Markets Wired

In a decision announced today, the U.S. Court of Appeals for the Fifth Circuit ruled in favor of the Federal Trade Commission, denying a petition by Chicago Bridge & Iron Company (CB&I) to review an administrative FTC opinion that CB&I illegally acquired certain assets of Pitt-Des Moines, Inc. (PDM) in February 2001, during a pending FTC investigation. The Circuit Court’s ruling ends litigation in the case against CB&I and upholds the FTC’s administrative opinion that the acquisition substantially lessened competition in four relevant markets for industrial storage tanks in the United States.

According to the Circuit Court decision, the FTC correctly applied the legal standards of burdens of proof and persuasion in its 2005 administrative opinion, properly analyzed the “potential entry” defense, and had substantial evidence to conclude that “potential entry” evidence was insufficient to rebut the prima facie case against the respondents. In addition, the Court found that the Commission relied on substantial evidence for its factual findings and that it did not abuse its discretion in issuing the remedy provisions, calling them “not overbroad nor punitive.” Finally, the Court found that a separate evidentiary hearing was not required in this case, as claimed by CB&I, and that the Commission “did not abuse its discretion” in denying CB&I’s request for a rehearing and an additional evidentiary hearing on the remedy the Commission would impose.

Case History

CB&I is one of the world’s leading global engineering and construction companies. PDM was a diversified engineering and construction company, and a distributor of a broad range of carbon steel products. Before the 2001 transaction, CB&I and PDM competed against each other as the two leading U.S. producers of large, field-erected industrial and water storage tanks and other specialized steel-plate structures.

The Commission’s complaint, filed in October 2001, challenged CB&I’s acquisition of PDM’s Engineered Construction and Water Divisions. The complaint alleged, among other things, that the consummated merger significantly reduced competition in four separate markets involving the design and construction of various types of field-erected specialty and industrial storage tanks in the United States: 1) liquefied natural gas (LNG) storage tanks; 2) liquefied petroleum gas (LPG) storage tanks; 3) liquid atmospheric gas (LIN/LOX) storage tanks; and
4) thermal vacuum chambers (TVCs).

Following an administrative trial to resolve these charges, an administrative law judge ruled in June 2003 that the acquisition was anticompetitive, and ordered CB&I to divest all assets obtained through the acquisition. Both CB&I and counsel supporting the complaint appealed this initial decision, and the case was then reviewed by the full Commission. In an opinion issued in January 2005, the Commission upheld the administrative law judge’s initial decision, finding that the acquisition was unlawful, but differed with that decision’s analysis on certain issues and with the decision’s final relief.

In its opinion, the Commission held that the acquisition violated Section 7 of the Clayton Act and Section 5 of the FTC Act. To restore competition as it existed prior to the merger, it ordered CB&I to create two separate, stand-alone divisions capable of competing in the relevant markets, and to divest one of those divisions within six months. CB&I then petitioned the Fifth Circuit to review the Commission’s decision, leading to the decision announced today. Copies of the Fifth Circuit Court of Appeals decision can be found on the FTC’s Web site on the case docket page and as a link to this press release.

The FTC’s Bureau of Competition works with the Bureau of Economics to investigate alleged anticompetitive business practices and, when appropriate, recommends that the Commission take law enforcement action. To inform the Bureau about particular business practices, call 202-326-3300, send an e-mail to [email protected], or write to the Office of Policy and Coordination, Room 394, Bureau of Competition, Federal Trade Commission, 600 Pennsylvania Ave, N.W., Washington, DC 20580. To learn more about the Bureau of Competition, read “Competition Counts” at http://www.ftc.gov/competitioncounts.

The Federal Trade Commission today announced a complaint and settlement with Negotiated Data Solutions LLC (N-Data), which allegedly violated federal law by engaging in unfair methods of competition and unfair acts or practices regarding its enforcement of certain patents against makers of equipment employing Ethernet, a computer networking standard used in nearly every computer sold in the U.S. The settlement will protect consumers from higher prices and ensure competition by preventing the company from charging higher royalties for the technologies used in the standard. The Commission found N-Data liable for its conduct under Section 5 of the FTC Act, alone, without a concurrent determination that the conduct rose to the level of a Sherman Act violation. The vote was 3-2 with Commissioners Pamela Jones Harbour, Jon Leibowitz, and J. Thomas Rosch in the majority and Chairman Deborah Platt Majoras and Commissioner William E. Kovacic dissenting and issuing separate statements.

According to the majority, “We recognize that some may criticize the Commission for broadly (but appropriately) applying our unfairness authority to stop the conduct alleged in this Complaint.” But the FTC’s authority to stop anticompetitive conduct that does not rise to the level of a Sherman Act violation is unique among federal agencies – and “the cost of ignoring this particularly pernicious problem is too high. Using our statutory authority to its fullest extent is not only consistent with the Commission’s obligations, but also essential to preserving a free and dynamic marketplace.”

Chairman Majoras disagreed with the majority’s determination of liability, stating that “[t]his case departs materially from the prior line [of FTC standard-setting ‘hold-up’ challenges], in that there is no allegation that [the patent holder] engaged in improper or exclusionary conduct to induce IEEE [Institute of Electrical and Electronics Engineers] to specify its NWay technology” into the relevant standard. “The majority has not identified a meaningful limiting principle that indicates when an action – taken in the standard-setting context or otherwise – will be considered an ‘unfair method of competition,’” she said, adding also, “The novel use of our consumer protection authority to protect large corporate members of a standard-setting organization is insupportable.”

N-Data, based in Chicago, is engaged in the business of licensing patents that it has acquired from inventors or other holders of patents. The patents involved in this matter were originally held by National Semiconductor Corporation (National). According to the FTC’s complaint, in 1994 National made a commitment to an electronics industry standard setting organization, the IEEE, that if the IEEE adopted a standard based on National’s patented NWay technology, National would offer to license the technology, for a one-time, paid-up royalty of $1,000 per licensee, to manufacturers and sellers of products that use the IEEE standard.

NWay technology enables two devices at opposite ends of a local area network (LAN) link to exchange information and automatically configure themselves to optimize their communication. This process is sometimes referred to as “autonegotiation.” Standardizing on a single autonegotiation technology allowed devices made by different manufacturers to work with one another and with different generations of Ethernet equipment.

As alleged in the complaint, N-Data obtained the patents knowing about National’s prior commitment and after the industry became committed to the standard, but N-Data has refused to comply with that commitment and instead has demanded royalties far in excess of that commitment. The complaint alleges that because N-Data began demanding royalties after it became expensive and difficult for the industry to switch to another standard, N-Data was able to demand higher royalties than the industry otherwise would have paid for the technologies. The complaint also alleges that consumers would be harmed because of N-Data’s conduct for a number of reasons, including that firms would be less likely to assist in the development of industry standards, and that many firms would be unwilling to rely on such standards even if they were developed. In addition, the complaint alleges that consumers would be forced to pay higher prices because of N-Data’s conduct.

N-Data has settled the charges and will be placed under an order prohibiting it from enforcing the patents unless it has first offered the patent license attached to the order, which is based on the terms offered in 1994, before the patented technology was incorporated into the Ethernet standard.

The Commission vote to issue the complaint and accept the consent order and to place a copy on the public record was 3-2, with Commissioners Harbour, Leibowitz, and Rosch voting yes and issuing a majority statement, and Chairman Majoras and Commissioner Kovacic voting no and issuing separate dissenting statements. The order will be subject to public comment for 30 days, until February 22, 2008, after which the Commission will decide whether to make it final. Comments should be sent to: FTC, Office of the Secretary, 600 Pennsylvania Ave., N.W., Washington, DC 20580.

NOTE: The Commission issues a complaint when it has “reason to believe” that the law has been or is being violated, and it appears to the Commission that a proceeding is in the public interest. The complaint is not a finding or ruling that the defendant has actually violated the law. The stipulated order is for settlement purposes only and does not constitute an admission by the defendant of a law violation. A consent agreement is for settlement purposes only and does not constitute an admission of a law violation. When the Commission issues a consent order on
a final basis, it carries the force of law with respect to future actions. Each violation of such an order may result in a civil penalty of $11,000.

Copies of the complaint, consent agreement, and an analysis of the agreement to aid in public comment are available from the FTC’s Web site at http://www.ftc.gov and also from the FTC’s Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W.,
Washington, D.C. 20580. The FTC’s Bureau of Competition works with the Bureau of Economics to investigate alleged anticompetitive business practices and, when appropriate, recommends that the Commission take law enforcement action. To inform the Bureau about particular business practices, call 202-326-3300, send an e-mail to [email protected], or write to the Office of Policy and Coordination, Room 394, Bureau of Competition, Federal Trade Commission, 600 Pennsylvania Ave, N.W., Washington, DC 20580. To learn more about the Bureau of Competition, read “Competition Counts” at http://www.ftc.gov/competitioncounts.

Commission approval of Federal Register notices: The Commission, by a vote of 5-0, has authorized publication of a Federal Register notice announcing the revised thresholds for Section 8 interlocking directorates. Section 8 of the Clayton Act was amended on November 16, 1990. The amendment establishes jurisdictional thresholds that trigger the Act’s prohibition on interlocking directorates. The Act also requires that the Commission revise those thresholds annually, based on the change in the level of gross national product. The new thresholds are $25,319,000 for Section 8(a)(1) and $2,531,900 for Section 8(a)(2)(A). The notice announcing the revisions will be published in the Federal Register shortly and will be effective upon publication. (FTC File No. P859910; the staff contact is James F. Mongoven, Bureau of Competition, 202-326-2879.)

The Commission, by a vote of 5-0, has authorized publication of a Federal Register notice announcing the revised thresholds for the Hart-Scott-Rodino (HSR) Antitrust Improvements Act of 1976 required by the 2000 amendments to Section 7A of the Clayton Act. Section 7A(a)(2) requires the FTC to revise the jurisdictional thresholds annually, based on the change in gross national product, in accordance with Section 8(a)(5). Certain related thresholds and limitations in the HSR rules also are adjusted by this notice. The notice will be published in the Federal Register shortly and become effective 30 days after publication. The revised thresholds will apply to all transactions that close on or after the effective date of this notice. (FTC File No. P859910; the staff contacts are Marian Bruno and Michael Verne, Bureau of Competition, 202-326-2846.)

Copies of the documents mentioned in this release are available from the FTC’s Web site at http://www.ftc.gov and from the FTC’s Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, DC 20580. Call toll-free: 1-877-FTC-HELP.

The Federal Trade Commission today announced a consent agreement with online sellers of alternative hormone replacement therapy (HRT) products that settles charges that they made health claims for their products without supporting scientific evidence.

The Commission’s administrative complaint, filed in September 2007, alleged that Herbs Nutrition Corporation and its principal, Syed M. Jafry, claimed that their natural progesterone creams are effective in preventing, treating, or curing osteoporosis; are effective in preventing or reducing the risk of estrogen-induced endometrial (uterine) cancer; and do not increase the user’s risk of developing breast cancer and/or are effective in preventing or reducing the user’s risk of developing breast cancer. The complaint alleged that they did not have substantiation for these claims and, in some cases, misrepresented that clinical testing proved that the products, Eternal Woman Progesterone Cream and Pro-Gest Body Cream, were effective.

Under the terms of the order, the respondents are required to have competent and reliable scientific evidence substantiating claims about the health benefits, performance, efficacy, safety, or side effects of any dietary supplement, food, drug, device, or health-related service or program, including claims that progesterone products are effective in mitigating, treating, preventing, or curing any disease. The order also prevents the respondents from misrepresenting the existence, contents, validity, results, conclusions, or interpretations of any test, study, or research. In addition, the order contains record-keeping and notification provisions designed to ensure that the respondents comply with the terms of the order, which will expire in 20 years.

The FTC staff identified the respondents during an Internet search of Web sites advertising products as natural alternatives to HRT. The FTC staff found that many of these marketers, including the respondents, were making disease cure and prevention claims, and sent them warning letters advising them to revise or delete any false, misleading, or unsubstantiated claims. The U.S. Food and Drug Administration also sent letters to other alternative HRT sellers, warning them that their business practices could be in violation of FDA law.

The FTC staff followed up with online advertisers who received letters, and all but seven modified the claims on their Web sites. In October 2007, the FTC announced that it had settled charges against six of the marketers that failed to modify their advertising, and issued a complaint against Herbs Nutrition Corporation and Jafry.

The vote authorizing the filing of the consent order and an analysis to aid public comment was 5-0. The consent order will be subject to public comment for 30 days, beginning today and continuing through February 19, 2008, after which the Commission will consider whether to make it final. Comments should be send to: FTC Office of the Secretary, 600 Pennsylvania Ave., N.W., Washington, DC 20580.

Copies of the order are available from the FTC’s Web site at http://www.ftc.gov and the FTC’s Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580. The FTC works for the consumer to prevent fraudulent, deceptive, and unfair business practices and to provide information to help spot, stop, and avoid them. To file a complaint in English or Spanish, click http://www.ftc.gov/ftc/complaint.shtm or call 1-877-382-4357. The FTC enters Internet, telemarketing, identity theft, and other fraud-related complaints into Consumer Sentinel, a secure, online database available to more than 1,600 civil and criminal law enforcement agencies in the U.S. and abroad. For free information on a variety of consumer topics, click http://ftc.gov/bcp/consumer.shtm.

The Federal Trade Commission today issued a report entitled “Accounting for Laws that Apply Differently to the United States Postal Service and its Private Competitors,” which fulfills its requirement under the Postal Accountability and Enhancement Act (PAEA).

The report identifies and quantifies – to the extent possible – the Postal Service’s economic burdens and advantages that exist due to its status as a federal government entity, as well as those benefits resulting from its postal and mailbox monopolies. The report also examines the net economic effect of the relevant laws governing the Postal Service and its private competitors, concluding that the USPS’s burdens and benefits both create marketplace distortions: legal constraints increase the USPS’s costs, disadvantaging it as a competitor; implicit subsidies that the USPS enjoys partially mask the USPS’s higher costs from consumers, creating incentives for consumers to purchase more competitive mail products from the USPS than they otherwise would. The report further explores ways that the Postal Regulatory Commission (PRC) or Congress may be able to minimize or eliminate such distortions.

Report Conclusions

The report’s conclusions are based on comments received in response to a Federal Register notice announcing the study; the Commission’s consultations with the USPS, other governmental agencies, and private parties; and a review of relevant publicly available material. They include the following:

From the USPS’s perspective, its unique legal status likely provides it with a net competitive disadvantage versus private carriers:

Federally imposed restraints on the USPS’s operations increase its costs to provide competitive products by an estimated $330-$782 million a year.

However, because the USPS is a federal government entity, the USPS’s competitive products operations enjoy an estimated implicit subsidy of between $39-$117 million a year.

From a market-wide perspective, the federally-imposed restrictions that impose economic burdens on the USPS and the implicit subsidies that provide the USPS an economic advantage should be viewed as two distinct distortions that compound each other and negatively affect the provision of competitive mail products: the USPS’s legal constraints cause it to use more resources to produce competitive mail products, whereas its legal advantages partially mask these higher costs from consumers, creating incentives for consumers to purchase more competitive mail products from the USPS than they otherwise would. Taken together, these two distortions mean that more resources are used to produce the current volume of competitive mail products than is necessary.

• Congress may wish to consider acting to reduce the constraints on the USPS’s competitive products operations.
• At the same time, the PRC may wish to consider requiring the USPS to account for its implicit subsidies when making pricing and production decisions.
• In the longer term, a variety of options exist to eliminate the legal differences between the USPS and its private competitors:
• Congress and the PRC may wish to consider whether relaxing the current mailbox monopoly to allow consumers to choose to have private carriers deliver competitive products to their mailboxes would create net benefits for consumers.
• Congress may wish to consider whether the scope of the postal monopoly could be narrowed to allow greater competition while still maintaining universal service.
• Establishing the USPS’s competitive products division as a separate corporate entity – with either private or governmental ownership – arguably would eliminate many of the major remaining major legal differences between the USPS and its private competitors.

Finally, the report notes that, “Ultimately the PRC will need to determine the appropriate approach under its regulatory authority to require the USPS to account for the economic benefits it derives from differential legal treatment. Further, only Congressional action can eliminate the legal constraints that negatively impact the USPS’s competitive product operations.”

Structure of the Report

The report begins with an executive summary that contains an overview of the Postal Accountability and Enhancement act and how it relates to the FTC’s study. It summarizes the responses to the Commission’s Federal Register notice seeking public comments on the study, provides an overview of the operations of the Postal Service and competitive mail products, and summarizes the conclusions of the FTC’s report. The remainder is divided into five chapters, each addressing a specific theme.

Chapter I provides an overview of the postal and mailbox monopolies and the competitive products industry. It also includes a description of the structure of the competitive products industry. Chapter II presents the legal differences arising from the USPS’s status as a federal entity, including implicit USPS subsidies and a range of restraints on the agency’s operations. Chapter III focuses on the advantages arising from the USPS’s postal and mailbox monopolies and Chapter IV covers accounting for cost differences due to legal requirements. These include estimating and accounting for the agency’s economic burdens and benefits, their net competitive effect on the Postal Service, efficiency issues related to accountings and implicit subsidies, and competition issues related to these subsidies. Finally, Chapter V focuses on eliminating legal differences between the Postal Service and its competitors, including relaxing legal and political constraints on the agency’s operations, competitive neutrality, modifying or eliminating the mailbox monopoly, and the corporatization of the USPS’s Competitive Products Division.

The Commission vote to issue the report was 5-0, with Commissioners Pamela Jones Harbour and Jon Leibowitz issuing a joint separate statement in which they concurred in part. According to the statement, which can be found on the FTC’s Web site as a link to this press release, Harbour and Leibowitz, “ . . . join in the Commission’s finding that the USPS, because it is an agency of the government of the United States, ‘enjoys’ a net competitive disadvantage versus other firms selling competitive products. . . . Having answered the question posed to the Commission by the Congress, we would have ended the Report [there].”

Copies of “Accounting for Laws That Apply Differently to the United States Postal Service and its Private Competitors: An FTC Report” are available from the FTC’s Web site at http://www.ftc.gov and also from the FTC’s Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580.

Today, the Toronto Strategic Partnership, of which the Federal Trade Commission is a member, released a paper summarizing the joint law enforcement initiatives undertaken in the last seven years to combat cross-border telemarketing fraud and other mass-marketing fraud. Through their combined efforts, the Partnership has shut down cross-border operations that defrauded nearly two million U.S. and Canadian consumers of more than $380 million.

In 2000, the Partnership was formed to enhance cooperation and coordination by civil and criminal law enforcement agencies targeting cross-border con artists. The Partnership’s significant accomplishments include:

• The FTC brought 19 major consumer fraud cases in federal courts in connection with its work with the Partnership;
• The Ontario Ministry of Government Services provided investigative leads, surveillance support, and database searches to unravel potential links between various businesses and individuals operating scams or frauds;
• The U.S. Postal Inspection Service filed criminal charges in 15 cases, resulting in 17 convictions. The respective grand jury indictments charged mail- and wire- fraud schemes had defrauded 191,000 victims of over $58 million;
• The Ontario Provincial Police (OPP) established the “Phonebusters” National Call Centre. In addition, the OPP was the lead agency in “Project Northern Rackets,” which involved more that 100 police officers from four different services who spent a year investigating a scam operating out of boiler rooms located in four cities in central Ontario; and
• The Royal Canadian Mounted Police contributed full-time staff to the work of the Partnership. The York Regional Police Service has contributed staff in the past. The U.K.’s Office of Fair Trading is the newest member of the Partnership.

One component of the Partnership, the Toronto Police Service Fraud Squad’s Mass Marketing Unit, is staffed on assignment from different Partnership agencies. “From the inception of the Partnership, the fraud squad has closed boiler rooms, conducted searches, arrested malefactors, and assisted in prosecutions. At least 644 people have been arrested, and 495 search warrants have been executed. Dozens of boiler rooms also have been closed, and tens of thousands of dollars have been returned to victims,” the paper notes.

The Partnership consists of law enforcement agencies in the U.S., Canada, and the UK. Its primary focus has been fraud emanating from the Province of Ontario. There are several other similar partnerships operating in other parts of Canada.

The paper covers activities from the formation of the Partnership through September 2007. In addition to the FTC, the Partnership is composed of the U.S. Postal Inspection Service, the Competition Bureau of Canada, the Toronto Police Service, the Ontario Provincial Police, the Ontario Ministry of Government Services, the Royal Canadian Mounted Police, and the United Kingdom’s Office of Fair Trading.

This release is available electronically from the FTC’s Web site at http://www.ftc.gov and from the FTC’s Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, DC 20580. Call toll-free: 1-877-FTC-HELP.

The marketers of “Slim Coffee” – an instant coffee product purportedly containing hoodia – have agreed to settle Federal Trade Commission charges that their advertising falsely claimed that their product would enable its users to lose significant amounts of weight without diet or exercise. The defendants ran television ads claiming that drinking Slim Coffee had been “clinically proven” to cause weight loss of “up to 5 pounds a week and up to 20 pounds a month.” “There’s no need to change your eating habits or what you eat,” the defendants claimed. “Just replace your coffee with Slim Coffee and you will start to see results. It’s that easy and all-natural.”

According to a complaint filed by the FTC in federal district court, the defendants’ weight-loss claims for Slim Coffee were false and unsupported by any reliable scientific studies, in violation of the FTC Act. Among other things, the Commission’s complaint alleged that neither Slim Coffee nor any of its individual ingredients, including hoodia, would enable its users to lose as much as two to five pounds per week, without reducing caloric intake or increasing physical activity.

Under the proposed settlement, Diet Coffee, Inc. and its principals, David Stocknoff and David Attarian, based in New York City, are prohibited from claiming that any product enables users to lose substantial weight without reducing caloric intake or increasing physical activity. The order also prohibits them from representing that any product or service causes weight loss, causes users to lose any specified amount of weight, reduces or eliminates fat, reduces or curbs appetite, or increases metabolism, or making any other health-related benefit or efficacy representation unless it is true, not misleading, and substantiated by reliable scientific evidence. In addition, the defendants are prohibited from misrepresenting the existence, contents, validity, results, conclusions, or interpretations of any test or study concerning such products.

The settlement contains a monetary judgment of $923,910, which is suspended based on the defendants’ inability to pay. The full judgment will be imposed if they are found to have misrepresented their financial condition.

The defendants advertised Slim Coffee on the Internet, radio, and television, including on Oxygen, Fox Reality Channel, A&E Television, The CW, WE, and Bravo. Advertisements also have appeared in magazines and Sunday newspaper supplements, including SmartSource by News America Marketing FSI, Inc.

The Commission vote to authorize staff to file the complaint and stipulated final orders was 5-0. The complaint and stipulated final orders were filed in the U.S. District Court for the Southern District of New York.

NOTE: These stipulated final orders are for settlement purposes only and do not constitute an admission by the defendant of a law violation. A stipulated final order requires approval by the court and has the force of law when signed by the judge.

Copies of the documents mentioned in this news release are available from the FTC’s Web site at http://www.ftc.gov and from the FTC’s Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580. The FTC works for the consumer to prevent fraudulent, deceptive, and unfair business practices and to provide information to help spot, stop, and avoid them. To file a complaint in English or Spanish, click http://www.ftc.gov/ftc/complaint.shtm or call 1-877-382-4357. The FTC enters Internet, telemarketing, identity theft, and other fraud-related complaints into Consumer Sentinel, a secure, online database available to more than 1,600 civil and criminal law enforcement agencies in the U.S. and abroad. For free information on a variety of consumer topics, click http://www.ftc.gov/bcp/consumer.shtm.

(FTC File No. 0723052)