On July 20, 2011, Express Scripts entered into an agreement to acquire Medco for approximately $29 billion. After the deal was announced, the FTC issued second requests to the parties to evaluate the competitive effects of the transaction. The FTC considered whether the merger would result in higher prices to plans sponsors, whether the merger might increase the merged entity's bargaining power with pharmacies, and whether the merger might harm consumers of specialty pharmaceuticals for patients with rare, complex or chronic conditions.
After an eight month investigation, the FTC closed the investigation without any action or conditions. The Commission vote on the motion to close the investigation was 3-1, with Commissioner Brill dissenting and issuing a separate statement. Commissioners Rosch and Ramirez and Chairman Leibowitz issued a closing statement on behalf of the Commission. The vote on the motion to issue the Statement of the Commission was 3-0-1, with Commissioner Brill abstaining.
Opposition
Groups such as the National Association of Chain Drug Stores (“NACDS”) and the National Community Pharmacists Association (“NCPA”) criticized the FTC’s decision to close the investigation, alleging that the merger will lead to fewer choices, higher prescription drug costs and diminished competition in the community pharmacy and PBM markets. The NACDS and NCPA, along with several retail pharmacies, filed a law suit in Pennsylvania federal court to block the transaction. However, the lawsuit was filed too late to prevent Express Scripts and Medco from consummating the transaction. The NACDS and NCPA were extremely vocal throughout the FTC's investigation.
Commission Statement
In its statement to close the investigation, the Commission explained that the PBM services market is competitive. The statement indicates that there are numerous PBM competitors who are expanding and winning business from the three largest PBMs. The statement explains that even though the Express Scripts/Medco deal combines two of the three largest PBMs in teh United States, the transaction is not likely to harm competition because the merging parties are not particularly close competitors, the PBM services market is not conducive to coordinated interaction, and there is little risk of the merged company exercising monopsony power.
A number of facts suggest that the merger will not result in anticompetitive effects. First, Medco lost one third of its business in the last year. Second, Express Scripts and Medco are not each other’s closest competitor. Indeed, the Commission explained that the parties’ documents and bid data analysis indicated that they had different customer bases, and diversion rates between Express Scripts and Medco were “substantially lower than the market shares would predict.” Moreover, the dated showed that CVS has won customers from Medco, but, there was little evidence that demonstrated that Express Scripts won customers from Medco or that Medco was winning customers from Express Scripts. Third, the Commission pointed to growing competition from health plan PBMs and stand alone PBMs. During the investigation, United HealthCare, Medco’s largest client, announced that it was dropping Medco and entering the PBM space as a formidable competitor and PBM service provider. The FTC also identified two standalone PBMs such as Catalyst and SXC as having recent success winning significant employer accounts. The Commission pointed out that these PBMs usually compete by trying to differentiate themselves from CVS, Express Scripts, and Medco by emphasizing a transparent pricing model, providing more individualized account management support, and offering customized PBM offerings. Fourth, the Commission stated that a coordinated interaction theory is not viable because CVS as a pharmacy retailer has different incentives other PBMs and smaller PBMs do not have the incentive to take part in any collusive efforts.
Dissent
Commissioner Brill described the merger as an industry "game changer" that creates a "merger to duopoly" between the merged ESI/Medco and CVS Caremark. She claimed that the transaction should have been blocked under both unilateral effects and a coordinated interaction theories. In short, she believed that the totality of the evidence including the market structure, data collected by the FTC, the lack of efficiencies, the fact that Medco was poised to be a maverick in the industry, and the lack of any firm capable of entering and replicating the competition lost by the transaction all tilted in favor of blocking the transaction.
Observations
The decision to close the investigation is noteworthy because it demonstrates that the FTC will focus on the facts and the competitive effects analysis rather than complaints made by opponents to a particular transaction. In the face of a great deal of vocal opposition and fierce lobbying efforts by opponents to the deal, the FTC’s decision to close its investigation and not to challenge the merger was done with a great deal of thought. Rather than to succumb to political pressure and even what the Commission viewed as an initial concern that the merger between two of the three largest PBMs might harm competition, the Commission and the staff relied on the evidence gathered during its lengthy investigation. Even though an announcement of a merger of two of the three major players in a particular industry may raise eyebrows at the FTC, the FTC staff will keep an open mind when it reviews internal company documents, market analysis and other evidence that parties to a merger may provide to the staff reviewing the deal. The decision also further demonstrates the value of merger parties taking an engaged and proactive approach to the merger review process rather than engaging in a confrontational approach with the staff.
Andre Barlow
(202) 589-1834
abarlow@dbmlawgroup.com
Melody Cheung
(202) 589-1834
mcheung@dbmlawgroup.com
Additionally, the FTC proposed to amend attorney disciplinary rules in Part 4 to provide more guidance on the type of conduct that may warrant disciplinary action and introduced processes for investigating and adjudicating allegations of attorney misconduct, issuing attorney reprimands, and suspending attorneys that have been disbarred.
Notably, Commissioner Rosch opposed the proposed changes, issuing a partial concurrence-partial dissent. Specifically, Commissioner Rosch approved the modernization of the Rules but criticized that the proposed changes lack two important reforms: mandatory compulsory process in all full-phase investigations and regular reports on the status of pending investigations to all Commissioners (not just the Chairman).
The Federal Register Notice is available at: http://ftc.gov/os/2012/01/120113part2and4frn.pdf
Melody Cheung
(202) 589-1834
mcheung@dbmlawgroup.com
In a separate statement, Commissioner Rosch listed several reasons for seeking Supreme Court review. He remarked that antitrust law failed to protect the most vulnerable of consumers, premature babies with congenital heart defects, when the courts allowed Lundbeck to charge whatever the market, that is, “desperate, frightened families” can bear. He argued that the district court committed an error of law and ignored basic economic principles by focusing only on cross-price elasticity of demand, to the erroneous exclusion of non-price considerations. He also argued that such an error by the district court allowed an economic expert’s opinion to trump undisputed findings of fact made by the court itself, allowing the court to ignore the parties’ own business documents, which showed that Lundbeck advantaged NeoProfen and disadvantaged Indocin in the marketplace. Moreover, Commissioner Rosch criticized the court’s failure to consider a hypothetical market, a common tool in merger analysis to postulate alternatives in which the merger did not occur.
The Commission took into account a number of factors and reasons for not seeking review in this case. As it stands, there are some negative implications for FTC reviews of pharmaceutical and biotech deals. The Eight Circuit decision now stands and it may result in more aggressive pharmaceutical merger activity. Pharmaceutical and biotech firms may not be so willing to enter into consent agreements requiring divestitures or walk away from the government’s threat of challenge given the Lundbeck decision. The other commissioners, however, must have reasoned that a loss at the Supreme Court would have made it even more difficult for the FTC to challenge pharmaceutical and biotech deals in the future.
Melody Cheung
(202) 589-1834
mcheung@dbmlawgroup.com
Judge Chappell’s decision concluded that the deal would eliminate competition in the Toledo, Ohio area for general acute care inpatient hospital services (the relevant market), as well as give ProMedica bargaining power with commercial health plans, which would ultimately result in higher rates for customers who pay for insurance coverage.
ProMedica argued that market responses would provide a competitive constraint after the acquisition of St. Luke’s, and that the combination would lead to increased efficiency that would outweigh the anticompetitive effects of the acquisition. It also argued that the deal should be permitted because St. Luke’s was a weakened competitor in recent years. Judge Chappell rejected both arguments.
Judge Chappell also rejected ProMedica’s request for an alternative remedy based on remedies the FTC required in Evanston Northwestern Healthcare’s 2007 acquisition of a nearby hospital. Like in the Evanstan case, ProMedica proposed that it be permitted to to continue to own St. Luke’s, but while erecting a “firewalled” negotiation team to negotiate and administer health care contracts exclusively for St. Luke’s independently of ProMedica. Because of the hold separate in place, Judge Chappell stated that there were differences in the two cases that allowed him to conclude that Promedica’s acquired assets were far less integrated compared to the Evanston case.
Indeed, Judge Chappell stated: “the evidence does not demonstrate, as it did in Evanston, that divestiture in this case would be ‘complex, lengthy and expensive process.’” He further stated: “here, ‘it is relatively clear that the unwinding of a hospital merger would be unlikely to involve substantial costs, [and] all else being equal, the commission likely would select divestiture as the remedy.’” Therefore, a divestiture was appropriate in ProMedica.
By requiring ProMedica to sell St. Luke’s to an approved buyer and to provide transitional services for one year to St. Luke’s, the order is designed to restore competition as it existed before the acquisition. The order also requires that ProMedica ensure that St. Luke’s remains viable until the divestiture.
Melody Cheung
(202) 589-1834
mcheung@dbmlawgroup.com
As part of its investigation, the Commission issued a subpoena requiring Church & Dwight to produce documents on its sale and distribution of condoms, accompanied by a civil investigative demand (“CID”) seeking information about cost, pricing, production and sales of its condoms in the U.S. and Canada. The subpoena provided that all responses shall be produced “…in complete form, unredacted unless privileged.” Church & Dwight turned over documents with information related to condom sales only with information about other products redacted, and the Company petitioned the Commission to limit or quash the subpoena and CID. The Commission denied the petition and sought enforcement of the subpoena in the district court.
The main dispute was whether the scope of the FTC’s inquiry extends to Church & Dwight’s products other than condoms. The district court found that that information to be “reasonably relevant” to the FTC’s investigation and not “unduly burdensome,” and granted the petition for enforcement.
On appeal to the United States Court of Appeals for the District of Columbia Circuit, Church & Dwight argued that (1) the district court did not interpret the scope of the resolution; (2) the district court failed to describe the materials sought in the subpoena and the CID; and (3) in determining relevancy, the district court required that the materials sought be plausibly, not reasonably, relevant to the Commission’s investigation (a lower threshold standard). Church & Dwight argued that in doing so, the district court departed from the legal standard in deciding whether the subpoena should be enforced. Furthermore, Church & Dwight argued that even if the district court had applied the correct standard of “reasonably relevant”, the disputed materials were not reasonably relevant to the investigation.
In its opinion, the Court of Appeals heavily addressed the first claim. The Court of Appeals asserted that the district court did not fail to interpret the resolution; it merely did not interpret the scope of the resolution as narrowly as Church & Dwight would have wanted. The Court of Appeals stated that “a district court must enforce a federal agency’s investigative subpoena if the information sought is ‘reasonably relevant’ or …‘not plainly incompetent or irrelevant to any lawful purpose of the agency’ and not ‘unduly burdensome’ to produce.” (quoting FTC v. Texaco, 555 F.2d 862, 876 n.29 (D.C. Cir. 1977)). Furthermore, according to the D.C. Circuit, “[T]he validity of Commission subpoenas is to be measured against the purposes stated in the resolution…” (quoting FTC v. Carter, 636 F.2d 781, 789 (D.C. Cir. 1980)). Relying on precedent, the D.C. Circuit stated that the boundary of the investigation may be defined quite generally, and that broadly stated resolutions are “not uncommon in the investigative process” (see Texaco, 555 F.2d at 874). The Commission argued that other products might play a role in Church & Dwight’s exclusionary practices, such as bundling and tying sales. The D.C. Circuit agreed that an investigation of bundling of rebates on condoms and other types of products in order to sustain a monopoly in the market for condoms is within the condemnation of the Sherman Act. See LePage’s Inc. v. 3M, 324 F.3d 141 (3d Cir. 2003). Church & Dwight argued that had the Commission sought to pursue a bundling theory, it would have specifically requested information on other products. The D.C. Circuit did not accept this argument, stating that the court “…does not require the Commission to seek in one document request all the information it might need in order successfully to establish a violation at trial” (at 8). The D.C. Circuit applied the Third Circuit decision in LePage’s Inc. v. 3M, reasoning that because Church & Dwight condoms and other products are sold in the Third Circuit, the Commission may lawfully investigate a violation of the law there. Accordingly, the court held that the FTC’s Resolution’s scope is lawful, and that it is lawful to investigate bundled discounts for condoms along with other products.
In response to the second claim, the D.C. Circuit rejected Church & Dwight’s assertion that the district court never described the materials sought in the subpoena, namely, information on the non-condom products that were redacted by the Company. The D.C. Circuit found that the district court did describe the disputed materials as “information from the documents [the Company] produce[d] regarding proprietary and confidential information on non-condom products…” FTC v. Church & Dwight Co., 747 F. Supp. 2d 3, 8 (D.D.C. 2010).
As for the third claim that the district court committed a legal and factual error in its finding of relevance, the D.C. Circuit refuted both arguments. Church & Dwight argued that Texaco demanded a “reasonable relevance” standard, while the district court applied mere “plausibility”, based on the district court’s statement that “[I]t is entirely plausible that information [concerning other products] appearing in the same document … would itself be relevant to the investigation.” The D.C. Circuit found that the correct legal standard, which states that the “requested materials … be reasonably relevant to the investigation…” is not inconsistent with the district court’s statement. With regard to the claim of factual error, the D.C. Circuit found Church & Dwight’s argument that Texaco requires the district court to independently review the information sought and “articulate the reasons underlying a finding of relevancy” to be erroneous, and as stated in Intervention Submission, it is Church & Dwight’s burden to show that information is irrelevant to a Commission investigation. Additionally, the D.C. Circuit found it obvious in the Commission’s Resolution that products other than condoms are relevant to the investigation, and it was not the district court’s responsibility to “belabor the obvious.”
In conclusion, all three of Church & Dwight’s claims failed before the Court of Appeals and the district court’s order granting enforcement of the Commission’s subpoena and CID was affirmed. The DC Circuit Court of Appeals deferred substantially to the Commission and the Commission’s expertise. Only in patently clear cases where the agency lacks the jurisdiction it seeks to assert is a Court of Appeals likely to rule against the FTC, particularly issues relating to discovery. This outcome serves as a warning to legal counsel representing companies that are the target of an antitrust investigation. The best way to deal with the government is not to quash a subpoena or a CID rather it is to negotiate with the investigative staff. Indeed, most CIDs are written in boilerplate form, with the expectation that the FTC’s staff attorneys will negotiate the scope with the target’s lawyers. In light of the D.C. Circuit’s decision, companies that are recipients of CIDs and their lawyers should cooperate with the staff as this is the most effective way to minimize the burden of a government investigation rather than to challenge the FTC in court.
Melody Cheung
(202) 589-1834
mcheung@dbmlawgroup.com
Andre Barlow
(202) 589-1834
abarlow@dbmlawgroup.com
(i) the combined annual global turnover of all businesses exceeds RMB 10 billion and the annual domestic (China) turnover of at least two businesses involved each exceeds RMB 400 million; or
(ii) the combined annual domestic turnover of all businesses involved exceeds RMB 2 billion and the annual domestic turnover of at least two businesses involved each exceeds RMB 400 million.
Discovery of Unreported Deals
Once MOFCOM acquires information about a “suspicious transaction,” it will start an initial investigation. This information can be reported by any channel, whether from the public or from an entity, opening the door for whistleblowers to report information. MOFCOM is required to keep the identity of the whistleblower secret. In the case that the whistleblower provides a written complaint complete with facts and evidence, MOFCOM is obligated to initiate an investigation. However, allowing whistleblower action carries the potential for abuse among competitors.
Generally, once the decision is made to initiate an investigation based on preliminary facts indicating that the transaction should have been reported, MOFCOM will open a file and notify the parties. Then, the parties must report back within thirty days, submitting information establishing that (i) it is a concentration which (ii) meets the reporting thresholds and (iii) that the transaction has been implemented and has not been reported. MOFCOM then determines that either the transaction should have been notified and initiate an in-depth investigation, or decide not to further investigate. Once a determination is made that the transaction should have been reported, the parties under investigation must suspend the transaction. The in-depth investigation basically consists of the ordinary MOFCOM merger review procedures. Once the parties have submitted all required information, the clock begins to run and the investigation can last up to 180 days.
Sanctions
The penalties in the Provisional Measures mirror those stated in the Anti-Monopoly Law of the People’s Republic of China (“AML”). The maximum fine that can be imposed for failing to file a reportable transaction is RMB 500,000 (around USD 80,000). Non-monetary penalties include an order to cease the transaction, divestiture of the shares or assets involved, transfer of the business, and any other measure necessary to restore parties back to their positions before the transaction. The Provisional Measures add that the level of sanctions will depend on the duration and extent of the violation, suggesting that a competitive effects assessment would factor into the investigation. However, it is unclear what level of violation would warrant a complete unwinding of the transaction. This (apparently intentional) lack of clarity is noteworthy because it provides a significant deterrence for businesses that used to get by without reporting deals. Importantly, MOFCOM also has the discretion to publish its findings at the close of an investigation, threatening a company’s public image, another strong deterrence measure.
Conclusion
The Provisional Measures add potency to MOFCOM’s enforcement of the AML which has been in force for over three years. They provide more clear and specific procedural rules for investigations. In contrast with the past where foreign investors and domestic companies considered not filing a reportable deal an acceptable risk, they now face a real danger of public embarrassment, fines, divestiture, or even unwinding.
Melody Cheung
(202) 589-1834
mcheung@dbmlawgroup.com
This case involves the wholesale distribution of pool products in the swimming pool industry, which had an estimated value of $3 billion in 2010. Manufacturers depend on distributors to sell the products, while distributors allow manufacturers to operate their factories year-round by purchasing large quantities of pool products throughout the year, despite the seasonal nature of the pool industry. In turn, distributors extend credit and provide quick delivery of pool products to thousands of retailers, most of which are “mom-and-pop” businesses that don’t have the resources to purchase directly from manufacturers. There are about 100 manufacturers of pool products but only three major manufacturers produce the full range of pool products. These three manufacturers collectively occupy over 50% of sales. To be successful, it is critical that a distributor sell the products of at least one of these three major manufacturers. PoolCorp is the world’s largest distributor of pool products used in the construction, renovation, repair, service, and maintenance of residential and commercial swimming pools. The FTC concluded that PoolCorp's market share exceeded 80% in some areas and that Pool Corp accounted for 30% to 50% of most pool supply manufacturers' sales, making it by far their largest customer. The FTC alleged that PoolCorp, therefore, has substantial market power (the power to exclude competition).
PoolCorp’s Alleged Conduct
The FTC’s administrative complaint contends that in 2002, PoolCorp acquired and eliminated it’s only competition in the Baton Rouge, Louisiana area. The FTC alleged that PoolCorp abused its market power by using the clout derived from this market power to prevent its suppliers from selling pool supplies to distributors that were trying to enter the market. In 2003, a new competing distributor emerged in the Baton Rouge area. PoolCorp allegedly responded by notifying all major manufacturers that it would stop dealing with any manufacturer that sold products to the new distributor. Furthermore, the FTC asserts that it threatened to terminate purchase and sales not only in Baton Rouge, but across the country. Such a threat posed significant enough of a loss to be catastrophic to even major manufacturers, a risk that could not be offset by a new entrant. As a result, the three most critical manufacturers refused to deal with the new entrant, which subsequently went out of business in 2005. PoolCorp allegedly used similar exclusionary practices in other local markets with the purpose of excluding new rivals and maintaining its monopoly power in local markets.
According to the FTC, by implementing an exclusionary policy that threatened manufacturers with contract termination if they also supplied new distributors, PoolCorp foreclosed new distributors from obtaining pool products from manufacturers that represented over 70% of all pool product sales, thus impeding market entry by new distributors. The FTC alleged the following anticompetitive effects: (1) increased prices and reduced output of pool products; (2) impeded PoolCorp’s rivals from entering or expanding their sales in the wholesale distribution market; and (3) reduced the choice of suppliers available to retailers.
The Order
The proposed Order contained in the Consent Agreement prohibits PoolCorp from: (1) conditioning PoolCorp’s sale or purchase of pool products, or a manufacturer’s membership in PoolCorp’s preferred vendor program on the manufacturer’s refusal to sell products to any other distributor other than PoolCorp; (2) pressuring manufacturers to refrain from or limit their sales to other distributors; and (3) discriminating or retaliating against a manufacturer for selling or intending to sell pool products to other distributors.
Statements of Commissioners
The Commission vote approving the settlement and consent order was 3-1 with a dissenting statement issued from Commissioner J. Thomas Rosch. The approving Commissioners concluded that PoolCorp had monopoly power in many local distribution markets and that PoolCorp’s threats to pool product manufacturers that it would no longer distribute their products if a manufacturer sold to a new distributor was harmful to competition. Consequently, suppliers/manufacturers, despite their preference to maintain a broad distribution network declined to add distributors because they feared retribution from PoolCorp. This strategy significantly increased a new entrant’s costs of obtaining pool products. Furthermore, such actions to foreclose new entrants from conducting their pool product distribution business had no legitimate justification, and the Commissioners assessed consumer harm because new entrants were prevented from providing a competitive restraint to PoolCorp’s monopoly prices, and were prevented from providing high quality service to retailers, so ultimately, consumers had fewer choices and were forced to pay higher prices for pool products.
Dissenting Statement
Commissioner Rosch argues that there was insufficient evidence that an antitrust violation occurred and that the alleged threats to manufacturers from PoolCorp were not even successful. In his estimation, the evidence showed that PoolCorp’s demands were not honored by manufacturers, who instead, made unilateral decisions not to supply new entrants for legitimate reasons (i.e., the new distributor was not desirable to the supplier because it did not have adequate facilities, a successful operational history, or favorable credit history). Rosch argues against entering a consent decree due to lack of evidence establishing causation between PoolCorp’s alleged threats and action taken by manufacturers, coupled with legitimate and plausible explanations for manufacturer decisions not to sell to new distributors. He also argues that no de novo entrants were actually excluded, and that there was no evidence of anticompetitive effects or consumer injury (such as price increases or service degradation), thus accepting a consent decree would not be in the public interest.
Conclusion
Despite the dissent, this case is noteworthy because it provides more insight into the way the Commission applies Section 5 of the FTC Act. Section 5 is broader and more encompassing than the Sherman or Clayton Acts, and is meant to cover conduct violating the spirit of the antitrust laws. The settlement agreement is important because the use of Section 5 signals that the FTC is becoming more enforcement oriented and is willing to extend beyond the antitrust laws despite the past twenty years or so of court precedent which has narrowed private antitrust enforcement. The settlement agreement indicates that the Commission will continue to actively consider whether it may be appropriate to exercise its full Congressional authority under Section 5. This means that cases like PoolCorp, which might not have enough evidence to successfully litigate under the Sherman Act or, are still likely to be enforced by the FTC under a broader unfair competition law. Accordingly, the willingness of the FTC to bring cases under Section 5 means that antitrust advice based solely on the Sherman Act are no longer sufficient because the FTC may investigate and take action against conduct that may not violate the Sherman Act. As the PoolCorp case demonstrates, the FTC’s expansive view of Section 5 requires companies with significant market power to review their antitrust compliance programs. Companies should be aware that using their market clout to exclude rivals from the market place could lead to unwanted government investigations. Although many exclusive supply agreements may be legal, when favorable terms negotiated with a supplier foreclose the buyer's rivals from competing, especially when the buyer has market power, there is a risk of government investigations and litigation. Therefore, companies in these situations should seek experienced legal counsel.
Melody Cheung
(202) 589-1834
mcheung@dbmlawgroup.com
Andre Barlow
(202) 589-1834
abarlow@dbmlawgroup.com
Policy Lessons from AT&T: Antitrust law remains powerful and relevant in combating anti-competitive activity and for preserving macroeconomic efficiency. Despite powerful lobbying efforts by large tech companies such as AT&T, the DOJ Antitrust Division remains relatively independent from political pressure. Moreover, Stelzer maintains that government regulation in a high-tech economy remains relevant, contrary to some critics of antitrust policy who say that “what was good for the days of steel-making and a brawn-driven economy is bad for a high-tech, brain-driven economy.”
Traditional Antitrust Concerns Remain Relevant: Stelzer elaborates on this assertion by stating that antitrust laws are needed for preventing the abuse of market dominance now more than ever. He argues that competition among firms breeds innovation, lowers prices and elevates productivity and living standards. Moreover, in Stelzer’s opinion, anticompetitive acts are harder to distinguish from competitive tactics in today’s economy, and such distinctions should be made on a case-by-case basis, suggesting that competition policy is still needed.
Competition Beats Regulation: Stelzer maintains that although regulatory supervision is preferable as a check on monopolies, such regulation outlives its usefulness. When changes in technology force a shift in the economics of the regulated industry that enables competition. He contends that the government should be present to prevent the accumulation of monopoly power through checks on mergers and anticompetitive tactics, but stop where regulation chokes innovation. He reasons that when replacing “imperfect regulation by imperfect competition” in certain industries, consumers benefited significantly.
The Social Consequences of Antitrust Policy: Though there are some people (whether those in government, those considered as “old money” or businessmen) who are opposed to competition policy because it lowers barriers to entry, competition policy is vital to ensuring that start ups created by entrepreneurs are able to prosper. The report notes that competition policy creates a relative ease of entry that spurs economic and social mobility which prevents class warfare prevalent in other nations.
Antitrust in High-Tech Industries: The report lays out concerns that must be considered as antitrust policy is applied to the high tech industry. Is the market definition process a reliable indicator of anti-competitive behavior? While the author recognizes the arguments against relying on defining the relevant market, he does see some value in it. The author notes that when considering market share in industries prone to rapid technological change, (although difficult) it may be beneficial to place more focus on future market shares rather than existing market shares, particularly in the technology industry. To be more specific, Stelzer argues that if companies like Google and Apple grow at their targeted rate, they will eventually have to make acquisitions that either complement or expand their products and offerings. An analysis based on these projected growth rates may indicate whether these acquisitions will encourage innovation or create barriers to entry.
Hauwa Otori
(202) 589-1834
hotori@dbmlawgroup.com
Melody Cheung
(202) 589-1834
mcheung@dbmlawgroup.com
The FTAIA limits enforcement of U.S. antitrust laws in situations where there are no clear effects on U.S. consumers. The Act aims to regulate foreign trade or commerce with foreign nations via a three-step test: (1) Did the conduct involve U.S. import trade or import commerce? (2) If not, does the conduct involve trade with foreign nations? and (3) If the conduct involves trade with foreign nations, does it have a “direct, substantial, and reasonably foreseeable effect” on the U.S. market?
In this class action suit, two groups of plaintiffs similarly alleged general and specifics examples of how the seven main competitors in the potash industry engaged in parallel business conduct in three foreign markets (Brazil, China, and India), which ultimately adversely affected those who directly or indirectly purchased potash products in the United States. The plaintiffs alleged that from 2003-2008, potash prices in the United States increased by roughly 600% as a result of an agreement by the defendants to jointly restrict output and to increase prices as exemplified by parallel business conduct in these foreign markets. The plaintiffs dismissed any notions that this price increase may be attributed to rising production costs or increased demand because the demand fell for much of the period, and the defendants had excess capacity.
Plaintiffs further argued that as global demand for potash declined during the second half of 2005, the defendants “jointly restricted” the output of potash to maintain an artificially high price. For instance, in the last two months of 2005, after defendant company Potash Corporation of Saskatchewan (“PCS”) announced the shutdown of three of its mines, which removed 1.34 million tons from the market, co-defendant The Mosaic Company (“Mosaic”) also announced a temporary 200,000 ton reduction in potash production. Based on this pronouncement and other similar events, the plaintiffs contended that “had the market truly been competitive, defendants would have the incentive to increase, not suspend, production to take advantage of their competitor’s reduced output and thus gain market share.”
The defendants moved to dismiss the Sherman Act claim based on the Federal Rules of Civil Procedure Rule 12(b)(1) and Rule 12(b)(6) for lack of subject-matter jurisdiction under the FTAIA and for failure to state a claim upon which relief could be granted. The defendants argued that the FTAIA barred the court from having subject-matter jurisdiction over this case. Additionally, the defendants argued that the plaintiffs’ complaint did not plausibly state an antitrust claim under the pleading standard in Twombly and Iqbal and must be dismissed under Rule 12(b)(6).
Seventh Circuit Court’s Analysis: “Import Commerce Exception” v. Direct-Effects Exception
The court reasoned that the threshold issue concerned the applicability of the FTAIA rather than the broader issue of whether the complaint sufficiently met the Twombly and Iqbal standards. In applying the FTAIA to the facts alleged in the complaint, the Seventh Circuit found that the district court erred in reasoning that a “tight nexus” existed between the alleged illegal conduct and the defendants’ import activities because the defendants imported potash into the United States and were accused of conspiring to fix the price of potash globally. Rather, the Seventh Circuit noted that there is a distinction between conduct that “‘involves’ import commerce and conduct that ‘directly, substantially, and foreseeably’ affects such commerce.” Further, the court explained that the “import commerce” exception and the “direct effects” exception must be analyzed separately and not be conflated.
The direct-effects exception applies in cases where foreign anticompetitive conduct has a “direct, substantial, and reasonably foreseeable effect” on the U.S. domestic or import commerce regardless of whether the conduct actually “involved” the U.S. import market. In other words, was the defendants’ alleged anticompetitive behavior directed at an import market?
Because of the dearth of case law interpreting the statute, the Seventh Circuit relied on the Ninth Circuit’s analysis of a similar term in the Foreign Sovereign Immunities Act. The Ninth Circuit explained the term “direct” as “an effect [that] cannot be direct[ed] where it depends on . . . uncertain intervening developments.” As a result, the court concluded that the complaint did not contain sufficient factual content to plead a plausible “direct, substantial, and reasonably foreseeable” connection between the alleged foreign anticompetitive activity and the domestic potash market and dismissed the case.
Lessons Learned
From the presented facts, the plaintiffs attempted to show an independent and distinct antitrust injury in the United States by highlighting the approximately 600% price increase of potash in the U.S. market. The plaintiffs sought to provide additional facts only by explaining the general characteristics of the potash industry that lent itself to making agreements to conspire. This information was supplemented with a focus on the Brazilian, Chinese, and Indian markets to show that potash prices in these foreign markets served as “benchmarks” for potash sales in the United States. Though the plaintiffs pointed to an independent and distinct antitrust injury in the U.S., the complaint was nevertheless dismissed.
The court reasoned that the plaintiffs made both general and specific factual allegations, they did not tie these facts back to the antitrust injury suffered by the United States. For instance, the plaintiffs highlighted supply and pricing activities in Brazil. After JSC International Potash Company (“IPC”) announced a price increase in Brazil, Canpotex Ltd. (the joint export marketing and distribution company of potash jointly owned by PCS and Mosaic) followed suit shortly thereafter. Based on the opinion, the plaintiffs did not tie this specific instance to a direct impact to the United States or explain how it could have reasonably impacted the U.S. potash market. Rather, the plaintiffs merely stated the facts and left the court to make the connection itself.
While it is true that this new standard may be difficult to reach without discovery, future plaintiffs alleging similar antitrust violations under the FTAIA may find it advantageous to ensure that the complaint contains specific facts that directly connect the effects of global antitrust misconduct to U.S. injury. Taking this extra step could aid the process of successfully meeting the FTAIA and Twombly/Iqbal standards.
Hauwa Otori
(202) 589-1834
hotori@dbmlawgroup.com
BBU and Sara Lee are, respectively, the first and third largest bakers and sellers of sliced fresh bread in the United States. They are among the four largest sellers in the 8 relevant geographic markets named in the Department’s complaint. In 2009, BBU, which owns Bimbo, Arnold, Brownberry, Oroweat, Mrs. Baird’s, Stroehmann, Freihofer, and Weber’s brands, totaled around $3.9 billion in sales. Aside from the Sarah Lee Brand Family, Sarah Lee also owns EarthGrains, Milton’s, Mother’s, Grandma Sycamore’s, Rainbo, San Luis Sourdough, Old Home, and Holsom, and totaled $2.1 billion in sales in 2010. In its complaint, the DOJ estimates that in the event of a successful acquisition, BBU would have a dominant share at the following percentages in the following 8 geographic regions: 63% in San Diego, 59% in Sacramento, 58% in Los Angeles, 56% in San Francisco, 52% in Omaha, 53% in Oklahoma City, 52% in Kansas City, and 56% in Harrisburg/Scranton.
Under the Proposed Final Judgment, the Defendants must divest their licenses to use certain brands and associated assets to acquirers that are capable of competing in the manufacture and sale of sliced bread in each geographic market. In the California geographic markets, the Defendants must divest the “Sara Lee Family” brands and EarthGrains; in Harrisburg/Scranton, the Defendants must divest Holsum and Milano brands; in Kansas City they must divest Earthgrains and Mrs. Baird’s; in Omaha they must divest EarthGrains and Healthy Choice; and in Oklahoma City they must divest the EarthGrains brand.
The sale of Sara Lee’s North American fresh bakery business to BBU was concluded on November 7, 2011 for $709 million.
Melody Cheung
(202) 589-1834
mcheung@dbmlawgroup.com
Leniency procedures are the center of the fight against practices that restrict competition. Cartels can be fined and eliminated because one of its members brings enough information and evidence to the competition authorities in exchange for leniency or a reduced fine. A recent judgment of the European Court of Justice (“ECJ”), analyzed in this text, ruled that national laws that allow this disclosure of information are possible.
While competition rules are still mainly enforced by the Commission and National Competition Authorities (“NCA”), private enforcement of competition rules through damage claims has been making a way for itself. The European Commission dreams of a world where people adversely affected by infringements of (European) competition law can easily claim damages and thus contribute to the effective enforcement of competition rules.
Private enforcement of competition rules
There is a steady increase of “victims” of infringements of European antitrust rules that are using private enforcement of national liability law to obtain damages for infringements of competition rules. Imposing the fine is no longer the end, but the beginning. There are usually three elements a claimant needs to prove when claiming damages: fault, damage and causality. In private enforcement of competition rules, claimants try to argue that the fact that a fine was imposed by competition authorities proves that there was a “fault” that caused “damage” and that there is ‘causality’ between those two. The fine proves fault.
Pfleiderer v the Bundeskartellamt
Pfleiderer is a German company that started civil actions for damages for the excessive cost it had to pay for purchasing from a cartel of manufacturers. Pfleiderer was a purchaser of décor paper and special paper for the surface treatment of engineered wood and one of the world’s three leading manufacturers of engineered wood, surface finished products and laminate flooring. It purchased goods with a value in excess of EUR 60 million in 2005-2008 from manufacturers that were penalized in 2008 for infringing Art.101 of the Treaty on the Functioning of the European Union (“TFEU”), which prohibits agreements of undertaking and decisions of associations of undertakings that restrict or impede competition.
In the context of preparing that civil action, the company submitted an application to the Bundeskartellamt (the German antitrust authority) on February 26, 2008 seeking full access to the file relating to the imposition of fines. When the Bundeskartellamt replied with documents from which all identifying information had been removed, Pfleiderer expressly requested access to all the materials in the file, including documents relating to the leniency application. When the Bundeskartellamt (partly) rejected that request, Pfleiderer brought an action before the local court of Bonn challenging that decision.
The court of Bonn was inclined to order access to the material in the file, which the applicant for leniency had made available to the NCA, as well as to the incriminating material and evidence collected. According to the court, various interests had to be weighed to determine the extent of the right of access, which is restricted to documents required for the purpose of substantiating a claim for damages.
This exposure would be more than potentially problematic for the effectiveness of the leniency program the Bundeskartellamt had started. If the program were to work effectively or even work at all, the company ready to give evidence of a cartel to which itself is part of has to be certain that the information is strictly confidential. If it however is faced with the possibility of incriminating information being disclosed to a third party wishing to start civil actions for damages, it will most likely not go to the competition authorities at all.
The local court of Bonn stated that while it was inclined to make that decision, it could run counter to EU law, particularly its obligation of sincere cooperation with EU institutions and Art.11-12 of Regulation 1/2003, which provide for a close cooperation and the mutual exchange of information between the Commission and the NCA in proceedings for enforcement competition rules where those proceedings fall within the scope of EU law. The court of Bonn raised the question whether it was necessary to deny access to information gathered in a leniency program within the framework of imposing fines for infringing competition rules to third parties in order to ensure the effectiveness and proper functioning of the competition provisions. The ECJ found that there was no binding EU law on this matter as it was ultimately the national court that weighed the various interests involved and decided on a case-by-case basis if national law allowed the disclosure of such information.
Effect of the preliminary ruling in Pfleiderer…
Pfleiderer can have a big effect on the possibility of private enforcement of competition rules, depending on the national court that is addressed. Things are thus looking promising in the UK and the Netherlands, as their national liability laws allow judges to consider a fine imposed by competition authorities as proof of “fault” and give a stronger position to claimants looking to bring a civil action. This ECJ judgment enables “victims” of cartels to substantiate their civil actions against all participants of the restriction on competition.
As a result, undertakings looking for a way out of a cartel can now approach the competition authorities and request leniency or reduced fines in exchange for enough information and evidence to impose fines on the other cartel members and eliminate the restriction on competition a cartel poses. But if these undertakings are faced with the possibility that their, often incriminating, information and evidence may be disclosed to people bringing civil actions against all cartel members, they will not be as eager to bring such information to the authorities.
The ECJ’s main argument was that it was settled case law that any individual had the right to claim damages for loss caused to him by conduct which is liable to restrict or distort competition (C-453/99 Courage and Crehan, C-295/04 to C-298/04 Manfredi and Others) and that the existence of such a right strengthened the working of the community competition rules. Such rights, according to the Court, discourage agreements or practices liable to restrict or distort competition. From that point of view, actions for damages before national courts could make a significant contribution to the maintenance of effective competition in the EU instead of nullifying it.
The Court’s reasoning is based on the assumption that such a right to information strengthens civil actions for damages. This right would deter undertakings from forming cartels in the first place because there would be no way out anymore when the fear of getting caught becomes real. Once a company under investigation provides the information to the competition authorities, the information might be disclosed to victims of the cartel’s behavior.
… not as bad as it seems
National courts have to decide if national liability laws are applicable to a situation in which a person seeking damages is asking access to information and evidence gathered in a national leniency procedure. It is only natural that the ECJ left it to the national courts to decide. Neither the provisions of the TFEU on competition nor Regulation 1/2003 lay down common rules on the right of access to documents relating to a leniency procedure, which have been voluntarily submitted to the NCA pursuant to a national leniency program. The Commission notices on Cooperation within the Network of Competition Authorities and on Immunity from Fines and Reduction of Fines in Cartel Cases are not binding on the member states.
There is a model leniency program within the European Competition Network designed to achieve harmonization of some elements of national leniency programs, but it is just a model and has, as such, no binding effect on the courts/tribunals of member states. So, in the absence of binding regulation under EU law on the subject, it is for the member states to establish and apply national rules on the right of access for persons adversely affected by a cartel to documents relating to national leniency procedures.
Also, the effect on European leniency procedures might not even be that big. First, while the Commission notices mentioned above are not binding for member states, they do apply to leniency programs implemented by the European Commission itself.
Second, the NCA are obliged to apply EU antitrust rules as soon as there is an EU dimension to the facts (if the facts come within the scope of EU law), i.e. if there is a cross-border element, and to ensure that those articles are applied effectively in the general interest (see to that effect Case C-439/08 VEBIC).
Third, the establishment and application of rules on the right of access to documents relating to leniency procedures is a competence of the member states, but they still have to exercise that competence in accordance with EU law (C-154/08 Commission v Spain). This principle is called sincere cooperation (Art. 4 (3) Treaty on the European Union). Also, member states may not render the implementation of EU law impossible or excessively difficult (C-298/96 Oelmule and Schmidt Sohne) and in the area of competition law they must ensure that the rules they establish or apply do not jeopardize the effective application of Art.101-102 TFEU. This principle is called useful effect.
Conclusion
This preliminary ruling has a positive effect on private enforcement of competition rules and thereby contributes to the effectiveness of national and European provisions on competition. It might deter undertakings that are part of a cartel from going to the NCA for a national leniency program, but it will not be the case for asking the European Commission for leniency in exchange for information and evidence of their cartel.
Laura Vlachos
(202) 589-1834
laura@dbmlawgroup.com
Item 3 – Agreements between Filing Parties Expanded to Non-Compete Agreements
Under the current Item 3, parties are required to file copies of their executed agreement. This request would be extended to executed agreements not to compete, or the most recent draft for a non-compete agreement.
Items 4 (a) and (b) – Certain Financial or SEC Documents.
Currently, filing parties are required to provide documents or internet links to certain documents submitted to the U.S. Securities and Exchange Commission. This requirement would be simplified by the HSR form changes, as the new Item 4(a) would require parties to only provide names and the Central Index Key number for all entities under common HSR control.
Under the current Item 4(b), parties are required to provide the most recent annual report, audit report and the regularly prepared balance sheet of the person filing the notification and include each unconsolidated U.S. issuer. The new Item 4 would only require the most recent annual report and/or the annual audit report.
Item 4(d) – Additional Documents for Evaluating or Analyzing Acquisition
A significant substantial change would be the addition of Item 4(d) to Item 4(c). Item 4(c) requires the production of all documents prepared by or for an officer or director for the purpose of evaluating or analyzing the acquisition with respect to market shares, competition, markets, potential for sales growth, or expansion into product or geographic markets. This Item is intended to provide the antitrust agencies with useful information for their (initial) substantive assessments of the competitive effects of the reported transaction.
With the new Item 4(d), the Commission intends to maximize the effectiveness of Item 4 by adding “categories of documents [that] are quite useful for the Agencies’ initial substantive analysis of transactions”. The Commission reasoned that parties have differing interpretations as to whether the documents are called for under current Item 4(c) so an Item 4(d) would enumerate these discrete categories of documents and require their submission with the HSR form.
The 11 comments that were filed with the Commission on the proposed amendments all expressed concerns regarding Item 4(d), raising the overarching issue of the relationship with Item 4(c). The Commission stated that Item 4(d) sought different documents from those covered by the language of Item 4(c). The argument was made that the collection and review of documents that had to be submitted under Item 4(c) of the HSR form was already costly and time-consuming. The amendment includes three additional categories of documents (confidential information memoranda, studies by third party advisors and studies for analyzing the synergies and/or efficiencies) with the HSR form, in addition to the documents listed in Item 4(c), which would increase the time and cost of the filing.
Item 5(a) – Revenue Reporting Requirements Adjusted
A second significant substantive change would be the revision of Item 5(a). The current Item 5 requires the parties to report certain U.S. revenues classified by NAICS Codes for the most recent year and for a “base” year (currently 2002). The amendment eliminates the requirement to report these historical U.S. revenues. Parties would also no longer need to provide information on “added or deleted” manufactured products. The person filing the form only has to provide revenues for the most recent year, broken down by 6-digit NAICS Codes for non-manufacturing activities and by 10-digit NAICS Codes for manufacturing activities (currently 7-digit codes). This reporting gives the Agencies a more accurate understanding of products in the United States.
Another new addition would be the requirement of reporting revenues related to products manufactured outside the United States and sold in the United States at the wholesale or retail level, or directly sold to the customer in the United States. These revenues will need to be reported under a 10-digit manufacturing NAICS Code. These revisions would decrease the burden of responding to Item 5 significantly.
Item 6(a) – Requirement of Identification of All Entities under HSR Control
The current Item 6(a) requires the filing parties to provide the full addresses for entities under their HSR control, even if the entity is located outside the United States. The new form would decrease the burden of responding to this Item by only requiring the parties to list responsive U.S. entities under common HSR control and responsive foreign entities under common HSR control that have sales into the United States. A street address will also no longer be required; a city, state and country will suffice.
Item 6(b) – Information about Third Parties Who Hold 5-50% of Voting Securities
A third significant substantive change would be the information on controlling minority interests of “associates” (see below under Items 6(c) and 7) with overlapping NAICS Codes. Currently, information is required about the third parties who hold at least 5% but less than 50% of the voting securities of corporations under common HSR control with the acquiring person or the acquired entity. The new Item 6(b) would require information about third parties who hold at least 5% of the voting securities or non-corporate interests of corporations or unincorporated entities only for the acquired entity and only for the acquiring entity and its ultimate parent entity. For natural persons, third party holders of at least 5% of corporations or unincorporated entities would only need to be identified for the top level entities under HSR control of such natural persons. This Item would also be extended to request information of the general partners of limited partnerships, regardless of what percentage they hold in such partnerships.
Items 6(c) and 7 – Reporting Requirement Expanded to “Associate” Entities under Common Management
Also new would be the requirement to submit information relating to “associates”. The current HSR rules require the ultimate parent entity of the acquiring entity to provide information with respect to all entities under its HSR control (§801.1(d)). So, entities under common management with an acquiring person, but not under common HSR control, are not included in this definition. The Agencies believe information about competitive overlaps between the acquiring entity and acquired entity would give a full picture of the competitive effects of the filed transaction if it included information about entities under common investment or operational management with the acquiring entity.
Hence, a new concept would be added: “associate”. The acquiring person would need to provide information about its associates and some of their holdings, next to the information about affiliates that was already required. The definition of “associate” can be found in the new 16 CFR 801.1(d)(2) (“An entity that is not under common control with the acquiring person but has the (in)direct right to manage the operations or investment decisions of an acquiring entity; or has its operations or investment decisions (in)directly managed by the acquiring person; or (in)directly controls/manages, is controlled/managed by or is under common control/management with a managing entity”).
A second point was added to Item 6(c), to be completed by the acquiring person. It requires an acquiring person to report all of its associates’ holdings of voting securities and non-corporate interests of 5% or more but less than 50% in the acquired entity(s) and in entities having 6-digits NAICS industry code overlaps with the acquired entity(s) or assets. The new Item 6(c) would also revise the information required about minority holdings of filing parties. While currently only information about 5% stockholders is requested, the parties would need to list their minority holdings of more than 5% but less than 50% of voting securities or non-corporate interests of an issuer or unincorporated entity with total assets of at least U.S.$ 10 million. In addition, the acquiring party would only list its responsive minority holdings of entities that derived dollar revenues in the most recent year in the same 6-digit NAICS Codes.
Item 7 was also amended to include the information regarding associates. Where it currently requires identification of NAICS code overlaps between the acquiring person (and entities under common HSR control) and the acquired entity/assets (new Item 7(a)(i)), the new Item 7 would also require identification of any associate that also derived revenues in the 6-digit NAICS Code(s) used by the acquired entity/assets (new Item 7 (a)(ii)). The new Item7 would also require certain information about the geographic areas in which the associates derived revenues in those overlapping NAICS Codes (new Item 7 (b) and (c)).
Laura Vlachos
(202) 589-1834
laura@dbmlawgroup.com
On May 23, 2011, the Department of Justice (“DOJ”) filed a civil antitrust lawsuit to block H&R Block Inc.’s (“H&R”) proposed acquisition of TaxAct, a digital do-it-yourself tax preparation software provider. The DOJ’s Antitrust Division filed its lawsuit in U.S. District Court in Washington, D.C., to prevent H&R Block from acquiring 2SS Holdings Inc., an entity within TA IX L.P. and the maker of TaxACT. The DOJ’s complaint details H&R’s motive to eliminate competition.
On October 13, 2010, H&R Block agreed to purchase 2SS Holdings in a transaction valued at $287.5 million. After a seven month review, the DOJ filed a complaint alleging that the proposed deal would substantially lessen competition in the growing U.S. digital do-it-yourself tax preparation software market resulting in higher prices and reduced innovation and quality for products that are used annually by millions of American taxpayers.
According to the DOJ’s complaint, H&R Block’s acquisition of TaxACT would eliminate a company that has aggressively competed with H&R Block and disrupted the U.S. digital do-it-yourself tax preparation market through low pricing and product innovation. Thus, the DOJ is characterizing TaxACT as the maverick in the industry. By ending the head-to-head competition between TaxACT and H&R Block, American taxpayers would be left with only two major digital do-it-yourself tax preparation providers.
The first major instance of maverick behavior by TaxACT that prompted a competitive reaction from H&R Block and Intuit occurred in 2004 in relation to the Free File Alliance (“FFA”), a public-private partnership of digital DIY tax preparation companies and the IRS designed to offer qualified individuals the ability to prepare and e-file free federal income tax returns. TaxACT was the first company to aggressively pursue lower prices in the Digital DIY Tax Preparation Product market for all taxpayers through the FFA by introducing an offer that was free to all individual US taxpayers.
TaxACT’s FFA offering threatened the profits of all Digital DIY Tax Preparation Product providers. Accordingly, though they matched TaxACT’s offering, members of the FFA, including H&R Block and Intuit, lobbied the government to limit the number of taxpayers to whom FFA members could offer free federal e-filing. Ultimately, the IRS, in October 2005, limited the type and the number of customers that could be offered a free product through the FFA. TaxACT responded to the FFA limitations by offering all taxpayers the ability to prepare and e-file their federal individual tax returns for free directly from TaxACT’s website.
Decision:
The district court considered private and public interest factors in rendering its decision. The public interest factors were neutral in nature and did not contribute significantly to the district court’s transfer analysis. The private interest factors, on the other hand, invoked in depth review of the implications of the case. First, in considering the deference to plaintiff’s choice of forum, the court found that the defendant had failed to prove that the case had no meaningful ties to the District of Columbia. The district court reasoned that other than the fact the DOJ is located in the District of Columbia, the first major instance of TaxACT’s maverick market activity that prompted a competitive reaction from H&R Block occurred in the District of Columbia. Facts indicate that the elimination of TaxACT’s alleged maverick activities is a key motivation for H&R Block’s proposed acquisition of the company. Therefore, the interactions among the FFA, IRS, and the defendants relating to TaxACT’s activities within the FFA are likely to implicate disputed issues of fact in this case. Since the FFA and IRS are headquartered in the District of Columbia, and TaxACT’s offering of free tax products initiated in the District of Columbia, the court could not conclude that this case has no ties with the current forum.
Second, the court considered the aspect of where the claim arose to be less important than other private interest factors, particularly because defendant’s products are sold online and the antitrust effect would be felt across the country. Third, the district court found that the convenience of the witnesses factor does slightly favor transfer, but not overwhelmingly so, because non-party witnesses are likely to be drawn from various districts around the country. The court agreed with the H&R Block that the Western District of Missouri would be more convenient for witnesses who work at H&R Block’s headquarters, located in Missouri. However, the district court noted that nonparty witnesses’ convenience carries the most weight in the analysis. Since non-party witnesses in this case are likely to come from around the country, including retired H&R Block employees in Kansas City, retired IRS employees in this district, and employees from competitor companies based in California, Utah, Georgia, and Arkansas, mere convenience of some H&R Block witnesses alone is insufficient to warrant transfer. In addition, the court pointed out the fact that H&R Block’s merger agreement contains a forum selection clause calling for any disputes over the merger agreement between the parties to be litigated in Delaware. The court found that the fact that the H&R Block and TaxAct negotiated and agreed to such a clause indicates their ability to avail themselves of legal protections offered by different fora around the country. Finally, the district court was not convinced that sources of proof would be easier to access in Missouri given the ease of electronic transfer of data.
Yolinda Qu
(202) 589-1834
yqu@dbmlawgroup.com
To avoid such a result, the Department of Justice (“DOJ”) and the Federal Trade Commission (“FTC”) (collectively “Agency” or “Agencies”) issued a Joint Statement (“Statement”) on March 31, 2011, outlining the Agencies’ antitrust enforcement procedures for ACOs.
The Statement articulates a screening process in which the Agencies will evaluate an ACO’s market power in each ACO participant’s Primary Service Area (“PSA”). The PSA is defined as the lowest number of contiguous postal zip codes from which the participant draws at least 75 percent of its patients for that service. The higher the PSA share, the greater the risk the ACO will be anticompetitive.
The Statement sets up three levels of antitrust scrutiny for the screening process: ACOs with PSA shares of 30 percent or less fall within the safety zone and have no obligation to contact the Agencies; ACOs with PSA shares of higher than 50 percent will be subject to mandatory Agency review to be completed within 90 days; and ACOs with PSA shares of between 30 percent and 50 percent may voluntarily seek Agency review.
This screening process has attracted criticism and concerns. First, some believe that PSA test is not a reliable indicator of market share and the government should examine its usefulness via empirical studies before employing it as a screening tool. This criticism is valid because a random PSA (calculated based on zip code) may or may not be a relevant geographic market. The definition of a relevant geographic market is a fact-based inquiry. While the Agencies tried to create an efficient test, the blanket definition of the geographic market is flawed and may result in more harm than good.
Second, ACOs with less than 30 percent PSA shares fall within the safety zone at the time they are formed. However, two or more ACOs with less than 30 percent of a particular PSA may merge in the future and end up holding more than 50 percent of the PSA upon completion of the transaction. The Statement is quiet about treatment of these after-acquired or merged ACOs. In addition, these transactions may fall short of Hart-Scott-Rodino (“HSR”) merger reporting requirements. Therefore, anticompetitive ACO formations may slip through without an adequate review by the Agencies.
Third, in order to comply with the screening process, all ACOs must calculate their shares of a relevant PSA market. This is costly and burdensome and can create another hurdle that prevents smaller organizations and providers from forming an ACO in a quick and efficient manner. The Statement should also clarify the source of data used for the calculation of the shares for a relevant PSA.
Fourth, the 90 day review process has been criticized as being inadequate by those who call for giving the Agencies higher flexibility and more extensive review periods.
The Agencies accepted the submission of comments regarding the Statement until May 31, 2011 and will modify the Statement accordingly. Whatever the outcome, one thing is clear: forming an ACO can raise antitrust concerns and to ensure compliance with the Agencies’ requirements, a detailed legal analysis of competition within a definable PSA must be conducted.
Parva Fattahi
(202) 589-1834
pfattahi@dbmlawgroup.com