The Chinese government announced on March 13, 2018, that it will consolidate the duties of three competition agencies into a new government agency to handle all antitrust matters. While it is too early to tell how this reorganization will impact China’s review of transactions and conduct cases, we believe that this change could lead to greater consistency and potentially more experienced attorneys reviewing competition matters.
The Federal Trade Commission (FTC) recently announced that it has challenged a merger between Wilhelmsen Maritime Services (Wilhelmsen) and Drew Marine Group (Drew) because of an overlap in service to “global fleet customers,” a narrow customer segment that purchases marine water treatment chemicals and services.
- The FTC issued an administrative complaint and filed a complaint in federal court seeking a temporary restraining order and preliminary injunction, asserting that Wilhelmsen’s proposed $400 million acquisition of Drew would significantly reduce competition in the market for marine water treatment chemicals and services used by global fleets.
- The FTC enforcement action focuses on a narrow sub-segment of customers, global fleet customers, that buys marine water treatment chemicals and services.
- The FTC distinguished global fleet customers from other marine water treatment chemical customers on the basis that:
- (1) global fleets have specialized needs that only a few suppliers can meet
(turn-key global sales, service and delivery capabilities, as well as consistent and reliable product supply); and
- (2) these customers seek out suppliers via requests for proposal and direct negotiation and therefore potential suppliers can price discriminate to that subset of customers.
- Because of the specific needs of global fleet customers and because global fleet suppliers can identify which customers are seeking service for global fleets, suppliers are able to price discriminate to the global fleet customer set.
- The FTC alleged a harm to competition because their investigation showed Wilhelmsen and Drew are each other’s closest competitors based on company documents, statements by the business personnel, and bid data showing that the companies are most frequently the first and second choice for global fleet customers. In addition, the FTC noted that Wilhelmsen and Drew would control at least 60 percent of the market with the next largest competitor having less than a 5 percent share.
- The FTC complaint disparaged the remaining market participants as unable to practicably compete with Wilhelmsen and Drew to service global fleets because they are perceived as offering lower quality products with less reliability, having more limited service capabilities, and failing to price competitively.
WHAT THIS MEANS:
- The FTC’s enforcement action continues a trend of applying price discrimination markets. These markets are characterized by: (1) buyers with special requirements that only select suppliers can service; and (2) sellers who can identify the buyers with those special requirements and selectively price based upon the knowledge of those special needs.
- Antitrust enforcement of price discrimination markets lead to narrower product market definitions. Therefore, applying price discrimination markets may result in antitrust enforcers challenging mergers that appear lawful when viewed as a broader market.
- There is increased risk of price discrimination markets being applied by antitrust enforcers in industries in which:
- The customers’ end uses differ for the same product;
- Merging companies’ documents recognize distinctions among customer groups; and
- Groups of customers require unique product characteristics.
United States: July – December 2017 Update
Although delays in antitrust appointments continued throughout the second half of 2017, the Federal Trade Commission (FTC) and Department of Justice (DOJ) continued to actively investigate and challenge mergers and acquisitions. Notably, the DOJ challenged the vertical AT&T/Time Warner transaction, the first vertical merger the DOJ has tried since the 1970s. The end of 2017 showed a trend where the FTC and DOJ are focusing on structural remedies rather than behavioral remedies. Additionally, at the end of 2017, the FTC and DOJ challenged several consummated transactions, as well as transactions that were not reportable under the Hart-Scott-Rodino Antitrust Improvements Act.
European Union: July – December 2017 Update
After two concentrations within the agrochemicals sector in the second quarter of 2017 — Dow/DuPont and ChemChina/Syngenta — the European Commission continued to see megamergers notifications in the agrochemical sector in the second half of 2017. The fourth quarter of 2017 saw the second Commission merger decision challenged successfully this year and the fourth case of annulment of a clearance decision since the implementation of the EU Merger Regulation.
Snapshot of Events (Legislation/Agency Remarks/Speeches/News, etc.)
- Seats at the FTC Remain Unfilled Despite Continued Progress in the Appointment of New Antitrust Leadership
After a long wait, on September 27, the Senate confirmed Makan Delrahim, President Trump’s nominee to head DOJ’s antitrust division. The DOJ has also named several deputies to serve under Delrahim: Andrew Finch, Bernard Nigro, Luke Froeb, Donald Kempf and Roger Alford. These positions are not subject to Senate confirmation.
President Trump nominated four Commissioners for the FTC, including Joseph Simons to lead the FTC as Chairman. Joe Simons is an experienced antitrust attorney who was previously Director of the FTC’s Bureau of Competition. He has mainstream Republican views. Until the new Commissioners are confirmed, there must presently be unanimity between the two Commissioners for the FTC to take action.
- FTC Warns That It May Challenge Vertical Mergers
Acting Bureau of Competition Director, Bruce Hoffman, gave remarks at the Global Antitrust Enforcement Symposium on September 13, 2017. He said that the FTC would be ready to challenge vertical mergers if there were competition issues to resolve. He added that the FTC may impose structural remedies in vertical mergers where it views the remedy as necessary to prevent competitive harm.
- Senator Amy Klobuchar (D-Minn) Introduces New Legislation to Curtail Market Concentration and Enhance Antitrust Scrutiny of Mergers and Acquisitions
On September 14, 2017, two bills were introduced by Senator Amy Klobuchar to the Senate: the Consolidation Prevention and Competition PromotionAct (CPCPA) and the Merger Enforcement Improvement Act (MEIA). Both bills are part of the Senate Democrats’ “A Better Deal” antitrust agenda. The CPCPA would impose extra scrutiny on so-called “mega deals” by shifting the burden of proof from antitrust enforcers to the companies. It would also update the Clayton Act to refer to “monopsonies” in addition to “monopolies.” The MEIA would increase the resources allocated to antitrust enforcers, both in terms of substantive information and financial terms.
- DOJ To Focus on Structural Remedies
Assistant Attorney General Makan Delrahim gave remarks at the American Bar Association Section of Antitrust Law’s Fall Forum on November 16, 2017. He announced that DOJ would seek to reduce the number of long-term consent decrees and focus on structural remedies instead of behavioral remedies.
- Senator Elizabeth Warren (D-Mass) Criticizes Recent Antitrust Enforcement
In a speech at the Open Markets Institute on December 6, 2017, Senator Elizabeth Warren advocated steps to improve antitrust enforcement. On mergers, she stated that increased enforcement is needed not just for horizontal mergers between direct competitors, but also for vertical mergers.
- Application of EU Merger Control Clarified: Non-Full Function Existing Joint Ventures Fall outside the Scope of EU Merger Control
On September 7, 2017, the European Court of Justice decided that, where joint control is acquired over a new or existing undertaking (or parts of an undertaking), that transaction can only fall within the scope of the EU Merger Regulation where the resulting entity will be ‘full-function.’
- Marine Harvest Gun Jumping Fine Upheld by the General Court
On October 26, the General Court confirmed the €20 million fine imposed by the Commission on Norwegian salmon farmer Marine Harvest in 2014 for allegedly implementing its acquisition of salmon producer Morpol ASA before notifying and receiving clearance from the Commission.
While Marine Harvest had been in contact with the Commission since December 2012, it only formally notified the acquisition of Morpol ASA on 9 August 2013. The Commission held, and the General Court agreed, that the company’s merger filing obligation was triggered several months earlier, when Marine Harvest acquired a 48.5 percent controlling shareholding in Morpol ASA in December 2012.
- EC Is Ramping Up Enforcement: Conditional Merger Clearances Doubled during Margrethe Vestager’s First Three Years
Since the start of Vestager’s tenure on November 1, 2014, the Commission cleared a total of 70 deals subject to commitments, whereas between February 2010 and February 2013 — Joaquin Almunia’s first three years in the Commission — 34 deals were approved conditionally. Vestager sought remedies in 6.8 percent of cases, while Almunia only required them in 3.9 percent.
In 2014–2017, 55 conditional clearances were granted in Phase I, while 15 were Phase II cases. Between 2010 and 2013 there were 25 Phase I conditional clearances and 9 Phase II, according to data from the EC’s merger database.
Dealmakers know that a critical part of the merger process is obtaining antitrust clearance from government enforcers. But, even if the antitrust enforcers review and clear a transaction, a third-party can file a private suit alleging the transaction violated the antitrust laws. Recently, an aggrieved customer did just that—it won a substantial jury verdict and is also seeking a court order to unwind the transaction nearly six years after the transaction was announced.
- On February 15, 2018, almost six years after Jeld-Wen announced an acquisition of Craftmaster Manufacturing, Inc. (CMI) in 2012, a federal jury awarded a customer, Steves and Sons (Steves), $58.6 million for antitrust damages and lost profits stemming from the acquisition. Additionally, Steves is seeking to unwind the 2012 Jeld-Wen/CMI transaction through a court order that would force Jeld-Wen to divest of assets sufficient to re-create a competitor as significant as CMI at the time of the acquisition in the doorskin market—that is, restoring competition to pre-transaction levels.
- The Department of Justice (DOJ) reviewed, but did not challenge, Jeld-Wen’s acquisition of CMI, which reduced the number of doorskin suppliers from three to two. Interestingly, the 2012 transaction involved CMI, a company that entered the doorskin market in 2002, when it acquired divested assets because of DOJ concerns about a doorskin merger at that time.
- One of the factors that led to DOJ clearance is that customers did not complain about the transaction. Prior to Jeld-Wen and CMI completing the transaction in 2012, Steves, entered into a long term supply agreement with Jeld-Wen.
- After the transaction, Steves became dissatisfied with Jeld-Wen’s treatment and alleged that it received less favorable price terms, reduced product quality and output, and worse service.
- As a result, in 2016—four years after closing—the customer filed a complaint alleging that Jeld-Wen’s acquisition of CMI violated the antitrust laws.
WHAT THIS MEANS
- Business leaders must understand that even if antitrust enforcers clear a merger, not only can they revisit that decision, but third parties can also sue for damages or to unwind the transaction.
- Steves did not complain about the merger until years after the transaction and yet still won a substantial verdict. This case is a reminder that business leaders must independently weigh the merits of their customer’s position (regardless of the antitrust enforcers’ posture regarding the same case) and manage the business appropriately after close to avoid a customer lawsuit.
- Secondarily, business leaders must realize that customer lawsuits can also create significant operational issues that distract from the company’s business objectives. For example, not only may company personnel be distracted from running the business while assisting with the defense of the litigation, the company may also face significant legal costs, as well as invasive discovery. Further, a complaint filed by one private litigant could spur follow-on litigation from other aggrieved customers or third parties. Buyers should be cognizant of those risks and should consider whether mollifying any aggrieved customers or suppliers would avoid litigation.
Indirect purchaser plaintiffs’ motion for class certification in a lithium ion battery suit was denied for failing to show concrete evidence linking increased input costs to increased end-product prices; theoretical inference is not enough.
- The US District Court for the Northern District of California denied a motion for class certification for a proposed class of indirect purchasers of lithium ion batteries. In re: Lithium Ion Batteries Antitrust Litigation, Case No. 13-MD-2420 (N.D. Cal. Mar. 5, 2018).
- An expert witness for indirect purchaser plaintiffs (IPPs) calculated a 100 percent pass-through rate of price increases on lithium ion batteries to end use products, resulting in an estimated $573 million in damages for the proposed class (or approximately $1.7 billion in treble antitrust damages).
- Defendants countered by arguing that the expert’s claim of pass-through of supracompetitive pricing was insufficiently substantiated because there was no direct connection between changing input costs and changing end-product prices. Simply put, there was no overcharge attributable to battery cost.
- The court agreed and held that without more than theory about how much, if any, antitrust harm passed through to IPPs, class certification would be denied.
WHAT THIS MEANS:
- In indirect purchaser cases, courts will focus on the pricing dynamics of the products actually purchased by the plaintiffs in relation to alleged cost increases of components of those products. Courts are concerned not only with the fact of pass-through, but also whether the overcharge caused prices to change to the plaintiffs and the class.
- Future indirect purchaser plaintiffs hoping to get past the class certification phase must show concrete evidence, not merely theory, about pass-through of supracompetitive pricing. This will likely be difficult for end users in cases involving numerous inputs.
The Federal Circuit held Walker Process Claims without a “substantial” patent issue can be heard outside the Federal Circuit based on the US Supreme Court decision in Gunn v. Minton.
- The tug-of-war between antitrust and intellectual property continued Friday, February 9, with the Federal Circuit transferring a Walker Process claim to the Fifth Circuit for lack of jurisdiction. Xitronix Corp. v. KLA-Tencor Corp., Case No. 2016-2746 (Fed. Cir., Feb. 9, 2018) (Moore, J.).
- In Walker Process, the Supreme Court held that a patent holder may be subject to antitrust liability in a situation where the patent was obtained by knowing and willful fraud on the patent office and all the other necessary elements for a Sherman Act charge are present.
- Here, Xitronix brought a Walker Process claim alleging KLA fraudulently obtained a patent. Though both parties asserted the Federal Circuit had jurisdiction over the claim, the Federal Circuit disagreed.
- The Federal Circuit specifically asked for supplemental briefing after oral argument relating to Gunn v. Minton, 568 U.S. 251 (2013), to determine whether jurisdiction in the Federal Circuit was proper. In Gunn, the Court held that though the Federal Circuit has exclusive jurisdiction over patent issues, the law doesn’t bar other courts from hearing malpractice claims relating to pursuing patents.
- Citing Gunn v. Minton, the Federal Circuit held that though this case would potentially involve “analysis of the [patent] claims and specifications and may require application of patent claim construction principles,” the federal question jurisdictional statute required more than “mere resolution of a patent issue.”
Thus, finding no “substantial” issue of patent law, the Federal Circuit transferred the claim to the Fifth Circuit to determine whether the patent was procured through fraud in order to illegally create or preserve a monopoly.
WHAT THIS MEANS:
- Going forward, Walker Process claims will not be heard in the Federal Circuit merely because they require some consideration of a patent issue.
- Gunn v. Minton continues to narrow the jurisdiction of the Federal Circuit. Tangential resolution of a patent dispute is not necessarily enough to invoke Federal Circuit jurisdiction.
- Bruce Hoffman, acting director of the Bureau of Competition at the Federal Trade Commission (FTC), announced that the FTC will no longer accept divestitures of inhalant and injectable pipeline drugs in pharmaceutical mergers.
- Hoffman, speaking at the Global Competition Review Seventh Annual Antitrust Law Leaders Forum on February 2, 2018, explained that divestitures of pipeline products were not working well for complex pharmaceuticals, such as inhalants and injectables.
- Instead, in situations in which the parties to the transaction own both a successfully manufactured inhalant or injectable and an overlapping pipeline inhalant or injectable in a concentrated market, the FTC will seek a divestiture of the manufactured product.
- An internal study at the FTC revealed that the rate of failure was “startlingly high” for divestitures of certain complex pipeline pharmaceutical products. Hoffman blamed the high failure rate on the difficulty in actually getting the complex pipeline pharmaceutical to market by a divestiture buyer. He explained that a divestiture buyer, for example, could struggle to reliably manufacture an inhalant or injectable product, frustrating its ability to ultimately bring the product to market.
In the course of one week, two top level DOJ Antitrust officials in the Trump Administration separately spoke at panels and suggested the possibility of a sea change in federal antitrust law with respect to indirect purchaser lawsuits. The comments further reinforce the Administration’s active focus on antitrust issues.
- Makan Delrahim, DOJ’s Assistant Attorney General in charge of the Antitrust Division (the Division), spoke at a conference organized by the Antitrust Research Foundation on January 19, 2018, and is reported to have stated that the Division was looking into the possibility of pursuing civil damages on behalf of taxpayers in antitrust price-fixing suits.
- A few days later, on January 23, 2018, Andrew Finch, DOJ’s Principal Deputy Assistant Attorney General for Antitrust, spoke at a Heritage Foundation conference and reportedly stated that the Division was “looking at whether or not it might be worthwhile to revisit those rules and suggest the same to the Supreme Court,” referencing the landmark decision Illinois Brick Co. v. Illinois, which prohibits indirect purchasers from recovering antitrust damages under federal antitrust law.
At the one year anniversary of the Trump administration, antitrust merger enforcement remains similar to the Obama administration, but it is still early to judge given the delays in antitrust appointments and given the DOJ’s lawsuit against the vertical AT&T/Time Warner transaction, the first vertical merger litigation in decades. Below are some of the recent developments that have impacted merger enforcement by the Federal Trade Commission (FTC) and Antitrust Division of the US Department of Justice (DOJ), as well as European regulators.
The US Federal Trade Commission recently announced increased thresholds for the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and for determining whether parties trigger the prohibition against interlocking directors under Section 8 of the Clayton Act.