Unilateral Conduct Committee E-Bulletin
Issue 51
March 02, 2007

The Section 2 Committee's monthly E-Bulletin is intended to offer the antitrust community updates and information on the latest developments relating to monopolization law and policy. If you have any comments or suggestions on the E-Bulletin, please e-mail Jay Modrall (jmodrall@cgsh.com), Adam Nyhan (anyhan@constantinecannon.com), Tanya Dunne (tdunne@cgsh.com), and Alee Scott (ascott@constantinecannon.com).

U.S. DECISIONS

EIGHTH CIRCUIT AFFIRMS SUMMARY JUDGMENT DECISION DISMISSING MONOPOLIZATION AND ATTEMPTED MONOPOLIZATION CLAIMS IN SPECIALIZED MEDICAL-DEVICE MARKET

HDC Medical, Inc. v. Minntech Corporation , 2007 WL 174398 (8th Cir. Jan. 25, 2007). HDC Medical, Inc. (HDC) and Minntech Corporation are competitors in a specialized medical-device market. 2007 WL 174398, at *1. HDC accused Minntech of exclusionary and predatory conduct in violation of Sections 1 and 2 of the Sherman Act. HDC alleged that Minntech modified the design of its product and manipulated its warranty to push HDC out of the market. Id. The Minnesota district court granted Minntech's motion for summary judgment after determining that no genuine issue of material fact existed on HDC's monopolization claim regarding Minntech's power in the relevant market or on HDC's attempted monopolization claim regarding Minntech's alleged anticompetitive conduct or dangerous probability of success, respectively. On appeal by HDC, the Eighth Circuit affirmed. Id. at *6.

HDC and Minntech manufacture dialyzer-reprocessing machines. Dialyzer-reprocessing machines work in conjunction with dialyzers. Dialyzers act as artificial kidneys in hemodialysis by filtering blood waste products. Dialyzers come in single-use and multiple-use forms. A multiple-use dialyzer must be cleaned after each use by a dialyzer-reprocessing machine. Dialyzer-reprocessing machines sanitize multiple-use dialyzers using chemical mixtures called reprocessing solutions. HDC and Minntech also produce the reprocessing solutions for use in dialyzer-reprocessing machines. Id. at *2. In 2000, Minntech began modifying its dialyzer-reprocessing machines. As a result, HDC's reprocessing solution allegedly was no longer compatible with Minntech's machines. In addition, Minntech allegedly manipulated the warranty on its machines, slandered HDC's products and engaged in illegal tying in order to expel HDC from the reprocessing solution market.

A monopolization claim under the Sherman Act requires a showing that the defendant "possessed monopoly power in the relevant market and willfully acquired or maintained that power." Amerinet, Inc. v. Xerox Corp., 972 F.2d 1483, 1490 (8th Cir.1992) . The District Court held that single-use and multiple-use dialyzers belong to a single product market after finding that the two types of dialyzers have identical uses. HDC disagreed, contending that the relevant product market was limited to multiple-use dialyzers, because of the "significant price differences" between single and multi-use machines. HDC did not dispute the District Court's finding that single-use and multi-use have identical uses, but claimed that the District Court ignored case law that suggests that significant price differences between identical-use products can result in a finding that separate product markets exist. Id. The Eighth Circuit noted that the US Supreme Court has repeatedly held that a price difference on its own is insufficient to infer two separate product markets. "[P]rice is only one factor in a user's choice between one [product] or the other. That there are price differentials between the two products ... are relevant matters but not determinative of the product market issue." United States v. Cont'l Can Co., 378 U.S. 441, 455, 84 S.Ct. 1738, 12 L.Ed.2d 953 (1964) ; see also Brown Shoe Co., 370 U.S. at 326, 82 S.Ct. 1502. In support of its position, HDC relied on statements from United States v. Aluminum Co. of America, 377 U.S. 271, 276 (1964) ("to ignore price in determining the relevant line of commerce is to ignore the single, most important, practical factor in the business." Id.), and the Eighth Circuit's holding in United States v. Archer-Daniels-Midland Co., 866 F.2d 242, 246 (8th Cir.1988) (creating a narrow exception (for products subject to government price support) to the general prohibition against placing significant weight on only price differentials to determine the relevant product market). Id. at *3. The Eighth Circuit distinguished both decisions, finding that the Supreme Court in Aluminum Co. of America used price as a supporting factor, not a dispositive factor, and in Archer-Daniels-Midland Co. the Eighth Circuit created a limited exception for instances involving governmental interference with the pricing of one of the products, which was not alleged in the instant case. Id.

On HDC's attempted monopolization claim, the Eighth Circuit found that HBC failed to provide evidence to support a finding that Minntech had engaged in predatory or anticompetitive conduct or that Minntech had a dangerous probability of success. Id. The court addressed HDC's two main claims: (i) that Minntech's warranty policy was implemented to hamper competition; and (ii) that Minntech altered the design of two products specifically for the purpose of harming competition.

In 1998, Minntech had announced that it would not honor its one-year warranty on its reprocessing machines if solutions other than Minntech's solutions were used in the machines. Minntech argued that it did not know how its machines would react to competitors' solutions. Minntech had offered to test competitors' solutions on its machines provided such competitors paid for the costs of conducting such tests. The District Court determined that this was a legitimate business justification for this action. "When a valid business reason exists for the conduct alleged to be predatory or anti-competitive, that conduct cannot support the inference of a [Sherman Act] violation." Midwest Radio Co., Inc. v. Forum Pub. Co., 942 F.2d 1294, 1297-1298 (8th Cir.1991) ; Paschall v. Kan. City Star Co., 727 F.2d 692 (8th Cir.1984) . The Eighth Circuit agreed, citing Marts v. Xerox, Inc., 77 F.3d 1109 (8th Cir.1996) (holding that there was no violation of the Sherman Act when Xerox announced that it would void the warranty on its photocopying machines if a competitor's replacement ink cartridge was used in the machine, because "[a]n owner of a new Xerox copier could forego the benefits of the warranty, buy service from Xerox or an independent provider, and purchase cartridges from the vendor of its choice. The end result is the same: customers receive both service and cartridges for their copiers." Id. at 1112).

The Eighth Circuit also found that Minntech had a legitimate business justification for the modifications of its products. Id. at *5. The court also held that HDC's allegation of a dangerous probability of success was not supported by the record and accordingly affirmed the District Court's grant of summary judgment to Minntech. Id.

FEDERAL CIRCUIT COURT OF APPEALS REVERSES TEXAS DISTRICT COURT'S 12(b)(6) DISMISSAL OF MONOPOLIZATION CLAIM IN DRILL PIPE CONNECTIONS CASE, WITH ONE JUDGE DISSENTING

Hydril Company LP v. Grant Prideco LP , 2007 WL 174713 (Fed. Cir. Jan. 25, 2007). Hydril Company L.P. and Hydril U.K. Ltd. (collectively Hydril), the appellants, manufactured threaded connections for interlocking lengths of drill pipe and at times sold finished drill pipe produced by third parties that used Hydril's threaded connections. Grant Prideco, Inc. manufactured and sold both drill pipe and its own line of connections. Hydril sued Grant Prideco, alleging, inter alia, that under Walker Process, Grant Prideco violated Section 2 of the Sherman Act by "obtaining and maintaining market power in the relevant markets by use of threats to enforce a patent that Grant Prideco knew was procured by fraud." 2007 WL 174713 at *1. Upon a 12(b)(6) motion to dismiss, the district court dismissed the claims. Id. at *3. Upon appeal, the Federal Circuit Court of Appeals reversed and remanded the case for further proceedings. Id. at *1. Circuit Judge Mayer dissented, stating, inter alia, that Hydril did not have standing to bring a Walker Process claim regarding the finished drill pipe market, as Hydril admitted that it only competed with Grant Prideco in that market outside the United States.

In the late 1980s, certain Hydril employees with knowledge of Hydril's threaded connection technology left Hydril and founded XLS Holding, Inc. and XL Systems, Inc. (together, XLS). XLS began manufacturing thread connections without a license from Hydril. Hydril sued for patent infringement. Hydril and XLS reached a settlement by which Hydril would focus on smaller diameter connections and XLS on large diameter connections. XLS was later sold to Grant Prideco. As part of that sale, Hydril and Grant Predico entered into a license sharing agreement whereby Hydril granted Grant Predico the exclusive right to use Hydril's existing intellectual property to make large diameter connections, and Grant Predico granted Hydril the exclusive right to use XLS's technology to make smaller diameter connections. Pursuant to the agreement, Grant Predico was restricted from using the intellectual property and know-how from its large-diameter business to produce smaller-diameter connections, and vice versa for Hydril. Either party could develop products in the other's field, provided that it did so independently of the intellectual property and know-how of its existing business. Grant Prideco later filed a patent application with the US Patent and Trademark Office (PTO) and was granted a patent for a combination of raw drill pipe with specific diameters and connections that fit that pipe (the 631 patent).

In its Walker Process claim, Hydril alleged that Grant Prideco obtained the 631 patent in a manner that was fraudulent and that Grant Prideco "obtained and maintained market power in the relevant markets by use of threats to enforce a patent that Grant Prideco knew was procured by fraud." 2007 WL 174713 at *1. Grant Prideco's alleged fraud was its failure to disclose to the PTO material prior art of which Grant Prideco was aware. The alleged threats to enforce the fraudulent patent arose from "communications to particular industry participants suggesting that Grant Prideco would act aggressively to challenge activities that it saw as potentially infringing." Id. at *2.

The District Court dismissed the Walker Process claim, holding that Hydril had failed to allege the minimum level of enforcement necessary to state a Walker Process claim against Grant Prideco; enforcement activity that would create an "objectively reasonable apprehension" that Grant Prideco intended to enforce the 631 patent against Hydril. Id. at *3. The District Court noted that the letter Hydril provided as evidence of the communication to " industry participants suggesting that Grant Prideco would act aggressively to challenge activities that it saw as potentially infringing" did not contain "‘an explicit threat or other language which…could create reasonable apprehension on Hydril's part that Grant Prideco might sue it for patent infringement.'" Id. at *23. The District Court also noted that there was no other evidence to suggest that an explicit threat was made in any other communications from Grant Prideco. Id. at *3. On these grounds, the court dismissed the Walker Process claim.

The Federal Circuit Court of Appeals disagreed. Under Walker Process, enforcement of a patent procured by fraud, if proven, would strip the patent holder of its exemption under the antitrust laws and may violate Section 2 of the Sherman Act, provided the elements necessary to a Section 2 case are present. Id. at *4. The Court of Appeals found that if Hydril could prove that Grant Prideco had omitted prior art from its 631 patent application, Hydril would have grounds for a monopolization claim under Section 2. The Court of Appeals found that Hydril had alleged sufficient threats of enforcement action by Grant Prideco against Hydril (i.e., sufficient to create a "reasonable expectation" that Grant Prideco would file, or threaten to file, patent infringement suits against Hydril or its customers), even if the threats were directed at Hydril's customers and not Hydril. Id. at *5 ("a valid Walker Process claim may be based upon enforcement activity directed against the [Hydril's] customers.") Id. Indeed, since threats against customers are likely to cause customers to "cease dealing with their supplier," this is the kind of antitrust injury the Sherman Act seeks to prevent. Id. The Court of Appeals declined to address Grant Prideco's additional arguments to support the dismissal of Hydril's antitrust claims (i.e., no showing of injury in fact as allegation relates only to exclusion from the international market and not the domestic market, Hydril was a remote party and Hydril did not allege that the 631 patent provided Grant Prideco with any market power in the relevant market). The Court of Appeals remanded the case to the District Court, stating that the District Court "appears to be in the best position" initially to resolve these complex issues. Id. at *7.

In a dissenting opinion, Circuit Judge Mayer argued, inter alia, that Hydril did not have standing to bring a Walker Process claim regarding the finished drill pipe market, as Hydril admitted that it only competed with Grant Prideco in that market outside the United States. Under Walker Process, the determination of whether a reasonable apprehension existed requires an appraisal of "the exclusionary power of the illegal patent… in terms of the relevant market for the products involved." 2007 WL 174713 at *9 (Mayer, J. dissenting). The exclusionary power of any US patent is limited to the United States. As a result, Judge Mayer noted that a "‘reasonable apprehension' of patent enforcement cannot exist where neither the plaintiff nor any of its customers may be subject to the exclusionary power of a patent." Id. Accordingly, Judge Mayer argued that the lower court's 12(b)(6) dismissal should stand.

DISTRICT OF COLUMBIA COURT DISMISSES CITIES' SECTION TWO CLAIMS AGAINST NATURAL GAS PRODUCERS

City of Moundridge v. Exxon Mobil Corp. , 2007 WL 80832 (D.D.C. Jan. 9, 2007). Plaintiffs, eighteen municipalities, sued five producers of natural gas. 2007 WL 80832, at *1.

Defendants together control over 70% of the natural gas consumed in the United States. Id. Plaintiffs purchase gas from defendants and supply it via municipal distribution systems to their residents. After Hurricanes Rita and Katrina in Fall 2005, defendants raised gas prices substantially. Plaintiffs alleged that no legitimate justification existed for the price increases, because the hurricanes did not cause any shortage of gas in the United States. Id. at *2. Plaintiffs brought Unilateral Conduct claims of monopolization, attempted monopolization and conspiracy to monopolize the nationwide market for natural gas. Id. at *1. They also alleged a conspiracy to fix prices in violation of Sherman Act Section 1, as well as a Robinson-Patman price discrimination claim. Defendants moved to dismiss the claims on grounds of failure to state claims, lack of personal jurisdiction, lack of standing and Noerr-Pennington immunity.

The court dismissed all three of the Section 2 claims for failure to state claims. Id. at *14. As to the actual monopolization claim, the court held that plaintiffs did not adequately allege the required element of monopoly power. A monopolization claim requires proof that a firm unilaterally acted to monopolize a market, the court stated. Here, plaintiffs alleged only that defendants together owned 70% of the market and together withheld supply of natural gas to monopolize the market. Such a "shared monopoly" theory, the court held, was insufficient for an actual monopolization claim.

The court rejected the attempted monopolization claim on the ground that plaintiffs failed to allege the element of specific intent to engage in anticompetitive conduct. Id. at *15. Specific intent may be inferred from conduct that has no legitimate business justification but to destroy or damage competition, the court held. That intent must, however, still be supported by a factual assertion. Here, the court held, plaintiffs had merely asserted specific intent in a conclusory fashion unsupported by factual allegations.

The failure to allege specific intent in the attempted monopolization context was also fatal to plaintiffs' conspiracy to monopolize claims. Id. at *16. The allegations supporting the conspiracy to monopolize claim seemed largely dependent on the facts supporting plaintiffs' Section 1 conspiracy claim, the court stated. The court had found those allegations sufficient to state a Section 1 claim. A Section 1 claim, however, does not require the specific intent that a Section 2 conspiracy claim requires. The court therefore found no allegations sufficient to allege that intent for purposes of the Section 2 conspiracy claim. Id. The court therefore dismissed all of the Section 2 claims.

The court dismissed the Robinson-Patman claim. Id. at *18. It also dismissed one defendant for lack of personal jurisdiction and another on the basis of the filed-rate doctrine. However, it held that plaintiffs adequately stated their Section 1 price-fixing conspiracy claim and that they had standing to raise it.

UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK GRANTS PARTIAL SUMMARY JUDGMENT IN CASE AGAINST BAR EXAM PREPARATION COURSE PROVIDER

Park v. The Thomson Corp. , 2007 WL 119461 (S.D.N.Y. Jan. 11, 2007). Plaintiff Anthony Park (Park) brought a putative class action against defendants The Thomson Corporation and Thomson Legal & Regulatory, Inc. (collectively, BAR/BRI) for alleged violations of the Sherman Act Sections 1 and 2 for tying and monopoly leveraging. 2007 WL 119461, at * 1. The parties filed cross motions for summary adjudication on Park's tying and monopoly leveraging claims. Id. BAR/BRI also moved for summary adjudication on Park's unjust enrichment claim. Id.

Defendant BAR/BRI offers bar examination preparation courses to students sitting for the bar examination in various states. Id. BAR/BRI offers uniform Multi-State Bar Examination (MBE) review for all fifty states, but its other courses differ by state as they are tailored to fit the requirements of each states' bar examination. Id. Plaintiff Park paid tuition for the BAR/BRI New York course and attended the course prior to sitting for the New York Bar Examination. Id.

Park alleges that BAR/BRI: (i) illegally tied its state law and MBE review courses; (ii) unlawfully leveraged its monopoly of the state law course; and (iii) was unjustly enriched by the challenged conduct. Id. at 2. The court granted summary adjudication on Park's tying claim with respect to the existence of a tying and a tied product (the MBE and the state law courses) and on the relevant market definition. Id. at 11. The court denied summary adjudication of the tying claim in all other respects for, inter alia, failure to prove sufficient market power. Id. at 7-8. The court also denied Park's motion for summary adjudication of the monopoly leveraging claim and denied BAR/BRI's request for summary adjudication of Park's unjust enrichment claim. Id. at 11.

To prove monopoly leveraging, the plaintiff must prove defendant used monopoly power in one market to foreclose competition in another distinct market, thereby causing injury. Id. at 10. In denying summary adjudication of Park's monopoly leveraging claim, the court relied on its ruling regarding market power for the tying claim, holding that proof of monopoly power in leveraging cases must necessarily be greater than the proof required in tying claims. Id. Because Park could not prove market power in the market for state-specific and MBE bar preparation in both integrated and stand-alone courses sufficient for the tying claim, Park's motion for summary adjudication on the leveraging claim also failed for failure to prove market power. Id.

The court reasoned that BAR/BRI's 80-90% market share in the product market could, by itself, permit an inference of market power. Id. at 8. In this case, however, the court also looked to barriers to market entry. The court found that, although BAR/BRI's own documents revealed the difficulty and high costs of entering the market, and various entities had attempted market entry and failed, the "primary barrier to entry is BAR/BRI's reputation for providing quality services." Id. The court held that entry barriers derived as a result of product quality and customer good will are generally not considered dangers to competition. Id. Therefore, the court declined to infer per se market power and denied Park's motion for summary adjudication on the issue. Id.

MINNESOTA DISTRICT COURT DISMISSES CABLE NETWORK'S MONOPOLIZATION CLAIMS AGAINST TWO LARGEST CABLE SYSTEMS OPERATORS

America Channel, LLC v. Time Warner Cable, Inc. , 2007 WL 142173 (D.Minn. Jan. 17, 2007). The America Channel, LLC (TAC) sued Time Warner Cable, Inc., Comcast Corporation and related entities for antitrust violations after they refused to carry TAC's programming on their respective cable systems. 2007 WL 142173 at *1. The defendants were the largest cable system operators in the United States. In additi on to alleged violations of Section 1 of the Sherman Act and Section 7 of the Clayton Act (regarding the defendants' acquisition of Adelphia Communications, Inc.), TAC alleged that each of the defendants monopolized or attempted to monopolize the relevant cable systems markets and cable network markets in violation of Section 2 of the Sherman Act. Id. at *7.

TAC was formed to operate a new cable network called The America Channel, which was intended to provide 24-hour coverage of personal stories of Americans in the 21 st century. TAC had not been launched, as it had been unable to find a cable system willing to carry the network. Id.

The defendants argued that TAC failed to state a Section 2 claim, because TAC had not sufficiently defined the relevant market and TAC had failed to allege any unlawful exclusionary conduct by the defendants. Id. at *8. The court agreed with the defendants on both points. Id. at *12. In its complaint, the court found that TAC had defined the relevant geographic market as primarily local and regional, but had not specified the actual local or regional areas implicated. As regards the relevant product market, the court found that TAC claimed cable systems market as a distinct product market but TAC had also indicated that there were other types of multi-channel video programming suppliers who provide interchangeable products and who compete with the defendants in certain areas. Id. As a result, the court held that TAC's complaint failed to sufficiently allege a relevant product or geographic market. Id. at *9. The court also denied TAC's claim of monopolization or attempted monopolization in the cable network market.

Even assuming that TAC had adequately pled a relevant market and that the defendants had monopoly power or a dangerous probability of achieving market power, the court held that TAC had not sufficiently pled that the defendants had engaged in any unlawful exclusionary conduct. TAC had relied on the essential facilities doctrine to support its Section 2 claims, stating that the defendants "denied TAC and other independent networks access to ‘essential facilities, cable systems, which are under the control of Time Warner and Comcast.'" Id. Following Trinko, the court noted that the essential facilities doctrine was inapplicable in cases where state or federal regulatory agencies have effective power to compel sharing of the essential facility and to regulate its scope and terms. Id. at *11 (citing Verizon Communications, Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398, 411 (2004)). In this case, it was undisputed that the FCC regulated access to the cable systems, and TAC's Section 2 claims based on the essential facilities doctrine were therefore denied. Id. TAC relied on Aspen Skiing to support its essential facility claim. The court distinguished Aspen Skiing on its facts and highlighted the Supreme Court's instruction in Trinko that "Aspen Skiing is at or near the outer boundary of [Section] 2 liability." Id. at *11 (quotingTrinko, 540 U.S. 398, at 399).

The court granted the defendants' motion to dismiss with leave for TAC to amend its complaint. The court concluded by stating that vague and conclusory allegations of antitrust violations combined with the use of "antitrust buzzwords" would not survive a motion to dismiss. Id. at *12.

 

UNITED STATES ANTITRUST ENFORCEMENT AGENCIES

AGENCIES CONTINUE HEARINGS ON SINGLE-FIRM CONDUCT

The Antitrust Division of the United States Department of Justice and the United States Federal Trade Commission in January continued their series of joint public hearings on single-firm conduct. Hearings on January 30 and 31 in Berkeley, California, provided a forum for business executives to provide their views. Summaries of these hearings, prepared by Christina Brown of O'Melveny & Myers LLP (San Francisco) and Amanda Wait of the Federal Trade Commission, are available on the Committee's Unilateral Conduct "Hot Topics" page, located here. More information on the agencies' past hearings and plans for future hearings is available here.

INTERNATIONAL DECISIONS

COURT OF FIRST INSTANCE UPHOLDS PREDATORY PRICING FINE AGAINST WANADOO ( FRANCE TÉLÉCOM)

On January 30, 2007, the Court of First Instance (CFI) upheld the European Commission's decision fining Wanadoo Interactive SA (now part of the France Télécom group) €10.35 million for abusing its dominant position in the high-speed Internet market (see T-340/03). This judgment broadly confirms the European courts' decisions in AKZO Chemie BV v Commission (Case C-62/86 [1991] ECR I-3359) and Tetra Pak International S.A. v Commission (Tetra Pak II) (Case C-333/94 P) and is consistent with the Commission's 2005 discussion paper on exclusionary abuses under Article 82 EC. The CFI confirmed the Commission's discretion in selecting the appropriate method for cost-recovery assessment and found that under EC law (unlike under US law), predatory pricing does not require a showing of actual competitive effects or a realistic chance that the dominant firm would recoup its losses through below-cost pricing. The CFI also confirmed that dominant firms do not have an "absolute right" to meet competitors' prices if that entailed pricing below average total cost (meeting competition defense).

In July 1999, the European Commission launched a sectoral inquiry into the development of high-speed Internet access and, in particular, the provision of local loop access services and use of the residential local loop. Scrutiny of Wanadoo Interactive culminated in an investigation by the Commission into the prices charged by Wanadoo to its residential customers in France for high-speed Internet access. First, the Commission argued that the dynamic nature of the market did not preclude Wanadoo from having a dominant position; it was eight times the size of its largest competitor. Second, the Commission maintained that Wanadoo engaged in predatory pricing in an effort to stifle competition. From 2001 to 2002, during the formative stage of the high-speed Internet market in France, the Commission found that, until August 2001, Wanadoo had charged predatory prices that did not cover its average variable costs (AVC) or, from August 2001 onwards, its average total costs (ATC) for its eXtense and Wandoo ADSL services. Furthermore, the Commission found that various contemporaneous internal documents showed Wanadoo had exclusionary intent. Consequently, on July 16, 2003, the Commission fined Wanadoo €10.35 million for abuse of its dominant position in violation of Article 82 EC (see COMP/38.233).

Wandadoo appealed to the CFI, arguing, inter alia, that it neither enjoyed a dominant position nor engaged in abusive practices. Wanadoo also sought to discredit the methodology used by the Commission to show that its pricing scheme was abusive.

The CFI confirmed the Commission's determination that high-speed Internet access for residential customers was a distinct product market and that Wanadoo was dominant in that market. The CFI added that Wanadoo enjoyed strategic advantages due to its "link-up" with France Télécom.

The CFI's principal findings with respect to the substantive test for predatory pricing were as follows:

• Under AKZO, evidence of actual anticompetitive effects is not required. The CFI noted that showing an anticompetitive object and anticompetitive effect may, in some cases, be one and the same thing. The court distinguished between pricing below AVC and pricing above AVC but below ATC. The court stated that pricing below AVC by a dominant firm is considered abusive in itself, "because the only interest which the undertaking may have in applying such prices is that of eliminating competitors." The court later noted, however, that pricing below AVC only raises a presumption of predatory intent. As regards pricing above AVC but below ATC, the court stated that such practices are abusive "if they are determined as part of a plan for eliminating a competitor." In this instance, the existence of predatory intent must be established on the basis of "sound and consistent evidence." In sum, evidence of actual anticompetitive effects in a predatory pricing case is not required.
• The Commission is not required to show recoupment of losses. The CFI dismissed Wanadoo's contention that it would be irrational for an entity to engage in predatory pricing if it could not reasonably expect to diminish competition in the long term with the aim of recouping its costs. Citing AKZO and Tetra Pak II, the CFI determined that the finding of predatory pricing does not require proof that the dominant firm had a realistic chance of recouping its losses.
• The Commission enjoys significant discretion regarding the methodology employed for assessing cost-recovery. The cost-recovery method employed by the Commission treated the costs of acquiring customers as an investment in an asset and depreciated that investment over its economic lifetime (four years). Wanadoo disagreed with this assessment method, arguing that the more appropriate test to reflect the economic value of each subscriber was a discounted cash flow analysis. Under this test, Wanadoo claimed that it would cover at least its AVC over the period of the alleged abuse. The CFI held that the "application of the method of determining the rates of recovery of costs, unlike the calculations themselves, entails a complex economic assessment on the part of the Commission in which it must be afforded a broad discretion." The court suggested that its review of the Commission's economic assessments would be limited to "manifest error" or "misuse of powers."
• Meeting competition defense is not always available when a dominant company charges below-cost prices. The CFI rejected Wanadoo's argument that the Commission's determination of predatory pricing prevented Wanadoo from meetings its competitors' prices. The court held that Wanadoo, as a dominant entity, does not have an "absolute right" to align its prices to those of its competitors if the purpose of this alignment is to fortify its dominant position. The CFI did not endorse the Commission's position that meeting competition is never allowed where a dominant firm's prices are below AVC/ATC. In below-cost pricing cases, meeting competition may therefore be a valid defense in certain circumstances.

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Jay Modrall
Vice-Chair, Unilateral Conduct Committee
Cleary Gottlieb Steen & Hamilton LLP
Rue de la Loi 57
B-1040 Brussels
+32 (0)2 287 2024
jmodrall@cgsh.com

Adam Nyhan
Constantine | Cannon
450 Lexington Avenue
New York, N.Y. 10017
(212) 350-2772
anyhan@constantinecannon.com

Tanya N. Dunne
Cleary Gottlieb Steen & Hamilton LLP
Rue de la Loi 57
B-1040 Brussels
ph.: +32 (0)2 287 2057
fax: +32 (0)2 231 1661
tdunne@cgsh.com

Alee Scott
Constantine | Cannon P.C.
450 Lexington Avenue
New York, N.Y. 10017
(212) 350-2796
ascott@constantinecannon.com