Merger Enforcement - The WLF Legal Pulse

Report
Antitrust in the Second Obama
Administration
Janet L. McDavid
January 29, 2013, Washington Legal Foundation
Bipartisan Support for Antitrust Enforcement
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Broad consensus on role of antitrust enforcement in free market
economy
– The alternative is often broad regulation
Broad, bipartisan support for antitrust enforcement
But many in bar, academia, and business community believe that
enforcement at DOJ was lax during the Bush Administration
President Obama was critical of DOJ antitrust enforcement during the
2008 campaign.
So we expected changes in antitrust enforcement in the Obama
administration—did we get change, and what should we expect in the
next four years?
In his second inaugural address, President Obama said, “Together we
discovered that a free market only thrives when there are rules to ensure
competition and fair play.” So we should expect continued antitrust
activism.
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New Leadership at Both Agencies
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Leadership is very important to the direction of the antitrust agencies.
Christine Varney became the Assistant Attorney General in charge of the
Antitrust Division in April 2009. She left in August 2011, and was
succeeded by three Acting Assistant Attorneys General.
Bill Baer was confirmed as AAG on December 30, 2012, and took office
on January 3.
– When Bill was FTC Bureau Director, his tenure was marked by
aggressive challenges to mergers, such as Staples/Office Depot,
Exxon/Mobil, BP/Amoco.
– He also was aggressive in challenging exclusionary conduct, such as
the case against Toys R Us.
Bill retains three experienced deputies, Scott Hammond (criminal
enforcement), Renata Hesse, and Leslie Overton.
– He has two deputy vacancies to fill: economics and litigation
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New Leadership at Both Agencies
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Jon Leibowitz was designed FTC Chairman in March 2009. He is expected to
leave shortly, creating a vacancy that can be filled either by designating one of
the two Democratic Commissioners, or nominating a new Chairman.
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Two Democratic Commissioners, Edith Ramirez and Julie Brill, have been
aggressive but sensible enforcers.
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Julie Brill’s background was as a state consumer protection enforcer in
Vermont and North Carolina.
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Edith Ramirez’s background was as a litigation partner at Quinn Emanuel,
who had tried some antitrust cases.
There are two Republican Commissioners, Maureen Olhausen and Joshua
Wright.
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Olhausen has been cautious on enforcement issues since her appointment in
early 2012.
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Wright was a law professor whose writings have been highly critical of several
enforcement efforts.
FTC senior staff include Rich Feinstein as Director of the Bureau of Competition
and Howard Shelansky as the chief economist. Rich is expected to leave soon.
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Merger Enforcement
• President Obama’s 2008 campaign antitrust statement
pledged that he would “step up merger review activity.”
• Many surprised by some Bush DOJ merger clearances.
– Whirlpool/Maytag -- > 70% market share
– XM/Sirius – combined the only two satellite radio firms
– Beer mergers resulted in two firms with a combined > 80% market
share
– DOJ threatened to sue Google/Yahoo, but the deal was abandoned
when DOJ threatened lawsuit
• So we expected increased merger enforcement, especially
at DOJ in the Obama Administration, and we got it.
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Merger Enforcement—Antitrust Division
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AT&T/T-Mobile (Aug 2011): DOJ sued to block the $39 billion deal. The parties later
abandoned the transaction.
H&R Block Inc./TaxACT (Nov. 2011): DOJ sued to block H&R Block’s proposed acquisition of
TaxACT, in DOJ’s first litigated merger case since 2003. The court enjoined the proposed
merger “on the grounds that the merger violates the antitrust laws and will lead to an
anticompetitive duopoly.”
Blue Cross Blue Shield of Michigan/Physicians Health Plan of Mid-Michigan (Mar. 2010): Blue
Cross Blue Shield, the largest provider of commercial health insurance in Michigan, sought to
acquire its largest competitor. DOJ sued to block the deal, which was abandoned.
Ticketmaster Entertainment, Inc./Live Nation, Inc. (Jan. 2010): Ticketmaster, the largest
ticketing company, was allowed to merge with Live Nation, a promoter of live concerts, subject
to a settlement agreement involving divestiture and conduct remedies.
Comcast Corp./NBC Universal Inc. (Jan. 2011): DOJ allowed the Comcast/NBCU joint
venture to go forward subject to certain licensing, anti-retaliation, and Open Internet provisions.
Google Inc./ITA Software Inc. (Apr. 2011)—Google”s acquisition of ITA, a producer of airfare
pricing and shopping systems, was resolved through a consent decree involving conduct
remedies.
Verizon/Comcast (Aug. 2012): Joint venture between Verizon and Comcast to resell each
other’s services, and Verizon’s acquisition of wireless spectrum from cable companies,
resolved through consent decree with conduct remedies.
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Merger Enforcement--FTC
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Polypore International v. FTC: decision blocking merger affirmed on appeal.
ProMedica Health System, Inc./St. Luke’s Hospital (Jan. 2011): hospital merger
enjoined.
FTC litigated and lost three merger cases:
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FTC v. Lab Corporation of America: FTC failed to sustain its burden of proof; challenge
abandoned.
FTC v. Lundbeck, Inc.: FTC had failed to prove that the merging firms’ products were in
the same relevant product market.
FTC v. Phoebe-Putney Health Systems: court found FTC challenge barred by state
action doctrine; Supreme Court decision expected in the Spring.
Grifols/Talecris Biotherapeutics Holding Corp. (July 2011): consent order
requiring divestiture of a plant.
Hard Disk Drive Mergers (Western Digital/Hitachi; Seagate/Samsung) (March
2012): in two simultaneous deals in the same industry, the FTC and EU required
divestitures by Western Digital.
Graco Inc./ITW Finishing LLC (May 2012): FTC litigation dismissed after Graco
agreed to divestitures.
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Merger Enforcement—Revised Merger Guidelines
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The Antitrust Division and the FTC revised the Merger Guidelines in August
2010 to describe principles and methodologies the agencies use to assess
whether to challenge a merger or acquisition.
The new Guidelines were intended to reflect the agencies’ actual practices,
as well as advances in economic analysis.
New Guidelines continue to rely on economic principles and do not revive
populist policies of earlier eras
New Guidelines emphasize flexibility and contain a “tool-box” of
methodologies for analyzing horizontal mergers
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1992 Guidelines sought to develop precise, step-by-step framework for analyzing
horizontal mergers, relying principally on market shares and market concentration.
But since then, actual agency practice has been less rigid.
New Guidelines note that agencies will “apply a range of analytical tools” in
predicting the likely competitive effects of horizontal mergers.
New Guidelines acknowledge that agencies will “normally” define a market if they
proceed to litigation: “In any merger enforcement action, the Agencies will
normally identify one or more relevant markets in which the merger may
substantially lessen competition.” (Section 4.0)
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Merger Enforcement—Revised Merger Guidelines
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Key question is how to predict potential competitive effects arising from
merger
Evidence of adverse competitive effects is the first substantive discussion
in the new Guidelines
Earlier versions of Guidelines focused on risk of “coordinated effects” with
little discussion of other theories, but agencies in practice came to favor
unilateral effects
New Guidelines continue trend to focus on “unilateral effects”: merged
firm may raise prices post-merger because many customers will shift to
second product in response to a price increase
New Guidelines include numerous techniques for assessing the likelihood
of these effects
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One new technique involves assessing the “upward pricing pressure” by analyzing
• the tendency of consumers of one of the merging parties’ product to shift to the
second merging party’s product in response to a price increase
• the margins earned on the second party’s product
Critical loss analysis evaluates whether the merged firm is likely to find a price increase
profitable
Coordinated effects analysis also remain relevant.
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Merger Enforcement—Revised Merger Guidelines
• Efficiencies
– Same approach as prior version of Guidelines
– Efficiencies will rarely tip the scales in mergers involving high levels of
concentration
• New Guidelines do not herald radical changes; instead, they
reflect current agency practice
• New Guidelines illustrate the evolution in economic thinking
and agency practice since 1992
– Provide antitrust counsel with a better understanding of
what agencies actually do
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Antitrust Division Merger Remedies
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In 2011, the Division issued the Antitrust Division Policy Guide to Merger
Remedies.
The Division now considers conduct remedies, along with structural
ones, to be an effective method of resolving some competitive concerns.
Horizontal Mergers: The typical remedy is divestiture of assets.
Vertical Mergers: In vertical mergers, the Division will consider conduct
remedies that preserve the efficiencies of the merger but eliminate the
possibility of conduct that would adversely affect competition. The
Division may also consider structural remedies, particularly “when the
vertical integration is a small part of a larger deal.”
The newly created Office of the General Counsel is now tasked with
ensuring that defendants comply with Division decrees.
Remedies should be “carefully tailored” to address the competitive harms
threatened by mergers. Remedies must preserve competition, not
competitors, and derive from “the careful application of legal and
economic principles to the particular facts of a specific case.” Whether
conduct or structural remedies are appropriate will depend on the results
of a “fact-intensive” inquiry into the circumstances of the merger
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Merger Enforcement—Different Standards for Litigation
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The courts have held that the FTC bears a lower burden of proof to secure a
preliminary injunction in merger litigation than does DOJ
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DOJ must satisfy traditional standards to enjoin a merger.
D.C. Circuit in Whole Foods stated that the FTC is entitled to enjoin a merger if there
are “questions going to the merits so serious, substantial, difficult, and doubtful as to
make them fair grounds for thorough investigation” by the FTC, i.e. an FTC
administrative trial taking at least 12 months.
The District Court in FTC v. CCC held that if the FTC meets this standard, there is a
“presumption in favor of preliminary injunctive relief” so the case can be litigated on the
merits in an FTC administrative case.
The FTC seems willing to pursue administrative cases when it loses a preliminary
injunction.
The Antitrust Modernization Commission cautioned that “parties to a proposed merger
should receive comparable treatment and face similar burdens regardless whether the
FTC or the DOJ reviews their merger. A divergence undermines the public’s trust that
the antitrust agencies will review transactions efficiently and fairly.”
The AMC also recommended that Congress should amend Section 13(b) to specify that
the FTC is subject to the same standard for entry of the preliminary injunction as the
Antitrust Division.
The ABA Antitrust Section made similar recommendations.
Several deals have been abandoned following FTC challenges because the
parties could not keep the deal alive for an additional 12 months of administrative
litigation.
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Section 2 Enforcement
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Bush DOJ failed to bring a major dominant firm case in 8 years
DOJ and FTC held joint hearings on Section 2, and Bush DOJ subsequently
issued a report – without the FTC. Three FTC Commissioners criticized the
report.
In her first speech as AAG, Christine Varney withdrew the Section 2 Report
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It raised “too many hurdles” to government enforcement and counseled “extreme caution”
She believed enforcers and courts can “separate the wheat from the chaff” in identifying
predatory acts
The “disproportionality test” reflected “excessive concern with the risks of over-deterrence”
In 2011, DOJ filed its first Section 2 case, challenging a Texas hospital’s
contracts that maintained its market power by prohibiting insurers from
contracting with its competitors.
The FTC filed a dominant firm case against Intel charging that it violated Section
5 of the FTC Act through exclusive arrangements intended to limit the use of
competitive products. The case was settled.
The FTC launched a highly publicized Section 2 investigation of Google, which
was settled earlier this month with voluntary commitments by Google with respect
to licensing and search. Commissioner Rosch characterized the settlement as
follows: “after promising an elephant more than a year ago, the Commission
instead has brought forth a couple of mice.”
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Civil Conduct Investigations
• Both agencies have started several notable conduct investigations
and lawsuits
• DOJ is litigating a case against Apple and several book publishers
alleging a conspiracy to raise prices on e-books.
• DOJ is in litigation with American Express involving its agreements
with merchants.
• DOJ is in litigation with Blue Cross/Blue Shield of Michigan in a
case alleging that MFN clauses in its contracts with hospitals
violate Section 1.
• DOJ charged that technology firms agreed not to hire each others’
employees.
• The FTC signaled its intention to use Section 5 aggressively.
• The FTC has continued to pursue “reverse payment”
pharmaceutical settlements.
• The FTC conducted Section 8 director overlap investigations
involving Google and Apple.
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Conclusion
• In the past, change in antitrust enforcement when
administrations change has been at the margin.
• The margin has been much broader in the transition from the
Bush Antitrust Division to the Obama Antitrust Division.
• New leaders have worked to re-establish the Antitrust
Division as a champion of antitrust enforcement.
– In particular, recent AAGs have re-built the Antitrust
Division’s litigation capabilities.
• The FTC is continuing its record of vigorous enforcement.
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Same Administration, New Management:
What to Expect from DOJ and FTC:
Antitrust & Intellectual Property
Andrea Agathoklis Murino
Presentation to the Washington Legal Foundation
January 29, 2013
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Recent FTC and DOJ Activity in the IP Space
 Patent Acquisition Entities (PAEs)
 Standard Essential Patents (SEPs)
 Reverse Payment Pharma Settlements
 Why are these issues hard?
– There is an inherent tension between antitrust
law, which is designed to eliminate monopolies,
and IP law, which is designed to grant a limited
monopoly
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PAEs
 What is PAE?
– An entity that purchases patents from existing owners and
makes money through licensing or exerting its licensing
rights (a.k.a. litigation) against those already using the
patents
 PAEs present special problems in antitrust law
– “Supporters of the PAE business model say that it
facilitates the transfer of patent rights, rewards inventors
and funds ongoing research and development efforts.
Critics describe adverse effects on competition and
innovation, including increased costs and a lack of
technology transfer, ultimately taxing consumers and
industry.”
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FTC/DOJ Workshop on PAEs
(December 10, 2012)
 Well-attended by all affected constituencies
 Viewpoints shared ranged from:
– Innovation is harmed
PAEs typically file suit after a product has been in the
market for some time
Firms will remove products from the market to avoid
litigation; “extortion”
PAEs have little incentive to cross-license
– Innovation is helped
PAEs are “specialists” engaging in trade, a concept
economists generally favor
PAEs are superior monetizers
Patents are not themselves proof of innovation
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FTC/DOJ Workshop on PAEs
(December 10, 2012)
 Agencies clearly hungry for data and empirical evidence to
determine whether there is a problem and if so, the scale of
the problem
 Accepting comments until March 10, 2013
– Next steps for Agencies murky because of changes in
leadership but this is certainly a continuing area of
concern
 FTC use of Section 5 possible but also less likely with
Commr’s Ohlhausen and Wright in place
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SEPs
 What is a SEP?
– Patent(s) necessary to implement a recognized industry
standard (think: DVD players; wifi)
 SEPs most common in Standard Setting Organizations (SSOs)
– Most SSOs require owners of SEPs to make disclosures and
commit to license SEPs on fair, reasonable, and nondiscriminatory terms (FRAND or RAND)
 Unfortunately, these commitments do not always lead to peace
– What is fair? What is reasonable? Definitional issues pervade.
– Imprecise or vague terms can lead to “hold-ups,” raising costs
to rivals and foreclosing competition
 Parties seek injunctions or exclusion orders at International Trade
Commission (ITC) – the “venue” of choice
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Enforcement Activity in SEPs
 DOJ
– CPTN (April 2011)
DOJ required certain commitments from the parties
– Nortel/Apple/Rockstar Bidco (February 2012)
Cleared Nortel without any commitments
No market power for RIM and Microsoft
Apple already agreed to open source
– Google/Motorola (February 2012)
DOJ concluded that Google had a substantial share of mobile
OS market BUT this particular transaction would not enable
Google to hold up rivals; no commitments required
“[H]ow Google may exercise its patents in the future remains a
significant concern.”
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Enforcement Activity in SEPs
 FTC
– Revisited Google’s acquisition of Motorola (January 3, 2013)
Under a theory of Section 5 liability and in a 4-1 vote, ordered
Google to cease seeking injunctive relief based on
infringement of the FRAND-encumbered SEPs that Google
acquired through its purchase of Motorola, unless certain
criteria satisfied
Concern voiced that the order contains too many loopholes
Dissent suggests order violates Noerr-Pennington and is an
overreach
– Has also used Section 5 to reach SEPs in a merger investigation
into vehicle air conditioning systems led to SEP commitments in
Robert Bosch GmbH (November 2012) and in Negotiated Data
Solutions (2008)
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Enforcement Activity in SEPs
 DOJ/USPTO Statement on SEPs (January 8, 2013)
– Counsels the ITC to be careful about granting injunctions
or exclusion orders because it may harm the public
interest
– “Although we recommend caution in granting injunctions
or exclusion orders based on infringement of voluntary
F/RAND-encumbered patents essential to a standard,
DOJ and USPTO strongly support the protection of IP
rights…”
– Statement excluded the FTC and did not refer to the
Google SEP order
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Reverse Payment Pharma Settlements
 FTC focus for many years
 What is a reverse-payment settlement?
– Branded drug manufacturer reaches a settlement with a
possible generic entrant that includes a delay by the generic
competitor and some monetary consideration from the branded
manufacturer
 SCOTUS will hear argument on March 25, 2013 in FTC v. Watson
– Whether reverse-payment agreements are per se lawful unless
the underlying patent litigation was a sham or the patent was
obtained by fraud (as the 11th Circuit has held), or instead are
presumptively anticompetitive and unlawful (as the 3rd Circuit
has held)
Justice Alito recused
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