McClatchy's Acquisition of Knight Ridder Approved

• Under a consent decree filed by the Antitrust Division of the Department of Justice on June 27, 2006, McClatchy will have to divest the St. Paul Pioneer Press as a condition of its merger with Knight Ridder. The sale does not come as a surprise, as McClatchy had announced in March that the St. Paul Pioneer Press would be one of the newspapers sold, noting that it would not fit the strategic direction of the company, as Knight Ridder already had a newspaper in that market, the Star Tribune. The consent decree is important, however, as it highlights the Division's continued view of media product and geographic markets.

  As in prior mergers, the Division separated the product market for daily newspapers from the product market for other sources of information. When looking at the market for readers, the Division noted that daily newspapers provided longer stories, classified advertisements, calendars of local events, and daily TV listings, while other sources of news, such as radio, television, and weekly newspapers, either did not provide any of these items or provided them on a reduced or less timely basis. 

  The Division also limited the product market because of the market for advertising. Advertisers who use daily papers would not consider using the internet, radio, television, or weekly newspapers, because none of those options would permit them to convey detailed information to their target audience in a timely fashion. Although the internet, radio, and television would permit the transmittal of timely information, and weekly newspapers would permit the transmittal of detailed information, only a daily paper could combine both required characteristics.

  Finally, the decision followed earlier precedent by defining the geographic market as the Minneapolis/St. Paul market, based on the level of interest in the local stories. Readers were unlikely to purchase an out-of-town newspaper in response to an increase in prices, because only a local paper would have the stories of interest to the readers.

  The decision is worth noting, however, because the Antitrust Division went through the trouble of filing a complaint and consent decree, despite the buyer having already announced that the newspaper would be sold off. Knight Ridder's failure to find an up-front buyer for the paper may have prolonged the investigation, by forcing the Department to investigate the overlap. Although Knight Ridder probably has a buyer lined up, as indicated by the consent decree only giving Knight Ridder 60 days to sell the paper, if Knight Ridder had found an upfront purchaser, the investigation might have closed earlier. 

FTC Commissioner Leibowitz Attacks Recent Court Decisions

• On July 27, FTC Commissioner Jon Leibowitz testified before Congress about the effect of patent settlements on generic drug competition. He used his testimony as an opportunity to attack the decision by the Eleventh Circuit Court of Appeals in Schering-Plough Corp. v. F.T.C., 403 F.3d 1056 (11th Cir. 2005) and by the Second Circuit in In re Tamoxifen Citrate Antitrust Litig., 429 F.3d 370 (2d Cir. 2005). He also called for the committee to pass legislation to overturn the courts' decisions.

  In 1984, Congress had passed the Hatch-Waxman Act, which permitted generic drug makers to apply for approval for a new drug using the test results from the studies used by the branded drug. Not having to perform the three stages of testing dramatically lowers the cost of entry for generic drugs. The intent of the legislation was to decrease the price of prescription drugs by allowing the quick introduction of generic drugs once the patents had expired. Although the branded manufacturers may challenge the generics on the basis of patent infringement, the generic drug manufacturers have successfully defended themselves 75% of the time. 

  In response to the threat posed by generic drug manufacturers, numerous branded drug manufacturers had started settling patent claims against them through contracts that included provisions, some of which had the effect of eliminating the generic drug from the market. Under the 2003 Amendments to the Hatch-Waxman Act, the branded and generic drug makers must submit these settlements to the Federal Trade Commission and the Department of Justice. The Federal Trade Commission had begun challenging these settlements under the Sherman and Clayton Acts, arguing that they were inherently anticompetitive

  In Schering-Plough Corp. v. F.T.C., 403 F.3d 1056 (11th Cir. 2005), the Eleventh Circuit refused to analyze the transaction under either the per se or rule of reason analysis. Rather the Court said that, for the transaction to receive scrutiny, the patent must either be proved invalid or it must be proved that the product did not infringe upon the patent. Only if the branded drug did not have a valid patent claim could the FTC maintain that the settlement was actually a "sham" and thus subject to the antitrust laws. The Second Circuit followed the Eleventh Circuit in In re Tamoxifen Citrate Antitrust Litigation., 429 F.3d 370 (2d Cir. 2005).

  According to Commissioner Liebowitz, the fact that 75% of generic drugs withstand the patent challenges under the Hatch-Waxman Act shows that, most of the time, entry is likely and will decrease prices. The court's decisions, therefore, will encourage settlements between branded and generic drug manufacturers, as the companies will split the monopoly profits rather than compete with each other. "[B]rand-name and generic company are both better off avoiding the possibility of competition and sharing the resulting profits, there can be little doubt that, should those rulings become the controlling law, we will see more of these settlements and less generic competition."

  Although Congress may not act on Commissioner Liebowitz's recommendations for the passage of a statute overturning the decisions, the testimony is significant as it indicates that the FTC feels that it may not be able to win this battle in the courts. As Commissioner Liebowitz noted, "litigating another case to conclusion will take years," meaning that the Commission sees little chance of obtaining a favorable judgment in another circuit that could cause the Supreme Court to take note. Although the FTC is currently suing Warner Chilcott, this case involved a non-competition clause that was more "naked" than the one at issue in Schering. Thus, unless Congress does pass a law, these settlements will probably remain legal for the foreseeable future, as, even in the event of an adverse decision in Warner Chilcott, lawyers will be able to draft agreements like those in Schering.

Christopher Bowen
(202) 772 5348