2. Using Antitrust to Protect Farmers and Ranchers David Balto CWAG Annual Conference July 18 – 21, 2010

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4. 4 DOJ/USDA Joint Hearings March 12, 2010 – Iowa – Seeds and general competition issues May 21, 2010 – Alabama – Poultry June 25, 2010 – Wisconsin – Dairy August 27, 2010 – Colorado – Livestock December 8, 2010 – Washington, DC - Margins

5. 5 JBS/National Beef Merger DOJ Antitrust and 17 state AG’s opposed the proposed acquisition If it had gone through, it would have combined 2 of the 4 top U.S. beef packers This would result in lower prices paid to cattle suppliers, and higher prices for consumers JBS and National abandoned the merger once the DOJ/AG action was announced

6. 6 JBS/National Beef Merger (cont) The DOJ Complaint Alleged –Reduce number of processors from 4 to 3 –Very competitive spot market for slaughter cattle – directly impacts consumer market –The purchase of fed cattle constitutes a relevant product market

7. 7 Monsanto 98% market share in soybean trait market 79% market share in corn trait market 60% market share in corn and soy germplasm 7

8. 8 Intellectual Property rights are not an unbridled monopoly “Microsoft: Our IP rights give us the power to restrict competition DC Circuit: That argument borders on the frivolous” To claim that the exercise of IP cannot lead to antitrust liability is “no more correct than the proposition that the use of one’s personal property such as a baseball bat cannot give rise to tort liability.” 8

9. 9 Agricultural Biotechnology As a result of advances in biotechnology, new seed varieties have been developed with characteristics, or “traits,” that are commercially desirable to farmers, increasing productivity and crop yields while reducing the chemicals required to control insects, diseases, and weeds. These seeds have been genetically modified through complex engineering that involves isolating and transferring foreign genes into those seeds. Genes hold information that endow that seed with a specific trait, such as herbicide tolerance or insect resistance. A genetically modified biotech seed thus comprises a complex combination of traits and germplasm -- the base genetic material that determines a plant’s agronomic characteristics -- designed to best suit farmers’ needs by accounting for, among other things, soil and agronomic conditions, weather and geography.

10. 10 Roundup Ready 1® The very first agricultural biotech trait, Roundup Ready 1® (RR1) for soybeans, is coming off patent in 2014. First introduced 1996, RR1 confers glyphosate tolerance. –As a result, Roundup and other glyphosate herbicides can be sprayed over the top of an entire field, killing the weeds without harming the RR1 soybeans. RR1 is found in over 90% of the soybeans planted in the U.S.

11. 11 Farmers Will Benefit from Generic Competition Generic competition for RR1 will significantly benefit American farmers, and ultimately American consumers. Studies have shown that generic competition significantly lowers drug prices: –a month after the first generic entry, the average price of generics for all 40 drugs in the sample was 76% of the brand price; –by the end of the first year it was 54%; and –by the end of the second year it was 41%. Generic Competition in the US Pharmaceutical Industry, Sasha et al., Int. J. of the Economics of Business, Vol. 13, No. 1, February 2006, pp. 15–38. Similar savings are expected in ag biotech if generic entry is allowed to occur.

12. 12 No Regulatory Framework for Generic Entry In the world of pharmaceuticals, federal law under the Hatch-Waxman Act enables researchers to work with a brand name pharmaceutical product before its patent expires, so that competing generic products can come to market shortly after patent expiration. –Drug Price Competition and Patent Term Restoration Act of 1984, Pub. L. No. 98- 417, 98 Stat. 1585 (1984) (codified as amended 21 U.S.C. §355 (1994)). The Hatch-Waxman Act allows generic manufacturers to file a drug approval application with the Food and Drug Administration demonstrating that the generic product is the “bioequivalent” of the branded product, without having to replicate the original safety and efficacy trials. However, in agricultural biotech, there are no rules in place comparable to Hatch- Waxman that allow generic competition to enter the market upon the expiration of the RR1 patent. There is a direct need for antitrust enforcement to protect these markets.

13. 13 “Product-Hopping”

14. 14 “Product-Hopping” Faced with the threat of generic competition, and the resulting loss of revenue, “brand-name drug manufacturers increasingly have turned to underhanded means to delay competition.” –See Letter from the American Antitrust Institute, Consumer Federation of America, Families USA, and US PIRG to the FTC, June 2006. “[P]roduct-hopping seems clearly to be an effort to game the rather intricate FDA rules… The patentee is making a product change with no technological benefit solely in order to delay competition… [S]uch a change could qualify as a predatory product change if it lacks substantial medical benefits.” –Hovenkamp & Lemley, IP and Antitrust, 2006 Supplement, § 12.5 at 12-45 – 12-46.

15. 15 Government Antitrust Actions Have Targeted Such Conduct Florida et al. v. Abbott Labs et al., No. 1:08-CV-00155 (D. Del. filed March 18, 2008). –In 2008, the Attorneys General of nineteen states sued Abbott Labs, alleging that Abbott and its co-defendant sought to extend their monopoly in the fenofibrate (a cholesterol lowering medication) market by attempting to force a switch from a branded drug that was losing patent protection to new, separately patented, formulations of the drug. –AGs alleged that this conduct successfully thwarted all generic competition, allowing Abbott and its co-defendant to charge monopoly prices for their fenofibrate drugs. Abbott Laboratories v. Teva Pharmaceuticals, 432 F. Supp. 2d 408 (D. Del. 2006). –As the original formulation of drug was losing patent protection, the defendants twice introduced new formulations of the drug (e.g., changing capsules to tablets) while simultaneously removing supplies of the previous formulations from the market. Defendants also removed each prior drug formulation from a database of approved drugs as it was withdrawn from the market. –Court held that the allegations were sufficient to state a claim under Section 2 and rejected defendants’ contention that to hold their formulation switching strategy unlawful would be to impose an obligation to aid generic competitors by allowing “free riding” on the branded drug. C.R. Bard, Inc. v. M3 Systems, Inc., 1998 –M3 Systems found internal documents demonstrating that Bard’s sole intent in changing its biopsy gun was to injure competitors in the replacement needle market, not to provide a better product.

16. 16 Foreign Regulatory Approvals Approximately 50 percent of the soybeans harvested in the United States are exported. Grains for foreign and domestic use are intermingled in the grain channel. In order for soybeans harvested in the United States to be accepted in the grain channel, key export approvals are required in countries which import soybeans, including the EU, China, Japan, Korea, and Taiwan. Without such regulatory approvals, soybeans with the RR1 trait cannot enter the grain channel. In order to have competitive products that include a generic RR1 trait in the market by 2015, developers need to begin immediately the foreign regulatory approval process, which can take as much as 7-10 years.

17. 17 Farmer Concerns On May 19, 2010, three major growers groups, American Farm Bureau Federation (AFBF), American Soybean Assn. (ASA), and the National Farmers Union (NFU), issued a joint statement emphasizing the importance of this issue to farmers. The statement noted that any resolution must be delivered in a timely and enforceable fashion, and include the following components: –A system for maintaining international regulatory approvals for generic traits after patent expiration in a way that enables generic single-trait products to be available for all farmers. –A product development clause, such as a research exemption, to allow both private and public sector researchers to work with a trait under proper stewardship restrictions before its patent expires. A research exemption should allow seed breeders to access the data package in a timely manner before trait patent expiration in order to advance single trait or stacked trait breeding programs. –A compulsory system for obtaining a timely letter of access to use data collected by the patent holder for the regulatory process for agricultural biotech products.

18. 18 Ramifications of Competitive Problems Lack of access to rival technology or distribution channels creates “closed” seed system impervious to competition Adverse effects of market power on competition, farmers, and consumers Higher technology fees for farmers Less choice for farmers and consumers Higher food prices for consumers Less innovation Dominance of the U.S. agricultural supply chain by a single firm

19. Proposed New Rules Under GIPSA

20. 20 Proposed New Rules Altering Livestock Marketplace On June 22, 2010 USDA Secretary Vilsack announced proposed new rules that constituted the most dramatic shift in the Packers and Stockyard Act (PSA) since its enactment. –Recent court decisions limited the scope of PSA by requiring evidence of harm to competition –The new rules do take into account competition, and do not require evidence of harm to consumers as in antitrust cases

21. 21 Specific Proposed Changes Proof of an "unfair practice" in violation of § 202(a) or (b) does not require proof of harm to competition - Acts that are "unfair" to individual producers may constitute a violation Packer must create and maintain records that prove legitimate reasons for any contractual terms that deviate from standard terms If a producer complains about differential treatment, GIPSA would then evaluate the packers file on its justification to determine if a violation of the Act had occurred

22. 22 Specific Proposed Changes (cont) Prohibit packers from purchasing livestock from another packer or another packer's affiliated company - precludes collusion in slaughter market where it is alleged that sales between packers facilitate the manipulation of prices Requires dealers who operate as buyers to identify that dealer as its packer buyer in a given area Precludes packers from offering better pricing terms to large volume producers than to a group of smaller producers who can collectively provide the same volume of livestock of equal quality

23. 23 Specific Proposed Changes (cont) Packers must provide GIPSA with contracts within 10 days of formation to "increase transparency" and allow comparisons Limits packers ability to require producers to make additional capital investments to facilities If capital investments are required, production contracts must be long enough that the producer can recoup 80% of his investment costs Prohibit packers from imposing contract terms on producers that require arbitration of disputes. Restrictions on the tournament systems used by many poultry processors

24. 24 Conclusion State Action to Help Alleviate Competitive Concerns in the Agriculture Industry –Give DOJ the moral courage to get full relief in seeds –Participate in USDA/DOJ Hearings –Comment on the proposed GIPSA regulations –Be more vigilant of anticompetitive mergers