Category: Antitrust

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.

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.

The DOJ and SEC Have Updated Their Foundational Foreign Corrupt Practices Act Resource

The U.S. Department of Justice (DOJ) and Securities and Exchange Commission (SEC) recently published an updated guide to the Foreign Corrupt Practices Act (FCPA), a key resource for corporate whistleblowers around the world.

The FCPA is a U.S. law that prohibits the payment of anything of value to foreign government officials in order to obtain a business advantage. The FCPA also requires publicly traded corporations to make and keep books and records that accurately reflect transactions of the corporation to ensure that no bribes were paid.

This singular law is extremely important to global corporate accountability because it ensures that U.S. companies can be held accountable for corrupt actions abroad. Additionally, because this law is a part of the Dodd-Frank Act, whistleblowers from around the world may anonymously and confidentially report such corruption to the SEC and receive an award for successful tips. The U.S. government has successfully prosecuted many foreign corporations under the FCPA and has issued millions of dollars in rewards to both U.S. and non-U.S. whistleblowers.

This new guide adheres to this standard by providing significant, easy to follow information on the scope of the FCPA, potential consequences for FCPA violations, and whistleblower protections. In this new edition, the DOJ and SEC expand their guidance on a number of issues citing new cases and the new DOJ FCPA Corporate Enforcement Policy, which all anticorruption advocates, including potential whistleblowers, and corporate compliance professionals should review and understand.

The complete list of topics on which updated definitions and guidance is provided is as follows:

  • Intermediaries

  • Gifts as bribes

  • Instrumentalities of foreign governments

  • Third party payments

  • The “local law defense”

  • Successor liability for corporations

  • Conspiracy liability

  • Applicable statutes of limitations

  • Criminal liability for accounting violations

  • Factors that the Justice Department considers in determining how to resolve a corporate criminal case

  • DOJ FCPA Corporate Enforcement Policy (a new official DOJ policy), including examples of when the DOJ will decline to prosecute

  • How corporate and individual cooperation is evaluated

  • Components of an effective compliance program

Copyright Kohn, Kohn & Colapinto, LLP 2020. All Rights Reserved.

For more on the Foreign Corrupt Practices Act, see the National Law Review Antitrust and Trade Regulation section.

Sellers Beware – The COVID-19 Pandemic Has Opened the “Price-Gouging” Pandora’s Box

As the Covid-19 emergency goes on, both federal and New Jersey authorities have begun to enforce anti-price gouging and anti-hoarding provisions of federal and state law. A wide range of businesses, including but going beyond the sellers of medical equipment, should be aware of the limits imposed by these statutes and the dangers posed by enforcement.

A.        The New Jersey Consumer Fraud Act

As has been widely reported in the media, the State of New Jersey is aggressively enforcing the anti-price gouging provisions of the Consumer Fraud Act, N.J.S.A. 56:8-107 through 109, during the current coronavirus emergency. Enforcement of the statute by the Division of Consumer Affairs or by private civil action under the Consumer Fraud Act poses a risk to the sellers of a broad variety of goods. However, it also poses a potential remedy for business purchasers for end use whose ordinary supply chain has been disrupted by the emergency.

During a state of emergency declared by the Governor, N.J.S.A. 56:8-109 declares it to be an “unlawful commercial practice” for any person to sell or offer for sale “any merchandise which is consumed or used as a direct result of an emergency or which is consumed or used to preserve, protect, or sustain the life, health, safety or comfort of persons or their property for a price that constitutes an excessive price increase.”  In turn N.J.S.A. 56:8-108 defines an “excessive price increase” as more than 10 percent greater than the seller’s price in the usual course of business immediately before the declaration of emergency, unless the price increase is attributable either to the seller passing through increased prices from its supplier or costs imposed by the emergency. In that case, the statute defines an excess price increase as an increase of more than 10 percent beyond the seller’s customary pre-emergency markup.

The statutory language sweeps broadly and may be applied to price increases of almost any product where demand has increased or the supply chain has been disrupted by the coronavirus emergency. A recent news story reports that more than 3,600 complaints of alleged price-gouging have been made to the Attorney General’s Division of Consumer Affairs, against more than 2,100 business, involving not only medical supplies but food and commodities in short supply like toilet paper and disinfectants. The Division is urging the public to remain “vigilant” and is actively soliciting complaints on its website. As it investigates complaints, the Division is issuing subpoenas for the seller’s pre-emergency and current cost, price and markup information. The defense of passing through increased costs requires the seller to document both higher charges from suppliers and other costs, such as hazard pay for employees, imposed by the emergency.

Penalties for violation of the Consumer Fraud Act include civil penalties of up to $10,000 for a first offense. There are additional penalties if the violation was directed against senior citizens or persons with disabilities. In addition, the Attorney General may obtain an injunction against future violations. The courts may order restitution to consumers of money obtained in violation of the Act, and twice the amount obtained in the case of senior citizens. Failure to make restitution as ordered is punishable as contempt of court.

In addition to the enforcement powers of the Attorney General, N.J.S.A. 56:8-19 gives any person who has suffered an “ascertainable loss of moneys or property . . . as a result of any practice declared unlawful” under the Consumer Fraud Act as amended or supplemented a private right of action to recover treble damages and attorneys’ fees, either directly or as a counterclaim in a suit by the seller. No reported decision decides whether this private right of action would apply to a violation of the Act’s anti-price gouging provisions, but it is reasonable to anticipate that creative counsel are contemplating private class actions on behalf of retail purchasers.

The private right of action under the Consumer Fraud Act extends not only to individual consumers but to businesses that purchase supplies or equipment for use in the business. Hospitals, medical practices and other large scale purchasers of supplies and equipment affected by the coronavirus emergency may wish to explore that possibility.

B.        The Federal Defense Production Act

The Korean War vintage Defense Production Act (“DPA”) gives the President broad powers to direct the production of essential goods and to prioritize their distribution during periods of declared national emergency. Section 101 of the DPA, 50 U.S.C. § 4511, authorizes the President or his delegate to designate goods as scarce materials critical to the national defense. Section 102 of the Act, 50 U.S.C.§ 4512, the anti-hoarding provision, prohibits any person from accumulating “1) in excess of the reasonable demands of business, personal, or home consumption, or (2) for the purpose of resale at prices in excess of prevailing market prices, materials which have been designated by the President as scarce materials or materials the supply of which would be threatened by such accumulation.”  Designations are required to be published in the Federal Register. Section 103 of the DPA, 50 U.S.C. § 4513 makes the violation of § 102 a federal crime subject to a $10,000 fine and one year imprisonment. In addition § 706, 50 U.S.C. § 4556, authorizes the federal courts to enjoin violations of the DPA at the suit of the government. Other provisions, not relevant here, authorize the government to provide incentives and subsidies to increase production of essential goods.

The DPA is based on the War Powers Acts of World War II. It is designed to authorize the kind of command economy in place during that war, in which the armed forces were the sole end user, the government controlled production by placing contracts, fixing priorities and allocating raw materials, and the government directly controlled prices in the civilian market. It empowers the federal government to become the sole buyer and allocator of materials critical to the national defense. However, the President has chosen not to take the responsibility for centralized purchasing and allocation of critical medical supplies. Instead, the federal government has decided to allow states and other end users to compete for limited resources while using the DPA’s criminal provisions to try to curb the more egregious examples of exploitation.

On March 23, 2020, the President issued Executive Orders 13909 and 13910, which invoke his authority under DPA § 101 to declare ventilators and medical personal protective equipment as scarce materials critical to the national defense. Under authority designated by the Executive Orders, on March 25, 2020 the Secretary of Health and Human Services designated a variety of masks, gloves, gowns, face shields and other personal protective equipment, as well as respirators, sterilization materials, and ventilators as scarce materials subject to the anti-hoarding section of the DPA.  The designation was published in the Federal Register at 85 FR 17592 (Mar. 30, 2020). It enumerates the types of short-supply equipment but does not provide guidance as to what constitutes accumulation in excess of reasonable demand for consumption or what prices are considered in excess of the prevailing market price.

The Department of Justice has created a joint federal-state anti-hoarding task force under the leadership of the United States Attorney for the District of New Jersey, and several criminal prosecutions of alleged hoarders have been instituted. However, the prohibitions in DPA § 102 of accumulation “in excess of reasonable demands” for the holder’s consumption or for resale at a price “in excess of prevailing market prices” appear to impose a rather vague standard of criminal liability, and there do not appear to be any reported decisions interpreting them. Unlike the New Jersey statute, there is no definite markup that would be allowed.

DPA § 104, 50 U.S.C. §4514, prohibits the President from imposing wage or price controls without Congressional authorization. Perhaps for that reason, the government has not set permissible prices for short-supply equipment at any time since the HHS designation. Instead, the government is taking the position that prevailing prices are either prices in effect in January and February of 2020, before the coronavirus crisis began in the United States, or that they are “benchmark” prices of a major private manufacturer. Whether either of those standards provides fair advance notice sufficient to support criminal liability is, to say the least, contestable.

In addition, the government’s position appears to criminalize what may be entirely legitimate economic activity. Experience has shown that there were large amounts of masks and other designated short-supply medical equipment scattered in pockets of inventory around the United States and abroad. Middlemen perform the valuable service of finding these supplies, marshaling them and making them available to end users. That takes effort, which will not be undertaken without the prospect of compensation. Unlike the New Jersey statute, the DPA does not on its face recognize the costs incurred by accumulators to obtain otherwise unavailable goods, either those passed through from upstream sellers, the expenses of search, or reasonable compensation for the effort involved.

In conclusion, the government has not used the Defense Production Act to set prices directly. Its criminal anti-hoarding provisions  are a very blunt instrument for regulating economic activity in a time of shortage, especially because the federal government is not acting as the sole buyer or allocator of goods or fixing prices but is instead requiring end users of short-supply equipment to compete against each other. These criminal provisions have never been tested in court, and they leave open the possibility of vigorous defense based on the lack of a clear standard of criminal liability, on the need to attract scarce goods into the market, and on the pass-through of legitimate costs incurred to do so, including a reasonable profit.

© Copyright 2020 Sills Cummis & Gross P.C.

For more on COVID-19 related price issues, see the National Law Review Coronavirus News legal section.

Ticketmaster, Live Nation Get Booed: Concert-Goers File Class Action for “Unchecked” Abuse of Market Power

Live Nation Threatens Anyone Who Doesn’t Play Along, Plaintiffs Allege

Concert-goers tired of paying “supracompetitive fees” on ticket purchases from Ticketmaster LLC filed a class action against the company and its parent, promoter Live Nation Entertainment, Inc., in U.S. District Court for the Central District of California on April 28 for abusing its more than 70% share of the primary ticketing market (i.e. where tickets are initially sold) for major concerts. The merged companies are also aggressively deploying anticompetitive tactics in pursuit of the lucrative “secondary ticketing” market where tickets are re-sold, typically at higher prices.

Ticketmaster achieved its dominant position through a “web of long-term exclusive dealing agreements” and other anticompetitive activity, the plaintiffs maintain. The companies merged in 2010, putting the ticketing giant together with the nation’s “most dominant concert promoter.” Live Nation controls 60% of the promotion business for major concerts. AEG Live is a distant number two, with 20% market share. Now, the plaintiffs say, Live Nation uses Ticketmaster as a loss leader to bludgeon its competitors and strong-arm venues (Iderstine v. Live Nation Entertainment, Inc. and Ticketmaster LLC, No. 1:20-CV-03888-PA-GJS, C.D. Calif., Western Div.).

“Subsidized by the supracompetitive profits Ticketmaster’s business generates from its domination of primary ticketing services for major concert venues, Live Nation Entertainment is able to keep a stranglehold on concert promotion services – losing tens of millions of dollars annually – by paying its clients exorbitant amounts,” the complaint reads. Live Nation “regularly threatens” concert venues with eliminating them from big-act tours if they use a Tickemaster competitor for ticketing services.

Live Nation has apparently become such an emboldened market bully that its CEO, Michael Rapino, openly boasted last year that if a venue doesn’t use Ticketmaster it will suffer economically because “we don’t hold the revenue.”  This stiff-arm anticompetitive style hasn’t been lost on the Department of Justice Antitrust Division or anyone who’s paying attention in the industry. It’s become the norm. The DOJ said U.S. venues have come to accept that if they don’t use Tickmaster they will lose big-star performers and significant revenue. “Given the paramount importance of live event revenues to a venue’s bottom line, this is a loss most venues can ill-afford,” the DOJ observed.

We recently wrote in our post — DOJ: Event Powerhouse Live Nation Punished Concert Venues for Using Competing Ticketers Despite Bar – of the government’s charge that Live Nation has been violating the DOJ-ordered ban on anticompetitive behavior for years. Now, Live Nation is operating under what the DOJ calls “the most significant enforcement action” of an existing antitrust consent decree in its history, one intended, at least, to secure stricter and longer lasting conditions designed to rein in the event conglomerate’s anticompetitive behavior. The DOJ action began more than a decade ago after the company acquired Ticketmaster. A 2010 final judgment permitted the merger but prohibited the company from retaliating against concert venues for using competing ticket companies, threatening concert venues, or taking other actions against concert venues for 10 years (United States v. Ticketmaster Entertainment, Inc., et al., Case No. 1:10-cv-00139-RMC [July 30, 2010]).

These are highly profitable companies. Live Nation’s 2018 revenues were $10.8 billion. Ticketmaster, a wholly-owned subsidiary following their merger in 2010, made $1.5 billion in 2018.

Despite the 2010 judgment, the DOJ announced earlier this year that Live Nation had been repeatedly violating it for years. The government hopes the modified and extended judgment clarifies for Live Nation what conduct is out of bounds and gives consumers and venues the relief the DOJ wanted in the first place.

Historically, structural remedies (such as divestitures) have been preferable to behavioral remedies (like consent decrees) in addressing antitrust concerns over proposed mergers. As Live Nation and Tickmaster are demonstrating, behavioral remedies are too easily ignored or abused by post-merger behemoths. Too often the benefits of violation outweigh the punishment. Their behavior also highlights the anticompetitive effects that can result from large-scale vertical mergers, which have been rampant in recent years. Bundling, tying, and exclusive contracts are just a few of the competitive concerns that we see playing out here, not to mention a stagnation in the entry of new competitors in various complementary markets.

Seeking relief under Sections 1 and 2 of the Sherman Act, Tickemaster and Live Nation, the Iderstine v. Live Nation complaint says:

  • Engage in anticompetitive exclusive dealing with concert venues;
  • Improperly wield the conditional copyright license Ticketmaster employs to grant access to its online platform, blocking, for example, purchases of a large number of tickets. This forces ticket brokers into exclusivity with Ticketmaster, and not its competitor;
  • Bar individuals from transferring tickets unless they use Ticketmaster to do so;
  • Prevent secondary ticket service providers from being able to do business – and charge consumers lower fees – by forcing venues to use both their concert promotion and concert ticketing services. In other words, tying. Ticketmaster enjoys double-digit annual growth as a result of its “unchecked” anticompetitive conduct, the complaint says.
  • Use “coercion of and threats against disloyal customers, ticket brokers, and others”;
  • Execute vertically arranged boycotts.

Ticketmaster has “clearly engaged in blatant, anti-consumer behavior for years,” the plaintiffs say. In addition to its “behind-the-scenes efforts to feed ticket brokers huge amounts of supply if they sold on Ticketmaster’s secondary platform,” the plaintiffs cite the DOJ’s extension of the 2010 consent decree. It’s only recently come to the attention of ticket-buyers that Live Nation has been “shamelessly” violating the consent agreement for years.  It also notes that the Federal Trade Commission ordered Ticketmaster to stop implying ticket prices were higher on its primary platform than its secondary re-sale platform, when the opposite is true.

The complaint seeks certification of two subclasses:

  1. Primary Ticketing Services Consumer Class. “All end-user purchasers in the United States who purchased a primary ticket and paid associated fees for primary ticketing services for an event at a major concert venue in the United States from Ticketmaster or one of its affiliated entities owned, directly or indirectly, by Live Nation Entertainment, Inc. at any point since 2010.”
  2. Secondary Ticketing Services Consumer Class. “All end-user purchasers in the United States who purchased a secondary ticket and paid associated fees for secondary ticketing services for an event at a major concert venue in the United States from Ticketmaster or one of its affiliated entities owned, directly or indirectly, by Live Nation Entertainment, Inc. at any point since 2010.”

© MoginRubin LLP

Is a Moratorium on Mergers During the Pandemic a Bridge Too Far?

In an interview with Politico’s Leah Nylen and Betsy Woodruff Swan, Rep. David Cicilline (D-R.I.) explained that he wants the next coronavirus relief package to include a moratorium on mergers while the U.S. economy struggles to face the pandemic. According to the report, the Rhode Island Congressman’s proposal would allow deals “only if a company is already in a bankruptcy or is otherwise about to fail.” Any other deals would be on hold at least until the national pandemic declaration is lifted.

In prepared remarks, Rep. Cicilline’s stated: “As millions of businesses struggle to stay afloat, private equity firms and dominant corporations are positioned to swoop in for a buying spree.” The remarks continued: “This is not complicated. Our country can leave room for merger activity that is necessary to ensuring that distressed firms have a fresh start through the bankruptcy process or through necessary divestitures while also ensuring that we do not undergo another period of rampant consolidation.”

These comments were part of the Congressman’s presentation for an event run by the Open Markets Institute (OMI), which recently said that it favors “an immediate ban on all mergers and acquisitions by any corporation with more than $100 million in annual revenue, and by any financial institution or equity fund with more than $100 million in capitalization.” The OMI claims the ban should remain in place during the current economic and health crisis.

According to the OMI, the ban is necessary because enforcement agencies are partially shut down and unable to effectively evaluate mergers. The OMI believes the ban will help “prevent a wholesale concentration of additional power by corporations that already dominate or largely dominate their industries, especially in ways that may significantly worsen the crisis that now threatens America’s health, social, and economic systems. The history of the Panic of 2008 and the subsequent Great Recession instructs us that such a massive, uncontrolled consolidation will result in the unnecessary firing of millions of employees, the unnecessary bankrupting of innumerable independent businesses, a dramatic slowing of innovation in vital industries such as pharmaceuticals, and a further concentration of power and control dangerous both to our democracy and our open commercial systems.”

Piles of Cash

The organization says that private equity firms and corporations “sit today atop vast piles of cash” and can readily swallow up distressed companies.

Rep. Cicilline and the OMI are rightfully concerned about an uptick in unlawful mergers stemming from the pandemic and should be commended for proactively raising the issue. History has demonstrated that well-capitalized firms will use economic downturns and the consequent drop in company valuations to acquire struggling rivals. And antitrust enforcers are certainly not operating at full capacity given current health and safety guidelines.

Even so, a moratorium on mergers seems like an overcorrection. Most mergers are lawful. While we can debate their overall effectiveness, since 2015, federal antitrust authorities have made second requests in less than 3% of qualifying transactions. And lawful mergers can lead to lower prices, higher quality, and increased innovation, as well as providing liquidity events.

Given these realities, lawmakers should craft legislation that aims to preserve the integrity of the pre-pandemic oversight process. This presumably can be achieved by giving regulators the power to slow down the merger review process when necessary. A resolution along these lines would seem to strike a better balance between protecting against rampant, unlawful consolidation and permitting lawful mergers to proceed.

© MoginRubin LLP

ARTICLE BY Timothy Z. LaComb of MoginRubin.
For more on COVID-19 related legislation, see the National Law Review Coronavirus News section.

FTC Announces 2020 Thresholds for Merger Control Filings Under HSR Act and Interlocking Directorates Under the Clayton Act

The Federal Trade Commission (“FTC”) has announced its annual revisions to the dollar jurisdictional thresholds in the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (“HSR Act”); the revised thresholds will become effective 30 days after the date of their publication in the Federal Register.  These changes increase the dollar thresholds necessary to trigger the HSR Act’s premerger notification reporting requirements.  The FTC also increased the thresholds for interlocking directorates under Section 8 of the Clayton Act, effective as of January 21, 2020.

Revised HSR Thresholds

Under the HSR Act, parties involved in proposed mergers, acquisitions of voting securities, unincorporated interests or assets, or other business combinations (e.g., joint ventures, exclusive license deals) that meet certain thresholds must report the contemplated transactions to the FTC and the Antitrust Division of the U.S. Department of Justice (“DOJ”) unless an exemption applies.  The parties to a proposed transaction that requires notification under the HSR Act must observe a statutorily prescribed waiting period (generally 30 days) before closing.  Under the revised thresholds, transactions valued at $94 million or less are not reportable under the HSR Act.

A transaction closing on or after the date the revised thresholds become effective may be reportable if it meets the following revised criteria:

Size of Transaction Test

The acquiring person will hold, as a result of the transaction, an aggregate total amount of voting securities, unincorporated interests, or assets of the acquired person valued in excess of $376 million;

or

The acquiring person will hold, as a result of the transaction, an aggregate total amount of voting securities, unincorporated interests, or assets of the acquired person valued in excess of $94million but not more than $376 million, and the Size of Person thresholds below are met.

Size of Person Test

One party (including the party’s ultimate parent entity and its controlled subsidiaries) has at least $188 million in total assets or annual sales, and the other has at least $18.8 million in total assets or annual sales. If the acquired party is not “engaged in manufacturing,” and is not controlled by an entity that is, the test applied to the acquired side is annual sales of $188 million or total assets of $18.8 million.

 The full list of the revised thresholds is as follows:

Original Threshold

2019 Threshold

2020 Revised Threshold
(Effective 30 days after publication in the Federal Register)

$10 million

$18 million

$18.8 million

$50 million

$90 million

$94 million

$100 million

$180 million

$188 million

$110 million

$198  million

$206.8 million

$200 million

$359.9 million

$376 million

$500 million

$899.8 million

$940.1 million

$1 billion

$1,799.5 million

$1,880.2 million

The filing fees for reportable transactions have not changed, but the transaction value ranges to which they apply have been adjusted as follows:

Filing Fee

Revised Size of Transaction Thresholds

$45,000

For transactions valued in excess of $94 million but less than $188 million

$125,000

For transactions valued at $188 million or greater but less than $940.1 million

$280,000

For transactions valued at $940.1 million or more

Note that the HSR dollar thresholds are only part of the analysis to determine whether a particular transaction must be reported to the FTC and DOJ.  Failure to notify the FTC and DOJ under the HSR Act remains subject to a statutory penalty of up to $43,280 per day of noncompliance.

Revised Thresholds for Interlocking Directorates

Section 8 of the Clayton Act prohibits one person from simultaneously serving as an officer or director of two corporations if: (1) the “interlocked” corporations each have combined capital, surplus, and undivided profits of more than $38,204,000 (up from $36,564,000); (2) each corporation is engaged in whole or in part in commerce; and (3) the corporations are “by virtue of their business and location of operation, competitors, so that the elimination of competition by agreement between them would constitute a violation of any of the antitrust laws.”1

Section 8 provides several exemptions from the prohibition on interlocks for arrangements where the competitive overlaps “are too small to have competitive significance in the vast majority of situations.”2  After the revised thresholds take effect, a corporate interlock does not violate the statute if: (1) the competitive sales of either corporation are less than $3,820,400 (up from $3,656,400); (2) the competitive sales of either corporation are less than 2 percent of that corporation’s total sales; or (3) the competitive sales of each corporation are less than 4 percent of that corporation’s total sales.

The revised dollar thresholds for interlocking directorates of $38,204,000 and $3,820,400 will be effective upon publication in the Federal Register; there is no 30-day delay as there is for the HSR thresholds.

1   15 U.S.C. § 19(a)(1)(B).

2   S. Rep. No. 101-286, at 5-6 (1990), reprinted in 1990 U.S.C.C.A.N. 4100, 4103-04.

© Copyright 2020 Cadwalader, Wickersham & Taft LLP

ARTICLE BY Joel Mitnick and Ngoc Pham Hulbig of Cadwalader, Wickersham & Taft LLP.
For more on Hart-Scott-Rodino thresholds, see the National Law Review Antitrust Law and Trade Regulation section.

DOJ Seeking to End Movie Studio and Theater Antitrust Decrees amidst Streaming Competition – A New Opportunity in Theatrical Distribution?

For the film and media distribution industries, this year has been action-packed.  Production budgets are skyrocketing and new digital services have been announced or are launching with each passing month. The streaming wars are upon us. Moreover, the FCC recently voted to treat streaming services as “effective competition” to traditional cable providers (or MVPDs), thereby triggering basic cable rate de-regulation in parts of Hawaii and Massachusetts.

The distribution landscape took yet another unexpected legal twist this week. On November 18, Assistant Attorney General Makan Delrahim announced that the Antitrust Division of the Department of Justice would ask a federal court to terminate the “Paramount Consent Decrees” (the “Decrees”), which have prohibited movie studios from engaging in certain distribution practices with movie theaters since the 1940s. The DOJ filed a motion to terminate the Decrees in federal court in the Southern District of New York on November 22, 2019.  Notably, the DOJ cites streaming services and new technology as a few of the many reasons that the Decrees may no longer be necessary in what the DOJ official sees as today’s highly competitive, consumer-driven content market. Given the volatility of the content licensing space, film licensors and licensees will have to carefully consider how the DOJ’s actions will affect their content rights and options going forward.

By way of background, the Decrees emerged out of the landmark 1948 Supreme Court antitrust case, United States v. Paramount Pictures, Inc. Prior to the case, top Hollywood studios frequently owned movie theaters (thus, owning both the means of production and distribution). This vertical integration led to lower distribution costs for the studios and gave them pricing power and the ability to discriminate about which theaters distributed their films. Not surprisingly, smaller, independent theaters struggled to survive.  The problem was exacerbated by studios engaging in practices such as “block-booking” (requiring theaters to distribute all or none of the studio’s slate of films) and overbroad “clearances” (restrictions on the time which must elapse between particular runs of a film), as well as alleged horizontal conspiracies between the studios and theaters on matters like minimum ticket pricing. As part of the Decrees, the defendant studios were restricted or prohibited from engaging in these practices and were required to divest certain interests in their theaters.

The DOJ’s November 22nd motion may not come as a surprise, as the DOJ first announced that the Decrees were under review in August 2018, after which several industry players, including the National Association of Theatre Owners (NATO), submitted comments. In particular, NATO argued, despite how streaming and technology might increase competition, that block-billing would still adversely impact independent or local chains that exhibit fewer films and may not be able to afford larger blocks of films.

Delrahim summed up the DOJ’s position, stating, “the [D]ecrees, as they are, no longer serve the public interest, because the horizontal conspiracy – the original violation animating the decrees – has been stopped. […] Changes over the course of more than half a century also have made it unlikely that the remaining defendants can reinstate their cartel.” In particular, the DOJ argued that the competitive concerns of the 1940s no longer exist because the movie marketplace has changed so drastically, citing how film distributors have become less reliant on theatrical distribution with the advent of streaming. According to the DOJ, colluding to limit theatrical film distribution in today’s market “would make no economic sense.”  In addition to streaming services, Delrahim also cited new theatrical release business models (such as flat-fee multi-ticket pricing) as increasing competition and innovation in film distribution.

The DOJ acknowledged NATO’s concerns in part and asked the court to implement a two-year sunset on block-booking and circuit dealing (licensing to all theaters under common ownership, as opposed to on a theater-by-theater basis). Whether terminating the Decrees would decrease innovation, neither the motion papers nor Delrahim venture to guess. Delrahim noted that antitrust enforcers need not predict the future but need only recognize that changes are occurring. He added that practices covered by the Decrees would not become per se lawful, but would rather be subject to review under the rule of reason standard.

Commentators are split on whether termination of the Decrees that have shaped Hollywood for decades will lead to any significant change for the movie business. One thing that is important to note is that the Decrees did not outright prohibit vertical integration of studios and theaters – the defendant studios could (and did) acquire theaters after proving that such acquisitions would not unreasonably restrain trade. Further, only those studios party to the Decrees remain subject to their restrictions, meaning many of today’s top studios (that now typically own a vast portfolio of traditional and digital entertainment properties) were non-existent or much smaller in the 1940s and have not been subject to the Decrees.

While it remains to be seen how this development will play out, it is noteworthy for digital providers because it may breathe extra life back into the theatrical release window. With mammoth streaming deals inked every week, the value of the theatrical release window was seemingly diminishing for some films. But now that many studios are forgoing third-party licensing fees and instead retaining their content for their own streaming platforms, studios may begin to ask whether added revenues from ownership of a theater chain could be a potential new source of revenue and a way to gain additional control of the theatrical window. Meanwhile, the effect of lifting the Decrees may not necessarily lead to a flurry of acquisitions, as other studios involved in direct-to-consumer streaming campaigns may not have the capital or desire to exploit the termination of the Decrees. Major theater chains will likely seek to strengthen relationships with studios, while independent theaters will look for ways to succeed despite potentially rising costs.

With all of these developments, studios and media platforms will also need to carefully consider how to protect their interests when handling their licensing arrangements, given the volatility in this space and keeping in mind the two-year sunset (assuming the DOJ succeeds) on block-booking and circuit dealing. While some distributors may be looking for long-term, exclusive content deals as they roll-out their streaming services, studios and content providers may seek flexibility as their distribution options are changing day-to-day.

© 2019 Proskauer Rose LLP.

More on entertainment distribution on the National Law Review Entertainment, Art & Sports law page.

Spurned by HP Board of Directors, Xerox Gets Hostile, and is Spurned Again

Case raises a unique antitrust question.

Copy equipment giant HP Inc. turned down the much smaller Xerox Holdings Corp.’s acquisition overtures twice in one week as the exchange of statements between corporate leadership grows increasingly hostile. From an anticompetition perspective, the case raises the interesting question of how the “failing firm” defense could come into play.

A deal would bring together the world’s second largest copier company, HP, a company whose leadership position was once so strong that its very brand name, derived from the word “xerographic” in 1938, became a verb used more often than the word “copy” itself. Xerox is also credited with innovations that brought us tools like the mouse and ethernet networks.

But Xerox, which has long since fallen from the top of the copier industry, was met with a flat-out rejection of its offer to get its mojo back by acquiring HP. Xerox offered HP $17.00 in cash and 0.137 Xerox shares for each HP share or $22 per share, or $27 billion overall. Skeptics wondered whether Xerox could execute such a deal, given it is “only” a $9.2 billion business, a third the size of HP. The skeptics were right. On Nov. 17 the HP Board of Directors informed Xerox that its offer was not in the best interests of shareholders as it “significantly undervalues” the HP business.

In its letter to Xerox Vice Chairman and CEO John Visentin, HP wrote that its board was concerned about the “potential impact of outsized debt levels on the combined company’s stock.” While saying it remained “ready to engage” with Xerox to better understand its business and its thinking around a merger, the HP board rejected the bid unanimously.

“We recognize the potential benefits of consolidation, and we are open to exploring whether there is value to be created for HP shareholders through a potential combination with Xerox. However,” the HP letter to Visentin continued, “… we have fundamental questions that need to be addressed in our diligence of Xerox. We note the decline of Xerox’s revenue from $10.2 billion to $9.2 billion (on a trailing 12-month basis) since June 2018, which raises significant questions for us regarding the trajectory of your business and future prospects. In addition, we believe it is critical to engage in a rigorous analysis of the achievable synergies from a potential combination. With substantive engagement from Xerox management and access to diligence information on Xerox, we believe that we can quickly evaluate the merits of a potential transaction.”

Xerox had said it could generate $2.3 billion by selling its 25% share in the joint venture, Fuji Xerox Co., Ltd., to FUJIFILM Holdings Corp. In a Nov. 8, 2019, statement, Xerox also said it was selling to a Fuji Xerox affiliate Xerox’s 51% stake in Xerox International Partners, a joint original-equipment-manufacturer venture between Xerox and Fuji Xerox. The companies also agreed to end the $1 billion lawsuit FUJIFILM filed against Xerox after last year’s terminated merger. “Total after-tax proceeds to Xerox from the transactions, which included accrued but unpaid dividends through closing, are approximately $2.3 billion. Xerox expects to use the proceeds opportunistically to pursue accretive M&A in core and adjacent industries, return capital to shareholders and pay down its $554 million December 2019 debt maturity,” according to Xerox.

Xerox did not take HP’s rejection well.

“We were very surprised that HP’s Board of Directors summarily rejected our compelling proposal ….” Xerox CEO Visentin responded, “claiming our offer ‘significantly undervalues’ HP. Frankly, we are confused by this reasoning in that your own financial advisor, Goldman Sachs & Co., set a $14 price target with a ‘sell’ rating for HP’s stock after you announced your restructuring plan on October 3, 2019. Our offer represents a 57% premium to Goldman’s price target and a 29% premium to HP’s 30-day volume weighted average trading price of $17.” Visentin added that the offer was not, as HP said, “highly conditional” or “uncertain.” “There will be NO financing condition to the completion of our acquisition of HP,” the Xerox CEO said.

Xerox gave HP until today (Monday, Nov. 25) to accept the offer, otherwise it would take the case directly to HP’s shareholders. “The overwhelming support our offer will receive from HP shareholders should resolve any further doubts you have regarding the wisdom of swiftly moving forward to complete the transaction,” Visentin said.

But HP didn’t need the whole weekend. Yesterday, on Sunday, Nov. 24, it rejected Xerox again via a letter signed by HP Chairman and CEO Enrique Lores and HP Board Chair Chip Bergh. They repeated that Xerox is undervaluing the company, adding that Xerox did not address HP’s concerns about Xerox’s ability to raise the cash or handle such a substantial debt burden. Lores and Bergh didn’t seem to appreciate Visentin’s attitude, either.

“It is clear in your aggressive words and actions that Xerox is intent on forcing a potential combination on opportunistic terms and without providing adequate information,” the HP leaders wrote. “When we were in private discussions with you in August and September, we repeatedly raised our questions; you failed to address them and instead walked away, choosing to pursue a hostile approach rather than continue down a more productive path. But these fundamental issues have not gone away, and your now-public urgency to accelerate toward a deal, still without addressing these questions, only heightens our concern about your business and prospects. Accordingly, we must have due diligence to determine whether a Xerox combination has any merit.”

And yet, things had seemed to be going so well. In June, Xerox and HP announced they were expanding their relationship. Xerox was to begin sourcing certain products from HP, many of which used Xerox software, and supplying toner for HP for these and other products. These printers use laser printing technology HP acquired from Samsung in 2017. Xerox and HP also agreed to partner in the Device as a Service (DaaS) market. Xerox said it would sell HP PCs and peripherals to its commercial customers under a DaaS model, and HP would make Xerox cloud-based content management available to its commercial PC customers in the United States.

As the HP leaders said, the relationship started to sour at least as early as August.

HP questions Xerox’s resources and innovation.

HP offered additional specifics as to why it didn’t find the deal attractive:

  • Xerox has missed consensus revenue estimates in four of the last five quarters.
  • Xerox’s revenue has fallen from $10.2 billion to $9.2 billion (on a trailing 12-month basis) since June 2018, and this is expected to continue. Xerox management projects revenue declines of 6% in fiscal 2019.
  • Given how much of the Xerox business is based on contractual revenue, HP is concerned about the decline in customer Total Contract Value (TCV) in excess of revenue declines, which suggests Xerox’s revenues may decline even faster in future years. HP noted that the TCV of enterprise signings (including renewals) in 2018 was down 13.9% in constant currency and Xerox’s churn for 2018 was 18%, both data points which Xerox has stopped providing publicly since the end of 2018.
  • After a review of synergies based on public information and the “limited information” Xerox provided, HP said it does not agree with the value of potential synergies. “[I]t appears that your assumptions include significant savings that are already included in each company’s independently announced cost reduction plans,” HP wrote.
  • When Xerox exited the Fujifilm joint venture, Xerox essentially “mortgaged its future for a short-term cash infusion.” HP feels this has “left a sizeable strategic hole” in the Xerox portfolio.
  • HP also took a shot that has to sting the once-heralded leader of innovation. “[W]e have concerns as to the state of Xerox’s technology resources, research and development pipeline, future product programs, and supply continuity and capability.
  • HP said Xerox has not accessed the great potential of the Asia Pacific market.

The ‘failing firm’ defense

What’s intriguing from an antitrust perspective is how the parties might use the “failing firm” defense in a hostile takeover scenario. The failing firm defense argues that a merger that substantially lessens competition is less harmful to competition than one party’s failure and exit from the market. The defense requires a showing that the acquired company cannot meet its financial obligations, would not be able to successfully reorganize in bankruptcy, has been unsuccessful efforts to elicit other reasonable offers, and is succumbing to the only available purchaser.

We would expect to see that defense raised here given the high post-merger market share and years-long decline of both parties. But how will Xerox make the required showing without the cooperation of HP management? And, in this case the acquirer is arguably the greater “failure” risk of the two firms, making this use of a “failing firm” case a rarity, if not a first.

Copier industry landscape.

Xerox’s global annual revenue was at $20.64 billion in 2011, $19.54 billion in 2014, and $9.83 billion in 2018. It’s now a $9.2 billion company, with revenues generated from a combination of services and equipment. In 2016, Xerox services accounted for roughly a third of the company’s global revenue. From 2012 to 2014 services generated more revenue than technology. That flipped in 2015 when service revenue dropped to a third of prior years.

HP’s net revenue from its printing business was at a high of $29.6 billion in 2008. It fell to $18.26 in 2016 and bounced up to $20.8 billion in 2018.

Worldwide, Canon is the market leader, with 24% of the market. HP is close behind with more than 21% of the market. Xerox has been in the low single digits for the past two years. After Canon and HP, market leaders are Brother (11%), Epson (10%), Kyocera (7%), NEC (5.6%), Ricoh (2.5%). Some 18.5% of the market is attributed to “other” companies.

Statistics provided by Statista based on data from IT Candor. Additional statistics from HP and Xerox.

© MoginRubin LLP

ARTICLE BY Dan Mogin and Jennifer M. Oliver of MoginRubin, edited by Tom Hagy.

Colleges, Students Tell DOJ McGraw-Hill/Cengage Merger Would Create a Textbook Duopoly

Two of the three dominant college textbook publishers – McGraw-Hill Education, Inc. and Cengage Learning Holdings II, Inc – have agreed to merge, creating a virtual duopoly in the college textbook market and setting the stage for a potential antitrust fight with the Antitrust Division of the U.S. Department of Justice. McGraw-Hill and Cengage claim the new company will generate global growth, improve margins, and produce efficiencies that will lead to more affordable education materials for students.

But several student and consumer groups disagree, arguing the merger will lead to decreased competition and higher prices for college textbooks. They also claim the post-merger entity will implement digital strategies (e.g., all-access digital subscriptions) that will: (1) force smaller competitors out of the market; (2) eliminate the secondary textbook market, which provides students a lower cost option for purchasing or renting textbooks; and (3) allow the two dominant publishers to collect and monopolize certain types of student data, including data showing students’ learning styles, students’ understanding of core concepts, students’ need additional assistance, and/or students’ risk of dropping out.

The Scholarly Publishing and Academic Resources Coalition (SPARC) has been one of the loudest critics of the merger. On August 14, 2019, SPARC sent a letter to the DOJ urging it to block the merger, arguing that it will “significantly decrease competition in a market already rife with anti-consumer behavior.”

In its section titled “The Textbook Market is Broken,” SPARC explains that college textbooks are sold in a “captive market” because students are forced to purchase the materials selected by their professors. This system “effectively hands the three major companies who currently dominate the market a blank check to develop expensive materials without regarding the preferences, needs, or financial circumstances of students. The textbook industry’s current state of dysfunction results from years of consolidation, unsustainable practices, and lack of price competition.” SPARC points to textbook pricing as an example of this dysfunction, as prices “have increased 184% over the last two decades — three times the rate of inflation.”

In a separate letter sent to the DOJ at the end of July, U.S. PIRG Education and student leaders from colleges across the country raised similar concerns. Specifically, the students explain they have “directly felt the impacts of skyrocketing textbook prices, further exacerbated by Cengage and McGraw-Hill’s efforts to remove cost-cutting options for students by undermining used book markets,” and that “[t]o maintain profit margins, publishers have put out custom or frequent new editions to make it difficult to find a used book for our classes ….” Citing a rather shocking statistic, the students claimed that “65% of students have skipped buying a book at some point in their college career because of cost despite 94% of them knowing it would hurt their grade.”

The students also identified several specific harms caused by “innovative” digital models employed in the textbook industry:

  • The publishers issue expiring access codes to paid online platforms that students must also use to submit homework and test answers, destroying the used book market;
  • Students cannot sell their materials at the end of the course or keep them or future reference, harming students who already cannot afford books;
  • Automatic billing or so-called “inclusive access” means that students are automatically charged for materials, eliminating their ability to price shop; and
  • Based on contracts proposed at some schools, publishers will continue to raise prices at the same rate that has led to the current affordability crisis.

The potential anticompetitive impacts of this merger are obvious and significant. Assuming the relevant market is the U.S. college textbook market, the merger is between two entities that each control more than 20% of an already highly concentrated market. Under relevant case law and the DOJ’s/FTC’s Horizontal Merger Guidelines, the merger presumptively increases market power for the post-merger entity and violates Section 7 of the Clayton Act. Moreover, the merging entities have made clear they intend to develop an all-access digital subscription service that, if adopted en masse, will likely eliminate both smaller competitors and the secondary market for college textbooks. Finally, by creating a virtual duopoly, the merger increases the likelihood of coordination among rivals. Considering these issues, the DOJ must take a very close look at this merger and implement conditions that address these issues if the merger is approved.

© MoginRubin LLP

ARTICLE BY Timothy Z. LaComb of MoginRubin.
Edited by Tom Hagy for MoginRubin LLP