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Changes Ahead for the US Agencies’ Antitrust Enforcement Activities?
Will the new administration change enforcement priorities?
Possible ‘revival’ of Section 2 enforcement
Although President Obama has promised more robust antitrust enforcement during his administration, the scope and substance of any change to US antitrust enforcement remain in question. Christine Varney, the new assistant attorney general for antitrust at the Department of Justice, has taken a public stance in favour of, in particular, a more vigorous enforcement of Section 2 of the Sherman Act. Varney quickly signaled a clear shift in DoJ policy by formally withdrawing the 2008 Antitrust Division policy paper on Section 2 of the Sherman Act in her first few weeks in office. Specifically, Varney openly criticised the Section 2 report as ‘an overly lenient approach to enforcement’ and warning firms with large market shares that exclusionary and predatory conduct would no longer be given a ‘free pass’ by DoJ.1 In doing so, Varney cleared the way for greater cooperation and collaboration with the Federal Trade Commission, which has long been at odds with the DoJ on enforcement under Section 2. Under the Bush administration, the FTC had vigorously pursued the pharmaceutical industry in particular for alleged abuses of Section 2. The DoJ now seems poised to join the fray and its recently announced investigation of the telecommunications sector seems a first salvo in that effort.
Varney’s efforts to revive Section 2 will, however, be largely tied to the DoJ’s ability to expand the scope of what constitutes a Section 2 violation under US law. In that regard, Varney will be confronted by a Supreme Court that is quickly moving in the opposite direction from her agency on Section 2 issues, as evinced by recent cases such as LePage’s, Trtnko and linkLine.2 In particular, the Supreme Court’s opinion in linkLine would appear to present the greatest challenge to broadening the scope of Section 2 enforcement. In the narrow sense, the court was asked in linkLine to decide whether a private litigant’s so-called ‘price-squeeze’ claims were valid under Section 2.3 A unanimous court rejected such claims as improper under both its 2004 opinion in Trinko (plaintiffs cannot challenge ‘too high’ wholesale prices absent an antitrust duty to deal) and Brooke Group (plaintiffs cannot challenge ‘too low’ retail prices absent evidence that such pricing was below cost).4 In so ruling, the court strongly suggested that Section 2 violations are limited to the ‘rare instances’ where a dominant firm truly prices predatorily (‘below-cost prices that drive rivals out of the market and allow the monopolist to raise its prices later and recoup its losses’) or in the ‘limited circumstances’ in which a firm’s unilateral refusal to deal falls within Aspen Skiing based on a prior profitable course of dealing.5 Given the high barriers presented by both Brooke Group and Aspen Skiing, absent a change of direction at the Supreme Court, the DoJ’s efforts to expand the scope of Section 2 enforcement may ultimately prove difficult indeed.
Significant changes to horizontal merger guidelines proposed
By comparison with the foregoing, merger control practices in the United States are likely to be significantly revamped by the new administration. Carl Shapiro, the newly appointed deputy assistant attorney general for economics and chief economist at the DoJ, and Joseph Farrell, the newly appointed director of the Bureau of Economics at the FTC, have jointly proposed replacing the well-established market concentration analysis (as measured by the Herfindahl-Hirschman Index (HHI)), which is used to screen mergers for potential anti-competitive effects under the agencies’ Horizontal Merger Guidelines, with a new test that measures upward pricing pressure (UPP).6 Shapiro and Farrell believe that the UPP analysis provides a simpler and more accurate approach for determining whether a proposed merger between rivals is likely to reduce competition and thus lead to higher prices.7 According to Shapiro and Farrell, the inexact science of market definition, which in many cases can be a largely subjective exercise, often fails to uncover a transaction’s potential anti-competitive effects.8 By comparison, Shapiro and Farrell believe the UPP test, which compares two nominally objective economic forces, provides a more objective measure of potential harm.9 Specifically, the UPP test proposes to compare the relative economic effect of lost competition between the merging parties, which creates upward pricing pressure, with the expected marginal-cost savings created by the merger, which create downward pricing pressure.10 If the net effect of these two forces results in a net upward pressure on prices for a given transaction, Farrell and Shapiro suggest that this transaction should be presumed to be anti-competitive and subjected to more in-depth investigation.11
Although it is possible that the new administration will seek to largely redraft the existing Horizontal Merger Guidelines so as to formally adopt the UPP analysis as the screening test for presumptively anti-competitive transactions, it is also possible that the agencies will begin applying the UPP test informally in those marginal cases where traditional market concentration analysis may, for various reasons, not accurately reflect unilateral pricing power in a particular market. The consequences of the agencies adopting the UPP analysis, either formally or informally, would be dramatic. In contrast to traditional market concentration analysis, the UPP analysis is a data intensive exercise. Not only does the UPP analysis require estimation of market shares (which are necessary to calculate HHIs), but also requires pricing, cost and margin data. The UPP analysis also requires, in most instances, an econometric estimation of diversion ratios, necessitating the retention of economists early on in the transaction process. For these reasons, conducting an UPP analysis early in a merger investigation (or, indeed, by the merging parties in advance of notification) may impose expenses on the merging parties that is disproportionate to the benefit of conducting the test in most instances.
The UPP analysis, if adopted by the agencies, may also ultimately result in the issuance of more Second Requests. While merger parties currently have a significant opportunity to contest any presumption of anti-competitive harm during the initial 30-day waiting period under the Hart-Scott-Rodino Antitrust Improvement Acts of 1975, if the agencies were to apply the UPP test, much of that initial 30-day period could be spent compiling and debating the substance of the necessary data to conduct that test. Further, if the UPP analysis were to be applied only informally, merging parties may have to defend their transaction under traditional HHI analysis as well as under the new UPP test.
Developments in civil antitrust enforcement
Merger enforcement by the numbers
The number of transactions reported to the agencies pursuant to the HSR Antitrust Act in 2008 decreased as compared to 2007.12 In 2008, 1,726 transactions were reported to the agencies pursuant to the HSR Act, down 22 per cent from the 2,201 transactions reported in 2007 and 65 per cent from the 4,926 transactions reported in 2006.13 The agencies issued 41 Second Requests during 2008 (21 by the FTC and 20 by the DoJ) in 2.5 per cent of notified transactions, down substantially from the 63 Second Requests issued in 2007 in 3 per cent of notified transactions.14 During 2008, the FTC challenged 21 transactions, leading to 13 consent orders, two administrative complaints, and six abandoned or restructured transactions.15 Over the same period, the DoJ challenged 16 transactions, leading to 15 consent decrees and one transaction that was ultimately restructured.16
In November 2008, the DoJ reached an agreement with InBev NV/SA (InBev) that permitted the completion of InBev’s US$52 billion acquisition of Anheuser-Busch Companies Inc, provided that InBev take certain steps to address competition concerns following the deal’s close.17 Under the terms of the settlement, the DoJ required InBev to sell Labatt USA and grant a licence to the acquirer to brew and sell Labatt brand beer for consumption throughout the United States.18 The DoJ also required that it approve the purchaser of Labatt USA to ensure the sale will restore the competition that existed for beer sales in Buffalo, Rochester and Syracuse prior to InBev’s purchase of Anheuser-Busch.19 In the large majority of markets in the United States, InBev accounted for less than 2 per cent of beer sales and engaged in very little direct competition with Anheuser-Busch.20 To the contrary, sales of InBev’s Labatt’s beer brands in Buffalo, Rochester and Syracuse account for a significant portion of beer sales.21 The DoJ concluded that, in those markets, the elimination of the competition between InBev and Anheuser-Busch would have resulted in high prices for consumers.22
The FTC’s long-standing opposition to Whole Foods Market Inc’s acquisition of Wild Oats Market Inc came to an end on 6 March 2009 when the FTC announced a settlement with Whole Foods to substantially restore the allegedly lost direct competition between the two natural foods retailers.23 Under the consent order, Whole Foods was required to divest 32 stores, approximately 12 per cent of the total number of stores Whole Foods and Wild Oats held before the merger, as well as Wild Oats’ intellectual property, including the rights to the ‘Wild Oats’ brand.24
The Whole Foods/Wild Oats transaction was originally notified to the FTC in early 2007.25 Following a lengthy investigation, the FTC issued an administrative complaint in June 2007 alleging that the transaction, if consummated, would substantially lessen competition.26 The FTC contemporaneously sought a preliminary injunction from a federal district court to prohibit the parties from closing the transaction pending completion of the administrative proceeding.27 The District Court rejected the FTC’s petition, finding that Whole Foods and Wild Oats competed against, and were constrained in their ability to raise prices by, all supermarkets, not just the ‘premium, natural, and organic supermarkets’ as had been defined by the FTC.28 Following the District Court’s ruling, the FTC submitted an emergency motion to the Court of Appeals to enjoin the parties from completing the transaction pending the FTC’s appeal of the District Court ruling.29 The Court of Appeals denied the FTC’s motion and the parties closed the transaction. The FTC, however, pressed its appeal forward and, on 29 July 2008, the Court of Appeals reversed the District Court, leading to the eventual settlement.30
Potentially impacting the agencies’ strategic thinking in future cases, the Whole Foods decision suggests that there should be a presumption in favour of granting a preliminary injunction to enjoin closing of a challenged transaction, even where the agency cannot fully demonstrate its likelihood of success on the merits. Although the effect of the Whole Foods decision has not been fully fleshed out, recent experience suggests that the agencies’ burden of proof necessary to obtain a preliminary injunction may be lessening, particularly in their home court in the DC Circuit.
Non-merger civil enforcement
The agencies remained active in non-merger civil enforcement in 2008. The DoJ non-merger civil investigations increased to 35 for 2008, up 12 from the previous year, while the FTC initiated four non-merger enforcement actions.31 The FTC, however, has filed five non-merger enforcement actions already since the start of the 2009 fiscal year, perhaps signaling a general trend towards more enforcement in non-merger civil actions.32
In particular, the FTC continues its active pursuit of ‘pay-for-delay’ settlements in the pharmaceutical industry, which are agreements between branded drug companies and generic drug companies that prevent or delay the introduction of lower cost generic formulations into the market. The FTC recently challenged this type of anti-competitive conduct in an enforcement action against Solvay Pharmaceuticals Inc, maker of AndroGel, and its agreement with two generic drug manufacturers, Watson Pharmaceuticals Inc (Watson) and Par Pharmaceutical Companies Inc (Par).33 The agreement requires Watson and Par to abandon patent challenges and delay the marketing of the generic formula for AndroGel for nine years, until 2015. AndroGel is Solvay’s branded testosterone-replacement drug, a prescription pharmaceutical with sales of more than US$400 million a year.34 The FTC claims that, by agreeing to delay the generic in exchange for payment, Watson and Par engaged in the unlawful sharing of monopoly profits instead of legitimately competing against Solvay on the sale of AndroGel.35 The FTC is also actively pursuing its case against Cephalon in Philadelphia federal court, seeking to enjoin Cephalon’s exclusionary payment agreement with four of its generic rivals, alleging such conduct denies consumers access to lower-cost generics thereby forcing consumers to pay hundreds of millions of dollars more a year.36
Criminal enforcement of the US antitrust laws
Criminal enforcement by the numbers
Criminal enforcement of US antitrust laws remains a top priority for the DoJ, the sole agency charged with jurisdiction for criminal antitrust enforcement. In contrast to other areas of antitrust enforcement, criminal investigations and prosecutions are increasing and have increased substantially over the last decade. In 2008, the DoJ filed 54 criminal cases against 59 individuals and charged 25 corporations.37 The DoJ also collected a record US$701 million in fines in 2008, a figure that the DoJ will easily beat in 2009.38 Indeed, as of spring 2009, the DoJ had already collected nearly US$1 billion in fines.39 With over 137 grand jury investigations pending at the close of 2008, the DoJ’s cartel enforcement activities show no signs of slowing.40
The DoJ’s recent efforts have resulted in, among other things, several additional indictments and successful prosecutions of foreign defendants for their participation in various alleged conspiracies in the electronics sector, including in thin film transistor-liquid crystal display (TFT-LCD) panels where LG Display Co Ltd’s fine of US$400 million was the second largest fine ever assessed by the DoJ.41 The DoJ’s long-standing investigation into the air cargo sector has also borne fruit. A total of 15 companies and four individuals have pleaded guilty to participating in the alleged air cargo conspiracy, while the DoJ has collected in excess of US$1 billion in fines as a result of that investigation.42
The DoJ also remains committed to seeking prison sentences for culpable executives involved in illegal price fixing conspiracies. In January 2009, Peter Baci, a former high-level shipping executive, was sentenced to serve 48 months in jail and ordered to pay a US$20,000 criminal fine for his role in an antitrust conspiracy involving the transportation of goods to and from the continental United States and Puerto Rico by ocean vessel.43 Baci’s sentence is the longest prison term ever imposed for a single antitrust charge.44 In 2008, the DoJ secured prison sentences of an average of 25 months, the second year in a row that the average prison sentence exceeded two years for antitrust crimes.45
TFT-LCD price-fixing conspiracy
The DoJ continues to secure plea deals, monetary fines and jail time in the TFT-LCD investigation. In November 2008, LG Display Co Ltd (LG), Sharp Corporation and Chunghwa Picture Tubes Ltd agreed to plead guilty for their roles in alleged conspiracies to fix prices in the sale of LCD panels and agreed to pay a total of US$585 million in criminal fines.46 In January 2009, executives from LG and Chunghwa agreed to plead guilty and serve jail time in the United States for their participation in that alleged global cartel.47 Under the plea agreements, all four executives have agreed to serve a term of imprisonment, pay a criminal fine and assist the DoJ in its government in its ongoing investigation.48 Two months later, in March 2009, Japanese electronics manufacturer Hitachi Displays Ltd agreed to plead guilty and pay a US$31 million dollar fine for its role in the TFT-LDC price-fixing conspiracy, and in April, a high-level Korean executive agreed to plead guilty and serve one year in jail in the United States.49 Including these most recent charges, to date four companies and nine individuals have been charged in the DoJ’s ongoing antitrust investigation into the TFT-LCD industry and more than US$616 million dollars in criminal fines have been imposed, or agreed to, as a result of the DoJ’s efforts.50
The DoJ successfully secured three additional guilty pleas in the Air Cargo investigation. Air cargo carriers LAN Cargo SA, Aerolinhas Brasileiras SA and El Al Israel Airlines Ltd, each agreed to plead guilty and pay criminal fines totally US$124.7 million for their roles in the conspiracy to fix prices in the air cargo industry.51 In April 2009, international airline companies Cargolux Airlines International, Nippon Cargo Airlines Co Ltd and Asiana Airlines each agreed to plead guilty and pay criminal fines totaling US$214 million for conspiring to fix prices.52 In addition, Asiana Airlines was charged with fixing the passenger fares charged on flights from the United States to Korea.53 Also in April, a Dutch citizen and former vice president for cargo sales in Europe for Martinair Holland NV, agreed to plead guilty, serve time in jail and pay a criminal fine for participation in a conspiracy to fix cargo rates for international air shipments.54 Including these most recent pleas, a total of 15 airlines and four executives have pled guilty or agreed to plead guilty in the DoJ’s ongoing investigation into price fixing in the air transportation industry. Collectively, the companies have paid or agreed to pay criminal fines totaling more than US$1.6 billion dollars.55
In April of this year, two subsidiaries of Swedish company Trelleborg AB, Virginia Harbor Services Inc, based in Virginia, and Trelleborg Industrie SAS, located in France, agreed to plead guilty and pay a total of US$11 million in criminal fines for their participation in separate conspiracies affecting the sales of marine products sold in the US and elsewhere.56 Including these latest charges, six individuals and two corporations have pleaded guilty or agreed to plead guilty in the DoJ’s ongoing investigation of fraud and collusion in the marine fenders and pilings industries.57
Continuing its efforts in the Marine Hose investigation, the DoJ obtained a guilty plea from Dunlop Oil & Marine Ltd (Dunlop), a British marine hose manufacturer, which included a payment of US$4.54 million dollars in criminal fines for participation in a conspiracy to rig bids, fix prices and allocate market shares of marine hose sold in the United States and elsewhere.58 Dunlop is the second corporation charged in the investigation.59
1 Christine A Varney, assistant attorney general for antitrust, Remarks as Prepared for the Center for American Progress, 11 May 2009.
2 LePage’s Inc v 3M, 324 F3d 141 (3d Cir 2003); Verizon Communs Inc v Law Offices of Curtis V Trinko LLP, 540 US 398 (2004)(Trinko); Pac Bell Tel Co v linkLine Communs Inc, 129 S Ct 1109 (2009)(linkLine).
3 See generally, linkLine. Price squeeze claims allege that vertically integrated firms can force their non-integrated downstream competitors out of the market by charging ‘too high’ wholesale prices to their downstream competitors while selling those same products to customers at ‘too low’ retail prices, the result of which is that the non-integrated competitor’s margins are squeezed to the point that they can no longer compete.
4 linkLine, 129 SCt at 1119-1120; Trinko, 540 US 398 (2004); Brook Group Ltd V Brown & Williamson Tobacco Corp, 509 US 209 (1993).
5 Id. at 1118; Aspen Skiing Co v Aspen Highlands Skiing Corp, 472 US 585 (1985).
6 Joseph Farrell and Carl Shapiro, ‘Antitrust Evaluation of Horizontal Mergers: An Economic Alternative to Market Definition’ (25 November 2008), Competition Policy Center, Paper CPC08-081 (Shapiro Report).
7 See generally, Shapiro Report.
12 Dates refer to the agencies’ fiscal year.
13 Hart-Scott-Rodino Annual Report, Fiscal Year 2008, available at www.ftc.gov/os/2009/07/hssreport.pdf (HSR 2008 Report).
14 HSR 2008 Report, Appendix A.
15 HSR 2008 Report at 2-3.
25 FTC v Whole Foods Market Inc et al, Case No. 07-5276 (DC Cir 29 July 2008) (Whole Foods).
26 Whole Foods at 3.
28 Whole Foods at 9.
29 Whole Foods at 4.
30 See generally, Whole Foods.
31 US Department of Justice, Antitrust Division Workload Statistics FY 1999-2008 (2008 Workload Statistics), available at www.usdoj.gov/atr/public/workstats.htm.
32 Federal Trade Commission Annual Report, March 2009 (FTC 2009 Report), at 13.
33 FTC 2009 Report at 16-17.
37 2008 Workload Statistics at 4.
38 The Accomplishments of the Department of Justice 2001-2009, available at www.usdoj.gov/opa/documents/doj-accomplishments.pdf
39 Congressional Submission FY2010 Performance Budget, available at www.usdoj.gov/jmd/2010justification/office/fy10-atr-justification.doc
40 Workload Statistics at 4.
45 Workload Statistics at 13.
49 www.usdoj.gov/atr/public/press_releases/2009/243414.htm; http://www.usdoj.gov/atr/public/press_releases/2009/245215.htm