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ANTITRUST ALERT
A Global Resource for Compliance Officers & Legal Advisors
ANTITRUST ALERT
A Global Resource for Compliance Officers & Legal Advisors
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FTC and DOJ Host Conditional Pricing Programs Workshop

by | Jun 25, 2014 | ,

The Federal Trade Commission (FTC) and United States Department of Justice (DOJ) hosted a workshop on June 23, 2014 discussing the law and economics of “conditional pricing” programs.  Most panelists were academics, including economists and law school professors.  The bulk of the presenters advocated a more aggressive posture towards these arrangements than the courts have recently adopted.

Conditional pricing programs.  Conditional pricing generally encompasses pricing, discounting and contracting practices in which a company’s prices charged will vary depending upon the level of purchases the customer makes from the company’s competitors.   Examples include:

  • Bundled discounts: Supplier X, which sells dominant product A and competitive product B, grants a discount on product A (which the customers have to buy) so long as customers buy a certain percentage of their needs of product B from Supplier X, rather than from its competitors.
  • Loyalty / market share discounts: Supplier X, which has a dominant position in product A, grants discounts from its baseline pricing if customers purchase a high percentage (e.g., 90 percent) of Product A from Supplier X, rather than from its competitors.

Theories of harm.  The panelists discussed two basic categories of theories of competitive harm.

  • Exclusion of rival manufacturer.  When a smaller rival, perhaps a new entrant, tries to break in to a market, the dominant incumbent may impose a conditional pricing program that makes it hard for the new entrant to get a significant share of sales, which may deprive it of critical scale efficiencies and render it a marginal supplier, or perhaps even force an exit.
  • Coordination / collusion of customers / distributors.  A retailer can be viewed as providing retailing services in the sale of the manufacturer’s products.  The purchases and contracts different retailers receive from manufacturers can be thought of as inputs in the retailer’s provision of its services.  Some of the economists stated their view that customers who may desire to coordinate their behavior as sellers can use conditional pricing programs from their suppliers to ensure that the input costs are comparable, which can reduce competition among retailers.  For example, the conditional pricing program may ensure that no retailer switches over from the dominant supplier to the new entrant with a lower cost product.  Keeping the customers from switching to the new entrant may make it easier to achieve or maintain coordination.

Relevance of cost based tests.  The panel addressed cost-based safe harbors in great detail, with most of the economists opining that they were simply not helpful.  The issue is whether conditional pricing programs that result in a product being sold “above cost” should fit within a safe harbor. 

  • Legal background.  This discussion starts with the Supreme Court’s Brook Group case, which found that above cost pricing cannot create liability under a predatory pricing theory.  In cases involving bundled /multiproduct discounts, there has been a circuit split with the Third Circuit (LePage’s) allowing liability even if prices are above costs, and the Ninth Circuit (Peace Health) holding that above [...]

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Ringing Regulatory Rumors: Deutsche Telekom Purportedly Agrees to Sell T-Mobile US

by | Jun 2, 2014 | ,

Reports circulated out of Japan and Germany late last week indicating Deutsche Telekom AG, owner of T-Mobile US Inc., reached a tentative agreement to sell T-Mobile to Softbank, owner of Sprint Corp.  The potential merger of the third and fourth largest wireless carriers has sent rumors of regulatory challenges flying.  Other news agencies, like Reuters, have said that crucial details including “price and financing remain to be worked out.”  None of the companies, however, have commented on the possible buyout.

Both Deutsche Telekom and Softbank have been frank about their desire to ink a deal.  Likewise, leading regulators at the Department of Justice (DOJ) have raised public concerns about the anticompetitive effects of the potential deal.  Earlier this year, William Baer, the assistant attorney general for the antitrust division at the DOJ, voiced his opinion that “consumers have benefitted from much more favorable competitive conditions” by having four major players in the wireless carrier industry.  As a result, he has expressed hesitation about the DOJ antitrust division’s ability to clear the long-rumored deal, which would create a narrower sector.

Sprint’s chairman, Masayoshi Son, has countered with a public campaign touting the benefits of the tie-up, including creating a more equal competitor to level the playing field with rival behemoths Verizon and AT&T.  Son has also encouraged regulators to more broadly consider access to internet, rather than the wireless industry alone.  Along those lines, he has made several proposals regarding mobile broadband and promised that with “a three heavy-weight fight” he would engage in “a more massive price war, a technology war.”

Still, industry commentators doubt the ability of the deal to clear regulatory hurdles.  Some have pointed to a lack of evidence from Son and Softbank showing that more effective price competition could flourish in a competitive environment with only three major players.  Such data is likely crucial to the fate of the tie-up, as a lack of similar data helped bring down AT&T’s prior proposed deal to purchase T-Mobile.  Additionally, the deal would require the Federal Communications Commission’s (FCC’s) approval alongside that of the DOJ.  Many cite FCC Chairman Tom Wheeler’s cable and wireless industry experience as indicating opposition to the deal.

Reports stated that Deutsche Telekom, which owns a 67 percent stake in T-Mobile, may be interested in keeping a small portion of its ownership interest—perhaps as much as 15 percent—in T-Mobile.  If Softbank moves forward, it may face challenges in a bid for T-Mobile, including cable giant Comcast.



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FTC and DOJ Release FY 2013 HSR Annual Report

by | May 27, 2014 | ,

On May 21, 2014, the Federal Trade Commission (FTC) and Department of Justice (DOJ) released the Hart-Scott-Rodino Annual Report covering Fiscal Year (FY) 2013 (October 1, 2012 – September 30, 2013).  The report describes key merger enforcement actions over the past year and provides interesting data regarding the agencies’ antitrust enforcement activity.

Specifically, the report indicates that in FY 2013, 1,326 transactions were reported under the Hart-Scott-Rodino (HSR) Act, representing an approximate 7 percent decline in reported transactions from FY 2012.  The FTC was granted clearance to investigate 145 of these transactions, while the DOJ was granted clearance to investigate 72 transactions.  Of the 145 transactions the FTC investigated in FY 2013, it only issued 25 second requests.  In other words, the FTC only issued second requests in 17.2 percent of its investigations in FY 2013.  The DOJ’s Antitrust Division, on the other hand, issued second requests in 22 of the 72 transactions it was granted clearance to investigate (i.e., 30.6 percent of its investigations).

However, of the FTC’s 25 second requests in FY 2013, it brought 23 merger enforcement actions.  That is, the FTC brought enforcement actions in more than 90 percent of the transactions for which it issued a second request in FY 2013.  The DOJ’s Antitrust Division brought only 15 merger enforcement actions in FY 2013, or just under 70 percent of the transactions for which it issued a second request (15 out of 22).

This information can be a helpful tool to assist clients in evaluating their chances before the merger enforcement agencies at various stages of the HSR notification process.  While the FTC and DOJ together only investigated 217 transactions in FY 2013, most of those investigations were brought by the FTC.  Furthermore, the agencies’ decisions to issue second requests made it increasingly likely that they would bring enforcement actions to block or unwind the transactions, particularly with respect to the FTC.



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Perspectives from the Federal Antitrust Enforcement Agencies

by , and | May 20, 2014 | , ,

At the recent Antitrust in Health Care conference in Arlington, Virginia, representatives from the Federal Trade Commission and U.S. Department of Justice Antitrust Division discussed important health care and antitrust topics.  Speakers stressed that the Affordable Care Act is not an opportunity for anticompetitive consolidation and conduct.  Providers and payers alike should continue to analyze every acquisition, collaborative arrangement, contract or unilateral action under the traditional framework of antitrust law.

Please click here to read the full article.



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DOJ and FTC to Hold Conditional Pricing Practices Public Workshop

by | May 9, 2014 | ,

The U.S. Department of Justice (DOJ) and Federal Trade Commission (FTC) announced on Tuesday, May 6, that the agencies will jointly hold a public workshop on June 23, 2014, to consider the economic effects and antitrust law treatment of conditional pricing arrangements.

Conditional pricing arrangements, such as loyalty discounts or bundled product discounts, are programs through which a seller may discount prices based upon a buyer purchasing specific volumes of or combinations of products. Loyalty discounts are practices by which a seller charges a buyer a lower price for purchasing a certain volume of a product or products. In bundling, another common pricing arrangement, a seller may offer several products for sale as one combined product, often charging less for the combined product than the sum of the prices of the component products.

Courts have been concerned that loyalty discounts and bundled discounting could be anticompetitive if utilized to exclude competitors from a market or to facilitate a predatory pricing scheme.

Despite these concerns, loyalty discounts and product bundling can also be procompetitive. Both programs can produce efficiencies. For example, by selling a greater volume of products or certain products together, a firm may reduce shipping or marketing costs. Further, these practices decrease prices through discounts, and courts have long recognized that “cutting prices to increase business often is the very essence of competition.”

No clear legal standard has been established for determining which conditional pricing arrangements are anticompetitive. For loyalty discounts, courts have attempted to articulate a standard by evaluating the economic theory that loyalty programs can facilitate exclusive dealing or predatory pricing schemes. For bundled discount practices, courts are split among three different legal standards, and a fourth was recommended by the Antitrust Modernization Commission in 2007.

The agencies have welcomed the public to submit comments on conditional pricing practices on its website. Comments are being accepted through August 22, 2014.



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First Successful Extradition of Foreign National for Price-Fixing Violation

by | Apr 7, 2014 | , ,

For the first time, the U.S. Department of Justice (DOJ) has successfully litigated an extradition of a foreign national on an antitrust charge.  This extradition shows that the DOJ is still pursuing individuals it charged several years ago with criminal price-fixing conduct and is a watershed moment in DOJ criminal enforcement of the antitrust laws.

Read the full article.



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Call Waiting: DOJ to Maintain Scrutiny of Wireless Industry Consolidation

by | Feb 7, 2014 | ,

The wireless industry has seen steady consolidation since the late 1980s.  Recently, in late 2013, reports began circulating about a potential merger between Sprint and T-Mobile, the nation’s third and fourth-largest wireless carriers, respectively.  Last week, however, in an interview with the Wall Street Journal, William Baer, the assistant attorney general for the antitrust division at the Department of Justice (DOJ), cautioned that it would be difficult for the Agency to approve a merger between any of the nation’s top four wireless providers.

T-Mobile’s CEO, John Legere, stated that a merger between his company and Sprint “would provide significant scale and capability.”  Baer, on the other hand, warned that “It’s going to be hard for someone to make a persuasive case that reducing four firms to three is actually going to improve competition for the benefit of American consumers,”  As a result, any future consolidation in the wireless industry is likely to face a huge hurdle in the form of DOJ’s careful scrutiny of any proposed transaction.

Much of the DOJ’s interest in the wireless industry stems from the Agency’s successful challenge of a proposed merger between T-Mobile and AT&T in 2011.  Since then, Baer believes consumers have benefitted from “much more favorable competitive conditions.”  In fact, T-Mobile gained 4.4 million customers in 2013, bringing optimism to the company’s financial outlook after years of losses.  In the final two quarters of 2013, T-Mobile’s growth bested that of both Sprint and AT&T.  The low-cost carrier attracted customers and shook up the competition by upending many of the terms consumers had come to expect from wireless carriers, as well as investing in network modernization and spectrum acquisition.  This flurry of activity has pushed the competition to respond with its own deals, resulting in “tangible consumer benefits of antitrust enforcement,” according to Baer.

The DOJ’s antitrust division has kept careful watch over the wireless industry the past few years. That scrutiny will remain, as the Agency persists to advocate that four wireless carriers are required for healthy market competition.  The cards are beginning to play out from the Agency’s decision, and as Baer stated, “competition today is driving enormous benefits in the direction of the American consumer.”



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Judge Rules in Favor of DOJ Finding Bazaarvoice/PowerReviews Merger Anticompetitive

by | Jan 13, 2014 | ,

On January 8, 2014, Judge Orrick of the Northern District of California ruled that Bazaarvoice’s acquisition of competitor PowerReviews violated Section 7 of the Clayton Act.  The ruling was in favor of the U.S. Department of Justice (DOJ).  The public version of the opinion was made available on January 10.  In its self-described “necessarily lengthy opinion,” which spans 141 pages, the court ultimately found that the facts overwhelmingly showed the acquisition will have anticompetitive effects and that Bazaarvoice did not overcome the government’s prima facie case.  The case included 40 witnesses at trial, more than 100 depositions and 980 exhibits.  Dr. Carl Shapiro testified as DOJ’s economist and Dr. Ramsey Shehadeh testified on behalf of Bazaarvoice/PowerReviews.  The court noted that the case presented some difficult issues, including that there were no generally accepted “market share statistics covering the sales of R&R solutions or social commerce solutions and no perfect way to measure market shares.”  And while neither side presented flawless analyses, the court found Dr. Shapiro’s approaches more persuasive than those of Dr. Shehadeh.

Bazaarvoice and PowerReviews each offered sophisticated “R&R platforms.”  R&R platforms provide a user interface and review form for the collection and display of user-generated content (i.e., user reviews) on the product page of a commercial website where the product can be purchased.  Often these are in the form of star ratings and open-ended reviews in a text box.  R&R platforms increase sales for the retailer and have a variety of different features.  The court noted that many on-ine retailers view an R&R platform as “necessary.”  Before the merger, Bazaarvoice and PowerReviews offered similar products and features and targeted similar customers.

The court found that the relevant product market was the narrow “R&R platforms,” rather than the broader “social commerce tools” or “eCommerce platforms.”  The court went through many popular social media platforms such as Facebook, Google+, Twitter, Instagram, and Pinterest, explaining why each was not a substitute for these R&R platforms.  In this relevant market, the court found that PowerReviews was Bazaarvoice’s only real competitor, and thus the merger “would eliminate Bazaarvoice’s only meaningful commercial competitor.”

At the end of the opinion, the court commented on the role of antitrust “in rapidly changing high-tech markets.”  It noted that there is a debate as to whether antitrust is properly suited to assess competitive effects in these markets.  The court declined to take sides and stated that its “mission is to assess the alleged antitrust violations presented, irrespective of the dynamism of the market at issue.”

The case now moves to the remedy phase.  In its complaint, the DOJ requested that the court order Bazaarvoice to divest assets originally possessed by either Bazaarvoice and/or PowerReviews to create a viable, competing business.   However, as Judge Orrick noted, 18 months after the merger, it may not be so simple to divest assets.  The judge scheduled a conference for January 22 with the parties to discuss a possible remedy.

There are several lessons to be gathered from this case.  First, the [...]

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Price-Fixing Executive Dealt Tough Sentence for Role in Cartel

by | Dec 13, 2013 | ,

On December 6, 2013, Frank Peake, former president of Sea Star Line LLC, was sentenced to five years in prison and ordered to pay a $25,000 fine for his role in fixing prices for rates and surcharges for freight transportation in coastal waters between the United States and Puerto Rico.  The alleged conduct began around late 2005 and continued until at least April 2008.  Earlier this year, Peake was convicted of violating Sherman Act Section 1 following a two-week trial in the United States District Court for the District of Puerto Rico.  Although Peake’s five-year sentence is shorter than the seven-year sentence sought by the Department of Justice, five years is the longest prison sentence ever handed down to an individual for a single antitrust charge. Previously, Peter Baci, another executive at Sea Star Line LLC, tied the record for longest prison sentence for a single antitrust charge with a four-year sentence.

Peake’s sentence reinforces the Department of Justice’s (DOJ) commitment to prosecuting executives involved in conspiracies to fix prices in violation of the antitrust laws.  Bill Baer, Assistant Attorney General of the DOJ Antitrust Division stated, “The Antitrust Division will continue to vigorously prosecute executives who collude to fix prices at the expense of consumers.”

The DOJ reported that Peake and other executives convicted in the price-fixing scheme conspired through meetings and other communications to fix, maintain and stabilize freight services rates in the coastal waters between the United States and Puerto Rico, to allocate customers in the freight services market, and to rig bids.  By selling Puerto Rican freight services at collusive, non-competitive rates, the “coastal shipping price-fixing conspiracy affected the price of nearly every product that was shipped to and from Puerto Rico during the conspiracy,” said Baer.

In all, six executives and three companies have either pled guilty or were sentenced at trial in the coastal freight waters cartel investigation. The corporations were fined $14.2-$17 million for price-fixing.  Four executives were fined $20,000 and received prison sentences ranging from 20-48 months. Another executive was sentenced to seven months for obstruction of justice.

This latest conviction illustrates the DOJ’s objective of prosecuting company executives as a means of deterring and punishing cartel activity.  In the past few years, cartel investigations have resulted in more executives sentenced to longer period of jail time.  For example, the percentage of executives sentenced to prison has increased to 71 percent from 2010-2012, up from 62 percent from 2000-2009 and 37 percent from 1990-1999.  Similarly, the average prison sentence increased to 25 months in 2010-2012 from 20 months from 2000-2009 and just eight months from 1990-1999.



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U.S. Senators Debate Toughening Cartel Penalties

by | Nov 19, 2013 | ,

On November 14, 2013, members of the Senate Committee on the Judiciary, Subcommittee on Antitrust, Competition Policy and Consumer Rights heard arguments regarding the effectiveness of current cartel prosecution and punishment strategies in deterring cartel conduct.  In her opening remarks, Senator Amy Klobuchar, chair of the Subcommittee on Antitrust, called price-fixing the most egregious form of antitrust violations.  “Cartels have no other purpose than to rob consumers,” Klobuchar stated.

At the hearing, William Baer, assistant attorney general for the Department of Justice (DOJ) Antitrust Division, highlighted the Division’s efforts to prosecute cartels over the last decade. Under the Antitrust Division’s recent aggressive enforcement efforts, the DOJ obtained record fines and jail time against corporations and individual corporate officers for cartels conduct.  In 2013, the DOJ obtained $1.02 billion in fines and filed 50 cases against cartels, including charges against 21 corporations and 34 individuals and the imposition of 28 prison terms averaging two years.  This presents a marked increase in the eight-month average jail term imposed against Antitrust Division defendants in the 1990s.

Over the past five years, the DOJ has, on average, obtained over $850 million in fines from cartels.  Baer noted the success of the DOJ’s leniency program, as well as cooperation with state and federal agencies like the Federal Bureau of Investigation (FBI) in investigating cartels.  The leniency program has increased the rate of self-disclosure by providing both corporations and individuals with incentives for investigating and reporting antitrust violations.  The DOJ has also amped up efforts to collaborate with competition authorities in foreign countries worldwide to better coordinate cartel policies, detection efforts and investigations.  As a result, the DOJ has obtained more sentences against foreign nationals, currently an average of 11 per year, as opposed to three per year in the 1990s.  The DOJ recently obtained record criminal fines and jail time in prosecuting large, complex cartels involving price-fixing conspiracies in the liquid crystal television displays, air cargo and freight, and automobile parts markets.

Others testifying in front of the Subcommittee pressed the Senate to adopt stricter cartel punishments in light of the “steady stream of cartels” that they view as a persistent problem despite the DOJ’s leniency program.  The panelists questioned the effectiveness of monetary penalties as a deterrent, noting that fear of jail time is only effective if individuals and corporations involved in cartels believe they are likely to be caught.  They testified that steep fines and punishments may actually discourage individuals from self-disclosing violations, so a better deterrent may be imposing bans on corporations and individuals convicted of cartel violations, which would prevent them from conducting business in certain markets or preclude them from serving on boards or in other corporate functions.

As the DOJ, in conjunction with other federal agencies, continues to vigilantly investigate and prosecute cartels, individuals and corporations should evaluate policies and internal compliance measures in consideration of federal and state antitrust laws.



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