October 26, 2011

Kinder Morgan And El Paso May Need To Cut Pipeline Networks To Save Massive Energy Merger

In a transaction valued at $21.1 billion – one of the largest energy deals in history – Kinder Morgan, Inc. has announced a deal to purchase the El Paso Corporation.

The two corporations are large “midstream energy” companies that process and transport oil and gas.  If the deal is approved by shareholders and the FTC, Kinder Morgan will be the largest midstream energy company in North America, controlling some 67,000 miles of pipelines linking every major production field to market.

The FTC is expected to examine whether the combined firm will exert too much control nationally, with particular attention to certain local markets where the firms have overlapping networks.  There is substantial overlap of networks in the center of the Untied States, between the Rocky Mountains and the Midwest.

Kinder Morgan has stated it is willing to sell assets to win approval of the deal.  Some concern about decreased competition may be eased because pipeline rates are regulated by the Federal Energy Regulatory Commission, which must also approve the closure of any pipelines where no alternate supply routes exist.

It is not hard to find precedent for divestiture in the sector.  In fact, the FTC intervened in a previous El Paso merger.  In 2001, El Paso and its merger partner were required to divest 11 gas pipelines stretching more than 2,500 miles before the deal was allowed to proceed.

The Kinder Morgan transaction – which contains a $650 million breakup fee – is expected to close next spring.  The deal has already triggered a lawsuit by the Louisiana Municipal Police Employees Retirement System against Goldman Sachs.  The fund claims that Goldman Sachs – which owns about 20 percent of Kinder Morgan – had a conflict of interest when it advised El Paso to sell to Kinder Morgan Inc.  The lawsuit alleges Goldman advised El Paso to sell at a lower price to earn more fees than if El Paso had gone through with a previously announced spinoff.

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Categories: Antitrust Enforcement, Antitrust Litigation

    October 24, 2011

    Federal Judge Takes Pilgrim’s Pride To The Woodshed For Manipulating Chicken Prices

    A federal judge in the Eastern District of Texas has slapped Pilgrim’s Pride Corp., the largest poultry producer in the U.S., with a $26 million damage award for manipulating the price of chicken.

    According to Magistrate Judge Charles Everingham IV, Pilgrim’s Pride violated the Packers and Stockyards Act of 1921 by shutting down a packing plant in El Dorado, Arkansas and refusing to sell the operations to its competitors with the intent to artificially raise prices.

    The decision to idle the plant in 2009 followed Pilgrim’s Pride’s filing for bankruptcy during a time of rising feed costs and a market decline.  Pilgrim’s Pride later emerged from bankruptcy after being taken over by the Brazilian meatpacking company JBS Swift.

    Judge Everingham cited an email from the company’s chief restructuring officer, William Snyder, in which he wrote that Pilgrim’s Pride intended “to restrict the chicken in the area and allow the prices to rise.”

    Pilgrim’s Pride CEO, Bill Lovette, said the company will appeal the ruling.   

    The case was brought on behalf of approximately 90 chicken farmers in Arkansas who were injured when Pilgrim’s Pride shut down the plant and refused to buy chickens from them.  According to Peter Carstensen, an antitrust law professor at the University of Wisconsin, the ruling may open up a new avenue for farmers to sue processors in the beef and pork markets as well.

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    Categories: Antitrust Litigation

      October 20, 2011

      Heavy Duty Truck Transmission Antitrust Suit Picks Up Speed In Delaware

      Federal Judge Sue L. Robinson in the District of Delaware has given the go-ahead to a suit alleging truck manufacturers conspired to create and maintain a monopoly with supracompetitive prices in the market for heavy duty truck transmissions.

      Judge Robinson has denied the defendants’ motion to dismiss the complaint in Wallach v. Eaton Corp.

      The class action, brought by Mark S. Wallach, the bankruptcy trustee for Performance Transportation Services Inc., and Tauro Bros. Trucking Co., alleged that defendants conspired to create and maintain Eaton’s monopoly in violation of Sections 1 and 2 of the Sherman Act and Section 3 of the Clayton Act.  Defendant Eaton is a manufacturer of heavy duty truck transmissions.  The other named defendants are original equipment manufacturers (OEMs) that purchase transmissions.  It is alleged that all defendants shared in the increased profits earned by Eaton.

      The complaint alleges that in response to both a downturn in the market for heavy duty trucks and increased sales by Eaton’s competitor, ZF Meritor, the OEMs and Eaton conspired to remove ZF Meritor from the transmission market.

      The alleged monopolization was enacted through the use of long term agreements.  Under these agreements, Eaton gave discounts and rebates to the co-defendants in exchange for their purchasing of transmissions exclusively from Eaton.  The agreements were allegedly de facto exclusive dealing contracts that forced ZF Meritor to leave the market for heavy duty truck transmissions.  According to the complaint, this enabled Eaton to charge higher prices to OEMs that were not members of the conspiracy.

      Ruling that there was sufficient evidence to suggest both a conspiracy and the maintenance of increased prices, Judge Robinson ruled that the Sherman Act claims should proceed, though she dismissed the Clayton Act claim.

      This litigation follows a suit in front of Judge Robinson in which ZF Meritor successfully proved antitrust violations by Eaton.  However, no damages were awarded in that case.

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      Categories: Antitrust Law and Monopolies, Antitrust Litigation

        October 17, 2011

        Canadians Release New Merger Guidelines

        Canada’s Competition Bureau has released final revisions to its Merger Enforcement Guidelines.

        The Guidelines describe how the Competition Bureau will analyze merger transactions. 

        The new Guidelines were issued on October 6, 2011, after the Bureau held consultations during the last two years with foreign competition agencies and throughout Canada.  The changes are the first revisions to the Guidelines since 2004. 

        The Guidelines were changed after the United States revised its Horizontal Merger Guidelines in 2010.  As we reported in an earlier post, the U.S. revisions offered a more tolerant approach for analyzing mergers by downplaying the role of market definition and by emphasizing the need to avoid interference with competitively beneficial mergers. 

        Some of the Canadian revisions follow the U.S. approach by having less of an emphasis on market definition and by looking more at the competitive effects of a merger.  Other features of the new Guidelines include discussing how a merger is defined under the Competition Act, providing for greater scrutiny of vertical mergers, and giving an update to the merger “efficiencies defence.”

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        Categories: Antitrust Enforcement, International Competition Issues

          October 14, 2011

          NBA Legend Bill Russell Challenges NCAA In Court

          Basketball legend Bill Russell, who led the Boston Celtics dynasty that dominated the NBA in the 1960s, is charging down court once again, but this time it’s in a federal – not a basketball – court.

          The former basketball star at the University of San Francisco, five-time winner of the NBA Most Valuable Player Award and a 12-time All-Star, is suing the NCAA, the Collegiate Licensing Company (“CLC”) and Electronic Arts, Inc. (“EA”), claiming that they are violating federal antitrust laws with licensing practices that enable them to profit from college basketball players’ likenesses long after they’ve left college.

          The complaint in Russell v. NCAA, which was filed in federal court in the Northern District of California, alleges that the defendants violated Section 1 of the Sherman Act by engaging in a price-fixing conspiracy and a boycott that “unlawfully foreclosed class members from receiving compensation in connection with the commercial exploitation of their images, likeness and/or names following their cessation of intercollegiate athletic competition.”

          The complaint claims that the defendants’ practices of having student-athletes contract away their rights to the commercial use of their images is the product of an anticompetitive conspiracy and results in unjust enrichment, entitling the plaintiff to damages and injunctive relief.  Russell is challenging the validity of the form used to achieve the transfer of rights. 

          The market for collegiate merchandise is significant.  The complaint cites the CLC website for the proposition that “there is a ‘$4.0 billion annual market for collegiate licensed merchandise.’”  Russell claims that while the defendants continue to reap financial benefits from players’ participation in collegiate sports, even former players are “foreclosed from participating or sharing” in the “commercial benefits from the sale and use of the players’ images,” notwithstanding the fact that the players have moved on from their respective collegiate careers. 

          The complaint focuses on the development of EA’s video games, such as “NCAA Basketball” and “NCAA Football,” which incorporate “photorealistic” graphics of players and venues. 

          The suit is being brought as a class action under Rules 23(b)(2) and (b)(3) of the Federal Rules of Civil Procedure.  Russell is the putative representative of two classes: one class of certain former student-athletes (for purposes of antitrust damages and injunctive relief), and one class of certain current and former student-athletes (for purposes of declaratory and injunctive relief). 

          This is the latest chapter in the perennial debate over the propriety of compensating collegiate athletes.  The complaint references a number of such pending litigations in California state and federal courts, including In re NCAA Student-Athlete Name & Likeness Licensing Litigation, and suggests the possibility of consolidation.

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          Categories: Antitrust and Price Fixing, Antitrust Litigation

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