can this be done by today?????

Page 272 DEFENSE COUNSEL JOURNAL–July 2008

THERE’S A NEW SHERIFF IN TOWN: EUROPEAN COMMISSION INVESTIGATIONS PROMPT U.S. ANTITRUST CLASS ACTION

By Eric Kraus and Jennifer Aurora

Eric Kraus is a partner in the New York office of Sedgwick, Detert, Moran & Arnold, LLP and is a member of that firm’s Class Action Task Force. Jennifer Aurora is an associate in Sedgwick’s New York Office. Eric Kraus and Jennifer Aurora report on a recent spate of U.S. anti-trust class actions based on European Commission investigations.

April 2008 Class Actions and Multi-Party Litigation

What was once as American as apple pie

is now almost as ubiquitous around the world as McDonalds: antitrust enforcement. In Germany, the United Kingdom, Japan, Australia, South Korea and elsewhere, there is no doubt that antitrust enforcement has been increasing.

Perhaps the most ambitious antitrust enforcement occurring outside of the U.S. are antitrust investigations brought by the European Commission (“EC”). Nowhere outside of the U.S. have companies been under greater attack than when subject to the investigational powers of the EC. An interesting corollary to the increased focus in Europe on efforts to curtail anticompetitive conduct has been a recent spate of new class action filings in the U.S.. The underpinnings of these filings are supported, at least in part, by allegations related to EC antitrust investigations.

I. Background of the European

Commission

The European Union (“EU”) is perhaps most easily understood by describing what it is not: It is neither a federation, like the United States, nor an organization for

cooperation between governments, like the United Nations. The countries that comprise the EU (“member states”) remain independent sovereign nations that pool together in order to gain strength and world influence.

The European Commission is the executive and administrative organ of the member states. The Commission exercises responsibility over the wide range of subject areas covered by the European Union treaty. Those areas include the treaty provisions and regulations thereunder that govern competition.8 Article 17 of Regulation 1/2003 empowers the Commission to conduct investigations of a “particular sector of the economy” when it suspects that a particular market is not competing efficiently. The Commission, like its United States counterparts—the Department of Justice and Federal Trade Commission— holds a range of investigative powers, including the power to request information, take statements, conduct inspections, and to impose sanctions.

The antitrust arena of the EC covers two prohibition rules set out in the EC Treaty— Articles 81 and 82. Article 81 of the European Community Treaty prohibits cartels and other “concerted practices” that distort competition. Article 81 is comparable to Section 1 of the Sherman Act, which outlaws concerted action to restrain trade.9 Price-fixing or bid-rigging are obvious examples of illegal conduct infringing Article 81. The EC also has a counterpart to Section 2 of the Sherman Act, which

8 Consolidated Versions of Treaty on European Union and Treaty Establishing European Community, Arts. 81 and 82, 2002 O.J. (C 325) 33, 64-65, 67 (hereinafter “EC Treaty”). 9 Section 1 of the Sherman Act states: “Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is hereby declared to be illegal . . . .” 15 U.S.C. § 1 (2004); Treaty Establishing the European Community, Art. 81, 2006 O.J. (C 321) E/1, available at http://eur-lex.europa.eu/LexUriServ/ site/en/oj/2006/ce321/ce32120061229en00010331.p df (last visited Feb. 11, 2008).

Newsletters Page 273 prohibits the willful acquisition or maintenance of monopoly power.10 Article 82 of the EC Treaty states: “Any abuse by one or more undertakings of a dominant position within the common market . . . shall be prohibited as incompatible with the common market insofar as it may affect trade between Member States.”11 This is exemplified by predatory pricing aimed at eliminating competitors from the market.12

The EC has launched several inquiries into a wide range of industry sectors including the financial services, energy, telecommunication, pharmaceutical and media sectors.13 In greater or lesser detail, these investigations have become the subject of pleadings in class actions filed in the United States. II. EC Investigations and U.S. Class

Actions: The First Wave

In recent years, EC investigations have proven to be fertile ground to class action plaintiffs’ lawyers, who have filed a new 10 Section 2 of the Sherman Act states: “Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony . . . .” 15 U.S.C. § 2 (2004). 11Treaty Establishing the European Community, Art. 82, 2006 O.J. (C 321) E/1, available at http://eur- lex.europa.eu/LexUriServ/site/en/oj/2006/ce321/ce3 2120061229en00010331.pdf (last visited Feb. 11, 2008). 12 Microsoft has been found to be in violation of Article 82’s “abuse of dominant position” provision, both for restricting the interoperability of competitors’ server software with the Windows operating system and for bundling the Windows media player with the operating system. See Commission of the European Communities, Commission Decision of 24.03.04 relating to a proceeding under Article 82 of the EC Treaty (Case COMP/C-3/37.782 Microsoft), 2004 O.J. (C900), available at http://ec.europa.eu/comm/competition/ antitrust/cases/decisions/37792/en.pdf (last visited Feb. 11, 2008). 13 Antitrust Sector Inquiries, http://ec.europa.eu/ comm/competition/antitrust/sector_inquiries.html (last visited April 2008).

wave of antitrust class actions in the United States asserting antitrust violations based substantially on the existence of the EC investigations themselves. For example, antitrust allegations have made their way into a multitude of U.S. class action complaints in industry sectors including fasteners and zippers, elevators, bath and kitchen fixtures, acrylic plastic manufacturers, bananas, wineries, carbon products, and bromine products.14 A defendant can generally expect to be hauled into U.S. courts if its alleged foreign wrongdoing caused a “direct, substantial and reasonably foreseeable” domestic effect and that domestic effect directly “gives rise to” plaintiffs’ claims.15

It appears that companies subject to a class action filed in the U.S. have a first line of defense when the class action is filed shortly after allegations by the European Commission of anticompetitive conduct are made public. The Second Circuit has recently declined to sustain a complaint without an adequate allegation of facts linking the alleged antitrust conduct in Europe to its domestic effects (i.e. an antitrust injury) in the United States. In the In re Elevator Antitrust Litigation, plaintiffs filed a putative antitrust class action lawsuit

14 Intratext, SA v. William Prym GMBH & Co., No. 07-CV-9720 (S.D.N.Y. 2007); In re Elevator Antitrust Litigation, No. 06-CV-3128, 2006 U.S. Dist. LEXIS 34517 (S.D.N.Y. May 26, 2006); In re Bath and Kitchen Fixtures, No. 05-CV-00510, 2006 U.S. Dist. LEXIS 49576 (E.D. Pa. July 19, 2006); Parks Paint & Varnish Co., Inc. v. Arkema, Inc., No. 2:06-CV-01093, (E.D. Pa. 2006); Stone v. Chiquita Brands Intl. Inc., No. 05-CV-22935 (S.D. Fla. 2005); Bernard Lawrence Winery v. Atofina Chemicals, Inc., No. 05-CV-04196 (E.D. Pa. filed Aug. 5, 2005); In re Electrical Carbon Products Antitrust Litigation, MDL No. 1514, 333 F. Supp. 2d 303 (D. N.J. Aug. 27, 2004); In re Bromine Antitrust Litigation, MDL. No. 1310, 203 F.R.D. 403 (S.D. Ind. Sept. 28, 2001). 15 F. Hoffman-LaRoche Ltd. v. Emagran, S.A., 542 U.S. 155, 161 (2004); see also Hartford Fire Ins. Co. v. California, 509 U.S. 764 (1993) ("[T]he Sherman Act applies to foreign conduct that was meant to produce and did in fact produce some substantial effect in the United States.").

Page 274 DEFENSE COUNSEL JOURNAL–July 2008

against various elevator companies alleging that defendants conspired to fix the prices of elevators and monopolized the market for the maintenance of elevators.16 The Second Circuit affirmed the dismissal of a complaint alleging that the defendants violated Sections 1 and 2 of the Sherman Act by (i) conspiring to fix prices for the sale and the continuing maintenance of elevators, (ii) conspiring to monopolize the markets for the sale and maintenance of the elevators, and (iii) unilaterally monopolizing and attempting to monopolize the maintenance market for its own elevators by making it difficult for independent maintenance companies to service each defendant’s elevators.17 Plaintiffs asserted that the conspiracy was undertaken (and its effects felt) in Europe as well as in the United States, and that the conspiracy was effected by price fixing, bid rigging and collusion to drive independent repair companies out of business. The complaint referenced various investigations into alleged antitrust violations by defendants and their affiliates, one in Italy and another by the European Commission.18 The plaintiffs asserted, inter alia, that the conspiracy claims were rendered plausible by specific factual allegations of defendants’ apparent anticompetitive misconduct in Europe. Specifically, the plaintiffs alleged that: 1) the Italian Antitrust Authority and the European Commission initiated investigations into possible wrongdoings by the defendants; 2) the European Commission raided the offices of each defendant and issued a statement that it “has good reason to believe that the manufacturers [] may have shared between themselves the tenders for sale and installation of elevators . . . and may have colluded to restrict competition with regard to after-sales services;” 3) the news report’s claim that [defendants] have admitted wrongdoing by some of its European employees; and 4) subsequent to the filing of the complaint, extraordinary

16 502 F.3d 47 (2d Cir. 2007). 17 Id. at 49. 18 Id.

fines were levied by the European Commission against defendants and their affiliates for various antirust violations.19

The court held “[t]hese allegations insufficient to establish a plausible inference of agreement, and therefore to state a claim.”20 According to the Second Circuit, the complaint – apart from alleging that the defendants were under “investigation” in Europe for alleged antitrust violations – was otherwise wholly lacking in factual predicate.21 Applying the U.S. Supreme Court’s holding in Bell Atlantic Corp. v. Twombly to plaintiffs’ conspiracy claims, the Second Circuit explained that a complaint must contain “enough factual matter (taken as true) to suggest that an agreement [to engage in anticompetitive conduct] was made.”22 While Twombly does not require “a heightened fact pleading of specifics, it does require enough facts to ‘nudge [plaintiffs’] claims across the line from conceivable to plausible.’”23 In the court’s view, plaintiffs’ “[a]llegations of anticompetitive wrongdoing in Europe – absent any evidence of linkage between such foreign conduct and conduct here – is merely to suggest that ‘if it happened there, it could have happened here.’”24 Without an adequate allegation of facts linking transactions in Europe to transactions and effects here, plaintiffs’ conclusory allegations did not “nudge [their] claims across the line from conceivable to plausible.”25

III. EC Investigations and U.S. Class

Actions: Lessons Learned

Until recently, the method of pleading that was fatal in In re Elevator Antitrust

19 Id. at 51 n. 6. 20 Id. at 50. 21 Id. 22 Id. at 50 (quoting Twombly, 127 S. Ct. 1955, 1965 (2007)). 23 Id. at 50 (quoting Twombly, 127 S. Ct. at 1974). 24 Id. at 52. 25 Id. (citations omitted) (quoting Twombly, 127 S. Ct. at 1974).

Newsletters Page 275 Litigation had been fairly common. As demonstrated in that case, courts will now scrutinize whether allegations of anticompetitive wrongdoing in Europe present a “plausible inference” of a domestic effect on United States commerce to sustain a claim under the Sherman Act. The suggestion that “if it happened there, it could have happened here,” absent allegations of linkage between such foreign conduct and conduct in the United States, will no longer pass muster under this new legal landscape.

The Second Circuit’s decision in In re Elevator Antitrust Litigation is an early illustration of the new obstacles of pleading antitrust conspiracies. However, there have been recent filings that suggest plaintiffs are at least trying to figure out a way out of the restrictions of In re Elevator Antitrust Litigation. For example, in Intratext, SA v. William Prym GMBH & Co., plaintiffs filed a class action complaint against various manufacturers of fasteners and zippers for the apparel industry seeking damages and injunctive relief for price fixing and market and customer allocation under Section 1 of the Sherman Act and the antitrust laws of the United States.26 According to the complaint, on September 19, 2007, the EC announced the results of a nearly six year long investigation into suspected anticompetitive conduct among the major manufacturers of fasteners and zippers.27 However, plaintiffs do not simply rely on the fact that the EC conducted an investigation of anticompetitive behavior in this industry. Rather, the pleadings focus on the EC findings that the alleged conspiracy to fix prices and allocate customers and markets was “on a worldwide level,” not just a European phenomenon.28 As a result of its investigation, the EC imposed fines totaling over 328 million euros ($456 million U.S. dollars) on several of the defendants.29 Moreover, certain members of the board of

26 No. 07-CV-9720 (S.D.N.Y. 2007). 27 See Intratext Complaint at 36. 28 Id. at 45, 48. 29 Id. at 42.

management of several named zipper manufacturers admitted to their participation in the international conspiracy.30 While the conduct complained of in the U.S. civil suit dates from a number of years ago and may suffer infirmities in this regard, the complaint does suggest that some of the conduct occurred, and domestic effects were felt, in the United States,31 which sounds at least like a nod in the direction of the In re Elevator Antitrust Litigation decision.

Similarly, in Georgia Street Appliances v. Outokumpu OYJ, plaintiffs filed a class action complaint against the manufacturers of ACR Copper Tubing used in the manufacturing of air-conditioning and refrigeration units alleging price fixing and collusion under the California Business & Professions Code § 16720.32 According to the complaint, a named defendant informed the EC about the existence of a cartel in the ACR Copper Tubing market and expressed its willingness to cooperate with the investigation pursuant to the Notice on the non-imposition or reduction of fines in cartel cases.33 As a result, the EC carried out unannounced inspections at the premises of various defendants. All of the defendants eventually cooperated with the EC investigation and provided details and documentation of their illegal cartel to the Commission. On December 16, 2003, the EC issued a decision and assessed fines totaling 79 million euros against participating companies in an international price-fixing and market allocation conspiracy in the ACR Copper Tubing industry.34 Nothing in the pleadings limited the operation of the cartel to Europe, but conversely alleged that the “defendants and their co-conspirators also directed their anticompetitive conduct at the global market for the manufacture and sale of ACR Copper

30 Id. at 52. 31 Id. at 53-57. 32 07-CV-01365 (VRW) (N.D.Cal. 2007). 33 Georgia Street Complaint at 45-46. 34 Id. at 48.

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Tubing, including the United States and the State of California.”35 It remains to be seen whether these antitrust complaints will survive motions to dismiss under the restrictions suggested in In re Elevator Antitrust Litigation and other similar cases. However, it is clear that savvy plaintiffs’ attorneys are beginning to undertake an effort to comply with the “plausible inference” standard and undoubtedly, there will be a new wave of court decisions scrutinizing whether pleadings set forth allegations of fact sufficient to “nudge [plaintiffs’] claims across the line from conceivable to plausible.”36

*** BRIEF REVIEW OF THE FOLLOW- THE-SETTLEMENTS DOCTRINE IN THE UNITED STATES

By Robert D. Allen and Abel Leal

35 Id. at 51. 36 In re Elevator Antitrust Litigation, 502 F.3d at 50 52, (quoting Twombly, 127 S. Ct. at 1974).

April 2008 Reinsurance, Excess and Surplus Lines

The follow-the-settlements doctrine is a powerful tool available to cedents when seeking indemnity from reinsurers. This doctrine obligates reinsurers to indemnify cedents for any payments the cedent makes for claims covered by the underlying insurance.37 While a reinsurer is not required to pay for losses that are not covered under the underlying policy, reinsurers cannot second guess the good faith liability determinations made by the cedent, or the cedent’s good faith decision to waive defenses to which it may be entitled.38 So long as the payment of claims arguably fall within the scope of the underlying policy, the reinsurer must indemnify the cedent.39 This standard is “purposefully low” and the decision making process of the ceding

37 Barry R. Ostrager & Thomas R. Newman, Handbook on Ins. Coverage Disputes, § 15.01[a] (12th ed. 2004). 38 Id. at § 15.04[b]. 39 Mentor Ins. Co. (U.K.) Ltd. v. Brankasse, 996 F.2d 506, 517 (2d Cir. 1993).

Robert D. Allen is the Partner-in-Charge of the Dallas, Texas office of Meckler Bulger & Tilson LLP. Mr. Allen’s practice is primarily focused in representing parties in the trial court and appellate proceedings in insurance and commercial litigation in Texas and other Southwest and Mid-West regions of the United States. Mr. Allen regularly represents parties in complex insurance coverage, bad faith, fraud, reinsurance and regulatory litigation matters. This includes disputes between excess carriers and primary carriers/self insureds, defending insurers and reinsurers in class action litigation and representing parties in litigation involving reinsurance, regulatory and insolvency related disputes. Mr. Allen also has served as a mediator, arbitrator, umpire, and expert witness in insurance and reinsurance disputes.

Abel A. Leal is a Senior Associate of the Dallas, Texas office of Meckler Bulger & Tilson LLP. Mr. Leal’s practice is primarily focused in representing clients in trial court and appellate proceedings in commercial and tort litigation arising out of the agribusiness, complex commercial litigation, and reinsurance and insurance coverage disputes. Mr. Leal has litigated cases in such states as Louisiana, Missouri, New Mexico, Oklahoma, Texas, and Vermont. Mr. Leal has also represented clients in arbitration proceedings. Mr. Leal has prosecuted and defended appeals in Louisiana and Texas appellate courts, and in the United States Court of Appeals for the 10th Circuit, which exercises appellate jurisdiction over cases filed in the federal trial courts of Colorado, Kansas, New Mexico, Oklahoma, Utah, and Wyoming. Robert D. Allen and Abel Leal explain the follow-the-settlements doctrine and its application.