The Food, Conservation, and Energy Act of 2008 (the “2008 Farm Bill”) required the USDA to promulgate new, and clarify existing, GIPSA regulations on a wide variety of topics.  The final regulations represent a significant retreat from the proposed rules and demonstrate the political power of large industrial meat companies.

As directed by Congress in the 2008 Farm Bill, the USDA proposed several changes to the relationship between farmers and meat packagers and processors.

Many industry observers have long criticized the power imbalance that exists between individual farmers, who have little bargaining leverage in the context of a multi-billion dollar industry, and large corporate meat dealers.  The proposed regulatory changes included rules that were intended to help level the playing field, such as creating definitions of competitive injury, unfair and unjust practices, and undue or unreasonable preferences or advantages. 

None of those provisions survived a year of heated debate and lobbying by the meat industry.

In addition to the notice and comment process, Congress intervened before the USDA published its final rule to prohibit the agency from passing most of the competition-related reforms.  The provisions that did make it into the final rule, such as allowing farmers to decline mandatory arbitration provisions in growing contracts, have come under heavy criticism, and the meat industry will likely continue to push for their repeal or modification.

ACOs are health care provider groups responsible for the cost and quality of care delivered to a group of patients cared for by the groups’ doctors.  The Affordable Care Act of 2010 seeks to foster the growth of ACOs as a way to control costs and boost quality in healthcare with a direction to the Centers for Medicare and Medicaid Services (CMS) to create a national voluntary program for accountable care organizations (ACOs) by January 2012.

As ACOs grow in number and influence during the next few years, antitrust policy will have to take into account the goals of health care reform as antitrust regulators deal with the competing concerns of competition and cost containment.

These antitrust issues are explored by Constantine Cannon partners Axel Bernabe and Ankur Kapoor in a recent article that considers the antitrust implications of ACOs under the Affordable Care Act.

After much controversy and intense lobbying by merchants and banks, key conferees have announced an agreement that preserves most of the Durbin Amendment and, remarkably, adds a critical and potentially groundbreaking new prohibition aimed at the networks and debit issuing banks.

While the situation remains fluid and things could change, if this agreement holds the merchants have won a huge victory.

In discussing where things currently stand, let’s start with the key provisions regarding debit interchange.

While the Federal Reserve still will be given the power to pass rules regarding debit interchange, those rules will not apply to federal, state and local government program prepaid debit cards.  Reloadable prepaid cards, such as the cards increasingly used by the unbanked, are also exempted.

In another change the definition of “interchange transaction fee” has been changed to prevent the Fed from regulating the fees that banks pay to Visa and other debit networks for membership except to the extent that such fees are used to undermine the interchange regulations.

Lastly, in a potentially significant change,  the Fed can now take fraud prevention costs into account in configuring rules  aimed at capping the amount that merchants will pay  for debit interchange but such costs can only be considered if a bank demonstrates that they are complying with standards established by the Fed to reduce fraud. 

That brings us to the most significant change that came out of the conference.  The initial legislation included a provision that prohibited the card networks from passing rules against merchants from offering discounts to favor one card network over another.  That provision has been removed.

Instead, the agreement includes a provision that directs the Fed to adopt rules that preclude debit network exclusivity that comes about by “contract, requirement, condition, penalty, or otherwise.”  This provision could effectively nullify the partnership agreements between numerous banks – particularly some of the largest banks in the country – and Visa, as those agreements have resulted in an increasing number of debit cards bearing on the Visa and Interlink.

Indeed, the bill’s specific language would appear to permit the Federal Reserve to invalidate (by rule) many existing Visa agreements that effectively require banks to issue either Interlink-only PIN-debit cards or Visa/Interlink only signature/PIN debit cards.  In this respect, the new language in the bill specifically states that “an issuer or payment card network shall not directly or through any agent, processor or licensed member . . . restrict the number of payment card networks on which an electronic debit transaction may be process to (i) 1 such network; or (ii) 2 or more such networks which are owned, controlled or otherwise operated by (I) affiliated persons; or (II) networks affiliated with such issuer.”  One could certainly argue that Interlink is “affiliated” with Visa, as it is, in fact, owned by Visa.  

If this provision is signed into law it could have a groundbreaking impact on the debit market – perhaps even a greater impact than the “interchange rate caps” portion of the bill.  Visa has dominated that market for decades and it has perpetuated that dominance in recent years via de facto or de jure arrangements with many banks that made Visa’s debit network, signature and PIN, their exclusive POS debit networks.  If that ends, competing networks, including MasterCard and the PIN debit competitors such as Star, PULSE, NYCE, Shazam and others may step into the breach.

Combined with substantial reductions in debit interchange such changes may well signal the end of signature debit.  This means that Visa’s days of dominating the debit market may be numbered.

The Senate has approved an amendment to its financial reform bill that curtails the power of the card issuers in significant ways, including requiring that the “interchange fees” charged by banks on fees on debit card transactions be “reasonable and proportional to the actual” costs of processing those transactions, and permitting merchants to offer discounts for cash payments.  Whether those limits are enacted into law, however, remains to be seen since the Senate bill must still be reconciled with the House financial reform bill – which does not contain the amendment.

Interchange fees are set by the credit card networks (Visa, MasterCard, Discover and American Express) to banks that issue those networks’ branded cards.  When a merchant accepts a credit or debit card, it loses a small percentage of each purchase price to the issuer through this fee.  For Visa and MasterCard transactions, which dominate the credit and debit markets, the fees vary from 1.5 to 2 percent of the price for credit card purchases and are approximately 0.75 percent for an average debit card purchase.  These little fees add up to big money: they totaled an estimated $48 billion in 2008.

Merchants have lobbied Congress to limit or eliminate interchange fees for years.  And a federal merchants’ putative class action in New York claims that Visa’s and MasterCard’s interchange fees result from price-fixing in violation of Section One of the Sherman Act.  According to the plaintiffs, Visa and MasterCard set their interchange rates through collusion with their member banks, which compete with each other: that is, price-fixing by competitors with the networks as facilitators.

The Senate has now given the merchants a major win by adopting an amendment by Senator Richard Durbin (D – Ill.) to the financial reform bill.  That amendment passed by a solid bipartisan vote of 64-33 despite fierce lobbying by Visa and MasterCard.

Durbin’s amendment would reform the debit card interchange system in two ways.  First, it would require debit card interchange fees to be “reasonable and proportional” to the issuers’ actual costs.  This provision addresses complaints that interchange fees, while purportedly compensating card-issuing banks for their transaction costs, in fact has steadily climbed out of proportion to such actual costs.  And the networks have continued to raise those rates in the United States at the same time as they have lowered them abroad in the face of foreign regulatory pressure, further fueling complaints that they are higher here than necessary.

Second, the amendment would direct the Federal Reserve System’s Board of Governors to establish standards for assessing whether interchange rates meet the “reasonable and proportional” standard described above.

Small issuers – those with less than $10 billion in assets – are exempt from both provisions above.  This “small bank” exception reportedly would exempt 99 percent of all banks and credit unions.  Thus in effect the interchange provisions of the Durbin amendment would affect only the largest issuers, which make the most money off these fees; 80 percent of the interchange revenue in 2008 went to just ten large banks.

The Durbin amendment would also go beyond interchange to address a trio of practices that have riled merchants for years.  Networks would have to let merchants offer discounts to encourage the use of particular card brands.  For example, Visa could not forbid a supermarket from offering discounts for the use of Discover credit cards (or the signature debit cards of Discover’s subsidiary Pulse).

Networks would also be forced to allow merchants to offer discounts to encourage the use of particular payment forms.  Thus MasterCard would have to allow a store to give discounts for customers paying with cash or check rather than plastic.  And networks would have to allow merchants to set “floor” and “ceiling” limits if they chose.  This is important to merchants because some sales, particularly low-dollar-amount ones, do not yield enough revenue to make them profitable after the merchant pays the interchange fee. 

So what next?  The House of Representatives has not added any provisions like the Durbin amendment to its financial services reform bill.  For the amendment to become law, therefore, it would have to survive the upcoming conference committee in which House and Senate representatives reconcile their different versions of the reform legislation.  It is too early to tell how Durbin’s amendment might fare in that battle.  But for now, merchants are relishing the first major victory that they have had on this issue – whether in court or in Congress – in years.

The new rules aim to clarify when companies’ horizontal agreements will be deemed to restrict competition and when such agreements will qualify for an exemption.  The rules include a new chapter on information exchange, and substantial revisions to the standardization chapter.  The revised rules also aim to prevent disputes over licensing fees charged by companies for their intellectual property rights once they become the standard.

Key issues addressed in the revised Horizontal Guidelines include:

• An assessment of information exchange between companies;
• Guidance on standard terms in the chapter on standardization;
• Clarification of the application of the competition rules to agreements between joint ventures and their parents; and
• Elimination of the “center of gravity test” which previously defined which parts of the guidelines were applicable to an agreement.

Key issues addressed in the revised R&D and Standardization Agreement regulations include:

• Disclosure of relevant intellectual property rights and readjustment of the “hardcore” restrictions;
• Introduction of a second market share threshold for specialization and joint production agreements pertaining to products used for internal consumption; and
• Clarifications to the notion of “potential competitor”, with the introduction of a three-year timeframe for future market entry.

The EC says that standard-setting disputes arise due to a lack of transparency during the selection process, and that one way to avoid disputes would be to require potential standard-holders to disclose at the beginning the maximum terms that a company would charge if its technology were incorporated in a standard.

In an attempt to quell future disputes that arise as to the level of FRAND (fair, reasonable and non-discriminatory) licensing terms, the draft guidelines also contain benchmarks to assess the level of FRAND licensing fees.  The EC considers a comparison of the charges prior to the adoption of the standard to be particularly relevant to FRAND terms. 

The EC is hoping that the new rules will prevent “patent ambushes” which occur when companies hide patents until the industry is locked in and then either refuse to license or request exorbitant fees for licensing.  The new rules will require clear disclosure from companies of their intellectual property rights to patents before inclusion in standards.

The current R&D and Specialization Agreement regulations grant safe harbor to agreements resulting in a market share not exceeding 25% in the case of joint R&D agreements between competitors and a market share not exceeding 20% in the case of specialization or joint production agreements.

When finalized, the revised rules will be incorporated into the existing Horizontal Guidelines and the Research & Development and Specialization Agreement BERs.  Both BERs are set to expire in December 2010.

The EC is accepting public comments on the revised rules until June 25, 2010.  Finalized rules will be adopted by the end of this year.

The United States Department of Agriculture will soon release new proposed antitrust rules for the meat industry that could significantly alter the balance of power between farmers and the big companies that buy their meat.  Although the USDA has not said when the new proposed rules will be made public, the 2008 Farm Bill requires that they be put in place by summer, which means the announcement could be made any day now.

There is widespread speculation among activists, farmers and meat industry officials about how far the Obama administration will go in regulating competition in the industry.  The proposed rules are likely to address, among other things, when a company may lawfully choose to buy one producer’s cattle or hogs over another, and when poultry companies can require farmers to upgrade their chicken houses with new equipment.

The new rules may well prove to be the most sweeping antitrust rules for the meat industry in decades.  The Obama administration has already signaled an interest in greater regulation with a series of joint Department of Justice and USDA workshops on competition and regulatory issues in the agriculture industry.  The stringency of the new rules is likely to be a good indicator of the administration’s regulatory bent.

The meat industry anxiously awaits the new rules, which could affect the prices paid by the consumer.  Although the meat industry is already heavily regulated, the market has limited competition.  For example, only four companies buy and slaughter 80% of the beef in the U.S.  Likewise, poultry companies determine chicken prices and can compel farmers to upgrade their chicken houses even though farmers argue that the upgrades only benefit the poultry company.

It seems likely that the Obama administration will be proposing – and fighting for – regulations that are tougher and father reaching than any since the Great Depression.  The big meat industry companies are already gearing up to protest any rules they deem too strict.

The Court’s decision dealt a decisive blow to an argument used (once too often) by the FCC under Chairman Martin, attempting to ground the FCC’s jurisdiction on “ancillary authority.”  The Commission contended that it had the power to regulate ISPs from limiting consumer access to certain types of Internet content on a discriminatory basis (known as “net neutrality”), even though Congress has never given the FCC specific statutory authority to do so.  Rather, the Commission constructed a series of arguments that its regulatory power over the Internet – classified for the last decade by the FCC as an “information service” – derived from other statutory powers and congressional policy statements as to the FCC’s responsibilities. 

Conceding that Congress intended the FCC to have jurisdiction to keep pace with technological change, and that the Internet is the most important communications innovation of this generation, the D.C. Circuit nonetheless repeated its warning from prior cases:  “the allowance of wide latitude in the exercise of delegated powers is not the equivalent of untrammeled freedom to regulate activities over which the statute fails to confer . . . Commission authority.”

Questions immediately turned to the fate of FCC’s recently-announced, broadly acclaimed, National Broadband Plan.   Some elements of the Plan are founded more squarely in statutory jurisdictional grants and confirmations of authority – such as reclaiming broadcast spectrum for broadband uses, enhancing use of broadband for public safety, improving use of broadband in schools, and ensuring better competition for consumer electronics devices to access multichannel video programming (such as cable, satellite, and telco television content) – and will not be hindered by the decision.

So, for example, the Commission’s agenda to spur new competition for set-top boxes and to require a neutral “gateway” device to network together television and Internet content in the home, will remain on the fast-track this year.  Other elements, however, such as accelerating the rollout of broadband service to rural areas and low-income citizens, consumer protection, and net neutrality, will need to find an alternative source of Commission authority. 

Among the potential losers in the net neutrality debate will be not just P2P services.  “Over the top” video services (third party video channels delivered over a cable ISP’s pipes) like Hulu, Joost, and YouTube, or alternative video storage and recommendation services like Boxsee or Sezmi, may find the cable companies erecting speed barriers or data limits to their competing video offerings. 

The next battleground will be the FCC itself.  The ink barely dried on the opinion before the Commissioners began baring their opposing positions on the most likely solution:  reclassifying Internet service as a “common carrier” communications medium, just like telephone service.  Commissioner Copps (appointed by Democrats) welcomed the end of “ancillary” authority and urged the Commission to quickly adopt this “Title II” reclassification strategy.  Commissioners McDowell and Baker (appointed by Republicans) opposed reclassification, and preferred to let the market regulate itself. 

Cable and Telco companies already have opened incursions on a second front – Capitol Hill.  Arguing that the real culprit is the current, often ineffective, 1996 Telecommunications Act, these stakeholders suggest that the FCC refrain from piecemeal action while Congress embarks on a multi-year odyssey to reform existing law. 

No matter which solution is chosen, undoubtedly the third theater of war will be the courts.  The FCC could choose to appeal the panel’s decision en banc, or seek certiorari to the Supreme Court.  Given an appeal strategy’s potential to delay the Broadband Plan, however, the FCC likely will undertake reclassification of Internet services as common carrier telecommunications – a move that will trigger a new round of appeals, but this time with a likely armada of ISPs as petitioners and Internet video services and consumer groups as intervenors.

Even if the FCC relents and lets the market decide, cable companies still may live to regret their victory over FCC jurisdiction.  As the Supreme Court concurring opinion observed in Pacific Bell Telephone Co.  v. linkLine Communications, Inc., the power of a regulatory authority to remedy allegedly anticompetitive conduct (there, predatory pricing) can potentially bar an antitrust claim:  “When a regulatory structure exists to deter and remedy anticompetitive harm, the costs of antitrust enforcement are likely to be greater than the benefits.”

So, what if Cox or Time Warner Cable gave preferences to their own video-on-demand offerings over transmissions by Netflix or CinemaNow?  Or what if Comcast, after its merger with NBC-Universal, restricted the speed or quality of competitors’ over-the-top services in favor of NBC-Uni-ownedHulu.com?  Such discriminatory practices ironically could leave them more vulnerable to antitrust suits by the many affected Internet services than if they had simply not contested the FCC’s claim of jurisdiction.  Which could mean: more plaintiff class actions, with potentially higher impact and less predictable results, than FCC regulation alone.

The Committee has passed S. 148, the “Discount Pricing Consumer Protection Act.”  This bill would reverse the Supreme Court’s decision in Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 887 (2007).  Leegin overruled a 1911 Supreme Court decision holding that resale price maintenance was per se illegal.

Under Leegin, resale price maintenance is judged under the rule of reason.  Under S. 148, resale price maintenance would again be treated as a per se violation.   

A link to the archived webcast of the Senate Judiciary Committee’s markup can be found here. 

On January 13, 2010, the House Judiciary Committee passed similar legislation, H.R. 3190, by voice vote.  

A link to the archived webcast of the House Judiciary Committee’s markup can be found here.  At this time neither the House nor the Senate has scheduled floor action on the respective bills. 

For further information on Leegin repeal legislation, see our earlier posts.

On March 3, the U.S. Court of Appeals for the Federal Circuit sat en banc to consider how to apply the patent misuse doctrine to patent pooling arrangements for standardized technologies, including the significance of evidence of anticompetitive effects such as the blocking the development of new technologies.

At issue in Princo v. U.S. International Trade Commission is whether it was patent misuse for a patent pool established by Philips, Sony and others to both include a potentially blocking patent that was not actually used in the standard and preclude that patent from being licensed outside the pool. 

Philips and Sony agreed to jointly develop a standard for recordable and rewritable compact discs (known as the “Orange Book”).  In developing the standard, they did not jointly develop any technology.  Rather, they used technologies each independently had developed.  In one instance, they chose one of two competing methods.  The Sony patent not chosen was, by some accounts, not commercially feasible.  However, an independent patent analyst believed one claim of the Sony patent could read more generally on the standard and, thus, block Orange Book adopters from practicing the standard.  Therefore, Philips determined to include the Sony patent in the pool, and subjected Sony to the pool’s requirement not to license the patent for use outside the Orange Book standard.

The Commission found Philips’s conduct not to constitute misuse, but a panel of the Federal Circuit reversed that finding, 2-1.  The majority held that an agreement to preempt further development of a competing technology by prohibiting separate licensing of the Sony patent, could constitute patent misuse.  While the alleged agreement may have promoted marketing of the Orange Book, it could have precluded development of the Sony approach in competition to the Orange Book.

From the wide-ranging sprawl of the en banc argument before the 11 judges, it was impossible to divine which way the judges may rule.  But, several key questions emerged:

Should patent misuse rule of reason analysis follow modern antitrust analysis?  Past Federal Circuit cases define misuse as an effort to extend the physical or temporal scope of a patent with anticompetitive effect.  Those cases required a showing of actual anticompetitive effect.  The FTC, as amicus curiae, urged the Federal Circuit to adopt its “quick look” procedure where activities could be considered inherently suspect in their anticompetitive impact and, so, shift the burden of proof to the patent owner to prove countervailing pro-competitive benefits.

But, as the Supreme Court noted in its 2006 decision in Illinois Tool Works v. Independent Ink, patent misuse and antitrust law have become “untwined” over the course of congressional action and recent decisions, and the FTC’s efforts to “re-entwine” the two may not be accepted by the Federal Circuit.  Indeed, one judge suggested that a valid Sherman Act claim based on an agreement to suppress technology may not equate to misuse of the patent. 

Must the alternative technology be commercially viable to support a misuse claim?  The parties disputed factually whether testimony indicated that the withheld Sony method could have succeeded in the market.  Some on the en banc court appeared to disagree with the prior panel decision, and asserted that there could be no anticompetitive effect unless the alternative technology was viable.  However, the FTC brief asserted that such proof should not be necessary, and that an agreement to suppress an alternative technology should be deemed anticompetitive in the absence of pro-competitive justifications.

Must an alleged infringer show individual injury from the anticompetitive effect in order to assert misuse? Several questions focused on whether Princo had actual interest in the withheld Sony patent or had asked Sony for a license.  This raises questions whether misuse should be based on the public interests vested in patents, or concepts more akin to antitrust standing and injury.

From the hour-long argument, it also appeared possible that procedural pitfalls could avert a decision on the merits.  Questions as to whether the issue had been properly presented to the Commission, and whether the state of the record permitted a decision on the merits or required a remand, intimated that the real underlying questions may need to be decided another day.

However, the active tenor of the debate suggests that any opinion will have serious implications both with respect to the future analytical construct for misuse cases, and the potential impact on patent pooling agreements.  As to the former, companies should watch closely to see whether pro-plaintiff burden-shifting approach favored by the FTC prevails, or whether proof of actual anticompetitive effect will continue to be the defendant’s burden.  As to the latter, as a matter of policy, there may be less incentive to create and promote standard technologies through pooling arrangements if pool participants potentially are subject to an obligation to compete against the standard or to allow others to do so through licensing.

Connecticut Attorney General Richard Blumenthal has announced that his office is investigating the merger of UnitedHealthcare and Health Net Inc.

UnitedHealthcare agreed in July to pay approximately $510 million to buy Health Net’s northeastern licensed subsidiaries.  As part of the deal, UnitedHealthcare agreed to buy the rights from Health Net to acquire its commercial members as they renew their coverage.  The deal was recently approved  by Thomas Sullivan, the Connecticut State Insurance Commissioner.

Health Net provides health benefits to approximately 6.6 million individuals across the United States.  It serves 578,000 members in New York, New Jersey and Connecticut and it is estimated that Health Net’s northeast operations have generated $2.7 billion in revenues for 2009.  

UnitedHealthcare provides health care benefits to 25 million consumers and has contracts with 600,000 physicians and over 5,000 hospitals and 60,000 pharmacies throughout the United States.

Blumenthal released a statement that the deal could violate antitrust laws and that “one of our concerns is whether the merger will cause excessive concentration in some segments of the health insurance market and thereby unlawfully restrain competition.”

Consumer groups have voiced concern that the merger will allow UnitedHealthcare to cherry pick Health Net customers.  Kathleen LaVorgna, President of the Connecticut State Medical Society, said that her organization does not “see any inherent benefit for patients.”  She added, “we are concerned United can pick and choose which employers it wants to continue to do business with thus dropping patients who are more likely to be at risk of needing more medical services.”

Some officials, however, believe the acquisition is good for competition. Sullivan said the transaction that he approved “strengthens, not weakens, consumer choice and security.”  He explained that if Health Net left Connecticut without partnering with another company, “Health Net policyholders would have been left to secure replacement coverage on their own without the benefit of UnitedHealthcare’s commitment to offer each policyholder renewal coverage.”