Antitrust Law Blog

Tampering With Documents In Connection With Hart-Scott-Rodino Merger Submissions Can Land You In Jail!

Sheppard Mullin — Thu, 10 May 2012 08:57:51 -0500

By Robert Magielnicki and Malika Levarlet

One does not usually associate the possibility of criminal penalties with the Hart-Scott-Rodino Act premerger review process. However, on May 3, 2012, the U.S. Department of Justice ("DOJ") announced that an executive of a South Korean company agreed to plead guilty to obstruction of justice charges and to serve five months in prison for altering documents filed with the DOJ and the Federal Trade Commission ("FTC") in connection with a proposed merger.

This plea agreement is the latest development in a civil merger investigation initiated by the Antitrust Division of the DOJ of the proposed acquisition by automated teller machine maker Nautilus Hyosung Holdings Inc. ("NHI") of a competing manufacturer of ATM systems, Triton Systems of Delaware Inc., in 2008. The Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("HSR"), as amended, requires companies contemplating mergers and acquisitions valued above certain thresholds to make premerger filings with the DOJ and the FTC. The federal antitrust agencies have authority to investigate and challenge the proposed transactions under Section 7 of the Clayton Act, if the transactions may substantially lessen competition. Before the Antitrust Division reached a decision regarding whether to challenge the transaction, the parties abandoned it.

In the two-count felony charge, the DOJ stated that Kyoungwon Pyo, in his role as senior vice president for corporate strategy at Hyosung Corporation, an affiliate of NHI, altered and directed subordinates to alter numerous corporate documents before they were submitted to the DOJ and the FTC in conjunction with the premerger HSR filings. The DOJ further alleged that, after the Antitrust Division opened a civil investigation of the proposed acquisition, Pyo falsified additional documents in response to a document request with the intention of impairing their integrity and availability for use in an official proceeding. According to the DOJ "the alterations misrepresented and minimized the competitive impact of the proposed acquisition."

On October 20, 2011, after voluntarily disclosing that numerous documents had been altered before being submitted to the government and agreeing to cooperate in the ongoing investigation, NHI pleaded guilty to two counts of obstruction of justice and paid a $200,000 criminal fine for its role in the document tampering. Following his employer, Pyo has agreed to plead guilty and to serve five months in prison for his conduct in a plea agreement which is subject to court approval. Pyo is charged with obstruction of justice, which carries a maximum penalty of 20 years in prison and a criminal fine of $250,000 for individuals.

This case marks the first time obstruction of justice charges have followed a civil merger investigation. The DOJ release is available at: http://www.justice.gov/atr/public/press_releases/2012/282873.htm

For more information on the applicable HSR thresholds please consult: http://www.antitrustlawblog.com/2012/01/articles/article/higher-filing-thresholds-for-hsr-act-premerger-notifications-and-interlocking-directorates-announced/

"Planogram" and "Category Captain" Marketing Programs Held Non-Exclusionary

Sheppard Mullin — Thu, 10 May 2012 08:44:58 -0500

By Don T. Hibner, Jr.

Rival condom manufacturer's antitrust claims dismissed. Church & Dwight Co., Inc. v. Mayer Laboratories, Inc., United States District Court, Northern District of California, Case No. C-10-4429 EMC (April 12, 2012).

Church & Dwight Co., Inc. ("C&D"), the manufacturer of Trojan brand condoms filed a declaratory relief action in the district of New Jersey seeking a declaration that its marketing of condoms through the use of "planograms" and retailer inspired "category captain" programs was lawful. Defendant Mayer Laboratories, Inc. ("Mayer") counterclaimed, alleging the C&D's marketing programs violated Sections 1 and 2 of the Sherman Act, the California Cartwright Act, the Lanham Act, and California unfair competition laws, and alleging as well tort claims for interference with contracts and interference with economic relations. The action was transferred to the Northern District of California.

After three years of litigation, and voluminous discovery, C&D moved for summary judgment. Based upon an analysis of primarily Ninth Circuit law relating to exclusive dealing, the court granted the motion as to the antitrust claims, finding that Mayer had failed to present a genuine issue that C&D had abused its position as category captain for certain retailers, or had engaged in exclusionary conduct that was other than pro-competitive. While the "rubber has hit the road" as to the antitrust claims, the motion for summary judgment was denied as to the interference tort claims.

C&D manufactures and distributes "Trojan" and other brand-name condoms. Its branded sales count for 75% of all retail condom sales in the United States, although its global share is only 11%. C&D's domestic market share has steadily increased from a 67.2% figure in 2001, and has been at least 50% since 1985. The number two seller has maintained a steady share of 14-15%, while the third has a share of just under 10%. Together, the sales of the three largest competitors account for an excess of 99% of national sales. These sales have been made in three channels. The first is "food, drug and merchandise" ("FDMx"), which accounts for almost 50%. The second channel is Wal-Mart sales alone, which accounts for 33%. The remaining channel is "convenience stores" ("c-stores"), which count for almost 15%. Mayer's sales of its "Kimono" brand represent a market share of less than one-half of 1%.

The channels differ somewhat in pricing and sales structure. Drug stores, for example, carry the largest variety of condom brands, with retail prices twice as high as the mass merchandise channel. Convenience stores tend to carry only one or two brands, in three-unit packs due to limited shelf-space. Convenience stores typically seek exclusive contract bids from the manufacturers. Convenience store pricing is still higher, and may represent impulse purchases. In all channels, there is a heavy reliance on point of sale advertising. The manufacturers compete for retail space on the basis of slotting fees for each "facing" on a retailer's shelves. Manufacturers may also offer promotional packages to secure premium shelf space at eye-level. In addition, there is strong competition for promotional and ongoing placement in end-caps and side-caps.

C&D engages in "market share discount" promotions, which are the source of the principal dispute between the parties. In a "market share discount" promotion, the manufacturer offers a discount to the retailer if the retailer purchases and sells the manufacturer's products in amounts that mirror a percentage of the manufacturer's market share within the given category. For example, C&D offers "planogram rebate agreements" ("POG") to large chain retailers. A retailer is given the opportunity to receive a percentage rebate on its POG purchases. The rebate is earned by the retailer by dedicating a specified minimum percentage of available facings to C&D products. C&D instituted its POG program in 1997. The percentage rebate available has varied from a low of 55% to a high of 80%. During the course of the litigation, the 80% tier was reduced to 65%, or below C&D's market share for the FDMx channel.

C&D has served as a "category captain" for certain chains, where its assistance has been requested. In "category captain" programs, a retailer selects a manufacturer of the class of products that is being purchased, to manage stocking, shelving and placement of the goods within the "category". At all times the retailer maintained control of the ultimate shelf space placements.

In granting the motion for summary judgment on the antitrust claims, the court noted that the alleged exclusionary conduct constituted nonprice restraints, and thus subject to rule of reason analysis under Continental T.V. v. GTE Sylvania, 433 U.S. 36 (1977). This requires a showing of an adverse effect on competition in an appropriate relevant market. R.J. Reynolds Tobacco Co. v. Philip Morris, Inc., 199 F. Supp. 2d 362, 380 (M.D.N.C. 2002). The court pointed out that this requires a plaintiff to demonstrate that the defendant has market power, and that its conduct has actual anticompetitive effects within the appropriate relevant product and geographic market.

The court also concluded that Mayer had failed to carry its burden of showing a substantial foreclosure of competition in the relevant market, which the court determined to be the sale of condoms at the retail level in the United States. In making this determination, the court noted that, pursuant to the R.J. Reynolds analysis, the appropriate relevant market analysis requires an evaluation of foreclosure both at the supplier and the consumer level. See also Ansell, Inc. v. Schmid Laboratories, Inc., 757 F. Supp. 467, 475 (D.N.J. 1991).

C&D argued, and the court agreed, that there was no proper evidence that C&D could charge supra-competitive prices, or that competitors lacked the capacity to increase output in the short run, or that on the facts presented C&D had taken any steps to reduce its output. Absent this showing, there could not be any anticompetitive effects, as a matter of law.

Originally, Mayer's counterclaim had proposed a relevant market consisting of "male condoms sold to retailers". Through its expert, however, it then proposed a market definition of "all male condoms sold to retailers in the FDMx channel, excluding convenience stores. To hedge its bet, it also proposed a "submarket" of drugstores.

In rejecting Mayer's relevant market qualifications, the court found that for the purposes of the case, the key ingredient was the actions available to consumers, assuming increases in unit prices, as a result of output limitations imposed upon Mayer's own output by C&D. The court held that Mayer had produced no evidence that prices in one channel did not constrain prices in another. Mayer also failed to show that cross-elasticity of both supply and demand were equally relevant in defining a relevant market, citing Rebel Oil Co. v. Atlantic Richfield Co., 51 F.3d 1421, 1434 (9th Cir. 1995). The court also factored into its analysis that Mayer's prices were actually higher than those of C&D, while noting in addition that high prices are not equivalent to supra-competitive prices.

The court noted that Mayer had failed to establish that C&D had violated Sections 1 and 2 of the Sherman Act, and corresponding California law, by the erection of significant barriers to either new entry, or to expanded penetration by Mayer.

Finally, the court commented that C&D's consumer brand loyalty, while high in the industry, could not constitute an exclusionary barrier. Citing United States v. Syufy Enterprises, 903 F.2d 659, 669 (9th Cir. 1990), the court recognized that reputation, and the existence of good will and customer satisfaction achieved through effective service, is nothing more than competition on the merits. As stated by the court in Syufy:

[W]hen a producer deters competitors by supplying a better product at a lower price, when he eschews monopoly profits, when he operates his business so as to meet consumer demand and increase consumer satisfaction, the goals of competition are served, even if no actual competitors see fit to enter the market at a particular time.

We make it clear today, if it was not before, that an efficient, vigorous, aggressive competitor is not the villain antitrust laws are aimed at eliminating. . . . We fail to see how the existence of good will achieved through efficient service is an impediment to, rather than the natural result of competition.

Id. at 668-669 (citing United States v. Waste Mgmt., Inc., 743 F.2d 976, 984 (2d Cir. 1984)).

But here is where the rubber really hits the road. Borrowing from the analysis in Reynolds and Rebel Oil, the Court noted that at no time did C&D offer a planogram that was not subject to acceptance or rejection by the retailer. Significantly, the market share allegedly foreclosed only once exceeded the historic market share then enjoyed by C&D, based upon consumer preference and acceptance. It noted that in no situation was a retailer required to accept the market share discount, and at no time was it threatened with a reduction in its volition to determine, on its own, the offerings and placement of the products that it was offering from sale.

While not cited by the court, the fact that the planogram market share rebate and category captain programs were strictly volitional to the retailers distinguishes United States v. Dentsply Intern., Inc., 339 F.3d 181 (3rd Cir. 2005). In Dentsply, the Third Circuit found that use of short term requirements contracts were nevertheless unlawful exclusionary where Dentsply's exclusives were coupled with a threat of termination of all future dealings, absent acceptance of the terms as offered.

The court's grant of summary judgment as to the antitrust and competition claims is also consistent with the Ninth Circuit law based upon Omega Environmental, Inc. v. Gilbarco, Inc., 127 F.3d 1157 (9th Cir. 1997), and its more recent decision in Allied Orthopedic v. Tyco Health Care Group, 592 F.3d 991 (9th Cir. 2010). Short term, volitional exclusivity programs do not unlawfully foreclose competition. They promote, and do not impede competition on the merits.

MOFCOM's "Fusion" Approach to Chinese Merger Control

Sheppard Mullin — Thu, 19 Apr 2012 13:17:59 -0500

By Becky Koblitz

We often hear about how China’s merger review “diverges” from other jurisdictions, most recently in reaction to conditional approvals of the Seagate/Samsung and Western Digital/Hitachi mergers. But China's MOFCOM is merely doing its homework. Similar to “fusion” cuisine, MOFCOM practices “fusion” merger control as it blends two aspects: its mandate under the Anti-Monopoly Law (“AML”), and the antitrust theories of other jurisdictions.

Unlike other jurisdictions, which are relatively independent of their respective governments, MOFCOM answers to the State Council. Under the AML, MOFCOM’s mission has a political perspective to advance “healthy development of a socialist market” and it has the authority to formulate and implement regulations “suitable for the socialist market economy.” Therefore, MOFCOM’s mission will vary depending on the State Council’s national economic policy: whether to move more to a capitalistic market-driven economy or remain as a socialist controlled economy.

From a purely theoretical perspective, the AML’s standard of review is in line with other mature jurisdictions; however, as in the case of MOFCOM’s mission, the standard of review has the added political element of considering the “socialist market”. The standard of review is whether it is likely that the transaction will result in eliminating or restricting competition. Similar to the US and EU practice, the factors to consider include: market shares and ability to control the market, degree of market concentration, effects on market access and technological progress, and effects on consumers. But for MOFCOM there is also the additional political factor—the effect of concentration on the political development of the national economy.

MOFCOM wants to be seen as being cooperative with other antitrust authorities and is keeping a high profile in this regard. MOFCOM continues to consult other jurisdictions with regard to the AML. The Chinese antitrust authorities signed Memoranda of Understanding (“MOU”) with both the UK Office of Fair Trading (January and March 2011) and with the US Department of Justice (“DOJ”) and US Federal Trade Commission ( “FTC”) (July 2011) with regard to developing competition policy and enforcement. The MOU with the US agencies was followed up in November with guidelines for cooperation between MOFCOM/DOJ/FTC with respect to merger filings. Under the guidelines, information can be shared relating to the timing of their respective investigations, technical aspects such as market definition, evaluation of competitive effects, theories of competitive harm, economic analysis and remedies.

In light of MOFCOM’s mandate under the AML and MOFCOM’s exposure to other jurisdictions’ experiences, this means that even though the market may be global, MOFCOM will focus on the impact on the Chinese market, allowing it to protect industries such as the automobile, agriculture and computer sectors. As such, MOFCOM has set conditions specific to the Chinese market, for example, by requiring an auto parts supplier to continue to supply other customers in the Chinese market (GM/Delphi merger); by requiring Russian potash producers to continue to sell to Chinese customers (Uralkali/Silvinit merger); and more recently, by not allowing the purchaser to exercise control over the target for a period of time (Seagate/Samsung and Western Digital/Hitachi).

In the Seagate/Samsung merger, MOFCOM required Seagate to establish an independent subsidiary to produce, price and market Samsung products and to build a firewall to prevent information from being exchanged between Seagate and the Samsung subsidiary. Seagate could request a waiver of this requirement after one year, depending on the competitive conditions. In the Western Digital/Hitachi merger, MOFCOM required the parties to maintain Hitachi’s subsidiary as an independent competitor that would market and develop the products and to build a firewall to prevent the exchange of information between the two parties. Western Digital could request a waiver of this requirement after two years, depending on the competitive conditions.

MOFCOM imposed these requirements despite the fact that the US and EU authorities had already cleared the Seagate/Samsung merger without conditions and cleared the Western Digital/Hitachi merger with structural remedies. MOFCOM’s concern was that China had the greatest number of consumers who bought computers and it was these end-users who suffered the most from imbedded price increases of the components, which were the products in the merger transactions. The hold-separate requirements which MOFCOM imposed in the Seagate/Samsung and Western Digital/Hitachi offshore mergers are prohibitions in disguise, since the parties must maintain their independent, pre-merger situation for a given period of time and the probability that the competitive landscape would change to justify the waiver of the requirements is low.

These hold-separate requirements are reminiscent of the “carve-out” conditions used in the airline alliance cases. In airline alliance cases the issue is whether a particular alliance can be granted antitrust immunity so that it can conduct its otherwise allegedly collusive, anticompetitive behavior without the risk of being prosecuted by the DOJ. In the event the reviewing agencies (the Department of Transportation grants antitrust immunity, but the DOJ comments during the application process) decide that not all the markets served by the alliance should fall under the antitrust immunity blanket, these markets are “carved out”, meaning that the carriers who are members of the alliance must retain their status quo as competitors in these markets.

The rationale for the hold-separate and carve-out requirements is the same: the nominal competitive state of the market is preserved. In the hold-separate situations, MOFCOM wanted to maintain the five players in the global HDD market (Seagate, Western Digital, Hitachi, Toshiba and Samsung). In the carve-out situations, the DOT/DOJ wanted to preserve a state in which the carriers conducted their business as competitors. Both the hold-separate and carve-out conditions are subject to review after a time period designated by the agencies and the conditions can be removed.

Thus, although MOFCOM’s most recent "hold-separate" conditions diverge from other jurisdictions’ decisions and as such, appear to contradict this image of international cooperation, they show that in fact MOFCOM has been doing its homework and applying the competitive analysis within its parameters under the Anti-Monopoly Law, a highly political creature.

District Court Dismisses Follow-On Suit Challenging Blue Cross's "MFN-Plus' Contracts Under Both Per Se and Rule of Reason Standards

Sheppard Mullin — Wed, 11 Apr 2012 12:03:25 -0500

By Helen C. Eckert

The District Court for the Eastern District of Michigan recently dismissed antitrust claims brought by the City of Pontiac against Blue Cross Blue Shield of Michigan's practice of requiring hospitals to enter into "MFN-Plus" contracts, which was alleged to have significantly raised prices to Blue Cross's competitors. City of Pontiac v. Blue Cross Blue Shield of Michigan, 2:11-cv-10276, Mem. Opinion and Order Regarding Blue Cross Blue Shield of Michigan's Motion to Dismiss (E.D. Mich. Mar. 30, 2012) ("Order"). The City's complaint was a follow-on to an antitrust suit filed by the U.S. Department of Justice and the Michigan Attorney General in the same Court, alleging Sherman Act violations of the same nature as set forth in the City's complaint. Despite the fact, however, that the DOJ's allegations were deemed to state viable antitrust claims, the same Court dismissed the City's complaint under both per se and rule of reason analyses.

Blue Cross is the largest commercial health insurance provider in Michigan, covering more than 60% of the commercially-insured population, and insures more than nine times as many Michigan residents as its next largest commercial health insurance competitor. Blue Cross has sought to include most-favored-nations clauses in many of its contracts with hospitals. The MFN-Plus clauses require the hospitals to charge some or all other commercial insurers more than the hospitals charge Blue Cross, typically by a much higher margin, ranging from 23% to 39%.

Moreover, Blue Cross has sought and obtained MFN-Plus in many hospital contracts in exchange for increases in the prices Blue Cross pays for that hospital's services. In these instances, the City of Pontiac alleged, Blue Cross purchased protection from competition by other insurers by causing hospitals to raise the minimum prices charged to those competitors, but in doing so has also increased Blue Cross's own costs. The City alleged that these MFNs have caused many hospitals to: "(1) raise prices to Blue Cross's competitors and all non-Blue Cross purchasers and insured by substantial amounts; or (2) demand prices that are too high to allow competitors to compete, effectively excluding them from the market." (Order, at 3).

In opposing Blue Cross's motion to dismiss, the City principally argued that its antitrust claims were properly evaluated under the per se violation standard. The Court, however, disagreed, holding that all vertical price restraints between entities at different levels of the market structure are to be judged under the rule of reason standard. (Id. at 13). As Blue Cross and the hospitals were at different level of the market structure – i.e., Blue Cross as the purchaser of hospital services – the per se rule did not apply.

Thus, in order to survive a motion to dismiss, the City had to satisfy the rule of reason standard, which required sufficient allegations that the MFN-Plus contracts produced adverse anticompetitive effects within relevant product and geographic markets. The Court found that the City's complaint, as well as its arguments in opposition to Blue Cross's motion to dismiss, gave sparse treatment to the rule of reason standard, instead focusing almost exclusively on the per se standard. (Id. at 14). While the Court held that the relevant product market was sufficiently pled at the pleading stage (noting that courts hesitate to dismiss claims for failure to plead such fact-driven inquiries), it was not so forgiving of the City's lack of factual allegations that the MFN-Plus contracts harmed competition.

While the Court, as well as Blue Cross, acknowledged allegations that one competitor had been deterred from entering the market, "[o]ne single competitor is not an antitrust concern." In the absence of any additional allegations, the Court held that such bare factual allegations failed to state a plausible claim under the rule of reason standard. Notably, in the DOJ suit, both parties agreed from the outset that the rule of reason standard applied to Blue Cross's MFN clauses. United States of America v. Blue Cross Blue Shield of Michigan, 2:10-cv-14155-DPH, Mem. Opinion and Order Denying Motion to Dismiss (E.D. Mich. Aug. 12, 2011).

DOJ Wins AUO Convictions in LCD Price-Fixing Trial, Successfully Defending Its Cartel Program

Sheppard Mullin — Fri, 16 Mar 2012 09:10:01 -0500

By James L. McGinnis

In a widely followed eight-week trial before the Honorable Susan Illston in the Northern District of California, the Antitrust Division of the United States Department of Justice succeeded in obtaining price-fixing convictions against AU Optronics, a Taiwanese company; AUOA, its US subsidiary; and two senior executives. Two more junior executives were acquitted, and the jury hung as to a third executive. The jury also found that the gain from the conspiracy was at least $500 million, thereby triggering the Alternative Fine statute, 18 U.S.C. § 3571(d), and upping the companies' potential exposure to $1 billion. DOJ has trumpeted the convictions and finding of guilt as vindicating its cartel enforcement program.

The Antitrust Division had alleged that the companies and individuals participated in a five-year-long conspiracy to fix the prices of LCD panels over the course of more than 60 meetings, including monthly meetings of LCD suppliers that the participants termed "Crystal Meetings".

This may have been the most important trial ever conducted in connection with the Antitrust Division's crown jewel, the international cartel enforcement and amnesty program. Its investigation was sparked by an amnesty applicant and lead to numerous pleas and multi-hundred million dollar fines before the AUO trial.

AUO argued that it was too new and too small to enter into agreements with larger, more established companies. Also, it used information from competitors to undercut them, according to its defense, and increase its market share. DOJ countered these defenses with scores of minutes from the meetings, internal AUO emails strongly suggestive of agreements, and the testimony of cooperating witnesses, several of whom had served prison time for their role in the alleged offenses. None of the defendants elected to testify.

Testimony from economists also took center stage. AUO's economist testified that AUO's prices consistently were lower than those discussed at Crystal Meetings. DOJ's economist testified that this was the wrong question. The right question, according to DOJ, was whether AUO's prices were higher than they otherwise would have been because of the conspiracy. To this question, DOJ's economist emphatically testified "yes", and supplied further testimony that the gain from the conspiracy far exceeded $500 million.

The jury deliberated for seven days, with their split verdicts arguably indicating they gave careful individual consideration to the evidence against each defendant.

Sentencing likely will take place in mid-June, 2012. This will be the first time a judge has sentenced a corporation after a price-fixing verdict where the Alternate Fine Statute has been triggered. United States District Judge Susan Illston's decision will be closely watched, to say the least.

AUO has vowed appeals, which could include several very important legal issues in addition to more typical trial evidentiary issues:

What sales "count" as commerce that DOJ can reach in its indictments consistent with the Foreign Trade Antitrust Improvement Act ("FTAIA")?
What commerce counts for purposes of an alternative fine calculation?
What, if any, purely foreign conduct can form the basis of a price-fixing charge?

These questions already are critically important, and their significance will continue to grow as DOJ increases cartel enforcement pressure on international companies and foreign conduct.

China Anti-Monopoly Law: What might we see in 2012?

Sheppard Mullin — Wed, 29 Feb 2012 13:25:16 -0500

On February 16, 2012 the Beijing office of Sheppard Mullin had a reception to celebrate the opening of new office space in China World Trade Center in the central business district. Firm Chairman Guy Halgren welcomed our 120-plus guests. Prior to the reception, Sheppard Mullin hosted a roundtable discussion on the Anti-Monopoly Law of China (“AML”). We had 18 participants, including in-house counsel for major corporations, as well as the German Chamber of Commerce. Our guest speaker, Mr. Zhang Yuqing, former director general counsel of the Chinese Ministry of Commerce (“MOFCOM”), who headed the inter-agency group which developed the AML, spoke on two topics which will probably be “hot” this year: a new regulation which will fine companies which didn’t report their transactions and went ahead with the transactions, and another regulation that deals with national security review. Gary Halling, head of Sheppard Mullin’s antitrust practice, spoke about recent enforcement trends in the U.S, specifically with respect to cartels. Michael Zhang of Sheppard Mullin’s Shanghai office also attended and gave his views on investment structures. The subsequent discussion among the participants was lively.

Sheppard Mullin hosts such roundtable discussions periodically, where we invite government officials and representatives of companies to exchange ideas and ask questions in an informal, off-the-record setting. If you are interested in participating in future roundtable discussions please contact Becky Koblitz, email address: bkoblitz@sheppardmullin.com. Below are the opening remarks of Becky Koblitz, Special Counsel, Beijing office of Sheppard Mullin Richter & Hampton LLP.

Antitrust Roundtable, February 16, 2012
China Anti-Monopoly Law: What might we see in 2012?

Let us begin with a look at the past three years of antitrust enforcement in China and recent trends in the US. Today, we are lucky to have with us Zhang Yuqing, former general counsel for MOFTEC/MOFCOM, who led an inter-agency working group to develop the Anti-Monopoly Law and Gary Halling, head of Sheppard Mullin’s antitrust practice. I will open with a brief summary of some highlights of antitrust enforcement in China and the US so that we have a backdrop or framework for our discussion.

China Anti-Monopoly Law: it’s still evolving

Unlike other jurisdictions where antitrust enforcement is centralized, in China three agencies enforce the Chinese Anti-Monopoly Law (“AML”). The Ministry of Commerce (“MOFCOM”) handles mergers, while cases related to anticompetitive conduct are split between the National Development and Reform Commission (“NDRC”) and the State Administration for Industry and Commerce (“SAIC”). The NDRC handles price-related violations and SAIC the non-price related violations. The AML has been in effect since August 2008 and continues to evolve as these three agencies adopt additional regulations in order to provide more guidance on and clarification of such aspects as terminology, procedures, and enforcement.

In the first three years the major focus has been merger filings. Merger notifications continue to be time consuming (some taking up to 6 months or more), and involve elaborate formalities and investigations which sometimes were not necessary. Last year 160 investigations were completed (in comparison to 25 in 2008, 80 in 2009 and 117 in 2010). Of those 160, four were cleared with conditions (in comparison to 1 in 2008, 4 in 2009, 1 in 2010), bringing us to a total of 10 conditional clearances, all involving foreign companies. There has been only one rejection (Coca Cola/Huiyuan, March 2009). This was only the second decision published by MOFCOM and there was little in-depth discussion of what was analyzed to reach the conclusion. The general reaction was that this was a political decision. Over the years MOFCOM’s analysis has become more sophisticated. For your convenience I have prepared a list of the transactions which were conditionally approved and the one trans action which was rejected. Of the four conditional clearances in 2011, three are noteworthy:

Penelope/Savio (October 31): MOFCOM required the controlling shareholder of Penelope to divest its interest in another company which was one of two major players in the global market for yarn cleaners (the other was a subsidiary of Savio). This case is the first time MOFCOM considered how control could be exercised through portfolio interests by examining voting patterns.
GE/Shenhua (November 10): MOFCOM imposed conditions related to the joint venture’s relationships with its licensees. This case involved a joint venture. The AML does not expressly state that joint ventures are subject to merger control, therefore this conditional approval is constructively an affirmation by MOFCOM that joint ventures are subject to the AML merger control provisions. Another interesting aspect of this case is that it involved a state owned enterprise (“SOE”).
Seagate/Samsung (December 12): MOFCOM imposed conditions related to the relationship between the two parties and production capacities. Similar to the Sanyo/Panasonic case, this case highlights MOFCOM’s divergence from the US and EU authorities which issued unconditional clearances.

Although 97% of the filings were approved, the system still needs to be streamlined, and MOFCOM is aware of this. In the recent press conference in December 2012, Shang Ming, director of the Anti-Monopoly Bureau of MOFCOM mentioned that efforts would be made to streamline the system.

Two topics which will probably gain more attention this year relate to the treatment of mergers which were not reported and national security reviews.

As of February 1st a new regulation has been in effect that penalizes companies that fail to make a required merger filing (i.e., they had met the thresholds). Based on information provided by a whistle-blower (member of the public or an entity or “other channels”) MOFCOM will open a file and start a preliminary investigation. The subject parties will be notified and required to submit within 30 days information regarding the transaction. MOFCOM will determine whether to continue the investigation. In the event it continues, the parties must suspend implementation of the transaction. The second in-depth investigation can last up to 180 days. MOFCOM can fine the parties (RMB 500,000/USD 80,000) or order other sanctions such as the unwinding of the transaction. We have made an unofficial translation of the regulations for your convenience.

The AML has a provision that requires an additional review when foreign firms acquire control of domestic firms and the transaction involves national security. In 2011, final rules to implement the national security review were issued in which “national security” sectors were identified and broken down into two categories: one related to the military and the other related to defense, agriculture, energy, transportation, technology and equipment manufacture. The purpose of the review is to see whether the transaction poses a threat to national security by looking at its potential impact on such areas as production of domestic products and services required for national defense, national economic stability, order within society, and China’s ability to research and develop key technologies involving national security. This terminology is still very vague. If the transaction meets the threshold for merger review and the domestic firm that is being acquired is in possible category of national security, then two reviews will be required. Timing may be an issue. It is not clear, but companies can probably submit reviews for National Security Review and AML merger notification at the same time.

This requirement has the potential to be used politically. The US has a similar national security review process under The Committee on Foreign Investment in the United States (“CFIUS”). The US definition of “national security” is not as broad as China’s. Up until now six cases involving national security have been filed. Of these three have been approved and three are still being reviewed by the committee designated to conduct the national security review. There have not been any public announcements regarding cases requiring national security reviews since there is no obligation under the rules to publish decisions.

Anti-competitive conduct

Although merger control is the area with the most activity and attention, it is not too early to consider the other component of antitrust, namely enforcement of AML provisions governing anticompetitive conduct. In early 2011 the NDRC and SAIC adopted rules setting forth how the two agencies would enforce the AML with respect to anticompetitive conduct ( the terminology used in the AML is monopoly agreements and abuse of dominance, in the US we refer to contracts/combinations/or conspiracies to restrain trade). There are surprisingly few cases in China.

In 2011 SAIC had its first cartel case under the AML, fining a concrete association and 5 of its members for market allocation (RMB 200,000/$30,000). The NDRC had three cases brought under the AML (it has brought many other cases under pre-AML price law). A paper association was fined for price-fixing and output restriction (RMB 500,000/USD80,000). Two pharmaceutical companies were fined for market allocation and price-fixing (RMB 7 million/USD 1.1). The fine was--for Chinese standards--huge. Two SOE’s (China Telecom and China Unicom) were investigated for restricting broadband access, but subsequently the two parties applied for a suspension of the investigation in exchange for their promise to improve internet interconnection quality, adjust pricing system and improve broadband network in China. The investigation is still pending.

International cooperation

We can expect more activity in the future based on the Chinese authorities’ fast learning curve and willingness to apply what has been effective elsewhere. Up until recently, the EU has had more influence over the Chinese practice: the AML is modeled after the EU treaty and the Chinese authorities continue to consult the EU. However, this is changing. The Chinese antitrust authorities have started to enter into cooperation agreements with other antitrust authorities with regard to antitrust enforcement. There is no cooperation agreement between the EU and Chinese authorities. In January and March, the UK Office of Fair Trading signed Memoranda of Understanding (“MOU’s”) with the NDRC and SAIC, respectively, in which they commit to cooperate and exchange best practices on competition and consumer policy as well as enforcement. In July, a MOU was signed between the US Department of Justice (“DOJ”) and US Federal Trade Commission (“FTC”) and the three Chinese enforcement agencies, under which they agree to cooperate in developing competition policy and enforcement. This was followed up in November with guidelines for cooperation between MOFCOM/DOJ/FTC with respect to merger filings. Under the guidelines, information related to the following issues could be shared: timing of their respective investigations, technical aspects such as market definition, evaluation of competitive effects, theories of competitive harm, economic analysis and remedies. Although enforcement in the anticompetitive conduct area is sparse in comparison to the US, the Chinese will be learning more about investigative methods as a result of the increased cooperation.

Cartel enforcement

The Chinese are also no doubt looking at recent trends in the US and other jurisdictions. The US experience is a good starting point to figure out what is likely to happen in China. Cartel enforcement is a trend in the US, involving such products as computer components, automotive electronic components, air cargo and passenger surcharges. The US investigations have targeted or charged many Asian executives. For your information we have prepared a table entitled “The $100 Million Club” which lists foreign companies and how much they were fined. Recently in the New York Times there was an article about a price-fixing case involving Japanese auto suppliers (the three companies were fined $78, $470 and $78 million and the executives received prison sentences or fined). “Since November, the Justice Department has obtained $748 million in fines from Japanese auto suppliers for price-fixing and bid-rigging, more than its antitrust division received in the entire previous fiscal year.“ The article quotes the acting assistant attorney general in charge of the antitrust division: ”Criminal antitrust enforcement remains a top priority and the antitrust division will continue to work with the F.B.I. and our law enforcement counterparts to root out this kind of pernicious cartel conduct that results in higher prices to American consumers and businesses.” The article then ends, “The plea agreements, which are subject to court approval, require the defendants to help the government in its investigation of the auto parts industry.”

What does this tell the Chinese?

This type of enforcement is a great potential source of revenue. More important, however, is the how a leniency program can be an effective enforcement tool. The US program provides for no prosecution of the company and cooperating executives if they are the “first in”. Such a program is a successful detection method and destabilizes cartels by creating anxiety and the race to the prosecutors. Presently the NDRC and SAIC have leniency provisions in their implementing regulations, but the general public opinion is that the provisions lack specificity as to the extent of the advantages of self-reporting. Perhaps we will see additional regulations regarding leniency measures.

Wrap up

Merger enforcement will continue to be a major focus and source for consumption of time and resources for foreign companies. We may see more activity in the cartel enforcement area as the Chinese enforcement agencies interact with those of other jurisdictions.

New York Federal Court Holds That Meetings Related To Drafting Arbitration Clauses May Be Probative Of Antitrust Conspiracy Despite Decision Makers' Lack Of Knowledge

Sheppard Mullin — Tue, 21 Feb 2012 16:38:03 -0500

By Eric O'Connor

In In re Currency Conversion Fee Antitrust Litig., 2012 WL 401113 (S.D.N.Y. Feb. 8, 2012), Judge William H. Pauley III denied a motion for summary judgment by Defendants Discover and Citigroup after finding that a handful of meetings over four years by Defendants' in-house counsel related to drafting and implementing arbitration clauses was probative of an antitrust conspiracy. This was despite Plaintiffs' admitted paucity of evidence, overall weak circumstantial evidence, the absence of discussions of pricing terms, and the lack of knowledge about such meetings by Defendants' decision-makers.

Background Claims and Facts

Plaintiffs, holders of credit or charge cards, alleged that the issuing bank Defendants violated Section 1 of the Sherman Act by conspiring to include mandatory arbitration clauses in cardholder agreements and participating in a group boycott by refusing to issue cards to individuals who did not agree to arbitration.

From 1999 through 2003, in-house counsel from Defendants allegedly met several times and discussed arbitration clauses. Moving Defendants Citigroup and Discover allegedly only attended 3-5 meetings, possibly adopted their arbitration clauses prior to such meetings, and their executives with decision-making authority to implement the arbitration clauses had "no knowledge" of such meetings. In re Currency Conversion Fee Antitrust Litig., 2012 WL 401113, at *1-3. These two remaining Defendants moved for summary judgment, but the Court denied the motion because there were genuine issues of fact to be resolved at trial.

Legal Standards

The Court summarized the familiar antitrust summary judgment standards stated in Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 588 (1986) (“antitrust law limits the range of permissible inferences from ambiguous evidence in a § 1 case. … [Thus, t]o survive a motion for summary judgment ... a plaintiff [alleging] a violation of § 1 must present evidence that tends to exclude the possibility that the alleged conspirators acted independently.”) and Monsanto Co. v. Spray–Rite Serv. Corp., 465 U.S. 752, 764 (1984) (to survive summary judgment, Plaintiffs must proffer “direct or circumstantial evidence that reasonably tends to prove the [defendants] had a conscious commitment to a common scheme designed to achieve an unlawful objective.”).

Defendants' adoption of arbitration clauses was sufficiently "parallel" conduct to be probative of an antitrust conspiracy.

The Court noted that Plaintiffs "identify no direct evidence that Defendants participated in a conspiracy" and "acknowledged that there is an 'extreme paucity of documents' supporting their theory of the case." In re Currency Conversion Fee Antitrust Litig., 2012 WL 401113, at *5, 8. Nevertheless, the Court found that the Defendants' implementation and modification of their arbitration clauses over a five year time period "roughly coincided" with so-called "Arbitration Coalition" meetings attended by Defendants' in-house counsel. Id. at *2-3, 5. This was sufficient parallel conduct to consider additional "plus factors" that could support an inference of a conspiracy.

The "Plus Factors"

Conduct Contrary to Defendants' Self-interest

While the Court acknowledged that it was in Defendants' self-interest to resolve disputes through arbitration and bar class arbitration, evidence that one defendant provided competitors with certain sensitive business information could be a "tacit invitation to collude" and supported an inference that Defendants used the meetings to coordinate their decision-making on arbitration. Id. at *6.

Motive

This factor was more difficult because "there [wa]s little evidence indicating that adoption of an arbitration clause threatened any Defendant's competitive posture." Id. The evidence also was mixed. For instance, while "Plaintiffs' own expert [] opined that the presence or absence of arbitration clauses does not impact consumer choice", the Court found that Defendants could not establish that there was no rationale motive to conspire because "what consumers view as 'salient' may change over time." Id. at *7.

Standardization

While the Court recognized that the binary decision to implement an arbitration clause or not is unusual for this factor, the Court found that each Defendant's decision to adopt an arbitration clause that roughly mirrored those used by its competitors was probative of a conspiracy. Id. at *7-8.

Inter–Firm Communications

While there were frequent meetings allegedly attended by some of the Defendants' in-house counsel, plaintiffs still needed to provide evidence that "tends to exclude the possibility that the alleged conspirators acted independently." Id. at *8 (citing Matsushita, 475 U.S. at 588). Here, it was undisputed that the Defendants' executives with ultimate decision-making authority for the arbitration clauses had "no knowledge of the meetings." In re Currency Conversion Fee Antitrust Litig., 2012 WL 401113, at *8. However, the Court found a triable issue of fact because in-house counsel who attended were not "low level employees" engaged in mere "shop talk." Id.

In re American Express Merchants' Litigation - Plaintiffs Survive Three Rounds In The Second Circuit, But Can They Survive The Supreme Court?

Sheppard Mullin — Tue, 07 Feb 2012 14:19:25 -0500

By David Garcia and Leo Caseria

On February 1, 2012, the Second Circuit Court of Appeals decided In re American Express Merchants' Litigation, No. 06-1871-cv, (2d Cir. Feb. 1, 2012) ("AMEX III"), holding, for the third time, that a class action waiver in an arbitration agreement between American Express and plaintiff merchants was unenforceable because it would effectively preclude plaintiffs from vindicating their federal statutory rights under the Sherman and Clayton Acts. The Second Circuit's decision likely sets the stage for Supreme Court review, and a final decision on whether and under what circumstances class action waivers are enforceable in at least federal antitrust cases, and perhaps other types of federal statutory claims as well.

Plaintiffs are merchants alleging that American Express unlawfully forced merchants to accept American Express credit cards and debit cards as a condition of accepting American Express charge cards, at the same high rates associated with charge cards. American Express moved to compel arbitration based on arbitration agreements with the merchants. Those arbitration agreements included class action waivers. In 2006, the Southern District of New York granted American Express's motion to compel arbitration. Plaintiffs appealed.

In 2009, the Second Circuit reversed, holding that the class action waiver was unenforceable. In re American Express Merchants Litigation, 554 F.3d 300 (2d Cir. 2009) ("AMEX I"). Its decision was guided by Green Tree Financial Corp.-Alabama v. Randolph, 531 U.S. 79 (2000), which held that a party seeking to "invalidate an arbitration agreement on the ground that arbitration would be prohibitively expensive . . . bears the burden of showing the likelihood of incurring such costs." Id. at 92. The Second Circuit in AMEX I held that plaintiffs satisfied this burden through expert economic opinion indicating that plaintiffs could not reasonably pursue individual antitrust claims against American Express, largely because of the cost of procuring expert economic testimony.

In 2011, after the Supreme Court decided Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp., 130 S. Ct. 1758 (2010), the Second Circuit reaffirmed its decision. See In re American Express Merchants Litigation, 634 F.3d 187 (2d Cir. 2011) ("AMEX II"), discussed at AT&T Mobility LLC v. Concepcion - What Does It Mean For Class Arbitration And Class Actions In Federal Antitrust Cases?. It held that Stolt-Nielsen was inapposite and did not require a different result: "Stolt-Nielsen states that parties cannot be forced to engage in a class arbitration absent a contractual agreement to do so. It does not follow, as Amex urges, that a contractual clause barring class arbitration is per se unenforceable." 634 F.3d at 193.

On February 1, 2012, the Second Circuit reaffirmed its earlier decisions and again held that the class action waiver in the American Express arbitration clause is unenforceable. The Second Circuit was unphased by two US Supreme Court cases decided since Stolt-Nielsen dealing with arbitration agreements. In AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011), the Supreme Court upheld the enforceability of a class action waiver in an arbitration agreement on the grounds that the Federal Arbitration Act (FAA) preempted California common law. The Second Circuit held that AT&T Mobility was inapposite because it did not address whether a class action waiver could be enforced if "the practical effect of the enforcement would be to preclude [plaintiffs'] ability to vindicate their federal statutory rights." AMEX III, p. 13 (emphasis added). According to the Second Circuit, AT&T Mobility, like Stolt-Nielsen, did not "require that all class-action waivers be deemed per se enforceable." Id. at p. 15.

In Compucredit Corp. v. Greenwood, No. 10-948 (U.S. Jan. 10, 2012), decided only weeks before AMEX III, the Supreme Court held that an arbitration agreement could be enforced in a case involving claims under the federal Credit Repair Organizations Act (CROA), because the CROA is silent on whether arbitration is permissible. Unlike AT&T Mobility, which involved a conflict between the FAA and state law, Compucredit involved a conflict between the FAA and another federal statute. Nevertheless, the Second Circuit found that Compucredit, like AT&T Mobility and Stolt-Nielsen, was inapposite. According to the Second Circuit, proof of Congressional intent need not be explicit: "Although the Sherman Act does not provide plaintiffs with an express right to bring their claims as a class in court, forcing plaintiffs to bring their claims individually here would make it impossible to enforce their rights under the Sherman Act and thus conflict with congressional purposes manifested in the provision of a private right of action in the statute." AMEX III, p. 15 n.5.

After disposing of the Supreme Court's recent decisions in Stolt-Nielsen, AT&T Mobility and Compucredit, the Second Circuit explained that arbitration clauses preventing litigants from the effective enforcement of federal statutory rights cannot be enforced. It relied, as it had in AMEX I and II, on the Supreme Court's Green Tree decision and expert evidence produced by plaintiffs indicating that it would not be economically feasible for plaintiffs to bring individual actions against American Express. It also relied, as it had in AMEX I and II, on Supreme Court dicta in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614 (1985) (which enforced an arbitration agreement in the context of a federal antitrust claim) indicating that where contract clauses operate "as a prospective waiver of a party's right to pursue statutory remedies for antitrust violations, we would have little hesitation in condemning the agreement as against public policy." Id. at 637 n.19. As the Second Circuit concluded: "Eradicating the private enforcement component from our antitrust law scheme cannot be what Congress intended when it included strong private enforcement mechanisms and incentives in the antitrust statutes." AMEX III, p. 23.

The Second Circuit was careful not make any sweeping pronouncements about class action waivers. Instead, it narrowly limited its holding to the specific class action waiver before it, and held that class action waivers must be considered on a case-by-case basis under the framework of Green Tree: "We do not hold today that class action waivers in arbitration agreements are per se unenforceable, or even that they are per se unenforceable in the context of antitrust actions. Rather . . . we hold that each waiver must be considered on its own merits." AMEX III, p. 24.

Thus, the stage is now set for the Supreme Court to decide whether class action waivers can be enforced in federal antitrust cases. Some of the possible outcomes are mentioned in our previous article following AMEX II. See AT&T Mobility LLC v. Concepcion - What Does It Mean For Class Arbitration And Class Actions In Federal Antitrust Cases?.

Higher Filing Thresholds for HSR Act Premerger Notifications and Interlocking Directorates Announced

Sheppard Mullin — Thu, 26 Jan 2012 18:08:51 -0500

1. Higher Thresholds For HSR Filings

On January 24, 2012, the Federal Trade Commission announced revised, higher thresholds for premerger filings under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The filing thresholds are revised annually, based on the change in gross national product and will be effective thirty days after publication in the Federal Register. Publication is expected within a week, so the new thresholds will most likely become effective in late February 2012. Acquisitions that have not closed by the effective date will be subject to the new thresholds.

The HSR Act notification requirements apply to transactions that satisfy the specified "size of transaction" and "size of person" thresholds. The key adjusted thresholds are summarized in the following chart:

Size of Transaction Test

Notification is required if the acquiring person will acquire and hold certain assets, voting securities, and/or interests in non-corporate entities valued at more than $68.2 million.

Size of Person Test

(Transactions valued at more than $272.8 million are not subject to the Size of Person Test and are therefore reportable)

Generally one "person" to the transaction must have at least $136.4 million in total assets or annual net sales, and the other must have at least $13.6 million in total assets or annual net sales.

While the filing thresholds have changed, the filing fees have not, but will be based on the new thresholds as follows: $45,000 for transactions valued at more than $68.2 million but less than $136.4 million; $125,000 for transactions valued at more than $136.4 million but less than $682.1 million; and $280,000 for transactions valued at more than $682.1 million.

The above rules are general guidelines only and their application may vary depending on the particular transaction.

2. Higher Thresholds For the Prohibition Against Interlocking Directorates

Also on January 24, 2012, the FTC announced new, higher thresholds for the prohibition in Section 8 of the Clayton Act against interlocking directorates. Section 8 prohibits, with certain exceptions, one person from serving as a director or officer of two competing corporations if two thresholds are met. Applying the new thresholds, competitor corporations are covered by Section 8 if each one has capital, surplus and undivided profits aggregating more than $27,784,000, with the exception that no corporation is covered if the competitive sales of either corporation are less than $2,778,400. As with HSR thresholds, the FTC is required to revise Section 8 thresholds annually based on gross national product. Section 8 thresholds become effective upon publication in the Federal Register, which is expected later this week.

Allegations of Conspiracy to Limit Crop Production: Ripe for Analysis Under Capper-Volstead

Sheppard Mullin — Wed, 28 Dec 2011 14:30:24 -0500

By Don T. Hibner, Jr.

On December 2, 2011, the district court denied a motion to dismiss antitrust conspiracy claims against potato grower cooperatives in several states. In re Fresh and Process Potatoes Antitrust Litigation, United States District Court for the District of Idaho, Case No. 4:10-MD-2186-BLW. The plaintiffs alleged that the defendant cooperatives agreed among themselves, through their cooperative structure, to restrict the output of their members by limiting potato planting acreages, paying farmers to destroy existing stocks, and refraining from bringing additional potatoes to market. The alleged purpose of the output-restricting conspiracy was to augment demand among direct purchasers of potatoes, thus driving up prices. The defendant cooperatives moved to dismiss on the ground that the allegations of antitrust conspiracy were immune, pursuant to the federal Capper-Volstead Act of 1922, 7 U.S.C. § 291-292.

In the years following enactment of the Capper-Volstead Act, the United States Supreme Court has held that the Act only provides limited immunity, within its statutory terms. Thus, Capper-Volstead protection extends only to associations of "persons engaged in the production of agricultural products". If a cooperative agreement includes persons other than "producers" - such as "processors" - immunity is forfeited. However, the inquiry may become fact-specific as to the status of producer members who are vertically integrated into various levels within the distributive stream. When does a "producer" mutate into a non-exempt "processor"?

The law also has been relatively straightforward that agricultural immunity is forfeited where the cooperative, or its members, engages in "predatory" acts directed at third-parties. "Predatory" acts include, without limitation, (a) the securing of shipping space in order to deny it to a competitor; (b) boycotting, picketing, or otherwise intimidating the customers of rival processors; (c) forcibly excluding non-members from packing facilities; (d) intimidating or boycotting dealers who paid less than prices charged by the cooperative; and (e) inducing suppliers and carriers to refuse to deal with rivals. See, e.g., Areeda and Hovenkamp, Antitrust § 249 (2011).

An issue of significance in In re Fresh and Process Potatoes, however, is whether Capper-Volstead immunity extends beyond the setting of sales prices through "collectively processing, preparing for market, handling, and marketing” to efforts to augment the sales price of the commodity through agreements to restrict output. Surprisingly, in the 90 years of the Act’s existence, this issue has remained unresolved.

The issue is clearly presented in In re Fresh and Process Potatoes, and is also in the forefront of additional pending class actions, including, without limitation, Edwards v. National Milk Producers Federation, et al., U.S. District Court, N.D. Cal., Case No. 4:2011cv-04766 (Sept. 26, 2011), and In re Processed Egg Products Antitrust Litigation, United States District Court, E.D. Pa., Case No. MDL No. 2002 (Nov. 26, 2011). As this piece was being written, a “new arrival” is Kraft Foods Global, Inc., et. al. v. United Egg Producers, Inc., U.S. District Court, N.D. Ill. (Dec. 12, 2011). Presumably, it will be MDL'd to the E.D. Pa.

In Edwards, plaintiffs allege that the National Milk Producers Federation, and other dairy companies conspired to limit the production of milk by paying farmers to reduce the size of their milk herds, in order to increase the prices of milk to consumers. The practice was commonly referred to as "herd retirement" within the industry. The complaint alleges that the conspiracy involved 70% of the nation's milk supply.

In In re Processed Egg Products Antitrust Litigation, plaintiffs allege that United Egg Producers and other cooperatives conspired to induce their members to restrict egg output by restricting members' flock sizes, through the pretext of reducing cage space densities for hens for animal welfare reasons. In addition, it is alleged that members were encouraged to export eggs at a loss, thus reducing the domestic egg supply available to consumers. In each of these actions, motions to dismiss have been denied, pending further discovery.

While the issue of the immunity of an agreement reducing members' output has been alluded to by commentators, it has remained fallow, and has not been ripe for adjudication until recently. Why is this so? Hypothetical answers at least present themselves. In re Fresh and Process Potatoes has now joined the flock.

Beginning in 2010, then Assistant Attorney General in charge of the Antitrust Division, Christine Varney announced that a new antitrust task force of investigators from the Justice Department had joined with investigators from the United States Department of Agriculture, to spearhead new enforcement oversight into the agricultural sector. See Christine A. Varney, The Capper-Volstead Act, Agricultural, Cooperatives, and Antitrust Immunity, The Antitrust Source (December 2010). This oversight has been augmented by state attorneys general and a series of private treble damage class actions in the agricultural sector. Ms. Varney also announced that, in addition to the ongoing task force investigation with USDA, proposed extensive new regulations for the meat industry were also forthcoming.

Enforcement officials' statements announcing increased scrutiny into limiting Capper-Volstead immunity are not new. In fact, they have been periodically reappearing since the 1938 Technical National Economic Committee, the 1955 Attorney General's National Committee To Study The Antitrust Laws, the 1979 National Commission For The Review Of Antitrust Law And Procedures, and the 2007 Antitrust Modernization Commission Report and Recommendations.

Nevertheless, the legality of output restriction agreements among agricultural cooperatives and their members seems to be an issue who's time has finally come. In In re Fresh and Process Potatoes, the court concluded, in denying the cooperatives' motion to dismiss, that it could not determine whether the Capper-Volstead exemption applied without a fact-intensive inquiry into two issues. The first was whether vertically-integrated members of the cooperatives included "non-producers", such that Capper-Volstead immunity would be forfeited. Second, was whether the Capper-Volstead Act included, within the concept of "marketing", agreements to collectively implement production controls, in order to raise prices. See Slip Opinion at 8 n.5.

In what it termed an "advisory opinion", it is now the court's tentative conclusion that Capper-Volstead immunity does not protect agreements to limit output. The court was of the tentative view that the language of Section 1 of the Capper-Volstead Act only applied to

… acts done to an agricultural product after it has been planted and harvested. Thus, under the plain language of the statute, coordinating and reducing acreage for planting is not allowed.

Id. at 14. The court noted by footnote that the federal enforcement agencies have from time to time come to the same conclusion, namely that production limitations are not permitted.

The defendants argue that because Capper-Volstead cooperatives are allowed to fix prices, they must also be allowed to restrict production. Economics and logic suggest that output and price are at least complementary functions, if not simply two separate vantage points for viewing an single integrated economic concept. This is suggested by economic literature of supply-demand equilibria from Smith and Ricardo, through Marshall, Keynes, and Samuelson. In fact, it is at least inferred by Messrs. Areeda and Hovenkamp that a cartel's ability to maintain a uniform pricing regime requires that it also be able to reduce its market output. See Antitrust Section 249d. See also, Holly Sugar Corp. v. Goshen County Coop. Beet Growers Association, 725 F.2d 564 (10^th Cir. 1984). Holly Sugar holds that it is permissible under Capper-Volstead for a cartel to require agreement from its producer members that they not make sales outside the cartel. In addition, marketing orders made pursuant to the Agricultural Marketing Agreement Act of 1937, 7 U.S.C. § 671, and various state legislation to the same purpose and effect, pursuant to a marketing agreement may lawfully limit the amount of produce allowed to be marketed under the order. Further, it is generally conceded by commentators that a Capper-Volstead cooperative association may limit the amount of produce that it will agree to purchase from its members.

Thus, there may be a good argument that the term "marketing" within the meaning of Section 1 of the Capper-Volstead Act implies that a cooperative's members can utilize an efficient means of price uniformity to enhance and augment the "price-taker" historic position in which they had been cast, and which was the impetus for the enactment of Section 6 of the Clayton Act, and Capper-Volstead itself.

The case law and commentary on Capper-Volstead supports the proposition that one of the purposes of its enactment was to allow farmers to raise the price of their output. Capper-Volstead was thus intended to facilitate the transfer of rents from consumers to producers. As is generally understood in antitrust economics, even a modest reduction in the output of a homogeneous, inelastic product may significantly augment sales prices. Such is the case with many agricultural commodities. Capper-Volstead was designed to allow the farmers and other producers of agricultural products to join together in cooperatives and raise the price of their products to consumers. By the same token, producers were not allowed to engage in predatory conduct to facilitate the joint raising of prices, or to combine with non-producer elements to facilitate price increases. One could argue that Congress must have intended to allow agricultural producer cooperatives' to meter their output by limiting their members' production. Otherwise, "cheating" on cooperatives' enhanced prices to consumers may defeat the ability of the producers to transfer consumer rents to themselves.

Yet, the In re Fresh and Process Potatoes court reasons to the contrary. It states that while an agricultural cooperative can fix the prices at which its goods are sold, it is the individual freedom of its members to augment production that prevents consumers from being overcharged. As stated by the court:

Individual freedom to produce more in times of high prices is a quintessential safeguard against Capper-Volstead abuse, which Congress recognized in enacting the statute. Id. at 17.

Perhaps a rejoinder would be that Congress intended that agricultural prices would rise as a result of agricultural cooperative price fixing, and it was Section 2 of the Act that would prevent "abuse". Section 2 empowers the Secretary of Agriculture to administratively prevent cooperatives from using their market power to such an extent that the price of any agricultural product "is unduly enhanced". See, 7 U.S.C. § 292. An argument could be made that this, and not the individual right to "cheat" on the cartel, is the quintessential safeguard against Capper-Volstead abuse.

But the court also relies upon dicta of the Federal Trade Commission in In re Matter of Central California Lettuce Producers Cooperatives, 90 F.T.C. 18, at 32 n. 20 (1977). There, the Commission opined

[T]here are strong indications that Congress did not intend to allow farmers to use cooperatives as a vehicle by which they could effectively agree to limit production.

At this point, the pending litigation, described above presents more questions than answers. But perhaps a quote from Galatians 6:7 is appropriate for the season:

Be not deceived; God is not mocked: for whatever a man soweth, that shall he also reap.

RIM Defeats Sherman Act Section 2 Claims At Pleading Stage

Sheppard Mullin — Wed, 28 Dec 2011 13:13:59 -0500

By Thomas D. Nevins

In “the latest installment in a contentious litigation”, defendant Research In Motion recently obtained an order granting its motion to dismiss plaintiff Eatoni's claims that RIM violated Section 2 of the Sherman Act and equivalent portions of New York’s Donnelly Act. Eatoni Ergonomics, Inc. v. Research In Motion Corp., No. 08-Civ. 10079 (WHP) (S.D.N.Y. Dec. 5, 2011), Memorandum and Order, p. 1 (Pauley, J.).

The course of this litigation began with RIM filing an action in 2005 for a declaratory judgment that it had not infringed Eatoni’s ‘317 patent for a “reduced QWERTY” keyboard and supporting software. That case settled with Eatoni granting a license to the ‘317 patent to RIM and a release of all claims of infringement. Further disputes resulted in an arbitration that led to RIM agreeing to collaborate with plaintiff on the development of a mutually agreed upon product. RIM’s management rejected the resulting joint design. Eatoni then filed this suit in 2008.

Infringing A Patent As Maintenance Of Monopoly Power

Eatoni alleged that RIM’s alleged infringement of plaintiff’s ‘317 patent constituted an antitrust violation. Plaintiff’s theory of liability was contained in a treatise stating that “in some limited circumstances, the costs of intellectual property infringement . . . on intellectual property owners can create significant barriers to entry, facilitating maintenance of monopoly power.” Op. at 5, quoting H. Hovenkamp, et al., IP and Antitrust: An Analysis of Antitrust Principles Applied to Intellectual Property Law 11-59 (2d ed. 2010).

The court found that plaintiff had not alleged facts supporting such a contention. Op. at 5 (“Eatoni has not plausibly alleged that RIM’s purported infringement imposed substantial costs or barriers to entry”). In addition, the court stated that no court had ever adopted such a theory, and refused to do so itself. Op. at 5 (“the court has not found any case in which patent infringement has been considered anticompetitive conduct”).

Even assuming that the infringement of a patent could present sufficient foreclosure opportunities to constitute exclusionary power, in the court’s view the claim was defeated by plaintiff having given defendant a license to the ‘317 patent and a “full and complete release” of claims, including “any past, current, or future claims” for patent infringement. Op. at 6. Plaintiff’s allegation that RIM infringed the ‘317 patent was precluded by the license and release.

Refusal To Deal

Eatoni also asserted Section 2 liability based on Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 427 U.S. 585 (1985). Plaintiff described Aspen Skiing as standing for the proposition that a monopolist’s refusal to deal is anticompetitive when the parties were previously engaged in a “cooperative venture.” Opinion at 6-7. Eatoni argued that RIM’s refusal to develop a joint product with plaintiff facilitated defendant’s willful maintenance of monopoly power.

The court noted that Aspen Skiing is “at or near the outer boundary of § 2 liability.” Op. at 7, quoting Verizon Communications v. Trinko, 540 U.S. 398, 409 (2004). A unilateral refusal deal is typically lawful. Op. at 6 (citing cases). That rule applied here. No duty to deal had arisen here because the unique facts in Aspen Skiing were absent – there was no lengthy commercial relationship causing dependence like Aspen Skiing. Op. at 7. Nor does it appear that plaintiff sufficiently alleged facts supporting an inference that defendant’s motives were exclusionary, such as the allegation of forfeiture of short term gains in Aspen Skiing, or that the rejection of the joint design was without a procompetitive justification.

Combination Of Lawful Acts As Unlawful

Plaintiff also asserted that unilateral acts that were lawful individually could be “aggregated into an unlawful ‘course of conduct.’” Op. at 8. Plaintiff relied on Continental Ore Co. v. Union Carbide & Carbon Corp., 370 U.S. 690, 698-99 (1962) (antitrust plaintiff “should be given the full benefit of [its] proofs without tightly compartmentalizing the various factual components and wiping the slate clean after scrutiny of each”).

The court restricted the language from Continental Ore, which concerned evaluating unlawful acts in the context of related facts, “to ‘evaluating the character and effect of a conspiracy.’” Op. at 8, quoting Continental Ore, 370 U.S. at 699. The court rejected the argument that the Supreme Court held that lawful conduct could be combined with other lawful conduct to violate the antitrust laws. One cannot create something by adding nothing to nothing. Op. at 8. “[T]he sum of zero and zero is zero . . . .” Id.

Essential Facility

Eatoni’s final liability theory was that RIM’s proprietary Blackberry platform was an essential facility for plaintiff’s keyboard technology. The court did not address whether the essential facility doctrine survived Trinko, 540 U.S. 398. Instead, it rejected plaintiff’s theory on two grounds: the antitrust laws did not require RIM to share its intellectual property (Op. at 9, citing SCM Corp. v. Xerox Corp., 645 F.2d 1195, 1204 (2d Cir. 1982)); and RIM’s platform was not essential to plaintiff, there being a number of companies that manufactured smart phones, such as Samsung, Motorola and Nokia. Id.

Netflix Wins Summary Judgment Dismissal Of Consumer Class Antitrust Claims

Sheppard Mullin — Fri, 09 Dec 2011 18:52:35 -0500

By Thomas D. Nevins

Plaintiff Netflix subscribers alleged that Netflix and Wal-Mart violated Sections 1 and 2 of the Sherman Act by entering into to a horizontal market allocation agreement. In re: Online DVD Rental Antitrust Litigation, No. M 09-2029 PJH, Order Granting Motion For Summary Judgment (N.D. Cal. Nov. 22, 2011). Netflix and Walmart entered into a Promotion Agreement under which Netflix would rent but not sell DVDs online, and Walmart would sell but not rent DVDs online. Walmart would promote DVD rentals by Netflix, and Netflix would promote the sale of DVDs by Walmart.

The Promotion Agreement stated that Walmart had previously decided to exit the online rental business, which it did after entering into the Agreement. Netflix paid to acquire Walmart rental customers. Netflix had stopped selling DVDs online prior to the creation of the Agreement. The Agreement also stated that Wal-Mart could reenter the online rental business if it chose to do so.

Plaintiffs claimed that their injury arose from Walmart’s exit from the rental business, which allegedly left Netflix free to charge supracompetitive prices to consumers for DVD rentals, which it allegedly did.

After the court certified a plaintiff class of Netflix subscribers and after Walmart had settled out, Netflix sought summary judgment on a number of grounds. The District Court, Phyllis J. Hamilton, J., found against plaintiffs in a 29 page opinion. The court held that plaintiffs could not establish the essential element of fact of injury, and accordingly granted defendant’s motion for summary judgment. In the course of its analysis, the court held that the per se rule could not be applied to the Promotion Agreement. Slip opinion at 9-16. The court did not make a definitive ruling under the rule of reason because of its holding that plaintiffs could not establish causal injury-in-fact. Slip op. at 16-19.

Per Se Rule

In rejecting application of the per se rule, the court held that the Agreement was not one “that facially appears to be one that would always or almost always tend to restrict competition and decrease output.” Slip op. at 9 quoting National Society of Prof’l Engineers v. United States, 435 U.S. 679, 692 (1978) (test for per se illegality); accord State Oil Co. v. Khan, 522 U.S. 3, 10 (1997). The per se rule applies to “’[c]lassic’ horizontal market division agreements [which] are ones in which ‘competitors at the same level agree to divide up the market for a given product.’” Slip op. at 10, quoting California v. Safeway, Inc., 651 F.3d 1118, 1133 (9^th Cir. 2011) (citation omitted).

Evidence supported Netflix’s contention that Walmart considered its rental business to be a failure and determined on its own to withdraw from that business, rather than withdrawing from the rental market as a quid pro quo in exchange for Netflix’s agreement not to sell DVDs in competition with Walmart. The court noted that Walmart had 1.5 percent of the DVD rental business, while Netflix had seventy percent and Blockbuster had the balance. Walmart’s minimal market presence made it unlikely that its withdrawal would restrict competition, particularly when Blockbuster would continue to provide competition. Slip op. at 15. Netflix adduced credible evidence to show that the Agreement resulted in “increased output in rentals,” and to support its contention that “the eventual agreement between the parties reflected Netflix’s desire to capitalize on Walmart’s independent realization that its online DVD rental service was not profitable, and to profit from such realization by negotiating terms upon which Netflix could acquire Walmart’s existing subscriber base and then improve upon this acquisition with cross-promotional efforts.” Slip op. at 14. There was no legal authority “clearly establishing the manifestly anticompetitive nature of joint promotion agreements such as the one in question.” Id. at 16. The court refused to treat the Agreement as a “naked” market allocation agreement, and therefore declined to apply the per se rule of illegality.

Rule Of Reason

When arguing for liability under the rule of reason, plaintiffs continued to maintain that Walmart’s withdrawal from the rental market was a quid pro quo for Netflix agreeing not to compete in the DVD sales market. They also adduced evidence that assertedly supported their contention that the online DVD rental market was negatively impacted as a result of the Agreement, as measured by lower output and unresponsiveness to consumer preference. They claimed that “Walmart was poised to rapidly grow its subscriber base via a major deal with Yahoo! and gain traction in the DVD rental market.” Slip op. at 18. Netflix countered with evidence assertedly showing that it had lowered prices and improved service since entering into the Agreement, together with showing that consumers benefitted from the Agreement and that “Walmart’s significance to the market and ability to impact the market was minimal.” Slip op. at 17.

The court did not reach the issue of whether the Promotion Agreement and the defendants’ conduct violated the rule of reason. This was because “plaintiffs have not, and cannot demonstrate, a triable issue as to competitive injury.” Id. at 18.

Fact Of Injury

Plaintiffs claimed that Netflix would have lowered prices had Walmart remained in the rental market. Netflix argued that Walmart was an insignificant competitor in the rental market, and that neither its exit nor its participation on the market had any impact on Netflix’s pricing.

Plaintiffs provided internal Netflix documents reflecting concern that Walmart’s presence had prevented Netflix from raising prices. E.g., Slip op. at 20 (Netflix memo discussing potential price increase and saying that Netflix “didn’t want to risk it while Walmart [was] still lurking”). Internal emails from both “Netflix and Walmart purportedly demonstrate[ed] that both companies viewed Walmart as a significant competitor to Netflix.” Slip op. at 21. Plaintiffs also adduced expert testimony to show that Walmart exhibited downward pricing pressure on Netflix that would have forced Netflix to reduce prices. Id. at 21-22.

Netflix provided evidence to show that, among other things: no one in the online DVD rental business based pricing decisions on what Walmart did; that objective evidence showed that Walmart failed to exert any pricing pressure on Netflix; that Walmart’s share of the online DVD rental business was de minimus; that Netflix did not lower its prices when Walmart had entered the market; and that Netflix did not lower prices in the face of a price cut by Blockbuster. Slip op. at 22-24. Further, plaintiffs’ expert “concedes that no competitors responded competitively to Walmart in online DVD rental in pricing terms.” Id. at 24.

The court found that Netflix's evidence had proven "market facts" defeating plaintiffs' contention that subscribers would have paid lower prices absent the Promotion Agreement. Id. There being no triable issue on fact of injury, the court granted summary judgment as to both plaintiffs' Section 1 and Section 2 claims.

No Mandatory Antitrust Review for ACOs

Sheppard Mullin — Mon, 14 Nov 2011 17:31:52 -0500

The Department of Justice and Federal Trade Commission recently issued their final "Statement of Antitrust Enforcement Policy Regarding Accountable Care Organizations Participating in the Medicare Shared Savings Program" pursuant to the 2010 Patient Protection and Affordable Care Act. The final statement was issued in conjunction with the Department of Health and Human Services' Centers for Medicare and Medicaid Services' final regulations implementing the shared savings program as part of a coordinated interagency effort to facilitate health care provider participation in the shared savings program, so as to achieve the cost savings and improvement in quality of care Congress intended. Both the final statement and CMS' final regulations aim to further encourage and incentivize formation of Accountable Care Organizations and participation in the shared savings program. As such, the final statement includes significant, material changes from the proposed statement of antitrust enforcement policy with respect to ACOs issued earlier this year. (See the April 15 article on the proposed statement.)

ACOs are, in essence, collaborations of independent health care providers and/or provider groups (including physician practice groups, hospitals, physician-hospital organizations and any other provider groups that CMS deems appropriate) centered around the concept of enhanced coordination of care to improve both the quality and cost of care. ACOs are to be accountable for the overall care of a defined population of Medicare beneficiaries, and upon meeting certain performance standards set by CMS, are awarded some portion of savings realized (in addition to traditional fee-for-service payments).

As explained in the final statement, the agencies recognize that health care providers are more likely to create ACOs that serve both Medicare beneficiaries and privately insured patients, and thus present an opportunity for health care providers to achieve for many other consumers the benefits Congress intended for Medicare beneficiaries through the shared savings program. To further this goal, the final statement aims to clarify antitrust enforcement policy regarding ACOs, including whether ACOs that meet CMS' eligibility criteria may nevertheless be subject to antitrust scrutiny.

The agencies explain that while they continue to refrain from delineating specific requirements of clinical integration, they do recognize that CMS' eligibility criteria -- including a management structure that comprises clinical and administrative processes, and processes to promote evidence-based medicine and patient engagement -- are broadly consistent with the agencies' prior statements regarding clinical integration. The agencies also make clear that joint negotiations with private payers will be deemed reasonably necessary to an ACO's purpose of improving health care, and ACOs utilizing the same structure and processes used in the shared savings program to serve privately insured patients will accordingly be afforded rule of reason treatment.

As for the significant changes from the proposed statement, first and most significant, the final statement eliminates the mandatory antitrust review that had previously been a prerequisite for entry into the shared savings program. Mandatory antitrust review had initially been contemplated for all ACOs whose share for any common service that two or more independent ACO participants provided to patients in the same PSA exceeded 50 percent. The Final Statement does away with this mandatory review in favor of a voluntary, expedited (90 day) antitrust review process for any "newly formed ACOs" that may desire further antitrust guidance. The new voluntary process will examine "whether the ACO will likely harm competition by raising the ACO's ability or incentive profitably to raise prices above competitive levels or reduce output, quality, service, or innovation below what likely would prevail in the absence of the ACO." The reviewing agency may also consider other factors appropriate in the rule of reason analysis as explained in the 1996 Statements of Antitrust Enforcement Policy in Health Care and the 2000 Antitrust Guidelines for Collaborations Among Competitors.

An FTC/DOJ ACO Working Group will be established to collaborate and discuss issues arising out of the ACO reviews to ensure efficient, cooperative and expeditious reviews. The policy statement also reaffirms the agencies' commitment to protecting competition in the health care markets, explaining the agencies' intent to monitor data and other information from CMS to assess the competitive effects of ACOs and guide future enforcement policies.

Second, the final statement -- with the exception of the voluntary expedited antitrust review discussed above -- applies to all collaborations among otherwise independent providers and provider groups that are eligible and intend, or have been approved, to participate in the shared savings program. The applicability of the final statement is not limited to only those collaborations formed after March 23, 2010 (the date on which PPACA was enacted), as was contemplated by the proposed statement.

The final statement is otherwise largely consistent with the guidelines set forth in the proposed statement. Notably, the antitrust "safety zone" for ACOs, whose independent participants provide a "common service" and have a combined share of 30 percent or less of each such common service in each participant's PSA, remains the same in the final statement, wherever two or more ACO participants provide that service to patients from that PSA. The "rural exception" and the "dominant provider limitations" from the proposed statement also remain intact.

The final statement also includes a list of specific types of conduct which, under certain circumstances, may raise competitive concerns and should be avoided. It makes clear that all ACO participants should avoid improper exchanges of price or other competitively sensitive information among competing participants, which may facilitate collusion in the provision of services outside the ACO. The agencies also identified the following four types of conduct which ACOs with high PSA shares (or other indicia of market power) should avoid:

1. Discouraging private payers from directing or incentivizing patients to choose certain providers.

2. Tying sales of the ACO's services to the private payer's purchase of other services from providers outside the ACO, and vice versa.

3. Contracting with ACO participants on an exclusive basis.

4. Restricting a private payer's ability to make available cost, quality, efficiency and performance information to aid enrollees in evaluating and selecting providers in the health plan if it is similar to that used in the shared savings program.

Whether the final statement will in fact further encourage and incentivize ACO formation by, among other things, replacing mandatory antitrust review with a voluntary one, remains to be seen and will undoubtedly by the subject of further study and debate. Furthermore, whether independent providers interested in collaborations by way of clinical integration will have to, at a minimum, meet CMS' eligibility criteria in order to avoid antitrust scrutiny also remains to be seen.

By David Garcia and Helen Eckert

This article was originally published by The Recorder. Click here for the full article.

Allegations of Conspiracy to Fix Prices in Ohio Rock Salt Duopoly Flunk "Plausibility" Analysis

Don T. Hibner, Jr. — Fri, 04 Nov 2011 11:03:40 -0500

Creation of duopolistic interdependence by misapplication of a state statute mandating preferential treatment for local producers is an implausible "slippery slope." Erie County v. Morton Salt, Inc., N.D. Ohio, No. 3:11-cv-00364-JGC, 9/19/11.

Fifty-four northern Ohio counties filed a state court class action for violations of the Ohio Valentine Act, Ohio's counterpart to the Sherman Act. The counties alleged that the only indigenous miners of rock salt in the state of Ohio, Morton Salt, Inc. and Cargill, engaged in a conspiracy to artificially inflate the prices of road salt between 2001 and 2008. Claims also included alleged violations of the Ohio Deceptive Practices Act and fraud. Defendants removed the action to the United States District Court, Northern District of Ohio, on diversity of citizenship grounds.

Defendants filed a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) on the ground that the allegations of the complaint did not sufficiently allege a claim of "conspiracy" under the Valentine Act. In granting the motion, the District Court held that the plaintiffs had failed to plead a sufficient factual basis for any of the claims in the second amended class action complaint. Accordingly, the action has been dismissed.

In essence, the court held that, in the words of the Bard, plaintiffs were "hoisted by their own petard." See William Shakespeare, Hamlet (1602). Here, the "petard" was the Ohio Department of Transportation (DOT)'s misapplication of the state's "Buy Ohio" law. Under the "Buy Ohio" law, state agencies can give a bidding preference to providers of products manufactured or mined in Ohio. The Ohio Department of Administrative Services (DAS) sets the criteria and procedures for awarding bids under its provisions. There are two requirements of relevance here. First, DAS must grant waivers of compliance when the program would result in state agencies "paying an excessive price for the product". Second, contract awards must be "competitive". If there are two or more qualified bidders offering products produced or mined in Ohio, this is deemed to be "sufficient competition" to prevent an excessive price from being extracted.

DOT, however, had its own version of the application of the "Buy Ohio" law. While DOT was required to seek and obtain a "release and permit" from DAS to award a contract to a provider of out of state rock salt, it failed to do so. Rather, it interposed its own requirements. The "Buy Ohio" law requires awarding a contract to a provider of Ohio produced or mined products where the provider's contract price does not exceed the price offered by a bidder offering out of state products by 5%. However, DOT considered that two bids from in-state producers was sufficient, and would obviate the need to secure out of state bids. On this basis, the only two in-state producers of rock salt in Ohio, namely Morton and Cargill, were deemed to be "sufficient competition". On this basis, DOT rejected bids from non-Ohio rock salt producers. As a result, either Cargill or Morton would be awarded any rock salt contract put to bid.

By this means, DOT eliminated competitive bidding by any company other than the two indigenous producers. This created a "duopoly", and by its interpretation, imposed impermeable barriers to entry by competing out of state producers. Ohio's two underground rock salt mines are both under Lake Erie. One mine is leased to Cargill, and the other to Morton. Each has a 100 year lease. Thus, by the interpretation given the "Buy Ohio" procurement law by DOT, bids by the two indigenous producers "locked out" all potential competition.

Not surprisingly, and fully consistent with George Stigler's "A Theory of Oligopoly", 72 J.P. Econ. 4 (1964), the market shares of the incumbents were substantially stable, with each company re-winning the same customer year after year, with little switchover, and where bidding patterns suggested the use of complementary bids, designed to maintain duopolistic interdependence.

In 2009, the Office of the Inspector General of Ohio (OIG) investigated the industry and came to the conclusion that the market place for rock salt was behaving non-competitively. The OIG report also noted that the incumbents' profit margins were "unusually high", and markedly higher than in counties to the south where the "lock-out" provisions were not in operation. Importantly, however, the OIG report also noted that it had "failed to find evidence that [Cargill and Morton] communicated on salt bids."

In granting the motion to dismiss, the Northern District of Ohio went through the litany of analysis of Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), and Ashcroft v. Iqbal, 129 S.Ct. 1937 (2009). The court held that to find an agreement, the defendants' conduct "must tend to rule out the possibility that the defendants were acting independently". Twombly, supra, at 554. Mere "parallel conduct [with] a bare assertion of conspiracy" is insufficient to raise a claim of anticompetitive conduct from speculative to plausible.

The court noted that the DOT was responsible for the formation and maintenance of the duopolistic market structure for the northern counties. Thus, it is not surprising that abiding by the Stiglerian analysis of "interdependence", it was unnecessary for the duopolists to engage in any level of concerted activity that would trigger liability under the Valentine Act. The court also noted that this was not a situation where limited but tailored discovery would be helpful. It noted that in the OIG's investigation, subpoenas duces tecum had produced upwards of 300,000 pages of documentary evidence, but no evidence of actionable collusion. Acting like "good duopolists", any such additional contact would have been unnecessary. Such is the workings of a market characterized by interdependence.

Thus, it can be said that the state of Ohio got exactly what it had bargained for, namely a rock salt market that was on an inherently slippery, anticompetitive slope. The dysfunction of the market place that the state of Ohio created for itself guaranteed that Cargill and Morton would be able to earn supra-competitive rents by each sticking to its own territories and maintaining its supremacy with its particular customers. A bidding war would have been inherently contrary to the economic self-interest of each of the duopolists.

As the State of Ohio Department of Transportation created the oligopoly, economic self-interest and rudimentary price theory teach that the state of Ohio was bound to reap exactly what it had sown. In "cleaning up" the complaint, the court also disposed of the remaining counts alleging deceptive practices and fraud. These counts were dismissed for lack of standing. In each case, the court held that the state of Ohio, through a misinterpretation of its own internal law, had received exactly what it had bargained for.

By Don T. Hibner, Jr.

ANDA Automatic Stay of FDA Approval Does Not Defeat Standing in Sham Litigation Antitrust Counterclaim

Don T. Hibner, Jr. — Tue, 20 Sep 2011 16:26:55 -0500

The District of Delaware recently denied a motion to dismiss an antitrust counterclaim in a patent infringement action in the wake of defendant Mylan, Inc. ("Mylan") having filed an Abbreviated New Drug Application ("ANDA") with the Federal Drug Administration ("FDA"). Shionogi Pharma, Inc. v. Mylan, Inc., United States District Court, District of Delaware, Civil Action No. 10-1077, August 31, 2011. The decision raises a host of interesting and provocative issues relating to the "sham" exception for petitioning activity immunity under the Noerr doctrine. See Eastern R.R. Presidents Conference v. Noerr Motor Freight, 365 U.S. 127 (1961) ("Noerr") and Professional Real Estate Investors v. Columbia Pictures Industries, 508 U.S. 49 (1993) ("PRE"). In essence, the court held that plaintiff and counter-defendant Shionogi Pharma, Inc. ("Shionogi") could not maintain that Mylan lacked standing to prosecute an antitrust counterclaim by virtue of Shionogi's filing of the underlying patent infringement action, which automatically triggered an ANDA automatic 30-month stay of FDA approval of Mylan's submission.

Shionogi is the owner and/or owner of exclusive licensing rights to U.S. Patent No. 6,740,341 BI. ("'341 patent"), entitled "Taste Masking Rapid Release Coating System." The '341 patent relates to the tablet design for masking a pharmaceutical's ill taste. Shionogi holds and is listed in the FDA "Orange Book" as the owner of a new drug application for Orapred ODT®, an orally disintegrating tablet.

Mylan filed an ANDA with the FDA for a "prednisolone phosphate orally disintegrating tablet", which it intended to market as a therapeutic equivalent to, or generic formulation of, Shionogi's patented Orapred ODT® product. Upon receiving notice of Mylan's FDA filing for a non-infringing proposed product before the expiration of the '341 patent, Shionogi filed suit alleging '341 infringement. Mylan had attached to its certification that the proposed product has no "spacing layer", and would not infringe the '341 patent. This is because the '341 patent allegedly excludes tablets without a "spacing layer". Shionogi received samples from Mylan, which confirmed the absence of a spacing layer. In response to Shionogi's patent infringement action, Mylan filed an antitrust counterclaim alleging that the infringement action was a "sham" and constituted monopolization and attempted monopolization under Section 2 of the Sherman Act, and a combination and conspiracy in restraint of trade in violation of Section 1.

Shionogi moved to dismiss the amended antitrust counterclaim on the ground that Mylan lacked "antitrust standing". It argued that Mylan was neither a consumer or competitor in a relevant market, and therefore lacked antitrust standing, and had failed to properly allege "antitrust injury". The linchpin of Shionogi's argument was that, upon the filing of Shionogi's patent infringement complaint, the FDA was statutorily unable to grant tentative approval to Mylan's ANDA application, and therefore Mylan could not demonstrate that it was ready to enter the market. Accordingly, Shionogi argued Mylan lacked standing, and could not have suffered "antitrust injury". By this argument, one would conclude that even if Shionogi had filed a sham patent infringement action designed to misuse the adjudicatory process, Mylan would be unable to assert an antitrust counterclaim, simply because Shionogi's complaint automatically triggered an FDA stay of approval. Mylan argued that the filing of the '341 infringement action was "objectively baseless", and intended to harm Mylan as a potential competitor in the relevant market by imposing anticompetitive barriers to entry, citing the Supreme Court's seminal decision in PRE. In PRE, the Supreme Court held that a petitioning lawsuit is "objectively baseless" if no reasonable litigant could expect a favorable outcome on the merits. The PRE test is whether the petitioning plaintiff has probable cause to sue. 508 U.S. at 63.

In denying Shionogi's motion to dismiss the amended antitrust counterclaim, the District Court noted first that "antitrust standing" is a "prudential, rather than constitutional" limitation on its jurisdiction. The court noted Shionogi's argument that the absence of FDA approval of Mylan's proposed product, rather than Shionogi's monopolistic behavior, impeded Mylan's entry into the market. The court observed, however, that this argument was at odds with its recent decision in In re Metoprolol Succinate Direct Purchaser Antitrust Litigation, Civ. A. Nos. 06-52 (GMS), 2010 WL 1485328, D. Del. April 13, 2010. There, it was held that the FDA approval process was simply one element of a factual analysis of antitrust standing. In support, it cited Andrx Pharmaceuticals, Inc. v. Biovail Corp. International, 256 F.3d 799 (D.C. Cir. 2001) and Hecht v. Pro-Football, Inc., 570 F.2d 982, 994 (D.C. Cir. 1977).

[I]ndicia of preparedness include adequate background and experience in the new field, sufficient financial capability to enter it, and the taking of actual and substantial affirmative steps toward entry. Id. at 807, quoting Hecht, Id. at 994.

The Delaware District Court held that it would suffice for Mylan to allege that although FDA approval was a regulatory prerequisite to entering the market, it could allege that it had the intent and preparedness to enter the market, by claiming that FDA approval was probable. Not discussed, but nevertheless a presence, were the allegations by Mylan that its ANDA certification clearly claimed that its proposed product had no "spacing layer", and thus would not infringe the terms of the '341 patent, which specifically excluded products formulated without such a "spacing layer". These allegations would clearly raise the specter that Shionogi's argument was "too cute by half", and that it was on notice that Mylan's ANDA certification could not "plausibly" be infringing, or that Mylan was not poised for entry into the market. See also Nobelpharma AB v. Implant Innovations, Inc., 141 F.3d 1059 (Fed. Cir. 1998), for an exhaustive treatment of the interrelationship between the various aspects of the Noerr "sham" exception to the concept of petitioning activity immunity.

The Shionogi court noted that Mylan had alleged in its ANDA its intention and preparedness to enter the market, and had demonstrated that it was a potential competitor. Mylan also alleged a sufficient causal connection between the alleged violation – the patent litigation itself, and the alleged harm to the competitive process, which was artificially keeping Mylan out of the market, and thus preventing the transfer of producer rents for the benefit of augmenting consumer welfare through the lower prices of generics. The court also noted the absence of more direct victims who could file suit, and the lack of any potential of duplicative recovery.

By Don T. Hibner, Jr.

China Announces First Administrative Anti-Monopoly Case

Michael X.Y. Zhang — Mon, 22 Aug 2011 17:13:36 -0500

On July 27, 2011, China’s State Administration for Industry and Commerce (“SAIC”) posted on its website information on the first anti-monopoly case regarding abuse of administrative power to eliminate or restrict competition.

The decision resulted from an unnamed city in China’s Guangdong province having issued an order requiring the use of GPS services of a private company to monitor the transportation of all hazardous goods in the city. The Guangdong Provincial Administration for Industry and Commerce (“Guangdong AIC”) investigated after receiving complaints from competitors, and concluded that the specific administrative order constituted an abuse of administrative power under the Anti-Monopoly Law of the People's Republic of China (“AML”). The Guangdong AIC sought the guidance of the SAIC, then made a recommendation to Guangdong’s provincial government to correct the abuse. On June 12, 2011 Guangdong’s provincial government ruled that the order violated Articles 8 and 32 of the AML (namely, abuse of administrative power to eliminate or restrict competition).

Effective August 1, 2008, the AML is China’s first comprehensive competition law. Like other comprehensive competition laws, the AML addresses the prohibition of anti-competitive monopoly agreements, the prohibition of the abuse of a dominant position, and merger control. Additionally, the AML covers the prohibition of administrative monopolies, addressing the anti-competitive effects of the misuse of government power. Such specific rules against administrative monopolies reflects the solid determination of the Chinese government to enforce the AML on those monopolistic conducts resulting from administrative decisions or orders at the local government level, which were quite common in the past.

Although this administrative anti-monopoly case is the first concluded by the SAIC, greater attention is being brought to the investigation and enforcement of administrative abuses of power. On February 1, 2011 the SAIC issued several new regulations implementing China’s AML, including a regulation specifically with respect to prohibiting the abuse of administrative power to eliminate or restrict competition. The regulation provides authorities clearer indications as to what may result in a breach of the AML, and what may perhaps be acceptable justification for conduct that may result in a breach.

In China, many public bodies regulate or engage in commercial activities, and the new regulations under the AML set out a number of provisions that limit how public bodies exercise their powers. Administrative bodies are prohibited from misusing their powers to restrict products from other regions of China, such as through price discrimination. Administrative bodies also may not force a business operator to conduct itself so as to be in breach of anti-monopoly laws and regulations. It remains to be seen whether the new regulations will result in the publication of further cases with respect to the abuse of administrative power.

By Michael X.Y. Zhang

Antitrust Counterclaim in Patent Infringement Action Lacks Plausible Allegations of Competitive Injury

Don T. Hibner, Jr. — Mon, 22 Aug 2011 16:58:39 -0500

Plaintiff SPX Corporation ("SPX") brought a patent infringement action against Master Cool U.S.A. ("Master Cool"). Master Cool answered and counterclaimed. In its counterclaim, it alleged that SPX had violated Section 2 of the Sherman Act by its utilization of short term exclusive dealing incentive contracts with distributors, which allegedly foreclosed competitive opportunities to Master Cool, SPX's direct competitor. Both SPX and Master Cool sell automotive refrigerant recycling and recovery machines ("ARRR equipment") through distributors. The distributors market the ARRR machines and related services to consumers through catalogs. Through a series of one year distributor contracts with dealers, SPX provided advertising funds that were exclusive to certain SPX products and that were unavailable should a distributor advertise competing products.

Each of the distributor and service contracts was for a one-year duration. Either party could terminate the contract "for any reason" upon thirty days written notice. Similarly, a distributor could terminate a contract "with or without cause" upon ninety days notice.

Master Cool's antitrust counterclaim alleged that SPX maintained a market share of 85-90%, and used its dominant market position to impose exclusivity agreements. It alleged "antitrust injury" in the market for ARRR equipment "in the form of reduced competition, innovation, and consumer choice", in violation of Section 2. The U.S. District Court, Northern District of Ohio dismissed the counterclaim on a FRCP 12(b)(6) motion, on the ground that, as a matter of law, the allegations were insufficient to allege an actionable injury to the competitive process, as opposed to a competitor. SPX Corporation v. Master Cool U.S.A., Inc., Case No. 3:10-CV-1266, ND, Ohio, 6/24/11.

Citing Iqbal, 129 S.Ct. at 1949, the court found that the alleged facts were insufficient to allege a plausible monopoly power maintenance claim. This was because, inter alia, the one year exclusive contracts are equally available to other distributors and competitors in the market. Thus, PSX's competitors, including Master Cool, could have engaged in competition for the same distributors, by engaging in competitive conduct of the same variety as engaged in by SPX. This being the case, the only plausible conclusion would be that at most, the counterclaim presents a case of competitor substitution, not elimination. There were no allegations that the limited exclusive dealing contracts were not competitively available to other actual or potential competitors in the relevant market, which was alleged to be a market for automotive refrigerant recycling and recovery machines and services. The court cited Roland Mach. Co. v. Dresser Indus., Inc., 749 F.2d 380, 393 (7th Cir. 1984) for the proposition that if an agreement does not exclude a significant competitor, the agreement could not possibly harm competition. In Roland, the court stated:

The exclusion of one or even several competitors for a short time or even a long time, is not ipso facto [an] unreasonable [restraint of trade]. 749 F.2d at 394.

However, unmentioned and undiscussed is the line of authority stemming from United States v. Dentsply Int'l, 399 F.3d 181 (3d Cir. 2005), cert. denied, 126 S.Ct. 1023 (2006). In Dentsply, the Third Circuit reversed the dismissal of a Department of Justice Antitrust Division complaint that alleged illegal monopoly power maintenance through a not seemingly dissimilar use of short term "at will" exclusive dealing contracts. Similar to the allegations of SPX's market share in Master Cool's counterclaim, the DOJ Antitrust Division complaint in Dentsply was that Dentsply had maintained a 75-80% market share from 1993 to 2005, and that its market share had been shown to be "impermeable". The DOJ argued that in the context of Dentsply's control of the relevant market, even the use of short-term exclusivity agreements, otherwise available to rivals, whether current competitors or potential entrants, were sufficient to deny efficient scale entry, and thus constituted an artificially imposed and maintained barrier to entrance or expansion. Further, the Dentsply court noted that Dentsply had been able to successfully impose a series of price increases within the relevant market without fear that the increases would not be followed by its smaller competitors. Thus, the pricing history constituted at least an inference of a "price umbrella" such that a smaller competitor's ability to utilize at least the same competitive tools as Dentsply was insufficient to constrain successful price increases by the dominant competitor, namely Dentsply. As the Third Circuit noted, Dentsply had . . . "effectively choked off the market for artificial teeth, leaving only a small sliver for competitors". See, 399 F.2d at 196.

Even before the Third Circuit's decision in Dentsply, there had been a series of conflicting decisions on the use of short term exclusivity practices as sufficient indicators of effective foreclosure, which would constitute insurmountable artificially imposed barriers to entry or expansion, which would trigger a Section 2 monopoly power maintenance offense. Compare LePage's, Inc. v. 3-M, 324 F.2d 141 (3d. Cir. 2003) (substantial discounts based on purchases of multiple product lines actionable, where through attribution, one or more of the product lines would have been at below a measure of permissible cost) with Concord Boat Corp. v. Brunswick Corp., 207 F.3d 1039 (8th Cir. 2000) (discounts based on high share of orders lawful where prices above cost, contracts are short-term, and entry is easy). See also, R.J. Reynolds Tobacco Co. v. Phillip Morris, Inc., 199 F.Supp. 2d 362 (MDNC 2002) (even defendant with market power may engage in promotional advertising and product positioning campaigns through funding of in-store display incentives, where rivals could gain same display space through use of similar competing practices).

What are the distinguishing factors between these lines of authorities? In a world where Twombly and Iqbal predominate, a bit of limited discovery might go a long way. Absent such discovery, which essentially converts a 12(b)(6) motion into a subsequent motion for summary adjudication, one must fall back on urging the district court to use its common sense as to what is "plausible" and what is "toothless", and hope that Dentsply-type allegations will be taken as initially sufficient to mutate a seemingly competitively neutral practice into one that is "impermeable" and such to constitute an artificially imposed barrier to entry of expansion, through the effective denial of efficient entry or expansion scale to rivals. The beat goes on. Stay tuned.

By Don T. Hibner, Jr.

Grocers' Revenue-Sharing Deal Deserves More Than a Quick Look, Ninth Circuit Holds

Tyler M. Cunningham — Tue, 02 Aug 2011 12:19:54 -0500

A revenue-sharing agreement among grocery stores, designed to help the stores weather targeted strikes by employees during labor strife, is not shielded from antitrust scrutiny by virtue of the non-statutory labor exemption, but neither is it so obviously anticompetitive to merit condemnation under a "quick-look" analysis, an en banc panel of the U.S. Ninth Circuit Court recently held. California ex rel. Harris v. Safeway, Inc., No. 08-55671 (9th Cir. July 12, 2011).

The case stems from labor negotiations in 2003 involving three large supermarket chains in Southern California (Albertson's, Ralphs and Vons). These three supermarkets had collective bargaining agreements with a union that were set to expire, and formed a multi-employer bargaining unit to negotiate. A fourth chain, Food 4 Less, had a separate contract with the same union that was due to expire several months later, and also joined the employers' group.

In anticipation of "whipsaw" tactics, by which a union exerts pressure on one employer in a multi-employer bargaining unit through selective strikes or picketing, Albertson's, Ralphs, Vons and Food 4 Less (hereafter "Defendants" or "Grocers") entered into a Mutual Strike Assistance Agreement ("MSAA"). The MSAA provided that, if one party to the agreement was struck by the union, the other Grocers (minus Food 4 Less) would lock out their employees within 48 hours.

The MSAA also included a revenue-sharing provision, providing that in the event of a strike or lockout, any grocer that earned revenues above its historical share relative to the other chains during the strike period would pay 15 percent of those excess revenues to the other Grocers. The 15 percent figure was designed to estimate the grocers' incremental profit. Slip Op. at 9288. The MSAA dictated that the revenue-sharing period would end two weeks following the end of the strike or lockout.

Negotiations broke down, and the unions began to strike. The union ultimately focused its picketing efforts on Albertson's and Vons only.

During the strike, the state of California sued, alleging that the MSAA's revenue-sharing provision violated Section One of the Sherman Act. Both sides moved for summary judgment. California claimed the revenue-sharing provision was a per se violation of Section One. The Grocers claimed the MSAA was immune from antitrust scrutiny under the non-statutory labor exemption, which limits an antitrust court's authority to pass judgment on trade restraints in a labor context. When the District Court denied both motions, the parties stipulated to an entry of final judgment for Defendants, and both sides appealed. California agreed not to pursue the theory that the MSAA violated Section One under a full-blown rule-of-reason analysis, and Defendants agreed not to pursue the various affirmative defenses they had pleaded, except the non-statutory labor exemption.

The original three-judge panel held that the agreement need not be tested under a rigorous "rule of reason" analysis. California ex rel. Brown v. Safeway, Inc., 615 F.3d 1171 (9th Cir. 2010). The panel instead subjected the MSAA to a new "quick-look-plus" analysis, under which the court considered the history of judicial experience with profit-sharing arrangements, along with the circumstances and details of the MSAA, and applied "rudimentary economic principles" to determine its likely anticompetitive effects. The panel concluded that the MSAA was indeed likely to have an anticompetitive effect. The court also rejected the Grocers' argument that any reduction in competition would be outweighed by the reduced cost of labor that would result from its enhanced bargaining position. The panel held that "driving down compensation to workers is not a benefit to consumers cognizable under our laws as a 'pro-competitive' benefit." Id. at 1192. The Court further held that the MSAA was not shielded from antitrust analysis by the non-statutory labor exemption.

The Ninth Circuit voted to rehear the case en banc. The resulting opinion, authored by Judge Ronald M. Gould, first affirms the district court's finding that the MSAA is not exempt from antitrust analysis under the non-statutory labor exemption. The Court analyzes the argument under Brown v. Pro Football, Inc., 518 U.S. 231 (1996), in which the U.S. Supreme Court held for the first time that the non-statutory labor exemption may extend to an agreement solely among employers. The Brown court held that an agreement among a group of NFL teams, following an impasse in bargaining with the players' association, to unilaterally impose terms and conditions from the lapsed collective bargaining agreement, was a well-recognized procedure in the collective bargaining process and thus exempt from antitrust review.

The en banc panel finds that the Grocers' revenue-sharing agreement was fundamentally different from the NFL teams' post-impasse agreement exempted in Brown, in every way that matters. Revenue-sharing is not an accepted practice in labor negotiations, with a history of regulation from the realm of labor law, the Ninth Circuit held. Slip Op. at 9298. The revenue-sharing agreement does not play a significant role in collective bargaining, nor is it necessary to permit meaningful collective bargaining. It does not relate to the "core subject matter of bargaining," like wages, hours and working conditions, the court held. The revenue-sharing agreement did not restrict a labor market, but rather a "business" or "product" market. Notably, the en banc court backs away from the more categorical statements made by the original three-judge panel on this point, and expressly stops short of announcing "a strict rule [that] the non-statutory labor exemption can only arise in a case involving restraint of terms directly relating to labor …." Id. at 9300.

In short, the Ninth Circuit rejects the Grocers' contention that Brown immunizes employers' use of "economic weapons" to advance their position in a labor dispute. Such a holding, the court said, would also immunize blatant price-fixing agreements, as long as the resulting profits were useful to employers during a strike, the court said. Id. at 9299.

The Court then proceeds to analyze the merits of California's Sherman Act claim, focusing initially on the state's claim that the challenged restraint is per-se illegal. The Court quickly dismisses California's attempt to characterize the revenue-sharing agreement as a market-allocation agreement, and instead focuses on the state's claim that the MSAA is a profit-pooling agreement, identical to those previously condemned by the U.S. Supreme Court as per-se illegal.

Defendants offered two defenses for their revenue-sharing agreement. First, they argued that the agreement was, by its terms, effective only for a limited and unknown duration. As a result, Defendants argued, the Grocers retained incentives to compete during the revenue-sharing period, in order to retain customers and best position themselves for the inevitable, post-strike return to competition as usual. Second, Defendants argued that the revenue-sharing agreement did not include all participants in the relevant markets, and a sufficient number of groceries remained outside the agreement to impose competitive discipline. The en banc majority found that these factors sufficiently distinguished the MSAA from other profit-pooling agreements described in the cited case law, such that per-se treatment would be inappropriate. Id. at 9311.

The en banc court also held that these same concerns precluded the "quick look" analysis endorsed by the original three-judge panel. Id. Given its limited duration and the existence of significant, external competitors in the market, it is unclear what competitive effects the MSAA would have, the Ninth Circuit said. While the revenue-sharing provisions might arguably lessen the Grocers' incentives to compete, the limited duration of the agreement and the presence of other competitors made it far from obvious that the grocers actually would refrain from competing, rendering the "quick look" mode of analysis inapplicable.

In so holding, the en banc panel again backed away from a broad holding from the original three-judge panel. Defendants had argued that their revenue-sharing agreement had pro-competitive benefits in the form of lower prices for consumers, which resulted from the grocers' ability to negotiate lower labor costs. The original panel rejected this argument categorically: "driving down compensation to workers is not a benefit to consumers cognizable under our laws as a pro-competitive benefit." The en banc panel did not endorse this view, but rather found that the issue need not be resolved, given its finding that California failed to meet its burden to show that the revenue-sharing was obviously anticompetitive. Slip Op. at 9313 n.17.

Chief Judge Alex Kozinski dissented in part from the majority opinion, joined by judges Richard C. Tallman and Johnnie B. Rawlinson. Kozinski states the court need not have ruled on the nonstatutory labor exemption, and thus the court's "groundbreaking" ruling on that issue is an advisory opinion beyond the scope of its jurisdiction. Further, Judge Kozinski writes that the majority likely reached the wrong conclusion on the labor issue, through an overly restrictive reading of Brown.

Judge Stephen Reinhardt also dissented in part, joined by judges Mary M. Schroeder and Graber. Judge Reinhardt, author of the Ninth Circuit's original opinion, disagreed with the majority's conclusion that the dispute required a full-blown rule of reason analysis. Rudimentary economics dictate that the revenue-sharing agreement can have only anticompetitive effects, Reinhardt writes. The agreement's limited duration and the presence of other competitors might reduce that anticompetitive effect, but cannot eliminate it altogether.

By Tyler M. Cunningham

US & China Sign Antitrust Memorandum of Understanding

Josie Shi — Tue, 02 Aug 2011 11:48:27 -0500

On July 27, 2011, the US and China signed an antitrust memorandum of understanding (“MOU”) in an effort to promote communication and cooperation among the antitrust agencies of the two countries. The MOU was signed by the US Federal Trade Commission and Department of Justice, together with China’s Ministry of Commerce (“MOFCOM”), National Development and Reform Commission (“NDRC”), and State Administration for Industry and Commerce (“SAIC”).

China’s antimonopoly enforcement responsibility is divided among MOFCOM, NDRC and SAIC; MOFCOM handles the review of mergers and acquisitions, the NDRC enforces laws with respect to price-related anticompetitive conduct, and the SAIC is responsible for non-price related anticompetitive conduct.

The MOU does not change the existing antitrust laws of either country, but rather aims to enhance the effective enforcement of competition laws by “creating a framework for long-term cooperation.” The MOU provides for periodic high-level dialogue among the MOU’s signatories, for communication and cooperation between individual US and PRC agencies, and lists specific areas for cooperation, including:

keeping each other informed of significant competition policy and enforcement developments,
enhancing each agency’s capabilities with appropriate activities related to competition policy and law such as training programs, workshops, study missions and internships,
exchanging experiences on competition law enforcement,
seeking information or advice from one another regarding matters of competition law enforcement and policy,
providing comments on proposed changes to competition laws, regulations, rules and guidelines,
exchanging views with respect to multicultural competition law and policy, and
exchanging experiences in raising awareness of competition law and policy.

Although broad in nature, the MOU is expected to usher in an era of enhanced cooperation among the US and China’s antitrust agencies.

By Josie Shi

Wal-Mart v. Dukes: Implications For Antitrust Class Actions

Sheppard Mullin — Mon, 11 Jul 2011 13:52:12 -0500

On June 20, 2011, the United States Supreme Court decided Wal-Mart Stores, Inc. v. Dukes, No. 10-277, holding that 1.5 million female Wal-Mart employees around the nation could not bring discrimination claims under Title VII of the Civil Rights Act of 1964 against Wal-Mart on a classwide basis, because the requirements of Federal Rules of Civil Procedure 23(a) and 23(b)(2) were not satisfied. The decision is yet another major decision from the Court this term relating to class actions. (See, e.g., AT&T Mobility LLC v. Concepcion, No. 09-893 (U.S. Apr. 27, 2011)). The Supreme Court's decision in Wal-Mart clarifies the "rigorous analysis" that courts must conduct under Rule 23, and reaffirms that the Rules Enabling Act, 28 U.S.C. section 2072(b), cannot be applied in a way that changes substantive rights. Wal-Mart gives antitrust defendants additional potential ammunition to defeat class certification, but it remains to be seen how courts will apply Wal-Mart to a Rule 23(b)(3) antitrust class action instead of a Rule 23(b)(2) Title VII discrimination class action.

The Wal-Mart Decision

The named plaintiffs in Wal-Mart alleged that Wal-Mart's local store managers exercised their discretion over pay and promotion matters in a way that disproportionately favored men over women. Plaintiffs alleged that Wal-Mart itself was liable under Title VII because Wal-Mart knew its managers were treating men and women differently but refused to do anything about it. According to plaintiffs, Wal-Mart's inaction gave rise to a "corporate culture" of bias against women that affected each and every female Wal-Mart employee. (Slip Op. at 4).

The District Court and Ninth Circuit both held that the prerequisites to class certification under Federal Rule of Civil Procedure 23(a) -- numerosity, commonality, typicality, and adequacy -- were satisfied. The Supreme Court reversed, holding that commonality was lacking because plaintiffs failed to prove the existence of common "questions of law or fact." Plaintiffs had presented three types of evidence to establish commonality: (1) "statistical evidence about pay and promotion disparities between men and women" at Wal-Mart; (2) "anecdotal reports of discrimination from about 120 of Wal-Mart's female employees"; and (3) expert testimony from sociologist Dr. William Bielby, who conducted a "social framework analysis" of Wal-Mart's culture and practices. (Slip Op. at 5-6). The Court held that none of this evidence constituted "significant proof" of a "general policy of discrimination" at Wal-Mart, as required to establish commonality in Title VII cases. (Slip Op. at 12-13) (the other method of establishing commonality in a Title VII case, showing a "biased testing procedure," had no application to the case). The Court held that plaintiffs' anecdotal and statistical evidence regarding disparities between men and women at the national and regional level could not establish "the uniform, store-by-store disparity upon which the plaintiffs' theory of commonality depends." (Slip Op. at 16-17). Moreover, plaintiffs' anecdotal evidence was "too weak to raise any inference that all the individual, discretionary personnel decisions are discriminatory," because the number of anecdotes was simply too small. (Slip Op. at 17-18). Dr. Bielby testified, based on his social framework analysis, that Wal-Mart had a strong corporate culture and was vulnerable to gender bias, but this evidence also failed to establish commonality because he could not determine to what extent specific employment decisions were actually guided by gender bias. (Slip Op. at 13-14).

The Supreme Court also held that plaintiffs' claims for backpay could not be certified under Rule 23(b)(2), again reversing the District Court and Ninth Circuit. Rule 23(b)(2) authorizes class actions where "the party opposing the class has acted or refused to act on grounds that apply generally to the class, so that final injunctive relief or corresponding declaratory relief is appropriate respecting the class as a whole." The Court explained that "Rule 23(b)(2) applies only when a single injunction or declaratory judgment would provide relief to each member of the class." (Slip Op. at 20). In contrast, the Court held that "individualized monetary claims belong in Rule 23(b)(3)," and a court must make findings regarding predominance and superiority before such a class can be certified. (Slip Op. at 22-23).

Wal-Mart Definitively Explains The Court's Obligation To Conduct A "Rigorous Analysis" At The Class Certification Stage

In holding that commonality was lacking under Rule 23(a), the Court clarified the standards applicable at the class certification stage. It reaffirmed the holding of General Telephone Co. of Southwest v. Falcon, 457 U.S. 147, 156 (1982) that a court must conduct a "rigorous analysis" to satisfy itself that the prerequisites of Rule 23(a) have been satisfied. The Court held that under the "rigorous analysis" standard, an inquiry into the merits of plaintiff's underlying claims is necessary to the extent merits issues overlap with class issues. (Slip Op. at 10-11). Indeed, the Court held that such overlap would occur "frequently." (Slip Op. at 10). The Court also noted that Rule 23 "does not set forth a mere pleading standard," and that a party seeking class certification "must affirmatively demonstrate his compliance with the Rule." (Id.).

This decision solidifies what had been an emerging trend among the Courts of Appeal, including the First, Second, Third, Fourth, Fifth, Seventh, Eighth, Tenth and Eleventh Circuits, and adopted by the Ninth Circuit in Dukes v. Wal-Mart Stores, Inc., 603 F.3d 571 (9th Cir. 2010). As the Ninth Circuit noted, arguments in favor of a less rigorous analysis at the class certification stage were often based on a "misunderstanding" (see Dukes, 603 F.3d at 582) of the following statement in Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 177 (1974): "We find nothing in either the language or history of Rule 23 that gives a court any authority to conduct a preliminary inquiry into the merits of a suit in order to determine whether it may be maintained as a class action." The Supreme Court agreed, and explained that Eisen was distinguishable because the district court there had conducted a preliminary inquiry into the merits in order to shift the cost of class notice under Rule 23(c)(2), and "not in order to determine the propriety of certification under Rules 23(a) and (b)." (Slip Op. at 10 n.6). The Court then eliminated any doubts regarding Eisen with the following statement: "To the extent the quoted statement goes beyond the permissibility of a merits inquiry for any other pretrial purpose, it is the purest dictum and is contradicted by our other cases." (Id.).

The implications for antitrust cases are significant and evident from decisions such as In re Hydrogen Peroxide Antitrust Litig., 552 F.3d 305 (3d Cir. 2009), In re New Motor Vehicles Canadian Export Antitrust Litig., 522 F.3d 6 (1st Cir. 2008), and Blades v. Monsanto Co., 400 F.3d 562 (8th Cir. 2005). In determining whether a plaintiff class should be certified, courts cannot take the allegations in an antitrust plaintiff's complaint at face value if defendants have presented contrary evidence. Arguments for and against class certification in antitrust cases are often based on expert testimony that overlaps with the merits of plaintiff's antitrust claims, and Wal-Mart leaves no doubt that a federal court in such a case should consider this evidence regardless whether it comes from a plaintiff or defendant, if it is necessary for the court to satisfy itself that the prerequisites of Rule 23 have been met.

Wal-Mart Holds That The Rules Enabling Act "Forbids" Courts From Using Class Procedures To Change Substantive Rights

In holding that plaintiffs' claims for backpay could not be certified under Rule 23(b)(2), the Court rejected the argument that plaintiffs' backpay claims were merely "incidental" to plaintiffs' claim for injunctive relief, because they were subject to individualized defenses by Wal-Mart. (Slip Op. at 26-27). Specifically, under Title VII's "detailed remedial scheme," if Wal-Mart could "show that it took an adverse employment action against an employee for any reason other than discrimination," Wal-Mart could avoid liability. (Slip Op. at 26). The Ninth Circuit had held that individualized defenses could be avoided if the trial court implemented a trial plan based on sampling and extrapolation. 603 F.3d at 625-27. The Supreme Court disagreed, holding that because the Rules Enabling Act, 28 U.S.C. section 2072(b), "forbids interpreting Rule 23 to 'abridge, enlarge or modify any substantive right,'" the trial court had no power to certify a class "on the premise that Wal-Mart will not be entitled to litigate its statutory defenses to individual claims." (Slip Op. at 27).

The implications of the Court's interpretation and application of the Rules Enabling Act has major potential consequences for antitrust class actions, which typically seek monetary relief and are usually certified under Rule 23(b)(3). The heart of the Rules Enabling Act portion of the decision seems to suggest that a federal statute containing a specific method for calculating damages upon the finding of a violation arguably requires a defendant to have an opportunity to see the damage calculation in the damage statute applied one plaintiff at a time. In the antitrust context this has particular application to the Antitrust Criminal Penalty Enhancement and Reform Act of 2004 ("ACPERA"), H.R. 1086, 108th Cong., 150 Cong.Rec. H3656, Title II, Section 201, et seq. (recently extended until 2020 pursuant to H.R. 5330), which provides a detailed remedial scheme applicable to cooperative civil antitrust defendants who have successfully applied for criminal amnesty under the U.S. Department of Justice's antitrust leniency program. ACPERA limits the damages recoverable against such a defendant to the actual damages caused by its own conduct, instead of the joint and several liability and treble damages typically available in antitrust conspiracy cases. Wal-Mart may bar antitrust plaintiffs from obtaining class certification against an ACPERA defendant using a common expert formula if doing so would deny an antitrust defendant's statutory right under ACPERA to present individualized evidence as to whether particular class members were actually affected by that defendant's own conduct. Also, even if an ACPERA defendant could be permitted to present individualized evidence regarding ACPERA damages within the context of a class action, a court would be faced with the tough question as to whether common issues can predominate over individualized questions under Rule 23(b)(3) if hundreds or thousands of mini-trials regarding ACPERA damages are planned.

Wal-Mart's Rules Enabling Act analysis may have even broader implications. If the Rules Enabling Act "forbids interpreting Rule 23 to 'abridge, enlarge or modify any substantive right'" (Slip Op. at 27), then applying Rule 23 to enlarge a plaintiff's antitrust claim should be just as forbidden as applying Rule 23 to abridge an affirmative defense, as was the case in Wal-Mart. If so, then class certification for many antitrust lawsuits may be difficult to obtain. For instance, state law indirect purchaser antitrust class actions, which are often removed to federal court pursuant to the Class Action Fairness Act, 28 U.S.C. sec. 1332(d) ("CAFA"), would be barred to the extent that defendants are not permitted to present individualized evidence to establish that any alleged overcharge was not "passed on" through a specific distribution channel to a particular plaintiff. And if defendants are permitted to disprove pass-on, for instance, by showing that individual retailers absorbed an alleged overcharge by offering coupons or a sale price to consumers, and thereby prevented the overcharge from being passed on to certain plaintiff consumers, certifying such a class may be barred by the predominance and superiority requirements under Rule 23(b)(3). The same problem likely arises in many direct purchaser class actions brought under federal antitrust law where prices are individually negotiated between defendants and each direct purchaser. Defendants should have the right to present individualized evidence to establish that prices were based on factors unique to each purchaser and each transaction.

On the other hand, oppositions to class certification based on the Rules Enabling Act are arguably nothing new in antitrust cases. Wal-Mart may be viewed as simply reaffirming the Supreme Court's earlier holdings that Rule 23 must be interpreted in conjunction with the Rules Enabling Act. See, e.g., Ortiz v. Fibreboard Corp., 527 U.S. 815, 845 (1999); Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 612-13, 629 (1997). If so limited, it may provide little help to antitrust defendants.

By David R. Garcia & Leo Caseria