The Federal Trade Commission has experienced significant turnover of Commissioners in the past year. Chairman Robert Pitofsky, who has chaired the FTC since April 12, 1995, was joined by three new Commissioners in the last quarter of 1997. Sheila Anthony replaced Janet Steiger; Mozelle Thompson replaced Christine Varney; and Orson Swindle replaced Roscoe B. Starek. In addition, Mary Azcuenaga announced her retirement effective as of April 1998. As a result, there is currently one vacancy on the Commission.
Sheila Anthony served as assistant attorney general in charge of legislative affairs at the U.S. Department of Justice immediately before her appointment to the Commission. Commissioner Anthony practiced law in a private firm in Washington, D.C. before beginning her government service. She was sworn in on September 25, 1997.
Immediately prior to his confirmation, Mozelle Thompson served as the Principal Deputy Assistant Secretary for Government Financial Policy at the Department of the Treasury, a post he held since 1993. Commissioner Thompson had previously worked at the New York State Housing Finance Agency, as a litigator in a private law firm, and as a law school professor at Fordham University School of Law and Brooklyn Law School. Commissioner Thompson was sworn in on December 18, 1997.
Orson Swindle served as Assistant Secretary of Commerce for Economic Development under President Reagan. He also served as Hawaii State Director of the Farmers Home Administration. In addition, Commissioner Swindle is a former Marine Corps fighter pilot and prisoner of war. He ran for Congress from Hawaii twice and played a significant role in the Ross Perot Presidential Campaign in 1992. Commissioner Swindle was sworn in on December 18, 1997.
Since the new appointments, staff members at the Federal Trade Commission have been required to provide extra lead time when seeking full Commission approval of any action. As a result, Commission staff have on occasion, less time to review matters before deciding whether or not to take action which can pose a particular problem in a Hart-Scott-Rodino merger review context where review time is already limited.
As the flood of corporate mergers continues, the Department of Justice and the Federal Trade Commission continue to be swamped by pre-merger notifications required by the Hart-Scott-Rodino Act ("HSR"). In testimony before the United States Senate Committee on the Judiciary, FTC Chairman Robert Pitofsky provided recent statistics demonstrating the impact of these mergers on the antitrust agencies. In addition, he offered his analysis of the underlying causes and effects.
Pitofsky estimated that in 1998, the FTC and DOJ will receive 4,500 HSR filings, compared to 3,702 filed in 1997 and only 1,529 filed in 1991. In 1997, Pitofsky estimated that nearly 70% of the filings were granted early termination and were permitted to proceed before the expiration of the initial thirty-day waiting period. On the other hand, 4.5% of the filings raised such significant concerns that the reviewing agency determined it was necessary to issue a request for additional information (commonly called a second request). Of those merging parties receiving second requests, almost half of them ultimately either abandoned the transaction or became subject to an enforcement action seeking to block the merger. Although the percentages become quite small, the raw numbers are still significant - in fiscal year 1997, 59 mergers were either challenged in court or abandoned.
Reviewing agencies must quickly determine which mergers they deem to be harmful to consumers. Pitofsky mentioned the particular importance of the dynamics of competition in what he called "the new economy." The following examples provide insight into issues which are of increased importance to these agencies and which merging parties should consider:
New Markets and New Types of Competition: Pitofsky cautioned that relevant markets are not static and cited the Staples/Office Depot merger to demonstrate that new forms of competition can create new markets, and, somewhat ironically, provide the basis for an enforcement agency to block mergers within those new markets;
Innovation and R&D: While some mergers may create R&D opportunities and allow competition, others may restrict cutting-edge research and new technologies. Pitofsky cited the Ciba-Geigy/Sandoz merger as an example of one in which the resultant monopoly of patent rights and important technologies would reduce competition and innovation;
Deregulated Sectors of the Economy: Just as airlines merged promptly after deregulation, other newly deregulated areas such as electricity, telecommunications, banking and financial services can be expected to consolidate. Pitofsky noted the agencies' intent to review these mergers and prevent those which would result in the elimination of a newly emerging competitor in one of these newly deregulated industries;
Vertical Combinations: While vertical combinations are generally beneficial to the consumer, Pitofsky cautioned that when a producer acquires a supplier of a critical input where there exist few alternative sources of supply, the producer may gain the ability to raise prices of that input for other producers and foreclose entry.
On February 13, 1998, the Federal Trade Commission amended its rules of practice to permit respondents to elect the faster scheduling option for more cases. Prior to the change respondents could "fast-track" only cases in which a federal court had granted a preliminary injunction. According to FTC Rules, the 13-month quick procedure will now be available in cases in which the Commission determines that the record developed in the federal court proceeding is "likely materially to facilitate resolution of the administrative case." Generally, we expect this to occur where there has been some significant amount of discovery undertaken in a related court proceeding which can be useful in the administrative case.
New Antitrust Guide
In July 1998, the Federal Trade Commission announced the creation of a new "Plain English Guide to Antitrust Laws" brochure which is available to the public. The brochure briefly describes the scope of the Sherman Act, the Federal Trade Commission Act and the Clayton Act. In addition, it provides short descriptions of illegal business practices, monopoly creation and maintenance, merger procedures and a list of frequently asked questions. The brochure is available on the internet at www.ftc.gov/ftc/antitrust.htm.
The Federal Trade Commission has recently obtained significant civil penalties against companies which did not comply with Commission merger consent decrees either by failing to divest assets within the required time period, or failing to maintain the assets appropriately pending divestiture. These actions are particularly significant given that the FTC has recently insisted upon shorter divestiture periods as a condition to entering into the decree.
Columbia/HCA Healthcare Corporation ("Columbia") entered into a consent decree to resolve competitive concerns the Commission expressed about its $3 billion merger with Healthtrust, Inc. Under the consent order, Columbia agreed to divest seven hospitals before January 1996. However, Columbia divested only five hospitals within that time frame. In July 1998, Columbia agreed to pay $2.5 million to settle the FTC's complaint that it violated the prior consent order by failing to divest hospitals in a timely manner. (FTC v. Columbia HCA Healthcare Corp., D.D.C. No. 98 CV 1889). The fine is the second largest in the FTC's history. Commissioner Orson Swindle concurred in the opinion, but wrote separately that he favored a much larger fine and believed the Commission should not have settled for only $ 2.5 million.
The FTC has obtained significant civil penalties from three other companies for their failures to comply with existing consent decrees resulting from prior mergers. Rite Aid paid $900,000 to settle claims that it failed to divest three pharmacies in Maine and New Hampshire. Schnuck's Supermarkets paid $3 million and divested an additional three stores to settle charges that it failed to maintain the stores which it was required to divest, allowing sales to decline 35%. CVS paid $600,000 to settle similar charges related to pharmacies it had been ordered to sell.
In a recent speech Gary R. Spratling, Deputy Assistant Attorney General, Antitrust Division, Department of Justice, discussed the recent increase in prosecutions of international cartels, the significant fines which have been levied, and the effects of participation in the Department's amnesty program.
Spratling described the common characteristics of international cartels as including: fixed prices; fixed worldwide sales volumes; allocation of markets by country; exchanges of competitive information among conspirators, including bid prices; and complex mechanisms for enforcing and monitoring the agreements. Spratling mentioned several recent cases meeting that description which resulted in firms paying fines in the tens of millions of dollars.
In 1997, the Antitrust Division of the Department of Justice collected a record breaking $205 million in criminal fines. In spite of the recent increases in fine collection, Spratling revealed that the Department of Justice has recommended that Congress raise the maximum antitrust fine from $10 million to $100 million.
Two recent prosecutions were made possible by information provided to the government by companies who decided to take advantage of the Corporate Leniency Policy - commonly called the amnesty program - in an effort to limit their own exposure. The amnesty program began in 1993 and because the program provides participants confidential treatment, there has been little evidence of its impact in reducing the liabilities of those firms who participate. Because the two recent firms announced their participation, it has become possible to document the effects of their participation.
In one case, the firm which initially contacted the Department of Justice about its role in the conspiracy paid no fine. Another firm which began to cooperate shortly after it became aware of the investigation, paid $49 million. In the other investigation, the initial cooperating firm again paid nothing, while the first firm to plead guilty paid $29 million. Obviously, the difference between being the whistleblower and a firm uncovered during an investigation are substantial.
In March 1998, the Loewen Group, Inc. consented to pay a $500,000 fine after the Federal Trade Commission filed a complaint alleging violation of the HSR premerger notification requirements. Loewen's failure resulted from a last minute change in the transaction which converted it from a $10 million transaction which did not have to be filed, to a $16 million transaction which did require advance notification. Even though there was no evidence that the failure to file was deliberate, the FTC decided to seek a penalty because there were real antitrust concerns with the deal and because Loewen had benefited financially from the failure to file.
First Circuit Confirms Narrow Per Se Offenses
In September 1998, the First Circuit affirmed a decision dismissing claims brought by Addamax against a joint venture, Open Software Foundation, Inc., and two of its members, Digital Equipment Corporation and Hewlett-Packard Company. Addamax charged the defendants with horizontal price fixing, boycott and other unlawful joint venture behavior. The First Circuit affirmed the dismissal of the case on the grounds that plaintiff's damages, if any, were not caused by the actions of the defendants. In the course of the opinion, the court confirmed that "joint venture enterprises - unless they amount to complete shams, - are rarely susceptible to per se treatment." The court continued that, "flinging around terms like `cartel' and `boycott' do not convert a rule of reason claim into a per se one." Addamax Corp. v. Open Software Foundation, Inc. et al., No. 97-1807 (1st Cir. September 4, 1998). Open Software Foundation, Inc. was represented by members of Hale and Dorr LLP's Antitrust Department.
Patent Pooling Found Anticompetitive
Two firms recently settled an FTC lawsuit alleging that their agreements to pool and cross-license a group of patents violated the Federal Trade Commission Act. In March 1998, the Federal Trade Commission filed suit against Summit Technology, Inc. and VISIX, Inc., complaining that the two companies were the only two firms with patents to technology necessary for photo-refractive keratectomy ("PRK") and had illegally pooled these patents to prevent competition and artificially raise prices. In August 1998, the firms agreed to disband their pooling agreement and to allow each other to use the whole group of pooled patents without the payment of licensing fees.
As alleged by the Federal Trade Commission, Summit and VISIX are the only two firms whose lasers have been approved for use in PRK by the Food and Drug Administration. The FTC claimed that when the two firms pooled their patents and agreed to share the proceeds of the use of the lasers, they eliminated competition in the market for PRK lasers which would have existed had each separately used their own patents to make and market lasers.
In 1995, the FTC and the Department of Justice jointly issued a set of guidelines regarding antitrust enforcement in the context of intellectual property. While the enforcing agencies agree that many licensing arrangements benefit consumers on the whole, their guidelines make it clear that licensing agreements that reduce competition among entities that would have been actual or likely potential competitors, may give rise to antitrust concerns. In addition, the guidelines suggested that some licensing schemes are so harmful to competition as to be per se violations of the antitrust laws. Licenses, particularly among competitors, should be carefully evaluated to ensure that their pro-competitive results outweigh any potential reduction in competition. In the Matter of Summit Technology, FTC Docket No. 9286.
FTC Finds Toy Boycott
In October, the Federal Trade Commission affirmed an administrative opinion finding that Toys "R" Us illegally induced toy suppliers to boycott warehouse clubs. The FTC found that in reaction to the growth in sales of toys by warehouse clubs such as BJ's and Costco, Toys "R" Us threatened to stop purchasing from toy suppliers who sold to the clubs and orchestrated an agreement among them to refrain from offering the clubs toys which were similar to those purchased by Toys "R" Us. This, in the opinion of the Commission, exceeded the right of a trader unilaterally to announce the terms upon which it would deal with suppliers under the Supreme Court's Colgate doctrine. Toys "R" Us has been ordered to cease the illegal practices and is barred from collecting certain types of information from the manufacturers supplying it with toys. Commissioner Swindle dissented in part, citing a lack of sufficient evidence of a horizontal boycott. In the Matter of Toys "R" Us, Inc. FTC Docket No. 9278 (Oct. 13, 1998).
Massachusetts Wholesale Liquor Law Struck Down
The United States District Court for the District of Massachusetts recently struck down the law which required liquor wholesalers to post their prices for the coming month and prohibited deviation from those prices except to match a lower price offered by a competitor. The court determined the law violated Section 1 of the Sherman Act because it contemplated not simply the exchange of price information, but instead required adherence to the announced price for a period of time. Although the Commonwealth defended the statute as "state action," exempt from the antitrust laws, the court rejected that defense after determining that the Commonwealth had no power to ensure that the price posted was a reasonable price. Courts in other parts of the country have reached contrary results creating some uncertainty about the level of state involvement required to take advantage of the state action doctrine in this context. Canterbury Liquors & Pantry v. Sullivan, 1998-1 Trade Cases CCH - 72,055 (D. Mass. 1998).
The Commonwealth has appealed the decision and filed a motion the District Court for a stay to maintain the status quo pending the outcome of the appeal. The District Court denied the request for the stay, rendering the decision immediately effective. Canterbury Liquors & Pantry v. Sullivan, 999 F. Supp. 144 (D. Mass. 1998).
Drug Wholesalers' Mergers Blocked
In July 1998, Judge Stanley Sporkin entered an injunction in favor of the Federal Trade Commission blocking two mergers in the drug wholesale business - the merger of Cardinal Health, Inc. with Bergen-Brunswig Corp. and the merger of McKesson Corp. with AmeriSource Health Corp. The four wholesalers at issue are the four largest in the industry and the only wholesalers providing national coverage. After the proposed mergers, the resulting two firms would have controlled 80% of the wholesale drug market. Shortly after the issuance of the opinion, the parties announced they had abandoned the transactions.
Having found that the merger would substantially increase market concentration, Judge Sporkin examined the rebuttal evidence. The wholesalers argued that ease of entry, the existence of power buyers and the resulting efficiencies effectively countered the increase in concentration and would result in benefits to the consumer. Although Judge Sporkin found entry to be possible within two years, he did not find that firms were likely to enter or expand. He noted the historical consolidation of the players with little or no expansion or entry in the past several years. While Sporkin agreed that there are power buyers dealing with these wholesalers, that fact alone, in his opinion, did not outweigh the damaging effects of consolidation. Finally, the court determined that the companies failed to demonstrate that the claimed efficiencies outweighed the benefits of continued competition.
The opinion recites three pieces of evidence which appeared to the court to be particularly persuasive to the FTC's case. First, the FTC presented internal documents which suggested that the real motive for the mergers was to decrease excess capacity and raise prices back to "rational" levels. Second, the FTC was able to demonstrate that its injunction against a wholesale merger in 1988 resulted in significantly lower prices to consumers. Finally, there was evidence that the four companies at issue had previously coordinated pricing and sought to undercut real competition in the marketplace. Federal Trade Commission v. Cardinal Health, Inc., Civil Action 98-595, 98-596 (D.D.C. 1998).
Citric Acid Producer Found Not To Be Member Of Conspiracy
A citric acid producer whose prices paralleled those offered by members of a conspiracy, who belonged to the same trade associations and who held meetings with members of the conspiracy, could not, without more evidence, be held to be a member of the conspiracy. In a civil conspiracy suit initially brought against five defendants, the four indicted conspirators settled, leaving one unindicted company, Cargill, defending the suit. Cargill introduced evidence from members of the conspiracy that no one from Cargill attended the meetings at which the markets were divided. Further, Cargill demonstrated that it had operated at full capacity during the relevant time period and not suppressed production as others had done. Although acknowledging that direct evidence of participation is not required to prove involvement in a conspiracy, the lack of direct evidence specifically related to Cargill was found to be probative because of the significant direct evidence linking the other four companies to the conspiracy. The United States District Court for the Northern District of California concluded that no reasonable jury could find Cargill to have been involved in the conspiracy and dismissed the suit. In re Citric Acid Litigation, 1998-1 Trade Cases CCH - 72,069 (N.D. Cal. 1998).
Nasdaq Class Litigation Settled
With one exception, the Nasdaq market-makers accused of conspiring to fix the bid-ask spreads of certain Nasdaq securities in violation of section 1 of the Sherman Act, have agreed to settle the litigation for a total of more than $1 billion. The attorney for the plaintiff class stated that he believes the settlement is the largest antitrust settlement in history. The defendants allegedly conspired to fix the spread between the bid and ask prices for almost 1600 individual stocks. This was apparently accomplished by avoiding odd-eighth quotes and was discovered when studies were publicized demonstrating the absence of odd-eighths in the pricing of Nasdaq securities. In re NASDAQ Market-Makers Antitrust Litigation, 1998 Trade Cases CCH - 72,028 (S.D.N.Y. 1998).
Health Care Information Sharing
On January 9, 1997, Representative Hyde introduced a bill (H.R. 415) to adopt a more lenient rule of reason analysis to a variety of health care activities including: 1) the exchange among health care providers of information relating to costs, sales, profitability, marketing, prices, or fees of any health care service so long as it is for the purpose of establishing a health care provider network and 2) the negotiation, execution and performance of contracts which include establishing and modifying fee schedules. This bill has been referred to the House Committee on the Judiciary.
On June 23, 1998, Senator Leahy introduced a bill (S. 2207) to amend the Clayton Act to provide enhanced power to the Attorney General to prevent mergers that would unreasonably limit competition in the telecommunications industry. The bill would add a new section prohibiting mergers of "large local telephone companies" without a finding by the Attorney General that the merger will promote competition and a finding by the FCC that each merging party has met a particularized set of standards. This bill has been referred to the Senate Committee on the Judiciary.
On July 30, 1998, the Senate passed a bill (S. 53) to eliminate the seventy-six year old antitrust exemption for baseball. The bill would allow baseball players to go to court over contract disputes with team owners, and, presumably reduce labor tensions which have caused a string of baseball strikes over the last thirty years.
Financial Services Competition
On January 7, 1998, Representative Leach introduced a bill (H.R. 10) to enhance competition in the financial services industry. Currently, bank mergers are examined by either the Federal Reserve Board or the Comptroller of the Currency. As part of this bill, which was passed by the House May 13, 1998, the Federal Trade Commission and the Department of Justice would play a greater role in the review of financial services mergers. In essence, the bill splits the review of bank mergers so that the bank portion is treated as a bank merger and the other portions, such as insurance or securities brokerage, would be treated under traditional Hart-Scott-Rodino mechanisms. This alteration would prevent banks who own different types of services from undergoing only the bank merger review process, as currently occurs.
It is clear that the federal antitrust enforcement agencies face a significant burden of handling the increasing volume of pre-merger notifications as the merger wave continues. However, both of these agencies continue to give careful attention to the pre-merger filings as well as compliance obligations arising out of consent decrees designed to solve competitive problems. Furthermore, enforcement of criminal antitrust law remains one of the highest priorities of the Antitrust Division both domestically and internationally. To minimize the possibility of legal problems emerging, it is important to consult a specialist early on when contemplating a merger, strategic alliance or licensing agreement.