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.
On July 24, 2017, the US Court of Appeals for the Ninth Circuit affirmed the dismissal of an antitrust counterclaim brought by ICTSI Oregon, Inc. (ICTSI), the operator of a marine shipping facility, against the International Longshore and Warehouse Union (ILWU) and the Pacific Maritime Association (PMA). ILWU is a labor union that represents many ICTSI employees, including longshoremen and mechanics. PMA is a multi-employer collective bargaining association covering the West Coast of the United States, which represents employers, including ICTSI, in negotiations with labor unions.
The opinion elucidates the current law surrounding the scope of Noerr-Pennington immunity and the implied labor exemption to antitrust liability.
- ICTSI’s antitrust counterclaim arose out of a labor dispute concerning ILWU’s collective bargaining agreement (CBA) with PMA, which required that all “reefer work” (i.e., plugging, unplugging and monitoring refrigerated shipping containers) performed by PMA members must be assigned to ILWU workers. When ICTSI instead assigned its reefer work to a rival union, the collective bargaining agreement administrator, the Joint Coast Labor Relations Committee, notified ICTSI that it was in violation of the CBA and faced monetary fines and expulsion from the collective bargaining association.
- ICTSI initiated a proceeding before the National Labor Relations Board (NLRB) to resolve the dispute. The NLRB ruled that the rival union workers were entitled to the reefer work. While the NLRB proceedings were pending, ILWU and PMA filed suits in the US District Court for the District of Oregon seeking an injunction ordering ICTSI to comply with the Joint Committee decision and assign the work to ILWU.
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.
- 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 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.
- 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.
On February 9, the US Court of Appeals for the Third Circuit upheld a ruling by the US District Court for the District of Delaware that indirect purchasers of Class 8 transmissions did not meet the requirements for class certification. The Third Circuit found that only the individual claims may proceed in the case. The opinion is significant because it reaffirms the difficulty indirect purchaser plaintiffs face when attempting to certify a class.
On 19 January 2017, the Italian Competition Authority (AGCM) and the Italian Medicines Agency (AIFA) signed a memorandum of understanding in order to increase enforcement in the pharmaceutical sector by strengthening their investigation powers and facilitating the exchange of data. Under the agreement, AGCM and AIFA will inform each other on cases concerning alleged violations of rules enforced by one of them. In particular, in case of negotiations carried out by AIFA with pharmaceutical companies on the applicable drugs prices, or whether counterfeiting cases regarding pharmaceutical products emerge during an investigation. Furthermore, the authorities will cooperate in their advocacy activities and in carrying out sector enquiries. Finally, the authorities will exchange information and data on matters of common interest.
The Polish Office of Competition and Consumer Protection (Urząd Ochrony Konkurencji i Konsumentów, “UOKiK”) has recently published its 2015 annual report presenting its first experiences with the recent amendments to Polish merger control regulations. However, only future developments will show the effects of the new much more severe rules on cartel infringement proceedings and sanctions for cartel behaviour.
On 18 January 2015 far-reaching changes to the Polish Act on Competition and Consumer Protection (Ustawa o ochronie konkurencji i konsumentów), alternatively named “Antimonopoly Law” (prawo antymonopolowe), came into effect. These have been made to close previously identified gaps and strengthen competition and consumer protection. In addition to important changes with respect to merger control and anticompetitive practices, the Antimonopoly Law as amended has introduced changes that allow for more open dialogue between undertakings and the UOKiK.
Faster and more flexible merger control proceedings
According to UOKiK’s 2015 annual report the average duration of merger control proceedings could be reduced by half despite the fact that the overall number of merger control proceedings increased. The average duration dropped from 57 days in 2014 to 34 days in 2015. Of all merger control proceedings that UOKiK completed in 2015 only three (of 235) were Phase 2 proceedings. This can be explained by the following amendments introduced in early 2015:
- A new two-stage merger control process: Phase 1 (1 month) and Phase 2 (4 months). The waiting period may be extended by UOKiK in the event that UOKiK requires additional information and documents from the parties;
- New approach in case of competition concerns: UOKiK informs undertakings about its competition concerns so that they may alter the proposed concentration to alleviate UOKiK’s concerns, e.g. through adequate remedies;
- Approach towards remedies: Undertakings may request UOKiK that it refrains from publishing in its decisions the deadline by which divestments must be made;
- De minimis clause extended: mergers and the creation of joint ventures explicitly (just like acquisitions of control already under the old law) do not need to be notified to the UOKiK if the turnover in Poland of each of the parties to the transaction does not exceed the equivalent of EUR 10 million in each of the two financial years preceding the transaction. The de minimis clause also applies to concentrations whereby control and assets are being acquired simultaneously.
Effective fight against cartels
New rules for more effective fights against cartels have been introduced but could not yet show any significant effect in 2015. The number of started proceedings (from 87 in 2013 down to 34 in 2015) and of leniency applications (from 10 in 2014 down to 2 in 2015) has dropped. UOKIK explains the reduction in numbers with the application of its new “soft approach” that contains inter alia best practices and the authority’s possibility to request undertakings to voluntarily terminate an infringement and to apply its best practices.
Nonetheless, one should keep in mind the following amendments to the law:
- New provisions concerning fines on individuals: individuals can now be fined up to PLN 2 million (approx. EUR 460,000);
- Limitation period: the limitation period has been extended from one to five years following the cessation of the anticompetitive practice. Through this extension of the limitation period, there is now a higher probability that UOKiK will be in a position to unearth, prevent and punish cartel activity;
- New provisions concerning leniency: (i) the introduction of leniency plus means that an undertaking may receive a reduction in fines of up to 30 percent for revealing another cartel, (ii) the obligation to end the anticompetitive practice starts with the leniency application (prior to the amendment it could have been continued until the actual presentation of evidence), (iii) even the ringleader of a cartel may apply for a full reduction of the fine that would otherwise have been imposed, and (iv) leniency applicants can benefit from fine reductions according to percentage bands (beforehand, leniency only led to a reduction of the fine’s ceiling);
- New provisions concerning settlements: these provisions have been introduced in order to simplify and accelerate proceedings. Specifically, settlements may lead to reductions in the fine of up to 10 percent;
- New provisions concerning behavioural and structural remedies: these new provisions are intended to more effectively eliminate the effects of anticompetitive practices;
- New provisions pertaining to dawn raids: appeals can now be brought in the event that the rights of the dawn raid’s addressee or a third person are violated during a dawn raid; the appeal has to be filed within seven days after the unlawful action occurred; as a result of a successful appeal the relevant evidence cannot be used in the proceeding concerned or in any other proceeding.
Authority’s open and soft approach
The UOKiK has adopted a more open approach permitting undertakings to contact the authority directly. New clarifying notices have been drawn up with the purpose of facilitating dialogue between undertakings and the authority. Moreover, UOKiK has updated its guidance (i) on how fines are to be calculated, (ii) on leniency application procedures, (iii) on issuing the commitment decision, (iv) on UOKiK’s detailed statement of objections, (v) on publications concerning sector enquiries, (vi) on merger control notifications and (vii) on UOKiK’s rules for contact with enterprises (see most recent documents and older ones available in English). In 2017, UOKiK will again review the new rules in consultation with undertakings and if necessary amend the provisions accordingly.
Chile has amended its Competition Law to “consolidate [its] leadership as a sophisticated agency in Latin America.”
On 16 November 2016, the Italian Competition Authority (the “Authority”) opened a proceeding against Vodafone Italia and Telecom Italia for alleged abusive conducts in the bulk SMS market. According to the Authority, both companies would have abused their dominant position in the upstream market of SMS termination services through alleged abusive conducts aimed at excluding or limiting other competitors’ ability to compete in the downstream bulk SMS market.
According to the Authority, Vodafone Italia and Telecom Italia would have implemented a margin squeeze strategy in breach of Article 102 TFUE. In particular, the tariffs applied by Vodafone Italia and Telecom Italia in the upstream and downstream markets would leave an insufficient margin for any efficient competitor to cover their own specific costs for providing the bulk SMS service to customers, therefore preventing or restricting their access to the downstream market. The opening of the investigation follows a complaint filed with the Authority by a smaller competitor operating in the downstream bulk SMS market. The proceeding is scheduled to close on 30 November 2017.
Gabriele Giunta contributed to this post
On 11 November 2016, the Italian Competition Authority (the Authority) fined eight modelling agencies (B.M. S.r.l. – Brave, D’management Group S.r.l., Elite Model Management S.r.l., Enjoy S.r.l., Major Model Management S.r.l., Next Italy S.r.l., Why Not S.r.l. and Women Models S.p.a.) and their trade association (Assem) of € 4.5 million for alleged price collusion. According to the Authority, the modelling agencies would have agreed on the applicable prices on the market with the aim of avoiding any form of competition. In particular, the alleged price collusion would have concerned all the components of the prices applied to the major maisons and other clients (e.g., fees for models, wages for the modelling agencies and other additional costs). Furthermore, a practical role would have been played by the trade association, Assem, where the modelling agencies had held frequent meetings to develop the alleged concerted practice.
In calculating the fine, the Authority took into account that the alleged conduct took place between 2007 and 2015. Moreover, the Authority granted to Img Italy S.r.l. the full immunity from fines given that it revealed the existence of the alleged conduct. Regarding the European scenario, on 29 September 2016, the French Competition Authority fined the main trade association, SYNAM and 37 modelling agencies of €2.38 million for price fixing. In addition, there is a pending investigation of the Competition and Market Authority into alleged anti-competitive conducts in the model management services in United Kingdom.
Gabriele Giunta contributed to this blog post.