Antitrust & competition review – spring 2014

Energy M&A under the Hart-Scott-Rodino Act Is there an exemption that applies to your deal? Scott P. Perlman mayer brown 1

Introduction

At a time when there is significant  M&A activity in the energy industry,  it is critical for energy companies  to understand how the premerger  notification filing requirements  of the Hart-Scott-Rodino Antitrust  Improvements Act of 1976 (“HSR Act”  or “the Act”), and the regulations  promulgated under the Act (“HSR  Rules” or “Rule(s)”), may apply to their  transactions. In fact, there are both  energy-specific exemptions to the Act  and other exemptions of more general  application that can be used to exempt  broad categories of energy mergers and  acquisitions from HSR Act filing  requirements. These exemptions are  highly technical, however, and include  a number of exceptions. As a result,  transactions that exceed the Act’s  basic filing thresholds often must be  reviewed carefully to determine  whether any of these exemptions can  be applied to the particular transaction  at issue. Moreover, amendments to the  HSR Rules and reporting form implemented in 2011 require parties to  certain energy transactions, particularly those involving master limited  partnerships (“MLPs”), to report  additional information where the  transaction does not qualify for an  exemption. This article provides a  brief overview of how these various  provisions may apply to energy-related  transactions, including the circumstances under which such transactions  are and are not exempt. HSR Act overview Under the HSR Act and Rules,  parties to acquisitions of assets,  voting securities, and equity interests  in non-corporate entities (e.g., limited  liability companies, partnerships), that  meet certain dollar thresholds, are  required to file premerger notification  forms with the Federal Trade  Commission (“FTC”) and the  Department of Justice (“DOJ”), and  observe a waiting period—usually  30 days—before they are permitted to  consummate the transaction. There are  two basic filing thresholds. The Size-ofPersons threshold is satisfied where  there is a person on one side of the  transaction with $141.8 million or more  in total assets or annual net sales,  and a person on the other side with  $14.2 million or more in total assets  or annual net sales. The Size-ofTransaction threshold is met if the  value of the transaction exceeds $70.9  million. Transactions valued in excess  of $283.6 million meet the filing  Scott P. Perlman Washington, DC +1 202 263 3201 [email protected] This article was initially  published in Oil & Gas  Financial Journal,  November 11, 2013:  http://www.ogfj.com/ articles/2013/11/energy-maunder-the-hart-scott-rodinoact.html2 Antitrust & Competition Review   |   Spring 2014 threshold regardless of the size of the persons.  Transactions meeting these thresholds are reportable  unless there is an applicable exemption. Energy-specific Exemptions Since 1996, the HSR Rules have included Rule 802.3,  which provides specific exemptions for acquisitions of  carbon-based mineral reserves. Under the Rule, an  acquisition of reserves or rights in reserves of oil,  natural gas, shale or tar sands together with associated exploration or production assets is exempt if the  fair market value of such assets to be held as a result  of the acquisition does not exceed $500 million.  Similarly, an acquisition of reserves or rights in  reserves of coal together with associated exploration  or production assets is exempt if the fair market value  of such assets does not exceed $200 million.  “Associated exploration or production assets” means  equipment, machinery, fixtures and other assets that  are integral and exclusive to current or future exploration or production activities associated with the  carbon-based mineral reserves that are being  acquired, but does not include (1) any pipeline and  pipeline system or processing facility which transports or processes oil and gas after it passes through  the meters of a producing field located within reserves  that are being acquired, or (2) any pipeline or pipeline  system that receives gas directly from gas wells for  transportation to a natural gas processing facility or  other destination. Significantly, in determining whether the $500  million or $200 million thresholds have been  exceeded, the parties do not need to count the value of  any non-producing reserves.  As a result of this  provision, acquisitions of oil and gas reserves with a  total value substantially in excess of $500 million may  be exempt (e.g., an $800 million acquisition consisting of $400 million in producing oil and gas reserves  and $400 million in non-producing reserves). As  noted above, however, the exemption does not apply  to transportation or processing assets outside of the  production field. In particular, such assets may  include natural gas gathering systems, processing and  treatment plants, transportation pipelines, storage  facilities and terminals. In a transaction in which  both exempt assets valued below the Rule 802.3  thresholds and non-exempt assets are being acquired,  the parties must determine whether, viewed separately, the aggregate value of the non-exempt assets  exceeds the $70.9 million size threshold, in which  case a filing will be required for the acquisition of  those assets.  Note that parties can take advantage of these  exemptions regardless of whether the transaction is  structured as an acquisition of assets or an acquisition  of voting securities or non-corporate interests. Under  Rule 802.4, where a direct acquisition of assets is  exempt under Rule 802.3, the acquisition of an equity  interest in an entity holding such assets also will be  exempt provided that the entity also does not hold  non-exempt assets valued in excess of $70.9 million. Other Exemptions Applicable to Energy  Transactions In addition to the Rule 802.3 exemptions, there are a  number of exemptions of more general application  that can be applied to exempt transactions involving  energy-related assets. A few of the most relevant  exemptions are described below. ACQU IS IT IONS OF NON - CONTROL LING INTERESTS  IN NON - CORPORATE ENT IT IES There are many cases in which energy-related assets  such as gathering systems and transportation pipelines are held in non-corporate entities, including  limited liability companies (LLCs) and limited  partnerships.  Under the HSR Rules, acquisition of an  equity interest in a non-corporate entity is not report-mayer brown 3 able unless, as a result of the acquisition, the  acquiring person will hold a controlling interest in the  entity. Thus, an acquisition that will result in the  acquiring person holding only a minority interest in a  non-corporate entity that holds energy-related assets  is exempt regardless of the dollar value of the interest  acquired. Further, this exemption applies even where  the minority interest being acquired is a general  partner or managing member interest that will give  the acquiring person management control of the  entity and its underlying assets. ACQU IS IT IONS OF NON - CORPORATE INTERESTS  IN FINANCING TRANSACTIONS Under Rule 802.65, an acquisition of a controlling  interest in a non-corporate entity is exempt from HSR  Act filing requirements if (a) the acquiring person is  contributing only cash to the non-corporate entity, (b)  for the purpose of providing financing, and (c) the  terms of the financing are such that the acquiring  person no longer will control the entity after it realizes  a preferred return. In recent years, it has become  increasingly common for financial investors to  contribute funds to entities that hold renewable  energy projects, including solar power and wind  projects, under terms that meet the requirements of  this rule. Thus parties to such investments should  consider whether their transaction qualifies for the  Rule 802.65 exemption. ACQUISITIONS OF ASSETS AND ENTITIES  LOCATED OUTSIDE THE US In an increasingly global energy industry, it is more  likely that both US and non-US companies will be  acquiring energy-related assets and entities located  outside the US Even if the parties to such transactions  that meet the Act’s jurisdictional thresholds cannot  take advantage of the exemptions discussed above,  such acquisitions may qualify for one or more HSR  exemptions relating to foreign commerce. In general,  the acquisition of assets located outside the US is  exempt so long as the non-US assets being acquired  from the same acquired person did not account for  aggregate sales in or into the US of more than $70.9  million in the acquired person’s most recent fiscal  year. A similar rule applies to acquisitions of voting  securities in non-US corporations and controlling  equity interests in non-US non-corporate entities.  Where a non-US person acquires a non-controlling  (less than 50%) voting securities interest in a non-US  corporate issuer, the transaction is exempt. Where a  non-US person acquires a controlling interest in a  non-US corporate or non-corporate entity, or a US  person acquires any voting securities interest in a  non-US corporation or a controlling interest in a  non-US non-corporate entity, the acquisition is  exempt unless the target entity, including any of its  controlled subsidiaries, holds assets located in the US  with a current fair market value of more than $70.9  million, or had sales in or into the US of more than  $70.9 million in its most recent fiscal year.  In transactions involving the acquisition of both US  and non-US assets or entities, it may be helpful for the  parties first to assess whether the US part of the  transaction alone is valued in excess of $70.9 million,  and if not, then determine whether the non-US part is  exempt; if it is, the transaction is not reportable; if the  non-US part is not exempt, the parties then should  determine whether the value of the US and non-US  parts together exceed the $70.9 million threshold. ADDITIONAL REPORTING OBLIGATIONS RELATING  TO MASTER LIMITED PARTNERSHIPS In 2011, the FTC implemented changes to the HSR  Act reporting form and regulations that were  designed to obtain additional information in filings  made by both private equity funds and MLPs, which  frequently are used to hold assets in the oil and gas 4 Antitrust & Competition Review   |   Spring 2014 sector. The effect of these new rules can be illustrated  with the following, simplified example. Assume GP is  the general partner and holds a 5% interest in both  MLP1 and MLP2, each of which owns natural gas  pipelines. MLP1 now plans to acquire another natural  gas pipeline in a transaction reportable under the  HSR Act. Under the old rules, MLP1 was not required  to report anything about MLP2’s pipeline holdings,  even if they competed directly with the pipeline MLP1  now is planning to acquire. Under the new rules, GP  and MLP2 are considered “associates” of MLP1, and  MLP1 must include information in its HSR Act filing  regarding any entity in which GP or MLP2 holds a 5%  or greater equity interest that operates in the same  industry as the assets or company being acquired by  MLP1. In this example, that would include information regarding MLP2’s pipelines, including the  geographic areas in which they operate. As this  example shows, an MLP that is managed by a general  partner that also manages one or more other MLPs,  and is engaged in a transaction reportable under the  HSR Act, needs to identify both relevant associate  relationships and the resulting information it may  need to report regarding those relationships. Conclusion As this discussion shows, there are many energyrelated transactions that, while potentially reportable  under the HSR Act, may qualify for one or more  energy-related or more general exemptions from the  Act’s reporting requirements. Parties to transactions  of the types discussed above should confer with  counsel to determine whether their transaction is  exempt, ensure that the transaction does not fall  within an exception to the relevant exemption, and  particularly if an MLP is involved, for guidance in  identifying any associate relationships. umayer brown 5 Public Hospital Mergers: A Case for Broader  Considerations than Competition Law? 1 Kiran S. Desai In the European Union, concerns about  increasing healthcare expenditures are  a major motivating factor for introducing competition in hospital services.  The EU healthcare landscape is dominated by public hospitals (that is,  hospitals owned and funded by the  State). This article addresses the  question of whether mergers between  public hospitals should only be decided  upon by a competition authority on  competition principles, or whether it  would be better that the ultimate  decision is taken by the government on  the basis of broader considerations. In  addressing this question, the focus, by  way of example, is the situation in the  United Kingdom.  This article is prompted by the change  that occurred from April 2013 in UK  law as it applies to public hospital  mergers, that the second merger to be  investigated under the new regime was  subjected to a second phase investigation and ultimately blocked by the UK’s  Competition Commission (CC), 2  and  there has been much criticism stemming from the matter. An indication of  this criticism is that at the July 2, 2013  meeting of the UK Parliament’s Health  Committee, in response to a question  the Secretary of State for Health stated  that “It is a concern to me…I want to  make sure that they [the Office of Fair  Trading] properly consider the benefits  and also that it doesn’t take too long”.  In responding to a question about  consideration of amended legislation,  he said “If we thought there was a  serious problem in terms of the structures…then we would consider it, yes.”  Unique Aspects of  Public Hospital Mergers Hospital mergers have particularities  that make analysis complex. First,  there tend to be few market players  and, typically, the market(s) of relevance are oligopolistic or even  monopolistic for certain services and  in certain areas. Further, entry and exit  are costly and, as a highly regulated  market, it may in particular areas be  impracticable or simply not allowed by  the regulator/government. Most problematically, hospital services  are credence goods—i.e., a good whose  utility impact is difficult or impossible  for the consumer to ascertain. In  contrast to experience goods, the  utility gain or loss of credence goods  is difficult to measure both before and  after consumption. However, the seller  of the good knows the utility impact of  the good, creating a situation of asymKiran S. Desai Brussels +32 2 551 5959 [email protected] Antitrust & Competition Review   |   Spring 2014 metric information. Examples of credence goods include  vitamin supplements, education and car repairs.  One example of how this may create market effects is  that the least expensive products might be avoided in  order to avoid suspected fraud and poor quality. So a  restaurant customer may avoid the cheapest wine on  the menu, but instead purchase something slightly  more expensive. However, even after drinking it, the  buyer is unable to evaluate its relative value compared  to all the wines they have not tried (unless they are a  wine expert). This course of action—buying the second  cheapest option—is observable by the restaurateur,  who can manipulate the pricing on the menu to  maximise their margin, that is, ensuring that the  second cheapest wine is actually the least good value. Dealing with this information asymmetry has led  some, and this is the case in the United Kingdom,  to focus on customer choice. This means ensuring  there are choices and improving the information and  information delivery mechanisms to enable customers  to make informed choices. Such choices tend only to  be relevant for elective care (that is, a health service  that is chosen by the patient or doctor, in contrast to  accident and emergency services). Another important distinction of hospital services is  integrated care, namely, the need for multi-disciplinary teams both across specific health services and  between health and social care. Integrated care is a  requirement of patients and, therefore, a concern of  the regulator/government.  Integrated care needs to be a part of the market  offering and may require hospitals to co-operate in  the provision of patient care. For example, in England,  many hospitals have formed networks for the treatment of cancer. This allows them to share best  practice, to transfer patient records effectively  between organisations and to ensure that patients  requiring specialist treatment receive care in the  specialist hospitals best placed to provide that care. A  hospital merger would need to be considered in this  context so that cooperation is not adversely affected  and that such networks do not become anticompetitive  structures. Finally, the sector is both economically and emotionally significant, and is therefore politically significant.  It is estimated that expenditure in England on publicly  provided elective hospital services was around £12  billion in 2012. The sector also raises emotions in the  customer (patient and their relatives) and stakeholders  (e.g., doctors). Consequently careful consideration of  the outcomes of applying competition law to this  sector is required. Market Definition PRODUCT MARKET The definition of “product market” has two main  complexities for public hospital mergers. First,  there is a multitude of different hospital services.  The International Statistical Classification of Diseases  and Related Health Problems (ICD), is the United  Nations-sponsored World Health Organization’s  standard diagnostic tool for epidemiology, health  management and clinical purposes. There are currently 14,400 different ICD codes, and some countries  have felt the need to supplement the ICD through  introducing codes dealing with medical procedures,  and/or use their own codes. In the United Kingdom,  there is a tendency to use the Office of Population  Censuses and Surveys Classification of Interventions  and Procedures (OPCS-4), which is a procedural  classification for the coding of operations, procedures  and interventions performed during in-patient stays,  day case surgery and some out-patient attendances  in the NHS. Second, there are different participants in the market,  with different demand and supply factors, leading to mayer brown 7 blurring of the market definition. For example, the  patient has an illness. The doctor works in a particular  hospital and, thus, that hospital will have a specialty.  The hospital will typically offer a multitude of different yet interrelated services. The payer (the government  or, in the case of the UK, increasingly in the first  instance a set of purchasers that are autonomous from  the government) faces a multiplicity of different costs:  diagnostic tests, drugs, medical devices, ancillaries,  room and board, etc., none of which are of concern to  the patient. However, the patient may need different  services and, given the issue of integrated care identified above, these component services may be offered by  different (competing) hospitals.  Seeking to facilitate analysis, hospital services can be  clustered based on similar medical resource requirements (primary, secondary and tertiary care  services), similar duration (inpatient and outpatient  services), or on similar complexity and volume. In  relation to the latter, market commentators have  offered different suggestions. For example,  Zwanziger Service Categories, based on a paper by  Zwanziger, Melnick and Eyre (1994), creates “diagnostic related groups” (DRGs) and identifies 48  service categories, where the emphasis of the definition is on the doctor as the key input into hospital  treatments. Such analysis can lead to opposite  problems. Thus, statistics at the cluster level that do  not appear problematic may mask issues in underlying categories, while issues in underlying categories  can complicate a case that looks nonproblematic at  the cluster level. As was noted previously, the UK’s competition  authority has blocked the first public hospital merger  that was subject to a full investigation, following the  regime change in April 2013. The summary of its  conclusion on product market definition in its  decision indicate the complexities involved: (a) Each specialty constitutes a separate  market. There may be a degree of differentiation within specialties and any constraint at  sub-specialty level will be taken into account,  when relevant, in our competitive effects  assessment.  (b) Within each specialty: (i) We treat outpatient and inpatient as separate markets and we  note that there is an asymmetric constraint  between inpatient and outpatient, with inpatient providers capable of readily supply-side  substituting into outpatient services but not  vice versa. We considered day-cases as part of  the relevant inpatient market. (ii) Outpatient  services should not be further separated  according to whether or not the services can be  provided in community settings, but certain  services are provided only in the community  and should be viewed as separate markets. (iii)  Non-elective and elective activities are separate  markets, although the provision of elective  activities may be constrained to some extent by  non-elective providers. 3 GEOGRAPHIC MARKET Geographic market is an even more complex subject  than product market definition. Local market analysis  techniques are critical and the case experience of local  market mergers in other markets offers some insight.  Thus, isochrones analysis (determining the geographic  market by reference to the locality bounded by a travel  time, for example, 20 minutes journey time by car) is a  technique that can be relevant. 4  Diversion ratio analysis  (surveying where customers would go if a particular site  was temporarily closed), may also provide insight, as  could the more complicated related technique of critical  loss analysis (measuring when the lost “business”  reaches a level such that it does not make sense for  the hypothetical monopolist to raise prices). 8 Antitrust & Competition Review   |   Spring 2014 Overlaying these techniques, it is necessary to consider  the particularities of hospital services. For example, in many countries in Europe, emergency services are  obliged to take accident and emergency patients to  the hospital nearest to the where the patient has been  found. For elective care, the degree of choice and  information asymmetry is important. Many patients  will be directed to a hospital by their general practitioner, or will naturally go to the hospital of choice of the  specialist doctor they are seeing (who may have to  choose that hospital because the specialist doctor  has a working relationship with it). Analysis of geographic market definition is particularly important given the experience of hospital  mergers in the United States. Between 1993 and 2000  there were more than 1000 hospital mergers. The  antitrust agencies (the Department of Justice and the  Federal Trade Commission) challenged only seven of  these mergers, yet lost in each case. As a result of that  set-back, the two agencies did not challenge a hospital  merger for several years. A full review by the agencies  as to the actual effect on the market of past mergers  led the agencies to conclude, in relation to geographic  market analysis, that the methods used by the courts  to define geographic markets in past hospital merger  challenges lead to markets that are overly broad,  mistakenly implying that some anticompetitive  hospital mergers are innocuous.  In the hospital merger challenges of the 1980s and  1990s, courts relied on the Elzinga-Hogarty (EH) test  to establish the boundaries of hospital geographic  markets. The EH test posits that a relevant antitrust  geographic market can be defined as an area for  which the product flows into and out of the area are  sufficiently small. In the context of hospital mergers,  the first step of implementing the EH test is to  designate a circle or group of zip codes that contain  both of the merging hospitals. If most of the patients  treated at the hospitals in this area also reside in this  area (i.e., the inflows are small) and most of the  patients residing in this area seek treatment at  hospitals in the area (i.e., the outflows are low), then  the area is an EH market.  The thresholds used by the courts to define flows that  are sufficiently small range from 10 to 25 percent. If  either the inflows or outflows exceed the threshold,  the market is expanded (usually by adding adjacent  zip codes) and the inflows and outflows are recalculated until an area is obtained with inflows and  outflows both below the threshold. Some economists  have long argued that the use of the EH test in  hospital merger cases is inappropriate and leads to  geographic markets that are too broad, especially in  and around urban areas where the inflows are typically large, as rural and suburban patients seek care at  the larger hospitals in the city. Courts using the EH  test in hospital merger cases have, in some cases,  defined geographic markets that are over 100 miles in  diameter. 5 It is perhaps not surprising that the Office of Fair  Trading (OFT) commissioned a report into market  definition. 6  While the report addresses private  healthcare services (PH), its consideration is also  relevant to geographic market definition in relation to  public hospital mergers. As the reviewers noted:  Techniques for geographic market definition  in PH have been examined in great detail in  the academic literature, as well as in government reports, competition investigations and  court cases. The majority of the literature  differentiates between the traditional, simpler  techniques developed in the 1980s and 1990s,  and the more complex and recent approaches.  Overall, these techniques represent a broad  spectrum of approaches that are characterised by different degrees of theoretical  soundness, complexity, data requirements mayer brown 9 and the extent to which they have been tested  empirically or have established precedent. For the UK, the reviewers’ opinion was that the  simpler techniques (isochrones or fixed-radii) were  likely to be more relevant, principally because of the  paucity of data available. However, a multi-layered  approach to geographic market definition is suggested, depending upon the health services in  consideration and the type of hospital. For example,  A&E services are likely to have smaller catchment  areas compared to elective cosmetic surgery, while a  large teaching (or university) hospital is likely to have  a larger catchment area than a limited service community hospital. Reasons for Public Hospital Mergers One of the UK government’s policies is that it wants  the NHS to become more efficient to free up funds for  treating patients and keeping up with new treatments.  On July 2, 2013, at the meeting of the UK Parliament’s  Health Committee, the Secretary of State for Health  said that “mergers between NHS providers were  important to improving efficiency….” This is consistent  with and an expression of the UK government’s  emphasis on competition, which has been an important  part of the UK government’s NHS policy since 2000,  and has antecedents in changes made since 1997. Hospital mergers are intended to improve or sustain  clinical quality, reduce operating expenses, increase  revenue, reconfigure service delivery, rapidly acquire  new skills or technologies, improve access to capital,  and be able to afford to provide new services that were  otherwise prohibitive for either hospital to acquire on  its own. Given the above, it is perhaps surprising that the view  of the vast majority of commentators— generally, and  not just in the UK—is that hospital mergers produce  little benefit. A paper published in 2012 7  examined  hospital mergers in the UK between 1997 and 2004.  It focused on short term general (referred to as acute  in the UK) hospitals. During the period studied, about  half of the short term general hospitals in the UK  merged. The study examined the impact of mergers  on a large set of outcomes including financial performance, productivity, waiting times and clinical  quality. The conclusion in the paper is that “such  mergers often produce little benefit” and that “the  findings suggest that further merger activity may not  be the appropriate way of dealing with poorly performing hospitals.” A paper published by McKinsey & Company in 2012 8 states in its introduction, “Many hospital mergers fail.  But when a merger is supported by both a compelling  strategic rationale and strong pre-and post-deal  management, the impact achieved is impressive.”  In a later article published in the UK’s Health Service  Journal the McKinsey authors confirm the general  view when stating that “unfortunately, examination of  the evidence from previous hospital mergers suggests  very few have delivered significant improvements in  clinical quality or financial performance.” The authors  add that “our research—an examination of more than  700 mergers around the world, combined with  surveys, interviews and literature review—suggested  the primary reason was the absence of substantial  changes in service delivery.” In aggregate, studies consider a large set of metrics  in considering hospital performance, for example,  mortality rate, teaching status, staff per bed, complication rates, high-tech services, overall reputation,  newspaper ranking, number of hospitals within X  drive time, standard deviation of distance to nearest  four hospitals, elective predictive patient flows, total  admissions, length of stay, total income, income  deprivation index for catchment population, prevalence of private hospitals, deaths after surgery, and  hip-replacement readmissions. These metrics clearly 10 Antitrust & Competition Review   |   Spring 2014 make the potential for a complicated and difficult  analysis. It is perhaps for this reason that despite the  general view held by commentators that hospital  mergers do not bring benefits, some commentators  are more nuanced.  For example, in a paper published in November 2012  by the Centre for Health Economics at the University  of York 9  the theoretical and empirical literature on  competition and quality is reviewed. The authors’  conclusion following a review of the theoretical  literature is that there are gaps in the theory and  further modelling work should be undertaken. Perhaps a Broader Government View  on Mergers Would Be Better? Prior to April 1, 2013, the UK government, or an  agency that was directly accountable to the  Department of Health, made all decisions regarding  public hospital mergers. Since that date, however, the  UK has placed mergers of most public hospitals into  the competition mainstream. This might result in  competition law applying to activities that under EU  law are able to be exempted from competition law  oversight because the public hospitals, at least in part,  are entrusted with the operation of services of general  economic interest, per Article 106 of the Treaty on the  Functioning of the European Union (TFEU). In Part I, above, it is identified that the particular  characteristics of public hospitals suggest that careful  consideration should be given to the outcomes of  applying only competition law to public hospital  mergers. These characteristics include, most notably,  that hospital services are credence goods, that they  have significant political and economic weight, and  that the different interests of the many participants  may mean that competition laws, and the authorities  that implement these laws, are not able to address all  of the relevant public policy and societal goals.  In Part II, the difficulties of product market and  geographic market definitions are identified.  Generally, these difficulties are not a new challenge  for competition authorities, nor are they ones that the  authorities cannot meet. However, at least in the  context of the United Kingdom, it might be unrealistic  to consider that the OFT would have the time or  resources to address the complexities, and this  concern might even apply to the CC. 10  With experience, though, the analysis of hospital mergers by the  OFT or CC should become more efficient. The test  that the CC must consider—the SLC test 11 —and so  whether or not there is an anticompetitive outcome,  allows the CC to consider any actions it proposes to  take on customer benefits – s.35(5) Enterprise Act  2002 (EA 2002). Despite this reference to customers  (patients), it is unlikely that the CC could, through  this provision alone, consider the broader societal  effects of a merger. In Part III, above, it is identified that public hospital  mergers are being encouraged through public policy  and the introduction of competition into the NHS. This  is despite the general record indicating that mergers do  not bring benefits. Moreover, there are a host of  potential benefits that merging parties seek—although  profit maximization is not typically one of them. These  nonpecuniary benefits could still be assessed in terms  of the economic unit of utility. However, such analysis  may be outside the experience and perhaps capability  of most competition authorities as the private utility  benefits of the merging parties needs to be measured  together with the effect on the utility of other stakeholders (for example, individual doctors or the  government which is the ultimate funder in the UK).  The above raises the thought that perhaps a broader  government view on public hospital mergers would be  preferable to the current method where a competition  authority makes the decision based strictly on competition law and principles. mayer brown 11 In relation to the UK, one possibility of allowing  government to take the ultimate decision on the basis  of broader considerations, without having radically  to alter the new regime, and maintain competition  principles as a key pillar for assessment, is to allow  the Secretary of State to issue a “public interest  notice” under the EA 2002, effectively allowing the  Secretary to be the ultimate decision maker. The Secretary may, prior to the OFT deciding to  whether to refer a merger to the CC, issue a public  interest notice. 12  Such a notice is issued if the  Secretary believes that a “public interest consideration” may be relevant to the merger. 13  A public  interest consideration is a consideration listed in  section 58 of the EA 2002. The list of public interest  considerations may be amended, removed or extend  by order of the Secretary of State. 14  While no health  subjects are currently listed, they could be inserted  by the Secretary through a relatively simple and fast  procedure. Indeed, the Secretary can simultaneously  issue a public interest notice and commence the  procedure to have a new subject determined to be  a public interest consideration. The Secretary has  similarly intervened in relation to large bank mergers  in the UK, allowing mergers to proceed even though  the CC concluded that the SLC test was met. There are various potential outcomes from the use of an  intervention notice, but in short it allows the Secretary  to block a public hospital merger that otherwise would  have been permitted on competition grounds, or to allow  a public hospital merger that otherwise would have been  blocked on competition grounds.  Conclusion When considering the merger of public hospitals,  competition authorities arguably should address  issues beyond those that are normally considered.  Further, while competition law and principles should  remain a key element in the analysis, there is justification for making the decision based on broader  considerations than competition law. u Endnotes 1  This is an abbreviated version of the article published in  the December 2013 issue of European Competition Law  Review. 2  The proposed merger between the Royal Bournemouth and  Christchurch Hospitals NHS Foundation Trust and Poole  Hospital NHS Foundation Trust. In the UK mergers are  first reviewed by the Office of Fair Trading (OFT), and will  be referred to the CC for full investigation if the OFT  believes that the merger would result in a substantial  lessening of competition. 3  Final Report, para. 5.53, page 56: The final report can be  found at: http://www.competition-commission.org.uk/assets/ competitioncommission/docs/2013/royal-bournemouth-andchristchurch-poole/131017_final_report.pdf. 4  Please refer to the article of this author “Isochrones:  Analysis of Local Geographic Markets” available at: http:// www.mayerbrown.com/files/Publication/7633e871-05b8- 428f-bbcd-cf6d9163bab8/Presentation/ PublicationAttachment/c7b45b1f-d4f4-413c-b5aab0579c87049f/Isochrones-Desai_Iss2_1108.pdf.  5  OECD, Policy Roundtables, Competition in Hospital  Services, 2012, DAF/COMP(2012)9. 6  Techniques for defining markets for private healthcare in  the UK, Literature review, Prepared for Office of Fair  Trading, November 2011. Although the report was supposed  to address product and geographic definition, the literature  review in the report did not discuss product market  definition in PH in detail because the reviewers opinion is  that “the product market definition will often draw on  clinical expertise and judgement, and may also depend on  the particular attributes of the competition case being  considered.” As a result the report focuses on the techniques for geographic market definition. 7  “Can governments do it better? Merger mania and hospital  outcomes in the English NHS” by Martine Gaynor, Mauro  Laudicella and Carol Propper, Journal of Health Economics  31 (2012) 528-543. 8  Marry in haste, repent at leisure: when do hospital mergers  make strategic sense?, by Penelope Dash, David Meredith  and Paul White, McKinsey, 2012 at: http://www.google. com/url?sa=t&rct=j&q=&esrc=s&frm=1&source=web&cd=1& ved=0CD0QFjAA&url=http%3A%2F%2Fwww.mckinsey. com%2F~%2Fmedia%2FMcKinsey%2520Offices%2FUnited12 Antitrust & Competition Review   |   Spring 2014 %2520Kingdom%2FPDFs%2FWhen_hospital_mergers_ make_strategic_sense_.ashx&ei=rwsWUrqGBqqk0QXXl4C oCw&usg=AFQjCNFS4QcbHXgGxUNO1m2riSzwB5VNMQ &sig2=QsELCCqQEZ_3H9mvNCweDA&bvm=bv.5115654 2,d.d2k. 9  Hospital Quality Competition Under Fixed Prices, The  University of York, Centre for Health Economics, CHE  Research Paper 80, November 2012, at: http://www.york. ac.uk/media/che/documents/papers/researchpapers/ CHERP80_hospital_quality_competition_fixedprices.pdf. 10  While the reasons are not clear from the public record,  it can be noted that for the first public hospital merger  investigated by the CC—see footnote 2—very unusually  two notices extending the period of the investigation were  issued, so extending this investigation from the statutory  limit of 24 weeks (approximately 6 months) to approximately 10 months. 11  Substantial lessening of competition. 12  EA 2002, s. 42(1). 13  Id., s. 42(2). 14  Id., s. 58(3).mayer brown 13 China Merger Control in 2013 Philip Monaghan There were some interesting twists in  the public and private enforcement of  China’s Anti-Monopoly Law (AML)  during 2013. In the area of merger  control, the Chinese Ministry of  Commerce (MOFCOM) published four  conditional clearance decisions:  Glencore/Xstrata, Marubeni/Gavilon,  Baxter/Gambro and MediaTek/MStar.  Each decision turns on its own facts,  but there are recurring themes: • MOFCOM is prepared to find  market power notwithstanding  relatively low market share levels. • There is a continued preference for  the imposition of elaborate and  onerous hold-separate arrangements as a condition for clearance. • MOFCOM has sought commitments  to supply certain key products to the  Chinese market on favorable terms  as a pre-condition to clearance. • MOFCOM will shy not away from  imposing extraterritorial remedies  even where the competition economics basis for seeking the commitment  might not be that clear cut. • Coordinated effects theories of  harm arise with some regularity  in MOFCOM’s published decisions  and this year’s cases offer further  examples.  Some of these themes appear driven  by industrial policy considerations  and indicate that any transaction that  involves key industries—food and  agriculture in Marubeni/Gavilon,  minerals and ores in Glencore/ Xstrata, important inputs for Chinese  manufacturers in MediaTek/MStar— will be scrutinized closely and  regulated with an eye toward broader  strategic interests. By contrast, Baxter/ Gambro is something of an anomaly  in so far as political considerations  were not in issue. We explore below these four cases in  detail and consider the implications for  MOFCOM’s future practice. Glencore/Xstrata Following a lengthy review lasting the  best part of a year, on April 16, 2013,  MOFCOM gave a conditional green  light to the acquisition of Xstrata by  Glencore. The long review period is not  the only way in which the decision  stands out. Particularly striking is  MOFCOM’s decision to seek an  extraterritorial divestiture in circumstances where the competition  arguments that might justify this  decision appear to be borderline.  Philip Monaghan Hong Kong +852 2843 2534 [email protected] mayerbrownjsm.com This article is extracted  from an article initially  published in The Asia-Pacific  Antitrust Review 2014:  w w w. GlobalCompetitionReview. com14 Antitrust & Competition Review   |   Spring 2014 Also striking is the fact that the regulator, for the first  time, published a detailed scheme of the remedial  commitments it accepted from the parties as a  pre-condition to clearance. This document offers a  valuable insight into MOFCOM’s practice and merits  careful consideration. It is also a further indication of  MOFCOM’s ongoing and developing commitment to a  more transparent process. Although neither Glencore nor Xstrata own or  operate productive assets in the relevant markets in  China, MOFCOM took great interest in the transaction, focusing on the importance of China as a major  market for the parties and China’s reliance on  imports of raw materials of central importance to  the wider Chinese economy. Explaining that import  volumes of copper, zinc and lead concentrate  accounted for 68.5, 28.7 and 27.3 percent, respectively, of total supplies on the Chinese market in  2011, and that the parties had relatively high market  shares in the production and supply of these products globally and in China, MOFCOM focused its  review on these markets and ultimately concluded  that the acquisition may have the effect of eliminating or restricting competition in them.  That said, the analysis of the parties’ market power  in the production and supply of copper concentrates  suggests that MOFCOM is willing to find market  power at what might otherwise be considered  moderate market share levels. The regulator  explained that Glencore and Xstrata are among the  world’s leading producers and suppliers of copper  concentrate and that the global market shares of  Glencore and Xstrata for the production of copper  concentrate were 1.5 and 6.1 percent, respectively, in  2011, with a combined share of 7.6 percent, collectively ranking third in the world. Further, the global  market shares of the parties in 2011 with respect to  the supply of copper concentrate were 5.3 and 4  percent, respectively, with a combined share of 9.3  percent, ranking first in the world. As regards the  market shares of Glencore and Xstrata for the supply  of copper in China itself, these were 9 and 3.1 percent  for 2011, giving a combined share of 12.1 percent—a  leading position on the market.  While the published decision does elaborate other  reasons for concluding the parties would have market  power post-merger in the copper concentrate market  (vertical integration and foreclosure concerns, barriers  to entry), it is worth noting that the market share levels  discussed above are all well below the 25 percent figure  used by, for example, the European Commission to  establish a threshold below which an absence of  restrictive effects can be presumed. Whether  MOFCOM will always be willing to find market power  at such levels is not clear. Arguably, the central issue for  the regulator in the case was an understandable  concern that China was uniquely dependent on overseas supplies of a critical commodity. The analysis of competition concerns in the markets  for zinc and lead concentrate is, in many respects,  comparable to the analysis for copper, albeit that  MOFCOM noted that China is less dependent on  imports as indicated above. MOFCOM therefore took  the view that softer behavioral commitments would  suffice in these markets. The most notable of the restrictive conditions  imposed—and likely the cause of the protracted  review as the regulator and the parties sought to agree  an acceptable compromise—is the required divestiture by September 2014 of Xstrata’s Las Bambas  copper mine in Peru at a price not lower than the  higher of the fair market value of the mine or the sum  of all costs incurred in developing it. The purchaser  must be approved by MOFCOM, though Glencore has  undertaken to use its best efforts to submit the details  of all potential buyers of Las Bambas to MOFCOM by  August 31, 2014. Whether this means MOFCOM  would then select a buyer is not entirely clear.mayer brown 15 If Glencore fails to comply with the structural remedy  and sell Las Bambas within the required time, the  remedy scheme provides that Glencore must submit  a proposal to MOFCOM for the appointment of a  divestiture trustee empowered to sell, without a  reserve price, Glencore’s interest in one of a number of  alternative copper mining projects in Latin America  or Southeast Asia as might be specified by MOFCOM. In addition to the structural remedy, MOFCOM sought  conduct remedies: behavioral conditions were imposed  relating to the pricing and volumes of copper, zinc and  lead concentrates supplied to Chinese customers. For a  period of eight years, Glencore agreed to supply the  Chinese market with 900,000 tons of copper concentrate annually at a regulated price—although the  minimum volume is subject to adjustment in line with  Glencore’s actual levels of production. In the case of  supplies of zinc and lead concentrates, Glencore agreed  that during the eight-year supply commitment period,  its offer conditions would be “fair, reasonable, and  consistent with the then prevailing terms used in the  international market.”  Marubeni/Gavilon MOFCOM published its conditional approval of  Marubeni’s acquisition of Gavilon Holdings hot on the  heels of the decision in Glencore/Xstrata. The US$5.6  billion grain deal between one of Japan’s largest  trading companies and the third-largest North  American grain company took just under one year for  MOFCOM to clear.  First notified by the parties in June 2012, the notification was withdrawn and resubmitted in January 2013  at the end of a Phase III review and after an initial  remedies proposal had been rejected. The transaction  was ultimately cleared several days after the parties  agreed to operate Marubeni’s and Gavilon’s China  soybean export businesses through separate and  independent legal entities backed up by firewall  mechanisms to safeguard against the exchange of  competitively sensitive information. The final remedies scheme includes the following elements: • Marubeni and Gavilon will set up two independent  legal entities for the purpose of exporting and  selling soybeans on the China market.  • Marubeni’s soybean subsidiary and Gavilon’s  soybean subsidiary will maintain structural  and operational independence with respect to  personnel, sourcing, marketing, sales and pricing  functions. Post-completion, Marubeni’s soybean  subsidiary will not source soybeans from Gavilon’s  US assets except on an arm’s-length basis.  Extensive hold-separate remedies of this kind are  not unusual in the China context, and MOFCOM  imposed similar arrangements in Western Digital/ Hitachi in 2012. What is telling, is not so much the  remedies as such but more the basis for seeking them  in the first place. MOFCOM’s decision rehearses the  key considerations: • China is the world’s largest importer of soybeans.  In 2012, China’s imported volume of soybeans  accounted for 60 percent by volume of total worldwide soybean trade, and 80 percent of China’s  domestic supply.  • China imported 58.38 million tons of soybeans in  2012, implying a total domestic market of 72.975  million tons (MOFCOM makes no reference however to total market size as it defines the relevant  market as a market for imports).  1 • Marubeni shipped 10.5 million tons of soybeans to  China in 2012, implying an approximate market  share of 14 percent—or 18 percent if the relevant  market is defined by reference to imports alone as  in the MOFCOM decision.2 Marubeni ranked first  among suppliers of imported soybeans in China.16 Antitrust & Competition Review   |   Spring 2014 • Gavilon’s global soybean sales in 2012 amounted  to 5.1 million tons. This seems to translate into a  global market share of approximately 5 percent.3  MOFCOM does not provide any market share  for Gavilon in China but the figures provided in  the decision allow one to determine that its share  would be less that 1 percent.4  • While noting that the supply of soybeans in China  was highly dependent on imports (80 percent of  all supplies were imported in 2012 as mentioned  above), MOFCOM explained that the downstream  domestic China market for soybean crushing was  highly fragmented and characterized by small  scale production with weak countervailing bargaining power.  Overall, the key consideration appears to have been  that the deal would significantly boost Marubeni’s  access to global soybean resources through the  acquisition of Gavilon’s capacity for soybean origination, storage and logistics in North America, thus  enhancing Marubeni’s ability to import soybeans into  China. This would result in what MOFCOM terms a  “materially strengthening” of Marubeni’s “control”  over the import market for soybeans.  Nonetheless, a more orthodox assessment of the facts  might lead one to question whether the parties have  any particular level of market power on the relevant  market for soybeans. In this respect, it is notable that  MOFCOM appears not to have considered  in any  detail the degree of competitive constraint provided  by Marubeni’s rivals or the ability of competitors to  expand in response to attempts by the merged firm to  increase prices and/or lower output. And, as indicated  above, it is striking that MOFCOM chose to define the  relevant market as a market for imports into China  thus, by implication, taking the view that domestic  supplies were somehow not relevant to the assessment. Whatever the rationale for such an approach—the  decision is silent on the point—the effect would be to  overstate the parties’ market position, albeit that on  the facts of the case, not by very much.  Baxter/Gambro  Baxter/Gambro was conditionally approved on August  8, 2013, after MOFCOM opened a so-called “Phase  III” review—an agreed extension to Phase II.  MOFCOM focused its competition assessment on the  relevant global and domestic China markets for  continuous renal replacement therapy (CRRT)  equipment and related consumables (collectively, the  markets for CRRT equipment) and haemodialysis  (HD) equipment. MOFCOM concluded that the  transaction would likely eliminate or restrict competition in these markets and specifically, for MOFCOM’s  purposes, the China market for the relevant products. The pie charts below show the parties’ respective  market shares in the CRRT China markets as disclosed by MOFCOM in its decision. Interestingly,  MOFCOM also offers a detailed assessment of concentration levels pre- and post-transaction using the  Herfindahl-Hirschmann Index (HHI).5 MOFCOM’s  findings in this respect are shown here in chart form.mayer brown 17 In relation to CRRT equipment, MOFCOM found that  the transaction would significantly increase concentration levels in the relevant markets (the HHI “delta”  or difference between the HHI levels pre- and postacquisition serves as an indicator or proxy for the  change in concentration levels brought about by the  merger) and eliminate Baxter’s closest competitor,  resulting in high combined market shares held by the  merged firm post acquisition and affording it what  MOFCOM regarded as a “dominant position” in the  China markets for CRRT equipment.  With respect to HD equipment, MOFCOM concluded  that the transaction would likely result in “coordinated effects” in the relevant markets in China, with  the two main competitors—the merged entity and a  third party, Nipro Medical Corporation—holding a  combined 48 percent market share. Although the  “increment” in the merged firm’s market share was a  modest 3 percent (according to MOFCOM Gambro’s  market share was 19 percent, while Baxter’s was 3  percent), the key consideration would appear to have  been the existence of an agreement between Baxter  and Nipro for the production of HD products.  MOFCOM was concerned that this agreement created  a risk that competitively sensitive information would  be exchanged on such matters as production costs and  quantities. The agreement would “facilitate the  mutual coordination” of the two key players on the  China HD market, according to MOFCOM. On this  point, it might be noted that MOFCOM appears  generally more open to deploying a coordinated  effects theory of harm as compared with authorities 18 Antitrust & Competition Review   |   Spring 2014 elsewhere. That said, the existence of structural links  between players in a market is generally recognized as  an important consideration when assessing the  likelihood of coordinated effects.  In light of its concerns, MOFCOM approved the  transaction subject to the following: • The divestiture of Baxter’s global CRRT business;  and • The discontinuation of the Baxter-Nipro  agreement for the production of hemodialyzers  in so far as it related to China. Other authorities, notably the EU Commission and the  Australian Competition and Consumer Commission,  accepted a similar remedy in relation to CRRT equipment. By contrast, the EU Commission noted in its  press release announcing it had cleared the transaction  that it “found that Baxter and Gambro are not particularly close competitors in HD and will continue to face,  after the merger, significant competition from a range  of dynamic market participants.” Different regulators  reaching different conclusions is, of course, an inevitable feature of global merger control.  MediaTek/MStar  MediaTek/MStar was first filed with MOFCOM on July  6, 2012. Following a number of rounds of unsuccessful  negotiations between the parties and MOFCOM over  the scope of a possible remedies package, the filing was  eventually cleared on  August 26, 2013.  MOFCOM noted that both merging parties are mainly  engaged in the design and manufacture of integrated  circuit chips for multimedia display and wireless  communications devices. After concluding that the  transaction would not likely have any anticompetitive  effects on the market for mobile phone baseband chips,  MOFCOM focused on the market for LCD TV control  chips. The published decision is equivocal as to whether  the geographic scope of this market is global or  national, but MOFCOM’s main concern was clearly the  China market which, in any event, had its own special  features in MOFCOM’s view. The pie chart below shows the parties’ respective  market shares in the relevant China market as set out  in MOFCOM’s decision. As in Baxter/Gambro,  MOFCOM offered a detailed assessment of concentration levels using the HHI system of indicators.  MOFCOM’s findings in this respect are again shown  here in chart form.mayer brown 19 MOFCOM considered the relevant Chinese market for  LCD TV control chips to be highly concentrated  before the merger and noted that the transaction  would “obviously” change the structure of the market.  In MOFCOM’s view, the acquisition would eliminate  MediaTek’s closest competitor and remaining suppliers, and the threat of new entry, would not constitute  an effective competitive restraint post merger.  MOFCOM concluded that the merged entity would  become the “dominant” player in China with a market  share of 80 percent.  In view of these concerns, MOFCOM imposed a  rather striking set of behavioral remedies: • MStar’s LCD TV control chip business  (Morningstar) must be maintained as an  “independent competitor” on the market; • MediaTek’s exercise of its shareholder rights in  Morningstar are to be strictly limited and subject  to prior approval by MOFCOM with the exception  of rights to receive dividends and information  necessary for producing consolidated financial  statements;  • Directors of Morningstar may only be appointed/ removed with the approval of MOFCOM; • MediaTek and Morningstar must maintain their  R&D investments at no less than pre-acquisition  levels; • MediaTek and Morningstar are prohibited from  exchanging competitively sensitive information  and using customers as conduits for the exchange  of such information. Board members and senior  executives who breach this obligation may be  dismissed; • Cooperation between MediaTek and Morningstar  is to be subject to prior approval;  • Certain customary pre-acquisition practices  regarding the supply of LCD TV control chips  and after-sales service levels must be maintained post merger;  • Should MediaTek and/or Morningstar merge in the  future with another party active in the LCD TV  control chip market, they must seek prior approval  from MOFCOM. This applies regardless of the  turnover of the undertaking concerned; and  • MediaTek and Morningstar must comply with certain arrangements intended to control the prices  of LCD TV control chips and related products sold  on the China market. In particular, prices in China  must not be higher than the prices of similar  products sold by MediaTek and Morningstar  outside China. Looking at these remedies, the obvious question  might be why MOFCOM would choose such a structure over a divestiture, which would seem equally  capable of addressing the competition concerns  identified while placing less of a burden on MOFCOM  in terms of monitoring. On the other hand, a straightforward divestiture would not have afforded  MOFCOM the leverage it acquired over LCD TV  control chip pricing in China in view of the pricing  commitment described above.  Conclusion While a review of these recent cases clearly highlights  the importance of industrial policy in a MOFCOM  review, conditionally cleared cases are the exception  rather than the rule. Such decisions make up a very  small percentage of the cases filed with MOFCOM:  approximately 97 percent of filings are cleared  unconditionally. Standard competition considerations  are therefore the prime concern although industrial  policy could well trump this in a given case. u Endnotes 1   MOFCOM does not in fact give any market share percentages for soybeans in its decision. It explains however that  China imported 58.38 million tons of soybeans in 2012 and  that this accounted for 80 percent of China’s domestic  supply. Accordingly China’s total market size would be in  the region of 72.975 million tons. Assuming Marubeni  shipped 10.5 million tons of soybeans to China in 2012 20 Antitrust & Competition Review   |   Spring 2014 (MOFCOM’s figure), this implies a market share of 14  percent of all domestic supply or 18 percent if the relevant  market is defined by reference to imports alone as  MOFCOM does. 2   See footnote 1 above. 3   MOFCOM advises that in 2012, China’s imported volume of  soybeans accounted for 60 percent by volume of total  worldwide soybean trade. As China imported 58.38 million  tons of soybeans in 2012, this would suggest the global  market amounted to 97.3 million tons. If Gavilon’s global  soybean sales in 2012 amounted to 5.1 million tons  (MOFCOM’s figure), this translates into a global market  share of approximately 5 percent.  4   MOFCOM advises that in China Gavilon is active in the  trading of “bulk agricultural produce such as yellow corn,  soybeans, soy meal, and feed and food ingredients”.  MOFCOM further notes that in 2012, Gavilon exported to  China a total quantity of about 400,000 tons of bulk  agricultural produce. Even assuming this entire volume was  constituted by soybeans (which it would not be), this  translates into a market share of less than 1 percent even  where the relevant market is defined solely by reference to  imports. 5   The Herfindahl-Hirschmann Index measures concentration  levels in a given market by summing the squares of the  individual market shares of all the firms in the market.mayer brown 21 China’s Security Review System for  Foreign Investment: Where Do We Stand? Hannah Ha Almost three years have passed since  China formally established its security  review system with regard to mergers  and acquisitions of domestic enterprises by foreign investors (“Security  Review System”). The regime has had a  relatively low profile when compared  with the acceleration in China’s AntiMonopoly Law (“AML”)-related  enforcement activity and procedural  developments over the same period.  The very broad scope and criteria for  review, and the lack of significant new  developments since the Ministry of  Commerce (“MOFCOM”) finalized its  procedural rules for the regime, 1  mean  that there remains the risk that, in  seeking to ensure compliance with  these rules, local bureaus could broadly  interpret what may be a “sensitive”  sector or investment and thereby cause  further delays in relation to foreign  investment deals (by referring such  transactions to MOFCOM and suspending their own reviews). Three  years on, the lack of transparency and  the uncertainties created by the regime  are still issues to be addressed by  Chinese authorities, and foreign parties  looking to invest in China will have to  continue carefully navigating this  process for the foreseeable future. This article summarizes the key aspects  of the regime, including its background,  scope and relevant procedures and  rules to date.  Relevant Legislation and  Regulations  On 3 February 2011, the State Council  published the Circular of the General  Office of the State Council on  Establishment of a Security Review  System Regarding Mergers and  Acquisitions of Domestic Enterprises  by Foreign Investors (“Circular 6”),  which formally commenced the  Security Review System and became  effective on 5 March 2011. On 4 March 2011, MOFCOM promulgated the Interim Rules of the Ministry  of Commerce on Issues Relating to  Implementation of Security Review  System for Mergers and Acquisitions  of Domestic Enterprises by Foreign  Investors. After a period of consultation  and practice, MOFCOM replaced the  interim rules with the Rules of the  Ministry of Commerce on  Implementation of Security Review  System for Mergers and Acquisitions  of Domestic Enterprises by Foreign  Investors (“MOFCOM Rules”)  on 25 August 2011. Hannah Ha Hong Kong +852 2843 4378 [email protected] com22 Antitrust & Competition Review   |   Spring 2014 Together, Circular 6 and the MOFCOM Rules provide  for the substance of the Security Review System,  detailing its scope, relevant considerations, decisionmaking procedures, enforcement powers and other  relevant matters.  China’s security-related review mechanism regarding  takeovers of domestic enterprises by foreign investors  was introduced long before 2011. For example,  Article 19 of the Interim Provisions on Mergers and  Acquisitions of Domestic Enterprises by Foreign  Investors (2003), provided for national economic  security as a consideration in the review of foreign  M&A deals in China. Similar subsequent provisions—  such as Article 12 of the Provisions on Mergers and  Acquisitions of Domestic Enterprises by Foreign  Investors (2009)—have continued to provide for  national economic security as a relevant consideration  by MOFCOM. National security screening requirements were  codified in Chinese national legislation for the  first time in August 2007 through the inclusion  of Article 31 in the AML, which stipulates that  M&A of domestic enterprises by foreign investors  where national security is affected should undergo  national security review “according to relevant  provisions” (“Security Review”). However, no  further provisions or regulations were enacted to  provide details for the process as referenced in  Article 31 during the period 2007-2010, until  Circular 6 and the MOFCOM Rules were issued. Transactions Covered by the  Security Review System According to Circular 6, a transaction falls within the  scope of Security Review if the following two criteria  are satisfied. In practice, the broad and non-exhaustive wording of the criteria (especially in terms of  relevant sectors) will often raise doubts as to whether  a particular transaction is caught by the Security  Review System, in which case foreign investors may  consider consulting with MOFCOM to seek clarity  around this issue. CROSS - BORDER M&A TRANSACT IONS  INVOLVING FOREIGN INVESTORS A transaction may be the subject of a Security Review  if it is a “merger/acquisition of a domestic enterprise  by foreign investor(s)” for the purposes of the Security  Review System, which includes the following types: • Foreign investment in a domestic enterprise  that is a non-foreign invested enterprise (“-FIE”)  (in the form of acquiring equity or subscribing  to the capital increase), thereby transforming it  into an FIE; • Acquisition of Chinese shareholder-held equity  in an FIE, or subscribing to the capital increase  of an FIE; • Acquisition of assets or equity from a domestic  enterprise (either a non-FIE or an FIE) through  an FIE; or • Acquisition of assets of a domestic enterprise  (either a non-FIE or an FIE) and operating  such assets through a newly established FIE. RELEVANT SECTORS The second criterion determining whether a transaction will be reviewed under the regime is whether it  involves a merger/acquisition of a domestic enterprise  active in certain sectors in China, where the transaction satisfies either of the descriptions below: • The transaction involves an “acquisition of ” national  defense enterprises, such as military industrial  enterprises and supporting enterprises for the  military industry, enterprises in the vicinity of key  or sensitive military installations, and other entities  in relation to national defense security (“Sector A”  enterprises); ormayer brown 23 • The transaction involves foreign investor(s)  “acquiring actual control of ” domestic enterprises that have a bearing on national security in  such areas as important agricultural products,  vital energy and resources, essential infrastructure, crucial transportation services, key  technologies, and major equipment manufacturing (“Sector B” enterprises). On a literal reading of Circular 6, it would appear  that the Security Review System sets a lower  threshold for foreign investment transactions  relating to Sector A enterprises (those connected  with military and national defense interests),  requiring only an “acquisition,” as opposed to  “acquiring actual control.” However, the description  of Sector B enterprises (those that have a bearing  on national security) is extremely broad, and there  remain uncertainties and contradictory views held  by various government departments as to what this  means in practice. What constitutes “actual control”? The term “acquiring actual control” is defined in  Circular 6 as “becoming a controlling shareholder  or an actual controller of a domestic enterprise  through merger/acquisition.” In addition, Circular 6  sets out certain situations of “acquiring actual  control” as follows:  A foreign investor, together with its parent holding  company and/or its holding subsidiary, holds 50%  or more of the total shares in a relevant domestic  enterprise following the relevant transaction; • Several foreign investors hold an aggregate of  50% or more of the total shares in a relevant  domestic enterprise following the relevant  transa c  tion; • Even though the foreign investor does not  hold 50% or more of the total shares following  the transaction, the voting rights attached to  the shares held by such foreign investor in a  relevant domestic enterprise are sufficient to  have a major inf luence on the resolutions of any  shareholder meeting, annual general meeting or  board meeting of that enterprise; or • Other circumstances exist that may lead to the  transfer of the actual control of matters such as  business decision-making, finance, personnel  and technology of the domestic enterprise to  the foreign investor. What are Sector B enterprises? The table on the following page lists relevant  documents issued by various authorities that  provide some guidance on the Circular 6 criteria  by specifying the types of enterprises that have a  bearing on national security.  release date authority document name sector/enterprise 17 May 2011 Ministry of Agriculture The 12th Five-Year Development  Plan for Agricultural Products  Processing Industry Key enterprises in the processing  industry for important agricultural products, such as grains and oil crops 17 Aug 2011 Ministry of Industry and  Information Technology Policy on the Development of  Agricultural Machinery Industry Key manufacturing enterprises  of agricultural machinery Continued  t24 Antitrust & Competition Review   |   Spring 2014 Even drawing on the guidance provided in these  documents, the Circular 6 criteria relating to Sector B  enterprises remains very broad. Article 4 of the  MOFCOM Rules provides that foreign investors can  apply to MOFCOM for consultation on the relevant  “procedural” issues of the Security Review System.  However, Article 4 also makes it clear that such  consultation has no binding and legal effect. Foreign  investors may obtain a legally binding answer from  MOFCOM only by making a formal application to  MOFCOM, which will then entail additional paper  work and time. Parties may choose to also consult  MOFCOM on “substantial” issues (such as whether a  transaction shall undergo Security Review). Security Review Assessment Under Circular 6, a Security Review will involve  assessing whether a foreign investment transaction  will impact any of the following:  • National defense security (and, in particular,  domestic production capacity, domestic services  provision capacity or relevant equipment and  facilities that are required for national defense); • The stability of the national economy; • Basic social life order; and • The capacity of indigenous R&D of key technologies related to national security. release date authority document name sector/enterprise 13 Dec 2011 General Office  of the State Council Opinions of the General Office  of the State Council on Strengthening  the Construction of Circulation System  for Fresh Agricultural Products Large-scale wholesale markets  of agricultural products 6 Mar 2012 State Council Opinions of the State Council  on Supporting the Development  of Leading Enterprises for  Agricultural Industrialization Leading agricultural enterprises 26 Dec 2012 General Office of the State  Council National Development Plan on Modern  Crop Seed Industry (2012-2020) Seed enterprises 2 Apr 2013 Department of Commerce  of Jiangsu Province Notice on Further Strengthening  the Coordination and Implementation  of Foreign M&A Security Review System Industries listed in the relevant  catalogues of National Development  and Reform Commission (“NDRC”) 2 Industries with relevant technologies  and products listed in the Catalogue of Key  Technologies and Products of which China  Should Hold Independent IPR 3 Industries internally listed for  security review within MOFCOM4mayer brown 25 These are obviously also very broad review criteria,  and foreign investors are no doubt concerned about  the breadth of discretion it affords Chinese agencies  to identify security concerns in respect of the Chinafocused transactions. Security Review Procedure The flow chart below summarizes the key aspects of  the Security Review process under Circular 6 and the  MOFCOM Rules.26 Antitrust & Competition Review   |   Spring 2014 RELEVANT AGENCIES Circular 6 established a new interministerial joint  committee (“Security Review Committee”) to conduct  Security Review work. The Security Review  Committee operates under the overall leadership of  the State Council, with the NDRC and MOFCOM  taking the lead in carrying out Security Review in  association with relevant departments, depending on  the specific industries and sectors involved in the  foreign investment transaction.  MOFCOM, which effectively acts as the gatekeeper  for referring deals to the Security Review Committee,  is responsible for reviewing formal applications from  foreign investors for completeness and for determining whether the notified transactions indeed fall  within the scope of Security Review. MOFCOM will  then submit the qualified applications to the Security  Review Committee for substantial review. The Security Review Committee is charged with  analyzing the impact of notified transactions on  national security and making decisions. APPLICATION TO MOFCOM Foreign investors must apply to MOFCOM for  Security Review of their M&A transactions in the  following three circumstances: • Where, after a self-assessment, foreign investors  believe their transactions fall within the scope of  Security Review; • Where a local MOFCOM requires foreign investors  to apply for Security Review (the local MOFCOM  will suspend its own review process); and • Where government departments, national  industry associations, competitors and upstream/ downstream enterprises suggest that certain  transactions should be subject to Security Review,  and both MOFCOM and the Security Review  Committee take the same view. Where two or more foreign investors jointly engage in  an M&A transaction, they can either jointly make the  application or appoint one of the foreign investors to  do so. In considering whether a transaction falls within the  scope of Security Review, MOFCOM will look at the  substance and actual impact of the arrangements. The  MOFCOM Rules clearly state that foreign investors shall  not circumvent Security Review by means of nominee  holding structures, trust arrangements, multilayer  investment and reinvestment structures, leasing or  lending arrangements, contractual control mechanisms,  overseas transactions or any other means. It should be  noted also that guidelines relating to the security review  process issued by the Department of Foreign Investment  Administration of MOFCOM require that parties  submit a written guarantee that they have not sought to  avoid the Security Review process, such as by utilizing  an arrangement of the type mentioned. Once foreign investors decide to make a formal  application to MOFCOM, they shall submit an  application form and enclose it with a significant  volume of other materials as required by the  MOFCOM Rules and relevant application guide.  If the application materials are complete and meet  the statutory requirements, MOFCOM will inform the  applicant in writing that the application is accepted.  Otherwise, the applicant will be required to furnish  the necessary further information. REFERRALS BY GOVERNMENT DEPARTMENTS  AND THIRD PARTIES TO MOFCOM New wording was added to pre-existing provisions  empowering government departments, industry  associations and industry participants to alert the  Chinese authorities to deals that they consider should  be subject to security review. This wording states that  MOFCOM may “require relevant explanations” from  entities that make such referrals. While this may  simply reflect the ability of MOFCOM to liaise with mayer brown 27 the relevant entities to obtain necessary details, it may  also reflect concern about the potential for the referral  process to be misused by (in particular) competitors  of the parties proposing to enter into a relevant M&A  deal—and to empower MOFCOM to make inquiries  into whether a referral is made simply in an attempt  to cause difficulties and delay for transactions. T IM ING MOFCOM shall, within 15 working days from the  date of accepting the application, form a view on  whether it considers the notified transaction should be  subject to Security Review and, if yes, inform the  applicant in writing. MOFCOM then shall refer the  application to the Security Review Committee within  5 working days. An applicant shall not implement its  transaction during this time but can proceed if it does  not receive any notice from MOFCOM after the  15-day period expires. If a transaction is referred to it for review, the Security  Review Committee will undertake a preliminary  review (“General Review”) of the transaction for a  period of up to 30 working days, during which time it  will consult with interested government departments.  If it is determined during this General Review that  the transaction does not raise national security  concerns, the Security Review Committee will inform  MOFCOM of this decision in writing (and MOFCOM  then has 5 further working days to report the decision  to the transaction parties).  If, however, any of the government departments that  are consulted consider that the transaction does raise  national security concerns, a further review will take  place (“Special Review”).  According to Circular 6, Special Review may take up  to 60 working days, at the end of which the Security  Review Committee will deliver to MOFCOM a  decision in writing (which MOFCOM will inform the  applicant within 5 working days). However, if there is  significant disagreement among members of the  Security Review Committee as to whether the transaction does give rise to Security Review issues, the  transaction will be referred to the State Council for  further consideration. No time limit for State Council  consideration is provided under Circular 6. After MOFCOM has referred the application to the  Security Review Committee, if the applicant amends  the application materials, cancels the notified transaction, or supplements or amends materials as required  by the Security Review Committee, it shall submit the  relevant materials to MOFCOM, and MOFCOM shall  refer these materials to the Security Review  Committee within 5 working days. Decisions/Remedies The Security Review Committee will, after substantial review of a notified transaction, provide a decision  in writing to MOFCOM, which will then notify the  applicant in writing within 5 working days. If the Security Review Committee decides that the  notified transaction has no impact on national  security, the transaction parties may proceed (subject  to other required foreign investment approval and  registration procedures). If the transaction is found to have potential impact on  national security and such transaction has not been  implemented, the transaction parties will be required  to suspend the transaction. Without adjusting the  transaction, amending the application materials and  going through Security Review, the transaction  parties will not be allowed to implement the  transaction. However, if the Security Review Committee considers  that the transaction has an actual or potential severe  adverse impact on national security, it may request 28 Antitrust & Competition Review   |   Spring 2014 that MOFCOM coordinate with other relevant  departments to either terminate the transaction or to  take effective measures such as transferring relevant  equity or assets to eliminate the impact of the transaction on China’s national security. Moving Forward—Scope for Greater  Clarity and Certainty  China’s Security Review System, which operates  separately from merger review under the AML  (although there are references to security review in  the AML) and other foreign investment approval  processes, remains an additional area in which  foreign parties must tread carefully when considering  investing in China. The interaction of these different  review systems interact, particularly through the  Security Review referral process, will likely result in  gradual developments of law and procedure as China  continues its efforts to keep these regimes consistent  and unified (such as the formal introduction in the  MOFCOM Rules of a confidentiality obligation similar  to that in the AML system, requiring MOFCOM and  other entities involved in the Security Review process  to keep state secrets, trade secrets, and other related  secrets confidential).  MOFCOM Rules failed to clarify a number of important issues relating to the Security Review process,  including how parties can in practice self-assess deals  for any potential bearing on China’s national security  when the Chinese authorities have so far only published a very broadly worded and non-exhaustive list  of sectors that may be considered “sensitive” in this  respect (and they do not publish details on transactions reviewed by the Security Review Committee).  Until further guidance is issued, given the inherent  uncertainties that still remain in the Security Review  System, it is essential for foreign investors to consider  at an early stage whether there is a need to engage  with local commerce authorities and to consult with  MOFCOM to obtain as much clarity and certainty as  possible so as to mitigate risk in their transactions. Apart from dealing with the difficulties of self-assessment and securing other required approvals in a  timely manner, foreign investors need to keep mindful  of the changing scope of Security Review along with  China’s continuing economic development and  industry focus. These investors also need to be aware  of, and sensitive to, the relevant government policies  and big picture issues concerning the industries in  which they are considering investing. u Endnotes  1 China’s new state security committee, announced at the  Third Plenum of the 18th Communist Party of China  Central Committee in November 2013, will not likely be  directly relevant to the Security Review System, given that  experts in China have commented that it is modelled on  the US National Security Council as a high-level organ  under the direct leadership of the President to handle  major and strategic matters in relation to national security  and foreign policy.    2 Such catalogues may include the Catalogue for Guidance  of Foreign Investment Industries (2011), the Catalogue for  Guidance of Industrial Structure Adjustment (2011, partly  amended in 2013) and Catalogue for Guidance of Key  Products and Services in Strategic Emerging Industries  (2013).   3 (GuoKeFaJiZi [2006] No. 540) – available at http://www. zjkj.gov.cn/kjm/fo/toPIDetail.do?id=PI3192.  4 An example of such a list is available at http://zhuzhou. hninvest.gov.cn/tzzn/381334.htm. However, the industry  codes used in this list (security review industry table) are  based on the old 2002 version of the Classification of  National Economic Industries, suggesting that this list may  have since been updated by MOFCOM.mayer brown 29 The Uncertain Reach of Section 5  of the Federal Trade Commission Act Robert E. Entwisle and Daniel K. Storino Compliance with US antitrust laws  requires firms to consider not only  conduct that falls within the scope  of the Sherman Act and the Clayton Act,  but also conduct that may violate the  Federal Trade Commission Act (the  “Act”), particularly Section 5. This task  is complicated by the fact that the outer  scope of Section 5 remains largely  undefined, leading to uncertainty as to  what conduct is permissible and impermissible. In the absence of further  legislative or judicial oversight, it is  unclear just how far Section 5 reaches.  Established almost a century ago, the  Federal Trade Commission (“FTC”)  shares enforcement responsibilities for  US competition laws with the Antitrust  Division of the Department of Justice.  The FTC derives its enforcement powers  from the Federal Trade Commission Act  and the Clayton Act, 1  and its enforcement mission is to halt conduct deemed  harmful to competition, including  practices barred by the Sherman Act,  such as price fixing, bid rigging, customer allocation and other per se  antitrust violations. 2  Although not  expressly authorized to enforce the  Sherman Act, the FTC reaches such  conduct through Section 5, which states  that “[u]nfair methods of competition in  or affecting commerce, and unfair or  deceptive acts or practices in or affecting  commerce, are hereby declared unlawful.” 3  But a question going back to when  the Act first became law still remains  unanswered: beyond conduct that is  already prohibited by the Sherman Act  and the Clayton Act, precisely what falls  within Section 5’s prohibition on “unfair  methods of competition?”  There are some who have argued that  Section 5 is “coterminous” with the  Sherman Act and the Clayton Act—a  “vehicle by which the [FTC] challenges”  traditional antitrust violations. 4  Yet it  seems clear that Congress intended  something else. The legislative history  shows that Congress purposefully  passed a vague statute to avoid the  “endless task” of legislatively drawing  the line between fair and unfair practices in all cases and intended that the  reach of Section 5 be developed over  time. 5  As the Supreme Court observed,  “[i]t would not have been a difficult feat  of draftsmanship to have restricted the  operation of [Section 5] to those  methods of competition in interstate  commerce which are forbidden at  common law or which are likely to grow  into violations of the Sherman Act, if  that had been the purpose of the  legislation.” 6 Daniel K. Storino Chicago +1 312 701 7686 [email protected] Robert E. Entwisle Chicago +1 312 701 8151 [email protected] Antitrust & Competition Review   |   Spring 2014 The more widely accepted argument is that Section 5  “was intended from its inception to reach conduct that  violates not only the antitrust laws, but also the  policies that those laws were intended to promote” 7 and that Congress “adopted a phrase which … does  not admit of precise definition, [because] the meaning  and application [would] be arrived at by … the  gradual process of judicial inclusion and exclusion.” 8 However, while the Sherman Act’s equally vague ban  on any “contract, combination … or conspiracy, in  restraint of trade” now incorporates a vast body of  case law interpreting its meaning, Section 5 jurisprudence did not develop the same way.  Sperry & Hutchinson was the Supreme Court’s last  comprehensive analysis of the FTC’s Section 5 powers.  That opinion, however, is 40 years old and has been  described as controversial. 9  In Sperry, the FTC  entered a cease-and-desist order against Sperry &  Hutchinson Co. (S&H) for attempting to “suppress the  operation of trading stamp exchanges and other ‘free  and open’ redemption of stamps.” 10  The Fifth Circuit  vacated the order, finding that S&H’s conduct had not  “violated either the letter or the spirit of the antitrust  laws,” and thus the order exceeded the scope of  Section 5. 11  Without reaching the question of whether  S&H’s conduct did, in fact, violate the letter or spirit  of existing antitrust laws, the Supreme Court found  that Section 5 empowers the FTC to define and  proscribe unfair competitive practices, even if not an  infringement of other antitrust laws. 12  The Supreme  Court concluded that the FTC “does not arrogate  excessive power to itself if, in measuring a practice  against the elusive, but congressionally mandated  standard of fairness, it, like a court of equity, considers public values beyond simply those enshrined in the  letter or encompassed in the spirit of the antitrust  laws.” 13 Analogizing the FTC’s powers to those of a court of  equity signals the Supreme Court’s view, at the time,  that Section 5 powers were quite broad, perhaps not  even constrained by precedent. But circuit courts later  found that Section 5 has its limits. For example, in E.I.  du Pont de Nemours & Co. v. F.T.C., 14  although conceding that a definition of “unfair” methods of  competition is “elusive,” the court vacated the FTC’s  finding that competing firms in an oligopoly violated  Section 5 by unilaterally and non-collusively adopting  practices that included: (1) the sale of a product by all  four firms at a delivered price, which included transportation costs; (2) providing “extra” advance notice of  price increases; and (3) the use of “most favored  nation” clauses in contracts with customers. The court  explained its view on the outer reach of Section 5,  holding that, when a practice is not “collusive, coercive, predatory or exclusionary in character, the  standards for determining whether it is ‘unfair’ …  must be formulated to discriminate between normally  acceptable business behavior and conduct that is  unreasonable or unacceptable.” 15  Otherwise the “door  would be open to arbitrary or capricious administration” of Section 5, because “the FTC could, whenever it  believed that an industry was not achieving its  maximum competitive potential, ban certain practices in the hope that its action would increase  competition.” 16 The last time a circuit court evaluated a pure Section  5 claim was 1992, and the standards for determining  what is “unfair” continue to remain obscure. 17 Recognizing this obscurity, Commissioner Joshua  Wright recently advocated that the FTC should focus  its Section 5 efforts on “plainly anticompetitive  conduct”—meaning a practice that “(1) harms or is  likely to harm competition significantly and that (2)  lacks cognizable efficiencies.” 18  Making clear that his  position is a starting point for further dialogue, the  Commissioner explained this definition would permit  the FTC to prosecute conduct that, while falling  outside the Sherman or Clayton Act, would not be mayer brown 31 controversial, because it is already deemed anticompetitive. Citing modern concepts of antitrust harm,  Section 5 would, for example, reach “invitation[s] to  collude” or the acquisition of too much market power,  falling short of a monopoly. 19  It remains to be seen  whether this approach, or one like it, will be formally  adopted or pursued. Still, such a definition might  sweep within its scope conduct that, in and of itself,  does not violate other antitrust laws and lead to  potential penalties for legitimate, non-collusive  conduct. For example, one might argue that, under  such a definition, an oligopoly like the one at issue in  du Pont could be deemed a violation of Section 5.  Proponents of expansive Section 5 powers note that the  FTC is an expert agency that Congress intended to have  a central role in policing business conduct. They further  note that, unlike the Sherman Act, there is no private  right of action under Section 5—which, in theory, limits  exposure to damages for conduct that does not, standing alone, violate other antitrust laws. However, while  there may be no express private right of action at the  federal level, numerous states have enacted their own  versions of Section 5 that permit private actions and, in  some cases, trebled or punitive damages. 20 In addition, the FTC has previously sought and  obtained significant monetary penalties in the form of  disgorgement and restitution. For example, in FTC v.  Mylan Laboratories, Inc., 21  the court accepted the  FTC’s argument that it could seek monetary relief for  violations of Section 5, because doing so is a “natural  extension of the remedial powers authorized under  § 13( b).” 22  The case was later resolved when the  defendants agreed to pay $100 million into a fund,  that included compensation for indirect purchasers  who allegedly were injured. 23  At the time, certain  Commissioners recognized the significant federal  antitrust policy implications of the settlement, in light  of the decisions in Hanover Shoe, Inc. v. United Shoe  Machinery Corp. and Illinois Brick Co. v. Illinois. 24 More recently, in July 2012, the FTC withdrew its  existing Policy Statement on Monetary Remedies in  Competition Cases that had been in place since 2003.  The Statement outlined those circumstances where  the FTC would seek monetary penalties. In withdrawing it, the FTC explained that “the practical effect of  the Policy Statement was to create an overly restrictive  view of the Commission’s options for equitable remedies.” 25  This may signal the likelihood that US  businesses will see more FTC attempts to impose  monetary penalties in future competition cases.  Further, private plaintiffs regularly cite enforcement  proceedings to demonstrate the plausibility of their  claims and evade dismissal motions. An expert  agency’s determination that certain conduct constitutes an “unfair method of competition,” even if not  falling within the strict contours of a traditional  Sherman Act claim, could be an element relied upon  by private plaintiffs to successfully plead a Sherman  Act claim, opening the door to the expense of antitrust  discovery and the potential for trebled damages. For  example, a private plaintiff might rely upon Section 5  proceedings based on so-called “invitations to collude,” or the exchange of commercially sensitive  information, to demonstrate a plausible Sherman Act  Section 1 claim. 26  Indeed, a jury might be permitted to  infer the existence of a tacit agreement based on this  type of conduct. 27  Consider a case like In re Bosley, 28  where the FTC  found that an exchange of competitively sensitive  information could “mutate into a conspiracy” and  “[c]ompetition may be unreasonably restrained  whenever a competitor directly communicates,  solicits, or facilitates exchange of competitively  sensitive information with its rivals.” Such proscriptions conceivably sweep in a wide variety of completely  legitimate conduct. And, although it is clear that such  conduct, standing alone, is not enough to plead a  traditional antitrust violation—since plaintiffs must 32 Antitrust & Competition Review   |   Spring 2014 allege more than just an “opportunity” to collude 29 — the existence of FTC proceedings and/or an adverse  FTC finding may nonetheless help plaintiffs get  beyond the pleading stage of a Sherman Act claim. 30 What is more, the modern enforcement environment  makes it unlikely that firms will elect to litigate a  Section 5 claim—all but foreclosing the possibility  that a robust body of case law may someday develop.  As in all types of adversarial proceedings, firms elect  to settle Section 5 claims for a variety of reasons,  including a desire to avoid protracted costs, inherent  uncertainty, bad publicity and potential sanctions that  can come from choosing to litigate with the  government.  So, what can firms do to avoid running afoul of  Section 5? Because the FTC has yet to adopt any  specific parameters that define the boundaries of  Section 5 power, companies continue to be left in the  dark as to precisely what type of conduct amounts to a  violation. This uncertainty makes it more important  than ever to provide employees with careful guidance  on how to limit exposure and avoid sliding into “gray”  areas. Also, further guidance from the FTC could be  coming soon.  After decades of relative silence on the issue, this past  year saw a growing coalition of support for establishing Section 5 guidelines. For instance, in addition to  the (albeit vague) limiting principles proposed by  Commissioner Wright, several members of Congress  also recently encouraged the FTC to specify the scope  of its Section 5 authority. Corporate counsel should  keep abreast of these developments, because, until the  FTC formally clarifies its position on the reach of  Section 5, US businesses will be forced to wrestle with  how to ensure compliance with an ambiguous law. u Endnotes 1   See Federal Trade Commission, About the Bureau of  Competition, available at http://www.ftc.gov/bc/about.shtm.  2   See id. at http://www.ftc.gov/bc/non-merger.shtm.  3   15 U.S.C. § 45(a)(6). 4   See Section 5 Recast: Defining the FTC’s Unfair Methods  of Competition Authority, Remarks of Joshua D. Wright,  FTC Commissioner, available at http://www.ftc.gov/ speeches/wright/130619section5recast.pdf; Concurring  Opinion of Commissioner Jon Liebowitz at 3, In re  Rambus, Inc., FTC Docket No. 9302 (Aug. 2, 2006),  available at http://www.ftc.gov/os/adjpro/d9302/060802ram busconcurringopinionofcommissionerleibowitz.pdf.  5   See H.R. Rep. No. 63-1142, at 19 (1914). 6   Federal Trade Commission v. R.F. Keppel & Bro., 291 U.S.  304, 310 (1934). 7   See Concurring Opinion of Commissioner Jon Liebowitz at  1-2, In re Rambus, Inc., FTC Docket No. 9302 (Aug. 2,  2006), available at http://www.ftc.gov/os/adjpro/d9302/060 802rambusconcurringopinionofcommissionerleibowitz.pdf.  8   See Federal Trade Commission v. R.F. Keppel & Bro., 291  U.S. 304, 311-12 (1934) 9   Although the Supreme Court has not recently revisited this  issue, in F.T.C. v. Indiana Federation of Dentists, 476 U.S.  447, 454-55 (1986), the Court signaled its continued  adherence to Sperry. In that case, which is now also more  than 25 years old, the Court explained: “[t]he standard of  ‘unfairness’ under the FTC Act is, by necessity, an elusive  one, encompassing not only practices that violate the  Sherman Act and the other antitrust laws, but also  practices that the Commission determines are against  public policy for other reasons.”  10   FTC v. Sperry Hutchinson Co., 405 U.S. 233, 234 (1972).  Trading stamps are similar to postage stamps. 11   Id. at 235. 12   Id. at 239. 13   Id. at 244. 14   729 F.2d 128, 130, 137 (2d Cir. 1984). 15   Id. at 138-39 16   Id. at 138-39. 17   See James Campbell Cooper, Working Paper No. 13-20, The  Perils of Excessive Discretion, The Elusive Meaning of  Unfairness in Section 5 of the FTC Act (November 2013),  available at http://mercatus.org/publication/ perils-excessive-discretion-elusive-meaning-unfairnesssection-5-ftc-act. mayer brown 33 18   Section 5 Recast at 15. 19   Section 5 Recast at 19-20. 20   Hakala, Justin J., Follow-On State Actions Based on the  FTC’s Enforcement of Section 5, 7-9 (Wayne State Univ. Law  Sch., Working Paper Grp., Oct. 9, 2008), available at http:// www.ftc.gov/os/comments/section5workshop/537633-00002. pdf.  21   62 F.Supp.2d 25, 37 (D.D.C. 1999). 22   15 U.S.C. § 53(b). 23   See FTC Press Release, available at http://www.ftc.gov/es/ node/64092. 24   See id. (“[a] particularly serious spillover effect of the  federal court decisions in this case is the potential conflict  with federal policy established by the decisions in Hanover  Shoe, Inc. v. United Shoe Machinery Corp. and Illinois Brick  Co. v. Illinois, and consistently maintained since that  time.”) 25   See FTC Press Release, available at http://www.ftc.gov/ news-events/press-releases/2012/07/ ftc-withdraws-agencys-policy-statement-monetary-remedies.  26   See, e.g., Thomas Dahdouh, Section 5, The FTC and Its  Critics: Just Who Are the Radicals Here?, 20 No. 2, J.  Antitrust & Unfair Comp. Law of Cal. 1, 20-21 (Fall 2011). 27   Monsanto Co. v. Spray–Rite Service Corp., 465 U.S. 752,  764 n. 12 (1984) 28   See ANALYSIS OF AGREEMENT CONTAINING  CONSENT ORDER TO AID PUBLIC COMMENT, In re  Bosley, Inc., File No. 121-0184 at 2 (2013) available at http:// www.ftc.gov/sites/default/files/documents/ cases/2013/04/130408bosleyanal.pdf.  29   See, e.g., Bell Atlantic Corp. v. Twombly, 550 U.S.544, 567  (2007); In re Citric Acid Litig., 191 F.3d 1090, 1098 (9th  Cir. 1999); Cosmetic Gallery, Inc. v. Schoeneman Corp., 495  F.3d 46, 53 (3d Cir. 2007); Williamson Oil Co. v. Philip  Morris USA, 346 F.3d 1287, 1319 (11th Cir. 2003). 30   Indeed, some courts have allowed Sherman Act claims to  proceed past the pleading stage even though the alleged  practice was “not illegal in itself,” because the conduct  purportedly “facilitate[d] price fixing.” In re Text Messaging  Antitrust Litigation, 630 F.3d 622, 627–29 (7th Cir. 2010).3 4 Antitrust & Competition Review   |   Spring 2014 Brazilian Competition Policy in Global  Context: Achievements and Challenges Eduardo Molan Gaban Enforcement of antitrust law in Brazil  has continued its trend toward consolidation and evolution. 1  Brazil’s economic  growth has resulted in more complex  transactions being submitted to merger  control, as well as more complex and  veiled antitrust investigations. In turn,  this has increased the visibility and  relevance of the Brazilian System for  Economic Defence (SBDC) and, especially, of the Administrative Council for  Economic Defence (CADE), the country’s main antitrust agency. 2  According to CADE’s 2012 Annual  Report, CADE has increased the  number of its technical staff, and given  them more responsibility, resulting in a  rise in the number of cases analyzed  per year: from 666 in 2005 to 955 in  2012, out of which 825 were merger  filings notified under the old regime  and 102 merger filings submitted under  the new regime. In the first half of  2013, 82 new proceedings were filed,  158 were ruled on  (out of which 59  were merger filings) and only 219  remain under analysis. In addition to the staff increase, the  reformulation and the enhancement of  cooperation within the SBDC (i.e., the  Secretariat of Economic Monitoring— SEAE, the Secretariat of Economic  Law—SDE, CADE’s Attorney General  Office, and Federal Public Prosecution  Office and CADE) eliminated overlapping activities and significantly reduced  the average analysis period of merger  filings—from 252 days in 2005 to 48  days (ordinary procedure) and 19 days  (summary procedure), both in 2012. The depth and strength of the decisions  can also be regarded as an achievement.  For example, since the New Brazilian  Antitrust Law (Law No. 12529/2011)  came into effect, CADE has been  keeping an eye on healthcare markets.  This has resulted in significant restrictions being imposed in some transaction  involving the acquisition of hospitals in  several Brazilian cities, including Rede  D’Or and Medgrupo Participações S.A.,  the veto of the acquisition of Hospital  Regional de Franca by Unimed and the  acquisition of Aliança by Qualicorp in  the healthcare insurance sector.  Additionally, in May 2012, CADE  authorized the assets swap between  Brasil Foods (BRF) and Marfrig  Alimentos S.A., in compliance with  heavy commitments of selling assets  assumed by BRF involving approximately 35 percent of the parties’  production capacity in Brazil comprising production facilities, distribution  Eduardo Molan Gaban São Paulo +55 11 2504 4639 [email protected] Observations in this  article about Brazilian  law are by Tauil &  Chequer Advogados.  They are not intended to  provide legal advice to  any entity; any entity  considering the possibility  of a transaction must  seek advice tailored to its  particular circumstances.mayer brown 35 centers and an important portfolio of products and  brands. 3  Also, the authority cleared the transaction  between the airline companies LAN and TAM,  subject to the swap with a competitor of some slots  and infrastructure in the São Paulo International  Airport and to the exit of one of the worldwide airline  company’s alliances (One World or StarAlliance). 4 In the steel sector, CADE granted an injunction to  prevent completion of the acquisition by the Brazilian  Companhia Siderúrgica Nacional (CSN) of additional  stakes in its competitor, Usinas Siderúgicas de Minas  Gerais S.A. (Usiminas). 5  CADE ordered that until a  final decision is rendered and subject to the imposition  of fines of Brazilian Real (BRL) 10 million plus BRL  10,000 per day of violation, CSN would not be allowed  to appoint any member to the board of directors or any  other management board of Usiminas. Cade also  ordered that no company of CSN’s economic group  should have access to competitively sensitive information or exercise any management or political rights over  Usiminas (e.g., voting in the general shareholders’  meetings). In addition to this, CADE imposed restriction in the creation of a partnership between Usiminas  and nineteen distributors of flat steel, eliminating an  exclusivity clause set forth in their agreement. While still under the old regime, CADE executed  some Agreements to Preserve Reversibility of the  Transaction (APROs) in important transactions in  order to maintain the competitive environment, as  well as to keep the parties independent until a final  decision was reached. This was the case in the merger  between the Brazilian airline companies Gol and  WebJet, 6  as well as the transaction concerning the  acquisition by Diagnósticos da América S.A. (DASA)  of control over MD1 Diagnósticos S.A., 7  and the  subsequent acquisition by AMIL Group of participation on DASA’s shares in the health assistance and  diagnosis services sector. Under the new regime, CADE has entered into the  first merger control settlement agreements (ACCs) in  transactions that raised competition concerns, as a  condition for their clearance under the Law No.  12529/11. The first such case refers to the acquisition  of Mach by Syniverse. During examination, the  General Superintendence found that the transaction  would result in high concentration in the GSM data  clearing and Near Real Time Roaming Data  Exchange (NRTRDE) markets, which are technological services  provided to mobile telecommunication  companies for the charging of roaming. To remedy  competition concerns, Mach and Syniverse proposed  executing the agreement, through which they undertake certain obligations to remove any anticompetitive  outcomes from the transaction. In the second case, involving Ahlstrom Corporation  and Munksjö AB, CADE concluded that there was  high concentration in the pre-impregnated decorative  paper (PRIP) market and in the heavy abrasive paper  market, and that there were neither prospects of new  entrants into the sectors nor sufficient firms able to  compete in these markets. Therefore, the sale of an  industrial unit of Ahlstrom was established as a  condition to the deal. CADE also cleared complex transactions, e.g., the  merger between two big retailers Casas Bahia and  Ponto Frio, acquisition of Skype by Microsoft, several  acquisitions in the meat sector by JBS (although  CADE is monitoring the market by means of monthly  reports sent by the company). Interestingly, CADE cleared the transaction between  airline companies Azul and Trip, on the condition that  by the end of 2014, the flight share agreement (code  share) that Trip has with TAM be terminated as well  as the use with intensity at least of 85 percent of their  scheduled takeoffs and landings at the Santos  Dumont airport, located in Rio de Janeiro. However, 36 Antitrust & Competition Review   |   Spring 2014 this case demonstrated that CADE is carefully  reviewing and verifying all the information provided  by the applicants, as the authority imposed an R$3.5  million fine (out of a maximum of R$5 million) on the  companies for presenting misleading information.  This kind of penalty had already been provided by  former Law No. 8884/94, although there are no  decisions that are worth mentioning in this sense. The  penalty was maintained in Law 12529/2011, and only  now has CADE applied a strict analysis of accuracy  and completeness to information provided by the  parties and demonstrated its willingness to punish  any minimal evidence of misleading information. In the case Azul /Tryp, for instance, CADE imposed  such a high fine because the parties did not provide  information about the existence of a code share  agreement with TAM. This information came out  during complementary discovery by CADE and  was determinant to the imposition of restrictions  to the transaction. The second, and more recent case of misleading  information involves Lauriate Group and the  Brazilian private university Anhembi Morumbi,  which were fined in R$4 million for hiding information of their economic groups, which would show  that a Lauriate Group’s members were already active  in the educational sector. The transaction involved  the rise of equity interest of Lauriate Group in the  managing company of Anhembi Morumbi from 51  percent to 100 percent. The first precedent of misleading information concerned the transaction between the companies  Cruzeiro do Sul Educacional S.A. and  ACEF S.A., in  the distance learning sector. According to CADE, the  parties did not inform an accurate number of courses  offered and the number of students enrolled. CADE  imposed a fine of R$200,000. Under the new regime, CADE has also focused the  analysis of merger filings on consolidating a restrictive  and objective approach in regard to the notification  thresholds, as well as acknowledging the need to enact  regulations concerning some concepts of Law No.  12529/11, such as the “associative agreements” (including distribution agreements, consultancy agreements,  partnerships in general, service agreements, etc.) that  fall within the scope of antitrust law, as well as the  concepts of control and relevant influence for the  purposes of submitting a transaction to merger control. CADE also evolved controlling behaviors, such as  cartels and unilateral conducts; however, society is  still waiting for a development in this sense, be it in  terms of speedy to conclude the cases, be it in terms  of willingness to face more cases. All of the changes to the SBDC that have taken place   are still not enough to put Brazil in the first tier in  terms of antitrust enforcement and competition  culture. Cultural and latent problems, not exclusively  related to competition law and to the SBDC, but  rather related to Brazil as a whole, have made the  challenge that much greater. In this regard, it is important to recognize that  competition law in Brazil is still less than 20 years old.  Competition culture has not yet been fully established  at the academic or governmental levels, let alone the  business environment or society as a whole. The tripod underlying the Brazilian Competition  Policy (merger control, behavior control and competition advocacy) is still being developed. In merger  control, CADE is facing a quite settled case law and  methodology, which, in addition to the institutional  maturity, gives the society the desired predictability  of whether a transaction should be submitted to  CADE and whether there will be difficulties for  unconditional clearance.mayer brown 37 CADE has continued to develop its efforts at behavioral control. This can be observed by the number of  cases it has ruled on, the level of penalties applied and  the outcomes of the judicial decisions when CADE’s  rulings have been challenged. However, CADE needs  to keep developing and refining its investigations in  order to signal to society that it is not worth the risk  to violate antitrust laws. For new cases, the leniency program is still something  of an unknown. It brings little confidence because  Brazil’s legal tradition is not used to granting benefits  to criminals who, in admitting to and giving information on their crimes, assist in the conviction of other  possible wrongdoers. However, leniency agreements  are useful for the authorities because they make it  possible to obtain information that would be very hard  to obtain in the normal course of an investigation. Additionally, the unilateral conduct cases are not a  small challenge to be faced. CADE has not many cases  of conviction, but stared to fix its position, what was  seen in the case SKF (2013), the first conviction for  resale price maintenance. The case involving Banco  do Brasil and exclusive dealing in payroll loans (2012)  can be also regarded as an achievement. More cases of  unilateral conducts, including those related to stateowned enterprises, might arise and lead CADE  reinforce its mandate for free competition and a level  playing field regime within the Brazilian markets. CADE is commencing to define its role on competition advocacy, which might be shared with SEAE.  Problems related to taxation could trigger this very  important pillar of competition law in Brazil. Both of  them shall think antitrust in a broader manner in  order to contribute to social welfare as much as  possible. The Brazilian society is anxious for a  support of the expert on competition to help the  country become more competitive and fair. u Endnotes 1 Competition and Antitrust are synonyms in Brazil; thus  this article uses either Competition Law or Antitrust Law. 2   The SBCD, the Brazilian antitrust system, is composed of  three administrative entities that are jointly responsible for  the antitrust enforcement: (i) Secretariat for Economic Law  of the Ministry of Justice (SDE); (ii) Secretariat for  Economic Monitoring of the Ministry of Finance (SEAE);  and (iii) Administrative Council for Economic Defense  (CADE). 3 Brasil Foods S.A./Marfrig Alimentos S.A. Concentration Act  No. 08012.011210/2011-67. Introduced in November 2011,  and cleared in July 2012. 4 TAM S.A./Lan Airlines S.A. Concentration Act No.  08012.009497/2010-84. Introduced in September 2010, and  cleared in December 2011. 5 Companhia Siderúrgica Nacional/Usinas Siderúgicas de  Minas Gerais S.A. Concentration Act No.  08012009198/2011-21. Introduced in September 2011 and  cleared in April 2012. 6 Webjet Linhas Aéreas S.A./VRG Linhas Aéreas S.A. Concentration Act No. 08012.008378/2011-95. Introduced  in July 2011, and cleared in October 2011. 7 MD1 Diagnósticos S.A./Diagnósticos da América S.A. Concentration Act No. 08012.010038/2010-43. Introduced  in September 2010, and cleared in October 2011.38 Antitrust & Competition Review   |   Spring 2014 Mobile Payments Systems:  Potential Competition Concerns Manu Mohan The mobile payments systems  (“m-payments”) ecosystem encompa  sses ha rdwa re manufa c  turers,  operating system developers, application developers, data brokers, coupon  and loyalty program administrators,  payment card networks, telecommunications providers, advertising  companies, brands and end merchants. Smart phones and payment  cards, by themselves, have invited  scrutiny from competition regulators,  and it is likely that the convergence of  the multitude of players, technologies  and participants for the development  of m-payments will be closely monitored by competition regulators. 1  The European Commission  (“Commission”) has already examined  three transactions relating to m-payments. 2  It is also understood that the  Commission has in December 2013  constituted a group bringing together  officials from several departments  covering antitrust law, technology,  consumer rights, industry and the  internal market to examine new  payment technologies. Sets of competitors have formed mobile payment joint  ventures in the United States as well. 3 The nature of mobile commerce is  changing at a rapid pace, and the  competition regulators will focus on  issues that impede the development  of the market through exclusionary  conduct, either collective or unilateral,  and erection of artificial barriers to  entry. The next section will discuss  issues related to a completion analysis  that different actors in the m-payments  ecosystem need to be aware of when  launching products or entering into  collaborative arrangements.  Potential Competitive Concerns  in M-Payments Ecosystem 1. Standard-setting and restrictive  effects The Commission has recently published  a Green Paper 4  in which it has  expressed its concerns that companies  controlling the standards, and, hence,  interoperability, would dominate the  whole payment chain: the device itself,  the application platform and security  management. 5  The Green Paper further  states that standardization work on  m-payments should ensure full interoperability between m-payment solutions  and favor open standards to enable  consumer mobility. 6 While technical standards have already  been developed 7  for Near Field  Communications (“NFC”) 8 , further  Manu Mohan Brussels +32 2 551 5942 [email protected] brown 39 developments are still expected. 9  For example, no  standards exist to enable customers to pay, redeem  coupons and claim loyalty points at the same time  with their mobile handsets. 10  In this relation, development of closed standards and specifications that the  whole industry would be forced to use and that the  standard-developing company/companies would have  the freedom to license or not and establish conditions  relating to their use would attract scrutiny from  competition regulators.  Participants to the standard-setting process would  need to ensure that participation in standard-setting  is unrestricted, that the procedure for adopting the  standard in question is transparent and that the  standardizations agreements contain no obligation to  comply with the standard. Further access to the  standard is to be provided on fair, reasonable and  non-discriminatory terms. 11  2. Creation of market power and  diminishing innovation  Joint ventures, strategic alliances and other collaborations among competitors are already an important  component in the m-payments ecosystem. In markets  where innovation is an important competitive force,  this may increase the firms’ ability and incentive to  bring new innovation to the market and thereby, the  competitive pressure on rivals to innovate in the  market. However, increased market power as a result  of such commercial arrangements may include the  ability to diminish innovation. 12  Network effects 13 heighten the importance of technology in the m-payments ecosystem.  In order to process payments securely, the presence of  a secure element (“SE”) 14  is necessary.  Usually, mobile  network operators (“MNOs”) would have the content  management rights 15  and control the access to the SE  if it is placed inside the SIM (“Subscriber  Identification Module”) card. There is an apprehension that if the only viable technologies are SEs that  are controlled by MNOs, then control of the SEs may  create market power for MNOs. This would reduce  competition or diminish innovation in m-payment  technologies. 16  For example, the Commission has  examined whether the MNOs that had entered into a  joint venture arrangement for providing mobile wallet  services 17  had the technical or commercial ability to  block/degrade/subordinate/deactivate their competitors’ mobile wallets using an SE, such as embedded  SE.  Diminishing innovation is not as problematic if  alternative security solutions exist that do no require  access to be granted by the MNO. In such a situation,  the owner/controller of the SE would be unable to  exercise market power.  3. Impact on fees Financial institutions currently are the main players  in the payments industry. Competition regulators  have had long-standing competition concerns, particularly in relation to the levy of interchange fees.  The competition regulators would examine the  establishment of structures that could perpetuate the  current model for generation of fees.  M-payments systems open the market to other  sectors, such as telecom and operating system manufacturers, all of which would want a share of the  revenues. The Commission’s Green Paper considers  that MNOs seem to be seeking to retain control of the  m-payments business, at least in their role of security  manager for the service. 18  A concern that has been  raised is that if the only viable technologies are SE  solutions that are controlled by MNOs, then MNOs  may seek to exercise market power by collecting  substantial transaction fees on all m-payments. 19  The  development of the revenue sharing model is therefore 4 0 Antitrust & Competition Review   |   Spring 2014 likely to be closely scrutinized by the competition  regulators.  4. Exclusivity and tying arrangements The combination of products in related markets may  confer the ability and incentive to leverage a strong  market position from one market to another via tying,  or other exclusionary practices. Technical tying occurs  when the tying product is designed in such a way that  it only works with the tied product and not with the  alternatives offered by competitors. Contractual tying  entails that when purchasing the tying good, the  customer undertakes only to purchase the tied  product and not the alternatives offered by  competitors. 20 In relation to m-payments systems, there is a complementary relationship between the issue of  payment cards and the provision of digital wallet  services that could give rise to conglomerate effects. 21 Such conglomerate effects may be facilitated through  exclusionary practices, such as tying. In relation to  the creation of a joint venture for providing digital  wallet services by issuers of payment cards, an  important part of the analysis would be whether  (i) the joint venture would have the ability to restrict  the use of payment cards in its digital wallet to cards  of the parent companies, (ii) there are sufficient  alternative issuers of payments cards, (iii) there  are competing digital wallets supporting the use  of competing financial institutions other than the  parents of the joint venture and (iv) the parents  would restrict the ability of use of payment cards  issued by them in competing digital wallets. 22   Harm  may be considered to arise if a joint venture denies  some key element to a rival.  When entering into exclusivity arrangements, companies should consider factors such as the freedom that  the joint venture’s members have to participate in  multiple m-payment systems, the extent to which the  members—individually or collectively—have market  power with respect to the denied element and the  availability of adequate substitutes for that element. u Endnotes 1   OECD Roundtable on Competition and Payment systems,  See para 4.2 of note by United States, dated 19 October  2012.  2   Case No COMP/M.6314 – Telefónica UK/Vodafone UK/ Everything Everywhere/JV dated 4 September 2012, Case  No COMP/M.6956 - Telefonica/Caixabank/Banco  Santander/JV dated 14 August 2013 and Case No  COMP/M. 6967- BNP Paribas Fortis/Belgacom/Belgian  mobile wallet dated 11 October 2013. 3   Isis, a joint venture including most of the major American  mobile phone network providers, and Merchant Customer  Exchange, a joint venture of many merchants Members of  MCX include Wal-Mart, Target, CVS, Sears, Lowe’s and  Shell Oil. 4   Green Paper, “Towards an integrated European market for  card, internet and mobile payments,” dated 11 January  2012.  5   Green Paper, “Towards an integrated European market for  card, internet and mobile payments,” dated 11 January  2012, para 4.4.1., p.17. 6   Ibid., p.16. 7   See Commission decision of 4 September 2012 in Case No  COMP/M.6314 – Telefónica UK/Vodafone UK/ Everything  Everywhere/JV, paragraphs 370, 373 and 376. 8   NFC is a type of wireless communications technology that  can be used to effect a payment where two devices, such as  a smart phone and reader, communicate through shortrange radio waves. 9   Financial Times report dated 1 October 2013 by Jeevan  Vasagar, “Visa, MasterCard and American Express are  proposing a new industry standard to make online  payments more secure, by eliminating the need to enter  account numbers when shopping online or on mobile  devices.”  10   See Commission decision of 4 September 2012 in Case  COMP/M.6314 Case No COMP/M.6314 – Telefónica UK/ Vodafone UK/Everything Everywhere/JV, paragraph 379. 11   Guidelines on the applicability of Article 101 of the Treaty  on the Functioning of the European Union to horizontal  cooperation agreements. See Commission decision of 4  September 2012 in Case COMP/M.6314 Case No  COMP/M.6314 – Telefónica UK/Vodafone UK/Everything  Everywhere/ JV, paragraph 253.mayer brown 41 12   Guidelines on the assessment of horizontal mergers under  the Council Regulation on the control of concentrations  between undertakings, OJ C 31, 5 February 2004, paragraphs 8 and 38.  13   Network effects occur where users’ valuations of the  network increase as more users join the network. For  example, as new customers enter a telephone network, this  might add value to existing customers because they would  be connected to more people on the same network. If  customers benefit from being on the same network (e.g.,  due to incompatibility with other networks), an incumbent  with a well-established network might have an advantage  over a potential entrant that is denied access to the  established network and so has to establish its own rival  network. Guideline of the Office of Fair Trading: Assessment  of market power, paragraph 5.21. 14   An SE could be located on the (i) Subscriber Identification  Module (“SIM”) card; (b) on a (micro) Secure Digital (“SD”)  card that can be integrated in some mobile handsets,  including, at the same time, the NFC technology; (c) on an  external device, such a Universal Serial Bus (“USB”) key;  (d) in the chip that is embedded in the mobile handset’s  hardware (“embedded SE”); and (e) in the cloud. 15   Content management rights allow the holder, for example,  to load the initial keys governing access, the application  code and confidential data for personalization or to update  data or code.  16   OECD Roundtable on Competition and Payment systems,  See paragraph 5 of note by United States, dated 19 October  2012. 17   There are two approaches to what is commonly described  as a mobile wallet. First, a container wallet, which, at a  minimum, provides the consumer with an overview of  all applications that are loaded into the SE and allows a  consumer to select which payment cards are switched on  and off and to set priorities between them. This mobile  wallet serves as a container for all the consumer’s virtual  payment cards and allows the configuration of the SE  even from different card issuers, in a similar fashion to a  consumer having several payment cards physically in his or  her wallet. Second, an app-centric wallet, which contains  only one application that can include several cards, but  from the same issuer. Each individual card stored on the  SE is represented by a corresponding application on the  mobile handset. A card belonging to an individual service  provider therefore shows up as an individual application  on the mobile handset. In the physical world, it would be  equivalent to a plastic card. See Commission decision  of 4 September 2012 in Case COMP/M.6314 Case No  COMP/M.6314 – Telefónica UK/Vodafone UK/Everything  Everywhere/ JV, footnote 3. 18   Green Paper, “Towards an integrated European market  for card, internet and mobile payments.” dated 11 January  2012, paragraph 4.4.1., pg.17.  19   OECD Roundtable on Competition and Payment systems,  See paragraph 5 of note by United States, dated 19 October  2012.  20   Guidelines on the assessment of horizontal mergers under  the Council Regulation on the control of concentrations  between undertakings, OJ C 31, 5 February 2004, paragraph 97.  21   Case No COMP/M.6956 - Telefonica/ Caixabank/Banco  Santander/JV dated 14 August 2013, para 73. 22   Case No COMP/M.6956 - Telefonica/ Caixabank/Banco  Santander/JV, paragraphs 75 to 88. 42 Antitrust & Competition Review   |   Spring 2014 Two Things You Need to Know About the  Apple/E-books Case Richard M. Steuer There has been plenty of press coverage  of the Justice Department’s antitrust  victory against Apple in the e-books  case. The case is on appeal but regardless of how the appeal ends, there are  two important take-aways from the  District Court decision: 1. Agency agreements are not dead. The court held that the defendant  publishers all adopted agency agreements with Apple at the same time and  then forced agency agreements on  Amazon—the largest retailer of  e-books—in order to raise retail prices  collectively, but the court was careful to  point out that agency agreements  themselves are not inherently illegal.  Agency agreements (under which the  agent earns a commission for distributing the goods but does not take title to  them) can be especially attractive for  intangible products such as digital  publications, because many of the  obstacles that historically have discouraged agency—e.g., retained risk of loss,  cost of insurance, UCC filings, monitoring, etc.—simply do not exist. Under an  agency model, the principal is able to  set the retail price, but so long as that  price is not being set or raised pursuant  to an agreement among competitors,  the Apple decision does not weaken the  legality of these arrangements. 2. Most-Favored-Nations Clauses are  not dead. The court held that the  “Most-Favored-Nations” (MFN) clauses  in the publishers’ contracts with Apple  provided the means to force the publishers to require Amazon to switch to  agency agreements and charge the  same higher retail prices as Apple, but  again the court was quick to add that  MFN clauses themselves are neither  improper nor illegal. At the same time,  it is important to understand that what  the parties and the court termed a  Most-Favored-Nations clause (or,  alternatively, a “price parity provision”  or “Retail Price MFN”) really was  markedly different from what MFN  clauses usually are understood to be. Ordinarily, an MFN clause appears in a  sales agreement, binds either the seller  or the buyer, and provides either (a) “I  promise to sell to you at the lowest price  that I charge any customer,” or (b) “I  promise to buy from you at the highest  price that I pay any supplier.” In  contrast, the MFN clauses that the  publishers entered into with Apple were  part of agency agreements, not sales  agreements. The publishers were not  selling to Apple, although initially they  were still selling to Amazon, which  resold e-books to consumers at prices  that Amazon set. Consequently, each  Richard M. Steuer New York +1 212 506 2530 [email protected] brown 43 publisher’s “MFN” agreement with Apple essentially  provided, “I promise to sell to consumers through  Apple’s electronic bookstore, which is acting as my  agent, at the lowest retail price that any of my customers (e.g., Amazon) charges consumers.” This meant  that if Amazon resold e-books to consumers for less  than the retail price at which the publishers were  planning to sell through the Apple bookstore (which is  exactly what Amazon was doing), Apple, as the  publisher’s agent, automatically could reduce the  retail price at the Apple store to the same amount in  order to remain competitive and continue to earn  commissions. Since the publishers were not eager for  their prices to drop, the court found that they forced  Amazon to switch to the agency model too and, as the  publishers’ agent, begin charging the same higher  prices as Apple. In short, there was nothing typical about the Apple  case. Because the MFN was unique, and was found to  be part of a price-fixing conspiracy among the publishers, the court’s condemnation should not be  expected to apply to ordinary MFN clauses. (In the  final order, the clause was termed a “Retail Price  MFN,” narrowly defined as an agreement under which  the retail price depends upon the retail price at which  another seller sells to consumers.) Although the  Justice Department has been hostile toward MFNs  for years, and has attacked them in the health care  industry, such clauses repeatedly have been upheld by  courts in a variety of contexts. They must be  approached with caution but they are not defunct.  The remaining lessons taught by the Apple decision  should be familiar: Do not collude with your competitors to raise prices or boycott a common supplier or  customer; do not write emails that can be misinterpreted as evidence of conspiracy; and do not engage in  telephone conversations with one of your competitor’s  executives unless you are planning a charity event or  happen to be married to one another. The bottom line is that if an agency agreement or  ordinary MFN clause is needed to serve a legitimate  purpose, it should be safe to adopt it notwithstanding  the Apple decision. u4 4 Antitrust & Competition Review   |   Spring 2014 Loyalty Discounts Becoming  More Complicated Than Ever Richard M. Steuer According to a sharply divided opinion  from the US Court of Appeals for the  Third Circuit, discounts conditioned on  customer loyalty can be anticompetitive  even if the discounted price still  exceeds the seller’s cost. Further, a  seller’s insistence that dealers charge  less for its brand than for rival brands  can also spell trouble.  In its 2012 decision in ZF Meritor, LLC  v. Eaton Corp., 1  the Third Circuit  confirmed that “loyalty discounts”— in which a seller provides price reductions or rebates to customers that buy  at least a specified percentage of their  purchases of a product from that seller— can violate the antitrust laws even if  the discounted price is not below the  seller’s cost, and even if eligibility for  the discount does not require 100  percent loyalty. How to tell whether a  loyalty discount crosses the line  depends on a variety of factors under  the Third Circuit’s approach, and the  opinion illustrates some things that  sellers may want to avoid. Also folded  into the opinion is an important  reminder of the risk associated with  agreements with dealers that restrict  the prices those dealers may charge  for competing brands. Discounts. The case involved loyalty  discounts offered by Eaton  Corporation, the leading maker of  heavy-duty truck transmissions with a  market share in excess of 80 percent.  There were only four customers in the  industry—the four manufacturers of  heavy-duty trucks—and Eaton offered  all of them contracts providing rebates  conditioned on their purchasing 70 to  97.5 percent of their requirements from  Eaton for a term of at least five years.  The contracts provided that if a manufacturer did not meet its target, Eaton  could require repayment of the rebates  and also could pull the plug on the  entire contract. Eaton’s only competitor  was ZF Meritor, which introduced an  innovative new transmission in 2001,  but did not offer as full a line as Eaton.  ZF Meritor disappeared from the  business in 2007, but not before  initiating this lawsuit. Preferred Pricing. In addition to  incorporating loyalty discounts, Eaton’s  contracts required the truck manufacturers to charge truck buyers a  “preferential price” for Eaton transmissions so that Eaton transmissions were  always priced lower than those of its  competitors. One truck manufacturer  was instructed to price ZF Meritor  transmissions at a $200 premium over  Richard M. Steuer New York +1 212 506 2530 [email protected] brown 45 Eaton transmissions, while other manufacturers  agreed to impose what they termed a penalty on ZF  Meritor transmissions. In addition, at Eaton’s urging,  the truck manufacturers imposed additional price  penalties on customers that selected ZF Meritor  products. Holding. In a 2-1 decision, the Third Circuit affirmed  the district court’s order against Eaton, upholding a  jury verdict. The court rejected Eaton’s argument that  a loyalty discount cannot violate the antitrust laws  unless it results in sales at below cost. The court held  that although, without more, loyalty discounts  involving a single product (not a bundle of products)  are not anticompetitive unless the resulting price is  below cost, other factors in this case resulted in “de  facto partial exclusive dealing.”  Principally, because of Eaton’s large market share and  entrenched customer demand, Eaton’s products  amounted to “necessary products” and so “losing  Eaton as a supplier was not an option.” Truck manufacturers therefore were not really “free to walk away”  from their long-term contracts if a competitor offered  a better price, even though the terms of the contracts  provided that they could. No truck manufacturer  “could satisfy customer demand without at least some  Eaton products, and therefore no [manufacturer]  could afford to lose Eaton as a supplier.” Perhaps a  better question would have been whether any truck  manufacturer could afford to lose the Eaton discount.  In any event, the court observed that “exclusive  dealing arrangements can exclude equally efficient (or  potentially equally efficient) rivals, and thereby harm  competition, irrespective of below-cost pricing.” Implicit in this approach, but never articulated, is the  fact that if some portion of the transmissions that  each manufacturer bought from Eaton really  amounted to “necessary” or “must have” products— because truck buyers would accept no  substitute—then the “discount attribution rule”  developed by other courts would require the entire  discount provided to that manufacturer to be attributed only to the portion for which ZF Meritor  realistically could still compete. If, with this recalculated discount, Eaton’s sales were still above cost for  that portion, there could be no liability because an  equally efficient competitor could meet the adjusted  price for that portion alone. The court never required  or undertook this analysis, relying instead on its more  amorphous theory of what constitutes de facto exclusivity coupled with the large share of the market  thereby foreclosed. The court also was not persuaded by the fact that  Eaton’s discounts did not require complete exclusivity  and allowed truck manufacturers to purchase some  transmissions from competitors without losing the  discount on Eaton products. Although the court cited  with approval cases that upheld programs requiring  customers to purchase 60-80 percent of their needs in  order to qualify for a discount, it noted that three of  the truck manufacturers here were required to  purchase 90 percent from Eaton, and the fourth was  required to purchase 70 percent only because it made  some of its transmissions itself. The court held that  this resulted in the same foreclosure that would result  from “complete exclusive dealing arrangements with  90 percent of the customer base” and therefore did not  preclude a de facto exclusive dealing claim. As for the preferential pricing requirement, the court  held that it was reasonable for the jury to find this  anticompetitive. The evidence showed that while some  of the discounts on Eaton products were passed along  by truck manufacturers to truck buyers, there also  was evidence that the truck manufacturers achieved  preferential prices for Eaton transmissions by “artificially increasing” the prices for ZF Meritor  transmissions. This is not the first decision to challenge limitations on the gap a dealer must maintain 4 6 Antitrust & Competition Review   |   Spring 2014 between the prices of competing products. Although it  may seem pro-competitive for a supplier to require that  “My brand must be sold for less than other brands,” if  the customer sets the resale prices for all brands, this is  no different from requiring that “Other brands must be  sold for more than my brand.” Depending on the  dealer’s cost for each brand, such a restriction might  result in higher prices for all brands. Judge Greenberg filed a long and impassioned dissent.  To Judge Greenberg, the foundation of Eaton’s  program was the availability of a discount that did not  result in sales below cost and this should have been  the end of the analysis. He concluded by writing:  “I do not know how corporate counsel presented with  a firm’s business plan…if it is a dominant supplier  that seeks to expand sales through a discount program…will be able to advise the management,” other  than “to take a chance in the courtroom casino” some  time in the future. This case is important because it holds, over strong  resistance, that discounts inducing exclusive dealing  and quasi-exclusive dealing can result in unlawful  foreclosure of competitors even if there is no bundling  of different types of products and even if there is no  selling below cost. This may not be the last chapter in  this saga, however, because eventually this issue is  likely to attract the attention of the Supreme Court,  which has not taken a close look at exclusive dealing  in almost 30 years. u