On July 22, 2005, the Court of Appeals for the District of Columbia Circuit denied a petition for review filed by PolyGram Holding, Inc. In so doing, the DC Circuit, in an opinion by Chief Judge Ginsburg, endorsed the Commission's characterization of the restraint in issue as "inherently suspect". The court held that the Commission was correct in following the analytical path that it established in In Re Massachusetts Board of Optometry.¹ PolyGram Holding, Inc. v. Federal Trade Commission, No. 03-1293 (DC Cer. 2005).

The Three Tenors, Jose Carreras, Placido Domingo and Luciano Pavarotti performed in a series of concerts coinciding with the World Cup soccer finals, in 1990, 1994 and 1998. PolyGram Holding, Inc. ("PolyGram") distributed the recording of the 1990 concert. Warner Communications, Inc. ("Warner") distributed the 1994 concert album. Both albums were highly successful, and remained on the top ten classical list, throughout 1994 through 1996.

In 1997, PolyGram and Warner formed a joint venture to distribute the 1998 concert album. Representatives met to discuss the "marketing and promotional activities" involved in a joint marketing program for the 1998 album. According to notes of a meeting between the joint venture partners, they agreed on an "advertising moratorium", to prevent "free riding" by the earlier, but separately distributed, albums. By the time the Three Tenors performed for the 1998 album, PolyGram and Warner had exchanged letters reaffirming their commitment to suspend advertising and discounting on the 1990 and 1994 concert albums, and agreeing that the moratorium would run from August 1 through October 15.

Within a week of the meeting, however, both parties exchanged letters repuderating any pricing or advertising restrictions relative to the earlier albums. However, there were private assurances between the joint venture partners that, in fact, they intended to honor the agreement. They did so.

In 2001, the FTC issued complaints against PolyGram and Warner, charging that the moratorium agreement violated Section 5 of the Federal Trade Commission Act. Warner consented to an order barring it from making any similar agreements in the future. PolyGram went to trial before an Administrative Law Judge ("ALJ"), who ruled that PolyGram was in violation of Section 5.

In In Re PolyGram Holding, Inc.,² the Commission, in a 61 page Opinion by Chairman Muris, affirmed the ALJ. In doing so, the Commission revived its characterization and analytic framework announced in In Re Massachusetts Board of Optometry.³ It began with the characterization that the conduct was "inherently suspect" as a restraint on competition in that the conduct "appears likely, absent an efficiency justification, to restrict competition and decrease output."⁴ Chairman Muris wrote for the Commission that only where the competitive harm is not readily apparent from the nature of the restraint itself, or where the charged party offers a plausible competitive justification for the restraint, must the Commission engage in a more searching analysis of the market circumstances surrounding the restraint, and thus make a determination as to competitive effects within a relevant market.⁵

The Commission determined that the agreement between PolyGram and Warner to prohibit discounts and advertising was "inherently suspect", because the restraints by their nature would tend to raise prices and reduce output.⁶

The Commission then looked to PolyGram to articulate a plausible competitive justification for the restraint. PolyGram objected to the Commission's analysis, and urged that it was incumbent upon the Commission to first offer evidence of anticompetitive effects, as the case was being analyzed under the rule of reason. PolyGram argued that they "moratorium" was justified because it prevented the earlier albums from "free riding" upon the marketing efforts of the joint venture partners. Thus, the restraints would create an incentive for each of the joint venture partners to vigorously promote the new album, and thus increase output.

The Commission rejected the proffered efficiency justification as legally insufficient. Having rejected the proffered efficiency justification, the Commission held that the restraint could then be condemned, without further analysis, and without any obligation on the part of the Commission to offer anticompetitive effects evidence.

Judge Ginsburg found that the Commission's analytical path was consistent with the Supreme Court's approach in analyzing claims under Section 1 of the Sherman Act, through a transition over a 25 year period from a "dichotomous" categorical approach to a more nuanced, "quick look" inquiry. The court held that there was no longer a bright line distinction between per se analysis and analysis under the rule of reason. Rather, the extent of the inquiry is tailored to the suspect conduct in a given case. Citing NCAA v. Board of Regents,⁷ and FTC v. Indiana Federation of Dentist's⁸ the court held that it was proper for the Commission to adopt an intermediate inquiry, generally dubbed at the "quick look", to evaluate horizontal restraints.⁹

Judge Ginsburg was "quick" to add that the "quick look" is not a new category of analysis that is an intermediate position between "per se" condemnation and a full-blown rule of reason" analysis. He held that the Supreme Court has not moved from a "dichotomy" to a "trichotomy," but instead, has backed away from any reliance upon fixed categories and has moved towards a continuum, citing California Dental Association v. FTC.¹⁰

Judge Ginsburg held that:

"Rather than focusing upon the category of which a particular restraint should be assigned … the essential inquiry is "whether … the challenged restraint enhances competition."¹¹

In order to make that determination, a court must make "an enquiry meet for the case, looking to the circumstances, details and logic of a restraint."¹²

Judge Ginsburg held that it was appropriate for the Commission, pursuant to Massachusetts Board of Optometry¹³ to first determine whether it is obvious. from the nature of the challenged conduct that it will likely harm consumers. If so, then the restraint may be deemed "inherently suspect". Unless the defendant then comes forward with a plausible, and legally cognizable competitive justification for the restraint, it will be summarily condemned. If the Commission explains that it can confidently conclude, without adducing "effects" evidence, that the restraint likely harmed consumers, or in the alternative, that anticompetitive effects are in fact likely, then the evidentiary burden shifts to the defendant to show that the restraint in fact does not harm consumers, or has "procompetitive virtues" that outweigh its burden upon consumers. The court held that the Commission was correct in rejecting PolyGram's proffered procompetitive business justification.¹⁴ An agreement between "joint venturers" to restrain price cutting and advertising with respect to products that are not part of the joint venture "looks suspiciously like a naked price fixing agreement between competitors, which would ordinarily be condemned as per se unlawful."¹⁵ The court held that PolyGram's proffered "free riding" argument was nothing more than a "frontal assault on the basis policy of the Sherman Act."¹⁶

In sum, because PolyGram failed to identify any competitive justification for its moratorium agreement with Warner to refrain from advertising or discounting their competitive Three Tenors products, the agreement violated Section 5 of the Federal Trade Commission. Accordingly, it was not necessary for the Commission to determine whether the Commission's findings of fact concerned actual competitive harm, supported by substantial evidence in the record as a whole.

1. 110 FTC 549 (1988).


2. 2003 WL 21770765 (July 24, 2003).


3. 110 FTC 549 (1988).


4. FTC Opinion at 22-24.


5. Id. at 29.


6. Id. at 35-40.


7. 468 U.S. 85, 100 (1984).


8. 476 U.S. 447 (1986).


9. Citing Areeda & Hovenkamp, Antitrust Law, Section 1911A (2004).


10. 526 U.S. 756, 779 (1999).


11. Id. at 779-80 (quoting NCAA, at 104).


12. Id. at 781.


13. 110 FTC 549 (1988).


14. Judge Ginsburg notes that the Commission appears to acknowledge that as economic learning and market experience evolves, so will the class of restraints subject to "quick look" summary adjudication. See California Dental, 526 U.S. at 781.


15. Slip Opinion at 7.


16. Citing National Soc. of Prof. Engineers v. United States, 435 U.S. at 695.

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

Aloha Petroleum ("Aloha"), a Hawaiian corporation involved in both the bulk supply and retail sale of gasoline on the Hawaiian islands, is seeking to acquire eighteen retail gasoline stations on the island of Oahu currently owned by Trustreet Properties ("Trustreet") as well as Trustreet's fifty percent interest in a petroleum importing terminal on Oahu known as Barbers Point. Aloha presently owns its own retail gasoline stations on Oahu and the other fifty percent interest in the Barbers Point Terminal. The FTC has filed a complaint in the U.S. District Court for the District of Hawaii seeking a preliminary injunction against this acquisition (FTC v. Aloha Petroleum, Ltd.). The FTC contends that this transaction, which is not reportable under the Hart-Scott-Rodino premerger filing guidelines, would have anticompetitive effects in both the market for the bulk supply of gasoline and the market for the retail sale of gasoline.

According to the FTC's complaint, all gasoline refined in or imported to Hawaii must be stored in petroleum terminals. There are only four such terminals capable of receiving out-of-state gasoline imports, all located on Oahu: Chevron, Shell, and Tesoro each own one and Aloha and Trustreet currently share the fourth, Barbers Point. Further, the ability to import gasoline is necessary to obtain a competitive price from the refiners in Oahu and thus necessary for the competitiveness of a bulk supplier. As such, there are only five competitively significant bulk suppliers in Hawaii: Aloha, Trustreet, Chevron, Shell, and Tesoro.

Gasoline is sold to the public in Oahu by retail stations that are either integrated (i.e. affiliated with bulk suppliers) or nonintegrated (i.e. independent stations with no affiliation with any bulk supplier). On Oahu, all five bulk suppliers operate their own integrated retail stations, including Aloha and Trustreet. Of these five bulk suppliers, only three, Aloha, Trustreet, and Tesoro, have sold gasoline to nonintegrated retailers. These nonintegrated stations generally charge lower retail prices than the integrated Chevron, Shell and Tesoro stations.

With respect to the market for the bulk supply of gasoline in Hawaii, the FTC claims that the proposed acquisition would substantially increase market concentration in an already highly concentrated market. As noted above, there are only five companies that have access to a petroleum terminal with the capability to import gasoline that is necessary to compete; Aloha's acquisition of Trustreet's fifty percent interest in the Barbers Point terminal would mean Aloha would have exclusive ownership of it and thus reduce the number of bulk suppliers with access to a terminal from five to four.

The FTC seems particularly concerned with the acquisition's effect on sales from bulk suppliers to nonintegrated retailers. Since only Aloha, Trustreet, and Tesoro appear to sell to nonintegrated retailers, the acquisition would reduce the number of bulk suppliers selling to nonintegrated retailers from three to two.

With respect to the retail gasoline sales market in Oahu, the FTC asserts that the Aloha and Trustreet stations provide the lowest priced gasoline from integrated stations, that Aloha and Trustreet are each other's closest competitors, that they constrain each other's ability to raise prices, and that this acquisition would substantially increase Aloha's market share. As such, in the FTC's view, Aloha's acquisition of Trustreet's stations would likely result in an increase in prices to consumers.

On the eve of the trial, the case settled. On September 6, 2005, the FTC asked the Federal District Court for the District of Hawaii to dismiss the Commission's complaint seeking an injunction to block Aloha's acquisition of a half interest in the Barbers Point terminal. The Commission forced Aloha to enter into a 20 year throughput agreement giving third-party Mid Pac Petroleum LLC substantial rights to use the Barbers Point terminal. The Commission believes the agreement will restore competition threatened by the acquisition.

Authored by:

Anik Banerjee
213-617-4124
abanerjee@sheppardmullin.com

On August 23, 2005, the UK's Department of Trade and Industry (DTI) published a consultation document on the possible reform of Part 9 of the UK's Enterprise Act 2002, which governs the release of consumer and competition information, and outlined options for disclosing currently confidential commercial information held by public authorities to consumers and businesses for pursuing their own private civil court proceedings.

Currently, the Enterprise Act does not, in general, allow for information to be released to businesses and individuals for the purposes of civil proceedings, although it does permit the disclosure to such persons for criminal proceedings, and in certain other limited circumstances. However, the UK Government is now considering whether it should be easier to disclose information which is currently confidential, and held by government agencies, for example, commercially sensitive information from mergers or antitrust market investigation, to consumers and business competitors for the filing of potential civil cases.

The disclosure of such information held by public agencies would likely result in an increase in the number of UK civil antitrust cases pursued against businesses by consumers and competitors. However, the DTI believes that, although the information released may allow civil claims against legitimate businesses, "[s]ome of these would be likely against businesses that had acted unlawfully", and, "where information is released and used to pursue a case, it will be because it supports the case, therefore there seems to be only a small risk that legitimate business would be affected".

The UK Government has, however, recognized that certain information will continue to be protected under EU law. For example, Articles 12 and 29 of the Council Regulation 1/2003/EC restrict the use of information acquired for the purpose of applying Articles 81 and 82 of the EC Treaty (these are the Articles which mainly deal with European antitrust matters); and those in Article 17 of Council regulation 139/2004/EC in relation to information acquired for merger purposes.

The DTI is consulting on the following four options:

Option 1 - Keeping Part 9 unchanged, which would mean that UK public authorities would continue to be unable to disclose information to consumers/business for the purpose of enabling them to seek compensation, or redress through civil law procedures.

Option 2 - Keep Part 9 unchanged, but issue best practice guidance on its application to ensure more consistent application.

Option 3 - Amend Part 9 to allow the release of information for the purposes of private civil proceedings for all cases where restrictions on disclosure of the information are not required by EU law. Disclosure would apply to a more extensive class of information, and, in particular, would include information gathered on UK antitrust issues.

Option 4 - Amend Part 9 to allow the release of information for the purpose of private civil proceedings in some cases only, and reassuring businesses that sensitive commercial information would not be released. For example, disclosure would only be permitted by identifying the UK legislation under which information could be released. Thus, IP right holders under the UK's Trade Marks Act 1994, would be able to get information from government enforcers to pursue civil cases against counterfeiters.

Part 9 of the Enterprise Act was specifically drafted so that sensitive competition information would be protected from disclosure. If Part 9 remains as drafted, such information will continue to be protected, and other information passed to public agencies in the course of complying with the law could not be disclosed to third parties. However, the wider business community will likely have considerable concerns with Option 3. Market sensitive information could be released to competitors, especially those outside the UK, which could potentially give them an unfair competitive advantage.

The DTI has acknowledged that individual and groups who are thinking of bringing civil proceedings (but who to date had not yet committed themselves) may use this option as an opportunity to go on a 'fishing expedition' "to see whether there might be material to bring a case". Businesses are also concerned that confidential information provided to a public agency to meet certain regulatory requirements could be accessed, and used in evidence against them. The DTI has stated that, "This [Option 3] will be an untried and untested option [and] although public authorities will reassure business that sensitive information will not be disclosed, there is no guarantee of this."

The period to respond to the DTI's consultation paper ends on November 18, 2005. The business community will be hoping that the DTI will listen to those respondents who identify options which ensure that business and consumers have access to the relevant information without releasing otherwise sensitive competition information.

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

On August 9, the Federal Trade Commission (the "FTC") approved by a 4-0 vote the publication of a Federal Register notice concerning proposed amendments to the HSR Rules, 16 C.F.R. Part 803. The proposed amendments would allow parties filing pre-merger documents under the HSR Act to provide Internet links to certain documents in lieu of paper copies for items 4(a) and 4(b) on the notification and report form. The proposed rulemaking also addresses "stale filing" situations, in which parties make premerger filings but then fail to comply with a Request for Additional Information and Documentary Material - commonly known as a second request. The proposed rule is that an acquired person's notification of the transaction shall expire after 18 months if a second request is still outstanding. The proposed rulemaking was drafted jointly by staff from the Department of Justice's Antitrust Division ("DOJ") and the FTC.

On August 16, 2005, the with the concurrence of the Acting U.S. Assistant Attorney General for Antitrust, authorized the release of the Twenty-Seventh Annual Report to Congress Regarding the HSR Premerger Notification Program (the "Report"). The Report summarizes FTC and DOJ actions under the HSR Act in fiscal year 2004. Noteworthy statistics include:

• 1,454 premerger filings were received, up more than 43% from the 1,014 filings received in fiscal year 2003, but still a decrease from the 4,926 filings reported in fiscal year 2000.

• The FTC challenged 15 transactions, leading to 10 consent orders, 1 administrative complaint, 1 litigated case, and 3 abandoned transactions. The FTC also authorized its staff to seek injunctive relief in 1 matter.

• The DOJ challenged 9 merger transactions, leading to 1 litigated case, 5 consent decrees, 2 abandoned transactions, and 1 other transaction that was restructured after the DOJ informed the parties of its antitrust concerns.

• The Commission's Premerger Notification Office ("PNO") responded to thousands of telephone calls seeking information concerning the reportability of transactions under the HSR Act and the details involved in completing and filing the Notification and Report Form.

• Second Requests were issued in 35 merger investigations, which was 2.5% of all transactions reported in 2004. This was a decrease from fiscal year 2003.

• Early termination was requested in 85% of the transactions reported and was granted 76% of the time.

• The dollar value of reported transactions rose to about $630 billion.

• The percentage of reported transactions by industry group of acquired entity were: health services: 2.4%; banking/insurance: 18%; consumer goods: 11.5%; energy and natural resources: 3.9%; information technology: 12.4%; transportation: 1.5%; chemicals and pharmaceuticals: 7%; manufacturing: 30.2%; and other: 13.1%.

• The FTC and DOJ continue to monitor compliance with requirements of the HSR Act. In fiscal year 2004, 25 corrective filings for violations were received, and the agencies brought two enforcement actions, resulting in payment of $1.8 million in civil penalties.

The Report also describes the HSR Act and provides a historical overview of how the federal antitrust agencies have implemented the Act since its enactment in the late 1970s. The Report then presents Fiscal Year 2004 developments relating to compliance with the Premerger Notification Rules and Procedures, which details the two enforcement actions resulting in payment of $1.8 million in civil penalties. The next section discussed both the FTC and DOJ's merger enforcement activities during the year by providing some brief information on each major merger investigated by the agencies. Finally, the report includes a summary of the ongoing reassessment of the effects of the Premerger Notification Program. The appendices provide a summary of transactions for fiscal years 1995-2004 and the number of transactions reported as filings during the same time period. In addition, a statistical table presents data profiling HSR filings and enforcement interest during Fiscal Year 2004.

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

• On September 8, 2005 ScanSoft, Inc. and Nuance Communications, Inc. announced that the DOJ has granted termination of the antitrust waiting period under the HSR Act for the proposed merger of Nuance with ScanSoft. The DOJ seriously investigated the merger of the combination of ScanSoft and Nuance that brings together the industry's most comprehensive portfolio of speech applications, technologies and expertise that will enable customers to deploy innovative speech-based solutions. The DOJ allowed the waiting period to close without requiring any conditions.

• On August 17, the Antitrust Division announced that the South Dakota Real Estate Commission, in response to an investigation by the Antitrust Division, rescinded two rulings that prohibited South Dakota real estate brokers from offering rebates, inducements, and other discounts to consumers. The Commission advised the Department of its action in a letter. The Commission voted unanimously, on June 30, 2005, to repeal, cancel, and nullify the Commission's Declaratory Rulings 93-1 and 03-01. Subsequently, the Commission notified all South Dakota real estate brokers that they now are free to offer commission rebates, incentives, and other discounts to buyers and sellers. In its letter, the Commission assured the Division that the "South Dakota Real Estate Commission will refrain from instituting any kind of prohibition that would ban licensees from offering rebates and inducements." The Antitrust Division has been investigating the Commission's rulings, which prevented South Dakota brokers from competing with each other for buyers and sellers of real estate services by offering rebates, discounts, and other incentives since June 2005.

• On August 10, two former top executives of Bayer AG, the German chemicals producer, were indicted by a federal grand jury for participating in an international price-fixing conspiracy in the rubber chemicals industry. Mr. Ick, former head of Bayer's Rubber Business Group, was charged with participating in the conspiracy from 1995 to 2001. Mr. Monn, former head of marketing of Bayer's Rubber Business Group, was charged with joining the conspiracy in or about January 1997. Both Mr. Ick and Mr. Monn are German citizens. More than $200 million in criminal fines have resulted from the Antitrust Division's ongoing investigations of price fixing of various rubber-related products. Over the past 18 months the Division has obtained guilty pleas from five companies--Bayer AG, Syndial S.p.A., Crompton Corporation, DuPont Dow Elastomers, Zeon Chemicals--and including today's charges, a total of six executives. The charges stem from an ongoing investigation being conducted by the Antitrust Division's San Francisco Field Office and the FBI in San Francisco.

• On August 3, the Antitrust Division announced the closing of its investigation into Sprint Corporation's proposed acquisition of Nextel Communications Inc. without requiring any divestitures. Although the Division did not challenge this merger, it required divestitures in the recent ALLTEL-Western Wireless and Cingular Wireless-AT&T Wireless mergers. The Division focused its investigation on mobile wireless telecommunications services that Sprint and Nextel currently offer, as well as on developing products such as advanced wireless broadband services where the companies are potential competitors. The Division concluded that none of the theories of competitive harm that the Division considered were ultimately supported by the facts. In analyzing mobile wireless voice and data services, the Division examined the extent to which Sprint and Nextel compete for the sale of such services in many areas throughout the United States. The Division found no substantial proof that the merged company could unilaterally exercise market power postmerger or that there likely would be competitive harm from coordinated interaction among the merged company and other remaining providers. The Division focused its investigation on local and regional markets, because customers purchasing mobile wireless telecommunications services choose among providers that offer such services where they are located and travel on a regular basis: home, work, other areas they commonly visit, and areas in between. The number and identity of mobile wireless telecommunications services providers varies among geographic areas, as does the quality of their services and the breadth of their geographic coverage, all of which are significant factors in customers' purchasing decisions. To evaluate the transaction, the Division examined the shares of the two carriers, how closely positioned the two carriers' offerings are in depth and breadth of coverage, the service features they offer (including push-to-talk services), and local network quality. The Division also looked at evidence related to the choices customers make in the marketplace. Based on the extensive evidence collected, the Division concluded that the merged company could not unilaterally exercise market power.

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

• On August 30, the Federal Trade Commission today issued a statement that explained its reason for closing the investigation of the $17 billion acquisition by Federated Department Stores, Inc. ("Federated") of the May Department Stores Company ("May") and allowing the deal to proceed. Federated owns or operates 456 department stores nationwide - under the Macy's and Bloomingdale's name - and May owns or operates 491 department stores throughout the United States under names including Marshall Field's, Lord & Taylor, Filene's and Kaufman's, Hecht's and Strawbridge, Foley's, Famous Barr, and Robinson-May.

  The Commission - writing with Chairman Majoras recused - issued the statement in accordance with its policy to help provide transparency for decisions in high-visibility matters. According to the statement, the Commission "conducted an exhaustive six-month investigation" of the proposed transaction, because the combination of the two chains, each of which is the product of multiple earlier combinations, "will create by far the largest chain of so-called 'traditional' or 'conventional' department stores in the country." In addition, the transaction will create high levels of concentration among conventional department stores in many parts of the country, and thus facially appeared to raise issues of competitive concerns. However, "When an industry is changing rapidly . . . it is necessary to take account of fundamental changes in the structure of the market." The statement detailed the rapid evolution of retail markets in the United States to demonstrate that suburban shopping malls "have largely replaced downtown shopping destinations."

  The Commission also examined evidence on pricing patterns, which it says "provides the most compelling, objective demonstration that . . . conventional department stores are not in a distinct market." They face competition from multiple retail formats for the merchandise they sell. Accordingly, the statement stated, department stores must consider prices and selections at a wide range of other retailers when they make inventory and pricing decisions. Also, Federated and May, like other department store chains, set prices that are uniform over broad geographic areas - typically multi-state regions. This fact distinguishes this transaction from, for example, Staples proposed merger with Office Depot in 1997, where a narrow "office superstore" market definition was bolstered by proof of differential prices, depending on the number of superstores in a particular city.

  The statement also discussed how the Commission defined the geographic market in which to examine the proposed acquisition, and finds that the market "is at least as large as an MSA," within which there are many alternatives to discipline prices. The Commission was aware, however, that many of the products now sold in department stores have non-price attributes that are also important to consumers. Accordingly, staff carefully reviewed the investigative record for any potential effects in non-price competition, such as reductions in merchandise assortment or new product introductions. None were found. Selected divestitures may take place following the transaction, but the FTC does not need to take action, in light of the broad relevant markets it found. In concluding its statement, the Commission said that, ". . .We recognize that many individual consumers mourn the gradual disappearance of individual department stores in their hometowns . . . These changes, however, have been ongoing for many years. We have not been able to uncover any evidence that this particular merger will have any adverse effect on consumers as a whole."

• On August 26, the Commission approved an application for proposed divestiture from Cytec Industries, Inc., related to Cytec's recent acquisition of the Surface Specialties Division of UCB S.A. Under the terms of a consent order with the FTC, Cytec was required to divest certain assets related to its purchase of UCB. Through its application, Cytec requested Commission approval to divest the UCB Amino Resins Business and the Fechenheim Additives Business, as those terms are defined in the order, to wholly owned subsidiaries of INEOS Group Limited and affiliates of INEOS Capital Limited. Through this action, the FTC has approved Cytec's application.

• On August 23, the Commission approved the filing of two comments with the Federal Energy Regulatory Commission ("FERC") concerning: 1) FERC's initiatives to reduce entry impediments in wholesale electricity markets that may stem from long-term risk in obtaining transmission services, and 2) the need to standardize the way in which transmission owners calculate the amount of capacity available for unaffiliated users of the transmission grid.

  The first comment, approved on August 8, 2005, concerns long-term transmission rights in markets operated by regional transmission organizations ("RTOs") and independent system operators ("ISOs"). According to the staff comment, wholesale electricity customers and their generation suppliers currently face substantial risk in the acquisition of long-term transmission access in markets operated by FERC-approved RTOs and ISOs. The risks relate both to the price and availability of long-term transmission. The staff comment provided three insights and suggestions on why FERC's initiatives to address long-term transmission risks are important. First, the staff comment states that FERC could make efficient generation entry more probable by reducing long-term transmission risk. Next, reduction of this long-term transmission risk is even more important in areas outside of those operated by RTOs or ISOs because of the risk of transmission discrimination. Finally, the comment suggests that FERC coordinate its policies to reduce transmission risk with its policies to promote efficient transmission investment projects, including those whose primary benefits are in the form of enhanced reliability of the transmission system.

  In the second comment, approved on August 22, 2005, the FTC states that standardization of the way in which transmission owners calculate the amount of available capacity may help prevent transmission discrimination within the electricity industry and ensure the reliability and security of the transmission grid. Specifically, the comment states that updating behavioral rules against undue transmission discrimination are likely to be helpful in the short-term while the FERC continues to implement structural remedies to remove the ability and incentive for transmission owners to engage in such conduct. The staff urges the FERC not to relax its efforts to implement RTOs and Transcos - independent, for-profit transmission companies - while improving its open access regulations. Further, transmission reliability and security concerns also may warrant updates of these regulations.

• On August 19, the Commission approved an application for proposed divestiture by Cemex, S.A. de C.V. ("Cemex") related to its recent acquisition of RMC Group PLC ("RMC"). Under the terms of the consent order allowing the acquisition, Cemex was required to divest RMC's ready-mix concrete assets in the Tucson, Arizona, area to a Commission-approved buyer within six months of signing the order. Through this action, the Commission has approved Cemex's divestiture of these assets to California Portland Cement Company. The Commission vote approving the divestiture was 4-0.

• On August 16, the Commission, with the concurrence of the Acting U.S. Assistant Attorney General for Antitrust, authorized the release of the Twenty-Seventh Annual Report to Congress Regarding the Hart-Scott-Rodino ("HSR") Premerger Notification Program. The report summarizes Commission and Department of Justice ("DOJ") actions conducted under the HSR Act in fiscal year 2004, noting that 1,454 premerger filings were received - 43 percent more than the 1,014 filings received in fiscal year 2003. The report also describes the HSR Act and provides a historical overview of how the federal antitrust agencies have implemented the Act since its enactment in the late 1970s. The report presents FY 2004 developments relating to compliance with the Premerger Notification Rules and Procedures, followed by a discussion of both FTC and DOJ merger enforcement activities during the year. Finally, the report includes a summary of the ongoing reassessment of the effects of the Premerger Notification Program. Appendices provide a summary of transactions for fiscal years 1995-2004 and the number of transactions reported as filings by month during this time. A statistical table presents data profiling HSR filings and enforcement interest during FY 2004. The Commission vote to issue the report, which is available on the FTC's Web site as a link to this press release, was 4-0.

• On August 9, the Commission has approved the publication of a Federal Register notice concerning proposed amendments to the Hart-Scott-Rodino (HSR) Rules, 16 C.F.R. Part 803. As detailed in the notice, which will be published shortly and can be found on the FTC's Web site as a link to this press release, the proposed amendments would allow parties filing pre-merger documents under the HSR Act to provide Internet links to certain documents in lieu of paper copies for items 4(a) and 4(b) on the notification and report form. The proposed rulemaking also addresses "stale filing" situations, in which parties make premerger filings but then fail to comply with a Request for Additional Information and Documentary Material - commonly known as a second request.

• On August 5, the Commission authorized the staff to file a joint amicus brief with the U.S. Department of Justice ("DOJ") in the matter Illinois Tool Works Inc. v. Independent Ink, Inc., No. 04-1329 (U.S. S. Court). The brief urges the reversal of a Federal Circuit Court decision, which held that there is an exception for patented products from the requirement that an antitrust plaintiff challenging a tying arrangement under Section 1 of the Sherman Act prove that the defendant has market power in the tying product market. The Commission vote authorizing the staff of the Office of General Counsel to file the joint brief with the DOJ was 3-0, with Commissioner Jon Leibowitz not participating.

• On August 2, following a public comment period, the Commission approved the issuance of two consent orders. The first concerns Chevron Corp.'s acquisition of Unocal Corporation. The second relates to the settlement of the Commission's administrative complaint against Unocal's subsidiary, Union Oil Company of California, for engaging in alleged anticompetitive practices. The Commission vote approving each of the final consent orders was 3-0-1, with Chairman Deborah Platt Majoras recused.

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

• On September 1, consumers in 14 East Coast states joined the rest of the country in qualifying for a free annual credit report from each of the three nationwide consumer reporting companies - Equifax, Experian, and TransUnion. The free reports were mandated by Congress in The Fair and Accurate Credit Transactions Act of 2003 ("FACTA"), which requires the nationwide credit bureaus to provide consumers with a free copy of their credit report, at their request, once every 12 months. Consumers who want to access their credit report online can go to www.annualcreditreport.com. Credit reports contain consumers' identification and financial information, including payment history with different creditors, inquiries made by various financial institutions, and information on the public record, such as foreclosures or bankruptcies. Consumer reporting companies collect and sell this information to lenders and other businesses that have a permissible purpose to obtain it. Access to the free credit reports was phased in across the country in four installments from west to east starting last December. September 1 marks the final phase of the roll-out. Consumers in Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, North Carolina, Pennsylvania, Rhode Island, Vermont, Virginia, West Virginia, the District of Columbia, Puerto Rico, and all U.S. territories are now eligible to receive their reports.

• Canadian defendants accused of fraudulently selling business directory listings were banned from the business directory industry on August 25 to settle charges brought by the Federal Trade Commission ("FTC"). The primary defendants are paying $165,000 in consumer redress. The FTC alleged the defendants called small U.S. businesses saying they wanted to "renew" the company's directory listings when, in fact, no prior relationship existed. One individual defendant is subject to a default judgment of almost $9 million. On the same day, the FTC also announced a new consumer education brochure, entitled: Business Directory Scams Try to 'Give You the Business'. The defendants, Datatech Communications Inc.; 9102-3127 Quebec, Inc. (doing business ("dba") as I-Point Media); Elias Bakomichalis; Gregory MacNeil; and, Robert Brewer are based in Montreal, Canada. They targeted American consumers exclusively, contacting small businesses and representing that they were calling to renew the businesses' directory listings. Some employees who talked with the defendants agreed to the "renewal" because they thought they were merely continuing an existing business relationship. When invoices for $299 were forwarded to their accounts payable departments, however, the businesses allegedly found that they were billed for "purchasing" a directory listing, and that the company had never purchased such a listing before. The defendants routinely denied requests to cancel the directory listings and harassed customers who refused to pay, saying their credit rating would be damaged and sometimes referring their accounts to collections. As part of a default judgment against Brewer and a settlement against the others, the defendants are banned from the business directory industry and from assisting others involved in the industry.

• On August 23, the marketers of "Smoke Away" settled FTC charges that they deceptively marketed dietary supplement kits by claiming they would allow smokers to quit smoking quickly, easily, permanently, and without cravings or other side effects. The FTC had filed a complaint against Emerson Direct, Inc. ("Emerson Direct" dba the Council on Natural Health) of Naples, Florida, the corporation that marketed Smoke Away; its owner Michael J. Connors, also of Naples, Florida; Thomas De Blasio, M.D., a physician from Manalapan, New Jersey; and Sherry Bresnahan, D.C., a chiropractor from Algonquin, Illinois. Emerson Direct marketed Smoke Away, while De Blasio and Bresnahan appeared as expert endorsers in advertisements. The FTC alleged the defendants did not have a reasonable basis for the claims they made about Smoke Away or for their claims that it is more effective than FDA-approved smoking-cessation products. The FTC also charged that two doctors who endorsed Smoke Away in advertisements did not properly use their expertise, and that one, a chiropractor, did not actually have the expertise she was represented as having. The company marketing Smoke Away and its owner agreed to pay $1.3 million to settle the charges. They also are prohibited from making any claims about the benefits, performance, efficacy, safety, or side effects of Smoke Away or any other smoking cessation product or program unless those claims are true, non-misleading, and substantiated. All of the defendants are prohibited from making any claims about the benefits, performance, or efficacy of any food, drug, or dietary supplement unless those claims are backed by scientific evidence. If either doctor is endorsing one of those products as an expert, they must actually have exercised their expertise by examining or testing the product. In addition, the chiropractor cannot misrepresent her expertise, training, and experience.

• The FTC announced on August 19 that it had authorized the staff to file an amended complaint in the matter currently pending against Elite Designs, Inc. and Anthony Antonelli. The Commission's original complaint in this matter, filed in February 2005 as part of the Project Biz Opp Flop law enforcement sweep, charged the defendants with several violations related to the FTC's Franchise Rule through their selling of jewelry display rack business ventures. Through this action, to be filed by the U.S. Department of Justice ("DOJ") on the FTC's behalf, the FTC seeks to add The Designer Collection, Inc. as an additional defendant in this matter. The Commission vote authorizing the DOJ to file the amended complaint on the FTC's behalf was 4-0.

• On August 18, FTC Chairman Deborah Platt Majoras issued a statement reporting that as of that week, the National Do Not Call Registry ("Registry") topped 100 million phone numbers. Her statement indicated that this number was a significant milestone for the Registry, which opened for business just over two years ago. The Registry is an efficient and effective tool for consumers and businesses. While millions of citizens have chosen to limit the number of unwanted telemarketing calls they receive, thousands of businesses are also able to target their calls to people who want to receive them. Industry compliance continues to be high, and registration remains free and easy. According to Chairman Majoras, the "Registry speaks volumes about the success of government programs driven by consumer choice, and Americans' preference for uninterrupted dinner-time conversation."

• The FTC charged an employment-opportunity scammer and his three companies on August 17 with marketing a fraudulent U.S. Postal Service ("USPS") employment program. The program offered consumers help in getting jobs with the USPS and guaranteed them job placement if they were able to get a certain score on the USPS' entrance exam. In reality, jobs, or even the opportunity to apply for jobs, were not available through the defendants. For many consumers, the advertised postal jobs were not available in their area at all. The FTC alleged the defendants, Sean Terrance Asberry and his companies, National Testing Services, LLC; Exam Preparation, LLC; and Future Planning, LLC, doing business as Exam Prep, LLC and Registration Department, put classified ads in newspapers across the country. The ads, which read $ ATTENTION $ Now Hiring for Postal Jobs and offered hourly salary rates, paid training and full benefits, led consumers to believe the defendants were connected with the USPS and the hiring process. When consumers called the toll-free numbers listed in the ads, they were told there were jobs available at their local post office. The defendants offered consumers an exam-preparation package and told consumers they had to pay a "one-time refundable fee" for the study materials. According to the defendants, the materials would assist consumers in getting jobs with the USPS by helping them pass the required entrance exam. The defendants also told consumers that if they scored high enough on the exam, they would receive immediate job placement. The defendants said that their product would include an employment application, a book entitled "Exam Prep Guide," 12 practice exams, and a copy of the actual exam.

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

• On August 30, the Canadian Competition Bureau announced that the Federal Court of Canada imposed fines totaling $1.675 million for a conspiracy to fix prices of nucleotides in Canada. Nucleotides are used as flavor enhancers in soups, sauces, spices and other foods. Ajinomoto Co. Inc. pleaded guilty for its alleged participation in the conspiracy ,and was fined $1.5 million. CJ Corp. also pleaded guilty to the allegations, and was fined $175,000 for its participation. "These international price fixing cartels prey on Canadian businesses and consumers by manipulating prices and competition in our marketplace," said Denyse MacKenzie, Deputy Commissioner of Competition. "The Competition Bureau will continue its aggressive prosecution of illegal cartel schemes."

• On August 26, the revised 'first-in' Immunity Policy for Cartel Conduct was issued by the Australian Competition and Consumer Commission. The new policy replaces the 2003 leniency policy, and follows a review to ensure that the policy was operating effectively. The policy will confer full amnesty from prosecution and penalty to the first eligible cartel participant to report its involvement in a cartel and cooperate with the ACCC's investigation and prosecution of other cartel members. The policy will not apply to cartel ringleaders or cartel members who have coerced others into taking part in the cartel. "The changes to the policy will enhance the ACCC's ability to detect and prosecute cartels by making it easier for cartel participants to seek immunity.

  This, combined with the impending introduction of criminal sanctions for cartel conduct, including jail sentences for executives, and the enhanced Immunity Policy makes the decision about whether or not those involved in cartels should apply for immunity a "no-brainer" said ACCC Chairman, Mr Graeme Samuel.

• On August 25, the French press reported that the French Conseil de la Concurrence had found evidence of price fixing between three French cellular phone operators, France Telecom, Bouygues Telecom and SFR, who are alleged to have held regular meetings to discuss prices. The investigation leak caused the French Finance Minister, Thierry Breton, to deny that the investigation poses a conflict of interest for him because he was the former CEO of France Telecom. He stated that if evidence of price-fixing is found, it would have to be punished, and the investigation involved allegations predating his tenure as CEO of France Telecom. The Conseil de la Concurrence is expected to rule on the case by the end of the year.

• On August 25, the European Commission approved under the EU Merger Regulation the $24 billion acquisition by Johnson & Johnson (J&J) of its competitor Guidant, subject to various conditions. In particular the parties must divest either J&J or Guidant Endoscopic Vessel Harvesting products plus Guidant's EEA endovascular business and J&J's EEA Steerable Guidewires business. The Commission's decision follows an in-depth investigation into the takeover. In light of the commitments given by J&J, the Commission concluded that the transaction would not significantly impede effective competition in the European Economic Area (EEA) or a significant part of it.

• On August 23, it was reported that South Korea's antitrust watchdog, the Fair Trade Commission, would reach a final decision in late September/early October on allegations that Microsoft Corp. unfairly used its dominant position to shut out rivals. The FTC has been investigating allegations raised by South Korean Internet portal, Daum Communications Corp., in September 2001, and more recently by RealNetworks, that Microsoft has breached South Korea's antitrust laws by bundling its media player and instant messenger program with the its Windows operating system.

• On August 22, it was reported that the European Commission had launched a formal investigation into allegations of cartel behavior in the market for methacrylate monomers and derived products (which, are used in a wide range of products including contact lens, electronics and plastics) between some of the Europe's largest chemical manufacturers. BASF AG, Degussa AG, Lucite International Ltd. and Imperial Chemicals Industries Plc are among the chemical companies believed to have been sent a statement of objections which alleges the exchange of sensitive market information, the forming a cartel to fix prices, allocating customers and passing on additional costs between 1995 and 2000.

  The UK's Department of Trade and Industry (DTI) published on its website updated documents relating to the US case of Empagran SA v. Hoffman-LaRoche, which deals with the question of whether actions can be brought in the US for damages suffered outside the US. The UK government, and other foreign governments, filed amicus curiae briefs with the Supreme Court and before the Court of Appeals arguing that the US courts should not hear damages claims on facts such as those that arose in this case. The DTI has published on its website copies of its amicus curiae briefs and of both the Supreme Court and the Court of Appeals judgments. It notes that the UK Government will continue to monitor future developments in this case in the coming months.

• On August 18, the Australian Competition and Consumer Commission announced that it had instituted proceedings in Federal Court, Adelaide against Auspine Limited, Geo J Bone & Sons Pty Ltd and Jag Timber Products Pty Ltd for alleged price fixing or attempted price fixing of timber estimating services in South Australia in contravention of the Trade Practices Act 1974. The ACCC alleges that during 2002, Auspine, Bone, and Jag Timber made an arrangement, or alternatively arrived at an understanding, containing, inter alia, provisions that they would no longer provide estimating services without charge but would pass on to the customer any charges incurred at cost and, that they would procure or attempt to procure or induce other timber suppliers to make an arrangement, or to arrive at an understanding, containing a provision to the same effect, but including other timber suppliers.

• On August 18, the details of an action brought by Alenia Marconi Systems SpA before the European Court of First Instance (CFI) were published. Alenia Marconi is seeking damages from the European Commission for non-contractual liability as a result of its decision to reject a complaint against Eurocontrol alleging a breach of Article 82 of the EC Treaty in connection with Eurocontrol's management of contracts for the supply of air-traffic management equipment, and in its provision of assistance to national administrations. Alenia Marconi is seeking damages under Article 288 EC Treaty for the losses that it claims to have suffered in the amount of €72.8 million. It claims that (i) in reaching its decision to reject the complaint, the Commission failed to exercise correctly the supervisory functions that it has in relation to monitoring the application of EC competition law; (ii) the Commission erred in failing to find that Article 82 was applicable to Eurocontrol; (iii) the Commission infringed its duties of supervision of the competition rules and its obligation to examine complaints impartially and diligently; and (iv) the Commission breached Alenia Marconi's rights of defense and infringed the principle that administrative proceedings should be of a reasonable duration.

• On August 17, the Argentine Executive Power submitted to the National Congress a draft bill for the modification of the Argentine Competition Law 25.156. Under the proposed new scheme, the Secretary of Technical Co-ordination of the Ministry of Economy will have a veto right over certain economic concentrations that require prior approval. In addition, six years after the enactment of the Competition Law 25.156, the National Tribunal for the Defense of Competition is to be created and its members appointed.

• On August 17, it was reported that the Mexican Federal Competition Commission had fined Coca-Cola and six of its bottlers for instituting exclusive contracts with Mexican retailers that resulted in Coke abusing its dominant position, and preventing entry into the soft drinks market. The investigation and fine followed complaints from Pepsi, and a related complaint from Big Cola, a local soft dinks producer. In a written statement, Coca-Cola stated that it plans to use the appeal processes to present arguments that its business practices comply with Mexican competition laws, and to demonstrate that its commercial practices are fair, foster efficiency in the marketplace and promote a free, competitive marketplace.

• On August 2, the European Commission published a report on securities trading, clearing and settlement arrangements for bonds and equities in the 25 EU countries. On the basis of this report, the Commission will work closely with national competition and regulatory authorities to ensure that possible barriers to cross-border competition monitored and if necessary investigated. The arrangements for these services are complex, varying from country to country, and this is the first authoritative analysis of the markets from a competition standpoint at the national and pan-European levels. The report will help the Commission, national authorities and market participants to understand the competitive dynamics in the sector, and, in particular, the current barriers to cross-border transactions. This work will also complement the wider regulatory debate on the optimal organization of EU securities infrastructures.

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

• On August 25, 2005, Reuters reported that Thomas Barnett will be nominated by President Bush to lead the Justice Department's antitrust division. In an announcement earlier in the week, the White House revealed its plan to nominate Barnett, who currently is the acting head of the division. He oversees competition cases, business mergers and investigations. Before that, he served as deputy assistant attorney general for civil enforcement at the division. Former antitrust chief Hewitt Pate left the position in June.

• On August 23, 2005, USA Today reported that FCC Chairman Kevin Martin may be looking to increase high-speed Internet access across the country. A provision in the 1992 Cable Act could empower the agency to allow regional Bell telecommunications companies to challenge cable television operators in the video market. "Several weeks ago I asked the staff to explore what the commission can do to ensure that local authorities are not unreasonably refusing to award additional competitive licenses" for video," Martin said. Permitting additional franchises, he added, "would promote competition and stimulate broadband deployment." The move could upset local franchising bodies, which may view it as an infringement of their authority.

• On August 15, 2005, the FCC took two actions to protect U.S. consumers from anticompetitive conduct in international telecommunications services markets and to ensure that they enjoy competitive prices as they make international calls. The first, the FCC adopted a Notice of Inquiry that seeks to build a record that would enable the Commission to better protect U.S. consumers from the effects of anticompetitive or "whipsawing" conduct by foreign carriers. "Whipsawing" generally refers to a broad range of anticompetitive behaviors in which foreign carriers or a group of foreign carriers exploit their market power in negotiating settlement rates with competitive U.S. telecommunication carriers. The second, the FCC resolved separately two remaining matters arising from previous Commission actions with regard to anticompetitive conduct on the U.S.-Philippines route. In particular, the FCC denied reconsideration of and affirmed its June 2004 order that upheld an International Bureau finding that six Philippine carriers had disrupted the U.S.-Philippine networks of two U.S. carriers in retaliation for their refusal to agree to the Philippine carriers' demand for rate increases, and that, by this action, the Philippine carriers had "whipsawed" the U.S. carriers, to the detriment of U.S. consumers. In the same decision, the Commission found that the U.S.-Philippines route was benchmark-compliant and that there was insufficient evidence of remaining competitive concerns raised with regard to that route. Accordingly, the FCC lifted the ISP from the U.S.-Philippines route pursuant to the policies adopted in its 2004 ISP Reform Order.

• On August 5, 2002, FCC Chairman Kevin Martin named Bruce Franca as Acting Chief of the Office of Engineering and Technology and Leslie Marx as Chief Economist. Bruce Franca has served as Deputy Chief of the Office of Engineering and Technology since 1987. Mr. Franca joined the Commission in 1974 as an engineer in the Aviation and Marine Division of the former Safety and Special Radio Services Bureau. He has also held positions in the Office of Plans and Policy and the Mass Media Bureau. Before joining the Commission, Mr. Franca worked for the Naval Ship Research and Development Center in Annapolis, Maryland; the Naval Electronics Laboratory Center in San Diego, California; and the Naval Applied Science Laboratory in Brooklyn, New York. He is a graduate of Pratt Institute in Brooklyn, New York, and has done graduate work in electrical engineering at the George Washington University. Leslie Marx joins the Commission under an Intergovernmental Personnel Act assignment from Duke University, where she serves as an Associate Professor of Economics at the Fuqua School of Business. Prior to joining Duke University, she was a professor at the Simon School of Business at the University of Rochester. Ms. Marx graduated as valedictorian from Duke University and received her PhD in Economics from Northwestern University.

• On August 5, 2005, the FCC loosened its regulations on high-speed Internet access offered by telephone companies, a move prompted by a recent U.S. Supreme Court decision upholding similar rules for competing broadband services offered over cable modems. The FCC voted 4-0 to classify phone-delivered digital subscriber lines (DSL) as a lightly regulated "information service," the same standard that applies to cable-based broadband. Until now, DSL has been a more heavily regulated "telecommunications service." "This has been a grueling process," said GOP Chairman Kevin Martin, who pushed the item and said it would "end the regulatory inequities that currently exist" between phone- and cable-delivered broadband. Republican Commissioner Kathleen Abernathy strongly backed the rulemaking but the two Democratic regulators, Jonathan Adelstein and Michael Copps, offered grudging support. "The order is far from ideal in my mind," Copps said, adding that he backed it after the Republicans showed flexibility on some issues and because the DSL reclassification was made inevitable by the high court. A key concern of the Democrats involved contributions to the $6.5 billion universal service fund. The fund provides phone subsidies to rural and low-income areas and has strong support on Capitol Hill. In the end, the FCC agreed to require phone providers of DSL to continue making their payments into the fund until the agency can devise a new contribution scheme. The Democrats, particularly Copps, had pushed for "network neutrality" provisions that would bar DSL providers from degrading or blocking services offered by competitors. Under the compromise, the FCC has adopted a set of principles on neutrality, but they are not enforceable, agency officials said. The agency also will seek to ensure that disabled Americans have access to DSL under the new regulatory regime and that consumer privacy is protected. In addition, law enforcement could wiretap phone calls made via broadband.

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