Regulator
Global News OF RELEVANCE TO Entities & Individuals affected by antitrust issues – WINTER 2009, Vol. II, No. 1
IN THIS ISSUE:
n International Update—Page 2
n China: InBev/Anheuser-Busch Merger Gets the Go-Ahead, but With Conditions—Page 2
n European Competition Law Update—Page 2
n Enhanced Pace of International Cartel Enforcement—Page 4
n EU Commission Targets Pharma Industry—Page 5
n Reed Smith Comments on the Application of the EC Merger Regime—Page 6
n Germany Proposes New Merger Control Threshold—Page 7
n Latest European Court Ruling Fails to Resolve Parallel Trade Uncertainty—Page 8
n United States Update—Page 9
n The Election of President Obama and Antitrust Enforcement—Page 9
n Implications of the Supreme Court Decision Rejecting Reliance as a Requirement in a
Civil RICO Claim—Page 10
n Make Way For Class Certification ‘Trials’—Page 11
n Federal Circuit Applies Rule of Reason and Validates Reverse Payment Patent
Settlements in In re Ciprofloxacin Hydrochloride Antitrust Litigation—Page 12
n Federal Court Allows Joint Bidding Suit to Proceed—Page 14
n Regulatory Update – In Brief—Page 15
n Reed Smith At The Podium…And On Paper—Page 13
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ANTITRUST REGULATOR – winter 2009
I N T E R N AT I O N A L U P DAT E
China: InBev/Anheuser-Busch merger gets the go-ahead, but with conditions
In its first public ruling since the adoption of the new Anti-Monopoly Law
Imposing conditions for merger clearance is nothing new. The paradox, however,
(“AML”), the Chinese Ministry of Commerce (“MOFCOM”) has allowed InBev’s
lies with the fact that MOFCOM’s assessment found that the acquisition will not
US$52 billion purchase of Anheuser-Busch, creating the world’s largest brewer.
distort competition in the beer market in China. The conditions were justified
Thomas Karalis
Trainee Solicitor – London
The conditions imposed to secure clearance may,
to ensure that no further acquisitions take place that may deteriorate the
however, leave a bitter aftertaste.
competitive structure of the market in the future.
The new competition law regime in China has
MOFCOM has indicated that its approach to merger control is not only
attracted a lot of attention since its adoption
to contribute to the normal operation of markets, but also to the healthy
last year and entry into force Aug. 1, 2008. The
development of enterprises. Preserving a “competitive” market structure has
AML itself is rather vague and only provides
always been a concern to competition law enforcers, but imposing conditions on
for general principles. With most implementing
future acquisitions for unproblematic transactions appears little, if at all, justified
rules not yet ready and a near complete lack of
on competition grounds. Businesses trying to acquire companies in China will
previous enforcement experience by the Chinese
now have to plan their future acquisition strategy carefully, including the potential
authorities, the first decisions were eagerly
impact on other business activities in China.
awaited.
Although MOFCOM has been conscious of the timeline provided for in the AML,
MOFCOM has approved a number of concentrations since the entry into force
it took several submissions of supplemental information before the preliminary
of the AML. However, this is the first decision to be made public, and MOFCOM
review could be commenced for InBev. MOFCOM has stated it is currently
has clarified it will usually only publish conditional approvals or prohibitions of
working on detailed implementation rules to clarify the material required to
concentrations. The decision, together with some guidance on merger review
be submitted to it for merger review. In the meantime, it is possible to submit
published by MOFCOM on its website, will allow companies and their advisers
questions in writing to MOFCOM for clarification, or refer to the notification
to get a feel for the enforcement of merger control in China and the procedure
guidelines under the older “Rules of Foreign Investors’ Acquisition of Domestic
involved.
Enterprises.”
MOFCOM set out its decision in a one-page document briefly stating the
Another point that emerged from the InBev decision was the role that
conditions imposed on the parties. InBev is required:
competitors and other industry players may play in the competition assessment
n Not to increase Anheuser-Busch’s existing 27 percent shareholding in
Tsingtao Brewery
n To inform MOFCOM if there is any change to its controlling shareholders in a
timely manner
n Not to increase InBev’s existing 28.56 percent shareholding in Zhujiang
Brewery
process. During the review, MOFCOM engaged in extensive consultations with
other government departments, beer industry associations, domestic beer
manufacturers, manufacturers of beer ingredients, and beer distributors. This is
not uncommon practice, but it remains to be seen how important an involvement
and influence third parties may have in the merger review process in China.
The AML and merger control enforcement in China are still at a very early stage.
The InBev decision is, however, sending worrying signals of competition law
serving as a guise for industrial policy planning and national protectionism,
n Not to acquire shares in China Resources Snow Brewery and Beijing Yanjing
Brewery
and it is hoped that this will not become a generalized trend of competition law
enforcement in China.
European Competition Law Update
European State-aid measures to combat the global financial crisis
The global financial crisis that has taken hold in the latter half of 2008 has given
rise to a flurry of activity in the State-aid field as a number of financial packages
have been put in place in order to save struggling European banks and to ensure
the stability of the financial systems of various EU Member States. These
packages necessarily need prior EC clearance as State aid to ensure that the aid
does not confer on the beneficiary undertakings, an unfair advantage over their
competitors within the EU.
In order to protect financial stability and avoid spill-over effects on the rest of
the economy, new temporary arrangements were put in place by the European
Commission Oct. 1 to allow quicker approval decisions on proposed emergency
rescue measures in favor of financial institutions. This has seen, for example, the
recent approval of rescue aid to Hypo Real Estate in Germany within a couple of
days of notification, and the approval of aid to Bradford & Bingley in the UK within
just 24 hours of formal notification following urgent informal discussions with UK
authorities on how to structure the package to limit distortions of competition.
(continued on page 3)
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ANTITRUST REGULATOR – winter 2009
European Competition Law Update—continued from page 2
The European Commission has also published guidance (in the form of a
way of undertakings in lieu of reference to the Competition Commission (“CC”).
Communication) to EU Member States as to how they can structure support
The Secretary of State (with whom the final decision rested), however, considered
schemes, such as guarantees or recapitalization schemes, in a way that would
that the stability of the UK financial system outweighed the competition concerns
be compatible with EU State-aid rules. The Communication considers that
identified by the OFT and therefore decided not to refer the merger to the CC for a
Article 87(3)(b), under which the Commission may allow State aid “to remedy a
more in-depth investigation.
serious disturbance in the economy of a Member State,” is available as a legal
basis for aid measures undertaken to address the
financial crisis in light of the level of seriousness
that the current crisis in the financial markets
has reached, and of its possible impact on the
overall economy of EU Member States. The
Commission has recently approved a number of
support schemes under Article 87(3)(b) in the UK
and other EU Member States.
This is an exceptional case and is the first time a public interest consideration
has been created in order specifically to facilitate a particular merger. As many
commentators have noted, the merged entity will, of course, be subject to the
ordinary competition rules in its daily operations.
BSkyB/ITV
A recent judgment of the UK Competition Appeal Tribunal (CAT), dismissing an
appeal by BSkyB (the UK’s largest pay TV provider), has upheld a decision of the
Secretary of State of January 2008 (implementing a Report from the Competition
The Commission’s recent activity in this
Commission) that BSkyB’s acquisition of a 17.9 percent shareholding in ITV (a
field shows its willingness to adapt its usual
UK national terrestrial television broadcaster) would give rise to adverse effects
procedures in exceptional circumstances. While
on competition. The CAT held that the CC had been entitled to find in its Report
the above measures have helped a number of
that the acquisition constituted a relevant merger situation, on the basis that
struggling financial institutions, struggling firms in other sectors are unlikely to
it granted BSkyB the ability to exert material influence over the policy of ITV,
have support approved on the same basis in the absence of a comparable risk to
and that it would lead to a substantial lessening of competition. The judgment
the wider economy.
supported the CC’s approach to the consideration of material influence, finding
Richard J. Waite
Associate – London
European & Middle East Corporate
Creation of a new public interest consideration in UK merger control
Following the Sept. 18, 2008 announcement by Lloyds of its intention to merge
with HBOS, the Secretary of State issued an intervention Notice to the UK Office
of Fair Trading (“OFT”) (the body responsible for first phase review of mergers in
the UK), stating that he believed the stability of the UK financial system ought to
be specified as a public interest consideration under the Enterprise Act, and that
this may be relevant to the consideration of the Lloyds/HBOS merger situation.
An order was subsequently laid before Parliament introducing this new public
interest consideration into the Act. As with the State-aid measures described
above, the intention was to ensure that the regulatory process did not prevent
rapid action from being taken to address issues arising from the global financial
crisis.
The UK merger regime provides limited powers for the Secretary of State to
intervene in mergers in order to protect legitimate public interest considerations.
Previously, the only specified public interest considerations had been national
security and plurality of media ownership. However, it was felt that the new public
interest consideration was necessary as the financial services sector was vital
to the economy, and the failure of a bank would leave individuals and businesses
unable to access savings, raise finance or meet day-to-day financial obligations,
with potential knock-on effects in other parts of the financial system.
that BSkyB had identified no defect that would render the findings perverse or
irrational.
The CAT did, however, find that the CC had incorrectly applied the plurality of
the media public-interest consideration in finding, in this regard only, that the
acquisition would not be expected to operate against the public interest. The
judgment provides interesting analysis of the media plurality public interest
consideration, this being the first time that the Secretary of State has intervened
in a merger on this (or any other) ground since the Enterprise Act gave decisionmaking authority to the OFT and CC. The CAT held that the Commission ought to
have treated BSkyB and ITV as wholly controlled by only one person, and treated
the fact that, in practice, BSkyB shares control over ITV with others as irrelevant
for the purpose of the plurality assessment.
This case is also noteworthy for the fact that the CAT went on to consider
separately in a second judgment whether to remit the media plurality question
back to the CC and Secretary of State. It held that the remedy imposed (requiring
BSkyB to reduce its shareholding to 7.5 percent) was not undermined by the
Report’s deficiency in relation to the plurality issue, and that remitting the
plurality issue to the CC and Secretary of State would therefore serve no useful
purpose: it could not result in any lesser remedy being considered appropriate as
the reduction in shareholding was still necessary to remove the adverse effect on
competition; further, there was no realistic prospect of any additional or different
Following its review of the transaction, the OFT concluded that there was a
remedy being imposed, as the existing remedy would also be sufficient to remove
realistic prospect that the anticipated merger would result in a substantial
the effects of the transaction on the plurality of media owners. The CAT has
lessening of competition in relation to personal current accounts, banking
refused BSkyB permission to appeal its decision, but leave to appeal may still be
services for small and medium-sized enterprises in Scotland, and mortgages. It
sought directly from the Court of Appeal.
was felt that it would not be appropriate to deal with the competition concerns by
(continued on page 4)
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ANTITRUST REGULATOR – winter 2009
European Competition Law Update—continued from page 3
New European liner consortia block exemption
On Oct. 21, the European Commission published a preliminary draft block
exemption Regulation for liner shipping companies participating in consortia
arrangements. Liner shipping essentially involves the provision of regular
services on which cargo is transported by container; consortia are defined as
arrangements between two or more carriers that provide international liner
shipping services exclusively for the carriage of cargo, chiefly by container,
and the object of which is to bring about cooperation in the joint operation of a
maritime transport service.
This review comes at a time when the European Commission has been phasing
out other sector-specific block exemptions, such as the aviation block exemption
and the liner conference block exemption, and when the only other sectoral block
exemption regulations in force (the Insurance Block Exemption and the Motor
Vehicle Block Exemption) are undergoing review, with the possibility that they will
not be renewed. This could therefore be the last sector-specific block exemption
adopted by the European Commission.
European Commission imposes highest ever cartel fine
On Nov. 12, the European Commission announced that it had imposed fines
Consortia arrangements have benefited from a block exemption since 1995, and
totaling €1.38 billion (roughly US$1.97 billion) on four European producers of car
the European Commission recently held a consultation period, inviting comments
glass involved in cartel activity between 1998 and 2003. (For more details, see
on a draft Regulation revising the existing block exemption that is due to expire
article on “Enhanced Pace of International Cartel Enforcement” in this issue of
April 25, 2010 (the submitted comments are now available on the European
the Antitrust Regulator.) This groundbreaking fine comes hot on the heels of a
Commission’s website at: http://ec.europa.eu/competition/antitrust/legislation/
€676 million (US$965m) fine imposed by the European Commission Oct. 1 on
maritime/). If adopted, the revised Regulation will remain in force until 2015.
participants in a paraffin wax cartel. These are the first significant fines imposed
An accompanying technical paper published by the European Commission
explains that consortia generally help to improve the productivity and quality of
liner shipping services through the economies of scale and efficiency they allow
in the operation of vessels and utilization of port facilities; customers benefit
from the improvements in service quality and the global coverage that such
since early 2007 and act as a clear and stark reminder to companies engaged
in cartel activity in Europe, that the Commission remains intent on sending out a
strong message that such activity will result in severe penalties. The European
Commission’s press release notes the right of injured parties to seek damages for
loss arising from the operation of the cartel.
arrangements bring about.
Enhanced Pace of International Cartel Enforcement
In recent months, we have seen a significant increase in antitrust enforcement
Europe’s car glass manufacturing industry. Between early 1998 and early 2003,
against international cartels. This increased activity in international cartel
these companies discussed target prices, market sharing and customer allocation
enforcement is worth noting since it reflects a greater emphasis on eradicating
through a series of meetings and other illicit contacts. The Belgian company
Lawrence Kill
Partner – New York
Commercial Litigation Eastern
price-fixing cartels by enforcement agencies
Solivar also took part in these discussions. These four companies controlled
worldwide. The following recent examples are
about 90 percent of the glass used in the EEA in new cars and for original
discussed here: (1) the imposition of the highest
branded replacement glass for cars, a market worth about €2 billion in the last
fine against a cartel ever, where the European
full year of the infringement. The Commission started the cartel investigation on
Commission fined car glass producers more
its own initiative following a tip from an anonymous
than €1.3 billion for a market sharing cartel; (2)
source. The Commission increased the fines against
LG, Sharp and Chunghwa’s agreement to plead
Saint-Gobain by 60 percent because it was a repeat
guilty and pay a total of $585 million in fines for
offender. Asahi provided additional information
participating in price-fixing conspiracies; and
to help expose the infringement, and its fine was
(3) the Eastern District of New York’s refusal to
reduced by 50 percent under the Leniency Notice.
dismiss a class action against various Chinese
These are the highest cartel fines the Commission
Vitamin C manufacturers.
has ever imposed, both for an individual company
The European Commission’s Imposition of the Highest Fine Ever
On Nov. 12, 2008, the European Commission imposed fines totaling
€1,383,896,000 again Asahi Glass, Pilkington, Saint-Gobain and Soliver for illegal
market sharing and exchange of commercially sensitive information regarding
deliveries of car glass in the European Economic Area (“EEA”), in violation of the
EC Treaty’s and the EEA Agreement’s ban on cartels and restrictive business
practices. Asahi, Pilkington and Saint-Gobain are the three major players in
(€896 million against Saint-Gobain) and for a cartel
as a whole.
The fines in this case are based on the 2006
Guidelines on Fines. Under these Guidelines, fines
Rizwan A. Qureshi
Associate – New York
Commercial Litigation Eastern
reflect the overall economic significance of the infringement as well as the share
of each company involved. The cartel constitutes a very serious infringement
of the EC Treaty’s antitrust rules. In setting the fines, the Commission took into
(continued on page 5)
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ANTITRUST REGULATOR – winter 2009
Enhanced Pace of International Cartel Enforcement—continued from page 4
account the respective affected sales of the companies involved, as well as the
$585 million in criminal fines for their roles in conspiracies to fix prices in the
combined market share and the geographical scope of the cartel agreements.
sale of liquid crystal display (“LCD”) panels. Of the $585 million in fines, LG, a
Practice Tip: Similar to the United States, the concepts of amnesty and leniency
are important factors in the Commission’s determination of the amount of the
fines imposed. Here, Asahi’s cooperation reduced its original fine by 50 percent
from €227 million to €113.5 million. The Commission’s imposition of the highest
fine ever against a cartel is reflective of its increasing emphasis on disbanding
price-fixing cartels, and highlights the importance of a defendant’s early
cooperation.
Second-Highest Criminal Fine Ever Imposed by the Department of
Justice’s Antitrust Division
South Korean corporation, will pay $400 million, the second-highest criminal fine
ever imposed by the Department’s Antitrust Division. Sharp Corp., a Japanese
consumer electronics manufacturer, has agreed to pay a $120 million fine for
its participation in separate conspiracies to fix prices for LCD panels sold to
Dell Inc., Motorola Inc. and Apple Computer Inc. Chunghwa, a Taiwanese LCD
manufacturer, has agreed to pay a $65 million fine for its participation with LG
and others in a price-fixing conspiracy.
The three companies, which were charged with violating the Sherman Antitrust
Act, allegedly held “crystal” meetings and engaged in communications about
setting prices on the LCD displays. They agreed to charge predetermined prices
Three leading electronics manufacturers—LG Display Co. Ltd., Sharp Corp. and
Chunghwa Picture Tubes Ltd.—have agreed to plead guilty and pay a total of
for the displays, issued price quotas based on those agreements, and exchanged
(continued on page 6)
EU Commission Targets Pharma Industry
Last January, the Commission spectacularly launched an investigation into the pharma sector by carrying out dawn raids on Europe’s major pharma groups. This
was the first time a sector inquiry had been commenced by unannounced inspections.
The Commission published a 400-page preliminary report on its investigation, which was launched at a press conference given by EU Competition Commissioner
Neelie Kroes in Brussels Nov. 28, 2008.
The Commission’s preliminary view, on which it will now consult, is that competition in the European pharma industry is not
working as well as it should. The Commission cites certain practices of the large pharma groups that the Commission believes
restrict competition and artificially keep the prices of drugs high.
The practices that concern the Commission are: registering lots of patents—apparently 1300 in one case—for the same drug
(patent clusters) in order to make it more difficult for other companies to produce competing (generic) versions of the same
drug; a policy of initiating litigation to keep the generic companies out of the market or delay their entry; settling these cases by
agreements that typically keep the generic competitor out of the market for a time; giving the generic competitor a license of the
patent holder’s drug or the right to sell it, so removing the possibility of a new generic drug entering the market; and/or including a
so called “reverse payment” to the generic company.
The truth is that there is really nothing new in any of these allegations or practices, many of which have already been extensively
litigated by competition authorities and industry players in the United States. The debate turns on the tension between antitrust
legislation that is aimed at promoting competition, and other laws that safeguard intellectual property rights, which by their very
nature confer an unchallengeable monopoly on the holder. Patents and other intellectual property rights are in the public interest
because they incentivize innovation by allowing innovators the exclusive right to exploit the fruits of their work during a defined period. It is natural that powerful
companies will wish to use the law in order to delay the entry of competitors and will vigorously defend any challenges to their intellectual property rights. European
law recognizes the importance of intellectual property rights, and also recognizes that it is not a breach of competition law just to be big and powerful.
Edward S. Miller
Partner – London
European & Middle East Corporate
So the Commission will have its work cut out if it is going to mount legal challenges to the practices it has identified. Of course, registration and vigorous defense of
patents restricts competition. That is the whole point of having a patent. When does this activity go so far as to become something that the law should sanction?
In this connection, the Commission will take little comfort from the more recent developments across the Atlantic. Last month, a U.S. Federal Appeals Court upheld
a decision in favor of drug companies Bayer, Hoechst and Barr in a challenge by a group of health plan providers that patent settlement agreements between the
three companies had artificially kept up the price of the drug Cipro—exactly the same argument raised by the Commission in its report. See article on Bayer/Barr in
this issue of the Antitrust Regulator.
So we will wait and see what enforcement action eventually results from this enquiry as it now goes to consultation. Consultation will finish at the end of January,
and the final report is expected next spring. In the meantime, the Commission is keeping busy with another series of raids on the pharma sector. This, the
Commission says, is unconnected with the current enquiry, and speculation is that these raids relate to distribution of drugs, rather than preventing or delaying
generic entry. Neelie Kroes has picked a big fight with the pharma companies. It certainly promises to keep her busy.
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ANTITRUST REGULATOR – winter 2009
Enhanced Pace of International Cartel Enforcement—continued from page 5
sales information on the display panels, in order to monitor and enforce the
Here, Judge Trager concluded that there was not enough evidence to determine
agreement.
that any of these doctrines applied to the defendant’s price-fixing action, despite
Practice Tip: This is yet another example of antitrust enforcement agencies
clamping down on international cartels. The fine imposed on LG is significant
as it is the second-highest ever imposed by the Antitrust Division, and puts into
perspective the crippling effect such a fine could have on a violating entity.
Antitrust Suit Proceeds Against Chinese Vitamin C Manufacturers
Despite an amicus brief submitted by the Chinese Ministry of Commerce, Eastern
District of New York Judge David Trager rejected a motion to dismiss and allowed
an antitrust action to proceed against Chinese Vitamin C makers. The Chinese
companies, Hebei Welcome, Jiangsu Jiangshan, Northeast Pharmaceutical
Group and Weisheng Pharmaceutical Co., claim they were compelled by their
government to fix the price of vitamin C in violation of U.S. law. The plaintiffs,
Ranis Co. and Animal Science Research Inc., are American manufacturers
who alleged in their complaint that the formation of the alleged cartel led to an
the arguments made by the Chinese government. The Chinese Ministry of
Commerce in its brief identified the “trade association” that allegedly facilitated
the cartel as the Chamber of Commerce of Medicines and Health Products
Importers & Exporters. The brief argued that such chambers, in contrast to their
voluntary nongovernmental U.S. cousins, have played a central role in China’s
shift from a command economy to a market economy. Although the ministry
noted that it did not decide the specific prices, the defendants and the ministry
insisted the companies could not have exported vitamin C without conforming
to the agreed-upon price. Judge Trager said the Chinese position was owed
deference but was not conclusive. Further, he said it was contradicted by other
documents in the case, which suggested a “complex interplay” between the
defendants and the Chamber that made it difficult to determine the degree of
defendants’ independence in setting prices. Judge Trager denied defendants’
motion to dismiss and has allowed the antitrust suit to proceed.
increase in the price of vitamin C in the United States from $2.50 per kilogram to
Practice Tip: This case is indicative of the fact that U.S. courts are taking a
$7 per kilogram between December 2001 and December 2002. In their motion
more stringent stance against international cartels. Even despite the arguments
to dismiss, the defendants did not deny the allegations, but invoked the “acts of
asserted by a foreign government, U.S. courts appear poised to enforce U.S.
state,” “foreign sovereign compulsion” and “international comity” doctrines.
antitrust violations by foreign cartels.
Reed Smith comments on the Application of the EC Merger Regime
At the end of October, the European Commission (the “Commission”) launched a
to concentrate their resources on making one filing and managing one timetable,
three-month public consultation on the functioning of the EC Merger Regulation
without incurring filing.
(“the ECMR”), which sets out the rules for merger control in the European
Economic Area (EEA, consisting of 27 EU Member States plus Norway, Iceland
and Leichtenstein).
mechanism, parties will still tend to opt to make multiple filings in different
Member States, especially when the transaction does not raise any competition
When the ECMR came into effect May 1, 2004,
concerns. Parties can be deterred from using the referral mechanism because
it introduced referral mechanisms that gave
the procedure lengthens the decision-making timetable and places an additional
the merging parties the right to request the
burden on the parties to provide detailed information to the Commission before
Commission to examine a transaction that was
formal notification is made.
notifiable in at least three Member States, even
when the turnover thresholds for Commission
review were not met. Conversely, the notifying
parties can request a referral to a Member
State when the transaction significantly affects
Lesley A. Davey
Partner – London
European & Middle East Corporate
However, Reed Smith noted that, while there are benefits to using the referral
competition in a distinct market in that Member
State. The Commission’s consultation focuses on
the effectiveness of these referral mechanisms.
The Competition and EU Group at Reed Smith submitted comments to the
Commission’s consultation at the beginning of December. Reed Smith noted
that, at the European level, there is a need for a referral mechanism that allows
the parties to request that the Commission reviews a transaction that triggers
notification in a number of EU Member States. Such a mechanism allows parties
The referral mechanism requires a period of 15 working days to be added to
the decision-making timetable, to allow for the referral request to be approved
or vetoed by the Member States. Given that a notified transaction cannot be
completed until it is approved by the Commission, this additional period can
deter parties from requesting a referral. This is particularly the case where the
transaction does not raise competition concerns and clearance can be expected
without a detailed investigation being initiated. In such circumstances, parties will
often prefer to coordinate notifications across a number of jurisdictions to ensure
clearance as quickly as possible so as not to delay the transactional timetable.
Reed Smith has therefore proposed the introduction of an expedited referral
procedure under the ECMR in those circumstances where the transaction does
not raise any competition concerns, and a “technical” notification requirement
has only been triggered because turnover thresholds have been met.
(continued on page 7)
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ANTITRUST REGULATOR – winter 2009
Reed Smith Comments on the Application of the EC Merger Regime—continued from page 6
Reed Smith also noted that the detailed information that has to be provided to the
competition concerns. Reed Smith therefore suggested that a shortened request
Commission when making a request acts as a deterrent from using the referral
form be introduced for these types of transactions.
mechanism. This is especially the case where the transaction obviously does
not raise competition concerns at either a Member State or Community level.
Reed Smith suggested that this information, which includes details of customers,
competitors, suppliers and changes to the market over a five-year period, is
overly burdensome for parties to a transaction that manifestly do not raise any
The Commission is due to complete its consultation Jan. 30, 2009. It will then
prepare a report to the EU Council of Minister setting out its views on how
effectively the referral mechanism is working and whether any amendments to
the ECMR are needed.
Germany Proposes New Merger Control Threshold
German merger control laws prevent parties from entering into M&A
On July 23, 2008, the German Federal Government took the decision to introduce
transactions before obtaining clearance of the proposed transaction with the
a new draft bill that, if implemented, would significantly reduce the number
Bundeskartellamt, the German Federal Cartel
of merger filings. The draft of the so-called “Third Small Business Relief Act”
Office. Entering into an M&A transaction
(Drittes Mittelstandsentlastungsgesetz) intends to disburden small and medium-
without obtaining clearance jeopardizes the
sized businesses (Mittelstand) in Germany from bureaucratic constraints. The
legal effectiveness of the proposed transaction,
competitiveness of the domestic medium-sized businesses, as well as the
at least with regard to any German element,
attractiveness of the business location in Germany, shall be improved.
and bears the risks of substantial fines for any
individual violating German law.
Constantin F. Conrads
Associate – Munich
European & Middle East Corporate
With regard to German merger control laws, the
draft bill proposes to introduce a new turnover
In determining whether a proposed transaction
threshold of €5 million that has to be exceeded by
needs to be notified to the Bundeskartellamt,
one of the parties, in addition to the existing turnover
German law sets up two thresholds (assuming
threshold of €25 million that has to be exceeded by
the de minimis exception and the trifle market
one party only according to the current provisions. If
provision do not apply):
neither of these two thresholds is met, there would
n First, the combined aggregate worldwide turnover of all companies involved
with the proposed transaction needs to exceed an amount of €500 million.
n Second, the German turnover of at least one participating company needs to
exceed €25 million.
be no requirement to notify a proposed transaction
in Germany.
If implemented, the number of merger control
procedures would be significantly decreased, which
Robert A. Heym
Partner – Munich
European & Middle East Corporate
would relieve the companies concerned, may they
These requirements do not necessarily take into account whether there is
be in Germany or abroad. The draft bill would therefore make a contribution that
an actual competitive impact in Germany. In most cases, merger filings are
proposed transactions do not have to be notified to the FCO if they constitute only
submitted for non-German M&A transactions for precautionary reasons because
little or obviously no risks to the local markets.
one party alone exceeds the €25 million domestic threshold. If, for example, a
The implementation would also align the current German laws to international
company headquartered in the United States intends to acquire all the shares
merger control regimes. Compared with the current German regulations, in
in another U.S. or other non-German company, a German merger filing will be
many other jurisdictions and even in the European Regulation EG/139/2004 (“EC
required if the acquiring party (including all affiliated companies) has worldwide
Merger Control Regulation”), the aggregate turnover of more than one company
sales exceeding €500 million and the sales in Germany exceed €25 million.
involved in the merger has to exceed a certain domestic turnover threshold. Thus,
The question of market impact and relevance of the transaction from a German
compared with other jurisdictions, a considerably high number of cases, including
merger control perspective will then (in principal) only be examined on a second
cases in which the target is not even located in Germany, are brought before the
level once the notification to the Bundeskartellamt has been submitted.
FCO for merger control purposes each year at the moment.
The current German laws result in a factual duty to notify proposed transactions
The German antitrust authority has not yet commented on the proposed
to the Bundeskartellamt, even if there are obviously no concerns from a merger
amendments. At this stage, it remains unclear whether and when this amendment
control perspective. This results in respective costs but, more important, can
will be adopted by the German parliament.
also cause considerable delay if a transaction cannot close because the merger
clearance is outstanding.
8
ANTITRUST REGULATOR – winter 2009
Latest European court Ruling fails to resolve parallel Trade Uncertainty
The European Court of Justice has again refused to set down clear guidance on
to supply petrol in a fuel shortage, where it was held to be not abusive for BP to
the legality of refusal by pharma companies to fill export orders from parallel
supply less fuel to an occasional customer than to a regular customer. Hardly a
traders. The ongoing legal battle between drug wholesalers and pharma
compelling analogy to GSK’s case.
companies about restrictions on parallel trade
enters a new phase of uncertainty following
the most recent ruling by the European Court of
Justice in a case brought against pharma giant
GSK by a group of Greek wholesalers.
Parallel trade comes about where wholesalers
take advantage of different reimbursement prices
for the same drugs prevailing in different EU
Member States by buying drugs and shipping
Edward S. Miller
Partner – London
European & Middle East Corporate
them from low price countries to high price
countries.
The most recent ruling (itself in a case that has
One might speculate that the Court felt that it was caught between a rock and
a hard place. The Court did not want to make the pharma industry—among the
most vibrant sectors in the EU—a new wide exception to its crusade to complete
the internal market. However, perhaps a degree of sympathy for the fact that
the national pricing differentials at the root of the problem are not the pharma
companies’ fault, left the Court with a desire to leave the door open just a crack.
So where does all this leave us? With about €4 billion of parallel trade annually,
one might think that there is an awful lot of “regular commercial practice” that
parallel traders can use to justify their export orders. One might also ask whether
it would still be normal commercial practice for a parallel trader to request an
increase in supplies of 5 percent, or 10 percent, or 20 percent—measured over a
month, a year or perhaps the history of the trader’s relationship with the relevant
kept the parties in litigation for eight years already) is the latest episode in a
drug manufacturer. What about the case of a parallel trader who currently trades
continuing soap opera of cases zigzagging between national European courts
in one drug but, seeing differentials falling away, switches his request for supply
and competition regulators, the European Commission and the European Court
to similar volumes of another drug manufactured by the same supplier? Such
of Justice. Unfortunately, the implication of the ruling is that this particular series
questions will all provide first rate opportunities to grow the practices of the drug
still has a long time to run.
companies’ and parallel traders’ lawyers.
In his earlier advisory opinion to the Court in this case, the European Advocate
The truth is that although pharma companies are likely to hail the judgment a
General had clearly not been impressed with the string of familiar arguments
major step forward, it may in practice be difficult to convince national courts
that GSK had dutifully trotted out. These are essentially that drug companies’
that large orders for export from existing traders are unusual within the meaning
refusal to supply parallel traders for export is justified by differential national
of today’s judgment, given the already widespread nature of parallel trade. The
reimbursement prices imposed on the drug companies by state social security
judgment will, however, at the same time provide support to those national courts
authorities, rather than set by the drug companies; that parallel trade unfairly
and competition authorities—such as the French Competition Council—who
impinges on a fair return on the substantial R&D required to bring a drug to
have shown sympathy with the more fundamental arguments raised by the
market; that restrictions on drug exports were needed to ensure adequacy of
pharma companies.
national supply in each country; and that parallel trade serves only to line the
pockets of the parallel traders rather than serving the interests of consumers.
Likely reaction by pharma companies will be to pursue their existing progression
down the supply chain. As the Courts continue to fail to resolve the uncertainty
As expected, the European Court did not dissent from the views of its Advocate
about how the law regulates drug distribution, pharma companies are likely to
General. To do otherwise would have been to open up a new exception to the
attempt to gain more security by acquiring more and more direct ownership and
much-promoted imperative of completing the European internal free market by
control of distribution. Even this, however, is not a complete answer. A refusal to
vigorously attacking any obstacle placed in the way of interstate trade. It would
supply a third-party distributor can still be abusive even where the supplier has
have taken a very brave court indeed to do this.
established its own internal distribution system—particularly where the supplier
However, in a significant move toward the position advanced by the pharma
companies, the Court held that pharma companies can refuse to supply “unusual”
orders from wholesalers. But to prevent the drug companies from jumping to the
conclusion that any export order at all could be “unusual,” the Court also made it
clear that a refusal to supply based only on the fact that the order was for export
rather than domestic sale would be unlawful. It was for the national courts to
decide what was unusual in the light of previous “regular commercial practice.”
The Court raked up two previous cases, both more than 30 years old, as authority
for this idea. One admittedly is one of the leading cases in the area of abusive
refusal to supply. However, in a judgment in that case running to more than 300
paragraphs, you really need to look hard to identify the two sentences the Court
relied on in the GSK case. The other case cited by the Court concerned a refusal
was previously trading with the third-party distributor. This difficulty for the drug
companies may also then lead to a temptation to leverage the existing legal obligation to satisfy demand in each national market by canny planning of creation
and utilization of production capacity so as to ensure that in a given geography,
available supply does not exceed local demand. So we might see some cases
where drug manufacturers argue that they simply don’t have sufficient production
capacity to be in a position to guarantee supply in the various EU member states,
while at the same time feeding demand for export orders.
Overall, this case unfortunately looks like another piece of rather inelegant
sidestepping of this key issue by the European Court. The result will be more
litigation and more uncertainty in the market as to the permissible scope of
parallel trade. In short—business as “usual”….
* This article was first published in International Clinical Trials, October 2008.
9
ANTITRUST REGULATOR – winter 2009
U N I T E D S TAT E S U P DAT E
The Election of President obama and antitrust enforcement
There can be no doubt that antitrust enforcement will be invigorated under the
n Additionally, the Obama administration will focus on agreements that retard
new administration. Traditionally, presidential candidates seldom spend a lot of
the entry of generic pharmaceuticals into the market, though he intends to
time discussing their antitrust policies. President-elect Obama, however, made
preserve the pharmaceutical companies’ incentives to continue to develop
himself clear about antitrust enforcement while on the campaign trail.
critical new drugs.
In a statement by President-elect Obama to the American Antitrust Institute,
n The Obama administration is expected to support open competition on the
Obama explained his belief that “Antitrust is the American way to make
Internet and would seek to promote many providers of network services
capitalism work for consumers…. Most fundamentally, it insists that
through network-neutrality. Accordingly, one would expect that the proposed
customers—not government bureaucrats, and
telecommunications and media consolidations will have a harder time passing
not monopoly CEOs—are the judges of what best
muster under the new administration.
serves their needs.” Obama further emphasized
that “as president, I will direct my administration
Obviously, it will take a while for the effects of Obama’s policies to be felt.
to reinvigorate antitrust enforcement. It will step
Nonetheless, in the face of what is sure to be much stricter antitrust scrutiny,
up review of merger activity and take effective
companies would be advised to consult counsel at the earliest point possible
action to stop or restructure those mergers
when contemplating a reportable merger or consolidation under the antitrust
that are likely to harm consumer welfare, while
regulations.
quickly clearing those that do not.” PresidentNatalie C. Moritz
Partner – Pittsburgh
Commercial Litigation Midwestern
elect Obama, in particular, pointed a finger at
the huge numbers of health care and health
Further, dominant firms, with significant market share, particularly
insurance mergers over the past 10 years, noting
in the health care, pharmaceutical, health insurance, media and
that these had not made the industry more
telecommunications industries, would be well-advised to assume tighter
efficient but rather had resulted in insurance premiums skyrocketing. In other
application of antitrust law to mergers, and may wish to revisit with counsel
public statements during his campaign, President-elect Obama similarly targeted
the following types of activities:
the telecommunications, media and pharmaceutical sectors as industries that
require stricter antitrust scrutiny and more enforcement.
So, what can we expect over the next four years in the United States?
n Eric Holder, Obama’s choice for Attorney General, has not expressed any
antitrust positions. Obama next will appoint assistant attorneys general under
Holder, including an assistant attorney general for the Antitrust Division. It is
expected that this appointee will take a harder look at proposed mergers and
dominant firm cases.
n President-elect Obama will also appoint a new commissioner to the FTC
and name a new chairman. Because the FTC is seen as currently promoting
aggressive antitrust enforcement, it is unlikely that these appointees will
deter the FTC from its current course of action, but instead will help bridge a
growing rift between the current FTC and DOJ.
n The Obama administration is likely to continue the current administration’s
vigorous enforcement efforts against international cartels.
n The Obama administration can be expected to target the health care and
health insurance industries, including closer scrutiny of proposed mergers and
dominant market shares in these industries. In fact, in an article published in
the Wall Street Journal Dec. 17, 2008, FTC Commissioner Jon Leibowitz was
quoted as saying that the FTC’s case against Ovation Pharmaceuticals (see
in-depth discussion in the Antitrust Regulator, at p. 15), “is an example of how
aggressive we are going to be on health care issues going forward.”
n Any type of tying arrangement, i.e., a requirement that one product or
service be purchased in order to be able to purchase another product or
service
n Any decision to stop dealing, or any refusal to deal, with a vendor or
distributor
n Any new pricing structure, including volume discounts, rebates or
differential pricing
n Any proposed restrictions on resale pricing or other resale restrictions
n Any intellectual property licenses
n Any agreements or joint ventures with competitors
In short, antitrust enforcement in the United States seems destined to show
renewed vigor.
10
ANTITRUST REGULATOR – winter 2009
Implications of the Supreme Court Decision Rejecting Reliance as a Requirement
in a Civil RICO Claim
On June 9, 2008, the U.S. Supreme Court issued its opinion in Bridge v. Phoenix
a required element. The Court is clear that its new rule does not mean that
Bond & Indemnity Co., a unanimous decision explicitly rejecting the notion that
a civil RICO plaintiff can prevail without showing that someone relied on the
a plaintiff must directly rely on the misrepresentations in a mail fraud scheme in
misrepresentation. Indeed, in order to have standing to bring a civil RICO suit,
order to bring a civil RICO claim. As recently as 2006, the Court in Anza v. Ideal
a plaintiff must both suffer an injury and demonstrate that the injury was
Steel Supply Corp. indicated that recovery under civil RICO was limited to the
proximately caused by the defendant’s fraudulent scheme. A plaintiff cannot
immediate victims of misrepresentation. Under the prevailing interpretation of
sustain an injury proximately caused by fraudulent statements upon which no
Anza, even if a party suffered a loss proximately caused by a fraudulent scheme,
one relied. But by allowing claims from “third-party” plaintiffs—those who are
it could not bring a claim unless it directly relied upon the misrepresentations
injured as a result of someone else relying on a misrepresentation—the Court
alleged. The ruling in Bridge has enhanced plaintiffs’ ability to bring claims under
has increased the number of plaintiffs who can bring a civil RICO action.
civil RICO, but has not rendered reliance irrelevant: reliance may no longer be a
formal element of a plaintiff’s claim, but it remains an important consideration in
determining whether the plaintiff was injured “by
Lower courts considering RICO claims have long employed different standards
reason of” the fraud alleged. It also remains a
regarding the required relationship between a defendant’s fraudulent act and a
potentially relevant factor in determining whether
plaintiff’s injury. Some courts required direct injury while others permitted both
class certification is appropriate.
direct and indirect injury. One complicating factor was that reliance has long been
Facts: Cook County, Ill. holds auctions to sell
tax liens on defaulted properties. The county
imposes a penalty on top of the amount of unpaid
taxes and awards liens to the bidder willing to
Jeremy D. Feinstein
Partner – Pittsburgh
Global Regulatory Enforcement
Reliance in Civil RICO Prior to Bridge
accept the lowest penalty. The county solved
the problem of selecting among equal bids by
imposing an allocation system and limiting
each entity to a single bid. This requirement is
enforced via a “Single, Simultaneous Bidder Rule” requiring bidders to submit an
affidavit stating that no agent of the entity has also submitted a bid. Phoenix Bond
brought suit against Sabre Group LLC, alleging that Sabre violated the county
an element in the common law tort of misrepresentation—a point that several
circuits cited as justification for reading it into civil RICO. The Supreme Court
initially sought to resolve the issue in Holmes v. Securities Investor Protection
(1992) by articulating a proximate cause standard based on the “directness of
the relationship” between the parties. Following Holmes, only plaintiffs who could
demonstrate an injury directly arising from another party’s fraudulent use of
the mail could bring suit. Lower courts struggled to apply the Holmes proximate
cause standard, and, once again, a circuit split formed regarding whether reliance
was a required element of a civil RICO action—at least two circuits held that
direct reliance was required while four (including the Seventh Circuit in Bridge)
allowed a third-party plaintiff to bring a successful claim.
rule by arranging for its affiliates to place concurrent bids. Phoenix Bond brought
In 2006, in Anza v. Ideal Steel Supply Corp., the Supreme Court refined the
its claim as a civil RICO action since Sabre used the mail to submit fraudulent
Holmes proximate cause standard to limit recovery to “immediate victims” of
affidavits to the county. The district court held that Phoenix Bond lacked standing
the alleged mail fraud. In Anza, the plaintiff alleged that its competitor unfairly
since it was only “indirectly injured” by Sabre’s misrepresentation. While Sabre’s
increased its market share by illegally refraining from charging state sales tax on
fraudulent scheme injured Phoenix Bond by preventing it from winning additional
cash purchases and concealing this conduct via tax fraud. The Court held that
tax liens in the auction, the district court held that Cook County was the only
the plaintiff (a competitor) was an “indirect victim” of the tax fraud and lacked
party to directly rely on the false affidavits.
standing to bring a civil RICO action. Consequently, the Court did not reach
The Seventh Circuit reversed, holding that Phoenix Bond’s loss—the opportunity
to acquire additional tax liens—was real and actionable. The Court of Appeals
the question of whether direct reliance by the plaintiff was a required element.
In dissent, Justice Thomas argued that the majority misinterpreted Holmes.
held that a plaintiff who did not directly rely on an alleged misrepresentation
may nonetheless recover damages under civil RICO, provided that the
Civil cases brought under the RICO (Racketeer Influenced and Corrupt
misrepresentation was the proximate cause of the plaintiff’s injury. Citing a circuit
Organizations) statute are close cousins of antitrust cases. Although civil
split on the issue of reliance, the Supreme Court granted certiorari to resolve
RICO cases are usually based on an underlying allegation of fraud, proof
whether fraudulent statements made to a neutral third-party constitute sufficient
of a conspiracy among different economic actors is often at the core of
grounds to sue under civil RICO.
the plaintiff’s case, just as it is in cases brought under Section 1 of the
The New Rule: In a unanimous ruling written by Justice Thomas, the Supreme
Court affirmed the Seventh Circuit Court of Appeals, and explicitly rejected the
existence of a direct reliance requirement. The Court’s decision in Bridge does
not completely eliminate the role of reliance in a civil RICO action, however;
Sherman Act. RICO claims are also similar to antitrust claims because they
permit prevailing plaintiffs to recover treble damages plus attorneys’ fees.
This causes the Plaintiffs’ Bar to prefer RICO claims to common law fraud
claims.
it simply departs from prior case law in holding that first-party reliance is not
(continued on page 11)
11
ANTITRUST REGULATOR – winter 2009
Implications of the Supreme Court Decision Rejecting Reliance as a Requirement in a Civil RICO Claim—continued from page 10
Thomas stated that the Court should focus on the purpose behind the alleged
because of plaintiff’s failure to properly allege proximate cause. Ironworkers
misrepresentation—gaining a competitive advantage through unfair competition.
Local No. 68 v. AstraZeneca Pharms. LP, No. 6:07-cv-5000-Orl-22-DAB, at
Furthermore, he noted that “reliance” is not found in the language of RICO. Two
*8-*12 (M.D. Fla. Nov. 3, 2008).
years later, Bridge provided the opportunity to revisit the issue.
n The scope of RICO continues to expand: The Court in Bridge explicitly
rejected the argument that anything short of requiring direct reliance would
Implications
n Expansion of defendants’ liability: By adopting a less restrictive view of the
elements of a RICO claim, the Bridge decision has increased the number of
plaintiffs who may recover damages based on an injury resulting from a fraud
scheme. The universe of potential civil RICO plaintiffs has expanded to include
entities who neither relied upon nor were even aware of the defendant’s
misrepresentation.
lead to the “over-federalization” of traditional state law claims. The Court
held that if their decision results in the undue proliferation of civil RICO suits,
then Congress must correct the error with more narrowly crafted statutory
language.
n Importance of intervening causes: Defendants accused of a civil RICO
offense by a third-party plaintiff are well advised to examine whether an
n Reliance plays a diminished, but still significant, role in civil RICO: As
noted above, the Court in Bridge held that while the plaintiff need not rely on
the misrepresentation, someone must rely on it. Indeed, Cook County “relied”
upon Sabre’s misrepresentations in the sense that the county processed the
fraudulent bids and corresponding affidavits. Without such reliance, no harm
could have been suffered by Bridge “by reason of” the misrepresentations.
Thus, reliance remains a part of a civil RICO claim by virtue of the causation
“intervening cause” broke the requisite chain of causation between the
alleged misrepresentation and the plaintiff’s injury. For example, Justice
Thomas notes that had Sabre been able to prove that Cook County knew
Sabre’s affidavits were false (yet permitted them to participate in the auction),
then the county would have broken the causal chain, thereby eliminating
proximate cause and precluding third-party liability.
n Insurance companies may have standing to bring viable civil RICO claims
inquiry. Because it is not a formal element of a plaintiff’s claim, however,
as third-party plaintiffs: In a multi-billion dollar class action against Eli Lilly
it may be more difficult to prevail on a motion to dismiss based on lack of
for overcharging for its drug Zyprexa, U.S. District Court Judge Jack Weinstein
reliance. For instance, one post-Bridge case reversed a dismissal based on
certified a class of third-party insurance company payors who claim injury
lack of reliance with the simple statement that after Bridge it is no longer
derived from misrepresentations that physicians relied upon. The plaintiffs’
necessary to plead or prove reliance. Brown v. Cassens Transport Co., 546
case has survived motions to dismiss, though an interlocutory appeal appears
F.3d 347, 357 (6th Cir. 2008). On the other hand, another post-Bridge court
likely.
ruled that while prescription drug users could in theory bring RICO claims
based on misrepresentations allegedly made to their doctors, and on which
Jeremy wishes to acknowledge the contributions of Justin Ehrenwerth to this
they did not directly rely, the defendant’s motion to dismiss must be granted
article.
MAKE WAY FOR CLASS CERTIFICATION ‘TRIALS’
In a significant year-end decision affecting all class actions, but particularly antitrust cases, the U.S. Court of Appeals for the Third
Circuit decided that trial courts must make bench-trial-like factual findings on all issues of fact essential to a class certification
decision, even if it means deciding “merits” issues. In re Hydrogen Peroxide Antitrust Litigation, No. 07-1689 (3d Cir, Dec. 30, 2008).
It may make class action defense lawyers into trial lawyers again. And in one area where class certification was nearly automatic—
antitrust cartel cases—plaintiffs will find it harder to certify a class because it eliminates any presumption of “injury in fact.” The
unanimous decision, authored by Chief Judge Scirica and marked “PRECEDENTIAL” by the court, reversed a trial court’s class
certification in an antitrust class action that followed on U.S. DoJ criminal enforcement action against manufacturers of the primary
bleaching agent in paper manufacturing. The court summarized its decision as follows:
In this appeal, we clarify three key aspects of class certification procedure. First, the decision to certify a class calls for findings by
Daniel I. Booker
Partner – Pittsburgh
Global Regulatory Enforcement
the court, not merely a “threshold showing” by a party, that each requirement of Rule 23 is met. Factual determinations supporting
Rule 23 findings must be made by a preponderance of the evidence. Second, the court must resolve all factual or legal disputes
relevant to class certification, even if they overlap with the merits—including disputes touching on elements of the cause of action.
Third, the court’s obligation to consider all relevant evidence and arguments extends to expert testimony, whether offered by a party seeking class certification or by
a party opposing it.
The court also made clear that any findings on merits issues made by the trial court in connection with class certification will not be binding on the finder of fact in
any trial on the merits.
12
ANTITRUST REGULATOR – winter 2009
Federal Circuit Applies Rule of Reason And Validates Reverse Payment Patent Settlements
in In re Ciprofloxacin Hydrochloride Antitrust Litigation
It is an increasingly common case that tests the inherent conflicts between
2 of the Sherman Act as well as state antitrust laws, and that Bayer unlawfully
antitrust and patent law. On Oct. 15, 2008, the Court of Appeals for the Federal
monopolized the ciprofloxacin market by enforcing a patent obtained by fraud
Circuit took a position consistent with the Second and Eleventh Circuits and
on the PTO. In 2003, the United States District Court for the Eastern District of
rejected the antitrust claims of a group of direct and indirect purchasers
New York denied plaintiffs’ motion for partial summary judgment, finding that the
contesting the legality of reverse payments made by a pharmaceutical patent-
settlement agreements were not per se illegal. In 2005, the district court granted
holder to a generic manufacturer to settle patent litigation. The Federal Circuit,
summary judgment for defendants Bayer and Barr, holding that the settlement
affirming the district court’s grant of summary judgment for the defendants, held
agreements could not be challenged under antitrust laws because they had no
that such agreements do not violate the antitrust
laws so long as the patent was not procured
through fraud, the underlying patent suit was
not a sham, and the anti-competitive effects of
the settlement agreements are not outside the
exclusionary zone of the patent.
P. Gavin Eastgate
Partner – Pittsburgh
Global Regulatory Enforcement
anticompetitive effect beyond the exclusionary zone of Bayer’s patent.
The appellants alleged numerous errors on the part of the district court and
appealed to the Federal Circuit. On appeal, appellants contended that the
settlement agreements were per se illegal because they allowed Bayer to exclude
a horizontal competitor, not by enforcing its patent rights in court, but by making
reverse settlement payments to Barr of $398 million. The Federal Circuit panel
Challenges to the Patent and the Settlement
held that, in reviewing the settlement agreements, the district court could not
Agreements
confidently predict the pernicious anticompetitive effects necessary to find the
Bayer Corporation owns a patent for the active
ingredient in its brand-name drug Cipro®. In
1991, Barr Labs, Inc. sought to manufacture a
generic version of the drug during the 180-day exclusivity period available to Barr
as a first challenger under the Hatch-Waxman Act. Barr challenged the validity
and enforceability of Bayer’s patent and, in response, Bayer sued Barr for patent
infringement. In settling these claims just before trial in 1996, Bayer and Barr
entered into a series of agreements designed to resolve both Barr’s challenge to
Bayer’s patent, and Bayer’s corresponding infringement suit. On one end, Barr
agreed to delay its entry into the Cipro® market until after Bayer’s patent expired.
Barr agreed not to manufacture its generic version of Cipro® in the United
States, to amend its Hatch-Waxman certification to the FDA, affirm the validity of
Bayer’s patent, admit infringement, and thereby relinquish its 180-day exclusivity
entitlement. In return, Bayer agreed to pay Barr $49.1 million up front, and
either supply Barr with limited quantities of Cipro® for resale, or alternatively,
make additional quarterly payments to Barr, bringing the total reverse payment
to approximately $398 million. Bayer also agreed to allow Barr to sell a generic
version of Cipro® approximately six months before the patent expired in 2003.
agreements per se illegal. Consequently, the district court properly analyzed the
agreements under the rule of reason.
Absent Fraud or Sham Litigation, Analysis of Patent Validity is
Inappropriate as Part of a Rule of Reason Analysis
Appellants also argued that the district court erred by failing to embrace the
position of the FTC, the Solicitor General and the Court of Appeals for the Sixth
Circuit, which appellants contended requires application of a modified rule
of reason analysis, taking into account the validity and strength of the patent
in evaluating the legality of reverse payment
settlements. The Federal Circuit again disagreed
and took a position consistent with the Second and
Eleventh Circuits, noting that pursuant to statute,
a patent possesses a presumption of validity. The
court confirmed that the proper approach in reverse
payment cases is two-part: (1) The district court
must determine if there is any evidence that the
patent was procured by fraud on the PTO, or that
the infringement suit was a sham or objectively
Jeffrey M. Weimer
Associate – Pittsburgh
Commercial Litigation Midwestern
After the settlement agreements, four other generic manufacturers—Ranbaxy,
baseless; (2) if no such evidence exists, the only
Mylan, Schein and Carlsbad—filed certifications with the FDA challenging the
remaining question is whether the agreements
validity of Bayer’s patent and seeking to manufacture their own generic versions
restricted competition beyond the exclusionary zone of the patent. The Federal
of Cipro®. Bayer sued all four companies for patent infringement and defeated
Circuit upheld the district court’s findings that Bayer properly procured its patent
Schein and Mylan on summary judgment. Bayer also won the Carlsbad case
and that Bayer’s infringement suit had merit. The district court also correctly
in a bench trial, again affirming the validity of its patent. A court dismissed the
noted that Bayer had prevailed in several subsequent infringement suits. As a
Ranbaxy case when Ranbaxy withdrew its certification to the FDA.
result, the Federal Circuit agreed that there is no legal basis for restricting Bayer’s
Resolution of One Dispute Leads to Another—The Antitrust Litigation
In 2000 and 2001, direct and indirect purchasers of Cipro® and advocacy
groups filed several antitrust actions against Bayer and Barr, challenging the
preferred means of enforcing its patent rights.
Only Anticompetitive Effects Beyond the Exclusionary Zone of the Patent
May be Redressed by Antitrust Law
reverse payment settlements. Specifically, plaintiffs alleged that the settlement
The Federal Circuit noted that a patent is an exception to the general rule against
agreements constituted an illegal market allocation in violation of Sections 1 and
monopolies and that, by its very nature, a patent is anticompetitive. As a result,
(continued on page 13)
13
ANTITRUST REGULATOR – winter 2009
Federal Circuit Applies Rule of Reason And Validates Reverse Payment Patent Settlements in In re Ciprofloxacin Hydrochloride
Antitrust Litigation—continued from page 12
the Federal Circuit agreed with the district court that before antitrust law may be
undertake the time and expense of bringing subsequent challenges to the brand-
invoked to redress a claim, it must be determined whether the anticompetitive
name patent. In this case, the Federal Circuit affirmed the district court’s reasoning
effects fall beyond the exclusionary zone of the patent. The Federal Circuit affirmed
that while the Hatch-Waxman Act may create burdens for generic manufacturers,
that the essence of the Bayer-Barr settlements was simply to exclude a generic
it also offers significant benefits—namely the ability to get approval for a generic
manufacturer from profiting from Bayer’s invention—an action “well within
version of a patented drug without having to endure the rigorous FDA new drug
Bayer’s rights as a patentee.” However, had the Bayer-Barr settlements included,
application process, and also the ability to “challenge the validity of a patent without
in addition to reverse payments, a provision by which Barr maintained its 180-day
incurring the costs of market entry or the risks of damages from infringement.” The
exclusivity period (barring entry of competitors) or an agreement that Barr would
Federal Circuit found these incentives clearly at work in this case, as evidenced by
not manufacture even non-infringing versions of its generic drug, such agreements
the fact that four other generic manufacturers challenged Bayer’s patent after the
likely would have exceeded the exclusionary zone of the patent and triggered
Bayer-Barr settlements.
potential antitrust liability, as was the case in a recent Sixth Circuit decision. The
Federal Circuit noted, however, that the Bayer-Barr settlements contained no such
provisions. As a result, when considering the scope of the settlement agreements,
and the well-established judicial policy favoring settlements, the Federal Circuit
agreed that the settlements were not violative of the Sherman Act, even though
they may have some adverse effects on competition.
The Settlement Agreements Did Not Create a Bottleneck or Prevent
Other Patent Challenges
The Federal Circuit rejected appellants’ argument that the settlement agreements
were anticompetitive because, in the pharmaceutical patent context of the HatchWaxman Act, a brand-name manufacturer can protect its monopoly for years
simply by paying off the first challenger. Appellants argued this is the case because
the first challenger is entitled to a 180-day period of exclusivity, which creates
a bottleneck and reduces the incentive for any other generic manufacturers to
In addition, the Federal Circuit found no bottleneck effect because as part of the
settlement agreements, Barr admitted infringement of Bayer’s patent and amended
its certification with the FDA, thereby relinquishing its rights to the 180-day exclusivity
period—an issue that the Federal Circuit held was properly decided in 2003 by the
district court in denying plaintiffs’ motion for partial summary judgment.
Consult Counsel
Pharmaceutical patent infringement litigants may find reassurance in the Federal
Circuit’s decision validating the Bayer-Barr reverse payment settlements, particularly
because the decision joins recent and similar decisions of the Second and Eleventh
Circuits. However, the legality of such settlement agreements is contingent upon the
parties’ awareness of the need to limit the anticompetitive effects of their settlements
to the exclusionary zone of the underlying patent. Pharmaceutical companies would
be well-served to consult with experienced counsel to avoid running afoul of antitrust
laws when structuring such reverse payment settlement agreements.
Reed Smith at the Podium…
Dec. 1, 2008: A “Competition Litigation Roundtable” was held in Reed Smith’s London office. Larry Kill and Peter Roth, QC of Monckton Chambers, were the
keynote speakers. The discussion focused on comparing the environment for competition litigation in the UK and the United States. Please contact Larry Kill for
more information.
Dec. 2, 2008: The CEU group held its 17th Annual Competition Forum. Peter Freeman, Chairman of the UK’s Competition Commission, addressed the topic,
“Competition Policy in Interesting Times - the Role of the Competition Commission.” Approximately 80 people attended the program, mostly clients. Please
contact Lesley Davey for more information.
Dec. 5, 2008: Fred Houwen and Richard Neville of Warner Brothers gave a presentation entitled “Risky Business: Current Challenges in the Relationship
between Competition Law and Copyright,” at a conference held at the Competition Commission in London. Please contact Fred Houwen for more information.
Dec. 4 - 5, 2008, “Competition Law and Shipping Contracts,” Marjorie Holmes conducted the following seminar: Reviewing and Understanding International
Shipping Contracts, London. Please contact Marjorie Holmes for more information.
Marjorie Holmes will be involved in the following speaking engagements: February 2009, “Competition Guidelines,” BIMCO Competition Workshop, Athens;
March 26, 2009, “Consortia Legislation,” Lloyd’s Maritime Academy – “EU Competition Law and the Shipping Industry,” London. Please contact Marjorie Holmes
for more information.
And on Paper…
Richard Waite published a Competition Law Update in the Nov. 18, 2008 edition of Solicitors Journal. Please contact Richard Waite for more information.
Marjorie Holmes edited and co-authored Competition Law and Practice: A Review of Major Jurisdictions, published by Cameron May International Law & Policy. The
book is now available for purchase. Please contact Marjorie Holmes for more information.
14
ANTITRUST REGULATOR – winter 2009
Federal District Court Allows Joint Bidding Suit to Proceed
On Dec. 15, 2008, a federal district court judge in Massachusetts denied the
shareholders of an acquired company against two private equity firms that
motion to dismiss filed by several private equity firms alleged to have engaged
initially bid separately for the target company before one firm withdrew its bid.
in joint-bidding for leveraged buyout (“LBO”) target companies. The defendants
See Pennsylvania Avenue Funds v. Borey, 569 F.Supp.2d 1126 (W.D. Wash. 2008).
in this case, Dahl, et al. v. Bain Capital Partners,
After the remaining firm’s bid was accepted—at a price lower than the original
et al., proceeded on two grounds in their motion
joint bid—the withdrawing firm acquired half of the successful bidder’s interest
to dismiss the suit: (1) The antitrust laws did not
in the target company. Ultimately, the court concluded that the plaintiffs could not
apply to the allegedly illegal conduct because
adequately allege that the defendants had market power and thus failed to state
they are preempted by Securities and Exchange
an antitrust claim.
Commission (“SEC”) regulation; (2) The plaintiffs
failed to state a claim under §1 of the Sherman
Act. Both were rejected by the court.
Natalie C. Moritz
Partner – Pittsburgh
Commercial Litigation Midwestern
The contrasting results in these cases are perhaps
attributable to the differing levels of specificity of
the two claims. While Borey challenged joint-bidding
The plaintiffs in this class action antitrust suit
practices in a particular transaction involving only
are shareholders in companies purchased by
two private equity firms, Dahl is a broader attack
the defendants, which include The Carlyle
on private equity “club deals” and alleges nine
Group, Goldman Sachs, Kohlberg Kravis Roberts
transactions as examples of the illicit conduct. These
and Co., and The Blackstone Group. While joint-bidding by private equity firms
results might provide guidance to future plaintiffs
conducting an LBO is legal (such transactions are known as “club deals”), the
seeking to challenge joint-bidding practices, insofar
plaintiffs allege that defendant private equity firms engaged in additional, illegal
as they demonstrate that when the court must
agreements to bid below fair value for companies and to illegally allocate the LBO
accept factual allegations as true, it is beneficial
market. According to the plaintiffs, the conspiracy was effectuated by, among
to frame those factual allegations as broadly as possible. Of course, it is also
other things, the submission of sham bids and agreements not to bid.
possible that these cases simply illustrate the divergent approaches to reviewing
In evaluating the motion to dismiss, the court was unconvinced that SEC
William J. Sheridan
Associate – Pittsburgh
Commercial Litigation Midwestern
motions to dismiss under the standards set forth in Twombly.
regulation of this area preempted application of antitrust laws. Under the
Private equity firms should take note of the challenged conduct in these two
standard set forth in Credit Suisse Securities (USA) LLC v. Billing, 127 S.Ct. 2383
cases when deciding to engage in joint-bidding with other firms.
(2007), the securities laws and antitrust laws must be “clearly incompatible”
in order for the doctrine of preemption to apply. Applying the test established
in Billing to determine whether clear incompatibility existed with respect to
The United States Supreme Court, in an antitrust case, Bell Atlantic Corp. v.
the challenged conduct, the court found that securities laws do not govern
Twombly, 127 S. Ct. 1955 (2007), established a new standard for plaintiffs
private equity LBOs, and, as such, the SEC is not empowered to regulate this
attempting to survive a motion to dismiss the complaint. The Supreme
conduct. Furthermore, rejecting an argument made by the defendants, the court
Court’s “plausibility standard” requires a plaintiff to allege more than a
determined that regulatory filings related to an LBO do not constitute substantial
“speculative” right to relief. Instead, a plaintiff, particularly in an antitrust
regulation within the meaning of Billing. In sum, because the SEC has no
case, must “state a claim to relief that is plausible on its face.” Twombly,
substantive authority to regulate private equity LBOs, the securities laws do not
127 S.Ct 1968. Before Twombly, a complaint would only be dismissed
preempt the antitrust laws.
under the standard set forth in Conley v. Gibson, 355 U.S. 41 (1957), if it
Next, the court considered whether the plaintiffs failed to properly plead their
claim under §1 of the Sherman Act. Applying the standard set forth in Bell Atlantic
Corp. v. Twombly, 127 S.Ct. 1955 (2007), the court concluded that the plaintiffs
had “plausibly” suggested an illegal agreement. The court was convinced largely
because plaintiffs’ complaint included nine specific transactions and because the
allegations “tie[d] the…firms together” by alleging an “overlap” in firms bidding
in multiple transactions.
Finding no grounds on which to dismiss the case, the court has ordered discovery
regarding the transactions specified in the complaint to proceed.
Importantly, this is the second significant private equity joint-bidding case
ruled on by a federal court in the past year. In February, the U.S. District Court
for the Western District of Washington dismissed an antitrust suit brought by
appeared, “beyond doubt that the plaintiff [could] prove no set of facts in
support of his claim which would entitle him to relief.” The more stringent
Twombly standard has been adopted by nearly all of the U.S. Courts of
Appeal to date.
15
ANTITRUST REGULATOR – winter 2009
Regulatory Update—in brief
Ovation Pharmaceutical, Inc.
On Dec. 16, 2008, the FTC filed a complaint against Ovation Pharmaceuticals,
Inc. in the U.S. District Court for the District of Minnesota, alleging that the
Illinois-based drug manufacturer illegally charged monopoly prices for its drug
that is used to treat a life-threatening heart condition in premature infants,
The FTC responded Dec. 12, 2008, by filing a motion to dismiss Whole Foods’ suit
for lack of jurisdiction. If the court chooses not to dismiss the suit, the FTC would
like to see it transferred to the D.C. Circuit because of the effect the ruling would
have on the jurisdiction of federal courts of appeals, which now have jurisdiction
over final FTC orders.
after purchasing the only similar medicine from a competitor in 2006. After
Look for information on further developments in this case in the next editions of
acquiring the competing medication, the FTC alleges that Ovation raised the
the Antitrust Regulator.
price for its drug “nearly 1300 percent,” from
$36 to approximately $500 a vial. The 2006
DOJ Requires Branch Divestitures in PNC—National City Acquisition
transaction did not require a Hart Scott Rodino
The Antitrust Division is requiring PNC Financial Services Group, Inc. to divest 61
filing, but the transaction and Ovation’s allegedly
National City Western Pennsylvania branches in order to complete its acquisition
anticompetitive conduct are being challenged
of the Cleveland bank. The $5.6 billion combination, announced Oct. 24, 2008,
now by the FTC, with the FTC seeking to have
will make PNC the fifth largest bank nationally in terms of total deposits, and the
Ovation divest itself of one of the drugs and to
fourth largest in branches.
disgorge the allegedly monopolistic profits it has
reaped from sales of the drug.
Natalie C. Moritz
Partner – Pittsburgh
Commercial Litigation Midwestern
Deposits in the divested branches are valued at
$4.1 billion, and those branches could take up to
Further developments in this case will be
six months to transfer. The divestiture includes
available in future editions of the Antitrust
deposits and commercial loans associated with the
Regulator.
branches. Additionally, the agreement with DOJ
Whole Foods Strikes Back: Grocer Sues FTC For Violation of Due Process
requires a substantial divestiture of National City’s
“middle market” lending, which according to DOJ
Ongoing litigation with the FTC has led Whole Foods to file suit to challenge the
includes “businesses with lending needs of more
agency’s administrative merger review process. This suit is the latest action
than $1 million.”
in a dispute over the Whole Foods acquisition of Wild Oats, an organic grocer,
which was agreed to Feb. 21, 2007. The FTC review of the merger was recently
reinstituted after the U.S. Court of Appeals for the D.C. Circuit reversed the
district court’s denial of an injunction that was originally filed to block the merger.
Whole Foods alleges that the FTC’s administrative trial violates due process
because it is the FTC that both brings and reviews the merger challenge. This
is in contrast to the procedure followed by the Department of Justice, which
must challenge mergers in federal district court. According to Whole Foods, the
FTC has prejudged the case in publicly available legal briefs and has instituted
a prejudicial discovery schedule. Whole Foods seeks an injunction to stop the
administrative trial.
The Antitrust Division is not expected to require
William J. Sheridan
Associate – Pittsburgh
Commercial Litigation Midwestern
any additional branches to be divested. And after
the Federal Reserve Board approved the transaction Dec. 15, 2008, only a
shareholder vote remains before the acquisition can be finalized.
CONTRIBUTORS TO THIS ISSUE
Daniel I. Booker
Pittsburgh
+1 412 288 3132
[email protected]
Natalie C. Moritz
Pittsburgh
+1 412 288 7264
[email protected]
Constantin F. Conrads
Munich
+49 89 20304 123
[email protected]
Rizwan A. Qureshi
New York
+1 212 205 6106
[email protected]
Leslie A. Davey
London
+44 (0)20 7816 3754
[email protected]
William J. Sheridan
Pittsburgh
+1 412 288 3156
[email protected]
P. Gavin Eastgate
Pittsburgh
+1 412 288 5710
[email protected]
Richard J. Waite
London
+44 0(20) 7816 3925
[email protected]
Jeremy D. Feinstein
Pittsburgh
+1 412 288 7972
[email protected]
Jeffrey M. Weimer
Pittsburgh
+1 412 288 7982
[email protected]
Robert A. Heym
Munich
+49 89 20304 122
[email protected]
Thomas Karalis
London
+44 0(20) 7816 3746
[email protected]
Lawrence Kill
New York
+1 212 205 6054
[email protected]
Edward S. Miller
London
+44 0(20) 7556 6778
[email protected]
The Antitrust Regulator is published by Reed Smith to keep others informed of developments
in the law. It is not intended to provide legal advice to be used in a specific fact situation;
the contents are for informational purposes only.
“Reed Smith” refers to Reed Smith LLP and related entities. © Reed Smith LLP 2009.