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Author: Pat Pascarella

“The blockchain did it” is unlikely to be a winning defense in an antitrust suit.  That, combined with the current enforcement (and legislative) trends targeting digital platforms, counsels that companies choosing to adopt blockchain as, or in, their business, be cognizant of how the antitrust laws may be applied. Perhaps even more so than other technologies since some degree of immutability is a primary feature of blockchain.

Before discussing specific antitrust proscriptions potentially applicable to blockchain, a word about the current rhetoric around the need to amend the antitrust laws to keep up with technology and today’s marketplace. Not the first time this assertion has been made, and certainly not the last. As the use of distributed ledger technologies become more and more prevalent, I am sure we will hear it again directed specifically at blockchain. But the fact is that the current antitrust laws are more than sufficient to deal with anticompetitive conduct involving blockchain or any other new technology.

In the end, antitrust comes down to injury and causation. It is this elegantly simple inquiry that protects the antitrust laws from obsolescence. And while we may debate the appropriate type of harm or injury addressable by the antitrust laws, (see, e.g., the current debate regarding the consumer welfare standard), antitrust asks no more of a court or jury than to determine (1) whether the requisite injury occurred, and (2) how. This may be a tad oversimplistic, but not by much.

Such an analysis can be applied as effectively to matters involving blockchain as it has been to matters involving plastic forks, tuna fish, or search engines. Of course, blockchain will no doubt create some interesting bumps in the road.  Courts may need to assess new theories of relevant markets and measures of market power.  Issues of control for purposes of imposing liability will be debated ala Copperweld.  And there will no doubt be some head scratching over who exactly is liable when a public permissionless blockchain is used to facilitate some anticompetitive outcome, and to who? But these inquiries are only new in the sense that the antitrust laws are being applied to a new set of discernable facts—as they have been countless times already.

Therein lies the first lesson. What makes the application of the antitrust laws to a new technology difficult is not some failing of the antitrust laws, it is the learning curve for attorneys and courts about the new technology itself, the related markets, and the face of future competition to which the laws are being applied—i.e., the facts. (In apparent recognition of this, some Antitrust Division attorneys reportedly have already attended courses regarding blockchain.)

The good news for antitrust practitioners is that blockchain technology and applications are not half as complex as having to learn for the first time how an operating system or search engine works (or perhaps we have just become more tech savvy these past 20 years). And while there have been very few cases to date involving blockchain and antitrust or competition laws, we have decades of cases involving databases, industry organizations, and platforms that we can draw on to identify possible areas of mischief for blockchain.

I would suggest potential antitrust risks involving blockchain can be grouped into three baskets:

  • Blockchain as a facilitating mechanism.
  • Blockchain as a bad actor.
  • Antitrust violations within a single blockchain.

Obviously as the use of blockchain evolves from relatively simple transactions and applications such as cryptocurrency trading or running smart contracts, to supporting all manner of social and business interactions, the factual scenarios falling into these baskets will become more complex.  But the core analysis should remain the same.

Blockchain as Facilitating Mechanism

Most antitrust attorneys’ radar goes off when they hear the term “distributed ledger”—as it should.  They have spent years counseling clients not to share certain competitively sensitive information with certain other market participants (most often rivals). Not because the sharing itself is a violation of the antitrust laws, but because of what the sharing might facilitate – e.g., price fixing, customer allocation, group boycotts, etc.

In a blockchain world, invariably some competitively sensitive data will find their way onto a shared ledger. They may be sufficiently anonymized, or they may not. Perhaps in the future such data milliseconds old will be viewed as sufficiently “historic” to render its sharing of marginal concern—or perhaps not. And there is a good chance that the data will not have been included with the intent of facilitating some conspiracy. Still, the fact that rivals have access to their competitors’ real-time prices, costs, capacity, production levels, or bids poses some risk.

There will, of course, be many blockchain-specific nuances. Is the blockchain public or private?  Permissionless or permissioned? But the operative questions remain constant—will the blockchain give rivals access to competitively sensitive information about their competitors that they would not have but for the blockchain? And does it matter? Any such sharing may or may not be defensible and may or may not render the blockchain itself liable under the antitrust laws. Still, access to such information would seem to be a reasonable plus factor for an antitrust plaintiff to allege.

Relatedly, a blockchain also could be a handy mechanism for policing a price-fixing, production-limiting, or customer-allocation conspiracy. Some have suggested that smart contracts (an unfortunately misleading name), or some application or functionality, could be deployed via blockchain to monitor pricing and sales and react to transactions that fall outside the parameters of the illegal agreement—possibly redistributing profits earned via the cheating. I find this scenario somewhat unlikely as it essentially requires the conspirators to commit their agreement to writing—or in this case coding—both equally discoverable. Let us not forget, that no matter how secret (or encrypted) the plan or related communication, the effect will be necessarily visible enabling both detection and prosecution.

Other areas of potential mischief include:

A blockchain could facilitate the inadvertent (or intentional) creation of a standard—although the creation of a standard via a public permissionless blockchain might have some interesting defenses available.

Caution also should be taken to avoid actions that might support an allegation that the exclusion from a private blockchain amounts to a group boycott or refusal to deal.

The Blockchain as an Actor

Can a blockchain itself violate the antitrust laws much like a firm or company today? Say a blockchain influenced by its founders, developers, and users (and in some instances miners), enables some conduct or practice with the purpose and effect to exclude or raise the cost of a rival entity (e.g., a competing blockchain, or perhaps a competitor relying on a centralized control solution). Or the blockchain is used to implement rules that permit an exchange of data among its users that enables collusion to the mutual benefit of the conspirators and blockchain (a hub and spoke conspiracy).

I think it is safe to assume that the answer to that question is yes. This is not to say however that the prosecution of such claims will not pose some interesting questions. For example, is the blockchain a firm or person like a corporation for purposes of antitrust enforcement? Who is “the blockchain?” Is there some control group and what are its bounds?  (See, Blockchain + Antitrust, Thibault Schrepel (2021) for an interesting and well-informed discussion of this and other potential antitrust-related issues in a blockchain world.) While questions such as these are today unanswered, I would suggest that they will be relatively simple issues for courts to deal with. Contrary to whimsical theoretic discussions, these issues will be decided in the cold light of facts – i.e., who did what to whom.  Nothing courts haven’t been called on to do with every new technology and marketplace. What is the alleged injury? And who caused it?

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Author: Jarod Bona

When you defend antitrust class actions in federal court like we do, you often see a long list of state antitrust claims brought by what are called indirect purchasers. That is because the federal antitrust laws have this strange quirk that usually forbids federal antitrust claims for damages by indirect purchasers.

You can read more about the history of how this doctrine developed here, including Illinois Brick and Hanover Shoe. And you can learn about the most recent Supreme Court developments for indirect purchasers, including the Court’s Apple v. Pepper case, here.

As sometimes happens when the US Supreme Court changes federal antitrust law, politicians melt down and some state governments pass reactive legislation altering their state antitrust statutes. If you are an armchair antitrust litigator, you might recall that after the Supreme Court announced its resale-price-maintenance decision in Leegin, some state governments responded with legislation so these vertical agreements would hold their per-se-violation status, at least under certain state laws.

After the Supreme Court eliminated most indirect-purchaser damage actions (see here for the co-conspirator exception), many states began allowing them under their own antitrust laws. So even though federal law bars these claims, class-action defendants still face them when a separate group of indirect-purchaser class plaintiffs sue in federal court under a hodgepodge of state antitrust laws. And it’s a little messy.

For background, the states that allow indirect purchaser damage actions are called repealer states and those that don’t are called non-repealer states. And the repealer states themselves vary in the scope of what they permit.

So, faced with this mess of conflicting state antitrust laws, class counsel will do what they can to streamline the applicable-law analysis for the presiding judge. Indeed, to achieve class certification, the plaintiff class must show not only that there is commonality among the class members, but also (for most actions) that the common questions predominate over the individual questions. A defendant might defeat class certification by showing that conflicting applicable laws overwhelm common issues of fact and law.

Until recently, it was not uncommon for a plaintiff class to sue a California-based defendant for damages in California federal court, on behalf of indirect purchasers from all the states—repealer and non-repealer alike. Their argument was that under California choice-of-law doctrine, California’s antitrust law—the Cartwright Act—applies to all of the claims because the “bad acts” were done in California, even though many class members experienced the injury outside of California. California, you might have guessed, is a repealer state that allows indirect purchaser damages under its antitrust law.

You can see what a luxurious solution this is for the indirect purchaser class plaintiffs: They can expand their total damages, even to potential class members in non-repealer states and the court need only analyze one jurisdiction’s law, California. And they can avoid writing the tedious briefs canvassing the laws of many different states. I can tell you, first-hand, that this briefing is monotonous for the defense side too—and probably the court.

Choice of Law and Stromberg v. Qualcomm

Of course, this “solution” assumes that it is proper under choice-of-law analysis to apply California law to all of the claims. This issue arose in the Ninth Circuit in 2021, in Stromberg v. Qualcomm, and Judge Ryan D. Nelson, writing for the Court, analyzed it marvelously.

This isn’t an article analyzing this Qualcomm decision, but I’ll tell you about what the court did on choice of law, the implications of that decision, and its broader lesson.

Important Note: Bona Law filed an amicus brief in a different, but potentially related, case in the Ninth Circuit supporting Qualcomm in an antitrust case brought by the FTC. So, based upon that appellate brief, the fact that we represent defendants in antitrust class actions, and that I generally like and respect Qualcomm, which is a San-Diego-based company, you should assume that I am biased. Indeed, if you are a sophisticated reader, you should always try to understand the writer’s perspective and potential biases because they affect the writing, even unintentionally.

Anyway, similar to the scenario above, this was a case in which the plaintiff class convinced the district court to apply California law to indirect purchaser claims from all over the country—both repealer and non-repealer states. In doing so, the court granted class certification, and Qualcomm appealed that grant under Rule 23(f) of the Federal Rules of Civil Procedure.

You can read more here about appealing a class certification order under Rule 23(f).

The Ninth Circuit ultimately condemned the district court’s choice-of-law analysis as faulty. Instead of California law applying to all claims, the laws of each of the other states should have applied to their respective resident plaintiffs.

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Author:  Steven J. Cernak

Recently, I was researching 2021 antitrust developments to update my Antitrust in Distribution and Franchising book and draft a long article for another publication. That research confirmed that new government antitrust enforcers and their actions gathered the most attention last year — but this blog covered those issues already, such as here and here and here. This post discusses the private antitrust litigation developments affecting distribution that I uncovered but that might have flown under your radar.

Refusal to Deal and Predatory Pricing

Despite the impression left by the mainstream media, not all antitrust cases involving claims of monopolization involved Amazon or Facebook.  Other defendants faced claims of gaining or maintaining a monopoly through refusals to deal or predatory pricing schemes.

Careful readers will recall the anticipation last year that Viamedia Inc. v. Comcast Corp. might generate a Supreme Court opinion on refusal to deal issues.  Here, the defendant monopolist had stopped dealing with the plaintiff after years of doing so and, allegedly, caused competitive harm.  The district court had dismissed the refusal to deal claim by explicitly following the Tenth Circuit’s opinion in Novell, Inc. v. Microsoft Corp., authored by then-Judge Gorsuch, because it found that the defendant’s conduct was not “irrational but for its anticompetitive effect.”  The Seventh Circuit reversed, finding the court’s application of the Novell standard inappropriate at the motion to dismiss stage when a plaintiff need only plausibly allege anticompetitive conduct even if the defendant might later try to prove a procompetitive rationale.

The defendant sought Supreme Court review and the Justices asked for the views of the Solicitor General. The Solicitor General did not recommend that the Court hear the appeal. In June, the Court denied the writ of certiorari. After remand, the plaintiff chose to drop its refusal to deal theory of the case and proceed only on a claim of illegal tying. Therefore, the opinion will stand and future monopolist defendants, at least in the Seventh Circuit, will have more difficulty dismissing refusal-to-deal claims. Instead of simply asserting that some rational potential procompetitive purpose or effect is self-evident from the complaint, the defendant will have to show that the allegations do not raise any plausible anticompetitive purpose or effect, a much more difficult burden.

In another refusal to deal case, OJ Commerce LLC v. KidKraft, LP, the defendant won summary judgment on plaintiff’s refusal-to-deal claim. Plaintiff was a discounting online retailer that had sold defendant’s products, including children’s wooden play kitchens, for years. An affiliate of plaintiff then began making wooden play kitchens that plaintiff also sold on its website.  Defendant objected, claiming that the affiliates’ kitchens were knock-offs of defendant’s products and that plaintiff’s sales of defendant’s products were plummeting. Eventually, defendant terminated its relationship with plaintiff, who then sued alleging illegal monopolization through a refusal to deal.

The court began with the proposition that even a monopolist is not required to do business with a rival. The court recognized that the Supreme Court had found an exception to that proposition in Aspen Skiing Co. but only if defendant’s termination of prior conduct was irrational but for its anticompetitive effect.  The court found “this is hardly the case here” as the defendant had shown several other potential explanations for its termination of plaintiff. As a result, the court granted defendant’s summary judgment motion.

Predatory pricing remains a popular claim by plaintiffs against alleged monopolists, despite the difficult standard for such claims imposed by the Supreme Court. In such claims, the plaintiff alleges that the defendant’s extraordinarily low prices will drive out competitors, which in turn will allow the defendant to later raise prices and harm consumers. In Brooke Group, the Court set a difficult standard to meet because “there is a consensus among commentators that predatory pricing schemes are rarely tried, and even more rarely successful.” Also, it can be difficult to distinguish low pro-competitive prices from predatorily low ones. Subsequent plaintiffs have found it difficult to successfully allege, let alone win, such claims.

Last year, we described an exception where a defunct ride-hailing company’s predatory pricing claims against Uber survived a motion to dismiss. In 2021, a taxi company was not as successful and its similar claims were dismissed (although other non-antitrust claims survived). In Desoto Cab Co. v. Uber Technologies, Inc., the court dismissed the claim because the plaintiff did not allege barriers to entry or expansion for new or existing competitors sufficient to allow defendant to recoup its losses. Plaintiff’s mere invocation of network effects without any allegations regarding how they might create entry barriers in this market also was not enough. Finally, unlike the plaintiff in last year’s case, this plaintiff failed to allege why Lyft no longer could prevent defendant’s recoupment through higher prices.

Tying and Agreement

2021 also brought opinions on some of the basic elements of a tying claim and what facts amounted to an agreement.

One element of a successful tying claim is that the defendant is selling two separate products, the tying and the tied product.  To make that determination, courts must find that “there is a sufficient demand for the purchase of [the tied product] separate from [the tying product] to identify a distinct product market in which it is efficient to offer [the former] separately from [the latter].”  In AngioDynamics, Inc. v. C.R. Bard, Inc., the court denied competing summary judgment motions from the parties on this question. The defendant had sought and received regulatory approval to sell the tied product separately; however, it had actually made only a few such sales and then just to a single customer. The only other competitor that sold both products did sell them separately; however, it was not clear that its conditions were identical to defendant’s. The court, therefore, could not determine as a matter of law that the consumer demand was sufficient to make it efficient for defendant to offer the tied product separately.   

For every Sherman Act Section 1 case, a successful plaintiff must show an agreement between defendant and some other entity. To meet that burden at summary judgment or trial, plaintiff must present “evidence that tends to exclude the possibility that the [the defendants] were acting independently.” In a typical distribution case, a terminated distributor claims an anticompetitive agreement between its supplier and some other distributor, usually based on some complaints about the terminated distributor to the supplier from the other distributor.

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Author: Aaron Gott

A couple years ago, clamor for antitrust scrutiny of the agricultural industry was growing apace. But then the pandemic happened. Demand bottomed out, processing plants shuttered and everyone feared an unprecedented virus-induced recession. The clamor disappeared. The National Pork Producers Council even won approval from the U.S. Department of Justice Antitrust Division (with some strings) to engage in a coordinated nationwide campaign to reduce output through mass culling.

But now the clamor is back, and the meat and poultry industry appears to be a priority target for 2022.

In a December 21, 2021 letter to U.S. Secretary of Agriculture Tom Vilsack, a broad, bipartisan coalition of fifteen state attorneys general—from AG Keith Ellison in Minnesota to AG Sean Reyes of Utah—urged the USDA to use its powers under the Packers and Stockyard Act to counter rapidly increased concentration among meat processors, vertical integration, exclusive production arrangements, new sales and marketing practices, the emergence of third-party data services as key players in the market, and producer attrition. The letter also invokes the American Rescue Plan Act of 2021 as an opportunity establish a grant to fund state antitrust enforcement efforts in agricultural markets.

The letter did not come out of the blue or raise a novel new idea about using the Packers and Stockyard Act to further antitrust enforcement. Earlier this year, the USDA announced it would conduct rulemakings to address what it described as competition problems in the livestock markets. The coalition is telling USDA that the states agree and want to help, and that they definitely will help if the USDA gives them money to do so.

Around the same time that the USDA announced its plans, the U.S. Senate also held a hearing on concerns in the packing industry.

All this attention comes exactly 100 years after Congress passed the Packers and Stockyards Act. Let’s look at a little background before discussing these recent moves in more detail.

What is the Packers and Stockyards Act?

The Packers and Stockyards Act was passed in 1921 in response to a Federal Trade Commission study concluding that the livestock industry needed more competition. It is administered by the U.S. Department of Agriculture, Packers and Stockyards Division of the Agricultural Marketing Service. The act contains financial protection measures, and prohibits (1) unfair, discriminatory, and deceptive practices and (2) activities that might adversely affect competition. The act has been amended over the years to increase its scope and add additional regulatory powers.

The P&S Act applies to anyone engaged in the business of marketing livestock, meat, and poultry in commerce, which includes not just stockyards and processors, but also commission firms, auctioneers, dealers, buyers, brokers, wholesalers, and distributors. Notably, the act specifically excludes one important category of players: farmers and ranchers who buy livestock for feeding purposes or in marketing their own livestock for sale.

The P&S Act is enforced through administrative actions by the USDA and, on occasion, the USDA refers violations for civil or criminal enforcement by the U.S. Department of Justice through a U.S. Attorney’s office (rather than the Antitrust Division). Penalties and remedies include injunctive relief, business shutdowns, five-figure civil penalties, and additional fines and jail sentences for actions handled by the DOJ.

The Packers and Stockyard Act isn’t the only agriculture-specific antitrust law. Delve into an overview of the Capper-Volstead Act’s farm cooperative exemption next.

What USDA Regulatory Changes Have Already Occurred?

In December 2020, the USDA finalized a new rule addressing “undue or unreasonable preferences or advantages,” but this rule does not focus on core antitrust enforcement or the market concentration issues raised more recently. In fact, the rule was a long time in the making—it was mandated by Congress in the 2008 Farm Bill. It focuses on regulating conduct similar to price discrimination under the Robinson Patman Act. The USDA also put out new guidance on its enforcement policy regarding the rule in the form of a “frequently asked questions (FAQ)” document, which includes industry-specific guidance.

What USDA Regulatory Changes Might Occur in 2022 and beyond?

The USDA’s announcement focused on increasing its P&S Act enforcement efforts and new rulemakings. The proposed rulemakings would clarify key provisions of the law, define prohibited practices, eliminate “oppressive practices in chicken processing,” and reinforce its position that the agency need not demonstrate actual or threatened harm to competition to establish a violation of the act.

The state attorneys general have some additional recommendations:

  • They focus on the P&S Act’s anti-monopoly purpose in a push for the USDA to consider both horizontal and vertical competition implications and to conduct retrospective “academic” merger reviews.
  • They ask the USDA to consider additional reforms beyond those announced to include limits on alternative marketing arrangements that the attorneys general claim have led to “producers increasingly finding themselves at the mercy of the processors” and significantly reduced the number of independent producers in the market.
  • They ask the USDA to closely examine third-party data sharing in agricultural markets, which has already been the subject of private antitrust litigation. The letter asserts that these private, subscription-based data services are so granular that they could facilitate unlawful coordination or lead to market manipulation.

The U.S. Department of Justice Antitrust Division also announced it is working with the USDA and other agencies to fight “excessive concentration” and anticompetitive conduct in agricultural markets with a focus on ensuring the ability of small and independent farmers to compete. This could mean more aggressive merger reviews and stepped up civil and criminal enforcement efforts targeting conduct. In fact, the DOJ already teamed up with the USDA and other agencies to investigate the broiler chicken industry, leading to more than a dozen criminal indictments against companies and their executives. The DOJ also just challenged U.S. Sugar’s proposed acquisition of Imperial Sugar in November 2021.

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Authors:  Steven Cernak and Luis Blanquez

As we have reported numerous times (most recently here), the Federal Trade Commission has been making headlines with some controversial changes to U.S. merger review procedures, disputes over its voting rules, and personnel changes. But while the FTC was making headlines, the other federal antitrust enforcer, the Department of Justice Antitrust Division, was launching the three antitrust enforcement actions we summarize below.  Now that Jonathan Kanter has been confirmed as the Assistant Attorney General in charge of the Division, we expect the pace of actions to only pick up.

American/JetBlue

In July 2020, American Airlines and JetBlue Airways announced the formation of the “Northeast Alliance.” The Alliance is a series of agreements between the two competitors relating to their respective operations at Boston’s and New York City’s four major airports. The agreements commit the two airlines to pool revenues and coordinate on “all aspects” of network planning except pricing at the four airports. The companies sought and, after making a few minor tweaks, received approval from the Trump Administration Department of Transportation in January 2021.  Shortly thereafter, the Alliance began operation.

In September 2021, the Biden Administration, joined by several states, sued the two companies alleging that the Alliance was a civil violation of Sherman Act Section 1 under the rule of reason.  The complaint describes the Alliance as effectively a merger of the two companies’ operations in Boston and New York that will reduce choice for consumers. Because the Alliance is effectively a partial merger, the complaint uses Clayton Act Section 7 analysis, including HHI calculations for various city-pairs that will be affected by the Alliance, to predict the negative effects on consumers.

In November 2021, the parties moved to dismiss the case. Their main argument is that in a Section 1 case, the complaint must allege anticompetitive effects that have already occurred. Predictions of potential anticompetitive effects, while sufficient for a Section 7 merger challenge, are insufficient here. The complaint does not allege any negative competitive effects, such as reduced flights, since the Alliance’s inception. In fact, as the motion and the companies’ monthly press releases since the lawsuit make clear, the capacity of the two airlines in the four airports has only increased. As of this writing, the Division and their state partners have not yet responded to the motion.

Penguin Random House/Simon & Schuster

In November 2021, the Department of Justice Antitrust Division filed a civil antitrust lawsuit to block Penguin Random House’s proposed acquisition of its close competitor, Simon & Schuster.  As alleged in the complaint, this acquisition would enable Penguin Random House, which is already the largest book publisher in the world, to exert outsized influence over which books are published in the United States and how much authors are paid for their work.

As described in the complaint, the publishing industry is already highly concentrated. Publishers compete to acquire manuscripts, which they edit, package, market, distribute and sell as books.  Publishers pay authors advances for the rights to publish their books. In most cases, the advance represents an author’s total compensation for their work. Just five publishers, known as the “Big Five,” are regularly able to offer high advances and extensive marketing and editorial support, making them the best option for authors who want to publish a top-selling book.

While smaller publishers occasionally win the publishing rights to anticipated top-selling books, they lack the financial resources to regularly pay the high advances required and absorb the financial losses if a book does not meet sales expectations. The complaint alleges that Penguin Random House, the world’s largest publisher, and Simon & Schuster, the fourth largest in the United States, compete head-to-head to acquire manuscripts by offering higher advances, better services and more favorable contract terms to authors.

This is a good example of how the Antitrust Division analyzes the existence of monopsony power and the way it sometimes harms competition in input markets.  In this case, the proposed merger would result in lower advances for authors and ultimately fewer books and less variety for consumers. It would also put Penguin Random House in control of close to half the market for acquiring publishing rights to anticipated top-selling books, leaving hundreds of individual authors with fewer options and less leverage.

U.S. Sugar/Imperial Sugar

During the same month of November, the new chief of the Antitrust Division––Jonathan Kanter–– filed his first merger challenge to stop United States Sugar Corporation from acquiring its rival, Imperial Sugar Company. The complaint alleges that the transaction would leave an overwhelming majority of refined sugar sales across the Southeast in the hands of only two producers.  As a result, American businesses and consumers would pay more for refined sugar, a significant input for many foods and beverages.

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Author: Luis Blanquez

“The legislature hereby finds and declares that there is great concern for the growing accumulation of power in the hands of large corporations. While technological advances have improved society, these companies possess great and increasing power over all aspects of our lives. Over one hundred years ago, the state and federal governments identified these same problems as big businesses blossomed after decades of industrialization. Seeing those problems, the state and federal governments enacted transformative legislation to combat cartels, monopolies, and other anti-competitive business practices. It is time to update, expand and clarify our laws to ensure that these large corporations are subject to strict and appropriate oversight by the state.”  

Self-explanatory, isn’t it? This is just an extract from the draft Act. Indeed, while the antitrust world is watching the U.S. Senate due to the vast reforms going on, and the FTC continues to repeal unilaterally the Hart-Scott-Rodino (“HSR”) merger review process, something is also currently cooking in New York: The New York 21st Century Antitrust Act.

In June 2021 New York’s proposed 21st Century Antitrust Act (Senate Bill S933A) passed the State Senate. The remaining steps before that bill becomes law are passage by the Assembly and the signature of the Governor, both of which are expected at some point next year. When that happens, the proposed law will radically amend the long-standing Donnelly Antitrust Act. This is potentially a much bigger deal than it may seem. Not just for the state of New York, but also for the future of U.S. antitrust law more generally. Why? Basically, because if the Act becomes law, it will import the well-known and more far-reaching “abuse of dominance” standard from the European Union ––targeting companies with market shares as low as 30% in NY; and will establish––for the first time––a state premerger notification system in the U.S.

General Scope but with a Specific Focus on Big Tech and Importing the Abuse of Dominant Position Standard

The Donnelly Act applies to any conduct that restrains any business, trade or commerce or in the furnishing of any service in New York. N.Y. Gen. Bus. Law § 340. The New Antitrust Act has the same scope but introduces two important wrinkles.

First, even though it generally applies to all sectors and industries, it expressly addresses and calls out anticompetitive behavior in the Big Tech industry. This is clearly in line with all the recent proposed antitrust bills and monopolization cases at federal level.

Second, it also imports the well-known and more far- reaching “abuse of dominant position” standard from Article 102 the Treaty of Functioning of the European Union. Until now, under the current standards applied by courts under Section 2 of the Sherman Act, Big Tech has been able successfully to challenge or defeat many of the unilateral action complaints filed in federal court. The New Antitrust Act explicitly acknowledges this: “effective enforcement against unilateral anti-competitive conduct has been impeded by courts, for example, applying narrow definitions of monopolies and monopolization, limiting the scope of unilateral conduct covered by the federal anti-trust laws, and unreasonably heightening the legal standards that plaintiffs must over-come to establish violations of those laws.” A good example of such limitations are refusal to deal cases in the U.S. But, if passed, this is going to change next year. NY’s Attorney General is going to have not only the authority to enforce the New Antitrust Act, but also the powers to define what constitutes––under New York Antitrust law––an abuse of a dominant position. As a European antitrust attorney who currently practices antitrust law in the U.S., this is indeed very interesting news.

While NY’s Attorney General will need to provide further guidance, for now the New Antitrust Bill states that a dominant position may be established by direct or indirect evidence.

Direct evidence may include, for example, the unilateral power of a monopolist to set prices, terms, conditions, or standards; unilateral power to dictate non-price contractual terms without compensation; or other evidence that an entity is not constrained by meaningful competitive pressures, such as the ability to degrade quality without suffering reduction in profitability. Under the Act, if the direct evidence is sufficient to show a dominant position, conduct that abuses that dominant position is unlawful without regard to a defined relevant market (or the conduct’s effects in that market). This seems to be––for the first time–– in line with a “per se” analysis under Section 1 of the Sherman Act. How the NY Attorney General is going to determine the existence of a dominant position, without even first defining the relevant antitrust market(s) concerned, remains to be seen.

A dominant position may also be established by indirect evidence. For instance, the Act incudes a presumption of a dominant position when a seller enjoys a market share of 40% or greater and 30% or greater for a buyer. This is a significantly lower threshold than the one currently used in federal cases brought under the Sherman Act. But the determination of a dominant position requires a much more detailed analysis of barriers to entry, potential competition, and purchasing power downstream, among many others. That’s without even considering the special circumstances of all the digital and technological markets where Big Tech companies are present. Once again, we will have to wait until we see further guidance from NY’s Attorney General under the newly acquired rulemaking powers to flesh out the definition of dominant position.

As for the existence of an abuse, the Act enumerates a non-exhaustive list of anticompetitive behavior: conduct that tends to foreclose or limit the ability or incentive of actual or potential competitors to compete, such as leveraging a dominant position in one market to limit competition in a separate market, or refusing to deal with another person with the effect of unnecessarily excluding or handicapping actual or potential competitors. With the new abuse of dominance standard in play, it will be interesting to watch how these theories of harm develop in NY, and how much tension they create with existing federal antitrust case law.

The Act, in a very cryptic one-line paragraph, excludes any procompetitive effects as a defense to offset or cure competitive harm. This seems to create a “per se” liability to any abuse of a dominant position, which would be problematic both under U.S. federal law and EU Competition law.

Under EU Competition law, not every exclusionary effect is necessarily detrimental to competition. Competition on the merits may result in the elimination of less efficient competitors from the market. See for instance C-209/10 Post Danmark I, or C-413/14 Intel. Indeed, aside from very few “by nature” abuses which are considered presumptively unlawful (and even under these the European Commission must still carry out a competition analysis if the dominant firm provides evidence on the contrary), a full-blown effects analysis is always required. See T-201/04 Microsoft.

Not only that, even if a specific conduct is found to constitute an abuse of a dominant position and restricts competition, a person can always attempt to show that its conduct is objectively justified. This applies to any alleged abuse, including “by nature” abuses. More information on treatment of exclusionary conduct in the EU may be found in: Guidance on the Commission’s Enforcement Priorities in Applying Article 82 EC Treaty to Abusive Exclusionary Conduct by Dominant Undertakings.

First State Premerger Notification System in the U.S.

The new Act also will establish a separate premerger notification system in New York where buyers––regardless of where they are incorporated––will have to notify the NY Attorney General sixty days before the closing of any transaction where any of the parties involved exceed the applicable reporting thresholds, set at assets or annual net sales in New York exceeding $9.2 million, which is currently 2.5% of the current federal HSR threshold. The sixty-day notification is double the thirty-day period applicable under the HSR Act.

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Resale Price Maintenance

Author: Jarod Bona

Some antitrust questions are easy: Is naked price-fixing among competitors a Sherman Act violation? Yes, of course it is. Indeed, it is a per se antitrust violation.

But there is one issue that is not only a common occurrence but also a source of great controversy among antitrust attorneys and commentators: Is price-fixing between manufacturers and distributors (or retailers) an antitrust violation? This is usually called a resale-price-maintenance agreement and it really isn’t clear if it violates the antitrust laws.

For many years, resale-price maintenance—called RPM by those in the know—was on the list of the most forbidden of antitrust conduct, a per se antitrust violation. It was up there with horizontal price fixing, market allocation, bid rigging, and certain group boycotts and tying arrangements.

There was a way around a violation, known as the Colgate exception, whereby a supplier would unilaterally develop a policy that its product must be sold at a certain price or it would terminate dealers. This well-known exception was based on the idea that, in most situations, companies had no obligation to deal with any particular company and could refuse to deal with distributors if they wanted. Of course, if the supplier entered a contract with the distributor to sell the supplier’s products at certain prices, that was an entirely different story. The antitrust law brought in the cavalry in those cases.

You can read our article about the Colgate exception here: The Colgate Doctrine and Other Alternatives to Resale-Price-Maintenance Agreements.

In 2007, the Supreme Court dramatically changed the landscape when it decided Leegin Creative Leather Products, Inc. v. PSKS, Inc. (Kay’s Closet). The question presented to the Supreme Court in Leegin was whether to overrule an almost 100-year old precedent (Dr. Miles Medical Co.) that established the rule that resale-price maintenance was per se illegal under the Sherman Act.

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Yang Yang

Author: Yang Yang

Ms. Yang is an Antitrust Partner at Fairsky Law Offices in Shangai. She is also a lecturer and researcher at China University of Political Science and Law. She authored a treatise on China Merger Control and is a member of the expert advisory team for Amendments to China Anti-Monopoly Law (with a total number of 8 members). Indeed, she leads the drafting of an expert report on suggested amendments to China Merger Control regime, Chapter 4 of Chinese Anti-Monopoly Law. She is also a frequent contributor to the Antitrust Report of LexisNexis and Competition Policy International (Asia Column and Asia Chronicle).

See also Yang’s previous article on this website: Antitrust Merger Control in China: Notifiable Transactions under the People’s Republic of China Anti-Monopoly Law

On October 23, 2021, the Chinese legislative authority released a draft amendment for public comments to China’s Anti-Monopoly Law (“AML”)1, with a public comment period open until November 21, 2021.2 The amendment is controversial because of the hefty fines on antitrust violations imposed in China by the State Administration for Market Regulation (“SAMR”). Internet platforms have been the most heavily fined by the SAMR, partially due to the use of a calculation method for monetary fines based on gross sales.3

Still No Clarification on the Definition of “Sales”, Which Serves as the Base for Monetary Fines

One of the most controversial legal matters for antitrust enforcement in China is the definition of “sales” as the basis for the calculation of monetary fines. The SAMR has the power to impose a fine between 1 to 10 percent of the “sales” generated by the firm in the preceding year. Even though both the current AML and the amendment are silent on the definition of “preceding year,” the SAMR has been considering for this purpose the year when the investigation is officially initiated.

Similarly, according to the published cases of the SAMR, the word “sales” refers to all sales from the firm as a whole, rather than just the firm’s sales from the relevant products and geographic markets.

With these two factors in mind, under the new draft, the calculation of “sales” would significantly impact firms doing business in China. Indeed, once the SAMR discovers the existence of a cartel or a Resale Price Maintenance (RPM) provision in one product market, it would consider all sales from the firm(s) involved as the basis for the calculation of the monetary fine.

But the main reason why this matter is controversial is the fact that––according to Chinese Administrative Law––administrative fines must be commensurate with the underlying violation in degree, importance and effects, among others. Considering the size of a firm as a whole, even 1 percent of the total sales would be heavier than any underlying violation.

For example, in the Alibaba Group decision, the parent company owns and operates shopping platforms, including Taobao.com and Tmall.com4. There, the abusive conduct refers to the alleged exclusive-dealing agreements since 2015, where Alibaba “forced” some major downstream merchants to enter the “Strategic Merchant Framework Agreement”, the “Joint Business Plan”, the “Memorandum of Strategic Cooperation” and other agreements. In those agreements Alibaba required that such major merchants would not access other competing online platforms. Despite the conduct only involving exclusive-dealing agreements with certain major merchants, the sales as the basis for calculating the monetary fines were the total sales of Alibaba Group in 2019, the year preceding the year when the government initiated the investigation.

Another example is the fine on Meituan, a platform well known for food-delivery.5 In this decision, the relevant market was the online food-delivery platform, implying that the violating abusive conduct all occurred in this market. But, the basis for the fine was still the total sales of the group, RMB 114,747,995,546 in 20206, which also included sales from travel and other businesses, like drug-delivery and flower delivery. Such non-food-delivery businesses in 2020 generated approximately 46% of the sales for this public company7.

Hub-and-Spoke Agreements Constitute a Third Kind of Illegal Agreement

Article 18 of the amendment provides that Operators shall not organize other operators to reach monopoly agreements or provide substantive assistance to other operators in reaching monopoly agreements. This clause essentially accepts “hub-and-spoke” agreements as a third kind of illegal agreement in addition to horizontal agreements between/among competitors and vertical agreements between/among merchants and distributors.

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antitrust-exemptions-300x196

Author: Jarod Bona

Congress and the federal courts have—over time—created several exemptions or immunities to antitrust liability.

The US Supreme Court in National Society of Professional Engineers v. United States explained that “The Sherman Act reflects a legislative judgment that ultimately competition will produce not only lower prices, but also better goods and services.” 435 U.S. 679, 695 (1978). And “[t]he heart of our national economy long has been faith in the value of competition.” Id.

National Society of Professional Engineers holds, effectively, that those that think that they should not be subject to competition—for whatever reason—don’t get a free pass.

But there are several situations that do create limited exemptions to federal antitrust liability. Importantly, however, the US Supreme Court has repeatedly emphasized that courts should narrowly interpret these exemptions.

Here are the primary antitrust exemptions created by Congress and the federal courts:

State-Action Immunity. State-action immunity comes up a lot at Bona law, as we work hard to enforce the federal antitrust laws against anticompetitive state and local conduct. This exemption allows certain state and local government activity to avoid antitrust scrutiny. Lately, the US Supreme Court has narrowed the doctrine, including for state licensing boards that seek its protection when sued under the antitrust laws (North Carolina State Board of Dental Examiners v. Federal Trade Commission). Bona Law also advocates a market-participant exception to state-action immunity, but the courts are split on that issue. We expect that this exemption will continue to narrow over time.

Filed-Rate Doctrine. The filed-rate doctrine is a defense to an antitrust action that is premised on the regulatory rates filed with a federal administrative agency. In many regulated industries (like insurance, energy, shipping, etc.), businesses must, generally, file the rates that they offer to customers with federal agencies. The filed-rate doctrine eliminates antitrust liability for instances in which, to satisfy the antitrust elements, a judge or judge must question or second guess the level of these filed rates (i.e. that they included overcharges resulting from anticompetitive conduct). So a business filing rates with a regulator is not, by itself, sufficient to create an exemption from antitrust liability. There are nuances.

Business of Insurance. The McCarran-Ferguson Act exempts certain acts that are the business of insurance and regulated by one or more states from antitrust scrutiny. You can read more about the McCarran-Ferguson Act and its requirements here.

Baseball. That’s right—there is a baseball exemption to antitrust liability. This is a judge-made doctrine developed long ago. The other sports don’t have an antitrust exemption and the question of whether baseball should have one comes up periodically. If you want to learn more, you should read the five-part series on baseball and antitrust that Luke Hasskamp authored.

Agricultural Cooperatives. The Capper-Volstead Act provides a limited antitrust exemption to farm cooperatives. Under certain circumstances, this Congressional Act allows farmers to pool their output together and increase their bargaining power against buyers of agricultural products. You can read more about this in Aaron Gott’s article on the Capper-Volstead Act. And you can read about production restraints here.

The Noerr-Pennington doctrine. The Noerr-Pennington immunity—named after two US Supreme Court cases—is a limited antitrust exemption for certain actions by groups or individuals when the intent of that activity is to influence government actions. The Noerr-Pennington doctrine can apply to actions that seek to influence legislative, executive, or judicial conduct. There is, however, an important sham exception to Noerr-Pennington immunity that often comes up in litigation.

You can learn more about the Noerr-Pennington doctrine and antitrust liability here.

Statutory and Non-Statutory Labor Exemptions. The statutory labor exemption allows labor unions to organize and bargain collectively in limited circumstances, including requirements that the union act in its legitimate self-interest and that it not combine with non-labor groups. The non-statutory labor exemption arrives from court decisions that further exempt certain activities that make collective bargaining possible, like joint action by employers that is ancillary to the collective bargaining process.

You can read more about both the statutory and non-statutory labor antitrust exemptions here.

Implied Immunity. Implied immunity occurs in the rare instances in which there is no express antitrust exemption, but the anticompetitive conduct falls into an area of such intense federal regulatory scrutiny that antitrust enforcement must yield to the pervasive federal regulatory scheme.

The typical area where this comes up is with the federal securities laws, which is a good example of pervasive federal regulation. The US Supreme Court case to read for this antitrust exemption is Credit Suisse Securities (USA) LLC v. Billing, from 2007.

Keep in mind that courts do not easily find implied immunity of the antitrust laws—there must be a “clear repugnancy” or “clear incompatibility” between the antitrust laws and the federal regulatory regime. A broad interpretation of this immunity could create massive antitrust loopholes because even a regulator with a heavy hand on an industry may not consider anticompetitive conduct as part of its command and control. And regulation itself creates barriers to entry in a market that is more likely to lead to less competition.

Export Trade Exemptions. A little-known exemption involves export trade by associations of competitors. This antitrust exemption arises primarily from the Webb-Pomerene Act and the Export Trading Company Act. These FTC and DOJ guidelines provide more information about this antitrust exemption.

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FTC-Merger-Review-Process-Destruction-300x200

Author:  Steven J. Cernak

The Federal Trade Commission continues to take subtle steps that, in total, will end up significantly changing the merger review process under the Hart-Scott-Rodino Act. We have already covered some of the earlier actions:  withdrawal of the 2020 Vertical Merger Guidelines, withdrawal of one long-standing HSR rule interpretation and threats to the rest, and the routine issuance of threatening letters to parties closing after the end of HSR’s waiting period. This week, the FTC took another such step when it announced that it would now “routinely” require many parties involved in mergers to obtain prior approval from the FTC for many future transactions.

Before 1995, the FTC had often included a “prior approval” provision in any order settling its review of a merger that it had found to be anticompetitive. That provision required the parties to seek FTC approval for any future merger, usually for the next ten years though usually limited to the markets involved in the original merger. In 1995, the FTC issued a Policy Statement explaining that it would no longer routinely require such prior approval provisions and, instead, would simply rely on HSR’s requirement for most large mergers to be reported to the antitrust agencies prior to consummation.  Earlier this year, the FTC rescinded that 1995 Policy Statement. This week, the FTC announced its replacement.

To understand the import of the new policy, you must understand how the HSR merger review process has worked in practice. The parties to most mergers and similar transactions above the threshold set by Congress (and automatically updated each year) must file certain forms and documents with both the FTC and the Department of Justice Antitrust Division before closing.  The reviewing agency, say, the FTC, then has thirty days to investigate and determine if it will allow the transaction to proceed or seek more information through a “second request.”

If the FTC goes the latter route, the parties then spend months providing the additional documents and information. After the parties certify full compliance with the second request, the FTC must choose to allow the transaction to proceed or sue to enjoin it. By that point months into the investigation, the parties and the FTC often agree to modifications to the transaction — typically, divestiture of certain assets to a buyer — that the FTC thinks will solve any competition concerns.

The details of that agreement are then memorialized. After this week’s statement, that document now will routinely provide that the parties, for future transactions, must seek prior approval from the FTC under terms and timelines set by the FTC, not HSR. Such prior approval requirements certainly will cover future transactions in the markets affected by the original transaction; however, the FTC might also seek broader prior approval provisions in certain cases. Also, the FTC might seek such prior approval requirements even if the parties choose to abandon the proposed transaction, whether prior to or after the FTC sues to enjoin it. Finally, the FTC likely will insist on prior approval before any buyer of divested assets can resell them.

Benefits Expected by the FTC

The FTC sees three main benefits from this new policy. First, it thinks that parties to “facially anticompetitive” transactions will not pursue them in the first place because of fear of imposition of these prior approval requirements for all future transactions. Second, the FTC will be able to preserve its resources by having fewer mergers to review and challenge and, for those subject to prior approval provisions, reviewing them under timelines and rules more FTC-friendly than HSR. Finally, the FTC will be able to review before consummation any deals that would be too small to trigger HSR filing requirements.

Other Likely Effects

The FTC’s assessment of potential effects seems both one-sided and simplistic. Certainly, the new policy will raise the costs to the parties of making HSR submissions on “facially anticompetitive” mergers and so should reduce their number; however, the costs of the risk of prior approval provisions also will fall on other mergers challenged by the FTC, at least some of which reasonable antitrust minds might have found to be not “facially anticompetitive.” Because parties will not be sure that their “good” merger will be mistakenly challenged as a “bad” one, they might hesitate to pursue mergers beneficial to consumers. So, the new policy could reduce both “bad” and “good” mergers.  The FTC’s new policy implicitly assumes that the benefit to the FTC from not needing to challenge the bad ones outweighs the costs to consumers from losing the benefits of the good ones never pursued.

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