FTC Approves Bosch's Acquisition of SPX
On November 26, 2012, the Federal Trade Commission (“FTC”) announced that it will allow Robert Bosch GmbH (“Bosch”) to acquire SPX Service Solutions, U.S. LLC (“SPX”) after Bosch entered into a settlement agreement that resolves the FTC’s allegations that Bosch’s acquisition of SPX, as originally proposed, would have been anticompetitive. In addition, Bosch and the FTC entered into a settlement agreement resolving anticompetitive conduct that occurred prior to the announcement of the acquisition.
The FTC alleged that the manufacture and sale of air conditioning recycling, recovery, and recharge (“ACRRR”) devices for motor vehicle air conditioning systems are a relevant product market. ACRRRs are stand-alone pieces of equipment used by automotive technicians to remove refrigerant from a vehicle’s air conditioning system, store the refrigerant while the air conditioning system is being serviced, recycle the refrigerant back into the system, and recharge the air conditioning system. ACRRRs prevent refrigerant gas from leaking into the atmosphere during the repair process. Devices that only extract refrigerant from air conditioning systems but do not recycle or recharge them are not cost-effective alternatives because they do not store or dispose of extracted refrigerant as required by EPA regulations.
Bosch acquired RTI Technologies, Inc. in 2010. The Bosch and RTI brands account for about 10% of ACRRR sales, while SPX’s sales amount to approximately 80% of all ACRRR sales in the United States. With a combined 90% market share, the FTC alleged that Bosch would have a virtual monopoly in ACRRR devices if the transaction were approved without conditions.
Besides the obvious horizontal overlap, the FTC was concerned about SPX’s pre-transaction conduct that allegedly harmed competition under Section 5 of the FTC Act. The FTC claims that it uncovered evidence that SPX holds certain potentially standard-essential patents (“SEPs”) necessary for implementing two SAE International ACRRR industry standards. Evidently, SAE International adopted the two standards while SPX was a member of a committee responsible for developing the standards. SAE International’s rules required working group members to disclose any patents that would be essential to the practice of a standard being developed, and to offer a license to such patents on either royalty-free or fair, reasonable, and non-discriminatory (“FRAND”) terms. After the standards were adopted, SPX acknowledged that it held patents that were potentially essential to both standards and committed to license them under FRAND terms. The FTC alleged that SPX violated its commitment to license key SEPs on FRAND terms to its licensees by continuing to seek injunctions against licensees of those SEPs. The FTC believes that SPX’s violation of its contractual obligation harmed competition in the manufacture of ACRRRs and should be considered an unfair method of competition under Section 5 of the FTC Act.
After a ten month investigation, the FTC and Bosch agreed to a settlement that would allow the transaction to proceed. Under the settlement agreement, Bosch must sell the RTI Brand to Mahle Clevitte, Inc. along with all the assets necessary to operate Bosch’s current U.S. ACRRR business, including RTI’s operations, manufacturing plant, contracts, employees, confidential business information and inventory. In addition, Bosch is required to license, royalty-free, certain SPX patents that may be essential to the practice of two industry standards, to Mahle Clevitte.
To resolve the Section 5 violation, the settlement agreement requires Bosch to grant licenses of key patents to competing manufacturers that need the use of the SEPs to manufacture ACRRR devices. Bosch also agrees to abandon SPX’s lawsuits for injunctive relief against SPX’s licensees. In addition to the SEP concern, the FTC required Bosch to stop its restrictive exclusive dealing arrangements with wholesale distributors and independent service technicians, and to agree not to enter into such agreements for the next 10 years. The provision prohibiting exclusive arrangements will allow entry and existing competitors to have access to wholesalers and service providers to assemble repair networks that ACRRR customers can use as alternatives in the future. The commissioners approved the controversial settlement agreement by a 3-2 vote.
Dissenting Commissioner Statement
While Commissioner Rosch was silent as to why he dissented, Commissioner Olhausen provided a dissenting statement. Commissioner Ohlhausen is in favor of the merger remedy; however, she disagrees with the use of Section 5 of the FTC Act to justify the portion of the settlement agreement that relates to what she describes as a breach of an implied contract term. Commissioner Olhausen believes that even if SPX breached its licensing commitment, SPX’s conduct does not amount to unfair competition under Section 5 of the FTC Act. Moreover, Commissioner Olhausen indicates that the FTC should have a little more “regulatory humility” given that the ITC and federal courts are considering these same issues related to SEPs. Finally, Commissioner Olhausen criticizes this enforcement action because she does not believe that it provides guidance to the business community on what business conduct may constitute an unfair method of competition under Section 5 of the FTC Act.
This enforcement action is noteworthy because the consent agreement not only includes a structural remedy that resolves the anticompetitive concerns related to the merger, but it also includes a conduct remedy related to a violation of Section 5 of the FTC Act. While the FTC’s requirement that Bosch sell off a business to allow its purchase of SPX is normal, the FTC’s requirement that Bosch stop SPX’s prior practice of suing for injunctions against other companies using SEPs that SPX agreed to license on FRAND terms is not. The majority of the FTC commissioners are sending a message to patent holders that seek injunctive relief against licensees of their FRAND-encumbered SEPs that the FTC can and will challenge that conduct as an unfair method of competition under Section 5 of the FTC Act. In addition to the SEP issue, the FTC also used the merger investigation to obtain another conduct remedy related to exclusive dealing arrangements. Therefore, this enforcement action can be interpreted as further evidence that the FTC is expanding its authority under Section 5 of the FTC Act and that the FTC may take action against alleged conduct violations during a merger review.