Category Archives: Antitrust Developments


Filed under Antitrust Developments, FTC, Uncategorized, Unfair Competition

In February 2015, Commissioner Joshua Wright of the Federal Trade Commission offered his personal views at the Symposium on Section 5 of the Federal Trade Commission Act, stating that “there is no more important challenge facing the Commission today than finally articulating the appropriate scope and role of the agency’s ‘unfair methods of competition’ authority under Section 5.” In those remarks, Commissioner Wright noted many of the compelling reasons for the Commission to issue a policy statement on its role in “unfair methods of competition” matters, including to provide “meaningful guidance to the business community about the contours of Section 5.”

After a prolonged wait, the FTC, earlier this week, issued its Statement of Enforcement Principles Regarding “Unfair Methods of Competition” Under Section 5 of the FTC Act. The Statement — consisting of three bulleted points — falls short of the guidance discussed by Commissioner Wright.  The Statement does, however, mark a step forward and provides important guidance on the principles that will govern FTC action under its standalone Section 5 authority.

Under Section 5 of the Federal Trade Commission Act, “unfair methods of competition in or affecting commerce” are unlawful.  In the over 100 years since the FTC Act was enacted, there has been much debate as to what exactly this vague language means.  Is this prohibition limited to violations under the Sherman Act and the Clayton Act, as applied by the federal courts and the FTC’s sister agency, the Department of Justice, Antitrust Division?  Or is it intended to be broader, encompassing conduct not covered by the Sherman Act or Clayton Act?  If the latter, then exactly how broadly will the Section be applied and, more importantly, how will businesses understand the contours of this prohibition?  These are some of the vexing issues that have plagued Section 5.  Now the FTC has provided some principles to help put some clarity to the subject.

In the Statement, the Federal Trade Commission, after noting the broad mandate intentionally provided to the Commission by Congress, outlined the “framework” for the Commission’s exercise of its “standalone” Section 5 authority.  The pertinent part of the Statement provides:

In deciding whether to challenge an act or practice as an unfair method of competition in violation of Section 5 on a standalone basis, the Commission adheres to the following principles:

  • the Commission will be guided by the public policy underlying the antitrust laws, namely, the promotion of consumer welfare;
  • the act or practice will be evaluated under a framework similar to the rule of reason, that is, an act or practice challenged by the Commission must cause, or be likely to cause, harm to competition or the competitive process, taking into account any associated cognizable efficiencies and business justifications; and
  • the Commission is less likely to challenge an act or practice as an unfair method of competition on a standalone basis if enforcement of the Sherman Act or Clayton Act is sufficient to address the competitive harm arising from the act or practice.

Breaking the Statement down, the FTC will apply its “standalone” Section 5 authority only in situations where there is competitive harm and in doing so, will be governed by a “rule of reason” type of analysis.  These are important clarifying points.  The Statement also makes it clear that “cognizable efficiencies and business justifications” will be considered.  What remains unknown, though, is how such efficiencies will be considered and weighed.  The Statement, while less than definitive, also provides that the FTC will likely not use its Section 5 authority when the practice in question can be addressed under the Sherman or Clayton Act.

The Statement, undoubtedly a compromise between the Commissioners, is certainly not the guidance that many had sought, and about which Commissioner Wright spoke.  In fact, the Statement was approved by a 4-1 vote of the Commissioners, with Commissioner Ohlhausen dissenting.  In her dissent, Commissioner Ohlhausen argues that the Statement is “seriously lacking” and that the Statement “explicitly permits the Commission to pursue conduct under Section 5 in the absence of substantial harm to competition.”  Commissioner Ohlhausen does not see the Statement as a game changer:

In truth, the open-ended ‘similar to the rule of reason’ framework — to the extent I understand how it may be applied — does not seem to differ meaningfully from the existing case-by-case approach heretofore favored by a majority of the Commission.

Commissioner Ohlhausen raises thoughtful points and concerns.  And while more could have been said in the Statement, it is difficult to imagine how the FTC could have issued a guidance that would have provided examples of all prohibited conduct and detail the limits of its authority.  Even with its brevity and absence of detail, though, the Statement does mark an improvement and does help to provide some useful framework to antitrust counselors and the business community about the FTC’s use of this authority.


Filed under Antitrust Developments, FTC

Government competition authorities in the United States are sometimes challenged, if not criticized, for not pursuing claims based on single firm conduct in maintaining a monopoly.  The recent opinion of the United States Court of Appeals for the Eleventh Circuit in McWane, Inc. v. Federal Trade Commission, No. 14-11363 (April 15, 2015) is an effective answer to those critics, demonstrating that the authorities will pursue cases based on single firm conduct under Section 2 of the Sherman Act in appropriate circumstances, especially when large market shares are involved. 

 Brief Background.  The FTC challenged McWane’s use of an exclusivity mandate with its distributors as violating the antitrust laws, relying on Section 2 monopolization and attempted monopolization law and precedent.  Following a two month administrative trial, McWane was found to have engaged in monopolization.  McWane appealed the decision to the Commission, which affirmed the ALJ’s decision on the monopolization claim, setting the stage for the appeal to the Eleventh Circuit.  At issue in McWane was the company’s exclusive dealing policy with its distributors in the domestic fittings market.  McWane manufactured and sold pipe fittings — the molded pieces that couple the pipes together — which was largely sold to municipalities for water authorities.  By applicable US regulation, certain projects required that the parts be manufactured only in the United States.  The FTC alleged that this was a separate market — a so-called domestic fittings market – in which McWane had 100% (later declining to 90%) of the share in the United States.  McWane, on the other hand, argued that the market was broader, encompassing all fittings, domestic and international.  The Eleventh Circuit rejected McWane’s market definition and, finding substantial evidence that the anticompetitive effects outweighed the largely non-existent procompetitive effects, affirmed the claim of monopolization in this market.   

McWane is significant for several reasons.  First, McWane provides useful insight into when an exclusivity provision — which the court notes is not per se illegal — constitutes willful maintenance of monopoly power and thus, a violation of the antitrust laws.  Second, the McWane opinion notes that a violation of the antitrust laws can occur even when significant entry (5% in one year by its competitor, Star Pipe Products) has occurred by a competitor.  Third, the opinion demonstrates that no matter how compelling the legal defense, if the historical emails and documents tell a different, anticompetitive story, then the defense will not be credible.  And finally, the opinion highlights that when all is said and done, the best evidence of anticompetitive conduct in the marketplace may well be the pricing of the subject company itself.   

The Monopolization Claim Was Most Certainly Lost at the Market Definition Stage.  While McWane may still have lost had the market not been defined to include only the domestic fittings market, once it was so defined, the game was over.  At that point, McWane was the 100% monopolist whose every move was scrutinized under this hue.  Had the market been defined as all fittings, McWane might have had a marginally better chance of convincing that competition existed, although even under that market, McWane was one of three manufacturers of fittings for sale in the United States.  An exclusivity provision in the latter context could be defensible, but in the former, hardly. 

When is Significant Entry Still Meaningless?  McWane is also notable in that a competitor actually obtained very significant market penetration during the time that the exclusive provision was used.  Ordinarily, this would provide excellent evidence that the policy at issue was not anti-competitive, as it did not prevent significant and timely entry into a market.  Yet, here, McWane made this very argument — before the ALJ, the Commission and the Eleventh Circuit — but in each case, the argument was rejected.  The facts were not as simple as McWane would have one believe.  Indeed, other evidence was presented of large barriers to entry.  Based on McWane’s exclusivity program, the two largest distributors prohibited their branches from buying from anyone other than McWane while the program was active.  With the key dealers tied up, McWane’s conduct resulted in “substantial and problematic foreclosure” of the market to competition.  And even with respect to Star’s entry, the Eleventh Circuit noted that the relevant question for the competition analysis was not whether entry occurred — it did — but whether greater entry would have occurred absent the conduct.  The Eleventh Circuit found substantial evidence to back up that finding of competitive harm.   

Those Pesky Emails.  A reading of McWane also highlights a point that has been made with more frequency by the courts and competition agencies today:  regardless of how great your defense and argument may seem, if the internal company documents and email do not support the position, or worst yet, contradict it, then it will be of no value.  As noted by the Eleventh Circuit:  “[T]here is agreement on the proposition that ‘no monopolist monopolizes unconscious of what he is doing.’”  Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585, 605 (1985) (quoting United States v. Aluminum Co. of Am., 148 F.2d 416, 432 (2d Cir. 1945))).  In this case, the Court found the evidence of anticompetitive intent “particularly powerful.”  McWane’s internal emails discussed Star’s anticipated downward impact on the domestic fittings’ prices and the need to keep Star from being able to “reach any critical mass.”  Not only did the documents reflect an anticompetitive intent, but they undermined any credible argument regarding procompetitive benefits of the conduct.  Indeed, the Eleventh Circuit found the documents ”damning,” and demonstrating that the procompetitive justifications were “merely pretextual.”  The conclusion is inescapable:  what a company says about the conduct prior to litigation can be some of the best or worst evidence regarding the pro or anti-competitive intentions at issue and it must be understood that such evidence will be considered.

In Any Event, It’s the Pricing that Matters.  Although this does not appear to have been a close call for the Eleventh Circuit, had it been, the final straw would likely have been McWane’s pricing in the domestic fittings market itself.  In a pointed discussion, the Court specifically noted that while McWane imposed this exclusivity in the domestic fittings market, it raised its prices and increased its gross profits “despite its flat production costs and its own internal projections that Star’s unencumbered entry into the market would cause prices to fall.”  The Court found these prices supracompetitive and noted that they were perhaps the Commission’s “most powerful evidence of anticompetitive harm.”  The numbers matter.  

It’s the Practical Effect.  Finally, McWane made an argument that its exclusivity program was presumptively legal, as it was short-lived and non-binding.  This argument, while perhaps true, did not fully account for the ”practical effect” of the conduct and ultimately proved too little.  Looking at such effect, the Court found that the program was arguably more anticompetitive than a traditional exclusivity arrangement as there were no procompetitive benefits associated with it. 

Exclusive contracts can be useful tools for companies to protect their brands, manage their resources and drive interbrand competition.  But, as demonstrated in McWane, exclusive contracts, whether intentionally or not, can be used for anticompetitive purposes or effect to limit or restrict a competitor’s entry by, among other things, limiting options for distribution.  Whether the conduct falls into the procompetitive or anticompetitive side will depend on many factors, but perhaps the most important for consideration is the market itself.  When market shares are high, conduct that might otherwise pass muster in a less concentrated market may find greater scrutiny and perhaps even condemnation under the antitrust laws.

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

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?


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.


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.    


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.


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.


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.


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.”


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.

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