United States: Antitrust Update - Spring 2006

The Spring Update summarizes two recent and unanimous U.S. Supreme Court decisions on antitrust issues, one confirming the legality, in most cases, of pricing of products by joint ventures (Texaco Inc. v. Dagher), and the other rejecting the presumptive monopoly power of patents, thus harmonizing antitrust law with patent misuse law (Illinois Tool Works Inc. v. Independent Ink, Inc.).  The Spring Update also discusses a recent change to the U.K. merger control regime and new Competition Commission interim procedures.

In the first of two major antitrust cases the Supreme Court has decided this Term, the Court held that a joint venture's pricing of its own products - even products bearing the brand names of the joint venture parents - is not subject to the per se rule.

Between 1998 and 2002, Texaco Inc. and Shell Oil Co. collaborated in a joint venture known as Equilon Enterprises ("Equilon") to refine and sell gasoline in the western United States under the original Texaco and Shell Oil brands.  Texaco and Shell Oil pooled their refining and marketing resources into Equilon and shared the risks of and profits from Equilon's activities.  The FTC and several states approved the formation of Equilon subject to certain conditions, which did not include any restrictions on the pricing of Equilon gasoline.

A class of Texaco and Shell Oil service station owners brought suit, arguing that Equilon's single price for both Texaco and Shell Oil brand gasoline constituted a per se illegal activity under Section 1 of the Sherman Act.  In reversing the Ninth Circuit, the Supreme Court held that Equilon's setting of a single price was not per se illegal.  The Court found that Texaco and Shell Oil did not compete with one another in the relevant market - namely, the sale of gasoline to service stations in the western United States.  Instead, they participated in that market jointly through their investment in Equilon.  In the Court's view, that is no different than any two businesses combining their capital and sharing the opportunity for profit and the risk of loss.

The Court rejected the Ninth Circuit's application of the ancillary restraints doctrine.  That doctrine governs the validity of restrictions imposed by legitimate business collaboration on non-venture activities.  The Court held that the Equilon business practice challenged by plaintiffs involved the core activity of the joint venture itself - namely, the pricing of the very goods Equilon produced and sold.  And even if the doctrine were invoked, the Court held that Equilon's pricing policies were clearly ancillary to the sale of its own products.

Texaco Inc. v. Dagher, No. 04-805, ___ U.S. ___ (2006).

View the Texaco Opinion

In Illinois Tool Works Inc. v. Independent Ink, Inc., the Supreme Court overruled its earlier precedents that had presumed that a patent confers market power for purposes of antitrust tying claims, thus harmonizing antitrust and patent misuse law.

Illinois Tool Works manufactures printing systems with three components: (1) a patented impulse ink jet printhead; (2) a patented ink container; and (3) specially designed, but unpatented, ink.  Illinois Tool Works sells its systems to OEMs who manufacture printers.  The OEMs agree that they will purchase their ink exclusively from Illinois Tool Works and that neither they nor their customers will refill the patented containers with ink of any kind.

Independent Ink, Inc. developed an ink with the same chemical composition as the ink sold by Illinois Tool Works.  It brought a complaint alleging, among other things, that Illinois Tool Works had engaged in illegal tying and monopolization under Sections 1 and 2 of the Sherman Act.  The district court granted summary judgment to Illinois Tool Works, rejecting Independent Ink's argument that Illinois Tool Works had presumptive market power because of its patent on the printhead system.  The Federal Circuit reversed, noting the academic criticism of the market power presumption for patents, but following existing Supreme Court precedent.

The Supreme Court reversed the Federal Circuit, rejecting the argument that patents confer presumptive market power.  The Court traced the history of the market power presumption in its antitrust jurisprudence, which dates back to International Salt Co. v. United States, 332 U.S. 392 (1947).  That case relied upon earlier patent misuse cases, which, according to the Court, generally held that by tying the purchase of unpatented goods to the sale of a patented good, the patentee was "restraining competition."

However, in 1988, Congress amended the patent laws, and enacted 35 U.S.C. § 271(d)(5), which precludes a finding of patent misuse predicated upon tying unless, "in view of the circumstances, the patent owner has market power in the relevant market for the patent or patented product on which the license or sale is conditioned."  The Court wrote that Congress's amendment "certainly invites a reappraisal of the per se rule announced in International Salt."  "[G]iven the fact that the patent misuse doctrine provides the basis for the market power presumption," the Court wrote, "it would be anomalous to preserve the presumption after Congress has eliminated its foundation."  The Court also noted that its decision to reject the market power presumption "accords with the vast majority of academic literature on the subject."

Illinois Tool Works Inc. v. Independent Ink, Inc., No. 04-1329, ___ U.S. ___ (2006).

View the Illinois Tool Works Opinion

The Office of Fair Trading ("OFT") recently announced a change in procedure for the provision of informal advice and confidential guidance to the parties to a proposed merger transaction.¹  The OFT has stated that it will not accept requests for confidential guidance until future notice.  The same applies with regard to providing informal advice, although the OFT is still willing to consider pro bono cases (involving public bodies or private enterprises unable to afford external competition law advice) and other exceptional cases, as and when resources permit.

Previously, the OFT would, upon request, informally discuss competition concerns in prospective mergers, where they had not yet been publicized, with the parties to the transaction.  The OFT would then give its preliminary opinion on the merger.  The parties could also seek confidential guidance from the OFT before making the merger public.

Both the informal advice and confidential guidance were non-binding on the OFT.  Furthermore, the OFT provided its advice without seeking third party views.  Informal advice was usually given orally in a meeting between the OFT and the parties.  An application for confidential guidance, however, normally resulted in a formal written opinion from the OFT as to whether the merger would be likely to raise issues warranting reference to the Competition Commission ("CC") and, if relevant, whether these issues could potentially be resolved by undertakings in lieu.

This interim change in procedure has occurred because the OFT has found the review of mergers under the Enterprise Act of 2002 ("Enterprise Act") more onerous than it initially anticipated.  The OFT's workload per merger case has been higher than expected, as is the number of resource-intensive complex cases.  The OFT is reluctant to continue diverting resources from public domain merger cases to deal with informal advice and confidential guidance.  This change in policy is aimed at ensuring that the OFT "discharges its merger control duties properly."²

The OFT considers that following judgment in Office of Fair Trading and others v. IBA Health Ltd.,³ it has been harder to provide reliable informal advice.  The case concerns an appeal against the decision of the OFT not to refer a merger for Phase II investigation by the CC.  The Competition Appeals Tribunal ("CAT") quashed the OFT's decision on the basis that it was not satisfied that the OFT applied the correct test or that all material considerations had been taken into account.  This case caused the OFT to revise its threshold test for referrals to the CC downwards from a "significant prospect" to a "realistic prospect" that the merger will substantially lessen competition.

In addition, in the case of UniChem Ltd. v. Office of Fair Trading,⁴ the OFT was found to have erred in taking account of evidence from competitors before deciding not to refer a merger to the CC.  The merging parties were given negative confidential guidance, i.e., that the merger would be likely to be referred; however, at the formal stage, the OFT decided not to refer the merger to the CC.  The OFT has admitted that 22% of transactions referred to the CC under the Enterprise Act had previously received favourable or qualified favourable advice or confidential guidance.

As a result of such increased litigation and judicial review of the OFT's published decisions, the OFT has decided to divert its resources away from voluntary procedures so that it may concentrate on creating a more robust decision-making process.  The OFT wants to ensure that its decisions are less vulnerable to challenge.

The change in policy means that parties to a proposed transaction must now rely on self-assessment and specialist competition advice in order to assess and allocate risk.  For the OFT, since it has freed up resources and management time as a result of the policy change, it should be able to conduct a thorough and more detailed assessment of any competition concerns in cases that reach it.

Moving forward, the OFT will focus increasingly on the strength of the parties' reasoning with regard to classic indicators such as market shares, HHI indices, barriers to entry and buyer power, but also on the evidence, including contemporaneous documents, which support that reasoning.

On 21 February 2006, the CC published for consultation a revised version of its guidance on the use of interim measures pending final determination of merger references.  The consultation has just closed.⁵

The OFT can refer a merger to the CC for Phase II in-depth investigation under the Enterprise Act.  When this occurs, the CC may take interim measures to prevent the parties taking pre-emptive action that may prejudice the investigation or impede the ability of the CC to take remedial action:

• It may accept such interim undertakings from the parties as it sees fit.⁶

• It may adopt interim undertakings or orders made by the OFT in relation to completed mergers.⁷

• It may make an interim order prohibiting or restricting any pre-emptive actions, imposing obligations as to the carrying on of activities or the safeguarding of assets and appointing a person to conduct or supervise such activities.⁸

In addition, certain statutory provisions come into operation automatically on reference where there are no such interim measures in place:

• In the case of a completed merger, the merged parties are prohibited from taking steps to further integration.⁹

• In the case of an anticipated merger, there is a prohibition in dealing in shares in any company to which the reference relates.¹⁰

In a guidance note published in October 2004, the CC indicated that it will consider on a case-by-case basis whether the statutory protections are sufficient to prevent pre-emptive action.¹¹

In the case of completed or near completed mergers, the CC will normally expect to receive interim undertakings from the acquirer in a completed merger in order to clarify how a party will treat the acquired business pending the determination of a reference and to strengthen or supplement the statutory prohibition.

In the case of anticipated mergers, interim measures may be necessary in the case of assets purchases, or share purchases where there is a concern that assets may be transferred.

The CC has published an updated template for standard interim undertakings which would form the starting point for discussion with the parties.  This is the subject of an ongoing consultation.  This has been amended in light of the CC's experience with the use of interim measures and its current practice.¹²

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.