Trade Secret & Unfair Competition Reporter

Category Archives: Antitrust Developments

REVISED MERGER GUIDELINES RELEASED

Posted by Eric Welsh on August 30, 2010 – 2:40 pm

Filed under Antitrust Developments, DOJ, FTC

As discussed in my prior report, the FTC, in April of this year, released for comment proposed revisions to the Horizontal Merger Guidelines. See Proposed Revisions To The Horizontal Merger Guidelines Released. After months of public comment and discussion, the FTC and DOJ have now released the revised Horizontal Merger Guidelines. Horizontal Merger Guidelines. As noted by Chairman Leibowitz in his accompanying statement, the Guidelines have been improved in large and small ways. Among other things, “the Guidelines emphasize the competitive effects of a deal over the more rigid, formulaic approach imposed by some interpretations of the 1992 Guidelines.” Under the Guidelines, market definitions and economic theory, while important, are only part of the story of competitive effects.

In an accompanying statement, Commissioner Rosch provided his own thoughts regarding the final version of the Guidelines, finding some agreement with Commissioner Leibowitz’s assessment.

“These Guidelines properly consider competitive effects first, and market definition second, thereby making clear that while market definition is important to assessing competitive effects and that the market must be defined at some point in the process, ultimately merger analysis must rest on competitive effects of a transaction.”

Commissioner Rosch rejected the notion of many that under the 1992 version of the Guidelines, market shares and structure were “gating items,” or necessary predicates for considering the competitive effects of the merger. Under the revised Guidelines, according to Commissioner Rosch, the competitive effects is given more appropriate consideration.

The Merger Guidelines no doubt provide greater clarity on a number of issues. For example, the Guidelines contain a section dealing with Powerful Buyers and lists the types of evidence to be considered when looking at the competitive effects of a merger, including the impact on innovation and the potential elimination of a “maverick” firm. The two year guidance for entry has been eliminated and the threshold numbers for the Herfindahl-Hirschman Index have been increased, as expected.

For Commissioner Rosch, though, the changes fall short of what is required. For example, Commissioner Rosch notes that the Guidelines say little about non-price competitive effects and do not provide a “clear framework for analyzing non-price considerations” (i.e. how do you factor in a loss of innovation?). According to Commissioner Rosch, economic theory should be, at best, a secondary consideration with empirical inferences to be in the forefront.

“The antitrust defense bar and its clients do not need safe harbors. That bar (including the many who are members of the Antitrust Section) are among the best and brightest lawyers in the world. What that bar and their clients deserve is what these Guidelines promise at the outset — namely, that they will be a complete and accurate description of what our enforcement staff considers in merger investigations and that they will be a helpful guide to courts. These Guidelines are neither.”

Essentially, Commissioner Rosch found fault with the heavy emphasis of economist and the antitrust defense bar in the revision process which “inevitably led to overemphasis on economic formulae and models based on price theory.”

Perhaps the tension identified by Commissioner Rosch emanates from the fact that heavy reliance on “empirical inference” rather than economic theory and analysis potentially leads to greater subjectivity and would be less help than more to the courts. The courts have required more in terms of evidence in the past and the Guidelines’ apparent move away from market definition is certainly a significant departure from the prior guidelines and indeed inconsistent with judicial precedent. What impact the Merger Guidelines will have in the courts in the future remains to be seen.

FTC SETTLES WITH INTEL: “A BIRD IN THE HAND . . .”

Posted by Eric Welsh on August 11, 2010 – 1:50 pm

Filed under Antitrust Developments, FTC, Unfair Competition

Nearly eight months after issuing a complaint against Intel Corp. for unfair competition under Section 5 of the FTC Act (See FTC Moves Forward with Stand Alone Section 5 Claim), the FTC announced last week that it has reached the terms of a settlement with Intel. The settlement (Decision and Order) is subject to public comment. In reaching the terms of this settlement, the FTC noted that the settlement does not strip Intel of its alleged monopoly in the x86 CPU processors, because that alleged monopoly was obtained through its innovation. Rather, the settlement is designed to address Intel’s commercial conduct moving forward in an effort to aid competition in that and other alleged markets.

“The touchstone of the Proposed Consent Order is the protection of consumers and competition. Thus, the Proposed Consent Order provides structural relief designed to restore the competition lost as a result of Intel’s past conduct, and injunctive relief that prevents Intel from engaging in future unfair methods of competition. The injunctive relief would prohibit Intel, when faced with new competitive threats, from engaging in the exclusionary and unfair conduct alleged in the Complaint. These provisions are designed to open the door to fair and vigorous competition in the relevant markets, leading to lower prices, more innovation, and more choice for consumers. The immediacy of this relief is particularly important in these rapidly changing markets.” (Analysis of Proposed Consent Order to Aid Public Comment)

The settlement appears, though, to reflect a number of concessions by the FTC. As noted, the settlement does not immediately alter Intel’s alleged monopoly status with the x86 CPU processors. Moreover, certain of the requested relief sought in the complaint is not reflected in the settlement, such as providing notice to the FTC of acquisitions in the future. Other relief sought in the complaint, which was broad and categorical, has been refined and narrowed in the settlement. Indeed, an entire section of the settlement expressly carves out exceptions to the restrictions imposed on Intel’s commercial conduct in the future (see Section IV.B.). For example, the FTC tries to strike a balance with the limitations to be imposed on Intel in entering exclusive contracts with OEM’s in the future. In the complaint, the FTC had sought to limit Intel’s practices in entering into these exclusive contracts. In the settlement, the FTC obtained those limitations while making it clear that it was not banning the practice entirely.

“Section IV.B.8 would allow Intel to enter into no more than ten exclusive agreements over the next ten years when it provides an OEM with “extraordinary assistance” under certain circumstances. The Commission recognizes that Intel has worked with OEMs and other customers to create innovative products that have benefitted consumers. The Commission wants to ensure that Intel has the opportunity to continue to invest monies in projects with OEMs and other customers to support future innovations. Intel, like any other firm, will only invest in research and development if it achieves a return on that investment. Section IV.B.8 recognizes that in “extraordinary” circumstances Intel should be able to negotiate exclusivity for a specific product in which it has invested research and development resources with an OEM or other customer.”

The FTC appears to have obtained much of the relief sought by the complaint (and in some places more – see appointment of Technical Consultants) through this settlement. It is apparent that the FTC understood though that a protracted fight would accomplish little in this industry, where technology changes rapidly. A prompt resolution, where some benefits could be obtained today, was evidently perceived as a better outcome than obtaining a victory years later with the landscape having changed in the interim. As Chairman Jon Leibowitz described the settlement (News Release):

“By accepting this settlement, we open the door to competition today and address Intel’s anticompetitive conduct in a way that may not have been available in a final judgment years from now. Everyone, including Intel, gets a greater degree of certainty about the rules of the road going forward, which allows all the companies in this dynamic industry to move ahead and build better, more innovative products.”

Clearly, for the FTC, the settlement was “the bird in the hand,” and was more valuable than trying to find two birds later in a bush that is ever changing.

FOR THE FTC, THE “U” IN U-HAUL STANDS FOR UNILATERAL ATTEMPT TO COLLUDE: FTC Settles Complaint With U-Haul in Invitation to Collude Case

Posted by Eric Welsh on June 14, 2010 – 6:39 am

Filed under Antitrust Developments, FTC, Unfair Competition

On June 9, 2010, the FTC announced that the Commission had voted out a complaint (5-0) against U-Haul International, Inc. and its parent company, AMERCO. Complaint. In that complaint, the FTC alleged that U-Haul and its parent had engaged in conduct over several years which amounted to an invitation to U-Haul’s biggest competitor, Budget, to collude and artificially maintain a higher price for truck rentals in the United States. The FTC also announced on June 9 that it had entered into a consent order settling the matter. Order. The order has been published for public comment.

According to the complaint, U-Haul and AMERCO’s Chairman, Edward J. Shoen, developed two strategies designed to eliminate competition between U-Haul and Budget for one-way rentals, both of which were designed to secure higher rates. Shoen then allegedly communicated these strategies internally to the regional managers of U-Haul, instructing the regional managers to set their pricing and then “LET BUDGET KNOW.” Shoen allegedly sent other similar instructions in 2006. In one internal communication, Shoen is alleged to have instructed local U-Haul dealers to contact Budget and Penske dealers to get them to raise their prices:

“We are successfully meeting or beating our Budget and Penske competitors. However, their rates are WAY TOO LOW. When you and your MCP [regional manager] decide it is time to bring some One-Way rates back up above a money loosing [sic] 35 mile, have your Dealers let the Budget and Penske Dealers know. Try ‘Are you tired of renting 500 miles for $149 and a $28 commission? Then, tell your Budget/Penske rep that U-Haul is up and they should be too.’”

In addition to allegedly communicating these strategies internally at U-Haul, the complaint alleges that Shoen also communicated to U-Haul’s competitors his interest in their raising their prices to meet U-Haul’s. The complaint quotes generously from a transcript of an AMERCO earnings press conference in 2008 to bolster the claim that U-Haul and AMERCO invited competitors to collude on price. For example, Shoen is quoted in the complaint as saying in this conference:

“[F]or the last 90 days, I’ve encouraged everybody who has rate setting authority in the Company to give in more time and see if you can’t get it to stabilize. In other words, hold the line at a little higher.

And if they [Budget] perceive that we’ll let them come up a little bit, I remain optimistic they’ll come up, and it has a profound affect on us.”

There are a number of interesting observations about this matter, short-lived as it was. First, the complaint does not allege that U-Haul actually conspired with Budget or any other competitor to maintain or raise prices. The complaint does not allege a violation of Section 1 of the Sherman Act for conspiracy. Rather, the complaint is premised on a single claim brought under Section 5 of the Federal Trade Commission Act based on U-Haul’s alleged invitation to its competitors to collude. Three of the Commissioners (Chairman Leibowitz, Commissioner Kovacic and Commissioner Rosch) voting out the complaint, issued a separate statement highlighting this point, evidently trying to send a message to the business community that the FTC will not wait for collusion to occur before it acts:

“The parties have settled an invitation-to-collude case and not a Sherman Antitrust Act Section 1 conspiracy case. Put differently, the complaint in this case alleges an unfair method of competition in violation of Section 5 of the FTC Act that does not also constitute an antitrust violation. . . . Today’s Commission action is instead based on evidence that Respondents unilaterally attempted to enter into such an agreement. The Commission therefore has reason to believe that Respondents engaged in conduct that is within Section 5’s reach.” Statement.

The U-Haul complaint is instructive on several grounds. First, as is clearly stated by the Commissioners, the FTC is looking at business practices to determine if they are “unfair methods of competition” and not simply violations of Section 1 of the Sherman Act. Executives of companies should not find solace in the fact that their anticompetitive comments may not have reached their competitors and resulted in an actual agreement to collude on price. According to the FTC, no such agreement is necessary for action to be taken. Second, executives of companies must be mindful not only of what is contained in their internal documentation (including email) but also what is stated in public press releases and earnings reports. A sure-fire way to catch the attention of the government is to have an earnings release where there is discussion of the need for a competitor to raise its prices, as was allegedly the case here.

SUPREME COURT SACKS NFL IN REJECTING “SINGLE ENTITY” DEFENSE IN SHERMAN ACT SECTION 1 CASE

Posted by Eric Welsh on June 3, 2010 – 11:15 am

Filed under Antitrust Developments, Federal Court, United States Supreme Court

Ending a string of nearly twenty years of victories in front of the Supreme Court by defendants in Sherman Act cases, the Supreme Court last month in American Needle, Inc. v. National Football League, et al., No. 08-661, ruled against the NFL in a case brought under Section 1 of the Sherman Act. In a unanimous decision, the Supreme Court soundly rejected the ”single entity” defense advanced by the NFL, the 32 NFL teams and the entity they created to manage and market their intellectual property, National Football League Properties (”NFLP”) (collectively, the “NFL defendants”), to the Section 1 claim asserted against them, remanding the case to the district court for further proceedings to determine if they had conspired together in restraint of trade.

American Needle involved a narrow issue before the Supreme Court: whether the NFL defendants were capable of conspiring together or whether they acted as a single entity for purposes of Section 1 of the Sherman Act in connection with their conduct in licensing their intellectual property. As demonstrated in the record, the NFL defendants had acted jointly in the licensing of their intellectual property since 1963 when NFLP was created. From 1963 to 2000, the NFL defendants licensed their intellectual property through NFLP, granting licenses on a non-exclusive basis to vendors to manufacture and distribute apparel with team logos and trademarks. American Needle was one of those non-exclusive licensees. In December 2000, the 32 teams of the NFL changed their game plan, and agreed to permit NFLP to enter into an exclusive license for the manufacture of the team apparel, which NFLP subsequently granted to Rebok. American Needle thereafter brought suit against the NFL, the NFL teams and NFLP in the Northern District of Illinois, alleging that the agreements between the NFL, the 32 teams, NFLP and Reebok violated Sections 1 and 2 of the Sherman Act. In their answer to this complaint, the NFL defendants asserted that they could not conspire under Section 1 ”because they are a single economic enterprise, at least with respect to the conduct challenged.”

After permitting limited discovery, the District Court dismissed the Section 1 claim, agreeing with the NFL defendants’ “single entity” defense. The District Court found that the NFL defendants ”in the facet of their operations respecting exploitation of intellectual property rights,” were “so integrated” that “they should be deemed a single entity rather than joint ventures cooperating for a common purpose.” American Needle appealed that decision to the Seventh Circuit Court of Appeals.

The Seventh Circuit looked at the issue of the “single entity” from the perspective of the “economic power” at issue in the relationship. The Seventh Circuit concluded that since “football itself can only be carried out jointly,” then “only one source of economic power controls the promotion of NFL football.” In the area of licensing team’s intellectual property, the marketplace was not deprived of independent sources of economic control, which competition assumes, as a result of the challenged activity. The Seventh Circuit affirmed the District Court. American Needle and the NFL defendants sought review by the Supreme Court.

Justice Stevens, writing for a unanimous court, rejected the “single entity” argument, in overturning the Seventh Circuit’s decision. Noting the long-established precedent of considering “form over substance” when reviewing conduct as a possible violation of Section 1’s prohibition against engaging in a “contract, combination . . ., or conspiracy” in restraint of trade, the Court observed that the issue is whether the parties are “separate economic actors” following their own “separate economic interests.” If that is found to be the case, then the market is deprived of independent centers of decisionmaking by such combination and actual or potential competition is lost. Considering the facts in the American Needle case from this perspective, the Court found each team possessed the attributes of independent economic decisionmaking, advancing their own economic interests which could be at odds with other teams. For example, from the perspective of a vendor making a team hat, the Colts and the Saints are two potentially competing suppliers of valuable trademarks. When the Colts license their intellectual property, according to the Court, they promote their own economic interest, not the interest of the teams as a whole. Accordingly, each team is an independent center of decisionmaking and when those teams jointly license the right to their intellectual property to a single vendor, they deprive the market of other centers of decisionmaking and, accordingly, of actual or potential competition. It is this context that distinguishes the relationship between the parties in American Needle from the relationship of a parent and its wholly owned subsidiary, which has long been found not to be capable of conspiring under Section 1. Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752 (1984). In the latter situation, the economic interests of the parent and subsidiary are one. The same cannot be said for the 32 NFL teams, each of which is an independently owned and managed business.

In reaching this conclusion, the Court rejected the analysis of the Seventh Circuit which found a single entity because “without [the cooperation of the teams], there would be no NFL football.” Finding the justification of cooperation to be irrelevant to whether the cooperation is concerted or independent, the Court noted that cooperation can be found in many different contexts which bear scrutiny under Section 1. As the Court observed:

“Any joint venture involves multiple sources of economic power cooperating to produce a product. And for many such ventures, the participation of others is necessary. But that does not mean that necessity of cooperation transforms concerted action into independent action; a nut and a bolt can only operate together, but an agreement between nut and bolt manufacturers is still subject to § 1 analysis.”

As with the NFL and the NFL teams, the Court also found the decisions of the NFLP itself to constitute “concerted activity” under Section 1. Although noting that this was a “closer call,” due to the fact that NFLP was a separate entity and the profits were distributed to the teams on an equal basis, the Court nevertheless found that for the same reasons the NFL teams’ conduct was subject to review under Section 1, so was NFLP’s conduct. For the Court here, the decision came down to a truism:

“Apart from their agreement to cooperate in exploiting those assets [the intellectual property], including their decisions as the NFLP, there would be nothing to prevent each of the teams from making its own market decisions relating to purchases of apparel and headwear, to the sale of such items, and to the granting of licenses to use its trademarks.”

NFLP simply was “an instrumentality” of the teams and the fact that the NFL teams shared in profits and losses of the NFLP did not save the case from Section 1 scrutiny, since if that were the case, then “any cartel ‘could evade the antitrust law simply by creating a “joint venture” to serve as the exclusive seller of their competing products.’” American Needle, quoting Major League Baseball Properties, Inc. v. Salvino, Inc., 542 F.3d 290, 335 (2nd Cir. 2008).

The Supreme Court’s opinion in American Needle does not mark the end of the NFL defendants’ contract with Rebok. The Court did not find the conduct to be a per se violation of the Sherman Act but rather conduct subject to further review under a “rule of reason” approach. Accordingly, the American Needle case has been sent into overtime and it is up to the NFL defendants to justify their conduct and save their agreement.

As American Needle continues its path in the District Court, attention will be turned to the ramifications of the decision. This decision is not limited to the grid iron but will apply to other venues where companies jointly market their intellectual property through a single licensing entity. Whether it is the NBA, NASCAR, other sports or other venues, closer scrutiny should be expected of those marketing relationships.

FTC CHALLENGES ANOTHER CONSUMMATED MERGER

Posted by Eric Welsh on May 25, 2010 – 1:05 pm

Filed under Antitrust Developments, FTC

Last month, a representative of the Federal Trade Commission spoke at the ABA Antitrust Law Spring Meeting regarding the FTC’s continuing interest in scrutinizing consummated mergers for potential violations under Section 7 of the Clayton Act. Within weeks of that presentation, the FTC has filed an administrative complaint challenging yet another consummated merger*, this time involving The Dun & Bradstreet Corporation’s February 2009 acquisition of Quality Education Data (”QED”).

In a complaint voted out by the Commission (4 to 1) on May 6, 2010, the FTC alleges that D&B acquisition of QED violated Section 7 of the Clayton Act and Section 5 of the FTC Act. The Commission alleges that D&B’s company, Market Data Retrieval (”MDR”), holds over 90% of the kindergarten through twelfth grade educational marketing databases in the United States as a result of the merger. The FTC’s complaint further alleges that MDR and QED “were the only two significant competitors in the K-12 data market” and that the acquisition substantially lessened competition by, among other things, “[r]educing the number of significant competitors from two to one, creating a virtual monopoly” and “allowing MDR, unconstrained by effective competition, to increase prices.” Commenting on the filing, Richard Feinstein, Director of the FTC’s Bureau of Competition, stated in the accompanying press release: “When Dun & Bradstreet acquired QED, it bought its closest competitor and created a monopoly. That’s going to get the FTC’s attention every time.” The complaint seeks divestiture of QED.

Despite its lack of detail, the complaint is notable as an indication that the FTC will challenge consummated mergers, even when the size of the transaction is relatively small. Of course, whether the FTC prevails is another matter. This merger was apparently consummated over fourteen months ago, and the complaint does not allege that despite the purported ”merger to monopoly,” that MDR had increased prices post acquisition or that pricing had in fact been adversely affected by any increase in market power. In addition, although claiming that the merger reduced the number of “significant competitors,” at least two other firms that compete in the alleged market are noted in the complaint, but dismissed as “insignificant players.” From the complaint, it appears that the FTC will contend that reputational issues pose significant barriers to entry and diminish the effectiveness of these two smaller firms as players in this alleged market.

Time will tell whether the FTC can make its case. One thing is certain: clearly this is not the last we will hear from the FTC when it comes to challenging consummated mergers.

_________

*Parker Poe Adams & Bernstein LLP is counsel to Polypore International, Inc. in a consummated merger challenge brought by the FTC. That matter was tried before Administrative Law Judge D. Michael Chappell last year. Eric Welsh was co-lead trial counsel.

PROPOSED REVISIONS TO THE HORIZONTAL MERGER GUIDELINES RELEASED

Posted by Eric Welsh on May 3, 2010 – 6:47 am

Filed under Antitrust Developments, DOJ, FTC, Federal Court, Unfair Competition

Recently, the FTC released for comment the proposed revisions to the 1992 Horizontal Merger Guidelines (the “Proposed Revisions“). Coming just a day before the beginning of the ABA Antitrust Law Spring Meeting, the release of the Proposed Revisions was sure to spark a great deal of discussion at the Spring Meeting as lawyers and economists began to digest the document. Fortunately for those who attended the Spring Meeting, they were not disappointed, as there was much discussion both in and out of the conferences about this topic.

Certainly, the Proposed Revisions offer to make important changes to the Merger Guidelines. For example, product market definition would not necessarily be a determinative consideration. “Market definition is not an end in itself: it is one of the tools the Agencies use to assess whether a merger is likely to lessen competition.” Proposed Revisions, p. 7. The Proposed Revisions though would apply a more expansive description of the definition of the “hypothetical monopolist” test used in determining product markets. In addition, the threshold numbers for the Herfindahl-Hirschman Index (”HHI”) would be increased (see Part 5.3) but would not be considered as necessarily providing a safe harbor. Also, a section would be added addressing “powerful buyers” (see Part 8). Here again, according to the revisions, the presence of so-called “power buyers” would not be determinative: “[T]he Agencies do not presume that the presence of powerful buyers alone forestalls adverse competitive effects flowing from the merger.” Proposed Revisions, p. 27. Finally, the two year guidance for market entry – formerly a central touchstone in merger cases — has been eliminated (see Part 9).

Interestingly, though, the Proposed Revisions are not viewed by some as a dramatic change from the existing Merger Guidelines. Commenting on the Proposed Revisions at the Spring Meeting, Deputy Assistant Attorney General for Civil Enforcement, Molly S. Boast, stated that the revisions were intended to bring the Merger Guidelines in line with current practice at the Agencies when reviewing mergers. Others might disagree. In any event, what is apparent, is that the Proposed Revisions suggest a shift away from “guidelines” to “indicators.” This appears to have been a conscious move to provide the agencies more flexibility in how they consider a merger.

“These Guidelines should be read with the awareness that merger analysis does not consist of uniform application of a single methodology. Rather, it is a fact-specific process through which the Agencies, guided by their extensive experience, apply a range of analytical tools to the reasonably available and reliable evidence to evaluate competitive concerns in a limited period of time.” Proposed Revisions, pp. 1-2.

In the next several weeks, antitrust practitioners will be chiming in on the Proposed Revisions. While formal comments may result in some changes around the edges, it should be expected that the Proposed Revisions will largely remain intact. Attention will then be focused on what role the Merger Guidelines, as revised, will play in discussions with the Agencies and in court battles over contested mergers.