Antitrust Division Finds No Problem with Pork Merger

On May 4, 2007, the Antitrust Division issued a press release announcing that it had decided not to challenge Smithfield Foods acquisition of Premium Standard Farms. In its press release, the Division indicated that it found that the acquisition would not pose a competitive problem for either consumers of fresh and processed pork, nor for pork farmers in the Midwest or in Virginia or the Carolinas.

Smithfield, the largest pork producer in the United States, had announced the transaction in September, agreeing to purchase Premium, the second largest pork producer, for $810 million in stock and cash. Almost immediately, the merger ran into opposition from organizations such as the United Food and Commercial Workers International Union, the National Family Farm Coalition, and the United Stockgrowers of America. In addition to lobbying the Department of Justice, they also urged state attorney generals to investigate the merger, expressing concern over the market power Smithfield would have over farmers looking to sell their pigs.

The Antitrust Division issued a second request to investigate concerns that the merged company would be able to increase the price consumers paid for pork products, while simultaneously decreasing the price paid to pork farmers for pigs sold to packing plants. The parties certified substantial compliance with the second request on February 5, and simultaneously announced that they had entered into a timing agreement with the Division that would permit the Division 60 days to review the transaction, as opposed to the usual 30 days that the Division has by statute. In addition, the agreement gave the Division another 30 days to review the agreement if necessary. On March 30, the Division took the option of the additional 30 days, giving it until May 7 to review the transaction, but approved it without conditions on May 4, finding that in each product and geographic market, Smithfield would still face competition from Tyson, Swift, Excel/Cargill, Hormel and Seaboard Foods.

The timing agreement between the Division and the parties, and the subsequent approval without conditions, highlights the benefits of working cooperatively rather than competitively with the antitrust enforcement agencies. As with most large mergers, the parties complied with the second request fairly quickly, but did not force the Division to make a decision on whether to sue for a preliminary injunction. The timing agreement gave the Division the flexibility to review the materials for a comparatively long time, but provided Smithfield and Premium with the assurance that the investigation would either terminate or result in litigation by a date certain. With good preparation, Smithfield and Premium were able to overcome competitive worries and should be able to close the transaction soon.

Antitrust Division Approves IEEE's Procedure on IP Licensing
On April 30, 2007, the Antitrust Division, in response to a business review letter from the Institute of Electrical and Electronics Engineers, Inc. ("IEEE"), approved the new IEEE procedure for preventing companies that hold patents from secretly introducing their patented technology into a standard. The Division and other antitrust enforcement authorities had worried that companies could insert requirements into the standards set by the standard setting organizations, and then exclude other manufacturers by charging exorbitant royalties.

The IEEE sets the standards for a variety of products that require interoperability. To set a standard, a working group meets for four years, develops a standard, and submits it to the vote of the members. Currently, the chair of the working group will ask the participants in the standard setting committee to disclose any essential patents and, if so, for the patent holders to state 1) that they will not enforce the patent, or 2) that they will license the patent on reasonable and nondiscriminatory terms to other manufacturers. The working group participants may not discuss licensing terms. However, the IEEE has found that the current system leads to 1) vague commitments that are difficult to enforce and lead to litigation with respect to the definition of "reasonable and non-discriminatory", and 2) the lack of discussion of the licensing terms prevents "sensible cost-benefit comparisons."

To remedy the current defects in the problem, the IEEE proposed a new system. If the working group chairman determines that a participant may hold a patent that could be essential to the licensed technology, the chairman will send the patent holder a letter seeking a response about the extent of the patent and how the holder will enforce it if the patent is part of the standard that is adopted. In response to the letter, the patent holder may:

1) do nothing, although this will earn it a referral to the patent committee, and the working group will inform the members at the time of the vote of the lack of a commitment;

2) send a Letter of Assurance ("LOA") that it does not have any patents essential to the proposed standard, although it may only do so after "contacting individuals within the company who are involved with the development of the standard";

3) send a LOA stating that it will not assert a patent claim against anyone who uses the patent to implement the standard;

4) send a LOA stating that it will license the patent to those implementing the standard for either no charge or a reasonable rate with all other conditions also set on a "reasonable and nondiscriminatory standard" or

5) send an LOA stating that it will charge reasonable rates, but also include the terms of the licensing agreement and details.

Once the working group has the information from the patent holder, the working group members will need to discuss the "relative costs of the proposed technological alternatives" without discussing "specific licensing terms." If the standard is adopted, the patent holder is bound by the terms of the LOA, but, if the patent holder begins demanding more onerous terms as a condition of licensing, the IEEE will have no enforcement mechanism.

The Antitrust Division approved the new standard setting procedure, stating that "a policy that requires patent holders to disclose and commit to their most restrictive licensing terms would permit SDO [Standard Development Organization] members to make more informed decisions when setting a standard because they would be able to compare alternative technologies based on differences in cost in addition to technological merit." The Division found that allowing the patent holders to disclose their most restrictive terms would encourage them to compete and offer better terms. The Division, however, stated that it was not passing on the legality of joint negotiations at the standard setting stage, and that any attempt to fix the prices paid by consumers would result in a suit by the Division.

The proposed changes and the Division's stance are interesting. It may prove difficult for members of the standard setting working group to "compare alternative technologies based on cost" without discussing specific licensing terms amongst themselves. In addition, although it does provide an avenue for future standards adopted by the IEEE to avoid any patent issues arising from the adoption of a standard, the Division does not discuss the fact that the proposed procedure does not provide any enforcement mechanism against a company that sends an LOA stating it has no patents essential to the standard, but, after the adoption, brings suit claiming that it does. The proposed standard states explicitly that the company does not need to go through all of its patents, but only needs to contact it members who are involved with the working group. Would a court enforce an LOA against a company that certified it had no patents if the company claimed that its employees were merely ignorant of other patents at the time of the LOA?

The approval of the procedure by the Division, and the earlier approval of the VMEbus International Trade Association, provides a framework for standard setting organizations to collaborate on new standards without running afoul of Section 1. Whether the new procedures prevent future litigation remains to be seen.