ANTITRUST BULLETIN NEW DEVELOPMENTS. E-Book Industry Faces Global Antitrust Scrutiny

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1 ANTITRUST BULLETIN Winter 2011/2012 Vol. 3, Issue 3 Inside This Issue Hold the Phone! Does Sprint s Challenge to the AT&T/T-Mobile Merger Ease the Path to Showing Antitrust Injury in Merger Cases? Ryan W. Marth Matthew R. Veenstra NEW DEVELOPMENTS Chinese Handcuffs: Compulsion, Collusion and Chinese Cartels in the In re Vitamin C Antitrust Litigation Thomas J. Undlin Amelia N. Jadoo Antitrust Practice Group Contacts K. Craig Wildfang 800 LaSalle Avenue 2800 LaSalle Plaza Minneapolis, MN (phone) (fax) kcwildfang@rkmc.com Stacey P. Slaughter 800 LaSalle Avenue 2800 LaSalle Plaza Minneapolis, MN (phone) (fax) spslaughter@rkmc.com E-Book Industry Faces Global Antitrust Scrutiny As e-books and e-book-reader sales soar this holiday season, antitrust investigations and lawsuits may influence how the industry develops in the future. Earlier this year private plaintiffs filed suit against Apple and several leading publishers, alleging that publishers conspired to raise the price of e-books from the $ 9.99 standard that Amazon had set when it introduced the Kindle. A different group of plaintiffs claimed that Amazon was a coconspirator. On December 9, the Judicial Panel on Multidistrict Litigation consolidated the private cases for common pretrial proceedings in federal court in Manhattan before Hon. Denise Cote. Just days before the panel s decision, both the Department of Justice and the European Commission announced that they had opened investigations into potentially collusive conduct in the e-book industry. While the Justice Department was silent on the theories it was pursuing, the Commission stated that it was investigating whether publishers possibly with the help of Apple, engaged in anti-competitive practices affecting the sale of e-books in the European Economic Area. The Commission made no mention of Amazon or other e-reader manufacturers in the press release announcing its investigation. > Continued Atlanta Boston Los Angeles Minneapolis Naples New York rkmc.com 2011/2012 Robins, Kaplan, Miller & Ciresi L.L.P. Printed on recycled paper.

2 ANTITRUST BULLETIN NEW DEVELOPMENTS CONTINUED H&R Block Abandons Deal After Injunction - AT&T Follows Suit Two high-profile mergers were recently abandoned after challenges from the Department of Justice. On November 15, H&R Block and 2SS Holdings-the developer of the TaxACT software-announced that they had abandoned plans to merge after Hon. Beryl A. Howell of the federal district court in Washington, D.C. issued a preliminary injunction against the proposed merger. In an extensive opinion-the first major decision under the new merger guidelines-judge Howell concluded that the merger was likely to lessen competition in the relevant market for do-it-yourself tax preparation software. AT&T announced on December 19 that it would give up its bid to acquire the U.S. business of T-Mobile. AT&T had previously withdrawn its application for FCC approval of the merger, which fueled speculation that the merger would fall apart. Reverse Payments Not Per Se Illegal In California On October 31, the California Court of Appeal became the latest court to hold that reverse payments settlement payments made by a branded-pharmaceutical manufacturer to a generic manufacturer in exchange for the generic agreeing to refrain from marketing its products were not illegal per se. The case arose out of California-law claims in the federal multi-district litigation over Bayer s drug Cipro, which the federal district court remanded to California state court. The Court of Appeal upheld the district court s summary judgment for Bayer and generic manufacturer Watson Pharmaceuticals, holding that reverse payments were not per se illegal under California law and therefore that the effects of Bayer s reverse payment was subject to the rule of reason. The court concluded that the agreements survived rule of reason scrutiny because they did not exceed the lawful scope of the patent covering Cipro and because the plaintiffs had not met their burden to prove that Bayer had engaged in sham litigation to defend the Cipro patents. Eighth Circuit Denies En Banc Rehearing In Lundbeck On November 22, the Eighth Circuit denied a request by the FTC, the Minnesota Attorney General, and the American Antitrust Institute for rehearing en banc in the challenge to Ovation Pharmaceuticals acquisition of Neoprofin, which gave it control over the only two drugs listed to treat a rare heart defect affecting premature infants. Just days after the acquisition, prices for one of the drugs, Indocin IV, rose thirteenfold. The FTC and the state of Minnesota attempted to use this price increase to demonstrate that the acquisition harmed competition. The district-court judge disagreed, however, concluding that the government could not prevail because, according to the court, it had not defined a proper relevant market. In affirming, the Eighth Circuit also credited the district court s findings that there was no pre-acquisition price competition between the drugs because neonatologists chose a drug based on factors other than price. If the government seeks certiorari, its petition is due on February 20, 2012.

3 Hold the Phone! Does Sprint s Challenge to the AT&T/T-Mobile Merger Ease the Path to Showing Antitrust Injury in Merger Cases? Ryan W. Marth Matthew R. Veenstra The government usually fares better than private plaintiffs when it comes to merger challenges. Competitor-plaintiffs difficulties often stem from their inability to demonstrate standing to challenge the merger. But a recent privateplaintiff challenge to AT&T s proposed acquisition of cellular-services provider. On August 31, the Department of Justice announced that it would challenge the merger. Then, in September, Sprint and Cellular South filed private antitrust lawsuits to enjoin the merger. Sprint is the third largest national cellular-services provider T-Mobile overcame and Cellular South is a that difficulty by smaller regional carrier. pleading facts showing a plausible antitrust injury. The opinion in Sprint v. AT&T both highlights the unique challenges private antitrust litigants face when seeking to enjoin competitor mergers Although Sprint and Cellular South failed to demonstrate adequate standing on claims related to prices paid by consumer, their claims based on access to necessary inputs survived initial review. The complaints in the private actions allege five theories of threatened injury stemming from both horizontal and vertical aspects of AT&T s proposed acquisition. Predictably, AT&T moved to dismiss the claims, and provides guidance on what a successful competitor arguing that the plaintiffs lacked standing to challenge the challenge might look like. merger. The Case On March 20, 2011, AT&T the nation s second-largest cellular-services provider entered into a stock-purchase agreement to acquire T-Mobile, the nation s fourth-largest The Clayton Act and Private Standing for Merger Challenges Section 16 of the Clayton Act authorizes private parties to seek injunctive relief to protect against threatened > Continued

4 ANTITRUST BULLETIN loss or damage by a violation of the antitrust laws. 1 In past cases, courts have limited Section 16 s reach to those plaintiffs that allege a threat of antitrust injury that is, a threatened loss of damage, personal to himself, of the type the antitrust laws were designed to prevent and that flows from that which makes defendants acts unlawful. 2 Antitrust injury allegations require factual support that meets the plausibility standard established in Bell Atl. Corp. v. Twombly. 3 Sprint and Cellular South s first claims alleged that the merger would illegally concentrate power in the wireless-services market, leading to higher consumer prices. Echoing the Supreme Court s decision in Cargill v. Monfort of Colorado, the court quickly dismissed those...the court was willing to find antitrust injury where the threatened foreclosure was much less straightforward than the handset and roaming foreclosure claims. inputs survived initial review. Both of the surviving claims allege that the merger threatens to foreclose plaintiffs access to necessary inputs creating both an antitrust injury and specific injury in fact. The first surviving claim alleged that post-merger AT&T could, together with Verizon, deprive plaintiffs of access to the most advanced handsets by entering into exclusive deals with handset manufacturers. The second surviving claim alleges that the merger threatens to foreclose access to roaming service to a Cellular South subsidiary that purchase roaming from AT&T. In a bit of a twist, the court upheld the second claim only with regard to Cellular South subsidiary Corr Wireless while dismissing the similar claims of Sprint and Cellular South. Corr Wireless, a user of GSM mobile technology, claims. The court reasoned that claims related to consumer currently purchases roaming service from AT&T. The court concerns belong to the government to bring consumers found a sufficient allegation of antitrust injury because behalf. The court went on to note that a potential price hike the removal of T-Mobile as a fellow purchaser of roaming by the new AT&T would actually provide an opportunity for from AT&T might cause independent roaming suppliers the plaintiffs to either raise prices themselves or increase to exit the market, leaving AT&T with a monopoly on GSM market share at AT&T s expense, and therefore could not roaming service. be considered an allegation of threatened harm standing alone. Interestingly, the court was willing to find antitrust injury where the threatened foreclosure was much less The Surviving Claims: When Can a Competitor s Merger straightforward than the handset and roaming foreclosure Cause Antitrust Injury? claims. Among the claims that were dismissed, only one the claim alleging a post-merger monopoly of mobile Although Sprint and Cellular South failed to demonstrate wireless service was on account of failure to satisfy the adequate standing on claims related to prices paid by antitrust injury requirement. All of the others were consumers, their claims based on access to necessary dismissed for failing to allege threatened injury-in-fact

5 with enough factual support to satisfy the plausibility test of Twombly. The court was willing to find an antitrust injury even when the harm was the alleged result of a rather long causal chain of events. The court s relative leniency on antitrust injury may just be giving with one hand but taking with another; the more attenuated the alleged harm, the more difficult it will be to plausibly allege injury-in-fact another prerequisite to private-plaintiff standing. As the court pointed out, each step in the causal chain must be supported by facts. At the pleading stage of an antitrust case this could be a formidable challenge possibly requiring hard-toobtain market data or even some analysis. The court found that the dismissed claims fell well short of the mark required by Twombly. The rest of the theories alleged by Sprint and Cellular South met a similar fate. Now that AT&T abandoned its acquisition bid, we will never know whether Sprint and Cellular South could have succeeded on their theories at trial. But the fact that they were able to open the courthouse doors as competitors may make private merger challenges a viable alternative to simply lodging complaints with the antitrust-enforcement agencies. Given the poor track record of private plaintiffs in establishing standing to challenge competitor mergers, the recent opinion allowing Sprint and Cellular South to challenge AT&T s proposed acquisition of T-Mobile is significant U.S.C Cargill, Inc. v. Monfort of Colo., Inc., 479 U.S. 104, 113 (1986); see also, e.g., Atl. Richfield Co. v. USA Petroleum Co., 495 U.S. 328 (1990) U.S. 544 (2007) Conclusion Given the poor track record of private plaintiffs in establishing standing to challenge competitor mergers, the recent opinion allowing Sprint and Cellular South to challenge AT&T s proposed acquisition of T-Mobile is significant. The decision provides a rare helpful precedent for future competitor-plaintiffs and sheds light on how to succeed under a theory that the proposed transaction will foreclose the plaintiff s access to necessary inputs. Ryan W. Marth rwmarth@rkmc.com Ryan received his J.D., magna cum laude, and Order of the Coif from the University of Minnesota Law School and his B.A., magna cum laude, from St. Olaf College. Ryan was a Fulbright Scholar at the University of Oslo. He practices in the areas of antitrust and trade regulation, business litigation, and mergers and acquisitions. Matthew R. Veenstra mrveenstra@rkmc.com Matt received his J.D., cum laude from the University of Michigan Law School, and his B.A. in Political Science and East Asian Studies from the University of Wisconsin-Madison. He practices in the area of business litigation.

6 ANTITRUST BULLETIN Chinese Handcuffs: Compulsion, Collusion and Chinese Cartels in the In re Vitamin C Antitrust Litigation Thomas J. Undlin Amelia N. Jadoo As U.S. companies increasingly deal with suppliers in China and other centrally planned economies, they may question whether the activities of their suppliers that are conducted within quasi-governmental agencies are reachable by U.S. antitrust laws. A recent decision by a federal court in Brooklyn she some light on that question. In the In re Vitamin C Antitrust Litigation, 1 a group of Chinese vitamin C manufacturers sought to defeat antitrust price-fixing allegations by arguing that the conduct at the heart of the claims was the result of government compulsion. In the... here, there is no rock and no hard place. The Chinese law relied upon by defendants did not compel their illegal conduct. still-pending litigation, U.S. purchasers of vitamin C claim that the defendants formed a cartel and, aided by the Chinese Chamber of Commerce of Medicines and Health Products Importers and Exporters (the Chamber), engaged in collusive, anticompetitive price-fixing conduct that included an agreement to fix the price and volume of exports of vitamin C. While not disputing that they participated in the price-fixing cartel, the defendants sought to defeat the action by proving that the Chinese government compelled their conduct. The defendants argued that their conduct was the result of government compulsion because they undertook the conduct as Chamber members and the Chamber is a governmentsupervised entity through which the Chinese government has some control. The Ministry of Commerce of the People s Republic of China (the Ministry) filed an amicus brief to support the defendants position. But the defendants and the Ministry were unable to persuade the Vitamin C Antitrust Litigation court that the laws of China required the defendants to take action that was illegal in the United States. The court said it remained unconvinced that the defendants could not comply with the laws of both countries, stating here, there is no rock and no hard place. The Chinese law relied upon by defendants did not compel their illegal conduct. Finding that the doctrines of act of state and/or comity also did not preclude defendants from antitrust liability in the United States, the court denied the defendants summary judgment motion. 2 No Compulsion of Chamber Cartel The court explained the complex factual background that led to its decision. The undisputed facts showed that the Chinese government created several China Chambers of Commerce for Import and Export and then granted these

7 Chambers the authority to regulate import and export commerce. These Chambers were given governmental functions, including the responsibility of addressing anti-dumping charges and industry coordination. The Chambers also had private functions, including the responsibility of conducting market research, mediating trade disputes, and organizing trade fairs. The Chamber with responsibility for medicines and health products was tasked with addressing problems surrounding the expanding vitamin C industry, which included anti-dumping lawsuits. To meet the challenges the industry faced, the Chamber created a vitamin C subcommittee to oversee exportation of vitamin C and directed the Subcommittee to establish mandatoryminimum export prices. The Subcommittee enacted a 1997 Charter that provided that the Subcommittee would supervise the implementation of export licenses, advise the Ministry on export quotas and coordinate and administrate market, price, customer and operation order of Vitamin C export. In 2002 the Subcommittee revised its Charter as a part of China s effort to open its economy to the world and pursuant to China s entry into the World Trade Organization. The new Charter made at least two key changes: membership in the Subcommittee was no longer required in order to export vitamin C; and material penalties for non-compliance were removed. Despite these changes, the defendants made agreements on price and export quotas of vitamin C during several meetings held by the Subcommittee between 2002 and These facts proved the undoing of the defenses that the defendants relied on. The defendants three defenses were all rooted in respect for the sovereignty of other independent states and the separation of powers within the United States. The Vitamin C Antitrust Litigation court, however, ultimately declined to defer to the Ministry s interpretation of law reasoning that the Ministry failed to address critical provisions of the 2002 Regime. The court noted, for example, that the Ministry makes no attempt to explain China s representations [to the World Trade Organization] that it gave up export administration of vitamin C. The court also noted that, although not dispositive, it could not ignore the fact that the defendants economic interests were aligned with the allegedly compelled conduct. The court ultimately found that there was no affirmative evidence of compulsion by the Chinese government. Instead, the evidence suggested that defendants voluntarily agreed to fix the price of vitamin C they sold in the United States. The court further questioned the credibility of documents filed by the Ministry after commencement of the lawsuit, finding that other facts before the court suggested that the Ministry was merely attempting to shield defendants illegal conduct rather than provide a straightforward explanation of Chinese law. The court also rejected the defendants comity defense. The court stated that it was unclear whether a factorbased test for analyzing comity issues, advanced by the Ninth and Third Circuit Courts of Appeal, was still valid after the Supreme Court s holding in Hartford Fire. 3 Rather than analyze these factors, the court concluded that absent a true conflict envisioned by Hardford Fire, dismissal on comity grounds would not be justified. The court concluded that the foreign-sovereign compulsion defense did not apply for the same reason and also because defendants did not face the imposition of penal or other severe sanctions for failure to comply. The court further declined to accept defendants position that it was the sovereign acts of the Chinese government that compelled defendants to engage in price-fixing. While it may be too early to determine if other courts will follow the Eastern District of New York s conservative approach when analyzing the doctrines of foreign compulsion, comity, and act of state, some courts have already grappled with similar issues concerning antitrust liability of foreign defendants. In one case In re Potash Antitrust Litigation 4 the court reached a result similar to that made in the Vitamin C Antitrust Litigation. In the Potash Antitrust Litigation, the Northern District of Illinois denied a Belarusian potash producer s motion to dismiss antitrust claims concluding that defendant s conduct was not compelled by an official act of the Republic of Belarus. That court stated that it was not convinced that this is a situation where we would be forced to inquire into official acts and > Continued

8 ANTITRUST BULLETIN conduct of the Republic of Belarus. 5 In Resco Products, Inc. v. Bosai Minerals Group Co., LTD, 6 however, the court was less sure of the role of state control. The Resco Products plaintiffs claimed that Chinese defendants conspired to fix prices and control the supply of bauxite in violation of Section 1 of the Sherman Act. The defendants argued that the price controls on bauxite was mandated by China s export control on regulations and policies. The Western District of Pennsylvania denied defendants motion to dismiss without prejudice and stayed the proceedings pending the outcome of the World Trade Organization (WTO) proceeding concerning China s export restriction on bauxite and other raw materials. The court concluded that while not dispositive, the WTO s report may implicate separation of powers concerns that the court should consider when determining whether the act of state doctrine applies to the case. But at least one court considered conduct arising from participation in a Chinese Chamber of Commerce to preclude antitrust liability because of government compulsion. In Animal Science Products, Inc. v. China Nat l Metals & Minerals Import & Export Corp., 7 the District of New Jersey granted defendants motion to dismiss in a price fixing case. In Animal Science, Chinese magnesite manufacturers/defendants successfully argued that through the auspices of their trade association the Chamber of Commerce of Metals, Minerals and Chemicals Importers and Exporters they were compelled by the Chinese government to control prices. Conclusion As more and more foreign manufacturers become subject to claims that their conduct violates U.S. antitrust laws, it Courts balancing antitrust enforcement and deference to foreign nations could impact foreign relations between the United States and China and, ultimately, their ability to cooperate on global antitrust enforcement. will be interesting to watch how the federal district courts and federal courts of appeal approach these doctrines whether they will follow a strict reading of Hardford Fire and closely scrutinize whether a true conflict exists such that a foreign defendant is caught between a rock and a hard place, or take a more expansive approach of analyzing other factors in making comity determinations. Courts balancing antitrust enforcement and deference to foreign nations could impact foreign relations between the United States and China and, ultimately, their ability to cooperate on global antitrust enforcement. For the time being, however, companies should not be discouraged from seeking damages for cartel activity merely because the activity was conducted behind the curtain of a quasi-governmental entity. 1 In re Vitamin C Antitrust Litig., 06-MD-1738, 2011 WL (E.D.N.Y. Sept. 6, 2011). 2 The defendants motion to dismiss was similarly denied in the predecessor case of In re Vitamin C Antitrust Litig., 584 F. Supp. 2d 546 (E.D.N.Y. 2008). 3 Hartford Fire Ins. Co. v. California, 509 U.S. 764 (1993). 4 In re Potash Antitrust Litig., 686 F. Supp. 2d 816, 825 (N.D. Ill. 2010). 5 Id. 6 Resco Prods., Inc. v. Bosai Minerals Grp. Co., LTD., No , 2010 WL (W.D. Penn. June 4, 2010). 7 Animal Sci. Prods., Inc. v. China Nat l Metals & Minerals Import & Export Corp., 702 F. Supp. 2d 320, vacated on other grounds, 2011 WL (3rd Cir. Aug. 17, 2011). Thomas J. Undlin tjundlin@rkmc.com Tom is experienced in a wide variety of complex business disputes, including: breach-of-contract, fraud, antitrust, securities and intellectual property claims. He graduated cum laude from William Mitchell College of Law and studied Political Science at St. Olaf College. Amelia N. Jadoo anjadoo@rkmc.com Amelia practices in the area of complex litigation with a focus on business litigation and antitrust litigation. She attended William Mitchell College of Law and earned a B.A. in Legal Studies and Criminal Justice, cum laude from Hamline University. This publication is not intended as, and should not be used by you as, legal advice, but rather as a touchstone for reflection and discussion with others about these important issues. Pursuant to requirements related to practice before the U. S. Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended to be used, and cannot be used, for purposes of (i) avoiding penalties imposed under the U. S. Internal Revenue Code or (ii) promoting, marketing or recommending to another person any tax-related matter. 2011/2012 Robins, Kaplan, Miller & Ciresi L.L.P. Printed on recycled paper.