THE LATEST: Further Efforts to Broaden the Scope and Impact for CFIUS Reviews of Foreign Acquisitions of US Businesses

We reported earlier on the Committee on Foreign Investment in the United States (CFIUS) and its legal and practical authority to review M&A transactions for possible risks to US national security posed by foreign ownership of a US business. Sens. Cornyn (R-TX) and Schumer (D-NY) reportedly are working separately on legislation to strengthen CFIUS, which could directly affect some cross-border M&A. Sen. Cornyn’s proposed changes to CFIUS would target Chinese technology investments while Sen. Schumer’s bill would encourage CFIUS to look at economic implications as part of its review.  These legislative efforts follow a bipartisan Congressional request in late Fall 2016 for the Government Accountability Office (GAO) to update its periodic analysis of CFIUS, urging the GAO to evaluate the possible expansion of factors considered by CFIUS in its M&A reviews to cover investment reciprocity and net economic benefits.

WHAT HAPPENED:

  • Now Sen. Debbie Stabenow (D-MI) and Sen. Chuck Grassley (R-IA) have introduced legislation that would add the Secretary of Agriculture and the Secretary of Health and Human Services as voting members of CFIUS. The bill would also direct CFIUS to consider matters of food security, access and safety when it reviews overseas acquisitions of US firms.
  • Though CFIUS may already consider food security as an element of national security, the new proposal would at a minimum enhance this factor. Stabenow said in a statement introducing the bill, “As foreign entities continue their aggressive acquisitions of US food and agriculture companies, it’s imperative that these transactions face additional scrutiny.”

WHAT THIS MEANS:

  • More broadly, the bipartisan legislative activity suggests an increased likelihood that CFIUS reform will gain traction in the Congress. Further support for broadening the scope and force of CFIUS may come from the Trump Administration, which would be consistent with its “America first” trade policy.
  • Any businesses with planned or pending cross-border M&A activity in the US, including those in the agribusiness sector, should monitor these developments.

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

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

WHAT HAPPENED:

  • Suture Express, a distributor focused on the sale of sutures, sued Cardinal Health and Owens & Micro, which are national distributors of a broad array of medical-surgical products, claiming that they had engaged in illegal tying through their practice of bundling sutures with other medical-surgical products in a manner that penalized customers that purchased sutures from other suppliers.
  • The parties filed cross motions for summary judgment and the lower court granted summary judgment to the defendants.  The court held that Suture Express’ claims failed as a matter of law because it could not prove that the defendants individually possessed market power.  The court also held that Suture Express could not meet the antitrust injury requirement because it had not shown that competition had been harmed.
  • The Tenth Circuit affirmed the lower court’s ruling.  On the issue of market power, the appellate court agreed with the lower courts’ findings that the defendants’ market shares on the alleged tying products (medical-surgical products excluding sutures) were relatively low (31 percent and 38 percent), there were many examples of customers switching to other distributors, and the defendants’ declining profit margins on medical-surgical products excluding sutures demonstrated that the defendants did not have the ability to control prices.
  • With respect to antitrust injury, the Tenth Circuit stated that the antitrust laws are meant to protect competition, not individual competitors.  The appellate court noted that despite the fact that roughly half of the market was not constrained by the bundling arrangement at issue, Suture Express accounted for a relatively small portion of this piece of the market.  This raised the question of whether it was just Suture Express that was harmed as opposed to competition generally.

WHAT THIS MEANS:

  • Establishing market power when defendants have relatively low market shares is difficult.  While market shares in and of themselves are not determinative of whether market power exists, the courts give market shares significant weight and when evidence of low market shares is combined with the other factors the Tenth Circuit found here, it is difficult for a plaintiff to meet its burden.
  • Vertical pricing arrangements that offer discounts to customers, even if associated with a bundling arrangement, are often viewed as procompetitive.  A plaintiff has the difficult burden of showing that a defendant’s bundle creates anticompetitive effects that outweigh its procompetitive effects.  The plaintiff must demonstrate that the arrangement caused harm not only to the plaintiff, but to competition as a whole.  Even if a plaintiff finds it difficult to compete against a defendant’s bundle, if customers have shown that they are willing and able to switch from the defendant’s bundle, establishing harm to competition will be a challenge.

THE LATEST: Losing Bidder for Pharmaceutical Triggers FTC Investigation, Fix, and $100 Million Fine in Non-HSR-Reportable Transaction

A private lawsuit filed by Retrophin Inc. (Retrophin), under then-CEO Martin Shkreli, likely triggered an investigation by the FTC into a consummated transaction.  Both the private lawsuit and the FTC complaint resulted in settlement.  In addition, the FTC levied a $100 million penalty.

WHAT HAPPENED:

  • In 2013, Questcor Pharmaceuticals, Inc. (Questcor) acquired the U.S. rights to Synacthen Depot (Synacthen) from Novartis (Mallinckrodt later acquired Questcor).
  • Questcor’s $135 million deal with Novartis out-bid several companies seeking to acquire Synacthen, including biopharmaceutical company Retrophin, who bid $16 million for the Synacthen license.
  • In 2014, Retrophin (under then-CEO Martin Shkreli) filed suit against Questcor, alleging that the purpose of the transaction between Questcor and Novartis was to eliminate competition for Achthar, Novartis’ ACTH drug used to treat infantile spasms and nephrotic syndrome, by shutting down Synacthen.
  • Retrophin’s case was settled in 2015 with Mallinckrodt (who acquired Questcor in the interim) paying Retrophin $15.5 million.
  • There are reports that the FTC challenged the consummated transaction of Questcor/Novartis following Retophin’s lawsuit. The FTC’s challenge recently resulted in a $100 million monetary payment and licensing of Synacthen for treatment of infantile spasms and nephrotic syndrome to an FTC approved licensee.

WHAT THIS MEANS:

  • Even if a transaction is non-reportable under the Hart-Scott-Rodino (HSR) Act, the FTC or DOJ may open an investigation into the transaction. The Questcor/Novartis transaction was not reported under the then-existing HSR rules because Novartis, the licensor, retained some manufacturing rights to Synacthen.
  • The FTC and DOJ may learn about potentially anticompetitive transactions in numerous ways, including HSR filings, news reports, complaints from disgruntled customers or competitors, private litigation involving the transaction, and as shown here, from the losing bidder.
  • HSR clearance or a determination that a transaction is not HSR reportable does not mean that the transaction is free and clear of government antitrust investigations or private litigation.

The Court of Justice of the European Union (CJEU) Confirms the Commission’s Approach to Hybrid Settlements

The case follows on from the Commission’s Animal Feed Phosphates cartel decision pursuant to which fines totalling €176 million were imposed on a number of producers of animal feed for price fixing and market sharing throughout the EEA.

During the investigation into the infringement, all the companies involved engaged in settlement discussions with the Commission with a view to obtaining a 10 percent reduction in the fine that would otherwise have been imposed had they not settled with the Commission. However, during the settlement process Timab, a subsidiary of the Roullier Group, decided to withdraw from the settlement procedure. The Commission therefore followed the standard administrative infringement procedure against Timab – despite the fact that it had entered into settlements with the other companies involved in the cartel. This was the first time, therefore, that the Commission rendered a decision in a so-called ‘hybrid’ case i.e. where some parties settle but others do not.

During the initial settlement discussions, several meetings were held between the Commission and Timab, during which evidence of the infringement was discussed. On the basis of the evidence available, the Commission informed Timab that a fine in the range of €41 to €44 million would be imposed on it. However, in its final decision of 20 July 2010, the Commission levied a fine of nearly €60 million on Timab.

Timab challenged the Commission’s decision before the General Court of the European Union (GCEU) in case T-456/10, claiming that the Commission had infringed its legitimate expectations regarding the amount of the fine, on the one hand, and its right not to incriminate itself, on the other. Such challenge was unsuccessful, however.

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THE LATEST: Occupational Licensing—Do We Need to Protect “the Public from Rogue Interior Designers Carpet-Bombing Living Rooms with Ugly Throw Pillows?”

The Federal Trade Commission (FTC) has looked at licensing boards many times in the past and advocated for regulations with less restriction that promote competition.  There are numerous examples of antitrust regulators’ interest in occupational licensing and competition concerns, including Advanced Practice Registered Nurses in the VA, non-lawyers in the provision of legal services, and dental regulatory boards.  Acting Chairman Maureen Ohlhausen recently gave a speech at the Antonin Scalia Law School addressing economic liberty, including a critique of occupational licensing where she stated, “I challenge anyone to explain why the state has a legitimate interest in protecting the public from rogue interior designers carpet-bombing living rooms with ugly throw pillows.”

WHAT HAPPENED:

  • Acting Chairman Ohlhausen reiterated her view that occupational licensing inhibits economic liberty. “Market dynamics will naturally weed out those who provide a poor service, without danger to the public.  For many other occupations, the costs of added regulation limit the number of providers and drive up prices.  These costs often dwarf any public health or safety need and may actually harm consumers by limiting their access to beneficial services.”
  • In the 1950s, less than five percent of jobs required a license. Today, approximately 25 to 30 percent of jobs require a license.
  • Different states regulate different occupations, and licensing requirements for the same occupations often vary significantly among states.
  • In her speech, Acting Chairman Ohlhausen said she is creating an Economic Liberty Task Force within the FTC. This task force will focus on occupational licensing regulations.

WHAT THIS MEANS:

  • We will likely see an increase in FTC actions involving licensing boards, such as in North Carolina Dental, where it is not the state itself acting but self-interested active market incumbents who impose occupational licensing requirements that limit competition.
  • The FTC Task Force will seek to “eliminate and narrow overbroad occupational licensing restrictions that are not narrowly tailored to satisfy legitimate health and safety goals.”
  • The FTC will help states identify problematic occupational licensing and reforms that promote reciprocity among states. We could see a roll back of occupational regulations.
  • Licensing boards and those who are involved in licensing regulations should examine the ways in which the regulation affects or could affect competition, whether there is evidence that a regulation is necessary to achieve the targeted policy goal, whether the regulation is narrowly tailored to meet the policy goal, and whether a less restrictive alternative is available to achieve the policy goal and benefit competition.

THE LATEST: Court Nixes Indirect Purchaser Claims for Lack of Standing

To bring a claim for antitrust damages, indirect purchasers must show that they have antitrust standing. They must demonstrate that their injuries are sufficiently direct and intertwined with the alleged cartel conduct that they are entitled to recover an overcharge, despite being downstream – sometimes by several levels – from the direct purchasers.

WHAT HAPPENED:

  • In Supreme Auto Transport LLC, et. al. v. Arcelor Mittal, et al. (Supreme Auto), defendant steel producers defeated state antitrust, consumer protection, and unjust enrichment claims brought by a purported class of indirect purchasers of retail products containing steel. The court found that plaintiffs lacked antitrust standing to recover for their alleged indirect harm.
  • Plaintiffs alleged that defendant steel manufacturers conspired to restrict steel output, thereby raising the price of steel. Plaintiffs contended that direct purchasers of steel  passed on these price overcharges to the plaintiff purchasers of steel-containing products such as refrigerators, dishwashers, automobiles, and construction equipment.
  • The court found it appropriate to apply the Associated General Contractors (AGC) standard – the prevailing test for antitrust standing under federal law – to each of the state antitrust claims. AGC looks at factors including the causal connection between the violation and the harm, the directness of the injury, and the risk of speculative and duplicative damages to determine whether a plaintiff is a proper party to bring the antitrust action.
  • Though plaintiff retail customers described their injury as inextricably intertwined with the defendants’ alleged restriction of the steel market, the court held that plaintiffs’ injury was too remote to confer standing. The complaint failed to account for interceding steps in the distribution and manufacturing chain that occurred between defendants’ production of raw steel and plaintiffs’ purchase at retail of a product containing steel as a component. Nor did the complaint provide a basis to link the steel in an end-use product to that produced in any of defendants’ steel mills.
  • The court determined that remoteness similarly doomed the plaintiffs’ other state law claims because they could not establish proximate cause between plaintiffs’ harm and defendants’ alleged misconduct.
  • The court also found that plaintiffs’ claims were time-barred, rejecting class action tolling of the statutes of limitations or relation back of the amended claims.

WHAT THIS MEANS:

  • Supreme Auto adds to a growing body of caselaw (see, e.g., In re Aluminum Warehousing Antitrust Litigation; In re Dairy Farmers of America, Inc. Cheese Antitrust Litigation) in which courts have found that indirect purchasers’ relationship to the alleged misconduct is too attenuated for plaintiffs to possess antitrust standing. Courts are rejecting attempts by indirect purchaser plaintiffs to justify standing based on their injury being “inextricably intertwined” with injuries of market participants.
  • A defendant facing antitrust claims by indirect purchasers should raise any gaps in the link between the alleged misconduct and the ultimate injury, highlighting interceding parties, steps in the manufacturing and distribution processes, and component traceability issues. This can be done in a motion to dismiss, prior to class certification.

Rolls-Royce Proposed Acquisition of Spanish Rival Industria de Turbo Propulsores. The European Commission Invites Interested Third Parties to Submit Comments

On 4 March 2017, the European Commission (Commission) published a notice concerning the notification of the proposed acquisition of the Spanish aircraft company Industria de Turbo Propulsores SA (Spain, ITP), by Rolls-Royce Holdings plc. (UK, Rolls-Royce). Interested third parties, such as competitors, suppliers or customers can provide the Commission with their observations on the likely impact of the proposed transaction on competition in order to facilitate its substantive assessment.

Interested third parties’ observations must reach the Commission no later than 14 March 2017.

Rolls-Royce is active in the development and manufacture of aircraft engines and power systems for civil aerospace, defense aerospace, marine and energy applications. ITP is a joint venture between Rolls-Royce and Sener Grupo de Ingenieria SA, and it is active in the design and manufacture of aircraft engine components.

THE LATEST: FTC Fixes Consummated Pharma Transaction Involving Pre-Phase 3 Product Because It Eliminated a “Nascent Threat”—Tacks on $100 Million Disgorgement Penalty

The Federal Trade Commission (FTC) challenged a consummated transaction using a monopolization theory to allege that the acquisition would eliminate “nascent” competition for therapeutic adrenocorticotropic hormones (ACTH) in the United States.

WHAT HAPPENED:

  • Questcor Pharmaceuticals, Inc.’s (Questcor) H.P. Acthar Gel (Acthar) is the only ACTH product sold in the US, is the standard of care for infantile spasms and is indicated for several other diseases.
  • In 2013, Questcor acquired the US rights to Synacthen Depot (Synacthen) from Novartis. Questcor was subsequently acquired by Mallinckrodt.
  • Synacthen is pharmacologically very similar to Acthar, as the active ingredient in both drugs is an ACTH molecule.
  • At the time of the acquisition by Questcor, Novartis’ Synacthen had been used safely and effectively for decades in Europe, Canada and other parts of the world to treat patients suffering from infantile spasms and other diseases. Synacthen had not yet begun US clinical trials.
  • The FTC alleged a monopolization theory—that Questcor had “extinguished a nascent competitive threat to its monopoly” by outbidding several other companies who were interested in bringing Synacthen to market in the US to compete with Questcor’s Acthar.
  • Then FTC Chairwoman Edith Ramirez (she has since resigned) noted that Questcor had a history of taking advantage of its monopoly, repeatedly raising the price of Acthar “from $40 per vial in 2001 to more than $34,000 per vial today—an 85,000 percent increase.”
  • The FTC settlement requires a $100 million monetary payment and that Mallinckrodt (Questcor was acquired by Mallinckrodt) license Synacthen for treating infantile spasms and nephrotic syndrome to an FTC approved licensee.

WHAT THIS MEANS:

  • In some circumstances, an action by a monopolist to block a nascent threat to its monopoly can violate the antitrust laws.
  • Typically, the FTC does not challenge pharmaceutical overlaps involving pharmaceuticals that have not yet entered Phase 3 clinical trials because there is still significant uncertainty that a product will ultimately come to market.
  • The FTC appears to have made an exception to its typical practice because Synacthen was anticipated to gain US approval easily and compete significantly with Acthar. Synacthen was approved outside the US for decades and was understood to be a safe and effective ACTH treatment.
  • The FTC may bring an action at any time under Section 7 to determine the legality of an acquisition. However, the FTC challenged this consummated transaction under a Section 2 theory of monopolization. The FTC has many tools to challenge actions under the antitrust laws.

THE LATEST: FTC Determines Behavioral Remedies are Sufficient to Fix Offshore Natural Gas Pipeline Overlap

The Federal Trade Commission (FTC) recently granted US antitrust clearance for Enbridge’s acquisition of Spectra after the parties agreed to behavioral commitments to remedy an overlap for natural gas pipeline transportation from the wellhead in three markets off the coast of Louisiana (Green Canyon, Walker Ridge and Keathley Canyon).

WHAT HAPPENED:

  • The merging parties each own interests in competing natural gas pipelines – Enbridge is the sole owner of the Walker Ridge Pipeline; and Spectra holds a minority interest (~7.6%) in the Discovery Pipeline via its interests in DCP Midstream.
  • As part of Spectra’s minority interest in the Discovery Pipeline, Spectra had access to detailed information on the pipeline’s pricing and other competitively sensitive information. In addition, Spectra had board voting rights over the pipeline’s significant capital expenditures including expansions needed to connect to new wells.
  • FTC determined that in certain areas within each of the three geographic markets, the Walker Ridge and Discovery Pipeline were the closest pipelines to new wellheads in development and therefore the lowest priced options.
  • In granting antitrust clearance, the FTC required that Enbridge and Spectra erect firewalls such that information related to the Walker Ridge Pipeline would not be shared with any of Spectra’s partners in the Discovery Pipeline and that Discovery Pipeline information is not shared with any Enbridge individuals involved in the Walker Ridge Pipeline business.
  • The FTC also required any board members appointed by Enbridge or Spectra to DCP Midstream recuse themselves from any vote pertaining to the Discovery Pipeline, unless the vote involves expanding the Discovery Pipeline beyond natural gas pipeline services in the Gulf of Mexico or changing the entities’ ownership interests in the Discovery Pipeline.

WHAT THIS MEANS:

  • FTC could investigate and require remedies in overlaps involving minority ownership interests (even when less than 10%), particularly when the overlapping entities are close competitors and the acquisition would give access to competitively sensitive information and control over the entity.
  • The FTC continues to apply narrow product and geographic market definitions in oil and gas cases. Here the FTC alleged relevant markets involving natural gas pipeline transportation in particular areas in the Gulf of Mexico.
  • While the FTC has stated a strong preference for structural remedies when fixing horizontal overlaps, there are situations in which the FTC will conclude that a behavioral remedy is sufficient.

Supreme Court Nominee Neil Gorsuch Has Significant Antitrust Experience

On January 31, 2017, President Trump nominated Neil Gorsuch to fill the vacant seat at the Supreme Court of the United States left by the late Justice Antonin Scalia. As a federal judge for the US Court of Appeals for the Tenth Circuit, a former private practitioner, and an adjunct professor of antitrust law at the University of Colorado, Gorsuch has an extensive background in antitrust.

In 1996, Gorsuch joined the law firm Kellogg Huber Hansen Todd Evans & Figel, where his practice included both plaintiff and defense litigation in antitrust matters. Gorsuch and his co-counsel helped secure a judgment of $1.05 billion in trebled damages for tobacco company Conwood Co. after a jury found that defendant United States Tobacco Co. engaged in anticompetitive marketing practices. Gorsuch also defended telecommunications company SBC Communications, Inc. during his tenure at Kellogg when a rival company alleged that SBC set forth an illegal tying arrangement. The US District Court for the Eastern District of Texas dismissed the tying count in 2004.

President George W. Bush appointed Gorsuch to the US Court of Appeals for the Tenth Circuit in 2006. In this role, Gorsuch authored several antitrust decisions. In 2009, Gorsuch wrote Four Corners Nephrology Associates, P.C. v. Mercy Medical Center of Durango, 582 F.3d 1216 (10th Cir. 2009), where he held that a hospital’s refusal to allow a physician to use its inpatient nephrology facilities did not violate the Sherman Act or Colorado law. In 2011, Gorsuch reversed a district court’s ruling in Kay Electric Cooperative v. City of Newkirk, Okla., 647 F.3d 1039 (10th Cir. 2011) after finding that a municipality’s electricity provider was not immune from antitrust liability under the state action immunity doctrine.

In 2013, Gorsuch authored his most well-known antitrust opinion, Novell v. Microsoft Corp., 731 F.3d 1064 (10th Cir. 2013). In this case, plaintiff Novell accused Microsoft of maintaining monopoly power over its operating systems by withholding intellectual property from rival software developers. Gorsuch determined that Microsoft’s purely unilateral conduct did not violate the Sherman Act and that “[f]orcing monopolists to hold an umbrella over inefficient competitors might make rivals happy but it usually leaves consumers paying more for less.” Id. at 1072 (internal citations omitted).

With background in representing plaintiffs and defendants and deciding cases in favor of both sides, Gorsuch’s policies about antitrust laws are not entirely clear. However, in his most recent and well-known case, Novell v. Microsoft, Gorsuch stated “[t]he antitrust laws don’t turn private parties into bounty hunters entitled to a windfall anytime they can ferret out anticompetitive conduct lurking somewhere in the marketplace.” Id. at 1080. This language may indicate a preference for a less interventionist approach to competitor conduct relating to its intellectual property.

With an extensive antitrust background, it will be interesting to see whether the Senate ultimately confirms Gorsuch (they did so eleven years ago unanimously) and, if so, whether antitrust issues reach our nation’s highest court.

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