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Message From The Editor Lisa Kimmel

I am happy to present this issue of Monopoly Matters. I hope you will find it interesting and useful. Inside you will find a critique of the FTC’s decision to close its investigation of Google search, an overview of divergent opinion on the role of antitrust in addressing patent hold-up, thoughts on the need for unilateral conduct guidance, a discussion of the Third Circuit’s decision in ZF Meritor, as well as recaps of recent committee programs and updates on unilateral conduct enforcement around the globe. I want to extend my gratitude to the talented volunteer authors that provided articles for this edition. If you have ideas for future editions of the newsletter, or want to provide feedback, please contact Lisa Kimmel at lkimmel@ftc.gov.

In This Issue:

Message From The Editor ........................................................... 1 Report from the Chair ................................................................. 3 Product Design Issues in the FTC’s Google Investigation: In Search of the Facts .................................................................. 4 Pondering Single-Firm Guidance in a Two-Agency World ........ 8 The Proper Role of Antitrust in Addressing Patent Hold-Up ... 11 De Facto Exclusive Dealing: The Third Circuit's Decision in ZF Meritor v. Eaton Corporation ......................................... 15 Can Section 5 Guidance Clarify Unilateral Conduct Enforcement? ............................................................................ 17 Program Review: “Does Aspen Skiing Apply to Intellectual Property Rights?” ...................................................................... 19 Program Review: “Parallel Exclusion: Is it Time for a Theory of Shared Monopoly?” .................................................. 21 2013 : Developments in the Enforcement of Article 102 TFEU ........................................................................................ 23 China Enforcement Update ....................................................... 28 Report from Canada .................................................................. 29 Canadian Competition Bureau Reviewable Conduct Branch Roundtable ................................................................................ 34 Latin America Enforcement Update: Brazil ............................. 35

THE UNILATERAL CONDUCT COMMITTEE LEADERSHIP

Chair

James B. Musgrove McMillan LLP Brookfield Place 181 Bay Street, Suite 4400 Toronto, Ontario M5J 2T3 416-307-4078; 416-865-7048 (fax) james.musgrove@mcmillan.ca

Council Representative

Kevin J. O’Connor Godfrey Kahn S.C. One East Main Street, Suite 500 Madison, WI 53703 608-284-2600; 608-257-0609 (fax) koconnor@gklaw.com

Vice Chairs Patricia Brink Director of Civil Enforcement U.S. Department of Justice 950 Pennsylvania Avenue, NW, Rm. 3118 Washington, DC 20530-0009 202-514-2562; 202-616-7320 (fax) patricia.brink@usdoj.gov

Nikihil Shanbhag Google 1600 Amphitheatre Parkway Mountain View, CA 94043-1351 (650) 214-5313 nshanbhag@google.com

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Monopoly Matters, the newsletter of the Unilateral Conduct Committee, is published twice a year by the American Bar Association Section of Antitrust Law. The views expressed in the newsletter are the authors' only and not necessarily those of the American Bar Association, the Section of Antitrust Law or the Unilateral Conduct Committee. If you wish to comment on the contents of Monopoly Matters, please write to the American Bar Association, Section of Antitrust Law, 321 North Clark Street, Chicago, IL 60654.

©Copyright 2013 American Bar Association. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. To request permission, contact the ABA’s Department of Copyrights and Contracts via www.americanbar.org/utility/reprint.

Scott A. Sher Wilson Sonsini Goodrich & Rosati 1700 K Street, NW, Fifth Floor Washington, DC 20006 202-973-8822; 202-973-8899 (fax) ssher@wsgr.com

Kim Van Winkle Office of the Attorney General of Texas 300 West 15th Street, Floor 7 Austin, TX 78701-1649 512-463-1266; 512-320-0975 (fax) kim.vanwinkle@texasattorneygeneral.gov

Stephen Weissman Deputy Director, Bureau of Competition U.S. Federal Trade Commission 600 Pennsylvania Ave., NW Washington, DC 20580 sweissman@ftc.gov

Johannes G. Zöettl Jones Day Grueneburgweg 102 Frankfurt, Germany D-60323 +49-699-726-3973; +49-699-726-3993 (fax) jzoettl@jonesday.com

Young Lawyer Representative Jose Carlos da Matta Berardo Barbosa, Mussnich & Aragao Av. Presidente Juscelino Kubitschek 1.455-10 andar Cep: 04543-011 - Itaim Bibi Sao Paulo +55-11-2179-4559; +55-11-2179-4597(fax) jcm@bmalaw.com.br

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Report from the Chair James Musgrove McMillan LLP, Chair, Unilateral Conduct Committee

It is hard to believe that another year has rolled around, we are all back at school (or the psychological equivalent), and that, therefore, another Chair’s report for Monopoly Matters is due. Still, as the world keeps turning, so your Committee keeps working. The role of the Chair of any ABA Committee is essentially to harness the energies, intellect and enthusiasm of a group of diligent, intelligent, hardworking lawyers to get the work of the committee done. The Unilateral Conduct Committee has been blessed with many such dedicated volunteers, and so I want to take an opportunity here to say thank you to some of them.

Firstly, two of our long time Vice Chairs, Tom Collin of Thompson Hine, and Mary Ann Mason of Crowell & Moring, left the Unilateral Conduct Committee to go on to bigger and better things within the ABA. I want to thank them very much for their dedicated service to the Unilateral Conduct Committee and wish them well in their further endeavours. Similarly our young lawyer representative, Kate Wallace, has moved on in the ABA world, after tremendous and dedicated service to us.

While we have lost some old friends we have gained some new ones. In addition to our returning Vice Chairs being, Patricia Brink, Johannes Zoettl, Kim Van Winkle and Stephen Weissman, we also have Nikhil Shanbhag at Google and Scott Sher at Wilson Sonsini as new Vice Chairs, and Jose Carlos da Matta Berardo as our new young lawyers representative.

In addition to Vice Chairs we have other important volunteers working to achieve the goals of the Committee. You will have noticed that our newsletter is edited by Lisa Kimmel of the FTC and we extend our sincere thanks to her for that effort.

The Committee’s update chapter for Antitrust Law Developments is being overseen by Kim Van Winkle with assistance from Scott Sher, but also with a terrific team of volunteers including Justin Cohen, Tiffany Lee, Yuan Ji, Robert Corp, Nandu Machiraju, Christina Brown and Kristiana Garcia.

Our social media efforts and ListServ continue with supervision from Johannes Zoettl and Jose Carlos da Matta Berardo, but with tremendous input from in particular Rainer Grossmann and Saami Zain. Saami has served loyally for a long time in the role, and will be stepping down at year end. We thank him sincerely.

The Committee’s monograph on Monopsony Issues which is currently in progress is being overseen by Richard Elliott with a dedicated team of writers and editors, including Jeffrey Prisbrey, Bradley Pollina, Dan Matheson, Samer Musallam, Chris Studebaker, Robert Connolly, Ian Connor, Nandu Michiraju, Mark Levinstein, and Brandon Boulware.

I can tell you have been inspired by all of this, and want to know how you can get involved – whether as author or editor for a book project or the newsletter, or with our social media effort or pursuing a project which you would like to recommend to the Committee. It could not be simpler. Figure out what you would like to help with and then call or e-mail me (james.musgrove@mcmillan.ca) or one of the Vice Chairs and outline your idea. No good ideas will be turned away, or go unpunished. In particular, as you know we are working on a book on Monopsony issues. We have most drafters, but are urgently seeking a few more drafters or senior editors. If you are interested please let me know right away. In addition, we are about to launch an update edition of the Handbook of Antitrust Aspects of Standard Setting. We need a set of drafters and editors, as well as a project leader – so please let me know of your interest.

I want to close this edition of the note from the Chair with a request that each recipient of this newsletter consider one person who you know or work with who you think would benefit from being a member of the Unilateral Conduct Committee, but who is not. Please encourage them to consider membership. Joining is, as you know easy. You just click on the button below and follow the instructions. You just need your email, ABA number and password. You will be directed to the ABA Online Committee Enrollment Form requesting membership in the Unilateral Conduct Committee.

Join the Unilateral Conduct Committee

If the link above does not work and you wish to join the Committee, please contact Cassandra Williams at (312) 988-5550 or by e-mail at cassandra.williams@americanbar.org.

It is even easier for you to invite your friends to become a member. Forward this issue of Monopoly Matters and encourage them to click on the above link.

We are looking forward to a terrific year of the Unilateral Conduct Committee, and we look forward to our various upcoming Committee Programs and the Spring Meeting, work on the Monopsony Book, our Town Halls and our other projects. I hope I will have occasion to speak with many of you over the course of the year.

James Musgrove

Chair

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Product Design Issues in the FTC’s Google Investigation: In Search of the Facts Gary L. Reback, Carr & Ferrell LLP1

In the last issue of Monopoly Matters, Lisa Kimmel, competition advisor to FTC chair Edith Ramirez, penned a spirited defense of the Commission’s decision to close its investigation into Google’s search practices without taking any action.2 Competitors contend that Google biases its search results, using its market dominance to direct Web traffic to its own specialty search services over the offerings of rivals.

Kimmel devoted most of her article to the legal standard for evaluating Google’s conduct, attempting to reconcile a widely criticized panel decision of the Ninth Circuit with the balancing test enunciated in the D.C. Circuit’s en banc Microsoft opinion.3 But she left little doubt that the Commission’s decision turned on the facts, rather than the law. According to Kimmel, the key facts did not involve market definition, or market share, or barriers to entry, or any of the other prima facie issues Google defenders like to argue about. Rather, Kimmel claimed that the Commission found dispositive what in a rule of reason analysis would be called a “procompetitive justification” – a defense for conduct that produces anticompetitive effects.

While Google’s manipulation of search results hurts rivals, Kimmel argued, it actually helps consumers. She variously described Google as acting in accord with “consumer preferences,” as providing “meaningful value to consumers,” and as producing “a benefit to consumers.” She claimed that the Commission weighed those “benefits to consumers against the evidence of harm to rivals” (a description of the FTC’s reasoning process that is not actually found in the Commission’s brief closing statement4), and concluded that Google’s conduct was

1 Gary Reback has represented a number of specialty search engines in the investigations of Google by the FTC and the European Commission. 2 Product Design Issues in the FTC’s Google Investigation: In Search of Competition on the Merits, MONOPOLY MATTERS, ABA Antitrust Section Unilateral Conduct Committee Bi-Annual Newsletter, Spring 2013. (At note 1, Kimmel states that the views in the article are her own and do not necessarily represent the views of the Commission or any Commissioner.) 3 Allied Orthopedic Appliances v. Tyco Health Care Group, 592 F.3d 991 (9th Cir. 2010); United States v. Microsoft Corp., 253 F.3d 34 (D.C. Cir. 2001). 4 Statement of the Federal Trade Commission Regarding Google’s Search Practices, In the Matter of Google Inc., FTC File Number 111-0163, January 3, 2013 available at http://ftc.gov/os/2013/01/130103googlesearchstmtofcomm.pdf

“on balance” not “demonstrably anticompetitive.” “[N]o reasonable interpretation of the law,” wrote Kimmel, “would have supported action on the record before the Commission.”

The Commission’s Reliance on Google’s Studies

So, what exactly did the “record before the Commission” include? What was the evidence of “consumer preferences” the Commission found so compelling? Neither Kimmel’s article nor the Commission’s closing statement provided much guidance or transparency. The closing statement referred specifically to Google’s introduction of “Universal Search,” an initiative announced in 2007.

By way of background, after Google and others introduced general search, a number of companies created specialty search sites for comparison shopping, local and other types of specific queries. Google then copied the pioneering work of these rivals by creating specialty search services of its own. As part of the 2007 “Universal Search” initiative that the Commission’s statement referred to, Google “preferenced” the results from its shopping service, known at the time the FTC started its investigation as Google Product Search (“GPS”), by placing those results higher than competitors’ results in Google’s general search results (regardless of where the GPS results should have been placed under the algorithm that Google applied to everyone else), and also by including in its own shopping results enhanced features that Google refused to make available to competitors, such as dynamic pricing and product pictures. The Commission’s closing statement found justification for this conduct because Google “typically” tested such algorithmic (organic listing) changes with users before implementing them and monitored how consumers reacted to the changes by analyzing “click-through” data.

A Google representative gave a more complete description of these procedures at a conference of state attorneys general a couple of years ago.5 He said that user focus groups are asked to compare side-by-side screen renderings, the first as currently displayed and the second with the proposed algorithmic change to the organic listings. The user group gives each screen star ratings, indicating whether the second rendering is more desirable than the first. Users in the focus groups are not permitted to “single out” specific features, but only to rate the

5 Presentation by Dana Wagner, “Internet Search Engines – Latest Issues,” Conference of Western Attorneys General, July 13, 2011 (transcript on file with the author).

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screen overall. If the focus group testing is deemed satisfactory, a small percentage of users actually searching on Google’s main site are exposed to the proposed change, and the company keeps track of how these users click on the new screens.

Google’s site displayed some of the shopping results screens from the ten-blue-links format and the “Universal Search” initiative used to test and demonstrate consumer preferences.6 According to the Google site, users were asked to compare product search results (in the ten-blue-links format) like this:

Screen 1: Ten-Blue-Links Format

to screens with preferenced GPS results in the “Universal Search” format like this:

6 See, “Facts about Google and Competition: When People are Shopping, They Want to Find Products,” http://www.google.com/competition/betteranswers.html, (retrieved January 19, 2013).

Screen 2: Preferenced Google Product Search Results

The New York Times reported that Google gave the FTC these screen comparison studies. The studies showed that users preferred the prominent display of Google listings in organic results (Screen 2) over the original “ten blue links” format (Screen 1).7

The Commission found that these studies resolved the legal questions about Google’s search manipulation. “[S]ome evidence suggested that Google was trying to eliminate competition,” said the then-FTC chairman Jon Leibowitz at the press conference announcing the Commission’s decision, but, according to the Commission’s closing statement, the “totality” of the evidence “indicates” that “in the main,” Google’s “primary goal” in preferencing its own shopping results was to “better satisfy its users’ search queries.”

Deficiencies in User Studies

Any marketing executive can attest to the difficulties of relying on user comparison studies (and, in this case, selective user

7 Edward Wyatt, Critics of Google Antitrust Ruling Fault the Focus, N.Y. Times, Jan. 6, 2013. http://www.nytimes.com/2013/01/07/technology/googles-rivals-say-ftc-antitrust-ruling-missed-the-point.html?_r=0

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comparison studies), to make sweeping generalizations, much less to make legal judgments. Challenges to the use of such studies frequently focus on what information the testers were not given. For example, in Google’s tests, were users told that one alternative would result in them paying far more for the same product than the other alternative? That is in fact the case with Google’s shopping results today, but users would not be able to distill this information by looking only at side-by-side screen comparisons.

Side-by-side screen studies submitted by Google’s rivals to the European Commission during its investigation of Google’s search practices show that users react strongly to pricing and product information and will invariably choose a lower priced alternative (for the same product) if it is clearly presented to them. Published academic studies (unrelated to the Google investigations) report the same results.

Did the FTC question Google’s methodology or otherwise investigate whether the studies Google used were contrived? The Microsoft court described a “procompetitive justification” as a “nonpretextual claim” of, for example, “greater efficiency or enhanced consumer appeal.” The balancing test set out in the Microsoft opinion expressly includes the opportunity for the government to rebut the justification a monopolist proffers. But the FTC apparently did little more than check Google’s math. The Commission’s closing statement unequivocally eschews “challenging” product design decisions where “ample evidence” supports even a “plausible” procompetitive justification – hardly a balancing test at all. Kimmel reinforced the point, arguing that if “consumers prefer” a design change, that consumer preference precludes the presentation of a prima facie Section 2 case – a proposition squarely at odds with the express language of the balancing test in the Microsoft opinion.

What the FTC Failed to Consider

In any event, what the Commission did not look at turned out to be far more important than what the Commission based its decision on. Although the Commission’s closing statement focused on Google’s transition from the ten-blue-links format to the 2007 Universal Search format of preferenced GPS results, by the time of the FTC’s decision, Google had abandoned that approach.

In the early summer of 2012, after the FTC staff had finished most of its Google-related discovery, the company announced and began to implement a major change in the presentation of organic shopping results. The most salient feature of Google’s announcement was the elimination of preferenced Google Product Search results – the very results that Google had convinced the Commission were better for users – from the

organic listings, leaving just the ten-blue-links format. Coincident with this announcement, Google continued to lower the shopping results of rival comparison shopping sites, leaving users without any comparison shopping results at all in the first several screens of organic listings.

GPS, like the offerings of Google’s product search rivals, was a Comparison Shopping Engine, built on what economists call an “information clearinghouse” model. Such sites permit users to compare prices for products quickly and easily. Economic research shows that comparison shopping engines – clearinghouses – can have a profound impact on prices, resulting in significant savings for consumers.

The elimination of GPS results from the organic listings in 2012 should have raised enormous red flags with the Commission. After all, the Commission expressly credited and eventually relied in its decision on Google’s claim that users preferred the prominent display of GPS results over the old ten-blue-links format. But in the subsequent 2012 design change, Google eliminated its preferenced GPS results, reverting once again to the ten-blue-links format for organic listings. Was the second change – a complete reversal of the first – also supported by user studies? Are we to conclude that user preferences changed so radically – a complete about-face? Or is it more reasonable to conclude that Google as a monopolist was executing a more complex strategy? After all, none of Google’s horizontal search competitors eliminated comparison shopping results from their organic listings.

As Google was phasing its preferenced GPS results out of the organic listings, it began phasing in a new search advertising initiative for merchants called “Google Shopping,” making the results from shopping queries on Google’s main page look like this (for the same query shown above):

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Screen 3: Google Shopping Results

Although the screen presentations of Google Product Search (Screen 2 above) and Google Shopping (Screen 3 above) look superficially similar in that they both feature prominently-placed Google listings containing pictures and dynamic pricing, the two initiatives differ markedly. Google Product Shopping, built on a clearinghouse model, prominently displayed the lowest available price and enabled users to save money by making apples-to-apples product price comparisons among numerous merchant listings quickly and easily, usually with a single click. By contrast, in the newer Google Shopping search advertising service, merchant advertisers gain prominent placement based upon how much revenue they generate for Google. (Merchant ad placement is based on the amount the merchant bids and the click-through rate for the merchant’s ad.) Google Shopping displays the price from the advertising merchant, regardless of whether it is a low price, and makes price comparisons for the same products very difficult and time consuming.

Merchant advertisers are able to bid more and pay Google more on a sustained basis only if they can charge consumers more for the same product, so Google Shopping is structured to insulate merchant advertisers from close competition – thereby facilitating higher advertised prices. And, indeed, studies submitted to the European Commission show that advertised prices on Google Shopping are, on average, almost 20 percent higher for the same product than on traditional Comparison Shopping Engines that are built on the clearinghouse model, with many product prices 50-80 percent higher.

It is hard to imagine that the 2012 transition from GPS to Google Shopping could have been supported by testing with fully informed users. Few rational consumers would knowingly prefer to overpay for a consumer product by 80 percent. Of course, since the introduction of Google Shopping was an advertising initiative rather than an algorithmic change, Google may not have even felt the need to justify the transition from GPS to Google Shopping by conducting user testing.

Nor did the transition from GPS to Google Shopping enhance efficiency. While it is technically possible to do a product price comparison on Google Shopping, the service is deliberately structured to make price comparisons as difficult as possible so as to enable the merchants that bid the most for prominent placement to charge higher prices. Typically, Google Shopping users are directed to click out to a merchant advertiser’s site without comparing other merchants’ prices for the same product.

Google might have claimed an efficiency defense with respect to the 2007 introduction of GPS – namely, by preferencing its own shopping results, Google saved users the time and trouble of doing additional searches to identify lower prices. But the

substitution of Google Shopping for GPS in 2012 not only raised prices, it also reduced the efficiency of Google’s price comparison mechanism.

Companies warned the FTC staff and each commissioner individually that Google Shopping resulted in higher consumer prices. But no one paid attention. Google completed the transition from GPS to Google Shopping in October 2012. The Commission voted to close the investigation into Google’s manipulation of search results a few weeks later, in November 2012, and announced its decision right after the first of the year.

Unless one is to believe that the Commission intentionally cleared the way for Google to increase prices and reduce efficiency, claims that the Commission fully investigated and understood Google’s conduct in comparison shopping must be discounted. At very best, the Commission investigated an intermediate step (the preferencing of GPS results) in Google’s overall strategy. In antitrust parlance, the FTC investigated and gave a clean bill of health to Google’s monopoly acquisition conduct without bothering to understand that Google had long since passed to the exploitation (rent seeking) phase of its dominance.

Conclusion

With more of the facts now in hand, the FTC’s balancing test suggested in Kimmel’s article (harm to rivals against consumer benefit) needs substantial revision. Analyzing the complete arc of Google’s conduct in the comparison shopping sector reveals that Google not only damaged the scope and quality of competition, it also raised consumer prices and reduced search efficiency. It is difficult to imagine any court holding that studies of what Google “typically” tests outweigh evidence of actual consumer overcharge, damage to competition, and reduction of efficiency. And, in any case, studies of preferences using consumers who are not fully informed about the pricing consequences of screen changes would be entitled to little, if any, weight in the Microsoft court’s balancing process.

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Pondering Single-Firm Guidance in a Two-Agency World Eric Berman, Williams Mullen

The Federal Trade Commission (FTC or Commission) and Department of Justice (DOJ or Antitrust Division) have a commendable track record of jointly issuing guidance in areas where they share enforcement authority, such as horizontal mergers, international operations, health care (including a separate joint policy statement regarding accountable care organizations), intellectual property, and competitor collaborations. Single-firm conduct is an important and complex area of U.S. antitrust law, and agency guidance on such conduct could be enormously helpful to large businesses and the practitioners who advise them. Still, formal guidance on unilateral conduct eludes us.

The absence of single-firm conduct guidelines is not for lack of effort or interest. In 2006, the agencies commenced joint year-long, comprehensive hearings on Sherman Act Section 2.1 After the hearings concluded, staff from both agencies collaborated on a Section 2 report that ultimately was endorsed only by the DOJ in 2008. The FTC did not join the report, and sharply criticized it: a majority of then-sitting Commissioners accused the DOJ of “plac[ing] a thumb on the scales in favor of firms with monopoly or near-monopoly power.”2 The Antitrust Division formally withdrew its report only eight months later.3 This year, two FTC Commissioners have called for the Commission to issue some type of formal guidance or policy statement on the reach of its standalone FTC Act Section 5 authority to prosecute unfair methods of competition.4

Against this backdrop, the question is not whether formal guidance can play a role in unilateral conduct enforcement

1 See Federal Trade Commission and Department of Justice Hearings on Section 2 of the Sherman Act: Single-Firm Conduct As Related to Competition, available at http://www.ftc.gov/os/sectiontwohearings/. 2 “Statement of Commissioners Harbour, Leibowitz, and Rosch on the Issuance of the Section 2 Report by the Department of Justice,” available at http://www.ftc.gov/os/2008/09/080908section2stmt.pdf (Sept. 8, 2008). 3 “Justice Department Withdraws Report on Antitrust Monopoly Law,” available at http://www.justice.gov/atr/public/press_releases/2009/245710.htm (May 11, 2009). 4 See Remarks of Maureen K. Ohlhausen Before the U.S. Chamber of Commerce, “Section 5: Principles of Navigation” (July 25, 2013); Remarks of Joshua D. Wright Before the New York State Bar Association’s Antitrust Section, “Section 5 Recast: Defining the Federal Trade Commission’s Unfair Methods of Competition Authority” (June 19, 2013).

policy, but what kind of guidance would be most useful to businesses? The substantive and procedural divergence between the FTC and DOJ suggests that harmonized guidelines encompassing both Section 2 and Section 5 is untenable, at least in today’s enforcement environment. Guidance on the reach of the FTC’s standalone Section 5 authority, however, would be a worthwhile undertaking.

Is Guidance on Unilateral Conduct Inherently More Difficult?

There would be several benefits to having formal agency guidelines on unilateral firm behavior: (i) guidelines can provide businesses with useful transparency into the agencies’ likely enforcement intentions; (ii) they can signal to foreign competition authorities how multi-national firms’ conduct will be viewed in the U.S., which in turn may facilitate convergence among global authorities; and (iii) they can provide judges – the ultimate arbiters of challenged conduct – with persuasive authority for framing court opinions. Guidelines would also provide companies with a single reference document to help shape their conduct, rather than require them to scour fact-specific business review letters, advisory opinions, and consent orders for piecemeal agency insights.

One wonders, then, why no such guidance exists to date. Some would suggest that guidance on unilateral conduct is inherently more difficult than for other areas of antitrust. As part of a 2007 OECD roundtable discussion, the U.S. submitted that “[p]roviding useful guidance to business on [single-firm exclusionary conduct] presents a challenge ‘because the means of illicit exclusion, like the means of legitimate competition, are myriad.”5 Courts and practitioners have also indicated that unilateral conduct presents uniquely difficult challenges – that distinguishing between the vigorous competitor and the exclusionary monopolist is particularly hard.6

5 Written Submission from United States, OECD Policy Roundtable on Guidance to Business on Monopolisation and Abuse of Dominance, DAF/COMP(2007)43, at p. 53 (June 2007) (citing Verizon Comm’ns Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398, 414 (2004) (additional internal quotation omitted)). 6 See, e.g., United States v. Microsoft Corp., 253 F.3d 34 (D.C. Cir. 2001) (“difficult to discern” whether monopolist’s act is exclusionary or competitive); see also Remarks of Chairman Majoras at FTC/DOJ Sherman Act Section 2 Joint Hearing (June 20, 2006) (“Unilateral or ‘single-firm’ conduct, however, still vexes us.”) and ANTITRUST MODERNIZATION COMM’N, REPORT AND RECOMMENDATIONS 81 (2007) (“How to evaluate single-firm conduct under Section 2 poses among the most difficult questions in antitrust law.”).

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Similar observations have been made about other areas of antitrust law, however. The Supreme Court has broadly observed that “the behavior proscribed by the [Sherman] Act is often difficult to distinguish from the gray zone of socially acceptable and economically justifiable business conduct.”7 Properly applying antitrust concepts to issues such as competitor information exchanges8 or to the health care industry9 can be tricky, but the agencies nonetheless managed to issue joint guidance in those areas.10 More likely, the difficulty in creating useful single-firm guidance stems from the differences between the two agencies that share enforcement authority over unilateral conduct.

Agency Differences Pose Obstacle to Joint Guidelines

Clarity, transparency and predictability are the hallmarks of useful guidance and are especially necessary under a dual-agency regime, particularly for firms whose conduct could conceivably be reviewed by either the Commission or the Antitrust Division (such as high-technology or health care companies). Effective joint guidance is made easier when certain conditions exist; for example, when the FTC and DOJ share authority under the same statute or over the same industry and when their enforcement philosophies somewhat align. For example, although there are procedural and substantive differences between FTC and DOJ merger review, both agencies are ultimately bound by Section 7 of the Clayton Act. Even with respect to joint conduct and horizontal agreements, where the FTC and DOJ enforce different statutes (FTC Act § 5 and Sherman Act § 1, respectively), there is doctrinal agreement on the importance of enforcement in this area.

Single-firm conduct presents different scenario. The FTC and DOJ not only exercise different statutory authority over unilateral conduct, but they also interpret their respective reach over such behavior quite differently. The DOJ has tended to exercise its Section 2 authority conservatively. Its now-

7 United States v. United States Gypsum Co., 438 U.S. 422, 440-41 (1978). 8 Id. at 441 (exchange of price information among competitors “illustrative” of the difficulty distinguishing acceptable from proscribed behavior). 9 See Remarks of William J. Baer Before the American Bar Association, “Antitrust & Health Care: New Approaches and Challenges,” (Oct. 1996) (“peculiar characteristics of health care services … have posed challenges … for the enforcement agencies charged with ensuring the competitiveness of those markets.”). 10 “Antitrust Guidelines for Collaborations Among Competitors,” (April 2000), available at http://www.ftc.gov/os/2000/04/ftcdojguidelines.pdf; “Statements of Antitrust Enforcement Policy in Health,” (August 1996), available at http://www.justice.gov/atr/public/guidelines/1791.htm.

withdrawn Section 2 Report suggested enforcement intentions that would not veer outside the bounds of traditional monopolization jurisprudence. Even after withdrawing its Section 2 Report in 2009, the Antitrust Division has initiated only a handful of Section 2 investigations each year11 and has filed a monopolization complaint only once since 1999.12 The FTC, by contrast, views its Section 5 power as extending beyond Section 2’s reach. Thus, we have seen high-profile challenges to a firm’s “course of conduct” when the company’s challenged practices, taken alone, would not violate Section 2,13 as well as the imposition of a consent decree against a company that, according to one then-sitting Commissioner, “did not engage in a general pattern of exclusionary conduct.”14

Standalone Section 2 Guidance

If jointly issued guidance seems unlikely, then one must ask whether separate Section 2 guidance (from the Antitrust Division) and Section 5 guidance (from the Commission) would be beneficial. As to the former, the body of Section 2 case law is extensive and always evolving. Companies can draw on more than a century of Section 2 judicial opinions spanning nearly every form of unilateral conduct. While some areas of single-firm conduct remain unsettled – particularly the propriety of loyalty discounts offered by monopolists – there is significant judicial guidance from the Supreme Court and the Courts of Appeals.

Generally, administrative agency guidelines are most appropriate and useful when the agency has particular expertise with the subject matter. For instance, both the FTC and DOJ possess considerable experience analyzing mergers – far more than federal judges do – and thus it is unsurprising that courts regard their Horizontal Merger Guidelines as useful resources.15 It is not apparent, however, that the Antitrust Division is more proficient in the area of Section 2 monopolization than is the

11 See Antitrust Division Workload Statistics FY 2003-2012, available at http://www.justice.gov/atr/public/workload-statistics.html. 12 See United States v. United Regional Health Care System, Case No. 7:11-cv-00030 (N.D. Tex. Feb. 25, 2011) (Complaint). 13 In re Intel Corp., Dkt. No. 9341 (Dec. 16, 2009) (Administrative Complaint). 14 In re Pool Corp., FTC File No. 101-0115 (Nov. 21, 2011) (Dissenting Statement of J. Thomas Rosch). 15 See, e.g., Chicago Bridge & Iron Co. v. FTC, 534 F.3d 410, 432 n.11 (2008) (“Merger Guidelines are often used as persuasive authority when deciding if a particular acquisition violates anti-trust laws.”); United States v. H&R Block, Inc., 833 F. Supp. 2d 36, 52 n.10 (D.D.C. 2011) (“courts in antitrust cases often look to [the Guidelines] as persuasive authority.”).

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federal judiciary, given the relative dearth of DOJ monopolization cases as compared with the robust body of case law. Indeed, rather than DOJ guidelines being necessary to serve as “persuasive authority” for the courts, it seems that the courts influence the agency’s Section 2 analysis. The withdrawn Section 2 Report extensively cited case law, and the competitive impact statement issued with the Department’s only recent Section 2 lawsuit cited monopolization cases such as Microsoft, Dentsply, and Peacehealth.16 If one concludes that formal guidance on unilateral conduct guidance from the DOJ is indeed necessary, then perhaps a mere codification of Section 2 case law is all that is needed.

Standalone Section 5 Guidance

The FTC, on the other hand, should answer the call of current and former Commissioners to articulate some guidance regarding the contours and limits of its Section 5 authority.17 Quite apart from the Section 2 context (extensive judicial experience coupled with relatively little DOJ enforcement), the FTC has exclusive domain and matchless experience enforcing Section 5. Section 5 analysis is almost entirely found in administrative opinions and consent orders, rather than in judicial opinions. Although some believe that Section 5 guidance should be developed on a case-by-case basis,18 piecemeal settlements will not provide firms with adequate direction about their conduct in a meaningful way.

To the extent formal guidance will help firms’ compliance with Section 5, this is a laudable goal in itself, as it can enable dominant firms to avoid unwanted collateral consequences of a Section 5 violation. Some have argued for the expansion of Section 5 by claiming that Section 5 actions shelter firms from the burden of follow-on treble damage private actions.19 This

16 United Regional Health System, note 12 supra (Competitive Impact Statement). 17 See note 4, supra; see also William E. Kovacic & Marc Winerman, “Competition Policy and the Application of Section 5 of the Federal Trade Commission Act,” 76 ANTITRUST L.J. 929, 930-31 (2010) (“we see a need for the Commission … to issue a policy statement that sets out a framework for the application of Section 5.”). 18 “Interview with FTC Commissioner Julie Brill,” The Antitrust Source (Feb. 2012), at p. 6. 19 See, e.g., Remarks of J. Thomas Rosch Before the LECG Newport Summit on Antitrust Law & Economics, “Wading Into Pandora’s Box: Thoughts On Unanswered Questions Concerning the Scope and Application of Section 2 & Some Further Observation on Section 5,” (Oct. 3, 2009) (“A plaintiff cannot rely on favorable Section 5 case law in a federal treble damage action. Neither can a federal district court rely on such a decision because the FTC alone can avail itself of Section 5 at the federal level.”).

argument is undercut, however, by then-Commissioner Kovacic’s warning about the risks of state law collateral consequences, given that numerous states have modeled their unfair competition laws on Section 5 and provide for double or treble damages.20 The argument is further undercut at the federal court level. In March 2010, the Commission entered into a consent decree with Transitions Optical, Inc. after alleging that the firm held an 80-85 percent share in the relevant market and that its exclusive dealing arrangements were anticompetitive. Very soon after the FTC’s settlement and press release were made public, the private plaintiffs’ bar launched numerous Sherman Section 2 lawsuits based on allegations in the FTC’s Section 5 consent. The defendants in what is now In re Photochromic Lens Antitrust Litigation would probably disagree with the claim that Section 5 enforcement lacks collateral consequences, as the private litigation has been ongoing for over three years and has incurred burdensome discovery.21

Conclusion

Crafting clear formal guidance on as complex an issue as single-firm behavior is no easy task, but it is an important one when the scope of the law that is used to prosecute such behavior is uncertain. The failed attempt to render a joint Section 2 report highlighted real differences between the way the FTC and DOJ view unilateral conduct enforcement. Fortunately, there is a rich and growing body of Section 2 case law to which dominant firms can turn for guidance. The reach of Section 5 over single-firm conduct, however, remains nebulous and seemingly within the exclusive domain of Federal Trade Commission lawyers. The FTC would serve the business community well by issuing guidelines, a policy statement, or some other type of formal guidance regarding what type of unilateral conduct does – and does not – offend Section 5 principles.

20 See Dissenting Statement of Commission William E. Kovacic, In re Negotiated Data Solutions, LLC, File No. 051-0094 (2008). 21 See, e.g., Scott Flaherty, “Transitions Must Produce FTC Probe Docs, Judge Rules,” Law360 (Nov. 6, 2012) (“A Florida federal judge … ordered Transitions Optical, Inc. to turn over documents related to a Federal Trade Commission investigation into the company’s business practices, ruling the information was relevant to antitrust claims made by putative purchaser classes in multidistrict litigation.”).

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The Proper Role of Antitrust in Addressing Patent Hold-Up Koren W. Wong-Ervin, Federal Trade Commission*

The antitrust agencies and lawmakers continue to focus on the problem of hold-up involving standard-essential patents (SEPs). Last month, the Federal Trade Commission (FTC) responded to comments and finalized the order in the Google/Motorola Mobility investigation. Soon afterwards, the Senate Judiciary Committee held hearings on antitrust and competition policy issues related to SEPs. But what role can and should antitrust law play in addressing unilateral conduct in involving SEPs, and in particular what role should it play in addressing patent hold-up?

Understanding the Problem

To properly understand the problem, it is important to keep in mind that vast numbers of licenses to SEPs have been negotiated and entered into without any intervention. The potential problem arises when a SEP holder has made a commitment to license on reasonable and nondiscriminatory (RAND)1 terms and then seeks to use injunctive relief as leverage in negotiations to obtain an unjustifiably higher royalty than would have been possible ex ante. Such conduct is known as a form of patent “hold-up.” As the courts, the Antitrust Division of the Department of Justice (DOJ), the FTC, and the Patent and Trademark Office (PTO) have explained, the threat of hold-up arises from the likely difficulty and expense of switching to a different technology once a standard is adopted.2 “This lock-in confers market power

*Koren W. Wong-Ervin is a Consultant in the Office of International Affairs at the Federal Trade Commission. The views expressed here are her own and do not purport to represent the views of the Commission or any of its Commissioners. 1 “RAND” is the common terminology used in the United States, while “FRAND,” or fair, reasonable, and nondiscriminatory terms, is commonly used in Europe and elsewhere. The terms are often used interchangeably to denote the same substantive type of commitment. 2 See, e.g., Microsoft Corp. v. Motorola, Inc., 2013 WL 2111217, **10-11 (W.D.Wash. 2013); DOJ and PTO Policy Statement on Remedies for Standard-Essential Patents Subject to Voluntary F/RAND Commitments at 4 (Jan. 8, 2013), available at http://www.justice.gov/atr/public/guidelines/290994.pdf (“1/8/13 DOJ-PTO Policy Statement”); Renata B. Hesse Speech Presented at Global Competition Review 2nd Annual Antitrust Law Leaders Forum at 16-17 (Feb. 8, 2013), available at http://www.justice.gov/atr/public/speeches/292573.pdf (“2/8/13 Hesse Speech”); Prepared Statement of the FTC Before the U.S. Senate Committee on the Judiciary Subcommittee on Antitrust, Competition Policy and Consumer Rights Concerning “Standard Essential Patent Disputes and Antitrust Law” at 4-5 (July 30, 2013), available at http://www.judiciary.senate.gov/pdf/7-30-13MunckTestimony.pdf (“7/30/13 FTC Statement”).

on the owners of the incorporated patents,” which SEP holders may seek to take advantage of by engaging in hold-up.3 According to the DOJ, “[t]his type of hold-up [i.e., seeking injunctive relief or an unjustifiably higher royalty rate] raises particular competition concerns when alternative technologies that could have been included in the standard were instead excluded from it.”4

Hold-up and the threat of hold-up may cause numerous problems such as “deter[ing] innovation by increasing costs and uncertainty for other industry participants, including other patent holders”5; “induc[ing] users to postpone or avoid incorporating standardized technology in their products”6; “slow[ing] the adoption of new standards or reduc[ing] the royalties other SEP owners earn because the standard is not widely adopted as anticipated”7; and harm to consumers in the form of higher prices.8

Possible Implications of Making a RAND Commitment

Many contend that making a RAND commitment is inconsistent with seeking injunctive relief. As the Ninth Circuit stated, “[i]mplicit in such a sweeping promise is, at least arguably, a guarantee that the patent holder will not take steps to keep would-be users from using the patented material, such as seeking an injunction, but will instead proffer licenses consistent with the commitment made.”9 Similarly, in Apple v. Motorola, Judge Posner stated, “I don’t see how, given FRAND, I would be justified in enjoining Apple from infringing the ‘898 [patent] unless Apple refuses to pay a royalty that meets the FRAND requirement. By committing to license its patents on FRAND terms, Motorola committed to license the ‘898 to anyone willing to pay a FRAND royalty and thus implicitly acknowledged that a

3 2/8/13 Hesse Speech at 16-17. 4 Id. at 17. 5 7/30/13 FTC Statement at 5 (citing FTC, The Evolving IP Marketplace: Aligning Patent Notice and Remedies with Competition at 234, available at http://www.ftc.gov/os/2011/03/110307patentreport.pdf; FTC-DOJ, Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition at 36 (2007), available at http://www.ftc.gov/reports/innovation/P040101PromotingInnovationandCompetitionrpt0704.pdf). 6 2/8/13 Hesse Speech at 17; see also e.g., Microsoft Corp. v. Motorola Inc., 2013 WL 2111217, at *10-11 (W.D. Wash. 2013); 1/8/13 DOJ-PTO Policy Statement at 4; 7/30/13 FTC Statement at 5. 7 2/8/13 Hesse Speech at 17; see also e.g., 1/8/13 DOJ-PTO Policy Statement at 4; 7/30/13 FTC Statement at 5. 8 See, e.g., Microsoft Corp., 2013 WL 2111217, at *10-11; 2/8/13 Hesse Speech at 17; 1/8/13 DOJ-PTO Policy Statement at 4; 7/30/13 FTC Statement at 5. 9 Microsoft Corp. v. Motorola, Inc., 696 F.3d 872, 885 (9th Cir. 2012).

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royalty is adequate compensation for a license to use that patent.”10

Those who believe a RAND commitment precludes seeking injunctive relief often claim a SEP owner cannot prove irreparable harm or the inadequacy of money damages under the Supreme Court’s 2006 decision in eBay v. MercExchange.11 Prior to eBay, permanent injunctive relief was virtually automatic following a district court’s finding of infringement given the general presumption of irreparable harm. In eBay, a unanimous Supreme Court rejected the presumption of irreparable harm and other categorical approaches in favor of a case-by-case application of “traditional equitable principles,” including requiring proof of the patent holder’s irreparable harm and the inadequacy of money damages. In December 2012, the FTC submitted an amicus brief to the Federal Circuit supporting a district court’s denial of injunctive relief to a RAND-encumbered SEP holder, and taking the position that eBay “provides a framework that courts can use to mitigate the risk of patent hold-up.”12 Specifically, the FTC agreed with the district court’s determination that Motorola could not establish that it would be irreparably harmed or that monetary relief (an ongoing royalty) would be inadequate where Motorola had committed to license its SEPs on FRAND terms.

Possible Roles for Antitrust and the Meaning of a “Willing Licensee”

Many, including the DOJ, the FTC, and the European Commission (EC), have suggested that antitrust should be used to address patent hold-up in the standard-setting context.13

Others have rejected this notion, contending that contract law is a superior vehicle to address the issue.14 While the FTC has

10 Apple v. Motorola, Inc., 869 F. Supp. 2d 901, 913-14 (N.D. Ill. 2012). 11 547 U.S. 388 (2006). 12 Brief for FTC as Amicus Curiae Supporting Neither Party, Apple Inc. and NeXT Software, Inc. v. Motorola, Inc. and Motorola Mobility, Inc., Nos. 2012-1548, 2012-1549 at 7 (Fed. Cir. Dec. 4, 2012), available at http://www.ftc.gov/os/2012/12/121205apple-motorolaamicusbrief.pdf. Commissioner Ohlhausen did not vote in favor of submitting the brief, and Commissioner Wright was not a member of the Commission when the brief was filed. 13 See, e.g., 7/30/13 FTC Statement at 1; 2/8/13 Hesse Speech at 19; EC Press Release, Antitrust: Commission sends Statement of Objections to Samsung on potential misuse of mobile phone standard-essential patents (Dec. 12, 2012), available at http://europa.eu/rapid/press-release_IP-12-1448_en.htm (“EC Press Release re Samsung”). 14 See, e.g., Herbert J. Hovenkamp, Standards Ownership and Competition Policy, 48 B.C.L. REV. 87, 106 (2007). Courts that have addressed the issue of failure to adhere to a FRAND commitment have done so under contract law principles, and a Washington federal jury recently found that Motorola’s conduct in seeking injunctive relief violated its duty of good faith and fair dealing with respect to its contractual commitments to the IEEE and the ITU.

looked beyond contract law to enjoin hold-up, it has done so under Section 5 of the FTC Act. For example, in Google/Motorola, the FTC alleged that Google engaged in unfair methods of competition by breaching its commitment to standard-setting organizations (SSOs) when it sought to enjoin and exclude willing licensees of its FRAND-encumbered SEPs.15 The Final Decision and Order specifically provide that Google and Motorola are not precluded from seeking injunctive relief against a potential licensee who: (1) is outside the jurisdiction of the U.S. District Courts; (2) has stated in writing or in sworn testimony that it will not license the FRAND patent on any terms; (3) refuses to enter a license agreement on terms that have been set by a court or through binding arbitration; or (4) does not provide the written confirmation requested in a FRAND Terms Letter within thirty (30) days of when the letter was delivered.16

Similarly, the EC recently sent Statements of Objections to Samsung17 and Motorola Mobility18 informing them of “its preliminary view” that seeking injunctions against willing licensees on the FRAND-encumbered SEPs amounts to an abuse of a dominant position prohibited by EU antitrust rules.

According to Joaquín Almunia, Commission Vice President in charge of competition policy, “[w]hen companies have contributed their patents to an industry standard and have made a commitment to license the patents in return for fair remuneration, then the use of injunctions against willing licensees can be anti-competitive.”19

Apple, Inc. v. Motorola Mobility, Inc., 886 F. Supp. 2d 1061 (W.D. Wis. 2012); Microsoft Corp. v. Motorola, Inc., 854 F. Supp. 2d 993, 999-1001 (W.D. Wash. 2012), reaffirmed, 864 F. Supp. 2d 1023, 1030-33 (W.D. Wash. 2012), aff’d in relevant part, 696 F.3d 872, 884 (9th Cir. 2012); Verdict Form, Microsoft v. Motorola, Case No. C10-1823JLR at 3 (Sept. 4, 2013). Many economists have long viewed the holdup problem and ex post opportunism as a contract problem rather than antitrust problem. See, e.g., Benjamin Klein, Market Power in Antitrust: Economic Analysis After Kodak, 3 S. Ct. Econ. Rev. 43, 62-63 (1993); Benjamin Klein, Robert G. Crawford & Armen A. Alchian, Vertical Integration, Appropriable Rents, and the Competitive Contracting Process, 21 J. Law & Econ. 297, 302 (1978); Oliver E. Williamson, Markets and Hierarchies: Analysis and Antitrust Implications 26-30 (1975). 15 See, e.g., Complaint, In the Matter of Motorola Mobility LLC, and Google Inc., Docket No. C-4410 ¶ 1 (July 23, 2013), available at http://ftc.gov/os/caselist/1210120/130724googlemotorolacmpt.pdf. 16 Decision and Order, In the Matter of Motorola Mobility LLC, and Google Inc., Docket No. C-4410 Section II.E (July 23, 2013), available at http://ftc.gov/os/caselist/1210120/130724googlemotorolado.pdf. 17 EC Press Release re Samsung. 18 EC Press Release, Antitrust: Commission sends Statement of Objections to Motorola Mobility on potential misuse of mobile phone standard-essential patents (May 6, 2013), available at http://europa.eu/rapid/press-release_IP-13-406_en.htm. 19 EC Press Release re Samsung at 1.

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With respect to the definition of a “willing licensee,” the EC stated that its “preliminary view is that the acceptance of binding third party determination for the terms of a FRAND licence . . . is a clear indication that a potential licensee is willing to enter into a FRAND licence.”20 “By contrast, a potential licensee which remains passive and unresponsive to a request to enter into licensing negotiations or is found to employ clear delaying tactics cannot be generally considered as ‘willing.’”21 The EC further stated that, in its “preliminary view, the fact that the potential licensee challenges the validity, essentiality or infringement of the SEP does not make it unwilling where it otherwise agrees to be bound by the determination of FRAND terms by a third party.”22

Others, however, have expressed deep skepticism about the applicability of antitrust to address hold-up. For example, Commissioner Wright has stated that “antitrust laws are not well suited to govern contract disputes between private parties in light of remedies available under contract or patent law.”23 According to Commissioner Wright, “[w]here antitrust laws can and should come into play is when participants abuse and manipulate the standard setting process to exclude competitors from the market,” i.e., naked price-fixing or deception that results in the acquisition of market power.24

Many, including FTC Commissioners Maureen Ohlhausen and Wright, contend that RAND commitments “generally should not be interpreted or implied to prohibit the pursuit of injunctive relief by a SEP holder, including any conduct reasonably ancillary to pursuing such relief, unless the prohibition is expressly provided for in a RAND commitment or clearly acknowledged by a SEP holder.”25 Commissioners Ohlhausen and Wright believe that “it is important to recognize that a predictable threat of injunction can create a significant deterrent to infringement and can promote licensing that allows the SEP holder to obtain the full market value for the patent without costly litigation,” and that “private licensing agreements are generally preferable to court fashioned rates because the parties will have better information about the appropriate terms of a license than would a court, and more flexibility in fashioning

20 EC Memo re Statement of Objections Against Motorola (May 6, 2013), available at http://europa.eu/rapid/press-release_MEMO-13-403_en.htm. 21 Id. 22 Id. 23 Remarks of Commissioner Joshua W. Wright, “SSOs, FRAND, and Antitrust: Lessons from the Economics of Incomplete Contracts” at 32 (Sept. 12, 2013), available at http://www.ftc.gov/speeches/wright/130912cpip.pdf (“9/12/13 Wright Speech”). 24 Id. at 24. 25 7/30/13 FTC Statement at 7 n.22.

efficient agreements.”26 Still others, including Commissioner Ohlhausen, contend that seeking injunctive relief on a patent, whether a SEP or non-SEP, constitutes protective petitioning of the government under the Noerr-Pennington doctrine.27

Commissioner Wright and others also argue that applying antitrust to private SSO contracts may have the unintended consequence of increasing the likelihood of reverse hold-up, i.e., the situation where a firm using the SEP delays good faith negotiations of a FRAND license. “By stripping the SEP holder’s right to injunctive relief, a potential licensee can delay good faith negotiation of a F/RAND license and the patent holder can be forced to accept less than fair market value for the use of the patents.”28 Many people have also expressed concern that using antitrust to expand express SSO commitments risks undermining the standard-setting process by discouraging participation. The costs of deterring participation in SSOs include: SSOs selecting inferior technology; market fragmentation between competing technologies; the risk of undermining the very purpose of SSOs, which among other things, facilitate compatibility and interoperability, reduce consumer costs, and advance innovation; and the risk that non-SEPs may be used to hold-up SEP owners.29

Others have relied on eBay to contend that, given the “high bar” it sets, only truly unwilling licensees will be subject to injunctive relief, and thus “there is no reason to believe that SEP owners have undue leverage over potential licensees or that FRAND commitments do not achieve the balance in interests.”30

Still others contend that a possible reason not to apply antitrust laws to FRAND agreements (absent price-fixing or deception resulting in acquisition of market power) is that there are market-based factors that may mitigate the risk of hold-up. As the FTC’s Chief Counsel for Intellectual Property recently testified before the Senate Judiciary Committee, these market-based factors include: (1) reputational costs that could be sufficiently

26 Id. at 8 n.26 (citations omitted). 27 See, e.g., Statement of Commissioner Maureen K. Ohlhausen, In the Matter of Robert Bosch GmbH, Docket No. 121-0081 at 1 (Nov. 25, 2012), available at http://www.ftc.gov/os/caselist/1210081/121126boschohlhausenstatement.pdf; Dissenting Statement of Commissioner Maureen Ohlhausen, In the Matter of Motorola Mobility LLC and Google Inc., Docket No. 121-0120 at 1 (Jan. 3, 2013), available at http://ftc.gov/os/caselist/1210120/130103googlemotorolaohlhausenstmt.pdf (citations omitted). 28 9/12/13 Wright Speech at 30. 29 See, e.g., id. at 27. 30 Testimony of Donald J. Rosenberg Before the U.S. Senate Committee on the Judiciary Antitrust, Competition Policy and Consumer Rights Subcommittee at 11 (July 30, 2013), available at http://www.judiciary.senate.gov/pdf/7-30-13RosenbergTestimony.pdf.

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large to deter fraudulent behavior given that patent holders are repeat players in standard-setting activities; (2) the first mover-advantage, which incentivizes patent holders who manufacture products using the standard to offer attractive licensing terms in order to promote the adoption of the product using the standard, increasing demand for its product rather than extracting high royalties; and (3) patent holders that have broad cross-licensing agreements with the SEP-owner may be protected from hold-up.31

Conclusion

While a consensus appears to be emerging among the DOJ, the FTC, and the EC regarding the possible role of antitrust in restricting unilateral conduct associated with SEPs, it is not without strong opposition. Indeed, many contend that not only does contract law provide a superior alternative to antitrust law in this area, but that application of the antitrust laws may cause more harm than good.

31 7/30/13 FTC Statement at 6.

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De Facto Exclusive Dealing: The Third Circuit's Decision in ZF Meritor v. Eaton Corporation Tiffany Lee, Wilson Sonsini Goodrich & Rosati

On April 29, 2013, the Supreme Court denied certiorari in the Third Circuit’s decision in ZF Meritor v. Eaton Corporation, 696 F.3d 254 (3d Cir. 2012), cert. denied, 133 S.Ct. 2025 (April 29, 2013), leaving intact a Third Circuit decision that found that Eaton’s market share discounts constituted unlawful de facto exclusive dealing arrangements under a rule of reason standard.

In Eaton, ZF Meritor, a supplier of heavy-duty truck transmissions ("HD Transmissions"), claimed that its competitor Eaton had entered into long-term loyalty discount agreements with all four direct purchasers in the market. These direct purchasers were truck manufacturing companies in the U.S. that purchased HD transmissions (“OEMS”). Id. at 265. The court found that while long-term supply contracts were “not uncommon in the industry,” Eaton’s new agreements were “unprecedented in terms of their length and coverage.” Id. Each agreement contained a conditional rebate provision, under which an OEM would receive rebates only if certain requirements were met. Id. While the agreements varied - some conditioning rebates on market share penetration levels, others on purchase targets - all the agreements had the same effect: they required an OEM to purchase virtually all its HD Transmissions from Eaton.

Eaton also offered OEMs large up-front payments for entering into the contracts. Id. The contracts also had harsh penalty clauses. Some of the contracts required repayment of all contractual savings if market-share penetration goals were not met. Others gave Eaton the right to terminate the supply contract. While the contracts contained a “competitive clause,” which permitted the OEM to purchase transmissions from another supplier that offered a lower price or better product that Eaton could not match, customers testified that the clause was “effectively meaningless.” Id. at 266.

At trial, a jury found that Eaton had violated Sections 1 and 2 of the Sherman Act and Section 3 of the Clayton Act. The district court rejected Eaton’s argument that the conduct was per se lawful because the product was priced above cost, reasoning that notwithstanding Eaton’s above-cost prices, there was sufficient evidence to establish that Eaton’s long term de facto exclusive dealing arrangements foreclosed a substantial share of the market

and harmed competition. On appeal, the Third Circuit affirmed, rejecting Eaton’s argument that the price-cost test should apply, and finding that because the Eaton's loyalty discounts functioned like exclusive dealing contracts, they should be evaluated under the rule of reason.

The core question for the Third Circuit was whether Eaton’s market share should be analyzed under the standard predatory pricing framework. Eaton had argued that because the conduct at issue was pricing discounting(i.e., pricing practice claims), that the “price cost test” from Brooke Group Ltd. v. Brown & Williamson Tobacco Group Crop., 509 U.S. 209, 222-24 (1983), developed in the context of predatory pricing cases, should apply. 696 F.3d at 269 n.9 & 273.

In Brooke Group, the Supreme Court fashioned a two-part test for predatory pricing under § 2 of the Sherman Act: to succeed on a predatory pricing claim, the plaintiff must prove: (1) that the prices complained of are below an appropriate measure of costs; and (2) that the defendant had a dangerous probability of recouping its investment in below-cost prices. 509 U.S. at 222-24. The first requirement, the “price cost test” is based on the notion that low prices benefit consumers: so long as prices are above cost (i.e., predatory level), price discounts are competition on the merits. The Third Circuit noted that Supreme Court has applied the price-cost test to challenges to a defendant’s pricing practices. 696 F.3d at 269 n.9.

However, characterizing Eaton's agreements as de facto exclusive dealing rather than pricing practice claims, the Third Circuit refused to apply the Brooke Group standard, and instead analyzed the agreements under the exclusive dealing rule of reason framework. Id. at 281. Under that standard, courts must take a "hard look" at the nature of the market to evaluate concentration and competitive effects. Id. at 284. The Third Circuit went on to consider factors that would be relevant to an exclusive dealing claim, such as the extent of foreclosure, the length of the agreements, and whether the agreements were easily terminable. Id. at 286-88.

The Third Circuit reasoned that Eaton’s large market share discounts effectively operated as non-price method of exclusion. Id. at 281. That is, the exclusion was not the result of the discount itself, but of the requirement that Eaton’s OEMs were required to purchase the vast majority of its product from Eaton in order to obtain and keep the discount. Id. at 283. Because Eaton was monopolist and had high percentage market share requirements with 100% of the direct purchasers in the market,

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the Third Circuit found that the contractual provisions operated as de facto exclusive dealing provisions and foreclosed competition in the market.

However, while concluding that the price-cost test did not apply in Eaton, the Third Circuit also limited significantly its prior decision in LePage's v. 3M, 324 F.3d 141 (3d Cir. 2003), suggesting it may no longer be good law. 696 F.3d at 275 n.11. LePage's involved allegations that 3M's multi-tiered bundled rebate program, which offered progressively higher rebates when customers increased purchases across 3M’s different product lines, constituted monopolization in violation of Section 2 of the Sherman Act. 324 F.3d at 154. The rebate programs set customer-specific target growth rates and were linked to the number of product lines in which the targets were met. If a customer failed to meet the target for any one product, it would lose the rebates across all product lines. LePage’s could not offer these discounts because it did not sell the same diverse array of products as 3M. Id. at 155. The Third Circuit rejected 3M's argument that the bundled rebate program was lawful because its bundled discounts never resulted in below-cost pricing, finding that 3M's bundled rebate program was most analogous to tying. Id. Eaton limited LePage's to bundled rebate programs which effectively link two separate product markets and are analogous to bundling or tying. 696 F.3d at 275 n.11.

In addition to limiting LePage’s, Eaton also made clear that the price-cost test still applies to market-share or volume rebates offered within a single-product market. 696 F.3d at 275 n.11. In its narrow reading of LePage's, the Third Circuit joined with its sister courts and held that the price-cost test applies to market share or volume rebates. Id.; see NicSand, Inc. v. 3M Co., 507 F.3d 442, 452 (6th Cir. 2007); Concord Boat Corp. v. Brunswick Corp ., 207 F.3d 1039, 1061 (8th Cir. 2000); Barry Wright Corp. v. ITT Grinnell Corp ., 724 F.2d 227, 236 (1st Cir. 1983). The ultimate question in determining which test applies is whether the predominant measure of exclusion is price, in which case the price cost test would apply, or non-price, in which a rule of reason analysis would apply. Id. at 280.

The court found certain facts compelling in distinguishing Eaton from prior loyalty discount cases. First, it found that it was the risk of losing a key supplier that drove customers to meet purchase targets, not the lure of lower prices. Id. at 278.

Second, customers were not free to walk away if a competitor offered a lower price because there was significant downstream demand for Eaton’s products; “losing Eaton as a supplier was not an option." Id. at 277-78. The court also pointed to evidence of anticompetitive intent. Evidence indicated that OEMs agreed to a number of unfavorable terms because they did not want to jeopardize their supply relationships with Eaton. For example, Eaton's contracts required OEMs to delist competing manufacturers’ HD engines from their data books. Id. at 266-67. Persuasive testimony from the OEMs indicated that they did not want to remove ZF Meritor's transmissions from their data books, but were essentially forced to do so or risk financial penalties or supply shortages. Id. at 277.

Where future decisions will draw the line between price predation (where the price cost test applies) and non-price predation (where the exclusive dealing framework applies) will become clear as more courts address the issue. Given that the Third Circuit did state that the price-cost test applies to loyalty discounts in single-product markets, it seems loyalty discounts alone are insufficient to invoke an analysis under the de facto exclusive dealing framework. Rather, it appears that evidence of anticompetitive intent, such as the presence of penalty clauses or threat of cancellation if requirements are not met, and anticompetitive effects, such as evidence that the contracts apply to all virtually all the direct purchasers in the market, must be present. Whether the Eaton de facto exclusive dealing framework takes hold or the case is limited to the facts will be resolved over time. For now, one thing is clear: having loyalty discounts, that are enforceable by repayment and cancellation penalty clauses, with all the major direct customers constitutes non-price predation and may be evaluated as de facto exclusive dealing.

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Can Section 5 Guidance Clarify Unilateral Conduct Enforcement? David Shotlander, Baker Botts L.L.P.

Businesses exceed expectations by coming up with novel approaches to increase revenue and decrease costs. Antitrust enforcement is concerned with protecting consumer welfare, in part by preventing business conduct that results in high prices and low output. These goals are neither consistent nor contradictory, but as businesses and agencies constantly learn and evolve, each carry a certain concern about the other.

As reflected in recent enforcement actions and investigations involving patent enforcement, standard setting, most-favored-nation clauses (MFNs), and Google’s product design, there is broad debate over what unilateral conduct does or may harm competition and under what circumstances. In recent years, businesses have engaged in practices to improve efficiency, sales and profitability that have come under significant scrutiny for their potential to yield competitive harm. Profit-maximizing businesses benefit from reduced competition and can legally reduce competition when there are offsetting efficiencies. For their part, the agencies can be proactive and often seek to review these practices to understand the costs, benefits and motivations.

For the business community, there is a pertinent threshold question: what unilateral conduct will be deemed illegal under what circumstances? Consent decrees and court decisions provide valuable guidance, but official policy statements add additional value to the business community, consumers and counsel by explaining how the agencies conduct analysis, what they look for, how they evaluate different types of evidence and roughly speaking, where and how they draw the line.

Consensus policy statements may be very helpful for conduct that is subject to prosecution under Sections 1 and 2 of the Sherman Act.1 But a policy statement would be especially helpful when it comes to application of Section 5 of the FTC Act to unilateral conduct. That said, policy statements require a consensus among different perspectives, including those who want to give businesses the most assurance to operate without risk and those who want to give the government to most flexibility to challenge unilateral conduct as regulators see fit. In 2008 the DOJ administration under President Bush issued Section 2 Guidelines that were repudiated just over a year later by the early Obama DOJ. To provide effective guidance, unilateral conduct policy cannot be unilateral.

1 15 USC §§1-2 (2012).

FTC Guidance on Unilateral Conduct?

Section 5 of the FTC Act declares unlawful “unfair methods of competition in or affecting commerce.”2 Recently, Commissioners Josh Wright and Maureen Ohlhausen issued separate, and in some parts contrasting speeches calling for official guidelines on the application of Section 5 with respect to competition practices. Wright included draft Guidelines with his speech. Chairwoman Ramirez and Commissioner Brill have also spoken out on Section 5, but disagreed with the issuance of official guidelines. Each provided a valuable perspective.

Commissioner Wright was the first to formally address Section 5 guidelines. Commissioner Wright stressed the need for guidance and clarity, particularly for the business community, and laid out a rather explicit test for the application of Section 5, stating “an unfair method of competition is an act or practice that (1) harms or is likely to harm competition significantly and (2) lacks cognizable efficiencies.”3 Under Wright’s approach, much of the more controversial unilateral conduct (e.g., SSO conduct and patent enforcement, loyalty discounts, MFNs) would seem likely to fall outside the realm of Section 5. While Wright’s statement did not go into depth on his views of Section 2, there were common elements between the position laid out in that draft and the discarded DOJ Section 2 report. Commissioner Wright later clarified that the proposed efficiency screen, which would immunize otherwise anticompetitive conduct, would not be an easy standard:

[T]he efficiencies screen I offer intentionally leverages the Commission’s considerable expertise in identifying the presence of cognizable efficiencies in the merger context and explicitly ties the analysis to the well-developed framework offered in the Horizontal Merger Guidelines. As any antitrust practitioner can attest, the Commission does not credit “cognizable efficiencies” lightly and requires a rigorous showing that the claimed efficiencies are merger-specific, verifiable, and not derived from an anticompetitive reduction in output or service. Fears that the efficiencies screen in the Section 5 context would immunize patently anticompetitive conduct because a firm nakedly asserts cost savings arising from the conduct without evidence supporting its claim are unwarranted.4

2 15 USC §45a (2012). 3 Statement of Commissioner Joshua D. Wright, June 19, 2013, available at: http://www.ftc.gov/speeches/wright/130619umcpolicystatement.pdf. 4 Commissioner Wright Responds to Section 5 Symposium, Truth on the Market, Aug. 2, 2013, available at: http://truthonthemarket.com/2013/08/02/commissioner-wright-responds-to-section-5-symposium/).

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One of the results of including a controversial element to his proposal, and likely not an unintentional one, was drawing responses from his fellow commissioners.

Commissioner Ohlhausen spoke next on Section 5.5 She also advocated for specific guidelines, but chose not to release a public draft. She expressed disagreement with Commissioner Wright that procompetitive efficiencies could immunize conduct under Section 5. That notwithstanding, Ohlhausen laid out six parameters that reject using Section 5 as an open-ended catch-all for any conduct that raises competition concerns: first, substantial harm to competition; second, no procompetitive justification sufficient to offset the harm; third, avoid conflicts within the government; fourth, requiring “robust economic evidence” of anticompetitive effects; fifth, using non-enforcement tools to avoid implicating Section 5; and sixth, providing clear guidance to minimize uncertainty.6 Like Commissioner Wright’s statement, Commissioner Ohlhausen implored the Commission to work together to issue something informative and transparent. Also like Wright (and Chairwoman Ramirez), Ohlhausen made clear that unfair methods of competition should only apply against conduct that harms the competitive process, not merely competitors.

Chairwoman Ramirez and Commissioner Brill have not offered as precise views on the application of Section 5 to unilateral conduct. Commissioner Brill spoke most recently, and expressed resistance to formal Section 5 guidance.7 “If we are to do a statement, from my perspective, it would have to be very flexible, very remedial, and I’m just not sure that's where my fellow colleagues are.” Commissioner Brill does not want the Commission to issue formal guidance while there is vacancy (only four commissioners). On this front, Brill cited the previous issuance and subsequent withdrawal of the Section 2 report.

Brill’s statement struck a similar tone to a statement by Chairwoman Edith Ramirez in April, that case developments (not guidelines) should be provide guidance on Section 5. “It’s important that companies have guidance and understand how it is that the agency intends to use this authority . . . Development on an incremental, case-by-case basis is an appropriate way to develop Section 5 authority.”8 The collective views Ramirez,

5 Section 5: Principles of Navigation, Remarks of Maureen K. Ohlhausen, July 25, 2013, available at: http://www.ftc.gov/speeches/ohlhausen/130725section5speech.pdf. 6 Id. 7 FTC's Brill Questions Whether Section 5 Consensus Possible, Competition Law 360, Aug. 22, 2013, available at: http://www.law360.com/articles/466661/ftc-s-brill-questions-whether-section-5-consensus-possible. 8 Section 5 Cases Offer Best Guidance, FTC Chief Says, Competition Law 360, April 12, 2013, available at: http://www.law360.com/articles/432595/section-5-cases-offer-best-guidance-ftc-chief-says.

Brill and DOJ leadership appear to lean against guidelines that would limit enforcers’ flexibility in exchange for greater business certainty.

Why Guidance on Unilateral Conduct Matters Unilateral conduct frequently entails or facilitates efficiencies that fuel ambiguity under the antitrust laws, even in the face of anticompetitive effects. Much of the conduct that attracts scrutiny is either untested under Section 2, or is unlikely to be actionable under Section 2, either because it is simply not a Section 2 violation or it is a deficient Section 2 claim (insufficient evidence to support a Section 2 claim in court). In each case, challenging conduct under Section 5 may be easier because of Section 5’s inherent flexibility, but raises some key questions about its interpretation. Should the Commission explain what unilateral conduct that is lawful under Section 2 may nonetheless violate Section 5? Can a deficient Section 2 claim, without more, constitute a Section 5 violation? Commissioner Ohlhausen specifically suggested that Section 5 should not be used for deficient Sherman Act cases, but can extend to business torts and other unilateral conduct that would not likely violate Section 2.

For the business community and others, it would be prudent for the FTC to provide clarity on Section 5 and its limits with respect to unilateral conduct. Furthermore, the FTC and DOJ should clarify the government’s interpretation of Section 2, especially as it relates to patent enforcement, market power thresholds, standard setting, loyalty discounts, MFN provisions and other more controversial areas. While the agencies alone cannot resolve varied views among courts and legal practitioners, they can and should express support for specific conduct that tends to yield procompetitive benefits, and describe at what point different practices would likely violate Section 2. Absent official Section 2 guidance, FTC guidance on Section 5 should encompass its position on unilateral conduct.

Official guidance on Section 5 and the legal limits of unilateral conduct would benefit competition by encouraging procompetitive conduct, and enabling businesses to conduct compliance training and investigations with more clarity on the law. In antitrust, ambiguity counsels against risky conduct, including procompetitive behavior and discount practices that may be captured by aggressive application of Section 5 (or Section 2). There are potential competition risks to official guidance, including encouraging anticompetitive conduct just beyond the proscribed enforcement limits, but that risk is more than outweighed by the likely benefits in terms of promoting efficiency and consumer welfare.

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Program Review: “Does Aspen Skiing Apply to Intellectual Property Rights?” Christina Fahmy, Kilpatrick Townsend & Stockton LLP.

On September 6, 2013, the ABA’s Unilateral Conduct Committee, Intellectual Property Committee, and Health Care & Pharmaceuticals Committee jointly hosted a panel discussion on the recent amicus brief filed by the FTC in Actelion Pharmaceuticals Ltd. v. Apotex Inc. Koren Wong-Ervin from the FTC served as the moderator for panelists Jonathan Gleklen, a partner at Arnold & Porter LLP; Markus Meier, Assistant Director at the FTC’s Bureau of Competition; and Ali Stoeppelwerth, a partner at WilmerHale LLP. Mr. Meier made his comments with the caveat that he did not speak on behalf of the Commission.

Background

Actelion Pharmacueticals Ltd. v. Apotex Inc., (Case No. 1:12‐cv‐05473 D.N.J.) involves Actelion, a brand-name drug manufacturer and three competitors – Apotex, Actavis, and Roxane. Each of the three competitors want to offer generic versions of two of Actelion’s products: Tracleer, which is used to treat pulmonary arterial hypertension, and Zavesca, which is used to treat type 1 Gaucher disease. To obtain approval for any generic, a company must test the generic against the brand-name product to demonstrate bioequivalence. Only then can the company file an abbreviated new drug application (“ANDA”) to seek FDA approval for the generic. Actelion had refused to supply Apotex, Actavis, and Roxane with brand-name product for bioequivalence testing, and sued all three companies for a declaratory judgment to affirm that its practice did not violate the antitrust laws. Apotex, Roxane and Actavis filed counterclaims alleging that Actelion’s refusal to sell directly to them constitutes unlawful monopolization in violation of Section 2 of the Sherman Act, based on refusing to deal and unlawfully controlling what the generics characterize as an “essential facility”. Roxane also asserted that Actelion’s exclusive dealing contracts with its distributors, which allegedly barred distributors from selling the products to companies like Roxane, violated Section 1 of the Sherman Act.

On March 13, 2013, the FTC filed an amicus brief, arguing that based on the Supreme Court’s decisions in Aspen Skiing Co.v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985),

Otter Tail Power Co. v. United States, 410 U.S. 366 (1973), and Verizon Communications, Inc. v. Law Offices of Curtis V. Trinko, 540 U.S. 398 (2004), Actelion’s refusal to sell brand-name product to the generic manufacturers for bioequivalence testing might violate Section 2 of the Sherman Act. The FTC’s amicus brief is available at http://www.ftc.gov/os/2013/03/130311actelionamicusbrief.pdf

The Discussion

The panel was asked to address what the potential consequences were, if any, of the FTC’s reliance in its amicus brief on Aspen Skiing for the proposition that “refusing to sell to generic rivals may constitute exclusionary conduct” supporting a violation of Section 2, in light of the general assumption that Aspen Skiing does not apply to intellectual property rights.

In Aspen Skiing, Ski Co. and Highland had originally worked together to offer a 4-slope ticket, that, as the name suggests, allowed skiers access to four slopes operated by different providers. Abruptly, Ski Co. announced that it would no longer participate in the arrangement. Ski Co. further refused to sell its tickets to Highlands at full retail price or honor vouchers held by Highlands customers. The Supreme Court held that while companies have a general right to deal with whomever they choose, the right is not unqualified. Aspen Skiing, 472 U.S. at 601. The Court then explained that if “a firm has been ‘attempting to exclude rivals on some basis other than efficiency,’ it is fair to characterize its behavior as predatory.” Id. at 605. The Court concluded that Ski Co.’s conduct was both exclusionary and predatory, and lacked any pro-competitive justification, making liability under Section 2 appropriate. Id at 610-11.

Mr. Gleklen began the panel’s discussion by stating that no court has ever applied Aspen Skiing to a refusal to license intellectual property. He expressed concern that the FTC seemed to be arguing that the patented good was an essential facility. Essential facilities doctrine has been applied by some courts where a company has restricted access to a facility that is “essential to competition,” where it is feasible for the company to provide that access. Mr. Gleklen noted that the Supreme Court has refused to adopt essential facilities doctrine, and has spoken of it with disfavor.

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Mr. Meier began by noting that essential facilities doctrine remains good law in several Circuits. He went on to note that the real question here was under what circumstances refusals to deal can constitute violates of section 2, in light of the Supreme Court’s decisions in Trinko, Aspen, and Otter Tail, which recognized that refusals to deal can violate section 2. Mr. Meier outlined three key conditions for the imposition of Section 2 liability for a refusal to deal. First, the accused party must willingly forsake short-term profits to achieve an anticompetitive end. Second, the accused party must be refusing to sell something it had been selling previously. Third, the governing regulatory statute must not already address the potential anticompetitive concern.

Mr. Meier went on to outline why he believed -- and the FTC had argued -- that Actelion’s conduct in the underlying case met those three conditions. First, he stated that Actelion clearly forwent the short-term sales to the generic manufacturers to avoid losing business to them in the long term. Second, Mr. Meier noted that Actelion was willing to sell its brand-name drugs to consumers and other participants in the market. Finally, Mr. Meier noted that Hatch Waxman did not address the anticompetitive concerns raised by Actelion’s conduct. Mr. Meier noted that this conclusion was confirmed by the FDA’s August 7, 2013 response to a Citizen Petition in which the FDA noted that antitrust concerns raised in this space would be more appropriately handled by the FTC.

Mr. Gleklen then asked what the FTC believed was anticompetitive about Actelion’s exercise of its patent rights. Mr. Meier said that the arguments Actelion made had nothing to do with their patent rights, and would apply even to circumstances where they had a patent. Mr. Meier noted that Hatch-Waxman does provide a 30 month injunction should a brand-name manufacturer wish to challenge an ANDA application for patent infringement. According to Mr. Meier, this is sufficient protection for the patent holder. In refusing to sell the brand-name drugs to generic manufacturers, brand-name suppliers can delay the development of generics, possibly causing consumer harm by reducing physician and consumer choice and raising prices. Therefore, according to Mr. Meier, Actelion’s actions had no reasonable procompetitive purpose and were more consistent with ensuring the elimination of future competition from generics.

Ms. Stoeppelwerth asked whether the second criterion, which focuses on prior course of dealing, was really about remedies. She noted that other courts interpreting Aspen Skiing has suggested that prior course of dealing is not a requirement for a Section 2 claim. Mr. Meier responded that prior course of dealing speaks to the alleged monopolist’s intent because, in his opinion, companies do not generally decide to give up sales in the short-term without guaranteed long-term benefit, which suggests intent to monopolize. A short debate then ensued about whether sacrificing short-term profits always indicated anticompetitive intent. Mr. Gleklen concluded the discussion by noting that the defense bar is extremely concerned about the potential implication of the FTC’s brief, and Mr. Meier encouraged the attendees to read the amicus brief in full.

The panelists had time for a few questions from the audience. One of the attendees noted that one of the traditional concerns in the refusal to deal cases, including Aspen Skiing, is the possibility of free-riding, and asked if the free-riding issue was relevant in Actelion. One of the panelists noted that, in a sense, Hatch-Waxman Act already allows generic manufacturers to free-ride on the innovations made by brand-name manufacturers by encouraging the development of generics. While acknowledging that this is frequently raised by defendants as a justification, Mr. Meier stated that a fear of free-riding does not justify anticompetitive conduct.

Currently, a hearing on the motion to dismiss and motion for declaratory judgment is scheduled for argument in front of the Third Circuit on October 13, 2013.

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Program Review: “Parallel Exclusion: Is it Time for a Theory of Shared Monopoly?” Jan M. Rybnicek, Federal Trade Commission1

On September 18, 2013, the Unilateral Conduct Committee of the ABA Section of Antitrust Law presented a program entitled, “Parallel Exclusion: Is it Time for a Theory of Shared Monopoly?” The program considered the appropriate application of the antitrust laws to exclusionary conduct by multiple firms within an industry that together potentially harms competition by blocking would-be market entrants.

Moderated by Sara Walsh, a Senior Antitrust Lawyer with Google and Vice Chair of the Joint Conduct Committee, the panel consisted of Scott Hemphill, a Professor at Columbia Law School, Jonathan Jacobson, a Partner at Wilson Sonsini and Committee Officer of the ABA Section of Antitrust Law, Jonathan Gleklen, a Partner at Arnold & Partner, and Joe Farrell, a Professor at the University of California-Berkeley and Partner at Bates White. The panelists explored whether parallel exclusion merits greater attention under the antitrust laws, the similarities and differences between the problem of parallel pricing and the problem of parallel exclusion, how expanding antitrust doctrine to capture parallel exclusion might deter procompetitive conduct, and how the courts and antitrust agencies should think about the potential anticompetitive concerns arising from parallel exclusion.

Scott Hemphill opened the program by describing the thesis of a paper he recently co-authored with Tim Wu, also a Professor at Columbia Law School, entitled “Parallel Exclusion,” that was published in The Yale Law Journal. Hemphill stated that the paper makes the case that parallel exclusion does not currently receive sufficient attention under the antitrust laws, and that U.S. antitrust doctrine should be updated to address anticompetitive parallel exclusion more effectively.

Hemphill argued that the lack of attention to the problem of parallel exclusion largely stems from the fact that parallel exclusion has mistakenly been lumped into the classic debate over whether parallel pricing—where firms in a market with only a handful of competitors are aware of and make the same

1 The author is an Attorney Advisor to Commissioner Joshua D. Wright. Any views expressed in this article are his own and do not necessarily represent the views of the Commission or any Commissioner.

pricing decisions without any actual agreement—should constitute an antitrust violation under Section 1 of the Sherman Act. Hemphill suggested that the parallel pricing debate is incomplete as applied to parallel exclusion because parallel exclusion has significantly greater social consequences. For instance, Hemphill noted that unlike parallel pricing, parallel exclusion is likely to affect innovation as well as price. In addition, parallel exclusion focuses on keeping entrants out of a market, whereas parallel pricing may attract new entrants. Lastly, parallel exclusion tends to be more stable than parallel pricing because firms do not face the difficult task of identifying the “right” price and only need to decide whether or not to exclude. Hemphill stated that this makes cheating easier to detect in the context of parallel exclusion than in parallel pricing.

As a result, Hemphill argued that antitrust doctrine should be updated to recognize parallel exclusion as a form of monopolization by multiple firms rather than falling into the trap of focusing on whether there is an agreement among competitors. Under this approach, the courts and antitrust agencies would apply the requirements and limitations that already exist in monopolization case law, namely the presence of monopoly power and anticompetitive harm and the absence of sufficient procompetitive justifications, to situations where multiple firms engage in exclusionary conduct. Moreover, in evaluating whether any anticompetitive harm results from such conduct, Hemphill argued that the courts and antitrust agencies should focus on the aggregate effect of the exclusionary contracts, rather than the effect of any single contract, to determine whether there is harm to competition.

Offering an economic perspective on the theory of parallel exclusion, Joe Farrell agreed that such conduct could be an antitrust issue, and that the courts and antitrust agencies should not dismiss the possibility of parallel exclusion. However, Farrell stated that there are several questions that would need to be answered on a case-specific basis and only after a fact-intensive inquiry in order to show that such conduct in fact is anticompetitive. For instance, we would need to think about why conduct that might be viewed as procompetitive when done by one member of an oligopoly becomes anticompetitive simply by virtue of all firms in the oligopoly deciding to engage in the same conduct. It also would be important to understand how an oligopoly organized itself to implement the parallel exclusion. Farrell stated that a rigorous analysis of these questions is

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necessarily because it is often difficult to distinguish anticompetitive exclusion from mere competitor complaints.

Jonathan Jacobson expressed the view that there is some merit to a parallel exclusion theory, but argued that even if there is an economic problem it does not mean there has to be a legal solution. Jacobson observed that the number of cases that fall under the parallel exclusion theory likely is very small, and that there exists a serious risk of confusing anticompetitive parallel exclusion with procompetitive contracting and other conduct. Jacobson expressed concern over how a judge or jury would decide which conduct is anticompetitive parallel exclusion and which is procompetitive contracting. In his view, because the social costs of condemning procompetitive conduct could be very high in such cases, courts and the antitrust agencies should apply the antitrust laws to parallel exclusion very carefully.

Jonathan Gleklen expressed significant concern over the prospect of expanding current antitrust doctrine to capture better the theory of parallel exclusion. In his view, it is entirely possible to prosecute parallel exclusion cases under current law, and changing the current rules could have a serious detrimental effect by deterring procompetitive conduct. Gleklen observed that conduct by firms without market power is unlikely to have competitive harm and, in fact, is generally viewed as being procompetitive. He offered the following example: Take an industry with ten firms, each of which has independently decided that vertical integration is important for business and therefore refuses to sell to an outside distributor. Gleklen argued that if we think it is procompetitive if one of the ten firms engages in the exclusionary conduct, why would we think it is different if all of the firms engage in the conduct? Another concern would be how do we decide which firm is liable? Is it the fifth firm to engage in the exclusionary practice or the seventh, and what is basis for distinguishing between the two? Gleklen thus argued that antitrust doctrine should not be expanded to attempt to capture parallel exclusion, and that doing so may make conduct where there is no consumer harm susceptible to antitrust liability.

In closing, although many of the panelists agreed that parallel exclusion could raise anticompetitive concerns in theory, there also existed serious concerns that pursuing the theory could deter procompetitive behavior. As a result, it appears that at a minimum, additional research and learning is needed to understand better how and when parallel exclusion is anticompetitive and, in reviewing specific cases, the courts and antitrust agencies must conduct a rigorous and fact-intensive inquiry to explain why the conduct in question is not procompetitive.

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2013 : Developments in the Enforcement of Article 102 TFEU Frances Murphy and Marguerite Lavedan, Jones Day

In 2013, the enforcement of competition rules against abuses of dominance has mainly been in relation to on-going investigations already commenced by the European Commission (the "Commission"). This is with the exception only of three new cases that were initiated this year- two cases in the energy sector and one case relating to Internet connectivity services. The focus of the Commission's enforcement of Article 102 TFEU1 remains on the sectors it considers to be of key priority: financial services, energy, telecommunications; information and communication technologies ("ICT"), transport; and life sciences.

In contrast with 2012, which saw judgment in important cases such as AstraZeneca, 2 Post Danmark, 3 and Tomra4, 2013 has so far been lacking in judgments by the European Court of Justice (ECJ). Accordingly, no new judgments are reported in this update. It should be noted, however, that three appeals touching on Article 102 TFEU issues are currently pending before the ECJ.

European Commission

New investigations

Oil and biofuel sectors

In May 2013, the Commission has opened an investigation into the oil and biofuel sectors. The Commission has concerns that certain companies active in and providing services to the crude oil, refined oil products and biofuels sectors may have prevented others from participating in the price assessment process, with a view to distorting published prices.

Bulgarian Energy Holding

In July 2013 the Commission opened an investigation into whether Bulgarian Energy Holding, its gas supply subsidiary Bulgargaz, and its gas infrastructure subsidiary Bulgartransgaz (together "BEH"), might be hindering competitors from accessing key gas infrastructures in Bulgaria. The Commission has concerns that BEH may be preventing potential competitors

1 Article 102 of the Treaty on the Functioning of the European Union ("TFEU") provides: "any abuse by one or more undertakings of a dominant position within the internal market or in a substantial part of it shall be prohibited". 2 Case C-457/10 P, AstraZeneca v Commission. 3 Case C-209/10, Post Danmark A/s v Konkurrencerådet. 4 Case C-549/10P, Tomra v Commission.

from accessing the Bulgarian gas transmission network and the gas storage facility by explicitly or tacitly refusing or delaying access to third parties. In addition, the Commission is also concerned that BEH may be preventing competitors from accessing the main gas import pipeline by reserving capacity that is consistently not used, without releasing it on the market.

Internet connectivity services

In July 2013, the Commission announced that it had conducted unannounced inspections at the premises of several telecommunications companies. The Commission is investigating whether these companies active in the provision of internet connectivity have breached TFEU, Article 102. Internet connectivity allows market players (such as content providers) to connect to the internet so as to be able to provide their services or products at the retail level.

Closed Investigations

In 2013, the Commission closed two TFEU Article 102 investigations using Article 9 of Regulation 1/2003 (the "Regulation"). Under Article 9, the Commission may conclude an antitrust investigation by deciding to accept legally binding commitments that have been offered by the companies concerned to close the investigation – a so called "Article 9 decision". Since the entry into force of the Regulation in 2003, the Commission has taken 29 Article 9 decisions, 18 of which related to Article 102 TFEU investigations.

Microsoft

The Microsoft case concerned the imposition of financial sanctions on Microsoft for breaching an Article 9 decision. If a company breaches commitments in an Article 9 decision, then under Article 23(2) of the Regulation, the Commission may fine the company up to 10% of its total turnover in the preceding business year.

An investigation by the Commission revealed that Microsoft had failed to roll out the browser choice screen with its Windows 7 Service Pack 1 from May 2011 until July 2012, affecting 15 million Windows users. On 6 March 2013, the Commission fined Microsoft €561 million for failing to comply with commitments it gave in December 2009 to offer users a browser choice screen enabling them to easily choose their preferred web browser.5 The level of the fine reflects the duration and gravity of the breach and moreover the need for a deterrent effect to avoid similar breaches in other Article 9 decision cases.

5 Case COMP/39.530 — Microsoft (Tying), 16 December 2009, OJ C 36, 13.2.2010, p. 7–8.

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CEZ

The Commission has closed its investigation into whether CEZ, the Czech electricity incumbent, may have violated EU competition rules by hindering the entry of competitors into the Czech electricity markets, in particular through excessive capacity reservations. On 10 April 2013 the Commission adopted an Article 9 decision, being satisfied that the final commitments offered by CEZ to divest significant generation capacity adequately addressed its concerns. The Commission found that the acquisition of any of the divested assets should allow the buyer to establish itself in the Czech market for the generation and wholesale supply of electricity and to compete effectively with CEZ.

E5

Early 2013, the Commission closed its preliminary investigation into the "E5" telecom operators (Deutsche Telecom, France Télécom, Telefónica, Vodafone and Telecom Italia) and GSMA, the mobile sector association, regarding the way standards for future mobile communications services are being developed. The Commission's investigation aimed at ensuring that standardization processes led by major telecom operators are not being used strategically to foreclose other companies. The Commission noted that the standardisation work formerly conducted by the E5 had been transferred to the GSMA and other industry associations, thus reducing the risk of standard setting work affecting competition negatively. The Commission therefore closed its investigation.

Ongoing commitment proceedings

Two TFEU Article 102 commitment proceedings are is still pending, albeit they are both in the final stages of the market testing phase. This is the stage at which the Commission approaches various firms with a draft of the commitments being offered by the parties under investigation with the purpose of whether garnering views on whether the commitments are sufficient to address competition concerns.

Google. The Commission is currently market testing commitments offered by Google in April 2013 in relation to online search and search advertising. The Commission's investigation, which started in 2010, focuses on whether Google may be abusing its dominant position in the markets for web search, online search advertising and online search advertising intermediation in the European Economic Area ("EEA"). In May 2012 the Commission published its four main concerns:

In general search results on the web, Google displays links to its own vertical search services differently than it does for links to competitors. This may result in preferential treatment.

Google may be copying original material from the websites of its competitors without their prior authorization. This could reduce competitors' incentives to invest in the creation of original content for the benefit of internet users.

Agreements between Google and partners, on the websites of which Google delivers search advertisements, whereby Google requires its partners to obtain all or most of their requirements for search advertisements from Google.

Restrictions that Google puts on the portability of online search advertising campaigns from its platform (AdWords) to the platforms of competitors.

To address these concerns, Google has agreed, for a period of five years and three months, to a package of measures that requires it to (1) clearly label promoted links to its own specialized search services so that users can distinguish them from natural web search results, (2) offer all websites the option to opt-out from the use of all their content in Google's specialized search services while ensuring that any opt-out does not unduly affect the ranking of those websites in Google's general web search results, (3) no longer include in its agreements with publishers any written or unwritten obligations that would require them to source online search advertisements exclusively from Google; and, (4) no longer impose obligations that would prevent advertisers from managing search advertising campaigns across competing advertising platforms. If the Commission concludes that these commitments address its four competition concerns, it may decide to make them legally binding on Google by adopting an Article 9 decision.

Deutsche Bahn. The investigation into Deutsche Bahn's pricing system for traction current in Germany is also at the market test stage. The investigation relates to Deutsche Bahn's pricing system. In June 2013, the Commission informed Deutsche Bahn of its preliminary assessment that Deutsche Bahn may have abused its dominant position on the market for the provision of traction current in Germany, in particular by offering discounts that only railway companies of its group could achieve fully. Deutsche Bahn has offered to introduce a new pricing system for traction current that would apply uniformly to all railway companies and should enable other electricity providers to directly supply traction current to railway companies. If the market test confirms that the proposed commitments remedy the competition concerns, the Commission will make them legally binding from 2014 for five years by adopting an Article 9 decision.

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Other ongoing Article 102 TFEU investigations

Energy

In 2013, the Commission's main focus remained on recently liberalized markets in Central and Eastern Europe with two investigations relating to Bulgaria, one relating to Romania and one covering other Central and Eastern European Member States.

There are currently two ongoing cases relating to the gas sector. The first is the BEH gas case, started by the Commission in July 2013 and described above. The second investigation concerns Gazprom, the state-owned Russian producer and supplier of natural gas, and whether Gazprom may be abusing its dominant position in upstream gas supply markets in Central and Eastern European Member States. The case has been met with political resistance and following the announcement of the EU investigation, Russian President Vladimir Putin, signed a decree whereby "strategic"' companies operating abroad may not pass information to foreign regulators without first seeking clearance from Moscow. EU competition laws, however, apply to all companies active in the EU, irrespective of their ownership, and it has been reported that the Commission is preparing a statement of objections.

The Commission is also investigating two electricity cases, one each in Bulgaria and Romania respectively. In Romania, the Commission opened proceedings against OPCOM and its parent company Transelectrica to investigate whether OPCOM may be abusing its dominant position. OPCOM is the operator of the only power exchange in Romania. The Commission has concerns that OPCOM may be discriminating against companies on the basis of their nationality or place of establishment by requiring that all participants on the spot markets on the power exchange hold a Romanian VAT registration and consequently be established in Romania. On 30 May 2013, the Commission announced that it had sent a statement of objections to OPCOM and Transelectrica, setting out its views on why this requirement discriminates against foreign traders and inhibits competition on the Romanian electricity market.

In Bulgaria, the Commission is investigating whether BEH may be abusing its dominant market position in the wholesale electricity market. In particular, the Commission is looking into certain provisions in electricity supply agreements entered into by subsidiaries of BEH, which may restrict their trading partners' freedom to deliver electricity purchased from BEH by prescribing where the electricity has to be delivered. Such contractual provisions may constitute territorial restrictions having the effect of distorting the allocation of electricity within

the Single Market and partitioning electricity markets along national lines.

Telecoms

The investigation into Slovak Telekom a.s. ("ST") and its parent company, Deutsche Telekom AG, is still ongoing. The Commission is of the view that ST may have refused to supply unbundled access to its local loops and wholesale services to competitors, and may have imposed a margin squeeze on alternative operators by charging unfair wholesale prices, all in violation of EU antitrust rules. Deutsche Telekom may be liable for the conduct of its subsidiary.

Transport

In March 2013, the Commission formerly opened proceedings against the Lithuanian railway incumbent AB Lietuvos geležinkeliai ("LG") to investigate whether it limited competition on the rail markets in Lithuania and Latvia by removing a railway track. The removal of this track could have prevented customers from using the services of other rail operators for the transport of freight between Lithuania and Latvia. The investigation has been ongoing since 2011.

Digital economy

The Samsung, Apple/Motorola and Microsoft/Motorola cases opened by the Commission in 2012 are still ongoing. The investigations focus on whether, by seeking and enforcing injunctions on the basis of standard-essential patents ("SEPs"), and where commitments have been given to license those SEPs on Fair, Reasonable and Non-Discriminatory ("FRAND") terms, the companies in question have engaged in an abuse of a dominant position. In May 2013, the Commission sent a statement of objections to Motorola Mobility in the Apple/Motorola case, informing Motorola Mobility of the commission’s preliminary view that Motorola Mobility's seeking and enforcing of an injunction against Apple in Germany on the basis of its SEPs for mobile phones amounts to an abuse of a dominant position by Motorola Mobility. The Commission considers that while recourse to injunctions is a possible remedy for patent infringements, such conduct may be abusive where SEPs are concerned and the potential licensee is willing to enter into a licence on FRAND terms. In such a situation, the Commission currently considers that dominant SEP holders should not have recourse to injunctions, which generally involve a prohibition to sell the product infringing the patent, in order to distort licensing negotiations and impose unjustified licensing terms on patent licensees. The Commission is concerned that the threat of injunctions can distort licensing negotiations, leading to licensing terms that the licensee of the SEP would not have

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accepted absent this threat and ultimately reducing consumer choice.

Finally, the investigation into whether The MathWorks Inc., a US-based software company, has abused its dominant position by refusing to provide a competitor with end-user licenses and interoperability information, is still pending although the Commission announced that it would focus on it during 2013.6 In 2004 Microsoft was fined for a similar abuse of dominant position and obliged to make "complete and accurate" interoperability information available to its competitors at reasonable rates.

Waste management

In July 2013, the Commission sent a statement of objections to the Austrian waste management company ARA informing it of its preliminary view that ARA may have abused its dominant position on the markets for the management of packaging waste (mainly packaging made of plastic and metal) in Austria by hindering competitors from entering or expanding in these markets. The case commenced with the initiation of antitrust proceedings by the Commission against ARA. The Austrian government recently submitted a new draft waste law to the Austrian parliament aiming at opening up the markets for the management of packaging waste to competition. The Commission nevertheless thinks that competition has been prevented by ARA's behaviour and wants to ensure that the legal possibility of market entry will ultimately translate into effective competition.

Life Sciences

The Commission’s investigation into Servier and several of its generic competitors continues. The Commission considers that Servier unduly protected its market exclusivity by inducing its generic challengers to conclude patent settlements and rendered generic market entry more difficult or delayed market entry by others by acquiring scarce competing technologies which would then produce Servier’s own branded drug.

European Court of Justice

Three appeals involving the application of TFEU Article 102 are pending before the ECJ; two of which concern the assessment of secondary markets, also called "aftermarkets".

6 Directorate General for Competition Management Plan 2013, page 25.

In the Greek Lignite appeals7 brought in November 2012, the Commission is appealing to the ECJ against the General Court's interpretation and application of Article 106(1) TFEU on State Aid in conjunction with Article 102 TFEU. In two judgments of September 2012, the General Court had found that the Commission had not identified the abuse of a dominant position. The Commission alleges that the existence of a dominant position in the primary market for the supply of lignite extends to the secondary market (for the wholesale supply of electricity in Greece), preventing competitors of the dominant undertakings from entering the market.

Secondary markets are also central to the Ink-jet printer manufacturers case.8 The European Federation of Ink and Ink Cartridge Manufacturers ("EFIM") is appealing to the ECJ against a General Court judgment upholding a Commission decision to reject a complaint the EFIM had made to the Commission alleging a breach of the TFEU, Article 101 and/or Article 102, by various original equipment manufacturers of ink-jet printers and printer supplies. The Commission had decided that the existence of interrelated primary and secondary markets meant that effective competition in the primary market was able to discipline the secondary market thus excluding any dominant position in this aftermarket. Consequently, it was unlikely to be possible to establish proof of collective and individual market dominance on the part of inkjet printer manufacturers in relation to their secondary markets for ink cartridges and ink.

Finally, Telefónica's appeal9 is to the ECJ against a judgment of the General Court upholding a Commission decision finding that Telefónica had engaged in a margin squeeze is also pending. The General Court upheld the Commission's analysis in its entirety, including its market definition, assessment of dominance, approach to demonstrating that there is a margin squeeze (the "as-efficient" competitor test) and the penalty the Commission had imposed on Telefónica. The General Court had also confirmed that the regulatory framework for telecommunications does not release dominant firms from their obligation to respect EU competition law. Telefónica claims that the Commission committed errors of law in its definition of the wholesale markets and in its assessment of its alleged dominant position. Telefónica also contests the Commission's assessment

7 Case C-553/12 - European Commission v DEI and Case C-554/12 - European Commission v DEI. 8 Case C-56/12 - European Federation of Ink and Ink Cartridge Manufacturers (EFIM) v European Commission. 9 Case C-295/12P - Telefónica S.A. and Telefónica de España, S.A.U. (OJ 2012 C-295/12).

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of the abuse and its alleged effects on competition in relation to the choice of wholesale inputs, the discounted cash flow method, the "period to period" method, and the likely or concrete effects of the conduct.

Conclusion

2013 is likely to see three Article 9 decisions in each of the CEZ, Google and Deustche Bahn Commission investigations. This appears to confirm that the Commission is increasingly relying on commitment decisions in TFEU, Article 102 investigations since they bring about a more rapid solution which can be in the better interests of the consumer than a protracted investigation.

For more information, please contact:

Frances Murphy London +44.20.7039.5959 fmurphy@jonesday.com Marguerite Lavedan London +44.20.7039.5222 mlavedan@jonesday.com

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China Enforcement Update Yan Luo, Covington & Burling LLP

Court Hands Down Judgment in Qihoo v. Tencent (March 28, 2013)

On March 28, 2013, the Guangdong High Court handed down its ruling on Qihoo v. Tencent, one of the most high-profile civil litigation under China’s Anti-monopoly Law (“AML”). The case involves two Chinese Internet companies, Qihoo 360 Technology Co., Ltd. (“Qihoo”) and Tencent Technology (Shenzhen) Co., Ltd (“Tencent”). Tencent provides, among other products, a popular instant messaging product, “QQ”, and Qihoo is a leading anti-virus software provider.

The long-running dispute between these two firms started when Qihoo brought a claim against Tencent, alleging Tencent abused its dominant position in the Chinese integrated instant messaging software and services market, in 2010. In September 2010, Tencent released its own anti-virus software and encouraged users of QQ to download it from the QQ website. In doing so, Tencent became a direct competitor to Qihoo, China’s largest anti-virus software producer. Qihoo then accused Tencent of scanning its users’ computers for private data and modified its anti-virus software to stop QQ from being able to access personal data. Tencent reacted by warning its users that the Qihoo software had caused QQ to malfunction and that its users should uninstall the Qihoo software. Tencent subsequently ceased to provide QQ software services to users that installed Qihoo software.

The two firms filed both administrative complaints against each other with China’s State Administration for Industry & Commerce (SAIC) and counter suits in courts. On April 18, 2012, the Guangdong High Court (“the Court”) heard the case filed by Qihoo. Almost a year after the hearing, the Court ruled that Tencent did not engage in abuse of dominance as defined in the AML and dismissed Qihoo’s claim for RMB 150 million in damages. Qihoo was ordered to pay RMB 796,800 in costs.

The judgment focused on three main issues: (i) definition of the relevant market; (ii) whether Tencent possessed a dominant position in the relevant market; and (iii) whether Tencent abused its market dominance so as to restrict and eliminate competition.

The Court rejected Qihoo’s definition of the relevant market, stating that it was too narrow. It found that, in addition to integrated instant messaging software and services such as Skype, products such as social networking services and other services such as Weibo (the Chinese equivalent to Twitter) are

within the same relevant product market and that the relevant geographic market was global.

The Court also found that Qihoo had not provided sufficient evidence to prove that Tencent had monopoly power in the relevant market. While Qihoo had cited expert reports to prove Tencent’s market share, the Court stated that market share alone is not sufficient to support a finding of dominance. Other factors to consider include the ability to control price, quantity, or other transaction or to prevent others from entering the market, and the competitiveness of the relevant market. Even if Qihoo’s market definition was adopted and Tencent has a high market share in that relevant market, Tencent did not have monopoly power because Tencent has no power to prevent new firms and technologies from entering into the market and the relevant market is very competitive.

Finally, the Court found that, Tencent had not engaged in anticompetitive tying and it has not abused its market dominance (if it has any) so as to restrict and eliminate competition.

This is a landmark decision because it is the first time that a Chinese court provides sophisticated and detailed competition analysis in an AML litigation and the first time where economic experts, in particular foreign experts, provided evidence to a Chinese court. The judgment, almost 40 pages, is much longer than most civil judgments in China.

SAIC Investigates Tetra Pak for Abuse of Dominance (July 5, 2013)

On July 5, 2013, SAIC announced that it was investigating Tetra Pak for potential abuse of market dominance in breach of the AML. Mr. Zhang Mao, the Minister of the SAIC, stated that Tetra Pak’s Shanghai headquarter has been raided and SAIC’s local branches in more than 20 provinces and cities were involved in the investigation. Tetra Pak issued a statement later, stating that it is cooperating with the SAIC and has responded to its requests for information about its Chinese operations. The investigation is still ongoing.

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Report from Canada Devin Anderson and James Musgrove, McMillan LLP

Recent Unilateral Conduct decisions of Canada’s Competition Tribunal Confirm Established Requirements of the Law

Introduction

In 2009/10 Canada fundamentally amended important aspects of its competition law.1 Many of the core concepts which had been part of Canada’s law for decades – and in some cases more than a century – were changed. For instance, merger notification was significantly revised. Price discrimination and predatory pricing – offences for more than 70 years – were simply repealed. Penalties were increased and penalties were added where none previously existed. New reviewable conduct provisions with respect to agreements with competitors were added. The cornerstone conspiracy offence, which for more than 100 years had required that there be an undue effect on competition, was recast as a per se offence, but with only certain conduct prohibited, and express statutory defences added dealing with conduct ancillary to a broader agreement. The Canadian criminal price maintenance provision, which had been stricter than its U.S. counterpart, was repealed and replaced with a new reviewable conduct price maintenance provision – prohibiting the conduct only where price maintenance leads to an adverse effect on competition. While this is not a place to argue the wisdom of those changes, the fact of new statutory provisions itself creates considerable uncertainty.

Added to this is the fact that Canada, unlike the United States, lacks a rich competition law jurisprudence. Many statutory provisions have had no or very limited judicial consideration. That is true of even those that survived the 2009/10 amendments. Provisions amended at that time have received virtually no meaningful interpretation in the few intervening years.

Given that situation, certainty is a rare commodity. It is also valuable – both to businesses seeking to comply with the law, and to government enforcers, who necessarily depend on voluntary compliance as the principal method to enforce these laws. Nevertheless, in a couple of recent cases, the Commissioner has sought expansive and novel interpretations of provisions of the Competition Act. Over the last few months the Canadian Competition Tribunal rejected these approaches, thereby providing the business community with some certainty and predictability.

1 Budget Implementation Act, 2009, S.C. 2009, c. 2.

The Toronto Real Estate Board Case

One of the provisions of the Competition Act which emerged largely unaltered from the 2009/2010 amendments is that dealing with abuse of dominant market position2. The only amendments to Section 78/79 of the Act arising out of the recent Competition Act changes was the addition of an administrative monetary penalty provision previously absent from abuse of dominance3. As a result of the change, firms which are found to have engaged in abuse of dominant market position can face administrative monetary penalties of up to $10 million dollars – or $15 million dollars if it is repeat conduct. However, while cases have subsequently been filed seeking these Administrative Monetary Penalties4, they were not sought in the case of the Toronto Real Estate Board (TREB)5.

While the TREB case did not involve issues related to statutory amendments, it did involve an attempted novel interpretation of the abuse of dominance provisions. To understand this a little history is required. The essential requirements for a finding of abuse of dominant market position or monopolization in Canadian law are three fold. First, a firm has to be found to completely or substantially control the business6. This has been equated by the Tribunal, in a long line of cases, to having market power in a relevant product and geographic market7. Secondly, the conduct challenged must be found to lead to a substantial prevention or lessening of competition8. Again in a string of cases this has been found to mean that the conduct has led to increase or preservation or entrenchment of the firm’s market power9. The third requirement is that the firm has engaged in a

2 Competition Act, R.S.C., 1985, c. C-34 [Competition Act], ss. 78 and 79. 3 Competition Act, s. 79(3.1): “If the Tribunal makes an order against a person under subsection (1) or (2), it may also order them to pay, in any manner that the Tribunal specifies, an administrative monetary penalty in an amount not exceeding $10,000,000 and, for each subsequent order under either of those subsections, an amount not exceeding $15,000,000.” 4 The Commissioner of Competition v. Direct Energy Marketing Limited, CT-2012-003; The Commissioner of Competition v. Reliance Comfort Limited Partnership, CT-2012-002. 5 The Commissioner of Competition v. The Toronto Real Estate Board, CT-2011-003, Notice of Application. 6 Competition Act, s. 79(1)(a). 7 M. Katz, “Abuse of Dominance” in James Musgrove, ed., Fundamentals of Canadian Competition Law (Toronto: Thomson Carswell, 2007) [Fundamentals of Canadian Competition Law] at pp. 151-154; see also e.g. Canada (Director of Investigation and Research) v. NutraSweet Co. (1990), 32, C.P.R. (3d) 1 (Comp. Trib.) [NutraSweet] at paras. 69-82; Canada (Director of Investigation and Research) v. Laidlaw Waste Systems Ltd. (1992), 40 C.P.R. (3d) 289 (Comp. Trib.) at paras. 96-98 and Canada (Director of Investigation and Research) v. Tele-Direct (Publications) Inc. (1997), 73 C.P.R. (3d) 1 (Comp. Trib.) [Tele-Direct] at paras. 224-225. 8 Competition Act, s. 79(1)(c). 9 Fundamentals of Canadian Competition Law at pp. 157-160; see also NutraSweet at paras. 137-156; Tele-Direct at para. 523.

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practice of anti-competitive acts10. While the statute contains an illustrative list of such acts11 the list is expressly not comprehensive, and the Tribunal has so found12. What the Tribunal has said, in a number of cases, however, is that anti-competitive acts have to be engaged in for an anti-competitive purpose which is conduct aimed at a competitor which is disciplinary, exclusionary or predatory13. Those have been the three long standing requirements for a finding of abuse of dominant market position.

In September of 2012, about a year after the then Commissioner filed her case against the Toronto Real Estate Board (and six months after issuing Draft Guidelines,14 which were similar in many respects to the Final Guidelines) the Commissioner of Competition issued revised Enforcement Guidelines15 with respect to the abuse of dominance provisions of the Competition Act. These Guidelines formally replaced the previous Guidelines16 issued 11 years earlier, and also replaced extensive Draft Guidelines17 which had been promulgated in 2009 but never finalized. The Guidelines, both in draft and final form were the subject of considerable commentary. One of the concerns expressed was that they contained considerably less detail than those which they replaced18. The comments also noted that the Guidelines signalled a shift in the Bureau’s enforcement approach to joint abuse of dominance, and in particular the question of whether conscious parallelism can be

10 Competition Act, s. 79(1)(b). 11 Competition Act, s. 78. 12 See e.g. Laidlaw at para. 121. 13 See e.g. NutraSweet at para. 90; Canada (Commissioner of Competition) v. Canada Pipe Co., 2006 FCA 233 at para. 64. 14 Competition Bureau, Draft Enforcement Guidelines on the Abuse of Dominance Provisions (Sections 78 and 79 of the Competition Act) (Ottawa: March 22, 2012). 15 Competition Bureau, Enforcement Guidelines on The Abuse of Dominance Provisions ( Sections 78 and 79 of the Competition Act) (Ottawa: September 20, 2012), available online: http://www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/eng/03497.html [2012 Guidelines]. 16 Competition Bureau, Enforcement Guidelines on the Abuse of Dominance Provisions (Sections 78 and 79 of the Competition Act) (Ottawa: July 2001). 17 Competition Bureau, Draft Enforcement Guidelines on the Abuse of Dominance Provisions (Sections 78 and 79 of the Competition Act) (Ottawa: January 16, 2009). 18Canadian Bar Association, Enforcement Guidelines: Abuse of Dominance (Competition Act sections 78 and 79) (May 2012), available online: http://www.cba.org/cba/submissions/pdf/12-34-eng.pdf; American Bar Association, Joint Comments of the American Bar Association Section of Antitrust Law and Section of International Law on the Canadian Competition Bureau’s Draft Updated Enforcement Guidelines on the Abuse of Dominance Provisions (Sections 78 and 79 of the Competition Act) (May 22, 2012), available online: http://www.americanbar.org/content/dam/aba/administrative/antitrust_law/at_comments_7879_201205.pdf; J. Musgrove, N. Campbell, J Meng, New Abuse of Dominance Guidelines (September 2012), available online: http://www.mcmillan.ca/new-abuse-of-dominance-enforcement-guidelines.

sufficient to constitute a joint abuse of dominance19. Most relevant for the TREB case, however, was the question of the necessary intent to constitute an anti-competitive act. As noted above, the jurisprudence determined that to constitute an anti-competitive act the conduct has to be undertaken with the goal of having a negative effect on a competitor which is predatory, exclusionary or disciplinary20.

This limiting principle – that an anti-competitive act has to be undertaken for a purpose aimed at a competitor – has been determined to exist in virtually all cases of abuse of dominance decided by the Competition Tribunal, and affirmed by the Federal Court of Appeal in the Canada Pipe21 case. Nevertheless in the 2012 Guidelines the Bureau stated that: “[W]hile many types of anti-competitive conduct may be intended to harm competitors, the Bureau considers that certain acts not specifically directed at competitors could still be considered to have an anti-competitive purpose.”22 As was noted at the time23, if that approach were accepted it would greatly expand the scope for finding that conduct constitutes abuse of dominance, because it removes the key limiting principle. Any activity by a firm with a meaningful market share and which has the effect of making it harder for others to compete with it could be successfully challenged as abuse of dominant market position24.

19 Ibid. 20 The focus on a competitor is, in some respects unfortunate, in that the primary focus with respect to competition law generally should be on competition, not competitors. Nevertheless, some limiting principle which restricts the range of conduct to which the abuse of dominance provisions apply is necessary if firms with significant market share which compete aggressively and successfully are inevitably not to be subject to challenge. 21 Canada Pipe at para. 68. 22 2012 Guidelines, s. 3.2. 23 Supra note 18. 24 This is not the first time that the Commissioner has sought to amend or change established interpretations while a case is before the Tribunal or the courts. In the Superior Propane case, the Commissioner challenged the acquisition by Superior Propane Inc. of ICG Propane Inc.; the Tribunal dismissed the challenge, even though it found that the acquisition would likely substantially lessen and prevent competition, on the basis that the efficiencies generated by the transaction would outweigh its anti-competitive effects (the “efficiencies defence”). At the time the Commissioner’s application was filed, the Bureau’s Merger Enforcement Guidelines highlighted the Commissioner’s reliance on the total surplus standard as the methodology used in assessing efficiencies. After the application was filed, speeches by senior Bureau officials articulated a significant deviation from the Merger Enforcement Guidelines, noting that “total surplus may not be an all-inclusive measure of the anticompetitive effects that are likely to arise from the merger” and that “it is more appropriate for the Competition Tribunal to determine whether the merger increases aggregate welfare or not” (“The treatment of Efficiencies in Merger Analysis”: remarks given by Gwillym Allen, Assistant Deputy Commissioner of Competition, Economics and International Affairs at the “Meet the Competition Bureau” conference, Toronto, 3 May 1999). The Tribunal was understandably critical of what appeared to some to be a suspiciously timed change in position. See e.g. Commissioner of Competition

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This issue, and this revised approach to the interpretation of the abuse of dominance provisions, articulated after the Commissioner filed her case against TREB, played a key role in the determination of the Toronto Real Estate Board case. The case followed on a settlement which the Commissioner had reached the previous year with the Canadian Real Estate Association (CREA)25. In the CREA case the Commissioner alleged that multiple listing service rules imposed by CREA constituted an abuse of CREA’s dominant position in the provision of residential real estate services,26 and sought an order prohibiting CREA from adopting, maintaining or enforcing any rules that discriminate against brokers who choose to provide only listing services on MLS or fee-for-service arrangements. Ultimately, CREA consented to the relief sought by the Commissioner and an order was entered that provided that real estate agents could offer more flexible service and pricing options to customers.

In the TREB case the Commissioner alleged that TREB and its members substantially or completely controlled the market for the supply of residential real estate brokerage services in the greater Toronto area, and that TREB used its control of its electronic database multiple listing service to enact and interpret rules, policies, agreements excluding competition from involved brokerage firms, and in particular rules prohibiting brokerages from offering a Virtual Office Website (VOW) operation. The Commissioner’s concern was that certain brokers sought to provide residential real estate services over the internet through a VOW. VOWs are lower cost than a traditional brokerage operations and the Commissioner alleged that TREB enacted rules to prohibit a brokerage from operating VOWs in order to protect the traditional delivery model.

The Commissioner’s application alleged that TREB’s substantial or complete control of the supply of residential real estate brokerage services in the greater Toronto area flowed from its ability to enact, interpret and enforce rules, policies and agreements that govern the use of access to the MLS system. She further alleged that the MLS restrictions enacted by TREB constituted a practice of anti-competitive acts the purpose of which was to discipline and exclude innovative brokers who offered VOW services.

On April 15, 2013 the Competition Tribunal dismissed the Commissioner’s application, with costs, in an

v. Superior Propane Inc., CT-1998-002, Reasons And Order at paras. 395-397. 25 The Commissioner of Competition v. The Canadian Real Estate Association, CT-2010-002, Registered Consent Agreement. 26 The Commissioner of Competition v. The Canadian Real Estate Association, CT-2010-002, Notice of Application.

uncharacteristically brief 8 page decision27. In it the Tribunal concluded that the Commissioner failed to meet all three of the requirements of Section 79 of the Act – although all essentially for the same reason – that TREB did not compete in the market for residential real estate brokerage services, did not have competitors in that market, and therefore could not have had market power in the market for residential real estate services. The Tribunal found that TREB had not engaged in a practice of anti-competitive acts – for reasons explored in a moment – and consequently the Tribunal found that a practice of anti-competitive acts had not led to the substantial lessening of competition.

The key issue, as noted, was whether or not TREB’s policies, particularly with respect to virtual office websites, constituted a practice of anti-competitive acts. The Tribunal noted that the Federal Court of Appeal had determined in the Canada Pipe case that for the purposes of Section 79(1)(b) the alleged dominant firm must compete with the firms harmed by the dominant firms practice of anti-competitive acts28. It noted that there were a series of Competition Tribunal cases which affirmed that the purpose common to all anti-competitive acts found in Section 78 is an intended negative effect on a competitor that is predatory, exclusionary or disciplinary. In the TREB case it was admitted that TREB did not compete with its members, and thus the restrictions on Virtual Office Websites could have negative effect on the competitor required by the provision.

The Tribunal noted the amended Abuse of Dominance Guidelines, and the fact that “the Guidelines also suggest that the Commissioner is not happy with the decision in Canada Pipe to the extent that it limits anti-competitive acts to those intended to harm a competitor.”29 However, the Tribunal noted that though the Guidelines do not state that the alleged dominant participant need not compete in the relevant market. Consequently, the Tribunal concluded that even on the Commissioner’s own Guidelines, which sought to broaden the definition of anti-competitive acts from those defined by the Tribunal or Court, the TREB situation did not fit.

As a result of the foregoing the Commissioner’s application was rejected and the traditional rule, that to constitute an anti-competitive act the conduct must be undertaken for an anti-competitive purpose, being a disciplinary, predatory or exclusionary purpose aimed at a competitor, was affirmed. This remains a limiting principle on findings of abuse of dominance.

27 The Commissioner of Competition v. The Toronto Real Estate Board, CT-2011-003, Reasons for Order and Order. 28 Ibid. at para. 12; Canada Pipe at para. 64-65. 29 TREB at para. 20.

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Not any action by a dominant firm which has the effect of reducing competition constitutes abuse of dominance.

The Commissioner, on May 14, 2013, announced an intention to appeal the decision.

The Credit Card Case

Unlike the Toronto Real Estate Board case, which was decided based on law which was essentially unchanged from the 2009/10 amendments to the Competition Act, the credit card case involved interpretation of a price maintenance provision, which had been until 2009 a criminal offence in Canada but which was re-enacted as a reviewable practice in the amendments process30.

Price maintenance has been a provision of Canadian competition law since 1951. It has gone through various iterations over the years but, until the 2009 amendments, and particularly since U.S. decisions had eliminated the per se ban on first maximum31 and then minimum32 resale price maintenance, the Canadian law had been stricter than the U.S. rule. Prior to the Canadian amendment it was a criminal offence to agree between suppliers and distributors as to a minimum resale (or advertised) price, and also criminal prohibition to refusing to supply someone because of their low price policy. In that regard, the Canadian law specifically prohibited Colgate33 type policies.

In addition to the vertical aspect of a resale price maintenance law, for a period of time between 1976 and 2009 the law, somewhat anomalously, also prohibited horizontal agreements with respect to prices. We say anomalously because Canadian price maintenance law was a per se offence, and yet until the 2009/10 amendments Canada’s conspiracy provision required that there be an undue effect on competition.

All that is by way of a prologue. As noted, in 2009 the law was expressly decriminalized, in response to work which had been done over many years by academics and others34 suggesting that it was illogical to have one criminal vertical practices provision – resale price maintenance – whereas other vertical practices such as tied selling and exclusive dealing were civil and reviewable in nature. This call was reinforced by the authors of a major study of Canada’s competition laws which called for simplification of the law and sought to have it more closely aligned as those with

30 Competition Act, s. 76. 31 Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911). 32 Leegin Creative Leather Products, Inc. v. PSKS, Inc., 127 S. Ct. 2705 (2007). 33 United States v. Colgate & Co., 250 U.S. 300 (1919). 34 See e.g. J.A. Van Duzer & G. Paquet, Anticompetitive Pricing Practices and the Competition Act: Theory, Law and Practice (October 22, 1999).

its major trading partner35. In 2009 Parliament responded to these calls and essentially re-enacted resale price maintenance as a reviewable provision, with largely the same definition of the conduct, but instead of an absolute prohibition it provided that the conduct could be prohibited if the Competition Tribunal found that it led to an adverse effect on competition.

In December, 2010 the Commissioner of Competition filed a case before the Competition Tribunal, relying on this new reviewable price maintenance provision, and alleging that certain rules established by Visa and MasterCard, and in particular the honour all cards and no surcharge rules established by those systems, constituted price maintenance36. After a full trial lasting some 7 weeks, the Competition Tribunal rejected the Commissioner’s position and found that price maintenance laws were not so broad as to comprehend these rules of MasterCard and Visa37. It also found that even if it was wrong in that regard it would exercise its discretion not to make an order, given the potential for significant unintended consequences of such an order. It also found that in its view the rules did create an adverse effect on competition, but that because the conduct did not constitute price maintenance and because it would exercise the discretion to make an order in any case, no order should be made38.

When the credit card case was launched there was considerable surprise that the Commissioner had chosen to challenge Visa and MasterCard rules pursuant to the price maintenance provision39. The conduct simply did not seem to conform with the generally understood parameters of price maintenance which, in its simplest form, is understood to be directed towards suppliers seeking to dictate resale prices to their distributors. The honour all cards rule and the no surcharge rule say nothing whatsoever about the price merchants charge their customers, and nothing about the price that Acquirers charge merchants. They simply say that if you accept one type of Visa or MasterCard credit card you must accept all such cards, and that if you choose to accept

35 Industry Canada, Compete to Win – Final Report (Ottawa: June 2008), available online: http://www.ic.gc.ca/epic/site/cprp-gepmc.nsf/vwapj/Compete_to_Win.pdf/$FILE/Compete_to_Win.pdf. 36The Commissioner of Competition v. Visa Canada Corporation and MasterCard International Incorporated et al, CT-2010-010, Notice of Application. Note, the authors represented MasterCard in the case before the Canadian Competition Tribunal. 37 The Commissioner of Competition v. Visa Canada Corporation and MasterCard International Incorporated et al, CT-2010-010, Reasons for Order and Order [MasterCard]. 38 MasterCard, para. 393-401. 39 See e.g. B. Zalmanowitz, S. Walker, J. Matsalla , Visa and MasterCard rules challenged by the Competition Bureau, Lexology (December 20, 2010), available online: http://www.lexology.com/library/detail.aspx?g=0db65aa2-2d85-486b-a8d9-b8cbf3734b37.

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the cards you cannot add a surcharge to consumers who decide to pay with a card.

The Commissioner’s theory, was in essence, that the Visa and MasterCard rules softened competition between Visa and MasterCard, which constituted an adverse effect on competition, and that that adverse effect on competition influenced upward discouraged the reduction of prices they charged – or perhaps of interchange they set. The Tribunal considered but rejected this theory. It noted there was nothing in the statutory history or approach to the provision which would suggest this reverse interpretation to the provision. It further determined that requirement to influence upward prices must mean something other than the consequences that flow from the companies exercising market power, otherwise the price maintenance provision would turn into an open ended provision with respect to the exercise of market power and there is nothing in the legislative history, other decisions or commentary supporting such interpretation40. The Tribunal also noted that the Commissioner may have chosen not to bring an application under the abuse of dominance provisions because pursuant to those provisions, as discussed above in relation to the TREB case, there must be an intended predatory, exclusionary or disciplinary negative effect on a competitor41. However, the Tribunal noted that any gap in the abuse of dominance provision did not justify an overreaching interpretation of Section 76.

In addition to the open ended approach to interpretation of price maintenance which the Commissioner advanced, and which the Tribunal rejected, the Tribunal also found that price maintenance requires that there be a resale of a product for the provision to apply – and it found that in this case credit card systems there was no resale of a product42. Visa and MasterCard provide certain services to transaction acquirers and transaction acquirers provide other services to merchants, but there is no resale of a product between products supplied by MasterCard and Visa to acquirers. For that reason as well the price maintenance provision did not apply.

As noted above, the Tribunal specifically indicated that even if it were wrong in the interpretation of Section 76 it would exercise discretion not to make an order. It noted that an order would be “a blunt instrument and there will be technical hitches, unforeseen consequences, a need for ongoing adjustment and stakeholder consultation.”43 It further noted that the experience in jurisdictions such as Australia and the United Kingdom has

40 MasterCard, para. 162. 41 MasterCard, para. 138. 42 MasterCard, paras. 115-116 and 141-157. 43 MasterCard, para. 395.

shown that concerns will be raised with consumers regarding surcharging and possible gouging44. It further noted that changes in one part of the credit card system were likely to have significant unintended consequences in other parts45. The Tribunal concluded that it was uncertain that a supposed “cure” would not be worse than the “disease”46.

In addition to the analysis of the decision set out above, the Competition Tribunal spent considerable time determining whether or not the Visa and MasterCard network rules had resulted in an adverse effect on competition, and it concluded that they had. While we take serious issue that conclusion, given the fact that the decision at the time of writing is subject to appeal we specifically refrain from commenting on that aspect of the case other than to note that it is highly controversial.

Conclusion

The Competition Tribunal, in both the TREB and credit card cases, rejected the invitation to give expansive and novel interpretations to the relevant provisions of the Competition Act, and instead chose to confirm the traditional interpretations of the abuse of dominance and price maintenance provisions. In this regard, while both decisions were, at the time of writing, either under appeal or subject to appeal, and therefore the Court of Appeal or even perhaps the Supreme Court may be ultimate arbiter of the question, the interpretations provided by the Tribunal give guidance and some level of certainty to the business community – although these issues are inherently complex and to some degree uncertain. Nevertheless the Tribunal’s confirmation that to constitute abuse of dominance conduct must be aimed at excluding, deterring or in some way injuring a competitor, and that for price maintenance there must be a resale product and that the adverse effect on competition must flow from the price maintenance, and not the reverse, are important decisions which will be of guidance to the business community as to how lawfully organize ones affairs.

44 Ibid. 45 MasterCard, para. 398. 46 Ibid.

Volume 11 No.1 Fall 2013

American Bar Association 34

Canadian Competition Bureau Reviewable Conduct Branch Roundtable James Musgrove, McMillan LLP

On Thursday June 20, 2013 the leadership of the Canadian Competition Bureau’s Reviewable Practice Branch participated in its first annual roundtable with members of the bar. The Branch wanted to provide information on its current initiatives and anticipated developments.

The Branch enforces the reviewable practices provisions of the Competition Act, the principal aspects of which being the new decriminalized price maintenance provision, the abuse of dominance provisions, the new civil provision dealing with agreements between competitors, the refusal to deal provision, and as well the provisions with respect to tied selling, exclusive dealing and market restriction.

The Branch, like the Competition Bureau as a whole, is primarily a law enforcement agency, and therefore its actions tend to be driven by external events and complaints brought to its attention. In that regard, it receives approximately 900 annual complaints which result, on average, in approximately 15 serious investigations per year. In addition to complaints, the Branch works to understand relevant developments and to proactively look for issues which may be of particular importance to ensuring a competitive economy. In that regard the Branch has particular interest in issues related to pharmaceuticals and in the digital economy more broadly.

Within the pharmaceutical area, two issues in particular which have taken the Branch’s attention are pay for delay (which is particularly timely given developments out of the U.S. Supreme Court), and product switching/product copying. These are both areas of ongoing effort and investigation. In particular, as has been publicly disclosed in court proceedings, the Bureau now has an ongoing investigation into product switching related to Alcon’s Panatol and Pantaday products. The Branch also anticipates hosting a roundtable workshop on pharmaceutical issues in the Fall of 2013, the details of which will become available in the coming months.

By way of its work product, other than enforcement actions, the Branch is working on a series of Frequently Asked Questions to supplement its 2012, slimmed down, Abuse of Dominance

Enforcement Guidelines. It is also working on Guidelines outlining its approach to the new decriminalized price maintenance provisions, which were the basis of its proceeding in the Competition Tribunal challenge to the no surcharge and honour all cards rules of Visa and MasterCard. Both the FAQs and the Guidelines will be released in draft, for comment by interested persons.

Volume 11 No.1 Fall 2013

American Bar Association 35

Latin America Enforcement Update: Brazil Mariana Tavares de Araujo and Júlia Gierkens Ribeiro, Levy & Salomão Advogados

SKF

In February 2013, Brazil’s Administrative Council for Economic Defence (“CADE”) sanctioned auto-parts manufacturer SKF for setting minimum sales price (see Case n. 08012.001271/2001-44). Pursuant to the decision, resale price maintenance (RPM) will be deemed illegal unless defendants are able to prove efficiencies. An infringement would be found regardless of the duration of the practice (in this case, distributors followed orders for only 7 months) or the fact that distributors follow or not the minimum sales prices as CADE considered the conduct illegal by object. CADE imposed a fine equivalent to 1% of SKF’s total turnover in the year preceding the initiation of the investigations.

ECAD

CADE adjudicated the investigation on the collection of royalties related to any and all public performance of music in Brazil by the Central Bureau of Collection and Distribution (“ECAD”) in March 2013. In Brazil, ECAD, which is formed by associations of copyright’s holders, has the monopoly for the collection and distribution of the amounts related to the public execution of the copyrights’ holders’ works (Law No. 9.610/98). According to the plaintiff, ECAD was abusing of its legal protection, in collusion with its associations, to fix the prices to be paid for the reproduction of its artists’ works. CADE’s commissioners all agreed that an anticompetitive conduct occurred, but diverged on the nature of the conduct.

For the reporting commissioner, who was followed by the majority of CADE’s tribunal, the collective management system is a necessity but there is space for competition in the distribution of the amounts related to copyrights. By fixing prices charged for the public reproduction of the copyright’s holders’ works, ECAD was abusing of its dominant position and was also facilitating concerted practices. Two other commissioners considered that the joint setting of prices was part of the collective management system, therefore, ECAD’s behavior, along with its’ associations, could not be considered a cartel. Still, because ECAD has a legal monopoly of an input that

can be considered as an essential facility, the commissioner recognized that the bureau was abusing of its dominance by charging abusive prices and creating discriminatory criteria for the entrance of new associations.

CADE imposed a fine of approximately R$ 6.5 million to ECAD and of approximately R$ 5 million to each of ECAD’s associations.

Settlements

CADE has also settled important investigations on unilateral conduct during the last year. Souza Cruz and Philip Morris agreed with CADE to end exclusivity arrangements with its dealers that prohibited the display of its competitors’ products and in-store advertisements, putting an end to a pending antitrust investigation that was initiated in 2005 (see Case n. 08012.003921/2005-10). Souza Cruz agreed to pay R$ 2.9 million, while Philip Morris paid R$ 250 thousand. According to CADE, the amount of the contributions was different due to the companies’ market share in Brazil, as well as aspects such as relapse and collaboration.

CADE also settled 39 investigations involving Unimed – a health care plan based on the cooperative work of physicians. Unimed prohibited its affiliated physicians from working with others health plans, preventing the entry of new health plans and reducing consumers’ choices. Unimed agreed to terminate the exclusivity clauses and had to pay a sum of approximately R$ 810 thousand as a condition to the settlements. This outcome was a milestone for CADE, since proceedings related to similar exclusivity clauses accounted for almost a third of the agency’s convictions since 1994.