According to the FTC, Rambus engaged in deceptive conduct which violated JEDEC disclosure rules by either failing to disclose patent related data, or making misleading statements about such data.  This led JEDEC to adopt standards allegedly utilizing Rambus patents, thereby permitting Rambus to acquire a monopoly and seek high licensing fees.  The FTC remedial order required Rambus to license its patents for reasonable royalty rates for three years, but thereafter forbid any royalty collection.

On appeal Rambus did not dispute the FTC findings that it had monopoly power in the markets identified by the FTC.  Rather, it focused on the conduct element of monopolization.  First, Rambus asserted the FTC erred in finding that it violated any JEDEC disclosure rules.  Second, it argued that the FTC found consequences of nondisclosure only in the alternative, ie,  it prevented JEDEC from either adopting a non-proprietary standard, or from extracting a RAND commitment from Rambus. Since the latter does not violate the antitrust laws, there is, according to Rambus,  an insufficient basis for liability.  The DC Circuit found this second argument persuasive, and cautioned that the evidence was weak on the first point.

The Court noted that the plaintiff – here the FTC – had the burden to show that the conduct is exclusionary.  Deceptive conduct, said the Court, is exclusionary only when it harms competition.  Since the FTC made its findings on this issue  in the alternative, and did not determine which of these outcomes was the more likely, it had to prove that both outcomes – the failure to adopt a non-proprietary standard or to extract a RAND licensing commitment – harmed competition.  The FTC failed to do so.  While deception can form the basis for exclusionary conduct, the Court concluded that "… an otherwise lawful monopolist's use of deception simply to obtain higher prices normally has no particular tendency to exclude rivals and thus to diminish competition."

To reach this conclusion, the Court relied heavily on NYNEX Corp. v. Discon, Inc., 525 U.S. 128 (1998).  In Discon, a lawful monopoly provider of local telephone services entered into a fraudulent scheme to accept rebates from a supplier and thereby increase its costs to justify higher rates that regulators approved.  Such conduct, however, was not found to violate Section 2 since the high prices were the result of the exercise of lawful monopoly power and thus did not harm the competitive process.

Applying Discon here, the Court concluded that the failure to extract a RAND licensing commitment from Rambus, and its consequent ability to extract higher licensing fees, likewise did not harm the competitive process.  In fact, said the Court, with RAND licensing there may well have been less competition from alternative technologies.  Since the FTC was unable to show that JEDEC would have selected a nonproprietary technology had Rambus made the required disclosures, its reliance on the absence of RAND licensing to show harm to competition was insufficient.  Harm to competition, said the Court, required an antitrust plaintiff to prove the SSO would not have adopted the standard but for the misrepresentation or ommission.  If JEDEC would have standardized the same technology despite Rambus deception, then that deception cannot be said to have any effect on competition.  JEDEC's loss of opportunity to seek favorable licensing terms, said the Court, is not an antitrust harm.

Although it did not rest its decision on this ground, the Court also expressed "serious concerns" about the strength of the evidence relied on by the FTC to support its crucial findings regarding the scope of JEDEC's disclosure policies and Rambus' violation of those policies.  It did so since, on remand, the FTC may evaluate the conduct under § 5 of the FTC Act, a broader standard than Section 2.  The Court conceded that JEDEC rules required disclosure of patents and patent applications, but it expressed skepticism that those rules required disclosure of potential amendments, or work in progress on those amendments.  It also questioned the FTC's conclusion that Rambus engaged in deceptive conduct with respect to a standard adopted more than 2 years after Rambus stopped attending meetings related to that standard.  The FTC presumably will consider these comments when and if it considers the case further on remand.

While the D.C. Circuit's opinion was not unexpected, certain aspects of its reasoning were surprising.  The use of Discon, for example, to conclude that high prices by a monopolist caused in part by fraud is not harm to competition is a bit of a stretch.  There the defendant NYNEX was already a monopolist at the time of the alleged fraud whereas here Rambus allegedly used the fraud to gain the monopoly in the first place.  Discon also involved no standard setting issues, no SSO, and no licensing issues at all, RAND or otherwise.  This latest decision in the Rambus saga may well find its way to the Supreme Court.

Authored by:

Carlton A. Varner

213.617.4146

cvarner@sheppardmullin.com

In a first amended complaint, Newcal listed four product markets, which included (1) replacement copier equipment for IKON and GE customers, with "flexed IKON contracts", (2) copier service for these contracts, (3) copier service for Cannon and RICOH brand copier equipment, and (4) copier equipment.  While the court found the latter two markets were implausible, because Newcal did not allege that IKON held market power in the nationwide market for copier equipment leases, it nevertheless stated a claim upon which relief could be granted in replacement copier equipment for IKON and GE flexed IKON contracts, and copier service on these contracts.  In essence, the fraudulent acts that extended the agreements were "Kodak" changes that mutated the relevant market from a competitive product and services market, to a monopolistic aftermarket.  The court held that the first amended complaint properly alleged a relevant market consisting of a derivative aftermarket for replacement equipment.  In Queen City Pizza, the court adapted the Klein & Saft analysis that the relevant market must be viewed as of the time of the formation of a franchise contract, and that the relevant market must therefore include all plausibly foreseeable economic franchise opportunities available to the potential franchisee.[1]  While the relevant market analysis set forth in Queen City Pizza has been widely followed in franchise antitrust cases, there is a window of a "Kodak moment" where the factual allegations of a complaint are on "all fours" with Kodak and where there are proper allegations of post contract formation "opportunism", that were not reasonably foreseeable or in contemplation at the time of formation.[2]  Here, the allegations of aftermarket opportunism led the Ninth Circuit to conclude that the case read on Kodak, and not on Queen City Pizza.[3]  And here, there were purchase and service contracts, but no "franchise."[4]

In an enigmatic and somewhat metaphysical analysis, the court held that allegations of fraudulent contract opportunism warranted the conclusion that the defendant's market power was a function of market imperfection and the lack of substitutability, rather than from a contract itself.  Noting that the new lease on life for the complaint may be somewhat fleeting, the court noted that nothing in its decision, guaranties that – or even speaks of whether – Newcal's complaint will "survive" summary judgment.  Thus, the application of Kodak may indeed be a "Kodak moment."  An issue that may be decided on summary judgment is whether the contract opportunism allegations are such that they could not have been anticipated at the time of formation.  We will see.[5]

Authored by:

Don T. Hibner, Jr.

213.617.4115

dhibner@sheppardmullin.com

Plaintiff alleged that Respironics and sleep labs entered into agreements whereby Respironics agreed to sell its products to the sleep labs at predatorily low prices in exchange for the sleep labs' prescribing Respironics' products to the exclusion of others'.  The court recognized that plaintiff alleged a vertical restraint of trade because it involved agreements among actors at different levels of market structure to restrain trade.  The "rule of reason" applies to allegations of vertical restraints.  Care Heating & Cooling, Inc. v. Am. Std., Inc., 427 F.3d 1008, 1013 (6th Cir. 2005).  Under a rule of reason analysis, plaintiff first had to show the existence of an agreement.

Existence of Agreements with Sleep Labs

Plaintiff did not offer any direct evidence of exclusive agreements with sleep labs, thus plaintiff instead relied on circumstantial evidence to establish such agreements.  To survive a motion for summary judgment, plaintiff needed to present evidence that would tend to exclude the possibility that Respironics and the sleep labs acted independently.

Plaintiff pointed out that Respironics gave away an estimated 591,254 free masks to sleep labs from 2000 to 2004, under a "Mask Maintenance Program," at a cost of approximately $1.5 million.  Respironics' sales training materials further indicated that the goal in giving away the masks was to obtain brand-specific prescriptions for its masks and PAPs, and to keep customers from seeking competitive alternatives.  The court found that this evidence merely demonstrated permissible internal company goals and did not, by itself, indicate a conspiracy with sleep labs.  The court also disagreed with plaintiff's argument that Respironics' practice of giving away free masks was against Respironics' economic self-interest because Respironics could have achieved the same results by selling their masks to the labs.  Evidence that some sleep labs received free masks from multiple companies and that plaintiff itself had admitted to providing either free or below-cost masks to sleep labs tended to show that Respironics' practice was consistent with its economic self-interest.

Plaintiff also challenged other practices such as Respironics' providing preprinted prescription pads to sleep labs which made it easy for a physician to check a box for Respironics rather than writing out a prescription for a competitor and Respironics' practice of providing certain sleep labs with resources and tools to help them identify new patients.  As with the free sleep mask program, the court again found that plaintiff had not provided evidence to create a genuine issue of material fact as to whether the programs evidenced exclusive agreements between Respironics and sleep labs to prescribe only Respironics-brand products.

Foreclosure/Anticompetitive Effects

Although the court could have ended its analysis at plaintiff's failure to prove the first prong of its claim, the court further explained "for the sake of completeness" that even assuming for the sake of argument that plaintiff could have proven the existence of exclusive agreements between Respironics and sleep labs for Respironics-brand prescriptions, plaintiff nonetheless failed to show that those agreements had an adverse effect on competition, as required by the second prong of the rule of reason analysis. 

The court subsequently explained various reasons why plaintiff failed to show anticompetitive effects in the relevant market.  First the court found insufficient evidence to show that Respironics "foreclosed competitors from gaining a foothold in the market" given that a number of companies compete in the OSA field and that two companies other than Respironics enjoy significant shares of the market.  Second, the court found that the percentage of sleep labs receiving Respironics' resources and tools to identify new patients was only between 3.25% and 4.88% and much too small to show foreclosure.  Finally, the court found that the survey on which plaintiff relied to show anticompetitive effects was flawed.

Existence of Agreements with DMEs

Plaintiff also argued that there was evidence of agreements between Respironics and DMEs and/or outlets that restrained trade by locking in business and foreclosing competitors.  Plaintiff submitted direct evidence of two agreements: one in which a provider promised to purchase 100% of its sleep disorder products from Respironics, and another agreement in which a provider promised to purchase 90%.  Both agreements rewarded the provider with a 4% rebate on Respironics' products.  The court, however, found that this claim bared little resemblance to the claim plaintiff pled in its complaint, which alleged a bundling practice that forced outlets to purchase Respironics' PAPs in order to purchase the masks at an economically viable price.  Therefore, the court found that the claim plaintiff pursued on summary judgment was not properly pled.

The court went further and stated that even if the claim was properly pled, plaintiff had not presented sufficient evidence to demonstrate foreclosure or other anticompetitive effects.  Plaintiff presented evidence of only two isolated agreements between Respironics and DMEs or outlets and Respironics further presented evidence that these agreements involved at most 100 to 125 DMEs out of 3,000 to 5,000 providers or 2% to 4.17% of the relevant market.  The court found this percentage too small to show any anticompetitive effects on the relevant market.

Authored By:

John S. Whittaker

415.774.2938

jwhittaker@sheppardmullin.com

In February 2007, Labatt, announced its intention to acquire the operations of Lakeport Brewing Limited Partnership.  Lakeport beer is marketed as a lower priced alternative to other brands of beer.  The same month, the parties filed a "long-form" premerger notification with the Competition Bureau, triggering a 42 day waiting period.  Before the waiting period expired, the Commissioner informed Labatt and Lakeport that it would not complete its review of the transaction by the end of the period.  The Commissioner was concerned that Lakeport's lower priced beer would be eliminated from the market, leaving consumers with fewer, higher-priced choices.  Influenced by a prior experience where it lost a deal because of the time it took the Competition Bureau to complete its review, Labatt proposed to the Commissioner that the deal close at the end of the waiting period subject to a hold-separate arrangement.  Under the hold-separate arrangement, Labatt would acquire Lakeport but delay integrating it in its business for thirty days.  Instead of accepting Labatt's proposal, the Commissioner filed with the Competition Tribunal an application under Section 100 of the Competition Act to obtain a temporary injunction blocking Labatt from completing the deal.

In considering the application, the key issue before the Tribunal was whether allowing the merger to close would substantially impair the Tribunal's ability to order effective relief post-merger.  Commissioner of Competition v. Labatt Brewing Company Limited et al., 2007 Comp. Trib. 8. The Commissioner tried to show this by arguing that the Competition Act gives the Tribunal fewer remedies to use once a merger has been completed, and that it is often more difficult to effectively remedy the anticompetitive effects of a merger after the merger has been effected.  Labatt and Lakeport replied there was no evidence that the merger would impair the Tribunal's ability to order divestiture or dissolution, especially given that the parties had offered to enter into a hold-separate agreement, which the Tribunal has accepted in the past.  The Tribunal interpreted Section 100 to mean that the Commissioner has the burden of showing that if it did not block the merger, it would impede its ability later to order a post-merger remedy that would "restore competition to a level not substantially less than it was before" the merger.  The Tribunal found the Commissioner did not sufficiently demonstrate this and denied the application.  Additionally, it stated that it did not have jurisdiction under Section 100 to order a hold-separate arrangement and that regardless, the arrangement was not necessary.

Round Two:  Commissioner Appeals and Loses

With this victory, Labatt and Lakeport closed the deal in late March 2007.  The Commissioner, however, appealed the Tribunal's decision to the Federal Court of Appeal.  The Commissioner argued the Tribunal misinterpreted section 100 and imposed too high an evidentiary burden to obtain relief.  The Commissioner alleged that relief under section 100 should be nearly automatic, unless the merging parties show that the Commissioner's application constitutes an abuse of process.  The FCA rejected the Commissioner's arguments, stating in its January 2008 decision, "[w ]e do not agree that Parliament intended the role of the Tribunal to be so limited."  Commissioner of Competition v. Labatt Brewing Company Limited, 2008 FCA 22.  The FCA found the Tribunal correctly applied the test under Section 100 and that the Tribunal's finding that the Commissioner had not satisfied the test was reasonable.  Offering the Commissioner some guidance, the FCA advised that in a Section 100 application, the Commissioner should show the nature of the potential lessening of competition that the merger will allegedly cause, the kinds of remedies the Commissioner might seek, and the potential effectiveness of those remedies with, and without, an interim order in place.

The Commissioner's losses in the Labatt case has not stopped her from seeking Section 100 applications.  But the Commissioner appears to be following the FCA's guidance and including the type of information the FCA outlined for the Commissioner in the Labatt decision.  There is however a sign that the Commissioner may begin to accept proposals to close a deal pending review subject to a hold-separate arrangement.  After losing the appeal, the Commissioner agreed to a hold-separate agreement in the merger of scrap metal firms American Iron & Metal Company Inc. and SNF Inc.  Some commentators have observed that the Commissioner's Section 10 losses should not change the way mergers are reviewed in Canada all that much because most firms that learn that the Commissioner needs more time to study their deal will opt not to close.  Rather, most firms choose to obtain substantive clearance of a deal before completing it.

Round Three:  Commissioner Suffers Aftereffects of Omitting Facts in Subpoena Application

The Commissioner's difficulties with the Labatt-Lakeport merger did not end there.  In February 2007, in connection with its ongoing investigation of the merger, the Commissioner obtained document production orders from the Federal Court ex parte (i.e. without notice to responding parties) under Section 11 of the Act.  The orders required Labatt and Lakeport, and eleven others in the beer industry, to produce voluminous information to the Commissioner.  Many of the same entities had been subject to similar orders in 2003 when the Commissioner conducted an inquiry into a bottling agreement among the brewers, and in 2006, when the Commissioner was reviewing the sale of another Canadian brewery, Sleeman's.  Labatt reportedly produced close to 140,000 pages of documents in response to the February 2007 subpoena, costing it $750,000 in external legal costs alone.  This was in addition to some 10,000 pages of records and other information the Commissioner received in the parties' long-form premerger filing.  Nevertheless, in November 2007, the Commissioner obtained yet even more production orders, again ex parte, against Labatt, Lakeport and fifteen others in the beer industry.  The Federal Court described these orders as "enormous" in complexity and scope.  Labatt, Lakeport and one other brewery, Moosehead, filed motions with the Federal Court to set aside the November 2007 orders.  They alleged these orders were substantially duplicative to the February orders and called for records and information irrelevant to the Labatt-Lakeport merger.

Justice Mactavish, the same judge who had issued the November orders, decided the motion.  In her reasons for her order quashing the November 11 orders, Justice Mactavish said that had the Commissioner provided her with complete disclosure, she would not have granted the orders.  Commissioner of Competition v. Labatt Brewing Company Limited, 2008 FC 59. She sharply criticized the Commissioner's disclosures in its ex parte application as "misleading, inaccurate or incomplete." A party seeking ex parte relief, she wrote, has the duty of ensuring that the court is apprised of all of the relevant facts.  The reason why this is so, she added, is self-evident, the judge and the party against whom the order is sought are literally at the mercy of the party seeking relief.  In this instance, the Commissioner's disclosures were unsatisfactory in three ways. As the first time that Section 11 orders have been struck down in the context of a merger, the Labatt decision is an important precedent. For the Commissioner, the decision may be hard to shake like a bad hangover, raising the bar the Commissioner must meet to obtain a section 11 subpoena.  For parties on whom such subpoenas are imposed, the decision, like a cold Labatt Blue in mid-July, may offer some relief.

First, although the Commissioner disclosed in her November application the orders she had obtained in February, she did not disclose that she had previously represented to the Court in seeking the February orders that the information she sought would likely be sufficient for the purposes of her inquiry into the merger.  Justice Mactavish held The Commissioner's failure to disclose  this representation or indicate what had changed since February 2007 were material omissions which justified setting aside the November order.  "In order to properly exercise the discretion conferred on the Court by section 11 of the Competition Act, and for the Court to be able to control its own processes, and to guard against the abuse of those processes, the Court must also be fully apprised of the relevant circumstances surrounding the request."

Second, the Commissioner represented in her November application that "none of the records or information sought has previously been requested from the respondents.”  In fact, Justice Mactavish found, there was obvious overlap between the subject matter of the orders.  The Commissioner argued this was made known to the Court by including the February orders in the November application.  Justice Mactavish disagreed.  "The fact that a document is before the Court, "given the volume of exhibits and the time which an ex parte judge has to deal with such matters, does not relieve the moving party of its duty to make full and fair disclosure. "

Third, the Commissioner failed to bring the concerns Labatt had articulated about the burdensome nature of the Commissioner’s prior demands to the Court’s attention.  More particularly, the Commissioner should have disclosed counsel for Labatt's letters sent the Commissioner's office after Labatt was served the February, 2007 order, expressing dismay over the Commissioner’s failure to advise the Court of the large volume of material already in the possession of the Commissioner with respect to the state of the beer industry in Ontario.  Labatt's counsel also advised the Commissioner that the February order required Labatt to waive privilege by disclosing a high level of detail in documents over which the privilege was claimed, required disclosure of irrelevant information, and that efforts to comply with the orders caused Labbat's file server to crash, and would have cost Labatt over half a million dollars to restore the lost data.  Justice Mactavish observed that the duty of full and frank disclosure requires a party seeking ex parte relief to inform the Court of any points of fact or law known to it which favor the other side, so that a balanced consideration of the issues can occur.  The Commissioner breached this duty.

Following this rebuke, the Minister of Industry announced he intended to investigate the matter and appointed a third party to review it.  On March 3, 2008, the Commissioner announced that a former executive legal officer of the Ontario Supreme Court and prosecutor would conduct the review.  Since its inception, Section 11 has been widely criticized by practitioners, academics, the Canadian Bar Association and others.  See Canadian Bar Association Letter Re: Information Bulletin on Section 11 of the Competition Act; D. Assaf, E. Lefebvre & H. Cooper, "Section 11 of the Competition Act: Time to Revisit and Reset the Balance in Criminal Investigations," Canadian Competition Record, Spring 2004.

Authored by:

Heather M. Cooper

213.617.5457

hcooper@sheppardmullin.com

On April 30, the Scottish Government announced that Scottish Ministers and the Scottish Health Boards had reached settlement with Norton Healthcare Limited and Norton Pharmaceuticals Limited in relation to civil claims brought against the companies' alleged anti-competitive cartel conduct in connection with the supply to the National Health Service (NHS) of generic drugs.  In February 2005, Scottish Ministers and Scottish Health Boards lodged claims in the English civil courts against a number of companies, in connection with their participation in alleged price-fixing cartels in respect of certain generic drugs: warfarin, ranitidine and penicillin-based drugs.  Norton Healthcare Limited and Norton Pharmaceuticals Limited have now agreed with Scottish Ministers and Scottish Health Boards, on a full and final basis and without admission of liability, to pay £2,837,500 in compensation.  They will also provide co-operation in connection with the continuing civil claims against a number of other companies regarding the alleged price-fixing arrangements for a number of generic drugs.  The Scottish Ministers and Scottish Health Boards reached a similar settlement with Goldshield Group Plc, Goldshield Pharmaceuticals Ltd and Forley Generics Ltd in March 2008.  These companies also reached settlements with the Department of Health in relation to similar price-fixing allegations in England.

On April 25, the UK's Office of Fair Trading (OFT) announced that it had issued a statement of objections alleging that certain tobacco manufacturers and retailers have engaged in unlawful practices in relation to retail prices for tobacco products in the UK.  The allegations relate to arrangements between the manufacturers and retailers to link retail prices of a manufacturer's brand to that of a competing brand and, in relation to some of the companies only, the indirect exchange of retail pricing information. The OFT sent a statement of objections to two tobacco manufacturers (Imperial Tobacco and Gallaher) and 11 retailers (Asda, the Co-operative Group, First Quench (trading as Threshers), Morrisons, Safeway, Sainsbury, Shell, Somerfield, T&S Stores, Tesco and TM Retail).  The OFT notes that where it is seeking to attribute liability to other companies, such as parent companies within the same corporate group, it has also addressed the statement of objections to them.  The OFT alleges that certain tobacco manufacturers and retailers variously engaged in one or more unlawful practices in relation to retail prices for some or all of a number of tobacco products in breach of the Chapter I prohibition of the Competition Act 1998.  Its allegations relate to two practices.  First, arrangements between each manufacturer and each retailer to link the retail price of a manufacturer's brand to the retail price of a competing brand of another manufacturer.  The OFT considers that this restricted the ability of each of these retailers to determine its selling prices independently.  Second, in the case of Gallaher, Imperial Tobacco, Asda, Sainsbury, Shell, Somerfield and Tesco, the indirect exchange of proposed future retail prices between competitors.  The companies will now have the opportunity to make written and oral representations in response to the alleged case set out by the OFT in the statement of objections. Any such representations will be considered by the OFT before any final decision is made.

On April 17, the OFT announced that it had issued a statement of objections to 112 English construction companies.  The OFT alleges that the companies breached the Chapter I prohibition of the Competition Act 1998 by engaging in bid-rigging activities in response to tenders issued by both the public and private sector.  In particular, the companies are alleged to have engaged in cover pricing (colluding with competing bidders to obtain a price that is too high to win the contract) and, in some cases, compensation was paid to unsuccessful tenderers.  The OFT stated that it has received 37 leniency applications and that 40 other companies have also admitted participation in some alleged bid-rigging activities.

On April 4, the Belgian Competition Council imposed a total fine of €487,755 on participants in an alleged price-fixing and market-sharing cartel for the chemical BBP.  All alleged cartel participants were granted a reduction in fines under Belgium's Leniency Notice. This is the first time that the Belgian Competition Council has imposed a fine for a cartel in a case based on a leniency application.  According to the Competition Council's press release, the alleged cartel involved regular meetings lasting from 1994 to 2002.

On April 10, the Chilean Antitrust Court (Tribunal de Defensa de la Libre Competencia) fined Almacenes París and Falabella, two of the three major Chilean retailers, for alleged collusion and abuse of dominance, following charges filed by the National Economic Prosecutors Office (Fiscalía Nacional Económica) and Banco de Chile, the second most important bank.  This case started in 2006 when Banco de Chile alleged that both Falabella and Almacenes París applied unlawful pressure on several technology companies to prevent their participation in a highly publicized technology event organized by Banco de Chile.  At this event, clients of Banco de Chile would be offered substantial discounts and free of interest installment payment terms for purchasing technology products, prior to the beginning of the World Cup in Germany.  The event was ultimately cancelled by Banco de Chile on the basis that several providers declined to participate, despite their initial confirmation.  The main evidence relied on by the Antitrust Court included copies of several e-mails between the providers and the accused retailers, and phone calls registers that showed an increase in the total amount of traffic between executives of the two companies and between them and the providers.  Both companies were sentenced to pay fines which are high in terms of historic antitrust Chilean practice.  Falabella was fined approximately with U$8,000,000 and Almacenes París was fined U$5,000,000.  One of the main reasons given by the Antitrust Court for imposing such amounts was that the companies were repeat offenders. They have been convicted in the past for colluding to prevent the use in their stores of bank credit cards on items sold on free of interest installment conditions, in the context of a 2003 Christmas promotion.  Both companies have appealed the case to the Chilean Supreme Court.

On April 2, the French Competition Council, which had received a complaint from a consumers association, fined seven doctors' unions for alleged concerted practices between their members in order to raise the price of medical consultations.  These alleged practices occurred between the end of 2001 and the beginning of 2005.  The Council alleged that the trade unions  circulated instructions in order to encourage "sector 1" specialists (specialists subject to government price control as opposed to "sector 2" specialists who are not subject to such a control) to increase their fees by improperly using the so-called "exceptional exceeding" procedure (a procedure allowing sector 1 specialists, in particular and justified circumstances, to charge fees exceeding the price caps imposed by the State).  The "exceptional exceeding" procedure, normally has to be used with "tact and temperance".  According to the Competition Council, "sector 1" specialists have been able to compensate the lack of revaluation of the price caps fixed by the State Sickness Insurance Fund.  The Council held that the circulation by a medical union of collective instructions recommending doctors to resort to the "exceptional exceeding" procedure with the aim of increasing the fees amounted to price collusion.  It held that these alleged practices harmed the French national health system, and that the excessive fees to be borne by the patients added up to €180 million over the period.  The Competition Council fined the unions a total amount of €814 000.

Authored by:

Neil Ray

415.774.3269

nray@sheppardmullin.com

Damages -  The EC recommends a system of single damages and not multiple damages.  The single damages will cover not only actual loss due to the alleged anticompetitive conduct but also the loss of profit resulting from it, for example, a reduction in sales.  Claimants will also have a right to interest payments.  Importantly, the EC raises the possibility of limiting the civil liability of amnesty applicants against "claims by his direct and indirect contractual partners" - this proposal is subject to further discussions.

Collective Redress -  The EC wants to avoid "class actions run by law firms for an unidentified number of claimants" and has suggested a combination of two complementary mechanisms of collective redress - (1) opt-in collective actions in which claimants expressly decide to combine their individual claims for harm they suffered into one single action, and (2) representative actions which are brought on behalf of the "identifiable victims" by qualified entities, such as consumer associations, state bodies or trade associations.  Individual Member States could either designate those qualified entities in advance or certify them on an ad hoc basis for a particular antitrust infringement.  These two types of actions are meant to complement each other to "avoid excessive litigation".

Discovery - The White Paper proposes a minimum standard of access to evidence in all Member States: all alleged victims of antitrust infringements should be able to ask the court to oblige the defendants to "reveal those pieces of evidence in its possession which are essential for the victims to prove their case for damages".  However, such disclosure will be subject to strict conditions and under the control of a judge.  For example, the claimant must have presented reasonably available facts to show plausible grounds for a case, the disclosure of the requested evidence must be truly necessary and proportionate, etc.  The EC does not want a situation "where defendants settle merely to avoid the heavy costs that excessive wide-ranging discovery can create".  Importantly, the EC also recommends specific protection of Corporate Statements by Leniency Applicants even when disclosure is ordered by a court.

Passing-On Defense / Indirect Claims - The EC wants to avoid defendants having to compensate both direct customers and final consumers for the same alleged illegal overcharge.  Therefore, the EC proposes that defendants "should be entitled to invoke the passing-on defense" against purchasers who may have passed on the overcharge to their own customers.  However, the EC proposals will make it easier for indirect purchasers to bring claims because they "should be able to rely on the rebuttable presumption that the illegal overcharge was passed on to them in its entirety".

Empowering Courts to derogate from normal cost rules -  The current costs associated with antitrust damages actions and Member States' cost allocation rules such as the "loser pays" principle have been a major disincentive to bring private claims in the EU.  The EC, therefore, encourages (i) Member States to design procedural rules fostering settlements as a way to reduce costs; (ii) to set court fees at a level so that they are not a disproportionate disincentive to antitrust damages claims; and (iii) give national courts the possibility of issuing cost orders derogating, in certain justified cases, from the normal cost rules, "preferably upfront in the proceedings".  Such cost orders would guarantee that the claimant, even if unsuccessful, "would not have to bear all costs incurred by the other party".

The EC has scaled back from its earlier more ambitious and radical announcements.  There will be no treble damages and no opt-out class actions - two best known features which characterize the US system.  However, there are concerns about the exact definition of "identifiable victims" who can bring representative actions, and the method of calculating antitrust damages which will be the topic of further guidance by the EC in the coming months.

Authored by:

Neil Ray

415.774.3269

nray@sheppardmullin.com

The Closing Statement began by stating that the key issue is whether the XM-Sirius merger would enable the merged entity to profitably increase prices to consumers.  It then identified several reasons why that was unlikely to occur.

First, it found that XM and Sirius did not compete with each other for either existing customers or for new subscribers through the new car channel.  Existing customers are locked in to either XM or Sirius when they make their initial selection, the two systems are not interoperable, and the switching costs too great.  Virtually all new car manufacturers had negotiated long term (lasting through 2012) sole source contracts with either XM or Sirius.

Second, as to new customers who sign up for service through the mass market retail channel, the DOJ found that other sources of audio entertainment were a sufficient substitute for satellite radio if the merged entity raised prices.  These alternatives include traditional AM/FM radio, HD radio, and MP3 (iPods) players.  The DOJ expressly stated that "evidence developed in the investigation did not support defining a market limited to two satellite radio firms."

Third, the DOJ cited the likely evolution of technology as an important factor as mitigating any anticompetitive effects of the merger.  It stated new technologies, such as mobile broadband devices, would likely be competitive alternatives in the future and thus restrain any attempt by the merged entity to raise prices or otherwise engage in anticompetitive activities.

Fourth, the DOJ stated the merger would result in efficiencies, such as the consolidation of development, production and distribution efforts on a single line of radios thereby eliminating duplicative costs and achieve economics of scale.  The DOJ concluded that "these efficiencies alone would be sufficient to undermine an inference of competitive harm."

Despite the DOJ disclaimers, the Closing Statement does provide useful guidance for future mergers.  Perhaps most important, it reflects a policy of analyzing the anti-competitive effects of a merger on a qualitative, not quantitative, basis.  It would have been simple for the DOJ to state, as have some courts and enforcers, that the unique aspects of satellite radio make it a separate market and then nix a merger between the only two companies in that market.  Instead, the DOJ focused on switching costs, long term contracts, and alternative technologies to conclude the merger would not negatively impact either old or new customers.  The Closing Statement also shows the importance of efficiencies in DOJ merger analysis even where, as here, "[i]t was not possible to estimate the magnitude of the efficiencies with precision due to the lack of evidentiary support provided by XM and Sirius."  Finally, the length of the investigation itself, over a year after the Second Request was issued (April 12, 2007) shows that the DOJ carefully evaluated the competing claims before reaching the decision to close the investigation.  All these factors, and perhaps other language in the Closing Statement, provide useful guidance on future transactions.

Authored by:

Carlton A. Varner

213.617.4146

cvarner@sheppardmullin.com

Article 50 of AML states that “The undertakings that violate the provisions of this Law and cause damage to others shall bear civil liability.”  This clause clearly opens the window for private civil lawsuits against monopolistic conduct in China under the AML.  As a direct interpretation to the wording, once a company’s business activity is deemed as “monopolistic activity” which violates the AML, and the harmed party has evidence of actual damages or loss, such harmed party should have the right to sue the company under the AML.

As the AML is deemed as more substantive rather than procedural in the nature, it  does not  define many important procedural issues relating to private action, including who has standing or is otherwise permitted to file a private anti-monopoly lawsuit.

2. Right to Sue of Consumers and Competitors

In absence of clear guidance by AML, any individual and legal entity is allowed to file lawsuit according the Civil Procedure Law.  Applying such rule to the anti-monopoly lawsuit, consumers are undoubtedly granted the right to sue multi-national companies, which has been confirmed by most key legislators and judges.  A leading legislator commented in an antitrust conference held in Beijing early this year that the implementation of individual consumers will be one of the most important goals of implementing AML.

However, it is questionable whether competitors, regardless registered inbound or outbound, will have the right to sue multi-national companies in China under the cause of action for monopolistic activities.  In many countries, competitors are  often  the party harmed by a company with a dominant position in an industry and therefore, do have standing to sue.  It is also true, however, that competitor standing to sue sometimes results in abusive and expensive litigation which may not promote competition at all. The United States, for example, imposes limits on competitor standing through the antitrust injury requirement coupled with the oft-stated mantra that the antitrust laws protect competition, not competitors.

3. Current Debate of Legislators

In fact, there was an debate within the legislation departments before the issuance of  the AML. The Standing Committee of National People’s Congress was concerned the risks that anti-monopoly litigation could be abused by companies in attacking state owned enterprises or growing private owned companies.  In previous drafts of the AML before the final version, the “party with interest” is entitled to file lawsuit under AML.  As discussed in various conferences before the issuance of the AML, such “party with interest” did include competitors and authorized standing to sue for competitors under the AML.  However, such term was changed in the final version of AML.  From such approach, it is a clear signal that the AML is considered as substantive law instead of procedural law, and  leaves the issue of competitor standing for judicial interpretation by Supreme Court.

According to various sources,, the legislative members of AML concluded that it should initially close the window for competitor standing.  Further, according to the legislation rules, the Supreme Court has the power to define procedural matters under any law, including the AML.  At the present time, Supreme Court has not yet issued any  interpretation or otherwise provided guidance on this issue.

4. Comment

In the current system of Chinese courts, the jurisdiction over any anti-monopoly case might eventually be set as intermediate court level.  However, due to the existence of local protection and difference of professional capacity of judges in different geographic areas, it is still risky that abuse of anti-monopoly litigation by certain local competitors might greatly impact not only state owned enterprises,  but foreign companies as well.  For example, if competitor standing is permitted, it is possible that some companies may file separate anti-monopoly lawsuits in different provinces at different time points against the same company.. The AML should be very cautious in granting the right to sue to competitors, and perhaps withhold entirely until the potential procedural abuses are resolved, and the scope of the AML itself is more established.

Authored by:

Michael X.Y. Zhang

86.21.2321.6000

mzhang@sheppardmullin.com

In 2002, eBay purchased the PayPal online payment service.  In the lawsuit, plaintiffs allege that eBay engaged in anticompetitive behavior through, among other things, eBay's controls over its payment methods, elimination of  buyer-protection for non-PayPal transactions, and requirement that sellers who would otherwise accept only money transfers accept credit card payments.  Plaintiffs also allege, that prior to eBay's acquisition of PayPal, eBay engaged in anticompetitive activity through its acquisition of two of PayPal's competitors and implementation of anticompetitive policies, including entering into agreements with AOL, Yahoo, and Google which purportedly eliminate competition by, inter alia, preventing potential competition and creating territorial market divisions. Plaintiffs also allege that eBay's exclusive marketing of PayPal and exclusion of competitor person-to-person online payment systems constitutes an illegal tying arrangement under the antitrust laws.

Based on the foregoing allegations, plaintiffs allege that eBay violated Sections 1 and 2 of the Sherman Act and Sections 1620 and 17200 of the California Business & Professional Code, and assert claims for: (1) abuse of monopoly power and monopoly maintenance for online auctions; (2) attempted monopolization of the market for online auctions; (3) abuse of monopoly power and monopoly maintenance in the market for person-to-person online payment systems; (4) attempted monopolization of the market for person-to-person online payment systems; (5) per se unreasonable tying; (6) unlawful trust, combination, or conspiracy in restraint of trade and commerce; and (7) unfair business practices.  On June 8, 2007 eBay moved to dismiss the bulk of the class action claims.

The Court's Decision

Monopolization

eBay moved to dismiss plaintiffs’ monopolization and attempted monopolization claims on the grounds that plaintiffs do not plead the existence of interchangeable alternatives to both eBay and PayPal and, therefore, failed to plead an identifiable relevant market.  However, the court stated that plaintiffs do not allege that eBay’s product alone constituted the relevant market, and have satisfied the elements of a prima facie case of anticompetitive behavior.  In addition, while the court noted that plaintiffs' market theory "may be implausible as a theoretical matter," the court noted that there has not yet been any discovery and plaintiffs are entitled to the opportunity to develop their claims.

eBay also moved to dismiss plaintiffs’ monopolization and attempted monopolization claims on the grounds that plaintiffs failed to identify any exclusionary or anticompetitive conduct arising from eBay’s acquisition of PayPal and online payment policies.  The court rejected eBay's argument and held that plaintiffs' allegation –– that eBay’s acquisition of PayPal and related policies are anticompetitive because it prevents online auction competitors from breaking into the online auction market–– satisfy the initial pleading requirements.

As a result, the court denied eBay’s motion to dismiss and plaintiffs can pursue abuse of monopoly power and monopoly maintenance claims.

Antitrust Injury

eBay also sought dismissal of plaintiffs’ claims on the grounds that plaintiffs failed to plead an antitrust injury, arguing that plaintiffs did not identify any consumers other than the named plaintiffs who were harmed by the alleged anticompetitive conduct.  The court rejected eBay's argument as misplaced because the requirement that a complaining competitor must show harm to consumers does not apply when the complaining plaintiff is himself a consumer.  Thus, the court ruled that plaintiffs adequately pled an antitrust injury.

Illegal Tying

Next, eBay moved to dismiss plaintiffs’ allegation that eBay’s online payment policies support a claim of an illegal tying arrangement.  Relying on Ninth Circuit case law that  requires an allegation of tying to include a claim of “pernicious effect on competition and lack . . . of any redeeming virtue,” Northern Pac. Ry. Co. v. United States, 356 U.S. 1, 5 (1958), the court held that plaintiffs failed to sufficiently allege that any tying arrangement actually caused harm to online auction market competitors.

Unfair Competition

Noting that California's unfair competition laws define unfair competition broadly, the court concluded that plaintiffs adequately pled claims for abuse of monopoly power and monopoly maintenance and, therefore, adequately pled a predicate claim.

Authored by:

Daniel L. Brown

212.332.3879

dbrown@sheppardmullin.com

On March 11, the European Commission announced that it has decided under Article 8(1) of the EC Merger Regulation to approve the proposed acquisition of the online advertising technology company DoubleClick, by Google.  In November 2007, the EC opened an in-depth investigation into the merger.  It was concerned that the merger could raise competition concerns in the markets for intermediation and ad serving in online.  The EC's investigation found that Google and DoubleClick were not exerting major competitive constraints on each other's activities and could not be considered as competitors at the moment.  Even if DoubleClick could become an effective competitor in online intermediation services, the Commission considered that it was likely that other competitors would exert sufficient competitive pressure following the merger. The Commission, therefore, considered that the elimination of DoubleClick as a potential competitor would not have an adverse impact on competition in the online intermediation advertising services market.

On March 11, the Japanese government authorities decided to submit a draft amendment to the Anti-monopoly Act to the Diet. The key points of the draft amendment are (i) the range of conduct for which the JFTC may impose surcharges will be extended to include, inter alia, misrepresentations, exclusionary types of private monopolizations and abuses of superior bargaining positions, and (ii) certain aspects of the current notification system for merger reviews will be revised, including the pre-notification system for share acquisitions.

On March 18, the European Commission announced that it is to conduct a joint research project with the US Department of Transportation (DOT) into transatlantic air services.  The project will consider the growth of airline alliances, and their effect on competition.  It will also look at the possible changes in the role of airline alliances following the EU-US Air Transport Agreement which was agreed in draft in March 2007 and is expected to be applied from the end of March 2008, pending ratification.  The Commission states that the agreement is expected to enhance competition by allowing EU or US airlines to serve any routes between Europe and the US, and calls for the Commission and the DOT to develop a common understanding of trends in the airline industry in order to promote compatible approaches on competition issues.  It is intended that the project will allow the Commission and DOT to cooperate more effectively based on a common understanding of competition in transatlantic markets and inform public discussions on the future of air transport.

The New Zealand High Court recently imposed penalties against a number of defendants involved in an alleged cartel in the wood preservative chemicals industry.  These chemicals are used by millers, timber treatment operators and in wood product businesses.  The NZ Commerce Commission alleged that two corporations together with their senior executives were parties to an overarching understanding that they would maintain market share, avoid unrestrained competition, and keep prices above their competitive level.  They alleged that price information was shared which resulted in uniform and simultaneous price rises, agreements to avoid direct price competition in bids for, or sales to, specific customers or agreeing to non-competitive bids for supply to ensure buyers remained purchasers from existing suppliers.  It was also alleged that following the attempted entry of a new competitor into the market, the two companies' executives also agreed to restrict the supply of chemicals and blending services to the new entrant and implemented that understanding including by exerting commercial pressure on suppliers not to meet the new company's orders.  Section 27 of the NZ Commerce Act 1986 prohibits contracts, arrangements or understandings that have the purpose, or have or are likely to have the effect, of substantially lessening competition in a market.  Under Section 80 of the Act, an individual who breaches Section 27 can be liable to a pecuniary penalty not exceeding NZ$500,000, and in the case of a body corporate, the greater of NZ$10,000,000 or three times the value of any commercial gain resulting from the contravention, or if the commercial gain cannot be readily ascertained, 10% of the turnover of the body corporate and all of its interconnected bodies corporate.

In two decisions on February 28 and March 14, the Norwegian Competition Authority (NCA) imposed fines of NOK1.6 million (approximately €200,000) and NOK1.3 million (approximately €162,500) respectively on two chemical for their alleged infringement of the Norwegian Competition Act. The two companies are competitors in the market for technical acetic acid which is used in the fishing industry and in the oil and gas industry.  They were alleged to have participated in illegal market-sharing and collaboration.  In its assessment of the fines, the NCA emphasized that market-sharing is one of the most serious infringements of the Norwegian Competition Act and that the alleged infringements occurred in a market with few operators.  The two particular companies together handled approximately all the technical acetic acid that is distributed/sold in the Norwegian market.

The Head of the Russian Federal Antimonopoly Service (FAS), Igor Artemyev, warned that the FAS will seek higher penalties for breaches of antimonopoly legislation.  Changes in the method of calculating penalties could lead to fines increasing two fold.  At present, penalties (within the 1-15% range) have generally been set at about 3-5% of turnover.  Under the new proposals, average fines would be between 7-8% of turnover.  Accordingly, Igor Artemeyev has warned that fines for anti-competitive behavior could double.  He has also warned that the period for companies to become accustomed to the penalties that can be imposed under Russian anti-monopoly law has now expired.  The fact that the law has been breached for the first time will no longer be an attenuating circumstance.  In addition, the FAS intends in the coming months to provide for an extension of the limitation period for imposing fines for anti-competitive behavior (if the damage caused exceeds RBL 1 million) from five to six years.

On March 26, the Netherlands Competition Authority (NMa) stated that it would like to receive any concrete complaints and signals which internet entrepreneurs have (such as sales prices compulsorily imposed by manufacturers and discriminating conditions for internet shops), substantiated by as many background documents as possible (letters, e-mails, telephone notes). The NMa will then be able to assess whether these complaints provide sufficient ground for an inquiry.  The NMa is looking for internet retailers that wish to complain that manufacturers force them to charge higher sales prices for the products that they sell following a survey of internet retailers by the Dutch distant selling organization, Nederlandse Thuiswinkel Organisatie (NTO), which showed that manufacturers are trying to prescribe the prices for internet retailers so that they are required to set higher prices than ordinary shops.

Authored by:

Neil Ray

415.774.3269

nray@sheppardmullin.com

In a first amended complaint, Newcal listed four product markets, which included (1) replacement copier equipment for IKON and GE customers, with "flexed IKON contracts", (2) copier service for these contracts, (3) copier service for Cannon and RICOH brand copier equipment, and (4) copier equipment.  While the court found the latter two markets were implausible, because Newcal did not allege that IKON held market power in the nationwide market for copier equipment leases, it nevertheless stated a claim upon which relief could be granted in replacement copier equipment for IKON and GE flexed IKON contracts, and copier service on these contracts.  In essence, the fraudulent acts that extended the agreements were "Kodak" changes that mutated the relevant market from a competitive product and services market, to a monopolistic aftermarket.  The court held that the first amended complaint properly alleged a relevant market consisting of a derivative aftermarket for replacement equipment.  In Queen City Pizza, the court adapted the Klein & Saft analysis that the relevant market must be viewed as of the time of the formation of a franchise contract, and that the relevant market must therefore include all plausibly foreseeable economic franchise opportunities available to the potential franchisee.[1] While the relevant market analysis set forth in Queen City Pizza has been widely followed in franchise antitrust cases, there is a window of a "Kodak moment" where the factual allegations of a complaint are on "all fours" with Kodak and where there are proper allegations of post contract formation "opportunism", that were not reasonably foreseeable or in contemplation at the time of formation.[2] Here, the allegations of aftermarket opportunism led the Ninth Circuit to conclude that the case read on Kodak, and not on Queen City Pizza.[3] And here, there were purchase and service contracts, but no "franchise."[4]

In an enigmatic and somewhat metaphysical analysis, the court held that allegations of fraudulent contract opportunism warranted the conclusion that the defendant's market power was a function of market imperfection and the lack of substitutability, rather than from a contract itself.  Noting that the new lease on life for the complaint may be somewhat fleeting, the court noted that nothing in its decision, guaranties that – or even speaks of whether – Newcal's complaint will "survive" summary judgment.  Thus, the application of Kodak may indeed be a "Kodak moment."  An issue that may be decided on summary judgment is whether the contract opportunism allegations are such that they could not have been anticipated at the time of formation.  We will see.[5]

Authored by:

Don T. Hibner, Jr.

213.617.4115

dhibner@sheppardmullin.com

Plaintiff was a wholesaler that purchased drugs, including Arava, from Aventis.  Its Complaint alleged that the Citizen Petition by Aventis was "objectively baseless" and filed simply for the purpose of delaying genetic entry, thereby preserving its ability to charge higher prices for Arava.  It alleged this violated Section 2 of the Sherman Act.  Aventis moved to dismiss the Complaint as barred by Noerr-Pennington immunity, lack of standing, and the failure to sufficiently allege relevant market and market power.  The Court denied the motion.

The Court noted that Noerr-Pennington immunity is not absolute and there is a sham exception.  As set forth by the Supreme Court PRE decision, the sham exception is satisfied when the lawsuit is objectively baseless in that no reasonable litigant could reasonably expect success on the merits, and the baseless suit conceals an attempt to directly interfere with a competitor's business relationships through use of a governmental process.  Professional Real Estate Investors, Inc. v. Columbia Picture Indus., 508 U.S. 49, 60-61 (1993).  Plaintiff alleged, and the FDA record showed, that Aventis' Citizen Petition was grounded on purported violations of labeling regulations by the ANDA applicants.  Specifically, they planned to cross refer to other brands and strengths when they themselves did not manufacture either the drug or strength indicated.  The FDA denied the petition in part because Aventis itself had used such cross references in similar circumstances.  Its petition also did not raise any new health or safety issues, or identify any new FDA regulations on labeling.  The Court found such allegations were sufficient at the pleading stage to satisfy the sham exception and prevent dismissal.

On the standing issue, the Court stated "It is beyond preadventure  …" that the Aventis petition decreased competition…." It rejected defendant's argument that, as a wholesaler rather than a competitor, plaintiff should be denied standing as it was not the most "efficient enforcer" of the antitrust laws.  As a direct purchaser from Aventis, plaintiff had to continue to pay the higher prices for Arava.  This constituted direct injury sufficient for standing.

Finally, on relevant market and market power, the Court held the relevant market was Arava and its generic equivalents was sufficient and consistent with Second Circuit authority.