© 2005 morrison & foerster llp all rights reserved antitrust update for in-house counsel...

© 2005 Morrison & Foerster LLP All Rights Reserved

Antitrust Update for In-House Counsel

American Bar Association

Section of Antitrust Law

Corporate Counseling Committee

March 10, 2006

2

Program Overview

• Supreme Court Jesse W. Markham, Jr.

• Washington News & U.S. Enforcement Agency DevelopmentsRoger W. Fones

• EU & International Developments Rony P. Gerrits

• Private Litigation Michael B. Miller & Kathyleen O’Brien


Supreme Court Developments

Jesse W. Markham, Jr.

4

Texaco, Inc. v. Dagher

• Background• Texaco and Shell Oil formed a joint venture, known as Equilon,

that fully consolidated the parties’ refining and sales functions • Equilon continued to market its refined gasoline under both the

Texaco and Shell brands to service stations • Texaco and Shell, through their joint control of the venture,

agreed that Equilon would sell both brands of gas at the same price

• Service station owners alleged that Texaco and Shell’s conduct was price fixing and per se unlawful

• 9th Circuit concluded unified pricing scheme constituted per se violation of § 1

5


• Supreme Court Opinion• Reversed the Ninth Circuit’s holding• Equilon is a legitimate joint venture in which Shell and Texaco

pooled their resources and shared the risks and profits • Rule of reason applies

• The “pricing policy challenged here amounts to little more than price setting by a single entity,” and while this conduct “may be price fixing in a literal sense, it is not price fixing in the antitrust sense”

• 9th Circuit’s misapplied the “ancillary restraints doctrine” • Applies only to competitive restraints on “nonventure activities”

• No application where the business practice being challenged “involves the core activity of the joint venture itself”

6


• Key Implications• Per se liability for joint venture will apply only in rare cases

• E.g., when the venture itself is a “sham” for unlawful price-fixing or market division

• “Ancillary restraints doctrine” applies to nonventure activities

7

Illinois Tool Works, Inc. v. Independent Ink, Inc.

• Background• Illinois Tool sold patented printhead and ink containers to OEMs

on condition that OEMs purchase unpatented ink exclusively from Illinois Tool and not refill the containers with any other kind of ink

• Ind. Ink sold ink to OEMs that could refill the Illinois Tool ink containers and alleged this conduct was a per se unlawful tying arrangement,

• Since Ind. Ink did not offer proof that Illinois Tool had market power in the sale of printheads, District Court granted judgment to Illinois Tool

• CAFC reversed and held that, under S.Ct. precedent, Illinois Tool’s patent created a rebuttable presumption of market power

8


• Supreme Court Opinion• Prior presumption of per se illegality for tying arrangements involving

patents stemmed from older patent misuse cases • Congress amended Patent Act in 1988 and eliminated the market

power presumption for patent misuse cases; hence, “it would be anomalous to preserve the presumption in antitrust”

• Court vacated the CAFC’s judgment and refused to adopt a rebuttable presumption of market power

• “[I]n all cases involving a tying arrangement, the plaintiff must prove that the defendant has market power in the tying product”

• “[V]ast majority of academic literature recognizes that a patent does not necessarily confer market power. . . many tying arrangements, even those involving patents and requirements ties, are fully consistent with a free, competitive market”

9


• Key Implications• Same standards apply to all tying arrangements• Provides additional comfort to owners of intellectual property• Increases burden for plaintiffs seeking to establish per se liability by

requiring actual proof of defendant’s market power • Courts can no longer presume this power from the existence of the

patent

• Nor can courts presume market power from the fact that the tying arrangement provides a means to price-discriminate

• Aligns the law’s treatment of tying arrangements involving patented products with the stated views of the federal antitrust enforcement agencies and most economists


Washington News & U.S. Enforcement Agency Developments

Roger W. Fones

11

Chairman Majoras Announces Reformsto FTC Merger Review Process

Four Significant Reforms to Second Request Process:• A new presumption that that the FTC will not require a party to search files of

more than 35 custodians.• The Director of Bureau of Competition may approve a staff request to require production from

additional custodians.• The parties must finish document production 30 days prior to certifying substantial compliance

with the Second Request and agree to an additional 60-day discovery period in the event of a challenge, or with FTC Staff, enter into an otherwise mutually acceptable timing agreement.

• A new presumption that the Second Request will only require production of documents from the preceding two year period (rather than the existing three year “relevant period”).

• A modified process for submitting a “partial privilege log” that will reduce significantly the burden of preparing the log. The log will not have to be produced until after certification of substantial compliance.

• A new presumption that the FTC will require preservation of backup tapes for only two calendar days and will not require production from tapes.

12

Chairman Majoras Announces Reformsto FTC Merger Review Process

FTC Announcement Leaves Key Questions Unanswered:• The FTC announcement mentions briefly the compliance burdens

associated with data requests, but does not offer any meaningful reform in this increasingly expensive and burdensome area.

• Will the announced “presumptions” be effective in limiting the actual scope of the Second Request?

• Will parties be able to negotiate timing agreements with FTC staff that do not delay the outcome of the investigation?

• Will the DOJ Antitrust Division follow suit? The Antitrust Division’s Merger Review Process Initiative, first announced in October 2001, does not offer the same kind of concrete reforms announced by the FTC.

13

DOJ Enforcement Activity

• Agencies Open Worldwide Air Cargo Investigations• The U.S. DOJ, European and Asian antitrust authorities are cooperating

in an investigation into whether air cargo carriers colluded to fix surcharges for fuel, security and war-risk insurance.

• Investigation conducted in response to complaints by shippers that surcharges have increased in lockstep in amount and timing since 2000.

• Authorities conducted surprise raids on several airlines in the U.S. and abroad.

• Airlines contacted regarding the investigation include British Airways, Air France, KLM, Lufthansa, Cargolux, SAS, Swiss International, Cathay Pacific, Polar Air Cargo, Korean Air, United, American, Japan Airlines, Asiana and Singapore Airlines.

• Lufthansa appears to be cooperating with the investigation, possibly seeking leniency.

14


• Jail Time for Foreign Nationals in Price-Fixing Conspiracy• Four Korean executives from Hynix Semiconductor, Inc. pleaded

guilty to participating in a global conspiracy to fix dynamic random access memory (“DRAM”) prices.

• The jail terms, which will be served in the U.S., range from 5 to 8 months, and each of the 4 executives will pay a fine of $250,000.

• According to DOJ, the executives• Participated in meetings and conversations with competitors to

discuss the price of DRAM sold to certain customers;

• Agreed on DRAM pricing with competitors;

• Exchanged price information with customers to monitor adherence to the agreed-upon prices.

• In December 2004, 3 German Infineon executives also pleaded guilty to DRAM price fixing and served jail terms ranging from 4 to 6 months.

15


• Deputy Assistant Attorney General Delivers Tough Speech on Criminal Enforcement• DOJ has eliminated the “no-jail deal” for domestic and foreign

prosecutions.• DOJ now routinely excludes multiple individuals from non-

prosecution coverage in corporate plea agreements.• DOJ will continue to seek jail time for foreign defendants in cartel

prosecutions - since 1999, 20 foreign nationals have served time in U.S. jails for violations of U.S. antitrust laws.

• DOJ’s “arsenal of tools” in international cartel investigations now includes the use of border watches, Interpol Red Notices and extradition requests.

• The Department has entered into formal antitrust cooperation agreements with Brazil, Israel, Japan and Mexico.

16


• Rolex Watch U.S.A., Inc. pays $750,000 resolving alleged violations of a 1960 Consent Decree• According to DOJ, certain provisions of a Rolex policy statement

violated the 1960 decree by placing restrictions on the use, resale and pricing of watch parts.

• Those restrictions included not selling parts to independent repair facilities without agreements that the facilities would refrain from using the parts in any watch itself containing non-Rolex parts.

• Despite the fine, DOJ also determined that the Decree should be terminated since “significant changes” in the watch industry rendered the decree unnecessary to protect competition.

• In a statement, DOJ counseled that companies not “flout” orders they consider outdated or unnecessary, but, instead, ask courts to modify them.

17

Washington News – Enforcement Agencies

• Barnett Confirmed Assistant Attorney General• The U.S. Senate unanimously confirmed Thomas O. Barnett to

serve as Assistant Attorney General in charge of the Justice Department’s Antitrust Division.

• Former Partner at Covington & Burling in Washington D.C.• Acting Assistant Attorney General since June 25, 2005, and prior

to that a Deputy Assistant Attorney General under R. Hewitt Pate.

18

Washington News – Enforcement Agencies

• FTC to Hold Hearings on High-Tech Consumer Issues• Hearings will explore ways in which technology development and

convergence and continued globalization of commerce affect consumer protection issues.

• Follow up to similar meetings held in 1995, which identified four important lessons:

• Must study new technologies to be prepared to deal with harmful collateral developments;

• Must bring law enforcement actions to reaffirm that FTC law applies in the context of new technologies;

• Must look to industry to implement self-regulatory regimes and develop new technologies; and

• Must educate consumers so they can protect themselves.

• The upcoming meetings are intended to address new technology-based dangers to consumers that have evolved since 1995, such as spyware.

• Hearings to be held Fall 2006.

19

Washington News - Congress

• Commissioner Kovacic Testifies on Oil Industry Competition• FTC Commissioner William Kovacic testified before a Senate

Judiciary Committee hearing on the effects of consolidation in the energy industry on the prices of gasoline.

• Arguing that too little competition exists in the industry, Senators raised several possibilities, including:

• windfall profits taxes• breakups of consummated mergers

• Kovacic defended FTC’s record of reviewing mergers and protecting competition through targeted divestitures in oil company mergers.

• Argued that breakups aren’t warranted, but insisted that the FTC will give the industry continued scrutiny.

20

Washington News - Congress

• Interchange fees, currently the subject of extensive private antitrust litigation, moved to center stage in Congress:• Feb. 15 hearing of House Energy and Commerce Committee’s

Trade and Consumer Protection Subcommittee• Merchants argued that interchange fees, charged on all debit

and many credit card transactions, are artificially high and represent an unfair hidden cost to consumers.

• Credit card representatives argued that direct regulation of interchange fees would upset agreements that have developed over time that ensure the orderly system of processing retail transactions through payment cards.

• Legislation directing the FTC to study interchange fees has passed the House and is pending in the Senate.

21

Washington News - Antitrust Modernization Commission

• Hearing of AMC on International Antitrust Issues• James Atwood, Covington & Burling: U.S. should explore enhanced comity

mechanisms for continued effectiveness of international cooperation among antitrust enforcement agencies. (Similar sentiments expressed by the ICC and OECD)

• Eleanor Fox, NYU School of Law: In the wake of Empagran, Congress should enact a more difficult test for plaintiffs trying to prove harm:

• Plaintiff’s harm must have been proximately caused by the illegal acts that harm the U.S. market and must be inextricably bound up with the affected U.S. commerce.

• Gerald Masoudi, U.S. DOJ, Antitrust Division: Congress should amend the International Antitrust Enforcement Assistance Act to allow use of information collected in international antitrust investigations to be used in extra-antitrust purposes under limited circumstances.

• Randolph Tritell, U.S. FTC: Empagran moved the law in the right direction. No legislative solution is necessary.


EU & International Developments

Rony P. Gerrits

23

European Commission Developments

• Two topics:• Gas and Electricity Sector Inquiry • Proposed modifications to the Leniency

Notice

24

Gas and Electricity Sector Inquiry

• June 13, 2005: Commissioner Kroes launches two broad sector inquiries• Financial Services (retail banking and

business insurance) – preliminary findings to be published in spring (payment cards)/ autumn (core retail banking and business insurance) 2006

• Energy Sector (gas and electricity): as a result of continued price increases and several complaints by potential new entrants

25


• Legal basis = Article 17 of Regulation 1/2003• Lack of intra-community trade, price rigidity or

other circumstances which suggest that competition may be restricted in a particular sector

• Commission powers of investigation are similar to powers of investigation in individual cases

26


• February 16, 2006: Preliminary findings published (wholesale market)1. Market concentration: very high, reflecting historical market

structure with national or regional monopolies2. Vertical foreclosure: strong links between incumbent

wholesalers and network companies 3. Lack of market integration: gas and electricity markets are

still national and/or regional4. Lack of transparency: Access to information for competitors

and consumers is often denied by incumbents, this may prevent wholesale consumers from making changes in their energy suppliers.

5. Unnatural price formation: dramatic price increases in the past couple of years

27


• Next steps:• Launch individual investigations against a number of

incumbents• Discuss modification ECMR to eliminate impact of 2/3

referal rule in case of mergers in the energy sector – limit creation of « national champions » (Endesa/ Gaz Natural)

• Role of national authorities: €290 million fine imposed on ENI for abuse of dominance (Italy)

• Final report: end of 2006

28

Amendments to 2002 Leniency Notice

• Ground for reform = uncertainty over discovery of corporate leniency statements in U.S. litigation

• Key features of reform• Corporate statements may be made in oral

form• Sanction mechanism put in place to

guarantee that limited access to file (solely for purposes of proceedings for the application of Article 81) is complied with

29

JFTC (Japan) Developments

• 2005 Amendments to the Anti-Monopoly Act entered into force in January 2006• Increase of administrative fines• Leniency program• Criminal investigation powers

• JFTC steps up merger enforcement• Own initiative investigation of foreign-to-

foreign merger (J&J/ Guidant)

30

JFTC (Japan) Developments

• METI: merger control as industrial policy tool• Study group created to review JFTC merger

control practice and provide recommendations

• In favor of global geographic markets and 50% safe harbor


Private Litigation

Michael B. Miller

Kathyleen O’Brien

32

Private Litigation

• Golden Bridge Technology, Inc. v. Nokia, Inc., 2006 U.S. Dist. LEXIS 7338 (E.D. Tex. Feb. 17, 2006)• Plaintiff GBT alleged that other members of a standard-setting

organization conspired not to deal with GBT and removed GBT’s patented technology from the standard.

• Defendants argued that GBT failed to plead sufficient facts to state a § 1 group boycott claim, and argued that the per se rule does not apply in the context of standards-setting organizations.

• Court denied defendant’s motion to dismiss; found that “the fact that the alleged § 1 violation arises within the context of a standard setting organization does not by itself prevent the application of the per se rule.”

33

Private Litigation

• Visa U.S.A. Inc. v. First Data Corporation

No. C 02-01786 JSW (N.D.Ca. March 2, 2006)• Counterclaim-Defendant Visa asserted as an affirmative defense

that it was a “single entity” and thus could not violate Section 1.• FDC moved for partial summary judgment on the affirmative

defense, arguing that Visa was not a single entity with respect to the functions at issue; instead, FDC argued that Visa was a JV whose members had different economic interests and competed with each other.

• The court granted FDC’s motion for partial summary judgment denying Visa’s single entity affirmative defense.


Eddins v. Redstone134 Cal. App. 4th 290 (2005)

California Supreme Court Denied ReviewFebruary 8, 2006

35

Eddins v. Redstone

• Expanded “secret rebate” provision of California’s Unfair Practices Act (“UPA”), California Business and Professions Code section 17045

• Contrary to the Fifth Circuit’s conclusion on the UPA in Cleveland v. Viacom Inc., 73 F. App’x 736 (5th Cir. 2003)

36

Eddins v. Redstone

MOVIE STUDIOS

BlockbusterPays $7 tape, but purchasing

all Studios’ Output

Distributors for Independent Rental Stores

($60 tape)

Independent Rental Stores

Independents sue Blockbuster and Studios claiming conspiracy in violation of Cartwright Act,

UPA, and unfair competition law (B&P Code 17200)

37

Eddins v. Redstone

UPA

Prohibits two types of unfair pricing:

(1) secret payments, rebates, or unearned discounts

(2) secret extension of special services or privileges not extended to all purchasers purchasing upon like terms and conditions

38

Eddins v. Redstone

UPA

ISSUE: ARE BOTH CLAUSES MODIFIED?


(2) secret extension of special services or privileges that are not extended to all purchasers purchasing upon like terms and conditions

39

Eddins v. Redstone

EddinsCalifornia

• MODIFIES ONLY SECOND CLAUSE

• “LIKE TERMS AND CONDITIONS” IS NO DEFENSE TO SECRET PAYMENTS/REBATES/DISCOUNTS

ClevelandFifth Circuit

• MODIFIES BOTH CLAUSES

• PRICE DISCRIMINATION PROHIBITED ONLY WHERE CUSTOMERS “PURCHASING ON LIKE TERMS AND CONDITIONS”

UPAISSUE: ARE BOTH CLAUSES MODIFIED?


(2) secret extension of special services or privileges that are not extended to all purchasers purchasing upon like terms and conditions

40

Eddins v. Redstone

WHEN IS A REBATE “SECRET?”

• When “essential terms” of rebate or secret discount are not public and not known to plaintiff

• Publicity of general terms not enough if specific essential terms not public

In Eddins, Plaintiffs/public knew about

(1) “copy depth” (i.e., the number of copies for a particular title), (2) price per video copy(3) studios’ revenue-sharing to argue that the essential terms were not secret.

• Suggests that to defeat a claim of “secrecy” on summary judgment, defendant must demonstrate all “essential terms” of the agreement were generally known – apparently more demanding standard than prior case law and commentary

41

Eddins v. Redstone

FUNCTIONAL CLASSIFICATION DEFENSE?

MOVIE STUDIOS

Blockbuster

Distributors for Independent Rental Stores

Independent Rental Stores

NO

Distributors usually get discount, not retailerBlockbuster did not perform any service different from distributors that warranted defense

42

Eddins v. Redstone

Other Aspects of Eddins• “Meeting Competition” defense

• factual question • must consider harm to “secondary line of commerce” - harm to

retail line, not just distribution line)• UCL Claim

• reversed summary judgment for same reasons UPA summary judgment reversed

• Antitrust Claims – conspiracy claims rejected• summary judgment standard in Aguilar v. Atl. Richfield Co., 25

Cal. 4th 826 (2001)• no evidence of “conscious parallelism”• Distinguished Toys “R” Us, Inc. v. Fed. Trade Comm’n, 221 F.3d

928 (7th Cir. 2000) – studios did not act against self interest


Morrison & Foerster LLP

Antitrust Practice and Speaker Profiles

44

Morrison & Foerster LLP

• For more than 40 years, the firm has been at the center of major antitrust litigation and merger reviews

• Our U.S./EU/Japan antitrust practice offers unmatched global coverage

• Ranked 11th on The American Lawyer’s 2005 A-List• Litigation department recognized as one of the best in the

country by The American Lawyer – 2004• Named to FORTUNE Magazine’s “Top 100 Companies to

Work For” – 2005 & 2006

45

Roger Fones is a partner in the Washington, D.C. office of Morrison & Foerster. Prior to joining the firm, he was with the Antitrust Division of the U.S. Department of Justice for nearly 30 years and most recently served as Chief of the Transportation, Energy and Agriculture Section for more than ten years. He is a leading expert in antitrust issues affecting regulated and partially regulated industries, particularly the airline and electric utility sectors.

Mr. Fones was involved in many high-profile matters while at the Department of Justice, including supervision of the Department’s lawsuits against American Airlines for monopolizing its Dallas-Ft. Worth hub and Northwest Airlines for buying control of Continental Airlines. He supervised every airline merger investigation in the past 15 years, and the Department’s appearances before the Department of Transportation. Mr. Fones also supervised numerous investigations and cases by the Department in the gas, electric and oilfield service industries, as well as in agriculture processing sectors (e.g., grain, corn syrup, dairy and seed technology).

Roger W. Fones

[email protected]

46

Rony P. Gerrits

Rony P. Gerrits’ is a partner in the Brussels office, his main area of expertise is E.U. antitrust law. Mr. Gerrits also has extensive experience in dealing with E.U. Member State competition authorities.

Mr. Gerrits’ practice focuses on merger filings, cartel cases and monopolization cases. His competition work has covered a variety of business sectors, including power generation, steel, chemicals, pharmaceuticals, telecommunications, consumer electronics, computer hardware and computer reservation systems.

Prior to joining Morrison & Foerster in 2000, Mr. Gerrits worked in Brussels and Washington, D.C., where he focused on E.U. and U.S. antitrust law. He is fluent in Dutch, English and French.

011 32 2 347 0400 [email protected]

47

Jesse W. Markham, Jr.

Jesse Markham is co-chair of the firm’s Antitrust Practice Group and a recognized authority on antitrust law. His practice includes complex antitrust litigation and counseling with an emphasis on technology, antitrust agency practice, including mergers and acquisitions, and criminal defense. He represents clients before enforcement agencies on civil and criminal investigations and proceedings. On the international front, he participated in the effort to establish antitrust enforcement mechanisms for Russia and the Ukraine and has represented clients in international criminal cartel investigations.

Mr. Markham served as Deputy Attorney General (antitrust) for California and Massachusetts. He is on the adjunct faculty of the University of San Francisco Law School, where he teaches introductory and advanced courses on antitrust law. He also is on the faculties of the intensive Advocacy Training Institutes at USF and at Stanford Law School. He has published many articles and co-authored two books on antitrust law. Mr. Markham is listed in The Best Lawyers in America (2006) as a leader in the field of Antitrust law.

415.268.7448 [email protected]

48

Michael B. Miller

Michael Miller’s practice includes the representation of clients in complex litigation in federal and state courts and in investigations before federal and state regulatory agencies. Mr. Miller regularly represents clients before both the Department of Justice's Antitrust Division and the Federal Trade Commission in connection with mergers and acquisitions, including deals in the pharmaceutical, aluminum, financial services, energy, computer software and consumer electronics industries.

Mr. Miller also represents clients in civil and commercial matters at both the trial and appellate levels. His cases have included representation of a publicly traded English investment trust in the New York Commercial Division, a large U.S. bank in U.S. antitrust litigation arising out of credit card operations, a trade association as amicus curiae in significant pending antitrust litigation action in the federal courts, a major health care provider in shareholder class actions in the Southern District of New York, the independent directors of a mutual fund group with respect to market timing cases and investigations, a large UK bank in U.S. antitrust litigation, and an individual involved in the Arthur Andersen/Enron matter.

Mr. Miller is the Co-chair of the Corporate Counseling Committee of the ABA Antitrust Section, the Editor of The Antitrust Counselor, and speaks and writes frequently on a range of litigation and competition law matters.

[email protected]

49

Kathyleen O'Brien

Kathyleen O’Brien is a partner in the Los Angeles office specializing in antitrust, advertising, intellectual property, and unfair trade practices counseling and litigation.

Ms. O’Brien served as an Assistant District Attorney for the City of New York where she handled criminal felony prosecutions. Since entering private practice in 1980, Ms. O’Brien has successfully handled state and federal agency investigations in the antitrust and unfair competition areas and has successfully defended civil and criminal actions in a wide range of industries including aerospace, billboards, chain link fences, communications, consumer products, conveyer belts, electronics, entertainment, hair care products, health care, insurance, medical devices, retail sales, tires, toys and games, and trash hauling. She also counsels corporate clients on a wide range of antitrust issues and regularly conducts internal investigations and antitrust compliance programs. Areas of specialization include group purchasing and standard setting, and a full range of sales and distribution issues including price-fixing, refusals to deal, discounting, customer allocation, tying arrangements, dealer termination, and matters involving product pricing and advertising support.

Ms. O’Brien has lectured and written widely in the antitrust and unfair trade practice areas. She is a co‑author of the 1999 handbook entitled California Antitrust Law. She is an active member of the American Bar Association and has served on the Private Antitrust Litigation Committee and the Criminal Practice and Procedure Committee of the Section of Antitrust Law.

[email protected]

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