[Federal Register Volume 76, Number 53 (Friday, March 18, 2011)]
[Notices]
[Pages 14987-14993]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-6182]
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DEPARTMENT OF JUSTICE
Antitrust Division
United States v. Graftech International Ltd. and Seadrift Coke,
L.P.; Public Comments and Response on Proposed Final Judgment
Pursuant to the Antitrust Procedures and Penalties Act, 15 U.S.C.
16(b)-(h), the United States hereby publishes below the comment
received on the proposed Final Judgment in United States v. GrafTech
International Ltd. and Seadrift Coke, L.P., Civil Action No. 1:10-CV-
02039, which was filed in the United States District Court for the
District of Columbia on March 3, 2011, together with the response of
the United States to the comment.
Copies of the comments and the response are available for
inspection at the Department of Justice Antitrust Division, 450 Fifth
Street, NW., Suite 1010, Washington, DC 20530 (telephone: 202-514-
2481), on the Department of Justice's Web site at http://www.usdoj.gov/atr, and at the Office of the Clerk of the United States District Court
for the District of Columbia, 333 Constitution Avenue, NW., Washington,
DC 20001. Copies of any of these materials may be obtained upon request
and payment of a copying fee.
Patricia A. Brink,
Director of Civil Enforcement.
UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA UNITED STATES
OF AMERICA,
Plaintiff,
v.
GRAFTECH INTERNATIONAL LTD.
and
SEADRIFT COKE L.P.
Defendants.
CASE NO.: 1:10-cv-02039
JUDGE: Collyer, Rosemary M.
DECK TYPE: Antitrust
DATE STAMP: March 3, 2011
Response of Plaintiff United States to Public Comment on the Proposed
Final Judgment
Pursuant to the requirements of the Antitrust Procedures and
Penalties Act, 15 U.S.C. 16(b)-(h) (``APPA'' or ``Tunney Act''), the
United States hereby responds to the public comment received regarding
the proposed Final Judgment in this case. After careful consideration
of the comment submitted, the United States continues to believe that
the proposed Final Judgment will provide an effective and appropriate
remedy for the antitrust violations alleged in the Complaint. The
United States will move the Court for entry of the proposed Final
Judgment after the public comment and this response have been published
in the Federal Register, pursuant to 15 U.S.C. 16(d).
The United States filed a civil antitrust complaint on November 29,
2010, seeking to enjoin GrafTech International Ltd.'s (``GrafTech'')
proposed acquisition of Seadrift Coke L.P. (``Seadrift''). The
Complaint alleged that the acquisition likely would substantially
lessen competition in the worldwide sale of petroleum needle coke used
to manufacture graphite electrodes, in violation of Section 7 of the
Clayton Act, 15 U.S.C. 18. That loss of competition likely would result
in higher prices, reduced output and less favorable terms of sale in
the global petroleum needle coke market.
Simultaneously with the filing of the Complaint, the United States
filed a proposed Final Judgment, which is designed to remedy the
expected anticompetitive effects of the acquisition, and a Stipulation
signed by the plaintiffs and the defendants, consenting to the entry of
the proposed Final Judgment after compliance with the requirements of
the Tunney Act, 15 U.S.C. 16. Pursuant to those
[[Page 14988]]
requirements, the United States filed its Competitive Impact Statement
(``CIS'') with the Court on November 29, 2010; the proposed Final
Judgment and CIS were published in the Federal Register on December 7,
2010, see United States v. Graftech international Ltd. and Seadrift
L.P., 75 FR 76026; and summaries of the terms of the proposed Final
Judgment and CIS, together with directions for the submission of
written comments relating to the proposed Final Judgment, were
published in The Washington Post for seven (days beginning on December
3, 2010 and ending on December 9, 2010. The sixty-day period for public
comment ended on February 7, 2011; one comment was received as
described below and attached hereto.
I. The Investigation and Proposed Resolution
A. The Investigation
On April 1, 2010, Defendants GrafTech and Seadrift entered into an
Agreement and Plan of Merger, pursuant to which GrafTech agreed to
acquire the 81.1 percent of Seadrift stock it does not already own for
about $308.1 million. Immediately following the announcement of the
merger, the United States Department of Justice (``Department'') opened
an investigation into the likely competitive effects of the transaction
that spanned more than seven months. As part of this detailed
investigation, the Department issued Second Requests to the merging
parties and several Civil Investigative Demands (``CIDs'') to third
parties. The Department considered more than a million documents
submitted by the merging parties in response the Second Requests and by
third parties in response to CIDs. The Department also took oral
testimony from eight executives from the merging parties, and conducted
over 100 interviews with customers, competitors and other market
participants. The investigative staff carefully analyzed the
information provided and thoroughly considered all of the issues
presented. The Department considered the potential competitive effects
of the transaction on the production and sale of petroleum needle coke
used to manufacture graphite electrodes, and concluded that the merger
likely would result in higher prices, reduced output and less favorable
terms of sale in the global petroleum needle coke market.
As part of its investigation, the Department considered the
potential competitive effects of the merger on the markets for numerous
products and services and on a variety of customer groups. The
Department concluded, as explained more fully in the Complaint and CIS,
the acquisition of Seadrift by GrafTech could substantially lessen
competition in the international petroleum needle coke market. Seadrift
is a producer of petroleum needle coke, a product purchased by GrafTech
and its competitors to make graphite electrodes which are, in turn,
sold to steel producers to melt scrap in electric arc furnaces.
Petroleum needle coke is a key input in large-diameter (18- to 32-inch)
electrodes, in particular, because they are often used in high
intensity applications, where petroleum needle coke's needle-like
structure, low coefficient of thermal expansion, and low impurity rate
are critical to efficient conduction of strong current without costly
shutdowns to replace broken or exhausted graphite electrodes. Petroleum
needle coke is available from four producers: ConocoPhillips Company
(``Conoco''), Seadrift and two other competitors located in Japan.
Sales typically are negotiated annually, with price terms and volume
targets memorialized in formal contracts.
At the time of the proposed merger, GrafTech received a substantial
portion of its petroleum needle coke supply from Conoco, pursuant to a
multi-year agreement (``Supply Agreement''), which also included a
provision that either GrafTech or Conoco could ``audit'' the books and
records of the other. On September 27, 2010, in response to the
proposed merger, Conoco activated the ``termination clause'' of that
agreement, which effectively locked in volume targets and imposed most-
favored-nation (``MFN'') pricing for three years, while leaving the
audit right intact. By operation of the merger, the audit clause would
extend to Seadrift the information provided to GrafTech from Conoco.
Should the audit clause be used in conjunction with the MFN, for
example, to verify that GrafTech was, in fact, receiving the lowest
price, Seadrift potentially would have access to its largest
competitor's production and pricing to all other customers. By
facilitating the exchange of customer-specific, real-time, competitor
pricing information, the merger was likely to facilitate coordination.
Therefore, the Department concluded, as a result of its
investigation, that GrafTech's acquisition of Seadrift likely would
substantially lessen competition in the development, production and
sale of petroleum needle coke in the United States, leading to higher
prices, reduced output and less favorable terms of sale in the
worldwide petroleum needle coke market, in violation of Section 7 of
the Clayton Act. The proposed Final Judgment is designed to address the
threat of information exchange created by the merger, by removing the
opportunity and means for Seadrift and Conoco to engage in
anticompetitive activity under cover of the Supply Agreement, and
possibly future supply arrangements.
B. Proposed Final Judgment
The proposed Final Judgment contains several layers of prohibited
and required conduct to eliminate the anticompetitive effects that
otherwise would result from GrafTech's acquisition of Seadrift. First,
the terms of the proposed Final Judgment require GrafTech and Seadrift
immediately to abrogate, amend or otherwise alter the current petroleum
needle coke Supply Agreement between GrafTech and Conoco to remove the
terms related to the ongoing audit rights, sharing of non-public or
proprietary information, and MFN pricing. Had these clauses persisted,
they might have allowed GrafTech and Seadrift access to Conoco's
customer-specific pricing, production and other commercial terms.
GrafTech also is prohibited from adding similar terms to future
contracts with Conoco for the ten-year period term of the proposed
Final Judgment. Second, to enforce this prohibition, GrafTech must
produce copies of each petroleum needle coke supply agreement to the
United States on an annual basis. As an additional safeguard against
any informal exchange of pricing or output information between
GrafTech, Seadrift and Conoco, the proposed Final Judgment also
mandates that GrafTech strictly segregate employees who negotiate terms
with Conoco from those who make decisions about pricing and production
at Seadrift, and vice versa. Finally, so that the United States can
detect any changes in capacity, production or sales that might suggest
coordination, GrafTech must report capacity, sales and production
information on a quarterly basis.
These layers of protection prevent harm without imperiling the
efficiencies that GrafTech expects from the merger. GrafTech
anticipates substantial, merger-specific efficiencies by internal
consumption of Seadrift petroleum needle coke, which would allow the
elimination of double margins. Should this result in lower GrafTech
prices for graphite electrode customers, it not only would benefit
those customers directly, but it also likely would incentivize other
graphite electrode competitors to reduce prices in response to that
competition. Verified plans to improve the quality of Seadrift
petroleum needle coke likely will benefit Seadrift's
[[Page 14989]]
graphite electrode customers, as well as the downstream consumers of
finished graphite electrodes, in the future. Thus, the source of
potential harm is eliminated without depriving consumers of the
procompetitive efficiencies that GrafTech and Seadrift expect their
merger to generate.
II. Standard of Judicial Review
The APPA requires that proposed consent judgments in antitrust
cases brought by the United States be subject to a sixty-day comment
period, after which the court shall determine whether entry of the
proposed Final Judgment ``is in the public interest.'' 15 U.S.C.
16(e)(l). In making that determination in accordance with the statute,
the court is required to consider:
(A) the competitive impact of such judgment, including termination
of alleged violations, provisions for enforcement and modification,
duration of relief sought, anticipated effects of alternative remedies
actually considered, whether its terms are ambiguous, and any other
competitive considerations bearing upon the adequacy of such judgment
that the court deems necessary to a determination of whether the
consent judgment is in the public interest; and
(B) the impact of entry of such judgment upon competition in the
relevant market or markets, upon the public generally and individuals
alleging specific injury from the violations set forth in the complaint
including consideration of the public benefit, if any, to be derived
from a determination of the issues at trial.
15 U.S.C. 16(e)(1)(A)-(B). In considering these statutory factors,
the court's inquiry is necessarily a limited one as the government is
entitled to ``broad discretion to settle with the defendant within the
reaches of the public interest.'' United States v. Microsoft Corp., 56
F.3d 1448, 1461 (DC Cir. 1995); see generally United States v. SBC
Commc'ns, Inc., 489 F. Supp. 2d 1 (D.DC 2007) (assessing public
interest standard under the Tunney Act); United States v. InBev N. V./
S.A., 2009-2 Trade Cas. (CCH) ]76,736, No. 08-1965 (JR), 2009 U.S.
Dist. LEXIS 84787, at *3 (D.DC Aug. 11, 2009) (noting that the court's
review of a consent judgment is limited and only inquires ``into
whether the government's determination that the proposed remedies will
cure the antitrust violations alleged in the complaint was reasonable,
and whether the mechanisms to enforce the Final Judgment are clear and
manageable'').
As the United States Court of Appeals for the District of Columbia
Circuit has held, under the APPA, a court considers, among other
things, the relationship between the remedy secured and the specific
allegations set forth in the government's complaint, whether the decree
is sufficiently clear, whether enforcement mechanisms are sufficient,
and whether the decree may positively harm third parties. See
Microsoft, 56 F.3d at 1458-62. With respect to the adequacy of the
relief secured by the decree, a court may not ``engage in an
unrestricted evaluation of what relief would best serve the public.''
United States v. BNS, Inc., 858 F.2d 456, 462 (9th Cir. 1988) (citing
United States v. Bechtel Corp., 648 F.2d 660, 666 (9th Cir. 1981)); see
also Microsoft, 56 F.3d at 1460-62; United States v. Alcoa, Inc., 152
F. Supp. 2d 37, 40 (D.DC 2001); InBev, 2009 U.S. Dist. LEXIS 84787, at
*3 Courts have held that:
[t]he balancing of competing social and political interests
affected by a proposed antitrust consent decree must be left, in the
first instance, to the discretion of the Attorney General. The court's
role in protecting the public interest is one of insuring that the
government has not breached its duty to the public in consenting to the
decree. The court is required to determine not whether a particular
decree is the one that will best serve society, but whether the
settlement is ``within the reaches of the public interest.'' More
elaborate requirements might undermine the effectiveness of antitrust
enforcement by consent decree.
Bechtel, 648 F.2d at 666 (emphasis added) (citations omitted).\1\
In determining whether a proposed settlement is in the public interest,
the court ``must accord deference to the government's predictions about
the efficacy of its remedies, and may not require that the remedies
perfectly match the alleged violations.'' SBC Commc'ns, 489 F. Supp. 2d
at 17; see also Microsoft, 56 F.3d at 1461 (noting the need for courts
to be ``deferential to the government's predictions as to the effect of
the proposed remedies''); United States v. Archer-Daniels-Midland Co.,
272 F. Supp. 2d 1, 6 (D.DC 2003) (noting that the court should grant
due respect to the United States' prediction as to the effect of
proposed remedies, its perception of the market structure, and its
views of the nature of the case).
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\1\ Cf BNS, 858 F.2d at 464 (holding that the court's ``ultimate
authority under the [APPA] is limited to approving or disapproving
the consent decree''); United States v. Gillette Co., 406 F. Supp.
713, 716 (D. Mass. 1975) (noting that, in this way, the court is
constrained to ``look at the overall picture not hypercritically,
nor with a microscope, but with an artist's reducing glass''). See
generally Microsoft, 56 F.3d at 1461 (discussing whether ``the
remedies [obtained in the decree are] so inconsonant with the
allegations charged as to fall outside of the `reaches of the public
interest' '').
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Courts have greater flexibility in approving proposed consent
decrees than in crafting their own decrees following a finding of
liability in a litigated matter. ``[A] proposed decree must be approved
even if it falls short of the remedy the court would impose on its own,
as long as it falls within the range of acceptability or is `within the
reaches of public interest.' '' United States v. Am. Tel. & Tel. Co.,
552 F. Supp. 131, 151 (D.DC 1982) (citations omitted) (quoting United
States v. Gillette Co., 406 F. Supp. 713, 716 (D. Mass. 1975)), aff'd
sub nom. Maryland v. United States, 460 U.S. 1001 (1983); see also
United States v. Alcan Aluminum Ltd., 605 F. Supp. 619, 622 (W.D. Ky.
1985) (approving the consent decree even though the court would have
imposed a greater remedy). As this Court has previously recognized, to
meet this standard ``[t]he government need not prove that the
settlements will perfectly remedy the alleged antitrust harms, it need
only provide a factual basis for concluding that the settlements are
reasonably adequate remedies for the alleged harms.'' United States v.
Abitibi-Consolidated Inc., 584 F. Supp. 2d 162, 165 (D.DC 2008) (citing
SBC Commc'ns, 489 F. Supp. 2d at 17).
Moreover, the Court's role under the APPA is limited to reviewing
the remedy in relationship to the violations that the United States has
alleged in its complaint, rather than to ``construct [its] own
hypothetical case and then evaluate the decree against that case.''
Microsoft, 56 F.3d at 1459. Because the ``court's authority to review
the decree depends entirely on the government's exercising its
prosecutorial discretion by bringing a case in the first place,'' it
follows that ``the court is only authorized to review the decree
itself,'' and not to ``effectively redraft the complaint'' to inquire
into other matters that the United States did not pursue. Id. at 1459-
60. As this Court recently confirmed in SBC Communications, courts
``cannot look beyond the complaint in making the public interest
determination unless the complaint is drafted so narrowly as to make a
mockery of judicial power.'' SBC Commc'ns, 489 F. Supp. 2d at 15.
In its 2004 amendments to the Tunney Act,\2\ Congress made clear
its
[[Page 14990]]
intent to preserve the practical benefits of utilizing consent decrees
in antitrust enforcement, stating ``[n]othing in this section shall be
construed to require the court to conduct an evidentiary hearing or to
require the court to permit anyone to intervene.'' 15 U.S.C. 16(e)(2).
The language wrote into the statute what Congress intended when it
enacted the Tunney Act in 1974, as Senator Tunney explained: ``[t]he
court is nowhere compelled to go to trial or to engage in extended
proceedings which might have the effect of vitiating the benefits of
prompt and less costly settlement through the consent decree process.''
119 Cong. Rec. 24,598 (1973) (statement of Senator Tunney). Rather, the
procedure for the public-interest determination is left to the
discretion of the court, with the recognition that the court's ``scope
of review remains sharply proscribed by precedent and the nature of
Tunney Act proceedings.'' SBC Commc'ns, 489 F. Supp. 2d at 11.\3\
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\2\ The 2004 amendments substituted the word ``shall'' for
``may'' when directing the courts to consider the enumerated factors
and amended the list of factors to focus on competitive
considerations and address potentially ambiguous judgment terms.
Compare 15 U.S.C. 16(e) (2004), with 15 U.S.C. 16(e)(1) (2006); see
also SBC Commc'ns, 489 F. Supp. 2d at 11 (concluding that the 2004
amendments effected minimal changes'' to Tunney Act review).
\3\See United States v. Enova Corp., 107 F. Supp. 2d 10, 17
(D.DC 2000) (noting that the ``Tunney Act expressly allows the court
to make its public interest determination on the basis of the
competitive impact statement and response to comments alone'');
United States v. Mid-Am. Dairymen, Inc., 1977-1 Trade Cas. (CCH)
]61,508, at 71,980 (W.D. Mo. 1977) (``Absent a showing of corrupt
failure of the government to discharge its duty, the Court, in
making its public interest finding, should.. carefully consider the
explanations of the government in the competitive impact statement
and its responses to comments in order to determine whether those
explanations are reasonable under the circumstances.''); S. Rep. No.
93-298, 93d Cong., 1st Sess., at 6 (1973) (``Where the public
interest can be meaningfully evaluated simply on the basis of briefs
and oral arguments, that is the approach that should be
utilized.'').
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III. Summary of Public Comment and The United States's Response
During the sixty-day comment period, the United States received
only one comment, from a Russian graphite electrode competitor,
Energoprom. Energoprom's comment, which objected to the scope of the
remedy described in the proposed Final Judgment, is attached hereto. As
explained in detail below, after careful review, the United States
continues to believe that the proposed Final Judgment is in the public
interest.
A. Summary of the Public Comment
Energoprom, a competitor of GrafTech's, is the largest producer of
graphite electrodes in the Russian Federation, with facilities in the
Rostov and Novosibirsk regions of Russia. Energoprom argues first that
the proposed Final Judgment should be expanded to require more thorough
monitoring to protect competition in the petroleum needle coke market
and, in the alternative, asserts that no settlement could be crafted
that would prevent anticompetitive effects from the merger of GrafTech
and Seadrift.\4\
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\4\ Energoprom also argues that GrafTech has failed to abide by
Russian competition agency reporting requirements, a complaint that
is beyond the scope of this review.
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Energoprom first argues that the proposed Final Judgment does not
require sufficient monitoring to prevent anticompetitive effects
arising from coordination. The company contends that GrafTech's
acquisition of Seadrift, in combination with GrafTech's supply
agreement with Conoco, increases the likelihood of price fixing, output
coordination, and other anticompetitive agreements between Seadrift and
Conoco.\5\ To prevent such coordination, Energoprom submits that it is
necessary to collect and analyze basic economic indicators regarding
these companies and the market as a whole.\6\ Energoprom further
objects to the ten-year duration of the proposed Final Judgment, and
questions whether competition will continue after its expiration.\7\
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\5\ Energoprom Comment at 2.
\6\ Id.
\7\ Id.
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Second, Energoprom argues that neither the Complaint nor the
proposed Final Judgment addresses the possibility that unilateral
effects may result from the acquisition of Seadrift by Graftech.
Energoprom argues that Seadrift has ``a dominant market position'' in
the petroleum needle coke industry.\8\ Acquiring Seadrift, in the
company's view, would allow GrafTech to determine the production volume
and terms of sale to GrafTech's competitors in the sale of graphite
electrodes, creating the potential for abuse.\9\ Energoprom argues that
unilateral anticompetitive effects may include a reduction of
Seadrift's output to GrafTech's competitors and less favorable terms of
sale to GrafTech's competitors, either of which may cause Energoprom
and other graphite electrode competitors to lose customers because of
reduced Seadrift output or because competitors ``couldn't provide
consumers as low [a] price for electrodes as GrafTech did.'' \10\
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\8\ Id. at 3.
\9\ Id. at 4
\10\ Id.
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B. The United States's Response
Energoprom's allegations are not new; in fact, the company
expressed its concerns to the United States on several occasions during
the investigation of the proposed acquisition. The United States is
confident that Energoprom's suggestions for additional remedial
measures are unnecessary to serve the public interest. Further, the
United States's exercise of its discretion not to allege in the
complaint potential unilateral effects from the acquisition is beyond
the scope of Tunney Act review.
1. Additional Monitoring Requirements
Energoprom asserts that, to prevent anticompetitive effects from
potential coordination between GrafTech, Seadrift and Conoco, the Final
Judgment must compel the ``systematic'' production of more information
than the proposed Final Judgment currently requires, including ``the
conditions of contracts entered into by each producer with consumers,''
each company's price lists, and ``other documents'' that reveal ``basic
economic indicators.'' \11\ Energoprom suggests this information should
be compared with similar information from the ``market on the whole.''
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\11\ Id.
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The additional documents and information that Energoprom suggests
should be required, at best, would be unnecessary supplements to the
comprehensive remedy included in the proposed Final Judgment and, at
worst, would impose a significant burden on GrafTech as well as other
competitors and customers in this industry. The proposed Final Judgment
already provides several layers of protection against potential
anticompetitive effects, whether they manifest as price increases or
output reductions, including significant reporting requirements. First,
the proposed Final Judgment removes the mechanism likely to facilitate
coordination on price and input by requiring that GrafTech amend its
supply agreement with Conoco to remove the audit and MFN provisions
prior to consummating the merger.\12\ The proposed Final Judgment
likewise prohibits GrafTech from adding similar provisions for ten
years. Second, the proposed Final Judgment requires that GrafTech
produce copies of all of its contracts with Conoco, so the United
States may monitor compliance with this prohibition and detect any
variation of the audit and MFN provisions that might suggest a price-
fixing or output restriction arrangement. Third, the proposed Final
Judgment requires that GrafTech erect a firewall that separates those
GrafTech employees negotiating prices and terms with Conoco from those
making decisions about price and output for Seadrifi. Finally, GrafTech
must produce information revealing
[[Page 14991]]
Seadrift's projected output and external sales on a quarterly basis.
Any significant change in production or sales levels immediately would
reveal changes in production volume that might suggest output
coordination, but also likely would provide a clear signal of the
attendant output effects of an anticompetitive price-fixing agreement.
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\12\ In fact, GrafTech has already complied with this provision
in the proposed Final Judgment.
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In addition, Energoprom's proposal that the proposed Final Judgment
should require the ``systematic collection, storage and processing'' of
information regarding customer contracts, price lists and other
``economic indicators'' ignores the significant administrative burden
such a requirement would impose on the Defendants, without any
attendant enforcement benefit. Moreover, Energoprom suggests this
comprehensive collection of data would be useful only in an effort to
measure ``divergence'' of Seadrift sales from ``the market as a
whole,'' \13\ which suggests a similar collection effort would have to
be made of third parties; such a requirement not only would be
burdensome, but also is beyond the scope of a settlement to a Clayton
Act action brought by the United States.
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\13\ Energoprom Comment at 2.
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Energoprom also objects to the ten-year duration of the
requirements in the proposed Final Judgment, arguing that ``[i]t is not
clear'' what the competitive environment will be like in ten years.\14\
However, it is precisely because it is difficult to foresee competitive
conditions more than ten years into the future that the proposed Final
Judgment is limited in duration. Ten years is the standard term of most
Department consent decrees, and reflects Department experience about
the most appropriate period for ensuring the prevention of harm posed
by most mergers. Upon expiration of the Final Judgment, the Defendants
will remain fully subject to the Sherman Act and the Division will
remain able to investigate any potential anticompetitive conduct.
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\14\ Id.
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In sum, the carefully constructed layers of requirements and
prohibitions included in the proposed Final Judgment are more than
sufficient to remedy the harm alleged in the Complaint, and
Energoprom's suggested additions merely would impose an unnecessary
burden without providing any commensurate benefit to consumers.
2. Expansion of the Complaint To Allege Unilateral Effects
Energoprom also argues that the United States should have alleged
that the merger likely would lead to unilateral anticompetitive
effects. Energoprom asserts that, even absent coordination with Conoco,
the acquisition of Seadrift would be sufficient to allow GrafTech the
ability to impose anticompetitive price increases or output
restrictions on downstream customers of graphite electrodes. This
argument, however, is not a valid basis for the Court to reject a
proposed remedy during Tunney Act review. As discussed above, in a
Tunney Act proceeding the Court must evaluate the adequacy of the
remedy only for the antitrust violations alleged in the complaint. See
United States v. Microsoft Corp., 56 F.3d 1448, 1459 (DC Cir. 1995).
The Tunney Act does not usurp the United States's prosecutorial
discretion to choose the type of case to bring; courts ``cannot look
beyond the complaint. . . unless the complaint is drafted so narrowly
as to make a mockery of judicial power.'' SBC Commc 'ns, 489 F. Supp.
2d at 15. Energoprom, however, seeks to ``construct fits] own
hypothetical case and then evaluate the decree against that case''--
precisely the approach specifically forbidden in Tunney Act proceedings
by the DC Circuit. See Microsoft, 56 F.3d at 1459. In this case, the
United States did not allege that the acquisition of Seadrift was
likely to generate a unilateral anticompetitive effect, and it is
improper for Energoprom to measure the sufficiency of the remedy
against such a hypothetical case.
Accordingly, the United States continues to believe that the
proposed Final Judgment will remedy the competitive harm likely to
result from GrafTech's acquisition of Seadrift and that entry of the
proposed Final Judgment is in the public interest.
IV. Conclusion
The issues raised in the public comment were among the many
considered by the United States when it evaluated the sufficiency of
the proposed remedy. The United States has determined that the proposed
Final Judgment, as drafted, provides an effective and appropriate
remedy for the antitrust violations alleged in the Complaint and is
therefore in the public interest. The United States will move this
Court to enter the proposed Final Judgment after the comment and this
response are published in the Federal Register.
Dated: March 3, 2011
Respectfully submitted,
Stephanie A. Fleming, Esq., United States Department of Justice,
Antitrust Division, Litigation II Section, 450 5th Street, NW., Suite
8700, Washington, DC 20530, Phone: (202) 514-9228, Fax: (202) 514-9033,
[email protected].
CERTIFICATE OF SERVICE
I, Stephanie A. Fleming, hereby certify that on March 3, 2011, I
caused a copy of the foregoing Response of Plaintiff United States to
Public Comment on the Proposed Final Judgment to be served upon
defendants GrafTech and Seadrift, mailing the documents electronically
to their duly authorized legal representatives as follows:
Counsel for Defendant GrafTech: Jonathan Gleklen, Esq., Arnold & Porter
LLP, 555 12111 Street, NW., Washington, DC 20004;
Counsel for Defendant Seadrift: Craig Seebald, Esq., Joel Grosberg,
Esq., McDermott, Will & Emery, 600 13th Street, NW., Washington, DC
20006;
/s/
Stephanie A. Fleming, Esq., United States Department of Justice,
Antitrust Division, Litigation II Section, 450 Fifth Street, NW., Suite
8700, Washington, DC 20530, Phone: (202) 514-9228, Fax: (202) 514-9033,
[email protected];
To: 450 Fifth Street, NW., Suite 8700, Washington DC., 20530.
Letter No: 9091-TM-01-2011
Date: January 25, 2011.
Attn.: Maribeth Petrizzi, Chief, Litigation II Section, Antitrust
Division United States Department of Justice
Fax:
Re: Comments to the proposed Final Judgment regarding acquisition of
Seadrift Coke L.P. by GrafTech International Ltd.
Dear Ms Petrizzi:
In connection with filing a Complaint on 29.11.2010 by the United
States of America, represented by Antitrust Division of the U.S.
Department of Justice to the U.S. District Court, District of Columbia
vs. GrafTech International Ltd. company (``GrafTech'') and Seadrift
Coke LP company (``Seadrift''), relating to the proposed acquisition of
Seadrift by GrafTech, together with proposed Final Judgment and
Competitive Impact Statement (published in the U.S. Federal Register
dated December 7, 2010 Vol. 75 No. 234), being guided by Section 15
U.S.C. 16(d), Closed Joint Stock Company ``ENERGOPROM MANAGEMENT''
(Moscow, Russia), hereinafter--the Company, being the management
company of electrode plants--JSC ENERGOPROM--
[[Page 14992]]
Novocherkassk Electrode Plant'' (Rostov region, Russia), JSC
``ENERGOPROM--Chelyabinsk Electrode Plant'' (Chelyabinsk, Russia), JSC
``ENERGOPROM--Novosibirsk Electrode Plant'' (Novosibirsk region,
Russia), all these companies together form ENERGOPROM Group, hereby
presents commentary to Final Judgment.
The above Complaint was filed by the United States of America in
the announcement of GrafTech--the world's largest manufacturer of
graphite electrode UHP, used in electric arc furnaces for electric
steel smelting, about the proposed acquisition of Seadrift--the second
largest world producer of petroleum needle coke--a key raw material
used to produce graphite electrode UHP. The Complaint seeks to reduce
the expected anticompetitive effect of the acquisition due to taking by
the parties to the transaction a number of measures listed in the
proposed Final Judgment.
ENERGOPROM Group is Russia's largest producer of graphite
electrodes UHP, supplies the goods to Europe and the USA and uses
petroleum needle coke in the production. ENERGOPROM Group considers
that the aforementioned transaction is contrary to the basic principles
of antitrust laws, which might result in substantial harm to the
competition not only on the world petroleum needle coke market, but
also as a consequence--on the market of graphite electrodes UHP and
electric steel market.
According to subsection 2 of section II of the Competitive Impact
Statement the alleged acquisition of Seadrift by GrafTech may
substantially lessen competition in the worldwide sale of petroleum
needle coke because it will allow Seadrift to be involved in the scope
of the long-term petroleum needle coke supply agreements (``Supply
Agreements'') between GrafTech and Conoco Philips Company
(hereinafter--``Conoco'')--a competitor of Seadrift, the world's
largest producer of needle coke, under which Conoco must provide
petroleum needle coke to GrafTech with the most-favored-nation
(``MFN'') basis meaning that prices to GrafTech may not exceed the
lowest price charged by Conoco to its other customers; \1\ to ensure
compliance with this MFN guarantee, GrafTech could demand to audit
Conoco documents reflecting the company's costs, pricing to specific
customers, volume of production to each customer and other commercially
sensitive terms of sale. As a result of GrafTech and Seadrift merger
Seadrift will be entitled to audit, which will allow it to monitor
online prices charged by its direct competitor from the electrode
producers and petroleum needle coke volume of sales to each customer.
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\1\ Such provision was activated on September 27, 2010 and valid
from 2011 until the end of 2013.
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However, even under the circumstances of absence of the MFN regime
and rights to audit, acting between GrafTech and Conoco in respect of
supply may provide GrafTech (and hence Seadrift) with inappropriate, in
this situation, competitive information with respect to pricing, supply
and production.
This situation creates the possibility of price fixing plot,
coordination of industrial production volume and other anticompetitive
agreements of Seadrift with its competitor--Conoco.
Sections IV and V of the proposed Final Judgment provide measures
(the required conduct and prohibited conduct of parties to the
transaction), which are designed to neutralize damage to the
competition, which is applied by the acquisition in question.
In accordance with these sections of the proposed Final Judgment
GrafTech and Seadrift shall:
--Amend the Supply Agreement in order to remove the most favored-nation
basis price clause and audit rights clause;
--Provide the Antitrust Division of the U.S. Department of Justice with
a copy of any agreements relating to the supply of petroleum needle
coke, formed between defendants and Conoco for the duration of the
proposed Final Judgment (10 years), as well as ordinary course of
business documents, which provide information on the quantity of output
and sales of Seadrift;
--Separate employees who are negotiating terms with Conoco from those
who make decisions about pricing and production at Seadrift. Similarly,
employees of Seadrift, who are negotiating agreements with competitors
of GrafTech, will be prevented from sharing any competitively sensitive
information thus obtained.
These provisions in the opinion of the Antitrust Division of the
U.S. Department of Justice help to ensure that defendants comply with
the proposed Final Judgment, as well as ensure that Conoco and Seadrift
do not coordinate their actions in terms of production volumes and
prices.
In our opinion the measures referred to in the proposed Final
Judgment are not sufficient and proportionate to damage caused to
competition by the acquisition.
In order to prevent coordination of the two largest producers of
petroleum needle coke it is necessary to carry out systematic
collection, storage and processing of information about functioning of
these companies in the product market by analyzing the conditions of
contracts entered into by each producer with consumers, price list of
each company and other documents. In this case, the most important
condition for determining coordination is fixed divergence by the
dynamics of basic economic indicators of the activities of these
companies with the average data of similar indicators for the market on
the whole.
The proposed Final Judgment does not stipulate the need to provide
by companies such documents and information.
In addition, the proposed Final Judgment is only valid for 10
years. It is not clear how will competitive environment be ensured at
the end of this period.
Along with this, we would like to point out the following. The
Complaint in question, Competitive Impact Statement, the proposed Final
Judgment analyzes only one aspect of the anti-competitive
acquisitions--possibility of action coordination of two competitors--
Seadrift and Conoco companies. Another important aspect of the
transaction is not touched upon. Before point it out, it is necessary
to give a brief description of the world petroleum needle coke market.
World petroleum needle coke market is characterized by several
features:
(1) A limited number of producers.
Only four companies work on the world petroleum needle coke market,
including Conoco and Seadrift. The number and composition of producers
did not change for a long time.
(2) High barriers to entry the market.
Specificity of petroleum needle coke market stipulates:
Large capital-construction facility for the production of
petroleum needle coke, and in case of the existing setup--a significant
change in the organization of the refinery;
High quality requirements for raw materials or need to
prepare raw materials by its desulphurization.
Use of the closed technologies that require long-term,
debugging.
Availability of skills and experience in technical and
laboratory staff.
Strict requirements for the quality of the original
product.
Limited sales market--only the electrode industry.
Thus, the market for petroleum needle coke is capital intensive and
niche, and barriers to entry are high.
[[Page 14993]]
(3) Lack of substitute products to petroleum needle coke.
Neither pitch needle coke nor anode coke can neither be mixed with
the petroleum needle coke, nor less serve as a complete substitute for
petroleum needle coke. It is fully described in paragraphs 12-14,
Section IV of the Complaint.
(4) Low-elasticity of demand for the goods, which means that
increasing the price for the goods does not entail reducing the demand
for it, which in turn is caused by the fact that the volume of demand
exceeds the supply of goods on the market.\2\
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\2\ Reducing the price of petroleum needle coke, and
consequently reducing the volume of its sales in 2009 is not
indicative, because it is caused by the global financial crisis.
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All the above indicates that the world petroleum needle coke market
is oligopolistic (market of collective dominance), so that each
participant of the market, including the Seadrift company, occupies a
dominant position and has a large market weight, regardless of the size
of its market share.\3\
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\3\ The Competitive Impact Statement states that the Seadrift
world market share is 19%.
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This fact in itself is a cause for heightened attention to the
behavior of each such entity on the market because abuse by such entity
a dominant position leads to serious negative consequences for
competition.
In this situation Seadrift--a company with a dominant market
position of the petroleum needle coke is acquired by the company, which
is the world's largest producer of graphite electrode UHP.
This acquisition creates a situation where the production volume of
petroleum needle coke and sales policy of this raw material to the
producers of graphite electrodes is determined by another producer of
graphite electrodes--their direct competitor. This situation creates a
wide field for abuse and may lead to a significant deterioration of
competition not only in the petroleum needle coke, but also in the
market of graphite electrode UHP.
Section III of the Competitive Impact Statement states: ``GrafTech
anticipates substantial, merger-specific efficiencies by internal
consumption of Seadrift petroleum needle coke, which would allow the
elimination of double margins. Should this result in lower GrafTech
prices for graphite electrodes downstream, it likely would incentivize
other graphite electrodes competitors to reduce prices in response of
that competition''.
We do not believe that these conclusions are correct and, on the
contrary, we would like to indicate the following possible ways to
abuse by GrafTech and Seadrift companies:
(1) GrafTech may use the control over the supply of petroleum
needle coke produced by Seadrift company to reduce the production of
petroleum needle coke and higher prices for graphite electrodes.
By limiting the supply of petroleum needle coke GrafTech may
interfere other producers of graphite electrodes to deliver the
required amount of graphite electrodes to maintain the same level of
production in industry.
(2) Prices for needle coke produced by Seadrift for other customers
may be raised; so GrafTech may increase its market share at the expense
of other producers of graphite electrodes because they couldn't provide
consumers as low price for electrodes as GrafTech did.
(3) GrafTech may use the methods of unfair competition, forcing
Seadrift waive or deviate without good reason to conclude contracts
with particular buyers, to set different prices for coke for different
customers, to impose needle coke consumers contract terms not
profitable for them. This creates a situation where market players will
be in different conditions and products of some may become
uncompetitive.
In conclusion, we would like to draw attention to one point.
The market of petroleum needle coke and graphite electrodes UHP
market are global and the Russian market is its integral part.
According to Russian law, if the transaction made outside the
territory of the Russian Federation may have an impact on the state of
competition in the Russian Federation it is subject to agreement with
the Federal Antimonopoly Service of the Russian Federation. To our
knowledge, Seadrift and GrafTech companies did not receive such
approval, and therefore violated the laws of the Russian Federation.
Summarizing up the above said in its Complaint, the United States
represented by Antitrust Division of the U.S. Department of Justice do
not cover all the negative effects of the acquisition in question, but
analyze only one aspect of it. But even in this aspect the measures
stipulated by the proposed Final Judgment are not adequate and
sufficient to prevent damage by the competition.
Public interests are to create maximum favorable conditions for the
functioning of free market economy with there are separate, independent
entities. The acquisition of Seadrift by GrafTech is inherently anti-
competitive--GrafTech--the largest consumer of petroleum needle coke
acquires the largest producer of petroleum needle coke, which forms the
basis for discrimination of all other customers of this raw material in
the whole world, which will negatively affect not only producers of
graphite electrodes, but also producers of electric steel. In this
connection the proposed Final Judgment by definition does not and can
not be in the public interest, since the transaction should not be
performed and approved under any circumstances, and therefore any
proposed measures do not compensate for the damage which will be caused
to competition in the petroleum needle coke market as well as and
graphite electrodes market UHP that will negatively impact the electric
steel market.
Based on the foregoing, ENERGOPROM Group requests Antitrust
Division of the U.S. Department of Justice to withdraw its consent to
the proposed Final Judgment.
Attachments:
--Articles of Association of CJSC ``ENERGOPROM MANAGEMENT'';
--Certificate of state registration of CJSC ``ENERGOPROM MANAGEMENT'';
--Decision of the sole shareholder on the appointment of the General
Director of the company.
All documents are appostilled and translated into English.
Contacts: Closed Joint Stock Company <>
123001, Russia, Moscow, Sadovaya-Kudrinskaya, 32/1, Tel +7 495 789 96
46, fax +7 495 789 96 47, Web-site: www.energoprom.ru, Contact e-mail:
[email protected].
Sincerely yours,
General Director Nadtochy A.
[FR Doc. 2011-6182 Filed 3-17-11; 8:45 am]
BILLING CODE 4410-11-M