Criminal Antitrust Update - October 2011

    12 October 2011

    INDUSTRY SCORECARD

    Technology: Google Inc. remains in the spotlight with its announcement in August 2011 that it will purchase Motorola Mobility Holdings Inc., the mobile handset maker. The acquisition should bolster Google’s Android mobile operating system, increase its patent inventory and allow direct competition with Apple. Motorola manufactures mobile phones that run on Google’s Android software. The Department of Justice (DOJ) and Federal Trade Commission (FTC) review of the proposed acquisition is still pending.

    Last month, Google’s Executive Chairman Eric Schmidt appeared before the Senate Subcommittee on Antitrust, Competition Policy, and Consumer Rights. He addressed concerns expressed by lawmakers and competitors that suggested Google has taken advantage of its dominance in the online search market. Specifically, the Subcommittee asked Schmidt about policies that allegedly favor Google-branded websites over competitors during search requests. The DOJ, FTC and European Commission (EC) are all reportedly investigating similar issues. Interestingly, Google’s main competitors in the online advertizing market, i.e., Yahoo Inc., Microsoft Corp. and AOL Inc., are reportedly discussing an agreement to jointly sell advertising space on each others’ websites.

    IBM and the EC recently entered into an agreement that would end the EC’s investigation of IBM’s alleged misuse of its market dominance in the mainframe computer market. The EC opened this investigation in the summer of 2010. The investigation was believed to have focused on allegations by three mainframe maintenance services companies, TurboHercules SAS, Neon Enterprise Software LLC and T3 Technologies Inc., suggesting IBM imposed unreasonable conditions for supplying competing mainframe maintenance service providers with parts and technical support. IBM’s agreement with the EC made certain concessions, including: (1) offering mainframe technical support to mainframe operators for five years; and (2) making mainframe parts more accessible to users. The EC also closed its investigation of alleged tying by IBM of its mainframe hardware with its operating system. We understand the DOJ is still investigating similar allegations.

    Refrigerant Compressor Industry: DOJ indicted three former executives from Panasonic Corporation, Whirlpool Corporation and Tecumseh Products Company for their alleged role in an international conspiracy to fix refrigerant compressor pricing. According to DOJ, the defendants coordinated price increases for refrigerant compressors to customers in the United States and globally from 2004-2007. These are the first indictments in DOJ’s ongoing investigation of the refrigerant compressor industry. Panasonic and Embraco North America Inc. entered guilty pleas in November 2010 and were sentenced to pay $49.1 million and $91.8 million in criminal fines, respectively.

    Automotive Parts: DOJ obtained two separate guilty pleas in its investigation of the aftermarket auto lights industry. Sabry Lee and Maxzone Vehicle Lighting Corp., two California aftermarket auto lights distributors, both agreed to plead guilty to one count of violating Section 1 of the Sherman Act. DOJ alleges that the defendants participated in a global conspiracy to fix the prices of aftermarket auto lights. The indictments claimed that the defendants exchanged pricing information and set prices during meetings in both Taiwan and the U.S. Three individuals have also been charged.

    Marine Hose Industry: Bridgestone Corp., the tire manufacturer, agreed to plead guilty to violating the Sherman Act in connection with its role in a global conspiracy to rig bids and fix prices in the marine hose market. Marine hoses are used to transfer oil between tankers and storage facilities. Bridgestone agreed to pay a $28 million fine and cooperate fully with DOJ in its investigation of the marine hose industry. Bridgestone also pleaded guilty to violating the Foreign Corrupt Practices Act.

    Pharmaceutical Industry: South Korean antitrust regulators fined six pharmaceutical companies this month for offering illegal kickbacks to medical professionals in order to promote prescriptions of their products. Among the companies fined were Bayer Corp., AstraZeneca PLC and Sanofi-Aventis SA. According to regulators, the pharmaceutical companies offered doctors and nurses free travel accommodations, meals, gifts and occasional cash payments in exchange for promotion of their products.


    COMPLIANCE TIP: TECHNOLOGICAL TYING

    What does a seller do when a competitor designs a product that is only compatible with its own complementary products and will not work with the competing seller’s products? On the surface, such conduct seems to represent an illegal tying arrangement, i.e., when a seller conditions a buyer’s purchase of a product on the purchases of a different [or tied] product. However, courts are reluctant to find an illegal tying agreement because “technological tying” is often seen as pro-competitive under the federal antitrust laws and therefore exempt from per se liability.

    Technological tying has become increasingly common. Rival manufacturers often challenge product designs or redesigns that limit compatibility to a defendant manufacturer’s additional products. Courts have repeatedly upheld these technological ties, however, on the grounds that unlike the anticompetitive motives underlying classic tying arrangements, advances in technology are generally the result of superior innovation. In the leading Ninth Circuit opinion on technological tying, Foremost Pro Color Inc. v. Eastman Kodak, 703 F.2d 534 (9th Cir. 1983), a competitor sued Kodak for tying sales of a new type of film with sales of photographic paper and film processing chemicals.

    The Ninth Circuit distinguished technological tying by pointing out the relatively low risk of “competitive evils,” in addition to noting that adopting innovative or superior designs does not generally suggest anticompetitive intent. The Court found that technological tying increases competition by improving consumer choice and encouraging others to manufacture innovatively designed products. Moreover, the Court found that the element of coercion is less likely to be found in technology-oriented cases. According to the Court, a manufacturer that makes a product incompatible with existing technology is not forcing the consumer to buy all three products, but is merely making the products a “prerequisite” to the use of the tying products. In other words, the integration of products is not sufficient to establish the element of coercion.

    DOJ has similarly shown some reluctance to challenge technological ties under the antitrust laws. “Incorporating new features into products to increase their value to consumers is a hallmark of innovative competition—even if innovation makes obsolete separate standalone products designed to meet the same consumer needs.” See COMPETITION AND MONOPOLY: SINGLE-FIRM CONDUCT UNDER SECTION 2 OF THE SHERMAN ACT, U.S. Department of Justice (September 2008).

    While Foremost is considered a leading case on technological ties, not all courts interpret and apply it uniformly. The U.S. Court of Appeals for the D.C. Circuit relied on Foremost in the Microsoft III case when it exempted technological tying claims from per se liability. SeeMicrosoft III, 253 F.3d 34, 47 (D.C. Cir. 2001). In that case, DOJ challenged Microsoft’s tying of its Internet Explorer web browser with its Windows operating systems. Unlike the approach taken in the Ninth Circuit in Foremost, the D.C. Circuit did not automatically dismiss the case for lack of coercion. Instead, the D.C. Circuit applied a rule of reason analysis to the technological tying claim.

    Manufacturers should be mindful that while technological tying is generally excluded fromper se treatment under the antitrust laws, not all technological tying claims will be dismissed for failure to plead the coercion element. Technological ties that are anticompetitive despite their efficiencies, or that arguably serve little or no purpose but to exclude competitors, may still be attacked under Section 1 of the Sherman Act.


    COMMENT: THIRD CIRCUIT LOWERS GOVERNMENT’S BURDEN IN PURSUING FOREIGN COMPANIES’ ANTITRUST VIOLATIONS

    A recent Third Circuit decision, Animal Science Products, Inc. v. China Minmetals Corp., No. 10-2288 (3d Cir. Aug. 17, 2011), overturned past Third Circuit precedent and created a circuit split regarding the application of the Foreign Trade Antitrust Improvements Act (FTAIA). The Third Circuit no longer considers the FTAIA to impose jurisdictional limits on antitrust claims involving trade or commerce with foreign nations. Instead, the Third Circuit construed the FTAIA as providing for substantive elements of an antitrust claim involving foreign trade. This procedural shift will make it harder for international corporate defendants to quickly resolve antitrust claims, in our view. Because this change arguably eases plaintiffs’ burden to establish jurisdiction over antitrust claims involving foreign trade, it could lead to increased efforts to prosecute international companies for antitrust violations by DOJ.

    The FTAIA limits the reach of federal antitrust laws by providing that the Sherman Act does not apply to “conduct involving trade or commerce … with foreign nations.” The FTAIA states that antitrust allegations in the U.S. must articulate a “direct, substantial, and reasonably foreseeable” effect on U.S. markets. If the FTAIA imposes jurisdictional limitations, defendants in antitrust matters may (and often do) assert the FTAIA to attack a plaintiff’s claim at the outset of the litigation and to argue for staged and limited discovery regarding subject matter jurisdiction. Such early litigation can place a substantial burden on plaintiffs to provide evidentiary proof at an early stage, without the benefit of large-scale discovery.

    In Animal Science Products, plaintiffs alleged that Chinese producers and exporters of magnesite engaged in a conspiracy to fix prices of the substance exported to and sold in the United States since April 2000. The district court raised the issue on its own, which likely prompted the defendants to seek dismissal based on lack of subject matter jurisdiction. The district court held that the FTAIA deprived it of subject matter jurisdiction and granted the defendants’ motion to dismiss.

    The Third Circuit reversed. Relying on a line of U.S. Supreme Court opinions, the Court held that the FTAIA is like numerous other federal statutes that establish substantive requirements regarding the merits of a claim – but not limits on jurisdiction. The Third Circuit relied most heavily on Arbaugh v. Y&H Corp., 546 U.S. 500 (2006). In that opinion, the Supreme Court held that statutes should not be construed as limiting Federal District Courts’ jurisdiction unless they explicitly contain a jurisdictional limitation.

    Consequently, plaintiffs must still plead and eventually prove that anticompetitive conduct had meaningful impact on U.S. commerce under the Third Circuit’s most recent standard. However, plaintiffs need not prove that the FTAIA has been satisfied to avoid early dismissal. While defendants may still be able to seek dismissal in antitrust cases for failure to state a claim, such early motions assume that all facts in the complaint are true, and that all reasonable inferences operate in plaintiffs’ favor. In other words, the road to dismissal under the FTAIA has a markedly different legal standard than it would if the court applies the FTAIA as a jurisdictional standard.

    Although Animal Science Products is not a criminal case, it may affect criminal antitrust investigations. The DOJ may feel emboldened to investigate conduct with less regard to the impact conduct may have had on U.S. commerce. Moreover, the DOJ will be aware that subjects of investigations will likely face more pressure from civil plaintiffs. Finally, the DOJ will be less likely to consider this potential jurisdictional challenge when it evaluates the strengths and weaknesses of its investigations. While it is unclear whether the Third Circuit’s approach will gain momentum, Animal Science is creating ripples in this area. The Seventh Circuit, which issued a widely-cited en banc opinion holding that the FTAIA’s limitations are jurisdictional in United Phosphorous, Ltd. v. Angus Chemical Co., 322 F.3d 942 (7th Cir. 2003), recently acknowledged this emerging issue. Plaintiffs in Minn-Chem, Inc. v. Agrium Inc., No. 10-1712 (7th Cir. Sept. 23, 2011), argued that the FTAIA should be interpreted to articulate substantive requirements for an antitrust claim. The Seventh Circuit explained that the Supreme Court’s Arbaugh and Morrison v. Nat’l Austl. Bank, (130 S. Ct. 2869 (2010)) decisions both held that courts cannot read jurisdictional limitations into federal statutes. The Seventh Circuit noted that this reasoning aligns with the United Phosphorousdissent, and that the argument “calls United Phosphorous into question.” Ultimately, the Seventh Circuit declined to rule on the issue since the outcome would be the same under either interpretation of the FTAIA.

    Any opinion that arguably weakens a company’s defenses in antitrust investigations is worth noting and studying. Because the Third Circuit’s holding overturned two prior decisions and conflicts with the eight other circuit courts of appeal that have considered the issue, it is too early to tell whether the Animal Science Products opinion is an outlier, as opposed to a meaningful inroad against a useful defense in antitrust investigations.