Section of Antitrust LawCorporate Counseling Committee

Antitrust Update

February 2007 Program

March 8, 2007

22

Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., Inc., No. 05-381 (S. Ct. Feb. 20, 2007)

• Supreme Court largely equates predatory buying and predatory pricing.

• Plaintiff Ross-Simmons’ sawmill closes after alder (input) prices rise and hardwood (output) prices decline. Defendant Weyerhaeuser enjoys 65% of input market but only 3% of output market.

• Plaintiff brings Section 2 suit, alleging that that Weyerhaeuser purchased “more logs than it needed, or paid a higher price for logs than necessary” in order to drive Plaintiff out of business. Jury awards $79 million, trebled. Ninth Circuit affirmed.

• Supreme Court reverses.

• Predatory over-buying (or bidding) is much like predatory pricing: consumers can benefit in the short-term; anticompetitive harm requires a theory of recoupment; and absent a cost-based test, there is a significant risk of chilling pro-competitive conduct (bidding aggressively for inputs).

• Thus, Court adapts Brooke Group to predatory bidding: to be unlawful, (i) price must be below cost in the output market, considering the higher price paid by inputs; and (ii) there must be a reasonable prospect of recouping those higher costs through “the exercise of monopsony power.”

• Plaintiff conceded that it could not satisfy Brooke Group; accordingly, judgment vacated and remanded.

33

Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., Inc., No. 05-381 (S. Ct. Feb. 20, 2007) (con’t).

• Issues the Supreme Court left open:

• Is “upstream” monopsony enough without downstream consumer consequences?

• Does harm to sellers alone count?

• Implications elsewhere.

• Is the liability standard the same when the plaintiff’s theory is that raising input prices is a scheme not to obtain monopsony power, but rather to obtain or reinforce downstream market power? (See Opinion footnote 2).

• Salop Article: Argument that Raising Rivals’ Costs is different.

• Counterargument: The weapon is still price.

• Even when theory is monopolization or attempted monopolization of “upstream” market, can recoupment also include enhanced market power downstream short of threatened monopoly power?

44

Resale Price Programs -- Current Law

• It is per se illegal for a supplier and a reseller to agree to a minimum resale price. Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911); see also United States v. Parke Davis & Co., 362 U.S. 29, 44 (1960) (Where a manufacturer uses means to “effect adherence” to resale prices, it has created “a combination in violation of the Sherman Act.”).

• It is, however, lawful for a supplier to make it known that its policy is to refuse to do business with discounters, and to refuse to deal - unilaterally - with any reseller that discounts. Monsanto v. Spray-Rite Servs. Co., 465 U.S. 752, 761 (1984); see also United States v. Colgate & Co., 250 U.S. 300, 307 (1919).

• The lawfulness of an agreement setting a maximum resale price is judged under the rule of reason. State Oil Co. v. Khan, 522 U.S. 3 (1997).

55

Leegin Creative Leather Products, Inc. v. PSKS, Inc.The Background

• Leegin manufactures women’s accessories sold under the “Brighton” brand.

• In 1995, Leegin adopted the Brighton Suggested Pricing Policy, which appears to have been a unilateral Colgate policy.

• In 1997, Leegin created the “Brighton Heart Store Program.”

• Incentives for participating retailers to create separate Brighton sections.

• To participate, retailer had to pledge to follow the Brighton Suggested Pricing Policy.

• Terminated PSKS for discounting and PSKS sued.

• Trial, court precluded proffered expert testimony that program was procompetitive as barred by the per se rule.

• Jury found for PSKS and awarded $1.2 million (later trebled).

• On appeal, Leegin did not challenge the finding that it had fixed resale prices.

• Argued that it should have been permitted to show that the program was justified.

• Fifth Circuit held that it was bound by Dr. Miles to reject such an inquiry.

66

Leegin Creative Leather Products, Inc. v. PSKS, Inc.At the Supreme Court

• The arguments:

• Leegin asks the Supreme Court to overrule Dr. Miles and hold that resale price maintenance agreements will be judged under the rule of reason.

• U.S. Solicitor General supports that outcome (“The per se rule should be abandoned, and Dr. Miles should be overruled.”)

• PSKS, of course, argues for retention of Dr. Miles.

• Several amici support PSKS and argue for retention of Dr. Miles or, as a backup position, for a presumption of illegality that would place the burden on the defendant to justify the program.

• “Prevailing wisdom” is that this Court is more likely than not to take up the Solicitor General’s invitation to overrule Dr. Miles.

77

In the Event of Reversal

• Ask yourself – is my company in a business that could benefit from having such a policy?

• How would your resellers benefit?

• How would those benefits ultimately inure to the benefit of the end-user consumers?

• Would it enhance your position vis a vis your competitors -- i.e., interbrand competition?

• Companies that already have Colgate policies would likely want to convert to more clear and enforceable “Leegin” policies.

• Planning and counseling benefits of a reversal would be profound.

• Legitimate policies could be simply written and enforced.

• Employee training need not look like a class in metaphysics.

• Better risk-assessment -- while assessments as to likely lawfulness still have to be made, judgments need not be based on fear that employees will fail to comply with difficult to understand distinctions.

88

The German CDC-Case: Class action “à "l‘Allemande„ Factual Background

• In 2003, the German Federal Cartel Office fined heavily twelve cement producers for allegedly operating a Germany-wide cement cartel.

• Eleven producers appealed.

• No final judgment yet.

• In 2005, a Belgian stock corporation (Cartel Damages Claims S.A., "CDC") founded by a German attorney sued the six largest cement producers for damages in an amount of EUR 114 mio. before the District Court in Düsseldorf.

• CDC's action is based on damage claims of 29 customers of these producers.

• Claims were assigned to CDC against a purchase price of EUR 100 (sic) and a contingent (variable) additional purchase price of 85% of whatever will finally be awarded to CDC. CDC also gets an advance payment for its legal cost.

99

The German CDC-Case: Class action “à "l‘Allemande„ Legal Background

• Germany's legal system does not provide for class actions.

• Typical of most of the continental European countries.

• Until a recent reform in 2005 of the German Act against Restraints of Competition parties damaged by a cartel could only be awarded damages by the courts if the cartel "specifically targeted" these parties, e.g. in connection with a bidding process.

• This legal requirement has now been abolished by the a.m. reform.

• Likewise, before the a.m. reform, the cartel members often raised the "passing-on-defence."

• This, too, is now expressly excluded by law.

1010

Ruling of the District Court in Düsseldorf

• Only preliminary judgment on whether the action is formally admissable.

• No judgment yet on whether action is founded in re and if so, what amount of damage is to be awarded.

• Nevertheless, the decision (not yet published) will pave the way for more cartel damage claims in Germany in the future :

• (i) Court accepted that damage claims may effectively be assigned by several damaged parties for a minimum purchase price only to one party actually suing the cartel members.

• Problem 1: Under German law the losing party has to bear the cost of the prevailing party. Will CDC be able to carry this potential burden?

• Problem 2: CDC pursues claims which were not directly assigned by third parties to CDC but first to one or more of the 29 customer parties which then included these third party claims into their own. Court wants to see whether these third party claims were validly assigned also to CDC.

• (ii) Court has expressed the preliminary view that 2005 reform law only wrote law expressly into the Act which if correctly interpreted prevailed already before the reform (no need that cartel "specifically targeted" damaged parties; exclusion of passing-on-defense).

1111

Outlook

• Private party enforcement of antitrust law through damage claims will gain ground in Germany and elsewhere in Europe.

• Unclear whether legislator will formally adopt US class action concept (recent Greenbook of EU Commission is still reluctant on this issue).

1212

Indirect Purchaser Litigation: Class Actions

• Sperry v. Crompton, 2007 N.Y. LEXIS 189 (N.Y., Feb. 22, 2007)

• Holds that treble damages provision of the Donnelly Act constitutes a “penalty” for purposes of New York’s class action statute, which prohibits class actions that seek to recover a penalty (CPLR 901(b)).

• Expressly recognizes that Federal Rule 23 does not have the limitation found in CPLR 901(b). But see Dornberger v. Metropolitan Life Ins. Co., 182 F.R.D. 72 (S.D.N.Y. 1998) ("Whereas this Court is bound by [Rule 23] in this action, the strictures of [CPLR (b)] do not contravene any federal rule.").

• Does not reach question of whether a class action can be maintained if plaintiff limits claim to actual damages.

• Separately holds that unjust enrichment claim cannot be maintained because “the connection between the purchaser of tires and the producers of chemicals used in the rubber-making process is simply too attenuated.” Id. at *17.

1313

Indirect Purchaser Litigation: Standing Requirement

• Lorix v. Crompton, 720 N.W.2d 15 (Minn. Ct. App. 2006)

• Purchaser of tires sued for injury allegedly suffered from conspiracy to fix the price of rubber chemicals used in manufacturing tires.

• Minnesota has an Illinois Brick repealer, giving those injured “directly or indirectly” the right to sue. Minn. Stat. § 325D.57.

• The issue was whether standing was, nevertheless, limited to “a consumer or competitor in the market restrained,” citing Associated General Contractors v. California State Council of Carpenters, 459 U.S. 519, 538 (1983).

• Court of Appeal concluded that plaintiff, as a purchaser of tires, did not have standing because she was not a participant in the rubber chemicals market that was allegedly restrained by defendants.

1414

Indirect Purchaser Litigation: Pass-on Defense

• Clayworth v. Pfizer Inc, et al. (Cal. Super. Ct., December 2006)

• Pharmacies sued drug companies for alleged conspiracy to raise price of prescription drugs. (Brought under Cartwright Act because pharmacies bought from wholesalers rather than directly from the defendants.)

• Defendants established that each plaintiff resold the drugs based upon pricing formulas that maintained plaintiffs’ margin as the cost of drugs increased.

• Trial court held that prohibition against pass-on defense in Hanover Shoe, Inc. v. United Shoe Machinery Corp., 392 U.S. 481 (1968), does not apply to Cartwright Act indirect purchaser claims.

1515

Indirect Purchaser Litigation: Pass-on Defense (con’t)

• Antitrust Modernization Commission will recommend that:

• Congress overrule Illinois Brick v. Illinois, 431 U.S. 720 (1977), and allow indirect purchasers to sue in federal court and removal of indirect purchaser claims to federal court.

• Courts allow consolidation of direct and indirect purchaser claims for pretrial and trial purposes.

• Congress modify Hanover Shoe to allow for allocation of damages between direct and indirect purchasers when both have sued, but continue the bar on a pass-on defense when only a direct purchaser has sued.

1616

Merger EnforcementPartial Stock Acquisitions

• In the Matter of TC Group, et al. (FTC File No. 061-0197)

• $22 billion acquisition by private equity investment group of Kinder Morgan Inc.

• KMI is an oil and gas pipeline and storage company operating in southeastern U.S.

• Two members of investment group, Carlyle Group and Riverstone Holdings, own 50% of Magellan Midstream Partners.

• Magellan owns and operates oil and gas pipelines in southeastern U.S.

• Carlyle and Riverstone together would only own 22.6% of KMI.

• Nonetheless - FTC required remedy.

1717

Merger EnforcementPartial Stock Acquisitions

• In the Matter of TC Group, et al. (cont’d)

• Settlement - January 25, 2007

• Carlyle and Riverstone become passive investors in Magellan.

• No board representation.

• Cede control to other partner, Madison Dearborn Partners.

• No management responsibilities and no attempt to influence management.

• Implement firewall to safeguard against exchange of competitively sensitive information between KMI and Magellan.

• Settlement sunsets in 10 years.

• Prior acquisition considered by Carlyle and Riverstone.

• TransMontaigne Inc. pipeline company.

• FTC questions apparently on similar grounds.

• Morgan Stanley Capital Group ultimately acquired assets.

1818

Merger EnforcementPartial Stock Acquisition

• Government focus on partial stock acquisitions is not a recent phenomenon, NOR is it limited to private equity transactions.

• Ciba-Geigy/Sandoz Merger (1996)

• Overlap resulting from partial ownership of Chiron.

• Chiron essentially independent but merged company would have authority to negate major financial commitments.

• FTC required major relief in its settlement.

• Univision/HBC merger (2005)

• DoJ required Univision to reduce its stock ownership in Clear Channel to 10% over six-year period.

• Dairy Farmers• DoJ case involving dairy coop co-ownership.

1919

• “Waiver of attorney-client and work product protections is not a prerequisite to a finding that a company has cooperated in the government’s investigation.”

• “Prosecutors may only request waiver of attorney-client or work product protections when there is a legitimate need for the privileged information to fulfill their law enforcement obligations.”

The McNulty Memorandum (December 12, 2006)and Privilege Waiver -- The More Things Change the More

They Remain the Same

2020

The McNulty Memorandum -- Category I Documents

• “Category I” information -- “copies of key documents, witness statements, or purely factual interview memoranda regarding the underlying misconduct, organization charts created by company counsel, factual chronologies, factual summaries, or reports (or portions thereof) containing investigative facts documented by counsel.”

• Before requesting waiver of privilege for Category I information, line prosecutors must obtain the approval in writing of the United States Attorney, who must consult with the Assistant Attorney General for the Criminal Division.

• A company’s response to the government’s request for a waiver of privilege for Category I information “may be considered in determining whether a corporation has cooperated in the government’s investigation.”

2121

The McNulty Memorandum -- Category II Documents

• “Category II” information – attorney-client communications or non-factual attorney work product.

• A request for waiver of privilege for Category II information must be approved in writing by the Deputy Attorney General.

• Such requests, according to the McNulty Memorandum, are to be sought only in “rare circumstances.”

• A company’s rejection of a request for Category II information may not be considered by prosecutors in making a charging decision.

• However, prosecutors may “favorably consider” a company’s compliance with a Category II request in determining whether the company has cooperated with the government’s investigation.

2222

The McNulty Memorandum --Companies Still Face Pressure to Waive Privilege

• The DOJ reserves the right to penalize companies who decline to produce the broadly-defined Category I information, while rewarding those companies that voluntarily produce Category II information.

2323

Mark S. PopofskyWashington, D.C.

• Joined Kaye Scholer as a partner in 1999 from the US Department of Justice.

• Served as Senior Counsel to the Assistant Attorney General in charge of the US Department of Justice's Antitrust Division.

• Notable successes include United States v. Microsoft Corp., and United States v. Nippon Paper Indus. Co., 109 F.3d 1 (1st Cir. 1997).

• Represents clients in antitrust, intellectual property, and commercial litigation, including jury trials, counsels clients concerning a variety of competition-related matters.

• Represents parties in mergers and investigations before the US Department of Justice and the Federal Trade Commission (FTC).

• Appellate practice includes matters before the Supreme Court and federal courts of appeals.

2424

Saul P. MorgensternNew York

• Focuses on complex litigation, class actions and multi-jurisdictional litigation before federal and state courts throughout the United States, international arbitral tribunals and federal agencies, and on representing companies and individuals in government investigations. Notable matters include:• Clayworth, et al. v. Pfizer Inc, et al. (Cal. Super. Ct., Alameda Cty.)

• In re Pharmaceutical Industry Average Wholesale Price Litigation (D. Mass.)

• In re Compensation of Managerial, Technical and Professional Employees Antitrust Litigation (D. N.J.) (formerly Todd v. Exxon, Inc. et al. (S.D.N.Y. and 2nd Cir.))

• In re Stock Exchange Options Trading Antitrust Litigation (S.D.N.Y.)

• In re Magazine Antitrust Litigation (S.D.N.Y.)

• In re Brand Name Prescription Drug Antitrust Litigation (D. Ill.) -- related state indirect purchaser class actions and opt-out Robinson-Patman litigation in the Eastern District of New York

• In re Harper & Row, Publishers, Inc. (Federal Trade Commission)

• Has counseled and represented clients in the agricultural chemical, computer hardware and software, diamond, energy, entertainment, insurance, investment banking, leasing, leisure, petrochemical, pharmaceutical, publishing, real estate, specialty chemical, telecommunications and toy industries.

2525

Harald RiegerFrankfurt, Germany

• More than 38 years’ experience in international corporate matters, with a strong emphasis on antitrust law.

• Joined Kaye Scholer after holding several positions at Metallgesellschaft AG (GEA Group, formerly known as mg technolgies ag), an international technology-based group.

• Served on the supervisory boards of several international firms and is a member of the board of trustees of the Research Center for Technology Law at the University of Heidelberg.

• Co-editor and co-author of Frankfurter Kommentar (a leading treatise on German and European Antitrust Law), and has written several papers and articles on corporate and antitrust law for conferences, seminars and law journals.

• Has extensive experience as arbitrator and counsel to parties in national and international arbitration proceedings.

2626

Aton ArbisserLos Angeles

• Specializes in antitrust and consumer class actions. Frequently counsels, lectures, and writes on those subjects, including Cal.Bus.&Prof.C. §17200.

• Wrote winning argument in California v. Texaco Inc., convincing the California Supreme Court that the state's antitrust laws did not apply to a multibillion-dollar merger.

• Nationally recognized for his successes in defending product liability cases, including winning the first-in-the-nation trial involving PPA (an over-the-counter decongestant removed from the market at the FDA’s request), named by the National Law Journal as one of the “Top 10 Defense Verdicts of 2004.” Mr. Arbisser successfully argued the appeal in that case in February 2007.

2727

Claudia R. HigginsWashington, D.C.

• Represents companies before the Federal Trade Commission and the Department of Justice in merger investigations and antitrust conduct investigations, many of which involve complex issues in rapidly evolving international markets and intellectual property. Has significant experience advising companies involved in international mergers and acquisitions.

• Joined Kaye Scholer after for more than two decades of distinguished service at the FTC, finally as Assistant Director for Regional Litigation responsible for regional office antitrust litigation and investigations throughout the US.

• Litigated cases before federal courts and administrative tribunals and oversaw investigations, litigation and enforcement efforts involving pharmaceuticals, consumer products, natural resources, manufacturing firms and high technology companies .

• Advised foreign competition authorities on competition policy and practice methods.

• Recognized for her instrumental role in developing the FTC's pharmaceutical merger policies regarding innovation and competition between branded and generic drugs.

2828

Gregory WallanceNew York

• Broad experience in white collar litigation and civil and commercial litigation.

• Has represented numerous individuals and organizations, including Fortune 500 companies, in state and federal criminal and regulatory cases and investigations.

• Conducts internal investigations of suspected criminal activities for major corporations, trade associations and financial firms and advised a variety of companies on how to establish corporate compliance programs.

• Served as a member of the Ad Hoc Advisory Group to the US Sentencing Commission on the Organizational Sentencing Guidelines and has testified before the Sentencing Commission and Congress as an expert on organizational sentencing issues.

• Served as Assistant United States Attorney for the Eastern District of New York from 1979 to 1985.