The federal transportation agency that oversees regulation of railroads is looking for ways to unplug bottlenecks that may be blocking competition on U.S. railways.

The U.S. Surface Transportation Board (“STB”) has issued a notice that it “will receive comments and hold a public hearing to explore the current state of competition in the railroad industry and possible policy alternatives to facilitate more competition, where appropriate.”

The Board is seeking written comments prior to a hearing addressing the legal, factual, and policy matters described in the notice, including whether the STB should amend its earlier decisions concerning so-called “bottleneck carriers.”  A rail bottleneck rate issue arises “when more than one railroad can provide service over at least a portion of the movement of a shipper’s goods from an origin to a destination, but where either the origin or destination is served by only one carrier, i.e., the bottleneck carrier.”

Under the current rules, a shipper cannot routinely force a bottleneck carrier capable of providing origin-to-destination rail service to quote separate prices for different portions of the route.  According to the STB, shippers do this so they can use a different carrier for those portions of the route served by non-bottleneck carriers.

The STB will also consider changing its rules on terminal facilities access and reciprocal switching agreements.

The STB noted that it has not recently examined these issues, and that the railroad industry has changed dramatically since the STB initially adopted its competitive access standards in the 1980s.  Further, it noted that while productivity gains in the railroad sector “appear to be diminishing,” overall rail transportation prices have increased since 2004, suggesting that it is time for the STB to consider competition issues again.

As CVS Caremark is learning, even an approved merger does not protect a company from later being accused of anti-competitive behavior as a result of the merger.  As we wrote in an earlier post, the Federal Trade Commission began investigating CVS Caremark Corp., which has been accused of anti-competitive practices, in spite of the fact that the FTC approved its merger several years ago.  The 2007 merger—worth $27 billion—combined CVS, a drugstore chain, and Caremark, a pharmacy benefits manager, and proceeded with the FTC’s blessing after a review under Hart-Scott-Rodino Antitrust Improvements Act.

Although the FTC has already confirmed that it is conducting an investigation—and in June FTC Chairman Jon Leibowitz confirmed that he had met with CVS Caremark officials and that the agency was in the process of receiving documents from them—the American Antitrust Institute is urging the FTC to aggressively pursue the possible antitrust violations at CVS Caremark.

The AAI claims that CVS Caremark is engaging in anti-competitive practices designed to force consumers to use CVS pharmacies.  According to Albert Foer, the AAI president, “evidence that this conduct is now occurring would clearly establish that the merger did in fact enable and incent the combined firm to engage in this conduct.”  The AAI claims that this conduct includes misusing information from the Caremark side of the business, including private patient information, to force consumers to use CVS over rival pharmacies.  In addition, the AAI claims that CVS Caremark is using its “maintenance choice” program to force consumers to use CVS.  The “maintenance choice” program allows consumers to only get prescriptions by mail or at CVS, and the company has been accused of enrolling consumers without their permission.

The AAI is not the only entity urging the FTC to take another close look at the CVS Caremark merger.  Eight members of Congress (four Democrats and four Republicans), asked the FTC to do exactly that in a September 2009 letter.  Should the FTC heed the congressmen and the AAI, a possible outcome could be divestiture.

Of all the substantive areas of American law, antitrust is perhaps the one that most aggressively reaches foreign conduct.  Ever since the Second Circuit’s 1945 Alcoa opinion (United States v. Aluminum Co. of America, 148 F.2d 416), courts and Congress have recognized that foreign conduct, when it affects U.S. commerce, can violate U.S. antitrust laws.  Thus U.S. antitrust regulators sometimes seek evidence of foreign conduct as they weigh whether to bring charges.  A recent decision demonstrates the extent to which, in today’s globalized economy, courts will enforce such pre-lawsuit investigative requests by regulators.

The decision is the October 29, 2010 Order of the United States District Court for the District of Columbia in Federal Trade Commission v. Church & Dwight Co., Inc.  The U.S. Federal Trade Commission (“FTC”) is investigating Church & Dwight (“C&D”), the maker of Trojan condoms, for monopoly maintenance or attempted monopolization in the U.S. condom market – specifically by agreeing to provide retailers with rebates or discounts in exchange for certain display arrangements.  The FTC is considering whether such agreements, if they exist, violate Section 5 of the Federal Trade Commission Act.

The FTC served C&D with a subpoena and a Civil Investigative Demand (“CID”) for documents regarding C&D’s incentive programs for retailers.  C&D refused to comply.  Citing relevance and burden, it challenged several aspects of the requests, including one for documents from C&D’s Canadian subsidiary.  These documents were not relevant, C&D argued, because the FTC’s inquiry was limited to whether C&D monopolized condom sales or distribution “in the United States.”

The Court held that the Canadian evidence was relevant to the investigation.  First, the Court held, the relevance standard governing enforcement of the FTC’s requests is quite liberal: it is satisfied so long as the FTC’s relevance arguments are not “obviously wrong.”  Here, the FTC contended that the Canadian documents were relevant because they may reveal the effects of C&D’s sales practices on its market shares.  C&D has a far lower share in Canada than in the U.S., the FTC argued, and the Canadian documents may shed light on whether different sales practices in the two countries produced this result.  The Court sided with the FTC, finding its argument “not obviously wrong.”  In doing so, the Court observed that the Canadian subsidiary’s conduct could have helped C&D secure a monopoly in the U.S., or could otherwise shed light on the investigation.  In light of such possibilities “in a globalized economy,” the Court held, a federal regulator must be able to investigate foreign subsidiaries.

As to burden, the Court first held that C&D did not adequately show that the burden would be impermissible.  The Court held that C&D was required to show that the FTC’s inquiry would threaten to “unduly disrupt or seriously hinder” C&D’s business operations.  C&D offered no affidavit or other evidence to support such a finding.  The Court also suggested that C&D try to reduce the burden of producing Canadian documents by agreeing with the FTC on electronic search terms to use in screening them.

For companies with U.S. and foreign offices, Federal Trade Commission v. Church & Dwight Co., Inc. perhaps teaches a simple lesson: when an agency requests documents from the foreign office, legitimate burden objections will go further than relevance arguments in shielding foreign documents.  As this decision suggests – and many others spell out more fully – a company that can provide strong, detailed evidence of the burden that it would suffer from production of foreign documents may be spared from compliance.  As the ever-globalizing commercial world makes relevance challenges less and less compelling, a burden challenge may be the last best hope for a company seeking to shield its foreign documents from U.S. regulators.

The decision is available here.

The potential acquisition of telecommunication company Qwest by Internet provider CenturyLink has cleared another hurdle.  Integra, a competitive local exchange carrier that both uses and resells Qwest network services, had fought the proposed deal because of the potential effects on its existing connectivity agreements with Qwest.  However, with a settlement agreement in place that ensures its rights under those prior contracts, Integra dropped its opposition to the deal.

The merger deal, valued at more than $22 billion, would create one of the largest telecommunications companies in the United States, with an extensive broadband network as well as landline telephone and wireless networks.  Because the combined company would present a formidable competitive force, many competitors still oppose the deal, such as the wireless carrier Sprint and other local exchange carriers. 

Whether the Integra settlement agreement will act as template for future agreements remains to be seen.  The settlement agreement contains a number of concessions to Integra, including a guarantee that the combined company will not pass on merger expenses to Integra, a guarantee that Integra can prevent Qwest from making certain types of changes to its network, and the right for Integra to inquire into any deteriorations in Qwest network services. 

The merger must also be approved by both the Federal Communications Commission and several state regulators.  The Department of Justice and the Federal Trade Commission do not oppose the merger.

The United Kingdom’s two antitrust agencies will be merged if a proposed consolidation that seeks to streamline the British regulatory process passes its own merger review by the government.

Currently, the U.K. employs two regulatory bodies to scrutinize competition activity, the Office of Fair Trading (“OFT”) and the Competition Commission.  The two bodies have slightly different roles, but work together in the clearance of mergers and in investigating allegedly anticompetitive conduct.

The U.K. government is considering merging the two bodies in the interest of enhancing efficiency and accountability in the scrutiny of merger deals, which can take longer to clear in the U.K. than in other jurisdictions.

The OFT has the authority to investigate cartels, while the Competition Commission leads investigations in alleged market dominance.  Typically, the OFT will conduct initial investigations in the scrutiny of merger deals in the U.K., and it will pass the investigation onto the Competition Commission if it has any concerns with the deal.

Unlike in the United States, where the antitrust regulators (the Federal Trade Commission and the Department of Justice) have to convince courts of the merits of blocking a merger, the U.K. grants its regulatory agencies the final word on merger clearance.

The U.K. has stated it will make a final decision on the proposed plan in 2011 after seeking public comments.

The idea of merging the agencies has drawn mixed reactions.  Some applaud the increased efficiency of having one agency conducting the merger process and competition oversight, while others fear that such an agency merger may undermine the quality of the oversight process. 

Alec Burnside, a competition partner at Linklaters LLP, cautioned that “[t]he challenge will be to make sure there is somehow still a ‘fresh pair of eyes.’”  He noted the possible danger of having one agency with all the antitrust power in that it might be “judge, jury, and executioner.”  However, he added that “the argument for a merger is compelling in its own way, and there may be other ways of ensuring the right checks and balances.”  Other competition lawyers in the U.K. have expressed the view that from cutting down the number of regulators will promote efficiency. 

The U.K. business community appears to favor the idea.  The Confederation of British Industry believes it would expedite the merger review and investigation processes, thus “reducing the time firms are left in limbo.”