The Concept of Full-Function Joint Venture in the EU

In the European Union (EU), at the inception of a joint venture (JV), parent companies must determine whether the newly created structure presents a full-functionality nature, which depends on its degree of autonomy. The answer to this question will determine the legal framework applicable to it.

On the one hand, if the JV is full-function it will fall within the scope of the EU Merger Regulation (Council Regulation (EC) No 139/2004 of 20 January 2004), assuming that the turnover thresholds set out in the Regulation are met. Under these circumstances, the European Commission (EC) will assess the impact of the JV on competition on an ex ante basis.

On the other hand, if the JV is not full-function and takes the form of a partnership formalized by a legal structure to a large extent dependent on its parent companies, the creation of a JV will not have to be notified but the EC may operate a control ex post, in the light of Article 101(1) of the Treaty on the Functioning of the EU which prohibits anticompetitive agreements between undertakings. In such a context, it is up to the parent companies creating a JV to determine whether their JV is compatible with competition law rules.

The ex post control has the advantage of avoiding the notification process that delays the implementation of the JV. However, within that framework, companies may not obtain a clearance decision and the fate of their JV is subject to legal uncertainty. It is thus generally preferable for companies to make sure that their JV will fall within the scope of the Merger Regulation because a clearance decision is irrevocable and unlimited.

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Price Discrimination Markets Lead Antitrust Enforcers to Increased Success

In the last two years, the Federal Trade Commission (FTC) and the Antitrust Division of the US Department of Justice (DOJ) brought, and won, several litigated merger cases by establishing narrow markets comprised of a subset of customers for a product. This narrow market theory, known as price discrimination market definition, allowed the agencies to allege markets in which the merging parties faced few rivals and, therefore, estimate high post-merger market shares. By their nature, price discrimination markets can lead to a challenge of a high-value deal where only a small number of the merging parties’ customers are allegedly harmed. Given the increased usage by the agencies and now judicial acceptance of the theory, counsel for merging parties must consider the potential for price discrimination market definition in assessing the antitrust risks for transactions.

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The European Commission Fines Truck Manufacturers a Record €2.93 billion for Cartel Conduct

On 19 July 2016, the European Commission (Commission) imposed fines totaling €2,926,499,000 on four truck producers (39824 – Trucks). The fine is the highest ever imposed on members of a cartel by the EU competition regulator. The case is also noteworthy because it is the first Commission prohibition decision following “Brexit” and could thus become a test case to see whether the UK remains a jurisdiction of choice for follow-on damages actions.
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Recent Enforcement Trends in Divestiture Packages

The Federal Trade Commission (FTC) and US Department of Justice’s (DOJ) Antitrust Division have been actively challenging mergers and acquisitions (M&A) across a variety of industries where there is not a viable or acceptable remedy to mitigate the agencies’ competitive concerns. Parties to M&A transactions that the FTC or the DOJ believe are likely to harm competition may remedy those concerns by divesting certain businesses or assets. The parties may divest the business or assets that raise anticompetitive concerns and proceed with the remainder of the transaction. Divestitures in horizontal mergers (i.e., transactions between competitors) aim to maintain or replace the competition in the relevant market that might otherwise be lost as a result of the transaction.

Proposed divestitures are evaluated on the particular facts of the case and must be robust enough to present a viable competitor. Recent transactions demonstrate that the FTC and DOJ will reject divestiture proposals that the agency finds insufficient, putting the entire deal at risk for merging parties. Before proposing a remedy to the FTC or DOJ, parties should keep the following in mind: (1) in today’s enforcement environment, the agencies are more demanding in seeking effective remedies; (2) the agencies are more likely to  require a buyer up front, particularly if the parties seek to divest assets that are less than an entire on-going, stand-alone business, or the to-be-divested assets are at risk of deterioration pending divestiture; and (3) a buyer must be competitively and financially viable.

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DOJ Continues to Monitor Interlocking Corporate Directorates with Restructuring of Tullett Prebon’s Acquisition of ICAP

On July 14, 2016, the US Department of Justice (DOJ) announced that the restructuring of a planned $1.5 billion transaction between Tullett Prebon Group Ltd. (Tullett Prebon) and ICAP plc adequately addresses the DOJ’s concerns that the transaction would violate Section 8 of the Clayton Act by creating an interlocking directorate.  The parties restructured their transaction after the DOJ issued a Second Request to adequately investigate the parties post-closing ownership structure.  The DOJ’s investigation of this transaction should serve as a warning for companies considering transactions with competitors where the parties will continue to compete post-merger: the antitrust agencies are going to extensively review any corporate governance structures which could be seen as creating a “cozy relationship” between competitors.

Section 8 of the Clayton Act generally prohibits representatives of a corporation from serving on the board of directors of a competitor corporation. This provision of the Clayton Act, which seeks to prevent the sharing of competitively sensitive information through director communications, continues to be rigorously enforced by the antitrust agencies since the FTC’s 2009 investigation of individuals serving on the boards of multiple large technology companies.

Last year, Tullett Prebon agreed to purchase ICAP’s global hybrid voice broking and information business.  Voice broking involves speaking to clients on the phone to negotiate prices and facilitate business.  The alternative to voice broking is electronic broking where prices are put on a platform and customers can transact without the need for a human broker.  Voice broking is typically used for illiquid assets, whereas electronic broking is used more often in highly liquid markets.  By selling its voice broking business, ICAP sought to focus on its electronic trading services.

As originally structured, the transaction would have resulted in ICAP owning 19.9 percent of Tullett Prebon and having the right to nominate one member of Tullett Prebon’s board of directors.  This structure was problematic for the DOJ due to the fact that ICAP and Tullett Prebon would continue to compete post-merger in non-voice broking platforms.  This led to the DOJ issuing a Second Request, which was focused on post-closing shareholding and governance arrangements.

After the restricting of the transaction, ICAP will not retain any ownership in Tullett and will not have the ability to appoint any directors.   This new structure will allow the parties to be “actually independent of each other” according to Principal Deputy Assistant Attorney General Renata Hesse.  “As originally proposed this deal would have violated [a] core principle – creating a cozy relationship among competitors.”

Companies considering transactions with competitors where the parties will continue to compete should exercise caution in their ownership structures and corporate governance post-closing.  Any arrangements which can be interpreted as allowing the parties to share information or create a conflict of interest will be closely examined by antitrust regulators and may lead to extended reviews.

FTC Encourages VA to Adopt Proposed Rule Preempting State Laws to Allow Advanced Practice Registered Nurses to Provide Services Without Physician Oversight

On July 25, 2016, the Federal Trade Commission (FTC) submitted comments to the Department of Veterans’ Affairs (VA) supporting a proposed rule only affecting VA facilities that would authorize Advanced Practice Registered Nurses (APRNs) to provide primary health care services without the mandatory supervision of physicians, regardless of state or local laws, with limited exceptions. Currently, APRNs in the employ of the VA are subject to VA requirements as well as various regulations on a state-by-state basis, with physician supervision required in over half of the states. Under Proposed Rule RIN 2900-AP44, APRNs that meet VA standards would have the authority to provide a described list of services without such physician supervision.

While the FTC acknowledged the important role of federal and state legislators in determining the “best balance of policy priorities,” the FTC has expressed skepticism of state laws requiring physician supervision. They have noted that such requirements “may raise competition concerns because they effectively give one group of health care professionals the ability to restrict access to the market by another competing group of health care professionals, thereby denying health care consumers the benefits of greater competition.” In fact, the FTC argued that physician supervision requirements may increase the cost of services that APRNs could provide, and by relaxing such requirements, consumers “may gain access to services that would otherwise be unavailable.” This increased access could also address shortages in access to primary and specialty care. As the FTC noted, the US has current and projected health care workforce shortages, particularly in primary care physicians, and the VA has emphasized the need to provide care to veterans in rural areas who have limited access to specialty services, some of which APRNs could provide.

Additionally, the FTC commented that the proposed rule could yield information about models of health care delivery. Under the current system, the VA’s use of APRNs is limited by state regulation. By preempting the state requirements, the FTC argued that the VA would be free to “innovate and experiment with models of team-based care.”

Interestingly, the proposed rule only applies within the scope of VA employment, which falls outside of “competition in the private sector” for which the FTC acknowledged it is typically concerned. But in this instance, the FTC concluded that the VA’s actions could positively impact competition in the health care service provider markets by encouraging entry that could “broaden the availability of health care services” outside of the VA’s system.

This is another example of antitrust regulators’ interest in occupational licensing and competition concerns generally. Just as this letter encourages competition between physicians and nurses for certain health care services, last month, US Department of Justice (DOJ) and FTC jointly submitted a letter encouraging competition between lawyers and non-lawyers in the provision of legal services in North Carolina. We previously analyzed that letter, and other important developments in occupational licensing that have occurred since February 2015, when the Supreme Court affirmed an FTC decision not to apply state action antitrust immunity for occupational licensing boards which are composed of market participants and not actively supervised by the state in North Carolina State Board of Dental Examiners v. Federal Trade Commission, 574 U.S.___ (Feb. 25, 2015). Here, the regulators have continued to encourage a review of occupational licensing schemes, focusing on the substance of the licensing scheme. In this letter and other actions, the regulators have shown a commitment to challenging and eschewing state occupation licensing schemes to increase competition.

McDermott’s Antitrust M&A Snapshot Published on July 17, 2016

McDermott’s Antitrust M&A Snapshot is a resource for in-house counsel and others who deal with antitrust M&A issues but are not faced with these issues on a daily basis. In each quarterly issue, we will provide concise summaries of Federal Trade Commission (FTC), Department of Justice (DOJ) and European Commission (EC) news and events related to M&A, including significant ongoing investigations, trials and consent orders, as well as analysis on the trends we see developing in the antitrust review process.

United States: January – June Update

The Federal Trade Commission (FTC) and US Department of Justice (DOJ) have been actively challenging mergers and acquisitions in the first half of 2016. In some instances, the parties abandoned their deal once the FTC or DOJ issued a complaint, in others, the parties entered into consent agreements with the agencies. In matters where a divestiture is an acceptable remedy, the FTC and DOJ have required robust divestitures with financially and competitively viable buyers. There is increasing pressure for broad divestitures and for upfront buyers in industries where the agencies do not have ample experience and where there may not be multiple competitive buyers willing to acquire the assets.

In merger challenges, the agencies have been successful in obtaining preliminary injunctions in Washington, DC, but have been less successful outside of their home court. The agencies have successfully argued price discrimination markets, where sales of products to a narrow group of customers were the market, and courts are accepting the agencies’ narrow market definition. We also see a trend in challenges due to innovation, where the merging parties are the market leaders in new developments and research and development in particular areas. Investigations continue to take many months, with many approaching or exceeding a year.

EU: January – June Update

In the EU, there has been a noticeable increase in the number of notified transactions to the European Commission (from 277 notifications in 2013 to 337 in 2015). Most of these transactions have been cleared by the EU regulator in Phase I without any commitments. However, there have still been a number of antitrust interventions requiring the merging parties to offer, often far-reaching, remedies. One industry has recently seen a particularly high ratio of antitrust intervention is the telecoms sector. For example, in the merger between the mobile operators Telenor and TeliaSonera, the parties abandoned the transaction due to European Commission opposition to the transaction. The European Commission publicly announced that the transaction would not have been cleared, and that the remedies offered by the companies were not convincing. A prohibition decision was also issued, despite the offered remedies, in the failed combination of Telefónica UK’s “O2” and Hutchison 3G UK’s “Three”. This transaction involved the longest merger control review by the European Commission to end up in a prohibition decision (243 calendar days, compared to the average of 157 calendar days to block a deal).

With regard to current trends in merger control remedies at the level of the European Commission, there continues to be a strong preference for structural remedies. Approximately 70 percent of merger remedy decisions between 2011 and 2015 involved divestitures. The European Commission prefers structural remedies because they entail a lasting structural change and there is no need for long-term monitoring.

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EU Court Rules That Royalties for Unpatented Technology Are Not Necessarily Anticompetitive

On 7 July 2016, the Court of Justice of the European Union (CJEU) handed down a judgment on whether Article 101 of the Treaty on the Functioning of the European Union (TFEU) must be interpreted as precluding effect being given to a licence agreement requiring the licensee to pay royalties for the use of a patent which has been revoked (Sanofi-Aventis v. Genentech, Case C-567/14).

Background

In 1992, Hoechst granted a licence to Genentech for a human cytomegalovirus enhancer. The licensed technology was subject to one European patent and two patents issued in the United States. In 1999, the European Patent Office revoked the European patent.

Under the licence agreement with Hoechst, Genentech was obliged to pay a one-off fee, a fixed annual research fee and a running royalty based on sales of finished products. Genentech never paid the running royalty, however, and in 2008 it notified Hoechst and Sanofi-Aventis (Hoechst’s parent company) that it was terminating the licence. Hoechst and Sanofi-Aventis believed that Genentech had used the enhancer to manufacture its blockbuster drug Rituxan and was therefore liable to pay the running royalty on its sales of that drug.

Sanofi-Aventis initiated two separate actions. In the United States, it brought an action alleging that Genentech infringed the two US patents. The US courts ultimately decided that there was no infringement of the patents in question. Sanofi-Aventis also submitted an application for arbitration against Genentech before the International Court of Arbitration to recover the royalties.

In the arbitral award, the sole arbitrator held that Genentech had manufactured Rituxan using the enhancer and that the company was therefore required under the licence to pay Sanofi-Aventis the running royalties. According to the arbitrator, the commercial purpose of the licence was to avert all litigation on validity. Thus, payments already made under the licence could not be reclaimed, and payments due had to be made regardless of whether the patent had been revoked or was not infringed.

Genentech brought an action before the Paris Court of Appeal seeking annulment of the arbitral award. The company relied on public policy arguments, claiming that a requirement to pay for the use of technology that Genentech’s competitors could use without charge put Genentech at a competitive disadvantage and contravened Article 101 TFEU. The Paris Court of Appeal stayed the proceedings and made a preliminary reference to the CJEU.

CJEU Judgment

The CJEU explained that royalties reflect the parties’ assessment of the value that is attributable to the possibility of exploiting licensed technology, and that this assessment may still apply after expiry of the period of validity of the patent. The court referred to established case law (Case 320/87 Ottung) and held that, where the licensee is free to terminate the licence agreement by giving reasonable notice, an obligation to pay a royalty throughout the validity of the agreement (i.e., not the validity of the IP rights) does not fall within the purview of the Article 101(1) TFEU prohibition.

The CJEU argued that Article 101(1) TFEU does not prohibit the imposition of a contractual requirement providing for payment of a royalty for the exclusive use of a technology that is no longer covered by a patent, on condition that the licensee remains free to terminate the contract. In this respect, the court noted that a royalty reflects (i) the price that is paid for the commercial exploitation of the licensed technology and (ii) a guarantee that the licensor will not enforce its IP rights against the licensee. As such, if the licence agreement is still valid and can be freely terminated by the licensee, the royalty payment is due even if the period of validity of the IP rights in question has expired.

Concluding remarks

This judgment by the CJEU highlights a number of practical considerations that licensors and licensees should be aware of when negotiating and concluding licence agreements.

First, licence agreements ought to expressly provide for what should happen with respect to the payment of royalties where and if the patents in question are revoked.

Second, if a licensor intends to extract royalties for patents that are no longer protected, the licence agreement should expressly state that the licensee is free to terminate the agreement by giving reasonable notice. Licensors should also ensure that licensees are not otherwise restricted in using the licensed technology following termination of the licence agreement. In order to limit antitrust scrutiny, licensors should consider including (e.g., in the preamble of a licence agreement) a brief commercial explanation of why royalties are charged for unpatented technology.

Third, if negotiations regarding royalties for unpatented technology prove difficult (e.g., because of the licensee’s bargaining power), licensors may consider applying a lower royalty rate following expiry of patent protection. Doing so would ensure that the licence agreement remains valid after expiry of the IP rights.

Fourth, extra caution is required when concluding international licence agreements that have a US element. This is because US law does not permit licensors to collect royalties accruing after patent expiry.

DOJ and FTC Encourages Competition Between Lawyers and Non-Lawyers in the Provision of Legal Services in Comments on North Carolina “LegalZoom” Bill

On June 10, 2016, the US Department of Justice (DOJ) and the Federal Trade Commission (FTC) jointly submitted a letter recommending that the North Carolina General Assembly limit the definition of the “practice of law” only to activities for which “specialized legal knowledge and training” is demonstrably necessary to protect consumers.  The regulators argue that if such a definition were applied to North Carolina House Bill 436, presently under consideration, it would promote competition between lawyers and non-lawyers in the provision of legal-related services. Continue Reading

Online Sales Restrictions Remain a Hot Topic: UK CMA Issues Statement of Objections

On 9 June 2016, the UK’s Competition and Markets Authority (CMA) issued a statement of objections (SO) to Ping Europe Limited (Ping), a golf equipment manufacturer, alleging that Ping had breached EU and UK competition law by banning the sale of its golf clubs online.

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