• On November 28, the Federal Trade Commission, together with the Antitrust Division of the U.S. Department of Justice (“DOJ”), announced that it will hold a series of public hearings designed to examine the antitrust implications of single-firm conduct under the antitrust laws. The primary goal of the hearings, which will begin in spring 2006, is to examine whether and when specific types of single-firm conduct are pro-competitive or benign, and when they may harm consumers. Participants will critically examine and discuss the standards used in recent cases, including DOJ’s enforcement actions against Microsoft, American Airlines, and Dentsply, and FTC cases against Intel, Unocal, and Rambus. Private actions, such as Trinko and LePage’s, also will be examined. Hearing participants also will examine what economic learning contributes to the analysis with respect to exclusionary or predatory conduct. In an upcoming Federal Register notice, the agencies will solicit public comment on the specific types of single-firm conduct that may raise antitrust concerns in a variety of regulated and unregulated industries. These comments will assist the agencies in developing the agenda and schedule for the hearings. The agencies anticipate participation from the business community, economists, lawyers, and other interested parties on this important topic.

• On November 22, the Commission authorized the staff to release publicly the FTC’s Performance Report for Fiscal Year (“FY”) 2005. As required by the Reports Consolidation Act of 2000, the Performance Report is included in the FTC’s Performance and Accountability Report (“PAR”) of Fiscal Year 2005. The FY 2005 PAR is the FTC’s third consolidated report prepared pursuant to the requirements of the Accountability of Tax Dollars Act of FY 2002. The PAR is presented in three parts: Part I contains introductory and summary information about the FTC performance and financial activities; Part II is the Performance Report; and Part III contains the agency’s financial statements and audit results. The FY 2005 independent financial audit resulted in the FTC’s ninth consecutive unqualified opinion, the highest audit opinion available.

• On November 18, following a public comment period, the Commission approved the issuance of a final consent order in the matter concerning DaVita, Inc. and Gambro AB. On October 4, the Commission accepted for public comment an order resolving the competitive issues raised by DaVita’s $3.1 billion purchase of rival outpatient dialysis clinic operator Gambro. DaVita will divest 69 dialysis clinics in 35 markets across the country. The Commission vote approving the final order was 4-0.

• On November 9, Federal Trade Commission Chairman Deborah Platt Majoras testified before a joint Senate hearing of the Committee on Commerce, Science and Transportation and the Committee on Energy and Natural Resources, detailing the FTC’s extensive experience in enforcing the nation’s antitrust laws regarding the petroleum industry and saying that federal price gouging legislation now being considered “would unnecessarily hurt consumers.”

  Regarding concerns about price gouging, Chairman Majoras said that, “In an economy in which producers are generally free to determine their own prices and buyers are free to reduce their purchases, it is unusual when many parties call for some sort of price caps on gasoline.” The FTC “is keenly aware of the importance to American consumers of free and open markets,” she said, “and intends faithfully to fulfill its obligation to search for and stop illegal conduct, which undermines the market’s consumer benefits.” She cautioned, however, “that a full understanding of pricing practices before and since Katrina may not lead to a conclusion that a federal prohibition on ‘price gouging’ is appropriate.” Consumers understandably are upset when they face dramatic price increase within a short period of time, especially during a disaster, the Chairman said. “But price gouging laws that have the effect of controlling prices likely will do consumers more harm than good . . . While no consumers like price increases, in fact, price increases lower demand and help make the shortage shorter-lived than it otherwise would have been.” The Chairman continued by saying that even if Congress were to outlaw gasoline price gouging, such laws would be difficult to enforce fairly, based on the difficulty of defining the term “price gouging” and determining when such laws should be put into effect. “For all of these reasons,” the Chairman said, “the Commission remains persuaded that federal price gouging legislation would unnecessarily hurt consumers. Enforcement of the antitrust laws is the better way to protect consumers.”

  Chairman Majoras noted that at least 28 states currently have statutes that address short-term price spikes in the aftermath of a disaster and if Congress mandates anti-“gouging” enforcement – despite the associated enforcement problems – such enforcement should be left up to the states. The states are better situated to react to price gouging based on their proximity to retail outlets and their ability to react quickly to consumer complaints on the local level.

  Chairman Majoras detailed the FTC’s active role in merger enforcement related to the petroleum industry, presenting data showing that the Commission has brought more merger cases at lower concentration levels in this industry than in others. Further, unlike in other industries, the Commission obtained merger relief in moderately concentrated petroleum markets. The testimony continued by examining the Commission’s recent nonmerger investigations into gasoline pricing, highlighted by the consent agreement reached with Unocal Corp., settling charges that the company deceived the California Air Resources Board (“CARB”) in connection with regulatory proceedings to develop the reformulated gasoline standards that CARD adopted. Under the agreement, Unocal (and Chevron, which acquired it earlier this year) agreed to give up its claims to the relevant CARB gas patents, potentially saving California consumers more than $500 million in gasoline costs annually.

  Finally, the Chairman presented the results of a Commission report on the factors influencing gasoline prices nationwide. According to the report, worldwide supply, demand, and competition for crude oil are the most important factors in the national average price of a gallon of gas in the United States. In addition, gasoline supply, demand, and competition produced relatively low and stable prices from 1984 to 2004, despite substantial increases in the United States’ gasoline consumption. Other factors, as well, such as retail station density, new retail formats, and state and local regulations, can affect retail gasoline prices.

• On November 8, the Commission received a petition for proposed divestiture from The Procter & Gamble Company (“P&G”) and The Gillette Company (“Gillette”). The Commission’s consent order allowing P&G’s acquisition of Gillette required the companies to divest certain assets after the transaction was consummated. In the petition, the companies requested FTC approval to sell Gillette’s Rembrandt toothpaste and tooth whitening business to Johnson & Johnson. The FTC accepted public comments on the proposed divestiture until December 7, 2005, after which it will decide whether to approve it.

• On November 7, the Federal Trade Commission filed a complaint in the U.S. District Court for the District of Columbia under Section 13(b) of the FTC Act seeking to put an end to an agreement between drug manufacturers Galen Chemicals Ltd. (now known as Warner Chilcott) and Barr Laboratories (“Barr”). The agreement denies consumers the choice of a lower-priced generic version of Warner Chilcott’s Ovcon oral contraceptive. According to the FTC’s complaint, Barr planned to launch a generic version of Ovcon as soon it received regulatory approval from the Food and Drug Administration. Warner Chilcott expected to lose half its Ovcon sales within the first year if Ovcon faced competition from a generic equivalent. Faced with this prospect, instead of competing with Barr, Warner Chilcott entered into an agreement with Barr preventing entry of Barr’s generic Ovcon into the United States for five years. In exchange for Barr’s promise not to compete, Warner Chilcott paid Barr $20 million.

  The complaint alleges that in September 2001, Barr filed an application with the FDA for approval to make and sell a generic version of Ovcon. Barr planned to sell generic Ovcon at a 30 percent discount to the branded product. In January 2003, Barr publicly announced its intention to market generic Ovcon by the end of that year. Generic Ovcon entry was understood by Warner Chilcott to be the “biggest risk to the company,” the complaint alleges. Warner Chilcott expected that Barr’s generic Ovcon would capture at least 50 percent of Ovcon’s new prescriptions within the first year, thus causing a significant decline in Ovcon revenues. To protect these revenues from generic competition, Warner Chilcott intended to introduce a chewable form of the product (“Ovcon Chewable”) before generic entry occurred. Warner Chilcott’s strategy, the complaint states, was to convert its Ovcon customers to Ovcon Chewable and to stop selling Ovcon. Prescriptions for Ovcon Chewable could not be replaced at the pharmacy with generic Ovcon without express approval of the patient’s physician.

  According to the FTC, by mid-2003, Warner Chilcott’s switch strategy to protect its Ovcon revenues – by converting customers to Ovcon Chewable before generic Ovcon entry – was in jeopardy. Barr’s generic Ovcon entry appeared imminent, and Ovcon Chewable had not obtained FDA approval. Facing the imminent threat of generic Ovcon entry, the complaint alleges, Warner Chilcott, in September 2003, entered into an agreement in principle with Barr. Under this agreement, after Barr received final FDA approval for its generic Ovcon product, Warner Chilcott would have the option to pay Barr a total of $20 million. In return for this payment, the complaint alleges, Barr would not compete in the United States for five years with its generic Ovcon product. Instead of entering and competing, alleges the FTC, Barr would agree to be available as a second supplier of Ovcon to Warner Chilcott if Warner Chilcott so requested.

  The complaint alleges that Warner Chilcott and Barr carried out their horizontal agreement not to compete. In April 2004, Barr received FDA approval to make and sell generic Ovcon. Several weeks later, Warner Chilcott paid Barr the money owed under the agreement. As a result, Barr is precluded from entering with its own generic Ovcon product until May 2009. The Commission’s complaint charges that defendants’ horizontal agreement not to compete, which prevents entry of Barr’s generic version of Ovcon for five years, constitutes an unfair method of competition in violation of Section 5 of the FTC Act. According to the complaint, the agreement on its face eliminates competition, has no plausible justification, and thus is a naked restraint of trade.

• On November 2, the Federal Trade Commission announced a consent agreement that will protect competition and consumers in three significant medical device product markets affected by Johnson & Johnson’s (“J&J”) proposed $25.4 billion acquisition of Guidant Corporation (“Guidant”). The agreement will allow the transaction to proceed, provided the parties comply with its terms. Under the terms of the order conditionally approving the transaction, J&J is required to 1) grant to a third party a fully paid-up, non-exclusive, irrevocable license, enabling that third party to make and sell drug eluting stents (“DESs”) with the Rapid Exchange (“RX”) delivery system, 2) divest to a third party J&J’s endoscopic vessel harvesting (“EVH”) product line, and 3) end its agreement to distribute Novare Surgical System, Inc.’s (“Novare”) proximal anastomotic assist device (“AAD”).

  According to the Commission’s complaint, the transaction as originally proposed would violate the FTC Act and Section 7 of the Clayton Act, as amended, and would reduce competition in the three product markets identified. Each of these markets is highly concentrated and potential entry would not be timely, likely, or sufficient to offset the alleged anticompetitive impact of the acquisition. Specifically, as described in more detail in the Commission’s analysis to aid public comment, J&J’s acquisition of Guidant would remove Guidant as an imminent competitor from the U.S. market for DESs and be likely to lessen competition in the U.S. markets for EVH devices and proximal AADs.

  The Commission’s consent order is designed to remedy the alleged anticompetitive impact of J&J’s acquisition of Guidant, not to improve pre-transaction competition in the relevant product markets. First, it requires J&J to license Guidant’s intellectual property surrounding the RX delivery system at no minimum price to an up-front buyer with a DES program in development within 10 days of the acquisition’s consummation. The parties proposed Abbott Laboratories (“Abbott”), one of the two companies best positioned to replicate the competition provided by Guidant in this market in the relevant time frame, as the up-front buyer of this divestiture package. The Commission believes Abbott’s experience with both drugs and vascular stents will enable it to become a strong competitor in the DES market at its time of expected entry in late 2007, the same time Guidant would have entered with its DES on an RX delivery system. Still, the RX license defined in the agreement is transferable, so if Abbott’s DES program is unsuccessful, Abbott will have the incentive and ability to transfer the license to another firm to ensure continued competition with J&J/Guidant.

  Second, the order remedies the acquisition’s potential anticompetitive effects in the market for EVH devices by requiring J&J to divest its EVH product line to a Commission-approved buyer within 15 days of its acquisition of Guidant. J&J has reached an agreement to sell these assets to Datascope, which currently has a line of products used in cardiac surgery, including products used in CABG procedures. The order allows Datascope to enter into a supply agreement with J&J for up to two years to ensure Datascope has time to receive required regulatory approvals and to begin manufacturing and/or packaging EVH device kits in its own facility.

  Finally, the order will remedy the competitive concerns in the market for proximal AADs by requiring J&J to end its distribution agreement with Novare for Novare’s proximal AAD, eNclose. The FTC expects Novare will be able to find a new eNclose distribution partner within the next couple of months.

  The European Commission (“EC”), Canada’s Competition Bureau, and other foreign competition authorities also reviewed this proposed merger. Throughout the course of their respective investigations, the FTC and the staffs of the EC’s Competition Directorate, the Canadian Competition Bureau, and other interested competition authorities communicated and cooperated with each other under the terms of their respective cooperation agreements.

• On November 1, following a public comment period, the Commission approved the issuance of a final consent order in the matter concerning Penn National Gaming, Inc. and Argosy Gaming Company. The final order amended the proposed order accepted for public comment on July 26, 2005, to reflect changes in the timing of the acquisition and changes in the contracts divesting a casino in Baton Rouge, LA.

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