Answer: NO. (But read the following fine print).

The passage of the Antitrust Criminal Investigation Improvement Act of 2005 (March 9, 2006) authorizing antitrust wiretapping for the first time has generated plenty of comment. And, in some circles, alarm. None of the comments, however, have been authored by practitioners experienced with wiretaps. That is not surprising. Almost all wiretaps are used in drug cases — not an area generally frequented by antitrust lawyers.

To understand why boardrooms are not going to be bugged, a brief primer on wiretap procedure is necessary. A wiretap application is probably the longest, most detailed document drafted by a federal prosecutor. There are several rigorous internal levels of review both within the F.B.I. and Department of Justice. The affidavit in support of the wiretap often can exceed 100 pages. Having it right is critical. While federal judges approve the applications very nearly 100% of the time, the evidence obtained by wiretap can be and sometimes is suppressed post indictment after the affidavit is fly-specked by defense lawyers. Suppression of the fruits of a wiretap always spells doom for the prosecution.

The wiretap statute, 18 U.S.C. § 2518, prescribes the following basic requirements:

(1) probable cause to believe that an enumerated crime —now including antitrust offenses — has been or is about to be committed;

(2) probable cause that communications concerning the offense will be intercepted;

(3) a finding that "normal investigation procedures have been tried and have failed or reasonably appear to be unlikely to succeed or to be too dangerous"; and

(4) that a particular communication facility [e.g., a phone] is or will be used in connection with the offense.

What this means is that there must be a serious showing of "necessity" — that the wiretap is necessary because other methods have failed and the particular telephone will produce evidence of the crime. The primary reason why boardrooms will not be tapped or bugged is that CEO's and board members almost never are involved in price-fixing. And competitors do not typically call each other from their boardrooms or senior executive suites.

Lower-level employees, however, do fix prices and do make telephone calls to competitors from their sales offices and their cell phones. So: how likely is it that salesmen and sales offices will be tapped or bugged? Answer: Not very.

Consider the following statistics on recent, pre-antitrust authorization wiretaps:

Second, it is relatively easy to make a case for a wiretap aimed at drug offenses. Drug cartels — unlike price-fixing cartels — are universally violent. "Necessity" is a fairly straightforward proposition in drug cases. The main issue generally is whether other methods at least have been tried. Moreover, all federal judges despise drug offenses and are inclined to credit representations of necessity in those cases. Put another way, a judge confronted with evidence of widespread drug dealing and attendant violence probably has a signing pen in hand very quickly. 

There is no reason to expect that an antitrust wiretap application would be viewed in the same way. Antitrust offenses are very different. They are never violent. Rarely, if ever, is there an impending catastrophe that needs to be averted. Current investigation methods — the grand jury subpoena, search warrant and amnesty program — are working very well.

None of this is to say that a wiretap in an antitrust case would never be justified. In fact, it is a certainty that the Division either already has or is looking intently for its first investigation to employ its new weapon. But an enforcement agency that already is noted for care and attention to detail will be even more careful with its first wiretaps. Having an early wiretap suppressed would be viewed as a disaster and a major embarrassment. There is no doubt that the Division will need to enlist other federal prosecutors experienced with wiretaps until the Division develops its own expertise. Supervising a wiretap is a prosecution specialty and not one for beginners. 

What sort of evidence might support an antitrust wiretap?

Surely, similar pricing would not be enough. Other evidence would be needed — tips, amnesty cooperators, for example. That kind of evidence, however, might be the very same kind of evidence suggesting that a wiretap is not necessary. Finding the right case, in other words, may not be easy.

In short, antitrust wiretaps will be:

• relatively rare, especially at the outset
• aimed at sales offices and staff
• based on strong evidence of wrongdoing — not simply suspicion stemming from similar pricing

Does this mean that senior executives should breathe a sign of relief?

Absolutely not. There is a relatively high probability that price-fixing, especially long-term price-fixing, will be detected. The Division's Amnesty and Amnesty Plus programs have proven to be among the most successful and effective law enforcement tools ever devised by DOJ. Those programs offer a pass to companies (no fine) and individuals (no jail) who are the first to blow the whistle on cartel activity or provide DOJ with information to make a case against others. These are powerful incentives.

According to the Division, they receive roughly two amnesty applications per month and have 56 grand juries currently investigating cartel activity. Scott Hammond, "An Update of the Antitrust Division's Criminal Enforcement Program, November 16, 2005. http://www.usdoj.gov/atr/public/speeches/213247.

There are, in other words, at least 56 reasons for senior executives to maintain serious and effective antitrust compliance programs.

For further information, contact Jim McGinnis, a partner in the firm's antitrust and white collar groups who specializes in international cartel cases. Mr. McGinnis is a former federal prosecutor who supervised wiretaps in addition to trying cases and arguing appeals. He can be reached at: jmcginnis@sheppardmullin.com or 415-774-3294.

On July 31, 2006, the Federal Trade Commission issued its long awaited decision concerning abuse of a technical standard setting process, In the Matter of Rambus, Inc., Docket No. 9302. The Rambus FTC proceeding has been closely watched by practitioners responsible for policing the involvement of companies in standard setting organizations ("SSO's"), and the companies themselves. Standard setting is increasingly important in this era of rapid technological change, as competitors seeks to cooperatively create open standards that operate pro-competitively by providing for interoperability to increase the value and commercial acceptance of a wide variety of products.

In the case of Rambus, the industry segment involved was Dynamic Random Access Memory ("DRAM") – the integrated circuits that hold temporary instructions and data for the central processing unit or central brain of a computer system. DRAM chips are essentially the computer's short term memory, and they comprise a worldwide annual market valued at somewhere between $35 and $40 billion dollars. Companies making the various related components that function in conjunction with DRAM in computers, and companies who purchase DRAM for inclusion in their own products, naturally wanted DRAM chips using open architectures which a variety of other technologies could be designed to operate with in an interoperable fashion. DRAM manufacturers and computer makers accordingly participated in an industry-wide SSO called the Joint Electron Device Engineering Council ("JEDEC") set up to create open, standardized architectures for DRAM chips.

Rambus, Inc. is a developer and licensor of computer memory technologies that participated in JEDEC. It makes no chips of its own, instead licensing its designs to other DRAM manufacturers for fabrication and sale. However, Rambus is alleged to have simultaneously been perfecting and refining its own patents for a competing DRAM technology during the course of its JEDEC involvement in the early and mid-1990s, and surreptitiously causing its technology to be embedded in the JEDEC standard. It then launched a wave of patent infringement suits against major DRAM manufacturers in 2001 after the Rambus technology became part of the JEDEC standards.

The infringement suits have understandably provoked a storm of litigation, including all manner of counter-claims against Rambus on the basis of its JEDEC activities.  These counterclaims include equitable estoppel against the enforcement of Rambus's patents, common law fraud claims, and alleged breaches of state law unfair competition statutes. The infringement suits also sparked the FTC's claim that Rambus's conduct constituted monopolization in violation of Section 2 of the Sherman Act, and therefore in turn constituted a violation of Section 5 of the Federal Trade Commission Act, ultimately resulting in the July 31, 2006 decision.

The case was originally filed on June 18, 2002 and took almost three years to complete before an FTC Administrative Law Judge. Millions of documents were produced, hundreds of witnesses were deposed and the administrative trial consumed 54 days over the course of 5 months. The ALJ issued his initial decision on February 23, 2004. He sided with Rambus in virtually every respect, and dismissed the FTC staff complaint. At the most summary level, the ALJ essentially found that: (1) JEDEC's rules did not require Rambus to disclose pending patent applications, (2) JEDEC's members were not deceived, (3)  ultimately, even if there was deception, there were no viable alternatives to Rambus's superior technology which would have ultimately become the JEDEC standard in any event, and (4)  there was no exclusion because Rambus's royalty rates were reasonable. The ALJ refused to broadly construe JEDEC's rules, which he found to be inconclusive on disclosure, or to imply any sort of duty to disclose pending patent applications as part of participating in an SSO process, because imposing such a requirement would, in his view, actually have anticompetitive effects by potentially stifling innovation.

The Federal Trade Commission reversed the Administrative Law Judge's determination in all respects. In a painstakingly 120 page analysis, the Commission concluded that Rambus's conduct constituted monopolization in violation of Section 2 of the Sherman Act which in turn supported the Commission's ultimate conclusion that Section 5 of the Federal Trade Commission Act had been violated.

The Commission began by defining a series of narrow relevant technology markets focusing on technologies designed to accomplish four specific operations which all DRAM chips must execute. The Commission then found that in these four narrow markets, by virtue of the patents it obtained while participating in JEDEC, Rambus possessed monopoly power because more than 90% of all DRAMs sold worldwide were manufactured pursuant to the JEDEC standard which included Rambus technology.

The heart of the Commission's decision is a detailed evidentiary analysis of JEDEC's rules and the expectations of its members, as demonstrated by their conduct, during the period between 1992 and the middle of 1996 when Rambus participated in JEDEC's deliberations. After reviewing the evidence at exhaustive length, the Commission concluded that JEDEC's rules and the actions of its other members, taken together, created an expectation on the part of the JEDEC participants that each participant would disclose any existing or pending patent applications for technology which would read on the JEDEC standard. It concluded that Rambus's failure to so disclose was premeditated and deliberate, and consequently constituted the illegal acquisition of monopoly power in violation of Section 2 of the Sherman Act. Moreover, the Commission found that viable alternatives to the Rambus technology did exist prior to their adoption in the standard, but that once the standard was adopted, DRAM manufacturers were "locked in" and could not deviate from the Rambus technology. Finally, the Commission rejected the notion that no exclusion had occurred because Rambus's royalty rates were fair and reasonable, and concluded instead that they reflected an improper exercise of monopoly power.

The preceding description does no more than scratch the surface of the Commission's decision, but a few conclusions reached by the Commission along the way deserve highlighting. First, and perhaps most significant from the perspective of legal doctrine, the Commission rejected Rambus's argument that a standard of proof beyond preponderance of the evidence ought to be applied to the staff's claim because the staff sought to in effect preclude Rambus from enforcing its lawful patent grants. Rambus contended that complaint counsel should have to prove the essential elements of their claims by clear and convincing evidence because of the inherent tension between the patent and antitrust laws. The Commission categorically rejected the contention, instead holding that patents are not inherently in tension with the antitrust law, and do not necessarily create market power, citing the Supreme Court's recent ground breaking decision in Illinois Tool Works Inc. v. Independent Ink Inc., 126 S. Ct. 1281 (2006).  The Commission similarly rejected Rambus's contention that a heightened burden of proof should be required to avoid the risk of chilling participation in SSO's. To the contrary, responded the Commission, SSO's work best when the members could depend on some assurance that other participants will not exploit the process by acting deceptively. However, the FTC stopped short of creating a presumption of disclosure, assuming SSO disclosure rules were ambiguous or silent.

The Commission also rejected Rambus's assertion that even if it did improperly inquire monopoly power, it could not be held liable because there was no proof of competitive harm in the form of supra competitive prices to consumers. Rambus argued that royalties paid by DRAM manufacturers, even if excessive, were only wealth transfers which would impose only private costs irrelevant to overall social welfare. The Commission rejected this argument, virtually as a matter of law, finding that it failed to acknowledge the possibility of decline in DRAM output that resulted from artificially heightened DRAM prices. Reduced output would constitute a dead weight loss that decreased overall social welfare, and therefore constituted consumer injury.

The Commission did not issue a final order. Instead it left the record open and invited briefing by the parties on the appropriate scope of a remedy. The Commission's comments in asking for this briefing seemed to create the possibility that the Commission will consider imposing an obligation on Rambus to license its intellectual property at some reasonable royalty rate which the Commission will determine. Given the potential significance of the Rambus decision on the thicket of private patent infringement litigation currently involving Rambus, the outcome of the Commission's remedy proceeding could have enormous economic consequences for the entire DRAM industry. We will report on the Commission's final decision after its penalty deliberations and remedy determination when the final decision is issued.

Authored by:

David Garcia

(310) 228-3747

"Monopoly leveraging," or the use of monopoly power in one market to achieve an advantage in a related market, is not in itself a violation of Sherman Act section 2, according to a recent opinion from the U.S. Court of Appeals for the Seventh Circuit. Schor v. Abbott Laboratories, No. 05-3344 (7th Cir. 2006). The complaint alleged that defendant Abbott Laboratories ("ABBOTT") attempted to leverage a monopoly on its patented AIDS drug Norvir to obtain a second monopoly on other drugs that can be combined with Norvir. The District Court dismissed the complaint for failure to state a claim and the Seventh Circuit affirmed. The court reasoned that such a practice cannot increase a monopolist's profits. "A monopolist can take its monopoly profit just once," Judge Frank H. Easterbrook wrote for the unanimous panel. "An effort to do more makes it worse off and is self-deterring." Therefore, the court concluded, monopoly leveraging does not violate the antitrust laws unless it takes a particular form, such as predatory pricing, tie-in sales or a refusal to deal.

Abbott holds a patent on Norvir. The drug belongs to a class called protease inhibitors, which are used to battle the human immunodeficiency virus (HIV), the retrovirus that causes the acquired immune deficiency syndrome (AIDS). When used alone, in doses high enough to be effective, Norvir causes serious side effects. However, Norvir can be combined with other protease inhibitors to boost their effectiveness. Abbott itself sells one such combination, called Kaletra. Plaintiff Gary Schor ("SCHOR"), a user of AIDS drugs, complained that Abbott, in an effort to establish a monopoly over protease inhibitors, charged an unduly high price for Norvir and an unduly low price for Kaletra. Schor alleged that Abbott was attempting to drive other vendors out of the market, freeing it to raise the price of Kaletra.

The court begins the analysis by rejecting alternate theories for antitrust liability. The complaint cannot allege illegal tying because Norvir is available as a product separate from Kaletra. Schor cannot allege a refusal to deal because Abbott will sell to anyone willing to meet its price. Schor cannot allege price discrimination because a patent holder is entitled to charge whatever price the market will bear. The complaint does not allege predatory pricing, as Abbott's rivals are still able to sell their protease inhibitors for a profit. Finally, the disparity of prices between Norvir and Kaletra is not a price squeeze in the mold of United States v. Aluminum Co. of America, 148 F.2d 416, 436-38 (2d Cir. 1945) (Sherman Act violated by selling processed aluminum sheets for less than the price of raw aluminum), because Kaletra sells for more than its Norvir component sold separately.

This leaves the plaintiff with a claim that "monopoly leveraging," standing alone, is a violation of Section 2. The court rejects this claim, saying there is no antitrust concern because such leveraging cannot increase Abbott's profits. A monopolist that controls an essential component of a product can extract its monopoly profit by charging a high price for that component. If the monopolist controls other components as well, and tries to raise prices on those components, the effect is the same as setting an excessive price for the original, monopolized component. Rather, the court finds, a monopolist's profit-maximizing strategy would be to promote competition among makers of the complimentary components, reducing their price so that the monopolist can charge more for its product. "Thus Microsoft does not make computers but encourages vigorous competition among Dell, Hewlett-Packard, Sony, Lenovo, and other participants in that market; the less it costs to buy the hardware, the more sales of operating system software there will be and the more Microsoft can charge." 

With Schor, the Seventh Circuit joins the Federal Circuit in rejecting "monopoly leveraging" as a stand-alone theory. See In re Independent Service Organizations Antitrust Litigation, 203 F.3d 1322, 1327 (Fed. Cir. 2000). Several other courts have expressed doubts about the validity of the theory. See, e.g., Willman v. Heartland Hosp. E., 34 F.3d 605, 613 (8th Cir. 1994); Key Enters. v. Venice Hosp., 919 F.2d 1550, 1566-68 (11th Cir. 1990); Advanced Health-Care Servs. v. Radford Cmty. Hosp., 910 F.2d 139, 149 n.17 (4th Cir. 1990). The opinion places the circuit at odds with "[p]erhaps some portions of" Berkeley Photo v. Eastman Kodak Co., 603 F.2d 263 (2d Cir. 1980), and Image Technical Services Inc. v. Eastman Kodak Co., 125 F.3d 1195, 1203-13 (9th Cir. 1997). (Although it's possible to categorize Image Technical as a refusal-to-deal case, the court said, "[W]e think it better to join the Federal Circuit in saying that Image Technical just got it wrong.")

The Schor court rejects the notion, suggested by Image Technical and espoused by the plaintiff, that market power achieved via patent leaves a monopolist more susceptible to claims of leveraging than market power achieved via other means. In fact, the court said, Abbott's patents do more to support its position than to assist Schor. Because Norvir is patented, the court reasons, Abbott effectively has a patent on the product "Norvir in combination with other drugs." Therefore, Abbott is entitled to monopolize such a combination. Yet it hasn't done so – doubtless, the court reasons, because Abbott has an economic interest in encouraging competition among the makers of the complimentary drugs. "It would make little sense to use the antitrust laws to condemn Abbott for a strategy (a) that it has not in fact pursued; (b) that would disserve its own interests; and (c) that the patents entitle Abbott to pursue if it chooses."

Finally, the panel rejects Schor's attempt to use rulings in two related cases in Northern California to dictate the result of the instant case. A federal judge in San Francisco denied Abbott's motion to dismiss one of the California suits, and later denied Abbott's motion for summary judgment in both of the suits. Schor argued that these decisions conclusively prove that his complaint states a ground for relief. The Seventh Circuit disagreed, however, for two reasons. First, the California decisions are not final, as they must be before they can have any preclusive effect on other lawsuits. Second, there is a difference in the governing law; California district courts must apply the Ninth Circuit's Image Technical decision, while Seventh Circuit courts need not.

Authored by:

Tyler Cunningham

(415) 774-3208

tcunningham@sheppardmullin.com

Antitrust Division Requires Divestiture of Tin Mill as Remedy for Mittal’s Acquisition of Arcelor

• On August 1, the Department of Justice filed its proposed final judgment and competitive impact statement, concluding its investigation of Mittal Steel’s purchase of Arcelor. As reported earlier, in May the Antitrust Division had reached an agreement with Mittal permitting its purchase of Arcelor to go forward in exchange for Mittal to agreeing to divest Dofasco if further investigation indicated that there was a problem with the transaction. As part of the initial hostile bid for Arcelor, Mittal had indicated that it wished to divest Dofasco to ThyssenKrupp, which had lost a bidding war for Dofasco to Arcelor in January. In response, Arcelor attempted to write the transaction to acquire Dofasco in such a way as to make divestiture impossible, thus trapping Mittal with a competitive problem. Later, Arcelor accepted Mittal’s offer.
  
  The complaint indicates that the relevant market is the market for tin steel products in the Eastern United States. Currently, Mittal controls approximately 44% of the market, whereas Arcelor has 2% and Dofasco has 4%. Another, unnamed company made up the remaining portion of the market. Although there is another tin mill in the Western United States, this tin mill does not usually produce products that compete with tin products in the Eastern United States, because the transportation costs are prohibitive. In addition, anti-dumping restrictions and self-regulation by foreign importers restrict the ability of imports to counter any increase in price.
  
  As part of the agreement, Mittal has to divest Dofasco, currently owned by Arcelor, which has a tin mill located in Hamilton, Ontario. If, however, Mittal is unable to extricate itself from the contract arranged by Arcelor, then the Department of Justice will notify Mittal within 90 days of whether Mittal will divest Mittal's Sparrows Point facility located near Baltimore, Maryland, or Mittal's Weirton facility located in Weirton, West Virginia. Mittal has 120 days to conclude the deal, although this time period can be extended by up to 60 days. 
  
  The consent decree is interesting in that it provides for multiple contingencies. In addition, the fact that the Antitrust Division gave itself the right to determine which plant must be sold if Mittal cannot sell Dofasco to ThyssenKrupp is unusual, as it indicates either 1) the Division wishes to force Mittal to maintain both plants, as it cannot be certain of which one it will keep or 2) the Division is still investigating the market for tin, and will make a determination, if need be, which plant would alleviate the competitive problems more effectively. Finally, the consent decree continues the Antitrust Division’s history of narrowly defining metal markets based both on type of metal and geographic region.
  

FTC Chairman Deborah Majoras Indicates Hesitation on Requiring Net Neutrality

• On August 21 FTC Chairman Deborah Majoras addressed the Progress and Freedom Foundation, an organization generally skeptical of government regulation of technology, in Aspen Colorado. In her address, Chairman Majoras indicated that she had asked the FTC's Internet Access Task Force to investigate net neutrality and what stance the FTC should take on the issue.
  
  Specifically, the Internet Access Task Force will look into whether paying for faster access will result in larger companies obtaining an advantage over smaller companies and whether the broadband providers could leverage the fees to give their own content providers an advantage over competing content providers. Chairman Majoras noted that Madison River, a DSL provider which also sold telephone services, had blocked access to Vonage's competing telephone services over the internet, resulting in a $15,000 fine.
  
  Before the FTC would indicate its support for legislation mandating net neutrality, however, Chairman Majoras indicated that the proponents would need to show 1) demonstrated harm, 2) the regulatory costs, 3) why market forces would not prevent inappropriate leveraging, and 4) why existing regulatory oversight was not sufficient. Chairman Majoras, however, indicated initial skepticism that the FTC would favor legislation. "I, too, support a highly competitive Internet environment. I just question the starting assumption that government regulation, rather than the market itself under existing laws, will provide the best solution to a problem." She stated that Madison River represented the only case where a broadband provider had leveraged its power as a service provider to favor its content, and that caution should be used before making policy on a single violation.
  
  In addition, Chairman Majoras warned that regulation does not always have the consequence its proponents sought. "[A]ny net neutrality or similar legislation could have the effect of entrenching existing broadband platforms and market positions, as well as adversely affecting the levels and areas of future innovation and investment in this industry." 
  
  Chairman Majoras then indicated that the market may be able to constrain any attempts to leverage positions as service providers to help their content business. "In the Internet space, consumers reign, as best I can tell. Consumers are powerful and tough customers. I ask myself whether consumers will stand for an Internet that suddenly imposes restrictions on their ability to freely explore the Internet or does not provide for the choices they want."
  
  Finally, Chairman Majoras focused on the current role that the Federal Trade Commission, Department of Justice, and Federal Communications Commission play in enforcing the existing antitrust laws. Because the investigations are fact-intensive, the agencies are able to handle changing technological standards, and investigate industries that range from supermarkets to semi-conductors.
  
  The speech is interesting because it indicates that Chairman Majoras does not currently see the need for legislation supporting net neutrality. "[T]hus far, proponents of net neutrality regulation have not come to us to explain where the market is failing or what anticompetitive conduct we should challenge; we are open to hearing from them." Whether the Internet Access Task Force will reach the same conclusion and what the FTC's final recommendation will be remains to be seen.
  

Antitrust Division Allows Sale of Contra Costa Times and San Jose Mercury News to MediaNews But Warns on Further Transactions

• Earlier this year, the Antitrust Division approved McClatchy’s purchase of Knight Ridder, subject to the requirement that it divest to Hearst Corporation the Saint Paul Pioneer Press in Minneapolis, as it was the closest competitor to McClatchy’s Minneapolis Star Tribune. Another portion of the transaction involved McClatchy's sale of the Contra Costa Times and San Jose Mercury News to MediaNews, although this was done to decrease debt, not to offset anticompetitive concerns. 
  
  However, Hearst Corporation then agreed to transfer the St. Paul Pioneer Press and the Monterey News to MediaNews in exchange for an interest in MediaNews's non-California asset. In the transaction as it is currently structured, Hearst will pay $299 million for an interest in MediaNews non-California assets, and MediaNews will then buy the St. Paul Pioneer Press and Monterey County Herald from Hearst, which Hearst purchased for $263 million. Hearst and MediaNews have also discussed collaborating other parts of the business within the Bay Area, such as newspaper delivery.
  
  MediaNews owns the Alameda News Group, which controls the Oakland Tribune, the Tri-Valley Herald, the Daily Review, the Fremont Argus, and the San Mateo County Times, papers which serve the "East Bay area," which includes Alameda and Contra Costa counties. The main paper in the East Bay Area is the San Francisco Chronicle, owned by Hearst. The division investigated whether MediaNews' papers competed with the Contra Costa Times and the Mercury News, and whether the combination would result in any synergies that would permit the Alameda News Group to compete more effectively with the Chronicle.
  
  The division noted in its press release that it had found that the newspapers of the Alameda News Group did not compete with the Contra Costa Times or the Mercury News. "Based on its investigation, the Division found that only a relatively small number of readers and advertisers view MediaNews' papers, on the one hand, and the Contra Costa Times and Mercury News, on the other hand, as substitutes." Although the Division allowed the merger to proceed, it also indicated that it had heard that Hearst, the owner of the San Francisco Chronicle, the leading newspaper in the East Bay Area, had publicly announced that it was considering acquiring an interest in MediaNews's non-California assets and entering into "collaborative arrangements with MediaNews involving San Francisco." The Division said that it would investigate any proposed collaborative agreement carefully, to ensure that competition levels are maintained.
  
  Although the Division routinely releases press releases announcing the end of merger investigations, this one stands out as the Division is announcing that arrangements that fall short of a merger between the competitors may warrant investigation. The scope of the investigation may depend on the details of the interest Hearst acquires in MediaNews.
  

  Authored by:

  Christopher Bowen

  (202) 772-5348

  cbowen@sheppardmullin.com

• On August 11, it was reported that a new set of rules relating to foreign investment in Chinese companies will require large international acquisitions to be submitted for competition review to the Ministry of Commerce and State Administration for Industry and Commerce. The threshold for notification are transactions that generate local revenues of more than CNY1.5bn (approx. US$190m) per year, or if either company holds a market share of more than 20%, or if the new entity will hold a combined market share of more than 25%. The new rules will start to apply next month.
• On August 14, Australia's Federal Court imposed a penalty of AU$280,000 on Cambur Industries Pty Ltd, the sole Australian distributor of Bamix and Magimix branded kitchen products, including the dual branded Nespresso / Magimix coffee making machines, for engaging in resale price maintenance. A Cambur sales and marketing manager was also fined AU$32,000. Cambur admitted to the Court that in its dealings with two Adelaide-based authorized retailers, it had breached Section 48 of the Trade Practices Act, by inducing or attempting to induce the retailers not to sell and advertise Cambur products at prices less than prices specified by Cambur; making it known to the retailers that Cambur would not continue to supply Cambur products unless the retailers agreed not to sell and advertise Cambur products at prices less than prices specified by Cambur; and, using statements of prices that were likely to be understood by the retailers as the prices below which Cambur products were not to be sold and advertised for sale. Australian Competition and Consumer Commission Chairman, Mr. Graeme Samuel, said, "Suppliers cannot seek to build brand value by imposing a minimum retail price for goods they have supplied - that is a decision for the retailer. Imposing such minimum retail prices prevents consumers from obtaining lower prices that may otherwise be available through competition".
• On August 2, the Australian Competition and Consumer Commission instituted proceedings in the Federal Court, Sydney, against FCHEM (Aust) Limited, Osmose Australia Pty Ltd, and Mr. Edward Mark Greenacre, the former Managing Director of Osmose Australia Pty Ltd, alleging cartel behavior in the timber preservatives industry. The ACCC's allegations concern conduct over a number of years involving price fixing in relation to the supply of various wood preservative chemicals including CCA (copper chromium arsenic) and LOSP (light organic solvent preservatives). These products are widely used by the timber industry. The ACCC is seeking declarations, injunctions, and pecuniary penalties.
• On August 16, it was reported that Venezuela's antitrust agency, Procompetencia, made public its decision to require airline companies to pay travel agencies a 10% commission fee for all their plane ticket sales. Procompetencia alleged that the progressive reduction of the commission paid to travel agencies over the past several years was an anticompetitive practice carried out by the airlines who had unilaterally imposed their conditions on travel agencies. 
• On August 15, the Norwegian Competition Authority (NCA) announced that it would appeal against an Oslo City Court's judgment to set aside the NCA's decision to impose a fine of NOK 20 million (€2.5 million) on Norwegian airliner, SAS. On June 6, 2005, the NCA imposed the fine on the SAS air carrier group for allegedly abusing its dominant position through predatory behavior on a domestic air route between Oslo and Haugesund between May and June 2004 which allegedly resulted in a smaller carrier, Coast Air, who was SAS’ only competitor on this route, withdrawing from the route. NCA's Director Eivind Kloster-Jensen, said, "We disagree with the reasoning for and the conclusion of the judgment".
• On August 14, it was reported that Russian Federal Prosecutors had been ordered to investigate suspected price fixing by building companies in Moscow and St. Petersburg as property prices increased to record levels. A spokesman for the Prosecutor General confirmed media reports that a probe had been commissioned, and cited a statement on the prosecutor's Web site: "The Prosecutor General has commissioned the Federal Anti-Monopoly Service to organize a probe - on the basis of possible price collusion - of the compliance of anti-monopoly legislation by building organizations when defining prices on housing".
• On August 18, the UK's Competition Commission (CC) published for consultation its proposed remedies designed to increase competition in the home credit market. In its provisional findings report published in April, the CC concluded that the lack of competition in the home credit market, from other credit products, new entrants or among the home credit providers themselves, means that customers face higher prices for their loans than would be expected in a competitive market. Along with the report, the CC also outlined a number of possible remedies to increase competition in the market. Since then, the CC has been discussing those possible remedies with home credit companies and other lenders as well as consumer bodies, credit reference agencies and other arms of government. Following these discussions, the CC is now proposing a package of measures which it considers will be practical and effective in increasing competition in the market to the benefit of customers.
• On August 14, New Zealand's Cease and Desist Commissioner, Terence Stapleton, issued the first Cease and Desist Order to be made under the country's Commerce Act. Cease and Desist orders allow for quick enforcement action against alleged anticompetitive behavior. The Commerce Commission sought the order against port owner Northport Limited for activities at Marsden Point port in Whangarei. Commerce Commission Chair, Paula Rebstock, said that Northport had allegedly attempted to use its monopoly power as the owner of the port to prevent competition in the general cargo marshalling services market: "Northport has attempted to leverage its monopoly power as the port owner to exclude competition in the downstream market for port services. Section 36 of the Commerce Act prohibits companies from using their market power in this way. Other companies must be allowed to compete with Northport’s own joint venture port services company". Since the order was issued, Northport has allowed competitors to marshal at the port, and the Commission has taken no further enforcement or penalty action against Northport.
• On August 14, Italy's antitrust agency alleged that national air carrier, Alitalia SpA, had withheld information about a 2004 acquisition, and that as a result it could be fined up to €4.8 million (US$6.1 million). The deal in question was its €7.1 million (US$9.1 million) acquisition of defunct Gandalf Airlines SA, mostly in order to inherit Gandalf's landing slots at Charles de Gaulle airport in Paris, and at Milan's Linate airport, and some on-the-ground equipment. The fine, if levied, would be calculated based on a percentage of Alitalia's €4.79 billion (US$6.11 billion) revenue last year, and not on the value of the deal in question. The Autorita Garante della Concorrenza e del Mercato said that Alitalia had failed to adequately communicate the acquisition of Gandalfi's assets as required, and even though Gandalfi was no longer operating, it represented a consolidation of the airline sector.

Authored by:

Neil Ray

(415) 774-3269

The Robinson-Patman Act provides price discrimination in the sales of commodities of like grade or quality. In Water Craft Management LLC v. Mercury Marine, No. 04-31139 (5^th Cir. 2006), plaintiff Water Craft, a retailer of outboard motors, sued its supplier, Mercury Marine, alleging that Mercury engaged in price discrimination prohibited by the Robinson-Patman Act by offering Water Craft's largest competitor, Travis Boating Center, discounts that far exceeded those offered to Water Craft. Mercury invoked the "meeting competition" defense to price discrimination claims, i.e. that the lower price offered to Travis was a good faith attempt to meet the low price offered to Travis by Mercury's competitor. After a bench trial, the district court agreed with Mercury that the meeting competition defense applied and entered judgment in favor of Mercury. Water Craft appealed to the Fifth Circuit, arguing that the district court erred in applying the meeting competition defense because (1) the district court's factual finding that Mercury's price discrimination was a good faith response to its competitor's low prices was erroneous and (2) where a defendant offers a price to the favored purchaser that is not as low as the price offered by the defendant's competitor, as was the case here, the defendant cannot, as a matter of law, avail itself of the meeting competition defense. The Fifth Circuit rejected these arguments and upheld the district court ruling. 

Reviewing the district court's factual findings for clear error, the Fifth Circuit noted that the focus of the meeting competition defense to price discrimination is the defendant's good faith belief that the price concession is being offered to meet a low price offered by its competitor. In United States v. United States Gypsum Co., 98 S.Ct. 2864 (1978), the Supreme Court identified indicia of good faith for determining whether the meeting competition defense should apply. Among these considerations are whether the defendant had received reports of discounts from other customers, whether the seller attempted to corroborate reported discounts by checking such reports against documentary evidence and market data, and whether the seller was threatened with a termination of purchases if it did not discount its price. 

In this case, the evidence showed that Mercury attempted to sell to Travis several times and was rebuffed because of its competitor's lower price. Mercury attempted to corroborate its approximation of its competitor's bid by consulting persons with knowledge of it and analyzing reports of discounts and pricing in the marketplace. Furthermore, as in the case where a defendant lowers its prices to avoid termination by a customer, the fact that Travis would not buy from Mercury until it lowered its price and the fact that Mercury's purpose appeared to be to win new business away from its competitor are similarly indicative that "the final lower price was necessary to compete, not a predatory attempt to undermine competition." Since Mercury received reports of discounts being offered by its competitor from several sources, proactively attempted to corroborate these reports, and appeared to be motivated by the prospect of winning a new customer away from a competitor with a lower price, the Fifth Circuit opined, Mercury had shown the indicia of good faith identified in United States Gypsum. 

Water Craft nevertheless argued that Mercury's discount was offered not as a response to its competitor's lower price but, rather, for the purpose of winning Travis's business so it could participate in and benefit Travis's rapid growth in the region. Although there was evidence suggesting that Mercury initially pursued Travis, which was rapidly expanding in the region and would sometimes buy out Mercury retailers and then not sell Mercury motors through them, the court found that the particular discount offered to Travis was "driven entirely by price negotiations in which Travis, like any savvy buyer, used [the price offered by Mercury's competitor] to extract deep discounts from Mercury." As such, the Fifth Circuit ruled, the district court did not clearly err in finding that Mercury's price discrimination was a good faith response to a competitor's lower price. 

The Fifth Circuit was similarly unconvinced by Water Craft's contention that Mercury's discount to Travis did not meet competition because Mercury's price to Travis was not as low as the price offered by Mercury's competitor. In support of this argument, Water Craft cited Falls City Industries, Inc. v. Vanco Beverage Inc., 460 U.S. 428 (1983), in which the Supreme Court explained that "a seller's response must be defensive, in the sense that the lower price must be calculated and offered in good faith to 'meet not beat' the competitor's low price." According to Water Craft, this statement from the Supreme Court indicates that the discriminatory price must meet and not exceed the competitor's low price. Characterizing this reading of FallsCity as "counter intuitive" and "strained," the Fifth Circuit further noted that the focus of a meeting competition defense is the defendant's intent to meet a competitor's price, not the actual correspondence between prices. Moreover, Falls City itself indicates that the meeting competition defense applies even where, as here, the defendant knew that its discriminatory price was not as low as its competitor's price because it stated that a defendant may engage in price discrimination where it was reasonable to believe that a competitor was offering a price equal to or lower than the defendant's discriminatory price. 

Accepting Water Craft's argument would also run counter to the Congress's intent in passing the Robinson-Patman Act. The purpose of the Act was to protect small retailers against price favoritism shown by manufacturers to larger retailers. Water Craft's argument would require a defendant to offer a discriminatory price that is even lower than necessary to win business from the defendant's competitor in order for the defendant to avail itself of the meeting competition defense. This result is clearly contrary to the Act's purpose of reducing disparities between small and large retailers.

Finally, the Fifth Circuit also rejected Water Craft's attempt to narrow the meeting competition defense because the availability of this defense is necessary to reconcile the Robinson-Patman Act with the general goal of the antitrust laws of fostering competition. As recently as Volvo Trucks North America, Inc. v. Reeder Simco GMC, INc., 126 S.Ct. 860 (2006), the Supreme Court has reaffirmed that the Act must be construed consistently with the overarching policies of the antitrust laws. As the Supreme Court put it in Great Atlantic & Pacific Tea Co. v. Pacific Tea Co., Inc., 99 S.Ct. 925 (1979), "the right of a seller to meet a lower competitive price in good faith may be the primary means of reconciling the Robinsion-Patman Act with the more general purposes of the antitrust laws of encouraging competition between sellers."     

Authored by:

Anik Banerjee

(213) 617-4124

abanerjee@sheppardmullin.com

In the first time a Canadian court has considered the tests for exclusive dealing and abuse of dominant position under the Competition Act, Canada's Federal Court of Appeal (the FCA or the court) held last June that the Competition Tribunal failed to correctly apply these tests.¹  The FCA thus overturned the Tribunal's dismissal of the Competition Commissioner's application seeking orders against manufacturer Canada Pipe Company Ltd. for abusing its dominant position and having a practice of exclusive dealing and remanded the case to the Tribunal for re-determination. The Commissioner appealed the Tribunal's dismissal of its claims, and Canada Pipe cross-appealed the Tribunal's finding that it had market power in the relevant markets.²  The case also reveals significant differences in the legal tests employed in the United States and Canada for unlawful exclusive dealing.

Background

Canada Pipe produces cast-iron drain, waste and vent ("DWP") products. These products are used in a variety of structures to carry waste and drain water, and to vent plumbing systems. Through its Stocking Distributor Program, a form of loyalty rebate program sometimes known as an "exotic discount", Canada Pipe offered substantial rebates and discounts to distributors that agreed to stock exclusively Canada Pipe brand cast-iron DWP products. Distributors could stock other makers' non-cast-iron DWP products and still obtain discounts from Canada Pipe. 

The Competition Commissioner alleged in its application to the Tribunal, filed in late 2002, that the loyalty rebate program constituted a practice of exclusive dealing under section 77 of the Act, and an abuse of dominant position under section 79 of the Act by preventing or lessening competition substantially in the markets for DWP products. 

At the outset of its review, the FCA pointed out that exclusive dealing and abuse of dominant position claims have parallel structure and logic, as they both involve identifying particular conduct, and both require findings of market power and actual or likely substantial lessening of competition.³ The court cautioned, however, that each statutory element "must give rise to a distinct legal test or otherwise the interpretation risks rendering a portion of the statute meaningless or redundant".⁴

Abuse of Dominant Position

Under Section 79(1) of the Act, the Tribunal may issue an order against a party where it exercises market power in a relevant market⁵ and engages in a practice of anti-competitive acts⁶ which is having or is likely to have the effect of preventing or lessening competition substantially in that relevant market.⁷ As noted by the FCA, "anti-competitive" act is not defined in the Act. A non-exhaustive list of eleven anti-competitive acts is, however, enumerated in section 78 of the Act.

In its February 2005 decision, the Tribunal held that Canada Pipe had market power in the relevant markets for DWP products but that the loyalty rebate program was not an anticompetitive act as meant in § 79(1)(b). The program was not anticompetitive, the Tribunal held, because it had not been shown to have substantially lessened or prevented competition in any market.⁸

The FCA began its review of the Tribunal's decision with what it considered the Tribunal's most serious error, the issue of whether Canada Pipe's loyalty rebate program has or is likely to have the effect of preventing or lessening competition substantially (§ 79(1)(c)). 

The FCA, endorsing the Commissioner's arguments, held that the correct test for establishing substantial lessening or prevention of competition is whether, but for the impugned conduct, the relevant market would have been "substantially more competitive". ⁹The Tribunal's focus on whether substantial competition continued to exist in the relevant markets following the introduction of the rebate program was wrong, the FCA held. Whether or not competition is substantial in a relevant market does not determine whether a certain practice has resulted in, or is likely to result in, a substantial lessening or prevention of competition.¹⁰ The correct approach is not to exclusively focus, as the Tribunal did, on entry by new firms and switching by incumbent firms, but rather to compare the level of competition in the presence of the exclusive arrangement with what it would have been in the absence of the arrangement. 

Canada Pipe objected to the "but for" test on the basis that it was novel. In fact, the Tribunal has never before used the "but for" wording in a decision. However, the FCA rejected Canada Pipe's argument. The no new argument principle, though well-established in Canadian jurisprudence, was inapplicable, the court held, because the Competition Tribunal had used the words of the but for test in its Enforcement Guidelines on the Abuse of Dominance Provisions and the substance of this test has been applied by the Tribunal in prior decisions. Canada Pipe thus had "ample notice" of this argument.¹¹

The FCA next turned to whether the Tribunal erred in finding that Canada Pipe's loyalty rebate program was not an anti-competitive act as meant in § 77(1)(b), for once market power and substantial lessening or prevention is shown, it must additionally be shown that the act is anti-competitive as meant in § 77(1)(b). Adopting the Tribunal's decision in the Nutrasweet case, the FCA held that the focus for whether an act is anti-competitive under § 77(1)(b) should be on the purpose of the conduct.¹² If the act's purpose is to have an anti-competitive effect on a competitor, that its predatory, exclusionary, or disciplinary, the act itself should be viewed as anti-competitive. Section 79(1)(b) requires no more, the court held.

“Purpose" in this context is meant in a broader sense than the subjective intent of the party, the overall character of the act in question should be taken into account.¹³ Furthermore, in the context of § 77(1)(b), "anti-competitive" refers to an act whose purpose is a negative effect on a competitor.¹⁴ This can be established not only by subjective intent but also by the reasonably foreseeable consequences of the acts themselves and the circumstances surrounding their commission, or both.¹⁵

Having made these findings, the FAC held that the Tribunal erred by concerning itself with the loyalty rebate program's intended effect on the state of competition in the market, as opposed to a competitor, and by requiring proof of a causal link between the program and a decrease in competition. No causal link is required, the FCA held, in the test for whether an act is "anti-competitive" under the abuse of dominant power provisions.¹⁶ Thus, a practice need not necessarily have an anticompetitive effect yet it still can be determined to be anti-competitive and, if other elements are proven, an abuse of dominant position. 

Likewise, factors such as the business justifications for a firm's conduct, would also be irrelevant for the purposes of Section 79(1)(b). Business justifications are only relevant, in the FCA's view, in determining whether the purpose of the alleged anti-competitive act had a predatory, exclusionary or disciplinary negative effect on a competitor. A valid business justification can overcome the deemed intention to prevent or lessen competition but is not an absolute defense. "A business justification is properly employed to counterbalance or neutralize other evidence of an anti-competitive purpose prior to making a determination under 79(1)(b)".¹⁷

The Tribunal's consideration of irrelevant factors critically influenced its reasoning and its determination as to whether Canada Pipe's program constituted an abuse of dominant position and its dismissal of this claim had to be overturned, the FCA held.

Exclusive Dealing

An order prohibiting exclusive dealing under section 77 of the Act can be issued where the Tribunal finds that a "major supplier", or a supplier in a market where exclusive dealing is widespread, has a practice of exclusive dealing that is likely to impede entry or expansion of a firm or product in a market,¹⁸ or has or is likely to lessen competition substantially.¹⁹

The Tribunal held that the loyalty rebate program did not constitute exclusive dealing as prohibited by section 77(2) for the same reasons that the program did not constitute an abuse of dominant position, in particular, that no actual or likely substantial prevention or lessening of competition had been shown.

Reviewing this decision, the FCA pointed out that in other cases the differences in the wording of the exclusive dealing and abuse of dominant position provisions might yield different results. In this instance, however, the Tribunal's adoption of the same legal test and analysis with respect to the substantial lessening of competition element for both provisions meant that to the extent the Tribunal erred in law in applying the test for substantial lessening of competition under § 77(1)(c), the same errors apply with respect to § 77(2).

The Tribunal's exclusive dealing decision was also erroneous, the FCA held, because the Tribunal analyzed the loyalty rebate program "from the narrow perspective of prevention, and not the broader perspective implied by the word "impede" used in § 77(2)(a) and (b). This unduly narrow perspective thus also constituted reversible error, the FCA held.²⁰

Canada Pipe is expected to seek leave to appeal to the Supreme Court of Canada. The leave application may be determined in early 2007. Since this is the first time these provisions have been considered by a court, there is a good chance that the Court will decide to hear the appeal. In the meantime, firms doing business in Canada are advised to consult competent antitrust counsel to consider whether their distribution programs and policies comply with all applicable legislation and the relevant jurisprudence. Those familiar with the tests for unlawful exclusive dealing under United States antitrust law should understand from the above that the legal tests for unlawful exclusive dealing in Canada are substantially different from the test employed in U.S. antitrust law and require careful consideration.

Authored by:

Heather M. Cooper

(213) 617-5457

hcooper@sheppardmullin.com