November 27, 2013
By Jeffrey I. Shinder
The steady stream of cartel investigations and lawsuits on both sides of the Atlantic in recent months highlights the need for vigilant antitrust enforcement to protect consumer welfare, despite the views of those, like the Wall Street Journal editorial page, who question the wisdom of antitrust law.
These alleged cartels range from the apparently venal manipulations of the financial services industry, where pure greed and opaque markets have resulted in the Libor, Euribor, and foreign exchange market investigations, to claimed conspiracies of expedience in stagnant or depressed industries, where the protagonists are alleged to have colluded to manage supply and “maintain” price in the face of weak demand. Given the slow growth that has plagued the industrialized world in recent years, we almost certainly will be hearing about more such cartels. Rigorous antitrust enforcement is often the only check against consumers suffering massive overcharges in numerous, even critical, industries.
At the end of last week, European Union (“EU”) regulators disclosed yet another significant investigation with their announcement of an inquiry into whether 14 of the world’s major container shipping companies—including the two leading firms of Danish shipping group A.P. Moller-Maersk A/S and Swiss-based MSC Mediterranean Shipping Company S.A.—have been coordinating price hikes on European routes dating back to 2009.
This new investigation follows raids on some of these companies two years ago by the European Commission (the “Commission”). According to the Commission, major shipping companies have been using press releases on their websites to signal impending price increases to each other. While such signaling, standing alone, would be insufficient to support an antitrust violation in the United States, it could be found to violate EU law if it has resulted in higher prices and harm to competition. However, the targets of the investigation undoubtedly will argue that their price increases were necessitated by competition in the industry and that their conduct reflected individual, and lawful, conduct that did not harm competition.
Notably, this investigation is taking place against the backdrop of separate U.S. and EU regulatory scrutiny of the planned “P3” vessel-sharing alliance among Maersk, MSC and France’s CMA CGM S.A. The alliance would purportedly address persistent overcapacity and declining freight rates through an agreement to share ships and engage in related cooperative operating activities, under a common management, while retaining individual commercial status and control of consignments.
Last month, the three shipping companies filed their proposed agreement with the U.S. Federal Maritime Commission (“FMC”) under the U.S. Shipping Act of 1984. The FMC is taking public comments on the agreements until November 29, 2013. If the FMC declines to enjoin the alliance or require additional information, the agreement will become effective on December 8, 2013. While that would confer antitrust immunity under U.S. law on the alliance, in this instance such immunity is not available under EU competition law.
Although EU law does exempt certain agreements among shipping companies from Article 101(1) of the Treaty on the Functioning of the European Union, the proposed alliance does not meet the requirements of that exemption. Thus, even if the alliance survives FMC scrutiny, which is not a given, it may receive a rougher ride in the EU.
Moreover, while the Commission claims that its price-signaling investigation is separate from its ongoing review of the P3 alliance, the cartel investigation could conceivably influence the Commission’s willingness to approve the alliance. It would not be surprising if the price-signaling investigation causes the Commission to impose additional restrictions on the alliance, even if it is approved.
Given the significance of the shipping industry to the global economy, the progress of these regulatory efforts in Brussels is well worth watching.
– Edited by Gary J. Malone
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Categories: Antitrust and Price Fixing, Antitrust Litigation, International Competition Issues
November 26, 2013
By Jeffrey I. Shinder and Ankur Kapoor
On November 20, 2013, U.S. District Judge Colleen Kollar-Kotelly set the stage for judicial review of the settlement that the U.S. Department of Justice (“DOJ”) has reached to resolve its challenge of the proposed merger of American Airlines and US Airways.
The court’s order sets the schedule for the Tunney Act procedure, which is the congressionally mandated judicial review process that is designed to ensure that the DOJ’s settlements are in the public’s interest of vigorous antitrust enforcement. Under this procedure, when the DOJ settles an antitrust case it must file a “competitive impact statement” justifying the settlement’s resolution of the competitive concerns raised by the DOJ. Interested parties are then given an opportunity to respond and comment. These materials are submitted to a federal judge who is empowered by the Act to reject the settlement if the court finds that it is not in the public interest.
For the controversial American Airlines-US Airways merger, this process will likely play out by the spring of 2014. The court has set deadlines of February 7, 2014, for public comment, and March 10, 2014, for the DOJ to respond to any such comments. At that time, the court will determine whether and when to hold a public hearing.
Since the Tunney Act’s standards were tightened by Congress in 2004, courts have generally deferred to the DOJ and played a modest role in reviewing antitrust settlements. Although most commentators expect this pattern of judicial deference to continue with the American Airlines-US Airways settlement, there are substantial reasons why this settlement should be subjected to searching scrutiny.
Some background is instructive. Initial market and antitrust expectations predicted that the merger would be cleared, possibly with substantial divestitures of take-off and landing slots at Washington, DC’s Reagan National Airport and with a few other divestitures of rights at certain airports. Industry commentators noted that the two airlines’ networks overlapped significantly only at Reagan National, and the airlines stated that there was overlap on only 13 non-stop routes (the DOJ said 17). To the surprise of the industry, and apparently to the two airlines as well, the DOJ filed suit in August while the parties were in the midst of settlement negotiations.
The DOJ’s well-drafted complaint elaborated in great detail how the proposed transaction threatened to reduce competition. First, the DOJ alleged that the merger would reduce competition not only at Reagan National and for a handful of non-stop routes, but for more than 1,000 city pairs (almost all of which involved one-stop routes) because of the high concentration in those markets that would result from the merger. Second, the DOJ alleged that the merger would reduce or eliminate US Airways’ incentive to continue to offer its “Advantage” fares, which are one-stop fares allegedly priced substantially lower—sometimes 50% or more—than other airlines’ one-stop and non-stop fares. Although the DOJ did not allege it explicitly, the DOJ clearly viewed US Airways as a pricing “maverick” under the federal antitrust agencies’ Horizontal Merger Guidelines and was proceeding under a theory that the merger would substantially reduce or eliminate US Airways’ disruption of certain city-pair markets. Third, the DOJ alleged that the merger would result in consolidation in domestic air transportation to the point where there would be only three remaining “legacy” carriers (i.e., carriers that existed prior to deregulation beginning in the late 1970s). The DOJ discounted competitive constraints by newer, lower-cost carriers with less extensive networks, such as JetBlue and Southwest, and alleged that an industry with only three legacy carriers would facilitate price coordination on both airfares and ancillary charges like baggage fees.
The DOJ settlement addresses only the competitive issues raised by the merger at Reagan National, New York’s LaGuardia International Airport, and to a lesser degree at five other airports (Chicago’s O’Hare International, Los Angeles International, Boston’s Logan International, Miami International, and Dallas Love Field). The settlement requires divestiture of: 104 air-carrier slots at Reagan National (slots are federally granted take-off and landing rights that must be obtained before an aircraft can operate at Reagan National, LaGuardia, JFK International, and Newark International, because of the heavy air traffic at those four airports); 34 slots at LaGuardia; and rights and interests with respect to two gates at each of the other five airports. The divestitures at Reagan National would result in the merged airline increasing its market share there by only 2%.
The DOJ settlement does not address any of the other competitive impacts alleged in the DOJ’s complaint. Given that the DOJ made these allegations after an exhaustive factual and economic investigation into the industry, generally, and into these two airlines, specifically, it begs the question why the DOJ would abandon these competitive issues in the settlement. The purpose of the Tunney Act proceeding is to answer this question. If the DOJ did indeed have sufficient facts and economic analyses to back these allegations, the settlement may, and should, be hard-pressed to survive judicial review—particularly given Judge Kollar-Kotelly’s reputation for deep and detailed analysis. Indeed, the DOJ ought to welcome rigorous scrutiny of the settlement given the unusual political pressure brought to bear in favor of the merger by state and city officials, airports, unions, and other groups.
To be sure, there are reasons why the competitive impacts alleged in the DOJ complaint may have been difficult to prove at trial. First, with respect to the high levels of market concentration for travel between the 1,000-plus city-pairs, the DOJ complaint used airlines’ revenues to calculate market shares and concentration. Revenues may not be a correct metric. To the extent that there is significant excess capacity on a given route, the fact that there are only two or three airlines operating that route need not result in high prices. Because the marginal cost of flying an additional passenger is so low, airlines on such routes do, and will continue to, cut prices in order to fill their planes as much as they can. Many of the 1,000-plus routes identified in the DOJ’s complaint are less-traveled routes for which excess capacity is a relatively greater possibility. Revenue shares arguably overstate legacy airlines’ market shares and understate low-cost carriers’ market shares.
Second, with respect to US Airways’ Advantage fares, the legacy airlines’ capacity cut-backs since 9/11—and US Airways’ possible relatively greater excess capacity given its relatively greater service on less-traveled routes—also could explain US Airways’ penchant to offer substantially lower prices at the last minute and for other airlines’ inability and disincentive to do so because their planes are already filled. With a fuller plane, it may be more profitable for an airline to charge higher prices to inelastic passengers on a tight schedule at the last minute. In short, US Airways’ “maverick” pricing may not be a disruptive price constraint on the other legacy airlines but instead is just a manifestation of excess capacity on a particular route at a particular time.
Third, with respect to competition by low-cost carriers like JetBlue and Southwest, the DOJ’s complaint is at odds with its statements concerning the settlement that divestiture of slots and gates to JetBlue and Southwest will ensure even more competition than a full stop to the merger would have done.
Whether the competitive impacts alleged in the DOJ complaint were merely theoretical or actually factual remains to be seen. Although a Tunney Act proceeding is not a forum to litigate the very issues that were settled, some analysis of the alleged competitive impact is necessary to ascertain whether the DOJ complaint’s alleged view of the domestic airline industry was correct. If the DOJ complaint had a substantial basis, then the settlement falls far short of addressing the competitive harms identified in the complaint, and the settlement should be rejected. If the complaint did not have a substantial basis, then the industry and the public need to know that in order to assess competition in the domestic airline industry in the future.
– Edited by Gary J. Malone
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Categories: Antitrust Enforcement, Antitrust Litigation
November 21, 2013
Former and current student athletes have achieved a major goal in their class action challenging National Collegiate Athletic Association (“NCAA”) rules permitting the use of their likenesses without compensation, convincing the U.S. District Court for the Northern District of California to certify a class for their claims for injunctive relief.
The NCAA also scored in In re: NCAA Student-Athlete Name & Likeness Licensing Litigation by convincing Judge Claudia Wilken to deny the part of plaintiffs’ class certification motion that sought certification of a damages subclass, blocking the athletes’ drive to obtain past damages in addition to revising the NCAA rules.
The court ruled that the plaintiffs met the requirement of being adequate representatives of the injunctive relief class because they seek an equal division of damages among all class members. The plaintiffs seek to require the NCAA to place a portion of the fees it receives from entities such as video game producer EA Sports (“EA”) into a trust fund for student athletes. The plaintiff’s proposed relief would also enable student athletes to negotiate separate deals for payments from game makers.
Judge Wilken denied certification of a damages subclass largely because of the complexities that would be involved in allocating past damages among the different past and current student athletes. “Plaintiffs would have to cross-check thousands of team rosters against thousands of game summaries and compare dozens of game schedules to dozens of broadcast licenses simply to determine who belongs in the Damages Subclass,” Judge Wilken noted.
The student athletes’ partial victory on their class certification motion comes on the heels of their late-October victory in defeating the NCAA’s motion to dismiss their claims. The NCAA had contended that the U.S. Supreme Court and other federal courts have upheld its rules prohibiting player compensation to preserve the amateur quality of college sports. However, the court found that “the revered tradition of amateurism in college sports” doesn’t stand for the sweeping proposition that student athletes must be barred from profiting off their likenesses during, and after, their college years.
Edward O’Bannon, MVP of the NCAA 1995 men’s basketball tournaments, initially led this class action. Other former and current college football players are now part of it. Their antitrust claim alleges that the NCAA conspired with EA and the Collegiate Licensing Company (“CLC”) to restrain competition in the market. The NCAA requires student athletes to sign various release forms as a condition of their eligibility to compete. According to the plaintiffs, those forms “require[d] each of them to relinquish all rights in perpetuity to the commercial use of their images, including after they graduate and are no longer subject to NCAA regulations.” The plaintiffs allege that this requirement restrains competition and lowers the student players’ compensation compared to what they would earn in a more competitive market.
The NCAA argues that this case is about professionalizing a few current student athletes to the detriment of all others. The NCAA also claims that it does not license student-athlete likenesses for any commercial purpose. According to the NCAA, it licenses its own copyrighted works, such as broadcasts, photos, marks, or logos.
EA and CLC settled out of court for a reported $40 million. However, the NCAA asserts it is willing to take this case to the Supreme Court, if necessary.
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Categories: Antitrust Litigation
November 19, 2013
The Supreme Court of Canada has decided not to import the U.S. bar to antitrust damage suits by indirect purchasers, rejecting the rule adopted by the U.S. Supreme Court in the landmark case of Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977).
In three antitrust cases, the Canadian Supreme Court held that indirect purchasers could bring class actions seeking damages sustained as a result of overcharges passed on to them through the chain of distribution. In the main case, Pro-Sys Consultants Ltd. v. Microsoft Corp., the court rejected Microsoft’s argument that Canada should follow the U.S. Supreme Court’s decision in Illinois Brick, which generally bars antitrust plaintiffs from basing damages on illegal overcharges that were passed on to them by parties that directly purchased products from the defendants.
The argument that only direct purchasers of defendants should have standing to seek antitrust damages has been used offensively and defensively in cases. Both U.S. and Canadian courts have rejected the use of passing on overcharges as a defense against claims by direct purchasers. The passing-on defense would have prevented direct purchasers from suing because they passed on the overcharges to their customers and thus had no claim to any actual damages. In Hanover Shoe, Inc. v. United Shoe Machinery Corp., 392 U.S. 481 (1968), the U.S. Supreme Court rejected this defense due to the difficulty posed in determining the nature and extent of the overcharges that direct purchasers passed on to their customers. In its Illinois Brick decision, the U.S. Supreme Court extended the rationale of Hanover Shoe, and held that indirect purchasers should generally be barred from seeking to recover illegal overcharges that had been passed on to them.
In Pro-Sys Consultants Ltd. v. Microsoft Corp., however, the Canadian Supreme Court rejected Microsoft’s argument that it should follow Illinois Brick, and hold that indirect purchasers should be barred from seeking damages based on passed-on overcharges. Microsoft argued that permitting indirect purchasers to sue for overcharges that were passed on to them would leave it exposed to recoveries in which both direct and indirect purchasers could recover the entire amount of the overcharges. In Illinois Brick the Supreme Court cited this risk of multiple recoveries as one of its bases in disallowing indirect purchaser claims. The Canadian Court, rejected this argument, and stated that if a defendant presented evidence of other similar suits in the same or other jurisdictions, a court could easily avoid such risks by dismissing the claim or by modifying any recovery, thus preventing any overlapping damage awards.
Microsoft also claimed that any attempt to trace the overcharges to indirect purchasers was too remote and complex to allow indirect purchasers to seek damages based on passed-on overcharges. The Canadian Supreme Court also rejected this argument, noting that most antitrust cases are complex. The Canadian Court reasoned that even though a damages calculation may not be exact, under the law it is enough as long as a plaintiff’s evidence shows “the extent of the damages as a matter of just and reasonable inference.”
Although Microsoft did not raise the issue, the Canadian Supreme Court also addressed the Illinois Brick holding that permitting damage suits by indirect purchasers would frustrate the deterrence objectives of competition laws. The Canadian Court held that since there was a strong possibility that direct purchasers would be reticent to sue overcharging parties because such a suit could threaten their business relationships, in some cases indirect purchasers would be the only parties likely to sue and promote deterrence.
Finally, the Canadian Supreme Court held that allowing indirect purchasers to sue could award compensation to the parties who were actually harmed when the direct purchasers passed on the unlawful overcharges.
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Categories: Antitrust Litigation
November 6, 2013
The U.S. Court of Appeals for the Eleventh Circuit has affirmed the dismissal of a novel antitrust counterclaim brought by Atlanticus Holdings Corp. against a group of hedge funds, holding that the doctrine of res judicata bars Atlanticus’s attempt to relitigate the issue.
The plaintiffs in Akanthos Capital Mangement et al. v. Atlanticus Holdings Corp. are 21 hedge funds, including Akanthos Capital Management LLC, Aria Opportunity Fund Ltd. and GLG Global Convertible Fund PLC, which filed suit against Atlanticus in 2009 to enjoin an allegedly fraudulent transfer. Atlanticus responded by filing its own suit against the hedge funds, claiming they had illegally conspired and violated the Sherman Act in their debt collection activities. Atlanticus subsequently answered the complaint in the original action and effectively asserted a counterclaim by incorporating by reference its antitrust complaint against the hedge funds.
The district court dismissed Atlanticus’s antitrust suit, which decision was affirmed last year by an equally divided vote of the Eleventh Circuit. The district court then granted a motion by the hedge funds to dismiss Atlanticus’s antitrust counterclaim because that claim had already been fully litigated in Atlanticus’s separate suit.
In the current appeal, the Eleventh Circuit has now affirmed the dismissal of Atlanticus’s antitrust counterclaim, holding that res judicata bars Atlanticus from relitigating, as a counterclaim, an antitrust claim that had already been dismissed in a separate suit.
In a concurrence, Judge William H. Pryor Jr. noted the novel nature of Atlanticus’s antitrust claim.
Atlanticus alleged that the hedge funds had committed a per se violation of Section 1 of the Sherman Act by engaging in a conspiracy to force the company to repurchase its notes at inflated prices. Judge Pryor, however, stated that dismissal of the antitrust claim was appropriate because such coordination among existing creditors is in the interests of all parties. He stated that “When noteholders negotiate collectively with the issuer of debt, their collective activity is not per se illegal because it is procompetitive.”
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Categories: Antitrust Litigation
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