The first quarter of 2019 proved to be as active as ever for antitrust regulators in both the United States and Europe. In the United States, vertical merger enforcement was the focus of a few high-profile matters. The US DOJ has been working on an update to the Non-Horizontal Merger Guidelines, possibly providing clarification for merging parties.

Meanwhile in Europe, although the European Commission cleared a number of merger control proceedings with remedies, the European Commission also blocked two transactions during the first quarter of 2019.

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Hélène de Cazotte, a trainee in the Firm’s Brussels office, also contributed to this publication.

The tenth of the FTC’s Hearings on Competition and Consumer Protection in the 21st Century focused on competition and consumer protection issues in US broadband markets. The panelists addressed developments in US broadband markets, technology, and law since the FTC staff’s 2007 Broadband Connectivity Competition Policy report and the FTC staff’s 1996 Competition Policy in the New High-Tech, Global Marketplace report.

Four panels of industry experts broadly discussed: (i) how the FTC should identify and evaluate advertising claims by internet service providers (ISPs) with respect to delivery speed; (ii) how broadband networks and markets have evolved since the 2007 Broadband Report; and (iii) how the FTC should identify and evaluate anticompetitive conduct in the broadband industry.

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Originally published by Competition Policy International, April 2019.

WHAT HAPPENED:

  • The Department of Justice filed a Statement of Interest in three related cases in the Eastern District of Washington yesterday dealing with alleged “no-poach” (or non-solicitation) agreements between franchisors like Carl’s Jr, Auntie Anne’s and Arby’s and their franchisees.
  • In the statement, the DOJ distinguished between “naked” no-poach agreements between competitors and the kinds of no-poach agreements in the franchise context that are typically vertical restraints between the parent company and the individual franchisee.
  • According to the DOJ, naked no-poach agreements should be analyzed as per se, or presumptively anticompetitive and illegal under Section 1 of the Sherman Act, while most vertical restraints should be analyzed under the rule of reason which requires some balancing of potential harms and benefits.
  • The statement did, however, distinguish two scenarios where franchise agreements could still merit per se
  • In a situation where the “franchisees operating under the same brand name agreed amongst themselves (and wholly independent from the franchisor), for example, not to hire any person ever previously employed by another franchisee that is a party to the agreement.” Stigar v. Dough Dough, Inc. et al., No. 2:18-cv-00244-SAB, Statement of Interest of the United States of America at 11 (Mar. 7, 2019).
  • In an agreement between a franchisor and franchisee relating to competition in a market where they actually compete. “If operating in the same geographic market, they both could look to the same labor pool to hire, for example, janitorial workers, accountants or human resource professionals. In such circumstances, the franchisor is competing with its franchisee.” If such agreement is not ancillary to any legitimate and procompetitive joint venture, it would warrant per se Id. at 13.

WHAT THIS MEANS:

  • For many franchises, the DOJ’s distinction between “naked” and vertical no-poach agreements will represent welcome respite from the onslaught of class actions that have been filed recently.
  • Franchisors and franchisees, however, will still need to demonstrate any past or future no poach agreements are not (1) between franchisees and independent of the franchisor, or (2) operating in the same geographic market where both entities actually compete.
  • It also remains to be seen whether the court will adopt the DOJ’s view on the topic, and how State Attorneys General will react.

Antitrust regulators in the United States and Europe were very active in the final quarter of 2018 closing a large number of cases requiring in-depth investigations. In the United States, regulators continue their focus on the potential need to update their methods of reviewing high-tech transactions with public hearings on the future of antitrust enforcement.

In Europe, recent reviews of Takeda’s acquisition of Shire and the creation of a joint venture between Daimler and BMW show a focus on how transactions will impact innovation for new products.

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Last week, in Connecticut Fine Wine and Spirits LLC v. Seagull, the US Court of Appeals for the Second Circuit affirmed a lower court’s motion to dismiss a lawsuit from Total Wine & More challenging parts of Connecticut’s Liquor Control Act and related regulations. Though the decision represents a victory for state alcohol regulatory regimes, the Second Circuit’s ruling was decided on the basis of established antitrust law and did not raise or rely on state regulatory authority under the 21st Amendment. Nonetheless, state alcoholic beverages regulators will embrace the court’s ruling.

In Connecticut Fine Wine, Total Wine challenged three sets of provisions in Connecticut’s alcohol laws. First, Total Wine challenged “post-and-hold” provisions. Under the post-and-hold provisions, state-licensed wholesalers are required to post a “bottle price” and “case price” each month with the Connecticut Department of Consumer Protection. Those prices are then made available to industry participants. During the four days after prices are posted, wholesalers may “amend” their posted prices to match—but not drop below—lower prices offered by competitors. Wholesalers are then obligated to “hold” their prices for a month.

Second, Total Wine challenged the state’s minimum-retail-price provisions. The minimum-retail-price provisions require retailers to sell alcohol beverages to customers at or above a statutorily defined “cost,” which is determined by adding the posted bottle price and a markup for shipping and delivery. Combined with the post-and-hold provisions, the minimum-retail-price provisions bind retailer prices to wholesaler prices.

Third, Total Wine challenged the state’s price discrimination and volume discount provisions. The price discrimination/volume discount provisions preclude wholesalers from offering a given product to different retailers at different prices and from offering discounts to retailers who are high-volume purchasers. Continue Reading Second Circuit Rejects Total Wine Challenge of Connecticut Pricing Laws

The Attorney General of the State of Washington (the State) scored another victory last week in its federal antitrust challenge to Franciscan Health System’s (Franciscan) affiliations with two competing physician practices, Washington v. Franciscan Health System, Case No. C17-5690 (W.D. Wa.), pending in the United States District Court for the Western District of Washington. Specifically, the district court ruled that Franciscan cannot assert as an affirmative defense that its affiliations are legal because the competing physician practices with which it affiliated would have been financially weakened without them.

WHAT HAPPENED

  • The Washington case arises out of two transactions that Franciscan and the Franciscan Medical Group (FMG) entered with competitors in the Kitsap Peninsula immediately west of Seattle, one of which was with The Doctors Clinic (TDC), a 54-physician practice.
  • After reviewing Franciscan’s contractual relationship with TDC, the district court ruled in an Order granting the State’s Motion for Partial Judgment on the Pleadings that the Defendants cannot assert the so-called “weakened competitor” defense. The court held that whether TDC was financially weak absent Franciscan’s affiliation can be evidence at trial under certain circumstances, but is not an affirmative defense justifying what is otherwise allegedly illegal price-fixing.
  • This decision comes on the heels of a prior decision in July 2018 in which the district court struck the defendants’ related affirmative defense that TDC was a “failing company.”

WHAT THIS MEANS

  • Together, the district court’s decisions indicate that parties entering affiliations without a complete unity of economic interests should be wary of relying on arguments or defenses that can carry greater weight in the merger context. The only way to defeat a price- or wage- fixing claim on the pleadings is to show either that 1) the parties achieved sufficient unity of economic interests to be considered one entity for antitrust purposes, or 2) the complaint did not sufficiently allege any agreement to restrain trade.
  • Health care providers should be careful to comply with the antitrust laws even in situations where the parties believe an affiliation will result in real benefits for patients, efficiencies, higher quality of care or other improvements specific to the health care industry. These factors play no role when providers have engaged in price- or wage-fixing—for example, through joint payor contracting or jointly implementing employee salaries—without having achieved a full unity of economic interests.

The US Federal Trade Commission’s (FTC) Bureau of Competition announced the launch of a new Technology Task Force that will investigate anticompetitive conduct, review past transactions, as well as contribute to pending merger reviews. The FTC’s investigation of consummated transactions will not be limited to large transactions that meet the HSR filing thresholds, but will also include so-called “non-reportable” transactions. The launch of this task force along with the ongoing FTC Hearings on Competition and Consumer Protection in the 21st Century is further evidence of US antitrust enforcers’ increasing focus on the technology sector.

WHAT HAPPENED:

  • On February 26, the FTC’s Bureau of Competition announced the creation of a Technology Task Force dedicated to monitoring competition in US technology markets. The mandate is expansive allowing for investigations of anticompetitive conduct, mergers and industry practices.
  • Importantly, the task force is not only charged with aiding in the review of prospective mergers, but also investigating consummated mergers of any size. For consummated mergers, the task force has the authority to reconsider prior matters and seek the full set of remedies (e.g., divestiture, licensing, etc.) that would be available during the review of a prospective transaction.
  • Patricia Galvan, currently the Deputy Assistant Director of the Mergers III Division, and Krisha Cerilli, currently Counsel to the Director, will lead the task force. Their team includes approximately 17 existing staff attorneys with experience in complex technological markets such as online advertising, social networking and mobile operating systems.
  • Bureau of Competition Director Bruce Hoffman explained that “by centralizing [the FTC’s] expertise and attention, the new task force will be able to focus on these markets exclusively—ensuring they are operating pursuant to the antitrust laws, and taking action where they are not.”

WHAT THIS MEANS:

  • The launch of the Technology Task Force together with the ongoing FTC Hearings on Competition and Consumer Protection in the 21st Century highlights the FTC’s and DOJ’s increasing focus on maintaining “free and fair competition” in the technology sector.
  • FTC Chairman Joseph Simons’s prior work at the FTC involved launching the Merger Litigation Task Force, which focused on hospital merger retrospectives, and sharpened the FTC’s approach in challenging health care transactions. This appears to be a similar move to sharpen the FTC’s knowledge and approach, but now directed at the technology sector.
  • Technology companies that have recently completed mergers should take care not to draw scrutiny from antitrust enforcers.
  • Typically, investigations of consummated transactions and anticompetitive conduct will begin with a review of publicly available materials before burdening targets with compulsory process and seeking information from customers, competitors and industry experts.
    • Upon receiving information requests from the FTC, targets of the investigations should engage quickly to understand the scope and focus of the investigation. An information request likely means the FTC investigation has progressed beyond the initial phase.
    • Industry participants (competitors, customers) could also receive significant information associated with FTC investigations. Those parties should also engage with the FTC quickly to jointly develop a reasonable plan for addressing the FTC’s information requests.

Q4 UPDATE: OVERVIEW OF CARTEL INVESTIGATIONS

Although 2018 saw guilty pleas and new indictments in several ongoing Department of Justice (DOJ) investigations, the year finished by continuing a downward trend in antitrust enforcement. DOJ’s criminal and civil fines in 2018 ended around $400 million—well short of the billion-dollar plus highs in 2014 and 2015, during the height of the auto parts and foreign exchange investigations. EU fines ended at €800 million, which was less than in 2017 and less than one fourth of the amount of fines imposed in 2016.

US DEVELOPMENTS

  • The DOJ has intervened in three federal class actions in the Eastern District of Washington to express its view over the proper standard of scrutiny to apply to no-poach agreements that are at the heart of several civil suits across the country. While a longer, more formal statement from the DOJ is expected soon, it appears that the DOJ will argue that the rule of reason should apply to most if not all of these lawsuits.
  • The DOJ revealed a new investigation into the bid rigging of fuel-supply contracts for US armed forces abroad. Three South Korea-based companies agreed to plead guilty to criminal charges and to pay $82 million in criminal fines for their involvement in a decade-long bid-rigging conspiracy that targeted contracts to supply fuel to United States Army, Navy, Marine Corps and Air Force bases in South Korea.
  • Two former Deutsche Bank traders urged a Manhattan federal judge in December 2018 to reverse their convictions for rigging the London Interbank Offered Rate (Libor) and to dismiss the charges against them. Prosecutors obtained the convictions in October 2018 by arguing that the two traders had conspired with the bank’s Libor submitters to skew the lending benchmark to benefit their derivative trades. In December, the pair argued that prosecutors obtained that conviction by lying to the court and the jury and by hiding evidence from defense attorneys throughout the case.
  • Two executives pleaded guilty and agreed to cooperate with the DOJ’s investigation into price fixing in the freight-forwarding industry.
  • While the DOJ’s investigation into price fixing of online promotional products appeared to slow, in November 2018, the DOJ announced new charges against another online promotional products company and its executive for conspiring to fix prices for customized promotional products, including wristbands, lanyards, temporary tattoos and buttons between May 2014 and June 2016.
  • The DOJ’s investigation into bid rigging of public real estate foreclosure auctions continues, as additional charges and guilty pleas continue to roll in.
  • Following up on an indictment from 2015, the DOJ obtained a plea agreement from an art dealer in the UK for agreeing with its competitors on Amazon Marketplace and elsewhere to fix the price of art posters sold online to customers in the US. The defendant agreed to pay a criminal fine of $50,000, plus fees, and agreed to a recommended sentence between 12 and 60 months.

EU DEVELOPMENTS

  • In November 2018, the Commission opened an investigation to determine whether agreements between booking system providers and airlines and travel agents distorts competition.
  • In December 2018, the Commission sent Statement of Objections to banks involved in trading US Dollar supra-sovereign, sovereign and agency bonds.

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The US Department of Justice (DOJ) recently sued former joint venture partners because they allegedly coordinated their competitive activities beyond the legitimate scope of their venture. This case illustrates several important points. First, companies who collaborate through joint ventures and similar arrangements need to be mindful that any legitimate collaborative activity does not “spill over” to restrain competition in other unrelated areas. Second, DOJ discovered the conduct during its review of documents produced in connection with a merger investigation. This is the most recent reminder of how broad ranging discovery in merger investigations can result in wholly unrelated conduct investigations and lawsuits. Third, one of the parties was a portfolio company of a private equity sponsor, highlighting how private investors can be targeted for antitrust violations. Continue Reading Out of Bounds: Sports Agencies Flagged for Anticompetitive Bidding Agreements

On 14 February 2019, the General Court of the European Union (GCEU) annulled the decision of the European Commission (Commission) on the Belgian excess profit exemption system (SA.37667) in its entirety on the ground that the Commission erroneously categorized the system as an “aid scheme” (T‑131/16 and T‑263/16).

IN DEPTH

Background

Since June 2013, the Commission has been investigating the tax practices of Member States. In the context of this investigation, on 11 January 2016, the Commission found that the so-called Belgian excess profit exemption system constituted an aid scheme that is incompatible with the internal market and that it had been implemented in breach of Article 108(3) of the Treaty on the Functioning of the European Union (TFEU). By the same decision, the Commission ordered that the Kingdom of Belgium recover the aid from the beneficiaries.

The excess profit exemption system allows Belgian entities of multinational companies to reduce their tax base in Belgium by deducting from their actually recorded profit so-called “excess profit”. That excess profit is determined by estimating the hypothetical average profit that a standalone company carrying out comparable activities could be expected to make in comparable circumstances and subtracting that amount from the profit actually recorded by the Belgian group entity concerned (the two-step methodology). To benefit from the excess profit system, multinational groups were required to obtain advance rulings from the Ruling Commission in respect of new situations (substantial investments and/or the creation of employment and/or the relocation of activities to Belgium) (the new-situation requirement).

The Kingdom of Belgium and Magnetrol International (one of the 55 beneficiaries listed in Annex to the decision) brought appeals against the decision.

Continue Reading General Court Annuls European Commission Decision on Belgian Excess Profit Exemption System