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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Engineers and Bridge

Author: Jarod Bona

As an antitrust attorney, over time you see the same major cases cited again and again. It is only natural that you develop favorites. Here at The Antitrust Attorney Blog, we, from time-to-time, highlight some of the “Classic Antitrust Cases” that we love, that we hate, or that we merely find interesting.

The Supreme Court decided National Society of Professional Engineers in the late 1970s—when I was two-years old—and before the Reagan Revolution. But the views that the author, Justice John Paul Stevens, expressed on behalf of the Supreme Court perhaps ushered in the faith in competition often associated with the 1980s.

The National Society of Professional Engineers thought that its members were above price competition. Indeed, it strictly forbid them from competing on price.

The reason was simple: “it would be cheaper and easier for an engineer ‘to design and specify inefficient and unnecessarily expensive structures and methods of construction.’ Accordingly, competitive pressure to offer engineering services at the lowest possible price would adversely affect the quality of engineering. Moreover, the practice of awarding engineering contracts to the lowest bidder, regardless of quality, would be dangerous to the public health, safety, and welfare.” (684-85).

So price competition will cause bridges to collapse? I suppose the same argument could be made for any market where greater expense can improve the health or safety of a product or service. We better not let the car manufacturers compete to provide us with cars because they will skimp on the brakes. It is often the professionals–including and especially lawyers–that find competition distasteful or damaging for their particular profession and believe that they are above it. Well, according to the US Supreme Court, they are not.

Indeed, quite recently, in NCAA v. Alston (analyzed here by Steve Cernak), the US Supreme Court reaffirmed and applied National Society of Professional Engineers when it told the NCAA that if they don’t like competition, they better go to Congress because, as of now, the Sherman Act applies to them and that law is predicated on one assumption alone: “competition is the best method of allocating resources” in the Nation’s economy.

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Sculpture Man Controlling Trade

Author: Steven J. Cernak

How do you tie together evolution, the wave, and market prices?  As Neil Chilson explains in his brilliant little book, Getting Out of Control, all are examples of emergent order.  While Chilson is a former FTC leader, this book is not just for antitrust and consumer protection lawyers and economists but for anyone trying to understand what they can, and cannot and should not, control.

The book is about more than policy and certainly more than antitrust policy.  It explores many ways in which emergent order can play a role in your life, both personal and professional.  After all, the subtitle is “Emergent Leadership in a Complex World.” So parts of the book read like a self-help or leadership book.

Those parts might be the least interesting, at least to many of us.  There is nothing objectionable in those sections but there also did not seem to be many new insights from viewing familiar issues through an emergent-order lens.  For example, Chilson describes how changing your habits can change you and your actions and how changing your environment can help change your habits: “If you want to stop eating sugar, don’t visit candy stores.”

But that advice does not seem much different than the directions that many of us have received in various six sigma or other corporate efficiency seminars. Many of mine while at General Motors were based on lessons learned from the Toyota Production System applied to the white-collar office.  There, changing the environment might mean putting yellow taping around the stapler on the table next to the copier to develop the habit of returning it to the same place every time. Good advice that all of us, whether in the workplace a few weeks or decades, need to hear periodically, but not particularly new.

Chilson’s policy discussions, however, do offer fresh and necessary takes on policy issues, like antitrust and other economic regulation, that are especially important today.  He starts by defining emergent order and distinguishing it from both randomness and designed order. Here, emergent order is the complex behavior of a system created by the interactions of many smaller components following simpler rules with no central control. To illustrate the differences among the three types, he uses various actions of a crowd at a sporting event.

As an example of emergent order, consider “the wave” at a large sports stadium — I will use the University of Michigan football stadium. The system, that is, the attendees, engage in the complex behavior of creating the coordinated, observable pattern of a wave moving around the stadium. No central authority controls the wave — some group of students, though not always the same one, tries to start it at different points in the game — and the small components, each fan, follows the simple rule of standing at about the right time. The wave peters out as enough fans grow disinterested.

An example of randomness would be the fans entering the stadium.  As Chilson notes, “you would be hard pressed to predict when any particular fan would arrive and take their seat” (although, at Michigan Stadium, a safe prediction is that fans named Cernak will be in their seats at the one hour to kickoff announcement). Designed order, on the other hand, would be if placards are handed out that, “when everyone holds them up, spell out ‘GO TEAM’ [or a Block M] across the entire stadium.”

Chilson builds on those definitions and examples to examine “the classic economic example of emergent order,” the price system. From these concepts, he derives principles for anyone dealing with emergent order, such as: expect complicated results even from simple actions; push decisions down to those actors with important local information; and be humble.

While the book is not overly technical or academic, its points are well-supported with quotes and “greatest hits” from top economists like Adam Smith, F.A. Hayek and his knowledge problem, Ronald Coase and his theory of the firm, and Elinor Ostrom. Chilson even interviews Russ Roberts, who has been popularizing emergent order on his EconTalk podcast for years.  (Surprisingly, there does not seem to be a reference to Roberts’s It’s a Wonderful Loaf, an ode to the magic and beauty of emergent order that I suggest to all my antitrust students.)

Specifically on antitrust and other regulatory matters, Chilson has high praise for his former boss at the Federal Trade Commission, former long-time Commissioner and Acting Chairman Maureen Ohlhausen. She frequently spoke about the need for the FTC to exhibit “regulatory humility,” a position that I have supported in the past. Chilson also seems to channel Edmund Burke in advocating for a common law approach to policy decisions, rather than some elaborate rulemaking, as the many cases decided with specific and local knowledge in the past end up embodying wisdom that should be respected now and in the future.

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Supply-Chain-Issues-and-Antitrust-300x185

Author:  Steven J. Cernak

Remember when UPS ran TV commercials, complete with jingles, trying to make logistics something that everyone cares about? No need now. Now, everyone knows how supply chain issues can affect toilet paper supplies, microchips for cars and, perhaps, even make Santa late with toys and decorations for Christmas.

With every supplier, distributor, retailer, and wholesaler scrambling to scrounge supplies and ship finished goods in some reasonably efficient and cost-effective manner, some harried supply chain executives might be tempted to take some bold and dangerous steps. Just as we have done a couple times during the pandemic, your friendly neighborhood antitrust lawyers are here to remind you of the old rules that still apply and speculate on how antitrust might affect these issues in the future.

Price Fixing and Price Gouging Rules Remain the Same

In a time of crisis, one tempting bold but possibly dangerous step for an executive to take is to directly contact or signal intentions to a competitor. For instance, a CEO might want assurance that any price increase to help recover increased transportation costs will be matched by the competitor. Depending on how the conversation goes, antitrust enforcers and courts could find a price fixing agreement — and, as the enforcers have made clear, price fixing is still per se illegal, even during a pandemic or other crisis. An agreement among competitors to boycott logistics providers raising their prices would meet a similar fate.

On the other hand, so-called price gouging does not violate the U.S. federal antitrust laws, as we explained here. So that CEO contemplating a price increase to cover increased transportation costs need not worry about federal antitrust issues; some states, however, do have non-antitrust laws that prohibit price gouging under certain circumstances.

Joint Ventures Might Help

Instead of jail time for price fixing, that phone call between competitor CEO’s could lead to joint efforts that could ease the business pain while staying on the right side of the antitrust laws.  As we explained here, the antitrust rules regarding joint ventures do not change in a crisis and some joint efforts among competitors, if implemented properly, do not violate the antitrust laws.  So if that CEO call will lead to joint research on new shipping methods; a new jointly-run warehouse; or lobbying the local legislature for regulatory relief, the antitrust laws likely will not stand in the way. Looks like some CEO’s are already thinking about joint ventures.

Bottlenecks Turn Out to be Monopolies?

While the antitrust laws have not changed, the changed economic conditions might lead to new outcomes. For instance, bottlenecks in the supply chain might start to look more like monopolies and so be subject to restrictions on monopolizing actions.

As we explained here, the first element in a monopolization claim under the U.S. antitrust laws is finding that the defendant is a “monopolist.” Usually, that process means defining a market and then seeing if the defendant has a high market share; however, the market share method is used more often only because the data are available to make the estimate. What a court really is trying to measure is the ability of the defendant to control its own price, that is, to price with little regard to how competitors might react. The supply chain crisis has uncovered several bottleneck companies that, at least in certain geographic areas, can name their price. As we described above, those high prices themselves would not violate the antitrust laws; however, any additional actions by that company to exclude new competition and maintain that pricing power could be a violation. Look for actions against such companies in the future.

More Merger Challenges Coming

As we have detailed here and here, the FTC is modifying their merger review processes and making it clear that they plan to challenge more mergers, irrespective of any supply chain issues.  And because the number of filings under the Hart-Scott-Rodino Act is way up, the FTC and DOJ Antitrust Division will have that many more chances to challenge mergers. So expecting more merger challenges is an easy prediction.

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Yang YangAuthor: 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).

Merger Control in China

According to Article 20 of the Anti-Monopoly Law of the People’s Republic of China (“Chinese AML”)1, a transaction is subject to a mandatory notification obligation at the State Administration of Market Regulation (SAMR) before being consummated or implemented if the transaction constitutes a “concentration” of undertakings or business operators, which meets or exceeds the relevant thresholds set forth in the Provisions of the State Council on the Notification Thresholds of the Concentrations of Undertakings.2

According to the Turnover Threshold Regulation, the concentrations not meeting the turnover threshold are still subject to the investigation of SAMR regardless of whether they are closed if the SAMR has evidence indicating potential anticompetitive effects of such concentrations.

In Summary, according to all Chinese AML, Turnover Threshold Regulation and the departmental rule, the circumstances when a concentration would fall within the Chinese merger regime would be as follows:

  • Mandatory Notification: Concentration and Turnover Thresholds. For failure to comply with this notification, SAMR has the power to reverse the consummated transaction and can impose a monetary penalty up to RMB 500,000 Yuan (approximately USD 70,000).
  • Voluntary Notification by Parties.
  • Where the turnover thresholds are not triggered, but evidence shows that there may be potential anti-competitive effects, SAMR has the power to initiate a review of the concentration.

Concentration

Under the Chinese AML and the current rules, any of the following transactions may constitute a “concentration” of undertakings:

  • a merger of business operators by absorption;3
  • a merger of business operators by new establishment;4
  • a business operator acquiring control of another business operator through an equity acquisition;5
  • a business operator acquiring control of another business operator through an asset acquisition;6
  • a business operator acquiring control of another business operator through contracts or other means;7 or
  • a jointly-controlled company by two or more business operators also referred to as a joint venture.8

Turnover Thresholds

Turnover thresholds may be triggered when:

  • in the preceding fiscal year, (i) the combined worldwide turnover of the parties participating in the concentration exceeds RMB10 billion (approximately US$1.6 billion) and (ii) at least two of the parties participating in the concentration each has a turnover within China exceeding RMB400 million (approximately US$60 million); or;
  • in the preceding fiscal year, (i) the combined turnover within China of the parties participating in the concentration exceeds RMB2 billion (approximately US$315 million), and (ii) at least two of the parties participating in the concentration each has a turnover within China exceeding RMB400 million (approximately US$60 million).

Revenues will be calculated on a group basis for each party participating in the concentration. And, “turnover within China” shall include the business operator’s import of products or services into mainland China from countries or regions outside of China, and shall exclude the export of its products and/or services from mainland China to countries or regions outside of China.

According to Guiding Opinions of Notifications of Concentrations, the turnover includes all the revenue from sales of products and provision of services in the preceding year, exclusive of relevant taxes and surcharges.9

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FTC-Vertical-Merger-Guidelines-300x225

Authors: Steven Cernak and Luis Blanquez

FTC Chairwoman Lina Khan keeps up her frenetic crusade to change the practice of antitrust enforcement. The new––and surely not last––change: the vertical merger guidelines.

On Wednesday, September 15, 2021, the FTC held an open virtual meeting to discuss the following:

Here, we will only discuss the first two items. For more background on these and other recent changes at the FTC, see our previous articles:

The FTC Continues the HSR Antitrust Process’s “Death of a Thousand Cuts”

FTC Guts Major Benefit of Antitrust HSR Process for Merging Parties

FTC Withdraws Vertical Merger Guidelines and Commentary

As expected, the FTC on a 3-2 vote decided to withdraw its approval of the Vertical Merger Guidelines, issued jointly just last year with the Department of Justice Antitrust Division (DOJ), and the FTC’s Vertical Merger Commentary.

According to the FTC’s press release, the guidance documents include unsound economic theories that are unsupported by the law or market realities. The FTC is withdrawing its approval to prevent industry or judicial reliance on this allegedly flawed approach. The FTC reaffirmed its commitment to working closely with the DOJ to review and update the agencies’ merger guidance.

The statements by the various Commissioners show the deep divisions within the FTC since Khan joined the Commission, not just about these Guidelines but more generally about how to enforce the antitrust laws and how to run the FTC.  The statement by the FTC majority asserts that the 2020 Vertical Merger Guidelines had improperly contravened the Clayton Act’s language with its approach to efficiencies. The statement explains the majority’s concerns with the Guidelines’ treatment of the purported pro-competitive benefits of vertical mergers, especially its treatment of the elimination of double marginalization.

The dissenting Statement of Commissioners Phillips and Wilson starts with a bang: “Today the FTC leadership continues the disturbing trend of pulling the rug out under from honest businesses and the lawyers who advise them, with no explanation and no sound basis of which we are aware.” The statement goes on to not only lament the confusion the withdrawal will generate but contrast the process used when the Guidelines were issued — months of public input and debate — with the process used for their withdrawal — no public input and, seemingly, no discussion even at the FTC outside the offices of three Commissioners.

The FTC pledged to work with DOJ to update vertical merger guidance to better reflect how the agencies will review such transactions in the future. Just an hour later, DOJ issued a statement explaining that they are reviewing both the Horizontal Merger Guidelines and the Vertical Merger Guidelines and, as to the latter, have already identified several aspects of the guidelines, such as the treatment of and burdens for the elimination of double marginalization, that deserve close scrutiny.  (We raised those issues when the Guidelines went through public debate last year.)  DOJ expects to work closely with the FTC to update the Guidelines so, perhaps, we will have new Guidance at some point in the future.

FTC Staff Presents Report on Nearly a Decade of Unreported Acquisitions by the Biggest Technology Companies

During the same meeting, FTC presented findings from its inquiry into the hundreds of past acquisitions by the largest technology companies that did not require reporting to antitrust authorities at the FTC and DOJ, generally because they were below HSR thresholds. Launched in February 2020, the inquiry analyzed the terms, scope, structure, and purpose of these transactions by Alphabet Inc., Amazon.com, Inc., Apple Inc., Facebook, Inc., and Microsoft Corp. between Jan. 1, 2010 and Dec. 31, 2019.

“While the Commission’s enforcement actions have already focused on how digital platforms can buy their way out of competing, this study highlights the systemic nature of their acquisition strategies,” said Chair Khan. “It captures the extent to which these firms have devoted tremendous resources to acquiring start-ups, patent portfolios, and entire teams of technologists—and how they were able to do so largely outside of our purview.”

The Commission voted 5-0 to make the report public. Chair Khan and Commissioners Chopra and Slaughter each issued separate statements. While the report did not recommend any changes to the merger review process, we expect that the FTC may utilize the report’s findings to recommend changes in the HSR process.

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Authors:  Steven J. Cernak and Luis Blanquez

In late 2020, the Federal Trade Commission (FTC) and the attorneys-general (AGs) from 48 states filed nearly identical antitrust lawsuits against Facebook for stifling competition by acquiring potential competitors, mainly Instagram in 2012 and WhatsApp in 2014, and for enforcing policies that blocked rival apps from interconnecting their product with Facebook. The alleged effect of this conduct was to (i) blunt the growth of potential competitors that might have used that interoperability to attract new users, and (ii) deter other developers from building new apps or features or functionalities that might compete with Facebook.

This week, the judge hearing the cases agreed to dismiss the claims from the FTC––without prejudice––stating that the lawsuit failed to plead enough facts to plausibly establish that Facebook has monopoly power in the personal social networking services market. Likewise, the Court also dismissed ––with prejudice––a similar case pursued by a group of 48 states on the basis that any alleged violations took place too long ago.

While by no means the final decision on these matters, the motion to dismiss opinion will significantly narrow the FTC case for now. It also highlights some of the difficulties that enforcers will face using the current antitrust laws against Big Tech companies.

Online platforms have been––and continue to be––scrutinized by antitrust enforcers around the world. In the U.S. the Antitrust Subcommittee of the House Judiciary Committee issued last year its long-anticipated Majority Report of its Investigation of Competition in Digital Markets. The Report detailed its findings from its investigation of Google, Apple, Facebook, and Amazon along with recommendations for actions for Congress to consider regarding those firms. In addition, the Report included recommendations for some general legislative changes to the antitrust laws. Since then, online platforms have been involved in high-profile antitrust litigation in the U.S. So even though Facebook has won the first round of this litigation, the war is far from over.

Chinese Translation: Thank you to our friends at the Beijing Fairsky Law Firm for preparing a translation in Chinese of this article.

Update: Please see an important update about the FTC’s amended complaint at the end of the article.

The FTC and State AGs Parallel Antitrust Complaints against Facebook

Both suits focused on the same Facebook categories of conduct. First were the acquisitions of Instagram and WhatsApp, both of which occurred more than five years ago. These deals allegedly increased Facebook’s power over social media networks, facilitating data integration and its sharing among some of the largest social media platforms. Next was Facebook’s requirement that any applications connecting to Facebook may not compete with Facebook or promote any of Facebook’s competitors. The complaint alleged that Facebook enforced these policies by cutting off access to the Application Programming Interface (“API”), the software that allows applications to talk to one another to allow communication with rival personal social networking services, mobile messaging apps, and any other apps with social functionalities.

Both the FTC and AG suits claimed that Facebook’s actions amounted to illegal monopolization in violation of Sherman Act Section 2. The states’ suit also claimed that the two acquisitions violated Clayton Act Section 7, the statutory prohibition of anticompetitive mergers.

In March Facebook Fired Back in its Motion to Dismiss

In March 2021, Facebook moved to dismiss the suits on several grounds.

First, the company claimed that the complaints did not properly allege a relevant market or that Facebook had monopoly power in any market.

Second, Facebook asserted that the FTC could not claim that the two acquisitions were illegal monopolization because the agency had cleared both transactions earlier under the Hart-Scott-Rodino premerger notification system. Even if the agency could make such a claim, the company claimed that the FTC failed to properly allege that such acquisitions were anticompetitive.  (We discussed the concept of post-HSR review both prior to and immediately after the FTC complaint was filed.)

Finally, Facebook claimed that the complaint did not properly allege that the company’s decision not to deal with all potential app developers who were potential competitors was subject  to an exception to antitrust law’s usual rule that even monopolists can choose their own partners. Basically, under U.S. antitrust laws if you are a monopolist, you can still refuse to deal with your competitors, unless: (i) you have already been doing business with them, and (ii) by stopping you are giving up short-term profits for the long-term end of knocking them out of the market.

The District Court’s Opinions Dismissing Both Cases

The judge hearing both cases granted Facebook’s motions to dismiss. The Court dismissed the FTC complaint without prejudice. This means that the FTC is allowed to amend its complaint and refile the case, and now has 30 days to do so. The AGs were not that lucky, and the judge dismissed their complaint with prejudice. The Court applied the doctrine of laches to conclude that AGs waited too long to challenge Facebook’s purchases of Instagram in 2012 and WhatsApp in 2014.

The Opinion against the FTC

In the decision re the FTC, the Court found that the complaint fails plausibly to allege how Facebook has a monopoly over personal social networking (“PSN”) services.

As with all monopolization plaintiffs, the FTC must plausibly allege that Facebook has monopoly power in some properly defined market. As do most plaintiffs, the FTC chose to allege this power indirectly by alleging that Facebook has a high share of the market, here for PSN services.  Despite some misgivings, the court found that the complaint’s allegations make out a plausible market for PSN services.

But that hardly ends the analysis. The FTC must also explain why Facebook enjoys a high share of that market and, therefore, monopoly power.  Here, the court found that the FTC’s allegations were inadequate for two reasons.

First because that “PSN services are free to use, and the exact metes and bounds of what even constitutes a PSN service — i.e., which features of a company’s mobile app or website are included in that definition and which are excluded — are hardly crystal clear.” In other words, the FTC must further explain whether and why other, non-PSN services available to the public either are or are not reasonably interchangeable substitutes with PSN services.

Second, even if the FTC better defines the market(s) of social networking, it must better explain how it developed the allegation that Facebook enjoys a market share of at least 60%: “[T]he FTC’s inability to offer any indication of the metric(s) or method(s) it used to calculate Facebook’s market share renders its vague ‘60%-plus’ assertion too speculative and conclusory to go forward.” Thus, the FTC has also fallen short to plausibly establish the existence of monopoly power by Facebook in the relevant market.

That finding alone was enough to support the court’s granting the motion to dismiss; however, it helpfully went on to discuss Facebook’s other grounds for dismissal.

The court explained that even if the FTC had sufficiently pleaded market power, its challenge to Facebook’s policy of refusing interoperability permissions with competing apps also failed to state a claim for injunctive relief. The Court held in both decisions that there is nothing unlawful about having such a policy in general. While implementation of such a policy can be illegal monopolization in certain limited circumstances, the FTC did not allege such facts.  Finally, all such denials of access occurred in 2013, seven years ago. Thus, the FTC lacks statutory authority to seek an injunction from a court for such past conduct.

On the other hand, the court did find that the FTC might be able to seek injunctive relief relating to Facebook’s past acquisitions of Instagram and WhatsApp. While those acquisitions took place years ago, the court found that Facebook’s continued ownership of the companies could be considered a continuing violation of Section 2. While the doctrine of laches does not apply to the US government, including the FTC, the court did note but did not decide several issues, including remedial ones, with such a long-delayed allegation.

The Opinion Against State Enforcers (AGs)

The judge also dismissed the parallel case brought by the AGs. The court explained that unlike the federal government, the states are bound by the doctrine of laches, in which those who “sleep on their rights” and wait too long to file a case cannot seek court relief. As a result, the allegations regarding the Instagram and WhatsApp acquisitions were insufficient to state a claim under either Sherman Act Section 2 or Clayton Act Section 7.

Using an analysis identical to the one used with the FTC complaint, the judge further rejected the AG’s claims that Facebook’s refusal to allow interoperability with competing apps constituted illegal monopolization. Because all of the claims of the AG’s were rejected in ways that cannot be rectified by the AG’s, the judge dismissed the complaint without any chance for the AG’s to modify the complaint and refile.

Final Remarks

At the time of this writing, the FTC is considering possible next steps. It could beef up its allegations regarding the market definition and Facebook’s share of that market and file an amended complaint regarding Facebook’s prior acquisitions. It could also appeal the dismissal of its current complaint.

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