Selected Antitrust Situations

Responding to Government Investigations Perhaps the most stressful antitrust event a client will experience is the receipt of an antitrust grand jury subpoena, Department of Justice Civil Investigative Demand or Federal Trade Commission subpoena. Receipt of such documents frequently marks the beginning of a criminal or civil antitrust investigation of the company, its employees , its competitors or its entire industry. Such investigations are material events in the life of the client and must be treated with great care. In the most severe cases, criminal antitrust proceedings can result in jail sentences for the individuals involved, massive fines for the corporation and potentially enormous treble damage exposure to private plaintiffs. While civil investigations do not carry the risk of criminal prosecution and penalties, they do carry their own risk of fines and frequently massive treble damage suits . ^[44]

A few examples should suffice to underscore the seriousness of such investigations and their aftermath. In the recent criminal charges brought in connection with the conspiracy between Christies and Sothebys, the world famous auctioneers of fine art, A. Alfred Taubman, the elderly former chairman of Sotheby's, was convicted of conspiring to fix prices and was sentenced to one year in prison plus $7.5 million in fines. ^[45] In addition, Sotheby's was forced to pay over $250 million in cash and other consideration to settle treble damage class action lawsuits. ^[46]

In a non-criminal proceeding, Mylan Laboratories, one of the worlds leading manufacturers of generic drugs, was forced to disgorge $100 million to the Federal Trade Commission to settle charges that it had cornered the market for ingredients of certain popular medications and raised their prices several thousand percent. ^[47] In addition, Mylan was compelled to pay at least $35 million to settle private antitrust class actions. ^[48] In another case, the leading brokerage firms on Wall Street paid more than $1 billion to settle private treble damage claims that they fixed prices for trading on the NASDAQ stock market. ^[49]

Given the serious, potentially bankrupting repercussions of an investigation and resulting government enforcement proceeding, it is critical once the investigation begins for the client and counsel to determine as quickly as possible what potential violation the government is investigating, who it is investigating, whether the client is a target or subject of that investigation, and the degree of the clients involvement and exposure. This information will drive counsels recommendations to the client and the strategy that will ultimately be pursued in addressing both the governments investigation and the likely (if not inevitable) private treble damage actions that will follow.

In responding to the investigation, perhaps the biggest and most important hurdle for the client and his counsel to clear is convincing the government attorneys handling the investigation that the clients involvement in the conduct under investigation was proper and legitimate . This is especially important (and potentially difficult) where the activity being investigated involves joint activity among competitors. Since such activity can result in price-fixing , market allocation and bidrigging, the most serious antitrust offenses , the investigating agencies will be highly suspicious about the purpose and propriety of the competitors communications and activities. The success or failure of the client and his counsel in persuading the investigating agency that the clients conduct was proper will likely determine the outcome of the investigation. That, in turn , will heavily influence any fines the client must pay and its degree of exposure in any subsequent treble damage litigation. ^[50]

Joint Ventures

Joint ventures can offer businesses substantial economic benefits and cost savings and are actually encouraged by the federal government. ^[51] However, they can also raise significant antitrust concerns and, while rarely attacked , are often investigated by the Department of Justice or the Federal Trade Commission.

Joint ventures can be used for a wide variety of commercially useful purposes. They can be used to share the research and development costs (and risks) needed to develop a new product such as a new pharmaceutical or other technical product. They can be used by small firms to form joint purchasing groups that will enable each participant to obtain volume discounts from suppliers that the individual firms might not have sufficient volume to obtain separately. Joint ventures can also be used to share and reduce costs of critical but expensive facilities such as warehouses and transportation equipment. Finally, joint ventures can be used to create new products that no single competitor could create itself. ^[52] While the joint ventures described above can all be perfectly lawful, potentially significant antitrust issues can arise when they involve competitors. The reason is obvious participation in the venture may require cooperation and collaboration by the competitors and will certainly require communication between them. These communications may or may not be appropriate. In addition, the venture itself may eliminate competition among the competing partners in the venture, raising potentially serious antitrust concerns. ^[53]

For example, if competitors form a joint venture to develop a new type of product that they could not realistically be expected to develop separately, that venture would likely be found to be lawful if investigated. ^[54] However, if as part of the venture the participants agree that they will all charge the same price for the new product, that agreement will render the venture (or at least the pricing agreement) unlawful . ^[55] Similarly, if the joint venture partners enter into a price-fixing or market allocation agreement and try to shield it from antitrust attack by calling it a joint venture, the government enforcement agencies will disregard the joint venture label and attack the agreement as a per se illegal naked restraint of trade. ^[56]

Given the tension between the pro-competitive aspects of joint ventures and the anti-competitive aspects that can emerge, it is important that businesses embarking on joint ventures be able to identify efficiencies the venture will create. The client and his counsel must be able to demonstrate that the parties to the venture are all making real contributions to the venture and that efficiencies in the form of new products, cost savings or the ability to extend the parties competitive reach will result. This is important because such contributions and savings are a significant marker the government will look at in determining whether the venture is real and has a legitimate business purpose. ^[57] Assuming it does, and assuming the venture is what the government calls a genuine integration of assets, where two or more entities are making real contributions of assets, talent, money and time to create something new or to generate true savings, the enforcement agencies will likely conclude that the venture is legitimate. ^[58]

Once the enforcement agencies determine that the venture is genuine and is not a facade for an otherwise illegal agreement among competitors, it will evaluate the venture to determine if there are collateral restrictions imposed on the venture or its participants that are themselves anti-competitive. ^[59] Such restrictions could take the form of agreements not to develop products that compete with the joint venture product or to deal exclusively with the venture. Such agreements may raise competition concerns depending on the facts specific to the venture and its participants. The agencies will also look to see if the venture itself has effects on competition, sometimes called spillover effects, that may be anti-competitive. ^[60] Both of these issues will be included in any antitrust review of the venture.

Given the potential sensitivity of joint ventures, especially those involving competitors, a thorough antitrust review of the venture should be done before the client makes any significant investment of time and resources into negotiating the terms of the venture with the other venture participants. The first questions that should be answered during the antitrust review are: What is the business reason for entering into the venture? What does the client expect to gain from it? Why cant the client achieve the same result on its own? Will the joint venture affect the clients relationships with its competitors in their activities outside the venture? If so, how? Will the venture affect the nature of competition between the client and its competitors who are not included in the venture? Will anyone (either customers, suppliers or other competitors) be injured by the venture? If so, who will be hurt and how? Answers to these questions may be critically important in determining if the venture raises antitrust questions and, if so, whether those questions should be cause for concern.

Mergers and Acquisitions Due Diligence

Mergers and Acquisitions constitute an area of antitrust practice unto itself. Entire books have been devoted to the subject and it would not be appropriate here to summarize the antitrust law of mergers and acquisitions. The kind of merger analysis done in the United States and in Europe, the kind of pre-merger filing regimes that different countries have and how all of it differs can provide endless grist for discussions among antitrust lawyers but is not especially useful for business executives. It is enough for businessmen to know that their mergers and acquisitions may require pre or post merger filings in many countries in addition to the United States and that the substantive merger review approaches used by different jurisdictions, notably the United States and the European Commission, may lead to different results. ^[61]

What businessmen should know about, however, are the antitrust risks that can arise during the due diligence process in transactions between competitors. Due diligence in mergers and acquisitions frequently occurs before antitrust lawyers are brought into the picture and, consequently, the parties to the transaction may not be sensitive to antitrust issues that due diligence can raise. In addition, since business executives will likely have dozens of other issues to contend with during the merger negotiation process, the antitrust significance of due diligence is not likely to be considered . It is for that reason that the issue is addressed here.

During the due diligence process, merging parties disclose to each other massive amounts of confidential information about their respective businesses. Such disclosure should not be surprising. Before two parties commit millions or billions of dollars to a transaction, they must be certain that the business they seek to combine with is what it appears to be. The responsibilities that each firms senior management owes to its board of directors and shareholders demand nothing less. However, where the merging firms are competitors, due diligence may include the disclosure of information concerning pricing, marketing plans, strategic plans, new product initiatives and the like. Such information, which goes to the heart of the rivalry between the two firms, would ordinarily be viewed by each firm as highly confidential and would never be disclosed to the other.

From an antitrust standpoint, the parties reluctance to share highly confidential competitive information with a competing firm is a good thing. Sharing such information is frequently the first step toward a pricefixing agreement or other agreement eliminating competition between rivals. Indeed, in at least one case, the Federal Trade Commission brought an administrative proceeding against two merging parties who exchanged product-specific price information during due diligence. ^[62] In order to close the deal, however, it may be necessary to share at least some highly sensitive competitive data.

There are usually ways to complete due diligence between merging firms in an antitrust appropriate manner. Antitrust lawyers have developed a number of approaches over the years to permit the parties to see the data they need without raising antitrust concerns. However, once the parties have shared sensitive information without using the protective measures developed by counsel, there may be little that can be done to correct the situation. Accordingly, before due diligence proceeds with respect to competitively sensitive information, antitrust counsel should be consulted.

^[44] Under the Clayton Act, antitrust violators may be sued by persons (individuals or businesses) injured by the violation for triple (treble) damages plus attorneys fees. 15 U.S.C. § 15.

^[45] See United States v. A. Alfred Taubman , Cr. No. 01 CR 429 (S.D.N.Y. 2001), aff'd , 297 F.3d 161 (2d Cir. 2002).

^[46] See In re Auction Houses Antitrust Litigation, 2001 WL 170792, *1 (S.D.N.Y. 2001) .

^[47] See Statement of Chairman Robert Pitofsky, et al., available at http://www.ftc.gov/os/2000/11/mylanpitofskystatment.htm

^[48] See http://www.pomerantzlaw.com/ publications /firmnewsUser2.cfm?pubid=290

^[49] In re NASDAQ Market-Makers Antitrust Litigation , 187 F.R.D. 465, 470 (S.D.N.Y. 1998).

^[50] Guilty pleas to criminal antitrust charges, convictions on such charges after trial or a judgment in favor of the government in a civil antitrust case can be used by a private plaintiff to establish that it has a prima facie case against the defendant in its subsequent civil case seeking treble damages. 15 U.S.C. § 16(a). It is therefore hardly surprising that the price of settling a treble damage case will go up if the client has been charged by the government with an antitrust violation and has then pleaded guilty or been convicted after trial.

^[51] See National Cooperative Research and Production Act of 1993, 15 U.S.C. §§ 4301-4305.

^[52] For example, networks of Automated Teller Machines (ATMs) that make it possible to obtain cash from any banks ATM, even by those who are not customers of that particular bank, are made possible by a joint venture among the banks who agree to participate in the ATM network.

^[53] Federal Trade Commn & U.S. Dept of Justice, Antitrust Guildelines for Collaborations Among Competitors , April 2000, at § 3.31(a) (hereinafter, JV Guidelines ).

^[54] JV Guidelines , § 3.3.

^[55] JV Guidelines , § 3.2.

^[56] Id.

^[57] JV Guidelines , § 3.36.

^[58] JV Guidelines , § 3.2.

^[59] JV Guidelines, §3.31(b).

^[60] JV Guidelines, §3.32.

^[61] The best known example is the now abandoned merger between General Electric and Honeywell which was approved by U.S. antitrust regulators and blocked by the competition authorities in the EU.

^[62] See In re Insilco Corp. , FTC Docket No. C-3783 (1998).