Unilateral Conduct Committee E-Bulletin
Issue 54
July 3, 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), Tanya Dunne (tdunne@cgsh.com), Adam Nyhan (anyhan@constantinecannon.com), Tracey Topper Gonzalez (tgonzalez@constantinecannon.com), Mitchell Stoltz (mstoltz@constantinecannon.com) and Daniel Streeter (dstreeter@rdblaw.com).

FLORIDA COURT ALLOWS SECTION 2 CLAIMS TO PROCEED IN MUSICAL EQUIPMENT CASE

Ace Pro Sound and Recording, LLC v. Albertson , 2007 WL 988867 (S.D. Fla. April 1, 2007). Plaintiff in this case is a retailer of musical instruments and sound and recording equipment. 2007 WL 988867, at *3. Defendants are Guitar Center, Inc., a competing retailer of sound and recording equipment, as well as Guitar Center’s former CEO, Martin Albertson, and seven suppliers of musical instruments and/or sound and recording equipment (the Supplier Defendants). Id. at *1.

Ace Pro alleged that Guitar Center was the world’s largest musical instrument retailer and the country’s largest sound and recording equipment retailer. Id. at *3. Guitar Center allegedly had market power in the nationwide markets for the brands and types of musical instruments and sound and recording equipment that it carried. Id. In 2001 and 2002, when Ace Pro was preparing to open its business in North Miami, Guitar Center allegedly used its market power to coerce the Supplier Defendants into refusing to sell instruments and equipment to Ace Pro. Id. at *4. Its intent in doing so, Ace Pro claimed, was to harm the plaintiff’s business. Guitar Center also allegedly used its market power to secure preferential discounts, promotional allowances and other benefits. Id. at *5.

Ace Pro alleged that the defendants’ conduct amounted to monopolization, attempted monopolization and conspiracy to monopolize the nationwide market for instruments and sound and recording equipment in violation of Section 2 of the Sherman Act. Id. at *2-3. It also allegedly violated Section 1 of the Sherman Act, the Racketeer Influenced and Corrupt Organizations Act (RICO) and Florida laws, for a total of twenty-six causes of action. Id. With respect to some claims, including all of the Section 2 claims, the plaintiff maintained the lawsuit as a class action. Id. at *1. The defendants moved to dismiss for failure to state a claim. Id.

The defendants argued that Ace Pro’s market definition was insufficient as a matter of law to state a Section 2 claim. Id. at *8. They likened Ace Pro’s alleged market to the market found incognizable in E. & G. Gabriel v. Gabriel Bros., Inc., 1994 WL 369147 (SDNY 1994), which described “name-branded deep discounted merchandise.” Id. The court distinguished that case on the ground that the market alleged in E. & G. Gabriel had less particularity than that alleged by Ace Pro, and on that basis denied the motion to dismiss the Section 2 claims. Id. at *9. The court also permitted the Section 1 claims and most other claims to proceed.

LOUISIANA COURT DISMISSES CONSPIRACY CLAIMS IN BAIL BOND MARKET BASED ON NOERR-PENNINGTON IMMUNITY

Bartholomew v. Bail Bonds Unlimited, Inc. , 2007 WL 1063338 (E.D. La. April 5, 2007). The plaintiff, Denise Bartholomew, and the defendant, Bail Bonds Unlimited, Inc (BBU) are competitors in the bail bond business. Bartholomew accused BBU and its owners of conspiring with public officials (not named as defendants) to give preferential treatment to the defendants’ bail bond business, in violation of Sections 1 and 2 of the Sherman Act. The Eastern District of Louisiana granted BBU’s motion to dismiss, finding that Noerr-Pennington immunity applied.

Bartholomew contended that the defendant used bribery and other unspecified illegal means to secure favorable treatment by law enforcement officials. 2007 WL 1063338, at *1. The officials allegedly gave the defendant the exclusive opportunity to take custody of certain arrestees each day. This conduct allegedly constituted a conspiracy to monopolize the market for commercial bail bonds in Jefferson Parish, Louisiana, in violation of Sections 1 and 2 of the Sherman Act. The same conduct allegedly violated the Racketeer Influenced and Corrupt Organizations Act (RICO), civil rights laws and Louisiana laws. BBU sought dismissal of the plaintiff’s Sherman Act claims based on the Noerr-Pennington doctrine. In response, the plaintiff claimed that the “sham exception” to Noerr-Pennington applied. Id.

The court noted that an antitrust exemption exists for “the conduct of private individuals in seeking anticompetitive action from the government,” id at *2, including “a concerted effort to influence public officials regardless of intent or purposes.” Id. (citing United Mine Workers of Am. v. Pennington, 381 U.S. 657 (1965)). Even a conspiracy involving “some element of unlawfulness,” the court held, can qualify for Noerr-Pennington immunity. Id. at *3 (citing City of Columbia v. Omni Outdoor Adver., Inc., 499 U.S. 365, 383 (1991)).

The court held that Noerr-Pennington’s “sham exception” applies only when a defendant seeks “to use the governmental process – as opposed to the outcome of that process – as an anticompetitive weapon.” Id. (citing Livingston Downs Racing Ass’n v. Jefferson Downs Corp., 192 F. Supp. 2d 519, 530 (M.D. La. 2001)). The court concluded that BBU’s actions – even the alleged bribery – were an attempt to use the outcome of their lobbying effort, rather than the effort itself, for anticompetitive purposes. On that basis, the court dismissed Bartholomew’s Sherman Act claims.

IN NEWSPAPER CONSOLIDATION CASE, CALIFORNIA COURT DENIES DEFENDANTS’ MOTION FOR SUMMARY JUDGMENT BASED ON STANDING

Reilly v. Medianews Group, Inc. , et al., 2007 WL 1068202 (N.D. Cal. April 10, 2007). The plaintiff, Clinton Reilly, is a subscriber to the San Francisco Chronicle and frequent purchaser of other Bay Area newspapers. The defendants, Medianews Group, Inc., The Hearst Corporation, Stephens Group, Inc., Gannett Co., Inc., and California Newspapers Partnership (CNP), own and/or operate daily newspapers in California. 2007 WL 1068202 at *1.

Clinton Reilly sued to block and undo a series of mergers among the defendants that he claimed were consolidating ownership of the Bay Area’s newspapers. Id. The mergers allegedly gave the defendants control of every major newspaper in a seven-county area that Reilly termed the Greater Bay Area. Compl. at 8, 9. These transactions, Reilly asserted, were a conspiracy to monopolize the markets for publication and sale of local daily papers in various geographic markets: San Francisco, the Greater San Francisco Bay Area (defined as including seven counties near the Bay), and certain other regions. Id. at 4. Reilly also alleged that the mergers were unreasonable and per se unlawful restraints of trade in violation of Section 1 of the Sherman Act. Id. at 10. Finally, he alleged that the mergers would substantially lessen competition and monopolize trade and commerce in violation of Section 7 of the Clayton Act. Id

The defendants moved for summary judgment on the ground that Reilly lacked antitrust standing. 2007 WL 1068202 at *1. The court, denying the motion, held that antitrust standing requires proof of (1) unlawful conduct (2) causing an injury to the plaintiff (3) that flows from that which makes the conduct unlawful and (4) that is of the type the antitrust laws were intended to prevent. Furthermore, (5) the injured party must be a participant in the same market as the defendants. Id. at *4 (quoting Glen Holly Entertainment, Inc. v. Tektronix Inc., 352 F. 3d 367 (9th Cir. 2003); Lucas Automotive Engineering, Inc. v. Bridgestone/Firestone, Inc., 140 F.3d 1228 (9th Cir. 1998)) .

Here, the court held that Reilly presented evidence that he actively participated in the alleged markets as a subscriber. Id. at *6. The court also followed the standing analysis applied to the same plaintiff in a related case, Reilly v. The Hearst Corp. , 107 F. Supp. 2d 1192 (N.D. Cal. 2000) (Reilly I). In Reilly I, Reilly had challenged another merger between two newspaper publishers on Sherman Act Section 1, Unilateral Conduct and Clayton Act Section 7 grounds. Citing congressional intent with respect to newspaper markets as reflected in the Newspaper Preservation Act (NPA), 15 U.S.C. §§ 1801-1804, Reilly I had held that Reilly had antitrust standing. Under the NPA, Reilly I held, the elimination of a newspaper represents a cognizable injury to interests protected by the antitrust laws, which supplies an additional ground for standing independent of the antitrust laws.

Based on Reilly I’s holdings and its analysis of the allegations in the present case, the court held that Reilly had antitrust standing. Id. at *6. It therefore denied the defendants’ motion for summary judgment.

Editors’ Note : On April 25, 2007, Judge Susan Y. Illston issued an injunction from the bench prohibiting enforcement of the defendants’ preexisting agreement not to compete with each other. Reilly v. Medianews Group Inc., et al., 2007 WL 1557215 (Verdict and Settlement Summary) (N.D. Cal. Apr. 25, 2007). After the judge’s ruling, the parties settled on the following terms: (1) the plaintiff will be able to recommend a citizen to be on the board of every other CNP newspaper (with the board’s approval); (2) the plaintiff will receive paid space for personal copy in CNP newspapers; (3) the plaintiff will receive agendas and minutes of every CNP meeting to ensure that there are no clandestine agreements with Hearst; and (4) the plaintiff will have a weekly column in all CNP newspapers. The defendants also agreed to pay the plaintiff’s costs and attorney fees, an amount that was kept confidential.

NEW YORK COURT DISMISSES SECTION 2 CLAIMS FILED BY STOCK TRANSFER AGENT AGAINST SECURITIES CLEARING AGENCY

Olde Monmouth Stock Transfer Co., Inc. v. Depository Trust & Clearing Corporation , 2007 WL 1180441 (S.D. N.Y. April 23, 2007 ). Plaintiff Olde Monmouth is a stock transfer agent providing services to companies that issue publicly-traded shares of stock. For example, Olde Monmouth keeps track of its clients’ stock ownership rolls and issues physical stock certificates at the request of stock owners. 2007 WL 1180441 at *1. Defendant Depository Trust & Clearing Corporation (DT”) is a securities clearing agency. DTC acts as a depository for trillions of dollars worth of physical securities certificates and operates a centralized system for book-entry transfers of securities among its participants, the beneficial owners of the securities deposited at DTC. Id. Olde Monmouth acts as an intermediary between its clients and DTC. DTC operates a service, the FAST Program, that allows transfer agents to use streamlined procedures for their dealings with DTC. Id. at *2. This litigation stems from DTC’s refusal to approve Olde Monmouth for the FAST Program. Id.

After repeated efforts to join the FAST Program, Olde Monmouth brought suit against DYC, asserting claims of monopolization and attempted monopolization in violation of Section 2 of the Sherman Act, among other causes of action. The court granted DTC’s motion to dismiss the monopolization and attempted monopolization claims. The court found that because DTC does not compete in the transfer agent market with Olde Monmouth, Olde Monmouth cannot state a claim for monopolization or attempted monopolization. Id. at *4. The court also rejected Olde Monmouth’s argument that DTC exercised “influence” over the transfer agent market, finding that Olde Monmouth cited no legal authority for the argument that market power under Section 2 encompasses “influence” by a non-competitor over the relevant market. Id. at *5.

The court also rejected Olde Monmouth’s alternative theories based on monopoly leveraging, the essential facilities doctrine and the Supreme Court’s decision in Aspen Skiing. The court found that a monopoly leveraging argument requires allegations that a defendant used its power in one market to monopolize another. Id. at *6. The court rejected this theory, because Olde Monmouth did not allege that DTC intended to enter the transfer agent market. Id. Similarly, in regard to the essential facilities argument, the court found that DTC’s actions could not enhance or enforce DTC’s alleged monopoly over the securities deposit market, because Olde Monmouth does not compete in that market. Id. Finally, the court rejected Olde Monmouth’s arguments under Aspen Skiing Co. v. Aspen Highlands Skiing Corp, 472 U.S. 585 (1985). In Aspen Skiing, the Supreme Court found that a ski resort’s decision to back out of a profitable arrangement with another ski resort could be an actionable “refusal to deal.” Id. at *7. The court rejected the application of Aspen Skiing to this situation, where Olde Monmouth and DTC are not competitors. Id.

PENNSYLVANIA COURT REJECTS MOTION TO DISMISS SECTION 2 CLAIMS AGAINST LARGE MUSHROOM GROWING COOPERATIVE.

In re Mushroom Direct Purchaser Antitrust Litigation , 2007 WL 1221143 (E. D. Penn. April 25, 2007). Direct purchasers of mushrooms filed a class action against Eastern Mushroom Marketing Cooperative, Inc. (EMMC), as well as several of its members, officers and non-members of EMMC. 2007 WL 1221143, at * 1. According to the plaintiffs, EMMC is the largest mushroom cooperative in the United States, controlling over 60% of the market for Agaricus mushrooms. Id. The plaintiffs allege that EMMC and the other defendants engaged in a conspiracy artificially to inflate the prices for mushrooms in violation of Sections 1 and 2 of the Sherman Act. Specifically, the plaintiffs allege that EMMC and the other defendants set prices for mushrooms sold in the entire continental United States, then launched a “supply control” campaign by using membership funds to purchase and dismantle non-EMMC mushroom growing operations. Id.

The defendants moved to dismiss the antitrust claims. As a threshold issue, the court considered whether the antitrust claims were barred by the Capper-Volstead Act, which provides a limited antitrust exemption to cooperatives. Id. at *4. The court noted that the Capper-Volstead exemption only applies if all members of the cooperative are “farmer-producers” of an agricultural product. If the cooperative acts in concert with persons or entities not engaged in agricultural production, the Capper-Volstead exemption does not apply. Id. at *5. Applying this rule, the court found that the exemption cannot be a basis for a motion to dismiss, because the plaintiffs allege that EMMC included members who were not engaged in agricultural production and that EMMC entered into agreements with persons or entities not engaged in agricultural production.

The court next considered whether plaintiffs had properly alleged an antitrust injury and a relevant product market. In regard to antitrust injury, the court found that the plaintiffs’ allegations that defendants purchased and dismantled allegedly productive mushroom growing operations in order to maintain inflated prices were sufficient to at least infer antitrust injury. Id. at *7. As for the relevant product market, the court stated that “the alleged product market must include all commodities that are reasonably interchangeable by consumers for the same purpose.” Id. at *9. The court found that the plaintiffs had properly alleged a relevant market of all Agaricus mushrooms grown in the United States. The court rejected the argument that this could not be a relevant market because an increase in price would shift demand to other types of mushrooms. The court reasoned that, because Agaricus mushrooms allegedly comprise ninety-nine percent of mushrooms sold in the United States, there is a lack of interchangeability of alternatives for mushroom consumers. Id.

The court then considered the plaintiffs’ specific antitrust claims. In regard to the Section 2 claims, the court found that the plaintiffs stated a valid cause of action for monopolization against EMMC by alleging that EMMC controlled between 60% and 90% of the relevant market and that EMMC raised and maintained artificially high prices for mushrooms. Id. at *12. The court dismissed the monopolization claim as to EMMC’s members, however, because the plaintiffs made no allegations regarding concerted monopolization by members of the cooperative. Id.

The court also denied EMMC’s motion to dismiss plaintiffs’ attempted monopolization claim. The court rejected EMMC’s argument that, as an alleged monopolist, it could not be liable for attempted monopolization. Rather, the court stated that a monopolist can be liable for attempted monopolization if it uses its power to destroy threatened competition, as alleged by the plaintiffs. Id. The court also held that the plaintiffs properly alleged that EMMC had a dangerous probability of achieving monopoly power by stating that EMMC controlled a majority of the mushroom market and that EMMC used predatory behavior to limit competition. Id. at *13.  

UK COURT OF APPEAL RULING ON APPROPRIATE COST STANDARD FOR EXCESSIVE PRICING ABUSES

British Horse Racing Board.

On February 2, the Court of Appeal overturned a ruling by the High Court that the British Horse Racing Board (BHB) had infringed the Chapter II prohibition of the Competition Act 1998 and Article 82 EC through the abuse of its dominant position, in particular through engaging in excessive pricing practices. In doing so, the Court of Appeal provided important guidance on the correct standard to apply in the assessment of excessive pricing abuses.

BHB is the administrator and governing body of British horseracing. Among its numerous responsibilities and functions, BHB compiles pre-race data in relation to every horseracing event, including the name and time of each race, course, race distance and information about horses and jockeys. BHB licenses such data to various third parties, including Attheraces (ATR). ATR supplies websites, television channels, and other audiovisual media relating to British horseracing to bookmakers and punters. ATR alleged that BHB had abused its dominant position in respect of the supply of pre-race data, which was characterized as an essential input for the provision by ATR of its varied internet and audiovisual services. In particularly, ATR contended that BHB had threatened to terminate the supply of pre-race data and had attempted to charge excessive and discriminatory prices.

Following a sustained commercial dispute, ATR commenced proceedings in the High Court in 2005. On December 21, 2005, the Chancery Division of the High Court ruled that BHB had abused its dominant position in respect of the supply of pre-race data (Attheraces Limited v. The British Horseracing Board Limited [2005] EWHC 3015 (Ch)). The court confirmed that, for the purpose of providing ATR’s services, the pre-race data constituted an “essential facility”, and that BHB’s refusal to supply the data was without objective justification and thus was both unreasonable and illegal. Of foremost significance, however, the Chancery Division held that BHB’s proposed prices were excessive and unfair.

In this regard, the Chancery Division observed that BHB had proposed to charge a price calculated as a percentage of the net profit achieved by ATR through the sale of certain of ATR’s services. This charge was deemed to be excessive, greatly outstripping the “economic value” of BHB’s pre-race data. Critically, the court ruled that the economic value of BHB’s pre-race data was measured properly by reference to the cost to BHB of collecting, collating, and distributing that data, with BHB, in addition, permitted to make a reasonable return on those costs (the “cost+ standard”). The Chancery Division ruled that BHB’s proposed charges were “so far in excess of any justifiable allocation of the cost of production and a reasonable return (in effect, the competitive price) that they are … plainly excessive” (¶ 305).

The High Court judgment was challenged by BHB, and the Court of Appeal issued its ruling in respect of that appeal on February 2 ([2007] EWCA Civ 38). BHB did not contest the market definition analysis adopted by the High Court, nor the finding that it was dominant. As was agreed by all parties, and the Court of Appeal, the principal matter for consideration was High Court’s finding of excessive pricing. BHB’s primary contention was that the application of the cost+ standard to determine the economic value, or proper competitive price, of BHB’s pre-race data was unsound. BHB submitted, instead, that the economic value of a product or service was a different concept from its cost. BHB proposed that economic value was instead a function of the revenue-earning potential of the relevant product or service to the purchaser.

The Court of Appeal endorsed BHB’s proposition, referring to the European Court of Justice’s (ECJ) judgment in United Brands v Commission ([1978] ECR 207). In United Brands, the ECJ held that a price is excessive where “it has no reasonable relation to the economic value of the product supplied” (¶ 250). Having regard to this formulation, the Court of Appeal held that the critical issue in an excessive pricing case is to determine the economic value of a product. In this regard, the Court of Appeal rejected the notion that either Article 82 EC or settled case law indicated that “the index of abuse is the extent of departure from a cost+ criterion” (¶ 207). To the contrary, the Court of Appeal maintained that the cost+ measure had two primary functions. First, it provides a baseline, below which no price can ordinarily be regarded as excessive. Second, it could be used as a default measure in circumstances where market abuse meant there was no practicable means to otherwise determine economic value.

The Court of Appeal therefore found that the High Court had viewed the economic value in the context of excessive pricing abuses too narrowly. Having regard to contemporary economic theory, the Court of Appeal ruled that to determine economic value it was valid to have regard to the value assigned to a product or service by its purchaser and the wider market, rather than focusing solely on a supplier’s costs of production. In the current instance, it was therefore relevant to consider the benefit ATR derived through the purchase of pre-race data. The court determined that, in disseminating pre-race data to end-users, ATR achieved a very substantial profit, suggesting that the correct value of the pre-race data was high, and higher than the value that would otherwise be assigned through the exclusive use of the cost+ standard.

Moreover, the Court of Appeal observed that, as a general matter, Article 82 EC is not concerned with price regulation. Article 82 EC, and by analogue the Chapter II prohibition, is intended to prevent abuses of dominant positions, with the object of protecting and promoting the process of competition, rather than individual competitors. On this basis, the threshold above which a price becomes abusive cannot be ascertained by reference in the abstract to the cost+ standard. Instead, a charge is abusive when set at an excessive level that compromises the ability of purchasers to compete on the market. In this circumstance, it is demonstrably the case that the excessive charge adversely affects competition. The Court of Appeal held that there was no evidence to show that ATR’s competitiveness on the market would be materially compromised by BHB’s proposed charge for pre-race data. On these bases, the Court of Appeal rejected the finding that BHB’s prices were excessive, and that it had engaged in abusive conduct.

The Court of Appeal’s judgment confirms that there is no presumption of an abuse of a dominant position when pricing exceeds the cost+ standard. The Court of Appeal favors an economics-based mode of analysis, of the type advocated by the European Commission in its current review of the application of Article 82 EC to exclusionary abuses. In particular, the Court of Appeal establishes that an effect on competition cannot be presumed to arise from an excessive price. Instead, reference must be made to the effect of the excessive price on competition.

EUROPEAN COMMISSION MARKET TESTS DISTRIGAS COMMITMENTS IN BELGIUM

Distrigas.

In April, the European Commission invited public comment on commitments proposed by Distrigas (see Commission notice and press release) in response to the Commission’s preliminary finding that Distrigas had abused its dominant position under Article 82 EC (see MEMO/06/197). The Commission’s preliminary view outlined in the SO was that a significant proportion of the Belgian gas market was closed to competition because Distrigas, the dominant gas supplier in Belgium, concluded long-term gas supply contracts with many of its industrial customers. In addition, a large proportion of the remaining gas sales in Belgium constitute intra-group sales within the Gaz de France/Suez group (e.g., Distrigas sales to Electrabel) and therefore are inaccessible to potential new market entrants.

Under the proposed commitments, Distrigas would guarantee, inter alia, that an average of 70% of the gas it supplies to industrial users would be made available to alternative suppliers, so that they may make competing offers to the relevant customers each year. Distrigas also proposed not to enter into contracts with industrial users and electricity producers in Belgium for more than five years.

EUROPEAN COMMISSION INITIATES ANTITRUST PROCEEDINGS FOR PATENT MISUSE

Boehringer Sohn and Boehringer AG.

On March 29, the European Commission announced that it had opened antitrust proceedings against Boehringer Sohn and Boehringer AG for an alleged infringement of Article 82 EC (see announcement). The Commission will investigate the extent to which these companies misused patents to exclude potential competitors in the market for chronic obstructive pulmonary disease drugs. While the initiation of proceedings signals that the Commission intends to treat the case as a high priority, it does not mean that the Commission has conclusive proof of an infringement.

BELGIAN COMPETITION COUNCIL ORDERS INTERIM MEASURES REQUIRING NETWORK PROVIDER TO DISCLOSE COMPATABILITY INFORMATION

Portima.

On February 14, the President of the Belgian Competition Council issued an interim order against Portima compelling it timely to disclose information required to ensure the compatibility of competing operating systems with its secure network system (Case MEDE-V/M-03/0060). Portima was established by a number of insurance companies to design a telecommunications network, called AS/2, for the exchange of data among insurance companies and brokers in Belgium. To access the AS/2 network, subscribers need a compatible operating system. Compatibility is ensured by software sourced from Portima or from competing providers, including Computer Resource Management (CRM).

CRM complained that Portima had failed to timely disclose various updates and modifications made to the AS/2 network, thereby impairing the reliability of CRM’s software product. CRM further contended that Portima was harming competition to the benefit of its own software offering. The Council sided with CRM.

In its competitive analysis, the Council found that, as there was no credible alternative to Portima’s AS/2 network in Belgium, Portima held a monopoly. The Council also found that Portima, with a 75-80% market share, held a “very strong market position” on a market for “operating systems specifically designed for insurance companies and brokers” established in Belgium. As a result, the Council found that by abusing its dominant position on the market for “telecommunication platforms aimed for data exchange between insurance companies and brokers”, Portima was harming competition on the market for “operating systems.” More specifically, an undertaking in the position of Portima was required to timely disclose to competing operating system providers the modifications to its telecommunications platform, so that competitors can ensure the compatibility of their products.

The Council considered the risk of serious and irreparable harm to be sufficiently established in light of the immediate compatibility issues arising from Portima’s behavior and the risk of Portima monopolizing the market for operating systems to justify interim measures. The Council ordered Portima, against a threat of periodic penalties, to disclose to competing operating system providers when modifications to its network system will occur and to provide the specifications required to ensure the compatibility of competing software products. The interim order requires disclosure reasonably in advance of the implementation of the modifications to the network so as to enable competing providers to make the necessary adjustments. The Council’s decision also discusses at some length certain procedural issues relating to parties’ rights to have access to file in interim proceedings.

FRENCH COMPETITION COUNCIL FINES GSK €10 MILLION FOR PREDATORY PRICING

GlaxoSmithKline France .

On March 14, the French Competition Council fined GlaxoSmithKline France €10 million for using predatory (below-cost) prices and tied rebates in the sale of certain pharmaceuticals to hospitals in France in 1999 and 2000. This is the Council’s first decision on the merits condemning predatory pricing as an abuse of a dominant position. Glaxo has announced that it would appeal the Council’s decision, which sets out interesting principles and methodology to assess predatory pricing.

The case concerned two products sold by Glaxo to hospitals: Zinnat ®, an antibiotic, and Zovirax ®, an antiviral. Patent protection for Zinnat ® and Zovirax ® expired in 1999, and Glaxo faced the threat of competition from generic manufacturers, including Flavelab, who started selling a Zinnat ® generic to hospitals in 1998. Glaxo unsuccessfully pursued legal action for infringement against Flavelab, and implemented selective price decreases when Zinnat ® competed with generics in hospital bids. In 2000, Glaxo was awarded 29 hospital bids, Flavelab only 3 and Panpharma, another generic manufacturer, only 1. Flavelab filed for bankruptcy protection in 2001 and was sold to Panpharma in 2002.

The Council defined predation as “the practice by which a company in a dominant position sets its prices at a level such that it incurs losses or foregoes profits in the short term, with the goal to evict or discipline one or several competitors, or make the entry on the market of future competitors more difficult, so as to later increase its prices to recoup its losses.” The Council found that Glaxo’s prices for Zinnat ® had been selectively set below cost in 12 hospital bids in 1999 and in 29 bids in 2000, which were the same bids that had been targeted by the generic competitors. According to the Council, the investigation also showed that Glaxo’s average price for injectable Zinnat ® had fallen dramatically from 1997 to 2000, before increasing again in 2001, after Flavelab had filed for bankruptcy, and resulting in a 2005 price slightly above its initial 1999 level. In addition, Glaxo offered tied rebates to hospitals who purchased Zinnat ® and Zovirax. ® The Council found that Glaxo pursued a predatory strategy which succeeded in eliminating Flavelab from the hospital market and deterring other generic manufacturers from entering the market for pharmaceuticals competing with Zovirax ®, a market ten times larger than the market for Zinnat ®-related pharmaceuticals. (Bundling as such was found to be part of the predatory pricing strategy rather than constituting a separate infringement.)

The Council considered that the transfer price between two companies within the Glaxo group constituted an appropriate cost benchmark to assess the predatory character of the relevant Zinnat ® prices. While the Council seemed to rely on this measure in the absence of alternative cost data, it is doubtful whether a transfer price generally is an adequate substitute for a company’s actual average variable cost.

In addition to deciding the specific case at hand, the Council spelled out general principles to assess predatory pricing practices.

First, in accordance with generally accepted economic theory, the Council emphasized the importance of the possibility of recoupment and the economic effect of the alleged predation. The expectation of exclusionary effects is central to the characterization of a predatory strategy and helps distinguish between predatory prices and low prices that may not be anticompetitive: “for example when the financial sacrifices are necessary to penetrate a new market, initiate a reduction in production costs through an education effect (learning-by-doing), or broaden a client installed base to create a network effect.” In addition, the possibility of recoupment of losses justifies regulatory intervention, as consumers would suffer from higher prices or reduced choices following the elimination or weakening of competition by the dominant company. On these issues, the Council is more aligned with economic analysis than recent EU case law such as Wanadoo, which rejected the need the show recoupment or economic effect in a predatory pricing case.

Second, because a predation strategy entails losses, the Council considered that for predatory pricing allegations to be credible, the dominant company concerned must have an incentive to apply such a policy (such as the protection of an entrenched position threatened by competition) and the financial capacity to absorb initial losses. There must be an anticompetitive rationale for the profit sacrifice, such as, in the case of competition between branded and generic pharmaceuticals, the intention to delay or limit generic entry and retain, if only temporarily, monopoly profits even after patent expiry. In this respect, the Council identified three types of predation strategies: financial predation, predation to give a “signal” to competitors, and predation to deter market entry by creating an aggressive reputation. According to the Council, Glaxo’s prices for Zinnat ® were intended to create a “reputation effect” in order to deter generic entry on several markets.

Using these principles, the Council laid down a three-step approach to investigating the lawfulness of very low prices applied by a dominant firm: (i) an investigation of the costs (variable/fixed) and the prices (in particular, their selective nature); (ii) the behavior of the company (the rationale for the profit sacrifice); and (iii) the justifications put forward by the company (such as alignment on competitors’ prices, impossibility of recoupment, and the “as efficient competitor” defense).

GERMAN FEDERAL CARTEL OFFICE FINES DRUG STORE CHAIN €300,000 FOR BELOW COST PRICING

Rossmann .

On February 8, the Federal Cartel Office (FCO) imposed a €300,000 fine on the drugstore chain Rossmann for violating the Section 20(4) GWB prohibition against the sale of products at below-cost prices. In 250 cases, Rossmann had sold 55 drugstore products from various manufacturers at below-cost prices.

The most contentious issues dealt with by the FCO were the definition of cost prices and the determination of the extent to which contributions to advertising costs may be included in the calculation of such prices. In accordance with its general pricing policy, Rossmann had set-off the entire amount of its rebates (contributions to advertising costs) solely to cut the sale prices of certain individual products by up to 50-60%. In line with its guidelines, the FCO found that the cost price of each product should be calculated on the basis of both the net price charged and all relevant conditions of purchase, which include contributions to advertising costs and other lump-sum payments. However, such contributions may only be included in the calculation of the cost price of the entire range of products bought from the same manufacturer. Hence, a company may not calculate the cost price of a single individual product on the basis of the entire amount of contributions received by the manufacturer.

The FCO’s approach on the calculation of cost prices is in line with its earlier decisions, namely Wal-Mart and Schlecker, despite the negative industry reaction in this regard. The practical impact of the FCO’s decision is that companies such as Rossmann wishing to continue their current aggressive pricing policies will now need to enter into specific promotional agreements with manufacturers that will allow them to offset advertising contributions against discounts on end-consumer prices in respect of the relevant products.

Rossmann has appealed the decision to the Düsseldorf Court of Appeals ( Oberlandesgericht Düsseldorf).

FIRST DECISIONS BY ITALIAN COMPETITION AUTHORITY ADOPTING COMMITMENTS IN ANTITRUST CASES, INCLUDING ABUSE OF A DOMINANT POSITION

Since the recent reform of Law No. 287/1990 permitting the Italian Competition Authority to adopt commitments in EC and national antitrust cases binding, the Authority has issued six decisions regarding commitments proposed by companies involved in antitrust proceedings, four of which relate to abuse of a dominant position.

In Anti-competitive Conduct on the Power Exchange, the Authority applied its new power for the first time, accepting and rendering binding the commitments offered by Enel in order to allay the Authority’s competition concerns regarding Enel’s strategies for supplying the wholesale electricity market. The commitments require Enel, through its subsidiary Enel Produzione, to sell 1,000 MW and 700 MW of virtual capacity in 2007 and 2008, respectively, on conditions in line with those prevailing on the electricity exchange. The 2008 selling quota is subject to an assessment by the Authority of Enel’s ability to exercise unilateral power in determining market prices (its so-called pivotal role), based on the structural nature of supply and demand. The Authority considered the commitments sufficient to significantly reduce Enel’s pivotal role in the markets concerned.

In Merck-Active Ingredients, the Authority accepted and made binding the commitment by Merck & Co. Inc. and Merck Sharp & Dohme (Italia) to grant free licenses of the active ingredient Finasteride and related generic drugs to third parties to allow them to manufacture and sell the products in Italy (as well as in the Member States where the active ingredient is not covered by any patent) two years before the expiration of the Complementary Protection Certificate. The Authority opened proceedings in this case to assess the allegedly abusive nature of the Merck group’s refusals to grant two licenses that were deemed indispensable for the production of active ingredients in quantities sufficient to allow wide distribution of generic drugs.

In Eni-Regasification business, the Authority accepted and made binding the commitments by Eni, thereby closing the Authority’s investigation into the potential abuse of a dominant position regarding the Panigaglia regasification plant. In November 2005, the Authority opened a proceeding against Eni and its subsidiaries Gnl Italia and Snam Rete Gas over the alleged abuse of a dominant position in the management and use of the LNG regasification plant at the Panigaglia terminal by impeding access to the terminal by downstream competitors.

Eni initially offered a commitment to sell 1.5 billion m 3 of natural gas for one year to interested third parties, with a possible increase up to 2 billion m 3 depending on the average price if the sale was conducted by auction. Following the results of a market test and based on the opinion of the Energy Authority, Eni modified its original commitments, doubling the quantity of gas to be sold (4 billion m 3), and extending the time period to two years at reduced sales prices. In the Authority’s view, Eni’s revised commitments satisfied any anticompetitive concerns as the commitments would allow Eni’s competitors to ensure their gas supplies during the interim period before the planned upgrades to pipelines for imported natural gas from TAG GmbH and Trans Tunisian Pipeline Company Ltd come on line in October 2008.

In Audipress, the Authority accepted and made binding commitments offered by Audipress to the effect that Audipress’ six-monthly surveys of newspaper circulation in Italy will include free daily newspapers as well as paid newspapers. In the Authority’s view, these commitments obviated the exclusion of the free press from the circulation certification system run by that association in Italy, which had led to discrimination in the sale of advertising to the benefit of paid newspapers. Audipress also undertook to ensure that surveys of the free press within its system will be comparable with those made for paid newspapers, in particular in terms of methodology and economic conditions.

SWISS FEDERAL COMPETITION COMMISSION LAUNCHES INQUIRY INTO PAYMENT CARD SERVICE PROVIDER’S REFUSAL TO PROVIDE INTERFACE INFORMATION

Telekurs Multipay .

Telekurs Multipay provides services permitting the payment of goods and services by credit and debit cards. A feature of such services is dynamic currency conversion (DCC). DDC permits the immediate conversion of payments into another currency (usually a currency that is more familiar or convenient to a given customer, such as the currency used in the customer’s credit card statement). Unlike with ordinary credit card payments, DCC allows the customer to know the proposed exchange rate and the converted final amount at the time the purchase is made rather than waiting until the credit card statement has been issued.

On January 17, the Federal Competition Commission (ComCo) launched an inquiry into Telekurs Multipay’s refusal to provide interface information to support the DCC function on payment terminals furnished to merchants by competitors of its sister-company, Telekurs Card Solutions.

The ComCo had proposed to adopt provisional measures directing Telekurs Multipay to provide the necessary interface information to competitors of Telekurs Card Solutions to support the DCC function. Telekurs took the initiative, however, to provide such access while the ComCo was undergoing its inquiry. As a result, the ComCo decided not to adopt provisional measures, but is still investigating these practices.

SWISS FEDERAL COMPETITION COMMISSION FINES SWISSCOM MOBILE OVER €200 MILLION FOR ABUSE OF A DOMINANT POSITION IN THE CALL TERMINATION CHARGES MARKET

Swisscom Mobile .

On February 5, the ComCo fined Swisscom Mobile CHF 333,365,685 (€202.5 million) for abuse of a dominant position in the call termination charges market. This is the largest fine ever imposed by the ComCo.

The ComCo defined the relevant market for call termination charges as being limited to the operator making the charge. So, by definition, Swisscom has a dominant position in respect to termination charges to all its users. Swisscom had fixed these charges, billed to other telephone operators (who pass them on, in one form or another, to their own subscribers), at CHF 0.335 (€0.215) per minute. The ComCo found that Swisscom had abused its dominant position from April 1, 2004 to May 31, 2005. On June 1, 2005, Swisscom reduced its call termination charges to CHF 0.20 (€0.12) per minute.

The ComCo may fine undertakings up to 10% of their group turnover in Switzerland for the past three years. In this case, Swisscom was fined around 3-4% of the Swisscom group’s most recent yearly turnover. This fine, therefore, is only one-tenth of what the ComCo could have imposed. The fine ultimately imposed by the ComCo was also less than the proposed fine of CHF 489 million (€297 million) in the ComCo’s draft decision.

This decision is notable in that, of the three mobile phone operators in Switzerland, only Swisscom was found to have abused its dominant position, and fined accordingly. In the EU, by contrast, it has always been the case that either all mobile telecom operators active on a market were fined for abuse in relation to termination charges, or none were fined.

The ComCo found that all three mobile telecom operators had abused their respective dominant positions in relation to termination charges. According to Swisscom, it applied the lowest call termination charges of the three operators. But Swisscom is by far the largest operator in terms of both subscribers (4.3 million) and revenue (CHF 4.1 billion (€42.5 billion) in 2005). Termination charges are justified in part by reference to costs, and Swisscom enjoys significant economies of scale advantages over its competitors. Moreover, Swisscom’s network advantages may have been another reason why the ComCo only imposed fines on Swiscom and not on the other two operators. On average, a lower proportion of calls made by Swisscom subscribers will be subject to termination charges (since most Swisscom customers’ calls will start and finish within Swisscom). To be competitive with Swisscom, other operators may have been justified in charging high termination charges.

Swisscom Mobile will appeal this decision to the Administrative Tribunal (which, as of January 1, 2007, has sole jurisdiction to hear appeals of ComCo decisions).

SWISS FEDERAL COMPETITION COMMISSION FINES PUBLIGROUPE €1.5 MILLION FOR ABUSE OF A DOMINANT POSITION ON THE MARKET FOR PRINT MEDIA ADVERTISEMENTS

PubliGroupe .

On March 5, the ComCo fined PubliGroupe CHF 2.5 million (€1.5 million) for abuse of a dominant position on the market for advertisements in the print media.

PubliGroupe is the principal conduit in Switzerland through which advertisements are placed for publication in the print media. PubliGroupe had established conditions that intermediaries (on behalf of advertisers) must meet in order to receive a commission from PubliGroupe. A group of independent intermediaries wished to sell advertising orders to PubliGroupe without meeting PubliGroupe’s conditions. PubliGroupe refused to pay commissions to these independent intermediaries.

The ComCo launched an investigation into PubliGroupe’s practices in November 2002. As a result of its investigation, the ComCo found that PubliGroupe held a dominant position in the market for the selling and placement of advertisements in the print media. The ComCo based this assessment on PubliGroupe’s large market share, its disproportionate share vis-à-vis that of its competitors, as well as on certain structural advantages enjoyed by PubliGroupe.

The ComCo determined the fine based on the type and gravity of the infringement. The ComCo also took into account that PubliGroupe discontinued the abuse during the course of the ComCo’s investigation. In particular, PubliGroupe agreed with the ComCo to cease such practices as of January 1, 2006. As a result, PubliGroupe modified the conditions imposed on intermediaries by lowering the turnover required for intermediaries to benefit from commissions. Furthermore, intermediaries are no longer required to sell all types of advertisements appearing in the print media, but may specialise in one or more categories.

Decision of December 27, 2006, case A366, Comportamenti abusivi sulla borsa elettrica.

Decision of March 21, 2007, case A364, Merck-Principi attivi.

Decision of March 9, 2007, case A371, Gestione ed utilizzo della capacità di rigassificazione.

Decision of March 2, 2007, case I651, A.D.S. Accertamenti Diffusione Stampa-AUDIPRESS.

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Jay Modrall
Vice-Chair, Unilateral Conduct Committee
Cleary Gottlieb Steen & Hamilton LLP
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B-1040 Brussels
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jmodrall@cgsh.com

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

Tanya Dunne
Cleary Gottlieb Steen & Hamilton LLP
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tdunne@cgsh.com

Tracey Topper Gonzalez
Constantine | Cannon LLP
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tgonzalez@constantinecannon.com

Mitchell Stoltz
Constantine | Cannon LLP
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mstoltz@constantinecannon.com

Daniel Streeter
Ross, Dixon & Bell, LLP
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(949) 622-2717
dstreeter@rdblaw.com