Antitrust: Coping With U.S. Changes And The Global Dimension

Sunday, October 4, 2009 - 01:00

Editor: Tell us about your background.

Wales: I have been an antitrust lawyer my entire career and have extensive experience in both the private and public sectors. In private practice, where I spent most of my career, I counseled and defended clients on the full range of antitrust matters, including mergers and acquisitions, criminal grand jury investigations, dominant firm conduct, distribution arrangements, licensing, and competitor collaborations.

I also spent a significant part of my career in the government as a senior official in both U.S. antitrust agencies. Most recently, and just before joining Jones Day, I was at the Federal Trade Commission, where I served for over three years in its Bureau of Competition. From 2008 to 2009, I supervised the nearly 300 lawyers and staff in the Bureau of Competition as acting director, and was responsible for all of the Commission's antitrust enforcement in each of the industries it oversees, including pharmaceuticals, healthcare, energy, chemicals, defense, and retail.

It was a very active time for the Commission, and I was able to oversee a number of important antitrust matters, including Whole Foods' acquisition of Wild Oats, lawsuits against Cephalon and Solvay Pharmaceuticals for exclusion payment settlements, and the challenge to CCC's acquisition of Mitchell, the first successful merger injunction case in nearly a decade.

From 2001 to 2003, I was counsel to Assistant Attorney General Charles James in the Department of Justice's Antitrust Division, where I was part of the front office team overseeing all antitrust matters before the agency. The Microsoft case was one of the matters I was responsible for and I worked on a number of other enforcement actions, including the DirecTV/Echostar merger and Northrop Grumman's acquisition of TRW.

Editor: Describe the personnel changes in the DOJ and the FTC and their likely effect on policies with respect to mergers and dominant companies and on policies relating to resale price maintenance, bundling, tie-ins and other practices.

Wales: To get a sense of how antitrust enforcement policy might change under the new administration at the FTC and DOJ, you need to look at the individuals who have been put in charge - Jon Leibowitz, the new FTC Chairman, whom I know well, and Christine Varney, who has been brought on as the new Assistant Attorney General for antitrust at DOJ. You should expect that their individual enforcement philosophies and priorities will have a major impact on what the antitrust agencies do. Both have been pretty vocal about being aggressive and pushing the envelope on antitrust enforcement, including litigating cases when necessary.

While what they have been saying is informative, the best indicator of their policies will be what enforcement actions they actually bring. At the FTC, Chairman Leibowitz has already been very active, challenging three mergers in court in the past several months. As for the DOJ, Christine Varney has been quite outspoken about her views. There is reason to expect that she will be very active and push the antitrust envelope in several areas, including high-tech industries and cases involving unilateral conduct and vertical relationships.

Editor: What challenges does she face with respect to unilateral conduct?

Wales: One of the most controversial areas in all of antitrust, both in the U.S. and abroad, is figuring out what unilateral conduct the government should challenge. This is because, unlike other types of conduct, like naked price-fixing, it is very difficult to distinguish between legitimate competition on the merits, which is good for consumers, versus anticompetitive conduct that is harmful. The agencies have to be careful not to attack pro-competitive or even benign conduct because it can chill conduct that truly benefits consumers, especially in the current economic environment. Several recent Supreme Court cases have echoed this concern.

Christine Varney has made it clear, as has the FTC, that she is more confident that the agencies can successfully draw the line between lawful and unlawful behavior than were the enforcers in the previous administration. That is why she withdrew the DOJ's Section 2 Report, which she criticized as setting too high a standard for identifying unlawful unilateral conduct. The challenge AAG Varney will face will come when she starts bringing unilateral cases in court and DOJ must convince a judge that the government has clearly identified unlawful conduct.

Editor: Will the administration's stimulus package and its agenda with respect to energy and healthcare influence antitrust policy?

Wales: The current economic and political environment can have a big impact on antitrust enforcement. Some of the same areas implicated by the new stimulus package, including healthcare, energy, the financial industry and high-tech, will be a major focus of the current federal antitrust enforcers. One needs only to look at the cases brought by the FTC over the past few months, and what both agency heads are talking about, to see that these will be the hot areas.

Chairman Leibowitz has led the charge against what are known as reverse or exclusion payments in the drug patent settlement context. According to the FTC, these payments by branded drug companies are anticompetitive because they delay price-cutting entry by generic competitors. Despite several setbacks in court, the FTC continues to bring lawsuits challenging this conduct in the hope the Supreme Court will eventually weigh in on the FTC's side. If the courts fail to outlaw these payments, however, the FTC hopes that Congress will pass a law prohibiting them. The FTC will also continue to be very active in other healthcare-related matters. All three of the filed merger challenges during Chairman Leibowitz' tenure have involved pharmaceuticals or medical devices.

Another industry overseen by the FTC that should anticipate a very high level of scrutiny is energy. The FTC has, and will continue to, look very closely at any mergers in that field. The FTC has recently conducted a number of investigations into gasoline prices, and I would be surprised if we don't see more, especially if gas prices rise. There have not been recent conduct challenges by the FTC in energy, but there is a real possibility that will change. In late 2007, Congress passed a law directing the FTC to consider a rule that would prohibit market manipulation in the wholesale petroleum industry. The FTC chose to adopt a rule prohibiting fraudulent or deceptive acts or practices that will take effect later this year. It will be very interesting to see what, if any, enforcement actions result from the new rule.

There is also some debate as to whether vigorous antitrust enforcement might interfere with the nation's recovery from the recent economic downturn, and, therefore, the antitrust enforcers should be less aggressive. That is not the view of the current leadership at DOJ, however, as made clear in AAG Varney's first speech in which she touted the importance of antitrust enforcement to any recovery.

Editor: What should we make of the announcement by the FTC and DOJ that they will be considering revising the Horizontal Merger Guidelines? Does this mean it will be harder to get mergers through the U.S. agencies?

Wales: It is not a big surprise that the agencies are looking to revise the Merger Guidelines. It has been 17 years since the Guidelines were instituted and it is clear that in certain respects they no longer accurately reflect how the FTC and DOJ look at mergers. For example, the market share screens used (known as HHIs) do not reflect current enforcement policy, and how the Guidelines define relevant markets may not be applicable in certain cases, as illustrated in the FTC's Whole Foods/Wild Oats case. A revision of the Guidelines that reflects some of the changes in enforcement would be a welcome accomplishment that should bring more transparency to the process.

What is also possible, however, is that the new administration, which has stated its intention to be more aggressive, could take the opportunity to tweak the Guidelines in a way that raises the bar for mergers. We will have to wait and see what the new Guidelines look like.

Editor: Does antitrust now have a global dimension?

Wales: Yes. Not too long ago, the U.S. antitrust agencies and the European Commission were the only major antitrust enforcers in the world, and antitrust lawyers focused all of their attention on those two jurisdictions. Since then, there has been an explosion in the number of jurisdictions that have active antitrust enforcement both with respect to mergers and unilateral conduct. The challenge for international businesses is keeping track of all of these jurisdictions and formulating business practices that pass antitrust muster under the different standards. I was encouraged to see that Christine Varney expressed in a recent speech her strong support for continuing efforts toward international antitrust convergence.

Editor: I understand that agencies located in different countries share information with each other. To what extent is that true?

Wales: As the world gets smaller and smaller, business conduct and mergers increasingly have an impact beyond national borders. This subjects many clients to multiple antitrust reviews for the same conduct or transaction, under potentially different standards and utilizing different evidence. This also creates significant challenges for the antitrust enforcers who must now work to coordinate the substantive and procedural aspects of their investigations with the other jurisdictions involved. As a result, information sharing among enforcers is no longer the exception, but the norm. When I was at the FTC and DOJ, it was pretty rare for transactions or investigations not to have some broader impact outside the U.S. and require some level of coordination with a foreign antitrust authority.

Editor: To what extent are foreign countries adopting counterparts to the Hart-Scott-Rodino Act and what problems arise because of the differing standards of such laws?

Wales: A large number of jurisdictions now have an antitrust regime and many of them have premerger notification requirements similar to Hart-Scott-Rodino in the U.S. This significantly increases the procedural burden on merging parties. Although many foreign jurisdictions have fairly straightforward thresholds based on local sales or assets, a good number of other jurisdictions have more vague filing triggers, like market shares, that can be a challenge to navigate. Jones Day has premerger notification experts who keep abreast of the changes in filing requirements and know how to give practical advice to clients in this situation.

Editor: The growth of China offers great opportunities for U.S. companies. What role does antitrust law play there?

Wales: There have been a number of important developments over the past year as we watch China implement its antimonopoly law. At the moment, there has been a lot of focus on China's attempts to deal with conduct by dominant firms and their version of unilateral or single-firm conduct under the antimonopoly law. What gives people heartburn is the vagueness of the law in several areas. As we discussed, one of the most difficult issues in antitrust is distinguishing lawful from unlawful unilateral conduct by a dominant firm. The current iteration of the Chinese law gives very little guidance on this important issue.

Let me give you an example of why people are concerned. If a firm is determined to be dominant under the new antimonopoly law in China, it is prohibited from charging an "unfair price." That is quite vague and subject to much interpretation. The problem comes when dominant businesses are trying to set prices in a way that does not run afoul of the new law. They may err on the side of caution and charge higher prices than they would otherwise so as not to be accused of unfairly undercutting their rivals and violating the law. Consumers are the ones left holding the bag when they are forced to pay higher prices. Hopefully, as the law in China develops more clear standards on unilateral conduct will emerge.

The Chinese law also has a merger review process, and so far they have looked at about 60 transactions. Only three have been rejected, including an acquisition by Coca-Cola of a Chinese juice manufacturer. Although that one deal has gotten a lot of attention, people feel that the alarm level is not as high on merger review as it is in unilateral conduct because the Chinese antitrust authority has approved the vast majority of mergers it has reviewed. Again, we will need to watch closely how new cases are handled and what standards develop.

Please email the interviewee at dpwales@jonesday.com with questions about this interview.