U.S. Antitrust Law Developments in the Past Year

U.S. v. Microsoft

Attention in U.S. antitrust law in the past year has focused heavily on the trial of the monopolization case against Microsoft brought by the U.S. government. This is clearly one of the most potentially significant antitrust trials since the U.S.'s seminal antitrust legislation of the Sherman Act was passed a century ago. The relief which could be ordered in this case, if a violation is found, could have a remarkable impact on the future development of computer software and on access to the world-wide Web. It is the matter on the U.S. antitrust landscape which has been foremost in the minds of those interested in antitrust matters.

On May 18, 1998, the U.S. Department of Justice and 20 states filed two lawsuits against Microsoft in U.S. District Court alleging antitrust a variety of violations focusing principally on claims of monopolization. U.S. law does not forbid the creation or continuation of monopolies as such, but it does prohibit the creation or continuation of monopolies by unlawful means. This is called "monopolization". It also condemns attempted monopolization which occurs when one has not yet achieved monopoly power but has a dangerous probability of doing so unlawfully. The complaints allege that Microsoft unlawfully leveraged a monopoly in personal computer operating systems to gain control of browsers used for access to the Web. The complaints specifically allege that Microsoft methodically violated U.S. antitrust law by requiring, as a condition of licensing Microsoft products, that computer manufacturers use Microsoft software exclusively and include only the Microsoft icon on the computer display screen.

The suits also accuse Microsoft of a variety of other anticompetitive activities including illegal exclusionary agreements with others in the industry to keep them from distributing, promoting, buying or using products of Microsoft's competitors or from providing services or resources to Microsoft's competitors; illegally tying other Microsoft software products to its Windows operating system; attempting to induce Netscape (its principal browser competitor) to enter into an allegedly anticompetitive scheme whereby the two companies would divide the browser market and violating a prior consent decree with the U.S. government which Microsoft signed in 1995 and which prohibits conditional licensing agreements with manufacturers regarding Windows 95. The government alleges that through these illegal and anticompetitive practices, Microsoft has acquired monopoly power in the market for PC browser software in violation of the Sherman Act.

Microsoft filed general denials of the complaints. Trial commenced in October and is continuing. Microsoft's founder, Bill Gates, and other senior Microsoft employees and expert witnesses are generally considered to have had a difficult time under intense government cross-examination.

Nynex Corp. v. Discon Inc., decision of the U.S. Supreme Court on December 14, 1998.

In the Nynex case decided at the end of 1998, the U.S. Supreme Court issued a significant antitrust decision and its principal one of the year holding that the per se group boycott rule does not apply to the decision of a single customer to abandon one supplier in favor of another, even if the customer's intent is to participate in an unlawful scheme to deceive state regulators.

Discon, a supplier of equipment removal services who had done contract work for Nynex over a two-year period, alleged that Nynex and its subsidiaries conspired with a competing supplier to exclude Discon from the market. Reversing the Second Circuit decision of August 1996, the Court rejected the argument that "an agreement between two firms, even in a vertical relationship," may be characterized as a horizontal restraint of trade under § 1 of the Sherman Act. Instead, the Court found that the customer's alleged boycott constituted only a vertical agreement, which is not per se illegal under a prior decision by the Court in 1988.

Affirming the precedent that the per se rule has no application in the boycott context unless there is a horizontal agreement among direct competitors, the Court held that to allege a violation of § 1 of the Sherman Act with regard to a vertical agreement, the plaintiff must still prove harm to the competitive process, as distinguished from harm to the plaintiff as individual. The Court was particularly reticent to extend application of the per se rule to all cases that allege regulatory fraud for fear that the potential for plaintiffs to characterize all improper business behavior as antitrust violations would discourage buyers from exercising the freedom to switch suppliers.

Justice Department Actions late in 1998

In two significant actions in the latter part of 1998, the U.S. Department of Justice sued Visa and MasterCard from restricting competition in credit card networks and agreed to permit the huge AT&T/TCI acquisition to go through subject to a divestiture:

In Visa U.S.A., Inc., on October 7, 1998, the U.S. Department of Justice sued Visa and MasterCard in New York City, charging that joint control of the world's two largest credit cards by the same group of banks networks -- known in the industry as "duality" -- has restricted competition from competing credit card networks. The Justice Department charged that Visa and MasterCard violated the antitrust laws by placing authority for their competitive decisions in the hands of banks that have significant financial interests in both networks. The Justice Department claimed that Visa and MasterCard are associations owned, governed and operated by their governing banks, and that these banks have rejected competition initiatives that might lead consumers to switch from one association's brand of card to the other's.

In AT&T and TCI, at year end, 1998, the Justice Department allowed the $48 billion merger of AT&T Corp. and TeleCommunications, Inc. (TCI) to go through following the divestiture of TCI's interest in Sprint Corporation's mobile telephone service business. Under the terms of its settlement agreement with the Justice Department reached on December 30th, AT&T and TCI must transfer the Sprint PCS stock to an independent trustee before they close their merger. The agreement provides for the trustee to complete the sale within a period of approximately five years and for the preservation of AT&T's incentives to compete aggressively against Sprint during the transition period.

Boeing - McDonnell Douglas acquisition

Boeing acquired McDonnell Douglas in August 1997, after intense negotiations with the European Union and a near-trade war with Europe. One day before the European Commission was expected to formally reject the merger, Boeing made a significant concession which ultimately resulted in EU approval of the deal. The Boeing-McDonnell Douglas acquisition represented a clear source of friction between U.S. and European (and even Japanese) antitrust trade regulation specialists which is still being discussed a year and one-half later.

At the time of the planned acquisition, Boeing was reported to have 60 percent of the global commercial aircraft market, Airbus Industriale, 35 percent, and McDonnell Douglas had dropped to less than 5 percent from a nearly 20 percent share 10 years earlier.

The U.S.'s position was that the market shares of Boeing, McDonnell Douglas and Airbus clearly indicated that the merger would not affect the global commercial aircraft market and hence was not anti-competitive. Moreover, most of McDonnell Douglas' business was in military aircraft, an area in which Boeing was weak.

The U.S. Federal Trade Commission in its approval of the merger stated that McDonnell Douglas no longer constituted a meaningful competitive force in the commercial aircraft market. However, the Commission acknowledged that Boeing's exclusive long-term (20 years) sales contracts with American, Delta and Continental were "potentially troubling." In fact, it was these long term exclusive sales contracts which seemed most to trouble the EU. One day before the EU's formal rejection was anticipated, Boeing conceded on this point and the EU's approval followed.

Some members of the European Union remained bitter. France in particular criticized the "arrogant and confrontational attitude" of the United States in negotiations. Clearly, it was the view among antitrust regulators in other parts of the world that the U.S. antitrust authorities had sacrificed the merger principles they had long preached to let this merger through for political reasons. The U.S. regulators, however, maintained that their investigations showed that McDonnell Douglas' commercial business was failing and was not viable as a candidate for sale independent of the Boeing transaction and that Boeing has no presence in military aircraft, an area in which McDonnell Douglas had a significant presence.

It is instructive to compare the handling of this acquisition with the later handling of the military aircraft and systems proposed acquisition between Lockheed Martin and Northrup Grumman discussed below.

Lockheed Martin Drops Deal to Acquire Northrop Grumman

Unable to reach a settlement with the Justice Department, on August 22, 1998 Lockheed Martin Corporation terminated its merger agreement with Northrop Grumman Corp.

The proposed $11.6 billion merger was the largest ever challenged by federal officials. According to the complaint filed in March of 1998, the Justice Department opposed the merger on the grounds that it would reduce competition and innovation in essential defense systems and equipment.

Lockheed and Northrop currently compete aggressively in the manufacture of military systems and components. Seventy percent of Lockheed's 1997 approximately $28.1 billion in sales and eighty percent of Northrop's almost $9.2 billion in sales were made to the U.S. military. Together, the two companies are paid nearly 28 percent of the Defense Department's budget for procurement and research.

The Justice Department argued that the merger would eliminate the rivalry, and thus the incentive for innovation, between the only two defense contractors with experience producing radar-evading stealth craft, and among two of only three companies capable of serving private contractors for advance tactical and strategic aircraft, sonar systems used on submarines and surface ships and electronic warfare systems designed to protect pilots from missile attack.

Price Fixing Cases

The U.S. antitrust authorities remained active in 1998 in enforcing the criminal antitrust laws against price fixing. In several cases, they did so in coordinated investigations with European antitrust authorities. Thus, in UCAR International, Inc., following investigations by the U.S. Justice Department and the European Union, the Justice Department charged that UCAR participated in an international cartel to fix the price and allocate the value of graphite electrodes sold in the United States and elsewhere. In April 1998, UCAR International Inc. agreed to plead guilty to price fixing and to pay a fine of $110 million, the largest fine in antitrust history.

UCAR is the country's largest producer of graphite electrodes, which are used in the steel-making process, and one of the two biggest producers in the world. According to the Justice Department's charges, UCAR conspired with unnamed parties for at least five years, from July 1992, to increase and maintain the price of electrodes, and to suppress and eliminate competition by restricting access to certain graphite electrode manufacturing technologies. During the five-year period, the Justice Department estimates, sales of graphite electrodes in the U.S. were greater than $1.75 billion. The Justice Department charged that the conspiracy forced steel makers to pay noncompetitive, higher prices for graphite electrodes.

Anticompetitive activity in the graphite electrode industry has been the subject of ongoing criminal investigations. In February 1998, Showa Denko Carbon, Inc., another producer of graphite electrodes, pled guilty to charges similar to the UCAR charges and agreed to pay a fine of $29 million. The Carbide/Graphic Group, also in the industry, announced its acceptance into the Antitrust Division's Corporate Leniency Program, which allows a company to escape criminal prosecution if it voluntarily reports its involvement in a crime and meets certain other criteria.

The $110 million sanction to UCAR, however, is the highest antitrust fine ever imposed, even trumping the $100 million paid by Archer-Daniels-Midland Co. for price fixing in the food and feed additives markets. According to the statutory formula, violations of the Sherman Act carry a maximum fine of $10 million for a corporation. However, the fine may be increased to twice the gain of the conspirators in the crime or twice the loss suffered by the victims, if either of those amounts is greater than the statutory maximum.

In Cerestar Biproducts BV., Cerestar Biproducts, the Dutch subsidiary of the French agricultural business Eridania Beghim-Say SA agreed in June, 1998 to plead guilty to charges under § 1 of the Sherman Act that it conspired between November 1992 and April 1994 to fix prices and allocate market shares in the sale of citric acid. Cerestar agreed to pay a fine of $400,000, and a Cerestar executive named in the action agreed to pay $40,000 for his role. The Justice Department Antitrust Division's pursuit of international conspiracy cases has so far netted $400 million in criminal fines, in a period of just 20 months. The case against Cerestar is the fifth such case filed in the citric acid industry, and brings the total of fines from that industry alone to just over $106 million. Citric acid is a flavor additive and preservative produced from various sugars. It is a $1.2 billion a year industry worldwide.

In previous cases in the industry, Archer Daniels Midland was fined $30 million, as part of its $100 million fine for price fixing in the lysine and citric acid additive industries, Haarmann & Reimer Corp. was fined $50 million, with an additional $150,000 from one of its senior executives, F. Hoffman-LaRoche, Ltd. was fined $14 million, with an additional $150,000 for one of its former managing directors, and Jungbunzlauer International AG was fined $11 million, plus $150,000 from one of its executives.

In Fujisawa Pharmaceutical Co., Ltd., Fujisawa Pharmaceutical Co., Ltd., a Japanese company, was fined $20 million, and one of its executives fined $200,000, after pleading guilty in February, 1998 to charges by the Justice Department that it participated in a combination and conspiracy to suppress and eliminate competition by fixing the price and allocating the worldwide market for sodium gluconate during the period from August 1993 through June 1995. Sodium gluconate is organic chemical used as an industrial cleaning agent. It is a $50 million a year industry worldwide.

The Fujisawa case, filed in the U.S. District Court in San Francisco, was the fifth international conspiracy case filed by the Justice Department in the sodium gluconate industry. In 1997, the Department filed charges against two Dutch companies, Azko Nobel Chemicals BV and Glucona BV, and two of their executives. The companies were fined a total of $10 million, and the executives each received a fine of $100,000. In December 1997, the Department filed charges against a French company, Roquette Freres, and one of its executives, resulting in a $2.5 million fine against the company and a $50,000 fine against the executive.

In U.S. v. Eastman Chemical Co., the Justice Department's first criminal antitrust charge in the ongoing international investigation into price fixing in the sorbates industry, American chemical giant Eastman Chemical Company agreed in September, 1998 to plead guilty to charges that it violated § 1 of the Sherman Act by participating in an international price-fixing conspiracy. The agreement requires the company to pay an $11 million criminal fine for its activities.

The sorbates industry, which includes potassium sorbate and sorbic acid, has yearly worldwide sales of approximately $200 million. Sorbates are chemical preservatives used primarily as mold inhibitors in high-moisture and high-sugar foods such as cheese and other dairy products, baked goods, and other processed foods.

The Justice Department had charged that Eastman, through one or more of its employees, conspired with other unnamed sorbates producers to suppress and eliminate competition in the sorbates market from in or about January 1995 until in or about June 1997.

Pharmaceutical and Healthcare Industry Acquisitions and Cases

In the merger area, pharmaceutical acquisitions of major size have come fast and furious in the past year as has consolidation in the healthcare industry. The FTC has a separate section which specializes in pharmaceutical acquisitions and tends to focus very heavily on overlaps in the "pipeline" of products under development in Phase I, II and III of clinical trials. Because of patent protection on pharmaceuticals, the FTC is very concerned to assure that future as well as present overlaps in therapeutic features of pharmaceuticals are addressed in the merger review process.

The FTC also brought an unusual monopolization case in the pharmaceutical area at year-end 1998. In the Mylan action, the FTC asserted that a U.S. pharmaceutical company had obtained a monopoly of two generic drugs through exclusive licensing arrangements for the supply of the raw materials neceesary to produce the drugs with its only competitors for these products. This action is now pending in the U.S. district court in Washington, D.C.

In the Matter of Merck & Co., Inc. and Merck-Medco Managed Care, Merck and Co., Inc. and its subsidiary Merck-Medco Managed Care, LLC agreed in August, 1998 to settle FTC charges that Merck's 1993 acquisition of Medco Containment Services substantially lessened competition in the manufacture and sale of pharmaceutical products in violation of § 7 of the Clayton Act.

Merck is engaged in the development, production and sale of pharmaceutical products. Medco is in the business of providing pharmaceutical benefit management (PBM) services to corporations, insurance companies, labor unions, and other divisions of the healthcare industry. Medco is the nation's largest PBM. According to the FTC, Merck's acquisition of Medco was the first vertical integration of a PBM into a pharmaceutical manufacturer, although other pharmaceutical manufacturers and PBMs have joined together since.

The complaint filed by the FTC charged that Merck's acquisition violates § 7 of the Clayton Act and § 5 of the FTC Act, because it is likely to have the effect of (a) foreclosing products of manufacturers other than Merck from inclusion on Medco's formularies; (b) enhancing the chances for collusion and other anticompetitive conduct between Merck and Medco; (c) eliminating Medco's independent negotiating function with other manufacturers; (d) reducing other manufacturers' incentives for innovation in the drug market; and (e) increasing prices and decreasing quality for pharmaceutical products available to consumers.

Under the terms of the consent agreement, Merck-Medco would be required to maintain an "open formulary," which includes drugs selected and approved by an independent Pharmacy and Therapeutics Committee, and to make the availability of the open formulary known to anyone who currently has a PBM agreement with Medco, as well as to all prospective customers for a period of five years. Medco would be required, in addition, to accept all discounts, rebates or other concessions offered by competing manufacturers in connection with its listings on the formulary. The consent agreement also prohibits Merck and Medco from sharing proprietary or other non-public information they receive from one another's competitors.

Also in the health care area, Columbia/HCA Healthcare Corporation agreed in July, 1998 to pay a $2.5 million civil penalty to settle charges that it violated a 1995 FTC order. The 1995 order permitted Columbia/HCA to proceed with the largest hospital merger in U.S. history -- a $3 billion merger with Healthtrust, Inc. involving more than 280 hospitals nationwide. The FTC had opposed the merger on the grounds that it would lead to higher prices and reduced services in six different geographic areas. Under the terms of the FTC order, Columbia/HCA was to divest seven hospitals within nine months to entities approved by the Commission, to operate them in competition with Columbia/HCA, holding their assets and information separate pending divestiture. According to the FTC complaint, Columbia/HCA failed to meet the deadline for divestiture with respect to the Utah-based Davis Hospital and Medical Center and Pioneer Valley Hospital by four months, and failed to comply with the hold separate agreements for these hospitals.
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