Source: https://www.corporatecomplianceinsights.com/antitrust-and-competition-understanding-the-risks/
Timestamp: 2019-04-21 20:58:28+00:00

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Nearly every code of conduct has a general antitrust compliance statement, and some get into a great deal of detail.
But while the basic principles of antitrust, collusion and abuse of dominance have changed very little over the years, the specifics of what constitutes an antitrust violation have evolved, as have the techniques available to ensure an effective compliance program. Spending a few minutes thinking about where the law might be going in 2014 can be useful in making sure that your compliance program really is addressing today’s risks.
Candidate Obama, like many others, talked about reinvigorating antitrust enforcement.1 The first Obama Administration started by withdrawing the report that had been issued in 2008 on enforcement of § 2 of the Sherman Act. Now that we are into the second Obama Administration, it is interesting to take a look and see where federal antitrust enforcement is likely to go.
The state of federal antitrust enforcement often begins with a discussion of the different approaches taken by the Federal Trade Commission (FTC) and the Antitrust Division of the Department of Justice (DOJ), the two federal agencies charged with enforcement of the antitrust laws. While the Antitrust Division has criminal jurisdiction that the FTC lacks, and the FTC has the broad coverage of the FTC Act in its statutory arsenal, the “inside baseball” discussion of the two agencies often looked at things like competing personalities and bureaucratic competition. But 2014 dawns with an unusual situation. The head of the Antitrust Division, William Baer, and the head of the Competition Bureau of the FTC, Deborah Feinstein, were both formerly partners at the same law firm, Arnold & Porter. Both also had stints at the FTC, and a certain similarity in approaching antitrust issues would not be a surprise. One may reasonably assume that any process requiring coordination between the two agencies, such as clearance of Hart-Scott-Rodino premerger notification forms, would be handled smoothly. While there may be differences in the enforcement priorities between the two agencies, don’t expect to see differences as dramatic as might have appeared in the past.
In his first formal remarks about antitrust enforcement,2 Assistant Attorney General Baer noted that the goal of government enforcement was to preserve or restore competition, rather than just to win cases. The government would try to fix mergers with divestitures, but some deals are viewed as nearly unfixable, and the Department will resort to litigation when negotiations do not yield a satisfactory outcome. In civil non-merger cases, such as the Apple e-books case, the goal was to seek a remedy that would “stamp out any lingering effects of the conspiracy” and prevent similar conduct in the future. Thus, the remedy in that case included a compliance program and a compliance monitor.3 Civil disgorgement may be an appropriate remedy if the defendant would otherwise have retained the monetary benefits of its anti-competitive conduct, and it may be sought in both merger and conduct cases. The likelihood of success by private litigants would also be considered. In the criminal enforcement area, Baer noted the remedy in the AU Optronics case had a $500 million fine and a compliance monitor.
Enforcement can be expected particularly in areas that reflect current consumer concerns, such as almost anything related to health care. One example is the announced policy with regard to filing of HSR reports on patent licenses in the pharmaceutical industry. Previously, the transfer of an exclusive license was reportable only if the seller did not retain any patent rights to “make, use or sell.” The FTC Premerger Notification Office announced that it will not consider a transfer of a patent license to be reportable even if the licensor retains the right to manufacture solely for the licensee, or if the licensor retains a right to market with the licensees. The rationale is that even if these limited rights are retained, the licensor is transferring “all commercially significant rights,” and therefore it is appropriate to treat the transaction as an acquisition. The rule applies only to the pharmaceutical industry, but “to the extent that other industries engage in similar exclusive licensing transactions, such transactions remain potentially reportable events” that would require HSR filing. Additionally, the Premerger Notification Office announced that it will assess whether similar rules should be adopted for other industries. So, while the pharmaceutical industry was upset at being singled out, other industries that depend on technology should be alert that premerger notification requirements may be imposed on their patent licenses, particularly where there is any sort of cost impact on the general public, or where there is some hint that there is an evasion of a regulatory rule that otherwise would have impacted the transaction.
One indication of the FTC’s aggressiveness is its attempt to obtain disgorgement from Cephalon in a reverse payment case. The FTC had been fighting with Cephalon for six years about its efforts to delay generic entry, and Cephalon sought to dismiss the complaint as moot since generic entry has now occurred. The FTC countered by arguing that it is appropriate to enter an injunction to prevent recurrence of the illegal conduct, and that the equitable remedy of disgorgement of the unjust enrichment had occurred. Cephalon’s case was not helped by comments from the former CEO who said, “We were able to get six more years of patent protection. That’s $4 billion in sales that no one expected.” The FTC recovered $100 million from Mylan when it challenged Mylan’s use of exclusive licenses to prevent generic competition. FTC v. Actavis, Inc. may impact the development of the substantive law here, but the FTC’s aggressiveness in seeking disgorgement shows that there is a greater potential downside to these situations than might have been anticipated when one did a risk assessment.
Aggressive enforcement against cartels will likely continue as before. The key staff development here was the resignation of Scott Hammond, who had been with the DOJ since 1988, and had been Deputy Assistant Attorney General for Criminal Enforcement since 2005. Brent Snyder, who has been with the Antitrust Division as a criminal antitrust lawyer since 2003, was named to replace Hammond. In fiscal 2012, more than $1.1 billion in criminal fines for antitrust violations had been recovered by the DOJ. The Division charged 16 corporations and 63 individuals with criminal antitrust violations, and courts imposed 45 prison terms with an average sentence of just over two years per defendant. During Hammond’s tenure, the amnesty program of the Antitrust Division was expanded significantly and served as the basis for the successful prosecution of a large number of cartel participants. The fiscal year ends in September, and FY 2013 statistics were not available at the time of this writing, but one should not be surprised at the relatively large number of settlements that occur in September of each year as the Division seeks to “make its numbers.” The Division also recognizes the fact that jail may be the most effective deterrence tool available to it, and the average jail sentence has increased from eight months to 25 months since the 1990s. In December 2013, a five-year sentence was handed down in the trial of Frank Peake, former president of Sea Star Line.4 This is the longest antitrust sentence to date, and makes Peake’s $25,000 fine look rather insignificant.
The economic bubble that started to burst in 2007 caused billions of dollars in damage to the economy and to thousands of individuals. Although one might have thought that antitrust tools might be deployed to counter this massive injury, including actions to break up some of the banks that were deemed “too big to fail,” it really hasn’t happened. The Dodd-Frank Act imposed many new requirements aimed at ensuring financial solvency, but one of the unintended consequences of the law was to increase the compliance burden on small banks and credit unions, resulting in closure, merger or sale.
Activity does continue with regard to certain conduct in the banking community, such as in the LIBOR (London Interbank Offered Rate) cases.6 If more evidence of similar collusive conduct is uncovered, particularly with impact on the public, then public enforcement is a risk. In theory, a public enforcer or private antitrust litigant could argue that a bank engaged in illegal, unfair or deceptive acts in order to injure competition, thus setting the stage for competitors to fail or be more willing to be acquired. But as the time passes from the 2007-2008 economic tumble, the odds of a § 2 case being filed decline. While it is imperative that banks continue to aggressively support their antitrust compliance programs, remedies are more likely to come in the regulatory arena.
Public enforcement against cartels continues, with lengthy prison terms and large fines sought. The DOJ will proceed against conspiracies that occur outside the United States when they have a domestic impact. And even if compliance programs did not play a role in the case before the litigation, there is a trend to insert compliance requirements as the cases are resolved. The AU Optronics7 case required the appointment of a compliance monitor with a compliance program that mirrored much of the Federal Sentencing Guidelines.
Academically, advances in understanding how people behave in the marketplace continue. The notion that people act for a variety of reasons other than narrow self-interest is readily accepted. However, in analyzing antitrust actions, classical market-driven economics is still the predominant tool. It is unlikely that, for example, the merger guidelines would be revised to reflect psychological understanding of behavior. However, the possibilities do exist that in a specific case, conduct may be better understood by applying behavioral economic concepts rather than classical economic concepts. Behavioral economics might provide greater insight into whether or not a given practice is anti-competitive.
But for compliance officers, the most important use of behavioral concepts may be to understand why people violate the law or a compliance policy. If there are certain tools that can be used that will make it more likely that an individual will follow the rules, they should be part of the arsenal of the compliance officer. The fundamental principle is to make certain that your antitrust compliance program (or any compliance program, for that matter) approaches the subject from the point of view of the employee. Relevant examples and understandable language are essential. Clear instructions on what is expected of the individual should be easily found.
Additionally, making it seem like antitrust compliance is part of what everyone in the “group” does, whatever group that might be, will make it more likely that an individual will adhere to a norm. Conduct must be reinforced up and down the chain of command. Since many people define themselves by their jobs, emphasizing the fact that an antitrust violation will result in loss of the ability to work anywhere in the same field may have a stronger deterrent impact than fines or jail.
Antitrust compliance programs often fail to cover the antitrust risks that might be presented by activities that are within the domain of human resources departments. While there may be antitrust exemptions for collective bargaining, it is a mistake to assume that anything done with regard to hiring employees is free from antitrust concerns. Actions have been brought by the federal government and the states to challenge “non-poaching” agreements among companies that might be drawing on the same pool of employees, even if they were not direct competitors.9 The FTC brought an action against the Music Teachers National Association, since its “code of ethics” prohibited members from soliciting other members’ students. Press coverage had a lot of fun with it, since piano teachers weren’t seen as a major threat to the economy, and the restraint was likened to a union contract. But as an antitrust risk it was fairly straightforward. This was an agreement not to compete, and a review of the MTNA code of ethics should have flagged it immediately.
Even in the context of employment or a professional or trade association, any rule that seeks to limit competition (or has that result) should undergo very thorough scrutiny to verify that there is a legitimate reason for it. In the employment world, anything done with other employers, such as a salary survey, should be reviewed by antitrust counsel to determine if it might create unacceptable risks.
The Federal Trade Commission and Antitrust Division will continue to cooperate with foreign enforcement agencies and international organizations. Regulation of competition is now a common part of the legal infrastructure of most countries, and while enforcement policy and competence may vary widely outside of the United States, antitrust must be a part of compliance programs wherever a company does business. Enforcers in China have said that they will now look at resale price maintenance as well as cartel enforcement. If you do business in China, you cannot afford to ignore the Anti-Monopoly Law. During 2013, large fines were imposed on multinational companies for engaging in price fixing and resale price maintenance, and companies were encouraged to “confess” their violations. The EU will continue to be aggressive, as shown by its actions against Google. In Mexico, the government announced its intention to scrutinize competition in telecommunications.
As in the AU Optronics case, U.S. government enforcement against cartels will take place if there is an impact in the U.S., and private follow-on litigation should be expected. The concept of private antitrust actions is gaining support outside of the United States. Compliance officers of multinational companies must continue to firmly resist the entreaties of overseas managers to allow them to participate in local cartels based on local custom.
The Administration is likely to continue its course of challenging mergers that appear to be anti-competitive from a consumer point of view10 and will probably continue to give less weight to arguments of efficiency than might have been persuasive in the Bush era. While it is probably impossible to bring back the “good old days” when air travel was pleasant, the challenge to the US Airways-American Airlines merger resulted in a settlement that was intended (hopefully) to preserve competition that would benefit consumers. Just before trial was about to start in the case brought by the DOJ and six states to block the merger, the case was resolved with an agreement requiring the airlines to divest slots and gates to low-cost carriers (such as JetBlue and Southwest), maintain commuter airline slots at Reagan National Airport and maintain air service in designated hub airports for three or five years. A divestiture trustee will be appointed by the court if the airlines do not complete the divestitures in the time specified in the agreement. The DOJ also has discretion to appoint a compliance monitor. The ostensible goal of the DOJ enforcement was preservation of competition, but it should be noted that there was political pressure brought on the government from employee unions, and there were various politicians from hub cities that would benefit from the deal going forward. Did the political pressure have any impact on motivating a settlement rather than a trial? There is no way to know, of course, but in highly publicized situations like this where economic benefits to defined constituencies may be important, lobbying can be expected.
Where technology is the key asset of merged companies, this gives additional means to resolve a challenge to the merger. The FTC challenged the merger between Honeywell and Intermec, and the matter was resolved with an agreement to license certain technology to another competitor and to not file patent infringement claims against that competitor.
Changes in market conditions are an important part of any merger analysis. The FTC blocked the merger between the two largest office supply superstores in 1997.11 But in November 2013, the FTC allowed the merger of Office Depot and OfficeMax to proceed. What happened? It would be tempting to answer by saying “the Internet,” but that would only be a partial answer. In 1997, the government did not accept arguments that mail order companies and mass merchandisers were part of the relevant market. Instead, they pointed to evidence that showed that unless another office supply superstore was in the area, there was no impact on prices from these other outlets. But fast forward 16 years and we have an elaborately developed Internet that provides the products through a number of sites, the ability to have Internet-ordered products picked up in a store and in-store kiosks that can be used to order goods that are not in stock. In short, the market had shifted, and merely looking at the share of sales of stores with a fixed retail location would not provide an accurate picture of the competition that was present.
If a proposed merger includes businesses in other countries, you should remember that more and more countries have their own merger review regimes. Different rules apply with regard to timing, filing fees and the threshold for challenge.
Whatever countries are involved, if an acquisition involves competing companies, the parties should understand that they need to think about possible fixes at the outset and not wait until a lawsuit is threatened (or filed) before working on a way to allow the deal to proceed.
The increasing antitrust litigation involving patents may be a sign of the evolution of our economy (and society) to a more technology-based world. But even without trying to make any profound interpretations of this trend, it is important to note the presence of antitrust intruding into the world of patent “monopolies.” There needs to be continuing sensitivity to whether the company has a “standard essential” patent, i.e., one that is part of an industry-wide standard. If the government finds that there has been an abuse of those patent rights, it may seek an order requiring licensing on a fair, reasonable and non-discriminatory (FRAND) basis. Mandatory patent licensing may also be required as a condition to allowing a merger to proceed.
The use—and possibly the abuse—of patent rights in the pharmaceutical industry remains in the spotlight. The Supreme Court, in the Actavis decision,16 addressed the practice of making payments to “settle” patent cases brought by generic drug manufacturers that contained an agreement that the generic manufacturer would delay entering the market, thereby effectively extending the period of patent protection for a drug. The Court ruled that these reverse-payment settlements under the Hatch-Waxman Act “can sometimes violate the antitrust laws,” and should be analyzed under the rule of reason.17 Antitrust liability is not governed by the patent law, and a court, by examining the size of the payment, potential future litigation costs and whether other services are involved, can assess the likely anti-competitive effects along with its potential justifications without litigating the validity of the patent.
The rule of reason approach adopted by the Court means that the details of what is reasonable and what is not are largely unknown. The cases that follow Actavis will flesh out those details. In In re Nexium Litigation,18 the court denied the motion to dismiss even though there was no monetary payment. The complaint alleged that an exclusive license to distribute the branded product was given in exchange for an agreement to delay entry into the generic market. So, although the Supreme Court spoke of the importance of the size of the payment, what may really matter is the value of the consideration.
The Supreme Court has whittled away the antitrust rules against resale price maintenance, and now both minimum resale price maintenance (attempts to limit discounting by resellers) and maximum resale price maintenance (attempts to limit price gouging by resellers) are judged under the rule of reason in federal court. Federal enforcement in this area is unlikely, unless the price maintenance allegations come as part of a monopolization or merger case. Private parties may raise these allegations, but it will be difficult to show damages or even get beyond early motion practice. Nevertheless, if a price maintenance policy is adopted, there should be a rationale for the price restraints prepared in advance of any litigation that demonstrates the reasonable, pro-competitive impact of the restraint.
State and federal price discrimination laws are still on the books, but the legal risk they pose has been significantly diminished by court decisions that make it increasingly difficult for plaintiffs to win their cases. But particularly where companies sell a branded product to competing wholesalers or retailers, management of pricing differences is important both for limitations of legal risk and for maintaining good relations with—and trust by—all customers. Antitrust litigation often results from a feeling of being mistreated, even if the facts prove otherwise.
As our society increasingly moves to an online existence for commerce and our personal lives, the importance of this area in your compliance program will increase, no matter what business you operate. Even in the absence of a specific federal cybersecurity law, the FTC has taken the position that actions that involve a breach of privacy or the release of financial information are a violation of the FTC Act as an unfair and deceptive practice.
Since 2000, the FTC has brought 21 actions against companies that have been hacked, asserting that the lack of security is a violation of § 5 of the FTC Act, which states that “Unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce, are hereby declared unlawful.” It has been fairly successful in this area. In 2005, BJ’s Wholesale Club agreed to settle a complaint that it failed to provide adequate security, which resulted in several million dollars in fraudulent purchases. It was ordered to implement an information security program and obtain an assessment of its program from an independent third party for the next 20 years.
In 2006, the FTC obtained a $10 million penalty from ChoicePoint Inc. over a data breach involving more than 180,000 stolen card numbers. The agency has also gone after Twitter, HTC and Google for data breaches, and these actions, like practically all such cases, resulted in fairly quick out-of-court settlements.
Part of the FTC’s “normal” enforcement actions involves the regulation of franchisors, and this took a cyber-twist when the Commission brought an action against Aaron’s Inc.,20 a company that franchises “rent-to-own” stores. Franchisees rented computers that included computer monitoring software which was able to track consumers’ locations, capture images on the computer webcams and activate keyloggers that could capture IDs and passwords. All of this was done surreptitiously. Nominally, the software was designed to help assist in collecting past-due amounts and recovering computers, but the FTC brought an action against DesignerWare LLC and several of the franchisees for violating the FTC Act.21 Even though Aaron’s did not have this software on computers at company-owned locations, the FTC asserted that Aaron’s “knowingly assisted its franchisees” in using the software. Because of Aaron’s involvement in the implementation of the software, which violated consumer rights, it was deemed to have violated the FTC Act. The case against Aaron’s was resolved with a consent order that prohibits the use of such software by Aaron’s or its franchisees, and Aaron’s is required to actively monitor its franchisees to make certain they do not engage in these practices in the future.
Of course, it will be interesting to see where the court comes out on this case, but there are several lessons for compliance officers in this case, regardless of the ultimate outcome. Even if the FTC is rebuffed by Wyndham, it will most likely continue to go after situations where there are security breaches, particularly those where consumer information is compromised. And it will seek to hold a franchisor liable for actions of a franchisee. So if your company or a franchised company collects any sort of consumer data as part of the business, the compliance plan should contain a cybersecurity risk evaluation. The compliance officer is not expected to be a computer security expert, but you need to make sure that this area is covered for the company and for any business partner, such as a franchisee, who could provide the basis for vicarious liability.
Can You Count on Your Antitrust Compliance Programs?
Yes—and no. If you have an “effective” compliance program (both in reality and as defined by the Federal Sentencing Guidelines), then you have a reasonable chance to prevent the kind of conduct that can result in antitrust liability. But unlike other compliance programs that meet the effectiveness criteria of the Federal Sentencing Guidelines, your “effective” antitrust program will not get any credit from the Department of Justice in sentencing recommendations. The official position of the DOJ is that, alone among all of the areas of criminal law that it enforces, antitrust compliance programs do not earn any credit when it comes to sentencing for an antitrust violation, since antitrust goes to the “heart” of the company. Why this is so has never been explained, but that should not stop you from insisting on an effective program. Understanding the basic risks of antitrust, and how those risks might evolve in the future, will help you craft your program to address those areas to which your firm may be most vulnerable. You want to stop violations from happening and make sure that your compliance program is the first to detect the violation if it occurs.
As frequently noted, while there may be political differences on other areas of regulatory enforcement, antitrust enforcement in the United States against price fixing is vigorous whether there is a Republican or Democrat in the White House. Differences in enforcement philosophy show up primarily in merger policy, and then perhaps in other peripheral areas such as § 2 or joint venture enforcement. Given the potentially draconian penalties that can be imposed for a violation (e.g., huge fines, lengthy jail terms, large treble damage lawsuits), with little or no ability to use FSG criteria as an offset, continued antitrust compliance vigilance is essential.
1 “[A]n Obama administration will take seriously its responsibility to enforce the antitrust laws so that all Americans benefit from a growing and healthy free-market economy.” https://www.wired.com/images_blogs/threatlevel/2009/04/obamatechplan.pdf (Aug. 5, 2008).
2 “Remedies Matter: The Importance of Achieving Effective Antitrust Outcomes,” Remarks at the Georgetown 7th Annual Global Antitrust Enforcement Symposium (Sept. 25, 2013).
3 After Baer’s speech, Apple filed a motion to stay the activities of the monitor, which were costing over $1,000 per hour. Apple claimed that the monitor was undertaking an investigation beyond that which was authorized in the order, but the Department defended the monitor’s actions.
4 United States v. Frank Peake, No. 3:11-cr-00512 (D.P.R. Dec. 6, 2013).
5 United States v. Apple, Inc. (S.D.N.Y. July 10, 2013).
6 Rabobank paid $325 million to settle the claim against it as part of a deferred prosecution agreement. Most of the litigation connected with the subprime mortgage debacle dealt with claims that there were breaches of representations and warranties, such as the case brought by Freddie Mac against Bank of America, which was settled on Dec. 2, 2013 for $404 million. One prosecution addressed bid-rigging and mail fraud in foreclosure auctions.
7 United States v. AU Optronics Corp., No. 09-cr-0110 (N.D. Cal. June 11, 2012).
8 Central Aluminum Co. v. Goldman Sachs Group, Inc., No. 13-14811 (E.D. Mich. Nov. 21, 2013) (class action complaint filed).
9 Cases were brought in 2010 against Google, Apple, Intel, Intuit, Pixar and Lucasfilm. United States v. eBay, Inc., No. 12-cv-5859 (N.D. Cal. Nov. 16, 2012), challenged a “handshake” agreement between eBay and Intuit not to solicit each other’s employees.
10 The merger between Anheuser-Busch InBev SA/NV and Groupo Mondelo might have been allowed to proceed without a DOJ challenge—and a required large divestiture—by the prior administration.
11 FTC v. Staples, 970 F. Supp. 1066 (D.D.C. 1997).
12 Although the FTC is an independent agency, it is responsive to political and societal trends.
13 For example, in New York, a law enacted on Oct. 24, 2013, specifically extends the state’s antitrust immunity to Nassau Health Care Corp. The law specifically allows Nassau Health to collaborate with others to further its health care objectives, even if such collaboration displaces competition.
14 In FTC v. Phoebe Putney Health Sys., Inc., 133 S.Ct. 1003 (2013), the Supreme Court denied the FTC’s challenge to a merger between hospitals that would have created the monopoly. The hospital sought to defend based on state action, but the Supreme Court ruled that state action antitrust immunity had to be explicitly stated in the enabling legislation.
15 Conduct remedies include firewalls that may limit sharing of certain confidential information or the requirement to license technology to competitors on a fair, reasonable and non-discriminatory (FRAND) basis.
16 133 S.Ct. 2223 (2013).
18 No. 12-md-2409 (D. Mass. Sept. 11, 2013).
19 M. Carrier, “Five Arguments Laid to Rest After Actavis,” Antitrust Source (Oct. 2013).
21 https://www.ftc.gov/news-events/press-releases/2013/04/ftc-approves-final-order-settling-charges-against-software-and. A civil suit was also filed. Byrd v. Aaron’s, Inc., 2011 U.S. Dist. LEXIS 73908 (W.D. Pa. June 16, 2011).
23 FTC Chair Edith Ramirez requested that Congress make the FTC’s role in enforcing data breaches official on Dec. 12, 2013.
25 S.42, passed Nov. 5, 2013.
Ted Banks is a Partner in the Law Firm of Scharf Banks Marmor LLC in Chicago, where his practice focuses on corporate compliance, antitrust/competition law, and food industry matters. He is also President of Compliance & Competition Consultants, LLC, and is an Adjunct Professor of Corporate Compliance at the Loyola University School of Law in Chicago. Formerly, Ted served as Chief Counsel & Senior Director, Global Compliance Policy at Kraft Foods.

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