on the pleadings. The Eleventh Circuit reversed. Contrary to earlier decisions, the Federal Rules of Civil Procedure, Rule 8(a)(2) does not, the court held, mandate a heightened pleading standard. (Citing Eleventh Circuit precedents Quality Foods de Centro America, S.A. v. Latin American Agribusiness Dev. Corp., S.A., 711 F.2d 989, 995 (11th Cir. 1983); and Spanish Broad Sys. of Fla., Inc.v. Clear Channel Communications, Inc., 376, F.3d 1065, 1077 (11th Cir. 2004).)

(a) Pleading Requirements to Adequately State a Claim that a License Agreement Constitutes an Unlawful Restraint of Trade under § 1 of the Sherman Act

According to the Eleventh Circuit, under the notice pleading requirements of F.R.C.P. 8(a), to prevail on a claim that a patent infringement settlement agreement violates § 1 of the Sherman At, a plaintiff must prove (1) the scope of the exclusionary potential of the patent; (2) the extent to which the agreements exceed that scope of the patent; and (3) the resulting anticompetitive effects in the relevant market.

In this instance, Andrx properly alleged that Elan's patent was necessary to the manufacture and sale of a controlled release naproxen medication and that the owner could effectively exclude competitors from making other controlled release naproxen medications. The court thus found that Andrx satisfied the first element to stating its claim.

Andrx's allegations as to the second element of this pleading requirement are more interesting. An assignment of a patent is specifically authorized by the Patent Act, 35 U.S.C. § 261 (1994), and is generally lawful under the antitrust laws. However, an assignment may violate the Sherman Act where the assignment constitutes unlawful monopolization or is part of an agreement by competitors to restrain trade beyond the scope of the patent grant. (See In re Cardizem Antitrust Litigation, 332 F.3d 896 (6th Cir. 2003); and Valley Drug v. Geneva Pharmaceuticals, 344 F.3d 1294 (11th Cir. 2003).)

In this instance, Andrx contended that as part of the settlement agreement, Skye Pharma agreed with Elan not to manufacture or sell a generic controlled release naproxen drug and that this putative agreement exceeded the lawful scope of patent rights as well as creating a bottleneck monopoly under Hatch Waxman as Skye Pharma was the first generic and entitled to the exclusive 180-day period to market a generic form of the drug covered by a § 355(b) application. This agreement not to manufacture or sell thus effectively blocked entry by Andrx and other potential generic competitors. and found by the court sufficient to satisfy the third element.

(b) Pleading Requirements to Adequately State a Claim that a Settlement and License Agreement of Patent Rights Violates S. 2 of the Sherman Act

The Eleventh Circuit likewise overturned the district court's finding that Andrx failed to state a Sherman Act § 2 claim of attempted monopolization relating to Elan's settlement and license agreement with Skye Pharma. Applying Quality Foods, 711 F.2d at 996, the court set out the requirements to state such a claim: (1) plaintiff must show specific intent on the part of the defendant to bring about a monopoly; and (2) the defendant's conduct has a dangerous probability of success. Andrx satisfied the first prong by stating that Elan had the specific intent to monopolize and preserve a monopoly in the controlled release naproxen market. Andrx additionally alleged that Elan was the only supplier of naproxen in the United States and that Elan therefore had achieved a probability of success. Andrx thus satisfied the second prong.

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

On September 22, 2005, Ms. Neelie Kroes, the European Union's Competition Commissioner, gave a speech at the Harvard Club, New York, on enhancing actions for damages for breach of competition rules in Europe.

This is one of Ms. Kroes top priorities, and she is personally convinced that private enforcement of the European competition rules will create a more competitive environment for European business and industry. She believes that the threat of having to pay damages for the harm caused by an infringement of the European antitrust rules will have a strong additional deterrent effect over and above the sanctions that can currently be imposed via public enforcement.

Ms Kroes believes that private action will promote a culture of competition enforcement amongst businesses, industry, and consumers, which will, in turn, help broaden the basis of support for the European antitrust rules. This implies a wider scope of enforcement beyond the priorities set by the European competition authorities. The enforcement of the competition rules via the courts will also provide direct justice to the victims of illegal anticompetitive behavior, by providing compensation for the loss they have suffered. Ms. Kroes emphasized that this instant relevance for citizens is something that enforcement by competition authorities can only rarely achieve.

A recent study found that private actions for damages for breach of competition law is totally underdeveloped in Europe. Accordingly, Ms Kroes confirmed that the European Commission is working on a Green Paper, which will set out the options that it is considering in the promotion of private enforcement of EC competition rules. The Green Paper will be used to stimulate discussion on identifying the appropriate incentives for private damage claims, while avoiding unmeritorious and even vexatious claims, and find ways to increase deterrence, while avoiding the situation where defendants settle simply because litigation costs are too high.

The European Commission is keen to learn from the US experience on how to foster a competition culture, and not a litigation culture. Ms Kroes thought that that US experience showed that there is no contradiction between fostering private anti-trust enforcement and preserving an efficient fight against cartels. She felt that private enforcement is complementary to the enforcement actions taken by competition authorities

Nor did she see any conflict between the promotion of private anti-trust enforcement in Europe, and the strengthening of the efficiency of the EC leniency programs. For example, corporations which qualify under the Department of Justice's antitrust leniency policy are now be able to avoid both treble damages and joint and several liability if they cooperate sufficiently with private plaintiffs, for instance, in the recovery of their losses.

However, Ms. Kroes recognized that is important to have a just and efficient system for final consumers to claim damages, which protects the genuine interests of the final consumer without imposing a disproportionate burden on the defendant. The Green Paper will, therefore, consider the possibilities of collective and representative damages actions. The Green Paper, which it is intended to be published by the end of 2005, will also cover issues of access to evidence; fault requirement; calculation of damages; collective actions; costs of proceedings; pass-on defense; and standing for indirect purchasers.

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

On September 16, 2005, the Third Circuit affirmed a district court's dismissal of a plaintiff's antitrust case on summary judgment in Harrison Aire, Inc. v. Aerostar International, Inc., Nos. 04-2904 & 04-3052 (3d Cir. Sept. 16, 2005). The three judge panel unanimously concurred with the district court that Harrison Aire had failed to show that Aerostar International had illegally established a monopoly over the market for replacement fabric for Aerostar hot air balloons or had illegally tied its repair fabric to the purchase of the balloon. The Third Circuit did, however, decide that Harrison Aire had standing to raise antitrust claims.

The facts of the case are as follows: Terry Harrison founded Harrison Aire, which offered hot air balloon flights in New Jersey, after retiring from his position as a pilot with Eastern Airlines in 1973. Mr. Harrison purchased his first hot air balloon from Raven Industries, the predecessor of Aerostar, in 1978. After purchasing the balloon, Raven's representative informed Mr. Harrison that he could only use Raven-made replacement fabric to repair the balloon, as other fabric would render the balloon "unairworthy." Id. at 3-7.

According to the decision, Mr. Harrison complained about this restriction, as repairing a balloon generally increases the usable life by 50-100% and other manufacturers sold considerably cheaper fabrics. In 1982, Raven made the policy explicit by placing the language in its owner manual, although Raven placed the language in the FAA Approved section, as opposed to the FAA Required section. Mr. Harrison continued to complain, but the representatives continued to tell him that no other fabric was "equal to or better" than Raven Fabric. Because the FAA required that any replacement parts make the balloon "equal to or better" than the original, Mr. Harrison understood Raven's answer to mean that his hot air balloons would no longer comply with FAA regulations if he repaired his balloon with non-Aerostar fabric. Id. at 6.

Aerostar, which purchased Raven in 1986, continued to refuse Mr. Harrison's requests to use other manufacturers' fabrics. Despite the refusals and his desire to find a better price for his replacement fabric, Mr. Harrison bought a "Big Ride" Aerostar balloon in 1986. In 1996, the balloon's fabric needed replacing, and Mr. Harrison again asked Aerostar to allow him to use the fabric of either of the manufacturers who had received approval to produce fabric for Aerostar balloons. Again, Aerostar refused to allow him to use other fabrics and, after investigating one of the brands and finding it unsatisfactory, Mr. Harrison decided to retire the "Big Ride" balloon. Id. at 7.

In July 2000, Braden's Balloons Aloft, Incorporated convinced an administrative law judge that Aerostar's warning was not legally binding. After learning of the decision, Mr. Harrison decided in March 2002 to file suit against Aerostar, alleging that Raven's and Aerostar's policies had caused his cash flow problems stemming from the operation of the "Big Ride" balloon. Specifically, Mr. Harrison argued that Raven and Aerostar had attempted to monopolize the Aerostar Balloon replacement fabric aftermarket, that Aerostar had unlawfully tied the Aerostar-brand fabric to Aerostar balloons, and a number of state law claims. Id. at 7-8.

The district court granted Aerostar's motion for summary judgment, holding that Mr. Harrison had failed to show that Aerostar had sufficient market power over the markets for either hot air balloons or replacement fabric, and that Mr. Harrison did not have antitrust standing, as he was injured by Raven's and Aerostar's purported misrepresentations, rather than any actual limitations. Mr. Harrison and Aerostar then agreed to dispose of the state law claims to facilitate appeal of the antitrust issues. Id. at 8, n. 1.

The Third Circuit affirmed the district court's substantive antitrust decisions. The Third Circuit first defined the relevant product market as "replacement fabric for Aerostar balloons." Id. at 16-17. The Third Circuit then looked to the Supreme Court's Kodak decision to answer "whether competition in the equipment market will significantly restrain power in the service and parts market." Id. at 17.

With regard to monopolization, the Third Circuit noted that usually competition in a primary market will discipline any attempt to monopolize the aftermarket, as customers, perceiving the higher prices in the aftermarket, will opt to purchase competitors' products in the primary market. Primary market competition will not restrain aftermarket abuses, however, if there was a combination of 1) a policy change after the products were purchased, 2) supracompetitive pricing, 3) dominance of the relevant aftermarket, 4) significant information costs that prevent life cycle pricing, or 5) high switching costs that could lock in a customer. Id. at 17-18.

The Third Circuit held that Mr. Harrison failed to show that Aerostar dominated the primary market or that any of the Kodak factors indicated undue market power in the aftermarket. Id. at 18. The Third Circuit noted that despite being aware of the restrictive fabric policy and its implications, Mr. Harrison chose in 1986 to purchase the "Big Ride" balloon from Aerostar. Mr. Harrison had the benefit of a competitive primary market when he chose Aerostar in 1986 and therefore should have calculated the costs of repairing the balloon with Aerostar material at that point. "Lacking any evidence of significant information barriers to lifecycle pricing, or any other evidence dissociating competitive conditions in the primary market and the aftermarket, summary judgment is proper on Harrison Aire's monopolization claim." Id. at 20.

The Third Circuit summarily dismissed the tying claim, holding that "the claim lacks merit." Id. Mr. Harrison had alleged that Aerostar had tied its replacement fabric to its hot air balloons. The Third Circuit found that because "[t]ying requires 'appreciable economic power' in the tying product market," Mr. Harrison's failure to "produce any evidence of appreciable market power in the tying product market" doomed his claim. Id. at 20-21.

The Third Circuit did hold, however, that Mr. Harrison had standing to raise his substantive antitrust claims. According to the Third Circuit, a jury may have found that Mr. Harrison's reliance on the manual's restrictions was reasonable. The Third Circuit also noted that until the Braden's case, the FAA had also thought that the Aerostar restrictions were binding. Thus, if Mr. Harrison had proven that Aerostar had prevented him from considering competitors, he would have suffered "the sort of harm the antitrust laws are intended to prevent." Id. at 22-23.

Although Mr. Harrison had standing to allege his antitrust injuries, the Third Circuit held that because he could not show that Raven or Aerostar had power in the primary market for hot air balloons, both his monopolization and tying claims failed.

Authored by:
Christopher Bowen
202-772-5348
cbowen@sheppardmullin.com

On September 29, 2005, Woodson & Associates, Inc., a Florida electrical contractor, was charged with conspiring to rig bids with respect to construction contracts in support of the Evolved Expendable Launch Vehicle ("EELV") program supported by the U.S. Air Force. According to the one-count felony charge filed in the U.S. District Court in Orlando, Florida, Woodson allegedly participated in a conspiracy to suppress and eliminate competition from at least March 1998 until June 2002 by rigging a series of bids on electrical construction contracts with regard to the EELV program at Space Launch Complex 37 at Cape Canaveral Air Force Station ("CCAFS"). Woodson agreed to plea guilty and pay a criminal penalty of $175,000.

Woodson was charged with carrying out the conspiracy with its co-conspirators, by, among other things:

• attending meetings and engaging in telephone conversations during which it discussed the submission of prospective bids on contracts with respect to the EELV program at Space Launch Complex 37 at CCAFS;

• agreeing during those meetings and telephone conversations not to compete on certain projects at Space Launch Complex 37; specifically Raytheon Engineers and Constructors, Inc. ("Raytheon") Project 7158 ("Underground Duct Bank"), and Project 7501 ("Fire Alarm and Smoke Detection Systems");

• agreeing during those meetings and telephone calls not to compete by designating Woodson the successful bidder on those projects; and

• submitting bids to Raytheon on Projects 7158 and 7501, which contained false, fictitious, and fraudulent statements and entries.

The charge and plea agreement demonstrates the Antitrust Division's resolve to prosecute corporations that allegedly take part in collusive cartels rather than independently compete. The ongoing investigation is being conducted by the Antitrust Division's Atlanta Field Office, with the assistance of the National Aeronautics and Space Administration, Office of Inspector General, and the United States Air Force Office of Special Investigations.

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

• On October 4, the Antitrust Division amended the complaint in its antitrust lawsuit against the National Association of Realtors ("NAR"), charging that the group's modified policy continues to prevent Internet-based real estate brokers from offering better services and lower costs to consumers. The lawsuit challenges NAR rules that limit competition from brokers who use Internet tools to serve their customers. The new complaint addresses how NAR's changes to its rules still obstruct competition, threaten to lock in outmoded business models and inflate prices in the industry. On the same day, NAR announced a modification of its policy. The Antitrust Division states that the modified policy continues to provide "brick-and-mortar" brokers with the power to inhibit the growth of Internet-based business models. The amended complaint asks the court to prevent NAR from using either the initial policy or the modified policy. Specifically, the modified policy contains a provision, the "blanket opt-out," that allows brick-and-mortar brokers to prevent an innovative broker from providing over the Internet the same Multiple Listing Service ("MLS") information that other brokers can provide in their offices. NAR's initial policy contained a similar provision. NAR's modified policy specifically exempts its own official website, Realtor.com, from the blanket opt out.

• On September 26, the Antitrust Division, at the request of the FTC, filed a civil antitrust lawsuit against Scott R. Sacane, a hedge fund manager, for violating the Hart-Scott-Rodino Antitrust Improvements Act of 1976. At the same time, the Division filed a proposed consent decree whereby Mr. Sacane agrees to pay a $350,000 civil penalty to settle charges that he violated premerger reporting requirements. According to the complaint, Mr. Sacane failed to comply with the premerger notification and waiting period requirements before making substantial acquisitions of two companies through an investment fund that he controlled, Durus Life Science Master Fund. Allegedly, Mr. Sacane ultimately held more than 50 percent of the voting securities of Aksys Ltd. and more than $100 million of voting securities of Esperion Therapeutics Inc. without complying with the Act. The complaint alleges that Mr. Sacane was in violation of the HSR Act from February 24, 2003 through May 2, 2005. The action demonstrates the FTC and DOJ's willingness to enforce the technical requirements of the HSR Act.

• On September 13, 2005, the Antitrust Division and the FTC announced that they will host a joint workshop entitled "Competition Policy and the Real Estate Industry." The workshop will cover such topics as new and innovative brokerage business models, multiple listing services, and the implications of state-imposed minimum-service requirements. The event, which is open to the public and the press, will be held on October 25, 2005 at the FTC's Satellite Building Conference Center located at 601 New Jersey Avenue, N.W., Washington, D.C.

• On September 8, the Antitrust Division filed a lawsuit against the NAR for allegedly suppressing competition for real estate broker services. Participation in the local MLS makes it possible for a broker to provide customers with listings for virtually all properties for sale in the community, which is critical to compete in the local market. Some brokers have recently begun offering brokerage services to their customers over the Internet, using so-called virtual office websites, or "VOWs". VOWs are password-protected Internet sites that allow the broker's customers to search the MLS database on their own, using their home computers to obtain the same information that would be available in a broker's brick-and-mortar office. Delivering listings over the Internet gives web-savvy consumers more control over their search for a home, allowing them to educate themselves about their options at their own pace and on their own time. This allows brokers to reduce the time that their agents spend searching the MLS database or showing homes the customer dislikes. The Division says that because the Internet can be used to deliver brokerage services more efficiently — resulting in better service and lower costs to consumers — brokers who utilize the Internet represent a competitive challenge to traditional brokers. In its complaint, the Division alleges that NAR's policy restrains competition by requiring NAR-affiliated MLSs to adopt rules that will allow brokers to withhold their clients' listings from other brokers' websites by means of an "opt out." On the same day of the lawsuit, the NAR amended its policy, but the Division did not withdraw its lawsuit.

• On September 2, 2005, the Antitrust Division filed an antitrust lawsuit challenging a non-compete arrangement between two digital jukebox companies--NSM Music Group Ltd. ("NSM") and Ecast Inc. ("Ecast"). The Antitrust Division also filed a proposed consent decree along with the lawsuit that requires the two companies to terminate the alleged illegal agreement under which NSM agreed not to enter the U.S. market with a digital jukebox to compete with Ecast. According to the complaint, NSM, already a manufacturer of CD jukeboxes, planned to begin offering a digital jukebox powered by its own platform in the United States in late 2002. At that time, digital jukebox purchasers had only two choices of digital jukebox products, one of which used Ecast's platform. A digital jukebox platform consists of a library of songs that have been licensed from U.S. copyright holders and the software necessary to access and play the songs. When installed in jukeboxes, a platform allows consumers to play any song in the music library. Allegedly, NSM abandoned its plans to enter the U.S. market with its own platform once it reached an agreement with Ecast that it would only manufacture digital jukeboxes incorporating Ecast's platform. The Antitrust Division believes that NSM's release of a third competing digital jukebox platform would have stimulated competition and resulted in better products at lower prices.

• On September 1, Thomas O. Barnett, acting Assistant Attorney General for the Antitrust Division, announced that Gerald F. Masoudi has been appointed to serve as the Deputy Assistant Attorney General in charge of International, Policy, and Appellate Matters for the Division. Mr. Masoudi was serving as Deputy Chief Counsel at the United States Food and Drug Administration. Masoudi earned his B.A. in economics from Amherst College in 1990. In 1993, he graduated with high honors from the University of Chicago Law School, where he served as an editor of the University of Chicago Law Review and was a John M. Olin Fellow in Law and Economics. Masoudi clerked for Judge Frank H. Easterbrook of the U.S. Court of Appeals for the Seventh Circuit.

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

• On September 30, the Federal Trade Commission conditionally approved The Procter & Gamble Company's ("P&G") $57 billion acquisition of rival consumer products manufacturer The Gillette Company ("Gillette"), provided the companies divest a variety of overlapping assets ranging from toothbrushes to antiperspirant/deodorant ("AP/DO") to ensure continued competition following the transaction. Under a consent agreement with the FTC, P&G and Gillette will be required to divest 1) Gillette's Rembrandt at-home teeth whitening business; 2) P&G's Crest SpinBrush battery-powered and rechargeable toothbrush business; and 3) Gillette's Right Guard men's AP/DO business. In addition, P&G must amend its joint venture agreement with Philips Oral Health Care, Inc. ("Philips") regarding the Crest Sonicare IntelliClean System rechargeable toothbrush.

  According to the complaint, P&G's acquisition of Gillette would be anticompetitive and in violation of Section 5 of the FTC Act and Section 7 of the Clayton Act, as amended. The FTC contends that the deal would lessen competition in the United States markets for at-home teeth whitening products, adult battery-powered toothbrushes, rechargeable toothbrushes, and men's AP/DOs. The transaction as proposed would likely lead to increased prices for these products. The complaint also states that entry by a new competitor into each of the relevant markets is unlikely to deter the alleged anticompetitive impact of the transaction, as such entry would be difficult, time consuming, and costly.

  The consent agreement is designed to remedy the allegedly illegal anticompetitive impact of P&G's acquisition of Gillette. It requires the companies to divest the Rembrandt business within three months and the Right Guard business within four months after the order becomes final. The buyer of each asset must be approved by the Commission, and if the companies cannot divest the businesses within the time required, the FTC may appoint a trustee to complete the divestitures. The consent agreement contains a separate order to maintain assets that requires P&G and Gillette to maintain the viability of the Rembrandt and Right Guard businesses as competitive assets until they are transferred to Commission-approved buyers. The FTC has approved Edward Gold of PricewaterhouseCoopers as the Interim Monitor to ensure the company's compliance with the consent agreement. The consent agreement contains several provisions to ensure the successful divestiture of the Crest SpinBrush business to Church & Dwight, Co., Inc., the Commission-approved buyer of these assets. First, it requires P&G to divest the rights and assets relating to adult battery-powered and rechargeable toothbrushes, including research and development data, sales and marketing materials, and intellectual property. Second, P&G will provide Church & Dwight with a transitional license to the Crest trademark to use with the SpinBrush name. These provisions will ensure that Church & Dwight is able to transition the Crest SpinBrush family of products to a brand it chooses. Third, the agreement requires P&G to provide services to Church & Dwight for several months to ensure the continued viability of SpinBrush products. Finally, the agreement requires P&G to amend its joint venture agreement with Philips regarding IntelliClean. The amended agreement allows Philips independently to market and sell IntelliClean and eliminates all non-compete provisions, allowing both P&G and Philips to develop and sell rechargeable toothbrush products in the future.

  The European Commission ("EC"), Canada, and Mexico also reviewed this proposed merger. Throughout the course of their respective investigations, the FTC and the staff of the EC Competition Directorate, the Canadian Competition Bureau, and the Mexican Federal Competition Commission consulted and cooperated with each other under the terms of the respective cooperation agreements with each jurisdiction and 2002 U.S.-EC Best Practices on Cooperation in Merger Investigations.

  The Commission vote to approve the complaint, consent order, order to maintain assets, and interim monitor agreement was 2-0-2, with Chairman Deborah Platt Majoras and Commissioner Pamela Jones Harbour recused.

• On September 27, the Federal Trade Commission and the U.S. Department of Justice Antitrust Division announced an expedited antitrust procedure and guidance for collaborations of businesses working to rebuild communities affected by Hurricanes Katrina and Rita. Under the expedited procedure for proposed business conduct relating to the aftermath of Hurricanes Katrina and Rita, the agencies will state their enforcement intentions within five business days of receiving the proposal. The FTC and DOJ already have programs in place to provide guidance to businesses concerned about the legality of proposed conduct under the antitrust laws. The FTC's "Staff Advisory Opinion" procedure and DOJ's "Business Review Letter" procedure allow any firm, individual, or group of firms or individuals to submit a proposed business plan or activity to the agencies and to receive a statement whether the agencies will challenge the activity under the antitrust laws. That process typically entails at least a 90-day review period prior to the issuance of the agency's guidance.

  Under the expedited procedure, an applicant would have to provide the FTC or DOJ by fax, e-mail, or letter a written description of the proposal, including the parties that would be involved in the effort or activity and the name and contact information of a person from whom the agencies could obtain additional information. This expedited procedure is for use solely for post-hurricane relief efforts and may be invoked at the option of the requestor in lieu of the agencies' standard procedures for handling requests for advice.

• On September 26, the Commission announced that a Connecticut-based hedge fund manager who failed to report several large stock purchases before they were made, as required by the Hart-Scott-Rodino ("HSR") Premerger Notification Act, will pay a $350,000 civil penalty to settle Federal Trade Commission charges. According to the complaint filed in federal district court by the United States Department of Justice at the request of the Commission, Scott Sacane, manager of the Durus Life Sciences Master Fund, failed to make four required premerger notification filings. His failure to do so violated the HSR Act for each transaction.

  In 1999, Mr. Sacane created what is commonly referred to as a hedge fund, which was composed of the Durus Life Sciences Master Fund Ltd. and a domestic and an international feeder fund. In transactions made between February 2003 and June 2003, Sacane acquired more than 50 percent of Aksys Ltd. ("Aksys") on behalf of the master fund, crossing two HSR pre-merger filing thresholds. During the same period, Mr. Sacane bought more than $100 million of stock in Esperion Therapeutics, Inc., ("Esperion") on behalf of the master fund, also crossing two HSR thresholds. No premerger filings were made prior to crossing any of the four thresholds.

  The complaint charged that in not filing each of the four HSR premerger notifications, Mr. Sacane failed to comply with the waiting period requirements related to the acquisitions of Aksys and Esperion shares. The shares were acquired on behalf of the master fund. Because of the fund's structure, under the HSR Act, both the managing entity of the master fund and the domestic feeder fund were required to make filings. As the parent of the managing entity, Mr. Sacane was required to file premerger filings on his own behalf, but he failed to do so. Based on its determination of the culpability of the parties in this case, the Commission recommended seeking penalties only against Mr. Sacane. In settling the complaint, Mr. Sacane has agreed to pay a civil penalty of $350,000.

• On September 23, following a public comment period, the Commission approved the issuance of a final consent order in the matter concerning Novartis AG's recent acquisition of Eon Labs, Inc. The Commission vote to approve the final consent order was 4-0.

• On September 16, the Commission approved a petition seeking approval of three proposed divestitures required under the FTC's order regarding Valero L.P.'s ("Valero") recent acquisition of Kaneb Services LLC ("Kaneb"). Under the terms of the consent order, Valero and Kaneb are required to divest: 1) the West Pipeline System; 2) the Philadelphia Area Terminals; and 3) the San Francisco Bay Terminals, as those terms are defined in the order, to Commission-approved purchasers. Through their petition, Valero and Kaneb requested FTC approval to divest all three assets to Pacific Energy Group LLC, or one of its wholly owned subsidiaries, per a July 1, 2005, purchase agreement between the relevant companies. The Commission has now approved each of the proposed divestitures. The Commission vote approving the divestitures was 3-0-1, with Chairman Deborah Platt Majoras recused.

• On September 13, the Federal Trade Commission and the Department of Justice's Antitrust Division announced that they will host a 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 will cover such topics as new and innovative brokerage business models, multiple listing services, and the implications of state-imposed minimum-service requirements. The event, which is open to the public and the press, will be held on October 25, 2005, at the FTC's Satellite Building Conference Center located at 601 New Jersey Avenue, N.W., Washington, D.C.

• On September 7 and September 21, the FTC's Associate General Counsel for Energy, John Seesel, testified on behalf of the FTC before the U.S. House of Representatives' Committee on Energy and Commerce and the U.S. Senate's Committee on Commerce, Science, and Transportation respectively. Mr. Seesel detailed the FTC's varied initiatives to protect competitive markets in the production, distribution, and sale of gasoline, and discussed in detail an important Commission study issued earlier this year on the factors affecting gas prices nationwide. In addition, Mr. Seesel testified that in 2004, the FTC staff published a study reviewing mergers and structural changes in the U.S. petroleum industry. The study also provided an overview of antitrust enforcement actions the Commission has taken since 1981 - including 19 complaints filed against larger petroleum mergers. Also, the FTC actively monitors wholesale and retail prices of gasoline and diesel, Mr. Seesel stated, to protect consumers by identifying unusual movements in prices both at the wholesale and retail levels and investigating their causes when appropriate.

  Mr. Seesel's testimony addressed two areas of concern. It first reviewed the basic tools the FTC uses to promote competition in the petroleum industry, including challenging potentially anticompetitive mergers, prosecuting nonmerger antitrust violations, monitoring industry conduct to detect possible anticompetitive behavior, and researching developments in the petroleum sector. Next, it reviewed what the Commission has learned from its conferences and research, as well as its review of recent gasoline price changes. The testimony also provided a detailed explanation of the Commission's recent report on the factors affecting the price of gasoline - a topic of even more relevance to consumers in the wake of price increases following Hurricane Katrina. The report analyzed the factors, including supply, demand, and competition, as well as federal, state, and local regulations, that drive gasoline prices, so policy-makers can evaluate and choose strategies likely to succeed in addressing high gasoline prices.

  Finally, the testimony stressed: 1) the worldwide supply, demand, and competition for crude oil are the most important factors in the national average prices of gasoline in the United States, and 2) that gasoline supply, demand, and competition produced relatively low and stable prices from 1984 until 2004, despite substantial increases in U.S. gasoline consumption. It also discussed local regulations that may have an impact on retail gasoline prices, as well as how the development of hypermarkets - large retailers of general merchandise and grocery items, such as Wal-Mart and Safeway - has affected what consumers pay at the gas pump.

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

• The Federal Trade Commission ("FTC") and Canada's Competition Bureau are working together to educate consumers about worthless products purported to produce weight loss. In that regard, they announced on September 28 the translation of an educational teaser Web site about these ripoffs into French. The new French translation is at http://www.wemarket4u.net/fatfoe/francais/. The Web site is in English at http://wemarket4u.net/fatfoe/ and in Spanish at http://www.wemarket4u.net/fatfoe/espanol/. The teaser Web site is designed to reach consumers surfing online for weight-loss products. At first glance, the Web site appears to advertise a new product that guarantees fast, easy weight loss in all users, with no diet or exercise necessary to lose up to 10 pounds per week permanently. In reality, the claims made for "FatFoe" represent "red flags" to consumers because they are almost always false or misleading. When consumers try to order FatFoe, they learn the ad is a warning from the FTC and the Competition Bureau of Canada about diet rip-offs. Through the joint effort, the FatFoe Web site has also been registered in Canada at http://www.fatfoe.ca. More information from the FTC about diet and fitness is available at http://www.ftc.gov/dietfit/ and also from the FTC's Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580.

• On September 28, Superior Mortgage Corp. ("Superior"), a lender with 40 branch offices in 10 states and multiple Web sites, agreed to settle FTC charges that it violated federal law by failing to provide reasonable security for sensitive customer data and falsely claiming that it encrypted data submitted online. The settlement bars future deceptive claims and requires the company to establish data security procedures that will be reviewed by independent third-party auditors for 10 years. The FTC's Safeguards Rule, enacted under the Gramm-Leach-Bliley Act, requires financial institutions, including lenders like Superior, to implement reasonable policies and procedures to ensure the security and confidentiality of sensitive customer information. Superior maintained customers' Social Security numbers, credit histories, and credit card numbers, among other sensitive information. However, the FTC complaint alleges that Superior violated the Safeguards Rule because it failed to assess risks to its customer information until more than a year after the Safeguards Rule took effect; failed to implement appropriate password policies to limit access to company systems and documents containing sensitive customer information; did not encrypt or otherwise protect sensitive customer information before sending it by e-mail; and, failed to ensure that its service providers were providing appropriate security for customer information and addressing known security risks in a timely manner.

• The FTC and a partnership including cybersecurity experts, online marketers, consumer advocates, and federal officials launched a new multimedia, interactive consumer education campaign on September 27 to help consumers stay safe online. A comprehensive OnGuardOnline.gov Web site has tips, articles, videos, and interactive activities that will address topics such as: how to recognize scams on the Internet; how to shop securely online; how to avoid hackers and viruses; and, how to deal with spam, spyware, phishing, and peer-to-peer file-sharing. The partnership also developed an OnGuard Online brochure. Using straightforward, plain-language materials, the initiative aims to help computer users be on guard against Internet fraud, secure their computers, and protect their personal information.

• On September 27, the FTC announced federal court action taken against two groups of Canadian-based defendants, each allegedly engaged in widespread cross-border fraud schemes. In the first complaint, FTC v. Centurion Financial Benefits, the Commission alleged the defendants placed unsolicited outbound telemarketing calls to U.S. consumers, falsely offering them pre-approved MasterCard and Visa credit cards for an advance fee of $249. The second complaint, FTC v. Pacific Liberty Benefits, alleges the defendants engaged in the same type of fraud, with the company's telemarketers promising credit cards, as well as an array of "complimentary" gifts, for $319. The FTC alleges that in neither case did consumers actually receive the credit cards or other goods that they were promised, and in each, U.S. consumers lost millions of dollars. In each case, the FTC contends the defendants' conduct violated Section 5 of the FTC Act and the Telemarketing Sales Rule ("TSR"), as amended. Judges in the U.S. district court in Chicago, Illinois have issued temporary restraining orders barring the alleged illegal conduct and freezing the assets of defendants. In each case, Canadian law enforcement agencies also executed criminal search warrants and made arrests.

• The FTC announced on September 23 an opinion and order holding respondents Telebrands Corporation ("Telebrands"), TV Savings, L.L.C. ("TV Savings"), and their principal Ajit Khubani liable for disseminating unsubstantiated and false advertising for the Ab Force, a belt-like device that uses electronic stimulation to cause involuntary contraction of the muscles of the abdominal wall. The respondents reaped over $19 million from sales of the Ab Force, despite their admission that the product did not produce results. Based on its own analysis of the respondents' Ab Force ads, the FTC - in an opinion authored by Commissioner Jon Leibowitz - concluded that the ads conveyed the claims alleged in the administrative complaint. The Commission also determined that other evidence - including a copy test and expert testimony - confirmed the Commission's analysis. Before and during the Ab Force ad campaign, the respondents' competitors advertised ab belts that were supposed to improve the physical condition of the user's abdominal muscles and help the user lose inches and weight - without exercise. The respondents' ads invited consumers to recall infomercials for competitors' ab belts and to compare the Ab Force to them. However, the respondents were well aware that the Ab Force was useless for the health, weight loss, and fitness purposes advertised.

• On September 23, two companies and their owner, who sold travel services, were barred from violating the FTC's Do Not Call ("DNC") Rule after being charged with calling numbers on the National DNC Registry. In the complaint and stipulated final order announced, the FTC alleged that the Arizona-based defendants called hundreds of thousands of telephone numbers on the Registry. To settle the charges, the defendants not only are prohibited from calling consumers whose numbers are on the Registry, but also will pay $5,000 in civil penalties. There are currently more than 105 million numbers on the National DNC Registry. The defendants in the complaint and settlement, Cutting Edge Travel, LLC; Cutting Edge Marketing, LLC; and Jeffrey Cope, sold vacation packages and other travel-related services to consumers through outbound telemarketing calls. Both companies are owned by Cope and located in Tempe, Arizona. Cutting Edge Travel is the telemarketing arm of Cutting Edge Marketing. In its complaint, the FTC alleged the defendants violated the provisions of the TSR that relate to the National DNC Registry. Following the provisions' implementation on October 17, 2003, the defendants allegedly called hundreds of thousands of numbers listed on the Registry.

• Concluding a case against several defendants who deceptively claimed they could register consumers on the Federal Communications Commission's ("FCC") DNC Registry to prevent telemarketing calls - before the Registry even existed - the FTC announced on September 20 a stipulated final court order and separate default judgment against the remaining two defendants in the case. The FTC's original complaint charged defendants Telephone Protection Agency ("TPA") and Alex McKaughn, Robert Thompson, and Rebecca Phillips with violating both the FTC Act and the TSR through their allegedly deceptive conduct. The court order announced bans McKaughn from all telemarketing activities and prohibits him from making misrepresentations similar to those alleged in the complaint. The default judgment against Thompson - TPA's vice president - bans him from telemarketing and contains terms prohibiting marketing misrepresentations. The default judgment also includes a monetary judgment of more than $672,000, the amount of consumer harm the defendants allegedly caused. The FTC's claims against TPA and Phillips were settled previously. According to the FTC's complaint, the defendants cold-called consumers offering to list them on the FCC do not call list. At the time the calls were made, however, the FCC did not have a do not call list in place, and the defendants had no way of listing consumers, who were charged as much as $99.95 for their first year of service.

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

• On October 7, the European Commission cleared under the EU Merger Regulation, the proposed acquisition of MCI by Verizon Communications. Since 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 will nevertheless add to the scope of MCI's Internet network but the Commission's assessment of the transaction showed that this overlap between the activities of Verizon and MCI is, however, very limited, and that the combined firm will continue to face several strong and effective competitors. The Commission also examined the vertical effects which 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 will not materially affect competitors' ability to provide such services.

• On October 5, the European Commission appointed Professor Neil Barrett, a computer scientist, as the Trustee who will provide technical advice to the Commission on issues relating to Microsoft's compliance with the Commission's 2004 Decision that Microsoft Corporation broke the EC Treaty's ban on abuse of monopoly power (Article 82) by leveraging its near monopoly in the market for PC operating systems onto the markets for work group server operating systems and for media players. The Commission's Decision imposed a fine of €497 million on Microsoft, and required the company to implement remedies as regards both work group server operating systems and media players. The Monitoring Trustee's role is to provide impartial expert advice to the Commission on compliance issues. For example, as regards the interoperability remedy, where Microsoft is required to disclose complete and accurate interface documentation which would allow non-Microsoft work group servers to achieve full interoperability with Windows PCs and servers, his expertise might be used in assessing whether Microsoft's protocol disclosures are complete and accurate, and whether the terms under which Microsoft makes the protocol specifications available are reasonable and non-discriminatory.

• On September 30, 2005, the European Court of First Instance published details of an appeal brought by Microsoft Corporation against the European Commission's decision that Microsoft make available to third parties, in source code form, software developed by competitors who had received interoperability information from it. The disclosure of the interoperability information was ordered by the Commission's 2004 decision finding that Microsoft had infringed Article 82 of the EC Treaty's Competition rules. Microsoft claims, inter alia, that the Commission's decision unlawfully deprives Microsoft of its property rights; the Commission lacks competence to impose such obligations; and by requiring worldwide, and disclosure of Microsoft's property rights, the Commission's decision infringes binding principles of public international law.

• On September 30, the Canadian Competition Bureau announced that it would not challenge the acquisition of The Gillette Company ("Gillette") by The Procter & Gamble Company ("Procter & Gamble"). Following a thorough review, the Bureau determined that divestitures required by United States and European competition agencies adequately resolved concerns in Canada. The Bureau identified some concern in the oral care markets for battery powered toothbrushes and teeth whitening products. In order to resolve competition concerns raised by the United States Federal Trade Commission, the European Commission and the Competition Bureau, Procter & Gamble agreed to divest the Spinbrush and Rembrandt oral care lines in the United States, Europe and Canada. The Bureau believes that these measures will preserve competitive options for Canadian customers.

• On September 28, Graeme Samuel, Australian Competition and Consumer Commission ("ACCC") addressing the Economics Society of Australia's Detection of cartels symposium in Melbourne, stated that the introduction of criminal sanctions for cartel conduct will raise the bar for ACCC investigations. The Immunity Policy, the development of a Memorandum of Understanding with the Director of Public Prosecutions, enhanced training of ACCC staff in a dedicated criminal enforcement and cartel branch, and a campaign to raise awareness of cartels amongst government procurement officials were some of the steps already under way to ensure the agency was equipped to undertake its new role. "Investigations into cartels are some of the most complex and difficult investigations that the ACCC undertakes", he said. "Proving a criminal cartel offence will take that difficulty to a new level. The inherently secretive nature of cartels and the measures taken to avoid detection often necessitate time consuming and resource intensive investigations." Mr. Samuel also stated that the introduction of jail sentences for executives involved in cartel behavior would, he hoped, "prey on the minds of Australian company executives".

• On September 23, 2005, Neelie Kroes, European Competition Commissioner, delivered a speech to the Fordham Corporate Law Institute, New York, on the policy review of Article 82 of the EC Treaty. She stated her belief that Article 82 enforcement should focus on conduct that has actual or likely restrictive effects on the market, which harm consumers. Her philosophy is that competition, and not competitors, should be protected. The aim is to avoid consumer harm, and aggressive competition, including by dominant companies, is good as long as it ultimately benefits consumers. The Commissioner also believes that inefficient competitors should not be protected by European competition policy from aggressive price-based actions of a dominant firm. She stated that one possible approach to pricing abuses could be based on the premise that only the exclusion of "equally efficient" competitors is abusive.

• On September 22, an association of independent music companies challenged the European Commission in court in Luxembourg over its decision to clear the SonyBMG merger last year. The one-day hearing plays a vital role in the appeal which had already been fast-tracked by the court. This is the first time small businesses have taken on the Commission in legal action of this scale. The association contests that Commission's clearance decision wrongly decided that the merger would not create or strengthen a collective dominant position on the markets for recorded music and the wholesale market for licenses for online music; would not create a position of single dominance on the market for the distribution of online music; and would not lead to coordination of the parties' respective music publishing businesses, which are not covered by the concentration. The court is expected to rule on the case in three to six months.

• On September 21, the European Court of First Instance approved the European Commission's decision to prohibit the proposed acquisition of Gás de Portugal, the Portuguese gas incumbent, by Energias de Portugal, the Portuguese electricity incumbent, and the Italian energy company ENI. In December 2004, the Commission prohibited the merger as it considered that the deal would significantly impede effective competition and deprive domestic and industrial customers from the benefits of competition. The Court's judgment confirms that the Commission was right to block the merger in the absence of adequate remedies. The Court held that companies must propose adequate remedies in due time with a view to solve fully the competition concerns identified by the Commission.

• On September 15, the Bundeskartellamt in Bonn, Germany, imposed fines totaling over €20 million against seven public insurance companies, and the directors involved. Earlier this year, the Bundeskartellamt had imposed fines totaling approx. €130 million against ten other insurance companies. The cartel law violations involve industrial property insurance sector, the buildings monopoly insurance sector, and property insurance in the hospital sector. President of the Bundeskartellamt, Ulf Böge, said, "Evidence has shown that the insurance companies in question have agreed since mid 1999 on how to set insurance premiums and conditions in order to turn around the market to their advantage. This is a clear infringement of cartel law and the persons committing the offence were aware of that fact."

• On September 14, the European Commission fined thread producers from Germany, Belgium, The Netherlands, France, Switzerland and the United Kingdom a total of €43.497 million for operating cartels in the market for industrial thread in violation of EC Treaty rules on restrictive business practices (Article 81). "Cartel behavior is illegal, unjustified and unjustifiable, and will be punished severely no matter how large or small the companies involved" declared EU's Competition Commissioner, Neelie Kroes. "I will not allow consumers to be denied the benefits of the [European] Single Market by companies carving up markets between themselves".

• On September 8, the Australian Federal Court in Perth held that Admiral Mechanical Services Pty Ltd, Direct Engineering Pty Ltd, Envar Engineers and Contractors Pty Ltd, and Scott Mechanical Services Pty Ltd had engaged in price-fixing and other cartel conduct with competing commercial and industrial air-conditioning and mechanical services contractors with respect to tender prices to be submitted by them for the supply of those services in relation to particular projects in Western Australia. The court also declared that six individuals were directly or indirectly knowingly concerned in, or party to, the contraventions.

• On September 7, the governments of Canada and Japan signed an agreement to improve competition law enforcement in areas such as international cartels and merger review. "This agreement provides the Bureau with another key enforcement tool to deal with anti-competitive activities in increasingly globalized markets," said Ms. Scott, Canada's Commissioner of Competition. "More cooperation between competition authorities facilitates compliance and effective enforcement of competition laws, for the benefit of businesses and consumers." The agreement contains provisions for enforcement cooperation and coordination, notification on enforcement actions that may affect the other country, conflict avoidance and consultation with respect to enforcement activities, and effective confidentiality protections. It is similar to existing agreements that Canada has signed with the United States, the European Union, and Mexico.

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

• The FCC announced on Tuesday, September 27, 2005 that it will not require Internet telephone companies to disconnect customers who have not acknowledged limitations in the emergency-911 dialing capabilities of Internet telephony. Demonstrating flexibility after imposing a hard-line requirement that providers of voice-over-Internet protocol ("VoIP") obtain replies from all customers by September 28, 2005, the FCC said no customer cut-offs will be required of companies with 90 percent compliance. Attention to the issue among VoIP providers now is likely to turn to what they say is a more daunting challenge: They must provide location-based, or "enhanced 911", capability to 100 percent of customers by November 28, 2005. "In the end, our focus has always been on making sure that [Internet protocol] technologies offer the capability to customers that when they pick up the phone and dial 911, they get to get an emergency operator," FCC Chairman Kevin Martin said in an interview after Senate Commerce Committee hearing testimony. "The notification issue - telling people it doesn't work - was always secondary to making sure that the technology did work," he said. The public notice released Tuesday "recognizes that great progress has been made by VoIP providers," said Jim Kohlenberger, executive director of the Voice on the Net ("VON") Coalition, which represents Internet telephone companies. Twenty-one VoIP providers obtained 100 percent acknowledgement from their customers, and 32 providers reached 90 percent. More than 27 providers did not reach 90 percent, according to the FCC. "In recognition of these substantial efforts and the very high percentage of received acknowledgements, the FCC's Enforcement Bureau announces that it will not pursue enforcement action against such providers." Companies not at 90 percent compliance have until October 25, 2005 to submit status reports. The notice said no enforcement action will be taken until October 31, 2005.

• On September 23, 2005, the FCC released rules for the newly "deregulated" providers of high-speed Internet service over digital subscriber lines and mandated that they and Internet telephone companies design their networks to facilitate surveillance by law enforcement. The FCC issued two separate orders: One declared that broadband over DSL provided by telecommunications companies is now an unregulated "information service." The other order requires all broadband and companies capable of being linked to the public-switched telephone network to help law enforcers implement wiretaps. The decision to push DSL into the generally less regulated category of information service under telecom law was occasioned by the June 27 Supreme Court decision in National Cable and Telecommunications Association v. Brand X Internet Services. That ruling upheld the FCC's declaration that broadband over cable modems is an information service, not a more heavily regulated "telecommunications service." Friday's FCC orders were supplemented by a three-page policy statement restating the agency's commitment to "network neutrality," or the notion that broadband providers allow consumers to access any legal content, applications or devices.

• On September 23, 2005, the FCC granted a Verizon Communications' request for pricing flexibility on advanced Internet-based services. According to the FCC, "the services for which the waiver is granted are referred to by Verizon as 'fast-packet' services, and comprise packet-switching equipment and facilities that reach enterprise customers through dedicated special access lines to form high-capacity data networks." The decision affects broadband services to businesses. Verizon was pleased by the decision, but not Earl Comstock, CEO of CompTel/ALTS, an association of Bell competitors. "We are disappointed that the FCC is once again granting a Bell request to limit the scope of competition in this country. Without requiring Verizon to prove that enterprise customers have competitive alternatives, the FCC granted Verizon authority to charge monopoly rates without fear of government oversight." The relief for Verizon comes on top of FCC's order last Friday relieving Qwest Communications of certain restrictions on monopoly providers in Omaha, Neb.

• On September 22, 2005, a group of competitive local exchange carriers asked the FCC to grant market remedies before it blesses the mergers of AT&T with SBC Communications and MCI with Verizon Communications. During a news conference, the companies — Broadview, BridgeCom, Conversent, Eschelon Telecom, NuVox, TDS Metrocom, Xspedius and XO Communications — asked the agency to condition the mergers in a number of ways, including requiring SBC and Verizon to lower and freeze wholesale access rates, grant current customers the chance to cancel contracts and drop limits on the use of certain local lines. The group of companies has consistently asked regulators to deny the mergers outright, but the FCC appears to be moving quickly to approve them. All of the companies are dependent, to varying extents, on renting local high-speed lines to reach their customers. They fear those rates will skyrocket after the mergers. An SBC spokesman said, "It is not much of a surprise that eight of our competitors have now pivoted from trying to stop the approval of the SBC-AT&T merger to starting a lobbying campaign to saddle the combined SBC-AT&T with onerous, unnecessary regulatory obligations. Our merger review remains on track, as evidenced by the state of New York's unanimous approval without conditions."

• On September 12, 2005, FCC Chairman Kevin Martin has asked agency staff to draft orders approving two big telecommunications mergers — AT&T with SBC Communications and MCI with Verizon Communications, AP reports. FCC officials declined comment. Early September marked 180 days that the agency has been considering the AT&T, SBC merger, and in a public notice, the agency said it had "stopped the clock" until Oct. 13, one day after the FCC's October monthly meeting. The notice said the firms requested that the agency's "information time clock for consideration of the transaction be stopped," and the FCC described it as an "informal benchmark" for meeting merger-approval decisions. The agency "retains the discretion to determine whether, in any particular review proceeding, events beyond the agency's control, the need to obtain additional information or the interests of sound analysis constitute sufficient grounds to stop the clock."

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