Friday, September 28, 2018

U.S. District Court for the District of Columbia, FTC v. Wilhelmsen, Civil Action No. 18-cv-00414-TSC

Merger: Antitrust: Competition: FTC:

Market definition:

Market (high market concentration):

Two competitors only:

Cluster market:

Targeted customers:

Price discrimination:

Hypothetical monopolist test:

Small but significant and non-transitory increase in price (“SSNIP”):

Brown Shoe Practical Indicia:

Herfindahl-Hirschmann Index (“HHI”):

Gross Upward Pricing Pressure Index methodology (“GUPPI”):

Injunctive relief:

Prima facie case:


(…) Maritime companies (…) regard a consistent and effective marine water treatment program as critical to maintaining an operational fleet of ships. See, e.g., PX80014 ¶¶ 3, 5, 7 (describing the importance of water treatment chemicals to ship operations, the need for consistency and dependability in chemical products, and the preference for companies offering total packages of chemical products and related services) (Op., p. 5).

(…) Pursuant to a Share Purchase Agreement dated April 27, 2017, WMS proposed to acquire 100% of Drew’s voting securities for approximately $400 million. Am. Compl. ¶ 25. The FTC then conducted a ten-month investigation, after which it “found reason to believe that the proposed Acquisition violates Section 7 of the Clayton Act and Section 5 of the FTC Act.”

Section 7 of the Clayton Act prevents mergers or acquisitions where “the effect . . . may be substantially to lessen competition, or to tend to create a monopoly” in “any line of commerce or in any activity affecting commerce in any section of the country.” 15 U.S.C. § 18. As the Supreme Court has noted, Section 7 concerns “probabilities, not certainties,” Brown Shoe Co. v. United States, 370 U.S. 294, 323 (1962), and thus the FTC need not demonstrate certainty that a proposed merger will produce anticompetitive effects—only that a “substantial lessening of competition will be ‘sufficiently probable and imminent’ to warrant relief.” FTC v. Arch Coal, Inc., 329 F. Supp. 2d 109, 115 (D.D.C. 2004) (citing United States v. Marine Bancorporation, 418 U.S. 602, 618 (1974)).

Section 13(b) of the Federal Trade Commission Act empowers the Federal Trade Commission to seek preliminary injunctive relief in order to prevent a merger until it can adjudicate the merger’s legality in an administrative proceeding, provided the agency has “reason to believe” that the merger will violate the antitrust laws. 15 U.S.C. § 53(b).

(…) The ultimate determination of the legality of a merger involves an assessment of the new firm’s market power (…) It is appropriate to begin a merger analysis by defining the “relevant product and geographic boundaries of the market in question.” (…) (“defining the relevant market is critical in an antitrust case because the legality of the proposed mergers in question almost always depends upon the market power of the parties involved.”)

The “relevant market has two components: (1) the relevant product market and (2) the relevant geographic market.” (Op., p. 11-12).

In this case, there is no dispute regarding the relevant geographic market—the parties agree it is global.

Relevant product market:

The Supreme Court has long maintained that “the outer boundaries of a product market are determined by the reasonable interchangeability of use or the cross-elasticity of demand between the product itself and the substitutes for it.” Brown Shoe Co., 370 U.S. at 325. Accordingly, the touchstone is demand substitution—“market definition focuses . . . on customers’ ability and willingness to substitute away from one product to another in response to a price increase or a corresponding non-price change such as reduction in product quality or service.” 2010 Merger Guidelines § 4 (…) Lastly, antitrust markets can be based on targeted customers. Section 4.1.4 of the Merger Guidelines—described by the court in Sysco as providing “the clearest articulation of a targeted customer approach to product market definition”—states that “if a hypothetical monopolist could profitably target a subset of customers for price increases, the Agencies may identify relevant markets defined around those targeted customers, to whom a hypothetical monopolist would profitably and separately impose at least a small but significant and non-transitory increase in price.” Merger Guidelines § 4.1.4; Sysco, 113 F. Supp. 3d at 27. In other words, a targeted customer market may exist when “a price increase for targeted customers may be profitable even if a price increase for all customers would not be profitable because too many other customers would substitute away.” Merger Guidelines § 3 (Op., p. 14).

Hypothetical monopolist test:

(…) The application (…) is frequently the subject of “testimony from experts in the field of economics,” and the “practical indicia” described by the Supreme Court in Brown Shoe. Sysco, 113 F Supp. 3d at 27. In determining the bounds of a relevant market, courts often opt “to ask hypothetically whether it would be profitable to have a monopoly over a given set of substitutable products . . . . If so, those products may constitute a relevant market.” H & R Block, 833 F. Supp. 2d at 51–52; see also 5C PHILLIP E. AREEDA & HERBERT HOVENKAMP, ANTITRUST LAW (hereinafter, “Areeda & Hovenkamp”), ¶ 530a, at 237 (4th ed. 2014) (“A market can be seen as the array of producers of substitute products that could control price if united in a hypothetical cartel or as a hypothetical monopoly.”). This hypothetical inquiry is referred to by courts and in the merger guidelines as the hypothetical monopolist test. See Sysco, 113 F. Supp. 3d at 27; Merger Guidelines § 4.1.1. The test essentially asks whether a “hypothetical profit-maximizing firm, not subject to price regulation, that was the only present and future seller of those products . . . likely would impose at least a small but significant and non-transitory increase in price (“SSNIP”) on at least one product in the market, including at least one product sold by one of the merging firms.” Merger Guidelines §4.1.1. A SSNIP is usually defined as five percent or more. Id.

The Brown Shoe Practical Indicia:

Courts also determine the boundaries of a relevant product market by examining “such practical indicia as industry or public recognition of the relevant market as a separate economic entity, the product’s peculiar characteristics and uses, unique production facilities, distinct customers, distinct prices, sensitivity to price changes, and specialized vendors.” Whole Foods, 548 F.3d at 1037–38 (Brown, J.) (quoting Brown Shoe, 370 U.S. at 325). The Brown Shoe “‘practical indicia’ of market boundaries may be viewed as evidentiary proxies for proof of substitutability and cross-elasticities of supply and demand.” H & R Block, 883 F. Supp. 2d at 51 (quoting Rothery Storage & Van Co. v. Atlas Van Lines, Inc., 792 F.2d 210, 218 (D.C. Cir. 1986)). (Op., p. 14-15).

Cluster market:

The court concludes that the FTC’s use of the cluster market approach is appropriate in this case. Although BWT and CWT products are distinct products intended for distinct uses, they are also indisputably similar. Both are specially blended chemicals that are injected into water systems using special equipment, in order to prevent corrosion and erosion in critical systems (…) While both products make up a “small fraction of the cost of managing a ship,” PX80014 ¶ 3, the cost of system failure in the absence of these products is high. JX-0135 at 002. The fact that these products are low cost, highly critical, and heavily dependent on precise chemistry means that maritime companies strongly prefer consistency in their use, so as to avoid the risk of adverse chemical reaction and the resulting temporary or catastrophic system failure. Moreover, BWT and CWT products are frequently sold together as part of an overall management program that includes a number of additional product-related services. Deckman Hrg. Tr. at 475: 4–14. These similar characteristics matter because they factor into customers’ decisions regarding the quantity of products they purchase, the timing of those purchases, as well as where they make their purchases. In other words, similar product characteristics—including function and risk—produce similar needs and constraints for shipping companies, which in turn affects supplier strategies and, accordingly, promotes similar competitive conditions across these product categories.
Defendants’ argument regarding the lack of interchangeability between BWT and CWT—i.e., the alleged product market’s “overinclusiveness”—is at odds with the concept of a cluster market as a doctrine that “allows items that are not substitutes for each other to be clustered together in one antitrust market for analytical convenience.” Staples II, 190 F. Supp. 3d at 117 (f. 2, p. 18).
(…) The law on cluster markets requires only similarity in competitive conditions—not indistinguishability. See Staples II, 190 F. Supp. 3d at 117 (op., fn. 3, p. 19).

“Global Fleets” as Targeted Customers:

As defined by the FTC, “Global Fleets are fleets of 10 or more globally trading vessels—vessels above 1,000 gross tons in size that have traded at two ports that are at least 2,000 nautical miles apart in the preceding 12 months.” Mot. Prelim. Inj. at 18, ECF No. 45-3. The FTC argues that it is appropriate to define the relevant product market around this group because “Global Fleets have distinct characteristics and requirements that limit customer choice, as compared to local or regional fleets,” thus making them susceptible to price discrimination as a distinct customer group. ECF No. 45-3 at 19. In particular, the FTC points out that Global Fleet customers have “particular needs as it relates to centralized negotiation of contracts for delivery to geographically dispersed locations, product consistency, and product availability.” The FTC also argues that Defendants have the ability to price discriminate because they “individually negotiate prices with each customer, and customers have a limited ability to arbitrage.” (…) The construct purports to isolate a relevant subset of the market and measure how the result of a merger would affect customers within that subset. It follows that the construct is a useful way to discuss and predict economic conditions only if its key aspects correspond to elements of the existing marketplace that would make it possible to “profitably target a subset of customers for price increases” post-merger. Sysco, 113 F. Supp. 3d at 38. The FTC, relying on the analysis of its economic expert, Dr. Aviv Nevo, has carried its burden to show that the construct is useful here.

Price Discrimination Against Global Fleet Customers is Possible Post-Merger:

The court finds that the FTC has carried its burden to demonstrate that price discrimination is possible post-merger because: (1) Global Fleets are a distinct group of customers with distinct needs; (2) negotiation with Global Fleets typically occurs on an individualized basis; and (3) documentation reveals that Defendants have contemplated pricing differentials based on size and trading pattern.
(…) While customers retain the freedom to purchase outside of framework agreements, they typically choose not to do so with products for which consistency is valued (Op., p. 30).
(…) In sum, based on (a) the lack of pricing transparency in a marketplace characterized by individualized negotiations, combined with (b) evidence that Global Fleets constitute a distinct segment of the market with distinct preferences, (c) evidence that WSS recognizes the potential benefits of price discrimination, and (d) the lack of any evidence suggesting arbitrage, the court concludes that price discrimination is possible post-merger.
In sum, the court concludes that “the supply of MWT products and services”—including BWT chemicals, CWT chemicals, and associated products and services—to Global Fleets constitutes a relevant antitrust market (Op., p. 33).

Probable effects on competition:

Having defined a relevant antitrust market, the court must “consider the likely effects of the proposed acquisition on competition within that market.”
Market concentration . . . is often measured using the Herfindahl-Hirschmann Index (“HHI”).” Heinz, 246 F.3d at 716; Swedish Match, 131 F. Supp. 2d at 167 n.11. As the court explained in Swedish Match: “The HHI calculates market power by summing the squares of the individual market shares of all the firms in the market. The HHI takes into account the relative size and distribution of the firms in a market, increasing both as the number of firms in the market decreases and as the disparity in size among those firms increases.”
(…) Sufficiently high HHI figures establish a prima facie case of anticompetitiveness. H & R Block, 883 F. Supp. 2d at 71 (citing Heinz, 246 F.3d at 715 n.9). (Op., p. 34).
The merger guidelines consider markets with an HHI above 2500 to be “highly concentrated,” and state that “mergers resulting in highly concentrated markets that involve an increase in the HHI of more than 200 points will be presumed to be likely to enhance market power.” Merger Guidelines § 5.3; Heinz, 246 F.3d at 715 (citing Baker Hughes, 908 F.2d at 982) (noting that significant increase in market concentration “establishes a ‘presumption’ that the merger will substantially lessen competition.”).
The FTC may also bolster its prima facie case by offering additional evidence. Relevant to this case, courts generally recognize that “a merger that eliminates head-to-head competition between close competitors can result in a substantial lessening of competition.”
(…) Market shares: WSS: 47%, Drew: 40%. Post-merger HHI: 7,214, with an increase of 3,563, indicating extremely high market concentration and a very large increase in concentration.

Two competitors only:

However, the court does not understand the FTC to contend that the current market is noncompetitive—rather, the FTC contends that the market is competitive, and that the continued competitiveness of the market depends on aggressive competition between the two existing global suppliers with high market shares. A head-to-head competition theory is not inconsistent with the presence of lower prices in the current market (Op., p. 42).

A GUPPI analysis is essentially a bargaining framework that quantifies a firm’s change in incentive to raise prices following a merger—i.e., the “upward pricing pressure.” PX61000 ¶¶ 318–19. The model takes as a premise that, when WSS (or Drew) bids for business in the current market, higher prices increase the chance that customers will choose another supplier, and that given the closeness of competition between WSS and Drew, Drew (or WSS) will usually be the alternative supplier. PX61000 ¶ 317. In this model, the firm that chooses to raise or lower prices must balance the potential for increased profits at a higher price against the potential to lose profits but gain business at a lower price. PX61000 ¶ 317. The optimal price lies somewhere between these points. PX61000 ¶ 317. The model hypothesizes that without Drew or WSS as a check, the need for balancing disappears. PX61000 ¶ 317. The incentive to raise prices depends on the size of the fraction of diverting WSS customers that go to Drew (or vice versa) and the size of the margin that Drew or WSS earns. PX61000 ¶ 320. To estimate these variables, Dr. Nevo used a number of values drawn from market share estimates based on revenue data, market share estimates based on WSS’s PSM tool, WSS salesforce data, and WSS win-loss data. PX61000 ¶ 321. For margins, Dr. Nevo used invoice data and variable cost margins. PX61000 ¶ 323. Dr. Nevo’s results across multiple trials, accounting for variations of these inputs and calculated from the perspective of both Drew and WSS, produced percentages consistently over 20%, indicating strong incentives for post-merger price increase. Nevo Hrg. Tr. at 658:20–660:23.

(U.S. District Court for the District of Columbia, Sept. 28, 2018, FTC v. Wilhelmsen, Civil Action No. 18-cv-00414-TSC)

La décision (62 p.) est disponible par le lien suivant :

Ses aspects les plus pédagogiques ont été repris ci-dessus.
Elle est d’intérêt notamment en ce qu’elle applique et explique les notions de « cluster market », « hypothetical monopolist test », ainsi que les outils d’analyse économique tels le « Gross Upward Pricing Pressure Index (« GUPPI ») », le « Small but significant and non-transitory increase in price (“SSNIP”) », et le « Herfindahl-Hirschmann Index (“HHI”)”.
La cour de district fédérale juge ici que la FTC est parvenue à établir prima facie l’existence d’effets anticoncurrentiels qui découleraient de l’acquisition d’une compagnie par l’autre, lesquelles sont principales concurrentes sur leur marché ; ces compagnies détiendraient une large majorité des parts de ce marché en cas d’acceptation de l’opération d’acquisition (abandonnée suite à la présente décision).

U.S. District Court for the District of Columbia, FTC v. Wilhelmsen, Civil Action No. 18-cv-00414-TSC

Merger: Antitrust: Competition: FTC: Market definition: Price discrimination:
Hypothetical monopolist test:

Critical loss analysis:
Aggregate diversion ratio:
Small but significant and non-transitory increase in price (“SSNIP”):

To model the course of a hypothetical monopolist, Dr. Nevo—the only economist to have performed the HMT in this case—conducted a critical loss analysis, which essentially calculates “the largest amount of sales that a monopolist can lose before a price increase becomes unprofitable.” Swedish Match, 131 F. Supp. 2d at 160. The test has three steps. First, Dr. Nevo calculated the critical loss threshold—that is, the point at which a hypothetical monopolist would lose too many customers for a SSNIP to be profitable. This step is purely mathematical—the critical loss threshold is the point at which increased profit margins resulting from an increase in price are offset by increased costs resulting from lost sales. Second, Dr. Nevo estimated the actual aggregate diversion ratio, which “represents the proportion of lost sales that are recaptured by all other firms in the proposed market as the result of a price increase . . . since these lost sales are recaptured within the proposed market, they are not lost to the hypothetical monopolist.” H & R Block, 833 F. Supp. 2d at 63. The aggregate diversion is calculated with reference to suppliers to whom lost customers would potentially take their business. Sysco, 113 F. Supp. 3d at 34. Third, Dr. Nevo compared aggregate diversion to critical loss, and if aggregate diversion exceeds critical loss, then a SSNIP would be profitable for a hypothetical monopolist. Id. (citing Swedish Match, 131 F. Supp. 2d at 160).
After running multiple trials with varying inputs, including a SSNIP of 10% (in addition to the typical 5%), Dr. Nevo found that across all cases, the highest critical loss estimate was 17.5%, and the lowest aggregate diversion ratio estimate was 90%.
In sum, the court concludes that “the supply of MWT products and services”—including BWT chemicals, CWT chemicals, and associated products and services—to Global Fleets constitutes a relevant antitrust market.

(U.S. District Court for the District of Columbia, Sept. 28, 2018, FTC v. Wilhelmsen, Civil Action No. 18-cv-00414-TSC)

La description de l’étape « Hypothetical monopolist test » de l’analyse économique dans la procédure d’examen de la question de la position dominante et de ses effets anticoncurrentiels suite à une acquisition projetée.

Evidence (video deposition)

FTC: Merger: Evidence (video deposition):

An evidentiary hearing on the motion for preliminary injunction began on May 29, 2018 and concluded on June 19, 2018. The court heard testimony from fifteen fact witnesses—either live or via video deposition—and three expert witnesses. Plaintiff and Defendants each submitted proposed findings of fact and conclusions of law on June 25, 2018, along with a combined 4,186 exhibits.

(U.S. District Court for the District of Columbia, Sept. 28, 2018, FTC v. Wilhelmsen, Civil Action No. 18-cv-00414-TSC)

Déposition à distance en procédure fédérale.

Wednesday, September 26, 2018

U.S. Court of Appeals for the Third Circuit, Humphrey v. GlaxoSmithKline PLC, Docket No. 17-3285, Precedential

RICO: Conduct committed abroad: Subject matter jurisdiction: (Jurisdiction):
(Antitrust: foreign injury, foreign entities).
(Goodwill: Property interest).

Section 1964(c) of the Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. §§ 1961–1968, creates a private right of action for a plaintiff that “is injured in his [or her] business or property” as a result of conduct that is proscribed by the statute. In RJR Nabisco, Inc. v. European Community, the Supreme Court determined that, although a litigant may file a civil suit against parties for racketeering activity committed abroad, § 1964(c)’s private right of action is only available to a litigant that can “allege and prove a domestic injury to its business or property.”

To establish liability pursuant to § 1962(c), a plaintiff must establish the existence of an enterprise that exists “separate and apart from the pattern of activity in which [the enterprise] engages.” RICO defines “enterprise” as “any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity.” Plaintiffs can show the presence of an enterprise by pointing to a “group of persons associated together for a common purpose of engaging in a course of conduct.”

The Court explained that “absent clearly expressed congressional intent to the contrary, federal laws will be construed to have only domestic application.” This presumption against extraterritoriality “avoids the international discord that can result when U.S. law is applied to conduct in foreign countries.” It also ensures that Congress—rather than the judiciary—is responsible for navigating the “delicate field of international relations.” Nevertheless, the Court concluded that RICO can reach extraterritorial conduct. However, the Court held that 18 U.S.C. § 1964(c) does not allow recovery for injuries suffered in foreign territories. The Court explained that “nothing in § 1964(c) provides a clear indication that Congress intended to create a private right of action for injuries suffered outside of the United States.” Thus, although RICO creates a cause of action for misconduct committed abroad, § 1964(c) requires a “domestic injury.”

(…) There is no consensus on what specific factors must be considered when deciding whether an injury is domestic or foreign.

(…) Because this case does not involve Article III standing, but rather presents an issue of statutory standing, subject matter jurisdiction is not implicated, and the parties incorrectly relied on Rule 12(b)(1).

(…) (The decision not to name GSK China as a defendant is likely an attempt to downplay ties to China.)

(…) In Cevdet Aksut Ogullari Koll. Sti. v. Cavusoglu, the district court found that a plaintiff’s principal place of business and the location of its operations were merely helpful considerations in determining whether the effects of an alleged injury were domestic or foreign. There, a Turkish corporation “asserted that its domestic business was injured because it had . . . annual sales to customers in the United States prior to transacting with the RICO enterprise.” The court held that, even if it were to assume that the plaintiff lost earnings from customers located in the United States, it nonetheless could ascertain no “domestic injury to the plaintiff’s business because its business was entirely located in and operated out of Turkey.” The “plaintiff’s injury was felt in the only place it had ever been located, in Turkey.” (245 F. Supp. 3d 650 (D.N.J. 2017).

The court’s analysis in Dandong Old N.-E. Agric. & Animal Husbandry Co. v. Hu is more analogous to our inquiry. The plaintiff there was a Chinese company that was one of the largest purchasers of soybeans produced in the United States. It alleged, inter alia, that the defendant’s RICO misconduct caused the plaintiff to lose contracts with soybean suppliers in the United States. The plaintiff claimed the loss of much of its market share and that its business operations slowed as a result of its inability to receive soybeans from U.S. suppliers at the same volume as before the defendant’s alleged misconduct. The plaintiff also alleged that it was forced to terminate 90 of its China-based employees. The court disregarded the location of the predicate acts that were alleged and instead focused only on where the plaintiff felt the effects of the alleged injury. That analysis caused the court to conclude that the plaintiff failed to establish a domestic injury. The trial court found that “any deprivation of the plaintiff’s money was felt in China. And, in sharp contrast to Elsevier, the Plaintiff was not deprived of its property in the United States because, indeed, the Plaintiff received all of the soybeans for which it contracted with U.S. suppliers.” (Dandong Old N.-E. Agric. & Animal Husbandry Co., 2017 WL 3328239 at *6). The plaintiff’s principal place of business was in China, all the terminated employees were fired in China, any expenses resulting from the alleged misconduct were paid from China, and the plaintiff’s business operated only out of China. The court found that the foreign plaintiff’s allegation that it lost prospective business opportunities from U.S. suppliers insufficient to establish that the plaintiff experienced a domestic injury because such a claim, without more, “is far too attenuated to suffice as a domestic injury under RICO.” For these reasons, the Dandong court ultimately held that “regardless of where the conspirators’ conduct took place, the plaintiff’s injury was felt in China, the only place its business had ever been located.” Although other courts have reached similar results, Dandong’s approach to determining the location of the alleged injury is particularly helpful because it is nuanced and the court considered the totality of the circumstances without relying on any single circumstance.

With this background as our guide, we must determine if Plaintiffs here have alleged a plausible domestic injury under § 1964(c). We begin with RJR Nabisco’s clear command: the analysis of whether a plaintiff has alleged a domestic injury must focus principally on where the plaintiff has suffered the alleged injury. “Nothing in § 1964(c) provides a clear indication that Congress intended to create a private right of action for injuries suffered outside of the United States.”

(…) Given the intangible nature of the alleged injuries here, our inquiry must focus primarily upon where the effects of the predicate acts were experienced. This will better allow for appropriate consideration of the nuanced nature of intangible interests.

(…) Whether an alleged injury to an intangible interest was suffered domestically is a particularly fact-sensitive question requiring consideration of multiple factors. These include, but are not limited to, where the injury itself arose; the location of the plaintiff’s residence or principal place of business; where any alleged services were provided; where the plaintiff received or expected to receive the benefits associated with providing such services; where any relevant business agreements were entered into and the laws binding such agreements; and the location of the activities giving rise to the underlying dispute.

Applying these principles to the allegations here, we have no difficulty concluding that Plaintiffs have not alleged a domestic injury. Rather, it is clear that the alleged injuries were suffered in China. As the District Court noted, at all relevant times, Plaintiffs lived in China; had their principal place of business in China; provided services in China (albeit to some American companies – but even they were operating in China); entered the Consultancy Agreement in China and agreed to have Chinese law govern it; met with Defendants’ representatives only in China.

(…) It is unclear whether an allegation of harm to goodwill constitutes a showing of “a concrete financial loss and not mere injury to a valuable intangible property interest.” Maio, 221 F.3d at 483 (fn. 101).

(…) RJR Nabisco observed that “there is good reason not to interpret § 1964(c) to cover foreign injuries just because the Clayton Act, a federal antitrust statute, does so.” RJR Nabisco, 136 S.Ct. at 2109. First, the Clayton Act explicitly authorizes foreign entities to bring suit under the statute. Id. Further, and as the Court described in F. Hoffmann-La Roche Ltd. v. Empagran S.A., 542 U.S. 155 (2004), the Foreign Trade Antitrust Improvements Act of 1982 excludes from the reach of antitrust laws “most conduct that ‘causes only foreign injury.’” RJR Nabisco, 136 S.Ct. at 2109 (citing Empagran, 542 U.S. at 158). (Fn. 129)

(U.S. Court of Appeals for the Third Circuit, Sept. 26, 2018, Humphrey v. GlaxoSmithKline PLC, Docket No. 17-3285, Precedential)

Même si le comportement illicite au sens de RICO a été commis à l’étranger, le lésé peut agir devant la cour de district fédérale. Dite cour est donc a priori compétente et la présente affaire ne pose pas de question de « jurisdiction ». Pour espérer l’emporter, le lésé doit alléguer et prouver un dommage « domestique » causé à son activité économique ou à ses biens. Si, comme en l’espèce, l’affaire présente des éléments d’extranéité, il peut être difficile de juger si le dommage est ou non « domestique ». Il le sera si, l’ensemble des circonstances ayant été considérées, nombre de ces circonstances pointent en direction des Etats-Unis et non en direction d’un état étranger. Est rappelé le principe de la présomption contre l’application extraterritoriale du droit fédéral, ladite présomption étant renversée en cas d’indication contraire du Congrès, exprimée clairement. Les circonstances importantes à considérer sont le lieu d’où le dommage est survenu, le lieu de résidence de la demanderesse, le lieu de ses activités principales, le lieu où les services ont été fournis, le lieu où la demanderesse a reçu ou devait recevoir le produit de ces services, le lieu de la conclusion du contrat, le droit applicable, et le lieu des activités à l’origine du litige.
Dans une affaire antérieure, la cour de district fédérale avait jugé que le siège de l’entreprise lésée et le lieu d’exercice de ses opérations ne sont pas dispositifs quant à déterminer si le dommage est « domestique » ou non. Dans cette affaire, une entreprise turque, au siège en Turquie, soutenait qu’une entreprise partenaire RICO avait porté préjudice à ses affaires « domestiques » (soit celles sur sol U.S.), le dommage consistant en une baisse de son chiffre d’affaires annuel aux Etats-Unis. La cour a jugé que même si tel devait être le cas, aucun dommage « domestique » n’avait été causé, du fait que les activités de l’entreprise turque étaient localisées en Turquie, menées par des opérateurs économiques en Turquie, et que le dommage avait été ressenti en Turquie uniquement.
Dans une autre affaire antérieure, la cour a considéré la totalité des circonstances et a retenu que la demanderesse RICO, une entreprise chinoise, était une des principales acheteuses de soja en provenance des U.S. La demanderesse soutenait avoir perdu des parts de marché aux Etats-Unis du fait du comportement de l’entreprise RICO, défenderesse. Elle alléguait en outre avoir en conséquence été contrainte de licencier une partie de son personnel en Chine. La cour a retenu le lieu où les effets découlant de l’illicéité ont été ressenti, soit la Chine uniquement, en précisant par ailleurs que la demanderesse avait reçu la contrepartie de tous les contrats passés avec les vendeurs U.S. L’allégation de pertes d’opportunités futures est insuffisante pour établir un dommage « domestique » au sens de RICO.
En l’espèce, la condition du dommage « domestique » n’est pas établie. Tous les points de contact sont localisés en Chine (la demanderesse est établie en Chine, lieu où elle déploie l’essentiel de ses activités commerciales, le contrat en discussion a été conclu en Chine, la loi applicable à ce contrat étant le droit chinois, et les contacts entre parties ont eu lieu en Chine).

Tuesday, September 25, 2018

California Court of Appeal (Third Appellate District), North Valley Mall v. Longs Drug Stores, Docket C079281, Certified for Publication

Contract (alteration): Corporation: Merger: De facto merger: (Corporate veil): Reverse triangular merger: Transfer of corporate stock: Creditors and shareholders: Assignment:

At issue in this case is whether the court should “go behind” the form of a corporate reorganization in order to alter contractual obligations, when the corporation utilized the type of reorganization it used in order to avoid altering its contractual obligations. The type of reorganization used in this case is a common one, and is referred to as a reverse triangular merger (A reverse triangular merger is one in which an acquiring corporation forms a new subsidiary, which is merged into the surviving corporation. In this case a survivor corporation, North Valley Mall, LLC, merged with Longs Drug Stores, Inc., the surviving corporation, by sale of its stock but with retention of its legal title to the property at issue). The usefulness of such a merger is to leave the target corporation intact as a subsidiary of the acquiring corporation where the target corporation has contracts or assets that are not easily assignable.

We conclude that where the form of reorganization was not chosen to disadvantage creditors or shareholders, we will not ignore the form of reorganization chosen by the corporation. We will affirm the judgment.

Corporations “ ‘have an identity apart from that of the owners.’ ” (Kraft, Inc. v. County of Orange (1990) 219 Cal.App.3d 1104, 1109.) Therefore, “the transfer of corporate stock is not deemed a transfer of the real property of a legal entity because the separate legal entity still owns the property.” (Ibid.) However, a traditional merger--one in which two or more corporations merge, one survives and the others disappear--results in the transfer of the assets of each disappearing corporation to the surviving corporation. (Marsh’s Cal. Corp. Law, (4th ed. 2013) Corporate Reorganizations § 19.10[C], p. 19-103; Phillips v. Cooper Laboratories (1989) 215 Cal.App.3d 1648, 1660.)

The transaction between CVS and Longs was a reverse triangular merger, sometimes referred to as a triangular phantom merger. This form of reorganization is used when the target corporation, in this case Longs, has licenses, permits, or property which is impossible or highly burdensome to attempt to transfer. (Marsh’s Cal. Corp. Law, supra, § 19.01[H], p. 19-18.) In a reverse triangular merger, the acquiring corporation (CVS) forms a new subsidiary, which is merged into the target corporation (Longs) so that the target corporation is a surviving corporation that continues to own its assets. (Ibid.) Here, CVS acquired all of the issued and outstanding shares of Longs. To effectuate the stock acquisition, CVS formed a subsidiary called Blue MergerSub Corp., which merged with and into Longs, with Longs being the surviving corporation. Longs became a wholly owned subsidiary of CVS, and was converted to a limited liability company named Longs Drug Stores, LLC. Longs remains vested with legal title to the property at issue.

There Was No Sale or Lease of the Property.

(…) Courts usually describe reverse triangular mergers as similar to stock acquisitions because they do not work an assignment of contractual obligations from the target to the acquiring parent company.

(…) “The intention of the parties as expressed in the contract is the source of contractual rights and duties. A court must ascertain and give effect to this intention by determining what the parties meant by the words they used.” (Pacific Gas & Elec. Co. v. G. W. Thomas Drayage & Rigging Co. (1968) 69 Cal.2d 33, 38, fn. omitted.) In this case, the plain language of the agreement specifies that the trigger for removing the CAM charge cap is the “sale or lease of any portion of the subject property to any third person . . . .” When the agreement was made, Longs was a corporation. A plaintiff who chooses to deal with a corporation must have known “that shares of stock therein might be owned by different stockholders and are subject to assignment to others in the ordinary course of business.” (Ser-Bye Corp. v. C.P.&G. Markets, Inc. (1947) 78 Cal.App.2d 915, 920, superseded by statute on another point, as stated in In re Alberto (2002) 102 Cal.App.4th 421, 430, fn. 4.)

(…) The Further Agreement indicates that the parties intended the CAM cap to be lifted if the corporate real property was sold or leased. We cannot interpret this language to include a sale of corporate stock. NVM asks us to conclude that even if the property at issue was never sold or leased by Longs, we should look behind the reverse triangular merger and conclude that it was a de facto merger, resulting in the transfer of the property to CVS. We decline to do so.

(…) Some courts have concluded that reverse triangular mergers do not effect a de facto merger unless they are structured to disadvantage creditors or shareholders. (In re McKesson HBOC, Inc. Securities Litigation (N.D. Cal. 2000) 126 F.Supp.2d 1248, 1277; Binder v. Bristol-Myers Squibb, Co. (N.D. Ill. 2001) 184 F.Supp.2d 762, 769-770.) There is no evidence this transaction was structured as a reverse triangular merger for either of these purposes.

(…) We will not interfere with the reasonable economic expectations of the parties to these reorganizations where there is no effort to disadvantage creditors or shareholders.

Secondary authorities: Gutterman et al., Cal. Transactions Forms (2018) Business Entities, § 12:8.; Marsh’s Cal. Corp. Law, (4th ed. 2013) Corporate Reorganizations.

(California Court of Appeal (Third Appellate District), Sept. 25, 2018, North Valley Mall v. Longs Drug Stores, Docket C079281, Acting P.J. Blease, Certified for Publication)

Un contrat entre deux entreprises liées à un centre commercial prévoyait un versement périodique dû par la société A. en faveur de la société B. au titre de la participation à l’entretien du centre commercial. La participation ne pouvait pas dépasser un montant déterminé, cette limite maximale n’étant plus applicable en cas de vente ou de mise en location des actifs de la société A.
Ultérieurement, par le biais d’une « reverse triangular merger », une société tierce est fondée dans le seul but de reprendre le capital-actions de A. Dite société a donc repris ce capital social, A. restant propriétaire de ses actifs (sa forme juridique a toutefois été modifiée, le management remplacé, et les locaux de la direction transférés).
Constatant cette réorganisation, B. demande à A. et à sa nouvelle société-mère une participation à l’entretien du centre commercial d’un montant supérieur au maximum contractuel précité. A. s’y oppose. D’où la présente procédure. B. invoque la théorie juridique de la fusion de fait (« de facto merger »). Elle considère qu’il convient de regarder au-delà du type de fusion choisi et de prendre en compte ici une « fusion de fait » impliquant une situation contemplée par le contrat entre A. et B., soit le transfert des actifs qui permet de juger comme nulle la clause de valeur maximale de la participation à l’entretien du centre commercial.
En l’espèce, la cour rejette la théorie de la fusion de fait, et considère qu’au moment de contracter au sujet de la question de la participation des frais du centre commercial, l’intention des parties était d’abolir la limite supérieure de ces frais uniquement en cas de transfert ou de location des actifs, et non en cas de transfert de la propriété des actions de la société, ledit transfert n’impliquant aucune modification s’agissant de la propriété des actifs, qui restent en main de la même société : seul l’actionnariat change, dans le cadre d’une « reverse triangular merger » (la forme juridique de l’entreprise a elle aussi été modifiée, ce qui n’est pas relevant ici dans la mesure où c’est bien la forme sociale (peu importe laquelle) qui détient encore et toujours ses propres actifs, avant et après les opérations d’acquisition). La cour serait prête à juger autrement, et à appliquer la théorie « de facto merger », si des parties utilisaient le montage de « reverse triangular merger » pour porter préjudice aux droits des créanciers ou des actionnaires sociaux, ce qui n’est pas le cas en l’espèce.

Thursday, September 13, 2018

U.S. Court of Appeals for the First Circuit, Plixer International, Inc. v. Scrutinizer GMBH, Docket No. 18-1195

Jurisdiction: Specific personal jurisdiction: Trademark infringement: Internet: Websites: Due Process: Fifth Amendment: Interlocutory appeal:

Given the particular facts of this case, we affirm the thoughtful holding of the district court that the exercise of specific personal jurisdiction against a German corporation under Federal Rule of Civil Procedure 4(k)(2) does not offend the Due Process Clause of the United States Constitution. We note that this is an area in which the Supreme Court has not yet had the occasion to give clear guidance, and so we deliberately avoid creating any broad rules.

Scrutinizer GmbH (Scrutinizer) is a German corporation with its principal place of business in Kassel, Germany. Through its interactive, English-language website, Scrutinizer runs a "selfservice platform" that helps customers build better software. Scrutinizer brings its customers' code from a third-party hosting service like GitHub2 to its "controlled cloud environment," where it runs "software analysis tools" meant to "improve source-code quality, eliminate bugs, and find security vulnerabilities."

Customers who contract to use Scrutinizer's online service can pay only in euros. Scrutinizer's standard contract with those customers contains a forum-selection clause and a choice-of-law clause that provide that all lawsuits relating to the contract be brought in German courts and under German law. Scrutinizer maintains no U.S. office, phone number, or agent for service of process; it directs no advertising at the United States; and its employees do not go to the United States on business.

Scrutinizer provides its service globally.

Plixer International, Inc. (Plixer), a Maine corporation, sued Scrutinizer in federal district court in Maine on November 21, 2016, for trademark infringement.

(…) Scrutinizer moved for permission to file an interlocutory appeal under 28 U.S.C. § 1292(b). The district court granted that motion. The district court found that the matter met the standard for such an appeal: it involved a controlling question of law on which there was substantial ground for difference of opinion and the resolution of which would help bring an end to the litigation.

We granted this interlocutory appeal on the district court's recommendation.

Plixer's basis for asserting personal jurisdiction over Scrutinizer is Federal Rule of Civil Procedure 4(k)(2).

Rule 4(k)(2) states: For a claim that arises under federal law, serving a summons or filing a waiver of service establishes personal jurisdiction over a defendant if: (A) the defendant is not subject to jurisdiction in any state's courts of general jurisdiction; and (B) exercising jurisdiction is consistent with the United States Constitution and laws.

Rule 4(k)(2) has three requirements: (1) the cause of action must arise under federal law; (2) the defendant must not be subject to the personal jurisdiction of any state court of general jurisdiction; and (3) the federal court's exercise of personal jurisdiction must comport with due process.

All parties agree that the first two requirements are met here. The question is whether personal jurisdiction comports with due process.

This is a federal question case, so constitutional limits on jurisdiction come from the Due Process Clause of the Fifth Amendment. The Fifth Amendment Due Process Clause requires the plaintiff to "show that the defendant has adequate contacts with the United States as a whole, rather than with a particular state."

To see if Scrutinizer's nationwide contacts are adequate, we turn to the familiar "minimum contacts" framework.

Plixer has asserted specific personal jurisdiction over Scrutinizer, so the minimum contacts inquiry has three prongs: relatedness, purposeful availment, and reasonableness.

That is, Plixer must show that (1) its claim directly arises out of or relates to the defendant's forum activities; (2) the defendant's forum contacts represent a purposeful availment of the privilege of conducting activities in that forum, thus invoking the benefits and protections of the forum's laws and rendering the defendant's involuntary presence in the forum's courts foreseeable; and (3) the exercise of jurisdiction is reasonable. A Corp., 812 F.3d at 59.

Scrutinizer has conceded the first requirement; we hold that Plixer has met the remaining two.

A Corp., 812 F.3d at 61 (holding that "the mere availability of a passive website" cannot by itself subject a defendant to personal jurisdiction in the forum).

Cossaboon v. Maine Med. Ctr., 600 F.3d 25, 35 (1st Cir. 2010) (noting that the running of a "website that is visible in a forum and that gives information about a company and its products" cannot alone support the exercise of jurisdiction).

The district court held that Scrutinizer had not merely made its website available in the United States; it had used that website to engage "in sizeable and continuing commerce with United States customers." Plixer, 293 F. Supp. 3d at 242. As a result, Scrutinizer "should not be surprised at United States-based litigation." Id. We agree.

(…) An objectively clearer picture of Scrutinizer's intent to serve the forum, the crux of the purposeful availment inquiry. See C.W. Downer, 771 F.3d at 66.

(…) Scrutinizer can take steps to limit access to its website. For instance, Scrutinizer could design its site to not interact with U.S. users, cf. Yahoo! Inc. v. La Ligue Contre Le Racisme et L'Antisemitisme, 433 F.3d 1199, 1203 (9th Cir. 2006), but it has not done so.

And Scrutinizer could take the low-tech step of posting a disclaimer that its service is not intended for U.S. users. See Bensusan Restaurant Corp. v. King, 126 F.3d 25, 27 (2d Cir. 1997); cf. Illinois v. Hemi Group LLC, 622 F.3d 754, 755 (7th Cir. 2010). Again, it has not done so. Instead, Scrutinizer's website ( is globally accessible.

In contrast, Scrutinizer did take a step to deal with foreign contract-based litigation -- it included a forum-selection clause and a choice-of-law clause in its standard customer contract. Those clauses provide that all lawsuits be brought in German courts and under German law. But Scrutinizer never suggests that Plixer could bring this suit in an alternate forum, whether Germany or elsewhere. And the clauses do not apply here; Plixer is not a party to Scrutinizer's contract, and Scrutinizer does not suggest that Plixer is bound by the contract. As the district court correctly noted, those clauses suggest that Scrutinizer "knew it was extending its reach outside Germany." Plixer, 293 F. Supp. 3d at 241.

(…) Second, Scrutinizer voluntarily served U.S. customers. Specific personal jurisdiction must be based on a defendant's voluntary contact with the forum.

Third, Scrutinizer's purposeful U.S. contacts were sufficient to put Scrutinizer on notice that it should expect to be haled into U.S. court. Scrutinizer has "targeted the world" by making its website globally accessible. See Nicastro, 564 U.S. at 890 (Breyer, J., concurring). But Scrutinizer says that it could not reasonably anticipate specific jurisdiction because it did not specifically target the United States with its business. We disagree.

(…) Ultimately, although a close call, we conclude that the German company could have "reasonably anticipated" the exercise of specific personal jurisdiction based on its U.S. contacts. Scrutinizer's "regular flow or regular course of sales" in the United States show that it has purposefully availed itself of the U.S. forum. The record does not reveal what percentage of Scrutinizer's business came from the United States. Nor does the record reveal whether Scrutinizer ever did an online trademark search for the term "Scrutinizer," either before or after it sought U.S. customers.

(Since 2000, the public has been able to search and retrieve for free "the almost millions of pending, registered, abandoned, cancelled or expired trademark registrations" online. McCarthy on Trademarks and Unfair Competition § 19:6 (5th ed.)).

(…) The record does show that Scrutinizer used its website to obtain U.S. customer contracts. Those contracts yielded nearly $200,000 in business over three-and-a-half years. This is not a situation where a defendant merely made a website accessible in the forum.

In contrast, a New Jersey federal district court found no regular course of sales when, over about a year, fewer than ten in-state sales brought the defendant "less than $3,383 in revenue." Oticon, Inc. v. Sebotek Hearing Sys., LLC, 865 F. Supp. 2d 501, 514-15 (D. N.J. 2011). "Such scant sales activity" did not "justify the exercise of specific jurisdiction" there.

Reasonableness: Though Plixer has satisfied the first two prongs of the analysis, we must still see whether the exercise of jurisdiction here is fair and reasonable. We consider five "gestalt" factors: (1) the defendant's burden of appearing in the forum, (2) the forum's interest in adjudicating the dispute, (3) the plaintiff's interest in obtaining convenient and effective relief, (4) the judicial system's interest in obtaining the most effective resolution of the controversy, and (5) the common interests of all sovereigns in promoting substantive social policies.

We consider first the burden on Scrutinizer. (…) For further support, Scrutinizer points to the burden of cross-Atlantic travel. (…) and modern travel "creates no especially ponderous burden for business travelers," (…) A defendant hoping to show that travel burdens should make the difference must show that those burdens are "special or unusual." (…) many of the case's logistical challenges "can be resolved through the use of affidavits and video devices."

On the second factor, Scrutinizer does not dispute that the United States has an interest in adjudicating a dispute over the application of U.S. trademark law. (…) Further, the United States has an interest in remedying an alleged injury that occurs in the United States.

(…) "When minimum contacts have been established, often the interests of the plaintiff and the forum in the exercise of jurisdiction will justify even the serious burdens placed on the alien defendant."

(U.S. Court of Appeals for the First Circuit, Sept. 13, 2018, Plixer International, Inc. v. Scrutinizer GMBH, Docket No. 18-1195, Circuit Judge Lynch)

Une entreprise allemande propose ses services (dans le domaine digital) par le biais de son site Internet. Le site et les services sont accessibles dans le monde entier. Un certain nombre de clients sont domiciliés dans divers états U.S. Ils rapportent à l’entreprise un chiffre d’affaire non négligeable.
L’entreprise n’a pas davantage de présence aux Etats-Unis. Elle n’y a ni présence physique ni employé. Elle n’a pas nommé d’agent auquel un envoi officiel pourrait être notifiée.
Une entreprise de l’état du Maine ouvre action devant la cour de district fédérale pour violation du droit des marques.
La question de la compétence de la cour est litigieuse.
En application du Cinquième Amendement de la Constitution fédérale (Due Process Clause), et tout en reconnaissant l’absence de jurisprudence de la Cour Suprême fédérale sur les questions précises que pose le cas d’espèce, le Premier Circuit fédéral juge que les conditions de la juridiction personnelle spécifique sont données, en précisant que la décision se limite aux faits de la cause et ne doit pas être interprétée largement. Le critère déterminant au sens du Cinquième Amendement est celui des contacts suffisants avec les Etats-Unis plutôt qu’avec l’un de ses états en particulier.
L’entreprise allemande n’a pas bloqué l’accès de son site aux clients U.S., n’a même pas posté un disclaimer refusant les clients U.S., mais, au contraire, leur propose, ainsi qu’au reste du monde, de contracter avec elle par le biais d’un site Internet en anglais. Elle a exécuté contre paiement nombre de prestations en faveur de nombre de clients U.S., et devait ainsi s’attendre à être actionnée devant une cour U.S. Le fait d’avoir inséré dans ses conditions contractuelles la loi allemande comme droit applicable et une cour allemande comme Tribunal compétent n’est d’aucun secours à l’entreprise allemande : bien au contraire, ces indications démontrent une volonté de s’engager internationalement, et la demanderesse à l’action en violation du droit à la marque n’est pas en rapport contractuel avec l’entreprise allemande.
Enfin, reconnaître la compétence de la cour de district fédérale satisfait aussi la condition d’une reconnaissance équitable : les voyages transatlantiques ne sont pas un fardeau qui ne saurait être exigé. D’autant que les productions de pièces et l’usage de moyens vidéos peuvent permettre d’éviter le déplacement de personnes. Un voyage transatlantique qui serait spécialement problématique peut permettre une décision d’incompétence de la cour U.S.