Articles Posted in Antitrust Counseling

Articles about antitrust counseling and training.

Global Antitrust

Author: Jarod Bona

Just because your company isn’t based in the United States doesn’t mean it can ignore US antitrust law. In this interconnected world, there is a good chance that if you produce something, the United States is a market that matters to your company.

For that reason, I offer five points below that attorneys and business leaders for non-U.S. companies should understand about US antitrust law.

But maybe you aren’t from a foreign company? Does that mean you can click away? No. Keep reading. Most of the insights below matter to anyone within the web of US antitrust law.

This article is cross-posted in both English and French at Thibault Schrepel’s outstanding competition blog Le Concurrentialiste

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HSR-and-Building-300x240

The FTC Headquarters in Washington, DC. The cornerstone to the building was laid in 1937 by Franklin Roosevelt, reportedly using the same trowel George Washington used to lay the cornership of the U.S. Capital in 1793. In the spirit of competition, the National Gallery of Art has set its sights on expanding into the FTC building, and in 2016, the General Services Adminsitration has been investigating the proposal. The FTC has strongly resisted this form of competition for its space.

Author: Steven Levitsky

Under US antitrust Law, parties to certain mergers and acquisitions must prepare what is called a Hart-Scott-Rodino (HSR) filing for the antitrust agencies.

In an earlier article, we mentioned that HSR filings, at least for voting securities and LLC interests, are not triggered by the literal “size-of-transaction” amount.

Instead, they are triggered by a combination of (1) all existing holdings in a target plus (2) what you intend to buy in that target. (In HSR lingo, this is called “aggregation.”) Plus, you need to calculate the total existing holdings across the entire control group. (In HSR lingo, this means all the entities controlled by the “ultimate parent entity.”) When you don’t, you run the risk of being fined $40,654 per day.

Here’s a great example, based on a real-life case. Alpha Fund owns $84 million of Bravo Ltd’s voting securities. Alpha Fund is controlled by Mr. Smith. Because of this control, Mr. Smith is the hedge fund’s “ultimate parent entity,” and he is deemed to “hold” everything in his control group.

Based on his fund’s holdings, Mr. Smith was appointed to the Board of Bravo Ltd. As a board member, he was given stock options for 10,000 voting shares and exercised them. Let’s assume that those shares were worth $50 each, so that the entire option acquisition was only $500,000. This is 0.0059% of the HSR threshold of $84.4 million. But that’s not the way the HSR system works.

What Mr. Smith should have done (or rather, what his lawyers should have done) was combine, or “aggregate,” all his existing holdings ($84,000,000) with the options he was about to convert $500,000). In other words, as a result of his option transaction, Mr. Smith now “held” $85,000,000 of voting securities in Bravo Ltd. But he never made an HSR filing. In this case, the FTC fined him $250,000.

This is actually a simplified version of the real story. In fact, Alpha Fund had previously failed to make an mandatory HSR filing, and had made a corrective filing only later, only proving that it is hard to keep track of acquisitions across a control group. As part of the settlement of the corrective (after-the fact) filing, the FTC always imposes an obligation to create and maintain a compliance program for future acquisitions. The FTC takes the position that a second failure to file proves that the compliance program was not complied with.

By the way, there was absolutely no competitive issue involved in this violation. The control group’s collective holdings in Bravo Ltd. were too low for it to be able to exert any control. Furthermore, Bravo Ltd. granted the options with one single day to exercise them. There was no possibility for Mr. Smith to have made an HSR filing. Despite all these mitigating factors, the fine was imposed simply because there had been an acquisition that required an HSR filing, and no filing was made.

Here’s another complication from the same story. Let’s assume that Alpha Fund bought the shares at $50,000,000, and that over time they appreciated in value to $84,000,000. It’s not clear, but it seems possible that Alpha and Mr. Smith had considered the original acquisition cost of the stock ($50,000,000 plus $500,000). That was another serious mistake, because the HSR rules require you to calculate the current value of your existing holdings. In other words, if your original $50,000,000 investment grows to $85,000,000 through appreciation, you don’t need to do a thing. But you can’t acquire a single dollar more of stock in the same target without making a filing.

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Aspen Mountains

Author: Jarod Bona

Yes, in certain narrow circumstances, refusing to do business with a competitor violates Section 2 of the Sherman Act, which regulates monopolies, attempts at monopoly, and exclusionary conduct.

This probably seems odd—don’t businesses have the freedom to decide whether to do business with someone, especially when that person competes with them? When you walk into a store and see a sign that says, “We have the right to refuse service to anyone,” should you call your friendly antitrust lawyer?

The general rule is, in fact, that antitrust law does NOT prohibit a business from refusing to deal with its competitor. But the refusal-to-deal doctrine is real and can create antitrust liability.

So when do you have to do business with your competitor?

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Sculpture Man Controlling Trade

This 1942 sculpture by Michael Lantz, 17-feet long, is meant to suggest a heroic figure (the FTC) restraining violent and untamed American commerce.

Author: Steven Levitsky

If you liked the old computer game, “Minesweeper,” then you’re ready to take on Hart-Scott-Rodino (HSR) filings for antitrust review of mergers & acquisitions. Both have rules. And both can produce unexpected catastrophes even if you think you’re following the rules. In fact, major clients, advised by major law firms, have been hit with hundreds of thousands of dollars in fines for mistakes that no one thought of at the time.

Let’s start with the 50,000 foot view of HSR compliance. You might know the basics: (a) you need to make an HSR filing when one side of the transaction has sales or assets of at least $16.9 million; (b) the other side has sales or assets of at least $168.8 million; (c) the transaction size is greater than $84.4 million; and (d) no exemptions apply. (These are 2018 figures).

An example to consider

Here’s an example of how things can work out badly. Let’s assume you get a call from the CEO of your client, Alpha Co. Alpha Co. is a small and relatively new company and the CEO tells you:

  1. Alpha’s annual sales and assets are $15 million.
  2. Alpha plans to buy $80 million of the voting securities of Bravo Ltd. (Alpha’s borrowing $65 million to do the deal.)
  3. Based on this, he wants to know if they need to make an HSR filing.

Applying what you know, you conclude that the “size-of-person” and “size-of-transaction” tests are both not met, so no HSR filing is required. Alpha Co. goes ahead and closes the deal.

Three months later, your client hears from the FTC. The FTC tells them that they violated the HSR Act by not filing, and that the fine is $41,484 per day, or $3,733,560 in all. What went wrong? (We’ll explain in detail in Point 2.)

But generally, what went wrong is that the 50,000 foot view is not enough. HSR rules are extremely technical and, some would say, not exactly logical. A lot of HSR terms don’t have a common sense meaning. You need to check and cross-reference the definitions and rules. And these, by the way, are not organized in any friendly or rational way, but seem to read like the Tax Code.

Here are some basic HSR concepts that might help you avoid the worst minefields.

  1. What are the basic HSR tests?

There are two tests to see if a filing is required.

First, “size-of-person.” Normally, you don’t need to file for the antitrust enforcers unless one side of the deal has sales or assets of at least $16.9 million and the other side has sales or assets of at least $168.8 million. (This are 2018 figures; these numbers change every February.)

But, as we’ll see soon in Point 2, the size-of-person test does not mean the size of the transaction party. Instead, it means the size of the buyer’s entire business group, or everything under the control of its highest entity (see §5). Don’t fall into the trap of measuring an incomplete control group.

Second, the “size-of-transaction” must be over $84.4 million (again, this is 2018; the numbers change every February). But there are several other filing thresholds that cover more purchases in the same target and could require successive filings. These include $168.8 million; $843.9 million; 25% of the target — but only if the size-of-transaction is more than $1.688 million; and 50% of the target — or control. Once you get control, you can buy as much more of the target as you want without ever filing again.

But, as we’ll see soon in Point 2, the “size-of-transaction” does not really mean the size of the transaction. Instead, it means (1) the combination of existing holdings and planned acquisitions, (2) that the entire buyer control group will have in the target control group after the deal closes (see §2). This includes voting stock acquired years before, that has to be analyzed at its current value. Don’t fall into the trap of measuring the wrong amount.

  1. What is an “ultimate parent entity” and why does it matter?

The “ultimate parent entity” is the top controlling entity of an entire business group.

The “ultimate parent entity” matters to your antitrust filing for the following reason. The purpose of the HSR filing system is to let the antitrust agencies know of significant shifts in competitive power. As a result, they don’t care about the names on the contract, which may be only small subs or special purpose vehicles. The antitrust agencies want to know what is really happening in terms of changes of competitive power.

To give the agencies that information, you must identify the entire control group of your transaction party. You do this by tracing control upwards from the transaction party (Alpha Co., in our case) to the very highest control level of the business group. That entity at the top, that isn’t controlled by anyone else, is the “ultimate parent entity,” which can be a company or an individual. The “ultimate parent entity” makes the filing. Its collective size and holdings affect the “size-of-person” and “size-of-transaction” tests we discussed in Point 1.

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exclusive-deailng-300x200

Author: Jarod Bona

Sometimes parties will enter a contract whereby one agrees to buy (or supply) all of its needs (or product) to the other. For example, maybe a supplier and retailer agree that only the supplier’s product will be sold in the retailer’s stores? This usually isn’t free as the supplier will offer something—better services, better prices, etc.—to obtain the exclusivity.

If you compete with the party that receives the benefit of the exclusive deal, this sort of contract can seem quite aggravating. After all, you have a great product, you offer a competitive price, and you know that your service is better. Then why is the retailer only buying from your competitor? Shouldn’t you deserve at least a chance? Isn’t that what the antitrust laws are for?

Maybe. But most exclusive-dealing agreements are both pro-competitive and legal under the antitrust laws. That doesn’t mean that you can’t bring an antitrust action and it doesn’t mean you won’t win. But, percentage-wise, most exclusive-dealing arrangements don’t implicate the antitrust laws.

You can read our article about exclusive dealing at the Bona Law website here.

It is important that I deflate your expectations a little bit at the beginning like this because if you are on the outside looking in at an exclusive dealing agreement, you are probably quite angry and feel helpless. From your perspective, it will certainly seem like an antitrust violation. And your gut feeling about certain conduct is a good first filter about whether you have an antitrust claim. What I am trying to tell you is that with regard to exclusive dealing, your gut may give you some false positives.

So what is an exclusive dealing agreement?

An exclusive dealing agreement occurs when a seller agrees to sell all or most of its output of a product or service exclusively to a particular buyer. It can also occur in the reverse situation: when a buyer agrees to purchase all or most of its requirements from a particular seller. Importantly, although the term used in the doctrine is “exclusive” dealing, the agreement need not be literally exclusive. Courts will often apply exclusive dealing to partial or de facto exclusive dealing agreements, where the contract involves a substantial portion of the other party’s output or requirements.

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Golden Gate Bridge California

Author: Jarod Bona

In an earlier blog post, we discussed Leegin and the controversial issue of resale-price maintenance agreements under the federal antitrust laws. We’ve also written about these agreements here. As you might recall, in Leegin Creative Leather Products, Inc. v. PSKS, Inc. (Kay’s Closet), the US Supreme Court reversed a nearly 100-year-old precedent and held that resale-price maintenance agreements are no longer per se illegal. They are instead subject to the rule of reason.

But what many people don’t consider is that there is another layer of antitrust laws that govern market behavior—state antitrust law. Several years ago during my DLA Piper days, I co-authored an article with Jeffrey Shohet about this topic. In many instances, state antitrust law directly follows federal antitrust law, so state antitrust law doesn’t come into play. (Of course, it will matter for indirect purchaser class actions, but that’s an entirely different topic).

For many states, however, the local antitrust law deviates from federal law—sometimes in important ways. If you are doing business in such a state—and many companies do business nationally, of course—you must understand the content and application of state antitrust law. Two examples of states with unique antitrust laws and precedent are California, with its Cartwright Act, and New York, with its Donnelly Act.

California and the Cartwright Act

This blog post is about California and the Cartwright Act. Although my practice, particularly our antitrust practice, is national, I am located in San Diego, California and concentrate a little extra on California. Bona Law, of course, also has a New York office.

As I’ve mentioned before, the Supreme Court’s decision in Leegin to remove resale-price maintenance from the limited category of per se antitrust violations was quite controversial and created some backlash. There were attempts in Congress to overturn the ruling and many states have reaffirmed that the agreements are still per se illegal under their state antitrust laws, even though federal antitrust law shifted course.

The Supreme Court decided Leegin in 2007. It is 2018, of course. So you’d think by now we would have a good idea whether each state would follow or depart from Leegin with regard to whether to treat resale-price maintenance agreements as per se antitrust violations.

But that is not the case in California, under the Cartwright Act. Indeed, it is an open question.

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Author: Luis Blanquez

On July 24, 2018, the European Commission fined manufacturers Asus, Denon & Marantz, Philips and Pioneer for over €111 million for restricting the ability of online retailers to set their own retail prices for a variety of widely-used consumer electronics products.

Background

Colgate Doctrine

Author: Jarod Bona

As an antitrust attorney with an antitrust blog, my phone rings with a varied assortment of antitrust-related questions. One of the most common topics involves resale-price maintenance. “Resale price maintenance” is also one of the most common search terms for this blog.

That is, people want to know when it is okay for suppliers or manufacturers to dictate or participate in price-setting by downstream retailers or distributors.

I think that resale-price maintenance creates so many inquiries for two reasons: First, it is something that a comparatively large number of companies need to consider, whether they are customers, suppliers, or retailers. Second, the law is confusing, muddled, and sometimes contradictory (especially between and among state and federal antitrust laws).

If you want background on resale-price maintenance, you can review my blog post on Leegin and federal antitrust law here, and you can read my post about resale-price maintenance under state antitrust laws here.

Here, we will discuss alternatives to resale-price maintenance agreements that may achieve similar objectives for manufacturers or suppliers.

The first and most common alternative utilizes what is called the Colgate doctrine.

The Colgate doctrine arises out of a 1919 Supreme Court decision that held that the Sherman Act does not prevent a manufacturer from announcing in advance the prices at which its goods may be resold and then refusing to deal with distributors and retailers that do not respect those prices.

Businesses—with the minor exception of the refusal-to-deal doctrine—have no general antitrust-law obligation to do business with any particular company and can thus unilaterally terminate distributors without antitrust consequences (in most instances; please consult an antitrust attorney).

Both federal and state antitrust law focuses on the agreement aspect of resale-price maintenance agreements. So if a company unilaterally announces minimum prices at which resellers must sell its products or face termination, the company is not, strictly speaking, entering an agreement.

Update: You can now read this article translated to French at Le Concurrentialiste.

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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.

But there is one issue that is not only a common occurrence but also engenders 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 my blog post 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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Author: Jarod Bona

Business can be brutal.

Let’s say you have this business. Maybe you started it recently, or maybe you’ve been around for some time. But, in any event, you offer a good product or service. Customers like you and you are making money.

This is—for many—the American dream. You have freedom, which plays itself out by your decision to exercise that freedom by working 80 hours per week. But you are working those 80 hours for your baby—your business.

And at least you have control over your circumstances: If you keep providing your customers with great value at a great price, you will succeed.

That’s true, except sometimes it isn’t.

Competing for customers in a market isn’t just about providing the best services, products, or prices. That is, of course, the biggest part of it, most of the time. If you do well for your customers, they will usually do well for you. But sometimes it is more complicated than that.

Companies compete within markets, but they also compete for markets.

What does that mean?

Let’s say you own a restaurant and there are five restaurants on your street. You compete within the market because whoever offers the best combination of atmosphere, price, and quality and can best match the needs (i.e. demand) of the prospective restaurant customers in that geographic area will make the most money. That is competing within the market.

But the more competition there is, the harder it is to make money. Every market is different, of course, but the greater the differentiation among competitors within the market and the less competition within that market, the more profit margins increase. This, of course, is just a rough approximation. Markets are complicated beasts.

The truth is, if you want to make more money as a business, it is best to avoid or minimize competition. That is why Peter Thiel tells you in Zero to One to create new markets or to build businesses that will face minimal competition. In that sense, a restaurant is a terrible business—too much competition. We wrote about avoiding competition and Peter Thiel’s excellent book here.

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