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Antitrust Highlights

The Antitrust Section has been a discrete section within the Attorney General’s Office since the late 1940s, and has had active involvement in numerous matters over the years. Below are brief descriptions of some of the most significant recent initiatives:

Book Publishers In mid 2007, the Attorney General became aware that book publisher Houghton Mifflin planned to merge with certain subsidiaries of book publisher Harcourt that, like Houghton Mifflin, specialized in the publication of textbooks for students in grades K-8. The Attorney General feared that the result of the merger would be higher textbook prices for California students. The U.S. Department of Justice (Antitrust Division) approved the merger in December 2007, and Houghton Mifflin and Harcourt proceeded to consummate the merger. But California further negotiated until mid 2009 with Houghton Mifflin, the surviving entity after the merger, when Houghton Mifflin agreed to a price cap on certain California-specific textbooks in reading, math, science, and social science. Houghton Mifflin was also required to pay $300,000 in attorney fees and costs to California.

Bookstores In the late 1990s, the Attorney General along with the Federal Trade Commission (the “FTC”) investigated the proposed merger of the nation’s largest chain of bricks-and-mortar bookstores, Barnes & Noble, and the nation’s largest wholesaler of books, Ingram Books. The investigation indicated that the merger would have serious anti-competitive effects nationally and for California. In June 1999, Barnes & Noble and Ingram Books called off the merger upon the announcement of governmental opposition to the transaction.

Commercial Insurance In March 2006, Zurich American Insurance Company (“Zurich”) settled allegations that the company unlawfully rigged bids for providing commercial insurance and made undisclosed payments to brokers for steering clients to Zurich, by agreeing to pay California and nine other states a total of $152 million in restitution, as well as to reform Zurich’s business practices.

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Computer Memory Chips In July 2006, a multi-state group, led by California, filed a federal-court lawsuit on behalf of all natural persons and government entities in California (and other parties), against all the major manufacturers of Dynamic Random Access Memory computer chips (“DRAM”), for conspiring to fix prices during the period 1998-2002, and thereby allegedly causing Californians to pay overcharges for DRAM-containing products. (DRAM is a common memory chip found in computer servers, laptops, certain networking equipment, and desktop computers.) Following federal-court proceedings, the Attorney General filed in state court in San Francisco a second, parallel lawsuit, on behalf of ninety-seven local California government entities and the University of California, alleged victims of the same misconduct.

The Attorney General seeks injunctive relief to prevent further misconduct by the DRAM companies, the imposition of civil penalties against the companies, and the recovery of damages or restitution for harm suffered by California natural persons and government entities.

Many of the DRAM manufacturers have pleaded guilty to federal criminal price-fixing. The Attorney General has entered into civil settlements with two of the DRAM manufacturers. As of late 2009, the parallel actions in federal and state court are ongoing against the remaining companies.

Computer Operating Systems In 1998, California joined the United States and other states in suing Microsoft for alleged monopolization of the computer operating systems market and related antitrust offenses. In this historic case, Microsoft was found in court to have unlawfully maintained a monopoly in the Microsoft Windows computer operating system. In 2001, the United States and one group of states, the so-called “New York Group,” settled by a consent decree their disputes with Microsoft as to remedies for Microsoft’s misconduct. California led a group of other states that refused to settle the matter with Microsoft on the consent decree’s terms, to try to obtain a better outcome. California’s efforts resulted in a court judgment that went beyond the consent decree in ensuring that consumers and businesses were protected from Microsoft’s anti-competitive behavior. For example, the “California Group” judgment prevents Microsoft from threatening competitors with retaliation. Microsoft also reimbursed California millions of dollars in legal fees.

Since 2002, California has worked with federal and state authorities in enforcing the Microsoft judgments, and California has led efforts to effectuate Microsoft’s full compliance with its legal and technical obligations under the judgments. Most notably, the time term of the Microsoft judgment has been extended several times, largely as the result of California’s leadership. In 2006, Microsoft agreed to a two-year extension of the judgment to rewrite technical documentation that must be provided to companies making or seeking to make products interoperable with Windows. In 2008, over the U.S. Department of Justice’s objection, but at California’s insistence, Microsoft was ordered to extend its compliance with the entire judgment another two years. California convinced the court that the judgment needed to continue for the relief to be effective. In 2009, Microsoft agreed to extend the judgment further, until May 2011, to ensure that regulators had enough time to review Microsoft’s rewritten technical documentation for compliance with Microsoft’s obligations. California continues to monitor Microsoft’s performance, including reviewing any complaints against Microsoft under the judgment. One recent complaint resolved by California resulted in Microsoft changing how Internet Explorer 8, the Internet browser, is installed on computing devices, so that consumers do not inadvertently have their default browser of choice switched.

Contact Lenses In June 2001, the Attorney General helped to negotiate a multi-state settlement with Johnson & Johnson (“J & J”) and Bausch & Lomb (“B & L”), allowing consumers who had purchased disposable contact lenses from J & J in the prior fourteen years to obtain cash rebates on future contact lens purchases and eye exams. J & J and B & L were the last non-settling defendants in an antitrust lawsuit brought by California, thirty-one other states, and a private consumer class against the American Optometric Association and multiple contact lens manufacturers, for conspiring to force consumers to purchase disposable lenses from optometrists at improperly high prices. Settlements had been reached earlier with the American Optometric Association and thirteen individual optometrist defendants.

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Gasoline California’s gasoline market was strengthened because of a June 2005 antitrust settlement agreement reached by California and Valero, a leading gasoline refiner and distributor. The agreement resolved California’s antitrust objections to Valero’s $2.8 billion acquisition of Kaneb. Under the agreement, Valero had to construct, at its Benicia refinery, crude oil storage tanks with a total capacity of 900,000 barrels, to assure supply for the California market. Also, to promote more business competition, Valero had to sell off gasoline and petroleum terminal facilities in Martinez and Richmond, which facilities Kaneb had owned. See also Gasoline Market

Health-Care Providers In the October 2005 merger of DaVita and Gambro Healthcare, two health-care companies providing crucial kidney disease treatment, the Attorney General obtained specified patient protections as a condition of approving the merger. Under the Attorney General’s divestiture plan, DaVita was required to sell to Renal Advantage thirty-two clinics that had been owned by DaVita or Gambro.

Jeans The Nicholas Petris Center on Health Care Markets and Consumer Welfare was established at the University of California, Berkeley, with an endowment of $2 million from settlement payments in the Attorney General’s 1980s Levi Strauss jeans price-fixing case. The Center focuses on general health research, consumer protection, affordability, and access to health care, especially by low- and moderate-income consumers, and the role of information in consumer choice. The Center also assesses market concentration, regulation, and competition in the health-care industry. The Center has published scores of health-care reports and studies and holds an annual symposium on a health-care topic.

The California Consumer Protection Foundation was established to administer and distribute several million dollars remaining from the consumer trust fund created from the Levi Strauss settlement. To date, this Foundation has distributed over $20 million dollars (gathered from many sources) to support a wide range of activities affecting consumers in many diverse fields such as health care, auto sales, consumer fraud, privacy, banking, finance, insurance, energy, and telecommunications.

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Music CDs In 2000, California, forty-two other states, and private attorneys sued five major music CD distributors and three national chain stores alleging a price-fixing scheme that prevented all music retailers from advertising discount prices. As part of the court-approved settlement of the matter, the accused companies were enjoined from engaging in the challenged practices, and the companies paid a total of $67.4 million in cash and provided $75.7 million in music CDs for victims of the harm. The funds were distributed directly to consumers, including those in California, using an online claims process. And 500,000 CDs were distributed to California public schools, colleges, universities, and libraries. Finally, California’s share of the settlement money remaining after consumer claims were paid was used to fund a series of grants, awarded by the California Arts Council, for musical performances throughout the state that would appeal to the diverse tastes of Californians.

Pharmaceuticals In January 2010, California and twenty-three other states achieved a $22.5 million settlement, pdf with pharmaceutical giants Abbott and Fournier after the companies "illegally blocked" cheaper generic substitutes for the patented brand-name cholesterol-reducing drug Tricor. The settlement is the result of one of the country's first legal actions challenging pharmaceutical companies for "product hopping," a strategy to block generic competition by making slight changes to the formulation of an existing patented drug.

“Abbott and Fournier devised a complex scheme that illegally blocked cheaper generic drugs from entering the market,” Attorney General Edmund G. Brown Jr. said. “They used minor reformulations of the drug to delay competition and filed frivolous patent lawsuits. This scheme cost California and other states millions of dollars.”

The settlement agreement requires the companies to cease illegal efforts to block generic competition to Tricor and to pay the states approximately $22.5 million dollars. In California, the Department of General Services, Medi-Cal, and the Department of Corrections will be reimbursed for overcharges. See also Pharmaceuticals

School Buses Laidlaw and First Student, competing companies that controlled separate bus depots in Riverside, sought to merge. Such a merger would have guaranteed the new company a monopoly on school busing contracts in the area, because no other company would have a nearby bus depot. The Attorney General obtained from the merging companies an agreement which allowed the Riverside Unified School District to purchase one of the properties on which there was a school bus depot which serviced district buses. The consent decree also gave the Los Angeles Unified School District the ability to rescind and to re-bid particular contracts with First Group, in the event of any price increases after the merger. California also received over $120,000 in reimbursement of attorney fees and costs.

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Supermarkets The biggest supermarket labor strike/lock-out in U.S. history, directly involving more than 70,000 workers, occurred in Southern California in 2003-04. Preparing for the strike/lock-out, four of the five major Southern California supermarket chains, Albertson’s, Food 4 Less, Ralphs, and Vons/Safeway entered into secret agreements to share revenues so as to balance the financial harm likely to be caused to them by the labor strife. Under the agreements, Ralphs and Food 4 Less paid more than $140 million to the other chains. The Attorney General discovered the agreements, recognized them as conspiracies not to compete during the covered time period, and brought an injunctive-relief lawsuit against the supermarkets for violating federal antitrust laws. Twice, the supermarkets attempted to have the lawsuit thrown out of court based on a labor exemption to the antitrust laws. The Attorney General prevailed against these attempts each time, setting important precedents in this area of antitrust law. As of 2009, the highest federal appellate court in California is reconsidering the labor exemption question, as well as whether the supermarkets’ revenue-sharing agreement is an automatic antitrust law violation subject to a permanent injunction.

Star “Registries” The Attorney General discovered that four interstate sellers of “star names” conspired to rig bids for their Internet advertising. A star seller or “registry” offers the gag gift of a star named after a person, the gift recipient. Such gifts usually consist of packages containing paper certificates and astronomy-related items. (Obviously, the registries do not actually sell stars, nor is there any official recognition of a star so named after a person.) Four of these star registries conspired and agreed with each other to reduce the amounts that they paid for Internet search-engine-generated advertisements, which charge advertisers for each “click through,” or time that an Internet user clicks on the ad from his/her Internet browser. Click-through prices are set by auctions, where advertisers bid to have their ads returned to Internet users in response to the users typing into their computing devices certain key words. The star registries further agreed to rotate among themselves opportunities to be the top bidders, and placed bids in accordance with such scheme. Rigging the key-word bids enabled the advertisers to obtain top result placements without competing for such positions as well as to pay lower click-through prices. Internet search engines suffered significantly reduced revenues. The Attorney General obtained an injunction against such further activities and also recovered civil penalties, attorney fees, and costs from the conspiring companies.

Traffic Signals Equipment In July 2006, after a two-week trial by the Attorney General’s Office in conjunction with the Los Angeles District Attorney’s Office, a court found Econolite Control Products liable for “tying” practices in the traffic signal industry, in violation of California antirust laws. The court awarded injunctive relief, civil penalties, attorney fees, and costs. Econolite had been able to charge inflated prices by forcing contractors to purchase Econolite’s generic traffic signals whenever Econolite’s unique traffic signal controller was specified on certain traffic signal construction projects. These higher prices were paid by cities and other government entities (and, ultimately, California’s citizens) for construction projects. Following the inception of appellate court proceedings, a settlement was reached that maintained all the injunctive relief and the majority of the civil penalties, attorney fees, and costs.

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Vitamins In the early 2000s, California achieved an $80 million settlement with major drug companies to resolve a vitamins price-fixing case. The case had targeted three Japanese and three European companies – Aventis Animal Nutrition, BASF, Daiichi Pharmaceutical, Eisai, Hoffman-LaRoche, and Takeda Chemical – that together controlled about 80 percent of the world vitamins market. The companies allegedly conspired to fix prices for such vitamins as A, B, C, E, and H and carotenoids. More than $38 million of the money that California recovered was distributed to California non-profit groups to improve nutrition and health-services delivery statewide and in local communities.

Waste Hauling Starting in summer 2008, the California Attorney General and the U.S. Department of Justice ("USDOJ") investigated the merger of two large waste-hauling companies, Allied and Republic, for antitrust-law implications. As part of the settlement permitting consummation of the merger in summer 2009, California and USDOJ required the merging companies to divest the Potrero Hills Sanitary Landfill in Suisun (Solano County), CA. This landfill accepts most of the Bay Area’s waste, and was therefore a key competitive asset. After the settlement was reached and the transaction consummated, environmental and recycling groups sought in both state and federal court to enforce a 1984 county ballot initiative, Measure E, which severely limited the amount of out-of-county waste that may be disposed of in Solano County. The measure had never been enforced because of U.S. Constitution Commerce Clause concerns. The Attorney General’s Office filed amicus briefs in both state and federal courts urging the courts to deny enforcement of Measure E, which would reduce the amount of out-of-county trash processed at the landfill from 600,000 tons annually to 95,000 tons annually. The Attorney General argued that if the volume of trash processed at the Potrero Hills facility was drastically limited, the facility would no longer provide effective competition to other landfills in the area, and prices to consumers would rise. During the Attorney General investigation of the merger, the Attorney General determined that Republic’s Potrero Hills facility competed directly with two landfills owned by Allied. The Attorney General concluded that, absent the divestiture of Potrero Hills, the merger of Republic and Allied would result in substantially-lessened competition in the disposal of municipal solid waste and increased prices for the disposal of such waste. The waste-disposal market has significant barriers to entry and the proximity of waste-disposal facilities to the point of origin of the waste is important, because transportation costs are high. The amicus brief concluded, “If Measure E were to be enforced, the carefully calibrated consent judgment’s goals will be weakened by deeply discounting the value of the divestiture in one of the major markets targeted in the consent judgment.” As of summer 2010, the matter is ongoing.

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