United States: U.S. Antitrust Outlook

2010 Developments and What to Expect in 2011

With 2010 as a guide, the U.S. antitrust agencies likely will continue their campaign to "reinvigorate antitrust enforcement" in 2011.¹ This past year, the Federal Trade Commission ("FTC") and the Antitrust Division of the Department of Justice ("DOJ") further implemented the Obama administration's policy of more active antitrust enforcement by applying increased scrutiny to mergers, both those subject to the reporting requirements of the Hart-Scott-Rodino ("HSR") Act as well as non-reportable, consummated transactions. The antitrust agencies also demonstrated a proclivity for exploring non-horizontal theories of competitive harm and imposing behavioral remedies either to enhance or replace more traditional structural relief. In addition, the FTC and DOJ released revised Horizontal Merger Guidelines (the "New Guidelines"), which provide the antitrust agencies with greater flexibility and the means for potentially more aggressive merger enforcement. Moreover, the agencies showed early signs of implementing this policy shift beyond mergers and were more active with respect to single-firm conduct and anticompetitive agreements.

The trend toward more aggressive and broader antitrust enforcement will likely continue in 2011. In particular, the agencies are expected to remain focused on the health care and high-technology industries.

Tougher Merger Enforcement

There is a growing sentiment among practitioners that, as a result of the more active merger enforcement policy, the agencies subjected transactions to longer and more burdensome investigations. In particular, practitioners perceived a noticeable shift in the review process that placed a greater burden on merging parties to demonstrate clearly that their transaction will not harm competition.

In August of 2010, the DOJ and the FTC released the first substantial revisions to the Horizontal Merger Guidelines since 1992. The highly-anticipated New Guidelines – perhaps the most significant development in U.S. merger review this past year – will certainly influence merger review in 2011 and beyond. In general, the New Guidelines emphasize that merger review is a flexible, fact-specific process involving analytical tools that may vary depending on the particular marketplace dynamics and the products at issue.

Although the New Guidelines are a substantial rewrite of the 1992 Guidelines, many of the revisions are consistent with current enforcement practice. The most noteworthy differences between the 1992 Guidelines and the New Guidelines are the reduced role of market definition and the endorsement of new analytical tools and methodologies (e.g., Upward Pricing Pressure) to determine whether a transaction is likely to have anticompetitive effects. The New Guidelines may enhance the agencies' ability to pursue more aggressive merger enforcement. For example, if accepted by courts, the reduced role of market definition and focus on anticompetitive effects potentially would allow the agencies to avoid problems that arose in prior cases, such as the Whole Foods/Wild Oats merger, where the FTC's case stumbled over market definition issues.

It is still too early to know the impact of the New Guidelines, and the true measure of their impact may not be known until courts have an opportunity to consider them.² 2011 may provide such a test. Merging parties in 2011 will certainly face, and should be prepared for, a tougher and more intense enforcement environment. Accordingly, early planning and antitrust risk analysis will be critical.

Continued Scrutiny of Non-Reportable and Consummated Transactions

In recent years, as the number of HSR-reportable transactions decreased, the number of agency challenges to non-reportable transactions increased.³ Whether this enforcement trend was attributable to the availability of agency resources during the economic downturn or a change in enforcement policy is subject to debate. This past year, however, despite the uptick in HSR filings, the agencies continued to challenge non-reportable deals in a wide range of industries.⁴ The types of non-reportable mergers that were challenged in 2010 were particularly interesting, and send a clear message that there are no safe harbors. Neither nominal deal value,⁵ nor exemptions from HSR reporting requirements,⁶ nor approval by another court⁷ protects a transaction from antitrust scrutiny. Nor will the agencies hesitate to seek redress for consummated, non-reportable transactions, as the FTC did when it ruled that a 2008 merger of rival battery component manufacturers was anticompetitive and ordered the acquirer to divest the acquired company.⁸

Accordingly, with the agencies taking a harder look at consummated and other non-reportable transactions, all transactions should be reviewed by counsel to assess antitrust risk, even if no HSR filing is required.

Expansion into Non-Horizontal Theories of Competitive Harm and Enhanced Behavioral Remedies

In recent years, the DOJ has publicly stated its desire to explore potential anticompetitive effects in non-horizontal cases. In her first speech as head of the Antitrust Division, Assistant Attorney General Varney ("AAG Varney") expressed her desire to "explore vertical theories and other new areas of civil enforcement."⁹ Indeed, in 2010, the agencies were increasingly focused on vertical issues and other less traditional remedies, culminating in the DOJ's recent imposition of behavioral relief to resolve its challenge to Comcast Corporation's ("Comcast") acquisition of a controlling interest in NBC Universal ("NBCU"), through a joint venture with General Electric.

In Comcast/NBCU, the DOJ expressed concerns that the vertically-integrated Comcast/NBCU joint venture could lessen competition by denying rival cable TV distributors and emerging online video distribution ("OVD") competitors access to NBCU channels and other popular programming content. To address these concerns, the DOJ conditioned its approval of the joint venture upon the parties agreeing to a host of behavioral remedies, many of which were designed to ensure that the transaction would not chill the nascent competition posed by OVDs. These provisions are quite extensive and regulatory minded.¹⁰

Similarly, the DOJ addressed vertical concerns in its challenge to the acquisition of Live Nation, Inc. ("Live Nation"), the nation's largest concert promoter, by Ticketmaster Entertainment, Inc. ("Ticketmaster"), the nation's largest primary ticketing business. Although the primary competitive concern articulated by the DOJ was the loss of nascent competition from Live Nation in the market for primary ticketing services, the DOJ was concerned that the vertical integration of Ticketmaster's primary ticketing business and Live Nation's concert promotion business would harm competitors in the market for primary ticketing services.¹¹ In order to remedy the DOJ's vertical concerns, Ticketmaster entered into a consent decree prohibiting it from engaging in conduct "that would impede effective competition from equally efficient rivals that may or may not be vertically integrated."¹² The decree included, among other provisions, terms preventing Ticketmaster/Live Nation from retaliating against any venue owner that chooses to use another company's ticketing services and from engaging in any anticompetitive ticket bundling with promotion and artist services.

Moreover, the DOJ continues to explore non-horizontal theories of competitive harm in its ongoing review of Google, Inc.'s ("Google") attempt to acquire ITA Software ("ITA"), a leading supplier of flight information software used by airlines and ticket sites to make online reservations. The DOJ is reportedly investigating whether, as a result of the acquisition, Google could unfairly disadvantage competing online ticket sites by limiting or impairing their access to ITA's software.

These actions demonstrate the DOJ's active interest in transactions that raise potential vertical foreclosure issues. Perhaps more interestingly, Comcast/NBCU and Ticketmaster/Live Nation also illustrate the DOJ's recent trend of imposing behavioral remedies, as opposed to structural relief, to protect and facilitate nascent competition. In 2011, the agencies are likely to continue to explore non-horizontal theories of competitive harm, such as impeding competition from rivals, nascent or otherwise, through vertical integration.

Companies contemplating mergers and acquisitions should be sure to consider all potential effects on competition, including effects arising from vertical integration, and be prepared to consider behavioral remedies as a possible condition to agency approval of the transaction.

Continued Expansion of Non-Merger Section 1 Enforcement

In addition to stepping up merger review and pursuing non-horizontal theories of harm, the antitrust agencies have also implemented an aggressive civil non-merger enforcement agenda. In 2010, the agencies challenged a number of practices under Section 1 of the Sherman Act, which concerns agreements that affect competition. These included horizontal agreements among competitors not to solicit each other's employees, and vertical distribution agreements between suppliers and distributors. The DOJ also sought and obtained disgorgement of profits – an unusual remedy – in a settlement to resolve claims that a large electricity generator's agreement with a financial services company restrained competition In September, the DOJ challenged the agreements of six prominent high-technology firms (Google, Apple, Adobe, Intel, Intuit, and Pixar) not to "cold call" each other's employees.¹³ A follow-on challenge involving Pixar and Lucas Film was later announced in December.¹⁴ Of particular interest was the DOJ's aggressive position that such agreements, which many believe were commonplace, were per se illegal (i.e., so inherently anticompetitive that no consideration of whether they actually caused anticompetitive effects was required). Defendants of these practices had argued that the agreements were pro-competitive and necessary to maintain good working relationships with technology partners with whom they were jointly developing services.

Later in the fall, the DOJ brought enforcement actions in the credit card and health care industries, challenging vertical agreements between suppliers and distributors. In U.S. v. American Express, MasterCard, and Visa, the DOJ challenged rules that prevent merchants from providing discounts, rewards, and information about credit card costs to consumers at the point of sale.¹⁵ The DOJ alleged that the merchant restraints suppressed competition among credit card companies by prohibiting merchants from offering discounts or other benefits to customers for the use of a particular credit card. Two weeks later, the DOJ and the state of Michigan filed suit against Blue Cross Blue Shield of Michigan ("BCBS") challenging the use of "most favored nation" clauses ("MFNs") by BCBS in its contracts with Michigan hospitals.¹⁶ Although MFNs are quite common and often viewed as pro-competitive, the DOJ alleged that BCBS used MFNs to harm competition in the markets for commercial health insurance in numerous areas throughout Michigan where, according to the DOJ, BCBS already had market power.¹⁷

Finally, in U.S. v. KeySpan, the DOJ sought disgorgement of profits to remedy the alleged anticompetitive effects of an agreement between KeySpan and a financial services company that ensured that KeySpan would withhold substantial output from the New York City electricity generating capacity market.¹⁸ The likely effect of the agreement, the DOJ alleged, was to increase capacity prices for the retail electricity suppliers who must purchase capacity and, in turn, to increase the prices consumers pay for electricity. This case marked the first time the DOJ sought disgorgement as a remedy in a civil case.¹⁹ The DOJ has sought disgorgement and restitution for criminal antitrust violations and for civil contempt, but never before in a civil suit. These cases illustrate a greater focus on non-merger enforcement that will likely continue in the coming year. These cases also remind that companies, particularly those with significant market positions, should be careful with respect to their interactions and agreements with other industry participants.

More Aggressive Single-Firm Conduct Enforcement

Both the FTC and the DOJ have committed to enhancing their efforts to investigate and challenge single-firm conduct such as monopolization under Section 2 of the Sherman Act or, in the case of the FTC, unfair or deceptive practices under Section 5 of the FTC Act. In 2010, the FTC reached a major settlement in its suit against Intel relating to alleged anticompetitive conduct in the markets for central processing units ("CPU") and graphics processing units ("GPU").²⁰ Among other allegations, the FTC alleged that Intel used threats and rewards aimed at the world's largest computer manufacturers, including Dell, Hewlett-Packard, and IBM, to coerce them not to buy rival CPU chips. Intel also allegedly engaged in exclusive dealing practices to prevent computer makers from marketing any machines with non-Intel computer chips. The FTC complaint was based on Section 5 of the FTC Act, which the FTC has used as an enforcement tool to combat anticompetitive single-firm conduct that may fall outside of Section 2. The Intel action reflects the FTC's interest in active enforcement of anticompetitive single-firm conduct through the use of an expanded set of enforcement tools, including an aggressive use of Section 5.

At the DOJ, AAG Varney has vowed to step up enforcement of anticompetitive single-firm conduct as the prior Democratic administration had done, for example, in the Microsoft case. AAG Varney explained, "The Antitrust Division must step forward and take a leading role in the development of the Government's multi-faceted response to current market conditions. Vigorous antitrust enforcement action under Section 2 of the Sherman Act will be part of the Division's critical contribution to this response."²¹

Thus far, the tougher rhetoric has not yet translated into a Section 2 enforcement action by the DOJ. Section 2 cases, however, take longer for agency staff to develop, and there have been reports of a number of active investigations. As a result, 2011 may be the year the DOJ brings such a case. Companies should be aware of the potential for increased enforcement in this area by both agencies, particularly in the health care and high-technology industries. Companies with market power – which alone does not offend the antitrust laws – need to be cognizant that the agencies are actively monitoring single-firm conduct.

Footnotes

1 Senator Barack Obama, Statement for the American Antitrust Institute (Sept. 27, 2007), available at http://www.antitrustinstitute.org/files/aai-%20Presidential%20campaign%20-%20Obama%209-07_092720071759.pdf.

2 One court has already cast doubt on the de-emphasis of market definition in the New Guidelines. In City of New York v. Group Health, Inc., the district court for the Southern District of New York specifically rejected the plaintiff's attempt to use an alternative to a market definition screen, and dismissed the merger challenge on the grounds that the plaintiff's definition of the relevant market was inadequate as a matter of law. See City of New York v. Group Health, Inc., No. 06 Civ. 13122 (RJS), 2010 WL 2132246 (S.D.N.Y. May 11, 2010).

3 HSR filings decreased from 2,201 in FY 2007 to 1,727 in FY 2008, and then again to 716 in FY 2009. At the same time, the agencies challenged approximately sixteen non-reportable transactions in FY 2008 and FY 2009, significantly more than the approximately twelve challenges to non-reportable transactions from FY 2001 – FY 2007. Because the FTC has not published the total number of non-HSR Act merger enforcement actions prior to 2007, and because the DOJ has not historically disclosed how many of its non-HSR merger investigations led to enforcement actions, the numbers listed here regarding such enforcement actions are based on agency press releases and other publicly-available information.

4 In FY 2010, HSR filings increased to 1,166 (up from 716 in FY 2009), while the agencies challenged approximately four non-reportable transactions in FY 2010 and another consummated transaction at the end of the 2010 calendar year.

5 See United States v. Election Sys. and Software, Inc., No. 1:10-cv-00380 (D.D.C. Mar. 8, 2010) (DOJ challenge of a $5 million consummated merger between competing suppliers of voting equipment systems), available at http://www.justice.gov/atr/cases/ess.htm.

6 See In the Matter of Simon Prop. Group, Inc., FTC File No. 101-0061 (Nov. 10, 2010) (FTC challenge of an acquisition of an outlet mall operator by one of its rivals, even though the real estate industry is exempt from the HSR Act), available at http://ftc.gov/os/caselist/1010061/index.shtm .

7 See In the Matter of Lab. Corp. of Am., FTC File No. 101-0152 (Dec. 1, 2010) (FTC challenge to a merger between lab operators, notwithstanding that a bankruptcy court previously had approved the buyer), available at http://www.ftc.gov/os/adjpro/d9345/index.shtm .

8 See In the Matter of Polypore Int'l, Inc., FTC Docket No. 9327 (Dec. 13, 2010), available at http://www.ftc.gov/os/adjpro/d9327/index.shtm .

9 See Christine Varney, Remarks as prepared for the Center for American Progress: Vigorous Antitrust Enforcement in this Challenging Era (May 11, 2009), available at http://www.justice.gov/atr/public/speeches/245711.htm .

10 In order to proceed with the acquisition, the parties agreed to license NBCU programming content to nascent OVD competitors of Comcast's cable TV services, refrain from imposing a variety of contractual terms upon content owners that unduly limit a content owner's ability to freely negotiate creative arrangements with Comcast competitors, subject themselves to anti-retaliation provisions, and adhere to open Internet requirements. See Competitive Impact Statement, United States v. Comcast Corp., No. 1:11-cv-00106 (D.D.C. Jan. 18, 2011), available at http://www.justice.gov/atr/cases/f266100/266158.pdf . The access-related provisions are extensive and require, for example, that OVDs be permitted to seek or be offered content under terms comparable to those in similar licensing arrangements with multichannel video programming distributors or other OVDs, which third parties may seek to enforce through arbitration.

11 Specifically, the DOJ was concerned that: (i) Ticketmaster/Live Nation would retaliate against venue owners who contracted or considered contracting for primary ticketing services with its competitors; (ii) Ticketmaster/Live Nation would require venues to take its primary ticketing services even if the venues only wanted to obtain concerts that Ticketmaster/Live Nation promoted; or (iii) Ticketmaster/Live Nation would require venues to take concerts that it promoted, even if those venues only wanted to obtain primary ticketing services.

12 See Competitive Impact Statement at 16, United States v. Ticketmaster Entm't, Inc., No. 1:10-cv-00139 (D.D.C. Jan. 25, 2010), available at http://www.justice.gov/atr/cases/f254500/254544.pdf.

13 See United States v. Adobe Sys., Inc., No. 1:10-cv-01629 (D.D.C. Sept. 24, 2010), available at http://www.justice.gov/atr/cases/adobe.htm .

14 See United States v. Lucasfilm Ltd., No. 1:10-cv-02220 (D.D.C. Dec. 21, 2010), available at http://www.justice.gov/atr/cases/lucasfilm.html .

15 See United States v. American Express Co., No. 1:10-cv-04496 (E.D.N.Y. Oct. 4, 2010), available at http://www.justice.gov/atr/cases/americanexpress.html . MasterCard and Visa entered into a consent decree settling the DOJ's charges. The DOJ's case continues against American Express, which declined to settle the charges against it.

16 See United States v. Blue Cross Blue Shield of Mich., No. 2:10-cv-15155 (E.D. Mich. Oct. 18, 2010), available at http://www.justice.gov/atr/cases/bcbsmfn.html

17 In the health care context, MFNs are contractual provisions that require health care providers to agree not to accept lower reimbursement for health care services from competing health insurers.

18 See United States v. KeySpan Corp., No. 1:10-cv-01415 (S.D.N.Y. Feb. 22, 2010), available at http://www.justice.gov/atr/cases/keyspan.html .

19 In its Competitive Impact Statement accompanying the complaint and proposed settlement, the DOJ stated that disgorgement is needed "to protect the public interest by depriving KeySpan of the fruits of its ill-gotten gains and deterring KeySpan and others from engaging in similar anticompetitive conduct in the future." See Competitive Impact Statement at 9, United States v. KeySpan Corp., No. 1:10-cv-01415 (S.D.N.Y. Feb. 22, 2010), available at http://www.justice.gov/atr/cases/f255500/255578.pdf . The DOJ explained that private lawsuits could not serve that purpose in this case, as the filed-rate doctrine likely could prevent damages actions. It remains to be seen whether the DOJ intends to limit disgorgement to circumstances in which private damages actions are unlikely to follow, or if it will employ the remedy more broadly in future cases.

20 The settlement prohibits Intel from using threats, bundled prices, or other offers to exclude or hamper competition, or otherwise unreasonably inhibit the sale of competitive CPUs or GPUs. In addition, among other conditions, the settlement prohibits Intel from deceiving computer manufacturers about the performance of non-Intel CPUs or GPUs.

21 See supra note 9.

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