The Chinese Ministry of Commerce (“MOFCOM“) has stepped up its merger control activities on many fronts in recent weeks, issuing ground-breaking decisions in the Glencore/Xstrata and Marubeni/Gavilon cases and circulating draft procedural rules for public consultation on merger remedies and on dealing with straightforward merger control cases.

The new decisions
On April 16, 2013, MOFCOM issued approval for Glencore’s acquisition of Xstrata subject to conditions. Less than a week later, on April 22, it did likewise for the takeover of Gavilon by Marubeni.

Overall MOFCOM’s approach in both transactions was remarkably similar. However, there were also some key differences.

Common features
Common to both transactions is that the merger control clearance procedure with MOFCOM was very drawn out – over a year from the moment of the initial filing in the Glencore/Xstrata transaction, and around 10 months for the Marubeni/Gavilon transaction. In both transactions, the parties withdrew their notifications at the end of ‘phase 3′ in the procedure (after around 180 days) – at the end of which a decision must be made according to the law – and re-filed them as new notifications.

The nature of the underlying market sectors and the concerns voiced by MOFCOM in the two cases were also remarkably similar.

In terms of the nature of the markets, both transactions were in sectors considered sensitive by the Chinese government – natural resources (Glencore/Xstrata) and agriculture/food products (Marubeni/Gavilon).

Moreover, the combined market shares of the merging parties were low in both transactions: in Glencore/Xstrata, the combined market shares in terms of actual supplies of copper concentrate, zinc concentrate and lead concentrate – the three products identified by MOFCOM as the relevant markets, with the geographic scope of the market determined to be worldwide – were 9.3%, 17.9% and 7.6%, respectively. In Marubeni/Gavilon, the MOFCOM decision does not state the market shares of the parties in the relevant market where MOFCOM expressed concerns – the “market for soy bean imports” in China – but the sales and market-related data scattered throughout the decision allow a rough calculation of the combined market share: less than 18.6%.

In addition, a common feature of both transactions was that there was little by way of overlap between their China businesses. In other words, the market share increment in China was, for the most part, rather insignificant. In Glencore/Xstrata, the market share increment through Xstrata’s supplies of copper concentrate in China was 3.1%, whilst Xstrata did not have any sales of zinc concentrate and lead concentrate in China. In Marubeni/Gavilon, the market share increment through Gavilon’s sales of soy beans in China was below 0.7%.

In terms of MOFCOM’s concerns, both decisions placed great emphasis on the fact that China relies on imports to a considerable extent: according to MOFCOM, China imported 68.5%, 28.7% and 27.3% of its consumption of copper concentrate, zinc concentrate and lead concentrate, respectively, and 80% of the soybeans consumed in China are imported. Likewise, both decisions stress that in both transactions a large proportion of the business of the acquirers is done in China in the markets in question.

Perhaps most importantly, the two decisions make clear that China’s reliance on imports and the perceived weakness in bargaining power on the side of the Chinese customers were important factors in MOFCOM’s assessment. For example, in Marubeni/Gavilon, MOFCOM explicitly stated: “At present, China is largely dependent on soy bean imports. The domestic soy crushing plants are of low concentration, small production scale and weak bargaining power. The proposed concentration between business operators is likely to further undermine the bargaining power of the downstream soy crushing enterprises.”

Of course, damage to customers including weak buyer power can be an important part of the substantive antitrust analysis in merger cases – whether in China or globally. At the same time, few, if any antitrust authorities worldwide would seek to impose conditions on transactions where the combined market share of the merging parties is below 10% or 20%, as was the case in Glencore/Xstrata and Marubeni/Gavilon.

Differences
There are, however, a number of key differences between the decisions in Glencore/Xstrata and Marubeni/Gavilon. For example, MOFCOM’s approach to market definition was quite different. In Glencore/Xstrata, MOFCOM found the relevant product markets to be those of copper concentrate, zinc concentrate and lead concentrate, and the geographic market to be worldwide. In contrast, in Marubeni/Gavilon, MOFCOM defined the geographic market to be China only, more specifically imports into China (without further explanation on how imported soy beans would differ from domestically produced soy beans).

Equally significant, the conditions subject to which approval was granted – the “remedies” imposed – differ materially between the two cases. In Glencore/Xstrata, the remedies were essentially two-fold:

• First, Glencore has to sell its rights in the copper project in Las Bambas, Peru, to a buyer acceptable to MOFCOM. If Glencore fails to do so by the specified deadlines, then a third party will be appointed as divestiture trustee to sell Glencore’s rights in other projects. This will put Glencore under considerable pressure to sell the rights in the Las Bambas project swiftly, and under MOFCOM’s supervision. It will be interesting to see whether the buyer will be a Chinese company.
• Second, Glencore entered into a number of behavioral commitments to continue providing copper concentrate, zinc concentrate and lead concentrate to Chinese buyers under certain specified conditions. In particular, Glencore committed to delivering a minimum amount of copper concentrate “at” or “by reference to” an annual benchmark price, and to supplying zinc concentrate and lead concentrate at fair and reasonable prices consistent with those in the international market.

By contrast, in Marubeni/Gavilon, the remedy in essence consists of keeping the soy bean businesses of Marubeni and Gavilon entirely separate, with firewalls in between. This commitment will stay in place for at least two years, after which Marubeni will have the right to apply to MOFCOM to waive or modify it. This remedy is very similar to those imposed by MOFCOM in the two Hard Disk Drive cases in 2011 and 2012.

There were also material differences in terms of the procedural approach taken by MOFCOM across the two cases. In Glencore/Xstrata, for the first time ever, MOFCOM published the relatively detailed ‘commitment proposal’ by the merging parties as an annex to its decision, while Marubeni’s commitment proposal was not made public.

The draft procedural regulations
In addition to the two public decisions, MOFCOM issued two draft regulations for comment. The first regulation is a draft Regulation on the Imposition of Restrictive Conditions on Concentrations between Business Operators, released on March 27. The goal of this draft regulation may be to streamline and consolidate the procedure for the negotiation, drafting and supervision of remedies. The draft regulation is meant to replace the Tentative Regulation on the Implementation of Divestiture of Assets or Businesses in Concentrations between Business Operators, issued in 2010.

The draft regulation on remedies is a relatively long and technical document. Most companies are unlikely ever to have to deal with it, as the regulation (if enacted) would only be used in a case after MOFCOM has voiced concerns and plans to clear the transaction subject to conditions. Judging from MOFCOM’s merger control track record since 2008, statistically at least, less than 5% of all transactions notified to MOFCOM will reach this point.

However, even for companies that are locked in remedy discussions with MOFCOM, the practical impact of the latter regulation (were it to become law) is not clear. As the Glencore/Xstrata and Marubeni/Gavilon cases illustrate, the approach towards remedies taken can differ quite significantly and is essentially a case-by-case approach. The remedies imposed in past cases have been quite varied, and the draft regulation – focusing mainly on the procedural aspects – may not be enough to bring about the goal of harmonizing MOFCOM practice in this regard if past form is anything to go by.

The second draft regulation circulated for public consultation is the draft of the Provisional Regulation on Standards Used for Simple Cases of Concentration between Business Operators, released on April 3, 2013.

The goal of this regulation is create a category of “simple cases,” which currently does not exist as a matter of law. The proposed category is defined by reference to a variety of factors, such as market share thresholds and includes certain types of joint ventures. However, the draft regulation may not provide any real value-add for businesses seeking to reduce the time spent waiting for MOFCOM’s decisions in simple, non-controversial cases: unlike a prior draft, the most recent version circulated for public comment does not state what consequences flow from classification as a “simple case.” In contrast, the prior draft contained a commitment by MOFCOM to accelerate the procedure for “simple cases” and issue clearance within phase 1 of the procedure (up to 30 days into the procedure), subject to certain exceptions.

Conclusions
In many ways, MOFCOM’s Glencore/Xstrata and Marubeni/Gavilon decisions are a “first.” The two cases are significant because they demonstrate MOFCOM’s willingness to impose remedies in merger control cases where the market shares go as low as 7.6%. Moreover, it emerges from both decisions that MOFCOM takes into account the reliance on imports as a key factor in its analysis. Although not entirely explicit, the two decisions come very close to an open recognition that Chinese merger control analysis can go beyond a ‘pure antitrust assessment’ and into the realm of policy. In that sense, it is also a “first” for those observers who still had any lingering doubts that this was the case.

Furthermore, the two cases have the dubious distinction of being among the longest MOFCOM procedures on record since the Anti-Monopoly Law came into effect in 2008; the Glencore/Xstrata case is the longest ever (among the cases that ended with decisions that were made public). More generally, the concern felt among many in the antitrust community on the ground in Beijing is that the processing time for merger control clearances is not decreasing as MOFCOM gains more experience in handling merger control cases. Hence, the interest of the business community in the draft Provisional Regulation on Standards Used for Simple Cases of Concentrations between Business Operators which has the potential to ease the burden upon companies notifying a concentration to MOFCOM that meets the criteria. However, the lack of any guidance on the part of MOFCOM in the current draft as to what this means in terms of processing time somewhat reduces its value to business. Companies want to have some assurance that a straightforward China merger control application will be cleared to a more definite, compressed timetable and that other parts of a global transaction are not held up by China, so that they can plan their business accordingly and concentrate on their post-transaction integration.

Richard Wolfram, Esq.

(Note:  In December 2012, the Department of Justice and the Federal Trade Commission held a Hearing on the impact of patent assertion entities (PAEs) on innovation and competition and the implications for antitrust enforcement policy.  The Agencies then issued a Request for Public Comments on the topic of the Hearing.  In response, on April 5^th, Richard Wolfram submitted the following comment to the DOJ and FTC, adapted and shortened here for Antitrust Connect.  The full Public Comment – one of almost 70 public comments submitted to the Agencies — is available at http://www.ftc.gov/os/comments/pae/pae-0066.pdf or from the author.)

This comment is submitted in my personal capacity and draws from my own experience for the limited purpose of addressing the following question:  what might be the legal rationale for a Sherman Act Section 2 monopolization claim against a PAE which has repudiated the commitment of its direct or indirect predecessor, which itself participated in a standard setting organization (SSO), to license any of its intellectual property “essential” to a standard developed by that SSO on fair, reasonable and non-discriminatory (F/RAND) terms.  This comment assumes for purposes of this discussion that the ever-thorny question of what constitutes a breach of a F/RAND commitment can be resolved and that a determination of breach can be made in a given case.

In a recent speech Deputy Assistant Attorney General Renata Hesse discussed the question of Section 2 antitrust liability for patent hold-up by owners of standard essential patents (SEPs), wherein they make knowingly false F/RAND commitments to the SSOs in which they participate and which then, in reliance on such commitments, develop standards incorporating their SEPs, resulting in industry lock-in.  See “IP, Antitrust and Looking Back on the Last Four Years,” Deputy Attorney General Renata Hesse (Feb. 8, 2013), available at http://www.justice.gov/atr/public/speeches/292573.pdf.  She further noted that the question has been raised whether Section 2 liability for such conduct, if any such liability obtains, should be limited as a matter of law and policy “exclusively to instances in which the patent holder intentionally deceived the SSO while it designed the standard.”  For instance, in contrast to the facts in Broadcom v. Qualcomm, 501 F.3d 297 (3d Cir. 2007), in which Qualcomm was found to have intentionally deceived the SSO at the time it made its F/RAND commitment, one can imagine a scenario in which an SSO participant holding an SEP makes a F/RAND commitment in good faith and then subsequently changes course and violates its F/RAND commitment after the standard is set.  It has been argued, Ms. Hesse notes, that in such circumstances “the competitive process may be equally disrupted if there were alternatives that the SSO would have included but were ultimately excluded because of the patent holder’s F/RAND commitment.”  As Ms. Hesse explicitly encouraged members of the bar to address this question, I write in response to this request, but now specifically with respect to the scenario in which the entity repudiating the F/RAND commitment is not the original obligor but its (direct or indirect) assignee, a PAE, as such conduct also squarely falls within the scope of the FTC/DOJ workshop on PAEs.  

Some five years ago I co-authored with David Balto a public Request for Investigation submitted to the FTC by the American Antitrust Institute alleging patent hold-up by Rembrandt, Inc, a PAE (referred to therein more broadly as a “non-practicing entity”), with respect to technology critical for the transmission of digital television signals, which was central to the nationwide conversion to digital TV.  See Request for Investigation of Rembrandt, Inc. for Anticompetitive Conduct That Threatens Digital Television Conversion, Petition to the Federal Trade Commission by the American Antitrust Institute, Bert Foer (March 26, 2008), available at http://www.antitrustinstitute.org/files/AAI%20FTC%20Petition%20Rembrandt%203.26.08_040120081130.pdf.  In that Request (the “petition”) we explained the basis for possible claims under Section 5 of the FTC Act and, notably for present purposes, also Section 2 of the Sherman Act, for patent hold-up by Rembrandt with respect to a F/RAND commitment made by its (indirect) predecessor, AT&T, to an SSO responsible for developing standards for digital television.

I incorporate the AAI’s petition herein by reference, first, in order to offer a concrete set of facts and allegations that may serve as a more meaningful basis for readers to examine the viability of a Section 2 claim against a PAE.  (I emphasize, however, that I am not seeking in any way to revive the claims therein.  The underlying facts were the subject of long-running litigation, in substantial part addressing the prior question of whether the standard(s) at issue even read on the relevant IP.)  Instead, the petition is cited here, and serves in part as the basis for this comment, only by way of example.  Rather than repeat the allegations of the petition, this comment assumes familiarity by the reader with it and elaborates on the legal basis for the viability of a Section 2 claim aimed at patent hold-up by a PAE, using the allegations in the petition as one example.

Before proceeding further with this analysis, it is worth pausing for a moment to explain why it might be useful to be able to apply Section 2 to patent hold-up by PAEs if Section 5 of the FTC Act might be sufficiently flexible and robust to address the same conduct.  The answer, of course, is that Section 5 enforcement is limited to the FTC; Section 5 enforcement (based on a theory of unfair competition and/or unfair acts or practices rather than on Section 2 alone) has been subject to criticism for a perceived lack of limiting principles (a view on which I express no opinion here); and Section 2 is more clearly developed in the law, generally viewed as being more rigorous, and enables the DOJ, state enforcers and private entities to seek injunctive relief and treble damages.  In other words, if Section 2 applies to patent hold-up by PAEs, such conduct is subject to a substantially wider array of potential enforcement options and remedies than under Section 5, thereby providing a stronger deterrent effect.

Finally, this comment does not purport to offer a full ‘white-paper’ treatment of the question under review but instead only to suggest the outlines of the argument for continuing analysis.

1. Repudiation of a F/RAND commitment is exclusionary conduct under Section 2 and distinct from exploitation of (legitimate) monopoly power.

Repudiation of a F/RAND commitment, either by the original obligor to the SSO or its direct – or a subsequent – assignee, of the intellectual property rights in question, can constitute exclusionary conduct within the meaning of Sect. 2, no less than deception by the obligor on that commitment, as explained below.

Assignee succeeds to F/RAND commitment.  First, many SSOs today, cognizant of the possibility of patent hold-up by PAEs, are making explicit in their governing rules that any assignee of SEPs subject to a F/RAND commitment takes such IP subject to that F/RAND commitment.  Over and beyond any such undertakings by SSOs, however, it is clear as a matter of law that an assignee succeeds to an obligor’s licensing rights and obligations (including F/RAND constraints).  See, e.g., Moldo v. Matsco, Inc. (In re Cybermetic Servs.), 252 F.3d 1039 (9^th Cir. 2001), cert. denied, 2002 U.S. LEXIS 683 (2002) (citing Keyston Type Foundry v. Fastpress Co., 272 F. 242, 245 (2d Cir. 1921) (“It had long passed into the textbooks that . . . an assignee acquired title subject to prior licenses of which the assignee must inform himself as best he can at his own risk”)); Worley v. Tobacco Co., 104 U.S. 340, 344 (1881) (“The assignee of a patent-right takes it subject to the legal consequences of the previous acts of the patentee.”); Medtronic AVE Inc. v. Advanced Cardiovascular Sys. Inc., 247 F.3d 44, 60 (3d Cir. 2001) (“an assignee obtains only the right, title and interests of his assignor at the time of his assignment, no more”); see also Alice Haemmerli, “Why Doctrine Matters:  Patent and Copyright Licensing and the Meaning of Ownership in Federal Context,” 30 Columb. J.L & Arts 1, n.247 (Fall 2006) (noting that patents are taken subject to existing licenses); and see generally 35 U.S.C. § 261 (“Subject to the provisions of 35 U.S.C. §§ et seq. [the Patent Code], patents shall have the attributes of personal property.”).  This principle is a necessary predicate to any claim of Section 2 liability of a PAE for patent hold-up.

Standard setting may provide the occasion for various forms of opportunism.  Second, it is well established that standard setting bodies may provide the occasion for opportunistic conduct.  The Commission’s enforcement actions in Dell Computer and Unocal, its allegations in Rambus, and the Broadcom v. Qualcomm suit, among others, offer examples.  The forms of opportunism are myriad, like the forms of exclusionary conduct.  As the Supreme Court has observed, standard setting presents many opportunities for exclusionary conduct. See Am. Soc’y of Mech. Eng’rs v. Hydrolevel Corp., 456 U.S. 556, 571 (1982) (“a standard-setting organization . . . can be rife with opportunities for anticompetitive activity”). Firms can secure monopoly power by failing properly to disclose intellectual property rights, or by failing to abide by an obligation to license on a reasonable and non-discriminatory basis.

The key is whether the conduct distorted competition for the standard.  Third, any form of conduct – deception or otherwise – that subverts the proper ends of a standard setting collaboration, by distorting competition for the standard and harming consumer welfare, can be “exclusionary” within the meaning of Sect. 2.  When a promise to do a future act is later repudiated or breached, whether by the original promisor itself or by a subsequent assignee, and that repudiation or breach cannot be excused by accident or other legal justified cause, but instead results from bad faith, it is immaterial whether the intent not to honor the commitment is formed only after it is originally made.  The potential anticompetitive consequences are no different from those in the more conventional scenario of a contemporaneous intent to deceive at the time of making the commitment (e.g., as alleged in Rambus, Qualcomm):  the reliance triggered by the giving of the commitment, and the expectation that the commitment will be fulfilled, which were a critical basis for the SSO’s selection of the standard in question (where the SSO participants understood that it may encompass the obligor’s IP rights), are undermined and competition for the standard has been distorted because the evaluation of the relative merits of alternative technologies, which includes the cost of licensing as a significant factor, has itself been distorted.

The Supreme Court has long held that anticompetitive manipulation of a standard setting process to protect or obtain market power may violate the Sherman Act.  See Hydrolevel, Allied Tube.  One of the key lessons from Allied Tube is that the predicate exclusionary conduct in standard setting is not limited to deception – and may even literally comport with an SSO’s rules – because opportunistic conduct that subverts the standard setting process and harms competition can take various forms.  For instance, the vote-packing conduct in Allied Tube itself was not deceptive – the defendant steel company and its allies openly recruited new voters for the vote on the insulation standard – but the Second Circuit and the Supreme Court upheld the jury’s verdict that the defendant “subvert[ed] the consensus standard-making process” and thus violated the Sherman Act.

In the case of the Advanced Television Systems Committee (ASTC), for instance – the SSO that selected for the standard IP ultimately assigned to  Rembrandt – the F/RAND commitment, like F/RAND commitments to virtually any other SSO, was intended to constrain the acquisition and exercise of monopoly power by participants in the ATSC with respect to their IP that might have been encompassed by the digital standard.  Rembrandt allegedly repudiated the ATSC F/RAND commitment, first by refusing to license its relevant technology on F/RAND terms to manufacturers pursuant to its obligation to the ATSC, in demanding non-F/RAND royalties from the networks and cable companies, and then by suing them for infringement.  By this repudiation, Rembrandt both acquired and exercised monopoly power.  This conduct is exclusionary in that the repudiation of the F/RAND commitment originally made by AT&T effectively undermined the reliance of the other SSO members on that commitment, which was the basis for their selection of AT&T’s IP for the standard – not of course in the present sense of undermining their reliance at the time of the selection process, but in the sense of post facto distorting competition for the standard because had they known the commitment would be repudiated, they would not have chosen that IP for the standard provided alternatives existed, or arguably even if no alternatives existed, in which case they might have selected no standard at all.  Thus, the SSO members excluded alternative technologies in the competition for the standard as a result of their reliance on the commitment that the F/RAND obligation would be fulfilled in selecting AT&T’s IP for the standard.  More specifically, they relied on the assurance of F/RAND pricing in their determination of the appropriate standard for digital transmission technology and the proprietary technology (including AT&T’s) that may be deemed to be encompassed by it.

Repudiation by a PAE of a F/RAND commitment is opportunistic and a form of ‘cheap exclusion’.  The petition characterized Rembrandt’s conduct both as opportunistic and as a form of ‘cheap exclusion’ – two characterizations that apply broadly to a variety of conduct that has been found to violate Sect. 2 in other cases.  First, with relevance to standard setting, former DOJ chief economist Carl Shapiro has explained that “a firm might obtain a dominant position based in part on certain ‘open’ policies that induce reliance by complementary firms, and then later exploit that position by offering less favorable interconnection terms or by refusing to interconnect with them altogether.”  And “[w]hen the effects of opportunism are market-wide,” he added, “antitrust concerns arise.”  See Carl Shapiro, Exclusionary Conduct 15 (Testimony Before the Antitrust Modernization Commission, Sept. 29, 2005), available at http://faculty.haas.berkeley.edu/shapiro/amcexclusion.pdf.

Further, as former FTC Competition Bureau Director Susan Creighton and co-authors explain, “opportunistic behavior occurs when a party to a relationship (like a contract) engages in the relationship, where the behavior is contrary to the other parties’ legitimate expectations but not necessarily to the precise rules governing the arrangement.  Such behavior generates no efficiency benefits, and not only transfers wealth but also raises transactions costs by compelling wasteful investments in protecting against future opportunism.  It is, in short, inefficient on its face.  Because such behavior is inefficient even if it does not produce market power after the facts, it can have no claim to legitimacy under an antitrust regime.”  S. Creighton, D. Bruce Hoffman, T. Krattenmaker, E. Nagata, “Cheap Exclusion,” 72 Antitrust L. J. 975, 987-88 (2005).  A PAE’s repudiation of a F/RAND commitment – and as alleged in the petition regarding Rembrandt – likely has market-wide effects and transfers wealth without commensurate efficiency benefits.  A PAE (and more generally, an NPE) can of course achieve efficiencies by introducing intellectual property rights into the stream of commerce.  But such efficiencies can be achieved without a PAE’s repudiation of its F/RAND obligation, and the attendant anticompetitive effects, which effectively negate any such possible efficiencies.

Second, opportunistic behavior that confers market power is a potential form of ‘cheap exclusion’.  Conduct that qualifies as cheap exclusion is marked by little or no cost to the actor engaging in the conduct and an absence of cognizable efficiencies.  The conduct of a PAE that engages in patent hold-up, as alleged in the petition on the part of Rembrandt, qualifies on both accounts.  As Creighton et al. note, opportunism in standard setting is a good example of cheap exclusion and its key features can be found in such cases as Allied Tube, Hydrolevel and Rambus:  “First, in each of those cases, the alleged conduct did not create wealth but simply transferred it, and so had no possible claim to efficiency.  Second, the conduct was cheap (in some cases, almost costless) to the firm engaging in it.  Third, the returns from successfully transforming the exclusionary conduct into monopoly profits were large in proportion to the costs of trying.  [. . . ]  [And, f]inally, the cheap exploitation of opportunism occurred where a handy source of durable market power already existed.”  Creighton et al., supra, 72 Antitrust L.J. at 988-89.  Thus, for instance, in Allied Tube, Hydrolevel, Unocal, Dell, Broadcom v. Qualcomm, and as alleged in Rambus, among other cases, the standard setting organization had the power to confer market power by choosing one party’s processes or by excluding another’s, resulting in the potential infliction of harm to consumer welfare.  Id.

Repudiation of F/RAND commitment is similar to other opportunistic conduct held to be the basis for stating a claim of exclusionary conduct under Section 2.  As former Bureau of Competition Deputy Director Sean Royall explained in an article several years ago, repudiation of a F/RAND commitment to an SSO is similar to other conduct that has been held to constitute exclusionary conduct under Section 2.  See M. S. Royall and A. Di Vincenzo, “The FTC’s N-Data Consent Order:  A Missed Opportunity to Clarify Antitrust in Standard Setting,” ANTITRUST, Vol. 22, No. 3, 83-92, at 86-87 (Summer 2008).

– Thus, the intentional breach of a binding commitment intended to restrain the acquisition and exercise of monopoly power has been held to constitute exclusionary conduct when such conduct is found to have occurred as part of a scheme to acquire monopoly power.  For instance, in Hewlett-Packard Co. v. Boston Scientific Corp., 77 F. Supp. 2d 189 (D. Mass. 1999), the plaintiff alleged that in order to secure FTC approval of a proposed transaction, the defendant made express, binding commitments in a consent order to take certain actions to facilitate post-merger entry and competition.  After the merger was completed the defendant failed to live up to these commitments.  By doing so, the defendant acquired monopoly power that it would not have possessed had it adhered to the terms of the consent order.  The court held that such allegations, if proven, would support a Sect. 2 claim.

– In Biovail Corp. Int’l v. Hoechst Aktiengesellschaft, 49 F.Supp. 2d 750 (D.N.J. 1999), the court reached the same conclusion on similar facts.  The FTC conditioned approval of a merger between Hoechst and Marion Merrell Dow (MMD) in part on the merged company’s agreement to give Biovail a right of reference to data filed with the FDA in support of MMD’s Cardizem, for approval of Biovail’s competing generic drugs. Hoechst initially agreed and gave Biovail a right of reference, in a letter to the FDA, but it subsequently narrowed the scope of its commitment to the FDA; as a result, one of Biovail’s applications for a drug to compete with Cardizem was denied for lack of supporting data.  Biovail then sued Hoechst, alleging that it had intentionally reneged on its commitment to the FTC in order to win approval for its merger with MMD.  The court stated that if Biovail could show that the defendants narrowed the right of reference in order to keep Biovail’s competing generic product from being approved, this would support a claim under Section 2 that defendants were willfully seeking to maintain or obtain monopoly power in the relevant market. Id. at 766.

– Repudiation of a F/RAND commitment to an SSO is also similar to the installed-base opportunism found to be exclusionary in the Supreme Court’s decision in Eastman Kodak Co. v. Image Technical Services, Inc., 504 U.S. 451 (1992).   Kodak, after first allowing independent service organizations to purchase Kodak replacement parts for its copiers, subsequently altered its policy to permit only Kodak-licensed service agents to purchase replacement parts for its copiers.   Because non-Kodak copier repair service providers were unable to obtain spare parts as a result of the new policy, the policy change effectively eliminated competition from that segment of the market.  Kodak’s ex post conduct was found to be exclusionary because it foreclosed competition in copier repair services through a policy change that could not have been reasonably foreseen by Kodak’s copier customers when they purchased the copiers, with attendant ‘lock-in’ effects.

The Court held that Kodak’s opportunistic about-face after consumers had made significant and irreversible investments in its copiers could be a basis for a finding that Kodak engaged in exclusionary conduct under Section 2 – and this in the absence of any allegation of deception on the part of Kodak, such as, for instance, an intent to lure prospective customers into buying Kodak copiers with the prospect of obtaining independent servicing, then to be followed by a policy change, thereby ensuring lock-in.  Similarly, as alleged in the petition regarding Rembrandt, to cite one example, manufacturers of digital transmission and demodulation equipment relied on the ATSC standards – just like their customers, the networks and cable companies – for their purchasing decision.  By the time Rembrandt had allegedly repudiated the F/RAND commitment, both manufacturers and their customers were locked in by their investments.

Rembrandt’s repudiation was effectively a policy change by the current obligor (Rembrandt), but of course with no deception on its part as of the time the original commitment by AT&T was given, nor indeed with no necessary pleading of deception at the time Rembrandt assumed the obligation.  Thus, hold-up conduct by a PAE fits within the category of installed-based opportunism/exclusionary conduct outlined in Kodak – a policy change that could not have been reasonably anticipated by those dependent on its intellectual property and does not necessarily include initial deception on the part of the defendant.  A theory of Section 2 liability for installed-base opportunisim should apply with even more reason in a standard setting context, given the implications of lock-in and consumer harm from a repudiation of F/RAND commitments.

Distinguishable from exploitation of legitimately acquired monopoly power. Exclusionary conduct in the form of hold-up by a PAE is distinguishable from another form of exploitation – not exploitation of opportunistic behavior, as described above, but exploitation of monopoly power that has been legitimately acquired.  To shed some light on this distinction, reference to the appellate decision in Rambus v. FTC is helpful (although there is considerable disagreement – which I share – with the court’s holding and various aspects of its rationale).  The Court of Appeals concluded that Rambus was a lawful monopolist because the FTC did not show that but for Rambus’s failure to make the necessary disclosure, JEDEC would have selected an alternative technology.  The court reasoned that a lawful monopolist’s raising prices, even allegedly in violation of a F/RAND obligation, does not violate antitrust law because it has no effect on competitive structure.  Under this analysis, whatever Rambus’s sins of commission or omission, JEDEC still might have chosen its technology; thus, its conduct did not exclude any other technology in the competition for the standard.  Rather, at most, Rambus’s conduct enabled it to charge a higher price than what might be reasonably construed by a court to be “reasonable and nondiscriminatory.”

Assuming, arguendo, that the court was correct – and I do not think that it was – that Rambus was therefore a lawful monopolist, then its conduct could therefore be characterized as exploitative but not exclusionary or violative of the antitrust laws.  As the court stated, “deceit merely enabling a monopolist to charge higher prices than it otherwise could have charged . . . would not in itself constitute monopolization.”  It further explained:  “an otherwise lawful monopolist’s use of deception simply to obtain higher prices normally has no particular tendency to exclude rivals and thus to diminish competition.”  The court relied for this proposition principally on the Supreme Court’s decision in NYNEX v. Discon.  NYNEX  had a lawfully secured monopoly with attendant monopoly power, which was then subjected to a regulatory regime intended to limit what NYNEX could charge for certain services.  The Court held that a fraudulent scheme by NYNEX to increase prices did not violate the antitrust laws because the consumer harm stemmed, not from a “less competitive market,” but from market power that was “lawfully in the hands of the monopolist.”  NYNEX’s wrongful conduct thus had no nexus to its initial acquisition of monopoly power.  In contrast, Rambus obtained monopoly power by deceptively inducing the SSO participants into believing that its non-disclosure obviated the need to demand a F/RAND commitment from it, as a means to prevent the creation of monopoly power.  Rambus thus did not have monopoly power prior to the inclusion of its technology in the standard, and this distinction from NYNEX is crucial.

Unlike the Court of Appeals’ characterization of the facts in Rambus, the petition regarding Rembrandt alleged that there were alternative, viable technologies to the one chosen for the ATSC digital transmission standard.  Thus, even assuming that the framing of the case by the Court of Appeals in Rambus was correct – that the FTC had to show, but could not show, that but for Rambus’s alleged omission, JEDEC would have selected another technology – the conduct by Rembrandt, and that of any other similarly situated PAE, is clearly distinguishable.  Rembrandt did not legitimately acquire a monopoly and then merely ‘exploit’ that power by refusing to grant a license to the manufacturers on F/RAND terms and instead suing the end-user networks (and cable companies) for infringement.  Rather, Rembrandt illegitimately acquired monopoly power and exercised that power by repudiating the F/RAND commitment.

The difference between NYNEX’s legitimate acquisition of monopoly power in NYNEX v. Discon, on which the Court of Appeals relied in Rambus, and the unlawful acquisition of such power by Rembrandt or similarly situated PAE, lies in the distinction, with particular application to standard setting, between monopoly and monopoly power.  On the allegations in the petition, the prior owners of the asserted SEP, assuming they claimed it to be essential to the standard, and until assignment to and repudiation by Rembrandt, had a monopoly in the relevant market because of the adoption of the standard; but they did not have monopoly power, because their power to exploit the monopoly through supracompetitive pricing, or even through declining to license the technology, was constrained by the F/RAND commitment.  In this sense it may be said that the prior owners of the asserted SEP, in giving and/or abiding by the F/RAND commitment, ‘negotiated away’ the monopoly power they otherwise would have derived from the asserted inclusion of their IP in the standard.  When Rembrandt then rejected this constraint, according to the petition, it engaged in illegal monopolization.  Once having been assigned the patent and acceded to the monopoly position corresponding to it because of the adoption of the standard, Rembrandt opportunistically exploited the monopoly when it repudiated and breached the F/RAND commitment.  In this way, Rembrandt willfully acquired and exercised monopoly power in the relevant market in violation of Section 2, according to the petition – and so also would be the case with any similarly situated PAE that engages in patent hold-up.

Thus, in the rather narrow sense in which exploitation of legitimately acquired monopoly power may be viewed as not anticompetitive, the alleged conduct of Rembrandt, as with any similarly situated PAE engaged in patent hold-up, is not exploitative but instead exclusionary, as it is properly understood as affecting the competitive structure ab initio (in effect, retroactively) for the selection of the technology to be encompassed by the standard. 

2. Hold-up by PAEs calls for government antitrust enforcement in lieu of/in addition to action on the contract or other common law cause of action.

Some may suggest that there may be little need for government antitrust enforcement regarding hold-up by PAEs because private non-antitrust remedies are available and the immediately affected firms are often sophisticated high technology companies.  But such a view is misconceived for several reasons.  First, the interests of the firms facing licensing demands based on opportunistic conduct are not necessarily coincident with the interests of consumers.  The entities facing the licensing demand may be able simply to pass on the licensing fees through the cost of the end product.  Thus, their primary concern might not be that they have to pay the licensing fee but rather that they not have to pay a fee substantially higher than their rivals.  They may be willing to be victimized by the exercise of monopoly power as long as they are not placed at a competitive disadvantage.  “[W]hen a standard used in a fairly competitive industry is subject to uniform hold-up [and as distinguished from hold-up of a single firm], direct buyers may bear little of the costs, which falls primarily on final consumers.”  J. Farrell, J. Hayes, C. Shapiro and T. Sullivan, “Standard Setting, Patents, and Hold-Up,” 74 Antitrust L.J. 603, 645 (2007).  As the authors explain,  the reason for this is that “[i]f each direct buyer knows that its rivals are paying as high a royalty as it is, pass-through can largely immunize it against economic loss from high running royalties.  Thus, the direct buyers, who might otherwise be the best guardians against gratuitous insertion of patents in standards, or against excessive royalties from such patents, may bear very little of the harm.  [. . . ]  Thus, consumers are not, in general well protected by the self-interest of direct technology buyers.”  Id.

Second, the firms facing such licensing demands may have a variety of arrangements with the firm engaging in the opportunistic conduct and thus may not have a complete incentive to attack this opportunistic conduct.  Practitioners in private antitrust class action litigation often observe that the “small victims” in the market bring these cases because the larger victims may have a variety of arrangements with the antitrust violator that they do not want to place at risk. 

Third, the legal remedies for the firms facing licensing demands may be inadequate.  In the standard setting area in particular, because of collective action and free rider problems, and the possible defenses such as reasonable reliance, “standard-setting participants, victims though they may be, [are] imperfect substitutes for government enforcement.”  Susan A. Creighton et al., “Cheap Exclusion,” 72 Antitrust L.J. 975, 993-94 (2005). 

Fourth, the firms subject to the licensing demand may not have the resources or assets necessary to vindicate their rights in court.  The firms making the licensing demands may initially focus on relatively weak market participants hoping to extract a favorable settlement from those unable to mount the litigation battle.  Some firms may have no choice but to capitulate to the anticompetitive conduct and the cost of the opportunistic conduct may eventually be passed on to the end consumer.

Fifth, the firms facing licensing demands may also hold patents essential to the standard and be in a position to profit from engaging in comparable opportunistic conduct.  In other words, those who are best positioned to bring a private cause of action may prefer to divide the “monopoly spoils” with other essential patent holders by all engaging in opportunistic conduct, as this may be a more profitable strategy than filing a lawsuit to reign in the conduct of others.

Finally, the FTC and DOJ are best positioned to clarify the law and defend the public interest in the area of opportunistic conduct involving standards, given the expertise and resources at their disposal.  The agencies’ economic and legal expertise and panoply of powers make them uniquely well suited to address the competitive problems arising from standard setting, including hold-up by PAEs.  As Creighton et al. summarize the point:  “[I]n the standards-setting arena . . . , numerous issues including collective action and free-rider problems, the availability of defenses such as a ‘reasonable’ reliance burden that would not apply to a government enforcement action, and the opportunity to pass hold-up costs through to consumers, all render standard-setting participants, victims though they may be, imperfect substitutes for government antitrust enforcement.”  Id. at 994 (citations omitted). 

Wolters Kluwer Law & Business

FTC Chairwoman Edith Ramirez and William J. Baer, Assistant Attorney General in charge of the Department of Justice Antitrust Division, testified before the Senate Judiciary Committee’s antitrust subcommittee on Tuesday. The hearing, entitled “Oversight of the Enforcement of the Antitrust Laws,” was the subcommittee’s first antitrust oversight hearing since Ramirez and Baer took the helms of their respective agencies.

In his prepared statement, Baer said that the Antitrust Division is focusing its enforcement efforts on “products consumers use every day…as well as other goods and services that have a significant impact on our nation’s economy, including health care, agriculture, transportation, energy, and financial services.”

Baer detailed cartel enforcement at the Antitrust Division. He noted that the Antitrust Division filed 67 criminal cases in the last fiscal year and obtained well over a billion dollars in fines. In the last five years, the Antitrust Division averaged criminal fines of almost $800 million per year, he added.

The Antitrust Division’s civil enforcement efforts also produce important results for American consumers, Baer noted. He pointed to the federal/state e-book price fixing case against Apple, Inc. and five publishers. Settlements in the case “have restored meaningful retail price competition.” The average price of top best sellers reportedly dropped by approximately three dollars in just the last few months.

“We are putting scarce American taxpayer dollars to good use,” Baer concluded.

Ramirez offered recent FTC highlights, including the two FTC cases before the U.S. Supreme Court this term, in her prepared statement.

The Supreme Court’s unanimous decision in February to revive the FTC’s suit challenging a Georgia hospital merger-to-monopoly was up first. In that decision (FTC v. Phoebe Putney Health System, Inc., 2013-1 Trade Cases ¶78,269), the Court held that the state action doctrine did not immunize the transaction from the antitrust laws.

The second case involves a “pay-for-delay” patent settlement between drug makers. Ramirez noted that the Court heard arguments in March. She said that she was hopeful that the Court will hold that these types of agreements are presumptively unlawful.

“As both of these Supreme Court cases show, the FTC remains broadly focused on preserving competition in health care markets as a way to help contain health care costs,” Ramirez said. She went on to point out the agency’s recent efforts to block anticompetitive hospital mergers in northern Virginia, Toledo, Ohio, and Rockford, Illinois.

In addition to challenging “pay-for-delay” agreements, the Commission has been looking at other ways that drug companies might be delaying generic competition. Ramirez pointed to two strategies: (1) the potential abuse of safety protocols known as Risk Evaluation and Mitigation Strategies (REMS) to prevent a generic from being able to access samples of brand products to begin the bioequivalence testing process required by the Hatch-Waxman Act; and (2) product hopping, where brand companies, facing a threat of generic competition, make minor non-therapeutic changes to their products to prevent generic substitution.

Ramirez told Subcommittee Chairwoman Amy Klobuchar (D, Minnesota) that she supported her bill aimed at combating pay-for-delay settlements, but that she couldn’t speak for the current Commission.

The Commission also remains focused on high-technology markets, according to the testimony. “The Commission recognizes the important role that innovation plays in technology markets, and takes a cautious approach where action is more likely to deter rather than promote innovation,” Ramirez noted. Ramirez pointed to the agency’s recent decision to close its investigation of Google’s search practices as an example of this cautious approach.

“The Commission also remains focused on preserving the integrity of the standard setting process,” Ramirez testified. She said that there will be an ongoing dialogue with stakeholders in this area.

Also on the intellectual property front, Ramirez noted that the FTC, in conjunction with the Antitrust Division, has been looking into the practices of patent assertion entities and non-practicing entities or “patent trolls” and the impact on competition. In response to questioning from the senators, neither agency head appeared ready to issue new guidance on unilateral conduct or unfair methods of competition.

Senator Mike Lee (R, Utah), ranking member on the subcommittee, inquired whether the Antitrust Division might issue guidance on Sherman Act, Section 2, in light of the decision of former Assistant Attorney General Christine Varney to withdraw guidance issued in September 2008 during the George W. Bush Administration. Baer said that he would not provide general, formal guidance on Section 2, but would provide guidance on a case-by-case basis through speeches or closing statements.

Senator Lee also questioned Ramirez regarding the need for the FTC to issue guidance on limiting principles for Section 5 unfair methods of competition enforcement. Ramirez directed the senator to guidance provided in recent enforcement actions. According to Ramirez, the agency has been approaching Section 5 enforcement carefully.

Both enforcers agreed that concerns over the differing standards imposed on the two agencies for obtaining preliminary injunctions in merger cases were overstated. Senator Lee asked whether Congress needed to get involved so that the same standard applies for both agencies.

According to Ramirez, at the end of the day, the standards used by the two agencies are quite similar. She did not see a practical difference as applied by judges. Baer agreed.

Baer pledged to continue working to promote competition in agriculture markets. He said that the Antitrust Division was working closely with Department of Agriculture and state attorneys general in farm states and that he understood that these issues were important to American consumers.

Wolters Kluwer Law & Business

FTC Commissioner Joshua D. Wright told attendees of the American Bar Association Section of Antitrust Law Spring Meeting on April 11 that he was hopeful that the Commission will issue a policy statement, articulating what constitutes an unfair method of competition in violation of Section 5 of the FTC Act. Saying it is the “Commission’s duty,” he expressed his belief that the current Commission is up for the task.

Wright’s remarks – “What’s Your Agenda?” — delivered at the meeting’s “Hot Topics” panel were added to the agency’s website late Monday.

Wright said he would kick off the process by offering a proposal, with certain limiting principles confining the scope of unfair methods claims soon. However, he did not offer a timeline.

According to Wright, Section 5 enforcement has fallen short of its theoretical promise as articulated by Congress, because the agency has not offered details on the provision. He noted that there are only “a handful of adjudicated decisions with any durable impact on antitrust doctrine or economic welfare.” Wright went on to say that “the Commission’s use of Section 5 has done little to influence antitrust doctrine and less to inform judicial thinking or to provide guidance to the business community.”

“There is little hope for Section 5 to play a productive role in antitrust enforcement unless the Commission articulates in a policy statement about precisely what constitutes an unfair method, how the agency will decide whether to bring unfair method claims, and a general framework including guiding and limiting principles for evaluating Section 5 cases,” said Wright.

Wright explained that a policy statement “must establish guiding principles for Section 5 theories of liability outside the scope of the Sherman or Clayton Acts.” At the very least, actionable conduct should result in harm to the competitive process and reduce economic welfare.

Two potential limiting principles were offered. First, Section 5 should not be used to evade existing antitrust law. A second potential limiting principle is a restriction that Section 5 unfair methods cases do not involve plausible efficiency claims.

Wright said that he believed his informal and public distribution of his own proposal would provide “a useful starting point for a fruitful discussion among the enforcement agencies, the antitrust bar, consumer groups, and the business community.” While Wright has time on his side – his term does not expire until September 2019 – it is unclear whether he will be able to convince the three other commissioners (eventually four other commissioners) to  issue such guidance.

Responding to a question about Section 5 enforcement at the Spring Meeting’s Enforcement Roundtable last Friday, FTC Chairwoman Edith Ramirez did not directly address Wright’s proposal to issue a policy statement. However, she suggested that the FTC would continue to develop this area of law through enforcement activity.

Ramirez believes that Section 5 is an important enforcement tool provided by Congress that ought to be used in a careful way. According to Ramirez, the agency has used its Section 5 authority appropriately.

FTC Bureau of Competition Director Reaction

FTC Bureau of Competition Director Richard A. Feinstein earlier Friday morning suggested that the agency has considered issuing guidance on the issue in recent years. In 2008, the FTC held a public workshop to examine the scope of the prohibition of unfair methods of competition under Section 5. The workshop considered types of business conduct that might be unfair methods of competition addressable by Section 5. While one of the goals of the workshop might have been to provide guidance, turnover at the Commission has prevented its issuance.

“The devil is in the details”, said Feinstein. He believes that the challenge for the agency is reaching a consensus on guidance that is worth providing.

Introduction

The smart phone wars have led to heated discussions over standard setting in technology markets. It seems only a question of time before the standard setting debate spills over into other areas. My personal candidate is the standard setting that underpins product quality, origin and safety certification.

Certification – where invisible features matter

An average consumer comes face to face with product certification in her local grocery store. Organic meat, cage-free eggs and fair-trade coffee are only a few examples of certified products, which increasingly populate store shelves. The expansion of green markets has also prompted certification and labelling programs for a wide range of products (e.g. natural, recyclable, eco-friendly, low energy, recycled content, non-toxic etc.).

Obviously, the usefulness of certification is not limited to food or eco-friendly market segments. Typically, certification comes into play in industries where the important characteristics of products are difficult to tell after the purchase has been made. We can’t verify where the tomato was grown or whether a bulb is really energy efficient. In other words, since the consumer cannot verify the truthfulness of each manufacturer’s claims, the goal of product certification is to bridge the information gap.

What is product certification?

One way of looking at it is to say that the purpose of product certification is to emphasise certain attributes of a product. From the consumer’s perspective certification reduces the transaction costs related to information gathering. It offers a low effort solution for consumers willing to make an informed choice (e.g. buy organic vegetable, verify materials used in the construction of a building). As buyers get more information, they can more easily adapt their consumption patterns. Thus, by increasing transparency product certification ultimately increases consumer satisfaction.

On the manufacturer’s side certification provides an incentive to develop products with the attributes desired by consumers. Moreover, by raising consumers’ awareness of the options open to them (e.g. fair trade coffee) certification can also create demand for a product category which was previously not in demand. Thus, product certification can be used as a differentiation strategy to create niche markets. If a standard is strong – meaning that it provides sufficient transparency and consumers have confidence in its control system –it should allow niche markets to develop and reach their potential. By encouraging the development of new and improved products, standards can in fact stimulate innovation. While a standard is being developed, alternative solutions can compete for inclusion in the standard.  Also, even once a standard is agreed, manufacturers still remain free to develop alternative standards that do not comply with the one previously agreed.

Certification can be based on voluntary labelling or public regulations. It is often policed by an independent third party in order to increase its credibility. If designed properly, certification should have a positive impact on the functioning of the markets, since it stimulates competition by increasing transparency.

Similarities to technology standard setting

The roles of product certification and technology standard setting are ultimately similar – in both cases the goal is to ensure that a given product possesses certain features. Technology standards ensure the compatibility and interoperability of the devices manufactured by different companies. As a result, adoption of new technologies is more rapid (more products can communicate with each other) and consumers’ costs related to using such technologies are reduced. Product certification also pursues some level of alignment across the industry, but the reasons behind it are usually more marketing-oriented (by focussing on the policy issues of concern to consumers such as protection of the environment, safety, health).

Both technical standards and certification are usually created with the participation of the members of the industry involved. This ensures that important technical/production aspects are reflected in the standard, but also creates a risk of collusion or disruption of the standard setting process.

In the case of technology standards – as the smart phone wars show – the greatest risk lies in the area of trust. Ultimately, since the creation of a technical standard requires effective collective action, the participants to the standard setting process need to follow the rules when the technical standard is in the making and honour their commitments afterwards.

Certification processes demonstrate somewhat similar vulnerabilities, since they also create incentives for businesses to hijack the collective action by influencing the certification process so that their own products are favoured over competing products.  This can be done through a variety of practices, which have one common denominator: raising rivals’ costs.

When certification can become anticompetitive?

How can businesses raise rivals’ costs by influencing the design of certification programs? Grollau et. Al. (2007) have identified four strategies: [1]

• Lobbying for a narrow product category: When the category of products is narrow, only a few can benefit from a certificate. The certified products will be compared with as few other products as possible. This, in turn, will result in less competition in the niche market. In addition, rivals, who do not meet the narrowly defined criteria, will not have the opportunity to differentiate their products.
• Defining criteria which favour certain products: This is a variation of the previous strategy. In this case, criteria can be designed according to the local conditions disfavouring other manufacturing traditions or can give preference to the processes and materials not used by competitors.
• Creating unfavourable monitoring mechanisms: This strategy focuses on making competitors’ lives more complicated once the certificate is granted. If a monitoring mechanism requires expensive and frequent tests to check compliance with a standard, costs related to such monitoring can be more burdensome for smaller competitors.
• Sending disrupting signals: This strategy targets competitors who have already obtained a certificate. By disseminating additional information or labelling, or creating uncertainty with respect to the certified attributes, companies can dilute a standard, and thus make it weaker and less profitable to use.

Assessing Certification Standards

How can we ensure that certification processes are not misused for anticompetitive ends?  The Commission’s Horizontal Guidelines, [2] which apply also to standard setting in the form of product certification, [3]  offer some helpful guidance in this respect. Where participation in standard-setting is unrestricted and the procedure for adopting the standard in question is transparent, standardizations agreements which contain no obligation to comply with the standard and provide access to the standard on fair, reasonable and non-discriminatory terms (FRAND)will normally not restrict competition. [4]

Having said that, the existence of these same guidelines has not prevented bitter disputes arising in other areas, and how the guidelines apply in practice is far from certain.  The experience resulting from the technology standard setting debate offers a lot of practical guidance on what it means in practice to provide access to standards on FRAND terms. Those considering this area can guess at how the lessons from the technology sector will apply to product certification, but the kinds of influence that can be exerted from within a standard setting process to skew its outcome are so subtle that general guidelines and lessons from other sectors will invariably fall short.  As more standards proliferate, and as better informed consumers become more demanding, so too will the opportunities for companies to mould standards to their best advantage, and stray into competition law grey zones. Only a thorough investigation will unravel all the issues, and it seems inevitable that competition authorities will have to examine the product certification area more closely before long.

The opinions expressed herein are those of the authors and do not necessarily reflect the views of their respective firms, clients, or any affiliates of any of the foregoing. This article has been prepared for informational purposes only and does not constitute legal advice.

This posting originally appeared on Kluwer Competition Law Blog.

1. Grolleau, G., L. Ibanez and N. Mzoughi, (2007), Industrialists hand in hand with environmentalists: how eco-labeling schemes can help firms to raise rivals’ costs, European Journal of Law and Economics, vol. 24 pp. 215-236.

2. Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements.

3. Horizontal Guidelines, sec. 257: “The terms of access to a particular quality mark or for approval by a regulatory body can also be regarded as a standard. Agreements setting out standards on the environmental performance of products or production processes are also covered by this chapter.”

4. Horizontal Guidelines, sec. 280.

Law Offices of David A. Balto

Commissioner Edith Ramirez became the new Chairwoman of the Federal Trade Commission on March 4. The White House announced the selection on February 28th.

Chairwoman Ramirez is an excellent choice for antitrust enforcement generally, but is truly an ideal Chair for the FTC as it prepares to face the next generation of anti-competitive practices stemming from patent misuse.  She uniquely combines an IP litigation background with a commitment to aggressively enforce the spirit and the letter of the antitrust laws, and may prove a valuable friend in the movement for patent litigation reform.

Prior to joining the FTC, Chairwoman Ramirez was a partner with top intellectual property litigation firm Quinn Emanuel Urquhart & Sullivan where she specialized in litigation and IP.  Since joining the FTC, Chairwoman Ramirez has been the Commission’s point person on IP matters, and likely is the most influential voice in the building.  Her ascension to Chairwoman only reinforces the strength of her message.

Some speeches and comments by Chairwoman Ramirez are representative of both her expertise and her commitment to using the antitrust laws to address competitive problems stemming from IP.  For instance, in July 2012, Chairwoman Ramirez testified before the Senate Judiciary Committee regarding standard essential patents, but also discussed the patentization of the mobile telecommunications industry in general:

Complex multi-component products are the norm in IT markets. For example, a smartphone has hundreds of components and technologies that enable it to communicate over wireless networks, stream video, access the internet, and perform all of the functions that consumers expect. The vast majority of these components and technologies are covered by patents. A conservative estimate of the number of patents that could be in play in a smartphone is in the tens of thousands.

Chairwoman Ramirez also recognizes the harm to competition that can result from this over-patentization of the industry.  In a speech before the Washington State Bar Association she discussed many of the issues that lie at the heart of abusive patent use and patent reform including 1) Competition and Innovation in the Patent Thicket; 2) Injunctions and Hold-Up; and 3) SEPs and Exclusion Orders.

On the first issue, she notes concerns with the acquisitions of patents leading to a costly arms race because it “drives companies to shift their resources from productive activities, like research and development, to less productive ones, like filing a multitude of dubious patent applications and acquiring massive patent portfolios.”  She also notes the need for the PTO and the courts to address the concern of patent quality.  On injunctions, she points out how the Supreme Court’s decision in eBay, gave the courts a framework to use injunctive relief prudently and noted that an injunction should be denied where exclusivity would harm innovation and competition.  In addition, she notes that the courts should take into account whether the patent owner practices its patent in deciding whether to grant an injunction, hopefully a factor that will dampen the grants of injunctions for patent assertion entities.

Finally, on SEPs and exclusion orders Chairwoman Ramirez reaffirmed testimony she gave for the Commission that the ITC has the tools, under its public interest authority, to prevent a patent owner from using the threat of an exclusion order to escape its commitment to license on a RAND basis.  She emphasized that it is important to remember that SEP litigation is more than merely private disputes because “[o]ver time, hold-up restricts competition and distorts incentives to invest in standardized products and complementary technologies.  The result for consumers will be higher prices, fewer choices, and inferior product quality.”

Most notably Chairwoman Ramirez opened her speech with the following remarks:

Patents create exclusive rights that encourage investment in innovation. But a system clogged by too many vague and trivial patents can do just the opposite. Injunctions also play a critical role in preserving the investment incentives at the heart of the patent system, ensuring that inventors can recoup their R&D costs. However, injunctions can also create risks in technology markets, where complex products with multiple components are the norm and interoperability standards are everywhere. In this environment, the threat of an injunction has the potential to deter innovation and distort competition.

Finally, in an article entitled “A Competition Policy Perspective on Patent Law: The Federal Trade Commission’s Report on the Evolving IP Marketplace” Chairwoman Ramirez discussed the burgeoning problem of patent assertion entities (“PAEs”):

Although PAEs share certain characteristics with other non-practicing entities (NPEs), such as start-ups, design firms, and universities, their unique business model has generated considerable controversy… The increased number of lawsuits, coupled with the rise in the number of landmark damage awards, has raised significant concerns about the potential adverse impact of PAE activities on innovation.

However, Chairwoman Ramirez follows this description with commentary suggesting PAEs are only responding to incentives created by the patent system, and are a “symptom and not the disease.”  Perhaps this bodes well for Chairwoman Ramirez’s support of patent reform, but it may also suggest that there is still work to be done to convince her and the rest of the FTC about how to address the problems of PAEs.

In the past year the FTC has increasingly recognized the problems arising from the assertion of intellectual property rights and how those problems can hamper competition.  With the dramatic increase in patent acquisitions and litigation by PAEs these problems are becoming momentous. The FTC, with the DOJ, has begun to use all of its tools – enforcement actions, hearings, amicus briefs, advice letters to other regulators – to begin the process of helping to get courts and regulators to address these problems.  President Obama could not have chosen a better steward to lead these efforts.

Cleveland-Marshall College of Law

I often feel a certain deflation after the Supreme Court decides an antitrust case.  After watching a case for months, prognosticating about it with other antitrusters, reading umpteen blog posts, reading the briefs if you’re into it and even some amici briefs if you’re really into it, the Court then rules one way or the other, and usually tailors its opinion pretty narrowly, breaking no meaningfully new ground.  I suppose many will have that feeling about Tuesday’s decision in Federal Trade Commission v. Phoebe Putney Mem. Hosp. Sys., and some are already saying that Justice Sotomayor’s brief opinion for a unanimous Court is just a narrow application of garden variety state action rules.  And I suppose it will be overshadowed by what will be a much bigger decision later this year, regardless how the Court decides it—the reverse-payments decision in Federal Trade Commission v. Watson. 

But I think there are a few reasons to see more in Phoebe than may first appear.  I also have some thoughts about the opinion’s author, Justice Sotomayor, and what may become (I hope I hope I hope!) her important new role in the wake of Justice Stevens’ retirement.

Reasons I Think Phoebe Matters

•           Cataclysm Averted.  First of all, in one important respect Phoebe resembles the Court’s most recent really big antitrust decision, American Needle.  Like that case, some will say that Phoebe is really no big deal because reversal was so predictable.  The lower court made what seemed like kind of a big departure from settled law, and so reversal was just a correction of doctrinal error that had ripened to circuit split.  But in both cases, one should remember that affirmance, which really was not impossible, would have been a disaster.  There are literally thousands or perhaps tens of thousands of state-authorized quasi-public entities littered throughout the country that participate in markets in various ways.  Had Phoebe gone the other way, it would immediately occur to participants in those programs, all over the country, that they really ought to test the limits of their new-found profit opportunities.  Many thousands more state statutes delegate authority of some kind to other public or private entities, and they too would raise new uncertainties if the Court affirmed the Eleventh Circuit’s extremely broad reading of “clear articulation.”

            Cataclysm. 

            Averted.

            That such a thing seemed not impossible—in either Phoebe or American Needle—really says something about the state of antitrust and the federal bench.

•           Reaffirmation of the Presumption Against Scope Limits.  As virtually her first observation after reciting the facts and lower court holdings, Justice Sotomayor reaffirmed this frequently stated sentiment:

            [G]iven the fundamental national values of free enterprise and economic competition that are embodied in the federal antitrust laws, “state-action immunity is disfavored, much as are repeals by implication.” [quoting FTC v. Ticor].

            The Court has said that kind of thing a lot, of course, but in the past few decades it has most often honored it in the breach.  It seems significant in and of itself that in Phoebe, its first state-action decision in twenty years, the Court re-emphasized a general limit on the doctrine that many lower courts have plainly forgotten.

•           Health Care Is Not “Special.”  Defendants and some amici stressed the significance of the fact that the case involved health care, and alleged that health care markets face special economic problems.  No surprise there; there has never been an antitrust defendant that didn’t have a reason for the judge that its circumstances require special antitrust clemency.  Indeed, I personally think the deepest, most ultimately unifying theme in all antitrust is the struggle of the general against the specific.

            But, at least with respect to the scope of antitrust, it now appears irrelevant that the particular context may involve health care.  The Phoebe opinion really didn’t mention it.  So, except as Congress explicitly says otherwise, it appears that antitrust will continue to apply to health care just as it does to other markets. 

            More generally, the Court silently reaffirmed in this case that the exemptions and immunities doctrines just aren’t concerned with the specific context.  There may be some exceptions, but at least the state action doctrine—and Noerr too, if you think about it—could care less about the specific market at issue.  They rather address the essentially constitutional interface between a federal policy preference and state sovereignty and other political values.

•           Clarification of “Reasonable Foreseeability.”  In some important sense, Phoebe’s business end will just be its narrow doctrinal clarification of the “clear articulation” requirement.  I’m not sure how much is added or if the Court has changed its own law at all, but at the very least it looks like Phoebe meant to reign in lower courts that have taken clear articulation too far.

            Prior to Phoebe, the Court’s most important gloss on that term was Justice Powell’s 1985 opinion in Town of Hallie, which explained that a state policy “clearly articulated” an intent to displace competition so long as anticompetitive consequences were “reasonably foreseeable.”  Perhaps since that formulation itself really adds very little, Phoebe adds a little more.  First, borrowing from Community Commc’ns Co. v. Boulder, Justice Sotomayor wrote that the ultimate question is whether “the State affirmatively contemplated” that delegees of state authority “would displace competition” (emphasis added).  That burden is met if it can be shown that anticompetitive effects were “reasonably foreseeable,” but, after Phoebe, reasonable foreseeability requires that effects to be “the inherent, logical, or ordinary result of the exercise of authority delegated by the state legislature.” 

            Realistically, this new language may not add much, and assessing “clear articulation” in any given case will still boil down to analogizing to the facts in the Court’s decisions.  But if there is now one basic known fact, it is that the Court is not sympathetic to very general delegations of authority.  The Court has now rejected both a home rule statute (Boulder) and the grant of “general corporate powers” as clear articulation, and Phoebe added this:

            Our case law makes clear that state-law authority to act is insufficient to establish state-action immunity; the substate governmental entity must also show that it has been delegated authority to act or regulate anticompetitively.

•           “[G]eneral [C]orporate [P]owers.”  Further along those same lines, it seemed to me significant that the Court followed the Commission’s characterization of the major question presented, repeatedly describing the question as whether Midcal’s “clear articulation” requirement could be satisfied merely by giving a “substate entity” some “general corporate powers.”  The trial court, the Eleventh Circuit, and the defendants all stressed that the powers granted to the hospital authority were emphatically not just “general corporate powers.”

•           A Presumption Against Clear Articulation?  Some Thoughts on the Federalism Rationale.  An interesting wrinkle was some policy reasoning at the end, in which Justice Sotomayor seemed almost to suggest that the best interests of state sovereignty themselves require something of a presumption against “clear articulation.”  Rejecting defendants’ request for a presumption in favor of immunity, she relied on an amicus brief of several states for the view that a “loose application of the clear-articulation test would attach significant unintended consequences to States frequent delegations of . . . authority,” and, “declin[ing] to set . . . a trap for unwary state legislatures,” she wrote that the Court would avoid any doctrinal standing that required them “to disclaim any intent to displace competition to avoid inadvertently authorizing anticompetitive conduct.”

•           “Market Participant” Remains a Possible Exception.  Footnote 4 of the opinion noted that an amicus, the National Federation of Independent Business, had urged the Court to decide the case by recognizing a “market participant” exception to the state action immunity.  Parker itself had recognized such a possibility, and the Court has been preserving it ever since.
Still, the odds are that if the Court ever reaches the question it will find there to be no such exception. The Court last considered the issue in City of Columbia in 1991, and while it there preserved the possibility of such an exemption, the Court rejected several others and seemed generally pretty skeptical of exceptions to state action immunity.  Since then most lower courts to have considered the question have rejected any such exception.

•           A Reminder That Justices See Substance and Scope Differently.  One really can’t forget that Phoebe was unanimous, and it was decided relatively quickly.  The Court, in other words, saw it as an easy case.  And yet, I doubt there is serious debate that, as far as antitrust is concerned, this is a conservative Court. Prior to American Needle in 2010, it had not ruled for any antitrust plaintiff, private or government, in nearly twenty years, despite having taken quite a number of antitrust cases in that time.  In many of them—Brooke Group, Trinko, Twombly, Weyerhauser, Leegin, Dagher, Credit Suisse, Linkline, etc.—the Court announced new substantive or procedural rules that severely disadvantaged plaintiffs.  And so I doubt Phoebe proves that the days of 5-4 conservative decisions ratcheting back exposure to liability are behind us.

•           The Whole Court Dislikes State Government Pork.  Finally, I think it is worth noting that most antitrust lawyers and even many federal judges seem to misunderstand what the Court finds fundamentally at stake in state action cases.  Many litigants and Court watchers seem to assume that state action cases are really about substantive antitrust policy or the social utility of the challenged state regulatory regime.  I don’t think so.  I think the Court sees these cases solely as posing a problem of federalism, and just takes for granted the kind of state regulatory programs that raise state action issues almost always to be disagreeable, parochial pork.  Justice Kennedy, for example, no antitrust hawk and the author of strongly pro-defendant opinions like Brooke Group, ringingly condemned state rubber stamps of price-fixing in Ticor.  Justice Scalia, who more or less extolled the virtue of monopoly in Trinko, wrote an opinion in City of Columbia openly despairing of the corruption that he saw as the bread and butter of local government.

            Phoebe does not disappoint.  Quoting City of Columbia, Justice Sotomayor explained that the Court’s state action rules sought to preserve state sovereignty, regardless how foolish or evil a state’s substantive policies might be, except that states could not “permit[] purely parochial interests to disrupt the Nation’s free-market goals.”

Reasons I’m Still Feelin’ Good JuJu for Sotomayor

During her confirmation period, an exciting Sotomayor fact for antitrusters was her concurrence in Major League Baseball Props., Inc. v. Salvino, 542 F.3d 290, 334 (2d Cir. 2008) (Sotomayor, J., conc.).  Salvino was a joint venture case in which the majority found a lack of conspiracy on the same reasoning as the 7th Circuit opinion in American Needle.  While Sotomayor would have ruled for defendants, her barn-burner of a concurrence schooled the majority pretty harshly for mistaking a garden variety horizontal conspiracy case, raising at most an ancillary restraints issue, for something else.  She sounded, in other words, kind of like Justice Stevens, and seemed possibly like someone who could fill his shoes in antitrust cases.  And there is reason to think the Court sees her as among its antitrust experts-after all, Phoebe was unanimous, meaning that Chief Justice Roberts assigned her to write it.

Now one reason maybe not to get excited just yet is that, admittedly, the Phoebe opinion is narrowly written, really addressing only the precise meaning of Town of Hallie’s “reasonable foreseeability” test for “clear articulation.”  But remember once again, this opinion is unanimous. And despite the fact that most Justices are more willing to limit antitrust substance than antitrust scope, some of the Court’s most recent state action cases seemed to make state action immunity relatively easy—notably in City of Columbia in 1991 and Town of Hallie and Southern Motor Carriers, both decided in 1985.  So if there is anything about the opinion that seems tepid or less than Thurman Arnold-esque, we should remember that it may have been necessary to secure votes.

Law Offices of David A. Balto

In Consolidation in Health Care Markets: A Review of the Literature, authors David Balto and James Kovacs in a study funded by and submitted to the Robert Woods Johnson Foundation discuss the recent literature concerning consolidation across various health care markets.

The paper focuses on consolidation of hospital, provider, and health insurance markets with the goal of understanding the impact consolidation has on health care prices, quality of care, and overall costs.  The paper seeks to provide an overview of the key research and present findings in different areas of healthcare to facilitate further investigation.

The authors find that while there is consolidation across many health care markets, some of the literature suggests consolidation can lead to greater efficiencies and higher quality care.  The authors also focus on specific Affordable Care Act provisions which have the goal of not only increasing access but improving the quality of care.

The paper then concludes with specific conclusions and policy implications including a discussion of agency antitrust enforcement and congressional action.

David A. Balto is an antitrust attorney in Washington, D.C. specializing in public interest advocacy. Mr. Balto is the former Assistant Director of Policy for the Competition Bureau of the Federal Trade Commission and attorney-advisor for Commissioner Robert Pitofsky. Mr. Balto also served as trial attorney for the Department of Justice Antitrust Division. Mr. Balto currently operates his own law firm in Washington, D.C.

James Kovacs is a third year law student at St. Louis University School of Law where he will obtain his degree in May 2013 with a concentration in Health Law.

Wolters Kluwer Law & Business

The Ninth Circuit on Thursday ruled that a plaintiff need not make a purchase in California to recover overcharges for price-fixed goods under the California Cartwright Act.

AT&T Corporation and other telecommunications companies that sold mobile wireless handsets containing liquid crystal display (LCD) panels could assert price fixing claims under the California Cartwright Act against manufacturers and distributors of LCD panels to recover overcharges, even though none of their purchases were made in California, the U.S. Court of Appeals in San Francisco decided. Dismissal of the California law claims on the ground that the Due Process Clause of the Fourteenth Amendment forbid the application of California law to these claims was reversed.

The plaintiffs alleged that between 1996 and 2006 they purchased “billions of dollars worth of mobile handsets containing the defendants’ LCD panels” and that the prices they paid for those handsets were artificially inflated because the defendants had orchestrated a global conspiracy to fix the prices of LCD panels.

While a number of the defendants had settled, Chunghwa Picture Tubes Ltd., Tatung Company of America, Inc., and Hannstar Display Corp. remained in the case. The defendants moved to dismiss the California law claims on Due Process grounds. The district court granted the motion to dismiss, holding that the Due Process Clause required that “in order to invoke the various state laws at issue, plaintiffs must be able to allege that ‘the occurrence or transaction giving rise to the litigation’—plaintiffs’ purchases of allegedly price-fixed goods—occurred in the various states.”

The appellate court rejected the defendants “assertion that applying California antitrust law to claims involving the purchase of price-fixed goods outside of California would violate their Due Process rights.” The location of the plaintiffs’ injury was not dispositive. All of the defendants’ conduct within California leading to the sale of price-fixed goods outside the state needed to be considered when determining whether California law could be applied without offending the defendants’ constitutional rights.

The court explained that the plaintiffs could proceed with the California Cartwright Act claims if more than a de minimis amount of each defendant’s alleged conspiratorial activity leading to the sale of price-fixed goods to the plaintiffs took place in California.

The defendants allegedly engaged in and implemented their conspiracy in the United States through the offices they maintained in California and entered into agreements to fix the prices of LCD panels in California. It was alleged that specific employees of particular defendants, operating from offices in California, participated in illegally obtaining and sharing their co-conspirators’ pricing information.

On remand, the district court was instructed to make an individual determination with respect to each defendant as to whether the plaintiffs alleged sufficient conspiratorial conduct within California that was not “slight and casual” such that the application of California law to that defendant was “neither arbitrary nor fundamentally unfair.” 

The appellate court went on to say that in-state conduct that causes out-of-state injuries can be relevant to a Due Process analysis, in the antitrust context and otherwise. The application of California law also would advance the state’s goal of maximizing deterrence of antitrust violations and ensuring disgorgement of ill-gotten proceeds. The perpetration of anticompetitive activities within California created state interests in applying California law to the conduct, the court reasoned.

The February 14, 2013, decision in AT&T Mobility LLC v. AU Optronics Corp., No. 11-16188, will be published at 2013-1 Trade Cases ¶78,262.

My partner Lee Van Voorhis in Washington drafted some thoughts on this transaction, which I thought would be of interest to the Kluwer readership.

DOJ Sues to Block Further Anheuser-Busch InBev/Grupo Modelo Linkage

On January 31, 2013, the Antitrust Division of the Department of Justice (“DOJ”) announced that it filed a complaint in federal district court seeking to block Anheuser Busch InBev (“ABI”) from acquiring the portion of Grupo Modelo (“Modelo”) it does not already own. The challenge highlights the importance of company documents, the risks of an upfront remedy and other antitrust tips for merging parties.

The Complaint’s allegations

ABI currently has a 43 percent voting interest and a 50.35 percent economic interest in Modelo, and has nine of its nineteen Board seats. Through the proposed acquisition, ABI would acquire control of, and the remaining economic interest in Modelo. The DOJ’s Complaint alleges that the proposed acquisition violates Section 7 of the Clayton Act by diminishing competition in the market for beer in the United States and 26 local markets within the U.S.

As a result of the merger, the Complaint alleges, ABI will have significant pricing power and less incentive to innovate. The Complaint dismisses ABI’s proffered remedy of the sale of Modelo’s equity interest in its United States distributor, as inadequate to alleviate the issues raised by the combination.

The Complaint defines the relevant product market as “Beer.” Although ABI sorts beer into sub-categories – sub-premium, premium (including ABI’s Bud Light), premium plus, and high end (including Modelo’s Corona) – the Complaint alleges that beers compete across categories with Bud Light competing with Corona.

The Complaint alleges that 26 local markets as well as the United States market nationally will be affected by the combination. These markets are already highly concentrated according to the DOJ/FTC Horizontal Merger Guidelines, the complaint states, and are dominated by ABI, MillersCoors, and Modelo. The transaction would combine the first and third largest brewers by market share in the United States.

Nationally, the complaint alleges, ABI has a 39% share, MillerCoors a 26% share, and Modelo is third with a notably small 7% share. However, the Complaint states that this may understate concentration as Modelo has a significantly higher share in many of the local markets involved. As a result of the merger, the Complaint alleges that the Herfindahl-Hirschman-Index (“HHI”), a measure of market concentration, would be increased enough to make the transaction presumptively illegal though it does not say from whence this presumption comes (presumably the Merger Guidelines, which are not necessarily the same as law).

The Complaint also alleges several anticompetitive effects from the merger including increased prices and loss of innovation. The Complaint alleges that higher beer prices will result from the merger both because of an increased likelihood of coordinated pricing between market leaders and unilateral price increases from ABI.

Beer prices in the United States are largely determined by “strategic interactions” between ABI, MillerCoors, and Modelo, it alleges. In practice, ABI announces an annual price increase and MillerCoors follows it soon after. The Complaint alleges, however, that Modelo has disrupted these price increases by declining to match them. As a result, ABI has had to postpone prices increases and also lower prices to keep customers from moving to Modelo products. Post-merger, the Complaint alleges that there will be no strong competitor to restrain ABI’s price increases.

The Complaint also alleges that the loss of head-to-head competition between ABI and Modelo will lead to higher prices on ABI brands. It alleges that without competition from Modelo, ABI will have a strong incentive to raise prices across brands. Any loss of customers on one brand, the Complaint alleges, could be recaptured on a different ABI brand. According to the Complaint the merger will also result in less product innovation and diversity in the market. ABI has in the past responded to Modelo’s competitive threats by adding new beer varieties to its offerings, for example Bud Light Lime.

In structuring the transaction. ABI and Modelo seem to have anticipated DOJ resistance. The proposed transaction includes the sale of Modelo’s 50% interest in its importer, Crown, to the owner of the other 50% and to give the importer an exclusive right to import Modelo beer into the United States for ten years. The Complaint asserts that this is a proposed remedy that will not alleviate the anticompetitive harm of the merger, but will simply create a “façade” of competition. For example, after the ten years are over, ABI may unilaterally terminate the contract and take over all importation and distribution of the Modelo brands.

According to the Complaint, the importer will be unable to replace the lost competition because it will own no brands or facilities of its own and be fully dependent on supplies from its ostensible competitor ABI. The Complaint states that the proposed remedy will transform horizontal competition between Modelo and ABI into a vertical dependency between the importer and ABI. Unlike Modelo, the importer will be reliant on ABI for supply and thus, unable and unwilling to resist ABI’s annual price increases. Indeed, the complaint asserts that it has been Modelo, through its 50% interest, that has kept the importer from behaving this way already.

Moreover, the Complaint alleges that because the import contract may be unilaterally terminated by ABI after ten years the importer will be incentivized to increase prices to please ABI to remain the sole distributor.
The Complaint alleges finally that entry and expansion into the beer market is unlikely to be sufficient to remedy the transaction’s competitive effects and that any claimed efficiencies are not merger specific nor likely to be passed onto consumers.

Legal implications for strategic acquirers and practical business conclusions

The ABI/Modelo Complaint has several implications. At the most basic level, it represents another example of the Obama administration’s commitment to “vigorously enforce” the antitrust laws. There are several other implications for companies, especially those that engage in strategic acquisitions of competitors:

• Documents remain the most important and most powerful pieces of evidence that the government uses to support its case. The ABI/Modelo Complaint relies heavily upon documentary evidence to support its main allegations, for example:

o Coordinated Effects – The Complaint alleged that ABI played the role of price leader in trying to coordinate pricing, mainly with MillerCoors, the second-largest beer producer in the US. ABI had developed a “Conduct Plan,” which emphasized being: “Transparent – so competitors can clearly see the plan…Simple – so competitors can understand the plan…Consistent – so competitors can predict the plan…Targeted – consider competition’s structure.” Modelo’s pricing was so disruptive that “[t]he impact of Crown Imports [Modelo] not increasing price has significant influence on our volume and share. The case could be made that Crown’s lack of increases has a bigger influence on our elasticity than MillerCoors does.”

o Unilateral Effects – Several ABI documents quoted in the complaint focused on Modelo’s role as a market disruptor and constraint on ABI’s prices. For example, one ABI executive wrote that “[t]aking market share this way is unsustainable and results in lower total industry profitability which damages all players long-term.” (“Emphasis in original.)

The importance of documents in this case cannot be overstated. The transaction involves a broad product market with four potential product submarkets, local and national geographic markets, and complex competitive dynamics. Without contemporaneous documents from ABI, Modelo, and Crown describing their business strategy, motives, and incentives, the DOJ likely could not have constructed a persuasive narrative of competitive harm.

The importance of company documents is reinforced by the FTC’s recently released Horizontal Merger Investigation Data Report. The Report shows that of 28 transactions between 1996 and 2012 in which the agency found “hot documents,” 25 resulted in an enforcement action. Companies should thus be vigilant in training employees to not create documents –deal documents or otherwise—that may contradict arguments that the company may wish to make to antitrust regulators in future transactions. Good document retention and document creation policies can help smooth regulatory review.

• There are both potential benefits and risks in proceeding with upfront remedies. The government will not automatically accept them, but will vet them carefully to determine whether they alleviate the antitrust harm. The Government will likely put the burden on the parties to show that the remedy alleviates all the competitive issues. As reflected in the 2011 Antitrust Division Policy Guide to Merger Remedies, the agencies take the position that a long-term supply arrangement alone between competitors will rarely be a sufficient remedy in a horizontal merger case.

Here, the DOJ rejected the proposed sale of the 50% interest in the importer coupled with a supply agreement, and then the government essentially alleged that ABI’s attempt to provide an upfront remedy was an admission that the transaction is anticompetitive. Note that this is an area where recently-appointed Antitrust Division head Bill Baer showed a strict approach in his prior stint as head of the FTC’s Bureau of Competition.

• Even though the agencies typically prefer to define narrow product markets, they may also define broader markets in certain situations. The Complaint alleges a broad “beer” market, instead of four distinct segments as reflected in ABI’s documents. Though this approach is consistent with past DOJ practice, as in 2008’s InBev/Anheuser-Busch merger and Miller/Coors joint venture, it seems to depart from typical agency practice as well as basic consumer perception. Both the 2010 Horizontal Merger Guidelines and agency practice favor narrow product market definitions, separating out functional substitutes into different markets. For example, in the DOJ’s 2011 lawsuit challenging the merger between H&R Block and TaxAct, the DOJ alleged a “digital do-it-yourself tax preparation software market,” and in the FTC’s 2007 lawsuit against the merger between Whole Foods and Wild Oats, the FTC alleged a “premium and natural organic superstore” market.

In this case, however, the broad market definition may be necessary for DOJ’s theory of harm. Most ABI and Modelo brands do not generally compete head-to-head. As the Complaint describes, ABI’s most popular brand, Bud Light, is in the premium category whereas Modelo’s Corona is in the high-end category. If the Complaint defined the market to be these narrower categories there would have been less competitive overlap and perhaps not enough to challenge the transaction.

• Pay attention to both local markets and a national market. Along with the recent AT&T/T-Mobile lawsuit, the Complaint alleges harm in both local geographic markets and a national market. This signifies that national companies that compete in local markets must not only assess a potential transaction’s potential effects in those local markets, but in the national market as well. In the past, companies of this nature might be reasonably confident that, even if they were merging with another large national competitor, the divestiture of assets in certain local geographic markets could remedy the anticompetitive harm. However, with the AT&T and ABI cases, the government has made it clear that it will also assess a transaction’s effect on competition from the national level. When such transactions are analyzed at the national level, targeted divestitures may not be sufficient for DOJ.

This post originally appeared on the Kluwer Competition Law Blog.