Antitrust & Trade Regulation Update

The European Court of First Instance (CFI) has dismissed an appeal brought by Duales System Deutschland GmbH (DSD) against two decisions of the European Commission finding that DSD abused its dominant position in the German market for the collection and recycling of packaging materials. The Commission ruled in 2001 that DSD had abused its dominant position when it charged the full fee for the use of its trademarked "Green Dot" label on materials that were collected and recycled by its competitors. The Commission applied the principle of "no service, no fee" and required DSD to cease charging a fee where the take-back and recovery obligations have been properly fulfilled by a third party. The Commission also ruled that existing service agreements between DSD and its waste collecting partners were exempt from the fee restrictions subject to the conditions that DSD allowed competing service providers to have unrestricted access to its waste collection infrastructure.

On appeal, the CFI upheld the Commission’s finding of abuse of dominance. The CFI reasoned that DSD’s selective marking requirement had the effect of dissuading manufacturers and distributors of packaging materials from using competing systems. The CFI further held, however, that DSD has the option "to collect an appropriate license fee for the sole use of the trademark."

Court of Justice Upholds Fine Against Britannia Alloys

The European Court of Justice has rejected the appeal brought by Britannia Alloys & Chemicals Ltd (Britannia) against the judgment of the CFI confirming the €3.37 million fine that the Commission had imposed on it for participating in a zinc phosphate cartel. In December 2001, the Commission fined six companies a total of €11.95 million for participating in a cartel between 1994 and 1998, through which cartel members fixed prices and allocated the market for zinc phosphate. Zinc phosphate is an anti-corrosion mineral pigment used in protective coating systems.

On appeal to the CFI, Britannia argued that the Commission had unfairly apportioned the fines to cartel members. Specifically, Britannia challenged the Commission calculation of the maximum fine it could receive because the Commission based its determination upon the company’s annual turnover in a year other than the one immediately preceding the decision. The CFI rejected this argument, and Britannia appealed to the Court of Justice. Addressing the company’s challenge before the CFI, the Court of Justice held that it was within the discretion of the Commission to select a year other than the year of the decision for determining the maximum applicable fine, particularly where, as in the case of Britannia, the party has no turnover in the year preceding the decision. The Court further held that in such cases the Commission has discretion to allocate unequal fines among cartel members.

The European Commission has authorized the proposed acquisition of Bertelsmann AG’s music publishing business Bertelsmann Music Group (BMG) by Universal Music (Universal). Universal is a leader in the music recording and music publishing industries. Concluding the in-depth investigation launched in March of this year, the Commission found that the merger as proposed threatened to harm competition in the market for music publishing rights for online applications. In light of the recent shift in power from the collecting societies to music publishers, the Commission feared that Universal would gain market power through the merger. Therefore, to obtain the Commission’s approval, Universal committed to divest several important catalogs that include Anglo-American copyrights and contracts with authors.

The Commission also has cleared the acquisition by VB Autobatterie GmbH (VB) of the automotive battery business of the FIAMM group. Both VB and FIAMM manufacture and supply automotive batteries bought by original equipment (OE) car and truck manufacturers, as well as by independent providers of repair services, wholesalers for automotive parts and supermarkets in the "independent aftermarket" (IAM). The Commission found that the transaction, as originally notified, would give VB a strong position both in the OE and IAM markets in Italy, Austria, the Czech Republic and Slovakia. To address these concerns, VB agreed to divest a portion of its manufacturing capacity and certain key FIAMM brands in the affected markets.

In a third recent clearance involving a divestiture condition, the Commission approved the proposed acquisition of First Choice, a UK travel services company, by rival TUI, which is active in both the tourism and shipping services markets. Both First Choice and TUI offer package tours, flights, travel agency services, car rental and cruises. The Commission found that the proposed transaction as initially notified would allow the parties to become the leading tour operator for short-haul package holidays and to have the largest nationwide network of travel agencies in Ireland. TUI therefore agreed to divest its Irish business, which operates under the "Budget Travel" brand.

The European Commission has issued Statements of Objections to several companies charged with participating in two separate price-fixing cartels. A Statement of Objections is a formal notice by the Commission, which informs the recipient of claims against them. A party receiving a Statement of Objections may respond to the Commission in writing, setting forth the facts relevant to its defense, and may also request an oral hearing. Following such procedures, the Commission may issue a decision as to whether the party’s conduct is compatible or not with the EC Treaty’s antitrust rules.

The Commission confirmed on May 8 that it had issued Statements of Objections to several companies regarding their alleged participation in a cartel for chloroprene rubber. Chloroprene rubber is a synthetic rubber that is mainly used in the manufacture of technical rubber parts including cables, hoses and power transmission belts, and in adhesives used in the manufacture of shoes and furniture.

The Commission also confirmed on June 1 that it had issued Statements of Objections to several companies active in the paraffin waxes industry. The Statements of Objections allege that the companies engaged in cartel activities in violation of Article 81 of the EC Treaty and Article 53 of the Agreement on the European Economic Area. Paraffin waxes are used in the manufacture of various products including candles and surfboards.

Regulators from more than 90 competition agencies, together with a select group of nongovernment advisers (NGAs) and other representatives from legal, business, economic, consumer and academic communities, converged in Moscow for the annual meeting of the International Competition Network (ICN). Launched in 2001, the ICN is a multinational body designed to promote consistency in competition policy and enforcement and to eliminate unnecessary procedural burdens affecting consumers and businesses. This year’s conference featured reports from the ICN’s working groups on mergers, competition policy implementation, unilateral conduct, and cartels. The conference also included presentations by key US regulators from both the FTC and DOJ.

Assistant attorney general in charge of the DOJ’s antitrust division, Thomas O. Barnett, announced plans for the ICN’s Merger Working Group to begin developing substantive guidelines for merger review. Three topics that Barnett announced will be considered in the coming year include: i) the efficacy of an agency’s merger review framework; ii) the use of presumptions and safe harbors in merger review; and iii) the analysis of market entry and expansion.

The ICN conference also showcased work by the ICN’s Unilateral Conduct Working Group (UCWG), which is co-chaired by the FTC’s international affairs director, Randolph Tritell, and the German competition authority or Bundeskartellamt. During the conference, the UCWG presented a draft report on enforcement of unilateral, anticompetitive conduct. The report includes chapters on the purpose of unilateral conduct laws, the assessment of dominance/substantial market power, and state-created monopolies, and reveals significant variations in enforcement policies among the 35 nations surveyed for the report.

Squire Sanders lawyer Shanker A. Singham was selected to participate in the ICN conference as a nongovernment advisor (NGA). A copy of the UCWG draft report and other materials from the conference may be downloaded from the ICN’s website: http://www.icn-moscow.org/page.php?id=7.

The JFTC announced on April 25, 2007 that it has established a research group to discuss whether to introduce a group litigation system into the Antimonopoly Act or the Premiums and Representations Act, with respect to claims for injunctions. Since May 11, 2007 three sessions have been held by the research group at the Japan Fair Trade Commission (JFTC) to discuss this issue.

According to Article 24 of the Antimonopoly Act, a person whose interests are infringed or are likely to be infringed by an act in violation of provisions of unfair trade practices by an entrepreneur or a trade association is entitled to demand the suspension or prevention of such infringement. However, under the Antimonopoly Act, claims for injunctive relief are limited to those filed by a single individual; injunction claims by groups or entities composed of more than one individual are not sanctioned by the Antimonopoly Act, and the Premiums and Representation Act does not provide for injunctive relief.

Thus far, the research group has primarily discussed issues such as the type of entity that should have injunction rights in group litigation (for example, consumer organizations or trade associations), the introduction of the group litigation system with respect to claims for damages, and the types of antitrust violations that should be subject to group litigation. The Research Group has not yet focused on whether group litigation should be introduced with respect to injunction claims.

The JFTC plans to publish a report later this year that summarizes the research group’s discussions.

The JFTC has released its annual report on the enforcement of the Antimonopoly Act of Japan for 2006. According to the report, the JFTC took legal action against 13 different violations of the Antimonopoly Act. Specifically, it issued surcharge payment orders or cease-and-desist orders against six instances of bid rigging, three price-fixing cartels and four unfair trade practices. In 2006, according to the report, the JFTC levied surcharges against 158 different companies, totaling approximately ¥9,200,006,367.

The report credits two amendments to the Antimonopoly Act with advances in Japan’s competition enforcement. According to the report, 105 applications for leniency have been filed with the JFTC since the leniency system was introduced with an amendment to the Antimonopoly Act in 2005. In addition, JFTC investigations resulted in two criminal accusations of bid rigging. Authority for JFTC to investigate suspected criminal violations of the Antimonopoly Act was also granted in 2005.

Venezuela’s Competition Authority has fined spirits company Diageo for violations of that country’s competition laws. The agency first investigated Diageo following complaints by rivals Distribuidora Glasgow, C.A. (Distribuidora) and Pernod Ricard Venezuela (Pernod) that Diageo had harmed competition through use of exclusionary contracts with respect to the marketing and distribution of its brands of spirits and liquors. According to complaints, Diageo used sponsorship contracts to require bars and restaurants to stock its iced vodka and whisky brands. After a two-year legal battle that unearthed additional competition complaints, the Venezuela Competition Authority fined Diageo US$3.2 million, the second largest such fine in the Authority’s history.

In addition to the fine against Diageo, the Competition Authority ruled that certain clauses in Diageo’s distribution contracts were null and void and issued a cease-and-desist order that will allow smaller firms to compete for promotional contracts. Also, as a result of its investigation into the industry, the Competition Authority fined Pernod US$1.31 million for its own exclusionary contracts.

Distribuidora, which emerged from the investigation unscathed, was represented by Squire Sanders Caracas lawyers Hernando J. Diaz-Candia, Bernardo Weininger and Arghemar Perez.

The US Supreme Court, in a 5-4 decision, has overturned its longstanding holding that vertical minimum resale price maintenance agreements are per se illegal. The case, Leegin Creative Leather Products, Inc. v. PSKS, Inc., __ S.Ct. __, No. 06-480, 2007 WL 1835892 (June 28, 2007), reverses the 96-year precedent established by the high court’s decision in Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911), in which the Court held that it is per se illegal under Section 1 of the Sherman Act, 15 U.S.C. §1, for a manufacturer to agree with its distributors to set minimum resale prices.

In Leegin, the owner of a Texas retail boutique, Kay’s Kloset, filed suit in the US District Court for the Eastern District of Texas after a supplier (Leegin) refused to continue supplying the boutique with its popular line of high-end leather goods and accessories. Leegin terminated its relationship with Kay’s when it discovered that Kay’s was discounting its products up to 20 percent below the suggested retail prices. Leegin’s official pricing policy, which it provided to its retailers, was to refuse to sell to retailers that did not honor suggested prices.

The District Court, in a decision upheld by the Court of Appeals for the Fifth Circuit, relied upon Dr. Miles in holding that Leegin had entered into a per se illegal vertical minimum resale price agreement, and therefore precluded Leegin from introducing at trial expert testimony about procompetitive efficiencies achieved through its pricing policy. The Supreme Court reversed and overturned Dr. Miles, holding vertical minimum resale price agreements are properly examined under the rule of reason, whereby courts consider the procompetitive effects of a challenged restraint in determining its overall effect upon competition.

Justice Kennedy, writing for the majority, noted that "economics literature is replete with procompetitive justifications for a manufacturer’s use of resale price maintenance" including: (i) stimulating interbrand competition by reducing intrabrand competition; (ii) eliminating free-riding by retailers that undersell rivals by offering fewer point-of-sale services; (iii) facilitating market entry by new firms and brands; and (iv) increasing interbrand competition by encouraging retailer services. The Court also pointed out the potential harms to competition that are posed by resale price maintenance agreements including: (i) facilitating manufacturer cartels and retailer cartels; (ii) forestalling innovation in distribution; and (iii) allowing manufacturers to pressure retailers to boycott products of smaller rivals.

Following this decision, manufacturers and their wholesalers and distributors will enjoy broader latitude to enter into agreements governing the minimum prices at which goods may be resold. Such agreements have not, however, been made per se lawful by this case. Instead, they still may be challenged under the rule of reason. Therefore, care still must be taken in negotiating vertical pricing agreements, particularly by manufacturers with dominant market shares that grant them market power. It is also important to note that the case changes per se treatment only of vertical pricing agreements (between a manufacturer and its distributors); horizontal pricing agreements between competing firms remain per se unlawful and will continue to be prosecuted as criminal offenses.

The US Supreme Court, in a second important antitrust case this term, has raised the bar for plaintiffs alleging antitrust conspiracy claims under Section 1 of the Sherman Act. In its recently released decision in Bell Atlantic v. Twombly, __ S.Ct. __ (May 21, 2007), the Court held that to allege an antitrust conspiracy plaintiffs must state "allegations plausibly suggesting (not merely consistent with)" concerted acts.

The case involved allegations that the nation’s regional telephone providers, including Verizon Communications Inc., BellSouth Corporation, SBC Communications, Inc. and Qwest Communications International, Inc., agreed not to compete with one another across their traditional geographic service boundaries. The plaintiffs, who represent a class of affected subscribers, alleged that the providers conspired to maintain their regional monopolies by agreeing to refrain from competing with one another, and to prevent entry by upstart providers that sought access to their networks.

The complaint was originally dismissed by the US District Court for the Southern District of New York, on grounds that the plaintiffs failed to allege any "plus factors" that if proved would establish more than mere "conscious parallelism" among the incumbent local exchange carriers or ILECs. Conscious parallelism alone is not a violation of the Sherman Act. The Court of Appeals for the Second Circuit reversed, holding the plaintiffs needed only to allege facts sufficient to "include conspiracy among the realm of ‘plausible’ possibilities in order to survive a motion to dismiss."

Reversing, a seven member majority of the Supreme Court held that to survive a motion to dismiss, antitrust plaintiffs must allege more than mere parallel conduct among competitors. In an antitrust conspiracy case, according to the Court, the plaintiff must allege facts that include enough "factual matter (taken as true)" to provide a "plausible grounds to infer an agreement." Parallel conduct, according to the Court, "must be placed in a context that raises a suggestion of a preceding agreement, not merely parallel conduct that could just as well be independent action."

The precise level of detail in which conspiracy claims must now be alleged remains unclear after Twombly. Plaintiffs’ counsel should take note, however, of the Court’s observation in a footnote that the plaintiffs had failed to point to a specific time, place or person involved in the alleged conspiracy. It is clear, however, that plaintiffs may no longer rely on the oft-cited language of the Court’s 1957 decision in Conley v. Gibson, which stated that allegations of antitrust conspiracy would not be dismissed unless "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Overruling the standard articulated in Conley, the majority in Twombly noted, "after puzzling the profession for 50 years, this famous observation has earned its retirement."

The US Federal Trade Commission (FTC) has moved to block the proposed US$670 million dollar takeover of the organic supermarket chain Wild Oats Markets, Inc. by rival Whole Foods Market, Inc. In a complaint filed with the US District Court for the District of Columbia, the FTC alleged that the merger as proposed would substantially reduce competition, in violation of Section 5 of the FTC Act and Section 7 of the Clayton Act.

Whole Foods is the nation’s leading organic supermarket chain, with 195 stores in the United States, Canada and United Kingdom, and 2006 annual revenues of approximately US$5.6 billion. Its largest and long-time competitor, Wild Oats, operates 110 stores in the United States and Canada, with US$1.2 billion in annual sales. According to the FTC’s complaint, in regional markets where the two overlap, "Whole Foods and Wild Oats are each other’s closest substitute and compete in quality and price." Should the merger be permitted, the FTC alleges, "Whole Foods likely would be able to raise prices unilaterally, to the detriment of customers of premium natural and organic supermarkets." The FTC further alleges that new entry in the market for premium natural and organic foods would not be timely, likely or sufficient to replace the competition lost due to the merger.

Much of the evidence referenced in the FTC’s complaint is drawn from an email written by Whole Foods CEO John Mackey to the company’s board members, in which the executive promised that the transaction would "eliminate forever" the possibility that anyone else could create a national competitor in the natural and organic grocery business, and would "avoid nasty price wars" in several cities where the two companies compete. Mackey has taken the unusual step of responding extensively to the FTC’s challenge in his blog, in which he argues that the statements in his e-mail are merely "macho posturing" taken out of context. In any event, the case demonstrates the importance of taking great care when drafting documents – including emails – that could be reviewed by antitrust authorities.

Over strenuous objections from the Bush administration, the US House of Representatives has passed – by a 345-72 vote – a bill that would make the Organization of Petroleum Exporting Countries (OPEC) subject to US antitrust laws. A companion bill (S.879) has been passed by the Senate Judiciary Committee but has not yet been reviewed by the full Senate. OPEC supplies two-thirds of the world’s oil reserves and over 40 percent of the world’s production, and 70 percent of the oil traded internationally.

The No Oil Producing Exporting Cartel Act of 2007 (NOPEC), which was introduced in both chambers of Congress, would amend the Sherman Act by adding a clause that would allow the US Department of Justice (DOJ) to prosecute countries that are suspected of conspiring to fix prices for oil. The NOPEC bill also confirms the jurisdiction of the US courts to decide antitrust cases against OPEC member nations and others by eliminating their immunity under the Foreign Sovereign Immunities Act. Such immunity was established in a 1979 US District Court decision which held that OPEC’s pricing decisions were essentially "governmental" acts of state (as opposed to "commercial" acts of state) and were thus beyond the jurisdictional reach of US courts. NOPEC would override the court’s decision, clarifying that such acts are not protected under sovereign immunity.

Vowing to veto any NOPEC legislation, the Bush administration has been outspoken in its opposition to the NOPEC bill. In a statement to House leadership, President Bush warned that the bill "has the potential to lead to oil supply disruptions and an escalation in the price of gasoline, natural gas, home heating oil, and other sources of energy." President Bush further predicted that NOPEC would "likely spur retaliatory action against American interests in [NOPEC] countries and lead to a reduction in oil available to US refiners."

The US Senate on June 29 passed by unanimous voice vote a bill (S. 1610) to reform the process by which the multi-agency Committee on Foreign Investment in the United States (CFIUS) reviews foreign acquisitions of US companies or assets for national security concerns pursuant to the Exon-Florio provision. The bill is similar to a measure approved by the House in February. Congress is expected to resolve the minor variations between the bills and send a final version to the President for approval, possibly before the August congressional recess.

Both versions of the bill would establish the CFIUS panel by statute and augment its reviews of foreign investments by mandating second-stage reviews of transactions involving foreign-government ownership. The bills also would expand the definition of reviewable transactions to include deals relating to homeland security or "critical infrastructure." They further would formalize the role of the national intelligence director in CFIUS reviews, require higher-level approvals within the CFIUS member agencies and impose reporting requirements to Congress for reviewed transactions.

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