Antitrust Update

Scott Sher Lisa Davis January 24, 2005

Wilson Sonsini Goodrich & Rosati PROFESSIONAL CORPORATION Agenda

ƒ Brief Overview of the Antitrust Laws ƒ Sales and Pricing Issues ƒ Antitrust and M&A

Client MCLE Day Wilson Sonsini Goodrich & Rosati PROFESSIONAL CORPORATION Sherman Act Section 1: Illegal Agreements

ƒ Per Se Violations : • Price Fixing or Bid Rigging by Competitors • Minimum Resale Price Fixing with Customers • Allocating Products, Territories or Customers by Competitors • Tying (but not technology bundling a la Microsoft) • Group Boycotts (but not mfr conspiring with disti re another)

ƒ Rule of Reason Otherwise Governs • E.g., non-price vertical restraints on channel involving territories, customers; similar restriction on sub-licenses

Client MCLE Day Wilson Sonsini Goodrich & Rosati PROFESSIONAL CORPORATION Section 2 of the Sherman Act

ƒ Unilateral offense • Possession of monopoly power – The power to control prices or eliminate competition • In a relevant market • Willful acquisition or maintenance of that power ƒ OK if power acquired via skill, industry or foresight ƒ OK if maintained by reasonable, non-predatory industrial practices ƒ Attempted monopolization

Client MCLE Day Wilson Sonsini Goodrich & Rosati PROFESSIONAL CORPORATION Sales and Pricing Issues

Wilson Sonsini Goodrich & Rosati PROFESSIONAL CORPORATION Refusals to Deal

ƒ Unilateral refusals to deal generally permissible ƒ Even a monopolist is not required to deal • Trinko v. Verizon – Necessity of past dealing with competitor – Need to have forsaken short-term profit? ƒ But a monopolist still may not engage in predatory or exclusionary conduct to “willfully maintain” monopoly or in attempt to monopolize a second market (specific intent, dangerous probability of success)

Client MCLE Day Wilson Sonsini Goodrich & Rosati PROFESSIONAL CORPORATION Exclusive Dealing/Licensing

ƒ Generally permissible under rule of reason: • But… purpose and competitive effects matter. • Watch out if you tie up a substantial percentage channel with exclusive dealings contracts (e.g., > 30%) ƒ Important factors: • Degree of Exclusivity, Foreclosure, Length of Agreement, Pro-competitive Effects, Less Restrictive Alternatives ƒ Recent Government Loss: U.S. v. Dentsply (currently on appeal)

Client MCLE Day Wilson Sonsini Goodrich & Rosati PROFESSIONAL CORPORATION Concerted Refusal to Deal/Group Boycott

ƒ An agreement between competitors not to deal with a particular supplier or customer ƒ Generally need market power and anticompetitive effect ƒ Examples: • Organizing an agreement among customers not to purchase products from a competing provider • Agreeing with competitors not to sell to a particular buyer or category of buyers • Colluding to exclude a competitor from SSO or trade association ƒ Also falls within unfair competition, business torts

Client MCLE Day Wilson Sonsini Goodrich & Rosati PROFESSIONAL CORPORATION Tying/Bundling

ƒ Bundling the Sale of Products Itself is not Illegal ƒ What is Illegal Tying? – Conditioning the sale or license of one product or service on the purchase or license of another, disfavored product or service – Market power in the tying product (>50%) – Anticompetitive effects – Includes either actual or economic tying ƒ Discount bundling may also raise antitrust issues – Key Decision: 3M v. LePage’s (3rd Cir. 2003) ƒ “Reverse Tying” also Illegal: • Conditioning the sale of one product on the agreement not to buy someone else’s product(s) ƒ Special problems of ‘technology tying’, e.g., Windows + browser – Key Decision: Microsoft (D.C. Cir. 2002); EC remedies 12/04.

Client MCLE Day Wilson Sonsini Goodrich & Rosati PROFESSIONAL CORPORATION Resale Price Maintenance (vertical price fixing)

ƒ You cannot agree with a distributor/reseller on the resale price to be charged customers ƒ Minimum (never) or maximum (sometimes)? ƒ You can: • Set prices unilaterally (Colgate) • Suggest prices • Control pricing by agents/brokers/consignees ƒ Same issues apply to MAP and Co-op Advertising programs ƒ Policing can lead to collusion among resellers ƒ Bigger problem if you compete against your reseller

Client MCLE Day Wilson Sonsini Goodrich & Rosati PROFESSIONAL CORPORATION Robinson-Patman Act

ƒ General Rule: Providing competing customers with different prices, or promotional incentives or allowances for the same product is unlawful • Buyers can be liable as well ƒ Price Discrimination Elements: • Sales to two different competing buyers on different price, discount or promotional terms • Sales close in time • Identical or similar products • Disfavored buyer and competition are injured as a result ƒ Several Technical Defenses • Available to all customers; meeting competition; cost justification; changing circumstances/obsolescence; product must be intended for U.S. use; competitors must show below cost pricing ƒ Key Issue: Terminated Dealers use R-P Act offensively

Client MCLE Day Wilson Sonsini Goodrich & Rosati PROFESSIONAL CORPORATION Antitrust and M&A

Wilson Sonsini Goodrich & Rosati PROFESSIONAL CORPORATION String of Recent Government Defeats

ƒ Oracle (DOJ 2004) • Demise of unilateral effects doctrine ƒ Dairy Farmers of America (July 2004) • Proof of anticompetitive effects required even in merger Sec. 7 case ƒ Arch Coal (FTC 2004) • Despite evidence of customer concern, Court rejected danger of tacit coordination. ƒ Sungard (DOJ 2001) • Government’s market definition rejected in bankruptcy context

Client MCLE Day Wilson Sonsini Goodrich & Rosati PROFESSIONAL CORPORATION Recent Government Enforcement in High Tech ƒ Chicago Bridge • Jan. 7, 2004: FTC affirms ALJ decision unwinding deal; dramatic remedies • Cleared after HSR review, then reopened ƒ Aspen Tech / Hyprotech • Not HSR Reportable (2 year investigation) • Complete divestiture of acquired products • Divest own product needed to support divested products • Commitment to support interoperability ƒ Genzyme / Novazyme • Not HSR Reportable (2+ year investigation into an R&D merger) • Big decision for innovation competition doctrine

Client MCLE Day Wilson Sonsini Goodrich & Rosati PROFESSIONAL CORPORATION