The intersection between the Sherman Act and the Capper-Volstead exemption for collective conduct by agricultural industry members has given rise to a number of recent cases.  In re Fresh and Process Potatoes Antitrust Litig., No. 4:10–MD–2186 (D. Idaho) (“Potatoes”), is particularly noteworthy. There, the District Court held that the Capper-Volstead exemption does not reach pre-production farming activity, such as planting and harvesting, adopted to reduce the supply of potatoes – and hence, to increase the price at which the product is sold. Lacking any refuge in Capper-Volstead, such collective farming activity is fully subject to per se condemnation under the antitrust laws.

The Case Background

Suing in Idaho, the heart of the nation’s potato industry, potato purchasers challenged the supply “management” program adopted by the United Potato Growers of America (“UPGA”), an umbrella cooperative of potato growers, as a Sherman Act § 1 violation. Under the program, potato growers agreed: (1) to limit potato planting acreage; (2) to destroy existing stocks; and (3) to refrain from growing additional potatoes, thus constricting the supply of potatoes available for sale. The purchasers further alleged that this pre-production potato management program was designed to raise product prices, and as implemented had in fact achieved that goal. Thus, the purchasers argued, the UPGA and other named defendants engaged in unlawful price-fixing.

The UPGA moved to dismiss, arguing, in substance, that the Capper-Volstead Act permits an agricultural co-op to agree on product selling prices – that is, to fix prices – even though the Sherman Act would prohibit the agreement absent the statutory exemption. See, e.g., Maryland & Virginia Milk Producers Ass’n. v. United States, 362 U. S. 458, 465 (1960); Northern Cal. Supermarkets, Inc. v. Central Cal. Lettuce Producers Coop., 413 F. Supp. 984, 991-93 (N.D. Cal. 1976), aff’d, 580 F.2d 369 (9^th Cir. 1978), cert. denied, 439 U.S. 1090 (1979). Restricting supply, the co-op asserted, was simply an alternative means to establish potato selling prices. Outside of the Capper-Volstead setting, many a company has, of course, been held liable under the Sherman Act for conspiring to price-fix by agreeing to limit supply. But according to the UPGA, because the Capper-Volstead Act permits co-op price-fixing, the exemption also immunized the co-op’s pre-production supply management program.

The District Court rejected the co-op’s Capper-Volstead defense. Potatoes, No. 4:10–MD–2186, 2011 WL 6020859 [(CCH) 2011-2 Trade Cases ¶77,739] (D. Idaho Dec. 2, 2011).  The Court held that the Capper–Volstead Act does not apply to pre-production supply restrictions, but reaches, instead, only “acts done to an agricultural product after it has been planted and harvested.”  Id. at *6. The Court is spot-right. Congress passed the Capper-Volstead Act to give members of the agricultural community the right to collectively market their products. But neither the express language of the statute, nor the underlying congressional intent, extends to collective action restricting pre-production crop supply. The Sherman Act immunity is, therefore, limited.

The Capper-Volstead Act

The Capper-Volstead Act arose from economic conditions in the late 19^th and early 20^th centuries. Historically, large buyers of agricultural products bullied farmers into lowering product prices. Product buyers not only touted the availability of supply from other farmers, they also exploited the bargaining power inherent in unpredictable weather and growing seasons and the farmer’s increasing need (indeed, often-times desperation) to sell crops before they spoiled. Having low-balled the farmers for their products, the buyers and subsequent middlemen then price-gouged consumers for whom farm products were necessities of life. Although American farmer cooperatives were organized prior to the Civil War, it was not until shortly after 1900 that dairy farmer associations began to bargain collectively, with many commodity associations formed thereafter. See generally Christine A. Varney, The Capper-Volstead Act, Agricultural Cooperatives, and Antitrust Immunity, The Antitrust Source 1, 1-2 (Dec. 2010) (“Varney Article”); Report of the National Commission For the Review of Antitrust Laws and Procedures 254-55 (1979) (“1979 Commission Report”).

Like organized labor, however, farmer co-ops were early targets of antitrust litigation. Buyers sued co-ops that combined their harvests and that engaged in joint selling to increase their own bargaining power for conspiring to violate the antitrust laws. In response, States adopted what were called “marketing acts”  to allow farmers “to continue to produce singly, but . . . to emulate the efforts and practices of industrial corporations in processing, preparing for market and marketing farm products.” Milton J. Keegan, Power of Agricultural Cooperative Associations to Limit Production, 26 Mich. L. Rev. 648, 649 (1927-28). Congress itself authorized the creation of non-profit, non-stock agricultural co-ops when it passed the Clayton Act in 1914, but the provision’s limited scope quickly rendered it ineffective.

Congress therefore enacted the Capper-Volstead Act in 1922. Section 1 of the Act provides, in pertinent part, that:

Persons engaged in the production of agricultural products as farmers, planters, ranchmen, dairymen, nut or fruit growers may act together in associations, corporate or otherwise, with or without capital stock, in collectively processing, preparing for market, handling, and marketing in interstate and foreign commerce, such products of persons so engaged. Such associations may have marketing agencies in common; and such associations and their members may make the necessary contracts and agreements to effect such purposes . . . .

7 U.S.C. § 291 (emphasis added).

Capper-Volstead’s Limited Antitrust Immunity 

By protecting co-ops from antitrust liability for collective marketing, Congress sought to enhance the bargaining power of co-ops in their struggle against “unnecessary middlemen,” who extracted “excessive profits” from both farmers and customers. See, e.g., 59 Cong. Rec. 7852. This state of affairs was “unfair to the consumer, because he had to pay too much for what he needs, and it is unfair to the farmer, because he receives too little in return for his investment of time and labor expended.” 59 Cong. Rec. 8022. Indeed, Senator Capper stated that, “for years evidence has been piling up to convince us that we have the most expensive marketing system in the world, also the most inefficient, if we except China . . . .”  62 Cong. Rec. 2060-61.  Thus, the Congressional debates emphasized the need to protect the farmer’s marketing activity as a means to deliver value down to end-user consumers. Senator Capper, along with others, believed that cooperatives would eliminate middlemen, streamline the marketing system, and provide farmers with access to a much broader market. See generally Maryland & Virginia Milk Producers, 362 U. S. at 464-68; Varney Article, The Antitrust Source at 5-6 (summarizing the legislative history).

The collective action that the Capper-Volstead Act permits is, accordingly, expressly limited to “processing, preparing for market, handling, and marketing.”  As the Potatoes court correctly recognized, this activity describes what happens after crops are “planted and harvested” – not before. 2011 WL 6020859, at *6.  Congress was quite clear in limiting antitrust immunity to collective post-production activity by farmers. There was no intent to insulate co-ops from all antitrust liability. The House Committee report on Capper-Volstead itself states that, “[i]n the event that associations authorized by this bill shall do anything forbidden by the Sherman Antitrust Act, they will be subject to the penalties imposed by that law.” H. R. Rep. No. 24, 67th Cong., 1st Sess., at 3 (1921).

Pre-Production Supply Restraints

The Supreme Court has recognized that the Capper-Volstead Act allows farmers to organize together, to set co-op policy, and, indeed, to establish or “fix” the prices at which the co-op will sell product – all without violating the antitrust laws.  See Maryland & Virginia Milk Producers, 362 U.S. at 465-66. But the courts have not recognized any Capper-Volstead authorization to immunize pre-production restraints on planting or harvesting. See Potatoes, 2011 WL 6020859, at *6 (distinguishing prior rulings that considered post-production restraints limiting the sale of product).

Federal enforcers have railed at the notion that Capper-Volstead protects supply restrictions from antitrust scrutiny. For example, in the early 1950s, the Antitrust Division filed two suits against co-ops that had adopted production restrictions, one of which resulted in a preliminary injunction and the other in a consent decree. Varney Article, The Antitrust Source at 6 n. 37. Stanley N. Barnes, then-Assistant Attorney General in charge of the Antitrust Division, stated unequivocally that co-op activity “to limit production” was among the activity that the Division regarded as illegal, regardless of Capper-Volstead. Address to the American Institute of Cooperation, Aug. 10, 1953, at 10, quoted in Note, Agricultural Cooperatives and the Antitrust Laws: Clayton, Capper-Volstead, and Common Sense, 44 Va. L. Rev. 63, 75 (1958); see generally Report of the Attorney General’s National Committee To Study the Antitrust Laws 325 n.231 (1955) (citing criminal cases in the 1940s).

The FTC has expressed the same position. Summarizing the Capper-Volstead debates, the Commission has noted that “Congress did not intend to allow farmers to use cooperatives as a vehicle by which they could effectively agree to limit production.” In the Matter of Central California Lettuce Producers Cooperative, 90 F.T.C. 18, 32 n. 20 (July 25, 1977). The FTC quoted Senator Capper:

But a farmers’ monopoly is impossible. If the cooperative marketing association makes its price too high, the result is inevitable self-destruction by overproduction in the following years. No other industry except agriculture has this automatic safeguard. With corporation activities the group producers, such as the United States Steel Corporation, can reduce the quantity of steel rails it will produce at any given time or completely close down its mills and reduce the supply.

 Id. (emphasis added).

In other words, under Capper-Volstead, co-ops can fix the price at which their products are sold “because if the price rises, farmers will produce more and consumers will not be overcharged. Individual freedom to produce more in times of high prices is a quintessential safeguard against Capper-Volstead abuse, which Congress recognized in enacting the statute.” Potatoes, 2011WL 6020859, at 8. The ability of individual farmers to control their own production thus operates as a natural check on the co-ops. But see Kenneth R. O’Rourke & Andrew Frackman, The Capper-Volstead Act Exemption and Supply Restraints in Agricultural Antitrust Actions, 19 J. of the Antitrust and Unfair Competition L. Section of the State Bar of Cal. 69, 83 (No. 2, Fall 2010) (critiquing Sen. Capper’s remarks).    

Equally important, control over the supply of agricultural products is itself the subject of a comprehensive federal statutory scheme – the Agricultural Marketing Agreement Act of 1937 (the “AMAA”), 7 U.S.C. §§ 601 et seq. – which the Secretary of Agriculture administers. Thus, as the FTC said in Central California Lettuce, while Capper-Volstead exempts price-fixing:

A different issue would be presented if it were alleged and proven that a cooperative had sought to limit production even among its own members, thus shutting off the safety valve against private abuse that ameliorates the adverse consumer impact of the Capper-Volstead exemption and circumventing the important procedural safeguards of the AMAA.

90 F.T.C. at 102 n.20.

Finally, although a co-op agreement on pre-production supply restraints is properly subject to the Sherman Act, a co-op’s bonafide gathering and distribution of product information should not, standing alone, subject the association to antitrust liability. See Potatoes, 2011 WL 6020859, at *8 (discussing Northern Cal. Supermarkets, 413 F. Supp. 984). Antitrust law does not condemn information exchanges, often a mission of trade associations, as per se unlawful. Agricultural co-ops covered by Capper-Volstead should not be treated differently. If, however, the information exchange is a mechanism to impose, implement, monitor or enforce pre-production supply restrictions, there would be no immunity. And, of course, non-per se antitrust scrutiny would apply in all events, as it does outside the Capper-Volstead context. See generally United States v. Container Corp. of Am., 393 U.S. 333 (1969); Todd v. Exxon Corp., 275 F. 3d 191 (2^nd Cir. 2001).

Capper-Volstead in the 21^st Century

Familiar principles counsel that exemptions from the antitrust laws are narrowly construed. Even putting to the side the statutory language and congressional intent, this canon of construction applies well to the Capper-Volstead Act today. The conditions that led to exempting co-op activity from the antitrust laws in 1922 – to allow small farmers to sell collectively as a counterweight to buyer power – are much-changed in the 21^st century, and have been for years. More than 30 years ago, a national antitrust commission observed “an accelerating trend toward concentration in agricultural marketing,” and noted that “the threat of monopoly by some cooperatives is now substantial.” 1979 Commission Report at 259.

Today, total agricultural co-op business was over $191 billion in 2008. Nat’l Council of Farmer Cooperatives, Cooperative Facts, available at http://www.ncfc.org/information/cooperative-facts. Huge agricultural co-ops, operating as vertically integrated enterprises, are commonplace.  “Agricultural producers not only plant, harvest and sell crops, but they or their cooperatives also pack and ship the crops.” Kenneth R. O’Rourke & Andrew Frackman, The Capper-Volstead Act Exemption and Supply Restraints in Agricultural Antitrust Actions, 19 J. of the Antitrust and Unfair Competition L. Section of the State Bar of Cal. 69, 71 (No. 2, Fall 2010).

For example, Land O’Lakes, the nation’s second largest co-op, had 2010 sales of more than $11 billion and earnings of over $178 million. Land O’Lakes, Annual Report at 2 (2010); National Consumer Cooperative Bank, 2011 NCB Co-Op 100 List, available at http://www.coop100.coop. Land O’Lakes not only markets milk and other dairy products, but also distributes “feed, seed, agronomy products and business and production services,” reaching all 50 states and 60 foreign countries.  Land O’Lakes, Inc., What Is a Co-op?, available at http://www.landolakesinc.com/company/coop/default.aspx.  The co-op consists of “approximately 9,000 employees, 3,200 direct producer-members and 1,000 member-cooperatives serving more than 300,000 agricultural producers.” Land O’Lakes, Inc., Welcome, available at http://www.landolakesinc.com/company/default.aspx. Land O’Lakes’ board consists of directors representing the co-op’s various dairy and “ag” regions. Directors are nominated by region, with director representation weighed according to business by co-op members within the particular region. Land O’Lakes, Goverance, available at http://www.landolakesinc.com/company/governance/default.aspx.

Ocean Spray, Sun-Maid, and Welch’s/National Grape are similarly large co-ops with integrated production, processing and marketing functions. These sorts of agri-businesses are a far cry from the co-ops that informed Capper-Volstead’s enactment. As the Potatoes case itself reflects, the buyer-power that today’s large co-ops can exercise is fairly a subject of concern. Stretching Capper-Volstead’s language to reach restraints on pre-production supply activity – collective conduct that has nothing to do with the reasons that Congress passed the law to begin with – hardly seems justified.

In 2010, the Antitrust Division and the Department of Agriculture hosted workshops around the country focused on competition in agricultural industries.   Whether this fact-finding activity will produce legislative change remains to be seen. This much is clear, however: whether the Capper-Volstead Act is still the right law for the state of the agricultural industry today is a question worth asking – and answering. Meanwhile, the Potatoes court correctly recognized that there is no sound basis for expanding the Act’s antitrust exemption to collective action restricting pre-production supplies under of guise of crop “management.”

The U.S. Department of Justice (“DOJ”) has blocked two mergers in the past several months, in each case after filing a lawsuit against the merging parties.  The first case involved a relatively small transaction in the digital tax business involving H&R Block and 2nd Story Software. The second case was the high-profile proposed acquisition by AT&T of rival wireless telephone carrier T-Mobile USA.  These cases illustrate an uptick in U.S. merger enforcement and an increased willingness on the part of the DOJ to challenge mergers in court.  They also illustrate a  resistance on the part of DOJ to accepting concessions proposed by parties seeking to obtain clearance of horizontal mergers.

The H&R Block case involved H&R Block’s proposed acquisition of 2nd Story Software, the maker of TaxACT digital tax software, for approximately $287 million.  H&R Block and TaxACT are the second and third largest sellers of digital tax software, but each is dwarfed by the size of industry leader Intuit’s TurboTax business, which constitutes more than 60% of the digital tax business.  H&R Block is much better known for its storefront tax preparation business than for its digital tax offerings.  TaxACT is an upstart digital-only player whose prices are frequently much lower than its Intuit’s and H&R Block’s.  H&R Block argued that its acquisition of TaxACT would make it a more efficient and formidable competitor to Intuit, and broaden its offerings to include the “value” (lower price) end of the business.  H&R Block also contended that the prices of digital tax preparation software are constrained by many other types of tax preparation methods, including the use of accountants or storefront tax preparation services (i.e., “assisted tax preparation”) and the ability of taxpayers to fill out tax forms on their own.  The DOJ, however, defined the market to be limited to digital products, and viewed the transaction as an anticompetitive 3 to 2 merger.  The DOJ also contended that the transaction threatened to eliminate a “maverick” low priced player, and would have left only two major digital competitors – Intuit and H&R Block – which the DOJ argued could coordinate post-merger.  The court ultimately accepted the DOJ’s view, and on October 31, 2011 issued a decision enjoining the merger.  (As a matter of full disclosure, the author was part of the team representing the merging parties in this transaction).

In the second transaction, AT&T sought to acquire T-Mobile USA, a competitor that some considered a maverick in the industry, from Deutsch Telecom for approximately $39 billion.  AT&T similarly contended that acquiring T-Mobile would make it a more effective competitor – in particular, it needed access to the “spectrum” that T-Mobile controlled in order to relieve its congested network and provide faster data services to smart phone users.  In this transaction as well, however, the DOJ argued that the deal would result in two major players dominating the industry – AT&T and Verizon Wireless.  One notable distinction from the H&R Block transaction was that AT&T was the industry leader prior to the proposed merger, whereas H&R Block – even if combined with TaxACT – would still have been less than half the size of TurboTax.  The AT&T/T-Mobile transaction also involved a question of how to define the relevant market: the DOJ complaint focused on the implications of the transaction on competition nationwide, while the more traditional method of analyzing telecommunications-related markets is to assess competition on a more local basis (e.g., the NY metro area).  In the face of the DOJ complaint and additional scrutiny from the Federal Communications Commission, the parties abandoned the transaction on December 19, 2011.

As noted, these aggressive actions by the DOJ illustrate an increased willingness to go to court, as well as a resistance to accepting concessions proposed by the parties in horizontal mergers.  The economic effect of the DOJ’s success in blocking the massive $39 billion AT&T/T-Mobile transaction dwarfs the impact of the H&R Block transaction.  Indeed, the $4 billion break-up fee alone paid by AT&T to T-Mobile is more than 12 times the size of the purchase price H&R Block proposed to pay for TaxACT.   But as far as legal impact is concerned, in the long run it may be the H&R Block decision that has the greater impact.  Because the parties abandoned the AT&T/T-Mobile transaction prior to a court ruling, that transaction provides no legal precedent for the DOJ to rely upon in future cases.  In contrast, the more than 80-page decision from the federal judge in H&R Block provides a strongly pro-government precedent in the very district (Washington, D.C.) where the DOJ is likely to bring most of its future cases.  Accordingly, even after the world has forgotten that there was a failed AT&T/T-Mobile transaction, U.S. antitrust enforcers may still be talking about digital tax preparation.

This post originally appeared on the Kluwer Competition Law Blog.

Mr. Stock is a partner in the New York office of Hogan Lovells. His practice consists of antitrust and complex commercial litigation matters.

There was much speculation that Baer would be named to head the Antitrust Division after Sharis A. Pozen, the current acting assistant attorney general for antitrust, announced her intention to resign just over one week ago (see January 24 blog post). Pozen plans to leave the Justice Department at the end of this month to return to private practice.

Bill Baer is currently the head of the antitrust group at the Washington, D.C. office of Arnold & Porter, LLP. Baer held a number of high-level positions at the Federal Trade Commission, including director of the FTC’s Bureau of Competition in the 1990s.

During Baer’s tenure, the Bureau of Competition was very active in the merger enforcement area. Among the most notable cases was the FTC’s successful challenge to the merger of office supply superstores Staples and Office Depot ((CCH)1997-2 Trade Cases ¶71,867, 970 F. Supp. 1066 (D.D.C. 1997)).

According to the White House announcement, after earning a J.D. at Stanford Law School, Baer began his legal career in 1975 as a trial attorney for the FTC Bureau of Consumer Protection. He joined Arnold & Porter in 1980, becoming a partner at the firm in 1983. In his practice, Baer represents a broad range of companies in U.S. and international cartel investigations, mergers and acquisition reviews, and in antitrust litigation, it was noted.

In light of the EC decision, NYSE and Deutsche Börse said that they were in discussions to terminate their merger agreement.

“The merger between Deutsche Börse and NYSE Euronext would have led to a near-monopoly in European financial derivatives worldwide,” said Joaquín Almunia, Commission Vice President in charge of competition policy, in an EC statement announcing the decision. “These markets are at the heart of the financial system and it is crucial for the whole European economy that they remain competitive. We tried to find a solution, but the remedies offered fell far short of resolving the concerns.”

The EC analyzed the effects of the proposed merger on the markets for European financial derivatives (European interest rate, single stock equity and equity index derivatives) traded on exchanges. The EC acknowledged that derivatives can be traded either on exchanges—exchange-traded derivatives (ETDs)—or over-the-counter (OTC). However, its investigation showed that ETDs and OTCs are generally not considered as substitutes by customers, since they use them for different purposes and in different circumstances.

Both NYSE Euronext and Deutsche Börse took issue with the EC’s market definition.

NYSE Euronext Chairman Jan-Michiel Hessels said in a statement that the decision was “based on a fundamentally different understanding of the derivatives market.”

“The EU Commission’s decision is based on an unrealistically narrow definition of the market that does no justice to the global nature of competition in the market for derivatives,” according to a statement of the Executive Board of Deutsche Börse. “The over-the-counter (OTC) derivatives market, the major part of the market as a whole, is completely precluded. We therefore regard the decision as wrong. What’s more, it is inconsistent and runs counter to the aim of extending financial market regulation to the OTC derivatives market which the Commission is simultaneously pursuing. In its decision, the European Commission also takes a contrary stand to the assessment of the derivatives market arrived at in the USA back in 2007. There, the two Chicago exchanges CME and CBOT were allowed to merge to form the largest globally operating derivatives exchange.”

The U.S. Department of Justice Antitrust Division in June 2007 closed its investigation into the proposed acquisition of CBOT Holdings Inc. by Chicago Mercantile Exchange Holdings Inc. (CME) after concluding that the transaction was not likely to reduce competition substantially. The Antitrust Division cleared the transaction without conditions.

In evaluating the NYSE Euronext/Deutsche Börse transaction, the U.S. Justice Department’s December 2011 complaint identified three relevant markets in which competition would have been impacted by the transaction:

1. displayed equity trading services;
2. listing services for exchange-traded products (ETPs), including exchange-traded funds; and
3. real-time proprietary equity data products in the United States.

The Justice Department noted that the competitive dynamics for each of the three markets was distinctly different outside the United States.

With the abandonment of the transaction, the U.S. complaint was most likely be voluntarily dismissed. A proposed final judgment resolving the U.S. antitrust concerns had not yet been approved by the federal court in Washington, D.C. It had been awaiting public comment and a determination that the consent decree would be in the public interest, pursuant to the Antitrust Procedures and Penalties Act.

Two more Japanese companies have agreed to plead guilty for their roles in multiple price fixing and bid rigging conspiracies in the sale of parts to automobile manufacturers in the United States. The Antitrust Division announced that Japanese suppliers of automotive electrical components—Yazaki Corporation and DENSO Corporation—have agreed to pay a total of $548 million in criminal fines.

The latest fines, when taken together with a $200 million fine imposed last November on Furukawa Electric Co. Ltd., bring the total fines from the probe to more than $748 million. Furukawa—a Japanese supplier of automotive wire harnesses and related products—was the first company charged in the investigation. Three executives also were charged at that time. A general manager of sales/chief financial officer at a Furukawa subsidiary in the United States also was fined $20,000.

In this second round of charges, Yazaki agreed to pay $470 million; DENSO agreed to pay $78 million; and four individual defendants agreed to each pay $20,000 fines.

According to Sharis A. Pozen, Acting Assistant Attorney General in charge of the Department of Justice Antitrust Division, the total amount of fines from this investigation “already surpasses the total amount in criminal fines obtained by the division for all of last fiscal year.”

In fact, in the last decade, the total amount of criminal fines imposed in Antitrust Division cases has only surpassed three-quarters of a billion dollars once in Fiscal Year (FY) 2009.

Second Largest Criminal Antitrust Fine

These latest fines also are remarkable because the $470 million fine against Yazaki is the second largest criminal fine ever obtained for a Sherman Act antitrust violation. That honor had previously been held by Samsung Electronics Company, a Korean manufacturer of dynamic random access memory (DRAM). Samsung was fined $300 million for its role in an international conspiracy to fix prices in the DRAM market.

A $500 million fine against F. Hoffmann-La Roche for its role in a vitamin cartel remains the largest ever imposed in a federal antitrust enforcement action. That fine has held that title since 1999.

There was no word on who would replace Pozen. However, there is speculation in the media that Bill Baer, head of the antitrust group at the Washington, D.C. office of Arnold & Porter, LLP. might be on the short-list of candidates. Baer has held a number of high-level positions at the Federal Trade Commission, including director of the FTC’s Bureau of Competition.

The current deputy assistant attorneys general at the Antitrust Division are: Joseph Wayland, Fiona Scott Morton, Scott Hammond, and Leslie Overton.

Pozen came to the Justice Department in February 2009. She served as chief of staff and counsel and as a key deputy to former Assistant Attorney General Christine A. Varney. Pozen was named acting antitrust chief upon Varney’s departure. Varney is now a partner in the antitrust group of the law firm of Cravath, Swain & Moore LLP.

Prior to coming to the Antitrust Division, Pozen was a partner in the Antitrust, Competition and Consumer Protection Group of Hogan & Hartson (now Hogan Lovells). She also worked for five years at the FTC as an attorney advisor, as assistant to the Bureau of Competition Director, and as a staff attorney.

Pozen’s Record

Under Pozen’s leadership, the Antitrust Division challenged the now-abandoned merger of AT&T Inc. and T-Mobile USA Inc. During her tenure as antitrust chief, the Antitrust Division also successfully blocked the proposed acquisition by H&R Block Inc. of TaxACT, a digital do-it-yourself tax-preparation software provider, at the government’s request ((CCH) 2011-2 Trade Cases ¶77,678).

Outside of the merger area, criminal enforcement remained an important priority while Pozen headed the agency. Among the major accomplishments in the criminal area were the Justice Department’s first enforcement actions targeting price fixing and bid rigging in the automotive parts industry. As part of the investigation, Furukawa Electric Co. Ltd., a supplier of automotive wire harnesses and related products, has pleaded guilty and been fined $200 million fine for its involvement in the conspiracy. That investigation among many others is ongoing.

Today, search is smarter and more dynamic–rich with real-time content, news, images, maps and reviews. Search no longer provides users a simple road map to the Internet – users utilize search to find answers to questions, and Google, Yahoo! and Bing have all adapted toward this model to stay relevant in a fiercely competitive environment.

The source of this information is also changing how search is adapting to user demand. More and more, users are not just relying on traditional search, web sites and public information, but also the input and opinion from those within social networks. A product review from someone you don’t know is one thing, but weighing it against that of a friend, family member or coworker is something entirely different and exciting. In essence, the value of social data in search is becoming critically important to how we weigh information, formulate opinions, and make decisions. As search engines strive to personalize search results to respond to each consumer’s individual and subjective search criteria, what better way than to instantly connect the searcher with those he or she already knows and trust?

The result: social networks and search are converging into the next iteration of search. 

So it’s no surprise that Google earlier today announced the integration of its Google+ social feature into its own search results.  But some commentators are already raising eyebrows and suggesting this further hurts Google with its current dealings with the FTC. 

Interestingly, Microsoft anticipated this fundamental shift in how users value information and the importance of personalized search results stemming from a user’s social media presence. In response, it integrated much of Facebook’s data last year into Bing. This has helped Microsoft build its user base and provide users with more relevant search results by including data from Facebook’s colossal platform–a walled garden of over 800 million users who spend more time on its site than the next four most popular web brands combined. More importantly, Facebook has locked other search engines out–denying others access to its content.

Google+ is the company’s only legitimate source of social media information. Facebook’s deal with Microsoft is exclusive, granting only Bing access to Facebook’s trove of personalized data points. Twitter, whose license with Google expired in July, also fences Google off from its information.

So, why is Google labeled as the bad actor by its competitors for such a move? Rather than trailblazing, Google seems to be simply playing catch-up. Google’s announcement only further demonstrates the importance and value of social data and how it impacts the decisions users make every day. Without access to content to social platforms like Facebook or Twitter, it is only logical that it incorporate its own social data to remain competitive and maintain its ability to provide results that users want. The final result for consumers is a paradigm shift in the understanding of search, and further reaffirmation that competitors strive to provide the best search results possible.

The Antitrust Division reviewed a number of mega-mergers in 2011. While the most of merger filings were approved by the Justice Department without challenge or with conditions in a consent decree, there were notable court battles.

Among the most significant of these was the federal/state challenge to AT&T’s proposed $39 billion acquisition of T-Mobile USA Inc. from Deutsche Telekom. The parties ultimately abandoned the proposal. The deal fell apart a little more than a month after the Antitrust Division was handed an important victory when the federal district court in Washington, D.C. enjoined the proposed acquisition by H&R Block Inc. of TaxACT, a digital do-it-yourself tax-preparation software provider, at the government’s request (2011-2 Trade Cases ¶77,678).

The Antitrust Division’s first merger case of the year was the Comcast/NBC Universal merger. A consent decree resolved antitrust concerns with the combination of Comcast—the nation’s largest cable operator and Internet service provider—and NBC Universal’s cable networks, filmed entertainment, and television programming (2011-2 Trade Cases ¶77,585). As the year came to a close, the Antitrust Division conditionally approved the merger of Deutsche Börse AG and NYSE Euronext.

The Justice Department also challenged non-reportable transactions. In May, the Antitrust Division moved to block George’s Incorporated’s acquisition of a Tyson Foods poultry processing plant in Virginia. George’s later consented to a settlement requiring it to make capital improvements to the plant in order to increase in the number of chickens processed at the facility, thereby increasing the demand for grower services (2011-2 Trade Cases ¶77,679).

In the health care area, the Antitrust Division resolved a challenge to an agreement between Blue Cross Blue Shield of Montana and five of six Montana hospitals that own New West Health Services, a health insurer that competes with Blue Cross in Montana.

Outside of merger enforcement, another important development in the health care area was the Antitrust Division’s first case since 1999 challenging a monopolist with engaging in traditional anticompetitive unilateral conduct. The Department of Justice announced in February that it had reached a consent decree (2011-2 Trade Cases ¶77,619), prohibiting United Regional Health Care System of Wichita Falls, Texas, from entering into contracts that allegedly inhibited commercial health insurers from contracting with United Regional’s competitors and maintained the firm’s monopoly for hospital services.

Criminal Enforcement

While the Antitrust Division in 2011 continued ongoing criminal investigations in the real estate, financial services, and other industries, the agency announced its first charges resulting from international cartel investigations into the auto parts industry, including conspiracies involving aftermarket auto lights and automotive wire harnesses and related products. The year also saw the first charges from an investigation into anticompetitive conduct in the airline charter services industry.

Federal Trade Commission

The Federal Trade Commission also was active in 2011 pursuing its competition mission. The Commission issued more than a dozen complaints challenging mergers and acquisitions in 2011.

Most of these matters were resolved by consent order. In a few cases, the FTC filed complaints in federal court to stop the mergers pending a full administrative trial. In addition to the challenged transactions, a number of proposed mergers were abandoned after FTC staff raised competitive concerns.

Many of the FTC’s merger challenges in 2011 involved participants in the health care industry. The FTC’s first acquisition challenge of the year was a challenge to a hospital merger. In January, the agency challenged ProMedica Health System, Inc.’s consummated acquisition of rival St. Luke’s Hospital in Lucas County, Ohio. In March, a federal district court granted the FTC’s request for a preliminary injunction, pending a full administrative trial on the merits (2011-1 Trade Cases ¶77,395).

In November, the FTC issued another administrative complaint challenging a hospital merger. In that matter, the agency is seeking to block OSF Healthcare System’s proposed acquisition of Rockford Health System, which would combine two of the three major hospital systems in Rockford, Illinois.

The FTC suffered a loss in a third hospital merger challenge initiated in 2011. The Eleventh Circuit affirmed dismissal of the agency’s challenge to Phoebe Putney’s proposed acquisition of its rival hospital in Albany, Georgia (2011-2 Trade Cases ¶77,722). The agency had alleged that the parties in that case structured the deal to try to use a local hospital authority as a straw man to shield the acquisition from federal antitrust scrutiny under the state action doctrine. However, the appellate court ruled that the transaction was immune.

The Eighth Circuit also dealt a blow to the FTC’s merger enforcement efforts in 2011. The appellate court affirmed dismissal of an action brought by the agency and the State of Minnesota against global pharmaceutical company Lundbeck, Inc., challenging a 2006 acquisition (2011-2 Trade Cases ¶77,570). The appellate court ruled that the district court did not commit clear error when it determined that the plaintiffs failed to identify a relevant market in challenging the drug company’s acquisition of the rights to a drug that allegedly resulted in a single firm’s control of the “practicable alternatives” for the treatment of a life-threatening heart condition affecting low-birth-weight babies. The Eighth Circuit has denied the Commission’s motion for an en banc rehearing.

Another setback in the health care area was the dismissal of the FTC’s complaint challenging Laboratory Corporation of America’s acquisition of smaller rival clinical laboratory testing company Westcliff Medical Laboratories, Inc. (2011-1 Trade Cases ¶77,348). That court also questioned the FTC’s proposed relevant markets for analyzing the anticompetitive effects of the transaction.

In addition to the merger litigation in the health care sector, the agency announced in 2011 four merger reviews involving drug makers that were resolved by consent decrees. Those actions included: Hikma Pharmaceuticals and Baxter International, Dkt. No. C-4320; Grifols and Talecris Biotherapeutics Holdings Corp., Dkt. No. C-4322 ; Perrigo Company and Paddock Laboratories, Inc., Dkt. No. C-4329; and Teva Pharmaceuticals, Inc. and Cephalon, Dkt. No. C-4335 .

Also in the pharmaceutical industry, the FTC continued efforts to combat so-called “pay-for-delay” agreements, supporting proposed federal legislation and pursuing pay-for-delay cases in federal courts.

Together with the Antitrust Division, the FTC released guidance for assisting health care providers in the formation of new accountable care organizations (ACOs) in October. The “Final Statement of Antitrust Enforcement Policy Regarding Accountable Care Organizations Participating in the Medicare Shared Savings Program” is intended to help health care providers form procompetitive ACOs that benefit both Medicare beneficiaries and patients with private health insurance, while protecting health care consumers from higher prices and lower quality.

The Commission also issued a unanimous opinion in 2011 holding that the North Carolina State Board of Dental Examiners—an agency of the State of North Carolina that regulates the practice of dentistry—excluded non-dentist providers from the market for teeth whitening services in violation of Sec. 5 of the FTC Act (2011-2 Trade Cases ¶77,705). Earlier in the year, the Commission decided that the board was not entitled to state action immunity (2011-1 Trade Cases ¶77,331).

Expect the issue of state action immunity to continue to be an important issue for the FTC in 2012 and beyond.

“Clarifying the state action doctrine, and limiting its anticompetitive potential, has been a Commission priority from 2001 through today,” said FTC Chairman Jon Leibowitz in a speech before the American Bar Association Section of Antitrust Law, in November.

U.S. antitrust approval is a major hurdle; however, the combination of the two leading stock exchange groups, which was announced in February, still requires clearance by the European Commission (EC).

Although the Antitrust Division settlement would only resolve concerns over the merger’s impact on U.S. markets, it indicates that the parties are willing to make concessions to get the deal done. It is a positive sign for a deal that continues to evolve in an effort to satisfy EC competition concerns.

U.S./European Cooperation

The Antitrust Division said that it worked closely with the EC in reviewing the deal. The parties provided waivers to facilitate cooperation between the agencies.

“The open dialogue between the Antitrust Division and the European Commission was very effective and allowed each agency to conduct its respective investigation while mindful of ongoing work and developments in the other jurisdiction,” said Sharon A. Pozen, Acting Assistant Attorney General in charge of the Antitrust Division.

Proposed U.S. Consent Decree

Under the terms of a proposed consent decree, which requires the approval of the federal district court in Washington, D.C., Deutsche Börse would have to direct its subsidiary International Securities Exchange Holdings Inc. (ISE) to sell its 31.5 percent stake in Direct Edge Holdings LLC and agree to other restrictions to resolve U.S. antitrust concerns. Direct Edge is the fourth largest stock exchange operator in the United States.

The relief required by the consent decree is intended to settle U.S. allegations that the merger would substantially lessen competition or potential competition in three relevant markets: (1) displayed equity trading services; (2) listing services for exchange-traded products (ETPs), including exchange-traded funds; and (3) real-time proprietary equity data products in the United States. According to the government’s complaint, NYSE and Direct Edge are head-to-head competitors in displayed equities trading services and in the provision of real-time proprietary equity data products. Direct Edge is allegedly a potential competitor to NYSE in listing services for ETPs.

European Commission Investigation

Meanwhile, the EC investigation continues. The in-depth investigation into the transaction was opened in August, after the EC’s initial market investigation indicated competition concerns in a number of areas.

The EC said in August that it had particular concerns in the field of derivatives trading and clearing. Derivatives are financial contracts whose value is derived from an underlying asset or variable, such as stocks, interest rates, or currencies. Derivatives are generally used for hedging, investment purposes, and overall risk management in financial markets. Clearing plays an important role in derivatives trading, managing the risk of the trading parties in the interim period between trading and settlement, the EC explained.

The merging parties announced on December 13 that they had submitted revised remedies to the EC Directorate-General for Competition. “[T]he parties have strengthened their original proposal with respect to European single equity derivatives by increasing the assets to be included in the divestiture, and to provide the purchaser of that business with an option to access Eurex Clearing for single equity derivatives products,” according to an NYSE announcement. “The parties have also improved the coverage of their clearing access remedy for innovative equity index and interest rate derivatives. In addition, the parties committed to license the Eurex trading system to a third party interested in launching interest rate derivatives.”

It has been reported, however, that the remedies offered by the parties are still not sufficient to allay customer concerns in Europe.

The parties also have agreed to extend the review period in Europe. A decision is expected in February 2012.

Because of weaknesses in our patent system, companies have started using patents strategically, threatening litigation to block competitors’ sales and stall the development of new products. These lawsuits cost millions to fend off — increasing costs of devices to consumers and dampening innovation. And the only way to fend off these suits is to wield a significant patent portfolio of one’s own, thereby creating the ability to threaten a return volley of infringement suits.

The result: a modern Cold War, in which only the threat of equally damaging retaliation can dissuade a patent aggressor from deploying its most destructive IP weapons. Winston Churchill’s famous comment that “the only direct measure of defense upon a great scale is the certainty of being able to inflict simultaneously upon the enemy as great damage as he can inflict” is as applicable to the mobile patent wars as it was to global politics in the latter half of the 20th century.

Patent Arms Race

The patent arms race is quickly coming to a head. In 2010, Novell announced it was being acquired by IT management vendor called Attachment. Curiously, Attachment would not be purchasing Novell’s vast patent portfolio. Rather, Novell’s 882 patents, many of which relate to free and open-source software, were sold to an unknown entity called CPTN Holdings LLC, which turned out to be a consortium of technology companies comprising Microsoft, Apple, Oracle and EMC.

The U.S. Department of Justice reviewed this transaction and eventually added conditions to the deal, requiring CPTN Holdings LLC and its owners to change their original agreements to address the department’s antitrust concerns. The department said that, as originally proposed, the deal would jeopardize open-source software innovation in a variety of areas, including mobile operating systems.

These conditions did not deter Microsoft and others from acquiring even more patents. For instance, in the battle to purchase the patent assets of Nortel, a Canadian technology company in bankruptcy, Google’s initial $900 million bid was dwarfed by an unknown, dark horse bidder with a $4.5 billion dollar offer: Rockstar Bidco.

When the blinds were lifted, it turned out that Rockstar Bidco was made of up of all the largest makers of smartphone operating systems, except Google: namely Apple, Microsoft and Research in Motion — plus a few others. Based on their history of patent aggression, it is no stretch to believe that these firms clearly intend to use the Nortel portfolio to handicap Google’s Android operating system and tax Google’s efforts to innovate in the mobile technology space.

In partial response to the acquisition of the Nortel portfolio by its already patent-rich competitors, Google announced plans in August to buy Motorola Mobility (MMI), which owns, among other things, some 17,000 patents. While the Department of Justice is currently reviewing the transaction, it’s clear that this deal will provide a potential deterrent against frivolous patent infringement lawsuits, help create patent balance amongst major smartphone players, and therefore promote competition and innovation on the merits. The fact that other Android-device manufacturers publicly support this deal shows the importance to consumers of patent balance in the mobile space.

It seems the only solution to these IP battles is to embrace the Cold War mentality and permit the IP equivalent of mutually assured destruction. Importantly, Google’s acquisition of MMI is very different from Rockstar Bidco’s purchase of Nortel’s patents because Google is a single firm fighting to establish its own defensive position, whereas Rockstar Bidco is a cadre of competitors aiming to prevent others from effectively competing with them. As such, regulators should allow Google to complete its acquisition of MMI immediately and they should continue to allow companies to engage in defensive patent acquisitions.

At the same time, to allow a cadre of companies to combine their efforts and target one standout competitor serves no procompetitive function. In fact, this can only accelerate the arms race, and distract the industry from competing on the merits. Regulators should remain vigilant for coordinated actions by companies — such as Rockstar Bidco’s acquisition of Nortel’s patents — aiming to damage another competitor.

We have to remember why we are having this debate. The companies involved are among the most creative and productive companies in America. We want them to continue innovating. We want them to continue competing with one another rather than engaging in patent aggression, which ultimately harms consumers by raising prices and reducing choice. We should not forget that it is innovation and competition which leads to the development of the very products we hope to receive as a gift this holiday season.