Foreign subsidies: The European Commission goes extraterritorial

The EU State Aid regime has long protected the EU internal market from anti-competitive subsidies granted by EU Member States. On 17 June 2020, the European Commission published a White Paper that proposes a new set of tools designed to address distortive effects in the internal market caused by subsidies granted by states outside the EU.

The White Paper outlines three complementary tools, or “modules”, intended to tackle the distortive competitive effects arising from foreign subsidies. These modules would be implemented by “supervisory authorities”, possibly at EU-level (most likely by the Commission itself) and/or at national level by an authority chosen by the Member State. For each of the three modules, the existence of a foreign subsidy with an actual or potential disruptive effect in the EU would be assessed in a “preliminary review”, potentially followed by an “in-depth investigation”. Undertakings under investigation could face “redressive measures” including the prohibition or even unwinding of certain transactions, or else make commitments to avoid prohibition. Failure to comply with procedural obligations would be subject to fines and periodic penalty payments.

Module 1 – General instrument to capture distortive effects of foreign subsidies

This largely mirrors the existing EU State Aid regime that applies to states in the European Economic Area (EEA). It proposes a general instrument that could capture all distortive effects of foreign subsidies exceeding a certain threshold, currently proposed at EUR 200,000 over three consecutive years. The Commission lists several categories of distortive subsidies, i.e. foreign subsidies that would distort the EU’s internal market: export financing, debt relief to the benefit of ailing undertakings, unlimited government guarantees, individual tax reliefs and foreign subsidies directly facilitating an acquisition.

For all other forms of subsidies, a more detailed assessment would be necessary, based on indicators such as the size of the subsidy, the size of the beneficiary and the utilisation of production capacity, the market situation, specific behaviour such as outbidding in acquisitions or distortive bidding in procurement procedures, and the level of activity of the beneficiary in the EU. If a distortive effect is established, it would be weighed up against any positive impact (the “EU interest test”), taking into account EU objectives such as job creation, climate neutrality goals, digital transformation, security, public order, public safety and resilience. Redressive measures could range from structural remedies and behavioural measures, to redressive payments to the EU, or the Member States, and could be subject to a limitation period of ten years.

Module 2 – Control of acquisitions facilitated by foreign subsidies

This proposes to tackle subsidised acquisitions of EU businesses by introducing an ex ante notification system, separate from and complementary to EU merger control and foreign direct investment screening. This module would investigate direct facilitation of acquisitions by foreign subsidies, as well as indirect de facto facilitation when foreign subsidies increase the acquirer’s financial strength. The regime would be subject to certain quantitative and qualitative thresholds and cover not only the acquisition of control over EU targets, but also the acquisition of significant – but possibly non-controlling – minority rights or shareholdings. The time period for the benefit of foreign subsidies would be limited, e.g. from three years prior to the notification until one year after closing. To avoid a prohibition of the planned transaction the acquirer could offer commitments, which would likely have to include structural remedies.

The proposals also envisage an ex officio review process to scrutinise acquisitions that should have been notified by the acquirer but were not, including after they have completed. The module includes the right to order the unwinding of completed transactions.

Module 3 – Control of unfair advantages in public procurement due to foreign subsidies

This complements the public procurement regime by introducing an additional notification obligation when submitting a bid, where the bidding party has received a “financial contribution” in the last three years. This module would address direct distortion of a procurement procedure by operation-specific foreign subsidies, as well as indirect de facto distortion by increasing the financial strength of the operator. The Commission aims to avoid situations where artificially low public procurement bids are facilitated by foreign subsidies. If a bidder is found to benefit from foreign subsidies, it could be excluded from public procurement in the EU.

The White Paper also identifies a risk that foreign subsidies create unfairness in the context of EU funding. The proposals are less developed, but the solution could be similar to Module 3 where EU funding is distributed through public tenders.

Hurdles and next steps

A first obstacle might be resistance by national governments that will scrutinise the proposal – the outcome of this process will influence the distribution of powers between the Commission and the Member States. For the general instrument (Module 1) as well as the public procurement instrument (Module 3), it is proposed that the Commission and the relevant national authorities would have concurrent authority for the initial stages. However, the Commission proposes to be exclusively competent to apply the EU interest test. Similar to its “one-stop shop” role in EU merger control, the Commission envisages exclusive responsibility for the enforcement of the ex ante control of acquisitions facilitated by foreign subsidies (Module 2).

In any event, enforcement outside the EEA will largely depend on third countries’ willingness to co-operate, which is not a given. State aid is highly political – foreign countries are unlikely to give the EU access to detailed information, unless the benefit of achieving EU approval outweighs the intrusion in the foreign state’s autonomy and political process. While the White Paper proposes an obligation to provide information, as well as powers to impose a fine or to order parties to unwind a transaction, the lack of effective enforcement outside the EEA could jeopardize the new regime(s). Even providing the supervisory authorities with the possibility to make decisions based on the facts available would not fully address this fundamental and intrinsic weakness.

Conversely, foreign companies benefiting from subsidies may lack information that would enable them to argue either the absence of a distortive effect, or the benefits outweighing such distortive effects. These dynamics could cause a stalemate between the EU and foreign countries, with increased trade barriers as a result.

The Commission acknowledges that there might be overlaps with existing legal tools, including international law such as the WTO Agreement on Subsidies and Countervailing Measures (for goods), as well as bilateral free trade agreements with third states, which may contain relevant dispute settlement or consultation provisions. In case of overlapping actions, the White Paper merely suggests the ability to suspend the proceedings under the proposed new instruments and to conditionally resume those if the distortion persists.

A public consultation is open for stakeholders to comment on the White Paper until 23 September 2020, with proposed legislation scheduled for 2021. Legislation is unlikely to come into force before 2022.

State Attorneys General Ramping up Merger Enforcement

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Last month, Colorado Governor Jared Polis signed a law repealing a provision of the Colorado Antitrust Act that prohibited challenging a merger under state law where the federal antitrust agencies did not also challenge the merger. This action is another sign that state Attorneys General are prepared to more aggressively enforce state antitrust laws, increasing the likelihood of divergent federal and state merger enforcement priorities and outcomes.

There are two complementary merger enforcement regimes. The federal regime, enforced by the Department of Justice (DOJ) and Federal Trade Commission (FTC), and the state regime which the state Attorneys General enforce. The Hart-Scott-Rodino Act’s pre-merger notification and waiting period requirements apply to the federal merger enforcement regime but do not apply to a state merger challenge. Generally, states may investigate a merger at any time, even after it has been consummated.

Historically, federal and state antitrust authorities have taken a cooperative approach to merger enforcement, working together to investigate and litigate proposed mergers. Playing more of a supporting role, the states typically deferred to the federal agencies’ enforcement decisions. For example, the DOJ and various states jointly investigated and successfully litigated the Anthem/Cigna merger. More recently, however, federal and state merger enforcement has diverged, most notably when several states filed an action challenging the T-Mobile/Sprint merger before the DOJ had completed its investigation. Anecdotally, line attorneys in state antitrust units have reported rising tensions with DOJ.

This recent divergence has been driven in part by a perception among many state AGs that DOJ and FTC have been under-enforcing federal antitrust law, particularly in the high-tech sector. Colorado and other states that have a record of more aggressive antitrust enforcement include New York, California, Texas and Washington. They and other states may be more willing to fill the void when they believe federal agencies have failed to act.

Given the increasing independence and assertiveness of state Attorneys General, merging parties cannot ignore their concerns. The strategic and practical considerations of state antitrust review should be on every checklist for a merger or major acquisition.

The European Antitrust Enforcers’ response to the Covid-19 outbreak: Antitrust rules will bend, but will not break

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In a welcomed attempt to align their approaches, the antitrust enforcers of the European Competition Network (ECN)1 have published a brief joint statement on the application of competition law during the Covid-19 crisis.

If one may regret that its content remains too high-level, it is an important step, which comes just shortly after the European Commission adopted a specific temporary State Aid framework in order to offer Member States the flexibility required in this exceptional context to support businesses impacted by the critical disruptions caused by the Covid-19 outbreak (commented here).

In addition to flexible public support measures, businesses need more clarity as to whether they can similarly benefit from a flexible enforcement of antitrust rules. At a time where businesses are put under considerable pressure, no one seems to question the fact that increased cooperation between them may be necessary, not to say indispensable for some economic sectors to continue to address basic consumers’ needs; likewise, there are reasons to believe that the traditional special responsibility of dominant firms may be harder to assume in the current circumstances.

Here and there, voices have rapidly been raised about the need to explicitly relax competition laws or their enforcement to allow companies to continue to meet European consumers’ vital needs while not dreading subsequent antitrust investigations (see for instance: the public statement issued by EuroCommerce, a trade association of European retail and wholesale companies, advocating for a waiver of normal competition rules to allow retailers to “share information on supplies and arrang[e] deliveries to the homes of people who cannot get out”).

At the same time, faced with the risk of a generalization of inflated prices for products or services in high demand due to the pandemic, antitrust enforcers naturally feel the need to be extra-vigilant and ensure that adequate safeguards remain in place, despite their own challenges of having (at least for some of them) their personnel working from home. It explains why some enforcers (such as the German Federal Cartel Office) have been vocal about the fact that existing competition law rules already provided sufficient flexibility and that they would continue to crack down on those who would unduly take advantage of the crisis to adopt anticompetitive conducts.

The guidance offered in the ECN’s joint statement strikes a balance between encouraging good-faith solutions and preventing abuses. It combines different approaches that have previously been supported by some European antitrust enforcers. But let’s make no mistake: the underlying message is clear: antitrust rules may bend but will not break, meaning that companies shall not lower their guard and ensure that they take adequate steps to mitigate the antitrust risks.

Flexible antitrust to ensure continued supply

In its joint statement, after acknowledging that “this extraordinary situation may trigger the need for companies to cooperate in order to ensure the supply and fair distribution of scarce products to all consumers”, the ECN assures that it “will not actively intervene against necessary and temporary measures put in place in order to avoid a shortage of supply”.

The ECN statement yet continues by stressing that “such measures” are likely to already comply with existing competition law, since they would either not be caught by the antitrust prohibitions or would fall under the existing exemptions. In other words, the message is that businesses will benefit from flexibility where this is justified by the Covid-19 pandemic, mostly because this flexibility is already an inherent part of the existing antitrust regime.

While nothing is said about what would be accepted as “necessary measures” or what is meant by “temporary” measures, some illustrations may already be found in decisions concerning topical sectors taken by some national enforcers. For instance, the Norwegian antitrust enforcer recently approved a three-month cooperation between Norwegian airlines in order to allow them to continue to ensure critical activities for citizens. Likewise, the German Cartel Office seems to have taken a softened approach to cooperation in the retail sector to the extent it is necessary to ensure continuous supply.

If useful, these precedents, however, leave numerous questions unaddressed.

To help companies navigate these issues, the members of the ECN seem willing to provide “informal guidance” to companies, which is a good thing in theory but clearly does not provide the same level of comfort as proper formal decisions. One may also have some doubts as to the enforcers’ ability to respond adequately in a timely manner to consultations considering that many of them have already made it clear that stakeholders needed to be prepared to face significant delays in the handling of pending investigations and merger control reviews.

It is hence to be hoped for that the members of the ECN will take inspiration from the UK CMA and will shortly, individually or jointly, follow-up with more detailed guidance.

Flexible antitrust to avoid excessive price increases

To tackle the other main issue, the risk of exaggerated inflation, the ECN joint statement contains a warning to companies that prices of “products considered essential to protect the health of consumers in the current situation (e.g., face masks and sanitising gel)” should “remain available at competitive prices” and that antitrust enforcement will continue to fight against antitrust infringements such as cartels or abuses of dominance. To the same end, the ECN joint statement also explicitly recalls that manufacturers can continue to use their right to set maximum prices.

This position is in line with the messages sent previously by several European antitrust enforcers. For instance, the Latvian Competition Council warned against price cartels resulting in overpayment for consumers. The Greek Competition Authority has communicated that it would indulge vertical agreements tending to maintain prices at a low level (maximum or recommended prices), which otherwise could be deemed anticompetitive in certain circumstances; conversely, resale price management (minimum prices) would still be examined and prosecuted.

However, one may wonder whether antitrust (flexible or not) is the appropriate tool to tackle excessive pricing problems in the current context. Why? Because, it may not offer a timely remedy (as a prior investigation will still be needed); because, the concept of exploitative abuse to address excessive prices traditionally raises several complex legal questions, and even more if we are to speak about temporary dominance resulting from the current context.

One may therefore not exclude that, in the most critical situations, European Governments will prefer ex-ante regulation over ex-post regulation, like in France where the price of hydroalcoholic gel was eventually fixed by decree.

 

1 ECN is the network for coordination between the national competition authorities (NCAs) within the EU/EEA, the European Commission (DG Comp) and the EFTA Surveillance Authority.

The implications of Brexit on the competition law landscape: Key takeaways from the CMA’s ‘Guidance on the functions of the CMA under the Withdrawal Agreement’

The UK will no longer be a Member State of the European Union (the “EU”) as of 11 p.m. on 31 January 2020 (“Exit Day”). A ‘transition period’ will run from Exit Day until 11 p.m. on 31 December 2020 (the “Transition Period”).

The Competition and Markets Authority (“CMA”) has published a guidance document explaining how Brexit, or “EU Exit,” will affect its ‘powers and processes’ for competition law enforcement (antitrust, including cartels), merger control and consumer protection law enforcement during, towards the end of and after the Transition Period (the “Guidance”). The Guidance also explains how ‘live’ mergers and ‘live’ antitrust cases being reviewed by the European Commission (the “Commission”) or the CMA during and at the end of the Transition Period will be treated.

In this post, we provide an overview of the key takeaways in relation to merger control and antitrust.

Merger control

The implications of EU Exit on merger control need to be considered during three different periods: (i) during the Transition Period; (ii) towards the end of the Transition Period; and (iii) after the end of the Transition Period.

  • During the Transition Period: The ‘one-stop shop’ principle will continue to apply. When considering whether the merger control thresholds under the EU Merger Regulation (“EUMR”) are met, the turnover generated by an undertaking in the UK will still need to be included. The CMA will not open an investigation into a transaction unless jurisdiction has been transferred to it under the EUMR’s referral mechanisms. The UK courts and the Competition Appeal Tribunal will not have jurisdiction to review decisions of the Commission or the UK-related aspects of these decisions.
  • Towards the end of the Transition Period: The Commission will retain jurisdiction over transactions that have been formally notified to it before the end of the Transition Period or if it has accepted referral requests under the EUMR (or the deadline for Member States to disagree to the request has expired (Article 4(5) of the EUMR)). If the Commission’s clearance decision in a particular case is subject to commitments, the Commission will continue to be responsible for monitoring and enforcing all aspects of these commitments, including any aspects relating to the UK, irrespective of whether the commitments have been agreed before the end of the Transition Period. However, the Commission and the CMA can agree to transfer responsibility for the monitoring and enforcement of the UK aspects of any commitments to the CMA.
  • Following the end of Transition Period: The ‘one-stop shop’ principle will no longer apply. The turnover generated in the UK will no longer be relevant for determining whether the jurisdictional thresholds under the EUMR are met. Parallel investigations (i.e. investigations by the Commission and the CMA) can take place with regards to transactions that meet the thresholds under the EUMR and the Enterprise Act 2002. The Commission will continue to be able to investigate the effects in the UK of transactions over which it had already exercised jurisdiction (i.e. because the transaction had been notified during the Transition Period or referral requests were accepted).

Antitrust

As with merger control, the implications for antitrust enforcement should be considered during three different periods: (i) during the Transition Period; (ii) towards the end of the Transition Period; and (iii) after the end of the Transition Period.

  • During the Transition Period: Articles 101 and 102 of the Treaty on the Functioning of the European Union (“TFEU”) will have full force and effect in the UK in addition to the domestic Chapter I and Chapter II prohibitions. Regulation 1/2003, the EU block exemption Regulations and EU guidance will also continue to be applicable. The Commission will continue to have the power to enforce and investigate suspected infringements of Articles 101 and 102 TFEU in relation to the UK. If the Commission has initiated an investigation into a suspected breach of either Article 101 or Article 102, the CMA and concurrent (sector) regulators in the UK will not be able to launch a parallel investigation. In the event that commitments have been accepted by the Commission before or during the Transition Period, the Commission will continue to have the responsibility for monitoring and enforcement of the UK-related aspects of these commitments. Infringements of EU law are relevant to the disqualification of directors for competition law infringements. This will continue to be the case during the Transition Period.
  • Towards the end of the Transition Period: The Commission will retain jurisdiction over cases in relation to which it has formally initiated proceedings before the end of the Transition Period. However, the CMA and the concurrent regulators may be able to obtain jurisdiction over such cases. For instance, if the agreement or conduct under investigation affects trade within the UK and are ongoing at the end of the Transition Period, the CMA or concurrent regulators may investigate facts post-dating the Transition Period. Further guidance will be issued concerning the applicable procedure. If the CMA and the concurrent regulators are investigating conduct that may affect trade between EU Member States and have not issued a decision before the end of the Transition Period and the case is ongoing, Articles 101 and 102 TFEU will no longer be applied.
  • Following the end of Transition Period: After the end of the Transition Period, the CMA and the concurrent regulators will only investigate suspected infringements of the Chapter I and Chapter II prohibitions. The Commission will continue to have responsibility for monitoring and enforcing the UK aspects of commitments given or remedies imposed; however, there is an option under the Withdrawal Agreement for this responsibility to be transferred to the CMA and concurrent regulators by ‘mutual agreement.’ Further guidance will be issued concerning the applicable procedure. It is expected that company director disqualification orders will also concern conduct found to have infringed Articles 101 and 102 TFEU during the Transition Period. The EU block exemption Regulations are ‘retained exemptions.’ As such, after the Transition Period, exemptions will operate as exemptions from domestic prohibitions. The Secretary of State, acting in consultation with the CMA, will have the power to vary or revoke the application of the retained exemptions. Businesses entering into agreements after the end of the Transition Period will be able to benefit from the retained exemptions provided they meet the relevant criteria.

The CMA considers the Guidance to be a ‘live’ document subject to change “in light of further political and legal developments.”

The Guidance is available here: https://www.gov.uk/government/publications/uk-exit-from-the-eu-guidance-on-the-functions-of-the-cma-under-the-withdrawal-agreement

M&A HSR Premerger Notification Thresholds Increase in 2020

Takeaways

  • The new minimum HSR threshold is $94 million and applies to transactions closing on or after February 27, 2020.
  • The current threshold of $90 million is in effect for all transactions that will close through February 26, 2020.
  • Failure to file may result in a fine of up to $43,280 per day of non-compliance.
  • The HSR Act casts a wide net, catching mergers and acquisitions, minority stock positions (including compensation equity and financing rounds), asset acquisitions, joint venture formations, and grants of exclusive licenses, among others.

The Federal Trade Commission has announced new HSR thresholds for 2020. Transactions closing on or after February 27, 2020 that are valued in excess of $94 million potentially require an HSR premerger notification filing to the U.S. antitrust agencies. The HSR Act and Rules require that parties to certain transactions submit an HSR filing and wait up to 30 days (or more, if additional information is formally requested) before closing, which gives the government time to review the transaction for potential antitrust concerns. The HSR Act applies to a wide variety of transactions, including those outside the usual M&A context. Potentially reportable transactions include mergers and acquisitions, minority stock positions (including compensation equity and financing rounds), asset acquisitions, joint venture formations, and grants of exclusive licenses, among others.

Determining reportability: Does the transaction meet the Size of Transaction test?

The potential need for an HSR filing requires determining whether the acquiring person will hold an aggregate amount of voting securities, non-corporate interests, and/or assets valued in excess of the HSR “Size of Transaction” threshold that is in place at the time of closing. Calculating the Size of Transaction may require aggregating voting securities, non-corporate interests, and assets previously acquired, with what will be acquired in the contemplated transaction. It may also include more than the purchase price, such as earnouts and liabilities. Talk to your HSR counsel to determine what must be included in determining your Size of Transaction.

If the transaction will close before February 27, 2020, the $90 million threshold still applies; closings as of February 27, 2020 will be subject to the new $94 million threshold.

Determining reportability: Do the parties to the transaction have to meet the Size of Person test?

Transactions that satisfy the Size of Transaction threshold may also have to satisfy the “Size of Person” thresholds to be HSR-reportable. These new thresholds are also effective for all closings on or after February 27, 2020. Talk to your HSR counsel to determine which entity’s sales and assets must be evaluated.

Filing Fee

For all HSR filings, one filing fee is required per transaction. The amount of the filing fee is based on the Size of Transaction.

Failure to File Penalty

Failing to submit an HSR filing can carry a significant financial penalty for each day of non-compliance.

Always consult with HSR counsel to determine if your transaction is HSR-reportable, especially before concluding that a filing is not required. Even if the Size of Transaction and Size of Person tests are met, the transaction may be exempt from the filing requirements.

No HSR Filing Means No Antitrust Issues? Think Again!

My transaction does not require an HSR filing. That means we don’t have to worry about potential antitrust issues, right? WRONG.

The HSR Act requires that parties to certain transactions submit a premerger notification filing to the Department of Justice Antitrust Division (DOJ) and Federal Trade Commission (FTC), and then observe a waiting period before closing. Any transaction valued in excess of the HSR threshold – currently $90 million – may require an HSR filing and expiration of the HSR waiting period as conditions to closing. An HSR filing may not be required where the transaction does not meet the minimum jurisdictional thresholds or an exemption to filing is available. Parties, however, should not equate “no HSR filing” with “no antitrust issues.”

The FTC just ordered the unwinding of a 2017 merger that was not HSR-reportable. German company Otto Bock HealthCare acquired private equity-backed Freedom Innovations; both companies supplied prosthetics and were the #1 and #3 manufacturers of microprocessor-equipped prosthetic knees. Otto Bock and Freedom confused “no HSR filing” with “no antitrust issues,” stating in the press release that “Anti-trust matters have already been clarified and a ‘simultaneous signing and closing’ was carried out.”

DOJ and FTC History of Investigating HSR Non-Reportable Deals – Even Very Small Deals

The DOJ and FTC have a history of launching investigations into transactions that did not require an HSR filing – including very small deals. Two examples are the DOJ’s post-consummation challenge of George’s $3 million acquisition of a chicken plant from Tyson Foods Inc., and the FTC’s challenge of American Renal’s $4.4 million acquisition of Fresenius dialysis clinics.

Even HSR-Cleared Deals Can Be Challenged Later

Parties also should not confuse HSR “clearance” with substantive “antitrust clearance.” While rarely used, the DOJ and FTC have the ability to later challenge transactions that were HSR-reportable and cleared. Recently, DOJ allowed the HSR waiting period to expire for Parker-Hannifin’s $4.3 billion acquisition of CLARCOR, Inc., and then challenged the consummated merger nine months later.

When the Federal Antitrust Agencies Pass, Others May Step Up to Investigate

The DOJ and FTC are not the only antitrust enforcers who can investigate a deal, and State Attorneys General (AGs) are becoming more active in merger investigations. For example, when the FTC decided against challenging Valero’s proposed acquisition of two Plains All American petroleum terminals in California, the California AG filed suit to block the deal.

All Deals Can Raise Concerns about Sharing Competitively Sensitive Information

Even after Valero abandoned the Plains All American terminal acquisition, the FTC continued to investigate if Plains improperly shared competitively sensitive information with prospective bidders, which could have been used to harm competition during or after the sale process.

Takeaways

Regardless of whether an HSR filing will be required:

  • Parties should always consider the antitrust risk of a transaction, no matter how big or small the deal or competitive overlap. Antitrust concerns can emerge from potential competition, too, in which case there may be no directly competing sales at the time the deal documents are executed. Before or after closing, filing HSR or not, the deal could face questions or a challenge from the federal antitrust agencies, State AGs or others.
  • Parties should always practice good document hygiene, bearing in mind that anything could be produced to the government or come to their attention. For example, Freedom’s own press release flagged that the merger combined the “number one and the number three” players.
  • Parties should implement practices to safeguard any competitively sensitive information that is shared through due diligence or otherwise during the bid/sale process. They also should ensure they do not violate anti-gun jumping laws that prohibit a buyer from taking control of a target or its operations pre-close.

 

U.S. v. Sabre: Putting the Innovation Theory of Harm to the Test?

In its recent complaint challenging the $360 million acquisition of Farelogix by Sabre, the Department of Justice (“DOJ”) appears to have left the door open to offering proof that harm to innovation in the market for airline bookings is a separate and independent basis to block the merger. When the case goes to trial in January 2020, watch to see if DOJ uses this case to provide a roadmap for the evidence and analytical tools to analyze innovation effects in a technology merger.

The Sabre/Farelogix Lawsuit

The DOJ complaint alleges that Sabre’s acquisition of Farelogix is a “dominant firm’s attempt to eliminate a disruptive competitor after years of trying to stamp it out.” Sabre operates the largest global distribution system (“GDS”) in the United States. A GDS is a computerized system that allows brick-and-mortar and online travel agents to search for fares and schedules and book flights across multiple airlines. The complaint alleges Farelogix is a disruptive competitor that has eroded Sabre’s dominance in airline bookings. Farelogix offers an innovative booking service that allows airlines to bypass GDSs and connect directly to travel agencies. Farelogix has also pioneered the next-generation technology standard, called “New Distribution Capability” (“NDC”). NDC offers more advanced communications between airlines and travel agents and gives airlines greater flexibility to offer travelers ancillary products and services, such as priority boarding and Wi-Fi.

The complaint alleges that over the years Sabre has used its dominant position to engage in a broad range of anticompetitive conduct to delay adoption of NDC and to impede Farelogix’s ability to compete . Despite Sabre’s efforts, Farelogix has loosened Sabre’s grip on the market for airline bookings which has given the airlines leverage to negotiate lower fees from the GDSs. In addition, competition from Farelogix has pushed Sabre to update its own outdated airline booking technology. In spite of Sabre’s efforts to hobble Farelogix, demand for NDC has steadily grown and Sabre has recognized Farelogix as an existential threat to its business model. According to DOJ, “[i]nstead of innovating to compete with Farelogix, Sabre has resorted to eliminating the competitive threat by acquiring Farelogix” and the “acquisition would wipe out this competition and innovation, harming airlines and American travelers.”

In a press statement released the same day the complaint was filed, Sabre wrote that the “DOJ’s claims lack a basis in reality and reflect a fundamental misunderstanding” of the airline booking market. In its answer, Sabre argues the transaction is procompetitive because it will accelerate the delivery of new technology to the airline booking market by combining Farelogix’s NDC technology and retailing capabilities with Sabre’s travel agent network and global footprint. Sabre challenges DOJ’s conclusion that Farelogix is a particularly disruptive and innovative competitor. Sabre contends Farelogix is “not disruptive today and will not become so in the future.” Farelogix’s booking service earned only $7 million in revenues in 2018 and has close to a zero percent share of the airline booking markets alleged in the complaint. Sabre further contends Farelogix is not poised to disrupt the market because there is nothing unique about Farelogix’s technology. NDC is an open standard that is freely available and at least 39 other firms are certified to provide NDC solutions.

Harm to Innovation

Traditional merger analysis has focused on price competition—the merged firm’s ability to raise price or reduce output. In recent decades, nonprice competition—the merged firm’s ability to reduce quality and innovation—has become an important dimension of merger analysis. The emphasis on innovation is nothing new. Section 6.4 of the DOJ/FTC 2010 Horizontal Merger Guidelines makes clear that competition may be harmed if a merger reduces the merged firm’s incentives to innovate:

The Agencies may consider whether a merger is likely to diminish innovation competition by encouraging the merged firm to curtail its innovative efforts below the level that would prevail in the absence of the merger.

Alleging harm to innovation is a well-accepted theory and many DOJ and the Federal Trade Commission (“FTC”) complaints have alleged technology mergers will reduce incentives to innovate. For example, in U.S. v. Bazaarvoice, a litigated case involving the consummated merger of the two leading ratings and review platforms, the DOJ introduced substantial evidence that competition between the parties was the primary driver of innovation in the market. In another recent DOJ case, the proposed acquisition of Tokyo Electron by Applied Materials, the parties abandoned the merger when they were unable to address the DOJ’s innovation concerns. Similarly, the FTC has challenged mergers to protect innovation in high-tech markets. For example, in Nielsen/Arbitron, the FTC required divestitures to protect future competition in the market for cross-platform audience-measurement services and in NXP/Freescale the FTC required divestitures to protect future competition in the semiconductor industry. FTC Chairman Maureen Ohlhausen explained the importance of innovation in the review of high-tech mergers:

Higher prices are obviously a fundamental concern in reviewing mergers of close competitors. The loss of competition to innovate and to develop better, faster, more efficient products, however can be just as concerning – particularly in the technology area, where essential competition often is not on price, but rather on product features.

Assessing Harm to Innovation

Most of these enforcement actions were resolved by consent where the agencies did not go into detail regarding the evidence considered and the analytic tools used to assess harm to innovation. In Bazaarvoice, the one litigated case, DOJ alleged harm to innovation along with effects on price and quality. DOJ did not ask, and the court did not find, that harm to innovation was a separate and independent basis to find the merger substantially reduced competition in the ratings and review market.

The Sabre complaint alleges two separate and distinct theories of competitive harm: (i) higher prices due to the elimination of head-to-head competition between Sabre and Farelogix, and (ii) reduced incentives to invest and innovate next-generation technology. The structure of the Sabre complaint and the extensive references to innovation competition suggests that DOJ may ask the court to make a separate finding that the merger should be blocked based on an innovation theory of harm.

The DOJ’s focus on innovation effects is likely a response to criticism that the agencies have placed excessive focus on price effects and failed to intervene when dominant firms acquire smaller, disruptive competitors. DOJ may seek to use the Sabre case to put harm to innovation on equal footing with price effects. Discovering whether DOJ intends to allege harm to innovation as a separate and independent basis to block the merger will have to wait until DOJ files its pretrial brief and presents expert and other testimony at trial. But if this is DOJ’s intention, the trial may very well answer some open questions about how the agencies approach the elimination of small, innovative competitors. For example, will DOJ articulate a clear standard for blocking a dominant firm’s acquisition of a smaller, innovative competitor? Even if Farelogix has been an aggressive and innovative competitor, will DOJ be able to prove Farelogix is uniquely positioned to push the airline booking industry forward? Expect Sabre to offer evidence that the GDSs have been a source of innovation and that there are many other similarly situated competitors that can match Farelogix’s NDC technology. Will DOJ be able to prove how Farelogix would have developed without the merger? Expect Sabre to argue that Farelogix is a weak competitor that does not have the resources to implement NDC technology at scale. What weight will DOJ give to any integration efficiencies of combining Sabre’s and Farelogix’s respective technologies? Expect Sabre to argue that the merger will lead to better products that will enhance, rather than stifle, innovation. Finally, what, if any, economic tools will DOJ use to measure any potential reduction in innovation in the airline booking market?

After Almost Two Decades the EU Commission Finally Revived Interim Measures

On June 26, 2019, the EU Commission opened a formal investigation into U.S. chipmaker Broadcom’s alleged abuse of dominance. In a rather unexpected move, the EU Commission informed the company, on the same day, of its intention to impose interim measures, a long-forgotten tool.

Broadcom, which is a major supplier of components for TV and modem chipsets, is being suspected of having put in place contractual restrictions to exclude its competitors from the market.

Hearings were held in late August.

On October 16, 2019, the EU Commission, likely unconvinced by Broadcom’s arguments, ordered Broadcom to unilaterally cease applying exclusivity clauses contained in its agreements with six manufacturers of TV set-top boxes and modems, withhold commercial advantages granted to some of its customers, and refrain from agreeing to the same provisions or like provisions for the time being.

The investigation on the merits is still ongoing.

Commenting on the October decision, Commissioner Vestager justified the recourse to interim measures, which had not been used for almost two decades, by saying that DG COMP had “strong indications” of Broadcom having engaged in exclusive or quasi-exclusive dealings with key customers and that “in the absence of intervention, Broadcom’s behavior [was] likely to create serious and irreversible harm to competition.

In her official statement about the Broadcom case, Commissioner Vestager made it clear that it would not remain a one-off case and that she was “committed to making the best possible use of this important tool,” whose advantages (efficiency, quickness) seemed to have been “re-discovered” on this occasion.

So, why such a change?

Interim measures, a tool long neglected by the EU Commission

The EU Commission’s power to impose interim measures was first recognized by the EU judge in 1980 in the Camera Care case. In this case, the judge ruled that the EU Commission had the power “to take interim measures which are indispensable for the effective exercise of its functions and, in particular, for ensuring the effectiveness of any decisions requiring undertakings to bring to an end infringements which it has found to exist.

The conditions to impose such interim measures were further clarified by subsequent caselaw.

Regulation 1/2003 later codified them as follows: “In cases of urgency due to the risk of serious and irreparable harm to competition, the Commission, acting on its own initiative may by decision, on the basis of a prima facie finding of infringement, order interim measures” (Article 8).

This codification, which could have been viewed as an opportunity to develop the use of this tool, has, instead, discouraged the EU Commission from doing so.

The conditions set forth in Article 8 of Regulation 1/2003 were indeed perceived as significantly harder to fulfill than the caselaw conditions until then applicable. The risk of a false positive (or Type 1 errors) was another reason for the EU Commission’s reluctance to use interim measures.

Thus, while decisions imposing such measures were already rare, there have simply been none since the entry into force of Regulation 1/2003.

The Commission is regularly asked to revisit its overly cautious approach to interim measures to no avail – until the Broadcom case.

Interim measures is a tool already used with some success by EU national competition authorities and is intended to be further developed at a national level

The EU Commission’s status quo contrasted with the dynamism of certain EU Member States’ competition authorities.

With an impressive track record of 27 cases of interim measures imposed between 2002 and 2019, the French Competition Authority (“FrCA”) has been by far one of the most active. While the greater use of interim measures by the FrCA may be explained by a lower burden of proof (condition of “likelihood of competition infringement” for the FrCA versusprima facie finding of infringement” for the EU Commission; condition of “serious and immediate harm” construed broadly for the FrCA versus serious and irreparable damage to competition as a whole for the EU Commission), it is also the result of a greater interventionism.

The fact that certain national competition authorities, like the FrCA, have used interim measures for years, with some success (including in the high-tech industry), has necessarily inspired the EU Commission.

It may also well be that, with the upcoming implementation of the ECN+ Directive that requires all Member States to enable their competition authorities to resort to interim measures, the EU Commission felt increased pressure to lead by example.

Dusted off tools for new challenges

The development of fast-moving markets and the hot debate as to whether the traditional tools of antitrust law are sufficient to tackle the issues posed by some big tech companies also explain the timely resurgence of interim measures.

While, around the world, legislators, academics, practitioners and competition authorities themselves continue to devise the best possible answer(s), competition authorities must find solutions to address everyday concerns voiced by consumers, clients and competitors confronted with potentially unlawful conduct adopted by big tech companies.

Dusting off some tools from the existing toolbox clearly forms part of the solution. It has been the case with the notion of exploitative abuse, voluntarily left aside from the Commission’s enforcement priorities back in 2009, and now revived.

It may now be the case with interim measures.

Conclusion

The EU Commission’s change of approach to interim measures is good news: certain circumstances do require prompt action to preserve competition on the markets and avoid irreversible harm to consumers, something which can only be achieved by interim measures given the long duration of the investigation on the merits.

This renewed interest for interim measures should not however make the EU Commission forget too quickly what it has long feared, namely Type 1 errors. Interim measures are prone to these errors which are very costly for the companies concerned and the economy in general. They can discourage companies from innovating and have the power to adversely affect public opinion for years to the detriment of the investigated companies even if the companies are cleared at the end of the day.

We can, of course, count on companies facing such measures to remind the EU Commission of these limits, as necessary.

In any event, to know whether this tool has definitively found its place in the EU Commission’s arsenal, one will have to wait for the EU judge’s reaction either in the Broadcom case, if Broadcom appeals the October decision (which seems highly likely), or in the following case of appeal against interim measures. If the EU Judge sets the bar too high in terms of the standard of proof required from the EU Commission, it will probably consign interim measures to oblivion. If the EU Judge is less demanding, it will open a rift that the EU Commission is sure to rush into.

‘Competitors’ Challenges to the Merits of a State Aid Decision is a Tough Nut to Crack, the Scor (Court) Case Reminds Us’

1. Background:

Back in 2013, Scor SE (“Scor”), whose subsidiary is engaged on the French market for the reinsurance of risks relating to natural disasters, lodged a complaint with the European Commission alleging unlawful and incompatible State aid in favor of Caisse Centrale de Réassurance (“CCR”). CCR is a public undertaking of reinsurance whose core activity concerns the reinsurance of risks relating to natural disasters in France and benefits from an unlimited State guarantee to the extent certain of its activities are concerned.

Unlimited public guarantees granted to undertakings are generally incompatible with EU State aid law. As the European Commission pointed out in its Guarantee Notice,[1]guarantees must be linked to a specific financial transaction, for a fixed maximum amount and limited in time. In this connection the Commission considers in principle that unlimited guarantees are incompatible with Article [107] of the Treaty.”

Departing from the aforementioned Notice and its decisional practice, the Commission, after having reviewed the measure in Phase I, dismissed Scor’s complaint and declared compatible, in decision C(2016) 5995 final of September 26, 2016 (the “Decision”), the unlimited guarantee in favor of CCR. The Commission considered that this guarantee was essential for the French regime for indemnification of natural disasters and pursued an objective of national solidarity in the face of risks related to natural disasters, and that it was necessary and proportionate in light of this objective and of limited disturbance on competition and interstate trade.

On May 6, 2019 the General Court of the European Union (“General Court”) dismissed the action in annulment that Scor introduced against the Decision (case T‑135/17 or the “Scor Court case”).

2. Interesting features of the Scor Court case:

It is not really its contribution on State aid substantive issues that makes this case interesting; it is rather that it reminds us of the difficulties facing companies willing to challenge the merits of a State aid decision that benefits a competitor (in this case, a compatibility decision to the benefit of CCR).

●   Legal standing to challenge a State aid compatibility decision on the merits

Referring to the landmark Plaumann case (Case 25-62), the General Court recalled that for Scor (as a non-beneficiary third party) to have standing to challenge the Decision on the merits, it had to demonstrate that it was “individually concerned,” i.e. affected by the disputed decision by reason of certain attributes peculiar to it or by reason of circumstances that differentiate it from all other persons and, by virtue of these factors, distinguish it individually just as in the case of the addressee.

To pass this test, the General Court traditionally considers that it is not enough for the applicant to be a competitor. The applicant must demonstrate that the disputed decision substantially affected its position on the market.

Hence the difficulty lies in what “substantially affected” shall mean.

We know from precedents, and this is emphasized once again by the Scor Court case, that the mere fact that a measure may exercise an influence on the competitive relationships existing on the relevant market and that the undertaking concerned was in a competitive relationship with the recipient does not suffice.

Rather, the criterion of substantial affectation of the applicant’s market position requires to be demonstrated by specific circumstances, such as: significant decline in turnover, appreciable financial losses or a significant reduction in market share following the grant of the aid in question, loss of an opportunity to make a profit or a less favorable development than would have been the case without such aid.

Hence it is easy to understand why this criterion can constitute a serious obstacle for competitors willing to challenge a State aid decision on the merits. It is even more true when one considers that, in the finding of State aid, the Commission generally does not devote too much effort to the demonstration of the affectation of competition resulting from the aid. One may regret this, as it would be very helpful (let alone for the concept of State aid) to find more developments in that regard.

In the case at hand, the General Court, following a two-step analysis, first identified the market concerned by the dispute (i.e. the French market for the reassurance of risks caused by natural disasters). It then went on to examine the circumstances put forward by Scor to demonstrate legal standing, namely: its subsidiary’s modest size on the market concerned (i.e. 0.08-0.11% – figures criticized by the Court for not being contemporaneous to Scor’s application) compared with its position on other French reinsurance markets (around 8-13%), as well as its complainant status and active role in the course of the proceedings. Regarding the first circumstance, the General Court took the view that Scor had failed to provide evidence of a potential link between the State guarantee to CCR and the particularly low level of Scor’s subsidiary’s market share on the French market for the reassurance of risks caused by natural disasters. As for the second circumstance, the complainant status and the active role played in the proceedings was recognized as a circumstance to account for, but it was said to be insufficient in itself to prove legal standing. The General Court consequently rejected, as inadmissible, Scor’s pleas challenging the merits of the Decision.

However, it declared admissible Scor’s pleas pertaining to the protection of its procedural rights, applying here again a well-established case-law according to which any “interested party” may claim protection of its procedural rights before the EU judge in relation to a decision not to raise objections or a non-aid decision.

●   Types of arguments left for competitors to challenge a State aid compatibility decision as illustrated by the Scor Court case

Competitors are easily deemed to be “interested parties,” i.e. “any person, undertaking or association of undertakings whose interests might be affected by the granting of aid …” (Article 1 of Regulation 2015/1589). But, then, as recalled by the General Court, the scope of their pleas is much more limited than if they were Plaumann-applicants, as they can only claim violation of procedural rights.

Applying this principle in the Scor Court case, the Court hence accepted to examine Scor’s pleas only on the failure to state reasons (an issue of public policy that EU courts must raise on their own motion), and on the violation of its procedural rights.

In that regard, Scor alleged that there were serious doubts as to the compatibility of the Decision, which should have led the Commission to open formal proceedings (phase II), i.e. long duration of the administrative proceedings; Commission’s hesitation on the legal basis for the Decision; the fact that a potential alternative system was envisaged; indications in the content of the Decision demonstrating serious doubts: failure to state reasons, insufficient and incomplete investigation, greater focus on the compatibility than on the existence of aid, no review of Scor’s proposal for alternative systems, misunderstanding by the Commission of the functioning of the guarantee, various circumstances raising doubts about the proportionality of the aid).

But, after addressing each of them in turn, the General Court eventually rejected all these arguments.

If, to some extent, procedural arguments may have a connection with the merits (in particular, the Court may examine substantive arguments to the extent they tend to support a procedural plea), it goes without saying that they are rather weak weapons and cannot compensate for the inadmissibility of substantive pleas. This can understandably leave the competitor-applicants frustrated when they do not manage to successfully pass the Plaumann test.

Furthermore, even in cases where pleas on the violation of procedural rights succeed, this does not necessarily mean that the measure at stake would ultimately be declared incompatible aid, as the Commission may comply with the requirements set out in a judgment without having to declare the measure incompatible.

At a time of increasing calls for enhanced private enforcement in the State aid space and when it is duly acknowledged that “State aid (…) directly harm[s] the interests of other players in the markets concerned, who do not benefit from the same type of support” (emphasis added) (see the 2019 Recovery notice), one may wonder whether it should not be necessary to revisit traditional principles about legal standing of competitors when it comes to challenging the merits of compatibility or non-aid decisions.

______________

[1] Commission Notice on the application of Articles 87 and 88 of the EC Treaty to State aid in the form of guarantees (2008/C 155/02).

New Anti-Monopoly Regulations in Force in China

September 1, 2019 may be seen as a new starting point for the enforcement of China’s antitrust and competition laws. On this date, three new sets of rules and regulations (the “Three New Regulations”) took effect, which were issued by China’s newly formed competition authority, the State Administration for Market Regulation (“SAMR”): [1]

  • the Interim Provisions on Prohibiting Monopoly Agreements (“IPP-MA”),
  • the Interim Provisions on Prohibiting Abuse of Dominant Market Positions (“IPP-AD”), and
  • the Interim Provisions on Prohibiting the Acts of Eliminating or Restricting Competition by Abuse of Administrative Power (“IPP-AAP”).[2]

The Three New Regulations are expected to provide clear guidance for the SAMR and the provincial market supervision departments in their enforcement of China’s Anti-Monopoly Law (“AML”).[3]

Main Contents of the Three New Regulations

The IPP-MA (36 Articles in total), the IPP-AD (39 Articles in total), and the IPP-AAP (25 Articles in total), are all for implementing the relevant sections of the AML (respectively, “Monopoly Agreements,” “Abuse of Dominant Market Position” and “Abuse of Administrative Power to Eliminate or Restrict Competition” sections), and have similar structures. Basically each of the Three New Regulations has the following main contents:

  1. Systematic provisions on AML enforcement mechanisms against relevant acts in violation of the AML. They are to:
    • Establish the two-level law enforcement system involving the national level and provincial level enforcement departments;
    • Set up working mechanisms, including general authorization to provincial level enforcement departments, designation of enforcement powers, commissioned investigations, and cooperation in investigations;
    • Set up the reporting system for the provincial enforcement department to initiate and handle an investigation into relevant AML violation acts; and
    • Urge the SAMR to strengthen guidance and supervision of provincial-level market regulation departments, and to unify the standards of law enforcement.
  2. Detailed provisions on law enforcement procedures:
    • The procedural regulations for each of the main stages of case handling, including whistleblowing, case-filing, investigation, case disposition, publicity, etc. are provided; the IPP-MA and the IPP-AD also clarify procedures regarding commitment proposal and handling.
    • The IPP-MA and the IPP-AD also incorporate by reference the procedural regulations promulgated by SAMR earlier this year in April, i.e. the Interim Provisions on the Procedures for Administrative Punishments for Market Supervision and Administration, and the Interim Measures for the Hearings for Administrative Punishments for Market Supervision and Administration.
  3. More details in implementing relevant sections of the AML:
    • Each of the Three New Regulations specifies the conditions or factors for finding violations of the AML, and clarifies the specific manifestations and constituent elements of violating acts. On one hand, they are expected to facilitate the implementation of the AML by not only providing guidance to AML enforcement agencies but also restricting those agencies’ discretions, and on the other hand, they may serve as clear guidelines for compliance by the parties subject to those regulations.
    • Each of the Three New Regulations provides details on how to deal with illegal acts. The IPP-MA and the IPP-AD specify the types of penalties, the factors to be considered for determining the amount of fines, and the content of administrative penalty decisions; they further clarify that a business operator shall still assume legal responsibility for reaching a monopoly agreement or abusing the dominant market position by passive compliance with administrative orders, but the responsibility can be lightened or mitigated according to law. The IPP-AAP distinguishes the action types in different case situations and clarifies the specific content of an administrative proposal after the investigation.
    • The IPP-MA also specifies the exemption and leniency system. For instance, it clarifies the conditions for applying for exemptions/leniency treatments, the consideration factors for the AML enforcement agencies to determine granting exemptions/leniency treatments, and the content of the exemptions/leniency treatments.

It is believed that the Three New Regulations will further enhance the fairness, standardization and transparency of AML enforcement.

The New Regime vs. the Old – A Comparison

  1. Each of the Three New Regulations is more comprehensive for including both substantive and procedural provisions. Before the institutional reform, the original AML enforcement agencies issued separate regulations respectively on substantive provisions and procedural provisions. Now each of the Three New Regulations combines substantive and procedural provisions to make the regulations more comprehensive and complete, which could be conducive to the implementation by AML enforcement agencies and compliance by the parties subject to the governance of those regulations.
  2. The Three New Regulations overall may improve the AML enforcement supervision mechanism: Each of the Three New Regulations clearly requires the provincial law enforcement departments to investigate and deal with illegal acts in accordance with the relevant provisions of the SAMR, and the SAMR shall strengthen the guidance and supervision of the provincial law enforcement departments. Moreover, the reporting system and a stricter supervision mechanism are to be established according to each of the Three New Regulations, which could be conducive to the AML enforcement and the formation of a new pattern of AML enforcement with the expectation of comprehensively unified standards and procedures and practice.
  3. Each of the Three New Regulations refines relevant provisions of the AML. The main highlights are:
    • The Interim Provisions on Prohibiting Monopoly Agreements[4]
      • Factors for identifying other monopoly agreements are provided. It clarifies the factors that need to be considered when applying the section “Monopoly Agreements” of the AML to identify other monopoly agreements. It is clarified that other monopoly agreements in the AML can be determined only by the SAMR, which reflects the prudential principle adopted by law enforcement agencies on this issue.
      • Prudence is attached to the application of the commitment system. Where an operator promises to correct his behavior and take the initiative to eliminate the consequences of his behavior, the AML enforcement agency may decide to suspend the investigation. The commitment system is conducive to saving law enforcement resources and improving law enforcement efficiency. At the same time, however, it is also prone to problems such as replacing punishment with suspension. It particularly stipulates that the commitment system shall not be applied to monopoly agreements for (i) fixing prices, (ii) restricting the number of goods produced or sold, or (iii) segmenting market; moreover, if the AML enforcement agency concludes after investigation that a monopoly agreement exists, it shall no longer accept an application for suspension of investigations, which is conducive to maintaining the authority of AML enforcement.
      • Adjustment is made to the leniency system. It sets different levels for the reduction and exemption of penalties, which may make the leniency system produce a better incentive effect, and encourage reporting and surrender. It also increases the number of operators entitled to lenient treatment up to three in a case, and at the same time it adjusts the extents of mitigation or exemption of punishments, which may make the leniency system work better.
    • The Interim Provisions on Prohibiting Abuse of Dominant Market Positions [5]
      • Factors for determining dominant market position of operators in new areas are provided. In recent years, the abuse of dominant market position in the Internet and intellectual property fields has received widespread attention. In response to the concerns of all sectors of society, and in order to strengthen the AML enforcement regarding dominant market position in the above two areas, the IPP-AD clearly clarifies the special factors that need to be considered in determining the dominant market position of operators in these two areas.
        • Prudence is attached to the determination of abuse of dominant market position. In law enforcement practice, it could be a complicated process to determine that the behavior of an operator constitutes such abuse. Although some acts may appear to constitute abuse of dominant market position, they may be actually commercially reasonable and should not be enjoined. The IPP-MD is believed to have fully considered the rationality of the behavior of operators, and clearly enumerates the typical abuse conducts; for instance, it stipulates that when a case involves sales of goods at a price lower than the cost, the analysis should be focused on whether the price is lower than the average variable costs; and in the case of free products provided in emerging areas such as the Internet, an overall consideration of free goods and related paid goods provided by the operator would be needed.
      • Circumstances of “justifiable reasons” are specified. Under AML, the question on whether “justifiable reasons” exist needs to be considered when determining whether a suspected act constitutes an abuse of dominant market position. The IPP-AD, based on enforcement authorities’ relevant experience, enumerates specific possible justifiable reasons for acts like selling goods at prices below cost, refusing to trade, restricting transactions, tying or attaching unreasonable trading conditions, differential treatment, etc. These provisions refine relevant provisions of the AML and are expected to enhance the law enforcement operability and increase the market predictability.
    • The Interim Provisions on Prohibiting the Acts of Eliminating or Restricting Competition by Abuse of Administrative Power [6]
      • Specific types of acts of abusing administrative power to eliminate or restrict competition are provided. As compared with the old regulations by NDRC and the former SAIC, the new regulations are expected to help accurately identify the violation acts and further enhance the operability in law enforcement practice.
      • Procedures of law enforcement and handling are improved as compared with the old regulations by NDRC and the former SAIC. For instance, it clarifies that the AML enforcement agencies may initiate investigations against suspected violation acts through performing their powers, whistleblowing, assignments by higher authorities, cases transferred by other organs, reports of lower-level organs, etc., and market-level regulatory authorities below the provincial level can also receive whistleblowing materials or discover case clues, which improves the case-filing procedure.

The Three New Regulations further clarify the standards for identifying violation acts and imposing penalties, grant the AML enforcement agencies relatively full power and authority to conduct investigations, collect evidence and sanction violating parties, which is expected to better guide and regulate enforcement activities and more effectively combat monopolistic behaviors.[7]

_____________

[1] Year 2018 is the 10th year of implementation of China’s Anti-Monopoly Law (“AML”), and it is also the year seeing China’s new round of administrative system reform. This round of reform directly led to a major change in China’s AML implementation mechanism, namely the establishment of SAMR, into which the duties of anti-monopoly law enforcement agencies originally dispersed throughout the National Development and Reform Commission (“NDRC”), the former State Administration for Industry and Commerce (“SAIC”) and the Ministry of Commerce (“MOFCOM”) were integrated. The SAMR now assumes the unified functions for AML enforcement.

[2] See the Interim Provisions on Prohibiting Monopoly Agreements, available at http://gkml.samr.gov.cn/nsjg/fgs/201907/t20190701_303056.html, the Interim Provisions on Prohibiting Abuse of Dominant Market Positions, available at http://gkml.samr.gov.cn/nsjg/fgs/201907/t20190701_303057.html, and the Interim Provisions on Prohibiting the Acts of Eliminating or Restricting Competition by Abuse of Administrative Power, available at http://gkml.samr.gov.cn/nsjg/fgs/201907/t20190701_303058.html.

[3] See Legal Daily, The Three Regulations for Implementing the Anti-Monopoly Law Implemented since September – The Anti-Monopoly Law Enforcement System Now Has “Steel and Sharp Teeth”, 2019-07-19, available at http://www.xinhuanet.com/2019-07/19/c_1124774162.htm.

[4] See Anti-monopoly Bureau, A Chart to Understand the Interim Provisions on Prohibiting Monopoly Agreements, August 30, 2019, available at http://gkml.samr.gov.cn/nsjg/xwxcs/201908/t20190830_306388.html.

[5] See Anti-monopoly Bureau, A Chart to Understand the Interim Provisions on Prohibiting Abuse of Dominant Market Positions, August 30, 2019, available at http://gkml.samr.gov.cn/nsjg/xwxcs/201908/t20190830_306387.html.

[6] See Anti-monopoly Bureau, A Chart to Understand the Interim Provisions on Prohibiting the Acts of Eliminating or Restricting Competition by Abuse of Administrative Power, August 30, 2019, available at http://gkml.samr.gov.cn/nsjg/xwxcs/201908/t20190830_306386.html.

[7] See Legal Daily, The Three Regulations for Implementing the Anti-Monopoly Law Implemented since September – The Anti-Monopoly Law enforcement system has “Steel and Sharp Teeth”, 2019-07-19, available at http://www.xinhuanet.com/2019-07/19/c_1124774162.htm.

 

Merger Non-Compete Clauses – Be Lawful or Be Gone

Non-compete clauses are commonly included in M&A agreements. Although generally recognized as lawful, non-competes must fulfill certain requirements to comply with antitrust and competition laws. A recent FTC enforcement action further clarifies these requirements for the U.S., and serves as a reminder that U.S. antitrust authorities are actively reviewing these provisions.

In January 2019 NEXUS Gas Transmission LLC entered into a Purchase and Sale Agreement (PSA) to acquire Generation Pipeline LLC, a 23-mile natural gas pipeline in the Toledo, Ohio area, from a group of sellers for $160 million.

In the Complaint and Proposed Consent announced on September 13, 2019, the Federal Trade Commission (FTC) took issue with the non-compete clause in the PSA, which would have prohibited one seller, North Coast Gas Transmission (NCGT), from competing with the Generation Pipeline for three years. NCGT not only holds a minority interest in the Generation Pipeline, but also holds the North Coast Pipeline, a 280-mile natural gas pipeline partially serving the same region. In the FTC’s view, the non-compete clause was effectively an agreement by two competitors to cease competition for a period of time. As a condition to receiving antitrust clearance to proceed with the transaction, the parties were required to amend the PSA to eliminate the non-compete clause, enabling NCGT’s North Coast Pipeline to continue competing with the Generation Pipeline. The parties will also be subject to various reporting and compliance requirements for ten years.

It is important to note that even where a transaction does not itself raise antitrust issues – as here, where the FTC did not find any issues with NEXUS’s acquisition of the Generation Pipeline – the antitrust agencies may nonetheless take issue with the ancillary agreements to a transaction. Here, the FTC looked beyond the competitive implications of the primary transaction and investigated the impact of the non-compete clause. Parties should carefully draft and negotiate all M&A agreement clauses that may impact competition, and consult with antitrust counsel as needed.


Does California’s Ban on Non-Competes Apply to Business Agreements? The California Supreme Court May Weigh In Shortly.

The Ninth Circuit recently certified a question to the California Supreme Court regarding the scope of California Business & Professions Code Section 16600.  As readers of the Orrick Trade Secrets Watch blog are likely aware, Section 16600 states that “[e]very contract by which anyone is restrained from engaging in a lawful profession, trade or business of any kind is to that extent void.”  Pursuant to this statute, California courts have struck down a number of restrictive covenants in contracts with employees in California, including non-compete provisions, customer non-solicit provisions, and certain employee non-solicit provisions.  The Ninth Circuit now wants to know whether the statute should apply to an agreement between two businesses.  The Supreme Court’s answer may have significant effects on business agreements and collaborations in or involving California.

The question arises in a recent case, Ixchel Pharma LLC v. Biogen, Inc., where the plaintiff sought to apply Section 16600 to an agreement limiting a pharmaceutical company’s ability to develop a new drug.  In 2016, Ixchel and a third-party company, Forward Pharma, entered into a collaboration agreement to develop a new and potentially profitable drug.  The collaboration agreement stated that Forward had the ability to terminate the agreement at any time by written notice.

In 2017, Forward entered into a separate agreement with Biogen.  Pursuant to that agreement, Forward agreed to terminate the collaboration agreement with Ixchel, stop development of the new drug, and refrain from entering into any new contracts for the development of the new drug.  In exchange, Biogen agreed to pay Forward $1.25 billion.

Ixchel subsequently filed suit against Biogen asserting claims for interference with contract, interference with prospective economic advantage, and unfair and unlawful business practices.  As a predicate for its unlawful business practices claim, Ixchel argued that Biogen entered into an agreement that violates Section 16600.  Specifically, Ixchel argued that the provision in the agreement with Biogen restricting Forward from working on the new drug violates Section 16600.

According to Ixchel, the statute applies to provisions that restrain “anyone” from engaging in lawful business.   Although “anyone” is not defined in the statute, Ixchel contends it should indeed mean “any” person and that other statutes regulating competition define “person” to include “a corporation, partnership, or other association.”  The district court disagreed.  It found that Section 16600 does not apply outside of the employer-employee context and dismissed the case.  Ixhcel appealed and the Ninth Circuit, after argument, certified this question to the California Supreme Court.

Applying Section 16600 to invalidate provisions in business-to-business agreements could have significant implications for all California businesses and firms doing business in California.  According to Biogen, for example, such a ruling would be contrary to the rule of reason in the federal antitrust context and could jeopardize any joint venture, lease, distribution agreement, or license agreement, as well as other widely used business agreements in which a business voluntarily limits the scope of its operations geographically, by sector, or otherwise.

When the California Supreme Court takes up certified questions, it generally requires separate briefs and oral argument.  The time to resolution varies among cases, but Antitrust Watch will keep an eye on the issue and provide updates as it develops.

Another Reminder That the UK Merger Control Regime Is More Than Just Voluntary

On 6 August 2019, the UK’s Competition and Markets Authority (the “CMA”) imposed an ‘Unwinding Order’ on a U.S. company, Bottomline Technologies (de), Inc (“Bottomline”), active in the business payment automation technology space, and its UK subsidiary (“Bottomline UK”), in connection with its investigation into Bottomline’s completed acquisition of Experian Limited’s Experian Payments Gateway business (the “EPG Business”). The acquisition was completed on 6 March 2019.

An ‘Initial Enforcement Order’ or ‘IEO’, preventing further integration, had already been imposed on Bottomline and Bottomline UK on 22 May 2019.

The Unwinding Order imposes obligations in relation to the handling of information:

  • Bottomline must not use “EPG Confidential Information” (i.e. commercially sensitive information regarding the EPG business) to “solicit” any existing EPG customers in relation to any product or service that competes with the EPG business;
  • Bottomline and Bottomline UK must “segregate” all EPG Confidential Information (including existing physical and electronic materials) and ensure that such information cannot be accessed by any Bottomline and Bottomline UK representatives or employees other than certain EPG staff, except where necessary to comply with regulatory and/or accounting obligations or with the prior written consent of the CMA;
  • Bottomline and Bottomline UK must procure that EPG staff destroy or delete any “Bottomline Confidential Information” (i.e. any commercially sensitive information regarding the Bottomline business in respect of any products or services that compete with the EPG business) that they hold; and
  • Bottomline and Bottomline UK must procure that no EPG staff have access to Bottomline Confidential Information, except with the prior written consent of the CMA.

The Unwinding Order remains in force until it is varied or revoked.

This matter reminds us of the risks inherent in proceeding to complete a transaction without having obtained CMA clearance, i.e. the risks of the CMA investigating a transaction (that has been legally completed) and imposing disruptive measures pending the outcome of its investigation. At a more general level, the difficulties of reversal are relative to the scale of implementation and would be far more difficult for instance if employee’ contracts have been terminated, or supply/customer contracts novated or terminated. A careful assessment of whether to voluntarily notify the CMA of a transaction prior to completion should therefore be conducted in respect of transactions involving overlapping businesses in the UK.

No Signs of Slowing Down — Global Antitrust Agencies Focus on Big Tech

Earlier this year, we covered the widespread interest in tech giants among international competition authorities, as well as the potential for divergence in intensity and type of enforcement across jurisdictions. We observed that while the U.S. enforcement agencies did not appear to support a regulatory approach to platforms and the digital economy, others like the Australian Competition and Consumer Commission (ACCC) and the UK Parliament’s Digital Culture, Media and Sport Committee may have a stronger appetite for proactive regulation.

Since that post, competition authorities, both U.S. and other, have intensified their focus, with activities ranging from sector-wide studies to investigations into individual tech companies.

For example, the U.S. Department of Justice Antitrust Division (DOJ) recently announced a broad review of whether online tech companies have harmed consumers or otherwise reduced competition. The probe will cover leading online platforms in “search, social media, and some retail services” and will focus on “practices that create or maintain structural impediments to greater competition and user benefits.”

That DOJ announcement is part of a broader effort by the U.S. antitrust enforcement agencies to address competition in the tech sector. Days later, the Attorney General met with eight State AGs who reportedly are considering opening their own investigations. The FTC launched a tech task force back in February (in addition to its recently concluded hearings on competition and consumer protection) and last month opened a formal antitrust investigation into Facebook (according to a recent press release accompanying Facebook’s Q2 earnings report). Reports also have emerged of FTC information requests to third-party resellers on Amazon. Even the Antitrust subcommittee of the U.S. House Committee on the Judiciary has held a hearing on online platforms and market power as part of its separate investigation.

The U.S. agencies’ overseas counterparts have remained just as active. In Australia, the ACCC just published the Final Report from its Digital Platforms inquiry. The inquiry focused on online search engines, social media platforms and other digital content aggregation platforms with an emphasis on Facebook and Google, and looked into the impact of digital platforms on competition in the advertising and media markets, and on advertisers, media content creators and consumers.

The final report found that Google has “substantial market power” in the supply of general search services and search advertising services in Australia, and that Facebook has “substantial market power” in the supply of social media services and display advertising services in Australia. Both companies were found to have “substantial bargaining power” in their dealings with news media businesses in Australia. The report cautioned that this market power could be used to damage the competitive process, though it did not look at whether these digital players have in fact misused their market power.

The report offered 23 recommendations “aimed at addressing some of the actual and potential negative impacts of digital platforms in the media and advertising markets, and also more broadly on consumers.” The recommendations most directly implicating competition include changing merger law to incorporate additional factors – such as the likelihood that the acquisition would result in the removal of a potential competitor from the market, and the nature and significance of assets, including data and technology, being acquired – and to require advance notice of acquisitions; and creating a new, specialist digital platforms branch within the ACCC to monitor and investigate proactively instances of potentially anticompetitive conduct by digital platforms and take action to enforce competition and consumer laws.

The report also recommended changes to Australia’s Privacy Act, including expanding the definition of “personal information” to include technical data, strengthening notification and consent requirements and pro-consumer defaults, enabling the erasure of personal information, and introducing direct rights of action and higher penalties for breach, as well as establishing an ombudsman scheme to resolve complaints and disputes with digital platform providers. Additional recommendations focused specifically on news media (e.g. creating a code of conduct to promote fair and transparent treatment of news media by digital platforms, improving digital media literacy in schools and the communities, and offering greater funding for public broadcasters and local journalism).

Similar undertakings are in the works around the globe. The ACCC report comes just as the UK Competition and Markets Authority (CMA) announced the start of a formal market study into online platforms and the UK market for digital advertising. The study will examine three potential sources of harm in digital advertising: (1) The market power of online platforms in consumer-facing markets – to what extent online platforms have market power and what impact this has on consumers; (2) Consumer control over data collection practices – whether consumers are able and willing to control how data about them is used and collected by online platforms; and (3) Competition in the supply of digital advertising in the UK – whether competition in digital advertising may be distorted by any market power held by platforms. Platforms not funded by digital advertising are expressly outside the scope of the study.

In keeping with what appears to be a greater openness toward proactive regulation than the U.S. agencies (at least historically), the discussion of potential remedies in the CMA’s Statement of Scope explains that the “current expectation is that any remedies are likely to focus on recommendations to Government for the development of an ex ante regulatory regime … and are likely to require legislative change.” The CMA does not believe that a “one-off” market investigation and intervention is “sufficient to provide a sustainable long-term framework for the sector.” The five main areas in which remedies may be required include: (1) increasing competition through data mobility, open standards, and open data; (2) giving consumers greater protection over data; (3) limiting platforms’ ability to exercise market power; (4) improving transparency and oversight for digital advertisers and content providers; and (5) institutional reform. The CMA plans to publish an interim report with initial findings in January 2020, with a final report to follow no later than July of next year.

Not to be outdone, the EU – which recently has been fairly active in the tech sector, including last year’s highly publicized Google Android decision – recently announced a formal investigation into Amazon. The investigation focuses on Amazon’s role as both a platform provider (through Amazon marketplace) and a participant on that platform (through its first-party retail offerings), asking whether Amazon’s use of sensitive data from independent retailers is in breach of EU competition rules. Specifically, the Commission will look into (1) the standard agreements between Amazon and marketplace sellers, which allow Amazon’s retail business to analyze and use third-party seller data; and (2) the role of data (including competitively sensitive marketplace seller data) in selecting the winners of the “Buy Box,” which allows customers to add items directly to their shopping carts and accounts for the majority of Amazon transactions.

As we cautioned previously, with so many competition authorities weighing in on how to assess tech competition, this confluence of inquiries and investigations can pose a challenge for global enterprises operating under an international patchwork of approaches. Technology-focused, data-intensive businesses should consider seeking antitrust counsel to monitor developing competition trends and implications across jurisdictions.

Companies, Board Members and Officers Take Note: U.S. Antitrust Agencies Are Focused on Interlocking Directorates

The FTC and the DOJ Antitrust Division have again warned companies, along with their board members and officers, of the legal prohibition on interlocking directorates: when an individual, or an organization’s agent(s), simultaneously serves as an officer or director of two competing companies. In a recent FTC blog, and prior post, the agency flagged the importance of monitoring for interlock issues during standard antitrust compliance. The DOJ Antitrust Division likewise recently made clear in remarks by Assistant Attorney General Makan Delrahim and Principal Deputy Assistant Attorney General Andrew Finch, that it, too, is closely monitoring interlocks, particularly during transaction reviews. In-house counsel, board members and executive officers must routinely monitor interlock issues, or risk an independent government investigation or side investigation to an M&A review.

The Law

Section 8 of the Clayton Act, 15 U.S.C. § 19, prohibits “interlocking directorates.” The concern is that officer or director interlocks between competitors could result in inappropriate coordination or the sharing of competitively sensitive information, in violation of antitrust laws. The purpose of Section 8 is therefore to “nip in the bud incipient violations of the antitrust laws by removing the opportunity or temptation to such violations through interlocking directorates.” U.S. v. Sears, Roebuck & Co., 111 F. Supp. 614, 616 (S.D.N.Y. 1953).

Q: Which positions are covered?

A: “Director” means a member of the board of directors, and “officer” means a position elected or chosen by the board. The prohibition applies not only to the same individual serving as an officer and/or director of two competing companies but also to entities (like private equity firms) that have their agent(s) or representative(s) serving in these roles.

Q: Which entities are covered?

A: While the statute specifically refers to interlocks among “corporations,” DOJ Antitrust Division AAG Delrahim recently signaled a willingness to enforce Section 8 against unincorporated entities such as LLCs, as the potential harm is “the same regardless of the forms of the entities.” The FTC has taken similar positions in, for example, investigating interlocks involving banks, which Section 8 exempts, and competing non-bank corporations.

Q: What are “competitive sales”?

A: “Competitive sales” are “the gross revenues for all products and services” sold by one company in competition with the other, “determined on the basis of annual gross revenues for such products and services in [the company’s] last completed fiscal year.” Companies are “competitors” if an agreement between them would violate antitrust laws. 15 U.S.C. § 19(a)(1)(B), (a)(2). The FTC has advised companies to look at their ordinary course business documents and to speak to knowledgeable employees in determining if two companies compete.

Q: Is there a grace period for compliance?

A: If an interlock did not violate Section 8 at the time it was established but, later, changed circumstances cause a prohibited interlock (such as two companies that previously did not compete becoming competitors), the companies or individuals will have one year to cure. During that time frame, parties must remember that other antitrust laws still apply.

When an interlock violates Section 8 from the time it was established, there is no grace period to cure.

The Risks

Section 8 violations are inherently illegal and do not require proof that the interlock resulted in harm to competition. The government’s remedy for a Section 8 violation is injunctive relief—elimination of the offending interlock, typically with an officer or director’s resignation. But any interlock — in violation of Section 8 or not—could give rise to claims under other antitrust laws. Section 1 of the Sherman Act prohibits combinations and conspiracies in restraint of trade, and Section 5 of the FTC Act prohibits unfair or deceptive acts in restraint of commerce. The FTC has stated it may use Section 5 to reach interlocks that may not “technically meet” the ban in Section 8 of the Clayton Act but which the agency determines may “violate the policy against horizontal interlocks expressed in Section 8.” Private plaintiffs also could bring a Sherman Act claim for treble damages.

A New Twist in the Micula Case

The Micula case refers to what started as an intra-EU arbitration dispute between two Swedish investors and Romania and might end—or not—as a State aid case. After the recent EU judgment of June 2019, which marks a new twist, the fate of this case from a State aid perspective remains at least partially undecided.

Background of the Micula case

In the late ’90s, the Romanian government wanted to attract investors to help Romania’s economy grow, especially in the poorer regions of the country. To do so, it inter alia enacted the Emergency Government Ordinance 24/1998 (“EGO 24”) later amended by Emergency Government Ordinance 75/2000 (“EGO 75”) which made available certain tax incentives to investors in certain disfavored regions of Romania and was expected to last 10 years.

Relying on this favorable scheme, the Micula brothers, two Swedish nationals, invested heavily in the Ştei-Nucet Drăgăneşti region in northwestern Romania.

However, in 2005, on the eve of its accession to the EU, Romania abolished almost all the tax incentives in an effort to comply with the EU acquis communautaire and especially State aid rules.

The Micula brothers brought a claim against Romania grounded on the violation of the “fair and equitable treatment” clause of Article 2§3 of the Sweden-Romania Bilateral Investment Treaty (hereafter, “BIT”) before an arbitral tribunal. The EU Commission intervened as amicus curiae in these proceedings. In essence, its position was that the EGO 24 incentives constituted incompatible State aid, and that any ruling reinstating the privileges or compensating for their loss would lead to the granting of new aid incompatible with the Treaty on the Functioning of the European Union. In 2013, the arbitral tribunal ruled in favor of the Micula brothers and ordered Romania to compensate the tax break losses for the 2005–2009 period for an amount of EUR 178 million, interest included.

Two years later, in a 2015 decision, the EU Commission found that the implementation of the compensation award by Romania was in breach of EU State aid rules. The Commission thus ordered full recovery from the Micula brothers.

This decision was appealed before the EU General Court which issued its judgment on June 18, 2019.

The General Court ruling

When traditional principles of law enforcement over time are called to the rescue

The claimants argued the Commission’s lack of competence and the inapplicability of EU law to a situation that predated Romania’s accession to the EU.

The General Court generally endorsed their arguments. It first pointed that EU law became applicable in Romania only after its accession to the EU on 1 January 2007, at which date the Commission acquired competence to apply EU rules to Romania. The General Court then determined that the date on which the alleged aid was granted was the date on which the right to receive compensation was acquired, i.e., the date of revocation of EGO 24 (2005). The General Court emphasized the irrelevance of the compensation award issued in 2013, after Romania’s accession to the EU, as it was simply a recognition of that right.

On this basis, the General Court concluded that the EU Commission had no jurisdiction over the amounts granted as compensation for the 2005–2007 period and exceeded its powers in State aid review by addressing the issue of damages without distinguishing the periods before or after accession.

Impact on the inapplicability of EU law to the State aid issue

On the substantive issue, there was not much left for the EU General Court to decide after the finding of inapplicability of EU law to the compensation for the period predating accession. After having recalled the well-established case law according to which compensation for damage suffered cannot be regarded as aid unless it has the effect of compensating for the withdrawal of unlawful or incompatible aid, the General Court logically concluded that the compensation of the withdrawal of EGO, at least for the period predating accession, could not be regarded as compensation for withdrawal of unlawful or incompatible State aid.

As the disputed decision failed to distinguish between compensation for the period predating accession and post-accession, the Court annulled the Commission Decision (EU) 2015/1470 of 30 March 2015 in its entirety.

Conclusion

While the General Court rightly quashed the EU Commission’s tendency to overly assert its competence when it comes to the State aid space, one may regret that the judgment does not address the substantive State aid issue at stake. The question of whether compensation of the withdrawal of EGO for the post-accession period constitutes State aid is hence cautiously left open by the General Court. Therefore, this judgment may possibly not put an end to the Micula saga as the EU Commission may not have had its last word.

This case, combined with the now-famous Achmea case, which has rung the death knell of investor-state arbitration clauses contained in intra-EU BITs[1], shows the potential difficulties that investors, which are incentivized by public measures, may face when they invest within the EU. Indeed, at the end of the day, they are the only ones to really bear the State aid risk and face the consequences of recovery, with relatively limited possibilities for legal recourse. This case shall remind those investors to carefully address the issue of potential State aid as part of their overall legal risk assessment.

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[1] See Declaration of the representatives of the governments of the Member States of 15 January 2019 on the legal consequences of the judgment of the Court of Justice in Achmea and on investment protection in the European Union.

DOJ Changes Course and Announces That It Will Favorably Consider “Robust” Antitrust Compliance Programs at Both the Charging and Sentencing Stages in Criminal Cases

Benjamin Franklin once observed that “an ounce of prevention is worth a pound of cure.” In the antitrust context, this means that most, if not all, companies will want as a matter of course to adopt and maintain an antitrust compliance program, because doing so will help avoid antitrust problems before they occur.

Until recently, however, the U.S. DOJ Antitrust Division gave no weight to corporate antitrust compliance programs at the charging stage of criminal cases, and provided little public guidance as to how they would be considered at the sentencing stage of such proceedings. As former Deputy Assistant Attorney General Brent Snyder noted in 2014, there were once two hard truths about compliance programs. The first was that the “existence of a compliance program almost never allows the company to avoid criminal antitrust charges.” [1] The second was that “the Division, like the Department of Justice as a whole, almost never recommends that companies receive credit at sentencing for a preexisting compliance program.” [2] That changed late last week with an important announcement by Assistant Attorney General Makan Delrahim. Delrahim described the changes to the Division’s treatment of antitrust compliance programs and also announced the publication of a Division guidance document that Division lawyers will use to apply the policy.

Prior to the policy change, a corporate compliance policy would itself garner no credit at the criminal charging stage; instead, the Division took an “all-or-nothing” approach, rewarding the first company in a cartel to come forward with leniency, and possibly advocating for criminal penalty reductions for other companies that fully cooperate in the investigation.

No longer. Going forward, a company with a “robust” compliance program (even if it is not the first to seek leniency) may be eligible for a deferred prosecution agreement (“DPA”). As Delrahim stated in his recent speech, “a company with a robust compliance program actually can prevent crime or detect it early, thus reducing the need for enforcement activity; minimizing the harm to consumers earlier and saving precious taxpayer resources” even if the compliance program is not 100% effective.

In evaluating whether a compliance program is robust, pursuant to its guidance document, the Division will ask three fundamental questions at the charging stage: (1) Is the corporation’s compliance well designed? (2) Is the program being applied earnestly and in good faith? and (3) Does the corporation’s compliance program work?

In asking and answering these three fundamental questions, the Division will consider nine factors, which the guidance document stresses are not a checklist or formula. The first factor looks to the program’s design and comprehensiveness, and considers whether the program is merely a “paper” program or whether it was designed, implemented, reviewed and revised as appropriate in an effective manner. The second factor looks to the culture of compliance, and asks whether management has clearly articulated —and conducted themselves in accordance with— the company’s commitment to good corporate citizenship. And the third factor looks to whether those with operational responsibility for the program have sufficient autonomy, authority and seniority, as well as adequate resources to implement the program. Other factors include whether the program: is tailored to the best practices of the industry and to the unique circumstances of the company; provides training and communication that is clear and empowers employees to act with confidence of the rules; requires periodic review, monitoring, and auditing; establishes reporting mechanisms to allow for anonymous or confidential reports without fear of retaliation; creates a system of incentives and discipline to ensure the program is well-integrated into the company’s operations and workforce; and implements mechanisms for self-policing, remedying issues and improving the program to prevent future issues. Although many of the factors are fairly straightforward and some reflect prior statements by agency officials, the guidance constitutes the first time in the Division’s criminal program history that it has issued formal guidance regarding how it evaluates antitrust compliance programs.

Perhaps not surprisingly, merely having a robust compliance program will not guarantee a DPA. Instead, the Division will also consider whether the company self-reported the misconduct, whether it cooperated with government investigations, and whether it took remedial action.

The new guidance document also clarifies how the Division will consider compliance programs at the sentencing stage. A company may receive a three-point reduction in its “culpability score” under the U.S. Sentencing Guidelines if it has an “effective” compliance program. However, there is no reduction if there has been an unreasonable delay in reporting illegal conduct to the government, and there is a rebuttable presumption that a compliance program is not effective when certain “high-level personnel” or “substantial authority personnel” participated in, condoned or were willfully ignorant of the offense. An effective guidance program may also avoid the need for the DOJ to recommend corporate probation. Finally, the Division’s guidance provides that a dedicated effort by the company’s senior management to change company culture after an antitrust violation and corporate actions to prevent the recurrence of an antitrust violation are relevant to whether the DOJ should recommend a criminal fine reduction.

In sum, for most companies, it has always made good sense to have, and to periodically update and review, an antitrust compliance policy. Of course, no one ever wants or expects to be involved in a criminal antitrust investigation, but in light of the Antitrust Division’s recent announcement about and guidance concerning how it will take such policies favorably into account in such investigations, it likely makes sense for many companies to dust off their programs to ensure that they are adequately robust in the eyes of the Division.

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[1] Snyder, supra note 1, at 9.

[2] Brent Snyder, Compliance is a Culture, Not Just a Policy, at 8 (Sept. 9, 2014), https://www.justice.gov/atr/file/517796/download.

DOJ Publishes Statements Clarifying Its Analysis of No-Poach Agreements – But Questions Remain

Since issuing the DOJ/FTC Antitrust Guidance for Human Resource Professionals in 2016, the DOJ Antitrust Division has remained active in enforcing and commenting on agreements among employers not to compete for hiring employees (“no-poach” agreements). DOJ filed several statements of interest in private antitrust suits involving no-poach provisions to provide guidance to the courts on the proper application of the federal antitrust laws to such restraints. Although the statements of interest provided clarity on the analysis of “naked” no-poach agreements, questions remain about the appropriate standard for analyzing no-poach restraints in franchise agreements.

Naked No-Poach Agreements Are Per Se Unlawful

DOJ recently took the unusual step of filing an unopposed motion to intervene in a class action no-poach settlement to enforce the injunctive relief agreed upon by the parties. The proposed class action alleged that a no-poach agreement between Duke/Duke University Health System and UNC/UNC Health Care System harmed competition for skilled medical labor. The named plaintiff alleged she was denied a lateral move to UNC from Duke because of agreements between senior administrators and deans at the institutions. On May 22 the court approved DOJ’s motion to intervene.

In its statement of interest, DOJ argued that such restrictions on hiring are per se unlawful market-allocation agreements between competing employers. These agreements harm consumers (employees) by depriving them of the benefits of competition that may lead to better wages or terms of employment. A court or agency will not evaluate the competitive effects of a per se unlawful agreement. Unlike such “naked” restraints, agreements that are ancillary to a separate, legitimate competitor collaboration are not considered per se unlawful and are analyzed under the rule of reason. In this case, DOJ argued that Duke had not presented evidence to show that the restraint was ancillary to a legitimate collaboration. DOJ’s analysis of the alleged agreements in its statement further cements the agency’s stance that “naked” no-poach agreements are per se unlawful. DOJ’s statement of interest sends a strong signal that it is actively monitoring no-poach cases and will readily offer its views where a party is making arguments inconsistent with the agency’s interpretation of the law. DOJ’s intervention will also deter the parties from violating the settlement and send a clear signal to others that DOJ will aggressively pursue firms that enter into naked no-poach agreements.

Questions Remain as to the Appropriate Standard for Analyzing Employment Restrictions in Franchise Agreements

Also making their way through the courts are several cases against fast-food chains alleging that franchisor agreements prohibiting poaching among franchisees are unlawful. For example, a complaint against Jimmy John’s alleged that Jimmy John’s orchestrated no-solicitation and no-hire agreements between and among franchisees. Similar claims were made against Auntie Ann’s, Carl’s Jr., Domino’s Pizza and Arby’s, among others, with some food chains settling.

DOJ filed a statement of interest in Harris v. CJ Star, LLC, Richmond v. Bergey Pullman Inc., and Stigar v. Dough Dough, Inc. In its statement, DOJ took the position that most franchisor-franchisee restraints should be analyzed under the rule of reason. It reasoned the agreement was vertical in nature because it is between a franchisor and a franchisee (parties “at different levels of the market structure”). By way of example, DOJ pointed to territorial allocations among franchises that restrict intrabrand competition but increase interbrand competition (i.e. competition among other food chains). Such restraints are evaluated under the rule of reason.

DOJ also argued that where there is “direct competition between a franchisor and its franchisees to hire employees with similar skills, a no-poach agreement between them is correctly characterized as horizontal and, if not ancillary to any legitimate and procompetitive joint venture, would be per se unlawful.” But then DOJ stated that the hub-and-spoke nature of the franchise agreement was an ancillary restraint because “the typical franchise relationship itself is a legitimate business collaboration in which the franchisees operate under the same brand.” According to DOJ, if the no-poach agreements are reasonably necessary to the franchise collaboration and not overbroad, they constitute an ancillary restraint subject to the rule of reason.

By contrast, the Attorney General of Washington took the position in an amicus brief that franchise agreements that “restrict solicitation and hiring among franchisees and a corporate-owned store” should be analyzed as per se unlawful, at least under state law. The AG argued that these agreements have both vertical and horizontal characteristics. Given the horizontal component, the AG took the position that such agreements do not warrant analysis under the more lenient rule of reason. The AG further argued that franchisors have “a heavy burden” in showing that these restraints can be justified as ancillary to a legitimate collaboration. The American Antitrust Institute similarly critiqued DOJ’s approach in a letter. It argued that the franchise no-poach agreements at issue are not ancillary because “[a]greements that have no plausible justifications or cognizable efficiencies are never ancillary” since they “do not hold the promise of procompetitive benefits and are not ‘necessary’ to the broader integration.”

Courts hearing the fast-food cases will have to resolve these conflicting arguments as they consider various motions to dismiss. In late May, a judge refused to grant Domino’s Pizza’s motion to dismiss concerning a no-hire provision that was included in the chain’s franchise agreements. The clause prohibited franchisees from recruiting or hiring other Domino’s franchisee employees without prior written consent. The judge found that plaintiff had sufficiently pled a horizontal restraint between franchisees and did not need to decide at the motion to dismiss stage which standard should ultimately be applied. The court reasoned that more factual development would be needed to decide that issue, unpersuaded by Domino’s Pizza’s reliance on summary judgment and trial decisions that contained a more robust factual record. A recent order by a district court evaluating similar claims against Jimmy John’s highlighted the varying positions emerging, referring to a “dichotomy” between DOJ’s position and the American Antitrust Institute. Although it acknowledged that DOJ is a “titan in this arena,” the court stressed that the agency is “not the ultimate authority on the subject.”

For now, employers that are members of any no-poach agreement with a vertical component should proceed with caution. Although DOJ’s position is favorable to no-poach agreements they deem vertical in nature, questions remain as to whether these agreements warrant per se, quick look, or rule of reason analysis.[1] Courts are proceeding cautiously, and a consensus has not yet emerged. As the court in Jimmy John’s succinctly summarized: “[T]hese questions here are in their infancy, and this battle looks like one that will make its way through the courts for years to come.”

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[1] A “quick look” analysis is used “when the great likelihood of anticompetitive effects can easily be ascertained.” California Dental Assn. v. FTC, 526 U.S. 756, 770 (1999).

Toward Uncharted Waters – The CVS-Aetna Merger

On June 4 – 5, 2019, Judge Richard J. Leon of the U.S. District Court for the District of Columbia held an extraordinary and unprecedented evidentiary hearing to decide whether to enter the proposed Final Judgment in U.S. v. CVS/Aetna requiring the divestiture of Aetna’s Medicare Part D business. Judge Leon has been highly critical of DOJ’s proposed remedy and has disrupted long-established DOJ practices to resolve competitive concerns in merger cases. A decision to reject the Division’s proposed remedy would upend established law, interfere with DOJ’s ability to negotiate merger settlements, and create uncertainty in DOJ’s merger enforcement program.

Procedural History

Following an 11-month investigation, the Antitrust Division on October 10, 2018 filed a lawsuit seeking to enjoin CVS Health Corporation’s $69 billion acquisition of Aetna, Inc. The complaint alleged the transaction would substantially lessen competition for the sale of individual prescription drug plans (“individual PDPs”) in 16 regions in the U.S. Individual PDPs provide Medicare beneficiaries with insurance coverage for their prescription drugs (Medicare Part D). To address the harm alleged in the Complaint, the Division filed a proposed Final Judgment that required CVS to divest Aetna’s nationwide individual PDP business to WellCare Health Plans, Inc.

When settling an antitrust case, DOJ must comply with the Tunney Act, which establishes various procedures the parties must follow, after which the settlement can be submitted to the court to determine whether entry of the proposed Final Judgment “is in the public interest.”[1] Consistent with standard Tunney Act practice, Judge Leon entered an order permitting the parties to close their transaction and requiring CVS to hold separate Aetna’s individual PDP business until the assets are divested to WellCare. Pursuant to Judge Leon’s order, the parties closed their transaction on November 28, 2018, and two days later completed the divestiture to WellCare.

Despite having authorized the parties to close the transaction, Judge Leon became concerned the status quo would not be preserved in the event he subsequently concluded the proposed Final Judgment would not be in the public interest. Judge Leon was very critical of the proposed remedy, which he said involved “about one-tenth of one percent” of the value of the transaction. He also expressed concern that the proposed Final Judgement failed to address potential harm in the market for pharmacy benefit management (“PBM”) services. PBM providers manage pharmacy benefits for health plans and negotiate their drug prices with pharmaceutical companies and retail pharmacies. Specifically, Judge Leon wanted to preserve the option to reject the proposed Final Judgment if he found that DOJ, in failing to allege harm in the PBM market, had drafted the Complaint so narrowly as “to make a mockery of judicial power.”[2]

Judge Leon ordered the parties to explain why CVS should not be required to hold Aetna separate and insulate the management of the two companies during the pendency of the Tunney Act process. DOJ vigorously objected that the court did not have the power to consider possible harm in the PBM market because the complaint did not allege harm in the PBM market and the record before the court did not implicate the judicial mockery standard. Ultimately, CVS diffused the issue when it voluntarily agreed to stop further integration efforts and to preserve the status quo by operating Aetna’s health insurance business as a separate unit from CVS’s businesses.

The Tunney Act requires the publication of the proposed Final Judgment followed by a 60-day public comment period. DOJ received 173 comments about the proposed settlement, many criticizing the remedy. DOJ filed its response to the public comments on February 13, 2019. It concluded that the proposed Final Judgment provides an effective and appropriate remedy for the antitrust violation alleged in the Complaint and is therefore in the public interest. Thereafter, the Division filed a motion requesting that Judge Leon enter the proposed Final Judgment.

Tunney Act Hearing

In most Tunney Act proceedings, courts make their public interest determination based on the Complaint, the terms of the proposed Final Judgment, public comments, and DOJ’s response to the public comments. In rare cases, the court will consider argument from the parties and on very rare occasions will hear from other interested parties. Here, Judge Leon accepted briefs opposing the remedy filed by amici curiae the American Medical Association, AIDS Healthcare Foundation, and Consumer Action and U.S. PIRG. In an unprecedented move, Judge Leon ordered a hearing to take live testimony from witnesses presented by the amici and the parties. In connection with the ordered hearing, Judge Leon directed the parties and amici to submit lists of witnesses and a summary of their testimony and issued the following rulings concerning the conduct of the hearing:

  • From the list submitted by the amici, Judge Leon selected three witnesses: an economic expert, the President of the American Antitrust Institute and the Chief Medical Officer from the AIDS Healthcare Foundation.
  • From the CVS list, Judge Leon selected CVS’s economic expert, Aetna’s Vice President of its Medicare Part D business and CVS’s Chief Transformation Officer.
  • Judge Leon refused to hear testimony from DOJ’s economic expert and WellCare’s Executive Vice President of Clinical Operations and Business Development.
  • Judge Leon ordered that witnesses will not be subject to cross-examination and there would be no opening and closing arguments.
  • Judge Leon overruled DOJ’s objection that the proposed hearing procedures gave the amici the ability to frame the issues and denied the DOJ from meaningful participation in the proceedings.

Over the two-day hearing, Judge Leon heard testimony from the amici’s expert witnesses that WellCare is not a suitable divestiture buyer because: (i) WellCare does not have Aetna’s brand recognition, (ii) WellCare will be dependent on CVS to provide PBM services and (iii) the divestiture itself raises concentration levels in several regions. Judge Leon also heard testimony from two amici witnesses that the merger raises vertical competitive concerns. By combining CVS’s thousands of pharmacies and 92 million PBM members with Aetna’s 22 million insurance customers, the merged firm will have a greater ability and incentive to deny its PBM services to rival health plans or raise the prices for its PBM services to rival plans. After the two-day hearing, Judge Leon indicated that he would accept final briefs and hear closing arguments next month.

What’s Next

The CVS/Aetna merger entered murky waters some months ago and is now headed toward uncharted waters. Pressuring merging parties to hold the two companies separate while the Tunney Act process plays out is unnecessary and unwarranted. Nothing in the Tunney Act bars the parties from consummating their merger, and consumers may be harmed by delaying integration activities that may generate efficiencies. Nor does closing prevent DOJ from obtaining additional relief if necessary. Parties that close before the settlement receives final approval by the court bear the risk the proposed remedy is not in the public interest and therefore may have to make additional concessions to obtain court approval. The Tunney Act evidentiary hearing was also highly unusual and did not give DOJ a fair opportunity to defend its settlement. In particular, DOJ had no cross-examination rights and no opportunity to offer expert testimony to rebut the testimony from the amici’s expert. Also unusual was Judge Leon’s decision to reject testimony from WellCare, even though the amici challenged WellCare’s suitability as a divestiture buyer.

The CVS/Aetna proceeding highlights a tension in the Tunney Act. Judge Leon’s public interest determination is limited by binding D.C. Circuit precedent U.S. v. Microsoft. Under Microsoft, DOJ has considerable discretion to settle antitrust cases and the court’s review is limited to reviewing the proposed remedy in relationship to the allegations in the complaint. A Tunney Act court does not have the authority to inquire into matters outside the scope of the complaint. Judge Leon clearly bristles at playing such a limited role. At a November 29, 2018 status hearing, Judge Leon said that he would not take a “rubber stamp” approach to approving the proposed Final Judgment. Judge Leon’s May 13, 2019 order regarding the Tunney Act hearing noted that Microsoft authorized a Tunney Act court to reject a settlement that makes a “mockery of judicial power.” The court’s actions clearly suggest that DOJ’s failure to allege and remedy harm in the PBM market may satisfy the “judicial mockery” standard.

It remains to be seen if Judge Leon, based on a two-day hearing, will second-guess DOJ’s decision that the merger will not harm competition in the PBM market. Given controlling authority in the D.C. Circuit and the irregularities in the Tunney Act proceeding, Judge Leon may conclude his only option is to enter the proposed Final Judgement. If, on the other hand, he rejects the proposed Final Judgment for failing to address concerns outside the scope of the Complaint, he will likely be overruled by the D.C. Circuit.

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[1] The Antitrust Procedures and Penalties Act, 15 U.S.C. §§16(b)-(h).

[2] U.S. v. Microsoft Corp., 56 F.3d 1448, 1462 (D.C. Cir. 1995).

 

Whistling in the Wind? DOJ’s Unusual Statement of Interest in FTC v. Qualcomm Case Highlights Disparity Between U.S. Antitrust Agencies on FRAND, SEPs, & Competition Law

In a highly unusual move, the U.S. Department of Justice Antitrust Division (DOJ) recently filed a statement of interest in the Federal Trade Commission (FTC)’s unfair competition case against Qualcomm. The statement asks the court to order additional briefing and hold a hearing on a remedy if it finds Qualcomm liable for anticompetitive abuses in connection with its patent licensing program. As the FTC pointed out in its short response to the DOJ, the court had already considered and addressed the question of whether liability and remedies should be separately considered, and the parties had already submitted extensive briefing regarding remedies.

The DOJ’s “untimely” statement of interest, in the words of the FTC, comes three months after a bench trial concluded in January of this year, while the parties are awaiting a decision on the merits from Judge Koh. The DOJ’s filing represents the most direct clash between the DOJ and the FTC on the issue of standard-essential patents (SEPs) subject to a commitment to license on fair, reasonable, and nondiscriminatory terms (FRAND). The two agencies have expressed divergent positions but up until recently had not directly taken any affirmative actions in the other’s cases or enforcement activities.

Though the statement of interest notes that the DOJ “takes no position . . . on the underlying merits of the FTC’s claims,” the DOJ’s views on this subject are well known. Assistant Attorney General for Antitrust Makan Delrahim has been a prominent and outspoken critic of the principal theory of the FTC’s entire case—that breach of a FRAND commitment can amount to an antitrust violation—despite the fact that legal precedent is well-settled in favor of the FTC’s position.

The Filing Represents Another Step by DOJ to Protect SEP Holders

For some time now, the DOJ has articulated a position largely hostile to the FTC’s underlying theory in its case against Qualcomm: the applicability of competition law upon a breach of a FRAND commitment. As background, SEPs are patents that have been voluntarily submitted by the owner and formally incorporated into a particular technological standard by a standard-setting organization (SSO). Because standardization can eliminate potential competitors for alternative technologies and confer significant bargaining power upon SEP holders vis-à-vis potential licensees, many SSOs require that the patent holder commit to license its SEPs on FRAND terms.

Beginning in late 2017, AAG Delrahim made a series of speeches presenting the DOJ’s new position on SEPs, FRAND commitments, and competition law. Among other issues, AAG Delrahim stated that the antitrust laws should not be used to police the FRAND commitments of SEP holders, insisting that such issues are more properly addressed through contract and other common law remedies. This new position by the DOJ was notable not only because it reversed the approach of the prior administration but also because it was largely inconsistent with numerous U.S. court decisions—including Judge Koh’s denial of Qualcomm’s motion to dismiss the FTC’s case. At a conference last week, AAG Delrahim doubled down on the DOJ’s position and stated he is looking for the “right case” to test the DOJ’s views on this issue. But if the DOJ were to press its views in court, it would find itself in a difficult and awkward position of having to argue that other cases that have ruled on these issues were wrongly decided.

In addition to the speeches, the DOJ has taken measures to implement its new approach, which up until recently, stopped short of effectively challenging the FTC. First, the DOJ opened several investigations of potential anticompetitive conduct in SSOs by companies that make devices implementing standards. Second, the DOJ withdrew its support from a 2013 joint statement issued by the DOJ and the U.S. Patent & Trademark Office on remedies for FRAND-encumbered SEPs because of the DOJ’s view, as explained by AAG Delrahim recently, that the policy statement “put a thumb on the scale” in favor of licensees. Third, the DOJ sought to submit another statement of interest in a private lawsuit filed by u-Blox alleging that InterDigital breached its FRAND commitments by demanding supra-competitive royalty rates for various wireless communications SEPs.

The DOJ’s current position fails to recognize the market distortion that can result when an SEP owner fails to comply with a voluntary commitment to limit those same patents rights—and the market power that is conferred on SEP holders in return for that commitment. It also fails to recognize that such policy actions ultimately will embolden certain SEP owners to engage in even more aggressive behavior at a critical period when innovative companies are beginning to incorporate wireless communications SEPs into entirely new industries, such as automobiles and the Internet of Things.

DOJ’s Filing Is Highly Unusual

The DOJ’s decision to insert itself into a case brought by another enforcement agency is exceedingly rare (although not entirely unprecedented). This is especially true because the FTC is representing the interest of consumers by acting pursuant to its authority under the FTC Act. The timing is also curious because the DOJ waited three months after the bench trial ended to file its statement, likely long after the court began drafting its opinion. The statement could be seen as a warning to the court that if it finds an antitrust violation it should not impose a remedy based on the evidence presented at trial.

The DOJ’s statement of interest further begs the question of why the agency thought it was necessary to bring itself into the case. To the extent that Qualcomm believes that the court should order additional briefing and a hearing on the issue of a remedy, even though the issue has seemingly already been addressed, Qualcomm is perfectly capable of presenting those views to the court on its own. In its response, the FTC made clear that it “did not participate in or request” the DOJ to weigh in on the case.

DOJ’s filing notes it is concerned about the risk that an “overly broad remedy” could “reduce competition and innovation in markets for 5G technology and downstream applications that rely on that technology.” But such a statement is remarkable. First, it suggests that the DOJ believes its sister enforcement agency is not concerned about fostering competition and innovation. Second, the statement suggests that the DOJ is willing to second-guess from the sidelines the judgment of both a court and competition agency that have been evaluating in detail the effect of Qualcomm’s business practices. Even if both of those positions are true, it is surprising to see the DOJ submit such a controversial filing in a matter in which AAG Delrahim is recused.

Ultimate Impact of Filing

The DOJ could have had multiple underlying motivations for choosing to submit this filing. Consistent with the split between the DOJ and FTC noted above, the DOJ could be signaling to the court that it disagrees with the FTC’s theory of competitive harm in an effort to influence the outcome on the merits. The DOJ could also be attempting to apply subtle pressure on the FTC to reach a settlement with Qualcomm to avoid drawing further attention to the two agencies’ divergent views on breach of a FRAND commitment. The statement could also be intended to discourage litigants from bringing antitrust cases premised on a breach of FRAND theory, demonstrating that, like in the u-Blox case, the DOJ is not reluctant to intervene.

However, regardless of the DOJ’s intention, its filing is unlikely to achieve any of those objectives. Judge Koh is an experienced judge who is well versed in issues at the intersection of antitrust and intellectual property law and does not shy away from ruling on difficult issues. Notably, when the FTC and Qualcomm jointly requested that she delay ruling on the FTC’s motion for partial summary judgment to pursue settlement negotiations, she denied the request and issued a significant decision holding that Qualcomm’s FRAND commitment means that it must offer licenses to its SEPs to competing chipset suppliers. Judge Koh may also exercise discretion to deny the DOJ’s statement, as the FTC pointed out in its response. More broadly, it is also unlikely that such a public airing of disagreement will go over well with an agency very focused on the state of competition in technology sectors. And the statement is also unlikely to deter private plaintiffs in light of the well-established and increasing body of case law holding that a breach of FRAND can violate competition law. The DOJ’s statement of interest, as unusual as it is, may ultimately amount to nothing more than whistling in the wind.