Government enforcement action and private antitrust litigation
have remained active in the US, despite predictions that the Bush
administration would take a more relaxed posture towards antitrust
enforcement and that a soft economy would lead to less
transactional activity. Most notably, the US Supreme Court, which
had not considered an antitrust case in over five years, decided
three antitrust cases in its 2003 to 2004 term. The Court recast in
sweeping terms the analysis of monopolization claims, limited the
reach of US courts to rule on damage claims by non-US claimants,
and opened US courts to discovery proceedings to aid private
parties before the European Commission. In addition, US courts and
agencies struggled with bundling and tying questions that have
broad pricing implications for a range of businesses, including
those in banking and financial services. On the merger front,
strategic consolidations have continued to get careful antitrust
review from the agencies, with a renewed, if uneven, attention to
the coordinated-effects theory. There are also some signs that the
enforcement agencies are taking a more flexible and practical
approach to remedies that both address competitive concerns and
retain merger efficiencies.
Enforcement activity remains robust at the agencies
The number of transactions reported pursuant to the
Hart-Scott-Rodino Antitrust Improvements Act 1975 (the HSR Act)
dropped again in 2003, after similar declines in 2002 and 2001. In
2003, 1,014 transactions were reported to the US agencies, a big
drop from the high of 4,537 established in 2000. Two principal
reasons explain the downturn. First, the increase in the statutory
size-of-transaction threshold in the HSR Act has excluded otherwise
reportable transactions from notification requirements. Second, the
economic slowdown has led to fewer transactions overall.
The enforcement agencies have continued to conduct preliminary
reviews of reportable transactions on a percentage basis consistent
with, if not slightly higher than, historical averages achieved
under the Clinton administration. During the Clinton years,
regulators sought clearance to investigate 17% of the transactions
notified to them under the HSR Act; clearance requests have
increased to 21% of transactions since the start of the Bush
administration. Second requests continued to be issued in about 4%
of all transactions notified. Interestingly, the Antitrust Division
and Federal Trade Commission (FTC) challenged 3.3% of transactions
that were eligible to receive a second request in 2002 to 2003, a
higher rate of enforcement activity than in any year of the Clinton
administration. All of this reflects a broad, non-political
consensus on antitrust policy that is not likely to be affected by
the outcome of the US elections.
New FTC chairman
After Tim Muris's decision to step down as FTC chairman, the
White House appointed Deborah Platt Majoras, an experienced
antitrust policy-maker and private practitioner, as his
replacement. Majoras previously served along with R Hewitt Pate,
the ongoing head of the Antitrust Division, as deputy assistant
attorney-general. She served as chair of the International
Competition Network's Mergers Working Group and, among other
responsibilities, was involved in the Antitrust Division's merger
review process initiative and the mergers best practices
project.
Under outgoing chairman Muris, the FTC had become a more visible
enforcer of the antitrust laws. In particular, Muris sought to
strengthen the agencies' emphasis on coordinated-effects analysis
in merger investigations. Majoras' appointment is expected both to
ensure a smooth transition and to continue these trends.
Leveraging, bundling and tying
The Supreme Court, lower courts and the enforcement agencies
have struggled with pricing issues analyzed as price
bundling, tying and leveraging, leaving
considerable uncertainty in the application of antitrust principles
to these practices.
Firms with monopoly power (and especially those firms that
control an essential facility) that use exclusionary and
competitively unjustified means to maintain or expand their
monopoly position have been found liable for illegal
monopolization. Moreover, firms that engage in anticompetitive
activities with the specific intent of gaining a monopoly position
have been found liable for attempted monopolization if there is a
dangerous probability that the firm will succeed. Belatedly, firms
with market power in one product can be held liable for illegal
tying if they use that power to coerce a customer to take an
unwanted product and that tie has an appreciable effect in the
market of the second product. The Supreme Court has curtailed the
application of monopolization and attempted monopolization theories
under the essential-facilities and monopoly-leveraging doctrines.
At the same time, the Supreme Court declined to review a Circuit
Court decision that found a monopolist's bundled pricing to be
illegal.
Verizon Communications Inc v Law Offices of Curtis V
Trinko
In his Trinko opinion, Justice Scalia recast much of the
jurisprudence concerning unilateral refusals to deal by monopolists
under Section 2 of the Sherman Act. In Trinko, a class of
consumers representing New York City customers of AT&T sued
Verizon, a monopolist over access to the local loop, for its
failure to give AT&T, a recent entrant in the local telephone
service market, non-discriminatory access to the local loop. The
plaintiffs alleged that Verizon's refusal to share with AT&T
access to Verizon's systems and support operations impaired
AT&T's ability to provide a competitive service. Stated
differently, Verizon, according to plaintiffs, used its monopoly
power in one market to deny competitive access to an adjacent
market. The Second Circuit found that Verizon's conduct raised a
viable monopolization or attempted monopolization claim. The
Supreme Court disagreed.
Among other things, Trinko might signal the end of the
monopoly-leveraging doctrine. Overruling Berkey Photo in a
brief footnote, the Court rejected all monopoly-leveraging claims
where the plaintiff failed to establish a dangerous probability of
monopolization of a second market. Thus defined,
monopoly-leveraging claims are nothing more than attempted
monopolization by a monopolist and are therefore superfluous.
The Court also drastically limited the scope of the
essential-facilities doctrine. Positioning Aspen Skiing at
the "outer boundary of Section 2 liability," the Court effectively
imposed a sacrifice test as part of a plaintiff's burden of proof.
In short, plaintiffs claiming Section 2 liability for denial of
access to an essential facility will now need to show that the
defendant sacrificed short-term profits or some other economic
benefit to injure or exclude the plaintiff. Trinko brings
unilateral refusals to deal jurisprudence into line with more
mainstream predatory pricing cases.
LePage's Inc v Minnesota Mining & Mfg Co
The Third Circuit's decision in LePage's decided the
issue of whether above-cost pricing of bundled products by a
monopolist can constitute illegal monopolization. In
LePage's, defendant 3M possessed a monopoly in the US market
for transparent tape under the Scotch brand name. LePage's entered
the market as a competitive producer of private label tape for
large retailers and, by selling its tape at a much lower cost,
LaPage's quickly gained market share. In response, 3M implemented a
multi-product bundled rebate programme, in which large retailers
were offered substantial rebates based on their total purchases in
various 3M product lines. While these rebates amounted to only a
fraction of the individual price (ranging from 0.2% to 2%) and,
importantly, did not result in 3M pricing any product below cost,
the programme yielded big incentives for participating retailers.
Critically, if a retailer failed to meet its target for any single
product included in the programme, the retailer would lose its
rebate across the entire programme.
One of the designated products in the 3M rebate programme was
transparent tape. Internal 3M documents indicated that the primary
purpose of the rebate program was to kill private label tape
competition. These documents further made plain that once
competition was driven from the marketplace, 3M intended to raise
the price of transparent tape to more profitable levels. After the
rebate programme was introduced to the market, LePage's market
share fell and other smaller competitors were driven from the
marketplace altogether. LePage's countered by suing 3M for illegal
monopolization, claiming that 3M's bundling scheme had effectively
excluded them from access to essential large retailers. In
affirming the jury's finding for LePage's, the Third Circuit
greatly expanded, and perhaps confused, the law of non-price
predation under Section 2.
In short, the Court rejected 3M's argument that, under the
well-recognized rule of Brooke Group, above-cost pricing can
never constitute illegal monopolization. The court declared that
Brooke Group: does not effectively bless all above-cost
pricing schemes; only applies to oligopolies and not to
monopolists; and only applies if the plaintiff has made a claim for
predatory pricing. The Court then proceeded to analyze the merits
of LaPage's claim. Relying heavily on 3M internal documents
produced during discovery, the Court found that 3M had no
reasonable business justification for engaging in its bundling
scheme. Based on this finding, the Court ruled that, under the
specific facts proven at trial, because 3M foreclosed its rivals in
specific product lines by offering bundled rebates and discounts
conditioned on requiring customers to buy across a range of product
lines, the jury was justified in finding that 3M's conduct
constituted illegal monopolization.
The LePage's analysis exposes any firm that may be deemed
to possess a monopoly position in a market to an increased risk of
liability if its bundling programme substantially lessens a rival's
sales or is intended to drive competition from the marketplace.
The Supreme Court, at the government's urging, declined to
review the LePage's decision to allow the issue of how to
treat bundling claims to further develop in the lower courts. Until
such time that the Supreme Court reviews this analysis, firms will
need to be cautious whenever adopting bundled discount
programmes.
The Antitrust Division opines on bank tying
Even as the Third Circuit struggled to come to grips with the
economic consequences of sophisticated non-linear pricing schemes
in LaPage's, the Antitrust Division and the Federal Reserve
Board debated the proper scope of the historical limitation of a
different kind of bundling: tying commercial loans with investment
banking services.
As a result of the Gramm-Leach-Bliley Act 1999, commercial banks
and their investment bank affiliates now can provide complementary
financial products and services to their customers. This practice,
which is known as relationship banking, may involve a bank holding
company's commercial bank subsidiary extending what has become low
margin commercial credit to a corporate borrower while that same
borrower receives higher margin investment banking or underwriting
services from the bank holding company's investment bank affiliate.
As stated in an October 2003 report by the General Accounting
Office, some investment banks (that generally do not engage in low
margin syndicated lending and whose investment banking business is
threatened) have complained that commercial banks are tying the
availability of bank credit to investment banking services by the
commercial bank's affiliate in violation of Section 106 of the Bank
Holding Company Act Amendments 1970 (the BHCA). The alleged tying
of commercial credit to underwriting services - an allegation that
the bank holding companies vigorously deny - is not likely to be
actionable under the Sherman Act because no commercial bank is
likely to have enough economic power in the tying product market
(that is, commercial credit) to effect an illegal, coercive
tie.
This issue, which is of strategic importance both to bank
holding companies and to investment banks, is playing out at the
Federal Reserve Board. The Board has proposed an interpretation of
Section 106 that notes that relationship banking (that is,
cross-marketing of services by banks and their affiliates) is not,
in and of itself, a violation of the bank tying provision but that
leaves many practical issues unresolved. The Antitrust Division
submitted its comments on the Federal Reserve Board's proposed
interpretation, expressing concern that the proposed interpretation
of Section 106 may restrict the ability of banks to bundle products
at a discount. Accordingly, the Antitrust Division urged the Board
to apply the rules of antitrust law to its interpretation of
Section 106 rather than impose more restrictions and inconsistent
obligations on affected financial institutions. The Board has not
taken a final position on these issues.
The Supreme Court restricts antitrust standing for
non-US claimants: F Hoffmann-La Roche Ltd v Empagran
SA
The Supreme Court also allayed concerns that non-US victims of
certain cartels could pursue treble damage claims in US courts. The
Supreme Court's Empagran decision denied antitrust standing
under the US Foreign Trade Antitrust Improvements Act (the FTAIA)
to foreign plaintiffs injured solely by the effect on foreign
commerce caused by the defendant's conduct. In Empagran, a
class of foreign plaintiffs alleged a worldwide price-fixing and
market-allocation conspiracy concerning the vitamins market.
Critically, the Empagran plaintiffs suffered injuries that
were unrelated to the US effects of the alleged conspiracy.
Declining to open US federal courts to worldwide jurisdiction,
Justice Breyer, writing for a unanimous Court, held that the FTAIA
did not extend the reach of the Sherman Act to such foreign
commerce and remanded the case to the lower court to determine
whether the plaintiffs' foreign injury was caused by the domestic
effects of the defendants' conduct.
The Supreme Court opens US courts to discovery
proceedings to aid foreign claimants: Intel v Advanced Micro
Devices
In a recent but little-noticed decision, the Supreme Court
upheld the Ninth Circuit's opinion that 28 USC § 1782(a) authorizes
a federal district court to engage in discovery proceedings to aid
private parties in proceedings before the European Commission. In
Intel, AMD sought to discover documents produced by Intel in
a private litigation in Alabama to assist in the preparation of its
complaint to the Commission. Although the Commission not only
denied AMD's petition to order their production but also further
represented to the Court that it did not even want to review the
documents requests, Justice Ginsburg affirmed the decision to allow
the requested discovery to proceed. In particular, the Court
declined to impose an additional threshold requirement under
Section 1782 that would require the movant to show that the
requested documents were also obtainable through the discovery
mechanisms of the foreign jurisdiction. Moreover, the Court ruled
that Section 1782 applied to discovery requests made by
complainants who are not technically litigants in the relevant
foreign proceeding. Lastly, the Court held that the Commission
qualified as a tribunal because it acted as a first-instance
decision-maker.
The Court noted in dicta certain factors to assist a district
court in ruling on a motion under Section 1782, but the consequence
of the Intel decision are potentially far-reaching. The
immediate practical implication is that private parties that
complain to the European Commission might not have to solely rely
on Article 11 requests issued by the Commission to develop the
factual basis for their complaint. The final scope of the decision
depends on the rigor with which the lower courts will apply the
Intel factors.
Important recent merger cases
Oracle/PeopleSoft
Earlier this year, the Antitrust Division, joined by seven state
attorney generals sued to enjoin the proposed merger between Oracle
and PeopleSoft. The Antitrust Division argued that Oracle and
PeopleSoft are two of only three (the third is SAP) worldwide
competitors in the market for enterprise software, high-function
human resource management and financial management services
software (HRM and FMS, respectively) designed to be integrated into
suites of associated functions from a single vendor with
performance characteristics that meet the demands of large
customers. For these customers, the Antitrust Division found that
off the shelf HRM and FMS products are not viable substitutes.
Thus, the Antitrust Division concluded that reducing the
competitive market from three to two participants would lead to
higher prices and reduced innovation. Oracle challenged the
Antitrust Division's market definition, arguing that under the
correct definition, which would include low-function HRM and FMS
software, the evidence would show that the market is highly
competitive and not concentrated. In pointed language, on September
9 the District Court rejected the Antitrust Division's market
definition as unrealistically narrow and denied the government's
request to enjoin the transaction. At press time, the Antitrust
Division had not yet announced whether it will appeal the
ruling.
Cephalon/Cima Labs
The FTC's settlement of its investigation of the proposed
acquisition of Cima Labs by Cephalon may indicate that the FTC has
backed away from its long-standing objection to licensing remedies
to fix competitive concerns raised by mergers in highly
concentrated industries. Cephalon held a monopoly position in the
manufacture and sale of prescription drugs to treat breakthrough
cancer pain (BTCP). Cephalon's BTCP product, Actiq, is scheduled to
go off patent in 2006. Cima Labs is in Phase III clinical trials
for OVF, a new BTCP drug, which is scheduled to enter the market in
2006 or 2007. The FTC concluded that the transaction would
substantially lessen competition in the BTCP market.
Rather than insisting on a divestiture, the FTC accepted a more
limited remedy by which Cephalon agreed to grant a licence to a
third party to develop a generic version of Actiq. The FTC sought
to distinguish this case from its historical resistance to
sacrificing expected competition between two brand-name products in
exchange for expedited entry of a generic product. The FTC
explained that the biggest anticompetitive effect of the
transaction would be to defeat generic competition. Through its
control over both products, Cephalon could move patients to the
patent-protected OVF, thereby defeating the full competitive effect
of eventual entry of a generic version of Actiq. This fact, in
addition to the low likelihood of further competitive innovation
between the parties in BTCP drugs, counselled in favour of
accepting a licensing remedy designed to expedite generic entry
rather than a divestiture of one of the branded drugs.
Despite the FTC's efforts to label this case as a sui
generis exception to the agency's strong preference for a
divestiture remedy, it is likely that players in markets with only
three or four competitors might now be emboldened to test the FTC's
new-found willingness to explore creative solutions for difficult
transactions.
Arch Coal/Triton Coal
The DC District Court's decision to deny the FTC's request for a
preliminary injunction preventing Arch Coal from acquiring Triton
Coal might have far-reaching effects if affirmed by the DC Circuit.
In sum, the decision casts doubt on the application of the
coordinated-effects theory of merger control. Historically, the FTC
has persuasively argued that it is entitled to a temporary
injunction once it establishes that a transaction exceeds the
relevant Herfindahl-Hirschman Index (HHI) thresholds set out in its
1992 Horizontal Merger Guidelines for assessing the competitive
impact of a proposed transaction on concentration in a market. In
Arch Coal, the Court accepted the FTC's market definition
and its conclusion that the post-merger concentration would exceed
the merger guidelines thresholds (the HHIs would range between 2292
and 2365, with an increase of between 163 to 224). Nevertheless,
the Court held that the FTC's prima facie case was not
strong and reduced the burden of proof on the parties opposing the
FTC's motion.
Moreover, the Court found that the FTC was not likely to succeed
on its theory that the transaction would lead to coordinated
restriction of output in the marketplace. In short, the Court
imposed on the FTC the burden to show that the market participants
had a propensity towards tacit collusion and that the market
supported the participants' ability to monitor each other's
behaviour. Thus, the Court's reasoning implies that, in the absence
of either evidence of prior examples of coordination or strong
proof of market transparency, the FTC cannot establish that a
transaction will cause coordinated effects.
The DC Circuit Court rejected the FTC's emergency motion for an
injunction pending its appeal.
Courts are cautious in applying the antitrust laws when
dealing with regulated industries
In the IPO Antitrust Litigation, the District Court for the
Southern District of New York dismissed putative class actions
based on the implied-immunity doctrine. Individuals who had
purchased shares of certain technology securities alleged that 10
investment banks that underwrote the initial public offerings for
those securities had conspired to inflate artificially the
after-market prices for the IPO shares. These plaintiffs had
brought separate lawsuits alleging that the underwriters violated
the Federal Securities Laws in connection with the same conduct.
The Security Exchange Commission had also investigated the conduct,
and had entered into various consent agreements with the financial
institutions.
The District Court dismissed the antitrust claims and applied
the implied-immunity doctrine because the conduct fell within the
SEC's authority and application of the antitrust laws and
securities laws might result in a conflict. The Court's decision,
which is on appeal to the Second Circuit Court of Appeals, is
therefore consistent with the Supreme Court's cautious approach in
Trinko, where the Court gave deference to a regulatory
scheme in determining the extent to which regulated conduct could
constitute a basis for an antitrust violation.
Author
biographies
Kenneth
R Logan
Simpson Thacher &
Bartlett LLP
Kenneth R Logan has been a litigator and antitrust practitioner
for over 32 years at Simpson Thacher & Bartlett. He has tried
jury and non-jury antitrust cases to judgment and handled merger
and non-merger proceedings before the US enforcement agencies and
the European Commission. Logan has also conducted a range of
antitrust and other complex matters for Viacom, Paramount, MTV
Networks, Universal, Seagram, American Electric Power, General
Motors, ITT Industries, Kohlberg Kravis & Roberts and others.
Logan along with Simpson Thacher & Bartlett is consistently
recognized in a number of publications as a leading antitrust
practitioner, including Chambers, Global Counsel,
International Who's Who of Competition Lawyers, and The
Guide to Leading Competition Lawyers.
Logan graduated from Princeton University in 1967 and from the
University of Pennsylvania Law School in 1972. He frequently writes
and speaks on US and international antitrust
issues.
Ethan E Litwin
Associate, London
office
Ethan E Litwin is an associate in Simpson Thacher & Bartlett
LLP's London office, where he focuses on antitrust compliance and
complex litigation. He regularly assists clients with antitrust
issues, ranging from worldwide merger control compliance to
investigations conducted by the Federal Trade Commission, the
Department of Justice, and the European Commission. Ethan has
co-authored several antitrust articles for US and European
publications, and is a member of the American Bar Association's
Section of Antitrust Law and the International Bar Association.
Ethan is admitted to the federal and state Bars of New York and is
a solicitor qualified by the Law Society of England and Wales.
Ethan received his law degree cum laude in 1998 from
Georgetown University Law Centre, where he was the CPP
editor-in-chief of The Georgetown Law Journal and part of
Georgetown's national champion moot court team. Ethan received his
BA degree from Duke University in 1992.
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