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It is the newest and most formidable weapon in the Federal Trade Commission’s arsenal. Now, if only the commission could figure out exactly how to use it. Disgorgement of profits for antitrust violations adds bite to the FTC’s bark. Instead of merely forcing companies to stop their illegal behavior, the agency has determined it can force wrongdoers to actually give back their ill-gotten gains. The first case cost Mylan Laboratories Inc. $100 million in 2000. Last month, the FTC announced a second disgorgement settlement, against the Hearst Corp., for $19 million. While the Hearst case helps solidify the somewhat tenuous precedent of disgorgement, the terms of the deal have triggered unusual fissures both within the agency and without. “The availability of this remedy could have a profound effect going down the road,” says Republican FTC Commissioner Thomas Leary, who called the decision to seek disgorgement “unnecessary, if not affirmatively harmful.” Many of Leary’s reservations were echoed by fellow Republican Commissioner Orson Swindle, putting new FTC Chairman Timothy Muris, also a Republican, in the odd position of siding with the two Democrats, Sheila Anthony and Mozelle Thompson. Equally improbable, outside the agency some staunchly conservative antitrust lawyers have found themselves sympathizing with plaintiffs’ lawyers over certain aspects of the case. “I think the FTC has entered uncharted waters here,” says D.C.-based Boies, Schiller, & Flexner partner William Isaacson, who along with co-counsel from Cohen, Milstein, Hausfeld & Toll could lose millions in attorney fees as a result of the FTC’s action. “But this is an unfortunate case to do that with.” It seems clear the agency is still grappling with how to handle disgorgement. In a recent Federal Register notice, the FTC asked for comments on 25 specific questions, many covering basic issues such as, “Are there particular violations … where disgorgement would be especially appropriate?” and “How should the commission calculate the amount of disgorgement?” Citing the open comment period, which runs through March 1, Muris, through a spokesman, declined to be interviewed for this article. Still, some onlookers find much to admire in his support of the settlement. “Tim Muris has never been afraid to defend an aggressive position,” says Steven Salop, a professor of economics and law at Georgetown University Law Center. “The FTC is showing leadership, moving ahead, pursuing various aspects of its agenda vigorously, while the Justice Department is going to sleep.” FTC ATTACKS The controversy began in April 2001, when the FTC filed suit against Hearst in the U.S. District Court for the District of Columbia, charging the company with illegally acquiring a monopoly over a key type of drug information database used by pharmacists, hospitals, and health plans. The case was based on Hearst’s 1998 acquisition of Medi-Span, the only significant competitor to Hearst subsidiary First DataBank. Following the acquisition, Hearst allegedly raised prices drastically. The FTC also charged Hearst with violating the Clayton Act by withholding key documents during the Hart-Scott-Rodino merger review process, “hinder[ing] the ability of the Commission to analyze the competitive effects of that acquisition prior to consummation.” The agency demanded the divestiture of Medi-Span and, in a far more unusual move, disgorgement of profits. Shortly after the FTC filed suit, a slew of private class actions followed, with Boies Schiller and Cohen Milstein as lead counsel for the direct purchasers and Coral Gables, Fla.’s Hanzman, Criden, Chaykin & Rolnick representing those who bought the information from vendors. The class actions settled in August, with $24 million for direct purchasers and $2.9 million for indirect purchasers. The FTC didn’t reach a deal until December, when the parties agreed that Hearst would pay $19 million. But the penalty, while impressive-sounding, carried no sting. That’s because the FTC agreed to offset the money from the class action settlement, in essence labeling $19 million of the $26 million “disgorgement.” The money still goes to the class members. “The Commission’s months-long pursuit of disgorgement has yielded a monetary recovery that adds no real value to the private remedy,” wrote Commissioner Swindle in a statement following the settlement. “I continue to think the decision to seek disgorgement was incorrect.” Leary is even more vocal in his opposition to the deal. “We didn’t need to get into it at all. There was no value added by bringing in the commission,” he says in an interview. “We could have settled for much higher civil penalties and avoided this mess.” In defending the settlement, Commissioners Anthony and Thompson released a statement noting “Hearst’s conduct was sufficiently egregious to justify the extraordinary remedy of disgorgement. Moreover, absent disgorgement, the divestiture of Medi-Span assets alone might have allowed Hearst to profit from its unlawful behavior.” Salop of Georgetown adds, “You can’t always count on a class action. Lawyers for class actions don’t have the consumer’s welfare in mind the same way the government does. There have been many class action settlements in recent years where attorneys have been awarded money and the injured consumers only get coupons.” While disgorgement in this case didn’t cost Hearst anything extra, O’Melveny & Myers partner Richard Parker, former head of the Bureau of Competition, notes that “the point is not to hurt the company, but for the FTC to achieve its enforcement objectives, and ensure there is significant deterrence for people engaged in anti-competitive conduct.” Hearst’s lead lawyer, Washington, D.C.-based Clifford Chance Rogers & Wells partner Kenneth Gallo, referred all questions about the case to the client. A Hearst spokesman did not return a call seeking comment. HOW MUCH FOR THE LAWYERS? Still, the deal leaves some lingering questions. Notes Leary: “The relationship between what the commission recovers and what you can recover in private action is unclear. There’s no law on the subject.” In private antitrust suits, treble damages are the maximum, but what if the FTC seeks disgorgement in the same matter? To Leary, that would amount to quadruple damages. Howrey Simon Arnold & White partner James Rill also finds the possibility troubling. The FTC, he says, needs to put forth “clearly defined principles [on disgorgement] so it doesn’t become a treasure hunt.” There is also the matter of attorney fees. The FTC has filed an amicus brief in the class action litigation protesting the $5.1 million in attorney fees that lawyers from Boies Schiller (including David Boies) and Cohen Milstein are seeking for their work in the case. The plaintiffs’ lawyers note that this represents just 20.9 percent of the total recovery — well below the typical 33 to 40 percent contingency arrangement. But the FTC takes credit for at least $18 million of the settlement — the amount that was on the table between Hearst and the FTC before the private suits were filed. The agency argues that class counsel added at most $8 million to the pot. “Petitioners’ application seeks fees representing over 60 percent of that portion of the common fund for which class counsel are responsible,” wrote FTC lawyers, noting that the agency staff put in 25,000 hours of time on the case, while plaintiffs’ lawyers didn’t even conduct formal discovery or write any motions. Responds Isaacson of Boies Schiller: “Counsel for private parties have separate interests to represent, and those clients need lawyers. … The rate we’ve asked for recognizes the FTC’s contributions, and is at the low end of court-approved rates.”

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