Category Archives: Antitrust Developments

The Federal Trade Commission Updates its “Guides for Advertising Allowances and Other Merchandising Payments and Services”: Still Struggling to Give Guidance under Robinson-Patman Act to Companies Competing in a Modern Economy

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Filed under Antitrust Developments, FTC, Uncategorized, Unfair Competition

Although infrequently finding itself front and center in case law and legal developments, the Robinson-Patman Act, 15 U.S.C. § 13 (the “Act”) from time to time resurfaces.  The Act prohibits discrimination in prices charged, promotional allowances paid and/or promotional services or facilities furnished in connection with the sale of commodities of like grade and quality to customers that compete against each other, although there are certain defenses.  Almost since its inception, the Act has been met with scorn, and frequent calls for its repeal or substantial modification.  The Act, which some contend runs counter to the principles of the antitrust laws of protecting competition rather than protecting smaller companies against their larger competitors, continues to defy these challenges.  But this flawed statute faces the additional challenge of adjusting to an ever changing marketplace. When the Act was enacted in 1936, there was no internet, no online retailers and no big box stores.  Today, companies, their counsel, the Federal Trade Commission and the courts are left to try to apply the Act in this new dynamic.  As one commentator noted, “compliance with the Act continues to absorb more of the time and attention of corporate counsel in most companies than any other aspect of the antitrust laws.”  “Crossing the Streams of Price and Promotion Under the Robinson-Patman Act,” Richard M. Steuer, Antitrust, Fall 2012.

In 1969, the FTC issued its ”Guides for Advertising Allowances and Other Merchandising Payments and Services” following the Supreme Court’s decision in F.T.C. v. Fred Meyer, Inc., 390 U.S. 341 (1968), which has been referred to as the “Fred Meyer Guides.”   16 C.F.R. Part 240.  The Guides which deal with Sections 2(d) and 2(e) of the Act are non-binding on the FTC and the courts but offer guidance to businesses when dealing with discounts and promotional allowances under the Act, an area that is even today only vaguely defined and in constant evaluation as the commercial marketplace changes. Now, for the second time since its inception, the FTC has revised the Fred Meyer Guides, with the first time being in 1990.   

In late 2012, the FTC requested public comments on the Fred Meyer Guides, noting that “[d]evelopments in technology, methods of commerce, and the law since the last revision of the Guides suggest that certain provisions of the Guides might usefully be revised.”  Among others, the FTC noted “the emergence of the Internet as an important retail sales and communications channel” as a development for which comment was predicated.  In response to this request, the FTC received a number of submissions, with varied perspectives, and then issued the updated Fred Meyer Guides.  The revised Fred Meyer Guides reflect certain changes which do provide additional guidance to businesses regarding compliance.  Significantly, though, the FTC declined to make a number of changes suggested by a number of contributors, including the American Bar Association Section of Antitrust Law, holding firm to its decade long positions and missing an opportunity to lead. 

First, the FTC declined invitations of several commentators to revise the Guides to include a requirement of “injury to competition” under Section 2(d) and 2(e).  These requests were motivated by the comments of the United States Supreme Court in the Volvo Trucks North America v. Reeder-Simco GMC, Inc., 546 U.S. 164 (2006), and subsequent cases, that the Act is to be interpreted in a manner consistent with antitrust principles of protecting competition, not existing competitors.   The FTC rejected this call, however, noting several times the difference between Sections 2(d) and 2(e) — the subject of the Guides — and Section 2(a) which prohibits direct and indirect price discrimination when competitive injury might result.  Section 2(a) contains an “injury to competition” element, whereas Sections 2(d) and 2(e) do not.  And significantly, Sections 2(d) and 2(e) are per se offenses, unlike Section 2(a).  The reason for the difference, as noted by the FTC, is that Sections 2(d) and 2(e) were intended to prevent evasions of Section 2(a) and, for that reason, do not require proof of competitive injury, often a weighty issue in antitrust cases.  The FTC noted that no commentator submitted any case law to challenge this basic understanding and expressly distinguished the Volvo Trucks  case as one that addressed liability under Section 2(a), not 2(d) or 2(e).  Yet, while declining to revise the Guides, the FTC acknowledged that while case law did not dictate that this change be made, the requested change was one that was consistent with agency application. 

“Revising the Guides to suggest that sections 2(d) and 2(e) plaintiffs must prove likely injury to competition therefore would not be supportable in the case law, even though requiring proof of likely injury to competition is sound enforcement policy.  . . .   However, consistent with the Supreme Court’s expressed view in Volvo Trucks, 546 U.S. at 181, that the Robinson-Patman Act should be construed to be consistent with the antitrust laws generally, the Commission has modified section 240.13 of the Guides, which relates to Section 5 of the FTC Act, to reflect its own view that Section 5 should be used only in cases of likely harm to competition.” 

So, does this mean that promotional allowances are subject to proof of injury to competition and does this mark a shift by the FTC?  No and no.  But the Guides reveal that the FTC itself will consider the injury to competition in certain situations involving customer liability for knowingly receiving discriminatory pricing through services or allowances not made on proportionally equal terms to its competitors under Section 5 of the FTC Act. 

Second, the FTC, while acknowledging that there is an issue of how to address sales over the internet, left the resolution of that issue for another day.  Largely stating the obvious, the FTC noted that the question of whether retailers, through brick-and-mortar stores or on the internet, are competing customers of a seller depends upon the “particular characteristics of the retailers’ formats, the location and characteristics of the retailers’ targets and actual customers.”  And the FTC concluded that if found to be competing customers, then these customers may be entitled to equal promotional allowances and services.  Yet, the FTC provided no guidance of just how that is to be done in these different environments. 

“Neither the developed law nor commenters on the Guides have provided any detailed guidance as to how sellers should, or currently do, make their promotional allowances and services available on proportionally equal terms across reseller formats, such as brick-and-mortar and online sales.  No single means of doing so is required, and a seller’s application of common sense and good faith will be relevant in assaying efforts to proportionalize promotional allowances and services across different formats.”

One of the significant motivators for seeking comment on the Guides simply is left outstanding.  This is unfortunate and clearly a missed opportunity.

Other highlights of the revised Guides includes:

  • Section 240.8, which previously stated that ”[a]lternative terms and conditions should be made available to customers who cannot, in a practical sense, take advantage of some of the plan’s offerings,” has been found too restrictive, and now applies to those customers who ”cannot, in a practical sense, take advantage of any of the plan’s offerings.”   The FTC rejected, though, the further suggestion of the Antitrust Section that the customer who cannot take advantage of any of the offerings should contact the seller for usable terms, finding it impermissible burden shifting under the Act.
  • Section 240.10(a) discusses offering promotional services and facilities that are “useable in a practical sense” by competing customers.  Customers that vary in size, may have limitations in availing themselves of cooperative radio or television advertising.  Giving a nod to the internet, the FTC provides some guidance that “proprotionally equal alternatives, such as online advertising,” should be offered to these customers. 
  • In Section 240.10(b), the FTC rejected the call for posting the details of the offer on the website for the customer to find as insufficient to meet the seller’s burden.  The FTC found more is required, as the seller’s efforts must be ”reasonably designed to provide notice to competing customers of the availability of promotional services and allowances.” 
  • The FTC has provided guidance to claims against customers receiving benefits of promotional services by noting that Section 240.13 that Sections 2(a) (applying to price discrimination) and 2(f) (prohibiting the knowing inducement or receipt of a price discrimination by Section 2(a)) would apply only in limited circumstances “where no promotional services are performed in return for the payments, or where the payments are not reasonably related to the customer’s cost of providing the promotional services.”  These two sections can be enforced by disfavored customers.

In a number of limited ways, the revised Guides mark an improvement in the manner in which Sections 2(d) and 2(e) are viewed.  However, what is most notable about the revisions is what did not happen.  An opportunity existed to embrace significant changes that would provide better policy, consistent with antitrust principles, and address the Act in the context of our modern economy.  This opportunity was missed, and the question once again is raised as to who will actually take on that task and fix it?

NO “PERMISSION TO ROUGHHOUSE IN MARKET” FOUND: SUPREME COURT UNANIMOUSLY FINDS FOR THE FTC IN OPPOSING HOSPITAL ACQUISITION

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Filed under Antitrust Developments, FTC, Uncategorized

In an opinion that has implications for the health care industry and beyond, the Supreme Court, in  Federal Trade Commission v. Phoebe Putney Health System, Inc., last month clarified the standard for exempting “state-action” from the federal antitrust laws, finding that a grant of general corporate authority by the State of Georgia to hospital authorities, which included the right to acquire hospitals, does not meet the “clear-articulation” test of showing that the State intended hospital acquisitions to be exempt from antitrust scrutiny.  At issue in that case was the acquisition of the second largest hospital in Dougherty County Georgia by the Hospital Authority of  Albany-Dougherty County (the “Authority”), an entity created and operated under state law, in what the FTC claimed was a merger to monopoly. 

First, some background is vital.  In 1941, the State of Georgia amended its Constitution to permit political subdivisions to provide health care services and the State enacted legislation — the Hospital Authorities Law, Ga. Code Ann. § 31-7-70 et seq.  This legislation provided the mechanism for the operation and maintenance of needed health care facilities in the several counties and municipalities of th[e] state.”  Under this law, counties and municipalities are empowered to create “a public body corporate and politic” called a “hospital authority” which is to be governed by boards appointed by the county or municipality.  Under this state law, a hospital authority could “exercise public and essential governmental functions,” and could exercise 27 enumerated powers, including the power to “acquire by purchase, lease, or otherwise and to operate projects,” 31-7-75(4), which are defined to include hospitals and other public health facilities.”  The Authority was formed under this law. 

Promptly after its formation in 1941, the Authority acquired Phoebe Putney Memorial Hospital (“Memorial”).  Following the acquisition, the Authority reorganized itself, creating two entities to manage Memorial — Phoebe Putney Health System Inc. (“PPHS”) and its subsidiary, Phoebe Putney Memorial Hospital, Inc., (“PPMH”).  The Authority thereafter leased Memorial to PPMH for $1 a year for 40 years.  Memorial, by itself, accounted for 75% of the market for acute-care hospital services provided to commercial health care plans and their customers in the six counties surrounding Albany, Georgia. 

In 2010, PPHS began discussions to purchase Palmyra Medical Center (“Palmyra”), the second largest acute-care hospital located only two miles from Memorial.  Together with Memorial, Palmyra and Memorial had 86% of the market.  PPHS proposed that the Authority purchase Palmyra with PPHS controlled-funds and then lease Palmyra to a PPHS subsidiary for $1 per year under a lease arrangement with Memorial.  The Authority approved the transaction, effectively placing 86% of the market under the Authority’s (and PPHS and PPMH’s) control.   

The FTC issued an administrative complaint against the Authority, PPHS and PPMH and concurrently filed an action in the United States District Court for the Middle District of Georgia against these parties to enjoin the acquisition on the grounds that it would create a virtual monopoly and substantially lessen competition for acute-care hospital services.  The District Court denied the injunction and dismissed the complaint on the grounds that the Authority, PPHS and PPMH were immune from antitrust liability under the state-action doctrine.  The FTC appealed the District Court’s decision to the Eleventh Circuit, which affirmed the district court’s decision, and thereafter, the FTC petitioned the Supreme Court for review. 

The “state-action doctrine” is a legal doctrine which can provide immunity from the federal antitrust laws to states and, in certain cases, non-state actors in the conduct of business.  The doctrine emanates from the Supreme Court decision in Parker v. Brown, 317 U.S. 341 (1943), which recognizes the right of the States to regulate their economies in their sovereign capacity.  In subsequent opinions, the Supreme Court has considered the state-action doctrine in a variety of contexts, including in the cable industry, sewer management services and billboard advertising, and in the process has helped refine when the doctrine may properly be invoked.  In the Phoebe Putney Health System case, the Supreme Court was called upon to see if the state-action doctrine would protect the decision of a hospital authority — which was created and empowered by the State of Georgia — to essentially merge the two largest acute-care facilities in and around Dougherty County, Georgia from antitrust scrutiny. Clearly, accepting the FTC’s allegations as true, the acquisition would result in a merger to monopoly.  As such, much was on the line.

The Supreme Court unanimously ruled that the acquisition could not be shielded by the state-action doctrine.  In making this finding, the Supreme Court started with the principle that the state-action doctrine is not favored given “the fundamental national values of free enterprise and economic competition that are embodied in the federal antitrust laws.”  The Court noted that state-action immunity will only be recognized “when it is clear that the challenged anticompetitive conduct is undertaken pursuant to a regulatory scheme that ‘is the State’s own.’”  Here, the central issue for the Supreme Court was whether the Authority’s actions were taken “pursuant to a ‘clearly articulated and affirmatively expressed’ state policy to displace competition.”  Federal Trade Commission v. Phoebe Putney Health System, Inc., 568 U.S. __ (2013), quoting  Community Communications Co. v. Boulder, 455 U.S. 40, 52 (1982).    

In Phoebe Putney Health System, the Supreme Court determined the state-action doctrine did not apply as it found “no evidence the State affirmatively contemplated that hospital authorities would displace competition by consolidating hospital ownership.”  Recognizing that the hospitals in Georgia are highly regulated by the State, the Court continued to note that such regulation does not translate to an expression by the State of a “policy to allow authorities to exercise their general corporate powers, including their acquisition power, without regard to negative effects on competition.”  Indeed, the Court rejected as unsupportable the argument advanced by the Authority that because the hospitals were regulated by Georgia and empowered to acquire hospitals, they were therefore exempt from antitrust scrutiny, as the “power to acquire hospitals still does not ordinarily produce anticompetitive effects.”  While the Court recognized that the State of Georgia already acts, through its granting of certificates of need for hospitals, to limit competition, that fact does not does not equate to the clear articulation of a state policy to displace competition that the Court was seeking. 

“We recognize that Georgia, particularly through its certificate of need requirement, does limit competition in the market for hospital services in some respects.  But regulation of an industry, and even the authorization of discrete forms of anticompetitive conduct pursuant to a regulatory structure, does not establish that the State has affirmatively contemplated other forms of anticompetitive conduct that are only tangentially related.”  

Moreover, while the Supreme Court found that while the State of Georgia authorized the Authority to acquire hospitals, it did not “clearly articulate and affirmatively express a state policy empowering the Authority to make acquisitions of existing hospitals that will substantially lessen competition.”  As the Court stated:  “‘simple permission to play in a market; does not ‘foreseeably entail permission to roughhouse in that market unlawfully.’”  Federal Trade Commission v. Phoebe Putney Health System, Inc., 568 U.S. __ (2013), quoting Kay Elec. Cooperative v. Newkirk, 647 F.3d 1039, 1043 (10th Cir. 2011). 

The Supreme Court’s decision has many significant implications. 

First, the decision provides a clear reminder that competition is the norm, not the exception.  Any effort to shield potentially anticompetitive conduct under the state-action doctrine will be closely reviewed. 

Second, while the application of this decision is in no way limited to the health care industry, it clearly signals, at least in Georgia, that competition for health care will be robust.  Moreover, as other states have some aspect of regulation of hospitals through a certificate of need system, see e.g., N.C.Gen.Stat. § 131E-175, health care consolidation or mergers in those states may suffer similar attack in their attempts to shield acquisitions, mergers or other affiliations from antitrust scrutiny.

Finally, the Supreme Court’s ruling has put the spotlight back on antitrust issues in health care, which of course has been a focal point for some time by the current administration.  But the decision also sets the stage, perhaps, for conflicts in the future, as states struggle with implementing the Affordable Care Act.  Indeed, the Authority argued to the Supreme Court that if anything, the states should be afforded even greater latitude in managing health care in light of the Federal Government’s stated goals of providing flexibility to states in implementing health care solutions under the Affordable Care Act.  This argument, while not gaining any traction with the Court, perhaps provides some foreshadowing of things to come.

DOJ VERDICT IN LIQUID CRYSTAL DISPLAY PRICE FIXING CASE SHOWS JURIES GET IT

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Filed under Antitrust Developments, DOJ

Earlier this week, after an eight week trial, a jury in San Francisco convicted AU Optronics Corporation (“AUO”), a Taiwanese corporation, its U.S. subsidiary, AU Optronics Corporation of America (“AUOA”), and two of their former executives with price fixing under the Sherman Act.  United States of America v. AU Optronics Corp., et al., No CR-09-0110 (N.D. Cal.).  The jury, while acquitting two other individual defendants, also found that the gross gains derived from the conspiracy, involving AUO, AUOA and other companies in the liquid crystal display market, to exceed $500 million. According to the Department of Justice’s press release, the Department’s investigation of the LFT-LCD market has led to seven other companies in this market previously pleading guilty to price fixing and paying fines in excess of $890 million.

In its superseding indictment in the AUO case, AUO, AUOA and several of their employees, including executives of AUO resident in Taiwan, were charged with conspiring to fix prices for thin-film transistor liquid crystal display panels (“TFT-LCD”) in the United States and elsewhere in violation of Section 1 of the Sherman Act (15 U.S.C. 1). The indictment also charged executives of LG Philips LCD Co., Ltd. and Chunghwa Picture Tubes, Ltd., although not the companies, as being part of the conspiracy. As charged, AUO, AUOA and the other co-conspirators met repeatedly, at so-called “Crystal Meetings”, in Taipei to fix the prices of TFT-LCD. The indictment also charged that senior-level employees of AUO instructed employees of AUOA to similarly contact employees of other TFT-LCD manufacturers in the United States to discuss pricing to major customers in the United States, which they allegedly did. The indictment charged that representatives of AUO and AUOA attempted to keep the “Crystal Meetings” secret, and later, when the Department of Justice began to investigate this conduct, that representatives of AUOA took steps to destroy evidence.

The AUO trial is informative in several respects and should be noted by all companies faced with investigation or indictment for potential price fixing violations. First, trial lawyers often question whether a jury could follow complicated and detailed issues in an antitrust case over a lengthy trial. The answer to that question by the jury in the AUO case seems to be a resounding yes. The verdict validates the Department of Justice and its lawyers’ ability to try an antitrust case to a successful conclusion. Second, while the defendants have indicated that they will appeal the verdict, the AUO case also confirms what has been apparent for some time, the Department of Justice’s criminal investigations are reaching far beyond the U.S. border to address antitrust violations that impact significantly the U.S. markets. In the AUO case, much of the alleged conduct occurred in Taiwan. Again, companies should heed this verdict as an indication that they will not be shielded from investigation or indictment simply because they keep their conspiratorial activities off shore. Of course, AUO should not be interpreted as meaning that the Department of Justice’s jurisdictional reach is limitless.  Look to the appeal of this verdict to provide useful guidance in the future on this jurisdictional issue.

Parker Poe’s Antitrust, Business Torts and White Collar Crime practice group represents clients in antitrust investigations and litigation and routinely counsels clients on antitrust compliance issues.  For more information, contact Eric Welsh ((704) 335-9052) or your Parker Poe relationship partner.    

ANTITRUST DIVISION ISSUES GUIDANCE ON MERGER REMEDIES

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Filed under Antitrust Developments, DOJ

Last month, the Antitrust Division of the Department of Justice issued its Policy Guide to Merger Remedies. The Policy Guide provides some helpful insight into the thinking of the Antitrust Division and its approach to merger remedies.

Of course the fundamental precept of the Policy Guide is that a “successful merger remedy must effectively preserve competition in the relevant market.” Preserving competition is the goal, not favoring individual competitors. The Antitrust Division is not to take sides but rather is to focus on what is “effective relief for the particular merger presented.” 

Merger remedies for horizontal mergers of competitors traditionally involve an order requiring the divestiture of the business or assets — a so-called “structural remedy.” In fact, the Policy Guide notes that the Division “will often insist on the divestiture of an existing business entity that already has demonstrated an ability to compete in the relevant market.”  Policy Guide p. 8.  Yet, the Policy Guide also notes that the Division will consider a remedy involving a divestiture of less than all of the business but it will have to be persuaded that the assets “will create a viable entity that will effectively preserve competition.”  Policy Guide p. 9. 

Moreover, divestiture of a business or assets may not be sufficient to address the Antitrust Division’s concern over competition. In some cases, the Antitrust Division might seek divestiture of additional assets, such as requiring a divested business to include additional lines necessary for effective competition, to increase the level of competition. The Antitrust Division, as noted in the Guide, might even seek divestiture of a global business even when the competitive problem is limited to the United States market if doing so would effectively preserve competition.

In other cases, typically involving vertical restraints, other remedies, directed at the behavior of the companies engaged in competition, might be viewed as necessary.  In situations such as this, the Antitrust Division may seek so-called “conduct remedies” — remedies that are intended to curb certain conduct that has actual competitive effects.  Conduct remedies can take a variety of forms including requiring that the alleged monopolist agree to license its technology or assets to others, to agree not to retaliate against customers that purchase from its competitors or to not enter into certain long term exclusive contracts that could, under the circumstances, be anticompetitive. “[O]ther conduct remedies are also possible” and in some situations, a resolution requires ingenuity and a combination of structural and conduct remedies.  What is interesting here, is that the Policy Guide indicates a willingness by the Antitrust Division to apply conduct remedies to horizontal competition issues. 

The difficulty, of course, is determine what remedy is truly necessary to preserve competition. As the Antitrust Division correctly notes “[a] remedy carefully tailored to the competitive harm is the best way to ensure effective relief.” Policy Guide p. 3. Broad, sweeping remedies can do more damage than good to the competitive landscape and can even, at times, be perceived as punitive. There must be limits to the remedies, a point again conceded by the Antitrust Division:

There should be a close, logical nexus between the proposed remedy and the alleged violation — and the remedy should fit the violation and flow from the theory or theories of competitive harm.”

Not every type of remedy has a “logical nexus” to the alleged violation. Dispassionate reason must be applied.  The goal should be restoring or maintaining competition in a relevant market through an effective remedy and not defaulting to formalistic approaches to merger analysis.  The Policy Guide would seem to reflect agreement on this point. 

While much of what is contained in the Policy Guide is not new, the Guide does raise some interesting policy questions. For example, the Antitrust Division states clearly that in considering a divestiture, it does not generally consider whether the divesting company is getting fair value for the sale. Policy Guide p. 30. Indeed, according to the Policy Guide, the Division will only consider the price of the sale if it “raises concerns about the effectiveness or viability of the purchaser.” Id. But this statement raises the important question of why should the Division ignore the consequences of a forced “fire sale” on the divesting company. Does not a forced sale at a greatly reduced price have significant economic consequences on the divesting company? And if so, does this not also potentially impact the competitive landscape by weakening a competitor? Should not the effect of the sales price on the seller be at least considered, especially if it impacts research and development, innovation and growth of that seller, as this certainly impacts competition and potentially the consumer? On this point, the Division’s view would appear too simplistic and indeed potentially violate the very “touchstone principle” of preserving competition that it sets out for its merger remedies. A review of the whole picture is necessary, not only half.

The Policy Guide suggests a certain openness by the Division to considering a variety of options as remedies.  The actual application of the Guide in the future will reveal whether this flexibility produces better outcomes for companies that are the subject of action by the Division.

DOJ FILES SUIT AGAINST TEXAS HOSPITAL FOR ANTITRUST VIOLATIONS BASED ON EXCLUSIONARY CONTRACTS WITH INSURERS

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Filed under Antitrust Developments, DOJ

In yet another example of the Department of Justice’s focus on potential antitrust violations in the health care industry (ANTITRUST ACTION AS A TOOL FOR PROVIDING AFFORDABLE HEALTH CARE:  DOJ CHALLENGES MOST FAVORED NATION CLAUSE IN BLUE CROSS BLUE SHIELD OF MICHIGAN CONTRACTS), the DOJ announced last week that it had filed a lawsuit against United Regional Health Care System (“United Regional”), located in Wichita Falls, Texas, for violations of Section 2 of the Sherman Act in connection with the company’s use of exclusionary contracts.  Complaint. In the press release announcing the lawsuit, the DOJ disclosed that it has reached a settlement with United Regional which is pending court approval.

The DOJ’s action here against United Regional provides a vivid reminder of the federal government’s focus on the health care industry and the use of antitrust investigations and prosecutions to protect competition and lower prices to consumers.

In this case, the DOJ contended that United Regional, formed as a result of a merger of the largest hospitals in Wichita Falls in 1997, was a “must have” regional hospital for insurers in Wichita Falls.  According to the DOJ, United Regional’s share of  an alleged inpatient hospital services market in the Wichita Falls area was approximately 90% and its share of outpatient surgical services sold to commercial health insurers in this same region was alleged to be over 65%.

The DOJ alleged that United Regional maintained its monopoly power through the use of exclusionary contracts with health care insurers, a practice which began soon after United Regional began to face competition from Kell West Regional, a 41-bed general acute-care hospital that opened in 1999.  The DOJ alleged that “United Regional adopted the exclusionary contracts in direct response  to the competitive threat presented by Kell West” and other competitors.  These contracts, as alleged, provided deeper discounts to insurers if they remained exclusive to United Regional and all shared the same feature:  subjecting the insurer to a penalty “ranging from 13% to 27%” if the insurer contracted with a competitor of United Regional in the Wichita Falls region.  The DOJ offered several examples of these alleged exclusionary contracts in the complaint, including:

“Exclusive Agreement.   The rates set forth in Exhibit A [80% of billed charges] are contingent upon [INSURER] not entering into another agreement with an acute care facility, hospital or ambulatory surgery center, directly or indirectly, for the provision of inpatient services and/or outpatient services in Wichita Falls, Texas or within ten miles of Wichita Falls, Texas.  If [INSURER] enters into another agreement with an acute care facility, hospital, or ambulatory surgery Center for the provision of inpatient services and/or outpatient services in Wichita Falls, Texas or within a ten mile radius of Wichita Falls, Texas, Clients shall immediately and automatically begin reimbursing Hospital, for Covered Services rendered by Hospital to Participants, one hundred percent (100%) of Hospital’s billed charges. . . .”  Complaint, 48 (emphasis in original).

Of course, not all discount provisions run afoul of the antitrust laws, a point conceded by the government.  As the DOJ noted in their Competitive Impact Statement that accompanied its press release, these types of discounts can either be pro-competitive or anticompetitive:

“Discounts tied to exclusivity can be procompetitive if they result from ‘competition on the merits,’ in which rival suppliers compete on price so that the most efficient firm will win additional consumers. In contrast, they can be anticompetitive if they would prevent equally or more efficient rivals from attracting additional consumers.”

In this case, though, the DOJ alleged that the contracts resembled de facto exclusive dealing arrangements.   Through the use of these exclusionary contracts, United Regional, according to the DOJ, charged supra-competitive prices.  In fact, the DOJ alleged that United Regional had some of the highest prices in Texas for outpatient surgical services.  Significantly, the discounted prices offered under their contracts with insurers based on exclusivity were priced to likely exclude an equally-efficient competitor from this region.  Analyzing the contracts under a “price-cost” test, the DOJ determined that a competing hospital would need to offer a price “below United Regional’s incremental cost for an insurer to profitably turn down United Regional’s offer of exclusivity.”

Having found the contractual provisions at issue to be anticompetitive, the DOJ turned to whether there was a valid pro-competitive business justification for the practice.  Here, the DOJ alleged that there were no valid pro-competitive business justification as the contracts did not simply provide lower prices in exchange for volume or economies of scale.  In fact, the DOJ alleged that this practice actually harmed consumers in that competitors to United Regional had excess capacity which was not utilized due to the effects of these alleged exclusionary contracts.  According to the DOJ, barriers to entry were high in Wichita Falls and these contractual provisions impeded entry and expansion, likely leading to higher health-care costs, higher insurance premiums and reduced competition between United Regional and its current competitors.

Under the terms of the proposed settlement, United Regional is prohibited from using exclusivity terms in its contracts “preventing insurers from entering into agreements with United Regional’s rivals.”  Included in this prohibition is the use of “conditional volume discounts” in its contracts that “could have the same anticompetitive effects as the challenged conduct.”

Several interesting observations can be made here.  First, one should not look at contractual provisions that provide some sense of exclusivity in the abstract.  It is vital to consider the effects of such contractual provisions in the context of the facts, including the markets and respective market shares held by competitors in the geographic area at issue.  Only then can it become clear whether the provision has anticompetitive effects.  Second, health care providers should take stock of their contractual provisions.  The DOJ has clearly signaled that it intends to take strong oversight to ensure that consumers obtain quality health care at affordable prices.  Any practice that significantly impedes that outcome may become the subject of legal action by the DOJ.

FTC AND DOJ ISSUE HART-SCOTT-RODINO ANNUAL REPORT

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Filed under Antitrust Developments, DOJ, FTC

The FTC and the DOJ issued the Hart-Scott-Rodino Annual Report for Fiscal Year 2010 on February 15, 2011. The Annual Report (attached) provides some interesting data regarding merger activity involving these two government agencies in 2010.

For background, the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“HSR”) provides the framework for the FTC and the DOJ to review, approve or if necessary, seek to enjoin merger transactions under the antitrust laws.  Only transactions meeting a minimum threshold amount of $63.4 million are required to be reported to the government under the HSA.

The Annual Report provides a fair summary of the FTC and DOJ action in the premerger notification program last year.  Some of the data reported is interesting and in some cases, raises a few questions.

First, fiscal year 2010 saw an uptick in merger filings requiring HSR approval.   According to the Annual Report, 1,166 transactions were reported under HSR in fiscal year 2010, marking a 63% increase over the prior year.  Of those filings, the FTC challenged 22 transactions and the DOJ challenged 19.  The majority of the transactions challenged were resolved by consent decrees or through the parties abandoning the transactions (19 transactions were resolved by consent decree by the FTC and 10 by the DOJ).

Second, the total dollar value of the transactions reported under HSA in fiscal year 2010 increased from the prior year ($533 billion to $780 billion).  This was, however, still significantly below the total dollar value for HSA reported transactions in 2007  of $2 trillion.  Perhaps this can be taken as a sign of some marginal improvement with respect to the state of the economy.

Third, while the Annual Report did not specifically break out data regarding enforcement action related to mergers that were already consummated, it appears that a number of the reported enforcement actions taken by the agencies during the year related to consummated mergers.  Again, based on the Annual Report, the FTC challenged 5 consummated mergers, and the DOJ challenged 2, during this period.  Clearly the FTC and DOJ remain prepared to challenge and potentially unwind mergers, even if they have been consummated, if they perceive a violation of the antitrust laws.

Fourth, second requests for information on reported transactions increased in fiscal year 2010 by 46% from the prior year.  While that is a startling figure, it is interesting to note that a larger percentage of those second requests fell on larger reported transactions.  For example, nearly one half of the HSR reported transactions, according to the Annual Report, were for merger transactions of less than $200 million.  Almost 20% of the HSR reported transactions were less than $100 million in value. Of those 215 transactions reported and valued at less than $100 million, only 6 (or 2.8%) were subject to second request investigations.  In contrast, 124 transactions valued at in excess of $1 billion were reported, and 13 (or 10.5%) were subject to second request investigations.  From the data that the government has collected, at least some consolation can be had from the fact that second requests occur less frequently in smaller transactions than in the larger ones.

It is worth noting that one figure not tracked by the government, which perhaps should be in the future, is the number of transactions abandoned by virtue of the issuance of a second request.  Such investigations certainly have a reputation for imposing great burdens on the companies involved in the transactions, and while those costs can be borne more easily by larger companies, they can prove fatal to smaller ones.  Tracking this information could help Congress and the agencies consider certain reforms to ensure that deals are reviewed on their merits and not simply killed by virtue of onerous regulation.

Finally, the Annual Report reminds us all of the significant penalties attached to failing to comply with the HSA requirements.  As noted in the Annual Report, 24 corrective flings for violations were received by the agencies.  In one instance, the DOJ brought enforcement proceedings in January 2010 against Smithfield Foods, Inc. and Premium Standard Farms, LLC, alleging that prior to the expiration of the statutory waiting period for Smithfield’s acquisition of Premium Standard, Premium Standard stopped making independent business judgment in hog purchases, submitting such decisions to Smithfield instead for consent.  As a result of this alleged “gun jumping,” the companies entered into a consent decree agreeing to pay a total of $900,000 in civil penalties to settle the charges.  A painful lesson learned in a transaction valued at $810 million.

DOJ PUTS AN END TO LUCASFILM’S NO COLD CALL AGREEMENT WITH PIXAR: MAY THE MARKET FORCE BE WITH YOU

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Filed under Antitrust Developments, DOJ, Uncategorized, Unfair Competition

The Department of Justice announced on December 21 that it had filed a complaint against Lucasfilm Ltd. regarding an alleged agreement between Lucasfilm and Pixar that restrained employee recruitment and hiring between the two companies.  The complaint is an off-shoot of the Department of Justice’s prior investigation into the employment practices by high tech companies such as Adobe Systems, Inc. and Apple Inc. (the “Adobe Systems matter”).  The Department of Justice further announced that same day that it had entered into a settlement with Lucasfilm regarding this alleged hiring practice. Lucasfilm has denied liability.

In its complaint, the DOJ asserts a claim under Section 1 of the Sherman Act, 15 U.S.C. 1, related to Lucasfilm’s alleged agreement with Pixar not to solicit each other’s employees.  Complaint The DOJ contended that Lucasfilm and Pixar entered into a three part protocol that restricted the hiring of each other’s employees.  Under this protocol, Lucasfilm and Pixar agreed, as alleged by the DOJ, that they would not cold call each other’s employees, that they would notify each other when making an offer of employment to an employee of the other company and that when making an offer of employment, neither company would counteroffer above the initial offer.  According to the DOJ, this agreement, which began in 2005, “disrupted the competitive market forces for employee talent” and was a per se violation of Section 1.  As stated by the DOJ in its accompanying Competitive Impact Statement:

“[Lucasfilm's and Pixar's agreed-upon protocol] eliminated a significant form of competition to attract digital animation employees and other employees covered by the agreement.  Overall, it substantially diminished competition to the detriment of the affected employees who likely were deprived of information and access to better job opportunities.”

The DOJ’s actions here are reminiscent of those taken in its filing of its complaint earlier this year against Adobe Systems and others related to their alleged cold calling agreement.   See DOJ Disconnects “Do Not Call List” As Antitrust Violation. In fact, the DOJ became aware of this agreement through its investigation in the Adobe Systems matter.  (The DOJ noted that it brought this complaint solely against Lucasfilm because it had already addressed this conduct with Pixar in its settlement in the Adobe Systems matter.)  Here, however, the DOJ did note that the conduct at issue with Lucasfilm was actually broader in scope than in Adobe Systems:

“The restraint challenged here is broader than the cold call restraints challenged in United States v. Adobe Systems, Inc.  The prohibition on counteroffers by non-employing firms renders the Lucasfilm-Pixar agreement, taken as a whole, more pernicious than an agreement to refrain from cold-calling, and is per se unlawful. See National Soc’y of Prof. Engineers v. United States, 435 U.S. 679, 695 (1978); Harkins Amusement Enterprises, Inc. v. General Cinema Corp., 850 F.2d 477, 487 (9th Cir. 1988).”

Although noting this distinction between the two cases, the DOJ’s analysis here was virtually identical to that in the Adobe Systems matter.  As in Adobe Systems, the DOJ found no relevant distinction in looking at allocation agreements that involve input markets versus output markets, and found support in its position by drawing on case law discussing allocation agreements involving customers, citing U.S. v. Cooperative Theaters of Ohio, Inc., 845 F.2d 1367 (6th Cir. 1988), and upstream inputs such as billboard leases, citing United States v. Brown, 936 F.2d 1042 (9th Cir. 1991).

In addition, while expressly commenting that restraints that are reasonably necessary for pro-competitive collaborations can be upheld under a rule of reason test, as it stated previously in the Adobe Systems case, the DOJ continued to note that restraints that are broader than necessary to achieve efficiencies of a business collaboration will be treated as per se unlawful. In addition, the DOJ further noted that the relief obtained against Lucasfilm would not prohibit the use of direct solicitation provisions by Lucasfilm that are reasonably necessary in certain contexts, including in mergers or acquisitions, contracts with consultants, settlements of legal disputes or legitimate joint ventures, among others.

The DOJ’s actions in Adobe Systems and now in Lucasfilm act as a reminder to employers to be mindful of potential antitrust concerns in their hiring practices.  Agreements with competitors to restrain the solicitation and hiring of employees, unless reasonably necessary for pro-competitive collaborations or other acceptable purposes, will be viewed as per se unlawful under the antitrust laws.  The DOJ has made it clear that they are closely watching, especially in this economic environment, to ensure that the “market forces are with you.”

BLUE CROSS BLUE SHIELD OF MICHIGAN TO DOJ AND THE STATE OF MICHIGAN: NOT SO FAST.

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Filed under Antitrust Developments, DOJ

As reported previously (ANTITRUST ACTION AS A TOOL FOR PROVIDING AFFORDABLE HEALTHCARE: DOJ CHALLENGES MOST FAVORED NATION CLAUSE IN BLUE CROSS BLUE SHIELD OF MICHIGAN CONTRACTS), the Department of Justice and the State of Michigan have instituted a civil lawsuit against Blue Cross and Blue Shield of Michigan (“BCBS”) challenging its use of Most Favored Nations clauses (“MVN’s”) in its contracts with hospitals in Michigan. On December 17, 2010, BCBS fired back, filing its motion to dismiss the complaint on several grounds.  First, BCBS asserts that the DOJ and the State of Michigan’s complaint is barred by the state action immunity doctrine established by the United States Supreme Court in Parker v. Brown, 317 U.S. 341 (1943).  BCBS argues that the state regulatory scheme under which it operates in Michigan is comprehensive and bars antitrust challenges that flow from such a regulatory scheme.  (Of note, BCBS argues that the DOJ had previously concluded that state action immunity precluded antitrust challenges on another Blue Cross entity’s use of MVN clauses in contracts in Pennsylvania.)  Second, BCBS argues that the DOJ and State of Michigan’s action should be dismissed as interfering with the authority of the state agencies’ regulation of substantial public policy issues under Burford v. Sun Oil Co., 319 U.S. 315 (1943).

Additionally, and of particular interest here, BCBS seeks dismissal of the complaint for failure to state a claim under Bell Atlantic Corp. v. Twombly, 550 U.s. 544 (2007) and Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009), including for failure to plead proper product and geographic markets and failure to plead anticompetitive effects or market power in any alleged market.  BCBS takes the DOJ and the State of Michigan to task for bringing a lengthy complaint, involving multiple product markets and seventeen geographic markets, but failing, as BCBS contends, to plead facts to support the allegations.  For example, Plaintiffs have failed, according to BCBS, to allege details as to the other market participants, with their products and services, which is necessary to determine the outer bounds of the relevant product markets.   Similarly, according to BCBS, while the complaint loosely refers to certain geographic markets (Lansing for example), there are no allegations as to why these “markets” are correct.  As BCBS states:

But Plaintiffs do not provide sufficient facts that even begin to explain why the “Lansing MSA” is a relevant geographic market.  For example, why is the Lansing MSA not part of a larger market?  Or a smaller market, including only part of Lansing?  And what about employers with operations throughout the State of Michigan, or the Midwest region, or even nationally, for whom network access to hospitals in Lansing is wanted but not sufficient?

Finally, as the Plaintiffs have not pled the product and geographic markets sufficiently, the Plaintiffs have also, according to BCBS, failed to allege anticompetitive effects or market power as to each of the relevant markets.

As stated in my first report earlier this month, this case is in its early stages.  The Plaintiffs have not filed a response to this motion.  Left for another day is a decision as to whether the allegations of the complaint are specific enough factually to withstand a motion to dismiss or mere legal conclusions requiring dismissal.  But while some have questioned in different venues and in different contexts the continuing role and importance of market definitions in antitrust cases, BCBS reinforces the point that markets remain central to proper analysis under the antitrust laws.

ANTITRUST ACTION AS A TOOL FOR PROVIDING AFFORDABLE HEALTHCARE: DOJ CHALLENGES MOST FAVORED NATION CLAUSE IN BLUE CROSS BLUE SHIELD OF MICHIGAN CONTRACTS

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Filed under Antitrust Developments, DOJ, Unfair Competition

In October, the Department of Justice and the State of Michigan filed a complaint in the United States District Court for the Eastern District of Michigan against Blue Cross Blue Shield of Michigan (“Blue Cross”) alleging violations of Section 1 of the Sherman Act and Section 2 of the Michigan Antitrust Reform Act, MCL 445.772. [complaint] At the heart of the Complaint is Blue Cross’ practice of utilizing ”most favored nation” clauses (“MFN”) in its contracts with hospitals in Michigan.

According to the Complaint, Blue Cross uses two types of MFN clauses:  one, referred to as “MFN-plus,” which allegedly requires 22 hospitals to charge some or all commercial insurers more than the hospital charges Blue Cross; and the second, referred to as “Equal-to” MFN’s, which allegedly require small community hospitals to charge other commercial health insurers at least as much as they charge Blue Cross.  The DOJ and State of Michigan allege that the use of these MFN’s has harmed competition in the State of Michigan by allegedly reducing the ability of other health care providers to compete with Blue Cross in the state, by raising prices paid by Blue Cross’ competitors and self-insured employers and by limiting entry or expansion by competitors or potential competitors.  In addition, the DOJ and State of Michigan also allege that Blue Cross itself, in some cases, compensated hospitals through increased payments in return for agreeing to include MFN’s in the contracts, thereby increasing its own costs and inflating costs to consumers.  The DOJ and State of Michigan allege that these contracts, containing MFN’s, unreasonably restrain trade in violation of Section 1 of the Sherman Act.

In commenting on the lawsuit, Assistant Attorney General Christine Varney said this:

“Our lawsuit alleges that the Blue Cross anticompetitive MFNs are used to raise hospital prices to any competing healthcare plans and thus reduces competition for the sale of health insurance and inflates the costs of health care services and insurance.  As a result, consumers in Michigan are paying more for their healthcare services and health insurance.”

While noting the significance of this action for the State of Michigan, Assistant Attorney General Varney made it abundantly clear that the ramifications of this action reach far beyond the state lines and such clauses and similar conduct will be a focus of the DOJ throughout the United States as the federal government continues to focus on providing affordable healthcare to consumers:

These kinds of anticompetitive MFNs affect healthcare delivery and costs in a very fundamental way.  Any time a dominant provider uses anticompetitive agreements, the market suffers.  This cannot be allowed in Michigan.  And, let me be clear, we will challenge similar anticompetitive behavior anywhere else in the United States.  American consumers deserve affordable healthcare at competitive prices.”

The fact that the DOJ took action in filing a complaint against Blue Cross is perhaps not unexpected.   First, the DOJ had earlier in the year reviewed Blue Cross’ announced merger with Physicians Health Plan of Mid-Michigan, announcing in March 2010 that it would challenge the merger on antitrust grounds.  In its press release, the DOJ noted that Blue Cross had nearly 70 percent of the market share in Lansing, Michigan.  Blue Cross was most definitely on the DOJ’s radar screen.  Second, Assistant Attorney General Varney stated in her remarks on Antitrust and Healthcare on May 24, 2010 that most favored nation clauses and other perceived exclusionary conduct would be a focus — indeed a cornerstone — of the DOJ’s enforcement activities in healthcare in the days to come:

“[Y]ou should expect the Justice Department to carefully scrutinize and continue to challenge exclusionary practices by dominant firms — whether for-profit or non-profit — that substantially increase the cost of entry or expansion.  This is particularly so with respect to most-favored-nations clauses and exclusive contracts between insurers and significant providers that reduce the ability or incentive of providers to negotiate discounts with aggressive insurance entrants.”

This case is in its early stages.  Blue Cross has not yet answered the Complaint.  In a press release issued on November 24, 2010 regarding the withdrawal of a “piggy back” lawsuit, Blue Cross made it clear that it believes it provides affordable healthcare to consumers in the State of Michigan.  While the DOJ claims to have followed a “rule of reason” approach in determining that the MFN’s violated Section 1 of the Sherman Act (see Update From the Antitrust Division, Carl Shapiro, Deputy Assistant Attorney General for Economics, Antitrust Division, U.S. Department of Justice, November 18, 2010), Blue Cross would appear to differ regarding that analysis and will likely contend that efficiencies overcome any anticompetitive concerns.  While this situation will need to be followed, it is also worth considering whether the DOJ will pursue other healthcare insurers in other jurisdictions as part of its cornerstone policy.

DOJ DISCONNECTS "DO NOT CALL LIST" AS ANTITRUST VIOLATION

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Filed under Antitrust Developments, DOJ

Recently, the Department of Justice announced that it filed a lawsuit against Adobe Systems, Inc., Apple Inc., Google Inc., Intel Corporation, Intuit, Inc. and Pixar (the “Do Not Call Defendants”), alleging violations of Section 1 of the Sherman Act, 15 U.S.C. 1 related to their allegedly entering into agreements not to cold call each other’s employees.  U.S. v. Adobe Systems, Inc., et al., Case No. 1:10-cv-01629 (Sept. 24, 2010) [complaint].  The DOJ alleged that these “Do Not Call Lists,” constituted naked restraints under Section 1 and per se illegal.  The DOJ, that same day, disclosed that it had entered into a proposed settlement with these defendants, which remains pending for public comment.  The Defendants have denied liability. 

While the fact that the conduct alleged — entering into a flat out prohibition against calling another competitor’s employees to hire them — gave rise to concern at the DOJ may not be terribly newsworthy, the DOJ’s analysis of the situation in its Competitive Impact Statement (attached) is.

First, some background is necessary. The DOJ contended that the defendants, at various times starting in 2005, agreed not to call each other’s employees for employment.  With the exception of Intel, each of the Do Not Call Defendants was alleged to have created internal “do not call lists” related to the competitor’s employees.  These alleged agreements precluded the cold calling of the competitor’s employees, regardless of geographic location or position.  The DOJ, looking at precedent in its complaint in U.S. v. Ass’n of Family Practice Residency Doctors, No. 96-575 CV-W-2, Complaint at 6 (challenging guidelines used for residency programs for senior medical students) and the illegal agreement found U.S. v. Cooperative Theaters of Ohio, Inc., 845 F.2d 1367 (6th Cir. 1988) (finding agreement not to solicit another’s customers a per se violation of Section 1), found support for its claims brought against the “Do Not Call” Defendants.  The DOJ viewed there to be no difference in treatment under Section 1 between customer restraints and employment restraints, or output or input markets:

“Antitrust analysis of downstream, customer-related restraints is equally applicable to upstream monopoly restraints on employment opportunities.”

For the DOJ, the restraints placed on the employees of the Do Not Call Defendants was great.  Even though these alleged agreements did not prohibit hiring of the other’s employees, the agreements interfered with the employee’s movement to another company and the pricing for those services.  Competition for hiring employees in the computer industry was impacted.  As the DOJ stated in its impact statement:

“Defendants’ concerted behavior both reduced their ability to compete for employees and disrupted the normal price-setting mechanisms that apply in the labor setting. These no cold call agreements . . . are facially anticompetitive because they eliminated a significant form of competition to attract high tech employees, and, overall, substantially diminished competition to the detriment of the affected employees who were likely deprived of competitively important information and access to better job opportunities.”

Perhaps the most interesting part of the DOJ’s action here is its analysis of what conduct is not prohibited as a per se violation when restricting employment opportunities.  The DOJ stated that certain limited exceptions exist to a per se analysis if the challenged agreement is “ancillary to a legitimate procompetitive collaboration“.  What is considered “ancillary” is a very short list:

“To be considered “ancillary” under established antitrust law, however, the restraint must be a necessary or intrinsic part of the procompetitive collaboration. Restraints that are broader than reasonably necessary to achieve the efficiencies from a business collaboration are not ancillary and are properly treated as per se unlawful.”

In other words, agreements not to hire that are narrowly drawn to protect the interests of a legitimate joint venture are not per se unlawful but would be reviewed under a rule of reason approach.  This is the only exception noted by the DOJ to its per se treatment.

In this “No Call List” matter, the DOJ contended that the agreement was not tied to a specific collaboration and was overbroad, applying to all geographies, job functions, product groups and time periods.  The DOJ concluded that these agreements were not “ancillary” to any collaboration, even though there was some indication that there were some joint venture collaborations between the parties.  Simply put, the DOJ sees the situation as black and white: if it is not “ancillary to a legitimate collaborative effort” — i.e. a joint venture — it is a per se violation of Section 1.

The implications of this DOJ action remain unclear. Would DOJ’s analysis have differed if the defendants had entered into this type of agreement to protect their trade secret information?  Would DOJ view agreements between competitors, that are part of settlement agreements but restrain the hiring of competitor’s employees to protect those secrets, as per se violations or subject to a rule of reason analysis.  Precedent would suggest that such agreements should be subject to a rule of reason analysis, Weisfied v. Sun Chemical Corp., 210 F.R.D. 136 (D. N.J. 2002), but the DOJ’s analysis is categorical and does not lend itself, at least on the face of it, to that interpretation.

For now, we will just have to put this discussion “on hold.”

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