Criminal Antitrust Update - April 2011

    1 April 2011

    INDUSTRY SCORECARD

    Health Care: Health care continues to be high on the Antitrust Division (the Division) of the Department of Justice's list of priorities. On February 25, 2011, the Division reached a settlement with United Regional Health Care System, a hospital in Wichita Falls, Texas, relating to allegations that United Regional unlawfully maintained a monopoly in violation of Section 2 of the Sherman Act, by offering significant price discounts to commercial health insurers in exchange for exclusive provider status. The Division contended that competing hospitals were excluded from the majority of insurers' network offerings, that in almost all circumstances accepted the significant price discounts.

    Technology: Google continues to face scrutiny in the U.S. and abroad due to its proposed acquisition of ITA Software, Inc., a flight information software company, as well its overall dominance in the Internet search engine market. Google is already under investigation in Europe for allegedly intentionally disfavoring competitors in Google search rankings. Competitors of Google and purchasers of Google advertising have petitioned the Division for a similar investigation in the U.S. Most recently, the U.S. Senate's antitrust subcommittee announced that it will closely examine "allegations raised by e-commerce websites that compete with Google that are being treated unfairly in search ranking, and in their ability to purchase advertising."

    Real Estate Foreclosure Auctions: The Division, along with the U.S. Attorney's Office for the Eastern District of California, is investigating a group of California real estate agents who allegedly conspired to rig the bids at foreclosure auctions. According to the Division, the agents would designate one person as the winner of a foreclosed property and the others agreed to not bid against the designated bidder. The bidders would later hold a second private auction of the designated property and split the net proceeds from the second auction. Presently, the Division has obtained four guilty pleas relating to this agreement. Moreover, the Division has stated that it intends to vigorously investigate bid-rigging schemes in real estate foreclosure auctions throughout the country.


    COMPLIANCE TIP: RESALE PRICE MAINTENANCE

    Resale price maintenance occurs when companies at different levels of the market structure (i.e., manufacturer and distributor) enter into an agreement relating to the resale price of products or services. According to the Supreme Court, such activity must be examined under a rule of reason analysis. To determine whether a pricing practice satisfies the rule of reason, courts will examine among other things, the potential benefits to competition and business justifications for the pricing practice.

    In February 2011, the Supreme Court denied a petition for writ of certiorari in PSKS Inc., v. Leegin Creative Leather Products, Inc.,[1] in which the Fifth Circuit applied the rule of reason to dismiss the plaintiff's vertical price fixing claim. This was the second time the Supreme Court was asked to review the Leegin case. In 2007, the Supreme Court issued a controversial decision, Leegin Creative Leather Products, Inc. v. PSKS, Inc.,[2] striking down the long-standing precedent that vertical price-fixing or "resale price maintenance" is per se illegal.

    The 2007 Leegin opinion identified several factors that are relevant when determining whether a vertical price restraint is pro-competitive: (1) the number of manufacturers in a given industry that use resale price maintenance, hence the likelihood that consumers can seek out alternative manufacturers and retailers; (2) the source of the price restraint; i.e. manufacturer/distributor or retailer (the latter would be more problematic); and (3) whether the manufacturer or retailer has market power.

    On remand, the Fifth Circuit held that in order to adequately plead a claim of vertical price-fixing under the rule of reason, a plaintiff must identify the relevant market and defendant's market power in that market. This is a high burden for plaintiffs to meet.

    Despite the Court's analysis of vertical price-fixing claims under Section 1 of the Sherman Act, many states have enacted legislation prohibiting all forms of resale price maintenance as per se illegal. Moreover, the Senate antitrust subcommittee recently reintroduced a similar bill that would prohibit vertical price pricing/resale price maintenance under federal law. This bill failed to pass in 2010. Thus, while plaintiffs are held to a heightened standard to prove illegal vertical price-fixing under the federal antitrust laws, companies should remain cautious when engaging in resale price maintenance as such activity may be per se illegal under state laws.

    [1] PSKS Inc. v. Leegin Creative Leather Products, Inc., 615 F.3d 412 (5th Cir. 2009), cert. denied, PSKS Inc. v. Leegin Creative Leather Products, Inc., No. 10-653 (2011).

    [2] 551 U.S. 877 (2007).


    COMMENT: DEFENDING A GLOBAL INVESTIGATION

    The high risk of extraterritorial consequences and parallel proceedings in antitrust investigations means that defending investigations requires a global view, anticipating and addressing concerns that arise from civil litigation and foreign investigations as well as U.S.-based regulators. This was particularly apparent from some recent developments.

    Decision Regarding the Foreign Trade Antitrust Improvements Act (FTAIA)

    The Division successfully prosecuted a number of semiconductor manufacturers for fixing the prices of Dynamic Random Access Memory (DRAM), resulting in a series of high-profile guilty pleas and fines in 2005. Though a related investigation of the Static Random Access Memory (SRAM) markets closed roughly one year ago without any plea bargains, a series of lawsuits consolidated under multidistrict litigation rules continues onward in the U.S. District Court for the Northern District of California against a number of large semiconductor manufacturers.

    In that case, manufacturers had moved to dismiss a number of claims on the grounds that the claims implicated foreign rather than domestic commerce. The manufacturers relied on the FTAIA, a statute that was enacted to help guide courts regarding the Sherman Act's application to foreign commerce. The law provides that antitrust allegations in the U.S. must articulate a "direct, substantial and reasonably foreseeable" effect on U.S. markets. The FTAIA's vague language has been the subject of much discussion among antitrust lawyers, but relatively few courts have interpreted the law. In the SRAM multidistrict litigation, the court dismissed claims in which SRAM was either invoiced or shipped from the U.S. but shipped to and paid for in a foreign country. At the same time, the court refused to dismiss claims involving goods that were shipped to a foreign country but invoiced and paid within the U.S. The opinion arguably narrows a significant jurisdictional defense to Sherman Act violations.

    The FTAIA has likely played an important role in resolving government investigations as well. In the wide-ranging investigation of price-fixing by airlines, a number of plea agreements acknowledged the "complexity of litigating the issues" on the issue of what constitutes foreign commerce, and whether that commerce should be included in calculating criminal antitrust fines. As a result, the Division and the airlines "agreed to disagree" regarding certain elements of foreign commerce, and the fines levied against a number of large airlines were substantially lower than the amounts dictated by the U.S. sentencing guidelines. We expect litigation and advocacy over the terms of the FTAIA to increase substantially, both in civil litigation and in defending government investigations.

    Access to Foreign Documents

    Two recent decisions highlight efforts, both by the Division and by civil plaintiffs, to expand the scope of efforts to obtain documents related to alleged price-fixing.

    In an ongoing multidistrict litigation in the Northern District of California regarding alleged price-fixing in the liquid crystal display (LCD) markets, Judge Susan Illston ordered that documents gathered by foreign regulators be submitted for the court's review to determine whether their relevancy and need for production outweigh the defendants' desire to keep the documents confidential. The plaintiffs want access to documents gathered by antitrust authorities in Europe and Japan to support their civil claims. Significantly, the Court's decision was over the objection of the foreign antitrust authorities, who had reportedly cooperated with U.S. antitrust prosecutors in investigating the LCD manufacturers. A number of large LCD manufacturers already agreed to guilty pleas and hundreds of millions of dollars in fines for criminal violations of the Sherman Act.

    On the criminal side of the LCD industry's antitrust issues, four law firms recently appealed to the U.S. Supreme Court ruling that would require the firms to produce foreign documents to a sitting grand jury. The law firms are all defending LCD manufacturers in civil and criminal proceedings. The Ninth Circuit Court of Appeals held that grand jury subpoenas trump civil protective orders, reversing a decision by the Northern District of California that quashed grand jury subpoenas issued to the law firms. The grand jury subpoenas seek documents that the LCD manufacturers maintained overseas but produced in civil LCD antitrust lawsuits, subject to a protective order.

    Generally, documents maintained overseas are beyond the reach of U.S. grand jury subpoenas. However, the Division has argued that documents brought into the U.S. for civil discovery can be obtained by grand juries, notwithstanding any protective order in the civil case. U.S. appellate courts are currently split on the issue of whether grand jury subpoenas outweigh civil protective orders. We plan to closely watch the progress of this appeal, as it may have broad impact on how U.S. law firms defend parallel civil and criminal antitrust proceedings, which virtually always involve foreign or multi-national corporations with substantial overseas business operations.