Antitrust and Consumer Protection Newsletter
In This Issue:
FTC and DOJ Issue Revised Horizontal Merger Guidelines
Wiggin and Dana Authors Influential Brief on Confidentiality of Documents Produced Under an Antitrust Subpoena
Resale Price Maintenance Redux
In-House Attorney/Client Communications Are Not Privileged In The European Union
FTC AND DOJ ISSUE REVISED HORIZONTAL MERGER GUIDELINES
On August 19, 2010, the Department of Justice and the Federal Trade Commission (the "Agencies") issued Revised Horizontal Merger Guidelines (the "Revised Guidelines"), which represent the first major revision of the Agencies' 1992 Horizontal Merger Guidelines ("the 1992 Guidelines"). The Revised Guidelines are intended to update the 1992 Guidelines and better describe the Agencies' actual practices when reviewing mergers and related transactions. The goal is to provide the merging parties and the public with more clarity and transparency through the process. A copy of the Revised Guidelines may be found on the FTC's website or on the Department of Justice's website.
Fact-Intensive Analysis. According to FTC Chairman Jon Leibowitz, the Revised Guidelines "emphasize the competitive effects of a deal over the more rigid, formulaic approach imposed by some interpretations of the 1992 Guidelines." FTC Press Release dated August 19, 2010. Moving away from rigid formulas, however, necessarily leads to a more fact-intensive analysis. Indeed, the Revised Guidelines provide that "merger analysis does not consist of uniform application of a single methodology. Rather, it is a fact-specific process through which the Agencies, guided by their extensive experience, apply a range of analytical tools to the reasonably available and reliable evidence to evaluate competitive concerns in a limited period of time." Revised Guidelines, Section 1 (Overview).
The Revised Guidelines therefore describe, in a dense, thirty-four page document, the many factors that the Agencies may consider when reviewing mergers between competitors. In fact, a new section in the Revised Guidelines highlights in some detail the types and sources of evidence that the Agencies are likely to consider during a merger analysis. Not surprisingly, and similar to prior practice, the Revised Guidelines provide that "[d]ocuments created in the normal course are more probative that documents created as advocacy materials in merger review." Revised Guidelines, Section 2.2 (Sources of Evidence).
Because the Revised Guidelines are lengthy, dense, and untested, it is more important than ever to consult with experienced antitrust counsel before attempting to evaluate any proposed transaction under the Revised Guidelines. The full import and practical application of the Revised Guidelines – and whether they will change any particular outcomes – all remain to be seen. One thing is certain: in the coming years, it may be more difficult to predict the outcome of any specific merger analysis, under the Agencies' new, and more amorphous, fact-intensive inquiry.
Commissioner Rosch's Concurring Statement. In an unprecedented statement issued with the release of the Revised Guidelines, FTC Commissioner J. Thomas Rosch wrote separately to concur with the issuance of the Revised Guidelines even though he deemed them to be "flawed." While Commissioner Rosch agreed with certain aspects of the Revised Guidelines, he criticized their "overemphasis on economic formulae and models based on price theory," among other things. Commissioner Rosch also stated that, despite striving for transparency, the Revised Guidelines do not reflect the way the enforcement staff at the FTC or the courts actually proceed when reviewing mergers and related transactions. As Commissioner Rosch's statement highlights, it likely will take many years for the Agencies and the courts to work through the proper interpretation and application of the Revised Guidelines.
Market definition as a means, not an end. The most significant development in the Revised Guidelines is a move away from market definition as a gate-keeper for merger analysis. Under the 1992 Guidelines, defining the relevant product and geographic markets was often seen as a threshold step, required before considering the transaction's actual competitive effects. The Revised Guidelines state explicitly that "[t]he Agencies' analysis need not start with market definition." Revised Guidelines, Section 4 (Market Definition). According to the Revised Guidelines, "[t]he measurement of market shares and market concentration is not an end in itself, but is useful to the extent it illuminates the merger's likely competitive effects." Id. Indeed, "[e]vidence of competitive effects can inform market definition, just as market definition can be informative regarding competitive effects." Id. The Revised Guidelines retain the existing methods for defining a product market (i.e., the hypothetical monopolist test), but emphasize that the analysis should be "guided by the overarching principle that the purpose of defining the market and measuring market shares is to illuminate the evaluation of competitive effects." Revised Guidelines, Section 4.1.1.
This is a new approach to market definition, and it will take some time to see how the Agencies actually apply this competitive-effects-driven method of defining a relevant market. Whether the courts will adopt this same approach also remains to be seen. While many courts have relied on the 1992 Guidelines when reviewing merger challenges, courts are not bound to follow any of the Agencies' guidelines. It will be interesting to see how the new principles of market definition play out in both the Agencies and the Courts.
Updated Provisions on Unilateral and Coordinated Effects. The Revised Guidelines also contain expanded sections on evaluating the potential unilateral and coordinated effects that may result from a proposed transaction. Unilateral effects are those effects that result simply from the elimination of competition between the two firms that have merged. The Agencies will look for evidence that the merger itself could result in a substantial lessening of competition, because the merged firm could, on its own, increase its prices, reduce its output, diminish innovation and/or reduce product variety. See Revised Guidelines, Section 6 (Unilateral Effects). For example, the Revised Guidelines explain that, in differentiated product industries, the Agencies will evaluate the extent of direct competition, using the diversion ratio of the products sold by the proposed merging entities (i.e., the fraction of unit sales lost by one firm's product due to an increase in price that would be diverted to the other firm's product). As another example, in industries where buyers often negotiate with various sellers, the Agencies will consider whether the merger of two selling firms prevents the buyers from playing various sellers off each other.
In addition to looking at potential unilateral anticompetitive effects, the Agencies consider the likelihood that the merged entity could enable or encourage post-merger coordinated interaction among firms in the relevant market. The Agencies are likely to challenge a merger because of the potential for coordinated anticompetitive effects if: (1) the industry is moderately or highly concentrated after the merger, (2) the market shows signs of vulnerability to coordinated conduct (e.g., where firms in this industry have previously colluded, where prices and customers are transparent, etc.), and (3) the Agencies have a "credible basis" to believe that the merger will increase that vulnerability. See Revised Guidelines, Section 7 (Coordinated Effects).
New Sections on Powerful Buyers and Partial Acquisitions. The Revised Guidelines also added several new sections, increasing the number and scope of factors that the Agencies claim they might consider in their fact-intensive merger analysis. For example, the Revised Guidelines include new sections on powerful buyers and mergers between competing buyers, demonstrating an increased concern with the possibility of buyer, or monopsony, power. See Revised Guidelines, Section 8 (Powerful Buyers) and Section 12 (Mergers of Competing Buyers). When the merging parties are sellers, powerful buyers may substantially reduce any likely anticompetitive effect from the transaction, by constraining the ability of the merging parties to raise prices. See Section 8. The Revised Guidelines also indicate that the Agencies will evaluate a merger of competing buyers using the same framework described for evaluating mergers of competing sellers. See Section 12.
Also new in the Revised Guidelines is a section on partial acquisitions, or transactions involving minority positions that do not completely eliminate competition between the parties to the transaction. See Revised Guidelines, Section 13. The Agencies recognize that partial acquisitions can lessen competition in three principal ways: (1) by giving the acquiring firm the ability to influence the competitive conduct of the target firm, (2) by reducing the incentive of the acquiring firm to compete, and (3) by giving the acquiring firm access to non-public, competitively sensitive information from the target firm. Because partial acquisitions can vary greatly in their potential for anticompetitive effects, the specific facts of each case must be examined closely.
Entry and Efficiencies. The Revised Guidelines also contain a simplified discussion of how the Agencies will evaluate whether entry into the relevant market is so easy that a merger is not likely to enhance market power. In assessing ease of entry, the Agencies examine the timeliness, likelihood, and sufficiency of entry. In a change from the 1992 Guidelines, which placed a two-year time frame on the "timeliness" inquiry, the Revised Guidelines provide that the "impact of entrants in the relevant market must be rapid enough that customers are not significantly harmed by the merger, despite any anticompetitive harm that occurs prior to the entry." Revised Guidelines, Section 9.1. The Agencies consider the "likelihood" of entry by looking at the history of the market and whether entry would be profitable. Finally, the Agencies "look for reliable evidence that entry will be sufficient to replicate at least the scale and strength of one of the merging firms." Revised Guidelines, Section 9.3.
The Agencies also consider whether the merger could result in efficiencies, such as two smaller firms combining to be able to compete against a larger rival, or the creation of a new product given the merging parties' two inputs. The Revised Guidelines indicate that the Agencies will only credit "merger-specific efficiencies," or "those efficiencies likely to be accomplished with the proposed merger and unlikely to be accomplished in the absence of either the proposed merger or another means having comparable anticompetitive effects." Revised Guidelines, Section 10. Because merger-specific efficiencies are "difficult to verify and quantify," the Revised Guidelines warn that "it is incumbent upon the merging firms to substantiate efficiency claims so that the Agencies can verify by reasonable means the likelihood and magnitude of each asserted efficiency, how and when each would be achieved (and any costs of doing so), how each would enhance the merged firm's ability and incentive to compete, and why each would be merger-specific." Id. Not surprisingly, "efficiency claims substantiated by analogous past experience are those most likely to be credited."
Conclusion. The Revised Guidelines demonstrate that the Agencies' review of any proposed merger of competitors will be heavily fact-intensive. Because the application of the Revised Guidelines will vary with each transaction, the full impact of the Revised Guidelines on the evaluation of mergers in the Agencies and the courts remains to be seen.
Should you have any questions about the Revised Guidelines or any aspect of merger analysis, please consult with a member of the Antitrust and Consumer Protection Practice Group.
Wiggin and Dana Authors Influential Brief on Confidentiality of Documents Produced Under an Antitrust Subpoena
In August 2010, the Connecticut Supreme Court issued an important decision on the extent to which the Connecticut Attorney General ("AG") must maintain the confidentiality of documents provided in response to an antitrust subpoena. The unanimous decision, in Brown & Brown, Inc. v. Blumenthal, 297 Conn. 710 (2010), was entirely consistent with arguments that Wiggin and Dana made in an insurance industry amici curiae brief filed in support of Brown & Brown ("B&B"), the party whose confidential documents were subpoenaed. A copy of the full decision may be found here.
Members of the Wiggin and Dana Antitrust, Insurance and Appellate Practice Groups worked together to draft and file the amici brief and are pleased that the Court adopted the points advanced in the brief. Wiggin and Dana filed the amici brief on behalf of the American Insurance Association, the Connecticut Business and Industry Association, the Insurance Association of Connecticut, the National Association of Mutual Insurance Companies, and the Property Casualty Insurers Association of America.
The AG, as part of his investigation into broker compensation, had issued a subpoena under the Connecticut Antitrust Act to B&B, an independent insurance broker. B&B responded that it would not fully comply unless the AG agreed that it would abide by the Antitrust Act and not publicly disclose confidential information that B&B would be providing, including trade secrets. The AG refused. He took the position that his office was free to disclose B&B's business materials to anyone – including potentially the company's competitors – as long as the AG believed that the disclosure would be helpful in advancing the antitrust investigation. The trial court granted summary judgment in favor of the AG, and B&B appealed.
The Connecticut Supreme Court reversed the trial court. In the unanimous decision, Chief Justice Rodgers wrote that while the state legislature "granted broad investigatory powers to [the AG] to pursue antitrust violators, [it] also intended to afford counterbalancing protections to investigatory targets in recognition of the potential sensitivity of internal business information and the fact that [the AG's] investigation need not be founded on any specified level of suspicion and, ultimately, might result in no allegation of wrongdoing." Id. at 723. The Court further held that, if the AG is to share subpoenaed information with other government agencies in Connecticut or in other jurisdictions, the other agencies must first agree to abide by Connecticut's nondisclosure provisions. Finally, if the AG ends up filing suit, subpoenaed materials filed in that suit would be subject to Connecticut's existing practice rules for the sealing of court records. Those rules set a high standard for sealing or otherwise limiting access to court records, but they provide the affected party with the opportunity to move to seal the records and brief the issues.
The AG's position and the trial court decision, had it been affirmed, would have significantly undermined the confidentiality provisions in Connecticut's antitrust statutes and posed serious problems for companies responding to AG antitrust subpoenas.Resale Price Maintenance Redux
In 2007, the United States Supreme Court overruled a century-old precedent and held that minimum resale price maintenance is not per se illegal under Section 1 of the Sherman Act and should instead be subject to the rule of reason. See Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007). For such a watershed decision, Leegin has had a smaller impact on actual business practices than expected, and for good reason: Not only did states respond with differing interpretations of their antitrust laws, but Congress also proposed (and continues to debate) legislation to overturn Leegin. See, e.g., Discount Pricing Consumer Protection Act of 2009, H.R. 3190, 111th Cong. (1st Sess. 2009).
For three years, manufacturers and sellers have been in limbo over whether and when they can dictate the retail prices at which their products may be sold. While federal law continues to adhere to the rule of reason announced in Leegin, several states – including New York, Illinois, Michigan, Maryland and California – have indicated that minimum resale price maintenance may be per se illegal under their state laws.
State attorneys general have filed several complaints under state law alleging that minimum resale price maintenance is per se unlawful. For example, in March 2008, just nine months after the Leegin decision, the states of Michigan, Illinois and New York filed suit in the Southern District of New York against high-end furniture maker, Herman Miller, Inc., for allegedly fixing the minimum resale price at which the company's furniture was advertised or offered for sale. See New York v. Herman Miller, Inc., No. 08-cv-2977 (S.D.N.Y. Mar 25, 2008). The complaint alleged a violation of Section 1 of the Sherman Act and the state antitrust laws of New York, Michigan and Illinois. Although the complaint did not explicitly allege that minimum price resale maintenance is per se illegal, it also did not allege relevant market power, indicating that the states were, in fact, relying on a per se analysis. The complaint made no mention of Leegin, or the fact that per se allegations would no longer suffice under federal law.
In February 2010, the California Attorney General filed a complaint in California state court against DermaQuest, Inc., alleging that a vertical resale price maintenance agreement was "in per se violation of the Cartwright Act" and California's unfair competition law. See California v. DermaQuest, Inc., No. RG10497526, at ¶¶ 14, 17 (Cal. Sup. Ct. Feb. 5, 2010). Within three weeks, the California Attorney General achieved a stipulated final judgment, imposing an injunction and civil penalties. See id., "Final Judgment Including Permanent Injunction," February 23, 2010.
In March 2010, the New York Attorney General filed a verified petition against Tempur-Pedic International, Inc. that alleged that the company violated state law by enforcing minimum retail prices for its products. See New York v. Tempur-Pedic Int'l, Inc., No. 04008337/10, (NY. Sup. Ct. Mar, 29, 2010). The case is not based on the Donnelly Act (New York's antitrust act), but instead alleges a violation of New York General Business Law Section 369-a, entitled "Price-fixing prohibited," which provides in relevant part: "[a]ny contract provision that purports to restrain a vendee of a commodity from reselling such commodity at less than the price stipulated by the vendor or producer shall not be enforceable or actionable at law." Tempur-Pedic's pending motion to dismiss will force the Supreme Court of New York to determine whether Section 369-a – which provides only that resale price maintenance agreements are unenforceable, not illegal – can be used to render an alleged vertical price maintenance agreement per se illegal.
In the most extreme example of a state disagreeing with the Supreme Court's Leegin decision, the Maryland General Assembly amended the Maryland Antitrust Act in 2009 to provide explicitly that "a contract, combination, or conspiracy that establishes a minimum price below which a retailer, wholesaler, or distributor may not sell a commodity or service is an unreasonable restraint of trade or commerce." Md. Code Ann., Com. Law § 11-204(a) (2010). This amendment makes clear that Maryland is intentionally departing from federal law with respect to the U.S. Supreme Court's decision in Leegin.
The lesson for anyone considering resale prices is that Leegin is not a panacea that gives manufacturers and sellers free reign to dictate the resale price for their products. Determining whether and how a manufacturer can (or should) dictate resale prices is a nuanced, many-factored analysis that must consider the laws of every state in which the product is sold. The current patchwork of resale price maintenance standards creates confusion and uncertainty for many distribution systems. However, until Congress or the United States Supreme Court provides further guidance on the appropriate standard of review for minimum resale price maintenance, the states will continue to construe their state antitrust and other laws however they see fit.
In-House Attorney/Client Communications Are Not Privileged In The European Union
On September 14, 2010, the Court of Justice of the European Union (ECJ) issued a critical decision governing the scope of the attorney/client privilege (known in the European Union as the legal professional privilege or LPP). The ECJ held that written communications between a non-lawyer corporate employee and in-house attorney were not protected by the legal professional privilege and therefore the European Commission (Commission) was entitled to review these documents as part of its investigation. This decision will have an immediate impact on all companies doing business within any of the 27 European Union Member states. A copy of the full decision may be found here.
The case arose in 2003 when the Commission and the Office of Fair Trading (the British competition authority) investigated two companies – Akzo Nobel Chemicals Ltd. and Akcros Chemicals Ltd. ("the companies") – for potential anticompetitive conduct. During the course of the investigation, a representative of the companies explained to the Commission that a small subset of the documents collected were likely covered by the legal professional privilege. Two of these documents were emails between the companies' Director General and the companies' in-house attorney in charge of competition law. The Commission reviewed these documents and determined that they were not subject to the legal protection privilege. The companies challenged the Commission's position, but the ECJ sided with the Commission.
The ECJ's decision was based on a prior LPP decision from 1982. This earlier decision held that, consistent with the laws of the Member States, "the confidentiality of written communications between lawyers and clients would be protected at the Community level." But, the decision specified that the protection was subject to two conditions: (1) "that the exchange with the lawyer must be connected to ‘the client's rights of defence,'" and (2) "that the exchange must emanate from ‘independent lawyers,' that is to say ‘lawyers who are not bound to the client by a relationship of employment.'"
The companies, supported by multiple intervening parties, argued that although the in-house attorney here was independent, notwithstanding that he was employed by the companies, because he is a member of the bar and governed by the same rules of professional conduct as outside counsel. The ECJ was not persuaded. It concluded that "an in-house lawyer cannot, whatever guarantees he has in the exercise of this profession be treated in the same way as an external lawyer, because he occupies the position of an employee which, by its very nature, does not allow him to ignore the commercial strategies pursued by his employer, and thereby affects his ability to exercise professional independence."
The companies and other intervening parties raised a number of other arguments in an attempt to convince the ECJ to broaden the legal professional privilege to cover written communications involving in-house counsel, all to no avail. One of the more persuasive arguments – and the one that most closely mirrors the policy rationale behind the more robust attorney/client privilege in the United States – was that without this protection, in-house attorneys could be limited in their ability to organize competition/antitrust compliance programs for their employees. This argument, as with the others, received no traction with the Court.
The opinion offers an interesting issue for debate. On a practical level, however, the ECJ's decision is clear and unambiguous: communications between company representatives and in-house attorneys are not protected by the legal professional privilege at the Community level (some of the 27 Member States' legal systems protect these communications, some do not). Thus, if a company intends to protect these written communications from disclosure to the Commission during a possible investigation, it must turn to outside counsel.