A Comparison of 10 Key Issues in Civil Price-Fixing Cases Under the EU’s New Antitrust Damages Law and U.S. Antitrust Law

In April 2014, the European Parliament approved legislation governing antitrust damages actions brought in the national courts of European Union Member States. The Parliament’s approval followed several years of debate, and was the last significant hurdle for developing a private damages law for the EU. The Directive requires the approval of the European Council, which will be a formality, at which point it will be formally adopted. EU Member States then have two years to implement it into their national laws. The Directive aims to make it easier for companies and consumers to bring damages actions against companies involved in EU antitrust infringements. The text of the Directive is available here.

There has been a great deal of commentary concerning the extent to which EU private damages law will become like that of the United States—with all of its benefits for those harmed by anticompetitive conduct and all of its burdens for those accused of engaging in the conduct. Now that the Parliament has approved the Directive and the scope and contours of the forthcoming EU law have become clearer, this article compares some of the key features of the new law with U.S. law in price-fixing cases. For simplicity, the article focuses on U.S. federal law, with references to state law only where important. Our discussion of the new EU law similarly omits reference to national laws. Although brevity is the soul of wit, it also can be a source of potentially incomplete short-cuts that can lead to debatable, or even misleading, conclusions. Accordingly, while this article provides a general overview and comparison of some important issues under U.S. and EU law, it is not meant to substitute for independent legal research and analysis. Read More

Opt-Out Antitrust Class Actions—A U.S. Perspective on the Consumer Rights Bill Pending in UK’s Parliament

Note: This article was adapted from a speech given by Mr. Popofsky[1] at the Oxford Centre for Competition Law & Policy in the UK on May 2, 2014.

Will opt-out class actions proposed by the UK Parliament’s Consumer Rights Bill bring the dreaded U.S.-style litigation culture to the United Kingdom? My personal assessment—that of a seasoned American antitrust practitioner—is that it’s doubtful.

But first, some background. Opt-out class actions are a form of what are known as collective actions or collective proceedings. Such actions are currently permitted in UK and European courts only on an opt-in basis—essentially a form of voluntary joinder—but then only in private claims for redress in the high court that follow on a prior public agency decision of wrongdoing under the competition laws of the UK or EU. Private antitrust actions in the UK are quite rare; only 27 such cases resulted in judgment in the 2005-2008 period. Only one collective action for damages has been brought on behalf of consumers. Read More

A Year Later: Comcast’s Impact On Antitrust Class Actions

This article originally appeared in Law360 on March 26, 2014.

On March 27, 2013, the U.S. Supreme Court issued its decision in Comcast Corp. v. Behrend, 133 S. Ct. 1426 (2013), overturning an order certifying an antitrust class action under Federal Rule of Civil Procedure 23(b)(3), which requires that questions of law or fact common to class members predominate over questions affecting only individual members.

The Supreme Court held that the plaintiffs’ expert’s damages model was unable to measure classwide damages attributable to the only theory of antitrust impact found viable by the district court. Because of this flaw in the damages model, individual damages calculations would overwhelm questions common to the class, and the class therefore could not be certified under Rule 23(b)(3).1

On remand, plaintiffs filed a new motion for class certification, slicing several years off the class period and limiting the geographic market to only five of the 18 counties in the Philadelphia area for which they originally sought certification.2 The defendants opposed the motion and filed a new motion to exclude the opinions of plaintiffs’ expert. The court then granted plaintiffs’ unopposed request to stay the case while the parties conduct settlement discussions. Plaintiffs and Comcast recently agreed to de-certify the Chicago-area class based on the Supreme Court’s decision, and plaintiffs filed an amended complaint limited to the five Philadelphia-area markets.3

It was not unexpected that class counsel in Comcast would narrow the class for which they sought certification, or that settlement discussions might take place after the Supreme Court’s decision. But what effect is Comcast having on class certification in other antitrust cases? Read More

European Commission Advances Proposal for Acquisition of Minority Shareholdings

In June 2013, the European Commission launched a consultation on its proposed reform of the EU Merger Regulation (EUMR), which included a proposal to extend the scope of the EUMR to cover acquisitions of non-controlling shareholdings between undertakings. The consultation closed in September 2013. This article provides an overview of the Commission’s proposal and the issues raised by the consultation, and sets out next steps in the legislative process.

The Commission’s Proposal

The EUMR entitles the Commission to review, prior to completion, transactions that confer control by one undertaking over another, provided that the parties to the transaction meet certain turnover thresholds. As part of a wider revision of the EUMR, the Commission proposes extending its jurisdiction to cover acquisitions of shareholdings that fall short of conferring “control” over the target, but which give the minority shareholder the ability to exercise sufficient influence over the target to reduce the intensity with which it competes, for example, by influencing pricing decisions.

In its proposal, the Commission refers to such transactions as the acquisition of “structural links,” reasoning that some problematic structural links may not be detected and sanctioned under Articles 101 and 102 of the Treaty on the Functioning of the European Union (TFEU)—which prohibit, respectively, anticompetitive agreements between undertakings and the abuse of a dominant position. In its discussion of the effects of such structural links, the Commission refers at length to Ryanair/Aer Lingus, where the Commission’s repeated prohibitions against Ryanair’s acquisition of full control of Aer Lingus did not prevent Ryanair from holding a 29.8 percent “non-controlling” stake in Aer Lingus, Ryanair’s only competitor on certain routes. The rights attached to Ryanair’s stake, although falling short of conferring “control,” allowed Ryanair to block certain strategic decisions in the shareholders meeting of Aer Lingus, which allegedly weakened Aer Lingus’s ability to compete with Ryanair. Read More

Six Months Since Comcast: What Do Recent Decisions Mean For Antitrust Practitioners?

I. Introduction

Every antitrust lawyer should be familiar with the U.S. Supreme Court’s decision in Comcast Corp. v. Behrend, 133 S. Ct. 1426 (2013), which overturned a 3rd U.S. Circuit Court of Appeals decision affirming an order certifying an antitrust class action under Federal Rule of Civil Procedure 23(b)(3). The Supreme Court held that the plaintiffs’ expert’s damages model was unable to measure class-wide damages attributable to the plaintiffs’ theory of antitrust impact. Because of this fundamental flaw in the damages model, individual damage calculations would overwhelm questions common to the class, and the class therefore could not be certified under Rule 23(b)(3).

In the six months since Comcast issued, decisions applying it have fallen into three general categories: (1) opinions distinguishing Comcast, finding an acceptable common formula at the class certification stage and Rule 23(b)(3)’s predominance test satisfied; (2) opinions certifying a class as to liability only under Rule 23(c)(4) (“When appropriate, an action may be brought or maintained as a class action with respect to particular issues.”); and (3) opinions applying Comcast and rejecting class certification on the ground that impact cannot be determined on a class-wide basis or no common formula exists for determining damages on a class-wide basis. See, e.g., Jacob v. Duane Reade, Inc., No. 11 Civ. 160 (JPO), 2013 U.S. Dist. LEXIS 111989 (S.D.N.Y. Aug. 8, 2013) (discussing decisions since Comcast).

Although courts have applied Comcast inconsistently, the decisions thus far suggest that Comcast may have a greater effect on class certification in antitrust cases than in other areas, because of the complexity of isolating the impact of various categories of alleged anticompetitive conduct, and the difficulty of disaggregating the conduct for class-wide damages models. Accordingly, defendants in antitrust cases should continue to see Comcast as offering an opportunity for an early test of plaintiffs’ damages models regarding class-wide damages.

This article first summarizes the Comcast decision. It then provides a high-level overview of decisions since Comcast, focusing on appellate decisions and a sampling of district court antitrust cases. Finally, we offer some thoughts on what these cases tell us about Comcast’s likely effects on antitrust class actions. In brief, recent decisions provide defense counsel with ammunition to use Comcast to challenge class certification under Rule 23(b)(3) by attacking plaintiffs’ (and their experts’) theories regarding class-wide impact and damages. Read More

China’s Anti-Monopoly Law: No Longer Just Merger Control?

Until this year, China’s enforcement activities in the field of antitrust, particularly as these activities have affected foreign companies, had been mainly focused on merger control with merger filings handled by the Anti-Monopoly Bureau of the Ministry of Commerce (MOFCOM).  Other areas of competition law such as resale price maintenance, price fixing, cartels and abuse of dominance, although addressed under China’s Anti-Monopoly Law (AML), had received scant attention from domestic and foreign companies, and the relevant regulatory bodies had taken few if any steps to enforce the relevant provisions of the AML. By way of example, until this year, an investigation into proposed price increases by Unilever in 2011, which resulted in a RMB 2 million (US$318,000) fine for Unilever, had been China’s only investigation of a multinational company related to pricing issues, and this investigation was carried out under the provisions of China’s Price Law, which dates from 1997.

Widening the scope of enforcement activities

For some time now, there have been signs that this limited focus is changing. Last year, both the National Development and Reform Commission (NDRC)—the body responsible for enforcing the price-related provisions of the AML—and the State Administration for Industry and Commerce (SAIC)—responsible for the enforcement of non-price-related provisions of the AML—expanded their antitrust teams in a move widely seen as a precursor of increased enforcement activities. In addition, the Supreme People’s Court (SPC) published the Provisions on Several Issues Concerning the Application of the Law in Trials of Civil Dispute Cases Arising from Monopolistic Acts  (see previous Newsletter coverage here) with the apparent intention of encouraging the private enforcement of the provisions of the AML in the Chinese courts.

The first half of 2013 has seen a notable increase in the scope of enforcement of China’s AML and the involvement of regulatory bodies other than MOFCOM. There were several high-profile court cases addressing complex antitrust issues. We highlight some of the most important developments below. Read More

Competition and Innovation: Application of European Competition Law to a Rival’s Demand for Access to a Competitor’s Data

The Internet has given rise to information-based businesses that create value by accumulating pools of data captured from many sources. Indeed, the collection and analysis of vast amounts of consumer data has become the engine driving significant innovation on the Internet. From search to social networks to shopping to gaming, the use of consumer-generated data is increasingly the way to monetize web services. Internet companies amass vast amounts of new data by the second. These data are then used by them, and others, to generate advertising revenue and to develop new products.

For many companies, products derived from raw data will drive innovation. For example, access to personal data will help firms better understand consumers and how to meet their needs. Retailers maintain extensive data on their customers (tied either to a customer loyalty card, name, or physical or email address). Using demographic information and purchasing history, companies can determine—through the power of data analytics—shopping habits and can then develop targeted advertising. For example, companies can now use predictive analytics to identify potentially pregnant women. They then can use targeted advertising to suggest a new product purchase—baby products—when that customer orders cleaning supplies or groceries.1

As Internet firms grow ever larger and their stores of data grow exponentially, questions regarding the control of, and access to, these data have emerged. Firms seeking to gain or ensure continued access to these data have asserted antitrust theories as a basis for doing so, although no European court has yet to accept any such claim. In reality, such claims have been raised principally as a counterattack when firms with some degree of market power have sued third parties for violating terms of service and copyright by accessing data in an unauthorized manner. These types of counterclaims raise numerous questions—the most obvious of which is, who owns the data anyway?

Read More

A Modern Look At The Nine Patent Licensing ‘No-Nos’ (Part Two): The Last Five ‘No-Nos’

In our last edition, we addressed the first four “no-nos” and their current status under U.S. antitrust law. Here’s a discussion of the remaining five.

In the 1970s, Bruce Wilson, a former deputy assistant attorney general at the U.S. Department of Justice, developed a well known list of nine patent licensing “no-nos.” The somewhat formalistic U.S. antitrust law of the 1970s viewed these licensing practices as generally unlawful, if not per se illegal. In this article, and the previous one, we consider the nine “no-nos” from the perspective of U.S. antitrust law in 2013. Many “no-nos” are no longer automatically unlawful, but it is nevertheless important to understand the issues, because patent licensing practices can still draw fire under the Rule of Reason.

Read More

A Modern Look at the Nine ‘No-Nos’ of Patent Licensing Under U.S. Antitrust Law: The First Four ‘No-Nos’

In the 1970s, Bruce Wilson, a former deputy assistant attorney general at the Department of Justice, developed a well-known list of nine patent licensing “no-nos.”  The somewhat formalistic U.S. antitrust law of the 1970s viewed these licensing practices as generally unlawful, if not per se illegal.  In this article, and in a follow-up article that will be published in the next edition of this newsletter, we will consider the nine “no-nos” from the perspective of U.S. antitrust law in 2013. Many “no-nos” are no longer automatically unlawful, but it is nevertheless important to understand the issues, because patent licensing practices can still draw fire under the Rule of Reason.

So without further ado, here is a discussion of the first four “no-nos” and their current status under U.S. antitrust law.

Read More

UK Supreme Court Issues First Antitrust Ruling

In October 2012, the UK Supreme Court issued its first antitrust judgment, ruling that the UK statutory limitation period for bringing “follow-on” damages actions—i.e., claims based on antitrust infringement decisions—was sufficiently clear that, under the facts of the case, it did not deprive the claimants of effective redress. This ruling is significant as it is the first time the UK’s highest appeal court has examined antitrust damages claims and shows, alongside several high-profile UK Court of Appeal judgments handed down earlier this year, that the UK courts are gaining experience and confidence in dealing with complex antitrust matters. This increased competence will continue to benefit both claimants and defendants in the form of increased legal certainty in what remains a growing and developing area of EU and UK law.

BCL v. BASF centered on the compatibility of the UK limitation rules for follow-on damages actions with the European Union legal principles of effectiveness and legal certainty. The claimants, BCL Old Co. Limited and others (BCL), brought an action, in 2004, for damages against members of the vitamins cartel other than BASF, following a decision issued by the European Commission in November 2001. BCL did not sue BASF until more than six years after the decision, in March 2008, bringing its action in the UK specialist Competition Appeal Tribunal (CAT). Pursuant to the CAT’s rules, a claimant wishing to bring such an action must do so within two years from the date on which the decision of the relevant competition authority becomes final, suspended by any appeal brought against the decision. BASF had appealed the Commission’s decision, but only on the level of the fine. BCL argued that it was not clear from the limitation rules that an appeal of the fine alone did not invoke the suspension of the limitation period and that, in any event, it had not been clear at the time the appeal was brought what BASF was appealing against.

In May 2009, the UK Court of Appeal found that BCL’s claim was time-barred and could proceed, if at all, only with an extension to the limitation period granted by the CAT itself. Later that year, the CAT assumed that it did have the power to extend but declined to do so. On appeal of this decision, the Court of Appeal, however, held that the CAT had no such power to extend the statutory deadline for bringing an action before the CAT and that European Union law did not require the CAT to hold such a power.

The UK Supreme Court was asked to consider whether the statutory limitation period and its application violated the claimant’s rights under European Union law principles by rendering it “excessively difficult” for BCL to bring a claim against BASF. The Supreme Court considered that the statutory language was “plain and ordinary” and the legal position was “clear.” It found that the risks to BCL of not bringing a claim against BASF in January 2004 were or should have been evident and the Supreme Court found no evidence that the reason BCL had not brought its claim earlier was actually due to any legal uncertainty. In any event, the Supreme Court held, even if the legal position had not been clear, the only remedy for BCL would have been to bring an action against the UK government. Any uncertainty would not have permitted an action for damages to be brought against BASF at this stage.

The ruling clarifies the CAT limitation period:  An appeal of a Commission decision limited to the level of fine does not suspend the two-year period. By contrast, an appeal on the substance of the infringement, by any addressee of the decision—even if not a defendant in the damages claim—does suspend the limitation period.

The UK Supreme Court and recent Court of Appeal judgments have a number of practical implications for both claimants and defendants in UK private damages actions. First, a claimant will need to review the details of all appeals of any relevant infringement decision to determine whether it is the infringement itself that is the subject of the appeal or merely the level of fine. An appeal of the level of fine will not suspend the CAT limitation period. For potential defendants who did not appeal the Commission’s decision, for example because they were one of the immunity or leniency applicants, this may mean a number of years of uncertainty where they have no influence over the outcome of any appeal. Conversely, a claimant will not be able to proceed with an action before the CAT until the outcome of any appeal brought on the substance of the infringement by one of the decision addressees, even if the claimant did not intend to sue that particular defendant. This may significantly delay any recovery by the claimant through an action brought before the CAT. Instead, a claimant may decide to bring a damages action before the UK High Court, which also has jurisdiction to hear follow-on damages actions, and where a claim is more likely to proceed pending appeals of the underlying infringement decision.

As outlined in previous editions of this Newsletter, the UK regime is currently undergoing significant reform with the planned merger of the Office of Fair Trading and the Competition Commission due to take place as early as spring 2014. The procedure for bringing antitrust damages actions is also currently under review by the UK government with a proposal to expand the CAT’s jurisdiction to hear damages claims that do not arise from a decision by a competition authority (also known as “standalone” claims). The full text of the Supreme Court’s judgment is available here.

Patent Licensing in the Cloud: Antitrust Issues

It is well established in the United States that a patent holder generally has broad discretion to determine how it uses or licenses it patents. The U.S. Supreme Court’s bottom-line principle expressed in Trinko—that companies are free to refuse to deal with anyone—applies to intellectual property as is does to other property rights.1 As the U.S. DOJ and FTC have expressed, “the unilateral right to refuse to grant a patent license is a core part of the patent grant.”2 And as patent holders generally are free to refuse to license their patents, they also generally are free to impose any restrictions they wish on licenses that they do grant.3

This general rule holds as well in the rapidly growing and changing cloud computing industry. Nevertheless, the antitrust laws do impose some limits on a patent holder’s rights, and as a result patent licensing and litigation have become significant competitive issues in the technology industry in recent years. Companies licensing patents in the cloud should be aware that certain licensing practices in the cloud might have anti-competitive effects that could trigger antitrust concerns. This article reviews, at a high level, whether the nature of cloud computing raises special antitrust risks, and if so, when a company should consider further review of its licensing practices.

A. An Overview of Cloud Computing
Cloud computing is the provision of data or applications on demand, over the web, to remote users. The cloud can best be viewed as a “stack” consisting of five layers—hardware, virtualization, infrastructure as a service (“IaaS”), platform as a service (“PaaS”), and software as a service (“SaaS”):

Cloud

Each layer depends on interface and protocol interoperability to those above and below it for the cloud to work properly. For example, when a user opens a photograph in her Facebook account on her smartphone, she is using a SaaS application (the Facebook app) to retrieve data (the digital photograph file) stored in remote hardware (the Facebook servers) that are collectively managed by virtualization software and an operating system. If the remote hardware fails, then neither the SaaS application nor the data can be retrieved, and the user experience collapses.

Within each broad layer is an abundance of potential product and technology markets that are similarly codependent: servers and mainframes with connected storage devices and networking gear; server, mainframe, and cloud operating systems; video compression and streaming software; search engines; webmail; online advertising; and others. Surrounding these is an overlapping series of products (and potential markets) such as smartphones, tablet computers, PCs, set-top boxes, and game consoles. Many, and likely most, of the underlying technologies in these markets are subject to intellectual property protections.

To recoup investments and obtain cost predictability, players at all levels in the cloud rely on patent licensing, frequently in the form of cross-licenses and portfolio licenses that provide a form of “patent peace” to the parties. The licensing practices are particularly important to the heavyweight patent holders that compete across multiple markets in the cloud. One player that competes in several cloud-related markets, IBM, perennially has been one of the top two patent holders in the world. Apple, Microsoft, Amazon, Hewlett-Packard, and Oracle/Sun also possess significant patent portfolios and compete with one another within the cloud industry. And recently, Google appears to be scrambling to catch up.

B. Antitrust Risks in the Cloud
Cloud computing represents a disruptive “paradigm shift” potentially comparable to the emergence of the Internet and the personal computer. As such, the cloud presents opportunities for companies to leverage rapid technology change to challenge previously dominant competitors in once-unassailable markets. And like the Internet and the PC before it, the cloud promises tremendous potential efficiency and innovation benefits for consumers and the economy. This virtually guarantees that competition authorities around the world will closely watch cloud-related markets for potential antitrust violations. For patent licensors, some of the most important antitrust risks include: (1) market power and tipping points; (2) tying and package licenses; and (3) standards setting and patent pools.

(1) Market Power and Tipping Points

As described above, the cloud consists of multiple intersecting and overlapping markets. As a result, cloud computing may present scenarios where a company that has market power in one cloud market can use that market power to foreclose competition in adjacent markets. This is especially the case because of the need for interoperability between technologies in the cloud. A company that holds patents covering protocols and other links between a monopoly product and products in another market can expect greater scrutiny of its licensing practices. This is especially the case in jurisdictions, such as the European Union, where monopoly leveraging is a more viable claim than in the United States).

Like other technology industries, the cloud also presents risks of tipping points, where one company’s product becomes an accepted standard. This potential for market tipping can be exacerbated by the presence of network effects or high barriers to entry, just as in more mature technology markets. Providers that operate across multiple cloud markets—and especially providers that are dominant in one or more markets—therefore should carefully review licensing practices to avoid being accused of leveraging market power in one area of the cloud into another area of the cloud.4

(2) Tying and Package Licenses

Another, related risk arising from the multiple layers of cloud markets is that of anti-competitive tying or bundling. Generally, a distinction exists between patent-to-product tying and patent-to-patent tying. In patent-to-product tying, the patent owner “uses the market power conferred by the patent to compel customers to purchase a product in a separate market that the customer might otherwise purchase from a competitor.” U.S. Philips Corp. v. Int’l Trade Comm’n, 424 F.3d 1179, 1189-90 (Fed. Cir. 2005). Courts have found such licenses to constitute antitrust violations or patent misuse, and companies should be wary of any such conditions in patent licenses. See, e.g., United States v. U.S. Gypsum Co., 333 U.S. 364, 400 (1948); Int’l Salt v. United States, 332 U.S. 392, 395 (1947); Virginia Panel Corp. v. MAC Panel Co., 133 F.3d 860, 868-69 (Fed. Cir. 1997).

By contrast, in most cases, companies may offer a license to a portfolio (or package) of patents without undue concern about potential antitrust risk. See Philips, 424 F.3d at 1190-91. However, package licenses can raise antitrust issues if a company that owns rights to essential patents forces licensees take a license to non-essential patents, and that coercion forecloses competition from commercially viable alternative technology. Id. at 1194. Therefore, patent holders who offer package licenses including both essential and non-essential patents should carefully review portfolio licenses, bundles, and package licenses to ensure that they do not present such risks.

(3) Standards Setting and Patent Pools

As with other technology industries, the need for interoperability in the cloud means that companies often must conform to industry standards to be serious providers of products or services providers. Where this is the case, special issues may arise. Most standards-setting organizations require participants whose patents read on an adopted industry standard to promise to license their patents on terms that are “reasonable and nondiscriminatory” (“RAND”). Any such promise places an immediate limitation on what is otherwise freedom to license on terms the patentee desires. Antitrust risks, as well as other contractual or tort law risks, may flow from undertaking a RAND obligation if those obligations are not fulfilled.5 In addition, similar issues may arise in the context of patent pools, where bundles of patents from different patent owners are collected in one pool for licensing subject to the kinds of commitments the DOJ has required in approving patent pools.6

* * *

In sum, companies can expect that the licensing practices that are increasingly commonplace in cloud computing, as elsewhere, likely are pro-competitive and in line with well-settled legal principles. However, the importance of the cloud and its nature mean that antitrust authorities will closely watch any licensing conduct in the cloud. In addition, any licensing that implicates more than one potential product market—especially where a patent owner has a monopoly in one market—could prompt greater scrutiny. In such cases, patent owners in the cloud should carefully review licensing strategies for potential antitrust risks.
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1 See Verizon Commc’ns Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398, 407 (2004) (“[A]s a general matter, the Sherman Act ‘does not restrict the long recognized right of [a] trader or manufacturer engaged in an entirely private business, freely to exercise his own independent discretion as to parties with whom he will deal.’”) (citing United States v. Colgate & Co., 250 U.S. 300, 307 (1919)).

2 U.S. DEP’T OF JUSTICE AND FED. TRADE COMM’N, ANTITRUST ENFORCEMENT AND INTELLECTUAL PROPERTY RIGHTS: PROMOTING INNOVATION AND COMPETITION (2007) (“JOINT ANTITRUST/IP GUIDELINES”), at 6.

3 See General Talking Pictures Corp. v. Western Electric Co., 305 U.S. 124, 127 (1938) (“The practice of granting licenses for restricted use is an old one. So far as it appears, its legality has never been questioned.”); Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700, 706 (Fed. Cir. 1992) (“Restrictions on use are judged in terms of their relation to the patentee’s right to exclude from all of part of the patent grant.”).

4 Because companies in the cloud frequently acquire businesses in adjacent markets or decide later to enter previously uncontested adjacent markets, an “Aspen Skiing” scenario may arise in this context. For example, a company that licenses software to hardware providers, and then enters the hardware business itself, should be wary of changes to existing licensing practices that could be viewed as anti-competitive attempts to foreclose hardware competition. See JOINT ANTITRUST/IP GUIDELINES at 28 (liability could attach “when a patent owner refuses to continue to license under circumstances paralleling those in Aspen”); Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985).

5 See, e.g., Broadcom Corp. v. Qualcomm Inc., 501 F. 3d 297 (3d Cir. 2007).

6 See, e.g., JOINT ANTITRUST/IP GUIDELINES at 65-85; Letter from Thomas Barnett to William Dolan and Geoffrey Oliver, Oct. 21, 2008 (RFID patent pool), available at http://www.justice.gov/atr/public/busreview/238429.htm.

Regional Focus: France

The French Competition Authority (the “Authority”) has been very active and recently published several sets of important guidelines. On May 16, 2011, it published guidelines on fines and on Feb. 10, 2012, it published guidelines on settlement proceedings and compliance programs. It also has rendered a very important decision in the leniency context, detailing new ways to calculate fines and demonstrating the need for companies to consider applying for leniency in cartel cases. We highlight below these recent developments of interest to companies and competition practitioners in France.

French Competition Authority Fines Four Laundry Detergent Manufacturers for Cartel Activity. On Dec. 8, 2011, the French Competition Authority fined four major laundry detergent manufacturers up to M€ 367.95 (the total amount of fines would have been M€ 713.57 without reductions due to leniency applications) for participating in a cartel through a trade association. This proceeding was initiated through applications for leniency by each party to the cartel before the Authority, as well as before the European Commission (“Commission”) in a separate proceeding that resulted in fines against Unilever, Procter & Gamble, and Henkel totaling M€ 315.2. In France, the Authority imposed its fines after finding that Unilever, Procter & Gamble, Henkel, and Colgate Palmolive held regular secret talks on their pricing and promotion policies and imposed a monitoring device of compliance with the cartel rules. Significantly, the Authority held that the benefits of the leniency and settlement procedures can be combined in certain circumstances (e.g., when the objections notified on the concerned company differ in one or more significant aspects from the content of its leniency application) and applied its new methods related to the setting of the financial penalties (cf. Notice on the Method Relating to the Setting of Financial Penalties of 16 May 2011).

French Settlement Procedure. On Feb. 10, 2012, the Authority released a framework document concerning its settlement procedure. The settlement procedure enables companies to waive their right to challenge the charges notified by the Authority’s investigation services in return for a reduced fine. The notice explains how to implement such a procedure, in particular how a company must waive its right to challenge the charges notified. In the framework of such a procedure, the companies can also change their behavior in the future by making structural (separate accounts, spinning off, etc.) or behavioral (modifications to contractual clauses, general terms of sale, price scales, etc.) commitments or by setting up antitrust compliance programs. Following the decision of the Authority regarding the detergent cartel referenced above, the benefits of the leniency procedure can be combined with the settlement procedure, in particular if the objections notified on the company in question differ in one or more significant aspects from the content of its leniency application. The settlement procedure grants a 10% reduction in the financial penalty, which may be combined with additional 5 to 15% reductions depending on the commitments made by the companies.

French Antitrust Compliance Programs. On February 10, 2012, the Authority released a framework document aimed at encouraging antitrust compliance programs whereby companies express how they comply with European and French competition rules. Such programs must seek two objectives: (1) prevent the risk of committing infringements and (2) provide the means of detecting and handling misconduct. Therefore, programs should provide informational measures (training, awareness) and operational initiatives (internal and external monitoring, audit, and alert mechanisms). The document does not provide a template compliance program but outlines five key features for establishing credible, efficient, and size-tailored programs. Although the existence of a compliance program is neither a mitigating circumstance nor an aggravating factor, implementing one may help companies to discover infringements and encourage them to submit an application for leniency, which may grant a complete or partial immunity. The commitment to establish or improve an existing compliance program within a settlement procedure may allow a reduction of the financial penalty up to 10%, to which other discounts may be added for a total reduction of up to 25%.

The Authority’s new framework will need time to be enforced and adapted and also may be challenged before the Court of Appeals and the Supreme Court. In the context of the European Competition Network and of the International Competition Network, it might be a subject of discussion among competition agencies and authorities. Of course, the new framework should influence companies in their organization, compliance, and defense strategies.

Regional Focus: China

China’s Anti-Monopoly Law (AML) continues to evolve since it went into effect in 2008. Recent developments offer some guidance on how future matters will be handled. Highlights of China’s latest antitrust and competition issues over the past six months include:

China Anti-Monopoly and U.S. Antitrust Agencies Sign Memorandum of Understanding. On July 27, 2011, China’s three anti-monopoly enforcement agencies—National Development and Reform Commission (NDRC), Ministry of Commerce (MOFCOM) and State Administration for Industry and Commerce (SAIC)—signed a Memorandum of Understanding (MOU) with the U.S. Federal Trade Commission (FTC) and the Department of Justice (DOJ) to further promote communication and cooperation among the agencies in the two countries. The MOU provides for periodic high-level consultations among all five agencies as well as separate communications between individual agencies. Specific areas of cooperation include, among others, (1) exchange of information about competition law enforcement and policy developments; (2) training programs, workshops and other means to enhance agency effectiveness; (3) provision of comments on proposed laws, regulations and guidelines; and (4) cooperation on specific cases or investigations when in the agencies’ common interest.

China’s Local Administration of Industry and Commerce Departments Sign Regional Cooperation Agreement for Enforcement of Anti-Monopoly Law. On Aug. 3, 2011, six of China’s provincial and regional Administration of Industry and Commerce (AIC) Departments (Xinjiang, Shanxi, Gansu, Qinghai, Ningxia and Xi’an) signed a regional cooperation agreement for the enforcement of the AML and the Anti-Unfair Competition Law. The cooperation agreement aims to improve cooperation between the six AICs on the enforcement of the AML and the Anti-Unfair Competition Law in general, and specifically in trans-regional cases. The agreement provides for the AICs to establish cooperation mechanisms, such as data exchanges, to notify each other of ongoing investigations, to commission joint surveys and to hold annual meetings to share experiences. Under the agreement, the AICs will also focus on investigating and dealing with unfair competition issues—in particular, widespread alleged illegal activities in key industries, commodity markets and regions—and they will conduct joint law enforcement activities.

China’s First Enforcement Action of Abuse of Administrative Power Under the AML. On July 27, 2011, China’s State Administration for Industry and Commerce (SAIC) published information on China’s first anti-monopoly case regarding abuse of administrative power to eliminate or restrict competition. The Guangdong AIC conducted investigations after three vehicle global positioning system (GPS) operators filed a complaint alleging that a municipal government abused its administrative power by issuing administrative orders that (1) required all targeted vehicles to upload real-time monitoring data to a specified municipal platform operated by a private company and to pay a service fee to that platform of no more than 30 yuan per vehicle, and (2) required traffic police departments to forbid vehicles that failed to comply from passing annual vehicle examinations. The Guangdong AIC concluded that these orders constituted an abuse of administrative power under the AML, and recommended that the Guangdong Provincial Government (GPG) correct the abuse. The GPG then ruled that the orders violated the AML and constituted an abuse of administrative power.

MOFCOM’s Promulgation of M&A Security Review Rules. On Aug. 25, 2011, the Ministry of Commerce (MOFCOM) promulgated the final version of the Implementing Rules for Security Review System on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (“Implementing Rules”), replacing the provisional rules issued on March 4, 2011. Under the Implementing Rules, transactions involving enterprises in the fields of national defense security, agricultural products, energy and resources and other areas with a bearing on national security—and which will be acquired and controlled by foreign investors—will be required to undergo a security review. Transactions ruled to have potential or significant impact on national security may be blocked. The requirements for filings under Article 5 of the Implementing Rules go beyond those of an anti-monopoly filing for a concentration of undertakings in some aspects, and include the following: application and introduction of the transaction; identification documents and basics of the foreign investors; basic introduction and documents of the merged domestic enterprise; documents of the foreign investment enterprise to be set up post-transaction; share transaction documents; asset transaction documents; and documents on the potential control of the foreign investors over the target.

The Implementing Rules remain largely the same as the provisional rules with the significant addition of Article 9, the anti-circumvention provision. Article 9 emphasizes that whether an M&A deal falls within the scope of national security review should be assessed by the substance and the actual impact of the deal, and any foreign investors are prohibited from escaping the security review via shareholding entrustment, trust, multiple-level reinvestment, leasing, loans, agreement control, overseas transaction or other ways.

MOFCOM’s Promulgation of Competitive Assessment in Anti-Monopoly Review Rules. On Aug. 29, 2011, MOFCOM promulgated the Interim Provisions on Assessment of the Impact of Concentration of Undertakings on Competition (“Interim Provisions”). The Interim Provisions discuss the unilateral effects and the coordinated effects of horizontal concentrations and the potential impact of non-horizontal concentrations on the up/downstream or associated markets to be considered in MOFCOM’s assessment of a transaction. Articles 5 through 12 identify six factors to be considered, including the following:

  • Article 5: Market shares, market structure and whether the business operators who are party to the concentration will gain or increase market control as a result of the concentration.
  • Article 6: Herfindahl-Hirschman Index and CRn index are clearly mentioned, but no specific index thresholds above which a concentration is considered as anticompetitive are provided. This reflects a case-by-case approach of MOFCOM, at least for the time being.
  • Articles 7–11: In analyzing the impact of the concentration of undertakings on market entry, technological progress, consumers, other relevant undertakings and the development of national economy, the Interim Provisions note the potential negative impact of concentration, and at the same time, acknowledge the potential positive side.
  • Article 12: Near-bankruptcy (the failing firm defense) and countervailing buying power are two of the catch-all factors to be considered. The latter is newly added in the Interim Provisions.

Client Case Study: A ‘Total’ Success in France

Orrick’s European competition team assisted and represented Total (Totalgaz and its parent company Total Raffinage Marketing) in a major, multi-year case in France that wrapped up on December 20, 2010, and that involved the five main players in the liquefied petroleum gas (LPG) market. Total’s competitor Shell had lodged price cartel accusations as part of its application for price leniencies submitted to the French Competition Authority (FCA), France’s national competition regulator. Shell had alleged that two cartels existed in the LPG market: one involving collusion on prices and one involving collusion to raise entry barriers for mass distributors who planned to enter the market.

The FCA investigated the allegations for more than five years and, at the end of the probe, accused the five companies involved of perpetrating a price cartel. The FCA also accused the parents of four of the companies, following the Akzo precedent (see Orrick’s summary of that ruling here). The FCA also determined that alleged barriers raised to hinder mass distributors’ entry represented an abuse of a collective dominant position, but not a cartel.

However, Shell’s leniency application, which had prompted the FCA investigation, was primarily based on e-mails and an affidavit from a former employee. The Orrick team discovered and proved that the e-mails were not genuine. No other party, nor the FCA itself, had raised this issue. Once Orrick’s team filed its findings, the FCA immediately appointed an expert who fully confirmed Orrick’s analysis. The FCA subsequently withdrew all of its accusations, dismissing the case without finding that any company had participated in a cartel.

Further, the FCA invited in the public decision its General Rapporteur (the head of investigations at the FCA) to initiate proceedings against Shell for misleading the FCA, which could net a fine up to one percent of Shell’s worldwide turnover. It also invited the chairman of the FCA to initiate criminal proceedings.

This case required complicated legal and economic analyses. One of the questions raised was whether the Airtours standard applied not only to ex-ante cases (merger control) but also to ex-post cases (antitrust) and whether it was the only standard to apply. The FCA decided to apply the Airtours test only and concluded, as argued by Total, that there was no collective dominant position in the LPG bottled gas market in France. This decision is very important for major companies because it applied the mergers and behavioral practices standard to antitrust cases and also gave useful guidance for how to analyze concentrated markets requiring high and long-term investments. Orrick’s team included associates Lise Damelet Grilli, Guénolé Le Ber and Philippe Zeller, and was led by Partner Philippe Rincazaux, all of the Paris office.

Regional Focus: China

Following the Ministry of Commerce’s (MOFCOM) rejection of Coca-Cola’s proposed acquisition of Huiyuan under the Anti-Monopoly Law (AML) in March 2009, China has continued to develop its AML procedures. Highlights on China’s legislative developments and cases in the past six months include:

New Security Review Procedure for Foreign Investment
On February 3, 2011, the General Office of the State Council issued a notice establishing the national security review for foreign investment in domestic enterprises (the Notice). This is the first time since China enacted the AML that the State Council specifically identified industry sectors subject to national security review. These sectors include: domestic military-related industry, agricultural products, energy, infrastructure, transportation, technology and equipment manufacturing. The Notice outlines the circumstances that would trigger a national security review where foreign investors acquire or obtain control over domestic Chinese enterprises. The national security review, which became effective on March 5, 2011, runs separately but in parallel with the anti-monopoly review. The text of the Notice can be found here.

Rules for Price-Related Antitrust Enforcement and Leniency Procedures
On December 29, 2010, China’s National Development and Reform Commission (NDRC), the agency responsible for AML enforcement, issued Procedural Provisions on Administrative Law Enforcement against Price Monopoly (the procedure rules) and Provisions on Anti-Price Monopoly (the substantive rules), effective February 1, 2011.
Two days later, on December 31, 2010, the State Administration for Industry & Commerce (SAIC) issued three sets of AML implementing provisions (also effective February 1) to clarify what constitutes violations and appropriate sanctions relating to: (1) monopoly agreements, (2) abuse of dominance and (3) administrative monopoly. SAIC’s three substantive provisions provide extensive definitions. NDRC Procedure Rules. NDRC Substantive Rules. SAIC provisions on monopoly agreements. SAIC provisions on abusing dominance. AML. SAIC provisions on administrative
monopoly.

In addition, the new NDRC and SAIC rules also explain China’s leniency procedures for price-related antitrust enforcement. The NDRC procedural rules provide that (a) the first applicant to report and provide important evidence to NDRC may be completely immune from any penalty; (b) the second applicant may obtain at least a 50% reduction of penalties; and (c) subsequent applicants may obtain at most a 50% reduction on penalties. Conversely, the SAIC rules provide no guidelines for reduction of penalties, but state that SAIC will take into consideration cooperation with the investigation, importance of the evidence provided and other factors. Under the SAIC procedural rules, the organizer of a cartel is not eligible for immunity or reduction of penalties.

Paper Manufacturers Association Punished by NDRC
On January 4, 2011, the NDRC fined the Paper Manufacturers Association in Zhejiang Province, Fuyang City, the maximum amount (RMB 500,000) under the Rules of Administrative Sanctions on Price Offense (the Rules). NDRC’s notice provided that in 2010, the Association had conducted meetings and gathered more than 20 members to fix and raise the price for packaging paper. According to the Rules, industry associations or relevant parties who organize participants to manipulate prices are subject to a fine of not more than RMB 500,000. More information is available here.

Tencent Technology (Shenzhen) Co., Ltd. v. Beijing Qihoo Technology Ltd.
Tencent Technology (Shenzhen) Co., Ltd. brought an action against Beijing Qihoo Technology Ltd., seeking RMB 4 million under the Anti-Unfair Competition Law (AUCL) and the AML. Tencent is an internet service provider that has millions of instant message software users. Qihoo is a manufacturer of anti-virus and security software. Tencent claimed that Qihoo breached the AUCL when Qihoo claimed that Tencent’s instant message system had infringed users’ privacy. Tencent notified instant messenger users that they would no longer be able to use Qihoo’s security software, and Tencent modified its system to be incompatible with Qihoo’s. On November 4, 2010, SAIC received a complaint requesting an investigation against Tencent for breach of Article 17(4) of the AML for abuse of dominant market position to require counterparty to trade exclusively with it without valid reasons. In late November 2010, China’s Ministry of Information and Technology became involved in the dispute, but decisions in both proceedings are still pending, despite the fact that both Tencent and Qihoo have published letters of apology to the public.

Regional Focus: California

In this issue, we focus on California because thousands of companies do business in California, and California has its own antitrust statutes that are applied in judicial decisions by both the California state courts and the federal courts. Three recent decisions demonstrate the importance of understanding how the antitrust laws are applied by state and federal courts in California.

The first case is Clayworth v. Pfizer, Inc., in which the California Supreme Court held that the “pass-on” defense is not available to defendants in price-fixing cases brought under California’s Cartwright Act, California’s analogue to the U.S. Sherman Act, when a single level of indirect purchasers sue. Under federal law, indirect purchasers are not allowed to sue, so the “pass-on” defense is not available to defendants. In California, however, indirect purchasers are allowed to sue. The issue in Clayworth was whether defendants can invoke the pass-on defense. The California Supreme Court said “no.” However, if multiple levels of indirect purchasers sue, pass-on issues still may need to be addressed. A more detailed analysis of this decision can be found in our July 13 client alert, available here.

The second case is Bay Guardian Co., Inc. v. New Times Media LLC, in which the California Court of Appeal held that—unlike under federal law—a plaintiff does not need to demonstrate that a defendant can recoup it losses to prove a predatory pricing claim under California’s Unfair Practices Act. In Bay Guardian, one alternative weekly newspaper alleged that its rival had sold below-cost ads. The court concluded that California law focuses on the purpose of the anticompetitive act, rather than potential competitive harm, as do the federal antitrust laws. A copy of the decision can be found here.

Finally, in California ex rel. Brown v. Safeway, Inc., the Ninth Circuit held that a profit-sharing agreement among a number of California grocery store owners was not immunized from antitrust review by the non-statutory labor exemption, because the agreement was not “needed to make the collective-bargaining process work” and did not raise questions ordinarily resolved by application of labor law principles. The court declined to hold the agreement was a per se Sherman Act Section 1 violation, because it was of short duration and did not involve all the firms in the relevant market. The court held, however, that the agreement violated Section 1 under a “quick look” analysis. The court rejected defendants’ argument that driving down compensation to workers is a pro-competitive benefit to consumers cognizable under the antitrust laws. A copy of the decision can be found here.

These cases demonstrate the range of state and federal antitrust issues that state and federal courts in California routinely address. It is critical for businesses operating in California to recognize that the state has its own set of antitrust laws that are not always consistent with (and sometimes are contrary to) the federal antitrust laws.

The Role of Antitrust Law and Analysis in Patent Litigation

The past decade has seen an explosion of patent litigation in the United States and an increased role for antitrust claims and the use of antitrust analysis in patent cases. For intellectual property lawyers, it is important to anticipate the antitrust issues often presented by patentees’ licensing or other conduct and their patent enforcement activities. For antitrust lawyers, it is important to understand the analytical framework for patent misuse and the antitrust counterclaims that may be available.

Antitrust Analysis for Patent Misuse Defenses

Patent misuse can be a powerful defense to a claim of patent infringement. If the defendant prevails on a misuse defense, the patent is rendered unenforceable until the misuse is purged. Senza-Gel Corp. v. Seiffhart, 803 F.2d 661, 668 n.10 (Fed. Cir. 1986). This is true not only as to the defendant, but also as to all others against whom the patentee would try to enforce the patent. This makes the patent misuse defense a potent weapon.

Misuse frequently arises as a result of the patentee’s licensing practices. Several types of licensing conduct have been held to constitute patent misuse or have been alleged in reported cases to be misuse, including: tying patents to unpatented goods, tying patents to patents (package licenses), charging post-expiration royalties, demanding royalties under U.S. patents based on worldwide sales, anticompetitive grantback clauses and field-of-use restrictions, and certain horizontal arrangements that often arise in the context of patent pools and cross-licensing arrangements.

The Federal Circuit has described patent misuse as the patentee’s act of “impermissibly broaden[ing] the ‘physical or temporal scope’ of the patent grant with anticompetitive effect.” Windsurfing Int’l, Inc. v. AMF, Inc., 782 F.2d 995, 1001 (Fed. Cir. 1986) (emphasis added). “To sustain a misuse defense involving a licensing arrangement not held to have been per se anticompetitive by the Supreme Court, a factual determination must reveal that the overall effect of the license tends to restrain competition unlawfully in an appropriately defined relevant market.” Id. at 1001-02 (emphasis added). In August 2010, the Federal Circuit affirmed that patent misuse requires proof of anticompetitive effects resulting from the misuse. Princo Corp. v. Int’l Trade Comm’n, 616 F.3d 1318 (Fed. Cir. 2010). Princo holds, however, that proof of an antitrust violation associated with the use of a patent is not sufficient to establish misuse. “What patent misuse is about, in short, is ‘patent leverage,’ i.e., the use of the patent power to impose overbroad conditions on the use of the patent in suit that are ‘not within the reach of the monopoly granted by the Government.’” Id. at 1331 (quoting Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100, 136-38 (1969)).

This emphasis on anticompetitive effects means that the traditional tools used for antitrust analysis are critical in the evaluation of a patent misuse defense. The only clear exception is when the patentee charges royalties based on post-expiration sales, which continues to be treated as per se unlawful under Brulotte v. Thys Co., 379 U.S. 29 (1964). Prevailing on a patent misuse defense typically requires the rule of reason analysis employed in antitrust cases.

Antitrust Counterclaims in Patent Infringement Cases

Defendants in infringement cases also commonly assert antitrust counterclaims in an effort to level the litigation playing field. The typical claim is a Sherman Act Section 2 claim for monopolization and attempted monopolization. The two main categories of antitrust counterclaims are Walker Process and Handgards claims. A Walker Process claim alleges that the patentee fraudulently procured the patent-in-suit. See Walker Process Equip. v. Food Mach. & Chem. Corp., 382 U.S. 172 (1965). A Walker Process claim is a complement to the inequitable conduct defense to an infringement claim. Rather than using misconduct before the Patent and Trademark Office (PTO) to invalidate a patent, the infringement defendant asserts the knowing enforcement of a fraudulently obtained patent as the predicate anticompetitive conduct supporting a Section 2 claim. Unlike the inequitable conduct defense, Walker Process always requires proof of “knowing and willful” fraud in prosecution. Id. at 177. Prevailing on a Walker Process claim requires not only demonstrating, by clear and convincing evidence, that the patent holder committed fraud on the PTO, but also proving, by a preponderance of the evidence, all of the other elements of a Section 2 claim.

A Handgards claim alleges that the patentee is seeking to enforce the patent even though the patentee learns that the patent is invalid or unenforceable after obtaining the patent. See Handgards, Inc. v. Ethicon, Inc., 601 F.2d 986 (9th Cir. 1979). Under Handgards, if the counterclaimant demonstrates by clear and convincing evidence that the patentee is enforcing the patent with actual knowledge that it is invalid, the sham litigation exception to the Noerr-Pennington immunity doctrine is satisfied. Some courts have applied to Handgards claims the two-part test for sham litigation claims adopted in Professional Real Estate Investors v. Columbia Pictures Industries, 508 U.S. 49 (1993) (PRE).

Under PRE, the counterclaimant must prove that the infringement suit is “objectively baseless in the sense that no reasonable litigant could realistically expect success on the merits” and that by suing the patentee is attempting “‘to interfere directly with the business relationships of a competitor,’ through the ‘use [of] the governmental process – as opposed to the outcome of that process – as an anticompetitive weapon.’” 508 U.S. at 61 (citations omitted). Prevailing on a Handgards claim also requires proving all the other elements of a Section 2 claim.

In addition to Walker Process and Handgards claims, it is becoming common for defendants in infringement cases to assert Section 2 counterclaims, as well as other claims, based on misconduct before standards-setting organizations (SSO). There are two main categories of claims. In the first, an alleged infringer asserts that the patentee engaged in patent holdup by engaging in deceptive conduct in the SSO process so that its patented technology was incorporated into the industry standard, or competition was otherwise restrained. E.g., Rambus, Inc. v. FTC, 522 F.3d 456 (D.C. Cir. 2008). In the second, the alleged infringer asserts that the patentee reneged on a commitment to license its patents on reasonable and non-discriminatory (RAND) terms. E.g., Broadcom Corp. v. Qualcomm, Inc., 501 F.3d 297 (3d Cir. 2007). When asserted under Section 2, both categories of claims require typical antitrust analysis and proof.

Conclusion

The assertion of patent misuses defenses and antitrust counterclaims is now routine in patent litigation. The antitrust issues associated with these defenses and counterclaims, often seen as subsidiary to the patent claims, are frequently at least as complicated and important as the underlying patent litigation. The antitrust-based claims and defenses require the same level of focus and diligence as the patent claims and other defenses.

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.

What to Do If Your Company Receives a U.S. DOJ Grand Jury Subpoena

You have just received notice of a grand jury subpoena duces tecum from the Department of Justice Antitrust Division in connection with a price-fixing investigation. Indeed, the likelihood of doing so may be on the rise. In 2008, the Division had 137 pending grand jury investigations, filed 54 criminal cases and charged 59 individuals and 25 corporations. The Division currently has nearly 150 open cartel investigations. In 2009, the Division collected over $1 billion in criminal fines. And the Obama administration has made clear that it intends to continue pursuing price-fixing conspiracies. What should you do if your company receives a subpoena? Below are 10 practical steps.

1. Inform the company’s key decision-makers
Receiving a grand jury subpoena is a critical event. The company’s key decision-makers should be informed immediately. This is an appropriate time to present a brief overview of the Sherman Act, the DOJ’s authority and the nature, scope and purpose of a criminal investigation.

2. Ensure that no relevant evidence is destroyed
You must take immediate steps to preserve relevant evidence, including both paper and electronic documents, to avoid even the appearance of an unwillingness to cooperate with the investigation, or worse, the obstruction of justice. Therefore, the company and its lawyers should circulate a memorandum or e-mail to the effect that a subpoena has been, or will be, received and that documents relating to prices, price levels, price terms, competitor contacts, etc., should not be destroyed. The memorandum should indicate that document-retention policies that would otherwise call for the destruction of these documents should be suspended. Although at the very outset of an investigation you may not necessarily know all the appropriate recipients of such a memorandum, you can likely identify the more obvious ones (e.g., decision-makers who had any authority relating to pricing, as well as their assistants). As you learn more, there may be good reason to circulate such a memorandum more widely.

3. Retain outside antitrust counsel
Although in-house counsel are often adequately equipped to deal with many aspects of a criminal investigation, outside counsel with experience in antitrust investigations will also likely be required. The general counsel’s office is part of the same corporate management that may be under suspicion by government attorneys. Not only do inhouse counsel face potential personal and professional conflicts if colleagues are implicated, but the numerous demands of the investigation, especially in its critical early stages, can often overwhelm in-house counsel.

4. Consider contacting the DOJ
It is important to contact DOJ to establish an atmosphere of cooperation. You may also learn something about the DOJ’s focus and true interests, especially in negotiating the scope of the subpoena. You will probably want to try to narrow the usually overbroad subpoena or, at least, identify areas of higher priority that can be addressed first. For example, the DOJ may be willing to allow the company to search its headquarters files first and produce them. Then, if the DOJ wants additional documents, but not before, the company would search its offsite locations or branch offices. You should not make any statements to the DOJ about the burden of compliance or the locations, existence or nonexistence of files unless you are absolutely sure that they are accurate.

5. Determine the company’s status and consider the leniency program
Knowing whether your company is a subject or a target of the investigation has important ramifications. You may want to ask whether the company is the subject or a target. Often, the DOJ does not make this determination until late in the investigation, so the fact that a company is classified as a subject may convey a misleading sense of security. Another way to probe the issue is by asking permission for the company’s counsel also to represent individual employees. If the DOJ objects, there is likely a serious issue.

The Antitrust Division has a corporate leniency program, which essentially insulates from criminal liability the first company (and its officers) in a cartel that provides information to the government. Leniency also may eliminate treble-damages exposure in certain civil contexts. The leniency program puts a premium on learning the facts quickly to maximize the company’s possibility to obtain leniency if there has been wrongdoing. You do not want to guess about whether leniency is available. The Antitrust Division is always fishing until they “get” someone, but you can ask: “As we conduct our own investigation, and without suggesting any guilt, should we be considering a leniency application?” If the answer is yes, it is possible to place a “marker” with the DOJ to preserve the company’s position for a limited time while conducting the investigation.

6. Ascertain the key players
Identifying the key players will affect the scope of the file search and determine, at least initially, the universe of information available. Every company has a different organization, but the group must include everyone with pricing authority or input, as well as their assistants and secretaries. The group is likely to include former employees if the investigation relates to events that happened more than a few years ago.

7. Determine the scope of file searches
Once the key players are identified, it becomes possible to identify existing files that must be searched. These files will almost always include pricing files, competitor contact files and significant customer files. Market analyses and reports also will be relevant. But do not overlook other areas of possible interest–including trade association files, telephone logs and travel expense/reimbursement files–which are often the focus of a government investigation.

8. Prepare a memorandum for corporate employees
The existence of an investigation is likely to prompt discussions between and among corporate employees. In addition, the company probably would prefer to designate one or several people to communicate with the DOJ. However, the company and individuals must be scrupulous to avoid even the appearance of interfering with a criminal investigation, witness intimidation or obstruction of justice, which can be prosecuted as separate offenses under 18 U.S.C. §§ 1503, 1505 and 1512(b). In addition, employees’ interests may or may not be totally aligned with that of the company, and they may have Fifth Amendment rights not to testify. Although every company is different, one way to balance these competing interests is to circulate a memorandum from counsel to the effect that an investigation has begun, that counsel is representing the corporation, that individuals may wish to consult their own counsel, that individuals have the right to discuss the case with the government but also have the right to have counsel present if they choose, and that if counsel is indicated, the company will pay the fees. Employees should also be requested to inform corporate counsel of any discussions or contacts with the government.

9. Interview key personnel
You should interview the company’s key personnel, making sure that employees are aware that counsel is representing the corporation, and that the communications are protected by the corporate privilege. But if separate counsel for employees is advisable, you may want to advise the affected employees that the company will provide counsel for them. The interviews should focus on competitor contacts, knowledge of competitors’ pricing and the company’s prices and pricing practices.

10. Determine if competitors or former employees should be contacted
You may want to contact competitors to learn about the government’s investigation, competitors’ negotiations with the government over subpoena scope, etc. Careful consideration should be given to the use of a joint defense agreement to maximize preservation of the attorney-client and other privileges. Former employees also may have valuable information regarding the period of time in question. In fact, it may be essential to talk with them. But care must be taken to ensure that they are aware whom counsel represents. Company executives should refrain from discussing the investigation with others, and particularly with their counterparts at competitors.

Concluding thoughts
Coping with a grand jury antitrust investigation can be a daunting task. But with careful and meticulous preparation and organization, it does not have to be overwhelming.