The American Bar Association Spring Meeting 2000, Federal Trade Commission Committee
Good morning, and thank you for inviting me to speak to you today about developments at the Bureau of Competition over the last twelve months.1 It is a great privilege for me to serve the consumers of the United States as Director of the Bureau of Competition. In my first six months on the job the Bureau faced, and continues to face, increasing and ever-demanding challenges. In meeting these challenges, I am fortunate to be able to call on an enormously talented and dedicated staff, which continually demonstrates its limitless energy and enthusiasm for fulfilling their duty as public servants. Senator Kohl has called them the "unsung heroes of antitrust" and I second that praiseworthy title.
Once again, the Bureau had a busy year. We entered into 22 merger consents, involving such diverse markets as grocery stores, crude oil, and pharmaceuticals. Parties abandoned another 9 transactions after we expressed competition concerns. We also challenged a variety of anticompetitive practices, obtaining 8 consent agreements involving areas such as health care restraints, vertical price fixing, and a violation of the Robinson Patman Act.
I could talk at length about our recent and on-going work at the Bureau of Competition, but today I will limit myself to an overview of a number of issues that have particular resonance, both at the Bureau and in the wider antitrust community: (1) the merger wave; (2) managing the burdens of the antitrust process; (3) Hart-Scott-Rodino reform; (4) the divestiture study; (5) oil and other energy mergers; (6) competition in health care and pharmaceuticals; and (7) the retail revolution.
II. The Merger Wave
The number of mergers continues to increase, and responding to those that are anticompetitive commands the bulk of the Bureau's resources. The number of mergers reported to the FTC and the Justice Department pursuant to the Hart-Scott-Rodino Act has more than tripled over the past decade, from 1,529 transactions in fiscal year 1991 to 4,642 transactions in fiscal 1999. In fiscal year 2000, filings continue at a record pace, over 15% above the record set in fiscal 1998.
The small increases in Bureau resources in the past few years have not kept pace with the flood of mergers. Thus, more than two-thirds of our competition resources currently are dedicated to merger enforcement, compared to an historical average of closer to 50 percent. The Washington Post recently characterized the merger wave as a "frenzy of merger madness, capping a dramatic wave of corporate consolidation that has been gaining momentum through much of the decade."2
While the number of merger filings has more than tripled in the past decade, the value of commerce has risen even faster, increasing an astounding eleven-fold during the past decade. But numbers alone do not explain the challenge of the current merger wave because today's merger transactions not only tend to be larger, but also raise novel or complex competitive issues requiring detailed scrutiny. In the past year alone, companies filed notifications for 273 mergers with a transaction size of one billion dollars or more, and many of these mergers involved overlaps in more than one product or service.
There are many reasons for the current merger wave. Strategic responses to an increasingly global economy account for a large percentage. Many are in response to new economic conditions created by deregulation (e.g., telecommunications, financial services, and electric utilities). Still others result from the desire to reduce overcapacity in more mature industries. The rapidly evolving world of electronic commerce has a substantial impact on the merger wave because consolidations often follow the emergence of a new marketplace. These factors suggest that the merger wave for the most part reflects a healthy, dynamic economy. Nonetheless, some mergers appear designed to stifle competition in important sectors of this dynamic economy.
III. Antitrust Process
Dealing with this merger wave is not a frictionless process. As a former practitioner, I am keenly aware of the burdens and costs of antitrust investigations. Like you, I was often in the position of explaining the antitrust process to clients and negotiating with the staff trying to speed up and to reduce the burdens of agency investigations and ultimately to achieve a favorable result for the client.
In my two years at the Bureau of Competition I have gained a new perspective on the antitrust investigation process. I have a greater appreciation of the needs of the agency for the information necessary to reach informed conclusions on important competition issues. As someone who participated in a seven week merger trial, I am acutely aware of the need for the government to be fully prepared for litigation when it is filed. That also means that we have to prepare for the possibility of litigation in many more cases than we actually file.
I know many of you have participated in recent discussions about the burdens placed on companies in the second request process. I believe that our investigations generally place relatively modest burdens on merging parties considering the depth of analysis required. Over 70 percent of merger filings are cleared on an early termination basis, and of the remaining filings less than 3 percent receive some type of extensive investigation, a second request. At the FTC, more than 60 percent of our second request investigations result in some form of enforcement action, suggesting that we are careful in identifying those mergers where enforcement action is most likely. It is not in our interest, given our strained resources, to issue a second request unless we have some strong indication of likely competitive problems. When a second request is necessary, they typically are not unduly burdensome. In less than 15% of investigations do the parties "substantially comply" with the request; rather, in most investigations, we agree to a limited document production focusing on a handful of essential issues. Approximately 70 percent result in document productions of under 20 boxes. The vast majority of investigations are completed within 120 days, which is particularly short considering the large number of matters that require parties to secure an up-front buyer during the investigation period.
Nevertheless, I recognize that improvements can and should be made, and today I want to announce several initiatives we have undertaken to streamline our practices. In drawing up these initiatives we have worked closely with the ABA Antitrust Section and individual private practitioners to identify problems and potential solutions. We have also had important input and counsel from members of Congress who are interested in this issue, particularly the Chairmen of both Judiciary Committees, Senator Hatch and Congressman Hyde, and their very able staffs. Following these consultations, we have identified four steps that I believe will result in significant improvements in our process.
The General Counsel will now serve as the arbiter in disputes over compliance with the second request, and any such appeal will be decided within 10 business days. That is our first reform, and I think a significant one. Although a dispute process was implemented approximately 5 years ago, this process was under-utilized. We heard from the private bar that parties were reluctant to appeal issues to the Bureau Director, who has the ultimate decision on whether to recommend a case to the Commission. By creating an appeal to an independent decision maker, we hope to make this process a more attractive option.
Second, we will routinely schedule second request conferences early in the investigation in which key issues will be identified and, hopefully, an agreed upon plan for the investigation put in place. Staff attorneys are now instructed to convene a "second request conference" with parties to a transaction within 5 business days after the issuance of the second request, unless otherwise agreed. The purpose of the meeting will be to discuss, in a nonbinding exchange of ideas, the competitive concerns presented by the proposed transaction. To the greatest extent possible, staff and the parties should identify threshold issues which, if resolved early, would allow the decision on whether or not to proceed with the investigation to be made quickly. The parties should expect to open discussion of document production at this conference, and I expect that my staff will be open to negotiating possible modifications to the second request.
Third, I have requested staff to respond to all requests for modifications within 5 business days after those modification proposals have been made. This procedure responds to complaints that requests to modify the second request are not consistently answered in a timely fashion.
Finally, I have asked the Assistant Director for Operations, Claudia Higgins, to conduct a thorough review of all second requests before they are sent to the Commission in an effort to provide additional review of the scope of documents requested.
An ongoing project is our work with the ABA and other industry representatives to identify "best practices" on the part of both government and private practitioners. As part of this project, the Bureau will evaluate its investigations over the past two years to identify strengths and weaknesses. We plan to use our list of best practices to conduct training for all staff attorneys. The Bureau has an active ongoing training program and in the next year we intend to make managing the second request process a critical aspect of that training. In addition, the Bureau will conduct a public workshop on these issues in the near future.
The clearance process is another issue frequently raised by practitioners. Both the Antitrust Division and the FTC are dedicated to resolving clearance disputes as expeditiously as possible, and we almost always meet our goal of resolving these disputes within ten days. While we are not always able to do that, it would be incorrect to conclude that unnecessary second requests are the result. In the past year there were only 47 FTC HSR investigations in which clearance disputes delayed the initiation of the investigation after the ten day period. Of those filings, only three resulted in second requests from the Commission, and two of those led to enforcement actions. Of course, we would prefer to meet the goal in every matter, but these delays do not seem to result in unnecessary second requests.
The reforms I have outlined today are unlikely to be the end of the story. Government enforcers must always look at ways to streamline the process and to reduce unnecessary burdens. I believe we have a mutually beneficial relationship with the Antitrust Section and look forward to working with them and others to find additional ways to improve the process.
IV. Other Hart-Scott-Rodino Issues
The $15 million size of transaction threshold has remained the same since the HSR Rules were put in place in 1978. As a consequence, a statute designed to capture several hundred of the largest mergers now results in close to 5,000 filings per year. Many feel the threshold is now too low and should be increased. Various bills have been introduced in both the Senate and the House. All would increase the size of transaction threshold and also increase the filing fee. Some bills would establish a multi-tiered approach, with the filing fee increasing with the size of the acquisition. At the moment, the issue is in flux and it is not clear that any single bill will gain enough support to pass either body. We believe that an increase in the size of transaction threshold is due and we support an increase; however, this increase must be accompanied by a fee change consistent with our budget needs.
The Hart-Scott-Rodino reform efforts take place against a backdrop of filings that have increased almost 300% in the decade without any increase in our Premerger Office staff. I take great pride in the work of our Premerger Notification Office. With a small staff of lawyers and other professionals they have handled the awesome challenges of the merger wave with great effectiveness. Managing such a workload is a daunting task, and we are fortunate to have Marian Bruno as Assistant Director of the shop. Under Marian's leadership the office has improved their responsiveness to inquiries from the public and are continually finding ways to make the HSR process more user friendly and efficient. The office answers thousands of phone calls every month responding to a variety of questions regarding the program.
The Premerger office conducts biweekly brown bag lunches which provide a forum for HSR practitioners to meet the staff, give input into the process, and to discuss HSR issues. We have conducted 19 meetings and the response has been very strong. In the months to come, we will be hosting these brown bags in several of our regional offices to hear more from practitioners outside the beltway. You should contact Marian if you would like to attend one of these sessions.
The Premerger Office is aware of the burdens of the HSR process and is attempting to reduce them. The office issued two formal interpretations over the last year. The first eliminated the requirement of 5 original notification forms and now allows an original and one copy to be filed with the FTC and 3 copies with the DOJ. This removes a small burden and I view this as an example of a step in the right direction. Just this week (Monday), the office issued a formal interpretation on the recently enacted Gramm-Leach-Bliley Act. As many of you know, banks and bank holding companies are now able to engage in securities and insurance businesses. The formal interpretation clarifies that for the PNO it's "business as usual"and the non-bank portions may be subject to premerger reporting requirements if the HSR size thresholds are met. We have several other burden reducing reforms under consideration and welcome ideas from the bar and business about how we can improve the process. Your input is important to making effective reforms to the HSR process so please contact us with your ideas.
Another HSR development that we have dealt with recently is the issue of "joint defense agreements" negotiated between the parties to a transaction. We have learned that some counsel are advising their clients to take "hell or high water" clauses out of the merger agreement and place them in their joint defense agreement. The parties then presumably withhold the agreement on the basis of attorney-client privilege. This is an unfortunate development. We consider these clauses, which detail the parties' bottom line on divestiture, to be an integral part of the merger agreement, and a necessary part of our antitrust analysis. Dropping them into a joint defense agreement does not change this fact. We are, therefore, adding a specification to our second requests to help us find and get this information.
V. The Divestiture Study
Transactions today are increasingly complex, and designing remedies can often be daunting. We are fortunate to have a Compliance Division with great expertise on what remedies work and what do not. Their expertise is invaluable as we face the challenges posed by the merger wave in an increasingly technology driven economy.
The Commission's objective is to provide relief that will return competition to the status that existed before the merger. We recognize that relief in a Section 7 case should be tailored to alleviate the likely anticompetitive effects in the relevant market. Thus, while it is true, as the Supreme Court has said, that the Commission has "wide discretion in its choice of a remedy," it seeks to assure that its remedy is reasonably related to the unlawful practices.3
We are aware of the need not to upset transactions that may enhance efficiency if effective remedies may be achieved through settlement. Crafting an effective remedy depends, in part, on a careful analysis of market structure, especially entry barriers. It also depends on what kind of relief would be most effective in restoring competition. To be an acceptable alternative to litigation, a settlement must resolve the competitive concerns uncovered during our investigation.
Over the past decade the Commission has faced several challenges in devising remedies in merger cases. In the past, divestitures of physical assets in areas of competitive overlap have been the principal form of remedy. However, in some markets, such as high tech markets, the divestiture of physical assets sometimes appeared over inclusive and, on occasion, inadequate. Thus, the Commission has sought a wide range of other remedies, including licensing arrangements. In some cases, these arrangements must be supplemented with a variety of assets and continuing relationships in order to assure that effective technology transfers take place.4
This year the Bureau staff completed a study of the divestiture process, focusing on merger cases brought from 1990-94.5 The study found that most divestitures create viable competitors in the relevant market, but identifies three potential issues that could cause problems: (1) divestitures of less than an on-going business, and divestitures to firms without some previous exposure to the industry at issue, such as through a supply or customer relationship, often raise problems about viability; (2) respondents tend to look for buyers who are not the strongest competitors, and they may engage in strategic conduct to impede the success of the buyer; and (3) many buyers of divested assets do not have access to sufficient information to prevent mistakes in the course of their acquisitions. In addition, the study observes that continuing relationships between the merged parties and the acquirer of the divested assets often lead to the failure of the remedy.6
The report recommends a number of order provisions and approaches to remedy that can mitigate some of the problems identified, including up-front buyers, a short divestiture period, interim trustees, and crown jewels. An up-front buyer is the key to many divestiture orders. In the past three years, up-front buyers have been specified in over 60 percent of divestiture consent decrees. We almost always insist on an up-front buyer if something less than an on-going business is to be divested. It is almost universally used where assets may deteriorate quickly, such as in retailing. However, up-front buyer provisions are not restricted to retailing. They have also been used in pharmaceuticals, industrial products, refractories, engine bearings, chemical plants and others. When an up-front buyer is not used, we require a short divestiture period, 4 months or less, and a crown jewel. We will continue to require the use of up-front buyers or a very short divestiture period, unless the parties can provide us with a persuasive case why such an approach is inappropriate. In the vast majority of cases, we will continue to insist on up-front buyers.
VI. Oil and Energy Mergers
The Commission has an extensive history of investigating mergers in the energy industries, particularly petroleum. The FTC has challenged mergers in those industries that would be likely to reduce competition, result in higher prices, and injure the economy of the nation or any of its regions.7
The Commission has been particularly active in investigating petroleum mergers due to the ongoing trend of consolidation and concentration in this industry. For example, on February 2, 2000, the Commission voted to challenge the proposed merger of BP/Amoco and ARCO.8 The Commission also challenged the merger of Exxon and Mobil,9 the largest oil merger in history.
BP/ARCO In BP-ARCO, the Commission is attempting to block a transaction that would create the third-largest private petroleum company in the world and the largest U.S. oil producer and refiner. The deal would combine the two largest producers of crude oil on the North Slope of Alaska, the two largest suppliers of ANS crude oil to refineries in California and Washington, and the two most successful competitors in bidding for exploration leases on the North Slope. In addition, the combined firm would have a dominant interest in the oil pipeline and storage facilities that serve the crude oil marketing center in Cushing, Oklahoma, the delivery point specified by the New York Mercantile Exchange for physical delivery of the world's most heavily traded petroleum futures contracts.
I cannot comment on an on-going court case, but I can set forth the allegation made by the Commission in our public complaint filed in District Court in San Francisco. In its complaint, the Commission alleges three separate relevant markets: (1) the production, sale, and delivery of crude oil to West Coast refineries; (2) bidding for rights to explore ANS; (3) and pipeline and oil storage services in Cushing, Oklahoma.
The Commission alleges that BP exercises monopoly power in various markets for the sale of crude oil to refineries on the West Coast by using price discrimination, including efforts to reduce the supply of crude oil by selling ANS crude to Asia, the U.S. Gulf Coast, or the U.S. Mid-continent. ARCO is the firm most likely to constrain BP's exercise of monopoly power. The Commission alleges the effect of the merger would eliminate ARCO as an effective competitor, eliminate substantial actual competition between BP and ARCO, eliminate the likelihood of even greater competition between BP and ARCO in the future, and increase the market power that BP already is exercising in the sale of crude oil to targeted West Coast refiners.
BP and ARCO are by far the two largest producers of ANS crude oil and the two most successful competitors in bidding for oil and gas leases on the North Slope and in exploring for and developing new producing oil fields on those properties. The Commission alleges that the effect of the proposed merger may be substantially to lessen competition in bidding for leases on state and federal properties on the ANS and will also raise the already formidable barriers to entry in the ANS bidding market and enhance the incentive and capability of BP to reduce the pace of exploration and development.
Cushing, Oklahoma is a major crude oil marketing hub in the U.S. Prices for crude oil in Cushing serve as a benchmark for the pricing of many other crude oils around the world. In addition, Cushing also serves as a focal point for light sweet crude oil futures trading on the NYMEX. Efficient functioning of the pipeline and oil storage facilities into and in Cushing is critical to the fluid operation of both the trading activities in Cushing and the trading of crude oil futures contracts on the NYMEX. After the proposed merger, BP would control over 40 percent of the pipeline and storage capacity serving Cushing. The Commission alleges that the merger would eliminate ARCO as an effective competitor in Cushing, eliminating substantial actual competition between BP and ARCO, and create or enhance market power. This market power likely would enable BP to manipulate NYMEX trading in light sweet crude oil futures by restricting or otherwise manipulating the deliverable supply of crude oil in Cushing.
Exxon/Mobil This merger was the largest industrial merger in history. Exxon owns four refineries in the U.S. that can process approximately 1.1 million barrels of crude oil and other feedstocks daily. Exxon owns or leases approximately 2,049 gasoline stations nationally and sells gasoline to distributors or dealers that operate 6,475 retail outlets throughout the U.S. Mobil operates four refineries in the U.S., which can process approximately 800,000 barrels of crude oil and other feedstocks per day. About 7,400 retail outlets sell Mobil-branded gas throughout the U.S.
The Commission alleged that the acquisition would significantly injure competition in a number of markets, including refining and marketing, and would allow Exxon/Mobil to raise gas prices to consumers. To settle the allegations, the parties agreed to the largest divestiture in history. The settlement preserved competition at a level at least as good as existed before the merger in each relevant market. The investigation was coordinated with the European Commission and the Attorneys General of several states.
The Commission found that the merger would pose competitive problems in "moderately concentrated" markets (California gas refining, marketing and retail sales of gas in the Northeast, Mid-Atlantic and Texas) and in "highly concentrated" markets (jet turbine oil). The most substantial portions of the settlement would resolve the problems in the moderately concentrated markets. In a statement, Chairman Pitofsky said, "this agreement will stand as the Commission's most significant enforcement effort in moderately concentrated markets in many years."
The two largest relevant markets, and the two largest divestitures, occurred in the marketing of gasoline in the Northeast and Mid-Atlantic and the refining and marketing of CARB gasoline in California.
Exxon and Mobil are direct competitors in at least 40 metropolitan areas. The Commission alleged that the merger would significantly reduce competition in these moderately and highly concentrated markets where major oil companies use price zones to set wholesale and retail prices neighborhood by neighborhood. Entry is unlikely because sites are difficult to obtain and build, and open stations are unlikely to switch to brands that are new to the market. If not restructured, the merged firm could increase prices significantly and each percentage increase would cost consumers approximately $240 million annually. The settlement requires Exxon/Mobil to sever its relationships with 1,740 gas stations. The company is required to sell the gas stations it owns or leases and assign their franchise and supply agreements with open dealers and jobbers to acquirers approved by the Commission. The acquirer could use the Exxon or Mobil name for up to 10 years and has the exclusive right to use Exxon or Mobil branded products and to expand the network in the relevant states and a nonexclusive right to accept and process Exxon or Mobil credit cards.
California requires motor gasoline to meet stringent pollution specifications mandated by the California Air Resources Board (CARB). Both Exxon and Mobil refine gas for use in California. The Commission alleged that CARB gas is a relevant market because motorists cannot switch in response to a price increase and the gas is sold nowhere else. More than 95 percent of CARB gas is refined by seven firms in a moderately concentrated market. To a much greater extent than in other areas of the country, these seven firms own their own stations and can carefully monitor the prices charged by their competitors' outlets, making it easier to identify firms that deviate from a coordinated price. A one percent increase in CARB gas would cost California consumers more than $100 million annually. The settlement requires the company to divest Exxon's Benecia refinery and Exxon's marketing in California. The company would divest approximately 85 owned or leased stations and assign supply agreements for approximately 275 others. Exxon would be prohibited from using the Exxon name in California for up to 12 years.
The Commission challenged potentially anticompetitive mergers in other energy industries as well. In one case, Dominion Resources, an electric utility that accounted for more than 70% of the electric power generation capacity in the Commonwealth of Virginia, proposed to acquire Consolidated Natural Gas ("CNG"), the primary distributor of natural gas in southeastern Virginia and the only likely supplier to any new gas-fueled electricity generating plants in that region. Dominion allegedly could have raised the cost of entry and power generation for new electricity competitors. Working closely with Commonwealth officials, the Commission required the divestiture of Virginia Natural Gas, a subsidiary of CNG.10 In the second, the Commission challenged CMS Energy Corporation's proposed acquisition of two natural gas pipelines.11 CMS itself was a transporter of natural gas, whose customers could purchase the gas from other suppliers, either for their own use or to generate electricity. The Commission alleged that the acquisition would have enabled CMS to raise the cost of transportation for its gas and electric generation customers. This case did not require divestitures, but the Commission's consent order assures that CMS cannot restrict access to its pipeline network, thus allowing new entry that should maintain a competitive market.
VII. Health Care and Pharmaceuticals
For many years, the Commission has been at the forefront in bringing enforcement actions to protect the competitive process in all types of health care markets, including services provided by hospitals and health care professionals as well as products provided by the pharmaceutical and medical equipment industries. In the past two years alone, the Commission has brought more than a dozen enforcement actions involving health care, pharmaceuticals, and medical devices.
In one of these cases, the Commission, jointly with several states, sued Mylan Laboratories, one of the nation's largest generic pharmaceutical manufacturers, charging Mylan and other companies with monopolization, attempted monopolization and conspiracy to eliminate much of Mylan's competition by tying up the key active ingredients for two widely-prescribed drugs used by millions of patients.12 The FTC's complaint charged that Mylan's agreements allowed it to impose enormous price increases - over 25 times the initial price level for one drug, and more than 30 times for the other. For example, in January 1998, Mylan raised the wholesale price of clorazepate from $11.36 to approximately $377.00 per bottle of 500 tablets, and in March 1998, the wholesale price of lorazepam went from $7.30 for a bottle of 500 tablets to approximately $190.00. In total, the price increases resulting from Mylan's agreements allegedly cost American consumers more than $120 million in excess charges. The Commission filed this case in federal court under Section 13(b) of the FTC Act seeking injunctive and other equitable relief, including disgorgement of ill-gotten profits. In July of last year the district court upheld the FTC's authority to seek disgorgement and restitution for antitrust violations.13 Trial is set for the Spring of 2001.
Let me say a few words about the use of Section 13(b) and explain why it is important in this case. In theory, criminal sanctions and heavy fines should deter egregious anticompetitive conduct. In practice, courts have been reluctant to impose the criminal penalties requested by the Justice Department and fines have been insufficient, almost never equaling or exceeding unjust gains. Without 13(b) disgorgement, some instances of serious anticompetitive conduct would pass a cost/benefit test, and make perfect business sense.
The 13(b) remedy is well-suited for the Mylan case because it does not involve such novel or complex concepts as to necessitate the Commission's expertise in an administrative forum. This is an allegation of a classic antitrust violation, in which a group of firms conspired to keep competitors out of the market, enabling them to charge higher prices. The criteria for 13(b) cases include a serious violation of the antitrust laws, a substantial amount of injury, and the ability to be able to identify and return a substantial portion of the disgorgement to the injured consumers.
Just last month, the Commission charged four other companies with entering into anticompetitive agreements that delayed the entry of generic drug competition, potentially costing consumers hundreds of millions of dollars a year. The administrative complaint issued against Hoechst Marion Roussel (now Aventis) and Andrx Corporation charges that Hoechst, the maker of Cardizem CD, a widely prescribed drug for treatment of hypertension and angina, agreed to pay Andrx millions of dollars to delay bringing its competing generic drug, or any other non-infringing version, to market while Hoechst sued Andrx for alleged patent infringement.14 Cardizem CD is a form of diltiazem, and Hoechst accounts for about 70% of the sales of once-a-day diltiazem products in the United States. Hoechst's Cardizem sales in 1998 exceeded $700 million (over 12 million prescriptions). The complaint further alleges that, because the Hatch-Waxman Act15 grants an exclusive 180-day marketing right to Andrx, Andrx's agreement not to market its product was also intended to delay the entry of other generic drug competitors.
Recently, some industry observers have noted that the threat of generic entry upon patent expiration has been a great stimulant for innovation.16 In response to generic competition with their older drugs, innovator companies research, develop, and market increasing numbers of improved new drugs. Such additions to the marketplace may satisfy previously unmet medical needs, break new therapeutic ground or compete with older drugs.
The Hatch-Waxman Act attempts to strike a balance between rewards to the patent holder and additional competition from new entrants in the pharmaceutical area by providing a clear path for generic alternatives to enter the market. In many respects, the Act has been successful in fostering the development of generic drugs. Subverting the Act through anticompetitive means would have serious consequences for harm to consumers.
The complaint against two other companies, Abbott Laboratories and Geneva Pharmaceuticals, Inc., which the companies agreed to settle, involved allegations of similar conduct in connection with a proprietary drug - called Hytrin - that Abbott manufactures, and a generic version that Geneva prepared to introduce.17 Hytrin is used to treat hypertension and benign prostatic hyperplasia (BPH or enlarged prostate) - chronic conditions that affect millions of Americans each year, many of them senior citizens. BPH alone afflicts at least 50% of men over age 60. In 1998, Abbott's sales of Hytrin amounted to $542 million (over 8 million prescriptions) in the United States. The complaint alleges that Abbott paid Geneva approximately $4.5 million per month to keep Geneva's generic version of the drug off the U.S. market. This agreement also allegedly delayed the entry of other generic versions of Hytrin because of Geneva's 180-day exclusivity rights under the Hatch-Waxman Act. Abbott was charged with monopolization of the market, and both companies were charged with conspiracy to monopolize. The proposed consent order enjoins such practices.
The drug settlement cases are the first to challenge the payment by a brand name drug firm to pay a generic rival to stay out of the market. This is a tremendously important area with high stakes to consumers and our nation's efforts to control medical costs. Within the next 4 years alone, patents on 33 drugs will expire representing over $14 billion in sales and consumers can expect major savings from generics if the incumbents do not block competition with illegal agreements.18
The Commission also plays an important role in studying the changing health care marketplace and advising regulators and Congress. The Bureau's staff has filed comments before the FDA on two recent regulatory initiatives: (1) reform of the generic exclusivity provisions (the regulations at issue in the drug settlement cases) and (2) the citizens petition process. We believe this advocacy serves an important role by helping regulators understand and take competition concerns into account in structuring the regulatory process.19 In addition, last year the Bureau of Economics issued a detailed report on the rapidly evolving pharmaceutical industry.20 The report found that developments in information technology, federal legislation, and the emergence of market institutions such as health maintenance organizations and pharmacy benefit managers have accelerated change in this industry. The report attempts to provide a more complete understanding of the competitive dynamics of this market and discusses possible competitive problems and procompetitive explanations for pricing strategies and other industry practices. These kinds of studies are important to help inform regulators, enforcers, and Congress on the important public policy issues involving health care.
VIII. The Retail Revolution
As a result of global and innovation-based changes, consumers are becoming aware that a "retail revolution" is underway. To remain competitive, retailers - whether brick-and-mortar or online - are seeking competitive advantages in purchasing, distribution, and marketing. The leading beneficiary of this innovation is the consumer. For example, the Internet has changed traditional sales and distribution patterns for products of all types, providing faster, cheaper, and more efficient ways to deliver goods and services. A market study by Jupiter Communications estimates that annual consumer sales on the Internet will explode from $15 billion in 1999 to $78 billion by 2003.
Experience demonstrates that traditional retailers sometimes respond to market upheavals by trying to forestall new forms of competition. When such conduct steps over antitrust boundaries, enforcement action is needed to ensure that anticompetitive practices do not deter development of procompetitive innovations.21 In 1998, for example, the FTC charged 25 Chrysler dealers with an illegal boycott designed to limit sales by a car dealer that marketed on the Internet. These brick-and-mortar dealers allegedly had planned to boycott Chrysler if it did not change its distribution of vehicles in ways that would disadvantage Internet retailers. The competitive danger of such a tactic is obvious: a successful boycott could have limited the use of the Internet to promote price competition and reduced consumers' ability to shop from dealers serving a wider geographic area via the Internet. An FTC consent order prohibits the dealers from engaging in such boycotts in the future.22
The Internet is not the only place where we have seen popular new forms of retailing attacked by traditional firms. The Commission enforcement action against Toys "R" Us is an example. The Commission held that Toys "R" Us used its market power to try to stop warehouse clubs, such as Costco, from selling popular toys such as Barbie dolls in ways that allowed consumers to make comparisons to the prices charged by Toys "R" Us . Warehouse clubs are a relatively new retailing format that has grown significantly in the past decade. Toys "R" Us's concern was that warehouse clubs were selling some toys at lower prices and beginning to take market share away from traditional toy retailers. In response, Toys "R" Us pressured toy manufacturers to deny popular toys to warehouse clubs, or to sell them on less favorable terms. The FTC issued an administrative order to stop these practices, and the matter is now on appeal to the U.S. Court of Appeals for the Seventh Circuit.23 Although the rivalry in that case was between two different kinds of brick-and-mortar firms, the enforcement principles underlying the Commission's action apply with equal force to the new world of online retailing.
Book selling is one of the industries that have been most visibly impacted by technological change. Traditional sellers in this industry have repositioned themselves against emerging competition. One method of doing so is through merger. A major transaction the agency reviewed last year was Barnes & Noble's attempted acquisition of Ingram Book Group. Barnes & Noble was the largest book retailing chain in the United States, and Ingram was by far the largest wholesaler of books in the United States. Thus, it was largely a vertical transaction.24 While many vertical transactions are likely to be efficiency-enhancing, and at times they have been treated as almost presumptively lawful, the Commission staff saw the Barnes & Noble/Ingram transaction as a serious competitive threat to thousands of independent book retailers. The staff was concerned that the acquisition of an important upstream supplier such as Ingram might enable Barnes & Noble to raise the costs of its bookselling rivals by foreclosing access to Ingram's services, or denying access on competitive terms.25 The rivals would be less able to compete, and Barnes & Noble could increase its profits at the retail level or prevent its profits from being eroded as a result of competition from new business forms such as Internet retailing. The Commission did not take formal action on this merger because the parties abandoned the transaction before the staff recommendation reached the Commission.
Of course, some traditional retailing practices also can raise competitive concerns. Earlier this month the FTC and the Attorneys General from 56 U.S. states, territories, commonwealths, and possessions settled charges that Nine West, one of the country's largest suppliers of women's shoes, engaged in resale price maintenance, resulting in higher prices for many popular lines of shoes. To settle the charges with the states, Nine West agreed to pay $34 million, which will be used to fund women's health, vocational, educational, and safety programs.
We also continued our enforcement efforts against anticompetitive supermarket mergers. The number of such mergers has increased dramatically in the past three years. While the Commission has not challenged geographic expansion mergers, many mergers among direct local competitors have raised competitive concerns. The Commission has taken enforcement action where appropriate. In Albertsons' proposed acquisition of American Stores, the Commission obtained an agreement to sell 144 stores to preserve competition in California, Nevada, and New Mexico.26 The Attorneys General of those three states participated in the investigation and negotiations in this matter. The consumer savings in Albertson's alone were estimated to exceed $200 million annually. In Shaw's Supermarkets' acquisition of Star markets, the Commission's proposed order requires divestiture of ten supermarkets in eight communities in the Greater Boston area.27 In the last four years alone the Commission has brought more than 10 enforcement actions involving supermarket mergers, requiring divestiture of nearly 300 stores in order to maintain competition in local markets across the United States.
Slotting allowances are another retailing-related topic of current interest at the Commission. The term "slotting allowance" typically refers to a lump-sum, up-front payment that a supplier, such as a food manufacturer, might pay to a retailer, such as a supermarket, for access to its shelves.28 These allowances can amount to tens or hundreds of thousands of dollars. Slotting allowances can be beneficial if they fairly reimburse retailers for the costs and risks of taking on an unproven new product, or when they result in lower prices to consumers. They can be harmful if they permit one manufacturer to acquire exclusivity, across many retail outlets, sufficient to prevent other firms from becoming effective competitors. Still other situations fall in an intermediate gray area. To sharpen our understanding of the circumstances under which slotting allowances can be beneficial or harmful to competition and to consumers, the Commission will hold a two-day workshop on May 31 and June 1. This session will bring together people from manufacturing, retailing, economics, and other relevant disciplines to discuss the issues involved in this very complex subject.
The Commission recently examined charges of price discrimination in a related retailing context and charged McCormick & Company, the world's largest spice company and by far the leading supplier in the United States, with engaging in unlawful price discrimination in the sale of spice and seasoning products. Some retailers allegedly were charged substantially higher net prices than were others, and discounts to favored chains allegedly were conditioned on an agreement to devote all or a substantial portion of shelf space to McCormick products. McCormick agreed to settle the charges by accepting an order that would prohibit the selling of spices at different prices to different retailers, except when permitted by the Robinson-Patman Act.
Last year was one of several recent remarkable years in antitrust enforcement. The merger wave has strained our resources, but the staff has responded with an herculean effort. Our innovative and important investigations and settlements have enhanced and preserved competition, to the benefit of American consumers and businesses.
1 The views expressed are those of the Bureau Director and do not necessarily reflect the views of the Federal Trade Commission or any Commissioner.
2 Sandra Sugawara, Merger Wave Accelerated in '99: Economy, Internet Driving Acquisitions, Wash. Post, Dec. 31, 1999 at E1.
3 FTC v. Ruberoid Co., 343 U.S. 470, 473 (1952).
4 David A. Balto & James F. Mongoven, "Antitrust Remedies in High Technology Industries," Antitrust Report 22 (Jan. 1999).
5 Staff of the Bureau of Competition of the Federal Trade Commission, A Study of the Commission's Divestiture Process (Aug. 1999).
6 For a more comprehensive description of the findings of the Divestiture Study see Richard G. Parker, Global Merger Enforcement, Remarks before the International Bar Ass'n, Barcelona, Spain (Sept. 27, 1999).
7 Section 7 of the Clayton Act specifically prohibits acquisitions where the anticompetitive acts affect "commerce in any section of the country." 15 U.S.C. § 18.
8 Federal Trade Commission v. BP Amoco, p.l.c., Civ. No. C 000416 (SI) (N.D. Cal. Feb. 4, 2000) (complaint) On March 15, 2000, the Commission and all other parties obtained an order from the Court adjourning the preliminary injunction hearing while the Commission evaluates the parties' proposal to sell all of ARCO's Alaska operations to Phillips Petroleum Co.
9 Exxon Corp., FTC File No. 991 0077 (Nov. 30, 1999) (proposed consent order).
10 Dominion Resources, Inc., C-3901 (Dec. 9, 1999) (consent order).
11 CMS Energy Corp., C-3877 (June 2, 1999) (consent order).
12 FTC v. Mylan Laboratories, Inc, CV-98-3115 (D.D.C., filed December 22, 1998; amended complaint filed February 8, 1999). The drugs in question are used for treatment of anxiety.
13 FTC v. Mylan Laboratories, Inc., 62 F. Supp.2d 25, 37 ("Based on the principle of statutory construction set forth in [two Supreme Court cases], five courts of appeals and numerous district courts have permitted the FTC to pursue monetary relief under § 13(b)").
14 Hoechst Marion Roussel, Inc., Dkt No. 9293 (March 16, 2000) (complaint).
15 Under the Hatch-Waxman Act, the first company to file an Abbreviated New Drug Application (ANDA) with the FDA for a generic drug (in this case, Andrx) has an exclusive right to market its generic drug for 180 days. Under the alleged Hoechst-Andrx agreement, Andrx could not give up that exclusivity right. Thus, by allegedly agreeing not to market its drug, Andrx prevented the 180-day exclusivity period from beginning to run, so that other sellers of generic versions of Cardizem CD also could not enter the market.
16 Kim Roller, "What will drive pharmacy sales into the new millennium?" Drug Store News. no 1. vol 21:CP1 (Jan. 11, 1999)(Raymond Gilmartin, Pres. and CEO of Merck, states that Merck plans to invest $2.1 billion in R&D as company faces patent expiration on 5 of its major drugs in 2000 and 2001).
17 Abbott Laboratories, FTC File No. 981 0395 (March 16, 2000) (proposed consent order); Geneva Pharmaceuticals, Inc., FTC File No. 981 0395 (March 16, 2000) (proposed consent order).
18 Amy Barrett, "Crunch Time in Pill Land" Business Week 52 (Nov. 22, 1999).
19 FTC Staff Comments to the Food and Drug Administration, 180-Day Exclusivity Period for Generic Drugs (Nov. 4, 1999); FTC Staff Comments to the Food and Drug Administration, Citizen Petitions (March 2, 2000).
20 FTC Bureau of Economics Staff Report, The Pharmaceutical Industry: A Discussion of Competitive and Antitrust Issues in an Environment of Change (March 1999).
21 David A. Balto, "Emerging Issues in Electronic Commerce," Remarks before 1999 Antitrust Institute, Columbus, Ohio (Nov. 12, 1999).
22 Fair Allocation System, Inc., C-3832 (Oct. 30, 1998) (consent order).
23 Toys "R" Us, Inc., Docket No. 9278 (1998), appeal docketed, No. 98-417 (7th Cir. Apr. 16, 1999).
24 The transaction also raised horizontal issues resulting from Barnes & Noble's significant internal distribution operations.
25 The merged firm might be able to do that in a number of ways, including strategies short of an outright refusal to sell to the non-Barnes & Noble bookstores. For example, Barnes & Noble/Ingram could choose to (1) sell to non-Barnes & Noble bookstores at higher prices, (2) slow down book shipments to rivals, (3) restrict access to hot titles, (4) restrict access to Ingram's extended inventory or back list, or (5) price services higher or discontinue or reduce services.
26 Albertson's, Inc., FTC File No. 981 0339 (June 21, 1999) (proposed consent).
27 Shaw's, Inc., FTC File No. 991 0075 (July 6, 1999) (proposed consent).
28 See "Slotting: Fair for Small Businesses and Consumers?" Hearing before the Committee on Small Business, United States Senate (Sept. 14, 1999).1