On September 17, the European Court of First Instance (CFI) handed down its judgment upholding a decision of the European Commission (EC) that documents seized during an EC antitrust investigation were not covered by legal professional privilege.  Despite indications by the President of the Court during the early part of the proceedings that the CFI might extend the scope of legal professional privilege in EU law, the CFI held that communications between in-house counsel, and internal clients, are not privileged in relation to EC competition investigations, and it set out the procedure that EC officials should follow if a dispute as to privilege arises during an on-site investigation.

In this case, Azko Nobel v. EC, which concerned disputed documents uncovered during a "dawn raid", the CFI held that even though specific recognition of the role of in-house lawyers, and the protection of communications with such lawyers was relatively more common today than when previously considered in the case of AM & S in 1982, it was nevertheless not possible to identify tendencies which were uniform or had clear majority support in that regard in the laws of the Member States.  The CFI also highlighted the fact that a considerable number of Member States do not allow in-house lawyers to be admitted to the Bar or Law Society, and therefore do not recognize them as lawyers established in private practice.  Thus, "the protection only applies to the extent that the lawyer is independent, that is to say, not bound to his client by a relationship of employment".

In its judgment, the CFI clarified the types of documents that fall within the scope of legal professional privilege.  It held the following:

• Internal company documents which are drawn up exclusively for the purpose of seeking legal advice from a lawyer in exercise of the rights of defense, even if they have not been exchanged with a lawyer or have not been created for the purpose of being sent to a lawyer, may nonetheless be covered by professional privilege;

   

• The mere fact that a document has been discussed with a lawyer is not sufficient to give it privileged status; and,

   

• The fact that a document has been put together under competition law compliance does not suffice by itself to confer protection on that document.

The CFI also went on to clarify the procedure to be followed during an investigation where there are disputed documents.  The CFI highlighted the following points:

• The company concerned does not have to reveal the contents of the documents in question provided that it presents the EC officials with relevant material to demonstrate the privileged nature of the documents;

   

• The company is entitled to refuse to allow the EC officials to even take a cursory look a the documents which it claims to be privileged, provided that the company considers such a look would reveal the content of those documents.  The company must give the EC officially appropriate reasons for its view;

   

• Where the EC officials do not consider the material presented by the company to be confidential, they may place a copy of the document in a sealed envelope, and remove it with a view to a subsequent resolution to the dispute; and,

   

• The EC is not entitled to read the contents of the disputed document before it has adopted a decision allowing the company concerned to refer the matter effectively to the CFI.

Although this ruling did not extend the scope of legal professional privilege to include communications between in-house legal counsel and clients, the CFI clarified the type of documents that fall within this definition, and the procedure to be followed in the case of disputed documents.

Authored by:

Neil Ray

415-774-3269

nray@sheppardmullin.com

In May of this year, the United States Supreme Court issued a highly important decision significantly tightening the requirements for pleading antitrust conspiracies.  In Bell Atlantic Corp. v. Twombly, 127 S.Ct. 1955 (2007), the Court held that allegations of parallel conduct and conclusory assertions of agreement will not suffice to survive a 12(b)(6) motion to dismiss.  Rather, the complaint must state "enough factual matter (taken as true) to suggest that an agreement was made" and such allegations must be enough to raise a right to relief "above the speculative level."  In reaching this conclusion, the Court expressly rejected the longstanding formulation for deciding motions to dismiss set forth in Conley v. Gibson, 355 U.S. 41 (1957), which held that a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of its claim which would entitle it to relief.  Now, under Twombly, an antitrust plaintiff may not rely on the possibility that it may later establish "some set of undisclosed facts to support recovery," but instead must plead "enough facts to state a claim to relief that is plausible on its face," and not merely "conceivable."

On September 4, 2007, the Second Circuit applied Twombly to dismiss what would have been considered a fairly detailed complaint in the pre-Twombly world.  In In re Elevator Antitrust Litigation, 2007 WL 2471805 (2^nd Cir. 2007), plaintiffs alleged that defendant elevator companies conspired to fix prices for the sale and maintenance of elevators and to otherwise monopolize the markets for the sale and maintenance of elevators.  In support of these allegations of conspiracy, the plaintiffs' complaint asserted that the defendants participated in meetings in the United States and Europe to discuss pricing and market divisions, agreed to fix prices for elevators and elevator services, rigged bids for sales and maintenance, exchanged price quotes, allocated markets for sales and maintenance, collusively required customers to enter long-term maintenance contracts, and collectively took actions to drive independent elevator repair companies out of business.  Citing Twombly, the Second Circuit upheld dismissal of the plaintiffs' complaint because the conspiracy allegations provided "no plausible ground to support the inference of an unlawful agreement."

The plaintiffs argued that a plausible inference of conspiracy could be drawn from the complaint  because (1) the complaint averred agreements between the defendants; (2) the complaint averred parallel conduct; and (3) the complaint noted evidence suggesting anticompetitive wrongdoing by certain defendants in Europe.  Regarding the averments of agreements between the defendants, the Second Circuit observed that the complaint enumerated "basically every type of conspiratorial activity that one could imagine."  However, the court also observed that the list of conspiratorial activity was "in entirely general terms without specification of any particular activities by any particular defendant."  Quoting Twombly, the court stated that such "conclusory allegation[s] of agreement at some unidentified point do not supply facts adequate to show illegality."

The court was similarly unimpressed with the plaintiffs' allegations of parallel conduct.  The plaintiffs contended that parallel conduct such as similarities in contractual language, pricing, and equipment design indicated that there was a conspiracy among the defendants.  The court noted that such parallel conduct are as likely a result of rational and competitive business conduct as conspiracy.  Similar contract terms can reflect similar bargaining power and commercial goals, similar pricing is just as consistent with competition as with anticompetitive conspiracy, and similar equipment design might merely be a reflection of the state of the art.  Thus, the court held, the parallel conduct alleged by plaintiff did not meet Twombly's requirement of showing that a conspiracy was plausible rather than merely possible.

As noted, the plaintiffs also asserted that the complaint's specific factual allegations of defendants' anticompetitive misconduct in Europe shows that their allegations of conspiracy are plausible.  The plaintiffs alleged, for example, that European antitrust authorities initiated investigations into defendants, that these authorities issued statements stating that they had good reason to believe that defendants engaged in collusive behavior, and that news reports claim that some of the defendants admitted wrongdoing by their European employees.  According to plaintiffs, these facts show the existence of a worldwide conspiracy or, at the very least, conspiratorial behavior undertaken in Europe that affected prices in the United States.  The Second Circuit noted that there was no evidence of any link between the alleged European misconduct and conduct or effects in the U.S. and nothing more than conclusory allegations regarding the nature and scope of the alleged worldwide market for elevators.  For example, there were no allegations of global marketing, that defendants monitored prices in other markets, or allegations of actual pricing or changes in pricing of elevators in the United States attributable to defendants' alleged European misconduct.  Thus, plaintiffs' allegations of defendants' European misconduct did not "nudge [plaintiffs'] claims across the line from conceivable to plausible" as required by Twombly.

Finally, the Second Circuit also dismissed plaintiff's allegations of unilateral exclusionary conduct.  According to the complaint, the defendants unilaterally acquired or attempted to acquire monopolies in the maintenance market for their own respective elevators by designing their elevators to prevent servicing by other providers, refusing to sell competitors parts, tools, or software necessary to service their elevators, and obstructing competitors' attempts to purchase elevators parts.  The court interpreted these contentions as essentially an allegation that the defendants refused to deal with third party maintenance providers in violation of Section 2 of the Sherman Act.  According the Second Circuit, this claim was fatally flawed because it did not allege that the defendants terminated any prior course of dealing with third party maintenance providers.  As the court explained, the Supreme Court's ruling in Verizon Commc'ns v. Trinko, 540 U.S. 398 (2004), made clear that firms have the broad right to refuse to deal with competitors and the sole exception to this right is when firms terminate a prior, presumably profitable, course of dealing in order forgo short-term profits to achieve an anticompetitive end.  Since the complaint in this case did not allege a prior course of dealing between the defendants and competitor maintenance providers, it clearly failed to state a claim.

Twombly was a landmark decision that made pleading antitrust conspiracies significantly more difficult.  The Second Circuit's decision in In re Elevator Antitrust Litigation is an early illustration of the application of the new Twombly standard that appears to confirm that antitrust plaintiffs will face new obstacles in pleading antitrust conspiracies.  Indeed, the Second Circuit's ruling drives home that we have come a long way from the days of Conley, when antitrust complaints could not be dismissed for failure to state a claim unless it appeared beyond doubt that the plaintiff could prove no set of facts in support of its claim which would entitle it to relief.

Authored by:

Anik Banerjee

213-617-4124

abanerjee@sheppardmullin.com

A patent holder that promises a standard-setting organization that it will license its technology on fair and reasonable terms, but reneges once its technology is adopted as the industry standard, may be held liable under the Sherman Act Section 2, the U.S. Court of Appeals for the Third Circuit announced in Broadcom Corp. v. Qualcomm Inc., No. 06-4292 (3d Cir. Sept. 4, 2007), available at 2007 U.S. App. LEXIS 21092.

The opinion reinstates Broadcom's claims for monopolization and attempted monopolization, holding that conduct that undermines the pro-competitive benefits of standard-setting organizations may, in some circumstances, be condemned as anticompetitive.

"Deception in a consensus-driven private standard-setting environment harms the competitive process by obscuring the costs of including proprietary technology in a standard and increasing the likelihood that patent rights will confer monopoly power on the patent holder,"  Judge Maryanne Trump Barry wrote.  Id. at *37.

The opinion was also a partial defeat for Broadcom, however, as the appeals court found that the microchip company lacked standing to assert a claim for unlawful monopoly maintenance in a market in which it neither competes nor seeks to compete.  The court also found that Broadcom failed to allege a sufficient antitrust injury to support its bid to force Qualcomm to divest its recent acquisition of Flarion, a leading developer of technology for next-generation cell phones.

The litigation is based on the core electronics used in cellular telephones.  Generally, cell phone service uses one of two standards: Code Division Multiple Access ("CDMA") or Global System for Mobility ("GSM").  The current generation of GSM phones uses the Universal Mobile Telecommunications System ("UMTS") standard, adopted by the European Telecommunications Standards Institute ("ETSI") and standard-setting counterparts in the United States.  The UMTS standard incorporates a technology, called Wideband Code Division Multiple Access ("WCDMA"), in which Qualcomm owns proprietary intellectual property rights, including patents.

In its complaint, Broadcom alleges that Qualcomm promised the ETSI that it would license its WCDMA technology on fair, reasonable, and non-discriminatory ("FRAND") terms.  ETSI relied on this representation when it included Qualcomm's technology in the UMTS standard, according to Broadcom's complaint.  However, Broadcom alleges, Qualcomm breached this promise by licensing technology on non-FRAND terms.  In particular, according to the complaint, Qualcomm demanded discriminatorily higher royalties from competitors and customers that used chipsets not manufactured by Qualcomm, in an effort to obtain a monopoly in the UMTS chipset market.

Qualcomm moved to dismiss the complaint under Federal Rule of Civil Procedure 12(b)(6), and U.S. District Court Judge Mary Little Cooper granted the motion.  The District Court reasoned that Broadcom failed to state a claim for monopolization in the WCDMA technology market because Qualcomm's patent on the technology conferred a right to exclude competition and set the terms by which the technology would be distributed.  The District Court found that Qualcomm's alleged deception before the standard-setting organization was of no moment under antitrust law because, no matter which technology was ultimately chosen, the adoption of a standard would necessarily eliminate competition.

The Third Circuit reversed and reinstated Broadcom's Section 2 claims.  The court expressed concern about the dangers of deceptive conduct before standard-setting organizations, and cited a series of recent cases that demonstrate "a growing awareness of the risks associated with deceptive conduct in the private standard-setting process."  Id. at *24 to *31, citing In the Matter of Rambus, Inc., No. 9302 (F.T.C. Aug. 2, 2006), available at 2006 WL 2330117; In the Matter of Union Oil Co. of Cal., No. 9305 (F.T.C. July 27, 2005), available at 2005 WL 2003365.

Although a patent confers a lawful monopoly over the claimed invention, the Third Circuit noted that, if the technology is adopted by a standard-setting organization and becomes "locked in" as the industry standard, the patent holder may demand supracompetitive royalties.  Measures such as commitments to fair and reasonable royalties are designed to prevent such anticompetitive outcomes.

"We hold that (1) in a consensus-oriented private standard-setting environment, (2) a patent holder's intentionally false promise to license essential proprietary technology on FRAND terms, (3) coupled with [a standard-determining organization's] reliance on that promise when including the technology in a standard, and (4) the patent holder's subsequent reach of that promise, is actionable anticompetitive conduct."  Id. at *36 to *37.

The Third Circuit also reinstated Broadcom's claim for attempted monopolization of the UMTS chipset market.  While the District Court found that Broadcom failed to allege sufficient facts showing anticompetitive conduct or a dangerous probability of achieving monopoly power, the Third Circuit found the complaint sufficient.

The Third Circuit upheld the district court's decision to dismiss several other antitrust causes of action.  The appeals court found that Broadcom lacked standing to assert its claim that Qualcomm monopolized the markets for CDMA technology and chipsets because Broadcom failed to assert that it competes or seeks to compete in these markets.  Id. at *53.

The appeals court also upheld the dismissal of Broadcom's claim under Clayton Act Section 7, which sought to enjoin Qualcomm's then-pending acquisition of Flarion Technologies, a "leading developer" of technologies for next-generation cell phones.  Broadcom claimed that the acquisition was part of Qualcomm's pattern of acquiring competitors to achieve market dominance, and claimed that it feared injury because it expected to be a competitor in these future-generation markets and might be required to license these future-generation technologies from Qualcomm.  The court found such "[h]ypothetical anticompetitive conduct" too speculative to support a claim.  Id. at *62.

Authored by:

Tyler Cunningham

415-774-3208

tcunningham@sheppardmullin.com

On September 17, the European Court of First Instance (CFI) essentially rejected the appeal by Microsoft against the European Commission's (EC) decision that it had abused its dominant position.  The CFI upheld the EC's finding that Microsoft had breached Article 82 by virtue of its refusal to grant interoperability information, and its bundling of Windows Media Player with the Windows PC operating system.  The CFI also confirmed the €497 million fine imposed on Microsoft, and the EC's remedies requiring the provision of interoperability information, and the unbundling of Windows Media Player.  However, the CFI concluded that the mechanism for the appointment of a monitoring trustee was unlawful.  It concluded that the EC had no authority to compel Microsoft to grant a monitoring trustee powers that the EC itself is not authorized to confer on a third party, or to require Microsoft to pay the costs of the monitoring trustee.

On September 17, the CFI also handed down its judgment upholding a decision of the EC that documents seized during an EC antitrust investigation were not covered by legal professional privilege.  The CFI confirmed that communications between in-house counsel, and internal clients, are not privileged in relation to EC competition investigations, and it set out the procedure that EC officials should follow if a dispute as to privilege arises during an on-site investigation.  In this case, Azko Nobel v. EC, which concerned disputed documents uncovered during a "dawn raid", the CFI held that even though specific recognition of the role of in-house lawyers, and the protection of communications with such lawyers was relatively more common today than when previously considered in the case of AM & S in 1982, it was nevertheless not possible to identify tendencies which were uniform or had clear majority support in that regard in the laws of the Member States.  The CFI also highlighted the fact that a considerable number of Member States do not allow in-house lawyers to be admitted to the Bar or Law Society, and therefore do not recognize them as lawyers established in private practice.  Thus, "the protection only applies to the extent that the lawyer is independent, that is to say, not bound to his client by a relationship of employment".

On September 19, the Canadian Competition Bureau announced that Ibiden Co. Ltd. of Japan had pleaded guilty to aiding and abetting an alleged conspiracy to fix the price of isostatic graphite which is commonly used in electrical discharge machinery to make dies for the continuous casting of metals, and in the manufacture of semi-conductor chips, and other mechanical applications.  “Ibiden’s significant and early cooperation in connection with this inquiry assisted the Commissioner’s investigation of other individuals and corporations for violations of the Competition Act,” said Denyse MacKenzie, Senior Deputy Commissioner of Competition.  “In the circumstances, we recommended lenient treatment, despite the serious nature of the offence”.  The Federal Court of Canada fined the company $50,000.  Ibiden is the third company to plead guilty in relation to alleged anti-competitive conduct concerning the supply, and sale, in Canada of semi-machined and block isostatic graphite.

On September 20, the UK's Office of Fair Trading (OFT) sent a statement of objections to the five large supermarkets and five dairy processors alleging that they breached the Chapter I prohibition of the Competition Act 1998 by colluding, through exchange of confidential information, to fix the prices of dairy products in 2002, and 2003.  It believes that the practices restricted the competitive process and led to higher prices, resulting in an estimated cost to consumers of about £270 million. The OFT also noted that the parties were aware that their actions might be anti-competitive.  The OFT has previously warned the  supermarkets about the risks of such collusion.  The supermarkets, and dairy processors, will now have the opportunity to make written, and oral representations in response to the allegations contained in the statement of objections.

On October 1, the EC announced that it had initiated formal antitrust proceedings against Qualcomm Incorporated concerning an alleged breach of EC Treaty rules on abuse of a dominant market position (Article 82).  Qualcomm is a holder of intellectual property rights in the CDMA and WCDMA standards for mobile telephone.  The WCDMA standard forms part of the 3G (third generation) standard for European mobile phone technology (also referred to as "UMTS").  This follows complaints lodged with the EC by Ericsson, Nokia, Texas Instruments, Broadcom, NEC and Panasonic, all mobile phone and/or chipsets manufacturers. The complaints allege that Qualcomm's licensing terms and conditions are not Fair, Reasonable and Non-Discriminatory ("FRAND") and, therefore, may breach EC competition rules.  The economic principle underlying FRAND commitments is that essential patent holders should not be able to exploit the extra power they have gained as a result of having technology based on their patent incorporated in the standard.  The investigation will focus on the issue of whether the licensing terms and royalties imposed by Qualcomm are, as alleged by the complainants, not fair, reasonable and non-discriminatory.  This initiation of proceedings does not imply that the EC has proof of an infringement.  It only signifies that the EC will conduct an in-depth investigation of the case as a matter of priority.  There is no strict deadline for the Commission to complete inquiries into alleged anticompetitive conduct.

On September 6, the Netherlands Competition Authority (NMa) held that Apple is not engaging in ‘tying practices’ linking its sales of the portable music player iPod, to music services provided by its online music store iTunes.  “Consumers who purchase music via Apple’s internet store are able to – and are permitted to – play this music on other players than an iPod,” explained René Jansen, member of the Board of the NMa.  “Furthermore, consumers may transfer music files bought from other online music stores to an iPod. There is no question of a tying arrangement.”  The NMa reached this conclusion after looking into a complaint lodged by the Consumentenbond, the Dutch consumers’ association, on the issue of Apple’s alleged abuse of a dominant position.  The NMa has dismissed the complaint.

On September 19, the EC announced a proposal for a new legislative package to reform the regulation of the energy sector. Under the proposals the operation of electricity and gas transmission networks from supply and generation activities will need to be effectively unbundled. As a derogation from such ownership unbundling, the EC is, however, proposing an alternative option whereby network assets could continue to be owned by a vertically integrated energy company, but the transmission operations must be transferred to an independent system operator company designated by the member state and approved by the EC.  The EC is also proposing a number of measures to make regulation more effective, including the establishment of a European Agency for the Cooperation of National Regulators, strengthening the powers of national regulators, formalizing co-operation between transmission system operators, and improving access regulation and transparency.

On September 19, the EC fined seven companies over €328m for allegedly operating a cartel on the markets for fasteners, and attaching machines in Europe and worldwide, in violation of EC Treaty rules that outlaw restrictive business practices (Article 81).  The EC alleged that the companies agreed on coordinated price increases, fixed minimum prices, allocated customers, shared markets, and exchanged other commercially important and confidential information. Prym group received full immunity from fines under the EC's leniency program in respect of the worldwide cartel on the markets for other fasteners and attaching machines, as it was the first to provide information about this cartel.  In addition, the fines imposed on Prym group for its involvement in the other infringements discovered were also lowered as a result of the company's cooperation.  Smaller reductions of the fines were also granted to two companies as a result of their cooperation under the EC's leniency program.  EC Competition Commissioner, Neelie Kroes, said: "It is unacceptable that the major fastening technology producers colluded for such a long time to maintain artificial price levels and to share customers and markets for products which are used every day by a lot of consumers. The highest management of these companies was well aware that this conduct was illegal, but decided to continue anyway".

On September 1, a new Competition Act (NCA) entered into force in Spain, replacing the 1989 Competition Act.  One of the most significant changes introduced by the NCA is the creation of a new competition authority, the National Competition Commission (NCC), which replaces the two organisms responsible for applying competition law under the 1989 Act (the Service for the Defence of Competition and the Tribunal for the Defence of Competition).  The NCC will now hold the investigation and decision-making powers.  It will consist of the Directorate of Investigation, which will carry out the investigation of the cases, and the Council, which will be the decision-making body, and will be composed of the President of the NCC and six members.  The NCA also contains a classification of infringements, which did not exist under the 1989 Act, establishing three different types of infringements: minor infringements, serious infringements, and very serious infringements.  This new classification will have a direct impact on the level of fines, as minor infringements will only be penalized with a maximum fine of 1% of the total turnover of the undertaking concerned, whilst serious, and very serious infringements will have maximum fines of 5%, and 10% respectively.

On September 5, the Belgian Competition Council published for consultation a new draft Notice on immunity from fines and reduction of fines in cartel cases.  The draft Leniency Notice, which is intended to replace the current Leniency Notice is based on the Model Leniency Program of the European Competition Network.  The amendments introduced by the draft Leniency Notice primarily aim at providing more guidance, and clarity, for companies applying for immunity from and/or reduction of fines and bring the Belgian leniency program in line with the European Commission's Leniency Notice.  Like the European Commission's leniency program, the draft Leniency Notice grants immunity to applicants who, in addition to meeting certain conditions set out in the draft notice, are the first to submit information and evidence that will enable the Belgian competition authority to carry out a "targeted inspection" in connection with the alleged cartel or find an infringement of Article 2 of the Belgian Competition Law, or Article 81 of the EC Treaty.