competitor information sharing in joint ventures and...

Competitor Information Sharing in Joint Ventures and Mergers: Minimizing Antitrust Risks Avoiding Gun-Jumping and Other Restraints on Competition

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WEDNESDAY, OCTOBER 22, 2014

Presenting a live 90-minute webinar with interactive Q&A

Robert Schlossberg, Partner, Freshfields Bruckhaus Deringer, Washington, D.C.

William Blumenthal, Partner, Sidley Austin, Washington, D.C.

Joseph G. Krauss, Partner, Hogan Lovells, Washington, D.C.

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Information Sharing in the Premerger Context Avoiding Gun-Jumping

Robert Schlossberg, 22 October 2014

Applicable Statutes to Premerger Activities • Antitrust laws govern the pre-closing conduct of parties to mergers,

acquisitions, and joint ventures • Merging firms are not yet a single entity

- Must be careful to maintain separate identities and behave in a competitive manner until a transaction closes

• Merging firms have legitimate interest in engaging in certain forms of coordination - Raises question of how much information parties can exchange in due

diligence and transition planning - Limits the amount of control that the acquiring company can exert

contractually or otherwise over the other party prior to closing • HSR Act, Section 5 of the FTC Act and Section 1 of the Sherman Act apply

to pre-consummation activities: - For covered transactions, HSR Act prohibits acquisitions of beneficial

ownership without first filing premerger notification and observing required waiting period

- Sec. 1 of the Sherman Act prohibits collective actions that adversely affect competition

- Sec. 5 of the FTC Act prohibits “unfair methods of competition” as well as “unfair or deceptive acts or practices”

6

Premature Control

• Prior to closing of a transaction, the parties must continue to compete with one another - Acquiring party generally should not exert control over the acquired

party • However, the acquiring party also needs to be comfortable that the value

of the acquired company is not materially diminished while the merger is being reviewed

• The tension often manifests in drafting and executing the terms of the merger agreement

• Drafting a merger agreement that walks the line of avoiding control while still protecting the interests of the acquiring company can be challenging

7

Beneficial Ownership & Premature Control

• Indicia of “Beneficial Ownership”: - The right to obtain the benefit of any increase in value or dividends - The risk of loss of value - The right to vote the stock or to determine who may vote the stock - The investment discretion (including the power to dispose of the stock)

• Factors analyzed by the antitrust enforcement agencies:

- Access to confidential information and control over key decisions - Ability to reverse any key decision if the merger does not close - Whether key decisions made by the target pre-closing were reached

unilaterally, mandated by the acquirer, or some point in between - Attempts by the acquiring firm to hire away key employees, appropriate

proprietary know-how, negotiate with important customers, or otherwise preempt attractive opportunities during pre-closing period

8

Computer Associates / Platinum Technology (2002)

• Summary: - Computer Associates (CA) exercised unlawful “operational control”

over significant and important aspects of the target’s business during the pre-consummation period

- The Merger Agreement and implementing provisions altered the status of the merging parties as “separate and independent economic actors”

- Although some provisions/restrictions in the Merger Agreement were customary and reasonable, others imposed “extraordinary conduct of business limitations” not normally found in merger agreements, which “severely restricted” Platinum’s ability to engage independently and competitively

• Civil Penalty: $638,000 fine imposed against CA • Injunctive Relief: CA also enjoined from entering into future merger

agreements that allowed it to establish product/service prices, receive bid information, or approve customer contracts prior to consummation

9

Computer Associates / Platinum Technology (2002)

• Permitted Conduct: - Provisions requiring firms to carry on business “in the ordinary course in

substantially the same manner as heretofore conducted” - Restrictions ancillary to a merger agreement if intended to prevent a seller

from “taking actions that could seriously impair the value of what the acquiring firm had agreed to buy”

• Conduct Establishing “Unlawful Control”: - Imposing pre-consummation restrictions on the target’s operations, pricing,

information management, and employees in the purchase agreement - Restricting the target’s ability to offer discounts to customers and retaining

“sole arbiter” rights for prior approval of discount and consulting contracts - Installing employees in the seller’s facilities to review discount requests

and contracts - Systematically obtaining competitively sensitive information relating to

competitive bids and customer information - Changing the target’s method of booking revenues - Exercising approval authority over the target’s participation at industry

trade shows

10

Gemstar / TV Guide International (2005)

• Summary: - Competitors in provision of interactive TV program guides - Parties were found to have ceased acting as separate economic

entities by discussing and agreeing on a number of coordination steps during the pre-closing period

• Civil Penalty: $5.67 million total fine imposed (maximum civil penalty of $11,000 per day per party)

• Injunctive Relief: Parties prohibited from entering into future agreements that would combine or transfer operational or decisionmaking control of product marketing and distribution; and/or exchange information related to current or future prices

11

Gemstar / TV Guide International (2005)

• Conduct Establishing “Unlawful Control”: - Pre-consummation implementation of standard price and term-setting

agreements - Draft customer contracts sent by TV Guide for Gemstar’s proposed

changes and approval - Agreements to allocate customers and phase out competing marketing

operations - Agreements to “slow-roll” negotiations for long-term agreements with

major customers until the merger was consummated

12

Qualcomm Inc. / Flarion Technologies (2006)

• Summary: - The DOJ alleged that Qualcomm acquired beneficial ownership of

Flarion’s assets by obtaining premature transfer of operational control - Violation of HSR Act resulted from aggregation of potentially

problematic provisions in the Merger Agreement (imposed with a purpose of restricting Flarion’s commercialization of products), plus day-to-day management control over pre-closing business decisions

- The Agreement – Flarion required to obtain Qualcomm’s prior written consent before undertaking certain business activities, including: • entering into agreements to license intellectual property to third parties (core

of Flarion’s business) • entering into agreements involving the obligation to pay or receive $75,000

or more in a year or $200,000 or more in the aggregate • entering into agreements relating to the disposition or acquisition of

intellectual property rights (except for “shrinkwrap” software licenses purchased for less than $10,000)

13

Qualcomm Inc. / Flarion Technologies (2006)

• Civil Penalty: $1.8 million fine imposed jointly on Qualcomm and Flarion - The maximum possible fine was mitigated as a result of the parties

voluntarily reporting the gun jumping issues and taking remedial measures

• No Injunctive Relief: No ongoing antitrust monitoring requirements or restrictions of future conduct

• Conduct Establishing “Unlawful Control”: Flarion sought Qualcomm’s involvement and followed any of its guidance (even when the merger agreement did not purport to require Flarion to do so), including: - “routine” hiring of employees in the ordinary course of business - review and consent before marketing products and services to current

and potential customers (including Qualcomm’s review of entire drafts of customer proposals)

- requests for approval of price quotations and discounts (including review of Flarion’s margins on certain products)

- strategic decisions on whether to pursue business opportunities

14

Smithfield Foods / Premium Standard Farms (2010)

• Summary: - In September 2006, Smithfield Foods announced the intention to

acquire Premium Standard • The DOJ opened an investigation and issued a second request but

ultimately closed the investigation in May 2007 without challenging the merger

- In January 2010, Smithfield Food and Premium Standard Farms agreed to a fine for gun jumping before expiration of the HSR Act waiting period

- The DOJ alleged that, in exercising operational control over Premium Standard and acquiring and holding assets from the target’s hog procurement contract, Smithfield prematurely acquired beneficial ownership of a significant segment of Premium Standard’s business operations

15

Smithfield Foods / Premium Standard Farms (2010)

• Civil Penalty: $900,000 • No Injunctive Relief • Conduct Establishing “Unlawful Control”:

- DOJ did not object to the terms of the merger agreement, which contained various customary interim ‘conduct of business’ provisions, such as: a restriction on Premium Standard’s right to issue new voting securities or sell assets and assume new debt; a requirement for Premium Standard to “carry on its business in the ordinary course consistent with past practice”

- Soon after the merger agreement was signed, Premium Standard submitted three multi-year contracts to Smithfield for its consent

- These contracts accounted for approx. $57m to $67m of Premium Standard’s annual hog purchases, and the information submitted to Smithfield for consent related to payment price, quantity of hogs for purchase, and the contract lengths

- The DOJ alleged that, by interacting in this manner, Premium Standard had ceased to exercise independent business judgment in its hog purchases and prematurely transferred operational control

16

Best Practices for Avoiding Premature Control

• Enforcement agencies recognize that an acquiring party has legitimate commercial and practical interests, and will expect and allow reasonable post-signing covenants designed to protect the target’s value

• Cause for concern arises where a purchase agreement limits a target’s pre-closing conduct, inhibits the target’s ability to retain its competitive and operational independence, and/or effectively transfers operational control of the seller to the buyer

• Parties must carefully consider covenants in merger agreements that impose restrictions on premerger conduct and/or require buyer approval to ensure that ordinary course competition is not restricted

• No business integrations may begin until after clearance is obtained; parties cannot allow for even the appearance or suggestion that parties have started to act as a single entity

• Clear guidelines should be issued early in the transaction process

17

Best Practices – What is Considered Permissive Conduct?

• Conduct generally considered permissible by antitrust authorities: - Agreements to operate in the “ordinary course of business” consistent

with past practices - Certain restrictions on conduct that would cause a “material adverse

change” in the target’s business - Joint conduct considered lawful independent of the proposed merger - Joint marketing/advertisements that generally promote the transaction

(with appropriate guidelines and controls) - Joint customer calls to discuss general benefits of the merger - Disclosure of confidential business information related to competing

products in the context of litigation or settlement discussions (subject to a protective order)

18

Best Practices – What is Considered Prohibited Conduct?

• Conduct generally to be avoided: - Agreements to exit certain businesses pending completion - Agreements to “slow roll” (or delay negotiations) with certain customers - Obtaining the other party’s pre-clearance for routine business decisions - Coordinating business strategies, production, sales, distribution or

discount policies - Covenants in the merger agreement that entitle the buyer to review or

approve the seller’s ordinary course of business activities in areas in which the companies compete

- Relocating staff to other party’s premises - Joint bidding for contracts when the normal industry practice does not

allow for this activity - Attending joint meetings with customers or other party’s internal meetings - Discussion of post-merger conduct of either party in relation to

sales/marketing prospects or mutual customers

19

Information Sharing in the Premerger Context

• Parties to a transaction need to exchange information for many reasons - Value assets - Conduct due diligence - Transition planning - Preserve value of deal during HSR waiting period

• Government wants to ensure that potential transactions do not lessen competition while they are being contemplated or if they do not proceed: - Maintain competition between the merging parties prior to closing - Avoid transfer of information that would harm competition during

merger negotiations or that would harm the ability of the company being acquired to compete should the merger fall through or be blocked

• Drawing a precise line between lawful due diligence and unlawful information sharing can be challenging

20

Omnicare / UnitedHealth Group (7th Cir., January 2011)

• Omnicare is an institutional pharmacy that provides services to long-term care (LTC) facilities; it negotiates contracts with health insurers who provide coverage to senior citizens in those LTC facilities - Senior citizens pay their premiums to health insurers; health insurers

then reimburse Omnicare at a pre-negotiated rate • In 2005, two health insurers – UnitedHealth and PacifiCare – entered

into merger talks, conducted due diligence, signed a merger agreement, and ultimately merged

• During the period of due diligence, UnitedHealth and PacifiCare each negotiated separate contracts with Omnicare

• Following the merger, UnitedHealth (the acquiring company) abandoned its contract with Omnicare and joined PacifiCare’s more favorable contract

• Omnicare sued alleging a conspiracy (and fraudulent scheme) between UnitedHealth and PacifiCare to coordinate their strategies for negotiating with Omnicare prior to consummating their merger and to depress their reimbursement rate

21

Omnicare / UnitedHealth Group (7th Cir., January 2011)

• District Court for the Northern District of Illinois granted summary judgment to UnitedHealth

• Court of Appeals for the Seventh Circuit affirmed the judgment of the District Court by finding that: - Early exchanges were restricted to aggregated pricing data, “sample

regions”, “high level review”, and “estimates” - Price information was shared among a limited number of high-level

executives (less likely to be involved in the negotiation with Omnicare) - Information shared outside the bounds of the Confidentiality Agreement,

without further evidence of concerted action, was not enough to support an inference of conspiracy

- Disclosed pricing information was “necessary to due diligence and was performed in a reasonably sensitive manner”

- Communications after signing and before closing focused on “long-term strategic planning” and were always “with an eye towards integration of services after the merger is completed”

- Information exchange process was monitored by outside antitrust counsel

22

Best Practices on Information Sharing • The Omnicare decisions reaffirmed commonly given advice, including:

- Companies should consult with antitrust counsel to manage risks when obtaining information necessary for diligence and integration purposes

- Careful planning and process documentation can reduce the risk of a successful allegation of improper information sharing

- Companies should avoid exchanging any information beyond what is necessary for valuing the transaction and setting the stage for post-merger integration

- Detailed, current competitive information presents the highest risk - Creating a limited “due diligence team” with personnel who are not

responsible for pricing and marketing decisions is strongly advised - For necessary but extremely sensitive information, aggregation or using

third-party vendors to review and summarize the information should be considered

- Negative covenants (e.g., providing the acquiring party a right to review high-threshold, material assumption of liability) have legitimate purposes. But care should be exercised in determining their scope and potential carve-outs

- Counsel should be involved in both drafting and implementing such provisions

23

Asahi / CoTherix (California Court of Appeal, March 2012)

• Asahi, a Japanese pharmaceutical company, entered into a licensing agreement with CoTherix for developing and marketing Fasudil, a drug for pulmonary arterial hypertension (PAH)

• Actelion merged with CoTherix and discontinued the development of Fasudil • Asahi sued CoTherix alleging a conspiracy between Cotherix and Actelion in

violation of the Cartwright Act, the California antitrust statute - Asahi alleged that Actelion conspired with CoTherix “for anticompetitive

purposes to eliminate an upstart competitor for PAH treatments” • Trial court granted summary adjudication for defendant and the Court of

Appeals affirmed. The Court found that: - “Cartwright Act does not apply to a merger” but only “to situations in which

the parties improperly collude and continue as separate, independent entities”

• The Court relied on the 8th Cir. decision, International Travel Arrangers, which approved the following jury instruction: - “If you find that [the parties] lacked independent economic consciousness

after they had decided to merge and before the merger was completed, they were not capable of conspiring together at that time”

24

“We are mindful that many forms of premerger coordination are reasonable and even necessary and that care needs to be taken not unduly to jeopardize the ability of merging firms to implement the transaction and achieve available efficiencies”

William Blumenthal, 2005 (then) General Counsel, Federal Trade Commission

25

The EU Perspective

• The section on Information Exchanges between competitors of the EC Horizontal Guidelines of December 2010 sets a low bar for an antitrust infringement in case of information exchange between competitors

• The Guidelines are particularly wary of information sharing involving: - Price data - Quantity data - Competitors’ market strategies

• Other relevant factors include: - Age of the data (no clear threshold on when data becomes historic) - Aggregation of the market data - Whether the information is genuinely public or private - Frequency of the exchange - Structure of the market (concentration, transparency and stability)

26

A Snapshot of the Approach in the “Rest of the World”

• MEXICO: Guidelines for Pre-Closing Discussions and Integration Planning The Guidelines state that before closing, parties should not: - exchange competitively sensitive information in areas where the parties

compete; - exchange any information that is not reasonably necessary for the

transaction; or - use any information gained except for the purposes of the transaction.

N.B. ‘Competitively sensitive information’ is confidential information relating to a party’s current and future pricing, customers, supply contracts and strategic plans.

• BRAZIL: CADE’s Resolution No. 1/2012 The provision implements Article 88 of the Brazilian antitrust law (Law No. 12,529/2011) and states that: “The parties must keep their physical structures and the competitive conditions unchanged until CADE’s final review [of the notified transaction], being prohibited, including but not limited to, any transfer of assets and any type of influence of one party over the other, as well as any exchange of competitively sensitive information except to the extent strictly necessary for the execution of the final binding document between the parties”.

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Biography

• Bob represents clients on a full range of antitrust matters before the FTC and the Antitrust Division of the Justice Department. He has considerable experience in M&A and has guided scores of national and international transactions through antitrust review to a successful conclusion. He works with a variety of industries, including chemicals, consumer goods, energy, industrial machinery, medical devices, pharmaceuticals, publishing, software and transportation.

• Bob is past chair of the ABA Antitrust Section’s M&A Committee and editor of the 3rd edition of its treatise on US antitrust law as applied to M&A. Global Counsel, Euromoney and The International Who’s Who of Competition Lawyers list him as a leading lawyer. Bob is also a non-governmental adviser to the International Competition Network.

• Bob clerked for the US Court of Appeals for the Ninth Circuit. He received his JD from George Washington University where he was Articles Editor of the Law Review and a member of the Order of the Coif.

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Robert Schlossberg

Partner, Washington, DC T +1 202 777 4550 E [email protected]

This material is provided by the international law firm Freshfields Bruckhaus Deringer LLP (a limited liability partnership organised under the law of England and Wales) (the UK LLP) and the offices and associated entities of the UK LLP practising under the Freshfields Bruckhaus Deringer name in a number of jurisdictions, and Freshfields Bruckhaus Deringer US LLP, together referred to in the material as ‘Freshfields’. For regulatory information please refer to www.freshfields.com/support/legalnotice.

The UK LLP has offices or associated entities in Austria, Bahrain, Belgium, China, England, France, Germany, Hong Kong, Italy, Japan, the Netherlands, Russia, Singapore, Spain, the United Arab Emirates and Vietnam. Freshfields Bruckhaus Deringer US LLP has offices in New York City and Washington DC.

This material is for general information only and is not intended to provide legal advice.

© Freshfields Bruckhaus Deringer LLP 2014

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Information Sharing Between Competitors

October 22, 2014 William Blumenthal Strafford CLE Webinar [email protected]

This Presentation

• Focus on legitimate collaborations among competitors – Standards generally more permissive when

arrangements do not involve competitors

• Excludes issues arising from cartels and naked restraints – Important, but not today’s presentation – Distinction from today’s issues sometimes blurs

31

Two Broad Families of Issues

• “Gunjumping” before merger closing or JV formation – Just addressed in Bob Schlossberg’s presentation – “Information sharing / diligence” strand – Distinct from “premature control” strand

• Ancillary restraints and collateral effects in the context of ongoing cooperation – Examples on next slide

32

Ongoing Cooperation: Examples

• Joint ventures – Where co-venturers compete with each other outside

the venture – Where a co-venturer competes with the venture

• Joint activity often not performed through entities – Joint development arrangements – Joint marketing and promotion – Joint purchasing

• Standard-setting organizations

33

Ongoing Cooperation: Examples 2

• Trade association data collection and dissemination • Benchmarking • Distribution by vertically integrated firms

– Where a manufacturer sells through independent distributors and through own distribution arm

– Where a component manufacturer sells to independent downstream firms and transfers in internal manufacturing operations

34

Main Legal Principles in US

• Information exchange as discussed here is subject to rule of reason treatment

• Certain content is riskier than other content – Price information is riskier than cost and other non-price

information – Detailed information is riskier than aggregated

information • Multiplicity of sources • Granularity of content

– Future information is riskier than stale information

35

Potemkin Village Exemptions

• Examples – National Cooperative Research Act of 1984 – National Cooperative Research and Production Act of 1993 – Standards Development Organization Advancement Act of

2004

• Recurring patterns – Justified by need to correct business misperception about

application of antitrust prohibitions to beneficial conduct – Exempts conduct that was already lawful under rule of

reason – Carves out antitrust-exposed conduct from scope of

exemption

36

Differences Emerging in Europe

• Increasingly more restrictive in application than standards in US

• Broadening interpretation of prohibitions on “restriction of competition by object” – Capture disclosure of “intended future prices or

quantities,” regardless of justifications or effect – Flexibility shown for historical information – Some flexibility shown for certain classes of agreements

such as R&D, joint production, joint purchasing

• Frequent use of bright-line thresholds for safe harbors – Reflection of systems based in civil code – Thin patina of certainty and rigor

37

And Uncertainties Remain in US

• How to treat public disclosures? – Valassis and analyst calls – Airline Tariff Publishing and posted prices

• When are buffers required? – Internal firewalls – Third-party intermediaries

• How to treat intermediaries and agents? • How is competitive effect to be assessed?

– Who has the burden of proving effect? – How are benefits and adverse effects to be measured?

38

And Uncertainties Remain in US 2

• What is required as to efficiencies? – When must they be shown? – By whom? – How proven? – When presumed?

• Even antagonists recognize potential procompetitive benefits and efficiency gains

39

US Competitor Collaboration Guidelines

• FTC/DOJ Antitrust Guidelines for Competitor Collaborations, issued in 2000

• Tightrope walk between political calls for permissiveness and need to protect against statements that undercut anti-cartel mission

• Result: grudging characterization of scope of legality – See ABA comments on draft CCGs, available at

http://www.americanbar.org/groups/antitrust_law/resources/comments_reports_amicus_briefs/2000_comments.html

• But increasingly cited by courts – Beginning to achieve mainstream acceptance, despite

inaccuracy of analytical content

40

Some Key US Authority on Jointness

• Leading historical Supreme Court cases on price information – Maple Flooring (1925) – Cement Manufacturers Protective Ass’n (1925) – Container Corporation (1969) – United States Gypsum (1978)

• Some other key Supreme Court cases on competitor arrangements – National Society of Professional Engineers (1978) – Broadcast Music (1979) – Maricopa County Medical Society (1982) – NCAA v. University of Oklahoma (1984) – American Needle (2010)

41

Some Key US Authority on Jointness 2

• Three lower court cases worth mention – Addyston Pipe (6th Cir. 1898), aff’d (1899) – United States v. Morgan (S.D.N.Y. 1953) – United States v. Brown University (3d Cir. 1993)

• Major government policy statements – Health Care Statements (1996) – Guidelines for Competitor Collaborations (2000) – Various business review letters

42

Some Authority on Jointness in the EU

• European Commission, Guidelines on Horizontal Co-operation Agreements (2011), available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2011:011:0001:0072:EN:PDF

• Organisation for Economic Co-operation and Development , Policy Roundtable: Information Exchanges Between Competitors under Competition Law (2010), available at http://www.oecd.org/dataoecd/12/52/48379006.pdf

43

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Information Sharing by Competitors: Recent Developments

Joseph Krauss Hogan Lovells US LLP Washington, DC October 22, 2014

www.hoganlovells.com

Recent Information Sharing Cases

• Last time we did this program, three significant information sharing cases to talk about: – Hair Care Products Case (In the Matter of Bosley Inc.) – Detroit Nurse Wages Case (Cason-Merenda v. Detroit

Medical Center) – The Iron Pipe Fittings Case (In the Matter of McWane and

Star Pipe Products) • Since then, . . .

– FTC decision on appeal in the Iron Pipe Fittings Case • And, unfortunately, not much else

46


But still things to discuss

• Update on McWane • FTC Trade Association cases • FTC and the DOJ policy statement on the sharing of

cybersecurity information

47


Update on The Iron Pipe Fittings Case: In the Matter of McWane and Star Pipe Products • Recall, . .

– The FTC charged that the three largest U.S. suppliers of ductile iron pipe fittings (used in municipal water systems) illegally conspired to set and maintain prices for pipe fittings, and that McWane illegally maintained its monopoly power in the market for U.S.-made pipe fittings through various exclusive dealing arrangements.

• Procedural History: – On January 4, 2012, the FTC filed complaint – Two companies settled -- Sigma Corporation and Star Pipe Products, Ltd. – McWane, Inc. elected to not settle and went to trial – Trails was heard before an administrative law judge in September –

November, 2012 – The ALJ decision was issued on May 8, 2013. – NEW EVENT: Commission decision on February 6, 2014, affirming, in part,

the ALJ’s decision, but dismissing the remaining counts

48


Information Exchange in the Iron Pipe Fittings Case • Count 2 of the FTC’s complaint alleged that the exchange of information

by the companies through a trade association, DIFRA (Domestic Iron Fittings Research Association), facilitated a price fixing agreement. – In particular, the Complaint asserted that the exchange of aggregated data

regarding the firms’ fittings shipments, including shipment information typically no more than two months old, “enabled each of the Sellers to determine and to monitor its own market share and, indirectly, the output levels of its rivals,” and “[i]n this way, . . . facilitated price coordination among the Sellers on the pricing of [fittings].” ¶¶ 35-36.

• The complaint alleged that the DIFRA information exchange played a critical role in the 2008 price fixing conspiracy by: – Being the quid pro quo for a price increase by McWane in June 2008, and – Enabling the parties to monitor each others’ adherence to the collusive

arrangement.

49


The ALJ Decision • On May 8, 2013, the ALJ issued his decision:

– found that McWane entered into anticompetitive agreements, including exclusive dealing agreements, that caused Sigma to abandon its efforts to enter the market for domestic iron pipe fittings and illegally pressured distributors to exclude Star from the market.

– But, dismissed the FTC’s allegations that McWane illegally conspired with Sigma and Star to raise and stabilize pipe fitting prices.

– AND, dismissed the FTC’s allegations that McWane had engaged in an illegal sharing of competitive information.

• ALJ found that the agreement by McWane, Star, and Sigma to participate in the DIFRA information exchange was not an unlawful facilitating practice. – He reasoned that the nature of the information exchanged—aggregated,

historic shipment volumes—was insufficiently specific and not the type of information, like pricing related data, that can facilitate price coordination.

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The FTC Decision

• Both FTC Staff and McWane appealed • Commission decision affirmed the finding that the exclusiivity

provisions were anticompetitive, – BUT, were unable to reach a majority decision on the price fixing and

information exchange allegations (2-2) and dismissed those counts – Chairwoman Ramirez and Commissioner Brill found by a

preponderance of the evidence, that the DIFRA information exchange constituted an unlawful facilitating practice under a rule of reason analysis.

– Commissioners Ohlhausen and Wright, on the other hand, found the evidence insufficient to establish a violation under the rule of reason.

• So, the allegation ultimately fizzled.

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Two Recent FTC Trade Association Cases • On 22 August 2014 the U.S. Federal Trade Commission (FTC)

announced that two professional associations have agreed to eliminate provisions in their codes of ethics that limited competition among their members in order to settle litigation brought by the FTC.

• National Association of Residential Property Managers, Inc. (NARPM)

– Represents over 4,000 real estate managers, brokers, and agents in the United States.

– The FTC’s complaint alleged NARPM and its members violated the antitrust laws through provisions in its code of ethics that prohibited “knowingly solicit[ing] competitor’s clients” and “criticizing other property managers or their business practices.”

• National Association of Teachers of Singing, Inc. (NATS)

– Represents over 7,300 vocal arts teachers in the United States. – The FTC alleged that NATS violated the antitrust laws through propagating an

ethical code that prohibited members from soliciting students from other members. • Specifically, NATS code of ethics stated that “members will not, either by inducements,

innuendos, or other acts, proselytize students of other teachers.”

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Lessons Learned from these FTC Cases • These actions demonstrate that the FTC is also not reluctant to

prevent competitors from agreeing to prevent information sharing with customers.

• FTC cases recognize beneficial activities of trade associations; BUT, there are times that these activities can draw antitrust scrutiny.

• Associations can minimize antitrust risk regarding ethical codes by: – Avoiding rules restricting members’ ability to truthfully solicit or advertise to

customers.

• The FTC actions against NARPM and NATS underscore the need for trade associations of all sizes and in all industries to continue to be vigilant in observing the antitrust laws.

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Other Developments: Information Exchange in the World of Cybersecurity

• In April, 2014, the FTC and the DoJ issued a policy statement on the sharing of cybersecurity information and stated that properly designed cyber threat information sharing is not likely to raise antitrust concerns and can help secure the nation’s networks of information and resources. – “The policy statement provides the agencies’ analytical

framework for information sharing among private entities and is designed to reduce uncertainty for those who want to share ways to prevent and combat cyberattacks.”

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DOJ/FTC Guidance on Cybersecurity

• Statement pointed to the DoJ/FTC “Antitrust Guidelines for Collaborations Among Competitors” that provides an overview of the agencies’ analysis of information sharing as a general matter. – Under those Guidelines, the agencies consider whether the relevant agreement likely

harms competition by increasing the ability or incentive to raise price above or reduce output, quality, service or innovation below what likely would prevail in the absence of the relevant agreement.

• Previous guidance issued in October 2000, in a DOJ business review letter to Electric Power Research Institute Inc. – In that letter, the Antitrust Division confirmed that it had no intention of taking

enforcement action against the company’s proposal to exchange certain cyber-security information, including exchanging actual real-time cyber threat and attack information. In that matter, the division concluded that as long as the information exchanged was limited to physical and cyber-security issues, the proposed interdictions on price, purchasing and future product innovation discussions should be sufficient to avoid any threats to competition. The legal analysis in that matter remains current.

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The DOJ/FTC Framework

• In examining information exchanges, the Agencies review the nature, business purpose, and likely competitive effect of an agreement. – The Agencies’ primary concern is with the sharing of any competitively

sensitive information—such as price, cost, or output information — that may facilitate price or output coordination and undermine competition among competitors.

• Although some agreements — such as those fixing prices or outputs, rigging bids, or dividing markets among competitors — will almost always be illegal, the central question for most information sharing agreements is “whether the relevant agreement likely harms competition by increasing the ability or incentive profitably to raise prices above or reduce output, quality, service, or innovation below what likely would prevail in the absence of the relevant agreement.”

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Applying that Framework to Cybersecurity • The Agencies’ recent joint statement applies this framework to

cybersecurity threat information exchanges to establish that “properly designed sharing of cyber threat information should not raise antitrust concerns.”

• When evaluating the antitrust risks of sharing cyber intelligence, the Agencies looked at three main factors: – Cyber threat information sharing can improve efficiency and help secure

our nation’s networks of information and resources. – Cyber threat information typically is very technical in nature which is

very different from the sharing of competitively sensitive information such as current or future prices and output or business plans.”

– Cyber threat information exchanges are unlikely to harm competition and is “unlikely in the abstract to increase the ability or incentive of participants to raise price or reduce output, quality, service, or innovation.”

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Implementation of the Policy Statement

• DOJ Business review letter of October 2, 2014 – a proposed data-sharing platform intended to help prevent cyber

attacks, will not face a Justice Department challenge – Assistant Attorney General William J. Baer observed:

• antitrust law is “not an impediment to legitimate private-sector initiatives to share specific information about cyber incidents and mitigation techniques in order to defend against cyber attacks.”

• The system, “as proposed, would be unlikely to facilitate price or other competitive coordination,” he maintained.

– The proposed system is designed to address “shortfalls” in more traditional information sharing systems while still “operating within the framework set forth in the Department of Justice and Federal Trade Commission's Antitrust Policy Statement on Sharing of Cybersecurity Information.”

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www.hoganlovells.com 59

Joe Krauss' practice is devoted entirely to the area of antitrust and economic regulation, with a particular emphasis on merger and acquisition counseling and litigation in all industries, and before federal, state, and foreign antitrust authorities.

Joe has counseled clients in numerous matters relating to mergers and acquisitions, joint ventures, distribution issues, standard-setting, Sherman Act, and Hart-Scott-Rodino Act compliance. He has represented clients from a number of industries, including automotive, electric utility, manufacturing, health, natural resources, e-commerce, computer hardware and software, and telecommunications, before both the U.S. Federal Trade Commission (FTC) and the Antitrust Division of the U.S. Department of Justice in merger investigations, civil nonmerger investigations, and in compliance matters before the agencies.

Joe served 11 years at the FTC. During his tenure at the commission, he served in a variety of capacities, including the Assistant Director of the Premerger Notification Office in the Bureau of Competition and Acting Assistant Director and Deputy Assistant Director of the Mergers II Division in the Bureau of Competition. His career at the commission also included serving two commissioners as an attorney advisor counseling on matters of antitrust policy and enforcement.

Joe has also been profiled in a number of prestigious publications, including Chambers USA, which noted, "He has a cool head and a steady hand--he's solid counsel in merger matters."

Joseph G. Krauss, Partner Washington, D.C.

● Antitrust Counseling ● Civil Investigations and Litigation ● Joint Ventures ● Mergers and Acquisitions

Joseph G. Krauss Partner, Washington, D.C. T +1 202 637 5832 [email protected]


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