Antitrust in the Second Obama Administration

1. Antitrust in the Second ObamaAdministration Janet L. McDavid January 29, 2013, Washington Legal Foundation

2. Bipartisan Support for Antitrust Enforcement • Broad consensus on role of antitrust enforcement in free market economy • The alternative is often broad regulation • Broad, bipartisan support for antitrust enforcement • But many in bar, academia, and business community believe that enforcement at DOJ was lax during the Bush Administration • President Obama was critical of DOJ antitrust enforcement during the 2008 campaign. • So we expected changes in antitrust enforcement in the Obama administration—did we get change, and what should we expect in the next four years? • In his second inaugural address, President Obama said, “Together we discovered that a free market only thrives when there are rules to ensure competition and fair play.” So we should expect continued antitrust activism.

3. New Leadership at Both Agencies • Leadership is very important to the direction of the antitrust agencies. • Christine Varney became the Assistant Attorney General in charge of the Antitrust Division in April 2009. She left in August 2011, and was succeeded by three Acting Assistant Attorneys General. • Bill Baer was confirmed as AAG on December 30, 2012, and took office on January 3. • When Bill was FTC Bureau Director, his tenure was marked by aggressive challenges to mergers, such as Staples/Office Depot, Exxon/Mobil, BP/Amoco. • He also was aggressive in challenging exclusionary conduct, such as the case against Toys R Us. • Bill retains three experienced deputies, Scott Hammond (criminal enforcement), Renata Hesse, and Leslie Overton. • He has two deputy vacancies to fill: economics and litigation

4. New Leadership at Both Agencies • Jon Leibowitz was designed FTC Chairman in March 2009. He is expected to leave shortly, creating a vacancy that can be filled either by designating one of the two Democratic Commissioners, or nominating a new Chairman. • Two Democratic Commissioners, Edith Ramirez and Julie Brill, have been aggressive but sensible enforcers. • Julie Brill’s background was as a state consumer protection enforcer in Vermont and North Carolina. • Edith Ramirez’s background was as a litigation partner at Quinn Emanuel, who had tried some antitrust cases. • There are two Republican Commissioners, Maureen Olhausen and Joshua Wright. • Olhausen has been cautious on enforcement issues since her appointment in early 2012. • Wright was a law professor whose writings have been highly critical of several enforcement efforts. • FTC senior staff include Rich Feinstein as Director of the Bureau of Competition and Howard Shelansky as the chief economist. Rich is expected to leave soon.

5. Merger Enforcement • President Obama’s 2008 campaign antitrust statement pledged that he would “step up merger review activity.” • Many surprised by some Bush DOJ merger clearances. • Whirlpool/Maytag -- > 70% market share • XM/Sirius – combined the only two satellite radio firms • Beer mergers resulted in two firms with a combined > 80% market share • DOJ threatened to sue Google/Yahoo, but the deal was abandoned when DOJ threatened lawsuit • So we expected increased merger enforcement, especially at DOJ in the Obama Administration, and we got it.

6. Merger Enforcement—Antitrust Division • AT&T/T-Mobile (Aug 2011): DOJ sued to block the $39 billion deal. The parties later abandoned the transaction. • H&R Block Inc./TaxACT (Nov. 2011): DOJ sued to block H&R Block’s proposed acquisition of TaxACT, in DOJ’s first litigated merger case since 2003. The court enjoined the proposed merger “on the grounds that the merger violates the antitrust laws and will lead to an anticompetitive duopoly.” • Blue Cross Blue Shield of Michigan/Physicians Health Plan of Mid-Michigan (Mar. 2010): Blue Cross Blue Shield, the largest provider of commercial health insurance in Michigan, sought to acquire its largest competitor. DOJ sued to block the deal, which was abandoned. • Ticketmaster Entertainment, Inc./Live Nation, Inc. (Jan. 2010): Ticketmaster, the largest ticketing company, was allowed to merge with Live Nation, apromoter of live concerts, subject to a settlement agreement involving divestiture and conduct remedies. • Comcast Corp./NBC Universal Inc. (Jan. 2011): DOJ allowed the Comcast/NBCU joint venture to go forward subject to certain licensing, anti-retaliation, and Open Internet provisions. • Google Inc./ITA Software Inc. (Apr. 2011)—Google”s acquisition of ITA, a producer of airfare pricing and shopping systems, was resolved through a consent decree involving conduct remedies. • Verizon/Comcast (Aug. 2012): Joint venture between Verizon and Comcast to resell each other’s services, and Verizon’s acquisition of wireless spectrum from cable companies, resolved through consent decree with conduct remedies.

7. Merger Enforcement--FTC • Polypore International v. FTC: decision blocking merger affirmed on appeal. • ProMedica Health System, Inc./St. Luke’s Hospital (Jan. 2011): hospital merger enjoined. • FTC litigated and lost three merger cases: • FTC v. Lab Corporation of America: FTC failed to sustain its burden of proof; challenge abandoned. • FTC v. Lundbeck, Inc.: FTC had failed to prove that the merging firms’ products were in the same relevant product market. • FTC v. Phoebe-Putney Health Systems: court found FTC challenge barred by state action doctrine; Supreme Court decision expected in the Spring. • Grifols/TalecrisBiotherapeutics Holding Corp. (July 2011): consent order requiring divestiture of a plant. • Hard Disk Drive Mergers (Western Digital/Hitachi; Seagate/Samsung) (March 2012): in two simultaneous deals in the same industry, the FTC and EU required divestitures by Western Digital. • GracoInc./ITW Finishing LLC (May 2012): FTC litigation dismissed after Graco agreed to divestitures.

8. Merger Enforcement—Revised Merger Guidelines • The Antitrust Division and the FTC revised the Merger Guidelines in August 2010 to describe principles and methodologies the agencies use to assess whether to challenge a merger or acquisition. • The new Guidelines were intended to reflect the agencies’ actual practices, as well as advances in economic analysis. • New Guidelines continue to rely on economic principles and do not revive populist policies of earlier eras • New Guidelines emphasize flexibility and contain a “tool-box” of methodologies for analyzing horizontal mergers • 1992 Guidelines sought to develop precise, step-by-step framework for analyzing horizontal mergers, relying principally on market shares and market concentration. • But since then, actual agency practice has been less rigid. • New Guidelines note that agencies will “apply a range of analytical tools” in predicting the likely competitive effects of horizontal mergers. • New Guidelines acknowledge that agencies will “normally” define a market if they proceed to litigation: “In any merger enforcement action, the Agencies will normally identify one or more relevant markets in which the merger may substantially lessen competition.” (Section 4.0)

9. Merger Enforcement—Revised Merger Guidelines • Key question is how to predict potential competitiveeffects arising from merger • Evidence of adverse competitive effects is the first substantive discussion in the new Guidelines • Earlier versions of Guidelines focused on risk of “coordinated effects” with little discussion of other theories, but agencies in practice came to favor unilateral effects • New Guidelines continue trend to focus on “unilateral effects”: merged firm may raise prices post-merger because many customers will shift to second product in response to a price increase • New Guidelines include numerous techniques for assessing the likelihood of these effects • One new technique involves assessing the “upward pricing pressure” by analyzing • the tendency of consumers of one of the merging parties’ product to shift to the second merging party’s product in response to a price increase • the margins earned on the second party’s product • Critical loss analysis evaluates whether the merged firm is likely to find a price increase profitable • Coordinated effects analysis also remain relevant.

10. Merger Enforcement—Revised Merger Guidelines • Efficiencies • Same approach as prior version of Guidelines • Efficiencies will rarely tip the scales in mergers involving high levels of concentration • New Guidelines do not herald radical changes; instead, they reflect current agency practice • New Guidelines illustrate the evolution in economic thinking and agency practice since 1992 • Provide antitrust counsel with a better understanding of what agencies actually do

11. Antitrust Division Merger Remedies • In2011, the Division issued the Antitrust Division Policy Guide to Merger Remedies. • The Division now considers conduct remedies, along with structural ones, to be an effective method of resolving some competitive concerns. • Horizontal Mergers: The typical remedy is divestiture of assets. • Vertical Mergers: In vertical mergers, the Division will consider conduct remedies that preserve the efficiencies of the merger but eliminate the possibility of conduct that would adversely affect competition. The Division may also consider structural remedies, particularly “when the vertical integration is a small part of a larger deal.” • The newly created Office of the General Counsel is now tasked with ensuring that defendants comply with Division decrees. • Remedies should be “carefully tailored” to address the competitive harms threatened by mergers. Remedies must preserve competition, not competitors, and derive from “the careful application of legal and economic principles to the particular facts of a specific case.” Whether conduct or structural remedies are appropriate will depend on the results of a “fact-intensive” inquiry into the circumstances of the merger

12. Merger Enforcement—Different Standards for Litigation • The courts have held that the FTC bears a lower burden of proof to secure a preliminary injunction in merger litigation than does DOJ • DOJ must satisfy traditional standards to enjoin a merger. • D.C. Circuit in Whole Foods stated that the FTC is entitled to enjoin a merger if there are “questions going to the merits so serious, substantial, difficult, and doubtful as to make them fair grounds for thorough investigation” by the FTC, i.e. an FTC administrative trial taking at least 12 months. • The District Court in FTC v. CCC held that if the FTC meets this standard, there is a “presumption in favor of preliminary injunctive relief” so the case can be litigated on the merits in an FTC administrative case. • The FTC seems willing to pursue administrative cases when it loses a preliminary injunction. • The Antitrust Modernization Commission cautioned that “parties to a proposed merger should receive comparable treatment and face similar burdens regardless whether the FTC or the DOJ reviews their merger. A divergence undermines the public’s trust that the antitrust agencies will review transactions efficiently and fairly.” • The AMC also recommended that Congress should amend Section 13(b) to specify that the FTC is subject to the same standard for entry of the preliminary injunction as the Antitrust Division. • The ABA Antitrust Section made similar recommendations. • Several deals have been abandoned following FTC challenges because the parties could not keep the deal alive for an additional 12 months of administrative litigation.

13. Section 2 Enforcement • Bush DOJ failed to bring a major dominant firm case in 8 years • DOJ and FTC held joint hearings on Section 2, and Bush DOJ subsequently issued a report – without the FTC. Three FTC Commissioners criticized the report. • In her first speech as AAG, Christine Varney withdrew the Section 2 Report • It raised “too many hurdles” to government enforcement and counseled “extreme caution” • She believed enforcers and courts can “separate the wheat from the chaff” in identifying predatory acts • The “disproportionality test” reflected “excessive concern with the risks of over-deterrence” • In 2011, DOJ filed its first Section 2 case, challenging a Texas hospital’s contracts that maintained its market power by prohibiting insurers from contracting with its competitors. • The FTC filed a dominant firm case against Intel charging that it violated Section 5 of the FTC Act through exclusive arrangements intended to limit the use of competitive products. The case was settled. • The FTC launched a highly publicized Section 2 investigation of Google, which was settled earlier this month with voluntary commitments by Google with respect to licensing and search. Commissioner Rosch characterized the settlement as follows: “after promising an elephant more than a year ago, theCommission instead has brought forth a couple of mice.”

14. Civil Conduct Investigations • Both agencies have started several notable conduct investigations and lawsuits • DOJ is litigating a case against Apple and several book publishers alleging a conspiracy to raise prices on e-books. • DOJ is in litigation with American Express involving its agreements with merchants. • DOJ is in litigation with Blue Cross/Blue Shield of Michigan in a case alleging that MFN clauses in its contracts with hospitals violate Section 1. • DOJ charged that technology firms agreed not to hire each others’ employees. • The FTC signaled its intention to use Section 5 aggressively. • The FTC has continued to pursue “reverse payment” pharmaceutical settlements. • The FTC conducted Section 8 director overlap investigations involving Google and Apple.

15. Conclusion • In the past, change in antitrust enforcement when administrations change has been at the margin. • The margin has been much broader in the transition from the Bush Antitrust Division to the Obama Antitrust Division. • New leaders have worked to re-establish the Antitrust Division as a champion of antitrust enforcement. • In particular, recent AAGs have re-built the Antitrust Division’s litigation capabilities. • The FTC is continuing its record of vigorous enforcement. 4111273_1.PPTX

16. Same Administration, New Management: What to Expect from DOJ and FTC:Antitrust & Intellectual Property Andrea Agathoklis MurinoPresentation to the Washington Legal Foundation January 29, 2013

17. Recent FTC and DOJ Activity in the IP Space • Patent Acquisition Entities (PAEs) • Standard Essential Patents (SEPs) • Reverse Payment Pharma Settlements • Why are these issues hard? • There is an inherent tension between antitrust law, which is designed to eliminate monopolies, and IP law, which is designed to grant a limited monopoly

18. PAEs • What is PAE? • An entity that purchases patents from existing owners and makes money through licensing or exerting its licensing rights (a.k.a. litigation) against those already using the patents • PAEs present special problems in antitrust law • “Supporters of the PAE business model say that it facilitates the transfer of patent rights, rewards inventors and funds ongoing research and development efforts. Critics describe adverse effects on competition and innovation, including increased costs and a lack of technology transfer, ultimately taxing consumers and industry.”

19. FTC/DOJ Workshop on PAEs (December 10, 2012) • Well-attended by all affected constituencies • Viewpoints shared ranged from: • Innovation is harmed • PAEs typically file suit after a product has been in the market for some time • Firms will remove products from the market to avoid litigation; “extortion” • PAEs have little incentive to cross-license • Innovation is helped • PAEs are “specialists” engaging in trade, a concept economists generally favor • PAEs are superior monetizers • Patents are not themselves proof of innovation

20. FTC/DOJ Workshop on PAEs (December 10, 2012) • Agencies clearly hungry for data and empirical evidence to determine whether there is a problem and if so, the scale of the problem • Accepting comments until March 10, 2013 • Next steps for Agencies murky because of changes in leadership but this is certainly a continuing area of concern • FTC use of Section 5 possible but also less likely with Commr’s Ohlhausen and Wright in place

21. SEPs • What is a SEP? • Patent(s) necessary to implement a recognized industry standard (think: DVD players; wifi) • SEPs most common in Standard Setting Organizations (SSOs) • Most SSOs require owners of SEPs to make disclosures and commit to license SEPs on fair, reasonable, and non-discriminatory terms (FRAND or RAND) • Unfortunately, these commitments do not always lead to peace • What is fair? What is reasonable? Definitional issues pervade. • Imprecise or vague terms can lead to “hold-ups,” raising costs to rivals and foreclosing competition • Parties seek injunctions or exclusion orders at International Trade Commission (ITC) – the “venue” of choice

22. Enforcement Activity in SEPs • DOJ • CPTN (April 2011) • DOJ required certain commitments from the parties • Nortel/Apple/Rockstar Bidco (February 2012) • Cleared Nortel without any commitments • No market power for RIM and Microsoft • Apple already agreed to open source • Google/Motorola (February 2012) • DOJ concluded that Google had a substantial share of mobile OS market BUT this particular transaction would not enable Google to hold up rivals; no commitments required • “[H]ow Google may exercise its patents in the future remains a significant concern.”

23. Enforcement Activity in SEPs • FTC • Revisited Google’s acquisition of Motorola (January 3, 2013) • Under a theory of Section 5 liability and in a 4-1 vote, ordered Google to cease seeking injunctive relief based on infringement of the FRAND-encumbered SEPs that Google acquired through its purchase of Motorola, unless certain criteria satisfied • Concern voiced that the order contains too many loopholes • Dissent suggests order violates Noerr-Pennington and is an overreach • Has also used Section 5 to reach SEPs in a merger investigation into vehicle air conditioning systems led to SEP commitments in Robert Bosch GmbH (November 2012) and in Negotiated Data Solutions (2008)

24. Enforcement Activity in SEPs • DOJ/USPTO Statement on SEPs (January 8, 2013) • Counsels the ITC to be careful about granting injunctions or exclusion orders because it may harm the public interest • “Although we recommend caution in granting injunctions or exclusion orders based on infringement of voluntary F/RAND-encumbered patents essential to a standard, DOJ and USPTO strongly support the protection of IP rights…” • Statement excluded the FTC and did not refer to the Google SEP order

25. Reverse Payment Pharma Settlements • FTC focus for many years • What is a reverse-payment settlement? • Branded drug manufacturer reaches a settlement with a possible generic entrant that includes a delay by the generic competitor and some monetary consideration from the branded manufacturer • SCOTUS will hear argument on March 25, 2013 in FTC v. Watson • Whether reverse-payment agreements are per se lawful unless the underlying patent litigation was a sham or the patent was obtained by fraud (as the 11th Circuit has held), or instead are presumptively anticompetitive and unlawful (as the 3rd Circuit has held) • Justice Alito recused