U.S. Antitrust Enforcement Agencies Release New Proposed Horizontal Merger Guidelines for Public Comment

On April 20, 2010, the Department of Justice and Federal Trade Commission jointly issued new Proposed Horizontal Merger Guidelines (Proposed Guidelines) for public comment. The Proposed Guidelines would replace the agencies’ existing Horizontal Merger Guidelines (Current Guidelines), last revised in 1997. The Proposed Guidelines can be found here.

What’s New in the Proposed Horizontal Merger Guidelines?

The Proposed Guidelines represent a substantial revision to the Current Guidelines and describe a more “flexible” approach to merger review. A handful of revisions stand out:

  • First, the Proposed Guidelines reduce the emphasis on defining a single “relevant antitrust market” in favor of greater focus on the competitive effects of the merger – regardless of the market in which those effects occur.
  • Second, the agencies recommend raising the market concentration thresholds that would trigger closer scrutiny of a merger.
  • Third, the Proposed Guidelines place greater emphasis on “unilateral effects” of mergers, rather than the traditional focus on “coordinated effects.”
  • Fourth, the agencies identify specific economic analytical techniques (e.g., diversion ratios, critical loss analysis, upward pricing pressure analysis) that they will use to test competitive effects.

What’s the Practical Impact of the New Proposed Merger Guidelines?

The general consensus is that although the Proposed Guidelines contain significant revisions, these changes merely make explicit the analytical approach the DOJ and FTC already use to review mergers. Critics complain, however, that this “flexible” approach is designed to allow the agencies to “have their cake and eat it too”—permitting them to win under either a traditional relevant market analysis, or an alternative economic analysis. The agencies’ codification of this more “flexible” approach likely reflects their reaction to difficulties they experienced in recent high-profile cases, such as their failures to block the Whole Foods-Wild Oats, Oracle-PeopleSoft and Western Refining-Giant Industries mergers. It remains to be seen whether the agencies will succeed in shifting merger review standards. The agencies still must win in court in the context of an existing body of case law that may not prove as “flexible” as the Proposed Guidelines. Indeed, in the first test of whether courts will accept such alternative economic analysis (the “upward pricing pressure test”) in place of traditional market definition to prove anticompetitive effects of a merger, the Southern District of New York rejected this approach, citing “the case law’s clear requirement that a Plaintiff allege a particular product market in which competition will be impaired.” City of New York v. Group Health, Inc., et al., No. 06 Civ. 13122 (S.D.N.Y. May 11, 2010) at 7 n.6.

European State Aid Law in a Nutshell

State aid law, an important part of EU competition law and a growing issue in the EU, can pose significant risks to companies in the EU, as reflected in state aid statistics published by the European Commission (Commission). In 2008, the 27 Member States granted state aid amounting to €279.6 billion (including €212.2 billion for measures in the context of the economic crisis). In the same period, the Commission adopted 530 decisions in state aid proceedings—16 of them ordering the recovery of state aid amounting to a total of approximately €913 million. This article provides an overview of state aid law and guidance to lawyers advising both recipients and challengers of state aid.

Member States Can Harm Competition

In the EU common market, the actions of Member States (who might have an interest in protecting domestic undertakings or otherwise influencing competition between undertakings for economic or other reasons) may distort competition. Therefore, the European Community in 1957 incorporated a simple rule in the EU Treaties: the granting of “state aid” by Member States to companies is prohibited, unless it is explicitly authorized by the Treaty itself or by the Commission in the circumstances provided for in the Treaty. Such authorizations are available, for example, under certain conditions for aid in favor of deprived regions or in favor of the development of certain economic activities or areas.

What Qualifies as State Aid Subject to Regulation?

The notion of “state aid” goes far beyond the classical concept of direct subsidies or payments by states to undertakings. It covers “any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favoring certain undertakings or the production of certain goods.” State aid can be granted by public authorities or by public undertakings, i.e., undertakings controlled by public authorities by majority of shares or voting rights. The “aid” may be a direct payment, but also any other benefit granted to an undertaking, e.g., a tax exemption or benefit, a capital injection, a loan, a guarantee, the conclusion of a favorable contract or any other benefit granted without an equivalent service in return to be rendered by the undertaking (e.g., the sale of public assets, including the privatization of companies, the sale of real estate, etc.).

State aid is permitted only in strictly limited circumstances or where specifically authorized by the Commission. Unauthorized aid may be recovered from the beneficiary company, with interest, on the order of the Commission. Competitors of companies that have received state aid can sue the grantor of the aid in national courts and seek recovery of the aid from the beneficiary company, the prevention of further aid and the recovery of damages. Companies must consider state aid rules not only when receiving any kind of allowance or subsidy from a Member State or when doing business with any public authority or undertaking, but also when evaluating acquisition of, or investment in, a company because the value of the target company could be significantly affected by the risk of recovery of state aid.

To assess whether a benefit without an equivalent service in return has been granted, the Commission and the European Courts regularly apply the so-called “private investor test.” The decisive question is whether a private investor who does not take into account considerations such as social or regional policy would have acted in the same way in similar circumstances. If the answer is “no,” the benefit is likely to constitute state aid.

The Extraterritorial Reach of EU State Aid Law

EU state aid rules are only applicable to aid granted by EU Member States. A further requirement for their applicability is that the measure affects trade between the Member States. These requirements do not mean, however, that the state aid rules apply only to purely intra-EU cases. Trade between Member States may also be affected if the aid is granted to an undertaking or for activities outside the EU. If the beneficiary is in competition with undertakings within the EU and the aid strengthens the position of the beneficiary compared with its competitors, EU state aid law applies.

Consequences of Unlawful State Aid

The Commission is the state aid “watchdog” in the EU. It is exclusively authorized to assess whether state aid is compatible with the common market and may therefore be authorized (except in the rare cases of exceptions authorized by the Treaty itself). No state aid may be granted without prior authorization by the Commission.

If the Commission has evidence that state aid was improperly granted, it opens a formal investigation against the Member State granting the aid and gives the Member State, the recipient and other interested parties (in particular the competitors of the recipient) an opportunity to present their views on the case. If the evidence is confirmed and the aid cannot be authorized, the Commission orders the Member State to recover the state aid with interest from the beneficiary.

The consequences of an infringement of the EU state aid rules are not limited to the Commission procedure: the European Court of Justice deems the state aid rules to be directly applicable,” i.e., individual companies can rely on them in the national courts of the Member States. Competitors of an undertaking that received illegal state aid can take the grantor to court and request the recovery of the aid, the prevention of the payment of further aid and the payment of damages. Competitors need not await a prior Commission decision ordering recovery.

When Should Undertakings Consider the EU State Aid Rules?

Companies should consider the state aid rules before seeking the granting of an allowance or some other kind of subsidy from a Member State. In other situations where they do business with public authorities or undertakings, private undertakings should also be aware of the state aid rules and question whether the authority/public undertaking is acting as a private investor would under similar circumstances.

State aid compliance should also be considered in the case of the acquisition of, or an investment in, another undertaking. The value of the target could be considerably affected by potential risks of a recovery of state aid. Such consideration is especially important because, if the Commission orders the recovery of state aid, the beneficiary cannot generally assert as a defense that it assumed the aid was authorized or that notification was not required.

State aid law can also provide an opportunity for undertakings to take action against distortions of competition caused by Member States subsidizing their competitors: undertakings can bring a complaint to the Commission requesting the opening of a formal investigation and/or can sue the grantor of the state aid in national courts, seeking recovery of the aid and possibly the payment of damages.

Recent State Aid Cases

A prominent current example of state aid involving U.S. companies is General Motors, which as part of its restructuring is seeking €2.7 billion of subsidies from the countries where it operates factories. Germany is willing to provide the majority of this amount. However, the Member of the Commission in charge of Competition expressed considerable doubts about such aid. Currently, the affected Member States and the Commission are in negotiations about the conditions under which aid to General Motors and/or its affiliates can be authorized.

In numerous cases, Member States have tried to subsidize their domestic airlines. The Commission has authorized rescuing and restructuring aid only under strict conditions and in some cases has ordered the recovery of the state aid. Currently, the Commission is investigating the financing of various regional airports. Additionally, the establishment of a production site in an underdeveloped region can raise issues. Many incentives offered by public authorities contain elements of state aid, e.g., the provision of building sites at reduced cost, the provision of infrastructure, financing of qualification measures for employees, etc.

Lastly, EU state aid law played an important part in the measures of Member States to overcome the recent financial and economic crisis. Virtually all measures taken to rescue individual banks, to strengthen the whole financial sector or to encourage domestic demand, as well as the granting of credit required notification to the Commission. In this context, the Commission acted swiftly: Some rescue programs in the fall of 2008 were authorized in the course of a weekend.

Conclusion

State aid rules create some risks when dealing with public authorities or undertakings, but also provide opportunities to combat distortions of competition. Lawyers advising companies where state aid may be an issue should be familiar with the regulations so they can properly advise their clients both when they are seeking state aid and when they might be in a position to challenge the grant of state aid to a competitor.

Regional Developments: United States

Legislative Developments

ACPERA. The U.S. House of Representatives voted to extend until 2015 the Antitrust Criminal Penalties and Enforcement and Reform Act of 2004, which among other things limits civil damages for a company participating in the DOJ’s leniency program if it demonstrates it cooperated with plaintiffs in those civil actions (H.R. 5330). The Senate is considering its own bill to extend ACPERA (S.3259).

Other Legislation. The U.S. Congress continues to consider legislation: (1) to overturn the Supreme Court’s decision in Leegin regarding resale price maintenance (H.R. 3190, S. 148); (2) to place restrictions on reverse payments to settle pharmaceutical patent litigation (S. 369, H.R. 3962); (3) to remove the antitrust exemption for insurance under the McCarran-Ferguson Act (S. 3217, H.R. 4626); and (4) to overturn the Supreme Court’s rulings in Twomby and Iqbal regarding pleading standards to withstand a motion to dismiss (S. 1504, H.R. 4115).

Agency Guidance

Agency Workshops.The DOJ, FTC and Patent and Trademark Office held the first interagency workshop on the intersection of patent policy and competition policy. Information regarding the workshop is available here. The DOJ and Department of Agriculture are holding a series of joint public workshops to explore the appropriate role for antitrust and regulatory enforcement in the agriculture industry. Information regarding the workshops is available here.

Regional Developments: Europe

Vertical Agreements Block Exemption.On April 20, 2010, the European Commission (Commission) adopted a new vertical agreements block exemption regulation (Regulation) and revised vertical restraints guidelines, effective June 1, 2010. The Regulation applies to any distribution, supply or purchasing arrangement with effect in Europe. It exempts from the application of Article 101 TFEU agreements between parties operating at different levels of the supply chain and which contain “vertical restraints” on competition. The Regulation only applies if the supplier and the buyer each has a market share not exceeding 30% and the agreements do not contain specified restrictions. Any vertical agreement where this 30% market share is exceeded will not benefit from the safe harbor and will need to be individually assessed under Article 101(3).

Although the main features of the existing rules remain, the new regime refines the distinction between “active” and “passive” sales, particularly in relation to online distribution. For example, a supplier may require its distributors to have one or more brick and mortar shops or showrooms as a condition of becoming a member of its distribution system. Guidance on “category management” agreements is included for the first time and covers potential competition issues that such agreements may raise. The guidelines state that, in most cases, category management agreements will not be problematic. Further information can be found here.

Horizontal Agreements Block Exemptions.On May 4, 2010, the Commission published draft regulations and guidelines for the assessment of agreements between competitors—so-called “horizontal co-operation agreements.” Currently, two block exemption regulations (set to expire on December 31, 2010) and accompanying Horizontal Guidelines exempt research and development (R&D) and specialization and joint production agreements from the general ban on restrictive business practices in Article 101 TFEU.

The Horizontal Guidelines have been revised to help companies assess with greater certainty whether an agreement restricts competition and, if so, whether it qualifies for an exemption. Key changes are a new chapter on information exchange and a substantial revision of the chapter on standardization to include guidance on the standard-setting process and the means of preventing its misuse. Changes to the draft specialization regulation include the introduction of a second market share threshold for specialization and joint production agreements pertaining to products used for internal consumption by the parties to the agreement. If a company sells these products on the market, exemption will be granted only if the parties’ downstream market share does not exceed 20%. No fundamental changes have been proposed to the R&D regulation.

The Commission is welcoming comments up to June 25, 2010, and will adopt final texts at the end of 2010. Further information can be found here.

European Commission Investigating IBM. The European Commission is conducting an investigation of IBM Corporation’s alleged abuse of dominance in tying the sale of mainframe hardware to the licensing of its dominant mainframe operating systems. The investigation was prompted by the filing of complaints with the Commission, including one by TurboHercules SAS, an opensource software and service provider. The Commission investigated IBM for similar conduct in the 1980s. As a result, IBM entered into a formal Undertaking with the Commission, which required IBM to supply interoperability information and banned it from tying mainframe products. IBM withdrew from the Undertaking in 1995. The U.S. DOJ is investigating similar allegations against IBM following a submission by the Computer and Communications Industry Association in August 2009.

Regional Developments: Asia

Malaysia Competition Bill and Competition Commission Bill Approved. The Malaysia Competition Bill 2010 and the Competition Commission Bill 2010 were approved by the nation’s Parliament on April 21, 2010. The Ministry of Domestic Trade and Consumer Affairs has indicated that the new laws would be implemented by the end of 2011. The new law prohibits cartels and abuses of dominant market position but does not cover merger control. The Competition Bill also creates a private right of action. The Competition Commission will be in charge of investigations and enforcement, and a Competition Appeals Tribunal will be established to hear appeals of the Commission’s decisions.

Notable Cases

U.S. Supreme Court Applies Rule of Reason to NFL Licensing Joint Venture. In American Needle Inc. v. National Football League, a unanimous Supreme Court held that NFL member teams’ licensing activities carried out through a joint venture are subject to challenge under Section 1 of the Sherman Act and analysis under the rule of reason. In holding that the teams could conspire with each other, the Court found that they lacked a complete unity of economic interest. A more in-depth discussion of American Needle, and a link to the Court’s decision, can be found in our recent Antitrust and Competition alert, available here.

U.S. Supreme Court Clarifies Arbitrability of Antitrust and Other Class Actions. In Stolt-Nielsen S.A. v. Animalfeeds International Corp., the U.S. Supreme Court held that imposing class arbitration on parties who have not agreed to class arbitration is inconsistent with the Federal Arbitration Act, 9 U.S.C. § 1 et seq. The plaintiff, Animalfeeds, ships goods pursuant to a standard contract known in the maritime industry as a charter party. The charter party at issue has an arbitration clause that does not include a provision authorizing class arbitration. Animalfeeds brought a class action alleging that shipping companies engaged in price-fixing, and the parties agreed as a first step they needed to determine whether the arbitration clause allowed class arbitration. The Second Circuit held the case could be arbitrated as a class action. The Supreme Court reversed, explaining that a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding the party agreed to do so. The decision is available here.

U.S. Second Circuit Rules on Reverse Payments in Patent Litigation. U.S. courts and enforcement agencies continue to differ as to the treatment of reverse payments to settle patent litigation. In the Ciprofloxacin litigation, Arkansas Carpenters Health and Welfare Fund, et al. v. Bayer AG, et al., Nos. 05-2851 and 05-2852, the DOJ filed an amicus brief in the Second Circuit proposing that excessive reverse payment settlements be deemed presumptively unlawful unless a patent holder can show that settlement payments do not greatly exceed anticipated litigation costs. On April 28, 2010, a three-judge panel of the Second Circuit issued a unanimous decision holding that the reverse payments at issue in that case did not violate the antitrust laws. At the same time, however, the panel made clear that it was bound by Second Circuit precedent in Tamoxifen and that there are “compelling reasons to revisit” that decision. The opinion ended by inviting a petition for a rehearing en banc, and numerous amici including the DOJ and FTC have filed briefs requesting a rehearing. As noted in the Developments section above, legislation to address reverse payments is pending in Congress. The Second Circuit’s decision is available here.

ECJ Advocate General Opinion on Legal Professional Privilege in C-550/07 P Akzo Nobel Chemicals and Akros Chemicals v. Commission. On April 29, 2010, Advocate General (AG) Kokott of the European Court of Justice (ECJ) gave an opinion (Opinion) on an appeal by Akzo and Akros against the General Court’s judgment that upheld existing case law and denied the application of Legal Professional Privilege to internal communications to and from in-house lawyers. AG Kokott considered that the relationship between in-house lawyers and their employers differs from the relationship between an external lawyer and his client. The AG opined that an in-house lawyer does not, notwithstanding any membership of a Bar or Law Society, enjoy the same degree of independence as an external lawyer and is “structurally, hierarchically and functionally” as well as “economically” dependent on his employer. This creates conflicts of interest between an enrolled lawyer’s professional obligations and the aims and wishes of his company. The AG recommended that the ECJ dismiss the appeal in its entirety. The AG’s Opinion is not binding on the ECJ but may inform the ECJ’s judgment. The judges of the ECJ are now beginning their deliberations in this case. The full AG’s Opinion can be found here.

UK Court of Appeal to HearEnron Coal Services Limited v. English Welsh & Scottish Railway Limited. The first antitrust “follow-on” action to proceed to trial in the UK is the damages claim by Enron Coal Services Limited (in liquidation) (ECSL) against English Welsh & Scottish Railway Limited (EWS). ECSL brought the claim against EWS under Section 47A of the Competition Act 1998, which allows a party to claim damages for loss or damage suffered as a consequence of an infringement of competition law established by a prior and binding decision of an EU or UK competition regulator. The Competition Appeal Tribunal’s (Tribunal) judgment of December 21, 2009, dismissed this claim on the grounds that causation had not been shown. ECSL applied to the Court of Appeal for permission to appeal on the grounds that, inter alia, the Tribunal had made fatal errors of interpretation of Sections 47A and 58 of the Competition Act 1998. Recently, the Court of Appeal granted ECSL permission to appeal the judgment on the basis that ECSL has a real prospect of success and the points involved are of general importance. The case is scheduled to be heard November 1-3, 2010.

NDRC Action Against Guangxi Rice Noodle Cartel. In the first cartel action since the Anti-Monopoly Law came into effect, China’s National Development and Reform Commission (NDRC) reported on March 30, 2010 that action had been taken against a cartel of 33 domestic rice noodle producers in the Guangxi Autonomous Region. NDRC found that the price cartel constituted an “unfair price act” in violation of the Price Law, the Anti-Monopoly Law and the Provision on Administrative Penalties for Unlawful Pricing Acts. Each of the three organizers of the cartel was fined RMB 100,000, while 18 cartel participants received fines ranging from RMB 30,000 to RMB 80,000. Twelve other cooperating cartel participants received warning letters. The Chinese media reported that one of the organizers was arrested for violation of Article 225 of the Criminal Law, which prohibits illegal business activities that “seriously disrupt the market order.” The full report can be found here.

Events and Articles

June 2010

Important Issues in Antitrust Law: What Global Companies Need to Know
Taipei, Taiwan
June 4–9, 2010
Orrick partners Stephen Bomse and David Brownstein and senior associate Vena Cheng are presenting a series of seminars in Taiwan addressing current antitrust issues of importance for international companies.

Friends of Europe Forum
Brussels, Belgium
June 10, 2010
Orrick partner Ted Henneberry will participate in a panel discussion on New Transatlantic Trends in Competition Policy. The panel will include EC Commissioner for Competition Joaquin Almunia, FTC Commissioner Tom Rosch, and DOJ Assistant Attorney General Christine Varney. Additional information here.

July 2010

Global Antitrust Enforcement and Compliance
Washington, D.C.
July 20–21, 2010
Orrick partner Robert Rosenfeld will moderate a panel discussion on Vertical Restraints: Preventing Resale Price Maintenance, Distribution and Other Pricing Arrangements that May Raise Global Antitrust Scrutiny.

The Role of Antitrust Law in Analyzing Patent Misuse
Silicon Valley, CA
July 21, 2010
Orrick partners Robert Freitas, David Goldstein and Eric Wesenberg will participate in the second in a series of seminars covering Antitrust Issues for Silicon Valley Companies. The panelists will discuss the convergence of patent misuse and antitrust analysis, and current developments in patent misuse defenses. Register here.

Past Events

May 2010

Bundling and Loyalty Discounts: What the Law Is and What the Law Should Be
Via Teleconference
May 25, 2010
Orrick partner Scott Westrich participated in an ABA panel discussion on the fundamentals of bundled pricing and loyalty discounts and the current state of the law in the United States and the European Union.

Bundled Pricing and Loyalty Discounts: Lawful Incentives or Exclusionary Conduct?
Silicon Valley, CA
May 19, 2010
Orrick senior counsel Larry Popofsky, partner Scott Westrich and of counsel Howard Ullman participated in the first in a series of seminars covering Antitrust Issues for Silicon Valley Companies. For a copy of the presentation click here.

21st Annual Communications and Competition Law Conference
Barcelona, Spain
May 17–18, 2010
Orrick partner Ted Henneberry participated in a panel discussion on Antitrust and the Internet.

Global Antitrust Enforcement: The Perspective from Latin America
São Paulo, Brazil
May 13-14, 2010
Orrick partner Philippe Rincazaux, Officer of the International Bar Association Antitrust Committee, participated in a panel discussion on legal and practical issues which arise in the context of merger remedies required by competition authorities when clearing a proposed merger.

April 2010

International Competition Network
Istanbul, Turkey
April 27–29, 2010
Orrick partners Ted Henneberry and Philippe Rincazaux participated in ICN’s 9th annual conference. Ted participated as a Non-Governmental Advisor on behalf of the U.S. DOJ and FTC, and Philippe participated on behalf of the French Competition Authority.

Presentation to China’s Ministry of Commerce
Beijing, China
April 22, 2010
Senior associate Vena Cheng was invited by the division chief of the Enforcement Division of the Anti-Monopoly Bureau of MOFCOM to present on the effects of U.S. cartel enforcement on PRC corporations at a MOFCOM meeting.

Recent Antitrust and Competition Publications

Commission v. MTU Friedrichshafen,” European State Aid Law Quarterly, February 2010 by Andrés Martin-Ehlers

The Supreme Court Holds That NFL Licensing Activities Are Subject to Antitrust Scrutiny,” Antitrust and Competition Alert, May 2010 by Scott Westrich

Vertical Agreements Block Exemption,” Antitrust and Competition Alert, April 2010 by Douglas Lahnborg

Get to Know: Andrés Martin-Ehlers

Dr. Andrés Martin-Ehlers, an Antitrust and Competition partner in Orrick’s Frankfurt office, joined the firm in 2008 after the merger of Orrick and Hölters & Elsing. Andrés focuses his practice in the areas of competition law, state aid and related litigation. He regularly works with industries such as banking, packaging materials for foodstuffs, chemicals, computer and related technology, sports, and infrastructural issues for airports and other facilities.

He has extensive experience working in Brussels and handles antitrust matters at the national and international levels, with particular emphasis on proceedings initiated by the European Commission.

Andrés also regularly counsels companies on compliance issues as well as European, national and multi-jurisdictional merger control filings. In the area of state aid, he recently successfully defended the granting of pitcoal state aid to the German producer RAG in the amount of more than €7 billion.

Andrés is the author of numerous articles on antitrust and state aid law, including “European State Aid in a Nutshell” published in this issue of the Antitrust and Competition newsletter and “Commission v MTU Friedrichshafen” in European State Aid Law Quarterly. He is also the co-author of State Aid Within the EU, the standard German book on state aid.