Criminal Antitrust Newsletter - July 2013

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INDUSTRY SCORECARD

E-books: Apple Inc.’s high-profile price-fixing trial ended in June, and the Court decided the case in the government’s favor recently.  Some reports from the trial suggested that the case brought by the DOJ Antitrust Division (the “Division”) ultimately lacked punch and substance when placed in context.  A few pre-trial disclosures and comments by the Court, as well as settlements by the publishers who were charged, hinted at a strong case for the government.  During the trial, an Apple executive called by the prosecution reportedly refuted many of the government’s arguments and weakened the value of a key email.  Further, a witness called by Apple who is involved in Barnes & Noble’s competing e-reader testified that the business model Apple supposedly suggested as a means of fixing prices was already being considered and proposed by Barnes & Noble months prior to Apple’s discussions with publishers.  Apple’s trial strategy, putting industry and e-book giant Amazon on trial in many respects, appeared to have scored points.  Nonetheless, the Court concluded on July 10 that Apple “played a central role in facilitating and executing” a conspiracy with publishers to increase the price of e-books.”  Federal Judge Denise Cote also concluded that “Apple seized the moment and brilliantly played its hand” by exploiting publishing companies’ frustration and fear over Amazon’s e-book pricing regime.  Anticipate a hotly-contested appeal.

Before the trial started, Penguin Group settled claims brought by various state attorneys general for $75 million.  Penguin was earlier reported to be involved in a merger/acquisition and had said it wanted to put the antitrust matter to rest as part of that process.  Penguin had already settled the federal price-fixing claims. 

Financial: The DOJ sought long prison sentences for a trio of former UBS executives who were convicted of various offenses related to rigging municipal bond investment auctions.  The defendants were convicted of various types of wire fraud and conspiracy for rigging bids in ways that benefited large banks and harmed municipalities that were bidding for investment advisers.  Prosecutors have sought between 11 and 20 years for each defendant, based on estimates that each defendant’s conduct cost investors millions of dollars in inflated costs. 

Credit default swaps (“CDS”), which were suspected of contributing to a global financial crisis in 2008 and beyond, have been in the spotlight recently due to regulatory action and litigation.  In May, a pension plan sued a number of large banks for allegedly stifling competition and fixing prices in the CDS market.  The plan claimed that the banks both fixed prices at artificially high levels and maintained a monopoly over the CDS markets.

In July, antitrust regulators in the European Union sued several large banks for allegedly conspiring to exclude derivatives exchanges from participating in a robust over-the-counter (“OTC”) market for CDS between 2006 and 2009.  Regulators have also suggested that confining the CDS market to OTC contributed to the global financial crisis by inhibiting transparency related to these types of swaps. 

Commodities: In Europe, a number of sugar producers received visits from antitrust regulators due to concerns about possible cartel activity.  The raids focused not only on exclusionary behavior but also on pricing agreements between supplier companies and retail businesses.  The investigation reportedly covers a diverse array of countries, including the United Kingdom, Germany, Belgium, and Slovenia.

Canadian antitrust authorities have charged two large chocolate manufacturers and a food wholesale/distribution network with fixing the price of chocolate candy in Canada.  Two executives who formerly worked for one of the chocolate companies have been individually indicted for price-fixing.  At least one other manufacturer reportedly cooperated with authorities and obtained a more lenient settlement as a result.

Automotive: More executives from Denso Corporation pleaded guilty to participating in a conspiracy to fix auto parts prices in the immense and ongoing auto parts antitrust investigation.  Previously, two other Denso executives had already pleaded guilty.  Both executives will serve slightly more than one year in prison and will pay a $20,000 fine.  The defendants were both allegedly involved in a conspiracy to fix the price of heater control panels for parts sold to Toyota Motor Corporation.  The sentences were slightly higher than those agreed to by the Denso executives who entered their guilty pleas earlier in the investigation.

Manufacturing: McWane Inc. largely avoided price-fixing allegations brought by the Federal Trade Commission (“FTC”) related to McWane’s business selling pipe fittings.  The FTC had previously settled with two competitors, Star Pipe Products Ltd. and Sigma Corporation.  However, an administrative law judge did find that McWane had monopoly power over the domestic U.S. market for pipe fittings, and that McWane used that power to exclude Star from the market around 2009.  The practical impact of the findings is not clear in that McWane claimed the program that led to the findings about restraining the fittings market was only used briefly.  McWane already indicated it may appeal the adverse ruling.   

Pharma/Health Care: The big antitrust-related news in the pharmaceutical industry was the United States Supreme Court’s opinion regarding drug patent settlement agreements between branded pharmaceutical manufacturers and generics in Federal Trade Commission v. Actavis, Inc., 570 U.S. ___ (2013).  The FTC has long contended that these agreements stifle competition in the pharmaceutical industry, despite the fact that generic manufacturers could make lower-cost alternatives due to the expiration of pharmaceutical patent protection.

In many drug patent settlements, branded pharmaceutical companies agree to not manufacture or market authorized generic drugs that would compete with the generic companies.  The FTC believes these agreements discourage generic manufacturers from making drugs that would compete with branded drugs whose patents have expired and has dubbed them “pay for delay” settlements that result in higher prices for consumers.  Some lower courts had held that the settlements could not be challenged on antitrust grounds so long as the settlements were within the scope of the ability of a patent-holder to exclude competition; others had held that payments from a patent-holder to a generic manufacturer to delay competition might be an unreasonable restraint of trade.

The Supreme Court landed somewhere in the middle.  On one hand, the Court held that reverse settlement agreements are not immune from challenge under antitrust law, even if the contract was conceivably within the scope of the right to exclude under a patent.  Rather, the Court found that such agreements can be evaluated under traditional antitrust law principles.  Therefore, the FTC should have been given an opportunity to prove that such contracts were anticompetitive.  On the other, the Court declined to hold, as the FTC had advocated, that drug patent settlement agreements are per se unlawful, ruling instead that the agreements would be subject to traditional “rule of reason” antitrust scrutiny.

After the opinion issued, the FTC claimed that it represented a significant win.  The reality is that while the opinion allows the FTC to challenge patent settlement agreements, it will also give pharmaceutical companies leeway to confront FTC and private challenges by attempting to explain how patent-related settlements should be sustained under the rule of reason.  In addition to the FTC, a host of private class action lawsuits are already well underway.  

The EU has moved quickly against pharmaceutical companies for similar conduct.  In June, EU antitrust regulators imposed a $125 million fine on Danish pharma Lundbeck A/S for paying to prevent competitors of an antidepressant from bringing generic versions to market.  Various other companies that participated in the deals were fined nearly $70 million.  A number of the companies are expected to appeal.     

Real Estate:  A real estate investor was indicted for bid-rigging and obstruction of justice for his alleged role in a scheme related to public foreclosure auctions that occurred in San Joaquin County, California.  At least one auctioneer has also been charged.  A number of other participants in the scheme have already entered guilty pleas.  The obstruction of justice apparently involved the elimination of incriminating electronic records.

Federal prosecutors have pursued claims against dozens of investors throughout the United States for similar schemes, all of which were roughly designed to take advantage of depressed real estate markets and involved bidders who arranged in advance to not bid against each other, purchased properties for artificially low prices, then held second, secret auctions among themselves and shared in the proceeds of the illegal second auction.

Energy: European antitrust regulators raided a number of large energy companies, including BP PLC, Royal Dutch Shell PLC, and Statoil, based on suspected efforts to unlawfully affect oil and biodiesel benchmark rates.  EU officials also voluntarily obtained information from Platts, a company that prepares and publishes energy pricing benchmark evaluations.  Because the pricing benchmarks could have affected much broader pricing of oil and related products, the damage associated with artificially affecting pricing benchmarks could be huge.  Senator Wyden of Oregon has asked the DOJ, in writing, to coordinate with the EU and determine whether these companies or others may have manipulated price indices in the United States.  Not surprisingly, a series of civil antitrust suits have already been launched against the companies.    

CONTINUED DEVELOPMENTS REGARDING THE FTAIA  

Parties continue to assert limits to the extra-territorial reach of U.S. antitrust laws under the Foreign Trade Antitrust Improvements Act ("FTAIA").  Most recently, Chinese technology manufacturer Foxconn International Inc. successfully avoided an antitrust suit related to USB 3.0 patents.  The plaintiffs had claimed Foxconn tried to monopolize the market for manufacturing USB 3.0 connectors in China, and that its anticompetitive behavior had an adverse impact on U.S. pricing.  A judge in the Southern District of New York disagreed, finding that whatever Foxconn and another company may have done in China, the Court could not determine how that conduct affected U.S. pricing.  USB connectors are a small component of the final products, computers and laptops, that are sold in the United States.  The matter is titled Lotes Co. Ltd. v. Hon Hai Precision Industry Co. Ltd.

The FTAIA applies U.S. antitrust law to import trade or commerce to the extent it has a “direct, substantial, and reasonably foreseeable effect” on the consumers or the economy in the United States.  Within the past few years, the Third and Seventh Circuit Courts of Appeal have taken a relatively broad view of the FTAIA and have therefore limited defenses available to foreign companies confronted with alleged violations of the Sherman Act.  Likewise, the federal court in California that presided over the price-fixing trial of AU Optronics rejected the defense’s assertion of the FTAIA as a defense.

The FTAIA should remain an important component of the defense of any non-U.S. corporation that faces antitrust civil or criminal allegations in the United States.  As the decision in Lotes shows, the relatively broad language of the statute continues to lend itself well to a jurisdictional/statutory challenge to antitrust claims, depending on the facts of each case and the types of products involved.  It would be worth following this case to see whether the plaintiffs appeal and whether the Second Circuit takes a view different from some other recent Circuit Court opinions.