Antitrust & Trade Regulation News

On February 2, 2004, the Federal Trade Commission (FTC) issued a report entitled "Horizontal Merger Investigation Data, Fiscal Years 1996-2003" (the "Report"). The Report analyzes seven years of data detailing how the FTC reacted to proposed mergers but deals only with mergers where the FTC issued a second request for information. The tables attached to the Report examined the ratio of mergers challenged by the FTC to those that were not challenged, and provides interesting information on how those numbers vary based on market concentration, number of significant competitors, "hot documents," and customer complaints. The FTC and the Antitrust Division of the Department of Justice use the Herfindahl-Hirschman Index ("HHI") to measure industry concentration. The HHI is calculated by adding the squares of the market shares of all firms that compete in a particular market. In order to gauge the effect a proposed merger will have on industry concentration, the FTC considers two numbers; the post-merger HHI, and the change in the HHI wrought by the merger. According to the 1992 Merger Guidelines, if the post merger HHI is less than 1000, generally, no further analysis is required. Mergers that increase the HHI by 100 to between 1000 and 1800 "raise significant competitive concerns," and mergers that increase the HHI by 100 to over 1800 are presumed to be "likely to create or enhance market power." Of course, merging parties can overcome this presumption. If they do, the FTC will not oppose the merger.

Table 3.1 to the report compiles data on FTC opposition to mergers at different levels of concentration. This table lumps together all the mergers resulting in an HHI of below 1800, and then details what has happened at various incremental levels up to, and over, an HHI of 7000. The chart shows that the FTC opposed 69% of all the mergers on the table, and opposed mergers that resulted in an HHI over 4000, or which resulted in an increase in HHI of greater than 2500, more than 90% of the time. Generally, it appears that a change in HHI (or "Delta") is a slightly bigger factor to the FTC than post merger HHI. Based on these statistics, it generally appears that if two equal sized firms at the top of a moderately concentrated market want to combine, they will have a harder time convincing the FTC to condone the merger than a larger firm that wants to acquire a small firm in a market that is even more concentrated than the first.

Table 4.2 to the report examines the effect that the number of "significant competitors" in a market has on the FTC’s decision whether to challenge a proposed deal. Not surprisingly, the numbers reflect that in situations where there are five or fewer competitors and two are merging, the FTC more likely than not will challenge the deal. Based on the chart, where a merger reduced the number of significant competitors from five to four, 62% of mergers were challenged; for mergers reducing competitors from four to three, 69% were challenged; from three to two 85% were challenged; and where the mergers resulted in only one remaining significant competitor, they were challenged almost 97% of the time. While none of this is particularly surprising, the chart reinforces the importance the FTC places on having significant competition.

Tables 5.1 - 6.2 to the report deal with the effect of so-called "hot documents," documents that suggest that the merger will have an adverse effect on competition. In this table, the FTC considered only those mergers that involved three or fewer markets, which produced 93 mergers. Hot documents were identified in twenty of these mergers, and the FTC opposed all but two of those 20. On the other hand, in the 108 cases without hot documents, 71 were challenged. Based on these statistics, the discovery of a hot document in a second request makes a challenge more likely. (It also should be noted that the hot documents tended to turn up more in the more concentrated markets that would be more suspect in any event). Tables 7.1 - 8.2 examine the effects of customer complaints about proposed combinations and, again the FTC only considered second requests involving three or fewer markets (not including retail). The FTC found 51 second requests involving strong customer complaints and 65 that did not. Only one of the 51 cases with strong customer complaints was not challenged. On the other hand, where there were no strong complaints, 34 of the 65 were not challenged. Although these numbers would not be statistically significant, they certainly seem to indicate that customer complaints will influence the FTC’s decision making.

None of this information is earth-shattering but it nonetheless provides useful guidance in evaluating the likelihood that a merger will be challenged.

On April 7, 2004, the FTC issued an administrative complaint challenging Arch Coal Inc.’s proposed acquisition of Triton Coal Company, L.L.C. (April 7, 2004) alleging that the proposed acquisition, which would combine two of the four leading coal producers in Wyoming’s Southern Powder River Basin ("SPRB"), would make anticompetitive coordination more likely and reduce competition in the production of SPRB coal. The FTC complaint, similar to the preliminary injunction proceedings filed in the U.S. District Court for the District of Columbia on April 1, 2004, also alleges that Arch and Triton are the two principal sources of excess capacity in the SPRB and the acquisition would result in a single source of excess capacity for production of 8800 Btu SPRB coal. Six states also filed in the D.C. District to enjoin the merger.

On April 15, the Department of Justice ("DOJ") and ten states amended their complaint against Oracle/PeopleSoft to include an allegation that the merger will raise the cost of ownership of HRM and FMS software needed to run large enterprises. Michigan, Connecticut and Ohio joined the original seven states: Texas, Hawaii, Maryland, Massachusetts, Minnesota, New York and North Dakota.

Pending Merger Investigations.

• FTC announced April 20, 2004 that it will not object to the merger of General Electric Co.’s NBC Division with Vivendi Universal Entertainment as expected.

• DOJ issued a Request For Additional Information to Cingular and AT&T Wireless.

• FTC likely to issue a Request For Additional Information to R.J. Reynolds—BAT in May, not for the increase in market share and concentration in the menthol cigarette product market, but because of the increase in concentration in retail cigarette shelf space.

While both the United States and the European Union ("E.U.") antitrust enforcement agencies view intellectual property licensing as generally procompetitive, do not presume that a patent necessarily creates market power, and balance efficiencies against anticompetitive effects, there appears to be some divergence in whether the measure of effect on competition should include intra-technology competition as well as inter-technology competition. According to Richard J. Gilbert, professor of economics at the University of California at Berkeley, who participated in the Sherman Act Section One, International Antitrust and Foreign Competition Law, and Intellectual Property Committee Panel at the 52nd Annual Spring Meeting of the ABA’s Antitrust Section, the E.U. considers both.

CANADA MAKES SIGNIFICANT CHANGES TO ITS MERGER GUIDELINES FOR GREATER HARMONY WITH US RULES

One of the primary focuses of the draft changes to the Canadian Competition Bureau’s Merger Enforcement Guidelines, announced April 8, 2004, is a reworking of the section regarding efficiencies, Part 8 of the Guidelines. The changes were made in accordance with the Bureau’s new approach to efficiencies as a result of the Federal Court of Canada’s ruling in the Superior Propane case. The old guidelines limited the efficiencies defense to the concept of "deadweight loss." The new guidelines provide an overview of what types of efficiencies will be considered and how the Bureau will weigh qualitative and quantitative factors of those efficiencies. The Bureau also recommends that the Competition Act be amended to deal with efficiencies more specifically. An additional significant change in the new draft guidelines is the focus on collateral anticompetitive effects resulting from a merger in addition to the focus on unilateral effects. The draft guidelines also expand the definition of what constitutes a merger and adopt more of a U.S. approach on market definition—focusing on demand side substitutability. The draft guidelines are subject to comment through May 25, 2004.

A New Jersey radiologist failed to persuade the U.S. District Court for the District of New Jersey that he had standing to allege an antitrust injury arising from his exclusion from an exclusive hospital contract to provide radiology services at a pair of hospitals located in Cumberland County, N.J. (Bocobo v. Radiology Consultants of South Jersey, D.N.J., 02-1697 (JEI), 2/25/04. Dr. Bocobo’s complaint alleged that Defendants conspired to exclude him from practicing radiology in the Cumberland County area in violation of § 1 of the Sherman Act and to monopolize the delivery of radiology services in Cumberland County in violation of § 2 of the Sherman Act and state law.

The staff radiologists at Bridgeton and Milleville Hospitals in Cumberland County subsequently formed Radiology Consultants of South Jersey, P.A. (Radiology Consultants), and Bocobo became a stockholder and employee of the corporation. Shortly thereafter, South Jersey awarded an exclusive contract to Radiology Consultants to provide radiology services at Bridgeton and Milleville. In early 2001, because of tensions within Radiology Consultants, a new corporation was formed - Alliance Radiology Associates, LLC (Radiology Associates). In July 2001, Bocobo was terminated by Radiology Consultants. He was not invited to join the new corporation. At this time, Radiology Associates entered into negotiations with South Jersey to be the exclusive provider of radiology services at Bridgeton and Milleville.

The Defendants moved for summary judgment on the basis that the plaintiff could not show the type of injury the antitrust laws were intended to prevent. The Court noted that the antitrust laws protect competition, not competitors. Relying in part on the Supreme Court’s holding in Atlantic Ritchfield, the Court reasoned that an antitrust plaintiff "must show that he has been ‘adversely affected by an anticompetitive aspect of the defendant’s conduct.’" Atlantic Ritchfield v USA Petroleum Co., 495 U.S. 328, 339 (1990). Accordingly, the Court reasoned, a plaintiff must show an injury to competition in a relevant market. Here, the court defines two potentially relevant markets: the market in which consumers purchase radiology services and the market in which radiologists compete for jobs to provide services.

As to the first potential market, the court found that Dr. Bocobo’s participation or exclusion had no impact on consumers because, on the whole, patients do not choose their radiologists. Radiology services are largely inpatient or clinic based and when those services are provided in a private out-patient setting, patients tend to rely on physician referrals. Thus, the Court reasoned, consumers are generally unaware of who reads their x-rays or runs their tests and the presence or absence of a single doctor has no impact on the market.

The plaintiff argued that the second market, the market in which radiologists compete for jobs, is geographically limited to the Cumberland County area at most, and, more likely, the Bridgeton, New Jersey area. At one point in time, South Jersey attempted to recruit a radiologist from Golden, Colorado to become chairman of the radiology department. When Bocobo was terminated from his position with Radiology Consultants, he found a new position within two weeks at the University of Pennsylvania. These facts persuaded the court to define the second relevant market more expansively to include at least southern New Jersey and Philadelphia. The relevant market thus defined, the Court found no evidence that the exclusion of Dr. Bocobo from membership in Radiology Associates negatively impacted competition. The Court acknowledged that Dr. Bocobo was injured to a certain degree in that he was forced to find a job outside Cumberland County where he had worked for 15 years and that this injury might be the basis for a tort or contract claim, but the Court concluded that this injury did not create the basis for an antitrust claim.

The Court attempts to reconcile this case with Angelico v. Lehigh Valley Hospital, Inc., 184 F.3d 268 (3d Cir. 1999), wherein the Third Circuit reversed the district court, finding that the plaintiff doctor did have antitrust standing because his injury (the termination of his staff privileges by defendants) flowed directly from "defendants’ concerted effort to exclude him form the market for cardiothoracic surgery." Both cases involving exclusionary conduct are not easily reconciled. In Bocobo, the plaintiff alleged concerted conduct to restrain and monopolize the market in violation of Sections 1 and 2 of the Sherman Act. In Angelico, the plaintiff alleged a concerted refusal to deal in violation of Section 1 of the Act. The distinction is not simply procedural. In Bocobo, the concerted conduct at issue that gave rise to the exclusion was a vertical exclusive dealing arrangement. In Angelico, the concerted exclusionary conduct, i.e., "blackballing" the plaintiff, was an agreement among three competing hospitals that collectively had sufficient market power in the relevant two county market to exclude the plaintiff from that geographic market for cardiothoracic surgery. The Bocobo Court notes that the primary distinction between the cases is that in Angelico the defendants had the requisite market power to foreclose the plaintiff ’s ability to compete in the market. On the other hand, in Bocobo, the plaintiff was unable to establish such market power in the hands of the defendants.

The Federal District Court in Colorado denied Clear Channel’s motion for summary judgment that it did not violate Sections 1 and 2 of the Sherman Act by conditioning the grant of free promotional air time upon the performer’s selection of a Clear Channel owned concert promoter. Nobody in Particular Presents, Inc. v. Clear Channel Communications, Inc., (D.Colo. April 16, 2004).

In a March 15, 2004 decision, a split panel of the Eighth Circuit reversed a jury verdict in favor of a limousine manufacturer on the ground that the District Court had improperly applied the per se standard to a case involving exclusion by standards setting. Craftsmen Limousine, Inc. v. Ford Motor Company, et al., 2004 U.S. App. Lexis 4782 (8th Cir., March 15, 2004). Craftsmen, a small company that manufacturers extra long limousines refused to join a vehicle certification program created by Ford, ostensibly to insure that limousines meet certain safety requirements. Because of Craftsmen’s refusal to join, it was also ineligible to join a limousine manufacturer trade association called "LIMO," in large part because Ford Company allegedly had lobbied to limit membership in that organization to those who also belonged to the Ford group. Thereafter, under pressure from LIMO, the leading industry publications refused to accept advertising from non-LIMO members or to allow their presence at industry trade shows, thus effectively precluding Craftsmen’s primary advertising vehicles and allegedly costing it substantial sales.

Craftsmen argued that the agreement between Ford and the members of LIMO to limit membership and to pressure magazines not to allow advertisement constituted an illegible horizontal restraint of trade, and the jury, which was instructed that such agreements constituted a per se violation of the Sherman Act, agreed and awarded damages to Craftsmen. On appeal, in a 2 to 1 decision, the Eighth Circuit reversed. In addressing the issue of the proper legal standard, the majority ruled that exclusion through standard setting ordinarily is judged under a rule of reason approach. Here, the issue centered around Ford’s contention that the standards in question were driven by safety concerns, not efforts to restrain competition. The majority found that it did not need to determine whether the subject standards actually had pro-competitive effects but rather found that "because the alleged restraints were arguably based, at least in part, on safety concerns, they may have had some pro-competitive effects[,]" and thus use of the per se legal standard was inappropriate.

A divided three judge panel of the Sixth Circuit Court of Appeals overturned a portion of a grant of summary judgment in favor of Phillip Morris that had been granted by the Middle District of Tennessee. As a result, the owners of cigarette vending machines will be able to take their Robinson-Patman Act §2(d) and §2(e) claims to trial. The appeals court affirmed the district court’s grant of summary judgment of the Robinson-Patman Act §2(a) claim. Section 2(a) of the Robinson-Patman Act prohibits price discrimination, while §§ 2(d) and 2(e) prohibit discriminating in the provision of promotional incentives to retailers.

Phillip Morris provided rebates, gifts (to be given to consumers), and other incentives to convenience stores but did not provide them to the owners of vending machines. The vending machine owners sued, claiming that Phillip Morris discriminated against them in favor of the convenience stores. The 6th Circuit dismissed the §2(a) claim because it requires retailers who buy from wholesalers to show that the wholesalers are under the control of the manufacturer. The plaintiffs were unable to muster any evidence in support of such a contention, so the §2(a) claim failed.

The district court originally granted summary judgment on the §§2(d) & 2(e) claims because it found no evidence that vending machines competed with convenience stores for cigarette customers. Because they did not compete for customers with one another, so the reasoning goes, they were not competing customers themselves. The district court grounded its ruling on the plaintiffs’ failure to produce a cross-elasticity-of-demand study. Cross elasticity of demand recognizes that when the price of one product rises, the demand for some products, but not others, increases. The appeals court held that a cross elasticity study is only one of many ways a Robinson-Patman Act plaintiff can prove competition. Here, the plaintiffs met their burden with a study of the buying habits of bar-patronizing smokers. The 6th Circuit found that this study was sufficient for a jury to find that competition existed between the vending machines and the convenience stores, and therefore overturned the grant of summary judgment.

Judge Kenneth M. Hoyt of the Southern District of Texas, Houston Division, recently entered summary judgment for Gruma Corporation, a leading maker of tortillas, on a variety of antitrust claims brought by Gruma’s competitors. The plaintiffs complained that Customer Marketing Agreements ("CMAs"), which provided for slotting fees to be paid by Gruma for increased shelf space and better shelf placement, violated various antitrust laws including the Robinson-Patman Act. The plaintiffs also alleged that Gruma conspired with Azteca Milling LP, eighty percent of which is owned by Gruma, to fix the price of corn mesa flour, an essential tortilla ingredient. The Court dismissed the Azteca claim because Gruma owns most of Azteca and a finding of a conspiracy would violate the rule that a party cannot conspire with itself or its subsidiaries. The gravamen of the plaintiffs’ complaint, though, had to do with the slotting fees. The Court rejected what it termed the plaintiffs’ implied argument that slotting fees are per se violations of the Robinson-Patman Act, noting that some plaintiffs pay these very same slotting fees. The fees resulted in lower costs to retailers, and lower prices to consumers. According to the Court, this is exactly the type of competition Antitrust laws should encourage. Gruma argued that its competitors must believe that vigorous price competition is "unsportsmanlike" and that they brought the lawsuit to increase the prices consumers pay for their tortillas. To support this point, Gruma cited government evidence that, while the CMAs were in effect, prices remained as flat as a tortilla.

The Court found insufficient evidence to sustain the plaintiff ’s predation claim. The plaintiffs produced no evidence that Gruma kept prices low with the intent to drive out competitors and then raise prices to recoup earlier losses. Further, the Court noted that the plaintiffs could not prove that Gruma sold tortillas at a price above its average variable cost ("AVC"), an essential element of a predation claim in the Fifth Circuit. The court also noted the low barriers to entering the tortilla market. The court reached this conclusion because many plaintiff companies, according to their promotional literature, came from "humble beginnings," and because of the recent proliferation of on-site tortilla making machines, such as those found in some grocery stores. The court found the tortilla market to be "exciting," invigorated by competition and innovative marketing, not burdened by anti-competitive behavior. The Court’s opinion can be found at 301 F. Supp. 2d 612.

The United States District Court for the Eastern District of Pennsylvania denied Bradburn Parent/Teacher Store, Inc.’s Motion for Class Certification in its Sherman Act suit against 3M on March 1, 2004. Bradburn Parent/Teacher Store, Inc. v. 3M, 2004 WL 414047 (E. D. Pa. 2004). The Court ruled that the plaintiff could not adequately represent the interests of the class that it sought to certify because the plaintiff ’s claims were not typical of those of many members of the purported class.

Bradburn alleged that 3M maintained a monopoly in the transparent tape market through its bundled rebate programs, in which 3M gave discounts to purchasers who bought products from different 3M product lines, in violation of § 2 of the Sherman Act. It sought to represent "a class of plaintiffs who directly purchased invisible and transparent tape from [3M] from October 2, 1998 until the present." Id. at *1. Thus, it sought to represent large-volume retailers, which sell private-label tape in addition to 3M tape. Because Bradburn only sold 3M tape, an overcharge theory of damages would have offered it the greatest recovery. Conversely, the large-volume retailers would have had a greater recovery by pursuing damages in the form of lost profits. The Court found that these conflicting theories of damages rendered the store an inadequate representative of the purported class.

Fourth Circuit Revives Petroleum Predation Claim The Fourth Circuit Court of Appeals recently overturned a district court dismissal of a South Carolina Unfair Trade Practices Act ("SCUTPA") claim. In R.L. Jordan Oil Company of North Carolina, Inc. v. Boardman Petroleum, Inc., the appeals court disagreed with the two reasons the district court gave: that the plaintiff failed to submit evidence of harm to competition, and that the SCUTPA violated the due process clause of the South Carolina constitution. Section 325(a) of SCUTPA prohibits the selling of motor fuel below cost "where the intent or effect is to destroy or substantially lessen competition or to injure a competitor." The appeals court found that the district court’s requiring Jordan to prove a lessening of competition, i.e. antitrust injury, effectively read out of the statute the alternative avenue for showing harm: showing injury to a competitor. Because such a reading differs from a plain reading of the statute, it is erroneous and the Fourth Circuit corrected it. The district court, as an alternative ground for dismissal, found the statute unconstitutional because it was not reasonably related to the legitimate state interest of preventing predatory pricing. The appeals court reversed (353 F. 3d 334), finding that the statute is reasonably related to the prevention of predatory pricing because harm to a competitor can serve as a proxy for harm to competition. Furthermore, proscribing harm to a competitor can serve other state interests, such as the prevention of "loss leader" selling and ensuring a stable gasoline market.

The Federal Circuit upheld the denial of a patent extension for Abbott Laboratories’ drug, Vicoprofen, combines previously patented hydrocodone bitartrate and ibuprofen as active ingredients. The Arnold Partnership v. Jon Dudas, Acting Under Secretary of Commerce for Intellectual Property (Fed. Cir. March 24, 2004, Case No. 03-1339). The Court rejected the argument that the combination of previously existing drugs created a new drug that is eligible for a patent extension in view of existing patent and FDA regulations. The Court, however, left open the possibility that eligibility for a new patent might exist where the combination of the two active ingredients achieves a result that exceeds the expectation of combining the component drugs.

The U.S. Supreme Court has granted certiorari in BellSouth Corporation v. Covad Communications Company, 299 F. 3d 1272 (11th Cir. 2003), cert. granted, 2003 WL 1786526 January 20 2004); and Quest Corp. v. Metro Net Services Corp., 329 F. 3d 986 (9th Cir. 2003), cert. granted, 2004 WL 51011 January 20, 2004). In Quest, the Ninth Circuit refused to grant summary judgment to an incumbent local exchange carrier (ILEC) for Sherman Act claims alleged by a reseller of telecommunications services that claims it was denied access to the ILEC’s telephone network because of the ILEC’s volume pricing amendments requiring per location pricing, which allegedly had the effect of driving the reseller out of the market. In BellSouth, the Eleventh Circuit denied summary judgment of a claim by a high-speed digital subscriber line internet service provider that the ILEC failed to provide adequate affirmative assistance to competitors, as required under the Telecommunications Act.

In both cases, the Supreme Court vacated the judgments and remanded the cases for further consideration in light of its recent decision in Verizon Communications, Inc. v. Law Office of Curtis V. Trinko, LLP, 124 S.Ct. 872 (Jan. 13 2004).

Oral arguments were heard before the Supreme Court on April 26, 2004 in F. Hoffman-LaRoche, Ltd. V. Empagran, S.A., on appeal from the D.C. Circuit which reversed the district court and held that under the Federal Trade Antitrust Improvements Act ("FTAIA"), a foreign plaintiff is able to sue for injuries outside the U.S. so long as there is an anticompetitive competitive effect on U.S. commerce that gives rise to "a claim" by someone, not necessarily the plaintiff. Thus the D.C. Circuit found that it had jurisdiction to hear claims by foreign direct purchasers of vitamins that made their purchases abroad to collect treble damages for alleged overcharges these plaintiffs paid in their home countries. This claim stems from DOJ’s criminal prosecution of a global price fixing and market allocation conspiracy in the bulk vitamin industry. The District Court and the dissent in the D.C. Circuit Court opinion supported the view adopted by the Fifth Circuit in Den Norsek Stats Oijeselskap As v. Herremac Vof, 241 F. 3d 420 (5th Cir.2001) that limited the ability of a foreign plaintiffs to sue in U.S. courts for injuries occurring outside the U.S. to cases where the effect on U.S. commerce gives rise to that plaintiff ’s claim. DOJ has filed an amicus brief supporting the Fifth Circuit’s view because it feared that companies would be more reluctant to come forward and expose the cartel if the consequence were worldwide civil liability. Justice Kennedy questioned this argument, however, by suggesting that DOJ could offer worldwide civil immunity amnesty to those companies that come forward. 

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