Antitrust and competition law alert #22

Fried Frank Antitrust and Competition Law Alert®
July 30, 2003
Fried Frank Attends International Competition Network’s
Second Annual Conference in Merida, Mexico—Easing
the Burden of Multi-Jurisdictional Merger Review
Antitrust enforcers from 46 countries met at The International Competition Network’s (ICN)
Airline Prevails Against DOJ in Major Predatory
annual conference in Merida, Mexico, on June 23-25. Formed in 2001, the ICN is a voluntary
Pricing Case—Tenth Circuit Rejects DOJ’s
network of antitrust enforcement authorities from 71 countries formed to support new
Alternative Measures for Below-Cost Pricing
competition authorities in enforcing their laws and to promote substantive and procedural
convergence among jurisdictions.
Sixth Circuit Upholds Finding of Per Se Liability
The Analytical Framework subgroup of the ICN rather than requiring that a definitive agreement in "Reverse Payment" Case
Merger Working group, led by prominent antitrust already be in place, and to impose reasonable experts in the private sector, presented a compre- hensive analysis and assessment of twelve “core” ■ complete merger reviews within a reasonable merger guidelines in respect to the key substantive and determinable time, allowing for expedited issues of market definition, unilateral effects, coor- dinated effects, barriers to entry and expansion and ■ limit initial notification requirements to informa- efficiencies, and offered recommendations in each tion necessary to identify issues that merit area. Fried Frank partner Deborah A. Garza led the further review, avoid imposing unnecessary team addressing entry and expansion and pre- burdens on parties, provide pre-notification sented its paper and recommendations to the guidance to parties where appropriate, and limit Merida conference. The final report is expected to translation requirements and authentication ■ apply merger control laws with a high level of At the end of the conference, ICN members adopted recommended practice proposals that they ■ periodically review merger control provisions to hope will help streamline multi-jurisdictional merger seek improvement in the merger review process, review and promote global convergence on sub- and consider reforms that promote convergence stantive standards. These recommended practices address issues of particular concern to companiesinvolved in cross-border transactions, calling for Although the ICN has no rulemaking authority, many jurisdictions have expressed a willingness toease the burden of multi-jurisdictional merger ■ assert jurisdiction only where the transaction has review. Adoption of the recommended practice pro- posals is seen as a step in that direction. The con- ■ make notification thresholds clear, understand- ference was addressed by Mexican President able, objectively quantifiable, and based on Vicente Fox, who reaffirmed Mexico’s commitment to antitrust enforcement as a key element of ■ permit parties to notify proposed transactions Mexico’s continued economic development. ■ based on a good faith intention to consummate, Copyright 2003. Fried, Frank, Harris, Shriver & Jacobson. All Rights Reserved. July 30, 2003 Airline Prevails Against DOJ in Major Predatory Pricing Case—Tenth Circuit Rejects
DOJ’s Alternative Measures for Below-Cost Pricing
The Tenth Circuit, in a closely-watched and controversial predatory pricing case, United States v. AMR Corporation, recently affirmed a lower
court’s dismissal on summary judgment of a suit initially brought by the Clinton-era Department of Justice (“DOJ”) against American Airlines,
Inc. (“American”).1 In AMR, DOJ alleged that American engaged in an unlawful predatory pricing scheme that targeted and sought to eliminate
low-cost carriers (“LCCs”) on routes connecting the Dallas/Fort Worth airport (“DFW”), one of American’s hubs. (American’s share of non-stop
passengers at DFW at the time of the 1999 suit was alleged to exceed 70%.) The government’s case relied in part on a novel theory under
which it was alleged that American saturated four “core” routes (the targeted routes) with additional capacity at a cost that was greater than the
revenues derived from the additional capacity. It was alleged that one purpose of this strategy was to establish a “reputation for predation”
and deter potential competition on several DFW routes, including those not directly targeted by American’s predatory conduct. The govern-
ment asserted that American was able to recoup its losses on the targeted routes through the revenues it derived from the non-targeted routes.
Some observers have criticized the government’s case as the product of an activist enforcement policy.
Judge Lucero, writing for the Tenth Circuit, rejected Thereafter, in the absence of LCC competition, cost is the sum of all variable costs—those costs the government’s claim under Section 2 of the American raised its fares and reduced the number that vary with output—divided by output.) Although Sherman Act because American, despite being a of flights on the targeted routes. In addition, DOJ courts have employed slightly different standards “brutal competitor” and pursuing aggressive asserted, American’s strategy involved establishing for measuring costs in predatory pricing cases, tactics, did not engage in below-cost pricing, the a reputation for predatory conduct in the DFW area, some measure of average variable cost is typically first element of a predatory pricing claim under the thereby discouraging potential LCC competitors on considered. At issue in AMR was the viability of test articulated by the Supreme Court in Brooke other non-targeted DFW routes. Without LCC DOJ’s alternative proxies for average variable cost. Group Ltd. v. Brown & Williamson Tobacco Corp.2 competition on those routes, American could charge On appeal, the Tenth Circuit did not consider the supracompetitive prices and recoup losses incurred In AMR, even though American responded to government’s “reputation for predation” theory or on the four routes directly targeted by the scheme.
competition from LCCs by substantially lowering any issue concerning the probability of American As of May 2000, American’s share of passengers prices and increasing the number of flights per recouping its losses incurred through its alleged boarded at DFW was 70.2%, while LCCs’ collective route, the government did not contend that predation, the second element under Brooke share in the DFW market was only 2.4%, a American’s fares were below average variable cost.
Group. Thus, AMR leaves open a number of substantially lower LCC share than in other areas Alternatively, DOJ advanced four other relatively questions about the viability of the government’s of the country such as New York and Chicago.
complex proxies for marginal cost (“tests”), each of “reputation for predation” theory and the which was based on American’s internal accounting appropriateness of looking to multiple markets to The Tenth Circuit’s opinion in AMR primarily systems. Judge Lucero deemed the government’s assess recoupment in predatory pricing cases.
focuses on the first prerequisite to a predatory tests to be “invalid as a matter of law, fatally flawed pricing claim—whether the government could prove in their application, and fundamentally unreliable.” In the mid-1990’s, American faced increased com- that “the prices complained of are below an According to Judge Lucero, the tests failed for the petition and drastically reduced fares from LCCs in appropriate measure of [American’s] costs.” The following reasons. Two tests were rejected because the DFW area. The airline responded with an Supreme Court has never precisely defined what they relied on cost measures that were “not in large aggressive business strategy for four “core” routes constitutes an appropriate measure of cost, so part, variable or avoidable with respect to that: (i) matched LCC fares, (ii) increased the lower courts have been provided with some American’s capacity increases.” They failed because number of seats eligible for lower fares (a practice flexibility to develop their own measures. The Tenth they incorporated fixed costs (i.e., costs not related referred to as yield management), and (iii) further Circuit, like other circuits, views marginal cost as an to the operation of a particular flight or route) in increased capacity in the form of additional flights.
“ideal” measure for purposes of evaluating preda- addition to variable cost measures. Another test (The government viewed each route as a separate tory pricing claims because where prices exceed was found to be inappropriate because it merely relevant market.) This strategy–which DOJ marginal costs, each additional sale is profitable measured the change in profitability from increased characterized as predatory because, among other and therefore not considered to be below cost.
capacity on a particular route rather than the costs practices, American was allegedly spending more However, given the difficulties of measuring associated with American’s capacity additions.
to add capacity than the revenues it generated from marginal cost, the Tenth Circuit and other courts such capacity increases–caused LCCs to abandon have looked to various proxies for marginal cost or avoid operations on the targeted routes.
such as average variable cost. (Average variable 1. 2003 WL 21513205 (10th Cir. 2003), aff’g 140 F. Supp. 2d 1141 (D. Kan. 2001). It is notable that while AMR was initially brought under Assistant Attorney General (“AAG”) JoelKlein, a Clinton appointee, the decision to appeal the case was made in June 2001 by R. Hewitt Pate, the current AAG. In June 2001, R. Hewitt Pate was Deputy AAG, but supervisedthe case because then AAG Charles James had recused himself. Following James’ departure from the Antitrust Division in November 2002, Pate became Acting AAG and was con-firmed as AAG by the Senate in June 2003. 2. 509 U.S. 209 (1993).
Copyright 2003. Fried, Frank, Harris, Shriver & Jacobson. All Rights Reserved. July 30, 2003 Airline Prevails Against DOJ in Major Predatory Pricing Case–Tenth Circuit Rejects DOJ’s
Alternative Measures for Below-Cost Pricing.continued from page two
In other words, the court determined that the test predation” theory, the most controversial aspect of claims with great skepticism. As a policy matter, was a short-run profit maximization test, a type of the government’s case. Because the government they see an inherent tension between prohibiting test that has been discredited by Brooke Group.
failed to satisfy the first element of Brooke Group, unlawful predatory conduct and not deterring Finally, the fourth test, which purported to measure the court did not address the second element— otherwise lawful pro-competitive and beneficial incremental passenger revenues from adding whether American had a “dangerous probability behavior (lowering prices and increasing capacity).
capacity and the average avoidable cost of such of recouping its investment in below-cost prices”— Chicago School theorists have further argued that capacity, was inappropriate because it included even though the district court determined that the unlawful predatory pricing is implausible and irra- arbitrarily allocated variable operational costs that government failed to satisfy both elements. In the tional given the uncertainties of recoupment.
were not related to actual flight activity and government’s case against American, it was critical However, adherents to the post-Chicago School therefore did not measure average avoidable costs. to its theory that American recouped losses have supported theories similar to the government’s incurred in a small set of markets (the routes in AMR as objectively and economically sound. In Although each of the government’s putative targeted by American’s predatory conduct) through AMR, while the lower court embraced the Chicago marginal cost proxies was rejected, Judge Lucero’s revenues generated from a much larger set of School – taking the view that most claims of opinion acknowledges the potential viability of markets (the routes that were the focus of predation are “subject to dismissal . . . due to the measures other than average variable cost, assum- American’s “reputation for predation” strategy).
absence of objective evidence of predation and ing such proxies are accurate and reliable. As the However, the district court, in its assessment of recoupment” – the Tenth Circuit, by contrast, did not court explained, average variable cost is “not recoupment, refused to consider any market fully commit to either judicial philosophy. Although favor[ed] to the exclusion of other proxies for the court reaches the same result, Judge Lucero’s marginal cost,” though the district court had opinion does not share the district court’s fealty to suggested otherwise. However, the Tenth Circuit According to the district court, the government’s Chicago-School skepticism and, indeed, speaks did not identify any specific measures that it approach to recoupment was “fundamentally mis- approvingly of “post-Chicago economists that have guided [and] contrary to law.” Following Brooke theorized that price predation is not only plausible, Group, the court stated that “recoupment analysis but profitable, especially in a multi-market context On a separate issue, AMR raises serious doubts must be focused on ‘an estimate of the cost of the where predation can occur in one market and about the viability of a “meeting competition” alleged predation and a close analysis of both the recoupment can occur rapidly in other markets.” defense in predatory pricing cases brought before scheme alleged by the plaintiff and the structure the Tenth Circuit. In dismissing the government’s and conditions of the relevant market’” (i.e., each In AMR, the Tenth Circuit did not shut the door case on summary judgment, the district court in separate route). The district court further explained on multiple-market recoupment theories. Had there AMR held that American was entitled to summary that the “government's broad-based claims of pre- been sufficient evidence of below-cost pricing, the judgment because American had only matched, dation by (subjectively-felt) reputation offer no prin- court might have been more receptive to the and not undercut, the fares of LCCs. The “meeting cipled basis for distinguishing between a reputation government’s “reputation by predation” theory. competition” defense, which is a statutory defense for predation, and a reputation for lawfully vigorous The court’s nod to post-Chicago School philosophy to price discrimination claims under the Robinson- competition.” Thus, the government’s case failed supports this view. At the same time, however, Patman Act, has been recognized by some circuits because, among other reasons, it could not AMR clearly illustrates the difficulties of pursuing in predatory pricing cases. The underlying rationale demonstrate recoupment based on each separate predatory pricing cases without evidence of pricing for the defense is that it does not make sense to below average variable cost. It might be possible find anticompetitive, and thus prohibit, conduct to use alternative proxies to average variable cost, whereby a company reduces its prices to meet Before the Tenth Circuit issued its opinion in AMR, but such measures will be closely scrutinized by lower prices first offered by other competitors. In some might have expected the court to resolve the court. The significant hurdles involved in a footnote, Judge Lucero notes that while there certain fundamental issues concerning the demonstrating below-cost pricing should not be may be “strong arguments for application of the legitimacy of predatory pricing claims, such as ignored. While Judge Lucero left the door open to meeting competition defense in the Sherman Act whether recoupment in multiple markets from plaintiffs pursuing multiple-market recoupment context,” the Supreme Court has not recognized predatory conduct in a smaller set of markets is a theories, the viability of such post-Chicago School such a defense and therefore the Tenth Circuit viable theory. In the past, predatory pricing issues theories ultimately remain untested in the Tenth have fostered much debate among antitrust lawyers and scholars. Followers of the influential Chicago Finally, it is notable that the Tenth Circuit court did School have historically viewed predatory pricing not address the government’s “reputation by 3. The district court concluded that, as a matter of law, recoupment from each targeted route could not be established because DFW was not characterized by the sort of structuralbarriers that made supracompetitive pricing plausible. Several LCCs had entered the market in recent years and continued to operate there. Furthermore, there was no evidence thatAmerican’s pre-LCC competition fares had been supracompetitive.
Copyright 2003. Fried, Frank, Harris, Shriver & Jacobson. All Rights Reserved. July 30, 2003 Sixth Circuit Upholds Finding of Per Se Liability in "Reverse Payment" Case
On June 13, 2003, the United States Court of Appeals for the Sixth Circuit upheld the district court's finding that an agreement under which
Hoechst Marion Roussel ("Hoechst") paid Andrx Pharmaceuticals, Inc. ("Andrx") $40 million per year not to enter the United States market for
Cardizem CD and its generic equivalents amounted to a per se horizontal market allocation agreement under the Sherman Act.
This case is significant in that the Sixth Circuit receipt of FDA approval to the conclusion of the concluded that paying higher prices for a product essentially upheld a controversial finding of per se lawsuit if Andrx prevailed (the suit was later settled due to a lack of competition in the market is the liability in a "reverse payment" case. However, the type of injury that can flow from the anticompetitive facts in this particular case could be viewed as effects of an agreement along these lines. Further, more egregious than other reverse payment cases In this class action case, the plaintiffs alleged that, the defendants' claim that Andrx's decision to stay and, thus, possibly more suitable for per se liability.
but for the agreement (specifically the payment of off the market was motivated not by the $40 million During the past five years, various reverse payment $40 million per year), Hoechst would have faced per year it was being paid by Hoechst, but by its cases have either been brought or pursued by the competition from both Andrx and other generic fear of damages in the pending patent infringement Federal Trade Commission (“FTC”) or other private competitors. The trial court denied the defendants’ litigation, raised a disputed issue of fact as to litigants. Many of those cases have either been dispositive motions, ruling that the agreement was a naked, horizontal restraint of trade and, as such, "necessary predicate" for the injury or the only means by which the injury could have been caused.
Accordingly, the Sixth Circuit denied the defendants' On appeal, the Sixth Circuit agreed with the trial motions to dismiss for failure to allege antitrust injury.
In September 1995, Andrx filed an Abbreviated New court that the agreement between Andrx and Drug Application ("ANDA") with the Food and Drug Hoechst was a per se illegal market allocation.
Administration ("FDA") to manufacture and According to the court, the agreement "guaranteed distribute a generic version of the drug Cardizem to Hoechst that its only potential competitor at In March 2000, the FTC settled a case against CD. Under the Hatch-Waxman Act, a company that time, Andrx, would, for the price of $10 million Hoechst and Andrx arising out of the same can seek approval from the FDA to market a per quarter, refrain from marketing its generic agreement. The settlement barred each of the generic drug before the expiration of a patent version of Cardizem CD even after it had obtained companies from entering into any agreement in relating to the brand name drug upon which the FDA approval." Further, the court noted that "[b]y which a first-filing generic company would agree (1) generic is based. The first company to file such delaying Andrx's entry into the market, the not to give up or transfer its 180-day Hatch- an ANDA gets an exclusive right to market the agreement also delayed the entry of other generic Waxman Act exclusivity or (2) not to bring a non- generic product for 180 days, meaning that no other competitors, who could not enter until the expiration infringing drug to market. In addition, any future generic can obtain FDA approval until the of Andrx's 180-day period of marketing exclusivity." agreements by the companies involving payments The court concluded that "the [a]greement . . . was, to a generic company to stay off the market made at its core, a horizontal agreement to eliminate during the pendency of patent litigation would have Hoechst sued Andrx for patent infringement, which competition in the market for Cardizem CD to be notified to the FTC and approved by the court, triggered a 30-month stay on the FDA’s approval of throughout the entire United States, a classic and the companies would be required to give the Andrx's ANDA. Hoechst and Andrx subsequently example of a per se illegal restraint of trade." The FTC 30 days' notice before entering into such entered an agreement by which Andrx agreed that Sixth Circuit rejected defendants' argument that "the even after it received FDA approval, it would [a]greement lacked anticompetitive effects and had continue to keep its generic Cardizem CD off the procompetitive benefits" as irrelevant given the per A discussion of reverse payment theories is pre- market during the 180-day exclusivity provision, se treatment of the conduct. It further rejected the sented as a featured topic in the Summer 2003 would not give up or transfer its 180-day exclusivity defendants' arguments that per se treatment was issue of Antitrust magazine. Fried Frank partner right, and would not market a non-infringing generic improper because the agreement was related to Deborah A. Garza is the Editorial Chair of Antitrust, version of Cardizem CD during the 180-day period.
enforcing a patent, and because of the "novel" area which is available for free to members of the In exchange, Hoechst paid Andrx $10 million per American Bar Association's Antitrust Section. ■ approval for its product. Hoechst also agreed to pay With respect to the issue of whether the plaintiffs Andrx an additional $60 million per year from the properly alleged antitrust injury, the court ultimately Copyright 2003. Fried, Frank, Harris, Shriver & Jacobson. All Rights Reserved. July 30, 2003 For more information please contact any of the following attorneys in Fried Frank’s Antitrust Department:
Washington, DC
New York
Fried, Frank, Harris, Shriver & Jacobson
Washington, DC
Los Angeles
Copyright 2003. Fried, Frank, Harris, Shriver & Jacobson. All Rights Reserved. July 30, 2003

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