ANTITRUST ALERT
ANTITRUST ALERT
A Global Resource for Compliance Officers & Legal Advisors
ANTITRUST ALERT
A Global Resource for Compliance Officers & Legal Advisors
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DOJ Antitrust Division Signals Impending Criminal Monopolization Cases

by , , , and | Mar 11, 2022 | , , ,

WHAT HAPPENED

On March 2, 2022, the US Department of Justice (DOJ) Antitrust Division Deputy Assistant Attorney General Richard Powers revealed that the DOJ intends to investigate and pursue alleged criminal violations against individuals or companies who violate Section 2 of the Sherman Act. For more than 40 years, criminal enforcement of antitrust laws have focused nearly exclusively on hardcore, per se anticompetitive agreements (i.e., price fixing, output restriction or market allocation) among two or more horizontal competitors. Section 2 of the Sherman Act, on the other hand, primarily focuses on conduct by one firm or company with significant market power and, typically, is a means to bring a civil case for monopolization or anticompetitive use of the existing monopoly power.

LEGAL BACKGROUND

This marks a radical departure from longstanding DOJ antitrust enforcement of monopolization claims. In general, the DOJ has refrained from Section 2 criminal prosecutions.

Section 2 makes it illegal to acquire or maintain monopoly power through anticompetitive means and focuses primarily on unilateral or one-sided anticompetitive behavior. Courts (including the Supreme Court of the United States) generally have analyzed Section 2 cases under the “rule of reason,” which weighs both procompetitive and anticompetitive effects of conduct.

Because the rule of reason imposes a balancing test that is akin to the preponderance of evidence standard, the higher criminal burden of proof could clash with existing jurisprudence and agency guidelines on Section 2 enforcement standards. In contrast, Section 1 of the Sherman Act prohibits anticompetitive agreements—where courts have automatically deemed certain types of agreements, such as agreements to fix prices, allocate markets or rig bids—as illegal “per se,” because they (through ample judicial and economic experience) have been deemed to produce little or no procompetitive effects.

DOJ’s HISTORY WITH SECTION 2

In the last 50 years, the vast majority of criminal cases that the Antitrust Division has brought involved per se illegal agreements under Section 1. The Antitrust Division appears to have initiated very few criminal Section 2 cases during that same period with mixed success. For instance, in United States v. Cuisinarts, the DOJ prosecuted the defendant under Section 2 for per se resale price maintenance agreements.[1] The defendant agreed to pay a $250,000 fine for a plea of nolo contendere. However, today, the per se criminal treatment of resale price maintenance is in serious doubt as the long line of Supreme Court decisions from GTE Sylvania to Leegin have firmly placed most vertical resale price restraints for Section 2 under the rule of reason standard.

WHAT’S NEXT

In 2016, the Federal Trade Commission and the DOJ released a joint publication called the “Antitrust Guidance for Human Resource Professionals” when announcing expanded criminal enforcement in labor markets for wage fixing and no-poaching agreements.[2] We expect the DOJ to release similar guidance with respect to criminal prosecution of Section 2 claims.

The policy shift raises a host of additional questions, such as what types of conduct under Section 2 the Division intends to focus [...]

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European Commission Consultation on Ex Ante Regulation of Online Platforms: Is Change Coming?

by | Jul 27, 2020 | , , ,

In parallel to a public consultation to seek feedback from the public regarding the New Competition Tool, the European Commission (Commission) is consulting on a proposal for an ex ante regulatory instrument that would ensure that “online platform ecosystems controlled by large online platforms that benefit from significant network effects remain fair and contestable, in particular in situations where such platforms may act as gatekeepers”.

This proposal stems from a range of concerns which, according to the Commission, could lead to large-scale unfair trading practices, less innovation and reduced consumer choice.

Feedback on the Commission’s inception impact assessment was due on 30 June (85 opinions were collected). The period for stakeholders from public and private sectors to contribute to the Commission’s public consultation (via online questionnaires) ends on 8 September 2020.

Identified Need to Regulate Large Online Platforms

In its inception impact assessment, the Commission noted that the number of digital ecosystems controlled by a handful of large online platforms have multiplied and businesses and (final) consumers have become increasingly dependent upon them.

According to the Commission, these large online platforms can gain market power due to their ability to accumulate a considerable amount of data, to access different technical assets and to easily expand into new markets and leverage their advantage (i.e. data) from their services. As a result, the key role that these “gatekeepers” play in the online economy has led to imbalances in bargaining power vis-à-vis users and competitors, making it particularly difficult for smaller digital firms to bring innovative solutions to the market. The Commission is further concerned that the current EU regulatory framework does not specifically address “the economic power” of these platforms at the source of these issues aforementioned.

Notably, Regulation (EU) 2019/1150 of 20 June 2019 on promoting fairness and transparency for business users of online intermediation services (Platform to Business Regulation or P2B Regulation) came into effect in July 2020. It aims to address the imbalance that exists between online platform providers and business users by imposing a number of transparency obligations on online intermediation services, such as e-commerce market places, applications stores, online social media. However, the Regulation does not take account of market power and further does not specifically address, in its present form, the issues stemming from gatekeeper power. The P2B Regulation also leaves outside of its scope emerging practices, such as certain forms of ‘self-preferencing’, data access policies, and unfair contractual provisions. As such, the Commission does not believe that the P2B Regulation, as is, can address the problems that it has observed.

Proposed Options

In this context, the Commission has proposed three alternative or complementary policy options:

  • Option 1: A revision of the P2B Regulation, adding prescriptive rules on specific practices that are currently addressed by transparency obligations in the Regulation, as well as on aforementioned new emerging practices.
  • Option 2: A horizontal framework empowering a dedicated regulatory body at EU level to collect information from gatekeepers for the purposes of assessment of their business [...]

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European Commission Initiates Consultation on Possible New Competition Investigation Tool

by | Jun 29, 2020 | , , ,

On 2 June 2020, the European Commission (the Commission) published its inception impact assessment (or roadmap) on the possible adoption of regulation that would introduce a new market investigation tool. This assessment was immediately followed by the launch of a public consultation to seek views and feedback from the public regarding such a tool. The new tool would enable the Commission to investigate and impose behavioural and/or structural remedies on businesses with significant market power, whether dominant or not – and without any prior finding of a competition law infringement. As such, this new tool could present a significant risk and potential burden for companies with market power. On the other hand, it offers potential benefits to market participants, such as new entrants, who might otherwise see their access to markets foreclosed.

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THE LATEST: Tenth Circuit Sides with Defendants in $200 Million Sutures Bundling Case

by | Mar 16, 2017 | , ,

In an antitrust case involving bundled discount on sutures, the United States Court of Appeals for the Tenth Circuit affirmed a lower court decision granting summary judgment in favor of defendants Cardinal Health 200, LLC and Owens & Micro Distribution, Inc.  The Tenth Circuit held that Plaintiff-Appellant Suture Express, Inc. could not prove that the defendants individually possessed market power and that it had not demonstrated that defendants caused substantial adverse effects on competition.

WHAT HAPPENED:
  • Suture Express, a distributor focused on the sale of sutures, sued Cardinal Health and Owens & Micro, which are national distributors of a broad array of medical-surgical products, claiming that they had engaged in illegal tying through their practice of bundling sutures with other medical-surgical products in a manner that penalized customers that purchased sutures from other suppliers.
  • The parties filed cross motions for summary judgment and the lower court granted summary judgment to the defendants.  The court held that Suture Express’ claims failed as a matter of law because it could not prove that the defendants individually possessed market power.  The court also held that Suture Express could not meet the antitrust injury requirement because it had not shown that competition had been harmed.
  • The Tenth Circuit affirmed the lower court’s ruling.  On the issue of market power, the appellate court agreed with the lower courts’ findings that the defendants’ market shares on the alleged tying products (medical-surgical products excluding sutures) were relatively low (31 percent and 38 percent), there were many examples of customers switching to other distributors, and the defendants’ declining profit margins on medical-surgical products excluding sutures demonstrated that the defendants did not have the ability to control prices.
  • With respect to antitrust injury, the Tenth Circuit stated that the antitrust laws are meant to protect competition, not individual competitors.  The appellate court noted that despite the fact that roughly half of the market was not constrained by the bundling arrangement at issue, Suture Express accounted for a relatively small portion of this piece of the market.  This raised the question of whether it was just Suture Express that was harmed as opposed to competition generally.
WHAT THIS MEANS:
  • Establishing market power when defendants have relatively low market shares is difficult.  While market shares in and of themselves are not determinative of whether market power exists, the courts give market shares significant weight and when evidence of low market shares is combined with the other factors the Tenth Circuit found here, it is difficult for a plaintiff to meet its burden.
  • Vertical pricing arrangements that offer discounts to customers, even if associated with a bundling arrangement, are often viewed as procompetitive.  A plaintiff has the difficult burden of showing that a defendant’s bundle creates anticompetitive effects that outweigh its procompetitive effects.  The plaintiff must demonstrate that the arrangement caused harm not only to the plaintiff, but to competition as a whole.  Even if a plaintiff finds it difficult to compete against a defendant’s bundle, if [...]

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Federal Court Finds Amex’s “Anti-Steering” Merchant Rules Anticompetitive

by | Feb 27, 2015 | ,

After a seven-week bench trial in an enforcement action by the U.S. Department of Justice (DOJ) and 17 state attorneys general, U.S. District Judge Garaufis (Eastern District of New York) held that American Express Co.’s (Amex’s) “anti-steering” rules (Non-Discrimination Provisions or NDPs) are an unreasonable restraint of trade in violation of Section 1 of the Sherman Antitrust Act.  The NDPs in Amex’s agreements with merchants prevent merchants from attempting “to induce or ‘steer’ a customer” from paying with non-AmEx credit cards by, for instance, offering discounts or incentives to customers paying with other cards, even though “the cost of [such] transaction[s] [would likely] be lower for the merchant.”  At bottom, the court’s holding centered on its conclusion that “these NDPs create an environment in which there is nothing to offset [Amex’s incentive] to charge merchants inflated prices [to process transactions, which] results in higher costs to all consumers who purchase goods and services from these merchants.”

In the initial step of its rule-of-reason analysis—DOJ’s burden to demonstrate that the NDPs “have had an ‘adverse effect on competition as a whole in the relevant market,’” which may be met by “establishing that [Amex] had sufficient market power to cause an adverse effect on competition”—the court focused first on market definition, then market power and anticompetitive effects.

Regarding the relevant market, Amex argued that it includes both debit and credit cards.  It distinguished United States v. Visa, where the Second Circuit held that credit cards and debit cards are distinct relevant markets, in light of “the dramatic growth in customers’ use of debit cards” since that 2003 decision.  The court disagreed, finding that “debit cards have not become reasonably interchangeable with [credit] cards or network services in the eyes of credit-accepting merchants, who are the relevant consumers in this case.”  Rather, the court employed a market definition comprising only credit cards, where AmEx holds a 26 percent share.  The court did, however, reject DOJ’s argument for an even smaller submarket, i.e., credit card services for only travel and entertainment merchants (where Amex’s market share is even higher), based on its finding that DOJ failed to show that credit card companies are able to charge discriminatory prices to those merchants.

The court went on to conclude that “Amex’s NDPs have adversely affected competition in the [relevant] market, and [Amex] possesses sufficient market power to cause such effects.”  The court found that Amex “enjoy[s] significant market share in a highly concentrated market with high barriers to entry, and are able to exercise uncommon leverage over their merchant-consumers,” for instance by “imposing significant price increases . . . without any meaningful merchant attrition.”  The court also found actual adverse effects on interbrand competition (i.e., that the NDPs “render[] low-price business models untenable, stunt[] innovation, and result[] in higher prices”), reasoning that the NDPs “deny[] merchants the opportunity to influence their customers’ payment decisions and thereby shift spending to less expensive cards[, such that the NDPs] impede a significant avenue of horizontal interbrand competition in the [...]

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Despite Potential Market Manipulation, FERC Declines to Reject Power Auction Results

by | Dec 31, 2014 |

The Federal Energy Regulatory Commission (FERC or the Commission) recently opted not to take action to set aside the results of a power auction that was allegedly manipulated.  In the face of significant public complaints, the Commission ordered revisions to tariff provisions governing future auctions.  While it opted not to take action here, the opinions of the commissioners effectively gave notice to capacity owners that rate increases alone may be a sufficient basis for investigating auction results, even if the auction is conducted pursuant to tariff.

The matter involved the impacts of actions taken by an energy provider that altered the outcome of a competitive auction.  Energy Capital Partners, a private equity firm, allegedly exercised and abused market power by announcing the impending shutdown of its coal-fired plant just prior to the auction and after the deadline for new resources to participate (thereby leaving a significant power deficit, triggering certain administrative pricing rules and driving up auction prices).  Multiple consumer groups intervened at FERC, seeking action by FERC to set aside the auction results, asserting that the auction had been manipulated.

FERC has authority to ensure that regional wholesale electricity markets served by regional transmission operators operate competitively.  Pursuant to ISO-New England Inc.’s (ISO-NE’s) applicable tariff, FERC is responsible for determining whether the results of ISO-NE’s annual Forward Capacity Market Auctions—through which power generators bid to sell their future capacity to ISO-NE—are “just and reasonable.”  Intervening consumer advocate groups opposed the capacity rates resulting from FCA-8 (ISO-NE’s most recent auction).

FERC—deadlocked 2-2—allowed FCA-8’s rates to become effective by operation of law and issued statements explaining their positions.  Despite the lack of a formal FERC order, these statements provide insight regarding the commissioners’ opinions on the scope of FERC’s authority, regulatory/rate certainty, market power and the filed rate doctrine.  Under the filed rate doctrine, a regulated entity may not charge a rate “different from the one on file with the Commission” so long as the filed rate was reached via proper implementation of the applicable tariff.[1]

Two commissioners (Clark and Bay), troubled by allegations and evidence of market power abuse, emphasized that FERC must “deter and mitigate market power abuses for the benefit of consumers.”  They further did not see the filed rate doctrine as an obstacle to FERC’s examination of the justness and reasonableness of FCA-8’s rates.  In their view, the Commission should have rejected FCA-8’s rates and taken a closer look by means of fast-tracked hearing and settlement procedures.  They expressed strong objection to “precluding an examination of capacity prices when evidence suggests that the exercise of market power may have contributed to those prices.”

By contrast, the other two commissioners would have accepted FCA-8’s rates as just and reasonable, but their differing approaches are noteworthy.  Chairman LaFleur argued that ISO-NE followed its tariff and that FERC thereby lacks authority to inquire further.  Under that view, any analysis of resulting rates—rather than review only of compliance with the tariff provisions—“would constitute retroactive ratemaking in violation of the [...]

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German Federal Cartel Office Launches Sector Enquiry into Food and Luxury Food Retail Market

by | Feb 11, 2011 |

by Martina Maier and Philipp Werner

The German Federal Cartel Office (FCO) announced yesterday that it has launched a sector inquiry into food retailers.  The FCO will focus its study on foodstuffs and luxury foodstuffs without explicitly naming particular goods in its press release but broadly stating that the enquiry will only focus on “selected product groups”.  According to the official statement from the FCO, which is only available in German, the authority seeks to improve its “understanding” of the relationship between retailers and suppliers.  The FCO plans to have a close look into the market power of the large retailers.  The assessment will also focus on “whether and to what degree the leading retailers enjoy a purchasing advantage over their competitors”.

The retailer market in Germany is very concentrated, with only four large retailers holding about 85 percent of the market.  The FCO thus plans not only to shed light into the  buyer power of the large retailers but will also focus on whether the “consolidation process” in the retail market has also led to a concentration in the procurement markets to the benefit of the largest retailers.

The sector enquiry should, according to the official statement from the FCO, support its analysis of the food purchasing market which is currently being investigated following dawn raids at the premises of more than 15 companies on the retail and the manufacturing level of branded products, mainly foodstuffs, on suspicion of co-ordinated retail price-fixing, in January 2010.

If the FCO will start an investigation into individual companies in the food retail market and how the sector enquiry will affect the investigation into branded goods, started in January 2010, remains unclear.  The case draws parallels to the UK where the Office of Fair Trading launched several market investigations and market studies into the UK food retailer and manufacturer markets.



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