Category: Antitrust & Trade Regulation

Defense Department Takes Aim at Anticompetitive Mergers in Defense Industry

Government says market concentration poses a national security risk.

In 1990, the Department of Defense could turn to 13 companies to produce tactical missiles, eight to make fixed-wing aircraft, and another eight to build ships. Now there are only three missile and three aircraft makers, and only two surface ship builders. There were eight satellite manufacturers in 1990; today there are only four. Tanks and other tracked vehicles are now made by a single company.

Such market consolidation is potentially harmful for the usual reasons, such as less innovation, higher prices, and a lower level of customer service. But when that customer is the DOD, having only one or a handful of defense equipment makers, suddenly critical military missions, military and civilian lives, and national security are put at risk, “[P]articularly in cases where the existing dominant supplier or suppliers are influenced by an adversary nation ….”

That is the worrisome assessment contained in a report issued by the DOD which is following up on President Biden’s July 2021 executive order, titled “Promoting Competition in the American Economy.” DOD is just one of the agencies now responding with plans to evaluate their respective competitive landscapes and to make recommendations to restore productive rivalries.

If market consolidation suggests harmful anticompetitive conditions, then the defense industry’s merger history should send up multiple flares. “Since the 1990s, the defense sector has consolidated substantially, transitioning from 51 to 5 aerospace and defense prime contractors,” the report says.

DOD offers five general recommendations to increase defense industry competition, saying it should:

  • Strengthen Merger Oversight. When a merger threatens DOD interests, DOD will support the Federal Trade Commission and Department of Justice in antitrust investigations and recommendations involving the defense industry.
  • Address Intellectual Property Limitations. Certain practices surrounding intellectual property and data rights have been used to limit competition in DOD purchasing and to induce “vendor-lock” and other undesirable results. DOD says it will identify its long-term intellectual property needs early in the bidding process. This should ensure that intellectual property is a key factor in evaluating competitive awards, and a negotiation objective in sole-source awards and when contracting with vendors willing to provide the government the intellectual property and rights it needs.
  • Increase New Entrants. To counteract the shrinking list of contractors, DOD says it will work to attract new entrants to the defense marketplace by reducing barriers to entry. This will be accomplished through small business outreach and support. DOD says it will use “acquisition authorities” that will give it the flexibility to adopt and incorporate commercial best practices to reduce barriers and attract new vendors.
  • Increase Opportunities for Small Businesses. DOD will increase small business participation in defense procurement, with an emphasis on increasing competition in priority segments of the defense industry.
  • Implement Sector-Specific Supply Chain Resiliency Plans. DOD calls for greater resilience in the supply chain for five priority sectors: casting and forgings, missiles and munitions, energy storage and batteries, strategic and critical materials, and microelectronics.

In June 2021, Bradley Martin, Ph.D., a retired Navy captain now with the RAND National Security Supply Chain Institute, wrote of the dangers of the defense industry’s shift to practices that make resupply of military equipment “highly questionable” should demand for equipment suddenly spike.

Abrams Main Battle Tank manufactured by General Dynamics, the sole producer of tanks and other tracked combat vehicles for the Department of Defense. Photo from General Dynamics’ website.

“If evaluated solely against meeting steady-state demand, the military operational supply chain works as it should,” Martin wrote. “The problem is not performance relative to incentives. Rather, the problem is that the existing guidance does not lead the system to conduct analyses and make decisions needed to support the highly demanding combat operations likely in a conflict with a major power. As a result, the ability of this system to properly support the joint force in the event of major conflict is at best untested and could be highly problematic.”

Recent Public and Private Actions

In addition to the government’s focus on the overall industry, it has been taking action to address specific instances of alleged and potentially anticompetitive behavior. In one instance, a private class action quickly followed.

In January, the FTC sued to stop Lockheed Martin Corp.’s $4.4 billion acquisition of Aerojet Rocketdyne Holdings Inc., marking the first time in decades the government opposed a defense industry merger. (Read FTC Sues to Torpedo Lockheed’s $4.4 Billion Aerojet Acquisition.)

The FTC noted that Aerojet, which reported more than $2 billion in 2020 revenue, is the last independent U.S. supplier of defense-critical missile propulsion systems. If the deal were to go through, the FTC said, “Lockheed will use its control of Aerojet to harm rival defense contractors and further consolidate multiple markets critical to national security and defense.”

Lockheed leads the pack of the largest defense contractors in the world. It is one of the leading suppliers of missile technology in a concentrated group that includes Raytheon Technologies, Inc., Northrop Grumman Corporation, and The Boeing Company. All are missile system prime contractors to the Department of Defense. The FTC says these companies are intermediaries between the U.S. government and the missile supply chain, including subcontractors like Aerojet.

In December 2021, a federal grand jury in Connecticut returned an indictment charging a former manager of leading aerospace engineering company Pratt & Whitney, Inc., and five executives of outsource engineering suppliers for participating in a long-running conspiracy to restrict the hiring and recruiting of employees among their respective companies. (Read Aerospace Execs Indicted for Conspiracy to Limit Worker Pay and Job Prospects.)

The conspiracy is said to have affected thousands of engineers and other skilled workers in the aerospace industry who perform services in the design, manufacturing, and servicing of aircraft components for both commercial and military purposes. According to the felony indictment, unsealed in U.S. District Court for the District of Connecticut, six individuals conspired with others to allocate employees by agreeing not to hire or solicit professionals from each other’s ranks.

Following the indictment, a jet engine mechanic formerly employed by Pratt & Whitney filed a class action suit in federal court in Connecticut against the company and five outsource engineer suppliers. The plaintiffs seek damages because of the alleged conspiracy to suppress labor costs and hamper employees’ career prospects using illegal no-poach agreements in violation of antitrust laws.

Ukraine Invasion Demonstrates ‘Rapid Escalation’

Combined with Russia’s invasion of Ukraine and the alarming specter of a widening conflict, security supply chain expert Bradley Martin’s assessment that the industry may not be set up to address a spike in demand for military equipment illustrates why the DOD’s plan to improve competition in the defense industry is an urgent one.

“The Ukraine crisis shows that situations can rapidly escalate, potentially leading to situations where spikes in demand might occur in largely unexpected ways,” Martin told the MoginRubin Blog. “If the U.S. had to deal with an expanded conflict in Europe, such as might occur if Russia were to threaten a NATO ally, DOD could reallocate munitions and supplies for some period, but expanding production and inventory over a longer period would be very challenging. This would likely be exactly the kind of conflict where low-standing issues with supply chains would show themselves, sometimes in unexpected ways.”

Defense is just one of several industries seeing increased scrutiny from enforcers. Healthcare also has been a focus of late (see our article regarding FTC’s action to stop a New England hospital merger). The technology sector is getting attention, too. As we wrote in February, chipmaker Nvidia called off its vertical acquisition of Arm Ltd. following an FTC challenge to the deal. A recent Treasury Department report on the alcoholic beverage industry foreshadows greater attention from the FTC and DOJ regarding deals in that sector.

In October the FTC said it was bringing back its policy of routinely restricting anticompetitive mergers, putting “industry on notice” that it will require aggressive acquirers to obtain prior approval “before closing any future transaction affecting each relevant market for which a violation was alleged, for a minimum of 10 years.” The agency is clearly making good on its promise.   

Edited by Tom Hagy for MoginRubin LLP.

© MoginRubin LLP
For more articles about antitrust, visit the NLR Antitrust Law section.

Government Continues Aggressive Antitrust Enforcement in the Healthcare Space

On February 24, 2022, the U.S. Department of Justice (“DOJ”) filed suit to block UnitedHealth’s proposed acquisition of Change Healthcare. UnitedHealth owns the largest health insurer in the U.S., while Change Healthcare is a data company whose software is the largest processor of health insurance claims in the U.S. The DOJ alleges that the acquisition, if allowed to proceed, would give UnitedHealth unfettered access to rival health insurers’ competitively sensitive information, including health insurance pricing. According to the complaint, this would lessen competition and “result in higher cost, lower quality, and less innovative commercial health insurance for employers, employees, and their families.”

The DOJ’s challenge continues a recent trend of aggressive enforcement involving vertical mergers (i.e. transactions between firms at different levels of the supply chain), with the Federal Trade Commission challenging three vertical mergers in the last year alone. These enforcement efforts represent a material shift from the prior enforcement attitude, which often allowed parties to resolve competition concerns raised by vertical mergers through conduct remedies such as information firewalls or supply commitments. The DOJ’s decision to forego such a remedy (assuming one was proposed) signals the government’s intent to take a tougher stance on mergers in the healthcare space. President Joe Biden previously listed prescription drugs and healthcare services as an antitrust priority area in his July 9, 2021 executive order.

The complaint was filed in the District Court for the District of Columbia and can be accessed here: https://www.justice.gov/opa/press-release/file/1476676/download.

Christopher Gordon also contributed to this article.

© Copyright 2022 Squire Patton Boggs (US) LLP
For more articles about healthcare, visit the NLR Health Care Law section.

9th Cir. Upholds Antitrust Jury Verdict Against Chinese Telescope Company [PODCAST]

Court affirms evidentiary rulings on market definition and overcharges. Agrees evidence supported verdict for collusion and attempted monopolization.

The Ninth Circuit Court of Appeals this month upheld judgment in favor of Optronic Technologies, Inc., finding there was sufficient evidence that Chinese telescope manufacturer, Ningbo Sunny Electronic (“Sunny”), conspired with a competitor in the U.S. consumer telescope market to allocate customers, fix prices, and monopolize the telescope market in violation of federal antitrust laws (Optronic Technologies, Inc., v. Ningbo Sunny Electronic Co., Ltd., No. 20-15837, 9th Cir. 2021). Ninth Circuit Judge Ronald M. Gould wrote the opinion.

California-based Optronic, known commercially as Orion Telescopes & Binoculars, sued Sunny in November 2014. Orion alleged Sunny violated Sherman Act Sections 1 and 2 by conspiring to allocate customers in the telescope market and conspiring to fix prices or credit terms for Optronics in collusion with Suzhou Synta Optical Technology. Orion further alleged Sunny’s 2014 acquisition of independent manufacturer, Meade, violated Section 7 of the Clayton Act. Orion alleged that Sunny engaged in these anticompetitive acts to force Orion out and further monopolize the telescope market.

A California jury found in favor of Orion on all counts and awarded the company $16.8 million in damages, which the district court trebled to $50.4 million. The district court also ordered injunctive relief, directing Sunny to supply Orion and Synta’s Meade on non-discriminatory terms for five years, and not to communicate with Synta about competitively sensitive information.

Rulings on key elements of plaintiff’s economic evidence affirmed.

Sunny appealed on several grounds, including two that challenged key elements of the plaintiff’s expert economic evidence. The jury had found Sunny liable for attempted monopolization and conspiracy to monopolize in violation of Section 2, which makes it unlawful for any person to monopolize or attempt or conspire to monopolize any relevant market. Sunny argued on appeal that the evidence could not support a Section 2 verdict because Orion’s economist failed to define a relevant market. In particular, Sunny claimed the expert did not examine the cross-elasticity between substitute products in the market or perform a SSNIP test, the standard analysis used to delineate the outer boundaries of a relevant market.

The appeals court found these contentions lacked merit. The plaintiff’s economist had testified that the relevant product market was the market for telescope manufacturing services. The purpose of the SSNIP test is to determine whether the relevant market is drawn too narrowly and should be expanded to include potential substitutes. But because no other manufacturing capacity can substitute for telescope manufacturing services, wholesale purchasers of telescopes cannot turn to other manufacturers to fulfill orders. Without substitutable manufacturers, a SSNIP test boils down to whether new manufacturers would enter the market fast enough to make an increase in price unprofitable for a hypothetical monopolist, which they could not. As a result, the court held that the economist reasonably could forgo performing a SSNIP analysis.

Sunny also challenged the economist’s estimate of anticompetitive overcharges that could not directly be observed. Neither the “benchmark” nor “before-and-after” estimation methods were available. Therefore, to develop a measure of damages, the plaintiff’s expert presented two different methods of estimating the overcharges. In the first method, the expert collected data on cartel overcharges from the economic literature on markets with structures and conditions similar to telescope manufacturing. The average of those overcharges was then used as an estimate of the overcharge resulting from defendants’ collusion. As a check on this estimate, the economist also submitted a theoretical Cournot equilibrium model of market prices based on assumptions drawn from the record in the case. The two methods yielded similar and consistent results. Affirming the admissibility of the expert’s damages estimates, the appellate court found the expert’s report and testimony “were sufficiently tied to the facts of this case such that the district court properly admitted this evidence.”

In rebuttal, the defendant’s economist testified to the high sensitivity of the assumptions used in the plaintiff’s theoretical model. Interestingly, defendants were not permitted to submit their own estimate of damages for the first time on rebuttal, so the defendants’ expert had to limit her testimony to the sensitivity of the model without the ability to show the jury any resulting alternative estimate of the anticompetitive overcharge. The appeals court affirmed the trial court’s limitation on the defendants’ rebuttal expert.

Price fixing and a larger scheme.

Sunny also argued that Orion failed to present sufficient evidence to support Orion’s Section 1 claims. Section 1 prohibits unreasonable restraints of trade. Horizontal price fixing and market allocation are per se unreasonable and support Section 1 liability without regard to any purported justification or defense. The Ninth Circuit noted that Orion offered evidence that Synta executives encouraged Sunny’s purchase of Meade, an acquisition that was part of a larger scheme by Sunny and Synta to jointly control the telescope manufacturing market, even though federal regulators had already prohibited such a combination. The court also declined to upset the jury’s finding that Sunny conspired with a Synta subsidiary to fix prices and credit terms to Orion, a per se violation of Section 1.

“If you break it, you buy it.”

Finally, it is notable that the appellate court affirmed the award of damages accruing after September 2016, when the defendant and Synta took their last steps to eliminate Meade, and Synta entered a Settlement and Supply Agreement with Orion. The court held that, even if the conspiratorial acts of Sunny and Synta ended in 2016, Orion could still recover post-2016 damages “because it continued to suffer economic harm from the harm to competition caused by the illegal concerted activity.” Thus, where collusion causes a durable change in market structure or sets the pattern of a continuing collusive practice, it is no defense that the conspirators may have ceased engaging in concerted action.

The rule adopted by the Ninth Circuit in Optronics is clear: “[W]here an antitrust plaintiff suffers continuing antitrust injuries from anticompetitive changes to market structure that arose from a proven antitrust violation, we hold that the violation may be a material cause of that injury, and so recovery of damages is permitted, even after the last proven date of the violative conduct. This rule accords with the common-sense principle that ‘if you break it, you buy it.’”

Welcomed clarity.

The Ninth Circuit’s opinion brings welcomed clarity on several points. It demonstrated that plaintiffs need not perform a SSNIP test where market-specific circumstances define a market’s outer boundary. For claimants facing the need to estimate unobservable anticompetitive overcharges, it affirms an ingenious method for arriving at a reasonable and reliable estimate. And, for past conspiracies with continuing anticompetitive effects, the decision announces the common-sense principle that a defendant “remains liable for the continuing injuries suffered by plaintiffs from the structural harm to competition that its unlawful scheme brought about.” Put simply, this is a well-articulated decision by a capable panel that adds precision and certainty to antitrust.

Edited by Tom Hagy for MoginRubin LLP

© MoginRubin LLP

For more articles on 9th Circuit decisions, visit the NLR Litigation section.

Intellectual Property Consolidation in the Agriculture Industry

Ever since agencies around the world such as the USPTO, USDA, and Union for the Protection of New Varieties of Plants (UPOV) have started recognizing and enforcing intellectual property rights relating to plants, there has been a slow yet massive consolidation in global seed markets.  This article discusses a brief history of how intellectual property rights and lax antitrust enforcement in the seed industry created one of the largest industry consolidations and how the current Administration seems to be taking steps in the right direction.

Intellectual Property in the Agriculture Industry

In 1930, the United States began granting plant patents and the USPTO issued the first plant patent in 1931 for a rose.  The UPOV is an international organization that was founded in 1961 to acknowledge and make available exclusive property rights for breeders of new plant varieties in all member states to the UPOV Convention. The U.S. Plant Variety Protection Act (PVPA) was enacted by Congress in 1970 to encourage the development of new varieties and to make them available to the public.  The Plant Variety Protection Act established in the Department of Agriculture an office to be known as the Plant Variety Protection Office.  These regulations are all very important for the protection and continued innovation of certain varieties of crops and plants.  However, when genetically modified seeds were introduced in 1996, seed companies began to take advantage of these protections and began to invest heavily in amassing as many seed-related IP rights as they could.  As these companies have merged and acquired smaller businesses, they remove competition from the industry, harming farmers, families, and consumers.

There are many ways that companies protect intellectual property in the agricultural industry.  For example, companies file for utility patents to protect a wide variety of plant-related inventions, such as breeding methods, plant-based chemicals, plant parts, and plant products. Plant patents are unique to the United States and provide protection to any distinct and new variety of plant that has been asexually reproduced, other than a tuber-propagated plant or a plant found in an uncultivated state.  Plant Variety Protection certificates, which are similar to plant patents, provide certain exclusive rights to breeders of any new, distinct, uniform, and stable sexually or asexually reproduced or tuber-propagated plant varieties.  Other rights, known as Breeders’ Rights, exist in other countries outside the United States and are very similar to the Plant Variety Protection regulations.  These protections generally last for 20 years from the date of filing and, according to the World Intellectual Property Organization, the patent owner has the right to decide who may – or may not – use the patented invention for the period in which the invention is protected.

The Key Players in the Agriculture Industry

Monsanto was a multinational agricultural biotechnology corporation founded in 1901 and based in the United States.  In 1970, Monsanto scientist John Franz discovered that glyphosate was an herbicide and quickly patented it as such.  In 1974, Monsanto brought the patented glyphosate herbicide to the market using the tradename “Roundup.”  In 1996, Monsanto created the first genetically engineered (GE), glyphosate-resistant crop, causing Roundup-resistant soybeans to be planted commercially throughout the United States.  By 1998, glyphosate-resistant corn was available on the market, and Monsanto became the largest supplier of these new GE, “Roundup-Ready” seeds.  This was such a breakthrough in the agriculture industry that in 2003, Roundup-Ready seeds accounted for about 90% of the genetically modified seeds planted around the globe.

As with many industries, the agriculture industry has those companies that are at the top and those that are not.  The agriculture industry’s “Big Six” companies—Monsanto, DuPont, Syngenta, Dow, Bayer, and BASF—turned into the “Big Four”—ChemChina, Corteva, Bayer, and BASF— after a series of mergers and acquisitions that took place in the last decade with very little oversight from some of the antitrust authorities in the United States and around the world.  As a result of these mergers, the “Big Four” companies now control around 60% of the proprietary seed in the world market.

The Consolidation of the Seed Industry

Dr. Phil Howard from Michigan State University discussed the tremendous consolidation of the commercial seed industry in one of his first publications, 2009’s Visualizing Consolidation in the Global Seed Industry: 1996-2008.  Dr. Howard describes how the hybrid-seed corn industry of 1930, the enforcement of patent-like protections, and especially the commercialization of fully patent-protected transgenic, genetically engineered seeds in the mid-late 1990s triggered a wave of consolidation in the agricultural industry.  To make matters worse, when these companies consolidated and amassed massive intellectual property portfolios, it was not uncommon for seed rights to be bundled with other inputs to protect profits in other, agrochemical divisions.  For example, as Dr. Howard details in Visualizing Consolidation, in order to use Monsanto’s herbicide-tolerant transgenic seed, farmers are required to also use Monsanto’s proprietary glyphosate herbicide, rather than a generic herbicide.  Essentially, if you were buying Roundup-Ready seed, you were buying Roundup herbicide, and if you were using Roundup herbicide, it was probably a good idea to buy Roundup-Ready seed.  This type of competitive business practice is one that eventually creates a multitude of problems for smaller, independent businesses, breeders, and farmers.

Antitrust and Anti-Competition in America

Antitrust laws are not a new concept in American society.  Antitrust laws are statutes and regulations that are designed to promote the overall competition in the market by promoting free, open, and competitive markets.  Congress passed the first antitrust law in 1890 when it wrote the Sherman Act, which made it illegal for companies to enter into agreements to compete with one another, resulting in price fixing and monopoly power.  Several years later, in 1914, Congress passed the Clayton Act and Federal Trade Commission Act to protect American consumers by giving the Federal Trade Commission (FTC) and the Department of Justice (DOJ) the authority to oversee and review mergers and acquisitions that are likely to stifle competition.  Under the Hart-Scott-Rodino Act, the FTC and DOJ review most of the proposed transactions that affect commerce in the United States and either agency can take legal action to block deals that it believes would “substantially lessen competition.”

While these laws are all beneficial in theory, their implementation in the agricultural industry has been lacking to say the least.  According to a study in 2018, Bayer alone is estimated to control 35% of corn seed, 28% of soybean seed, and 70% of cottonseed in the global market!  Even more alarming may be the USDA’s 2014 report citing concerns that glyphosate-resistant crops have become ubiquitous with American agriculture with 93% of soybeans, 85% of corn, and 82% of cotton planted being genetically modified to be glyphosate-resistant.  The herbicides that are used to combat the weeds surrounding the crops, in many cases, are supplied by the same company that provides the seeds.

Promoting Competition in the Agriculture Industry

It has been almost a century since the first antitrust laws were enacted, and yet the problem of corporate consolidations remains in many industries across America.  On July 9, 2021, the Biden Administration signed an executive order aimed to promote competition within various industries in the United States.  The order includes 72 initiatives by more than a dozen federal agencies to promptly tackle some of the most pressing competition problems across our economy.  According to the Administration, this order is a “whole-of-government” approach to drive down prices for consumers, increase wages for workers, and facilitate innovation. This was a major step in the right direction to weaken the power that major businesses have obtained as a result of corporate consolidation in industries like healthcare, technology, transportation, and especially agriculture.

This Executive Order also established the White House Competition Council to drive forward the Administration’s whole-of-government effort to promote competition.  On September 10, 2021, the Competition Council held its inaugural meeting to discuss promoting pro-competitive policies and new ways of delivering concrete benefits to America’s consumers, workers, farmers, and small businesses.  During the meeting, the heads of the Department of Health and Human Services, the Department of Transportation, the Department of Justice, the United States Department of Agriculture, and the Federal Trade Commission briefed the council members on their efforts to implement the directives of the Executive Order.

The Challenge of Facing the Consolidated Agriculture Industry

According to an October 20, 2021 report by Thomson Reuters, Tom Vilsack, the U.S. Secretary of Agriculture, said that the Biden Administration plans to take a hard look at the consolidation of the seed industry and figure out “why it’s structured the way it’s structured” and “whether these long patents make sense.”  The White House Competition Council is certainly faced with a difficult challenge to parse through both anti-competition law and intellectual property law.  For centuries these bodies of law have caused great debate.  One body of law restricts monopolization wherein the later grants monopolistic opportunities.

There is no doubt that any changes to the current seed industry scene would shake things up.  But what exactly would that look like?  Are we going to see the “Big-4” morph into another, new identity?  Are changes to the patent law system likely?  Whatever happens, the agriculture industry will likely pay close attention to the actions of the White House Competition Council over the next couple months.

Article By Reinier R. Smit of Summa PLLC

Copyright 2021 Summa PLLC All Rights Reserved

Not-So-Free Shipping: Yeezy Brand to Pay Us$950,000 Over Late Shipping Under California Consumer Protection Laws

Supply chain disruptions, coupled with a surge in online shopping, have led to overstretched companies and impatient customers. The supply chain crisis1 continues to cause shipping delays across the nation as companies struggle to work around pandemic-related constraints. A recent case in the Los Angeles County Superior Court has put companies and individuals who advertise or conduct business, online or otherwise, in California on notice that failure to adequately communicate with customers regarding accurate shipping times could result in consumer protection law liability for missed shipment deadlines.

On 8 November 2021, the Los Angeles County District Attorney’s Office announced that the high-end sneaker and retail clothing companies, Yeezy Apparel LLC and Yeezy LLC (collectively, Yeezy), will pay US$950,000 to settle a civil consumer protection lawsuit. The lawsuit, filed by district attorneys in Los Angeles, Alameda, Sonoma, and Napa counties, alleged that Yeezy engaged in unlawful business conduct under the California Business and Professions Code (BPC) for failing to ship items in a timely manner and false advertising.2

THE LAWSUIT – CALIFORNIA V. YEEZY APPAREL LLC

In its complaint, filed on 22 October 2021, the state of California alleged that sneaker and apparel brand Yeezy, owned by entertainer Ye (previously known as Kanye West), advertised on its website that customers could expect two to three business days for order processing and an additional three to five days for shipping, but in fact failed to send products within 30 days after certain orders were placed, in violation of California BPC Sections 17538 and 17500.3

Under Section 17538, companies must ship goods within 30 days4 of the customer placing an order unless otherwise conspicuously stated in the advertisement or on the website. Upon determining that a shipment may be untimely, a company may (1) provide a full refund,5 (2) send a written notice to the buyer that offers a full refund and either details the expected duration of the delay or proposes product substitution,6 or (3) ship a substitute product of equivalent or superior quality to the buyer with an option for the buyer to return the product.7

Section 17500 governs untrue or misleading statements, including a prohibition against the advertisement of goods or services with the intent to not sell them as advertised. The statute bars “any advertising . . . which is untrue or misleading.”8 Further, the statute prohibits advertisements that the company either knew or should have known would be misleading.9 Violation of Section 17500 can result in a fine of up to US$2,500, up to six months of imprisonment, or both.10

The state of California’s claims against Yeezy ultimately were resolved by a settlement agreement in which Yeezy agreed to refund future customers whose items are not timely shipped, refrain from making any false or misleading statements regarding shipping times, and pay US$950,000 in civil penalties.

KEY TAKEAWAYS

  • If you are expecting significant shipping delays, promptly send written notices to customers explaining the expected duration of the delay (expressed using a specific number of days or weeks) and offering to provide a refund upon request.
  • If proposing to substitute goods or services, adequately describe the substitute goods or services, fully indicating how the substitution differs from the original order.
  • Provide a toll-free telephone number or another free method for the buyer to request a refund.
  • Include a clear and conspicuous disclosure statement in your advertisements or on your website that notifies customers that shipping times may be delayed due to COVID-19 or other supply chain-related factors.11

With a thorough and proactive response to potentially delayed shipments, retailers can avoid costly litigation and financial penalties and continue to build transparent and reliable relationships with customers.

FOOTNOTES

1 For more information on supply chain disruptions, see Melissa J. Tea and Sarah A. Decker, No Supplies in the Chain, K&L GATES (Oct. 20, 2021).

2 Complaint, California v. Yeezy Apparel LLC, No. 21STCV38971 (Cal. Super. Ct. Oct. 22, 2021).

3 Id. at *3–4. According to the complaint, Yeezy’s alleged untimely shipments had been occurring for at least four years.

4 If the customer applies for an open-end credit plan at the same time as placing an order for products that are to be purchased on credit, the company will have 50 days to comply with § 17538, rather than 30.

5 Cal. Bus. & Prof. Code § 17538(a)(2).

6 Id. § 17538(a)(3).

7 Id. § 17538(a)(4).

8 Cal. Bus. & Prof. Code § 17500.

9 See id.

10 See id.

11 Notably, although Ye partnered with sportswear brand Adidas to sell Yeezy products, Adidas was not included as a defendant in the lawsuit. Adidas displayed a disclaimer on its website that informed customers that shipping times would be delayed due to COVID-19’s impact and related federal, state, and local mandates.

Copyright 2021 K & L Gates

Article By Melissa J. Tea and Kelsi E. Robinson of

K&L Gates

For more articles on supply chain, visit the NLR Utilities & Transport section

FTC Files Much-Anticipated Monopolization Charges Against Broadcom

Also Paves Way for Private Actions

As predicted by some, the Federal Trade Commission issued a complaint charging Broadcom Inc. with illegally monopolizing several markets for semiconductor chips used to deliver television and broadband internet services. The Commission simultaneously issued a proposed consent order that, if approved, would settle the FTC’s charges against Broadcom and allegedly restore competition in the impacted markets. But this is likely just the beginning of Broadcom’s antitrust issues in the U.S. because the FTC’s complaint provides an effective roadmap for Broadcom customers to collect treble damages for their overpayments.

The Complaint and Consent Decree

The FTC alleges that Broadcom has monopoly power in three separate semiconductor chip markets: (i) systems-on-a-chip (“SOCs”) for set top boxes, (ii) SOCs for DSL broadband devices, and (iii) SOCs for fiber broadband devices. It also determined Broadcom is one of a few significant suppliers of other chips relevant to the investigation, which include wi-fi chips that enable the devices to connect to wireless internet and front-end chips that convert analog signals to digital signals for the devices. Collectively, the FTC refers to these chips as the “Relevant Products.”

According to the FTC, Broadcom maintained its monopoly power through unlawful practices beginning in 2016. At that time, Broadcom began facing competitive threats from nascent rivals in the monopolized markets, which was largely fueled by Broadcom customers (cable and internet service providers and original equipment manufacturers (“OEMs”)) attempting to lessen dependence on Broadcom and foster competition in these markets. Around the same time, customer demand began shifting significantly from broadcast STBs (i.e., traditional cable STBs) to streaming STBs that access content via the home’s broadband modem.

In response to the competitive threats and changing market dynamics, Broadcom endeavored to maintain its monopoly power rather than compete on the merits.

Through a series of long-term contracts entered with service providers and OEMs, and through an accompanying campaign of threats and retaliation, Broadcom induced customers to purchase or use Broadcom’s relevant products on an exclusive or near-exclusive basis.

Broadcom’s misconduct had significant anticompetitive effects, including: (i) foreclosing competitors from a substantial share of the relevant markets, (ii) causing higher prices for customers, (iii) preventing rivals from reaching necessary scale by stopping OEMs and service providers from purchasing relevant products from them, (iv) reducing customer choice and innovation by impeding rivals’ development efforts and/or causing them to divert money and resources from the relevant markets, and (v) erecting significant barriers to entry and expansion.

The consent order prohibits Broadcom from entering into these same types of exclusivity or loyalty agreements with its customers for the supply of the monopolized chips. Broadcom also must stop conditioning access to or requiring favorable supply terms for these chips on customers committing to exclusivity or loyalty for the supply of other relevant chips. And, finally, the consent order explicitly prohibits Broadcom from retaliating against customers for doing business with rivals. The consent order will remain in place for 10 years and Broadcom is required to submit a compliance report to the court annually. The FTC will publish the consent agreement package in the Federal Register with instructions for filing comments. Comments must be received 30 days after publication. The Commission provided an analysis of the agreement to assist those who wish to comment.

The complaint and consent decree are significant for several reasons beyond restoring competition in the relevant markets.

For one, the complaint bestows purchasers of Broadcom’s relevant products with most facts needed to plead a Section 2 monopolization case for treble damages. The complaint defines the relevant markets, explains that Broadcom has monopoly power in at least the monopolized markets, describes how Broadcom unlawfully maintained its monopoly power, and explains how Broadcom’s misconduct harmed competition and caused purchasers to pay higher prices.

Second, the complaint substantiates claims that Broadcom’s anticompetitive conduct extends beyond the relevant markets identified in the complaint. For example, Western Digital, the largest manufacturer of hard disk drives in the U.S., alleged that Broadcom engaged in strikingly similar misconduct in that market. Specifically, Western Digital alleged in a 2017 public court filing that Broadcom demanded that Western Digital buy certain components for its hard disk drives exclusively from Broadcom and eliminate avenues from which it could buy these components from rivals. Broadcom threatened to cut off supply of necessary components if Western Digital did not capitulate.

Broadcom customers in any market should consider whether they have been impacted by misconduct like that flagged by the FTC.

If so, then they should analyze two things: (i) whether they have made sufficient purchases to warrant filing a private action to recover treble damages and (ii) whether they should file a comment during the notice period concerning the adequacy (or lack thereof) of the consent decree. Given that Broadcom is subject to both judicial oversight for the next 10 years and an anti-retaliation clause in the consent order, companies should feel comfortable filing an action or comment against Broadcom.

© MoginRubin LLP
For more articles on the FTC, visit the NLRAntitrust & Trade Regulation section.

Five Tips for Selecting the Best FTC Defense Lawyer for Your Case

An experienced attorney is all but imperative for individuals and businesses facing an investigation by the Federal Trade Commission (FTC). FTC investigations are very nuanced and involve complex issues that are unfamiliar to most. However, not all FTC defense lawyers offer the same value to those facing an FTC investigation.

If you or your business is under investigation by the Federal Trade Commission, you should be sure to hire an experienced FTC defense attorney. The more experience an attorney has, the more likely they will have handled a case very similar to yours, giving them a unique perspective on what you can do to quickly and efficiently wrap-up the investigation.

As Dr. Nick Oberheiden, Founding Attorney of Oberheiden, P.C., recently explained:

FTC investigations are complex, and while there are many attorneys who are willing to take on these cases, clients should be selective when deciding which FTC defense firm to work with. Clients are best served by selecting an attorney who has worked with businesses in the same industry, and successfully handled similar investigations in the past. Otherwise, clients run the risk of needing to pay their attorney to get up to speed or—worse yet—having an attorney who is unprepared to handle their case.

Here are a few tips to consider when deciding which FTC defense attorney to hire to represent you in your case:

1. Inquire About Their Experience

A quick Google search for FTC lawyers provides dozens of law firms vying for your business. Many of these firms will tout “years” or “decades” of experience. However, only very few FTC defense firms routinely handle active FTC investigations. When meeting with an attorney, be sure to ask them where all their experience comes from. In many cases, you’ll find out that these attorneys handle a wide range of seemingly unrelated matters. When dealing with such a complex area of law, having specific, hands-on experience is critical to the success of your case. You wouldn’t trust your primary care provider to perform brain surgery, and you shouldn’t let a general practitioner handle your FTC investigation case.

2. Ask Out Who Will Handle Your Case

Many FTC defense and compliance law firms list only the most experienced or successful attorneys on their websites. When you set up a consultation to speak with a lawyer, you may even meet with a partner or senior associate. However, that is not necessarily the lawyer who will be handling your case. When you hire a law firm to represent you in an FTC investigation, you are hiring the firm. It is then up to the firm to decide which attorney is going to handle your case. Unless you ask, a firm is under no obligation to tell you who you will be working with.

Some FTC defense law firms actually have former U.S. Attorneys, Department of Justice trial lawyers, or other law enforcement officers or prosecutors. Having an attorney who has worked on the enforcement side of an FTC investigation can provide you with extremely valuable insight, as they know how the FTC sees certain issues and makes decisions.

When meeting with an FTC defense lawyer, it is important that you ask which of the firm’s attorneys will be handling your case. This is important because you don’t want to be under the impression that you’re going to be working with (and paying for) a high-level attorney, only to find out that they assigned your case to a new associate.

3. Find Out if They Have Handled Similar Cases for Other Clients

Not all FTC investigations are the same. It is critical that you choose an FTC defense attorney who is not only experienced handling the specific type of investigation you are facing, but also one who has worked with similar businesses in the past. The more a lawyer knows about your underlying business, the better they will understand the nature of the potential violation and how to defend against it.

The nature and extent of an FTC investigation will depend, in part, on the type of potential violation, but also on the nature of the business, the FTC is looking in to. When selecting an attorney to represent you in an FTC investigation, it is imperative that you work with a lawyer who has specific experience helping clients who were in a similar situation to the one that you find yourself in. For confidentiality reasons, don’t be surprised if a lawyer cannot give you the specific names of parties they represented, but they should be able to give you details about former clients’ cases, how they were able to help, and what the outcome of the investigation was. If an attorney seems uncomfortable discussing this with you, chances are that they don’t have experience working with similar businesses.

4. Ask About Their Track Record

When meeting with a lawyer, don’t be afraid to ask them about the outcomes of their previous cases. You want to hire a lawyer who is not only experienced, but also who has been able to effectively wrap-up an FTC investigation for their clients. A lawyer may not be able to get into specifics, but they should be able to tell you how they helped other clients in similar situations deal with the FTC investigation, and the outcome of those cases.

5. Make Sure You Get Along

This may go without saying, but you will be working closely with your attorney throughout the FTC investigation process. For many clients, being able to get along with their lawyer is a critical part of this process. Personalities differ, and a successful attorney may be great at handling the FTC lawyers, but, if they are hard to work with, you are losing out on one of the benefits of working with a lawyer: peace of mind. An experienced FTC defense attorney can provide you with much-needed peace of mind through what is invariably a stressful process. If the thought of picking up the phone and calling your attorney causes you stress, you’re already not getting everything you deserve.

If you or your business is facing an FTC investigation, don’t take on the FTC alone. An attorney can make your life much easier, and help you work towards a favorable outcome. When selecting an attorney, take your time, because this is a major decision that is worth devoting as much time as necessary to get right.

Oberheiden P.C. © 2020

ARTICLE BY Dr. Nick Oberheiden from Oberheiden P.C.
For more, visit the NLR Corporate & Business Organizations section.

The Boeing 737 MAX is Back – What is the Impact for Manufacturers?

It is hard to move the news cycle beyond vaccine updates, but this week brought such news. The aerospace industry received the announcement that many were expecting for a long time. The FAA has decided to allow Boeing to resume deliveries and commercial flights of the 737 MAX by the end of the year.

What is the impact? From an aerospace supply chain perspective, the distribution of a vaccine and the 737 MAX are connected because they each relate to the eventual return of people getting on airplanes, both for business and personal reasons. From a long-term perspective, the fundamentals of the aerospace industry remain solid and there will be a recovery.

However, I have heard some in the media and in the manufacturing industry try to suggest that the return of the 737 MAX will fix the problems in the industry in the short term.

I agree with many of the reactions set forth in a recent article published by Reuters, which attempts to “pump the brakes” on the immediate impact of the 737 MAX. Industry leaders such as Kevin Michaels and Richard Aboulafia underscore the stark reality.

Aboulafia states:

“The market really won’t need new-build planes for a few years, since there are 387 737 MAX’s waiting to return to service, and 450 already-built 737 MAX’s waiting to be delivered.”

Michaels concurs:

“This is great news but . . . It will take several years (for the 737 MAX supply chain) to get back to full production, maybe as many as three years.”

At the end of the day, the return of the 737 MAX is good news in the long-term for Boeing and for the aerospace supply chain. But, the short term challenges remain, as Boeing and Airbus expect that their suppliers will use this time of relatively-low demand in commercial airspace to invest in their businesses. Easier said than done.

Copyright © 2020 Robinson & Cole LLP. All rights reserved.
For more articles on the Boeing 737 MAX, visit the National Law Review Antitrust & Trade Regulation section.

U.S., 11 States Sue to End Google’s Reign as “Monopoly Gatekeeper for the Internet”

Suit says company improperly uses market power to achieve exclusivity.

The U.S. Department of Justice and 11 states have sued Google LLC in federal court in Washington, D.C. for unlawfully maintaining its position as “monopoly gatekeeper for the internet” by blocking competitors in Internet search and search advertising markets. “For many years, Google has used anticompetitive tactics to maintain and extend its monopolies in the markets for general search services, search advertising, and general search text advertising — the cornerstone of its empire,” the government suit alleges. Google immediately responded via web post, calling the suit “dubious” and “deeply flawed.”

Download the complaint.

The complaint pays special attention to internet searches on mobile devices, an activity that has by far overtaken searches initiated by consumers on desktop computers. Mobile searches are now “the most important avenue for search distribution in the United States.” Mobile and desktop devices that default to the Google search engine gives the company “de facto exclusivity,” according to the complaint.

Google is alleged to maintain its dominance in general search by entering into “exclusionary agreements, including tying arrangements” to “lock up distribution channels and block rivals.” Google uses its considerable resources and revenue to help make this happen. “Google pays billions of dollars a year to distributors … to secure default status for its general search engine …” The company even prohibits device makers and distributors from dealing with Google’s competitors. Deals have been struck with Apple, LG, Motorola, Samsung, AT&T, T-Mobile, Verizon, Mozilla, Opera, and UCWeb, the suit alleges. And some agreements require distributors to take and feature “a bundle of Google apps” to make sure Google is a consumer’s first click for popular services.

These exclusionary agreements are alleged to cover just under 60 percent of all search queries, while almost half of the remaining queries go through Chrome, also a Google product. “Between its exclusionary contracts and owned-and-operated properties,” the suit says, “Google effectively owns or controls search distribution channels accounting for roughly 80 percent of the general search queries in the United States. Largely as a result of Google’s exclusionary agreements and anticompetitive conduct, Google in recent years has accounted for nearly 90 percent of all general-search-engine queries in the United States, and almost 95 percent of queries on mobile devices.”

“Google has thus foreclosed competition for internet search,” the government says.

Moreover, “Google monetizes this search monopoly in the markets for search advertising and general search text advertising, both of which Google has also monopolized for many years,” the complaint says. Google generates $40 billion a year from advertisers, part of which it uses to get distributors to favor Google’s search engine. These payments discourage distributors from switching and create a barrier to entry for rival search engines, especially small, innovative players.

“Google’s anticompetitive practices are especially pernicious because they deny rivals scale to compete effectively,” the DOJ and the states explain. Google’s products run on complex algorithms that “learn” which ads to present to which users. The “volume, variety, and velocity of data,” which Google has more of than anyone, “accelerates the automated learning of search and search advertising algorithms.” The scale of the data it feeds into these algorithms is something Google has acknowledged is the key to its success.

The complaint adds that Google’s grip on distribution “thwarts potential innovation.” The government plaintiffs noted two rivals — one that is using a subscription model and DuckDuckGo, which has strict privacy protection policies – “are denied the tools to become true rivals: effective paths to market and access, at scale, to consumers, advertisers, or data.”

The government notes that the once scrappy Google claimed Microsoft’s practices were anticompetitive. “Almost 20 years ago, the D.C. Circuit in United States v. Microsoft recognized that anticompetitive agreements by a high-tech monopolist shut off effective distribution channels for rivals, such as by requiring preset default status (as Google does) and making software undeletable (as Google also does), were exclusionary and unlawful under Section 2 of the Sherman Act.”

Google’s exclusionary strategy is being applied more harshly in newer technologies, such as voice assistants and the “internet of things,” such as smart speakers, home appliances, and autonomous cars. Without a court order, the government says, “Google will continue executing its anticompetitive strategy, crippling the competitive process, reducing consumer choice, and stifling competition.”

The suit asks the court to declare that Google has acted unlawfully to maintain monopolies in the search services, search advertising, and search text advertising markets. It seeks unspecified structural relief and an order prohibiting future exclusionary practices.

Google: It’s a “Dubious Complaint”

Kent Walker, VP of Global Affairs for Google, apparently saw the suit coming. In a well-illustrated response, he wrote: “Today’s lawsuit by the Department of Justice is deeply flawed. People use Google because they choose to, not because they’re forced to, or because they can’t find alternatives.”

“This lawsuit would do nothing to help consumers. To the contrary, it would artificially prop up lower-quality search alternatives, raise phone prices, and make it harder for people to get the search services they want to use,” Walker said.

“Our agreements with Apple and other device makers and carriers are no different from the agreements that many other companies have traditionally used to distribute software,” the response continues. “Other search engines, including Microsoft’s Bing, compete with us for these agreements. And our agreements have passed repeated antitrust reviews.

Read Google’s full response.

Edited by Tom Hagy for MoginRubin LLP.

© MoginRubin LLP
ARTICLE BY Jonathan Rubin  of MoginRubin
For more articles on antitrust suits, visit the National Law Review Antitrust & Trade Regulation section.

U.S. Government Announces One of Its Largest Customs Fraud Settlements

The Department of Justice last week announced a $22.8 million settlement involving customs duty fraud—one of the largest False Claims Act settlements involving customs duties to date. A former company employee reported the alleged violations against German multinational chemical and gas company, Linde AG, and its American subsidiary, Linde Engineering North America, Inc. (collectively, “Linde”). The whistleblower, who will receive $3.78 million for reporting the alleged violations, alleged that Linde fraudulently evaded customs duties by falsifying invoices and incorrectly describing imports in customs documents, both in terms of the characteristics of the imported products and their cost.

Importers are obligated to provide U.S. Customs and Border Protection with accurate reporting information, which allows the government to assess duties properly on U.S. imports. Under the False Claims Act (FCA), any knowing failure to accurately report or pay the full amount of customs duties is a violation of the law. A company that knowingly evades customs duties risks liability under the FCA, potentially resulting in treble damages and penalties. FCA is a powerful and essential tool used to combat fraud against the government, including customs and duties fraud, which is the second-largest source of federal revenue collected by the U.S. Government after taxes.

The complaint alleges that Linde misclassified its imported pipe products under the wrong Harmonized Tariff Schedule (“HTS”) codes to decrease or avoid paying antidumping and countervailing (“AD/CV”) duties. Goods imported into the U.S. are classified by numerical HTS codes tied to specific customs duty rates, including AD/CV duties when applicable. AD/CV duties protect American manufacturers and industries from unfair trade practices, specifically “dumping” of imports into the U.S. market for less than market value. The duties also protect import subsidies by foreign governments, which benefit importers at the expense of U.S. manufacturers. Importers must accurately identify the HTS codes and the amount of AD/CV duties owed in its customs entry documents, including the summary customs, Form 7501, submitted with every import. An FCA violation occurs when an importer knowingly breaks these rules.

The complaint alleges that Linde also understated the value of its imported goods by failing to disclose to the government “assists”—costs that add value to imported goods not reflected in the price paid to the invoicing vendor. In one instance, Linde purchased and shipped raw material to overseas vendors, who manufactured and assembled the product for importation into the U.S. Linde then imported the completed assembled product without including the cost of the foreign raw materials in entry forms or invoices submitted to U.S. Customs. The value of imported goods determines the duties; any knowing undervaluation of imports is a False Claim Act violation. The value of imported goods, including any assists, also must be identified in Form 7501.

The complaint alleged that Linde paid 50 percent less in import duties than similar companies, even while Linde moved its American manufacturing operations overseas and increased its imports from $750,000 to $268 million in four years. Under FCA, a person who reports fraud against the government (a whistleblower) resulting in a qui tam lawsuit that recovers money owed to the government is entitled to an award of between 15% and 30% of the amount recovered.  These awards are a strong incentive to encourage those with knowledge of fraud on the U.S. Government to come forward. Although insiders typically bring cases under the False Claims Act, cases involving customs fraud have been brought by non-insiders, including competitors, who are often well-positioned to identify fraudulent customs practices.

© 2020 by Tycko & Zavareei LLP
ARTICLE BY Tycko & Zavareei Whistleblower Practice Group
For more articles on fraud, visit the National Law Review Criminal Law / Business Crimes section.