WORKING WITH, AND COMMUNICATING WITH, YOUR COMPETITORS AND SUPPLIERS IN OILFIELD SERVICES INDUSTRY -- IMPORTANT ANTITRUST ISSUES

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1 WORKING WITH, AND COMMUNICATING WITH, YOUR COMPETITORS AND SUPPLIERS IN OILFIELD SERVICES INDUSTRY -- IMPORTANT ANTITRUST ISSUES Sean F. Boland Baker Botts L.L.P. October 7,

2 Session Roadmap Government Antitrust Enforcement -- In The U.S. And Globally. Joint Ventures And Other Collaborative Efforts With Competitors. Sharing Proprietary Information With Competitors And The Risk Of Unilateral Invitations To Collude. Antitrust Issues Involving Agreements With Your Suppliers.

3 U.S. And Global Antitrust Enforcement U.S. Antitrust Enforcement Under The Obama Administration Is Alive And Well. Restaffing Of Both Federal Agencies With "True Believers" And New Agendas. Big Cases Are Being Fought In The Courts And Won. U.S. v. Apple (Book Publishing). DOJ Challenge To US Airways/American (Ongoing). U.S. v. AT&T/T-Mobile (Blocked). U.S. v. Inbev/Modelo (Huge Settlement). FTC's Multiple Actions Challenging Settlements Between Branded/Generic Drug Companies (Supreme Court). Watch: FTC Action On Office Depot/Office Max.

4 U.S. And Global Antitrust Enforcement (cont.) We Also See: Courts Rejecting Carefully Drafted Settlements Between DOJ/Defendants (Gunnison Case). Parties Abandoning Mergers Long Before Any Court Challenge Is Even Filed (Nasdaq/NYSE). Enforcement Agencies Increasingly Challenging Small Merger Transactions That Are Not Even Reportable. (25 cases since 2001.) Basic Democrat Versus Republican Antitrust Enforcement Philosophies.

5 Why Should I Worry About Antitrust?

6 Why Should I Worry About Antitrust? Criminal Penalties: Enormous fines Jail sentences in some jurisdictions (including U.S., and increasingly others -- such as the UK and Australia) Follow-on civil lawsuits: Millions of dollars in costs Endless and expensive (whether we win or lose) lawsuits Disruption, distraction to the company and to you personally

7 Bid Rigging and Cartels are a U.S. and International Priority The detection, prosecution and deterrence of cartel offenses remain the highest priority at the Antitrust Division U.S. DOJ speech March 2008 Competition law is a major "growth business," especially cartel enforcement: Countries "jumping on the band wagon" Recognition of value of free markets Fines generate major revenues for competition authorities

8 U.S. Fines and Criminal Penalties Maximum statutory fine for corporations: $100 million But, fines may be increased to as much as twice the pecuniary gain derived from the offense or twice the loss suffered by the victims of the offense Maximum sentence for individuals: 10 years imprisonment and $1 million fine DOJ believes jail time greatest deterrent 80% + of defendants serve time Average sentence 2 to 3 years

9 U.S. Criminal Antitrust Fines Growing Source: U.S. Dep't of Justice Antitrust Division

10 Recent Major U.S. Antitrust Fines Defendant (FY) Product Fine (US$) AU Optronics Corp. of Taiwan (2012) Liquid crystal display (LCD) panels $500,000,000 F. Hoffmann-La Roche, Ltd. (1999) Vitamins $500,000,000 Yazaki Corp. (2012) LG Display Co., Ltd /LG Display America (2009) Société Air France and Koninklijke Luchtvaart Maatschappij, N.V. (2008) Automotive parts (wire harnesses, instrument panel clusters, fuel senders) $470,000,000 Liquid crystal display (LCD) panels $400,000,000 Air transportation (cargo) $350,000,000 British Airways PLC (2007) Air transportation (cargo & passenger) $300,000,000 Korean Air Lines Co., Ltd. (2007) Air transportation (cargo & passenger) $300,000,000 Samsung Electronics Company, Ltd. / Samsung Semiconductor, Inc. (2006) Memory chips $300,000,000 BASF AG (1999) Vitamins $225,000,000 CHI MEI Optoelectronics Corporation (2010) Liquid crystal display (LCD) panels $220,000,000 Source: U.S. Dep't of Justice Antitrust Division

11 The Global Expansion Of Competition Laws Today, antitrust/competition laws are enforced in over 100 countries worldwide

12 Global Antitrust Enforcement U.S. Successfully Exported Its Corporate Leniency Program -- Over 50 Jurisdictions Have Them And Many U.S. Antitrust Prosecutions Originate Abroad. 70 Jurisdictions Have Pre- Or Post-Merger Filing Requirements. A Leading Chinese Antitrust Agency (NDRC) Recently Suggested That Large Foreign Multinationals (Including GE, Siemens, etc.) Should Leave Their Lawyers At Home And Simply Confess Their "Guilt."

13 Global Antitrust Enforcement (cont.) Fines For Illegal Cartel Behavior In Europe Are Huge And Jail Time For Individuals Is Expected To Increase.

14 E.U. - Ten Highest Cartel Fines Year Company Case Amount in * 2008 Saint Gobain Car glass 800,000, Philips TV and computer monitor tubes 705,296, LG Electronics TV and computer monitor tubes 687,537, F. Hoffman-La Roche AG Vitamins 462,000, Siemens AG Gas insulated switchgear 396,562, Pilkington Car glass 357,000, Ideal Standard Bathroom fittings 326,091, E.ON Gas 320,000, GDF Suez Gas 320,000, ThyssenKrupp Elevators and escalators 319,779,900 Source: European Commission

15 Joint Ventures And Other Collaborative Ventures With Competitors Section 1 Of The Sherman Act Is The Backbone Of U.S. Antitrust Enforcement. It Prohibits Price Fixing, Bid Rigging, Market And Customer Allocations And Other Types Of Unreasonable Collaborative Conduct Which Restrains Trade. Requires An "Agreement" Of Some Sort With Another Company -- And Cannot Be Violated If Your Company Is Making Purely Independent Business Decisions.

16 Joint Ventures And Other Collaborative Ventures With Competitors (cont.) Of Course, If You Are In A "Joint Venture" (e.g., Traditional JV, Joint Operating Agreement, Joint Bidding, Area Of Mutual Interest Agreements, Teaming Agreements, Alliance Agreements And Even Gas And Oil Partnership Agreements...) There Is, By Definition, An Agreement Of Some Sort. Thus, We Are Left With Two Questions: 1) Does The Written Agreement Contain The Entire Agreement; And 2) Does The Entire Agreement Unreasonably Restrain Trade.

17 Joint Ventures And Other Collaborative Ventures With Competitors (cont.) DOJ/FTC Are Politically Disposed To Take Tough Enforcement Positions Involving The Oil And Gas Industry. Recent Enforcement Activity: U.S. v. Gunnison and SGI Grand Jury Investigation Chesapeake/Encana "Joint Ventures" Which Expressly Limits Bidding Activity For Land Leases May Be Per Se Unlawful E&P Companies Across U.S. Are Auditing Their Joint Leasing Programs

18 Joint Ventures And Other Collaborative Ventures With Competitors (cont.) What About Oil Service Companies? Working Together -- JVs, Alliances Or Prime/ Subcontractor Relationships -- Bidding Function Is Often Altered. Sharing Proprietary Information With Each Other Either Directly (Trade Associations) Or Indirectly Through Unilateral Public Communications.

19 Joint Ventures And Other Collaborative Ventures With Competitors (cont.) Joint Ventures With Competitors The Best Single Source For Evaluating JVs Are Joint DOJ/FTC Antitrust Guidelines For Collaboration Among Competitors (2000). Guidelines: Far From Perfect; Difficult To Apply (Even For Antitrust Lawyers); Require A Fact Intensive And Fact Specific Analyses.

20 Joint Ventures And Other Collaborative Ventures With Competitors (cont.) Joint Guidelines Employ A 4-Step Analysis: Is The Joint Venture Acting As A Single Economic Entity? (Pooled Capital; Shared Profit And Loss; Corporate Form Not Controlling) Independent Competitors (i.e., No Single Entity) -- Is Conduct The Type That Always Raises Prices Or Reduces Output? (Strict Scrutiny) Not Per Se Conduct -- Does It Have Obvious Anti- Competitive Effects -- "Quick Look" Analysis (NCAA/College Football 1994) No Obvious Anti-Competitive Effects -- Flexible Rule Of Reason Analysis (Also Two Safe Harbors -- Market Shares/R&D)

21 Joint Ventures And Other Collaborative Ventures With Competitors (cont.) Our Clients Would Like Simple, Bright Line Rules For Collaborative JV With Competitors, Particularly, If The Competitor Is Really Functioning As A Supplier, Customer, Subcontractor, Etc. Relying On The "Form" Of Relationship However Can Be Dangerous. Recently -- Oilfield Client Wanted To Enter Into Prime/Subcontractor Relationship With Competitor. Prime Would Make All Decisions Regarding Price And Output. Subcontractor -- Strictly A Vertical, Vendor/Vendee Relationship With Prime.

22 Joint Ventures And Other Collaborative Ventures With Competitors (cont.) Ok? More Questions. How Many Viable Bidders Would There Be For The Project? But For Prime/Subcontractor Relationship Would Subcontractor Have Bid Independently? Is The Prime/Subcontractor Relationship Disclosed To The Customer? Was There Any Quid Pro Quo For Deal? How Would Subcontractor Pricing Information Be Used In Future?

23 Joint Ventures And Other Collaborative Ventures With Competitors (cont.) An Experienced Antitrust Lawyer Should Be Able To Review A Potential JV Fairly Quickly But It Is Certainly Worth The Effort To Do The Analysis.

24 Sharing Proprietary Information With Competitors Competitors Often Share Proprietary Information. Some Of The More Common Forms Of Such Sharing Involve: Premerger Exchanges Of Information. Industry Or Trade Groups -- Exchange Statistical Information Either Directly Or Through Third Parties. Unilateral, But Reciprocal, Exchanges Of Information By Competitors Through Public Sources (Analyst Calls Or Conferences). Direct Sharing Information With Competitors In Joint Ventures, Etc.

25 Sharing Proprietary Information With Competitors (cont.) The Supreme Court Has Stated That The "Exchange Of Price Data And Other Information Among Competitors Does Not Invariably Have Anti-Competitive Effects; Indeed Such Practices Can In Certain Circumstances Increase Economic Efficiency And Render Markets More, Rather Than Less, Competitive. Gypsum, 438 U.S. at 443 n. 16 (1978).

26 Sharing Proprietary Information With Competitors (cont.) What Makes Information Sharing With Competitors Unlawful, As Opposed To Being Potentially Procompetitive, Is Evidence Of A "Conscious Commitment To A Common Scheme Designed To Achieve An Unlawful Objective." Monsanto, 465 U.S. at 764. In Other Words, The Exchange Has To Involve An Agreement Among The Competitors To Unlawfully Use The Information. Parallel Conduct By Competitors "Must Be Placed In A Context That Raises A Suggestion Of A Preceding Agreement." Twombly, 550 U.S. at 557 (2007).

27 Sharing Proprietary Information With Competitors (cont.) Also Clear From The Case Law That Certain Proprietary Information Is Riskier To Exchange Than Other Types Of Information. Current Or Future Price Information Is The Most Sensitive Data. Price Information Is Riskier Than Cost And Other Non- Price Information. Detailed Information Is Riskier Than Aggregated Information. Multiplicity Of Sources. Granularity Of Content.

28 Sharing Proprietary Information With Competitors (cont.) Information Exchanges Are Viewed With Even Greater Suspicion In Europe Than The U.S. What Is Perfectly Permissible In The U.S. May Be Quite Suspect In Europe. This, However, Is A Very Hot Area In U.S. Antitrust And The Recent Cases Suggest That We Will See More Activity Here. Recent Investigations/Cases -- All Ongoing: DOJ Ongoing Investigation Of Delta/AirTran Bag Fees: AirTran announces in an earnings call that it will initiate a $15 bag fee in Atlanta if arch competitor Delta imposes such a fee first. Delta subsequently establishes a bag fee; AirTran follows.

29 Sharing Proprietary Information With Competitors (cont.) FTC Litigation Against Iron Pipe Fittings Manufacturers (McWane). Exchanges of aggregated U.S. shipment information by three competitors. Reports prepared by third party accounting firm represented by antitrust counsel. FTC alleges that information exchange improperly facilitated price coordination even if facts show prices were actually reduced. FTC lost at administrative trial level but matter proceeds. Detroit Nurses Wages Case -- Private Litigation. Five lawsuits alleged various hospitals improperly exchanged wage information for nurses in Detroit. Direct contacts by HR employees. Health care industry meetings. Third party surveys. Case proceeding to trial.

30 Sharing Proprietary Information With Competitors (cont.) Bottom Line: Sharing Proprietary Information With Competitors, Whether Through Direct Exchanges, Through Third Parties Or Even Through Public Announcements Is Closely Scrutinized Today And Private Parties And Governmental Agencies Are Bringing Cases Even When The Net Affect Of The Exchanges Results In Lower Prices And/Or Great Output.

31 Contractual Relationships With Suppliers And Customers A Final Area Of Increased Antitrust Scrutiny Involves Various Contractual Relationships Between Suppliers And Customers. In U.S. v. Apple (Electronic Book Publishing), The District Court Found For The First Time That Most Favored Nation ("MFN") Clauses Can Constitute A Violation Of Section 1 Of The Sherman Act. A Typical MFN Clause Is Imposed At A Buyer's Request To Ensure That The Buyer Gets The Lowest Price In The Market. Very Common. Most Often Are Pro-Competitive.

32 Contractual Relationships With Suppliers And Customers (cont.) There Are, However, Potential Anti-Competitive Effects With MFNs. For Example: MFNs Can Facilitate Coordination At The Seller Level Were Most Sellers Have MFN Clauses In Their Contacts With Buyers. MFN, By Their Very Nature, Also Make It More Difficult For Sellers To Discount To New Customers (Who Might Actually Represent More Sales Than The Favored Customers, Thus, Increasing Prices As A Whole In The Marketplace).

33 Contractual Relationships With Suppliers And Customers (cont.) Despite The Economists Fascination With MFN Clauses, As A Practical Matter, Service Companies Should Continue To Do What Is In Their Own Economic Interest Until We Get Clearer Guidance From The Courts.

34 Contractual Relationships With Suppliers And Customers (cont.) Finally, We Should Also Recognize That Exclusivity Provisions In Both Seller-Proposed Contracts And Buyer-Proposed Contracts Will Continue To Receive Increased Scrutiny In Two Situations: First, If The Buyer Requests Exclusivity It Is Often Because The Input Provided By The Seller Is Either In Short Supply Or Because It Provides The Buyer With Some Competitive Advantage. In Either Case, If The Buyer Has Some Degree Of Market Power In Its Market, This Could Be Considered Exclusionary Conduct By A Dominant Firm In Violation Of Section 2 Of The Sherman Act. (Could Also Violate Section 1 Of The Sherman Act; Section 3 Of The Clayton Act; And Section 5 Of The FTC Act.)

35 Contractual Relationships With Suppliers And Customers (cont.) Second, If The Seller Requests Exclusivity, It Is Often Because The Seller Wants To Exclude Its Competitors, Including New Entrants, From Access To The Buyer. If The Seller Has Market Power In Its Market, This Similarly Could Be Considered Exclusionary Conduct By A Dominant Firm. It Has Been My Experience, Particularly In Recent Years, That It Makes Sense, In Most Instances, To Push Back Against Those Sort Of Provisions When They Are Not In Your Interest And To Seek To Impose Them When They Are In Your Interest. The Fact That Exclusive Dealing Arrangements Can Be Terminated At Will Does Not Necessarily Save The Arrangement (U.S. v. Dentsply, 3rd Cir. 2005).

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