Notices. Notice

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BILLING CODE 8011-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-57579; File No. SR-NASDAQ-2008-026] Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change to Participate in the Options Penny Pilot Program March 28, 2008. Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”), 1 and Rule 19b-4 thereunder, 2 notice is hereby given that on March 25, 2008, The NASDAQ Stock Market LLC (“Nasdaq” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule change as described in Items I and II below, which Items have been substantially prepared by Nasdaq.

The Exchange filed the proposal as a “non-controversial” proposed rule change pursuant to section 19(b)(3)(A) of the Act 3 and Rule 19b-4(f)(6) thereunder, 4 which rendered the proposal effective upon filing with the Commission. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4. 3 15 U.S.C. 78s(b)(3)(A). 4 17 CFR 240.19b-4(f)(6). I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change Nasdaq is planning to commence trading on its recently-approved NASDAQ Options Market 5 on March 31, 2008, and to participate from that date in the Options Penny Pilot Program by trading in penny increments all 63 options currently scheduled to be traded in penny increments on the six existing options exchanges. 6 Nasdaq's participation in the pilot will commence at the start of trading on the NASDAQ Options Market on March 31, 2008, and continue until March 27, 2009. 5 *See* Securities Exchange Act Release No. 57478 (March 12, 2008), 73 FR 14521 (March 18, 2008) (SR-NASDAQ-2007-004 and SR-NASDAQ-2007-080). 6 The following options will be traded on The NASDAQ Options Market beginning March 31, 2008:

QQQQ and AMAT. See Options Trader Alert #2008-4 at *http://www.nasdaqtrader.com/TraderNews.aspx?id=OTA2008-004.* The text of the proposed rule change is available at Nasdaq, the Commission's Public Reference Room, and *http://www.nasdaq.com.* II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, Nasdaq included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change.

The text of these statements may be examined at the places specified in Item IV below. Nasdaq has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose On March 12, 2008, the Commission approved SR-NASDAQ-2007-004 and SR-NASDAQ-2007-080, proposals to create the NASDAQ Options Market (“NOM”). Chapter VI, Section 5 of the approved rules states that Nasdaq may trade options in penny increments pursuant to the Commission's pilot program for options (“Penny Pilot Program”).

Through this filing, Nasdaq proposes to establish the parameters of its participation in the Penny Pilot Program. Prior to the Penny Pilot Program, options were quoted in nickel and dime increments. The minimum price variation for quotations in options series that are quoted at less than $3 per contract is $0.05 and the minimum price variation for quotations in options series that are quoted at $3 per contract or greater is $0.10. Under the Penny Pilot Program, beginning on January 26, 2007, market participants were able to begin quoting in penny increments in certain series of option classes.

The Penny Pilot Program originally included the following thirteen options: Ishares Russell 2000 (IWM); NASDAQ-100 Index Tracking Stock (QQQQ); SemiConductor Holders Trust (SMH); General Electric Company (GE); Advanced Micro Devices, Inc. (AMD); Microsoft Corporation (MSFT); Intel Corporation (INTC); Caterpillar, Inc. (CAT); Whole Foods Market, Inc. (WFMI); Texas Instruments, Inc. (TXN); Flextronics International Ltd. (FLEX); Sun Microsystems, Inc. (JAVA); and Agilent Technologies, Inc.

(A). On September 28, 2007, the following twenty-two options classes were added: SPDRs (SPY); Apple, Inc. (AAPL); Altria Group Inc. (MO); Dendreon Corp. (DNDN); Amgen Inc. (AMGN); Yahoo! Inc. (YHOO); QUALCOMM Inc. (QCOM); General Motors Corporation (GM); Energy Select Sector (XLE); DIAMONDS Trust, Series 1 (DIA); Oil Services HOLDRs (OIH); NYSE Euronext, Inc. (NYX); Cisco Systems, Inc. (CSCO); Financial Select Sector SPDR (XLF); AT&T Inc. (T); Citigroup Inc. (C); Amazon.com Inc.

(AMZN); Motorola Inc. (MOT); Research in Motion Ltd. (RIMM); Freeport-McMoRan Copper & Gold Inc. (FCX); ConocoPhillips (COP); and Bristol-Myers Squibb Co. (BMY). These thirty-five options classes are among the most actively-traded, multiply-listed options classes. The next phase of the Penny Pilot Program is scheduled to commence on March 28, 2008, with the addition of the following 28 options classes: Goldman Sachs Group, Inc. (GS); Countrywide Financial Corporation (CFC); Bank of America Corporation (BAC); iShares MSCI Emerging Mkts.

Index Fund (EEM); Merrill Lynch & Co., Inc. (MER); Vale (RIO); EMC Corporation (EMC); Exxon Mobil Corporation (XOM); Wal-Mart Stores, Inc. (WMT); The Home Depot, Inc. (HD); Valero Energy Corporation (VLO); Alcoa Inc. (AA); Dell Inc. (DELL); SanDisk Corporation (SNDK); The Bear Stearns Companies, Inc. (BSC); Pfizer Inc. (PFE); eBay Inc. (EBAY); Halliburton Company (HAL); Lehman Brothers Holdings Inc. (LEH); JPMorgan Chase & Co. (JPM); Washington Mutual, Inc. (WM); Ford Motor Company (F);

Target Corporation (TGT); American International Group, Inc. (AIG); Newmont Mining Corporation (NEM); Verizon Communications Inc. (VZ); Mini-NDX Index Options (MNX); and Starbucks Corporation (SBUX). The minimum price variation for all classes included in the Penny Pilot Program, except for the QQQQs, will be $0.01 for all quotations in option series that are quoted at less than $3 per contract and $0.05 for all quotations in option series that are quoted at $3 per contract or greater.

The QQQQs will be quoted in $0.01 increments for all options series. During the extended and expanded Pilot Program, Nasdaq commits to deliver two reports to the Commission. Each report will analyze the impact of penny pricing on market quality and options system capacity. The first report will analyze the results from March 31, 2008 through July 31, 2008, and the second report will examine the results from August 1, 2008 through January 31, 2009. These reports will be provided to the Commission within thirty days of the conclusion of the reporting period. 2.

Statutory Basis Nasdaq believes that the proposed rule change is consistent with the provisions of Section 6 of the Act, 7 in general, and with Section 6(b)(5) of the Act, 8 in particular, in that it is designed to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest; and are not designed to permit unfair discrimination between customers, issuers, brokers, or dealers, or to regulate by virtue of any authority conferred by this title matters not related to the purposes of this title or the administration of the exchange. 7 15 U.S.C. 78f. 8 15 U.S.C. 78f(b)(5).

Analysis of the current Penny Pilot Program has shown that the reduction in the minimum quoting increment has resulted in narrowing the average quoted spreads in all classes in the Pilot. A reduction in quoted spreads means that customers and other market participants may be able to trade options at better prices. Nasdaq's participation in the Penny Pilot Program as proposed by Nasdaq will allow further analysis of the impact of penny quoting in the Pilot classes over a longer period of time on, among other things:

(1)Spreads;

(2)peak quote rates;

(3)quote message traffic;

(4)displayed size;

(5)“depth of book” liquidity; and

(6)market structure. Nasdaq's unique options market structure will add to the analysis delivered by the existing options markets to date. B. Self-Regulatory Organization's Statement on Burden on Competition Nasdaq does not believe that the proposed rule change will result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others Written comments were neither solicited nor received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The proposed rule change has become effective pursuant to section 19(b)(3)(A) of the Act 9 and Rule 19b-4(f)(6) thereunder, 10 because the foregoing proposed rule does not:

(i)Significantly affect the protection of investors or the public interest;

(ii)impose any significant burden on competition; and

(iii)become operative for 30 days from the date on which it was filed, or such shorter time as the Commission may designate if consistent with the protection of investors and the public interest. 9 15 U.S.C. 78s(b)(3)(A). 10 17 CFR 240.19b-4(f)(6). A proposed rule change filed under Rule 19b-4(f)(6) normally may not become operative prior to 30 days after the date of filing. 11 However, Rule 19b-4(f)(6)(iii) permits the Commission to designate a shorter time if such action is consistent with the protection of investors and the public interest. 12 Nasdaq has requested that the Commission waive the 30-day operative delay. Nasdaq has represented that it has carefully planned a detailed and thorough testing and roll-out schedule for the NOM market, and has coordinated that schedule with numerous industry participants. Waiving the 30-day operative delay will allow Nasdaq to participate in the ongoing industry-wide Penny Pilot Program upon commencement of trading on the Nasdaq Options Market on March 31, 2008. Furthermore, the proposed rule change is substantially similar to the Pilot programs of the other six options exchanges, which were approved by the Commission after notice and comment, and does not present any novel regulatory issues. 13 For these reasons, the Commission believes that waiving the 30-day operative delay is consistent with the protection of investors and the public interest, and designates the proposal to be operative upon filing with the Commission. 14 11 17 CFR 240.19b-4(f)(6)(iii). In addition, Rule 19b-4(f)(6)(iii) requires the self-regulatory organization to give the Commission notice of its intent to file the proposed rule change, along with a brief description and text of the proposed rule change, at least five business days prior to the date of filing of the proposed rule change, or such shorter time as designated by the Commission. Nasdaq has satisfied the five-day pre-filing requirement. 12 17 CFR 240.19b-4(f)(6)(iii). 13 *See, e.g.* , Securities Exchange Act Release No. 56568 (September 27, 2007), 72 FR 56422 (October 3, 2007) (SR-NYSEArca-2007-88). 14 For purposes only of waiving the 30-day operative delay, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). At any time within 60 days of the filing of the proposed rule change, the Commission may summarily abrogate such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. 15 15 *See* 15 U.S.C. 78s(b)(3)(C). IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission's Internet comment form ( *http://www.sec.gov/rules/sro.shtml* ); or • Send an e-mail to *rule-comments@sec.gov.* Please include File Number SR-NASDAQ-2008-026 on the subject line. Paper Comments • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090. All submissions should refer to File Number SR-NASDAQ-2008-026. This file number should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site ( *http://www.sec.gov/rules/sro.shtml* ). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission's Public Reference Room, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of the filing also will be available for inspection and copying at the principal office of Nasdaq. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-NASDAQ-2008-026 and should be submitted on or before April 25, 2008. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority. 16 16 17 CFR 200.30-3(a)(12). Florence E. Harmon, Deputy Secretary. [FR Doc. E8-6960 Filed 4-3-08; 8:45 am] BILLING CODE 8011-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-57583; File No. SR-Phlx-2008-23] Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change as Modified by Amendment No. 1 Thereto To Amend the Quarterly Options Series Pilot Program To Permit the Listing of Additional Series March 31, 2008. Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) 1 and Rule 19b-4 thereunder, 2 notice is hereby given that on March 27, 2008, the Philadelphia Stock Exchange, Inc. (“Exchange” or “Phlx”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule change as described in Items I and II below, which Items have been substantially prepared by the Exchange. On March 28, 2008, the Exchange submitted Amendment No. 1 to the proposed rule change. The Exchange has designated this proposal as non-controversial under section 19(b)(3)(A)(iii) of the Act 3 and Rule 19b-4(f)(6) thereunder, 4 which renders the proposed rule change effective upon filing with the Commission. The Commission is publishing this notice to solicit comments on the proposed rule change, as amended, from interested persons. 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4. 3 15 U.S.C. 78s(b)(3)(A)(iii). 4 17 CFR 240.19b-4(f)(6). I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend Phlx Rule 1012, Series of Options Open for Trading, to expand the number of series of exchange traded fund (“ETF”) options that may be listed pursuant to Phlx's Quarterly Option Series (“QOS”) pilot program (the “Pilot Program”) 5 and to establish a delisting program in connection with the Pilot Program. 6 5 Phlx's Pilot Program was established in 2007 and subsequently extended through July 10, 2008. *See* Securities Exchange Act Release Nos. 55301 (February 15, 2007), 72 FR 8238 (February 23, 2007) (SR-Phlx-2007-08) (“Pilot Program Release”) and 56030 (July 9, 2007), 72 FR 38645 (July 13, 2007) (SR-Phlx-2007-42). The American Stock Exchange, the Chicago Board Options Exchange (“CBOE”), the International Stock Exchange, and NYSEArca (the “pilot program exchanges”) have similar pilot programs that likewise continue through July 10, 2008. 6 The Phlx proposal is substantially identical to a proposal by CBOE. *See* Securities Exchange Act Release No. 57410 (March 3, 2008), 73 FR 12483 (March 7, 2008) (SR-CBOE-2007-96). *See also* Securities Exchange Act Release No. 57425 (March 4, 2008), 73 FR 12783 (March 10, 2008) (SR-ISE-2008-19) (notice of filing and immediate effectiveness of a similar proposed rule change by the International Securities Exchange). The text of the proposed rule change is available on the Exchange's Web site ( *http://www.phlx.com* ), at the Exchange's principal office, and at the Commission's Public Reference Room. II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The purpose of the proposed rule change is to amend the Exchange's Rule 1012, Series of Options Open for Trading, to permit the Exchange to list strike prices for QOS in ETF options that fall within a percentage range (30%) above and below the price of the underlying ETF. The proposed rule change will allow the Exchange, upon demonstrated customer interest, to open additional strike prices of QOS in ETF options that are more than 30% above or below the current price of the underlying ETF. The proposal will permit the Exchange to list up to sixty

(60)additional series per expiration month for each QOS in ETF options. Additionally, the proposal will establish a delisting program for delisting QOS within certain parameters. The Pilot Program in Phlx Rule 1012 allows the Exchange to list and trade QOS on ETFs that satisfy the applicable listing criteria under Phlx rules. 7 Under the Pilot Program, the Exchange may list QOS in up to five currently listed option classes that are either options on ETFs or indexes. The Exchange is also permitted to list QOS in any options class that is selected by the other pilot program exchanges. QOS trade based on calendar quarters that end in March, June, September and December. The Exchange lists QOS that expire at the end of the next consecutive four calendar quarters, as well as the fourth quarter of the next calendar year. For example, if the Exchange were trading QOS in iShares Russell 2000 Index Fund (“IWM”) in the month of April 2008, it would list series that expire at the end of the second quarter 2008 (June), third quarter 2008 (September), fourth quarter 2008 (December), first quarter 2009 (March), and fourth quarter 2009 (December). 7 Phlx Rule 1101A establishes the Pilot Program for index options. Phlx now lists QOS in five ETF options:

(1)Nasdaq-100 Index Tracking Stock (“QQQQ”);

(2)IWM;

(3)DIAMONDS Trust, Series 1 (“DIA”);

(4)Standard and Poor's Depositary Receipts/SPDRs (“SPY”); and

(5)Energy Select SPDR (“XLE”). 8 The average trading volume and total volume for QOS in IWM options, QQQQ options, and SPY options exceed the volume for QOS in the other ETF options (DIA and XLE) that are listed and traded on the Exchange. The chart below provides trading volume figures for the fourth quarter in 2007, demonstrating that, in all but the month of November, QOS in IWM, along with QOS in QQQQ and SPY, were some of the more popular and heavily traded QOS on the Exchange. 8 These are the same options that are listed by the other pilot program exchanges. QOS October 2007 ADV Total Vol November 2007 ADV Total Vol December 2007 ADV Total Vol IWM 2,090 48,066 3,998 83,952 9,325 177,172 QQQQ 3,900 89,692 8,043 168,904 15,859 301,320 SPY 3,919 90,134 4,697 98,646 5,064 96,210 DIA 412 9,478 669 14,042 1,816 34,496 XLE 653 15,008 8,967 188,316 3,357 63,776 Over time, some of the pilot program exchanges have received requests from market participants to add additional strike prices for QOS in IWM options that would be outside of the price range for setting strikes as provided for under Rule 5.5(e)(3) (hereinafter “+/−$5 range”). 9 Moreover, investors and other market participants have advised such exchanges that they are buying and selling QOS in IWM options to trade volatility. In order to adequately replicate the desired volatility exposure, these market participants need to trade several IWM option series, many having strike prices that fall outside of the +/−$5 range currently allowed under the QOS rules. 9 Commentary .08(d) to Phlx Rule 1012 provides that the Exchange shall list strike prices for a QOS that are within $5 from the closing price of the underlying on the preceding day. Market participants have also advised pilot program exchanges that their investment strategies involve trading options tied to a particular option “delta,” 10 rather than a particular level of the underlying security or index. At issue is the fact that delta depends on both the relative difference between the level of the underlying security or index and the option strike price and time to expiration. For example, with IWM trading at $85 per share, the strike price corresponding to a “25-delta” IWM call ( *i.e.* , a call option with a delta of 25) with one month to expiration would be 89. However, the strike price corresponding to a “25-delta” IWM call with 3 months to expiration would be 93, and the strike price of a “25-delta” call with 1 year to expiration would be 106. In short, the +/−$5 range for QOS in IWM options is insufficient to satisfy customer demand. 10 “Delta” is a measure of how an option price will change in response to a $1 price change in the underlying security or index. For example, an ABC option with a delta of “50” can be expected to change by $0.50 in response to a $1 change in the price of ABC. In order to meet such customer demand, the Exchange proposes to amend Commentary .08 to Phlx Rule 1012, which governs the Quarterly Option Series Pilot Program. Specifically, the Exchange proposes to revise Commentary .08 to allow the Exchange to open additional strike prices of QOS in ETF options that are within thirty percent (30%) above or below the closing price of the underlying on the preceding business day. The Exchange also will be permitted to open additional strike prices of QOS in ETF options that are more than 30% above or below the current price of the underlying ETF, provided that demonstrated customer interest exists for such series, as expressed by institutional, corporate, or individual customers or their brokers. Market-Makers trading for their own account will not be considered when determining customer interest under this proposed provision. The Exchange will be permitted to list up to sixty

(60)additional series per expiration month for each QOS in ETF options. The Exchange also is proposing to add new paragraph

(g)to Commentary .08 to Phlx Rule 1012, which will set forth a delisting policy. Specifically, with respect to QOS in ETF options, the Exchange will, on a monthly basis, review series that are outside a range of five strikes above and five strikes below the current price of the underlying ETF, and delist series with no open interest in both the put and the call series having a strike price that is:

(i)Higher than the highest strike price with open interest in the put and/or call series for a given expiration month; or

(ii)lower than the lowest strike price with open interest in the put and/or call series for a given expiration month. To illustrate how the proposed delisting program will work, assume that IWM closed at $70 on the day the Exchange conducts the monthly review of QOS in ETF options. Series having strike prices above $75 and below $65 would be reviewed by the Exchange for possible delisting. Assume that the Exchange lists the following QOS in IWM options that expire in June 2008: Calls—June 08 Exp Strike Open Interest? Puts—June 08 Exp Strike Open Interest? 62 No 62 No 63 No 63 Yes 64 Yes 64 Yes * * * * 76 Yes 76 Yes 77 Yes 77 Yes 78 Yes 78 Yes 79 Yes 79 Yes 80 Yes 80 Yes 81 Yes 81 Yes 82 Yes 82 Yes 83 No 83 No 84 No 84 No 85 No 85 Yes 86 Yes 86 No 87 Yes 87 Yes 88 Yes 88 Yes 89 Yes 89 No 90 Yes 90 No 91 No 91 No 92 No 92 No 93 No 93 No The Exchange would delist the first series listed above, as well as the last three: $62, $91, $92, and $93. The Exchange would not delist the $83 and $84 series because there are series having open interest with strike prices higher than these two series. In addition, the Exchange would not delist the $63 call series because there is open interest in the $63 put series. Notwithstanding the proposed delisting policy, customer requests to add strikes and/or maintain strikes in QOS in ETF options in series eligible for delisting shall be granted. Further, in connection with the proposed delisting policy, if the Exchange identifies series for delisting, the Exchange shall notify other options exchanges with similar delisting policies regarding eligible series for listing, and shall work with such other exchanges to develop a uniform list of series to be delisted, so as to ensure uniform series delisting of multiply listed QOS in ETF options. The Exchange expects that the proposed delisting policy for QOS in ETF options would be adopted by other options exchanges that have adopted the QOS Pilot Program. The Exchange represents that it has the necessary systems capacity to support new options series that will result from this proposal. Further, as proposed, the Exchange notes that this rule change would become part of the Pilot Program and, going forward, would be considered by the Commission when the Exchange seeks to renew or make permanent the Pilot Program in the future. 11 11 To the extent the Commission views the proposed rule change as an expansion of the Pilot Program, thus triggering the requirement under the terms of the Pilot Program Approval Order that the Exchange submit a Pilot Program report, the Exchange notes that it submitted a report on or about June 26, 2007, in connection with its filing to extend the Pilot Program through July 10, 2008. *See* Securities Exchange Act Release No. 56030 (July 9, 2007), 72 FR 38645 (July 13, 2007) (SR-Phlx-2007-42). 2. Statutory Basis The Exchange believes that because the additional new series can be added without presenting capacity problems and because the Exchange has proposed a delisting policy with respect to QOS in ETF options, the rule proposal is consistent with section 6(b) of the Act 12 in general, and furthers the objectives of section 6(b)(5) of the Act 13 in particular, in that it is designed to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and to protect investors and the public interest. 12 15 U.S.C. 78f(b). 13 15 U.S.C. 78f(b)(5). B. Self-Regulatory Organization's Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act. C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others No written comments were solicited or received with respect to the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The Exchange has designated the proposed rule change as one that:

(1)Does not significantly affect the protection of investors or the public interest;

(2)does not impose any significant burden on competition; and

(3)does not become operative for 30 days from the date of filing, or such shorter time as the Commission may designate if consistent with the protection of investors and the public interest. Therefore, the foregoing rule change has become effective pursuant to section 19(b)(3)(A) of the Act 14 and subparagraph (f)(6) of Rule 19b-4 thereunder. 15 The Exchange has asked the Commission to waive the 30-day operative delay to permit the Exchange to immediately compete with the other options exchanges that have similarly amended their quarterly options series pilot programs. 14 15 U.S.C. 78s(b)(3)(A). 15 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) requires a self-regulatory organization to provide the Commission with written notice of its intent to file the proposed rule change, along with a brief description and text of the proposed rule change, at least five business days prior to the date of filing of the proposed rule change, or such shorter time as designated by the Commission. The Exchange has fulfilled this requirement. The Commission notes that this proposal is substantially similar to a proposed rule change submitted by CBOE, which was approved by the Commission following publication for notice and comment, and does not raise any new regulatory issues. 16 Waiving the 30-day operative delay will promote, without undue delay, further competition in the options market. 17 For these reasons, the Commission believes that waiving the 30-day operative delay is consistent with the protection of investors and the public interest and designates the proposal operative upon filing. 16 *See* Securities Exchange Act Release No. 57410, supra note 6. *See also* Securities Exchange Act Release No. 57425, *supra* note 6. 17 For purposes only of waiving the 30-day operative delay, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. *See* 15 U.S.C. 78c(f). The Commission notes that this rule change will become part of the Pilot Program and, going forward, its effects will be considered by the Commission in the event that the Exchange seeks to renew or make permanent the Pilot Program. 18 Thus, in the Exchange's future reports on the Pilot Program, the Exchange should include analysis of

(1)the impact of the additional series on the Exchange's market and quote capacity, and

(2)the implementation and effects of the delisting policy, including the number of series eligible for delisting during the period covered by the report, the number of series actually delisted during that period (pursuant to the delisting policy or otherwise), and documentation of any customer requests to maintain QOS strikes that were otherwise eligible for delisting. 18 As set forth in the Pilot Program Release, if the Exchange were to propose an extension, expansion, or permanent approval of the Pilot Program, the Exchange must submit, along with any filing proposing such amendments to the program, a report that provides an analysis of the Pilot Program covering the entire period during which the Pilot Program was in effect. *See* Pilot Program Release, *supra* note 5. The Pilot Program Release requires the Exchange to include in its report, at a minimum:

(1)Data and written analysis on the open interest and trading volume in the classes for which QOS were opened;

(2)an assessment of the appropriateness of the option classes selected for the Pilot Program;

(3)an assessment of the impact of the Pilot Program on the capacity of the Exchange, OPRA, and market data vendors (to the extent data from market data vendors is available);

(4)any capacity problems or other problems that arose during the operation of the Pilot Program and how the Exchange addressed such problems;

(5)any complaints that the Exchange received during the operation of the Pilot Program and how the Exchange addressed them; and

(6)any additional information that would assist in assessing the operation of the Pilot Program. At any time within 60 days of the filing of the proposed rule change, the Commission may summarily abrogate the rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. 19 19 For purposes of calculating the 60-day period within which the Commission may summarily abrogate the proposed rule change, the Commission considers the period to commence on March 28, 2007, the date on which the Exchange filed Amendment No. 1. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission's Internet comment form ( *http://www.sec.gov/rules/sro.shtml* ); or • Send an e-mail to *rule-comments@sec.gov* . Please include File No. SR-Phlx-2008-23 on the subject line. Paper Comments • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090. All submissions should refer to File Number SR-Phlx-2008-23. This file number should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site ( *http://www.sec.gov/rules/sro.shtml* ). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission's Public Reference Room, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of such filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-Phlx-2008-23 and should be submitted on or before April 25, 2008. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority. 20 20 17 CFR 200.30-3(a)(12). Florence E. Harmon, Deputy Secretary. [FR Doc. E8-6961 Filed 4-3-08; 8:45 am] BILLING CODE 8011-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-57578; File No. SR-Amex-2008-34] Self-Regulatory Organizations; American Stock Exchange LLC; Notice of Filing of Proposed Rule Change To Give Retroactive Effect to Its Revenue Sharing Program for ETF Quoting Participants March 28, 2008. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) 1 and Rule 19b-4 thereunder, 2 notice is hereby given that on March 27, 2008, the American Stock Exchange LLC (“Amex” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule change as described in Items I, II, and III below, which Items have been substantially prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4. I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to retroactively apply a previously-adopted revenue sharing program (“RSP”) for Designated Amex Remote Traders (“DARTs”), ETF specialists, and registered traders (collectively, “ETF quoting participants”) on the Exchange. The text of the proposed rule change is available at Amex's principal office, the Commission's Public Reference Room, and *http://www.amex.com.* II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, Amex included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to retroactively apply its previously-adopted RSP for ETF quoting participants on the Exchange, as described below. The RSP was first put in place by the Exchange for ETF specialists and registered traders, effective July 1, 2007, and was to last through December 31, 2007 unless otherwise extended. 3 The Exchange then inadvertently failed to file to extend the RSP at the expiration of that time period, but, upon realizing the error (when recently expanding the RSP to DARTs), promptly filed to reinstate the RSP for all ETF quoting participants, effective March 18, 2008. 4 The RSP is now in effect through the end of September 2008. 3 3 *See* Securities Exchange Act Release No. 55893 (June 29, 2007), 72 FR 37059 (July 6, 2007) (SR-Amex-2007-68) (“RSP Release”). 4 *See* Securities Exchange Act Release No. 57541 (March 20, 2008) (SR-Amex-2008-25), 73 FR 16400 (March 27, 2008) (reinstating RSP for all ETF quoting participants); *see also* Securities Exchange Act Release No. 57540 (March 20, 2008), 73 FR 16399 (March 27, 2008) (SR-Amex-2008-23) (expanding RSP to DARTs). The purpose of the instant filing is to seek approval to retroactively apply the now-reinstated RSP for the time period January 1, 2008 through March 17, 2008 in order to effectively assure continuity of the RSP from its inception for all ETF quoting participants on the Exchange, who have continued to quote aggressively in the expectation of receiving RSP payments flowing therefrom. To date, the Exchange believes that the current RSP has been beneficial in creating incentives for ETF quoting participants and does not believe it fair to withhold RSP payments for the retroactive period from ETF quoting participants solely because of the Exchange's inadvertent error. Retroactive application of the RSP will satisfy all ETF quoting participants' expectations. For the retroactive period, the RSP will operate under the same terms established in the RSP Release. 5 Specifically: 5 *See supra* note 3. • RSP payments will be made from the Exchange's general revenues and not be limited to a particular revenue source. • ETF specialists may receive an aggregate RSP payment (calculated monthly) of as much as $0.0024 per share (or 24 cents per 100 shares) whenever the specialist either buys or sells his specialty ETF on the Exchange and is a provider of liquidity in that transaction ( *e.g.* , the specialist's quote is traded against or the specialist offsets an order imbalance as part of an opening or closing transaction). The RSP payment is comprised of $0.0004 per share (or 4 cents per 100 shares) for all shares executed on the Exchange in their specialty ETF (irrespective of whether the specialist is the provider of liquidity), plus another $0.0020 (or 20 cents per 100 shares) if the specialist is the provider of liquidity in the transaction. If the specialist is not the liquidity provider, then the RSP payment is limited to $0.0004 per share executed on the Exchange in its specialty ETF. • Registered traders in ETFs will receive an RSP payment of $0.0010 per share (or 10 cents per 100 shares) whenever the registered trader either buys or sells an ETF on the Exchange and is a provider of liquidity in that transaction. 6 6 The RSP for DARTs, although described in SR-Amex-2008-23 and SR-Amex-2008-25 ( *see supra* note 4), does not require any retroactive application because DARTs did not actually begin trading on the Exchange until after the effective date of Amex's filing reinstating the RSP. • No ETF quoting participant will receive an RSP payment when another ETF quoting participant is a contra-party to the same transaction. • RSP payments will be made on transactions in securities trading at less than $1 only in amounts proportionate to the amount on which the Exchange collects revenue. • Customer transaction charges are capped at $100 per transaction, meaning that the transaction charge of $0.0023 per share is assessed only on the first 43,478 shares executed, and an ETF quoting participant would receive an RSP payment based only on the first 43,478 shares executed. 2. Statutory Basis Amex believes the proposed rule change is consistent with Section 6(b) of the Act 7 in general, and furthers the objectives of Section 6(b)(4) of the Act 8 in particular, in that it is intended to assure the equitable allocation of reasonable dues, fees, and other charges among its members and issuers and other persons using its facilities. Specifically, the Exchange proposes to retroactively apply the RSP to assure continuity of the program from its inception and to assure fairness for the ETF quoting participants. 7 15 U.S.C. 78f(b). 8 15 U.S.C. 78f(b)(4). B. Self-Regulatory Organization's Statement on Burden on Competition The Exchange believes that the proposed rule change does not impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others No written comments were solicited or received with respect to the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 35 days of the date of publication of this notice in the **Federal Register** or within such longer period

(i)as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding, or

(ii)as to which the Exchange consents, the Commission will:

(A)By order approve the proposed rule change, or

(B)Institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission's Internet comment form ( *http://www.sec.gov/rules/sro.shtml* ); or • Send an e-mail to *rule-comments@sec.gov.* Please include File Number SR-Amex-2008-34 on the subject line. Paper Comments • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090. All submissions should refer to File Number SR-Amex-2008-34. This file number should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site ( *http://www.sec.gov/rules/sro.shtml* ). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission's Public Reference Room, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-Amex-2008-34 and should be submitted on or before April 25, 2008. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority. 9 9 17 CFR 200.30-3(a)(12) Florence E. Harmon, Deputy Secretary. [FR Doc. E8-7026 Filed 4-3-08; 8:45 am] BILLING CODE 8011-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-57581; File No. SR-Amex-2008-31] Self-Regulatory Organizations; American Stock Exchange, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend the Quarterly Options Series Pilot Program To Permit the Listing of Additional Series March 31, 2008. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) 1 and Rule 19b-4 thereunder, 2 notice is hereby given that on March 25, 2008, the American Stock Exchange, LLC (“Exchange” or “Amex”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule change as described in Items I and II below, which Items have been substantially prepared by the Exchange. The Exchange has designated this proposal as non-controversial under Section 19(b)(3)(A)(iii) of the Act 3 and Rule 19b-4(f)(6) thereunder, 4 which renders the proposed rule change effective upon filing with the Commission. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b-4. 3 15 U.S.C. 78s(b)(3)(A)(iii). 4 17 CFR 240.19b-4(f)(6). I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend Amex Rule 903, Commentary .09 (Quarterly Options Series Pilot Program) to permit the Exchange to list strike prices for Quarterly Options Series (“QOS”) in exchange traded fund (“ETF”) options that fall within a percentage range (30%) above and below the price of the underlying ETF. Additionally, upon demonstrated customer interest, the Exchange also will be permitted to open additional strike prices of QOS in ETF options that are more than 30% above or below the current price of the ETF. Specialists and registered options traders (“ROTs”) trading for their own account will not be considered when determining customer interest under this provision. In addition to the initial listed series, the Exchange may list up to sixty

(60)additional series per expiration month for each QOS in ETF options. Further, the proposal includes a delisting program to be undertaken by the Exchange in connection with QOS in ETF options. The text of the proposed rule change is available on the Exchange's Web site ( *http://www.amex.com* ), at the Exchange's principal office, and at the Commission's Public Reference Room. II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The purpose of this proposal is to amend Amex Rule 903, Commentary .09 (Quarterly Options Series Pilot Program) to allow the Exchange to open additional strike prices of QOS in ETF options that are within thirty percent (30%) above or below the closing price of the underlying ETF on the preceding business day. Additionally, upon demonstrated customer interest, the Exchange also will be permitted to open additional strike prices of QOS in ETF options that are more than 30% above or below the current price of the underlying ETF. Specialists and ROTs trading for their own account will not be considered when determining customer interest under this provision. In addition, the Exchange will be permitted to list up to sixty

(60)additional series per expiration month for each QOS in ETF options. On July 11, 2006, the Exchange filed with the Commission a pilot program proposal to permit the listing and trading of QOS in options on indexes or options on ETFs that satisfy the applicable listing criteria under Amex rules. 5 QOS trade based on calendar quarters that end in March, June, September and December. The Exchange lists QOS that expire at the end of the next consecutive four calendar quarters, as well as the fourth quarter of the next calendar year. For example, if the Exchange were trading QOS in the iShares Russell 2000 Index Fund (“IWM”) in the month of April 2008, it would list series at the end of the second quarter 2008 (June), third quarter 2008 (September), fourth quarter 2008 (December) and first quarter 2009 (March) and fourth quarter 2009 (December). 5^ *See* Securities Exchange Act Release No. 54137 (July 12, 2006), 71 FR 41283 (July 20, 2006) (SR-Amex-2006-67) (“Pilot Program Release”). Under the Pilot Program, the Exchange is permitted to list QOS in up to five currently listed option classes that are either options on ETFs or indexes. The Exchange is also permitted to list QOS in any options class that is selected by other securities exchanges that employ a similar Pilot Program under their respective rules. Currently, the Exchange lists QOS in five ETF options:

(1)Nasdaq-100 Index Tracking Stock (“QQQQ”);

(2)IWM;

(3)DIAMONDS Trust, Series 1 (“DIA”);

(4)Standard & Poor's Depository Receipts (“SPY”); and

(5)Energy Select SPDR (“XLE”). The average trading volume and total volume for QOS in IWM options, QQQQ options, and SPY options exceed the volumes for QOS in the other ETF options (DIA and XLE) that are listed and traded on the Exchange. The chart below provides trading volume figures for the fourth quarter in 2007, demonstrating that, depending on the particular month, QOS in IWM, QQQQ, or SPY options are the most popular and heavily traded QOS on the Exchange. QOS October 2007 ADV Total Vol November 2007 ADV Total Vol December 2007 ADV Total Vol IWM 715 16,443 9,435 198,143 6,306 126,119 QQQQ 1,004 23,103 4,655 97,763 11,303 226,068 SPY 2,793 64,234 4,509 94,688 4,046 80,911 DIA 3 63 38 792 72 1,435 XLE 60 1,390 1,721 36,143 843 16,866 Over time, the Exchange has continually received requests from market participants to add additional strike prices for QOS in IWM, QQQQ, and SPY options that would be outside of the price range for setting strikes as provided under Commentary .09 to Rule 903 (hereinafter the “+/−$5 range”). 6 Investors and other market participants have advised the Exchange that they are buying and selling QOS in IWM, QQQQ, and SPY options to trade volatility. In order to adequately replicate the desired volatility exposure, these market participants need to trade several options series in IWM, QQQQ, and SPY, many having strike prices that fall outside of the +/−$5 range currently allowed under the QOS rules. 6 Commentary .09(c) to Rule 903 provides that the Exchange shall list strike prices for a QOS that are within $5 from the closing price of the underlying on the preceding day. In addition, other participants have advised the Exchange that their investment strategies involve trading options tied to a particular option “delta,” 7 rather than a particular level of the underlying security or index. At issue is the fact that delta depends on both the relative difference between the level of the underlying security or index and the option strike price and time to expiration. For example, with IWM trading at $85 per share, the strike price corresponding to a “25-delta” IWM call ( *i.e.* , a call option with a delta of 25) with one month to expiration would be 89. However, the strike price corresponding to a “25-delta” IWM call with 3 months to expiration would be 93, and the strike price of a “25-delta” IWM call with 1 year to expiration would be 106. In short, the Exchange has been advised that the +/−$5 range for QOS in IWM, QQQQ, and SPY options is insufficient to satisfy customer demand. 7 “Delta” is a measure of how an option price will change in response to a $1 price change in the underlying security or index. For example, XYZ option with a delta of “50” can be expected to change by $0.50 in response to a $1 change in the price of XYZ. In order to meet customer demand, the Exchange proposes to amend Commentary .09 to Rule 903, which governs the Quarterly Options Series Pilot Program. Specifically, the Exchange proposes to revise Commentary .09 to Rule 903 to allow the Exchange to open additional strike prices of QOS in ETF options that are within thirty percent (30%) above or below the closing price of the underlying ETF Shares (as defined in Rule 900(b)(42)) on the preceding business day. The Exchange also will be permitted to open additional strike prices of QOS in ETF options that are more than 30% above or below the current price of the underlying ETF, provided that demonstrated customer interest exists for such series, as expressed by institutional, corporate, or individual customers or their brokers. Specialists and ROTs trading for their own account will not be considered when determining customer interest under this proposed provision. The Exchange will be permitted to list up to sixty

(60)additional series per expiration month for each QOS in ETF options. The Exchange also is proposing to add new paragraph

(e)to Commentary .09 to Rule 903, which will set forth a delisting policy. Specifically, with respect to QOS in ETF options, the Exchange will, on a monthly basis, review series that are outside a range of five strikes above and five strikes below the current price of the underlying ETF, and de-list series with no open interest in both the put and the call series having:

(1)A strike higher than the highest strike price with open interest in the put and/or call series for a given expiration month; or

(2)a strike lower than the lowest strike price with open interest in the put and/or call series for a given expiration month. To illustrate how the proposed delisting program will work, assume that IWM closed at $70 on the day the Exchange conducts the monthly review of QOS in ETF options. Series having strike prices above $75 and below $65 would be reviewed by the Exchange for possible delisting. Assume that the Exchange lists the following QOS in IWM options that expire in June 2008: Calls—June 08 Exp Strike Open interest? Puts—June 08 Exp Strike Open interest? 62 No 62 No 63 No 63 Yes 64 Yes 64 Yes * * * * 76 Yes 76 Yes 77 Yes 77 Yes 78 Yes 78 Yes 79 Yes 79 Yes 80 Yes 80 Yes 81 Yes 81 Yes 82 Yes 82 Yes 83 No 83 No 84 No 84 No 85 No 85 Yes 86 Yes 86 No 87 Yes 87 Yes 88 Yes 88 Yes 89 Yes 89 No 90 Yes 90 No 91 No 91 No 92 No 92 No 93 No 93 No The Exchange would de-list the first series listed above, as well as the last three: $62, $91, $92, and $93. The Exchange would not, however, de-list the $83 and $84 series because there are series having open interest with strike prices higher than these two series. In addition, the Exchange would not de-list the $63 series because there is open interest in the put series. Notwithstanding the proposed delisting policy, customer requests to add strikes and/or maintain strikes in QOS in ETF options in series eligible for delisting shall be granted. Further, in connection with the proposed delisting policy, if the Exchange identifies series for delisting, the Exchange shall notify other options exchanges with similar delisting policies regarding eligible series for listing, and shall work with such other exchanges to develop a uniform list of series to be de-listed, so as to ensure uniform series delisting of multiply-listed QOS in ETF options. The Exchange expects that all options exchanges that have a QOS Pilot Program will adopt the proposed delisting policy. The Exchange represents that it has the necessary systems capacity to support new options series that will result from this proposal. Further, as proposed, the Exchange notes that this rule change will become part of the pilot program and, going forward, will be considered by the Commission when the Exchange seeks to renew or make permanent the pilot program in the future. 8 8 To the extent the Commission views the proposed rule change as an expansion of the pilot program, thus triggering the requirement under the terms of the Pilot Program Approval Order that the Exchange submit a pilot program report, the Exchange notes that it submitted a report on June 28, 2007, in connection with its filing to extend the pilot program through July 10, 2008. *See* Securities Exchange Act Release No. 56032 (July 9, 2007), 72 FR 38634 (July 13, 2007). 2. Statutory Basis The proposed rule change is consistent with Section 6(b) 9 of the Act in general and furthers the objectives of Section 6(b)(5) 10 in particular in that it is designed to prevent fraudulent and manipulative acts and practices, promote just and equitable principles of trade, remove impediments to and perfect the mechanisms of a free and open market and a national market system, and, in general, protect investors and the public interest. The Exchange believes that adoption of this proposal will promote competition among the options exchanges related to the quarterly options series pilot programs. 9 15 U.S.C. 78f(b). 10 15 U.S.C. 78f(b)(5). B. Self-Regulatory Organization's Statement on Burden on Competition The Exchange believes that the proposed rule change will impose no burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others No written comments were solicited or received with respect to the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The Exchange has designated the proposed rule change as one that:

(1)Does not significantly affect the protection of investors or the public interest;

(2)does not impose any significant burden on competition; and

(3)does not become operative for 30 days from the date of filing, or such shorter time as the Commission may designate if consistent with the protection of investors and the public interest. Therefore, the foregoing rule change has become effective pursuant to Section 19(b)(3)(A) of the Act 11 and subparagraph (f)(6) of Rule 19b-4 thereunder. 12 The Exchange has asked the Commission to waive the 30-day operative delay to permit the Exchange to immediately compete with the other options exchanges that have similarly amended their quarterly options series pilot programs. 11 15 U.S.C. 78s(b)(3)(A). 12 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) requires a self-regulatory organization to provide the Commission with written notice of its intent to file the proposed rule change, along with a brief description and text of the proposed rule change, at least five business days prior to the date of filing of the proposed rule change, or such shorter time as designated by the Commission. The Exchange has fulfilled this requirement. The Commission notes that this proposal is substantially similar to a proposed rule change submitted by the Chicago Board Options Exchange, which was approved by the Commission following publication for notice and comment, and does not raise any new regulatory issues. 13 Waiving the 30-day operative delay will promote, without undue delay, further competition in the options market. 14 For these reasons, the Commission believes that waiving the 30-day operative delay is consistent with the protection of investors and the public interest and designates the proposal operative upon filing. 13 *See* Securities Exchange Act Release No. 57410 (March 3, 2008), 73 FR 12483 (March 7, 2008) (SR-CBOE-2007-96). *See also* Securities Exchange Act Release No. 57425 (March 4, 2008), 73 FR 12783 (March 10, 2008) (SR-ISE-2008-19). 14 For purposes only of waiving the 30-day operative delay, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. *See* 15 U.S.C. 78c(f). The Commission notes that this rule change will become part of the pilot program and, going forward, its effects will be considered by the Commission in the event that the Exchange seeks to renew or make permanent the pilot program. 15 Thus, in the Exchange's future reports on the Pilot Program, the Exchange should include analysis of

(1)the impact of the additional series on the Exchange's market and quote capacity, and

(2)the implementation and effects of the delisting policy, including the number of series eligible for delisting during the period covered by the report, the number of series actually delisted during that period (pursuant to the delisting policy or otherwise), and documentation of any customer requests to maintain QOS strikes that were otherwise eligible for delisting. 15 As set forth in the Pilot Program Release, if the Exchange were to propose an extension, expansion, or permanent approval of the Pilot Program, the Exchange must submit, along with any filing proposing such amendments to the program, a report that provides an analysis of the Pilot Program covering the entire period during which the Pilot Program was in effect. *See* Pilot Program Release, supra note 5. The Pilot Program Release requires the Exchange to include in its report, at a minimum:

(1)Data and written analysis on the open interest and trading volume in the classes for which QOS were opened;

(2)an assessment of the appropriateness of the option classes selected for the Pilot Program;

(3)an assessment of the impact of the Pilot Program on the capacity of the Exchange, OPRA, and market data vendors (to the extent data from market data vendors is available);

(4)any capacity problems or other problems that arose during the operation of the Pilot Program and how the Exchange addressed such problems;

(5)any complaints that the Exchange received during the operation of the Pilot Program and how the Exchange addressed them; and

(AAPL)is at 60, Research in Motion

(RIMM)is at 60, and Goldman Sachs Group Inc.

(GS)is at 60. *See* Securities Exchange Act Release Nos. 55664 (April 24, 2007), 72 FR 23867 (May 1, 2007) (SR-CBOE-2007-36) and 56772 (November 8, 2007), 72 FR 64261 (November 15, 2007) (SR-CBOE-2007-126). 7 “Any actions taken by the President of the Exchange pursuant to this paragraph will be submitted to the SEC in a rule filing pursuant to Section 19(b)(3)(A) of the Exchange Act.” Rule 8.3A.01(b). • Bear Stearns

(BSC)from its current limit of 50 to 60; • Dryships, Inc.

(DRYS)from its current limit of 50 to 65; • Lehman Brothers

(LEH)from its current limit of 50 to 60; • Petro Bras SA

(PBR)from its current limit of 50 to 60; and • Visa, Inc.

(V)from its current limit of 50 to 60. 8 8 Options on Visa, Inc.

(V)will be listed on the Exchange beginning approximately March 28, 2008. The trading volume in these classes recently has increased substantially or is expected to increase. In addition, increasing these CQLs to 60 (or 65 in the case of DRYS) will accommodate Market-Makers that are currently on the wait-list to be appointed to the option classes. Increasing the CQLs in these options will enable the Exchange to enhance the liquidity offered, thereby offering deeper and more liquid markets. Lastly, CBOE represents that it has the systems capacity to support this increase in the CQLs. 2. Statutory Basis Accordingly, CBOE believes the proposed rule change is consistent with the Act and the rules and regulations under the Act applicable to a national securities exchange and, in particular, the requirements of Section 6(b) of the Act. 9 Specifically, the Exchange believes the proposed rule change is consistent with the Section 6(b)(5) 10 requirements that the rules of an exchange be designed to promote just and equitable principles of trade, to prevent fraudulent and manipulative acts and, in general, to protect investors and the public interest. As indicated above, the Exchange believes that increasing the CQL in these options will enable the Exchange to enhance the liquidity offered, thereby offering deeper and more liquid markets. 9 15 U.S.C. 78(f)(b). 10 15 U.S.C. 78(f)(b)(5). B. Self-Regulatory Organization's Statement on Burden on Competition CBOE does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others The Exchange neither received nor solicited written comments on the proposal. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The foregoing proposed rule change will take effect upon filing with the Commission pursuant to Section 19(b)(3)(A)(i) of the Act 11 and Rule 19b-4(f)(1) thereunder, 12 because it constitutes a stated policy, practice, or interpretation with respect to the meaning, administration, or enforcement of an existing rule. 11 15 U.S.C. 78s(b)(3)(A)(i). 12 17 CFR 240.19b-4(f)(1). At any time within 60 days of the filing of the proposed rule change, the Commission may summarily abrogate such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission's Internet comment form ( *http://www.sec.gov/rules/sro.shtml* ); or • Send an e-mail to *rule-comments@sec.gov.* Please include File Number SR-CBOE-2008-34 on the subject line. Paper Comments • Send paper comments in triplicate to Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090. All submissions should refer to File Number SR-CBOE-2008-34. This file number should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site ( *http://www.sec.gov/rules/sro.shtml* ). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission's Public Reference Room, on official business days between the hours of 10 a.m. and 3 p.m. Copies of such filing also will be available for inspection and copying at the principal office of the CBOE. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-CBOE-2008-34 and should be submitted on or before April 25, 2008. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority. 13 13 17 CFR 200.30-3(a)(12). Florence E. Harmon, Deputy Secretary. [FR Doc. E8-7028 Filed 4-3-08; 8:45 am] BILLING CODE 8011-01-P SECURITIES AND EXCHANGE COMMISSION [Release No. 34-57587; File No. SR-CHX-2007-21] Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; Order Granting Approval of Proposed Rule Change, as Modified by Amendment No. 1, To Amend Rules Relating to Registration Requirements March 31, 2008. I. Introduction On October 9, 2007, the Chicago Stock Exchange, Inc. (“CHX” or “Exchange”), filed with the Securities and Exchange Commission (“Commission”) pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) 1 and Rule 19b-4 thereunder, 2 a proposed rule change to amend rules relating to registration requirements. On February 14, 2008, CHX filed Amendment No. 1 to the proposed rule change. The proposed rule change, as amended by Amendment No. 1, was published for comment in the **Federal Register** on February 28, 2008. 3 The Commission received no comments on the proposal. This order approves the proposed rule change, as amended. 1 15 U.S.C. 78s(b)(l) 2 17 CFR 240.19B-4. 3 *See* Securities Exchange Act Release No. 57363 (February 20, 2008), 73 FR 10846 (February 28, 2008). II. Description of the Proposal The Financial Industry Regulatory Authority, Inc.'s (“FINRA”) Web Central Registration Depository (“Web CRD”) system is a centralized, web-based system used by securities exchanges and broker-dealers across the country to track registration and qualification information about firms and the individuals who work for those firms. CHX entered into an agreement with FINRA to allow the Exchange's participants to use Web CRD to register certain of its associated persons. Therefore, the Exchange proposes to amend its registration rules relating to registration requirements and to adopt related fees and to delete an outdated provision in its rules. First, the Exchange proposes to require Exchange participants to use Web CRD to register their associated persons who are required to register with the Exchange under CHX rules. 4 Similarly, the Exchange also seeks to require participants to submit a Form U-5 to the Web CRD following the termination of the associated person. 5 4 *See* proposed Article 6, Rule 2, Interpretation and Policy .01. 5 *See* proposed Article 6, Rule 2, Interpretation and Policy .02. The Exchange plans to allow its participants to transition to the use of the Web CRD system over the course of a six to nine-month period. At the end of this period, CHX participants would be required to use Web CRD for submitting any registration materials required by CHX rules. Second, the Exchange proposes that it be allowed to direct its participants to submit fingerprint cards to the Exchange or to FINRA for processing during the registration process. 6 Current CHX rules require participants to submit fingerprints to the Exchange. The Exchange seeks flexibility so that it could determine, from time to time, which fingerprint processing method would be most efficient for the Exchange and for its participants. 6 *See* proposed Article 6, Rule 10, Interpretation and Policy .01. Because FINRA would assess charges to CHX participants for using the Web CRD system and for processing any fingerprints that are submitted, the Exchange also is amending its Fee Schedule to include applicable registration, processing and termination fees, as well as various fingerprint charges. 7 7 7 These charges include an $85 registration fee; a $95 disclosure processing fee; a $30 annual processing fee; and termination fees of $40 and $80. Fingerprint processing fees would be $30.25 per card for an initial submission; $13 per card for a second submission; and $30.25 per card for a third submission. These fees reflect the charges assessed by FINRA for these services; CHX would not be charging any additional fees of its own. Finally, CHX proposes to delete Interpretation and Policy .03 of Article 6, Rule 2 that requires firms to notify CHX of the termination of any non-registered, associated person's employment. CHX believes that this requirement has become somewhat obsolete with the elimination of its physical trading floor because the requirement had been largely focused on the employment status of clerks working on the Exchange's trading floor. 8 8 Moreover, CHX regularly receives an updated list of a firm's associated persons when it conducts its annual examinations. III. Discussion and Commission Findings The Commission has carefully reviewed the proposed rule change and finds that it is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange. 9 In particular, the Commission finds that the proposed rule change is consistent with Section 6(b)(5) of the Act, 10 which, among other things, requires that the rules of a national securities exchange be designed to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system and, in general, to protect investors and the public interest. 9 In approving this proposed rule change, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 10 15 U.S.C. 78f(b)(5). The Commission believes that Exchange's proposal to require its participant firms to use Web CRD system to register certain associated persons and to submit a Form U-5 following the termination of the associated person would eliminate the need for manual processing currently performed by Exchange staff. Significantly, it would also allow for the compilation of information related to the registration of associated persons in one central repository for access by regulators and broker-dealers, and could allow the Exchange's regulatory group, as well as the firms themselves, to better determine whether a registrant has met applicable continuing education requirements. The Commission believes this should increase regulatory efficiency and capabilities without imposing an undue burden on participants. The Commission also believes that it is reasonable to provide the Exchange with the flexibility to determine whether it, or FINRA, would be best suited to process fingerprint cards, while participants would continue to have the obligation to submit fingerprints. Furthermore, the Commission believes that it is appropriate for the Exchange to amend its Fee Schedule to reflect fees that FINRA would charge for services rendered in connection with the use of Web CRD and the fingerprinting services set forth in the proposal. The Commission notes that CHX would not be charging any additional fees of its own. Finally, the Commission agrees that it is appropriate for CHX to delete Interpretation and Policy .03 of Article 6, Rule 2 relating to the firms' requirement to notify the Exchange of the termination of any non-registered, associated person's employment, since it has become obsolete given CHX's new trading model and since CHX regularly receives an updated list of a firm's associated persons when it conducts its annual examinations. IV. Conclusion *It is therefore ordered* , pursuant to Section 19(b)(2) of the Act, 11 that the proposed rule change (SR-CHX-2007-21), as amended, be, and hereby is, approved. 11 15 U.S.C. 78s(b)(2). For the Commission, by the Division of Trading and Markets, pursuant to delegated authority. 12 12 17 CFR 200.30-3(a)(12). Florence E. Harmon, Deputy Secretary. [FR Doc. E8-7029 Filed 4-3-08; 8:45 am] BILLING CODE 8011-01-P SMALL BUSINESS ADMINISTRATION [Disaster Declaration #11206 and #11207] Arkansas Disaster #AR-00018 AGENCY: U.S. Small Business Administration. ACTION: Notice. SUMMARY: This is a Notice of the Presidential declaration of a major disaster for the State of Arkansas (FEMA-1751-DR ), dated 03/28/2008. *Incident:* Severe Storms, Tornadoes, and Flooding. *Incident Period:* 03/18/2008 and continuing. *Effective Date:* 03/28/2008. *Physical Loan Application Deadline Date:* 05/27/2008. *Economic Injury

(EIDL)Loan Application Deadline Date:* 12/29/2008. ADDRESSES: Submit completed loan applications to: U.S. Small Business Administration, Processing and Disbursement Center, 14925 Kingsport Road, Fort Worth, TX 76155. FOR FURTHER INFORMATION CONTACT: A. Escobar, Office of Disaster Assistance, U.S. Small Business Administration, 409 3rd Street, SW., Suite 6050, Washington, DC 20416. SUPPLEMENTARY INFORMATION: Notice is hereby given that as a result of the President's major disaster declaration on 03/28/2008, applications for disaster loans may be filed at the address listed above or other locally announced locations. The following areas have been determined to be adversely affected by the disaster: Primary Counties (Physical Damage and Economic Injury Loans): Baxter, Jackson, Madison, Stone, Benton, Lawrence, Marion, Woodruff, Independence, Logan, Randolph. Contiguous Counties (Economic Injury Loans Only): Arkansas: Boone, Cleburne, Cross, Greene, Monroe, Pope, Searcy, St. Francis, White, Carroll, Craighead, Franklin, Izard, Newton, Prairie, Sebastian, Van Buren, Yell, Clay, Crawford, Fulton, Johnson, Poinsett, Scott, Sharp, Washington. Missouri: Barry, Ozark, McDonald, Ripley, Oregon, Taney. Oklahoma: Adair, Delaware. The Interest Rates are: Percent *For Physical Damage:* Homeowners with credit available elsewhere: 5.500 Homeowners without credit available elsewhere: 2.750 Businesses with credit available elsewhere: 8.000 Other (including non-profit organizations) with credit available elsewhere: 5.250 Businesses and non-profit organizations without credit available elsewhere: 4.000 *For Economic Injury:* Businesses & small agricultural cooperatives without credit available elsewhere: 4.000 The number assigned to this disaster for physical damage is 112066 and for economic injury is 112070. (Catalog of Federal Domestic Assistance Numbers 59002 and 59008) James E. Rivera, Acting Associate Administrator for Disaster Assistance. [FR Doc. E8-6992 Filed 4-3-08; 8:45 am] BILLING CODE 8025-01-P SMALL BUSINESS ADMINISTRATION [Disaster Declaration #11205] Iowa Disaster #IA-00014 Declaration of Economic Injury AGENCY: U.S. Small Business Administration. ACTION: Notice. SUMMARY: This is a notice of an Economic Injury Disaster Loan

(EIDL)declaration for the State of Iowa, dated 03/31/2008. *Incident:* Structural Fire. *Incident Period:* 01/19/2008. *Effective Date:* 03/31/2008. *EIDL Loan Application Deadline Date:* 12/31/2008. ADDRESSES: Submit completed loan applications to: U.S. Small Business Administration, Processing And Disbursement Center, 14925 Kingsport Road, Fort Worth, TX 76155. FOR FURTHER INFORMATION CONTACT: A. Escobar, Office of Disaster Assistance, U.S. Small Business Administration, 409 3rd Street, SW., Suite 6050, Washington, DC 20416. SUPPLEMENTARY INFORMATION: Notice is hereby given that as a result of the Administrator's EIDL declaration, applications for economic injury disaster loans may be filed at the address listed above or other locally announced locations. The following areas have been determined to be adversely affected by the disaster: Primary Counties: Jackson. Contiguous Counties: Iowa: Clinton, Dubuque, Jones. Illinois: Carroll, Jo Daviess. The Interest Rate is: 4.000. The number assigned to this disaster for economic injury is 112050. The States which received an EIDL Declaration # are Iowa and Illinois. (Catalog of Federal Domestic Assistance Number 59002) Dated: March 31, 2008. Steven C. Preston, Administrator. [FR Doc. E8-7002 Filed 4-3-08; 8:45 am] BILLING CODE 8025-01-P SMALL BUSINESS ADMINISTRATION Liquidation and Debt Collection Activities; Fees for Liquidation Activities Performed by Authorized CDC Liquidators AGENCY: U.S. Small Business Administration (SBA). ACTION: Notice of Compensation Fees Percentages. SUMMARY: SBA is setting the compensation fees for Authorized CDC Liquidators (“ACLs”) for their liquidation activities on 504 loans that have been completed as of the date of this notice, and for ongoing liquidation activities being pursued according to an approved liquidation plan, at 10% of the net recovery proceeds realized from the sale of collateral or other liquidation actions on an individual loan up to $25,000 for each such loan and 5% of the realized net recovery proceeds above such amounts. SBA is also setting compensation fees for liquidations by ACLs of 504 loans where the debenture was purchased during the period after May 14, 2007, through the date of this notice, and for which a liquidation plan has not yet been approved by SBA, at 4% of the net recovery proceeds realized from the sale of collateral or other liquidation action on an individual loan up to $25,000 for each such loan and 2% of the realized net recovery proceeds above such amounts. DATES: These compensation fee percentages are effective as of April 4, 2008. FOR FURTHER INFORMATION CONTACT: Walter Intlekofer, Chief, Portfolio Management Division,

(202)205-7543, *walter.intlekofer@sba.gov.* SUPPLEMENTARY INFORMATION: On April 12, 2007, SBA published in the **Federal Register** at 72 FR 18349, a final rule amending the regulations pertaining to guaranteed loan and debenture liquidation and litigation cases for the Certified Development Company Program and the 7(a) Guaranteed Loan Program. This final rule had an effective date of May 14, 2007. In Section 120.542(c) of the amended regulations, SBA published the formula for determining the compensation fee that SBA would pay to Authorized CDC Liquidators for their liquidation actions on 504 loans. SBA stated that the compensation fee was to be a percentage (to be published in the **Federal Register** from time to time, but not to exceed 10%) of the net recovery proceeds realized from the sale of collateral or other liquidation activities, on an individual loan, up to a fee of $25,000 for such loan, and a lower percentage (also to be published in the **Federal Register** from time to time, but not to exceed 5%) of the realized net recovery proceeds above such amounts. SBA recognizes that some ACLs have been performing liquidation activities on certain 504 loans since the publication of the final rule. Therefore, SBA will provide compensation from its administrative budget and on an interim basis, is setting the liquidation compensation percentages as follows: For all liquidations of 504 loans that have been completed by an ACL as of the date of this notice, where the liquidation plan was approved by SBA after the date the CDC became an ACL, SBA will pay a compensation fee of 10% of the net recovery proceeds realized from the sale of collateral or other liquidation actions on an individual loan up to $25,000 for each such loan and 5% of the realized net recovery proceeds above such amounts. For all liquidations currently in progress that are being pursued by an ACL in accordance with an SBA approved liquidation plan that was approved after the date the CDC became an ACL, SBA will pay a compensation fee of 10% of the net recovery proceeds realized from the sale of collateral or other liquidation actions on an individual loan up to $25,000 for each such loan and 5% of the realized net recovery proceeds above such amounts. For all liquidations by an ACL on 504 loans for which the debentures were purchased after May 14, 2007 (the effective date of the final rule), through the date of this notice, and for which a liquidation plan has not yet been approved, SBA will pay a compensation fee of 4% of the net recovery proceeds realized from the sale of collateral or other liquidation actions on an individual loan up to $25,000 for each such loan and 2% of the realized net recovery proceeds above such amounts. Liquidation plans for these loans must be submitted to SBA Commercial Loan Centers in Fresno, CA or Little Rock, AK within 90 calendar days from the date of this notice. For any 504 loan for which the debenture has not yet been purchased, SBA is unable to pay any compensation fees at this time. Any future change will be communicated in the **Federal Register** . Pursuant to 13 CFR 120.542(c), all requests for compensation fees must be received by SBA within nine months from the date of SBA's purchase of the defaulted debenture. Fee requests not received within such timeframe will be automatically rejected. Authority: 13 CFR 120.542. Grady Hedgespeth, Director of Financial Assistance. [FR Doc. E8-7067 Filed 4-3-08; 8:45 am] BILLING CODE 8025-01-P SMALL BUSINESS ADMINISTRATION Region II Buffalo District Advisory Council; Public Meeting The U.S. Small Business Administration Region II Buffalo District Advisory Council located in the geographical area of Buffalo, New York, will hold a public meeting on Wednesday, April 9, 2008, starting at 10 a.m. eastern standard time. The meeting will take place at HSBC Bank USA, One HSBC Center, Buffalo, New York to discuss such matters that may be presented by members, and staff of the U.S. Small Business Administration, or others present. Anyone wishing to make an oral presentation to the Board must contact Franklin J. Sciortino, District Director, Buffalo District Office, in writing by letter or fax no later than Friday, April 4, 2008 in order to be put on the agenda. Franklin J. Sciortino, District Director, Buffalo District Office, U.S. Small Business Administration, Niagara Center, 540 Niagara Center, 130 S. Elmwood Avenue, Buffalo, New York 14202; telephone

(716)551-4301 or fax

(716)551-4418. Cherylyn H. Lebon, Committee Management Officer. [FR Doc. E8-7063 Filed 4-3-08; 8:45 am] BILLING CODE 8025-01-P OFFICE OF SPECIAL COUNSEL Agency Information Collection Activities; Request for Comment AGENCY: Office of Special Counsel. ACTION: First Notice. SUMMARY: In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35), and implementing regulations at 5 CFR part 1320, the U.S. Office of Special Counsel (OSC), plans to request approval from the Office of Management and Budget

(OMB)for use of four previously approved information collections consisting of complaint forms. These collections are listed below. The current OMB approval for Forms OSC-11, OSC-12, OSC-13, OSC-14 and the OSC Survey expire 9/30/08. We are submitting all four forms and the electronic survey for renewal, based on the upcoming date of expiration. Two of the four forms are being revised, Forms OSC-11 and OSC-12. Form OSC-11 has had major changes made to its electronic version, so that it has a certain amount of “intelligence” now built in. Depending upon your responses, it navigates you to the proper sections; it also has help menus for those who need more information prior to making their selections. The electronic form OSC-12 had minor modifications made to it, in order to allow it to be integrated into the new software used to support form OSC-11. Current and former Federal employees, employee representatives, other Federal agencies, state and local government employees, and the general public are invited to comment on this information collection for the first time. Comments are invited on:

(a)whether the proposed collection of information is necessary for the proper performance of OSC functions, including whether the information will have practical utility;

(b)the accuracy of OSC's estimate of the burden of the proposed collections of information;

(c)ways to enhance the quality, utility, and clarity of the information to be collected; and

(d)ways to minimize the burden of the collection of information on respondents, including through the use of automated collection techniques or other forms of information technology. DATES: Comments should be received by May 16, 2008. ADDRESSES: Roderick Anderson, Director of Management and Budget, U.S. Office of Special Counsel, 1730 M Street, NW., Suite 218, Washington, DC 20036-4505. FOR FURTHER INFORMATION CONTACT: Roderick Anderson, Director of Planning and Analysis at the address shown above; by facsimile at

(202)254-3715. The paper versions of the complaint forms for the collection of information are available for review on OSC's Web site, at http://www.osc.gov/forms.htm. The screen captures of the electronic forms are available for review on OSC's web site at http://www.osc.gov/library.htm. For those wishing to test out the new functionality of the “interactive” form OSC-11, it will be available to you during the second, 30 day notice, where you will be able to create a user name and password, and log in to test out the form. SUPPLEMENTARY INFORMATION: OSC is an independent agency responsible for, among other things,

(1)investigation of allegations of prohibited personnel practices defined by law at 5 U.S.C. 2302(b), protection of whistleblowers, and certain other illegal employment practices under titles 5 and 38 of the U.S. Code, affecting current or former Federal employees or applicants for employment, and covered state and local government employees; and

(2)the interpretation and enforcement of Hatch Act provisions on political activity in chapters 15 and 73 of title 5 of the U.S. Code. *Title of Collections:*

(1)Form OSC-11, (Complaint of Possible Prohibited Personnel Practice of Other Prohibited Activity;

(2)Form OSC-12 (Information about filing a Whistleblower Disclosure with the Office of Special Counsel);

(3)Form OSC-13 (Complaint of Possible Prohibited Political Activity (Violation of the Hatch Act));

(4)Form OSC-14 Complaint of Possible Violation of the Uniformed Services Employment and Reemployment Rights Act (USERRA). **Type of Information Collection** *Request:* Approval of a previously approved collection of information, of which the forms and survey expire on 9/30/08. Also request that the revised electronic versions of forms OSC-11 and OSC-12 be approved. *Affected public:* Current and former Federal employees, applicants for Federal employment, state and local government employees, and their representatives, and the general public. *Respondent's Obligation:* Voluntary. *Estimated Annual Number of Respondents:* 2,700. *Frequency:* Daily. *Estimated Average Amount of Time for a Person to Respond:* 64 minutes. *Estimated Annual Burden:* 2,899 hours. *Abstract:* This form is used by current and former Federal employees and applicants for Federal employment to submit allegations of possible prohibited personnel practices or other prohibited activity for investigation and possible prosecution by OSC. Dated: March 31, 2008. Scott J. Bloch, Special Counsel. [FR Doc.E8-7030 Filed 4-3-08; 8:45 am] BILLING CODE 7405-01-S DEPARTMENT OF STATE [Public Notice: 6148] 30-Day Notice of Proposed Information Collection: DS-160, Nonimmigrant Visa Electronic Application, OMB 1405-XXXX ACTION: Notice of request for public comment and submission to OMB of proposed collection of information. SUMMARY: The Department of State has submitted the following information collection request to the Office of Management and Budget

(OMB)for approval in accordance with the Paperwork Reduction Act of 1995. • *Title of Information Collection:* Nonimmigrant Visa Electronic Application • *OMB Control Number:* None • *Type of Request:* New Collection • *Originating Office:* Bureau of Consular Affairs, Visa Services (CA/VO) • *Form Number:* DS-160 • *Respondents:* All nonimmigrant visa applicants • *Estimated Number of Respondents:* 10 million • *Estimated Number of Responses:* 10 million • *Average Hours Per Response:* 75 minutes • *Total Estimated Burden:* 12,500,000 hours • *Frequency:* Once per visa application • *Obligation to Respond:* Required to obtain benefit DATES: Submit comments to the Office of Management and Budget

(OMB)for up to 30 days from April 4, 2008. ADDRESSES: Direct comments and questions to Katherine Astrich, the Department of State Desk Officer in the Office of Information and Regulatory Affairs at the Office of Management and Budget (OMB), who may be reached at 202-395-4718. You may submit comments by any of the following methods: • *E-mail: kastrich@omb.eop.gov* . You must include the DS form number, information collection title, and OMB control number in the subject line of your message. • *Mail (paper, disk, or CD-ROM submissions):* Office of Information and Regulatory Affairs, Office of Management and Budget, 725 17th Street, NW., Washington, DC 20503. • *Fax:* 202-395-6974. FOR FURTHER INFORMATION CONTACT: You may obtain copies of the proposed information collection and supporting documents from Lauren Prosnik, who may be reached at 202-663-2951. SUPPLEMENTARY INFORMATION: We are soliciting public comments to permit the Department to: • Evaluate whether the proposed information collection is necessary to properly perform our functions. • Evaluate the accuracy of our estimate of the burden of the proposed collection, including the validity of the methodology and assumptions used. • Enhance the quality, utility, and clarity of the information to be collected. • Minimize the reporting burden on those who are to respond. *Abstract of Proposed Collection:* The Nonimmigrant Visa Electronic Application (DS-160) will be used to collect biographical and other information from individuals seeking a nonimmigrant visa. The consular officer uses the information collected to determine the applicant's eligibility for a visa. This collection combines questions from current information collections DS-156 (Nonimmigrant Visa Application), DS-156E (Nonimmigrant Treaty Trader Investor Application), DS-156K (Nonimmigrant Fiancé Application), DS-157 (Nonimmigrant Supplemental Visa Application), DS-158 (Contact Information and Work History Application), and DS-3052 (Nonimmigrant V Visa Application). *Methodology:* The DS-160 will be submitted electronically to the Department via the internet. The applicant will be instructed to print a confirmation page containing a bar coded record locator, which will be scanned at the time of processing. Applicants who submit the electronic application will no longer submit paper-based applications to the Department. Dated: March 5, 2008. Stephen A. Edson, Deputy Assistant Secretary, Bureau of Consular Affairs, Department of State. [FR Doc. E8-6989 Filed 4-3-08; 8:45 am] BILLING CODE 4710-06-P DEPARTMENT OF TRANSPORTATION Federal Aviation Administration Aviation Rulemaking Advisory Committee; Renewal AGENCY: Federal Aviation Administration (FAA), DOT. ACTION: Notice of renewal. SUMMARY: Pursuant to section 14(a)(2)(A) of the Federal Advisory Committee Act, and in accordance with section 102-3.65, title 41 of the Code of Federal Regulations, the FAA gives notice it has renewed the Aviation Rulemaking Advisory Committee

(ARAC)for a 2-year period beginning March 20, 2008. The Committee's primary purpose is to provide the public with an earlier opportunity to participate in the FAA's rulemaking process. It will continue to operate in accordance with the rules of the Federal Advisory Committee Act and the Department of Transportation, FAA Committee Management Order (1110.30C). For further information about the ARAC, please contact Ms. Gerri Robinson, FAA Office of Rulemaking, 800 Independence Avenue, SW., Washington, DC 20591; telephone number: 202-267-9678. Issued in Washington, DC, on March 28, 2008. Pamela A. Hamilton-Powell, Executive Director, Aviation Rulemaking Advisory Committee. [FR Doc. E8-7075 Filed 4-3-08; 8:45 am] BILLING CODE 4910-13-P DEPARTMENT OF TRANSPORTATION Federal Aviation Administration [Docket No: FAA-2008-23639] Deadline for Notification of Intent To Use the Airport Improvement Program

(AIP)Sponsor, Cargo, and Nonprimary Entitlement Funds for Fiscal Year 2008 AGENCY: Federal Aviation Administration, DOT. ACTION: Notice. SUMMARY: The Federal Aviation Administration

(FAA)announces June 1, 2008, as the deadline for each airport sponsor to notify the FAA whether or not it will use its fiscal year 2008 entitlement funds available under Public Law 110-190 to accomplish AIP-eligible projects that the sponsor previously identified through the Airports Capital Improvement Plan

(ACIP)process during the preceding year. If a sponsor does not declare their intention regarding the use of 2008 entitlement funds by June 1, 2008, FAA will be unable to take the necessary actions to designate these as “protected” carryover funds and these funds would not be carried over if FAA spending authority from the Airport and Airway Trust Fund is not extended beyond June 30, 2008. FOR FURTHER INFORMATION CONTACT: Mr. Wayne Heibeck, Deputy Director, Office of Airport Planning and Programming, APP-2, on

(202)267-8775. SUPPLEMENTARY INFORMATION: Section 47105(f) of title 49, United States Code, provides that the sponsor of each airport to which funds are apportioned shall notify the Secretary by such time and in a form as prescribed by the Secretary, of the sponsor's intent to apply for the funds apportioned to it (entitlements). This notice applies only to those airports that have had entitlement funds apportioned to them, except those nonprimary airports located in designated Block Grant States. Sponsors intending to apply for any of their available entitlement funds, including those unused from prior years, shall submit by June 1, 2008, a written indication to the designated Airports District Office (or Regional Office in regions without Airports District Offices) that they will advertise, bid, and submit an application prior to June 10, 2008, or by the date established by the designated Airport District or Regional Office. This notice is promulgated to expedite and prioritize the grant-making process. In the past, the FAA has established a deadline of May 1 for an airport sponsor to declare that it will defer use of its entitlement funding. Considering the AIP program has been extended for only 9-months into the middle of a fiscal year, and uncertainty about additional statutory action before the end of the fiscal year, the FAA is establishing June 1 as the deadline for each airport sponsor to notify the FAA whether or not it will use its fiscal year 2008 entitlement funds. Public Law 110-190, enacted on February 28, 2008, amended section 48103 of title 49, United States Code, to extend the Airport Improvement Program

(AIP)for the 9-month period beginning October 1, 2007 and ending on June 30, 2008. This law enables the FAA to use a portion of the AIP obligation authority made available under Public Law 110-161 (“Consolidated Appropriations Act, 2008”). Although the AIP grant authority available for FY2008 does not expire on June 30, 2008, the FAA's expenditure authority from the Airport and Airway Trust Fund will expire on June 30 in the absence of an additional statutory extension. Therefore, to avoid the risk of not being able to carryover funds should an additional extension not be enacted, AIP funds should be obligated in FAA's accounting records on or before June 20. Obligations must be made on or before June 20, rather than June 30 because the FAA's accounting systems will be taken off-line to perform the end of the month closeout shortly after this date. Sponsors have three options available to them regarding AIP grants during this 9-month period. First, sponsors may elect to make an application for a grant based on entitlements currently available to them. Sponsors that elect to take such a grant must submit grant applications to the FAA no later than June 10, 2008, in order to meet the June 20, 2008, obligation deadline. Second, sponsors may elect to wait until after the June 1, 2008 notification date for protection of carryover entitlements. However, if a sponsor does not declare their intention regarding the use of 2008 entitlement funds by the June 1 deadline, FAA will be unable to take the necessary actions to designate these as “protected” carryover funds and these funds would not be carried over if FAA's Trust Fund expenditure authority is not extended beyond June 30, 2008. Third, sponsors may elect to declare their intention to carryover the entitlements prior to the June 1, 2008 deadline through sending an acceptable written notification of such intention by June 1, 2008. FAA will then issue discretionary grants in an aggregate amount not to exceed the aggregate amount of deferred entitlement funds pursuant to the authority and limitations in section 471 17(f). Airport sponsors may request their unused carryover entitlements that have been deferred after September 30, 2008 as provided in current law. If a statutory extension beyond June 30th of FAA's authority to make expenditures from the Trust Fund is enacted, and if additional AIP contract authority for fiscal year 2008 is made available, and FAA is therefore able to use the remaining obligation authority under Public Law 110-161 through September 30, 2008, the deadline for each airport sponsor to notify the FAA that it will use the remainder of its entitlement funds will be July 9, 2008. Sponsors intending to apply for any of their available entitlement funds, including those unused from prior years, those previously apportioned pursuant to Public Law 110-160, or those apportioned through a statutory extension for fiscal year 2008 entitlement funds shall submit by July 9, 2008, a written indication to the designated Airports District Office (or Regional Office in regions without Airports District Offices) that they will advertise, bid, and submit an application prior to August 1, 2008, or by the date established by the designated Airport District or Regional Office. Issued in Washington, DC on March 28, 2008. Wayne Heibeck Deputy Director, FAA Office of Airport Planning and Programming. [FR Doc. E8-6943 Filed 4-3-08; 8:45 am] BILLING CODE 4910-13-M DEPARTMENT OF TRANSPORTATION Federal Aviation Administration Seventy-Sixth Meeting, RTCA Special Committee 159: Global Positioning System

(GPS)AGENCY: Federal Aviation Administration (FAA), DOT. ACTION: Notice of RTCA Special Committee 159 meeting. SUMMARY: The FAA is issuing this notice to advise the public of a meeting of RTCA Special Committee 159: Global Positioning System (GPS). DATES: The meeting will be held April 14-18, 2008 from 9 a.m. to 4:30 p.m. (unless stated otherwise). ADDRESSES: The meeting will be held at RTCA, Inc., 1828 L Street, NW., Suite 805, Washington, DC 20036. FOR FURTHER INFORMATION CONTACT: RTCA Secretariat, 1828 L Street, NW., Suite 805, Washington, DC 20036; telephone

(202)833-9339; fax

(202)833-9434; Web site *http://www.rtca.org* . SUPPLEMENTARY INFORMATION: Pursuant to section 10(a)

(2)of the Federal Advisory Committee Act (Pub.L. 92-463, 5 U.S.C., Appendix 2), notice is hereby given for a Special Committee 159 meeting. The plenary agenda will include: April 14 • All Day, Working Group 2C, Inertial (GPS/Inertial), Macintosh-NBAA Room & Hilton ATA Room. April 15 • All Day, Working Group 4, Precision Landing Guidance (GPS/LAAS), MacIntosh-NBAA Room & Hilton ATA Room. April 16 • All Day, Working Group 2, Wide Area Augmentation System (GPS/WAAS), ARINC Room. • All Day, Working Group 4, Precision Landing Guidance (GPSILAAS), MacIntosh-NBAA Room & Hilton ATA Room. April 17 • All Day, Working Group 4, Precision Landing Guidance (GPS/LAAS), MacIntosh-NBAA Room & Hilton ATA Room Morning (9-12 p.m.) (tentative), WG-6, Interference (GPS Interference), Colson Board Room. April 18 Plenary Session • Chairman's Introductory Remarks. • Approval of Summary of the Seventy-Fifth Meeting held January 25, 2008, 2007, RTCA Paper No. 071-081SC159-962. • Review Working Group

(WG)Progress and Identify Issues for Resolution. ○ GPS/3rd Civil Frequency (WG-1). ○ GPSIWASS (WG-2). ○ GPS/GLONASS (WG-2A). ○ GPS/Inertial (WG-2C). ○ GPS/Precision Landing Guidance and (WG-4). ○ GPS/Airport Surface Surveillance (WG-5). ○ GPS/Interference (WG-6). ○ GPS/Antennas (WG-7). ○ GPS/GRAS (WG-8). • Ad Hoc Group—Report—Proposed Activity—GPS L1 Only MOPS. • Review of EEJROCAE Activities. • Assignment/Review of Future Work. • Other Business. • Date and Place of Next Meeting. Attendance is open to the interested public but limited to space availability. With the approval of the chairmen, members of the public may present oral statements at the meeting. Persons wishing to present statements or obtain information should contact the person listed in the FOR FURTHER INFORMATION CONTACT section. Members of the public may present a written statement to the committee at any time. Issued in Washington, DC, on March 26, 2008. Francisco Estrada C., RTCA Advisory Committee. [FR Doc. E8-6928 Filed 4-3-08; 8:45 am] BILLING CODE 4910-13-M DEPARTMENT OF TRANSPORTATION Federal Aviation Administration Forty-Fourth Meeting, RTCA Special Committee 186: Automatic Dependent Surveillance-Broadcast (ADS-B) AGENCY: Federal Aviation Administration (FAA), DOT. ACTION: Notice of RTCA Special Committee 186 Automatic Dependent Surveillance-Broadcast (ADS-B) meeting. SUMMARY: The FAA is issuing this notice to advise the public of a meeting of RTCA Special Committee 186 Automatic Dependent Surveillance-Broadcast (ADS-B). DATES: The meeting will be held April 21-25, 2008, at 9 a.m. (unless otherwise noted). ADDRESSES: The meeting will be held at RTCA Conference Rooms, 1828 L Street, NW., Suite 805, Washington, DC 20036. FOR FURTHER INFORMATION CONTACT:

(1)RTCA Secretariat, 1828 L Street, NW., Suite 805, Washington, DC 20036,

(202)833-9339; fax

(202)833-9434 Web site *http://www.rtca.org.* SUPPLEMENTARY INFORMATION: Pursuant to section 10(a)(2) of the Federal Advisory Committee Act (Pub. L. 92-463, 5 U.S.C. Appendix 2), notice is hereby given for a Special Committee 186 meeting. The agenda will include: April 21 • All Day, ASSAP & CDTI Subgroups, MacIntosh-NBAA Room & Hilton ATA Room. • All Day, RFG, Colson Board Room. • All Day, WG-1/ATSA SURF IA, ARINC Room. April 22 • All Day, ASSAP & CDTI Subgroups, MacIntosh-NBAA Room & Hilton ATA Room. • All Day, RFG, Colson Board Room. • All Day, WG-1/ATSA SURF IA, ARINC Room. April 23 • All Day, ASSAP & CDTI Subgroups, MacIntosh-NBAA Room & Hilton ATA Room. • All Day, RFG, Colson Board Room. • All Day, WGI/ATSA SURF IA, ARINC Room. April 24-25 • Open Plenary (Chairman's Introductory Remarks, Review Meeting Agenda, Review/Approval of the Forty-Third Meeting Summary, RTCA Paper No. 046-08/SC186-259, Date, Place, and Time of Next Meeting). • FAA Surveillance and Broadcast Services

(SBS)Program—Status. • Working Group Reports. ○ WG-1—Operations and Implementation. ○ WG-2—TIS-B MASPS. ○ WG-3—1090 MHz MOPS. ○ WG-4—Applications Technical Requirements. ○ WG-5—UAT MOPS. ○ RFG—Requirements Focus Group. • Consider for Approval—New Document—Safety, Performance and Interoperability Requirements Document for the In-trail Procedure in Oceanic Airspace (ATSA-ITP) Application, RTCA Paper No. 059-08/SC186-260. • Consider for Approval—New Document—Minimum Operational Performance Standards

(MOPS)for Aircraft Surveillance Applications Systems (ASAS), RTCA Paper No. 071-08/SC196-261. • Review of EUROCAE Activities. • Closing Plenary Session (New/Other Business, Review Actions Items/Work Program, Adjourn). Note • ASAS—Aircraft Surveillance Applications System. • ASSAP—Airborne Surveillance & Separation Assurance Processing. • CDTI—Cockpit Display of Traffic Information. • MOPS—Minimum Operational Performance Standards. • REG—Requirements Focus Group. Attendance is open to the interested public but limited to space availability. With the approval of the chairmen, members of the public may present oral statements at the meeting. Persons wishing to present statements or obtain information should contact the person listed in the FOR FURTHER INFORMATION CONTACT section. Members of the public may present a written statement to the committee at any time. Issued in Washington, DC, on March 27, 2008. Francisco Estrada C., RTCA Advisory Committee. [FR Doc. E8-6929 Filed 4-3-08; 8:45 am] BILLING CODE 4910-13-M DEPARTMENT OF TRANSPORTATION Federal Aviation Administration Nineteenth Meeting: RTCA Special Committee 207/Airport Security Access Control Systems AGENCY: Federal Aviation Administration (FAA), DOT. ACTION: Notice of RTCA Special Committee 207 Meeting, Airport Security Access Control Systems. SUMMARY: The FAA is issuing this notice to advise the public of a meeting of RTCA Special Committee 207, Airport Security Access Control Systems. DATES: The meeting will be held April 29, 2008, from 9:30 a.m.-4 p.m. ADDRESSES: The meeting will be held at RTCA, Inc., 1828 L Street, NW., Suite 805, Colson Board Room, Washington, DC 20036. FOR FURTHER INFORMATION CONTACT: RTCA Secretariat, 1828 L Street, NW., Suite 805, Washington, DC 20036; telephone

(202)833-9339; fax

(202)833-9434; Web site *http://www.rtca.org* . SUPPLEMENTARY INFORMATION: Pursuant to section 10(a)(2) of the Federal Advisory Committee Act (Pub. L. 92-463, 5 U.S.C., Appendix 2), notice is hereby given for a Special Committee 207 meeting. The agenda will include: April 29 • Opening Plenary Session (Welcome, Introductions, and Administrative Remarks). • Review of Meeting Summary, RTCA Paper No. 078-081SC207-047. • Martime TWIC Report. • ACTS Report. • Comment review by section. ○ Workgroup 1: Introduction. ○ Workgroup 2: Requirements and System Design. ○ Workgroup 3: Local Identity Management System. ○ Workgroup 4: Physical Access Control. ○ Workgroup 5: Intrusion Detection Systems. ○ Workgroup 6: Video Systems. ○ Workgroup 7: Security Operating Center. ○ Workgroup 8: Communications Infrastructure. ○ Workgroup 9: General Considerations. ○ Workgroup 10: Appendices. • Consider for Approval—Revised DO-230A—Standards for Airport Security Access Control Systems, RICA Paper No. 070-081SC207-046. • Closing Plenary Session (Other Business. Establish Agenda, Date and Place of Following Meetings). Attendance is open to the interested public but limited to space availability. With the approval of the chairmen, members of the public may present oral statements at the meeting. Persons wishing to present statements or obtain information should contact the person listed in the FOR FURTHER INFORMATION CONTACT section. Members of the public may present a written statement to the committee at any time. Issued in Washington, DC, on March 27, 2008. Francisco Estrada C., RTCA Advisory Committee. [FR Doc. E8-6945 Filed 4-3-08; 8:45 am] BILLING CODE 4910-13-M DEPARTMENT OF TRANSPORTATION Federal Aviation Administration Seventh Meeting, Special Committee 215 Aeronautical Mobile Satellite (Route) Services Next Generation Satellite Services and Equipment AGENCY: Federal Aviation Administration (FAA), DOT. ACTION: Notice of RTCA Special Committee 215, Aeronautical Mobile Satellite (Route) Services, Next Generation Satellite Services and Equipment. SUMMARY: The FAA is issuing this notice to advise the public of a third meeting of RTCA Special Committee 215, Aeronautical Mobile Satellite (Route) Services, Next Generation Satellite Services and Equipment. DATES: The meeting will be held April 30-May 1, 2008, 9 a.m. ADDRESSES: The meeting will be held at RTCA, Inc., 1828 L Street, NW., Suite 805 Washington, DC 20036. FOR FURTHER INFORMATION CONTACT: RTCA Secretariat, 1828 L Street, NW., Suite 805, Washington, DC, 20036; telephone

(202)833-9339; fax

(202)833-9434; web site *http://www.rtca.org* for directions. Note: Dress is Business Casual. SUPPLEMENTARY INFORMATION: Pursuant to section 10(a)(2) of the Federal Advisory Committee Act (Pub. L. 92-463, 5 U.S.C., Appendix 2), notice is hereby given for a Special Committee 215 meeting. The agenda will include: Wednesday, April 30, 2008 • Opening Plenary Session (Welcome, Introductions, and Administrative Remarks) • Review and Approval of Agenda for Seventh Plenary • Review and Approval of Sixth Meeting Summary (215-026; RTCA Paper No. XXX-08/SC215-XXX) • DO-262 Normative Appendix ○ Drafting Status Report ○ Review of Action List and Outstanding Actions ○ Review of Comments and Approval Draft ○ Review of FRAC and PMC Approval Processes • DO-270 Normative Appendix ○ Report from Drafting Group ○ Review of Action List and Outstanding Action ○ Subnetwork Operational Approval Process ○ Review and Discussion of FAA Satellite Voice Advisory Circular (D. Robinson) • Closing Plenary Session (Any Other Business, Review of Next Plenary Dates, Adjourn) Attendance is open to the interested public but limited to space availability. With the approval of the chairmen, members of the public may present oral statements at the meeting. Persons wishing to present statements or obtain information should contact the person listed in the FOR FURTHER INFORMATION CONTACT section. Members of the public may present a written statement to the committee at any time. Issued in Washington, DC, on March 26, 2008. Francisco Estrada C., RTCA Advisory Committee. [FR Doc. E8-6927 Filed 4-3-08; 8:45 am] BILLING CODE 4910-13-M DEPARTMENT OF TRANSPORTATION Federal Aviation Administration [Summary Notice No. PE-2008-13] Petition for Exemption; Summary of Petition Received AGENCY: Federal Aviation Administration (FAA), DOT. ACTION: Notice of petition for exemption received. SUMMARY: This notice contains a summary of a petition seeking relief from specified requirements of 14 CFR. The purpose of this notice is to improve the public's awareness of, and participation in, this aspect of the FAA's regulatory activities. Neither publication of this notice nor the inclusion or omission of information in the summary is intended to affect the legal status of the petition or its final disposition. DATES: Comments on this petition must identify the petition docket number involved and must be received on or before April 24, 2008. ADDRESSES: You may send comments identified by Docket Number FAA-2008-0030 using any of the following methods: • Government-wide rulemaking Web site: Go to *http://www.regulations.gov* and follow the instructions for sending your comments electronically. • Mail: Send comments to the Docket Management Facility; U.S. Department of Transportation, 1200 New Jersey Avenue, SE., West Building Ground Floor, Room W12-140, Washington, DC 20590. • Fax: Fax comments to the Docket Management Facility at 202-493-2251. • Hand Delivery: Bring comments to the Docket Management Facility in Room W12-140 of the West Building Ground Floor at 1200 New Jersey Avenue, SE., Washington, DC, between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. *Privacy:* We will post all comments we receive, without change, to *http://www.regulations.gov,* including any personal information you provide. Using the search function of our docket Web site, anyone can find and read the comments received into any of our dockets, including the name of the individual sending the comment (or signing the comment for an association, business, labor union, etc.). You may review DOT's complete Privacy Act Statement in the **Federal Register** published on April 11, 2000 (65 FR 19477-78). *Docket:* To read background documents or comments received, go to *http://www.regulations.gov* at any time or to the Docket Management Facility in Room W12-140 of the West Building Ground Floor at 1200 New Jersey Avenue, SE., Washington, DC, between 9 a.m. and 5 p.m., Monday through Friday, except Federal holidays. FOR FURTHER INFORMATION CONTACT: Jan Thor, ANM-113,

(425)227-2127, Federal Aviation Administration, 1601 Lind Avenue, SW., Renton, WA 98057-3356; or Frances Shaver, ARM-204,

(202)267-9681, Office of Rulemaking (ARM-1), Federal Aviation Administration, 800 Independence Avenue, SW., Washington, DC 20591. This notice is published pursuant to 14 CFR 11.85. Issued in Washington, DC, on March 28, 2008. Pamela Hamilton-Powell, Director, Office of Rulemaking. Petition for Exemption *Docket No.:* FAA-2008-0030. *Petitioner:* Fokker Services, B.V. *Section of 14 CFR Affected:* §§ 26.11, 26.43, 26.45 and 26.49. *Description of Relief Sought:* Fokker Services, B.V., requests their Models F27 Mk200 through Mk1000 and F28 Mk1000 through Mk4000 be exempt from the requirements contained in §§ 26.11, 26.43, 26.45 and 26.49. Section 26.11 requires development of instructions for continued airworthiness applicable to an airplane's electrical wiring interconnection systems. Sections 26.43, 26.45, and 26.49 are requirements related to the development of damage tolerance data for repairs and alterations. [FR Doc. E8-7083 Filed 4-3-08; 8:45 am] BILLING CODE 4910-13-P DEPARTMENT OF TRANSPORTATION National Highway Traffic Safety Administration Petition for Exemption From the Vehicle Theft Prevention Standard; Volkswagen AGENCY: National Highway Traffic Safety Administration (NHTSA), Department of Transportation (DOT). ACTION: Grant of petition for exemption. SUMMARY: This document grants in full the petition of Volkswagen Group of America

(VW)in accordance with § 543.9(c)(2) of 49 CFR part 543, *Exemption from the Theft Prevention Standard* , for the Audi Q5 vehicle line beginning with model year

(MY)2009. This petition is granted because the agency has determined that the antitheft device to be placed on the line as standard equipment is likely to be as effective in reducing and deterring motor vehicle theft as compliance with the parts-marking requirements of the Theft Prevention Standard. DATES: The exemption granted by this notice is effective beginning with model year

(MY)2009. FOR FURTHER INFORMATION CONTACT: Ms. Carlita Ballard, Office of International Policy, Fuel Economy and Consumer Programs, NHTSA,1200 New Jersey Avenue, SE., West Building, W43-439, Washington, DC 20590. Ms. Ballard's phone number is

(202)366-0846. Her fax number is

(202)493-2290. SUPPLEMENTARY INFORMATION: In a petition dated February 15, 2008, VW requested an exemption from the parts-marking requirements of the Theft Prevention Standard (49 CFR part 541) for the Audi Q5 vehicle line beginning with MY 2009. The petition requested an exemption from parts-marking pursuant to 49 CFR part 543, *Exemption from Vehicle Theft Prevention Standard* , based on the installation of an antitheft device as standard equipment for an entire vehicle line. Under § 543.5(a), a manufacturer may petition NHTSA to grant an exemption for one of its vehicle lines per year. VW's submission is considered a complete petition as required by 49 CFR 543.7, in that it meets the general requirements contained in § 543.5 and the specific content requirements of § 543.6. VW's petition provided a detailed description and diagram of the identity, design, and location of the components of the antitheft device for its new multipurpose vehicle line. VW will install its passive, transponder-based, electronic immobilizer antitheft device as standard equipment on its Audi Q5 vehicle line beginning with MY 2009. Key components of the antitheft device will include a passive immobilizer, an immobilizer control unit, an electronic ignition lock, an adapted ignition key, an engine control unit, an electronic steering column lock (ELV), and an automatic gear (if available). VW stated that the device is activated by turning the key in either of the front door locks to the “lock” position or by locking the vehicle with the remote key fob or an optional keyless entry and locking control. The antitheft device will also include an audible and visible alarm feature that will monitor and protect the doors, rear hatch, and hood against unauthorized entry. If an unauthorized entry is attempted, the horn will sound and the vehicle's lights will flash. VW also stated that the vehicle's radio, amplifier and multi-media interface are theft deterrent protected and if removed from the car, the components will not operate unless re-activated by an authorized dealer. VW stated that the Audi Q5's immobilizer prevents the vehicle from being operated by unauthorized persons. When the ignition key is turned to the “on” position, the key's transponder, the immobilizer control unit, the ELV, and the engine control unit initiate a complex set of tests to determine if vehicle start-up should be enabled. If the tests fail, the vehicle cannot be started. The ignition system is monitored in the sense that if an external voltage is applied in an attempt to by-pass the immobilizer system, the alarm is triggered. In addressing the specific content requirements of 543.6, VW provided its own test information on the reliability and durability of its device. VW conducted tests based on its own specified standards and believes that the device is reliable and durable since the device complied with its specified requirements for each test. In its petition, VW further stated that because the Audi Q5 is a new vehicle line, there is no historic theft data published for a similar Audi vehicle line. VW also stated that its antitheft system will be at least as, or more, effective in reducing and deterring theft as other comparable vehicles installed with an alarm and engine immobilizer. VW further stated that the theft reduction benefits from immobilizer systems cited in recently granted petitions for exemptions have included a 70% reduction in 1997 immobilizer-equipped Ford Mustang thefts compared to 1995 models without an immobilizer. Based on Highway Loss Data Institute

(HLDI)data, BMW vehicles experienced theft loss reductions resulting in a 73% decrease in relative claim frequency and a 78% lower average loss payment per claim for vehicles equipped with an immobilizer. The agency agrees that the device is substantially similar to devices in these and other vehicle lines for which the agency has already granted exemptions. The agency also notes that the device will provide the five types of performance listed in § 543.6(a)(3): promoting activation; attracting attention to the efforts of unauthorized persons to enter or operate a vehicle by means other than a key; preventing defeat or circumvention of the device by unauthorized persons; preventing operation of the vehicle by unauthorized entrants; and ensuring the reliability and durability of the device. Pursuant to 49 U.S.C. 33106 and 49 CFR 543.7(b), the agency grants a petition for exemption from the parts-marking requirements of part 541 either in whole or in part, if it determines that, based upon substantial evidence, the standard equipment antitheft device is likely to be as effective in reducing and deterring motor vehicle theft as compliance with the parts marking requirements of part 541. The agency finds that VW has provided adequate reasons for its belief that the antitheft device for the Audi Q5 vehicle line is likely to be as effective in reducing and deterring motor vehicle theft as compliance with the parts-marking requirements of the Theft Prevention Standard (49 CFR part 541). This conclusion is based on the information VW provided about its device. For the foregoing reasons, the agency hereby grants in full VW's petition for exemption for the Audi Q5 vehicle line from the parts-marking requirements of 49 CFR part 541. The agency notes that 49 CFR part 541, Appendix A-1, identifies those lines that are exempted from the Theft Prevention Standard for a given model year. 49 CFR part 543.7(f) contains publication requirements incident to the disposition of all Part 543 petitions. Advanced listing, including the release of future product nameplates, the beginning model year for which the petition is granted and a general description of the antitheft device is necessary in order to notify law enforcement agencies of new vehicle lines exempted from the parts-marking requirements of the Theft Prevention Standard. If VW decides not to use the exemption for this line, it must formally notify the agency. If such a decision is made, the line must be fully marked according to the requirements under 49 CFR 541.5 and 541.6 (marking of major component parts and replacement parts). NHTSA notes that if VW wishes in the future to modify the device on which this exemption is based, the company may have to submit a petition to modify the exemption. Section 543.7(d) states that a Part 543 exemption applies only to vehicles that belong to a line exempted under this part and equipped with the anti-theft device on which the line's exemption is based. Further, section 543.9(c)(2) provides for the submission of petitions “to modify an exemption to permit the use of an antitheft device similar to but differing from the one specified in that exemption.” The agency wishes to minimize the administrative burden that section 543.9(c)(2) could place on exempted vehicle manufacturers and itself. The agency did not intend, in drafting Part 543, to require the submission of a modification petition for every change to the components or design of an antitheft device. The significance of many such changes could be *de minimis* . Therefore, NHTSA suggests that if the manufacturer contemplates making any changes, the effects of which might be characterized as *de minimis* , it should consult the agency before preparing and submitting a petition to modify. Authority: 49 U.S.C. 33106; delegation of authority at 49 CFR 1.50. Issued on: March 31, 2008. Stephen R. Kratzke, Associate Administrator for Rulemaking. [FR Doc. E8-7098 Filed 4-3-08; 8:45 am] BILLING CODE 4910-59-P DEPARTMENT OF TRANSPORTATION Surface Transportation Board [STB Ex Parte No. 290 (Sub-No. 5) (2008-2)] Quarterly Rail Cost Adjustment Factor AGENCY: Surface Transportation Board. ACTION: Approval of rail cost adjustment factor. SUMMARY: The Board has approved the second quarter 2008 rail cost adjustment factor

(RCAF)and cost index filed by the Association of American Railroads. The second quarter 2008 RCAF (Unadjusted) is 1.077. The second quarter 2008 RCAF (Adjusted) is 0.497. The second quarter 2007 RCAF-5 is 0.471. EFFECTIVE DATE: March 31, 2008. FOR FURTHER INFORMATION CONTACT: Pedro Ramirez,

(202)245-0333. [Federal Information Relay Service

(FIRS)for the hearing impaired: 1-800-877-8339.] SUPPLEMENTARY INFORMATION: Additional information is contained in the Board's decision, which is available on our Web site *http://www.stb.dot.gov* . To purchase a copy of the full decision, write to, e-mail or call the Board's contractor, ASAP Document Solutions; 9332 Annapolis Rd., Suite 103, Lanham, MD 20706; e-mail *asapdc@verizon.net* ; phone

(202)306-4004. [Assistance for the hearing impaired is available through FIRS: 1-800-877-8339.] This action will not significantly affect either the quality of the human environment or energy conservation. Pursuant to 5 U.S.C. 605(b), we conclude that our action will not have a significant economic impact on a substantial number of small entities within the meaning of the Regulatory Flexibility Act. Decided: March 31, 2008. By the Board, Chairman Nottingham, Vice Chairman Mulvey and Commissioner Buttrey. Anne K. Quinlan, Acting Secretary. [FR Doc. E8-7079 Filed 4-3-08; 8:45 am] BILLING CODE 4915-01-P DEPARTMENT OF TRANSPORTATION Surface Transportation Board [STB Finance Docket No. 35119] Nittany and Bald Eagle Railroad Company—Temporary Trackage Rights Exemption—Norfolk Southern Railway Company Norfolk Southern Railway Company

(NSR)has agreed to grant non-exclusive, temporary overhead trackage rights to Nittany and Bald Eagle Railroad Company (N&BE) over a portion of NSR's line between milepost 194.2, Lock Haven, PA, and milepost 139.2, Driftwood, PA, a distance of approximately 55 miles. 1 1 A redacted version of the trackage rights agreement between N&BE and NSR was filed with the notice of exemption. The full version of the agreement, as required by 49 CFR 1180.6(a)(7)(ii), was concurrently filed under seal along with a motion for protective order. The request for a protective order is being addressed in a separate decision. The transaction is scheduled to be consummated on or after April 23, 2008, the effective date of the exemption (30 days after the exemption was filed). The temporary trackage rights will expire on December 30, 2008. The purpose of the temporary trackage rights is to allow N&BE adequate bridge train service for temporary, seasonal traffic originating on the N&BE for delivery to an off-line destination. As a condition to this exemption, any employee affected by the acquisition of the temporary trackage rights will be protected by the conditions imposed in *Norfolk and Western Ry. Co.—Trackage Rights—BN* , 354 I.C.C. 605 (1978), as modified in *Mendocino Coast Ry., Inc.—Lease and Operate* , 360 I.C.C. 653 (1980), and any employee affected by the discontinuance of those trackage rights will be protected by the conditions set out in *Oregon Short Line R. Co.—Abandonment—Goshen* , 360 I.C.C. 91 (1979). This notice is filed under 49 CFR 1180.2(d)(8). If it contains false or misleading information, the exemption is void *ab initio* . Petitions to revoke the exemption under 49 U.S.C. 10502(d) may be filed at any time. The filing of a petition to revoke will not automatically stay the transaction. Any stay petition must be filed on or before April 16, 2008 (at least 7 days before the exemption becomes effective). Pursuant to the Consolidated Appropriations Act, 2008, Public Law No. 110-161, 193, 121 Stat. 1844 (2007), nothing in this decision authorizes the following activities at any solid waste rail transfer facility: collecting, storing, or transferring solid waste outside of its original shipping container; or separating or processing solid waste (including baling, crushing, compacting, and shredding). The term “solid waste” is defined in section 1004 of the Solid Waste Disposal Act, 42 U.S.C. 6903. An original and 10 copies of all pleadings, referring to STB Finance Docket No. 35119, must be filed with the Surface Transportation Board, 395 E Street, SW., Washington, DC 20423-0001. In addition, one copy of each pleading must be served on Richard R. Wilson, 127 Lexington Ave., Suite 100, Altoona, PA 16601. Board decisions and notices are available on our Web site at *http://www.stb.dot.gov* . Decided: March 28, 2008. By the Board, David M. Konschnik, Director, Office of Proceedings. Anne K. Quinlan, Acting Secretary. [FR Doc. E8-6865 Filed 4-3-08; 8:45 am] BILLING CODE 4915-01-P DEPARTMENT OF THE TREASURY Office of Thrift Supervision Minimum Security Devices and Procedures AGENCY: Office of Thrift Supervision (OTS), Treasury. ACTION: Notice and request for comment. SUMMARY: The proposed information collection request

(ICR)described below has been submitted to the Office of Management and Budget

(OMB)for review and approval, as required by the Paperwork Reduction Act of 1995. OTS is soliciting public comments on the proposal. DATES: Submit written comments on or before May 5, 2008. A copy of this ICR, with applicable supporting documentation, can be obtained from RegInfo.gov at *http://www.reginfo.gov/public/do/PRAMain.* ADDRESSES: Send comments, referring to the collection by title of the proposal or by OMB approval number, to OMB and OTS at these addresses: Office of Information and Regulatory Affairs, Attention: Desk Officer for OTS, U.S. Office of Management and Budget, 725-17th Street, NW., Room 10235, Washington, DC 20503, or by fax to

(202)395-6974; and Information Collection Comments, Chief Counsel's Office, Office of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552, by fax to

(202)906-6518, or by e-mail to *infocollection.comments@ots.treas.gov.* OTS will post comments and the related index on the OTS Internet Site at *http://www.ots.treas.gov.* In addition, interested persons may inspect comments at the Public Reading Room, 1700 G Street, NW., by appointment. To make an appointment, call

(202)906-5922, send an e-mail to *public.info@ots.treas.gov,* or send a facsimile transmission to

(202)906-7755. FOR FURTHER INFORMATION CONTACT: For further information or to obtain a copy of the submission to OMB, please contact Ira L. Mills at, *ira.mills@ots.treas.gov*

(202)906-6531, or facsimile number

(202)906-6518, Regulations and Litigation Division, Chief Counsel's Office, Office of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552. SUPPLEMENTARY INFORMATION: OTS may not conduct or sponsor an information collection, and respondents are not required to respond to an information collection, unless the information collection displays a currently valid OMB control number. As part of the approval process, we invite comments on the following information collection. *Title of Proposal:* Minimum Security Devices and Procedures. *OMB Number:* 1550-0062. *Form Number:* N/A. *Description:* The requirement that savings associations establish a written security program is necessitated by the Bank Protection Act (12 U.S.C. 1881-1884), which requires the Federal supervisory agencies to promulgate rules establishing minimum standards with which each financial institution must comply with respect to the installation, maintenance, and operation of security devices and procedures to discourage robberies, burglaries, and larcenies, and to assist in the identification and apprehension of persons who commit such acts. *Type of Review:* Extension of a currently approved collection. *Affected Public:* Business or other for-profit. *Estimated Number of Respondents:* 832. *Estimated Number of Responses:* 832. *Estimated Burden Hours per Response:* 2 hours. *Estimated Frequency of Response:* Annually. *Estimated Total Burden:* 1,664 hours. *Clearance Officer:* Ira L. Mills,

(202)906-6531, Office of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552. Dated: March 31, 2008. Deborah Dakin, Senior Deputy Chief Counsel, Regulations and Legislation Division. [FR Doc. E8-6971 Filed 4-3-08; 8:45 am] BILLING CODE 6720-01-P DEPARTMENT OF THE TREASURY Office of Thrift Supervision Minority Thrift Certification Form AGENCY: Office of Thrift Supervision (OTS), Treasury. ACTION: Notice and request for comment. SUMMARY: The proposed information collection request

(ICR)described below has been submitted to the Office of Management and Budget

(202)395-6974; and Information Collection Comments, Chief Counsel's Office, Office of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552, by fax to

(202)906-5922, send an e-mail to *public.info@ots.treas.gov,* or send a facsimile transmission to

(202)906-7755. FOR FURTHER INFORMATION CONTACT: For further information or to obtain a copy of the submission to OMB, please contact Ira L. Mills at, *ira.mills@ots.treas.gov* ,

(202)906-6531, or facsimile number

(202)906-6518, Regulations and Litigation Division, Chief Counsel's Office, Office of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552. SUPPLEMENTARY INFORMATION: OTS may not conduct or sponsor an information collection, and respondents are not required to respond to an information collection, unless the information collection displays a currently valid OMB control number. As part of the approval process, we invite comments on the following information collection. *Title of Proposal:* Minority Thrift Certification Form. *OMB Number:* 1550-0096. *Form Number:* Form 1661. *Description:* OTS uses the results of the certification process to maintain an accurate listing of minority-owned thrifts. OTS provides training, technical assistance, and education programs to those thrifts throughout the year. In addition, OTS uses the list to provide information to potential investors who may be interested in supporting minority-owned thrifts. Finally, OTS reports annually to Congress on its efforts to support minority-owned thrifts, in accordance with Section 301 of the Financial Institutions Reform, Recovery and Enforcement Act of 1989. *Type of Review:* Revision of a currently approved collection. *Affected Public:* Business or other for-profit. *Estimated Number of Respondents:* 22. *Estimated Number of Responses:* 22. *Estimated Burden Hours per Response:* 30 minutes. *Estimated Frequency of Response:* Annually. *Estimated Total Burden:* 11 hours. *Clearance Officer:* Ira L. Mills,

(202)906-6531, Office of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552. Dated: March 31, 2008. Deborah Dakin, Senior Deputy Chief Counsel, Regulations and Legislation Division. [FR Doc. E8-6972 Filed 4-3-08; 8:45 am] BILLING CODE 6720-01-P U.S.-CHINA ECONOMIC AND SECURITY REVIEW COMMISSION Notice of Open Public Hearing AGENCY: U.S.-China Economic and Security Review Commission. ACTION: Notice of Open Public Hearing—April 24-25 2008, New Orleans, Louisiana. SUMMARY: Notice is hereby given of the following hearing of the U.S.-China Economic and Security Review Commission. *Name:* Larry Wortzel, Chairman of the U.S.-China Economic and Security Review Commission. The Commission is mandated by Congress to investigate, assess, evaluate and report to Congress annually on the national security implications and impact of the bilateral trade and economic relationship between the United States and the People's Republic of China, and to provide recommendations, where appropriate, to Congress for legislative and administrative action. Pursuant to this mandate, the Commission will hold a public hearing in New Orleans, Louisiana. Background This event is the fourth in a series of public hearings the Commission will hold during its 2008 report cycle to collect input from leading experts in government, business, industry, academia and the public on the impact of the economic and national security implications of the U.S. growing bilateral trade and economic relationship with China. The April 24-25 hearing is being conducted to obtain commentary on the safety and trade issues related to imported seafood from China. This hearing will address the U.S. government and seafood industry perspectives, as well as the health and safety risks associated with Chinese seafood imports, and will be Co-chaired by Vice Chairman Carolyn Bartholomew and Commissioner Daniel Slane. Information on upcoming hearings, as well as transcripts of past Commission hearings, can be obtained from the USCC Web Site *http//www.uscc.gov* . Purpose of Hearing The hearing is designed to assist the Commission in fulfilling its mandate by examining the effects on the U.S. fishing industry of imported seafood from China and the resulting health and safety risks associated with Chinese seafood imports. The hearing will also highlight how such factors negatively or positively affect U.S. companies, investors, and workers. Copies of the hearing agenda will be made available on the Commission's Web site *http://www.uscc.gov* . Any interested party may file a written statement by April 24, 2008, by mailing to the contact below. The hearing will be held in two sessions, one in the morning and one in the afternoon, on April 24 and a morning session on April 25 where Commissioners will take testimony from invited witnesses. There will be a question and answer period between the Commissioners and the witnesses. Public participation is invited during the open-microphone session for public comment at the conclusion of the afternoon session on April 24. Sign-up for open-microphone session will take place in the morning of April 24 beginning at 8:30 a.m. and will be on first come, first served basis. Each individual or group making an oral presentation will be limited to a total of 5 minutes. Because of time constraints, parties with common interests are encouraged to designate a single speaker to represent their views. DATE AND TIME: Thursday, April 24, 2008, 9 a.m. to 3:45 p.m. and Friday, April 25, 2008, 9 a.m. to 1:30 p.m. Eastern Daylight Time. A detailed agenda for the hearing will be posted to the Commission's Web site *http://www.uscc.gov* in the near future. ADDRESSES: The hearing will be held at the Pan American Life Conference and Media Center, Orleans Room located on the 11th floor in the Pan American Building at 601 Poydras Street, New Orleans, Louisiana 70130. Public seating is limited to about 50 people on a first come, first serve basis. Advance reservations are not required. FOR FURTHER INFORMATION CONTACT: Any member of the public wishing further information concerning the hearing should contact Kathy Michels, Associate Director for the U.S.-China Economic and Security Review Commission, 444 North Capitol Street, NW., Suite 602, Washington DC 20001; phone: 202-624-1409, or via email at *kmichels@uscc.gov* . Authority: Congress created the U.S.-China Economic and Security Review Commission in 2000 in the National Defense Authorization Act (Public Law 106-398), as amended by Division P of the Consolidated Appropriations Resolution, 2003 (Public Law 108-7), as amended by Public Law 109-108 (November 22, 2005), and Public Law 110-161 (December 26, 2007). Dated: April 1, 2008. Kathleen J. Michels, Associate Director, U.S.-China Economic and Security Review Commission. [FR Doc. E8-7014 Filed 4-3-08; 8:45 am] BILLING CODE 1137-00-P 73 66 Friday, April 4, 2008 Notices Part II Department of Justice Antitrust Division United States v. Monsanto Company and Delta and Pine Land Company; Public Comments and Response on Proposed Final Judgment; Notice DEPARTMENT OF JUSTICE Antitrust Division United States v. Monsanto Company and Delta and Pine Land Company; 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 the comments received on the proposed Final Judgment in *United States* v. *Monsanto Company and Delta and Pine Land Company* , No. 1:07-cv-00992, filed in the United States District Court for the District of Columbia on May 31, 2007, and the United States's response to those comments. Copies of the comments and the United States's response to the comments are available for inspection at the Department of Justice Antitrust Division, 325 Seventh Street, NW., Room 215, Washington, DC 20530,

(202)514-2481, 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. J. Robert Kramer II, Director of Operations, Antitrust Division. In the United States District Court for the District of Columbia [Civil Action No.: 1:07-cv-00992] United States of America, Plaintiff, v. Monsanto Company and Delta and Pine Land Company, Defendants. Hon. Ricardo M. Urbina Plaintiff United States's Response to Public Comments Table of Contents Plaintiff United States's Response to Public Comments I. Background A. The United States's Investigation of the Transaction B. The Traited Cottonseed Markets C. The Competitive Effects of the Transaction D. The Proposed Remedy II. Developments Since the Filing of the Complaint A. Approval of Acquirers of the Enhanced Stoneville Assets B. VipCot Assets Offered to Syngenta C. Third Party License Modifications D. Filing of Public Comments III. The Standards Governing the Court's Public Interest Determination A. The Appropriate Legal Standard B. The Appropriate Inquiry Is Whether the Remedy Preserves Competition, Not Whether It Replicates DPL IV. Response to Comments Criticizing the Sufficiency of the Remedy A. Divestiture of the Stoneville Business Unit and Monsanto Germplasm Provide the Acquirer a Firm Foundation on Which to Compete in the MidSouth and Southeast Markets 1. Stoneville Infrastructure 2. Monsanto/Stoneville Germplasm a. The Breeding Process b. Stoneville Germplasm c. Additional Monsanto Germplasm i. Advanced Exotic Yield Lines ii. MAB Populations B. Additional DPL Germplasm Provides Important and Meaningful Value 1. The DPL germplasm is of high quality 2. The acquirer will be able to use this germplasm effectively 3. Monsanto/DPL's use of the germplasm does not diminish its value to the acquirer and provides farmers continued benefits C. The Remedy Preserves Incentives and Opportunities for Effective Traited Cottonseed and Trait Development Competition 1. Syngenta will be able to effectively use the VipCot Assets 2. The remedy will preserve opportunities for trait developers to market non-Monsanto traits in competitive cottonseed 3. The remedy should not—and does not—guarantee the introduction of DuPont's OptimumGat trait 4. The remedy will preserve the number of “platforms” for trait development that existed pre-merger V. Response to Comments That the Remedy Is Not Workable A. The Divestitures and License Changes Are One-Time Events, Not Ongoing Behavioral Remedies B. Monitoring Compliance With the Remedy Will Not Unduly Burden the United States or the Court VI. Response to Comments That Raise Issues Beyond the Scope of the Court's Review A. Crops Other Than Cotton B. Conventional Cottonseed C. The Southwest and West Traited Cottonseed Markets D. Prices for Cottonseed Sold for Livestock Feed E. Alleged Monsanto Exclusionary Business Practices VII. Conclusion Plaintiff United States Response To Public Comments 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 comments received regarding the proposed Final Judgment in this case. After careful consideration of the comments, the United States continues to believe that the proposed Final Judgment will provide an effective and appropriate remedy for the antitrust violation alleged in the Complaint. The United States will move the Court for entry of the proposed Final Judgment after the public comments and this Response have been published in the **Federal Register** , pursuant to 15 U.S.C. 16(d). On May 31, 2007, the United States filed the Complaint in this matter alleging that the proposed acquisition of Delta and Pine Land Company (“DPL”) by Monsanto Company (“Monsanto”) would violate Section 7 of the Clayton Act, 15 U.S.C. 18. Simultaneously with the filing of the Complaint, the United States filed the proposed Final Judgment and a Stipulation signed by plaintiff and defendants consenting to the entry of the proposed Final Judgment after compliance with the requirements of the Tunney Act. Pursuant to those requirements, the United States filed a Competitive Impact Statement (“CIS”) in this Court on May 31, 2007; published the proposed Final Judgment and CIS in the **Federal Register** on June 15, 2007, see *United States* v. *Monsanto Co.* and Delta and Pine Land Co., 72 Fed. Reg. 33336-01, 2007 WL 1708314; and published 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, in The Washington Post for seven days beginning on June 28, 2007 and ending on July 4, 2007. The 60-day period for public comments ended on August 27, 2007, and eleven comments were received as described below and are attached hereto. I. Background A. The United States Investigation of the Transaction On August 14, 2006, Monsanto entered into an agreement to acquire DPL for approximately $1.5 billion. Over the following nine and a half months, the United States conducted an extensive, detailed investigation into the competitive effects of the proposed transaction. As part of this investigation, the United States issued Second Requests to the merging parties, as well as Civil Investigative Demands to all of the major cottonseed companies and cottonseed trait developers. The United States received and considered more than a million pages of responsive material and deposed relevant Monsanto and DPL executives. More than 125 interviews were conducted with customers, competitors, and others with knowledge of the industry and competitive conditions, including national and regional agricultural supply companies, grower organization representatives, USDA cotton experts, and agricultural economists and academics. The United States met repeatedly with concerned parties, including DuPont, one of the commenters, analyzing their allegations and submissions. 1 1 The United States also spoke multiple times with representatives from the offices of the Attorneys General of 27 states interested in the progress of the United States investigation, including representatives of 16 of the 17 states where cotton is grown in the United States (Georgia's office elected not to participate). In this proceeding, thirteen states, representing less than 20% of U.S. cotton production, have signed onto a comment (discussed infra) questioning the proposed Final Judgment. Of the states signing the comment, Delaware, Kentucky, Rhode Island, Utah and West Virginia elected not to participate in any of the communications between the United States and states's representatives during the United States investigation. The comment does not explain either the scope of the investigation, if any, those non-participating states undertook to reach their conclusions or the reasons why none of the commenting states has initiated independent legal action to enjoin the transaction. In its investigation, the United States considered the potential competitive effects of this transaction on numerous products and geographic areas. For several of these, the United States concluded that the proposed merger was unlikely to reduce competition. 2 As the Complaint alleges, the transaction did, however, threaten competition with respect to traited cottonseed sales in two geographic regions—the MidSouth and the Southeast. 3 2 Indeed, the United States concluded that, viewed as a whole, the transaction was likely to create some efficiencies that could benefit consumers. A Monsanto-DPL combination brings together firms with complementary strengths and assets. Monsanto has proficiency in transgenic trait development, and DPL had expertise in cottonseed breeding. Merging allows the two programs to operate in tandem. Through the integration of trait development and cottonseed breeding, traited cottonseed could reach consumers faster and at lower cost . 3 See Complaint at 12-13. B. The Traited Cottonseed Markets Most cottonseed sold today contains “transgenic traits”—genetic material from other organisms that is inserted into the cottonseed germplasm to give the cotton plant desirable characteristics. Two types of transgenic traits currently are available:

(1)Herbicide tolerance traits, such as Monsanto's “Roundup Ready” and recently introduced “Roundup Ready Flex” (“Flex”), which make the cotton plant able to withstand spraying with particular herbicides, and

(2)insect resistance traits, such as Monsanto's “Bollgard” and new “Bollgard II,” which make the cotton plant toxic to certain pests. Cotton farmers overwhelmingly prefer traited seeds because their use significantly reduces labor and input costs. In 2006, farmers planted about 87% of the cotton acres in the U.S. with traited seeds. *USDA Cotton Varieties Planted 2006 Crop Report* . Most traited cottonseed is “stacked” to include both herbicide-tolerant and insect-resistant traits. In the Southeast and MidSouth, 90.8% and 89.3% (respectively) of the seed sold in 2006 included both types of traits, and farmers now rarely purchase seed that contains only an insect-resistant trait. 4 4 Today, traited cottonseeds that contain only insect resistance account for less than 2% of total traited acres. At the time the Complaint was filed, DPL and Monsanto, via its Stoneville business unit, were significant producers of traited cottonseed in the United States. Indeed, DPL and Stoneville together accounted for over 90% of traited cottonseed sales in the MidSouth and Southeast regions of the United States where cotton farmers place the most value on insect-resistant and herbicide-tolerant traits. That vigorous competition would have been lost as a result of the transaction. As the Complaint alleges, Monsanto is currently the dominant provider of insect-resistant and herbicide-tolerant traits for cotton. 5 Monsanto's insect-resistant and herbicide-tolerant traits accounted for over 96% of the transgenic traits in cottonseed nationwide in 2006; over 98% of the traited cottonseed sold in 2006 in the MidSouth and Southeast contained Monsanto's traits. Indeed, Monsanto's traits are the only traits found in any of the traited cottonseed DPL sold prior to the merger. 5 See Complaint at 2-3. DPL was, however, positioning itself to move away from Monsanto's traits by exploring options with several trait producers that were developing insect-resistant and herbicide-tolerant cotton traits. The most advanced of these efforts was work with Syngenta to introduce VipCot—an insect-resistant trait that would compete with Monsanto's Bollgard traits. DPL's work with Syngenta had reached a stage where DPL had successfully introduced VipCot into 42 of its elite breeding lines. 6 DPL had already stacked five of the VipCot traited lines with Flex prior to the merger and anticipated commercializing those lines in approximately 2009. Following DPL's breeding protocols, DPL anticipated that stacked versions of the other 37 VipCot lines would have been ready for commercialization sometime between 2012 through 2016. 6 As discussed below, the relief provided by the proposed Final Judgment calls for divestiture of 43 DPL lines containing VipCot. The 43rd line included in the VipCot Assets is a line that DPL acquired from Syngenta in 2006 that already contained VipCot. DPL's efforts with respect to a non-Monsanto herbicide-tolerant trait were at a more preliminary stage. In the summer of 2006, DPL entered into a licensing agreement with DuPont to introduce seed with OptimumGat, an herbicide-tolerant trait that would compete with Monsanto's Flex trait. At the time the Complaint was filed, DPL had not successfully introduced OptimumGat into any of its elite breeding lines. Rather, development work to advance the OptimumGat project remained primarily with DuPont. As a backup to the OptimumGat venture, DPL had also entered into agreements to test two other herbicide-tolerant traits that would compete with Monsanto's Flex, including a trait being developed by Bayer called Glytol. Using VipCot in combination with one of the three herbicide tolerance options that DPL was exploring, DPL envisioned bringing a limited quantity of cottonseed with a non-Monsanto stack of insect-resistant and herbicide-tolerant traits to market as early as 2012. But in light of standard breeding and testing time requirements, it likely would have taken DPL several years longer to entirely phase out Monsanto's traits. Equally important, DPL's ability or willingness to switch totally away from Monsanto's traits was dependent on several assumptions—namely that farmers were satisfied with VipCot's performance versus Monsanto's Bollgard traits, and that DPL found a successful non-Monsanto herbicide-tolerant trait in the next few years. As the Complaint further alleges, Monsanto knew that DPL was working with other trait companies and feared that a possible outcome of those partnerships would be that DPL ceased offering Monsanto's traits in its cottonseeds. 7 Monsanto thus had begun to take steps to strengthen its own proprietary seed platform to support its cottonseed trait business. In fact, the United States's investigation revealed that Monsanto was making a concerted effort to grow its share of traited cottonseed sales. 7 See Complaint at 9-10. Foremost among these efforts was Monsanto's acquisition in 2005 of Stoneville, which had approximately 15% of the market for traited cottonseed nationwide and a 33% and 9% share of the MidSouth and Southeast markets, respectively. After acquiring Stoneville, Monsanto made significant investments in the company, including: Investing in upgrades of new buildings and greenhouses, lab equipment, ginning and delinting equipment, and warehouse and equipment storage; hiring additional employees for the breeding facilities, particularly at its Maricopa, Arizona, breeding facility which targeted creating varieties for the Southeast; improving Stoneville's manufacturing facilities, such as adding bagging, dust collection, and handling equipment; and improving Stoneville's molecular marker capabilities and library. Monsanto also had been engaging in other efforts to develop proprietary cotton germplasm. Those included

(a)researching exotic strains of cottonseed (which the proposed Final Judgment refers to as the “Advanced Exotic Yield Lines”),

(b)mapping molecular markers for select breeding crosses that would enable Monsanto to expedite identification and further breeding of the most promising progeny from those crosses (which the proposed Final Judgment refers to as the “MAB Populations”), and

(c)establishing the Cotton States program, through which Monsanto obtains licenses to promising germplasm from university breeding programs and private breeders, and, after introducing traits, licenses the resulting traited cottonseed varieties to small cottonseed companies and distributors seeking to sell traited cottonseed under their own brands. Monsanto's internal business plans projected that as a result of these efforts, Stoneville's market share in the Southeast and MidSouth would grow substantially over the next few years. Indeed, Monsanto projected that Stoneville, with Monsanto traits, and DPL, with non-Monsanto traits, would have roughly equal market shares by approximately 2015, with Dow and Bayer traited seeds holding much smaller shares. Accordingly, if unremedied, the combination of Monsanto and DPL would have combined the two largest traited cottonseed options for farmers in the MidSouth and Southeast. 8 8 The United States's investigation found that Bayer's efforts prior to the merger to develop germplasm for the Southeast and MidSouth, if successful, would not likely bear fruit any sooner than 2016. Given the early stage of Bayer's breeding efforts in those geographic areas, the United States did not rely on this as a source of potential entry. In contrast, Dow has developed some varieties suitable for the MidSouth and potentially the Southeast, which will enter the market some time in the 2008 to 2011 time frame. However, given limitations in its current trait licensing agreements with Monsanto, it was unclear that entry of Dow varieties would have a significant competitive effect in those markets. C. The Competitive Effects of the Transaction Based on this evidence, the United States determined that the merger of the two companies would likely lessen competition in the near, medium and long term. In the near term, absent the transaction, Monsanto's efforts to increase Stoneville share in the MidSouth and Southeast would give farmers more choices and could lead to lower prices. 9 Also in the near term (beginning in approximately 2009), the entry of DPL seed containing Syngenta's VipCot trait stacked with Monsanto's Flex trait could have offered farmers a new insect-resistant trait option and put some pressure on the price for insect-resistant traits. 10 The United States's investigation revealed that the most significant competitive effect of the transaction likely would have occurred in the medium term (beginning in approximately 2012) when DPL would first be able to offer cottonseed stacked solely with non-Monsanto traits and farmers in the MidSouth and Southeast would benefit from the emergence of competition between two germplasm/trait platforms, namely, Stoneville seed with Monsanto traits and DPL seed with VipCot and a non-Monsanto herbicide-tolerant trait. 9 With its dominance in traits, Monsanto might have recaptured any seed price reductions through higher trait fees. 10 Because DPL would have had to combine VipCot with a Monsanto herbicide-tolerant trait, Monsanto might have recaptured any reduction in fees for an insect-resistant trait through increases in fees for Monsanto's herbicide-tolerant trait. The United States also found that Monsanto's acquisition of DPL, if unremedied, would threaten longer term harm by deterring or delaying the entry of new types of cotton traits in the MidSouth and Southeast. 11 Cotton trait developers would not have a seed partner independent of Monsanto with seeds suitable for the MidSouth and Southeast. Given the significance of the MidSouth and Southeast cotton growing regions, the inability to reach farmers in these regions would reduce potential returns from investments in developing cotton traits. And even if other potential sources of revenue for trait developers were sufficient to support continued investment in cotton trait development, 12 the benefits of these investments would not reach farmers in the MidSouth and Southeast. 11 In addition to potentially new insect resistant and herbicide tolerant traits, there is current transgenic trait research regarding, among other things, drought tolerance, nematode resistance and yield. 12 These other revenue opportunities arise from the fact that

(a)many potential cotton traits have applications across other crops, including corn and soy, that offer significantly more revenue potential than cotton,

(b)the demand for traited cottonseed outside the United States is significant and growing, and

(c)there is substantial cotton acreage within the United States in regions other than the MidSouth and Southeast, namely the Southwest and West. D. The Proposed Remedy The proposed Final Judgment remedies the anticompetitive effects of the acquisition alleged in the Complaint-the elimination of competition between DPL and Monsanto for the development, breeding and sale of traited cottonseed and the elimination of DPL as a partner independent of Monsanto for developers of traits that would compete against Monsanto-in three principal ways: First, the proposed Final Judgment requires Monsanto to divest the Enhanced Stoneville Assets to an acquirer who is capable of using the assets to compete effectively. The Enhanced Stoneville Assets include Stoneville's U.S. cottonseed business, key cottonseed lines developed by DPL for the MidSouth and Southeast, and additional Monsanto cotton breeding assets. The Enhanced Stoneville Assets provide the acquirer what it needs to continue Monsanto's efforts to increase Stoneville's share and be an effective ongoing seed competitor in the near term and beyond. Moreover, the acquirer will be able to use these assets, on its own or in partnership with other trait developers, to breed and commercialize high quality cottonseed for the MidSouth and Southeast with non-Monsanto traits, preserving medium and longer-term competition that would otherwise have been lost as a result of the merger. Second, the proposed Final Judgment requires Monsanto to divest the VipCot assets to Syngenta and to allow Syngenta to breed with the VipCot traited lines. This will preserve the potential for near term benefits from VipCot entry, as well as medium and longer term benefits from stacking VipCot with non-Monsanto herbicide traits (including other nascent traits) and developing improved germplasm. Third, the proposed Final Judgment requires Monsanto to modify two sets of licenses to eliminate restrictions on the use of non-Monsanto traits:

(1)Its cottonseed trait licenses with seed companies to permit licensees to breed and sell, without penalty, cottonseed containing non-Monsanto traits and cottonseed containing both licensed Monsanto traits and non-Monsanto traits, and

(2)its Cotton States licenses to remove any provision that allows Monsanto to terminate the license if the licensee sells cottonseed containing other traits. In the United States's judgment, the asset divestitures and license modifications required by the proposed Final Judgment remedy the competitive harms identified in the Complaint. II. Developments Since the Filing of the Complaint The United States filed the Complaint and Proposed Final Judgment on May 31, 2007. The Court entered the Hold Separate and Preservation of Assets Stipulation and Order on June 1, 2007, and Monsanto completed its acquisition of DPL on that same date. Since the filing of the Complaint, the following events have occurred in furtherance of the requirements set forth in the proposed Final Judgment and the Tunney Act: A. Approval of Acquirers of the Enhanced Stoneville Assets Section IV.E. of the proposed Final Judgment requires defendants to divest the Enhanced Stoneville Assets to an acquirer acceptable to the United States. The acquirer must have a credible commitment to the traited cottonseed market and have the intent and capability of competing effectively. Shortly after acquiring DPL, Monsanto proffered Bayer CropScience (“Bayer”) and Americot Inc. (“Americot”) to the United States as potential acquirers of the Enhanced Stoneville Assets, with Bayer set to acquire all of the divestiture package except for certain assets relating to the Southwest market which would be sold to Americot. The United States evaluated the proposed acquirers, including analyzing the terms of the proposed purchase agreements, the terms of other recent contracts between Monsanto and Bayer, the market presence of both proposed acquirers, and other information bearing upon the acquirers' capabilities to use the divested assets effectively in competition with Monsanto/DPL. 13 13 The United States was already familiar with both Bayer and Americot's existing U.S. cottonseed operations, having interviewed representatives of these companies on numerous occasions and reviewed business documents provided by both companies during the Monsanto/DPL investigation. Bayer proposed to purchase the bulk of the Enhanced Stoneville Assets for $310 million. Its commitment to the cottonseed market is demonstrated by, among other things, its successful entry into the Southwest cottonseed market under the Fibermax and AFD brands. 14 Bayer's growth in this market has been impressive; it entered the Southwest market in 1999 and, by 2006, had a significant share of seed sales in that region and had displaced DPL as the market leader. In addition to cottonseed sales, Bayer has had an active cottonseed trait development program, which has resulted in the marketplace introduction of its Liberty Link herbicide-tolerant trait. 15 In addition to these cottonseed efforts, Bayer also operates one of the world's largest crop protection and agricultural chemical companies, providing it ready access to agricultural distribution channels in the MidSouth and Southeast as well as pesticide, herbicide, and seed treatment products to complement its cottonseed offerings. 14 Bayer's willingness to commit such a large amount of capital to acquiring the assets also tends to indicate Bayer's interest in using the Enhanced Stoneville Assets to create a viable competitor to Monsanto/DPL. 15 Liberty Link makes cotton tolerant to glufosinate herbicides and is only available in Bayer's FiberMax cottonseeds, which are primarily used in the Southwest where they perform well. Despite these strengths, Bayer has not been successful in cottonseed sales in the MidSouth and Southeast, largely as a result of inferior germplasm for those regions. Acquiring the Enhanced Stoneville Assets will enable Bayer to become a more effective competitor in the MidSouth and Southeast 16 by giving Bayer high-quality germplasm specifically targeted toward the regions' growing conditions, breeding stations focused on developing varieties for those regions, and experienced personnel. 17 16 Upon acquiring Stoneville, Bayer publicly noted, “[t]he new germplasm and the geographic reach of the Stoneville business East of Texas ideally complement Bayer's cotton seed and trait business.” See May 31, 2007 press release, “Bayer CropScience agrees to acquire U.S. cotton seed company Stoneville for US-$310 million,” available at < *http://www.bayercropscience.com/bayer/cropscience/cscms.nsf/id/20070529_EN?open&ccm=400* >. 17 In its submitted comments, DuPont specifically questions Bayer's ability to compete in the MidSouth and Southeast, citing the fact that Bayer had not successfully penetrated those markets in the past. DuPont Comments at 18. See also AAI Comments at 16. However, DuPont's claim merely highlights Bayer's prior difficulty in accessing or developing competitive germplasm for these regions, rather than speaking to Bayer's ability to succeed once it has such germplasm. That Bayer can fully succeed when it has access to competitive germplasm is well documented by its successful entry in the Southwest market. To avoid creating any competitive issue in the Southwest where Bayer is strong, Bayer did not acquire that portion of the Enhanced Stoneville Assets best suited for producing traited cottonseed for the Southwest region of the United States—i.e., the assets related to Stoneville's NexGen brand of cottonseed. 18 Those assets, which include cottonseed lines and a dedicated breeding program targeting the Southwest, generated over $16 million in sales for Stoneville in 2006, and Monsanto projected they would generate $36 million in sales by 2010. Americot, a regional cottonseed company founded in 1987 that sells seed predominantly in west Texas, acquired the NexGen assets for just over $6 million. With a recently upgraded breeding facility dedicated to developing lines for the Southwest, Americot is well positioned to use the NexGen assets effectively. 18 Stoneville started its NexGen germplasm program to develop cottonseed adapted to growing conditions in the Southwest growing region. Bayer's Fibermax and AFD brands also have a significant presence in this region. Based on analysis of these factors, the United States determined that divestiture of the Enhanced Stoneville Assets to Bayer and Americot satisfied the objectives of the proposed Final Judgment and approved the proposed acquirers. Monsanto divested the Enhanced Stoneville Assets on June 19, 2007. 19 19 The sale of divestiture assets during the pendency of the Tunney Act review of a proposed final judgment is consistent with the United States's standard practice, as is permitting closing of the transaction challenged in the Complaint. The materials filed with the Complaint included a Hold Separate and Preservation of Assets Stipulation, requiring the parties to maintain certain assets separate after the close of the merger (in this instance, DPL's assets) until the United States was assured that the acquirer or acquirers proposed by Monsanto for the Enhanced Stoneville Assets would meet the standards set forth in the proposed Final Judgment (i.e., the acquirer was capable of operating a viable cottonseed business using the divested assets). This procedural setting allowed Monsanto and DPL to close their merger shortly after the Complaint and Proposed Final Judgment were filed and to expeditiously complete the sale of the Enhanced Stoneville Assets to Bayer and Americot, thereby ensuring that neither the Enhanced Stoneville Assets nor DPL were held in competitive limbo during the pendency of the Court's review. B. VipCot Assets Offered to Syngenta Section V of the proposed Final Judgment requires Monsanto to offer certain DPL cottonseed lines containing Syngenta's traits (the “VipCot Assets”) to Syngenta. Under the proposed Final Judgment, Monsanto cannot satisfy the required divestiture of the VipCot Assets without the United States first approving the terms of the licenses pursuant to which Monsanto offers Syngenta the assets. Since May 31, 2007, the United States had numerous discussions with Monsanto and Syngenta regarding the terms of these licenses. On August 27, 2007, Monsanto and Syngenta entered into an interim Material Transfer and Use Agreement to facilitate transfer of VipCot traited cottonseed to Syngenta for further development prior to Monsanto providing final licenses that meet the terms of the proposed Final Judgment. Pursuant to that agreement, Monsanto delivered to Syngenta certain seeds that the proposed Final Judgment requires Monsanto to offer to Syngenta. After obtaining approval from the United States, Monsanto, on November 27, 2007, offered to Syngenta the licenses required by the proposed Final Judgment. C. Third Party License Modifications Section VI of the proposed Final Judgment requires Monsanto to revise certain third-party cottonseed licenses and gives the United States sole discretion to approve the proposed revisions. The United States engaged in continuing negotiations with Monsanto to ensure that the revisions satisfied the terms of the proposed Final Judgment. On November 15, 2007, Monsanto, pursuant to Section VI.B. of the proposed Final Judgment, provided to the United States for its approval copies of the modified licenses Monsanto intended to offer to third party seed companies; the United States approved the modified licenses on November 20, 2007. Monsanto then provided to the licensees the offers containing the modified license language. The offers remain open until March 31, 2008. D. Filing of Public Comments During the 60-day public comment period called for by the Tunney Act, the United States received comments from the following eleven organizations and groups: the American Antitrust Institute (“AAI”); Attorneys General of Virginia, Arkansas, Delaware, Kentucky, Maryland, New Mexico, North Carolina, Ohio, Oklahoma, Rhode Island, Tennessee, Utah, and West Virginia (the “States”); California Consumers United (“CCU”); E.I. du Pont de Nemours & Co. (“DuPont”; the Illinois Stewardship Alliance (“ISA”); the International Center for Technology Assessment/Food Safety (“ICTA”); a comment signed by the president of Plains Justice, the president of the Women, Food, and Agriculture Network, and the president of the Iowa Farmers Union (“Plains Justice”); a comment signed by a group of Texas cotton gins and other cotton based associations (“Texas Cotton Associations”); the Ohio Farmers Union (“OFU”); the Organization for Competitive Markets (“OCM”); and the Wisconsin Farmers Union (“WFU”). The criticisms offered by the Commenters generally fall into four areas:

(1)The appropriate standard of review;

(2)the sufficiency of the divestiture to preserve competition in the relevant markets;

(3)the workability of the remedy; and

(4)purported competitive harms not alleged in the Complaint. Upon careful review, the United States believes that nothing in the comments warrants any changes to the proposed Final Judgment or is sufficient to suggest that entry of the proposed Final Judgment is not in the public interest. We address these issues below and explain why the criticisms raised in the comments are not valid. III. The Standards Governing the Court's Public Interest Determination A. The Appropriate Legal Standard As discussed in detail in the Competitive Impact Statement (at 23-27), the Court, in making the public interest determination called for by the Tunney Act, is required to consider certain factors listed in the Act relating to the competitive impact of the judgment and whether it adequately remedies the harm alleged in the complaint. 20 This public interest inquiry is necessarily a limited one as the United States is entitled to deference in crafting its antitrust settlements, especially with respect to the scope of its complaint and the adequacy of its remedy. *See generally United States* v. *Microsoft Corp.,* 56 F.3d 1448, 1458-62 (D.C. Cir. 1995); *United States* v. *SBC Commc'ns,* 489 F.Supp.2d 1, 12-17 (D.D.C. 2007). 20 See 15 U.S.C. 16(e)(1)(A) & (B). The Microsoft court explained that a court making a public interest determination under the Act should consider, 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. Microsoft, 56 F.3d at 1458-62. With respect to the scope of the complaint, the Tunney Act review does not provide for an examination of possible competitive harms the United States did not allege. *See, e.g., Microsoft,* 56 F.3d at 1459 (stating that the district judge may not “reach beyond the complaint to evaluate claims that the government did *not* make”). 21 The reviewing court may look beyond the scope of the complaint only when the complaint has been “drafted so narrowly as to make a mockery of judicial power.” *SBC Commc'ns,* 489 F.Supp.2d at 14. That is not the case here as the Complaint properly alleges the harm the transaction is likely to cause in the relevant product and geographic markets. Indeed, multiple commentors recognized the sufficiency of the Complaint: The States, for example, note that “the United States acknowledges the significant anticompetitive effects that the acquisition will have on the development, production and distribution of cotton biotech traits and seeds.” 22 DuPont similarly states that “the Complaint filed by the Justice Department's Antitrust Division details the serious harm to farmers and consumers that will result,” and further acknowledges that the “Complaint sets forth a clear and compelling story of the competitive injury that will result from the proposed transaction.” 23 21 Were a court to reject a proposed decree on the grounds that it failed to address harm not alleged in the complaint, it would offer the United States what the Court of Appeals for the D.C. Circuit referred to as a “difficult, perhaps Hobson's choice,” in that the United States would have to either redraft the complaint and pursue a case it believed had no merit, or drop its case and allow conduct it believed to be anticompetitive to go unremedied. Microsoft, 56 F.3d at 1456. 22 States Comments at 6. 23 DuPont Comments at 2 & 19. With respect to the sufficiency of the proposed remedy, a district court must accord due respect to the United States's views of the nature of the case, its perception of the market structure, and its predictions as to the effect of proposed remedies. *E.g., SBC Commc'ns,* 489 F.Supp.2d at 17 (United States entitled to “deference” as to “predictions about the efficacy of its remedies”); see also CIS at 24-26. Under this standard, the United States “need only provide a factual basis for concluding that the settlements are reasonably adequate remedies for the alleged harms.” *SBC Commc'ns,* 489 F.Supp.2d at 17. DuPont, referencing the Division's review of Monsanto's abandoned attempt to purchase DPL in 1998, suggests that the “government has an extra burden * * * when it changes its view on an identical transaction.” 24 But the assertion finds no support in the language of the statute or the caselaw. This is not surprising given that it contravenes long-established precedent holding that a prosecutor's exercise of discretion carries no estoppel effect. Moreover, DuPont's position would inappropriately require the court to engage in extensive fact finding of historical events—in essence, a trial within a trial—simply to determine whether the two transactions were in fact “identical” and whether the government accepted a less effective remedy than it would have the first time. 25 24 DuPont Comments at 3. 25 In fact, DuPont's factual premise is flawed. Contrary to DuPont's suggestion, the fact that Monsanto abandoned its initial proposed acquisition of DPL in the face of a threatened enforcement action by the United States does not imply that no remedy would have been acceptable to the United States in 1999. Rather, it implies only that Monsanto was at that time unwilling to agree to remedies deemed necessary by the United States. B. The Appropriate Inquiry Is Whether the Remedy Preserves Competition, Not Whether It Replicates DPL Some of the commentors criticize the remedy, particularly the Enhanced Stoneville Assets divestiture, for not creating a competitor that mirrors DPL in scope and independence. 26 But they pose the wrong standard for evaluating the effectiveness of the remedy. Because the antitrust laws seek to protect competition, the purpose of the remedy is not to recreate DPL but to preserve the competition that DPL brought to the market—to ensure that cotton farmers continue to realize the competitive benefits they would have had but for the merger. 26 See, *e.g.* , States Comments at 7 (“divested Stoneville is not the equivalent of DPL”); WFU Comment at I (proposed remedy “does not even come close to replacing independent DPL”). Thus, the key questions in evaluating the remedy are:

(1)Does it ensure that farmers will continue to benefit from competition to develop, commercialize and sell cottonseed in the MidSouth and Southeast?, and

(2)Does it preserve the likely benefits to competition that would have arisen from development of cottonseed for the MidSouth and Southeast containing non-Monsanto traits? The proposed remedy does both, as we explain in more detail below. For some commentors, however, no remedy would suffice for this transaction or even any other potential acquisition of DPL. They essentially argue not only that the sole effective remedy in this case would be to block the transaction outright but that DPL must be kept as it is—independent of any trait provider—in perpetuity, available at any time for partnership with any trait provider that chooses to work with it. 27 This is a extraordinary proposition, and it is wrong. It relies on a static view of the market, presuming that DPL is essential to a competitive traited cottonseed market; it discounts the incentives and abilities of others, such as Bayer and Syngenta, to compete; it ignores market facts, such as Stoneville's efforts and growing success in the MidSouth and Southeast; and it would deny DPL and consumers the efficiencies that would come from vertical integration with a trait provider (evidenced by the significant number of seed companies that are vertically integrated into trait development). 27 See, e.g., States Comments at 7 (“[S]toneville has been divested to Bayer, a trait development competitor of Monsanto. Because of this, Stoneville can never duplicate DPL's unique position as an independent cotton seed company that can use its successful and high-quality germplasm to partner with several different biotech companies to develop viable competitive alternatives to Monsanto's monopolies in traits.”); OFU Comments at 1 (Enhanced Stoneville Assets do “not take the place of an independent Delta and Pine Land”). In short, the remedy, when considered in light of the applicable legal standard and the appropriate inquiry, satisfies the public interest requirements set forth in the Tunney Act. IV. Response to Comments Criticizing the Sufficiency of the Remedy Several commenters offer criticisms regarding the sufficiency of particular aspects of the remedy. 28 Before addressing these criticisms, it is important to note that the remedy should be evaluated as a whole. It is not necessary that each asset included within the remedy package, on a stand-alone basis, sufficiently preserves competition. Rather, the key determination is whether, as directed by the proposed Final Judgment, the entire remedy maintains competition for the development, commercialization and sale of traited cottonseed in the relevant markets. The remedy here accomplishes this goal by bringing together: 28 See States Comments at 6-8; ICTA Comments at 6-8; AAI Comments at 8-16; DuPont Comments at 9-18; OFU Comments at 1; WFU Comments at 1; Texas Cotton Associations at 2; ICTA Comments at 1; Plains Justice Comments at 1; ISA Comments at 1; 0CM Comments at 2. • An ongoing, historically successful cottonseed company, Stoneville, that has sold cottonseed in the MidSouth and Southeast since 1922, and in which Monsanto has recently invested heavily; • Changes in Stoneville's trait licenses with Monsanto that give the purchaser of the Enhanced Stoneville Assets terms similar to those held by DPL; • All of Monsanto's ongoing germplasm enhancement efforts that supported its internal predictions of substantial Stoneville market share growth over the next five years; • Eight DPL elite conventional breeding lines that serve as the germplasm source for approximately 60% of DPL's sales in the MidSouth and Southeast; • Twelve DPL elite conventional breeding lines that DPL anticipated would be the germplasm source for its next generation of traited seed in the MidSouth and Southeast; • The requirement that the purchaser of the Enhanced Stoneville Assets be capable of and committed to using the assets to compete for traited cottonseed sales in the relevant markets; • Divestiture to Syngenta of the VipCot development work to prevent any significant delay in bringing cottonseed with non-Monsanto traits to the marketplace; and • Changes in Monsanto's trait license agreements with other cottonseed companies to allow them, without penalty, to stack non-Monsanto and Monsanto traits and to sell cottonseed that includes non-Monsanto traits. This far-reaching remedy does not depend on the future success of each and every one of its components. Even if some component of the remedy were to fall short of expectations—e.g., one of the next-generation DPL lines fails to continue exhibiting the high performance characteristics that it has exhibited thus far—it would not jeopardize the efficacy of the remedy. Taken as a whole, there is no question that the remedy satisfies its goal of curing the competitive harms alleged in the Complaint. Nevertheless, we respond below to commentors' particular concerns. A. Divestiture of the Stoneville Business Unit and Monsanto Germplasm Provide the Acquirer a Firm Foundation on Which To Compete in the MidSouth and Southeast Markets Some commenters claim that Stoneville will not provide the acquirer of the Enhanced Stoneville Assets with an adequate foundation on which to compete against Monsanto/DPL. 29 29 See DuPont Comments at 6, 13 and 14; 0CM Comments at 2; States Comments at 4 and 7. Stoneville, however, is an ongoing business, which has operated in the relevant markets for over 80 years and has significant capabilities and growth potential. It offers high quality germplasm and has a strong developmental pipeline. Its divestiture, coupled with additional cotton germplasm from Monsanto's breeding programs, will provide the principal acquirer—Bayer—a well-developed infrastructure and significant germplasm assets. 1. Stoneville Infrastructure When Monsanto acquired Stoneville in 2005, Stoneville was a freestanding cottonseed company with a strong breeding program, as well as a national sales and marketing force. These existing assets had been sufficient to position Stoneville as a national provider of traited cottonseed—second only to DPL in the MidSouth and Southeast. As described above, Monsanto nonetheless took several steps to enhance Stoneville's breeding capabilities. With these investments, Stoneville is poised for significant growth, as reflected by Monsanto's internal projections. DuPont nevertheless suggests that Stoneville's lack of viability as an ongoing business is evidenced by trait developers choosing not to work with Stoneville between 1999 and 2005, when Stoneville was independent of Monsanto. 30 In making this argument, DuPont fails to note the fundamental reason why trait companies, including DuPont, chose not to work with Stoneville; namely, that under Stoneville's licenses with Monsanto at that time, Stoneville could not stack a non-Monsanto trait with a Monsanto trait. 31 Similarly, Stoneville was likely to be reluctant to provide a platform for an unproven trait because the terms of its Monsanto licenses became less lucrative if it worked with a non-Monsanto trait (e.g., it received a smaller share of the trait fee collected by Monsanto from farmers). In contrast, DPL could freely work with non-Monsanto traits, including stacking them with Monsanto traits, without risking reduction in its fee share or losing its Monsanto trait license altogether. The Enhanced Stoneville Assets include trait licenses from Monsanto that are comparable to those held by DPL pre-merger, and free of the restrictions that previously existed in Stoneville's licenses. 30 DuPont Comments at 15. 31 DuPont further suggests that Stoneville's inferiority as a trait partner is evidenced by Monsanto choosing to purchase DPL. DuPont overlooks the important fact that DPL had a pending lawsuit against Monsanto under which Monsanto faced a potential $2 billion liability. By purchasing DPL, Monsanto eliminated that liability. Although not a merger-specific efficiency, eliminating this potential liability provides an explanation for Monsanto's decision to undertake the acquisition. Monsanto's desire to resolve that litigation also contradicts ISA's assertion that “the clear reason for Monsanto's acquisition of Delta is elimination of competition in seeds.” ISA Comments at 1. DuPont also claims that the divestiture is insufficient in that it does not provide the acquirer enough breeding stations, comparing DPL's eleven global breeding stations with Stoneville's two breeding stations. 32 That comparison, however, is misleading. Though DPL has eleven breeding stations worldwide, only five develop varieties for the MidSouth and Southeast. The divestiture includes the two breeding facilities that Stoneville used for developing MidSouth and Southeast varieties, 33 and Bayer has two additional breeding stations located in those regions, bringing Bayer's total to four after the divestiture. Accordingly, as a result of the sale of Enhanced Stoneville assets to Bayer, DPL-Monsanto and Bayer will have breeding infrastructures similar in size and scope focused upon developing varieties suited for the MidSouth and Southeast. 32 DuPont Comments at 15; see also States Comments at 3. 33 Monsanto also used facilities in Georgia and North Carolina in part for cottonseed development. Because Monsanto used those facilities for development of several crops besides cotton, and Monsanto included in the Enhanced Stoneville Assets the cottonseed-related tangible assets kept at those sites, the United States did not require divestiture of the real property supporting those facilities. 2. Monsanto/Stoneville Germplasm The remedy provides the acquirer of the Enhanced Stoneville Assets all U.S. Stoneville cotton germplasm, as well as germplasm from Monsanto's Advanced Exotic Yield and Marker Assisted Breeding programs. For various reasons, commentors fail to understand the significance of these divestitures. a. The Breeding Process Much of the criticism results from lack of familiarity with the cottonseed breeding process. To address that deficiency, we provide below a short primer on cottonseed development. There are two breeding stages in the development of quality, traited cottonseed. Breeders first develop elite conventional (nontraited) lines and, from those, they proceed to develop commercial traited varieties. In developing an elite conventional line, the breeder begins by crossing two elite lines that the breeder anticipates will produce quality offspring. The result of that cross will be many progeny plants with differing characteristics. The breeder then evaluates and selects some subset of the progeny as promising enough to continue in the breeding process. In the greenhouse, the breeder then self-pollinates the progeny plant (i.e., crosses the plant with itself), evaluates its progeny, and makes further selections. This process is typically repeated four times in the greenhouse as the breeder continues to make selections based on observable plant characteristics. Promising lines then are grown in the field and subjected to additional testing. At the end of this process, which takes approximately six years, the finished line can take either or both of two paths. If the seed company intends to commercialize the line as a conventional variety, the company will subject the line to an additional year of field trials and then over the course of the next two years “bulk” the line up for commercial sale. If the seed company intends to use the finished line as a traited variety, the seed company will subject the line to a separate procedure. The finished line (the “recurrent parent”) will first be crossed with a donor plant that contains the desired trait to introduce or “introgress” the trait into the recurrent parent line. After that initial cross, progeny plants are selected on the basis of agronomic characteristics and the presence of the trait. Those plants are then typically “backcrossed” with the recurrent parent, which involves pollinating the plants with pollen from the recurrent parent. Backcrossing brings the plant closer to the genetics of the recurrent parent, except that the trait is now present. Breeders typically backcross three to five times. Once the backcrossing is completed, the seed company puts the resulting traited seed through a period of increased testing and eventually bulking up for commercialization. Limited quantities of a traited variety from that recurrent parent will be commercially available approximately five years after the recurrent parent is available for breeding. 34 34 Breeding a traited variety from elite parents can take as little as four years or as long as seven. The seven year outer time frame can be reduced by several means, including: using counter-seasonal breeding; using molecular markers to reduce the number of crosses used in introgression and increase stages; using high quality germplasm as the trait donor, in the case of creating a stacked variety, using a trait donor that contains both of the desired traits; limiting the number of official variety trials prior to making the seed available for sale; and bringing a more limited volume of seed to market in the launch year. b. Stoneville Germplasm The proposed Final Judgment provides the acquirer of the Enhanced Stoneville Assets with all of Stoneville's U.S. germplasm. 35 DuPont, however, questions the likelihood that the varieties in Stoneville's development pipeline will be successful. 36 The evidence, however, shows the strength of the pipeline and, as Monsanto itself had predicted, its strong likelihood of commercial success. 35 As discussed above, this includes all germplasm with the exception of the NexGen varieties Americot acquired. 36 DuPont Comments at 9-10. Stoneville has over fifty lines in its pipeline for possible commercialization in the MidSouth and Southeast between 2008 and 2012. Stoneville's pipeline is the product of its traditional focus on mid- to full-season varieties found in the MidSouth as well as a more-recent sustained and intensive research effort to develop germplasm suitable for the Southeast. 37 Stoneville has historically been more successful at capturing sales in the MidSouth than in the Southeast (as evidenced by its 2006 share of 16% in the MidSouth versus 8% in the Southeast) because its breeding program had focused primarily on varieties harvestable early in the growing season. When Emergent Genetics (“Emergent”) acquired Stoneville in 1999, however, it saw the Southeast as a lucrative growth area and began taking steps to increase Stoneville's efforts to breed mid- to full-season varieties (i.e., varieties better suited to the longer growing season afforded in the more southern growing areas). To this end, in 2001 Emergent acquired Helena Chemical's breeding program, which included germplasm lines suited for the Southeast. In addition, Emergent established a breeding station in Arizona with the specific mission of breeding mid- and full-season varieties. 37 Full-season varieties typically perform better in the Southeast than the early- to mid-season varieties that excel in the MidSouth. When Monsanto acquired Stoneville in 2005, it continued these efforts to breed varieties suitable for the Southeast, significantly increasing the number of testing plots and aggressively using counter-season production to accelerate the introduction of full-season varieties. According to Monsanto's internal field tests, conducted prior to entering the agreement to acquire DPL, several of Stoneville's lines are performing in yield trials on par with DPL's most successful varieties in the MidSouth and Southeast, DP555 and DP444. Indeed, Monsanto anticipated that its efforts to improve Stoneville's breeding program would result in Stoneville gradually increasing its national share from 13% in 2006 to nearly 20% by 2010 (this estimate did not include the likely share increases that would stem from germplasm being developed by Monsanto outside of Stoneville that the proposed Final Judgment also requires to be divested). 38 38 DuPont notes that Stoneville's share in the Southeast and MidSouth has been in decline as evidence that its potential to compete in the future is not bright. DuPont Comments at 14. However, because Emergent's and Monsanto's investments in Stoneville's breeding capabilities are so recent, Stoneville's share declines do not accurately reflect Stoneville's potential. In 2007, Stoneville reversed the trend of declining share. According to USDA's annual reports on cotton varieties planted, Stoneville's breeding efforts are, as Monsanto predicted, beginning to produce results. From 2006 to 2007, Stoneville's share increased from approximately 13% to 15% nationwide and from just over 8% to 11% in the Southeast. c. Additional Monsanto Germplasm The proposed Final Judgment also requires Monsanto to divest cotton lines from its valuable internal research and development efforts—the Advanced Exotic Yield lines and the Marker Assisted Breeding (“MAB”) populations—regardless of whether Monsanto considered those lines to be part of Stoneville. In this way, the remedy ensures that the acquirer has the breadth of Monsanto's cottonseed development programs that would have been used to compete against DPL absent the transaction. i. Advanced Exotic Yield Lines DuPont implicitly criticizes the inclusion of the Advanced Exotic Yield Lines in the divestiture package, suggesting that because the CIS describes the value of these developmental lines as “promising,” the lines likely will be of little commercial value to the acquirer of the Enhanced Stoneville Assets. 39 Although Monsanto started its Advanced Exotic Yield program as a means of identifying traits in exotic cotton plants that would increase yields when bred into more traditional commercial lines, that program also resulted in the creation of finished elite lines that have achieved significantly better yields in field tests than the current leading varieties in the MidSouth and Southeast. As noted in the CIS, Monsanto planned to bring the first traited varieties from these lines to market by 2009. Monsanto forecasted that these traited varieties would be a significant driver of market share for Stoneville. 40 39 DuPont Comments at 11 and 15. 40 Despite their origin in a trait research program, further breeding and commercialization of these lines requires only traditional breeding techniques. AAI suggests that the acquirer will have little incentive to commercialize these varieties because they contain Monsanto traits. The comment offers no explanation of why the acquirer would forgo a significant profit opportunity by abandoning germplasm that appears to have significant advantages relative to competing germplasm that also contains Monsanto traits. In any case, Bayer has already publicly touted its acquisition of the Enhanced Stoneville Assets as including “access to additional high performing cotton products with insect-resistant and herbicide-tolerant Monsanto traits.” 41 41 Bayer, Investor Handout, Q2 2007, *http://www.investor.bayer.de/user_upload/2747/* . AAI also contends that many of the Advanced Exotic Yield Lines “are of extremely limited value to the acquirer” because they already contain Monsanto traits and “[b]reeding out Monsanto traits and then breeding in competing traits will take a long time.” 42 AAI's criticism, however, reflects a misunderstanding of the value of the lines and the various methods by which the acquirer can use them. In the near term, the acquirer can commercialize varieties from the Advanced Exotic Yield Lines that currently contain Monsanto traits. Sales of such varieties likely would be important for the acquirer in growing Stoneville's market share. In the medium and longer terms, the acquirer can use the lines as breeding stock to introduce varieties containing, in whole or in part, non-Monsanto traits. It can do this by two different methods. First, it could simultaneously breed out any Monsanto traits that are not desired while breeding in new traits. Under this method, it could use any of the lines, including the four recurrent parents, 43 as a parent in crosses that ultimately result in commercial varieties containing the desired traits, including varieties containing only non-Monsanto traits. Such a process could be carried out within the five year time horizon during which DPL anticipated it could bring non-Monsanto traited seed to market. 44 Under the second method, which would take additional time, the acquirer could breed out the Monsanto traits to make new conventional lines 45 and then use those conventional lines as breeding stock to launch varieties containing non-Monsanto traits. 42 AAI Comments at 13. 43 One of the recurrent parents is a conventional line and can be used immediately for breeding a variety that contains only non-Monsanto traits. The other three recurrent parents were originally created by crossing a variety containing Bollgard with an exotic variety and those parents accordingly contain the Bollgard I trait. If Bayer chooses, it can use these three parents immediately to breed varieties that contain a stack of a non-Monsanto herbicide trait and Bollgard II (breeding in Bollgard II does not require breeding out Bollgard I). 44 Under this method, a breeder would cross an Advance Exotic Yield Line containing Monsanto traits with a line that contains non-Monsanto traits. The breeder can then select from the progeny offspring that lack the Monsanto traits and advance those offspring through traditional breeding methods to create the desired variety. 45 Breeders can create a finished conventional line by crossing an Advanced Exotic Yield Line containing Monsanto traits with a conventional line and then selecting progeny that lack traits for further breeding. Commenters' concerns regarding the rights retained by Monsanto to the Advanced Exotic Yield Lines also lack merit. 46 The rights retained by Monsanto to these lines merely allow Monsanto to continue a trait research program that, if successful in identifying a yield trait that could be introgressed into cotton varieties, would significantly benefit cotton farmers. Moreover, the proposed Final Judgment makes clear that, whether or not its research program is successful, Monsanto cannot encumber in any way the acquirer's use of the Advanced Exotic Yield Lines. 46 See ICTA Comments at 7; AAI Comments at 9. ii. MAB Populations AAI and DuPont question the value of the MAB lines to the acquirer of the Enhanced Stoneville Assets, pointing to language in the CIS which states that some of the MAB lines contain Monsanto's traits. 47 In essence, such comments suggest that the Enhanced Stoneville Assets divestiture is only effective as a remedy to the extent the divestiture gives the acquirer access to conventional cotton lines. Since the acquirer would need to breed Monsanto's traits out of some of the MAB lines to create non-Monsanto traited lines, the commenters conclude that the competitive value of the MAB lines to the acquirer is limited in the near term and at most questionable in the longer term. That conclusion is incorrect. 47 AAI Comments at 13; DuPont Comments at 11. Monsanto's MAB cotton program involved identifying genetic markers for important agronomic characteristics in the progeny resulting from the cross of two elite lines. The goal of the MAB program was two-fold. First, breeders could use these markers to make better informed selections from the progeny plants and could thereby produce a variety that likely was agronomically superior to, and bred more quickly than, a variety derived from traditional breeding selection methods. Monsanto anticipated that commercial varieties from the MAB program would become available as early as 2012. Second, and in the longer term, a large library of such genotypic information would offer breeders the ability to make better decisions about what elite varieties to cross in the first instance. Accordingly, divesting the MAB populations and the accompanying molecular mapping data provides the acquirer of the Enhanced Stoneville Assets with germplasm and genetic information that will enhance its offerings over the medium term and provide a significant informational foundation for successful competition over the longer term. With respect to the specific concern that the MAB populations are of little value to the acquirer because some contain Monsanto traits, the AAI overstates the scope of the limitation articulated in the CIS. While many of the MAB populations are based on a cross involving a parent that contains a Monsanto trait, approximately 37% of them are not. Moreover, as explained above, the time line for creating and commercializing conventional versions from lines containing Monsanto traits, or creating versions containing traits other than Monsanto's, is approximately five years. B. Additional DPL Germplasm Provides Important and Meaningful Value Given the growth projections in Monsanto's business documents, the Stoneville germplasm combined with the Monsanto Advanced Exotic Yield and MAB cottonseed lines arguably would be sufficient to enable the acquirer of the Enhanced Stoneville Assets to compete effectively against DPL cottonseed. However, the proposed Final Judgment seeks to further ensure effective competition by supplementing the Monsanto assets with certain key DPL germplasm lines consisting of 20 lines representing the pedigrees of many of DPL's popular current varieties in the MidSouth and Southeast as well as a significant portion of DPL's breeding pipeline for these areas. Commenters had several concerns regarding these 20 lines, 48 which we address below. 48 See AAI Comments at 12; DuPont Comments at 12; and OCM Comments at 3. 1. The DPL Germplasm Is of High Quality Some commenters question whether the 20 DPL lines will produce competitive traited varieties. 49 The United States used two methods to select the 20 lines, both of which were designed to identify the lines that had the greatest chance of commercial success in the MidSouth and the Southeast. First, the United States looked to the germplasm in the pedigrees of the DPL varieties currently performing best in the MidSouth and Southeast (based on total sales). The eight divested DPL lines that fall into this germplasm category 50 are prevalent in the pedigrees of the DPL varieties most successful in the MidSouth and Southeast today; five of these lines 51 are the recurrent parents of the DPL varieties accounting for about 60% of DPL's 2006 cottonseed sales in the Southeast—the growing region where DPL holds the greatest share advantage. 52 Any of these lines could be used immediately as a recurrent parent for a traited variety, as well as for breeding stock for developing new elite lines. 49 For example, DuPont raises questions about the process used in selecting these 20 lines. DuPont Comments at 12. The AAI suggests that the chances of the government picking good varieties is low. AAI Comments at 13. 50 Lines DP 5690, DP 491, DP 2156, DP 565, DP 5305, DP 5415, and Delta Pearl. 51 Lines AZ2099, DP 491, DP 565, DP 415, and Delta Pearl. Delta Pearl is the recurrent parent of DPL's wildly successful DP 555 BGIRR (which accounted for over 18% of all U.S. cottonseed sales in 2007 and over 80% of total cottonseed sales in the Southeast in 2007). Dupont notes “the CIS does not disclose how many other DPL germplasm lines are represented in the lineage of these currently popular varieties.” DuPont Comments at 12. No other DPL germplasm lines are represented in the lineage of the traited varieties derived from these five lines. 52 OCM's and AAI's representation that these eight lines reflect only 1% of cotton acreage is based only on their share of sales when offered as conventional commercial varieties. OCM Comments at 3; AAI Comments at 12. However, the relevant statistic is the one cited above and in the CIS; namely, the role these lines have had in fostering DPL's current share of traited varieties in the MidSouth and Southeast. Second, the United States examined what germplasm DPL was counting on for its future seed sales, recognizing that breeding programs are not static. Thus, the other twelve DPL lines included in the divestiture package—even though not currently offered for sale or found in the pedigrees of current bestsellers—were selected because DPL gave them the highest rating of the select group of lines that it had in the pipeline for trait introduction in its MidSouth and Southeast breeding programs. 53 DPL had in fact already introgressed Syngenta's VipCot trait—the foundation of DPL's effort to move away from Monsanto—into these lines, revealing DPL's confidence that they were most likely to produce high yielding varieties suitable for the MidSouth and Southeast. 54 These lines would likely have been the source for any non-Monsanto traited varieties that DPL would have brought to market in the MidSouth and Southeast from 2012 to 2016. Because these lines are finished elite lines, any competent breeder (such as the breeding personnel at Stoneville and Bayer) could have traited versions of any of these lines ready for commercialization within approximately the next five years, *i.e.* , within the same time frame that DPL could bring a non-Monsanto herbicide-tolerant seed to market. 55 53 The United States's investigation revealed that over the past several years DPL's breeders have established a four-tier system for ranking the potential of germplasm the breeders have under development. From 2004 (when DPL set up the rating system) to 2007, only fifteen lines across DPL's five MidSouth and Southeast oriented breeding stations received DPL's highest internal ranking. The ranks assigned by DPL reflect the results of extensive field testing. Under the proposed Final Judgment, twelve of those lines will go to the acquirer of the Enhanced Stoneville Assets. 54 Similarly, in 2006 DPL attempted to introduce potential OptimumGat events into seven DPL lines, hoping by that process to create a plant in which OptimumGat successfully imparted herbicide tolerance. While that attempt by DPL and DuPont failed to produce any potential candidates for use as an OptimumGat donor parent, the fact that all seven of the lines used in that experiment are among the twelve divested further demonstrates the high regard DPL had for these lines. 55 Thus, AAI's criticism (p. 12) that the “acquirer is therefore obtaining only the raw inputs necessary to breed varieties that could be commercially viable in the future and only after considerable expenditure” is incorrect. Finally, some commenters opine that the mere fact that this germplasm has not yet been tested in the marketplace inherently diminishes its value. 56 As discussed above, the divested material is hardly of unpredictable quality. The twelve lines of DPL germplasm were selected precisely because those lines' superior performance had already been observed and relied upon by DPL's breeders. 57 DPL was developing the next generation of germplasm that it planned to use in connection with marketing non-Monsanto traits. Divestiture of this germplasm will allow the acquirer to continue these efforts and not rely solely on currently available material. 56 See, e.g., ICTA Comments at 7 (“Twelve of the 20 lines are experimental lines with unproven and hence uncertain commercial potential.”). 57 In further support of its claim that 20 lines are insufficient, DuPont claims that “DPL introduced 64 unique cotton varieties in the past eight years, but only 14 ever came to represent 1% or more of annual U.S. cottonseed acres.” DuPont Comments at 16. The statistic, however, is misleading. One elite breeding line can result in multiple unique varieties in two independent ways: varieties with the same recurrent parent can be differentiated based on their trait composition; additionally, the process of introgressing a trait into a conventional elite parent may yield multiple promising and distinctive progeny that have commercial potential. For example, Delta Pearl is the recurrent parent of five traited varieties introduced by DPL between 2000 and 2006 as well as being offered as a conventional variety. Similarly, DP491 is the recurrent parent of four traited varieties as well as being offered as a conventional variety. Thus, divesting 20 lines provides the potential for many more than 20 commercial varieties. 2. The Acquirer Will Be Able To Use This Germplasm Effectively Some commenters suggest that it will take the acquirer anywhere from eight to fifteen years to commercialize traited varieties from these 20 lines. 58 To fact, it should take far less time. Because all 20 of the DPL lines in the Enhanced Stoneville Assets are finished elite conventional lines, they can be immediately used as a recurrent parent for a cross with a trait donor. Assuming competing traits are available to breed into them, traited varieties from these lines could reach the market in approximately five years—the same general time frame in which DPL could have introduced non-Monsanto traited varieties absent the merger. 59 58 Several commenters, citing provisions in the Complaint (¶ 15) and the CIS (at p. 16), provide time frames ranging from eight to fifteen years for how long it would take the acquirer to bring traited varieties of the DPL germplasm to market. E.g., States Comments at 6 (8-10 years); AAI Comments at 12 (10 years); and OCM Comments at 2 (8-15 years). 59 Commenters ignore the fact that DPL has already completed the bulk of the breeding process on the divested lines ( *i.e.* , the first six or seven years of making crosses and winnowing progeny). Commenters' citations to the Complaint and CIS are thus inapplicable. See Complaint ¶ 15 (referring to the time period for bringing a new variety to market from an initial cross of two cotton lines—the divested lines are well past that stage) and CIS at 16 (referring to DPL using the divested lines to bring varieties to market “over” the course of the next decade, not, as AAI suggests, for at least another ten years). Contrary to DuPont's suggestion, 60 the acquirer of the Enhanced Stoneville Assets will not be at a disadvantage with respect to effectively using the DPL germplasm lines included in the package. The proposed Final Judgment specifically provides that the acquirer will receive applicable performance data and other information. 61 Such information transfers are a routine practice in the seed industry when germplasm or seed companies are bought or sold (which also occurs routinely)—the books, logs, and other documentation about a breeding line are transferred with the line even if the breeder does not go to the new owner of the line. These materials will readily allow the Stoneville breeders to understand the work that has been done on these lines to date and to move the lines forward in their breeding program. 62 60 DuPont Comments at 13. 61 See proposed Final Judgment Schedule B, Section 2. 62 Bayer has already received this information from DPL in conjunction with the divestiture of the 20 DPL lines. The States also contend that “even post-acquisition, Monsanto retains the right to * * * preclude [the acquirer of the divested DPL lines from us[ing] them with non-Monsanto cotton biotech traits.” States Comments at 7. Under the proposed Final Judgment, the acquirer of the DPL lines can freely use them to create varieties that contain

(a)solely non-Monsanto traits,

(b)Monsanto's Bollgard II and non-Monsanto herbicide tolerant traits, and

(c)Monsanto's Flex, non-Monsanto insect resistant traits and non-Monsanto herbicide tolerant traits. The only limitation regarding use of non-Monsanto traits is that for a period of seven years the acquirer cannot commercialize varieties from the DPL lines that solely have Bollgard II, Flex and a non-glyphosate cotton herbicide tolerant trait currently commercialized in cotton. The only non-glyphosate cotton herbicide tolerant trait currently commercialized in cotton is Bayer's Liberty Link. This limitation adds to Bayer's incentive to introduce a non-Monsanto glyphosate tolerant cotton trait as a substitute for Monsanto's Flex. 3. Monsanto/DPL's Use of the Germplasm Does Not Diminish Its Value to the Acquirer and Provides Farmers Continued Benefits Some commenters claim that the fact that Monsanto retained the right to continue working with the DPL lines, so long as the commercialized variety contains Monsanto-only traits, means that these lines have little value to the acquirer 63 and provides Monsanto an improper benefit. 64 First, to the extent that the DPL germplasm provides the acquirer of the Enhanced Stoneville Assets with a variety that has strong agronomic characteristics, the acquirer will have every incentive to market that product. Indeed, rather than being reason for concern, Monsanto's desire to retain rights to these lines is further indication of the value of this germplasm within DPL's breeding program. 63 States Comments at 7 (“even post-acquisition, Monsanto retains the right to sell the most popular seeds from those lines”); OAG at 3 (20 lines “is not even a true divestiture”); DuPont Comments at 13 (divestiture of DPL germplasm is non-exclusive). 64 ICTA Comments at 7; see also AAI Comments at 10; DuPont Comments at 13. Second, the licensing back of the lines to Monsanto/DPL benefits cotton farmers. For example, if Monsanto did not have a license for the to-be-divested DPL lines that are recurrent parents to existing DPL traited varieties (including DP555, which contains Monsanto's traits), Monsanto would have to remove these varieties from the market, significantly limiting options for cotton farmers. Similarly, without such a license, Monsanto would have to discard any varieties in DPL's developmental pipeline that have the divested lines as a recurrent parent, even if those lines already contain only Monsanto's traits. The commenters do not explain why competition would be served by denying cotton farmers these varieties. 65 65 ICTA's concern about the provision allowing DPL to sell conventional versions of the DPL divested lines is also misplaced. ICTA Comments at 4 (“DoJ has absolutely no basis for proposing, or assessing the adequacy of the remedy cited above”). At the time the Complaint was filed, the 2007 seed purchasing season was already under way and DPL was selling some of the divested lines as conventional varieties. Thus, the provision permitting DPL to continue to sell these varieties in 2007 merely avoided disruption to farmers who wanted to buy these conventional varieties for that season. C. The Remedy Preserves Incentives and Opportunities for Effective Traited Cottonseed and Trait Development Competition Commentors expressed concern about the opportunities for trait developers. Those concerns, however, are misplaced as discussed below. 1. Syngenta Will be Able to Effectively Use the VipCot Assets Some commenters 66 express concern that certain provisions of the license agreements accompanying the divestiture of the VipCot Assets will unnecessarily restrict Syngenta's use of the assets. 67 66 See e.g., ICTA Comments at 7-8; AAI Comments at 10. 67 The proposed Final Judgment requires Monsanto to divest to Syngenta 43 advanced DPL germplasm lines traited with VipCot and related assets necessary to bring varieties from these lines to market. As noted above, the development of Syngenta's VipCot trait in DPL seed was at an advanced stage when Monsanto's acquisition of DPL was proposed. The United States required the divestiture of the most advanced of DPL's VipCot lines not to ensure that Syngenta could replace Stoneville as a competitor against DPL the Enhanced Stoneville Assets divestiture addresses that harm but to prevent any delay to VipCot's commercialization as a result of the merger. The terms of the proposed Final Judgment will provide Syngenta the rights it needs to bring VipCot to market and, thus, fulfill the goal that the VipCot Assets divestiture is intended to accomplish. As provided in the proposed Final Judgment, the divestiture of these 43 lines to Syngenta offers several possible paths to market for this traited germplasm. 68 Syngenta could start its own seed company using this germplasm as a base either on its own or via a joint venture—and make sales of the traited seed directly to distributors or farmers. Syngenta already operates soy and corn seed companies in the United States and is one of the largest providers of cotton-related herbicides and insecticides in the world. Syngenta also is a partner with DuPont in a recently formed joint venture called Greenleaf Genetics, which the companies established to out-license the companies' proprietary corn and soybean genetics and biotechnology. In addition, Syngenta has the option of licensing the traited germplasm to other seed companies, such as Bayer, Dow and Americot, which already have breeding and distribution programs in place. 69 68 The United States has worked with Monsanto and Syngenta to ensure that the divestiture (including access to any required licenses) is accomplished under terms that do not restrict Syngenta's competitiveness and are commercially reasonable. 69 Of course, Syngenta also could license just the VipCot trait to seed companies if the DPL-traited germplasm is not attractive to potential licensees or if Syngenta wished to keep the DPL germplasm for its own branded seed product. The requirement in the proposed Final Judgment that a commercialized variety derived from the VipCot Assets contain one of four listed Syngenta insect-resistant events is not unduly restrictive. 70 These are the four “versions” of the insect-resistant trait that Syngenta and DPL were most confident could achieve commercial success in the near-to-medium-term. This restriction, therefore, is directly tied to the harm that divesting the VipCot Assets is designed to remedy; namely, delay in the introduction of the VipCot traits that DPL and Syngenta had been positioning to enter the market. 71 It is unlikely that any new insect-resistant traits developed by Syngenta other than VipCot would be available for more than a decade, and any such trait likely could in any event be stacked with one of the four existing events consistent with the proposed Final Judgment. 70 See AAI Comments at 10. 71 Contrary to the apparent perception of some commentors (see, e.g., ICTA Comments at 8), this aspect of the proposed Final Judgment is not designed to ensure, by itself, an adequate platform of high-quality germplasm for future trait developers. The limitations on Syngenta's use of the germplasm are appropriate to match this aspect of the remedy to its more-narrow objective preventing the merger from delaying VipCot's commercialization—and unrestricted access to this germplasm is unnecessary in light of the other elements of the proposed Final Judgment. 2. The Remedy Will Preserve Opportunities for Trait Developers to Market Nonmonsanto Traits In Competitive Cottonseed Some commenters expressed concern that post-merger there will no longer be a sufficient base of non-Monsanto controlled cottonseed to support future trait development. 72 However, the Enhanced Stoneville Assets divestiture provided for in the proposed Final Judgment establishes a substantial future platform for cotton trait developers to use to reach farmers in the MidSouth and Southeast. 72 See, e.g., OFU Comments at I (“competing seed trait developers will have great difficulty gaining access to the market”); OCM Comments at 3. In addition, the third party license changes required by the proposed Final Judgment promote the development and commercialization of competitive cottonseed with non-Monsanto traits by giving cottonseed companies the ability to partner with trait developers other than Monsanto without any financial penalty. Currently, DPL seed accounts for approximately 43 percent of U.S. cottonseed acres, leaving over half of all U.S. cottonseed acres available to trait developers who seek to compete against the merged Monsanto/DPL. Commenters fail to explain why this amount of acreage is insufficient, especially given the additional returns on investment in cotton trait research that could be gained from Stoneville's likely growth in the MidSouth and Southeast, possible cross-crop trait applications, and international cottonseed markets. With regard to the license changes, AAI suggests that Monsanto's trait licensing practices should be addressed in a separate case, claiming that the required licensing modifications do not help to remedy the loss of competition alleged in the Complaint. 73 To the contrary, the modifications specifically address competition lost from Monsanto's acquisition of DPL, since DPL's licenses did not limit its ability and incentive to work with non-Monsanto trait providers. 74 These trait providers will now be able to work with cottonseed companies who previously had restricted licenses. 73 AAI Comments at 15. 74 In requiring these changes, the United States made no determination as to whether any provisions in Monsanto's licenses violated the antitrust laws. 3. The Remedy Should Not—and Does Not—Guarantee the Introduction of DuPont's OptimumGat Trait Several commenters express concern that the remedy is insufficient because it does not ensure that DuPont's OptimumGat trait will reach the market. 75 As discussed above, the proposed remedy preserves the potential for the development and introduction of competing herbicide-tolerant traits in the MidSouth and Southeast. OptimumGat may prove to be such a trait, but there was never any certainty of that even without the merger. 76 Indeed, DPL was itself exploring herbicide-tolerant trait alternatives with developers other than DuPont. For example, Bayer and Syngenta independently have been working on herbicide-tolerant traits for cotton that could be commercialized on or before the time when DPL could have brought OptimumGat to market absent the merger. Thus, there was never any guarantee that OptimumGat would ultimately be commercialized in cotton even if DuPont were able to continue working with an independent DPL, 77 and it would be inappropriate for an antitrust remedy to establish a guarantee that the market would not have provided. 75 See, e.g, DuPont Comments at 2 (DuPont terminating research and development for OptimumGat in cotton); States Comments at 4 (claiming that “because of DeltaMax's termination, Monsanto's cotton herbicide-tolerant trait dominance is assured for the foreseeable future”). 76 As noted above (supra p. 5), development efforts for introducing OptimumGat in DPL germplasm were at a preliminary stage. 77 See DPL 2006 Form 10K. 4. The Remedy Will Preserve the Number of “Platforms” for Trait Development That Existed Pre-Merger Commenters suggest that because Bayer itself develops traits it will not work with other trait developers and that the remedy thus fails to preserve trait development opportunities. 78 Even if the claim were true, the competitive harm identified in the Complaint is still addressed: pre-merger, farmers in the MidSouth and Southeast looked forward to a choice between Stoneville/Monsanto and DPL/non-Monsanto traited cottonseed; post-merger they still will have a choice as they will look forward to competition between Stoneville/Bayer and DPL/Monsanto. 78 States Comments at 7. It is important to bear in mind that DPL itself might not have continued to work with multiple competing trait developers. Contemporaneous DPL business documents indicate that DPL likely would have selected only one non-Monsanto stack to bring to market in light of the costs associated with breeding traited varieties, commercially distributing multiple varieties, and managing the requirements and earning potentials of licences with trait developers. Thus, DPL likely would have chosen only *one* non-Monsanto insect-resistant trait and one non-Monsanto herbicide-tolerant trait to promote. It is also likely that DPL would have continued offering a Monsanto stack because of the apparent market demand for Monsanto's traits. 79 79 DPL's agreements with Syngenta and DuPont did not require exclusivity, and future market conditions (especially demand by farmers for Monsanto's proven traits) might have dictated that DPL continue offering Monsanto traits. Internal DPL business documents suggest that it planned to follow this course. In any event, Bayer has very strong incentives to use other third-party traits if those traits are better than the traits it can develop on its own. Indeed, Monsanto will have the same incentive. Competition from one will spur the other to try to offer the best product, regardless of whether the included trait is developed in-house or licensed from a third-party. 80 (And, it bears remembering, such development of traits is, and would have been absent the merger, likely to occur nearly a decade in the future.) 80 Recognizing this dynamic, third-party trait developers will have incentives to continue research efforts. V. Response to Comments That the Remedy Is Not Workable A number of commenters posit that the remedy provided for in the proposed Final Judgment is not in the public interest because the remedy is “conduct-based” 81 as opposed to “structural,” and because the required divestitures have “strings attached,” such as licenses running between Monsanto and the acquirers of the divested assets. These commenters further assert that these provisions essentially render the remedy too costly to administer, or will require too much ongoing involvement and policing by the United States or the Court to be effective. As explained below, the proposed Final Judgment provides an effective remedy that is clean and certain (i.e., consisting of one-time, well-defined events that do not involve costly government regulation of the market), is consistent with the Merger Remedy Guide issued by the United States, 82 and does not involve cumbersome monitoring by the United States or the Court. 81 See e.g., AAI Comments at 9-10; CFS Comments at 7-9; DuPont Comments at 13-14; States Comment at 7. 82 See U.S. Dep't. of Justice, Antitrust Div., Antitrust Division Policy Guide to Merger Remedies, (October 2004), available at *http://www.usdoj.gov/atr/public/guidelines/205108.pdf* (hereinafter “Merger Remedy Guide”). A. The Divestitures and License Changes Are One-Time Events, Not Ongoing Behavioral Remedies The remedies proposed by the United States are one-time events calling for the divestiture of identifiable and transferable assets and intellectual property as well as modifications to certain licenses. These are not conduct remedies that involve ongoing entanglement in market operations or regulation of Monsanto's ongoing conduct. 83 83 See Merger Remedy Guide at 7-12 (describing the differences between structural and conduct remedies). Specifically, the proposed Final Judgment calls for the divestiture of Stoneville, an ongoing cottonseed business that has been bought and sold on several occasions, including all of Stoneville's domestic germplasm, breeding, and sales and marketing assets, together with the information and intellectual property necessary to use those physical assets. In addition to the Stoneville business unit, the remedy calls for the divestiture of additional complementary assets, i.e., the 20 DPL cotton germplasm lines. 84 The transfer of this package of assets is a one-time event that constitutes a workable remedy to preserve competition and provides clear lines of ownership, with Bayer owning outright the Stoneville business, as well as the 20 lines formerly belonging to DPL. In its basic structure, this remedy is not different from the commercial transfer and licensing of germplasm and related intellectual property that occurs routinely in the marketplace. 84 The Merger Remedy Guide recognizes that there may be instances when “additional assets from the merging firms will need to be included in the divestiture package.” Merger Remedy Guide at 12. Some commenters suggest that aspects of the remedy involving licensing arrangements are unworkable conduct remedies that are inconsistent with the United States's policies on merger remedies. 85 The United States's Merger Remedy Guide, however, explains that proper merger remedies can “involve the sale of physical assets” as well as the “sale or licensing of intellectual property.” 86 Licensing is routine in this industry, where companies often combine the work of others (e.g., germplasm, traits, intellectual property) with their own useful developments and introduce better products for the market. The licenses in this case were crafted so that each company would know which rights it would retain after the divestiture to help ensure a workable remedy. 85 ICTA Comments at 6-8; AAI Comments at 9. 86 Merger Remedy Guide at 7. The divestiture of the VipCot Assets to Syngenta is also a workable remedy. The germplasm divestiture is accomplished though a license to Syngenta rather than absolute ownership, but the method of transfer will not affect Syngenta's ability to compete effectively as Syngenta will have a non-terminable and royalty-free license to use the divested lines. 87 As discussed above, the provisions in the proposed Final Judgment offer Syngenta several alternatives for bringing the DPL germplasm to market, and entry of VipCot-traited varieties will alter the structure of the traited cottonseed market regardless of the means selected. 87 Merger Remedy Guide at 15 n.22 (describing requirements that the Division typically imposes on structural remedies involving licensing). Finally, the proposed Final Judgment's requirement that Monsanto modify existing third party licenses is also a one-time event. The changes to these licenses require modification of certain terms that will enable those third parties to work more readily with non-Monsanto trait providers. B. Monitoring Compliance With the Remedy Will Not Unduly Burden the United States or the Court Contrary to some commenters' suggestions, the terms of the proposed Final Judgment do not require cumbersome monitoring of the marketplace by the United States or the Court. 88 For example, pointing to certain conditions and limitations placed on the germplasm to be divested under the proposed Final Judgment, AAI asserts that the divestitures are a “conduct-based, regulatory-style ‘fix’ that imposes on this Court a monitoring and compliance burden that it should be loathe to undertake.” 89 These criticisms grossly overstate monitoring issues associated with the proposed Final Judgment. 88 See ICTA Comments at 8-9; AAI Comments at 11. 89 AAI Comments at 11. As stated above, the asset divestitures and license modifications are one-time events that, in fact, have already been accomplished in their entirety or have been implemented successfully in significant part. There remains, of course, the possibility that a dispute under one of the asset purchase agreements or licenses will arise in the future. Such a possibility exists in nearly every case in which the United States requires divestitures. As a general matter, such disputes would not require intervention by the United States, as the parties to the dispute can rely on contract procedures and other remedial steps to reach a resolution. Accordingly, while the United States will continue to monitor Monsanto's behavior to ensure compliance with the judgment, the prospect of the United States and this Court becoming enmeshed in the types of disputes enumerated by the commenters is both exaggerated and remote. VI. Response to Comments That Raise Issues Beyond the Scope of the Court's Review Several commenters express concerns about competitive issues not raised in the Complaint. As discussed above in Section III.A., issues beyond the scope of the Complaint are outside the purview of the Court. However, even if the Court were to consider the merits of these alleged concerns, the United States appropriately concluded that permitting the transaction will not give rise to the posited harms. A. Crops Other Than Cotton Several commenters expressed concern that the merger will have a detrimental impact on the development of traits for corn and soy. 90 These commenters argue that a reduced revenue opportunity in cotton will make trait producers hesitant to develop traits as they will have fewer opportunities to profit from their investment. Market conditions belie that prediction. 90 See, e.g., States Comments at 5, 9; ISA Comments at 1; OFU Comments at 1; OCM Comments at 2; Plains Justice Comments at 1. The revenue opportunities for corn and soy traits far exceed those for cotton, based on available acres. The market for biotech soy is more than four times greater than the market for biotech cotton in the United States, and more than three times greater worldwide. The market for biotech corn is at least four times greater than that for cotton in the United States, and at least 1.3 times greater than that for cotton worldwide. Within the United States, the combined market opportunity to sell biotech soy and biotech corn is roughly 130 million acres, whereas there are only 15 million cotton acres. 91 That revenue opportunity has proven sufficient for DuPont to continue its commercialization of OptimumGat in corn and soy and to continue research and development of other transgenic traits 92 and likely would provide similar incentives for other trait developers. 91 Monsanto estimates, from Hugh Grant, Chairman, President, and CEO, Monsanto, Presentation at Sanford Bernstein Strategic Decisions Conference, slide 11 (May 30, 2007), *http://www.monsanto.com/pdf/investors/2007/05-30-07.pdf.* 92 See Investor Day Presentation at slides 34, 36 and 40. B. Conventional Cottonseed ICTA suggests that the transaction will result in harm to a conventional cottonseed market. 93 The merger does not, however, substantially alter incentives of seed companies to offer conventional varieties. Absent the merger, DPL's share of the trait fee charged by Monsanto reflected a significant share of DPL's revenues, and DPL's revenues from trait fees would have become even larger as it shifted to non-Monsanto traits. Accordingly, even without the merger, DPL would have had substantial incentives to shift sales from conventional to traited seed so as to earn these fees. Further, ICTA fails to explain why, assuming there is a core set of farmers committed to using conventional seed, Monsanto or Bayer would not continue to have sufficient incentives to provide conventional seed to them. 94 93 See, *e.g.* , ICTA at 28, 43. 94 ICTA notes that “40%” of the 36 conventional varieties planted in 2006 were DPL varieties. According to USDA 2006 data, DPL offered fifteen conventional varieties, with seven of those fifteen having sales in the MidSouth and Southeast. Six of those seven were divested to Bayer as part of the Enhanced Stoneville Assets. C. The Southwest and West Traited Cottonseed Markets ICTA contends that the transaction will harm competition for traited cottonseed in the Southwest and West regions of the United States. A close examination of the facts reveals the lack of support for ICTA's claim. 95 95 ICTA Comments at 5. With respect to the Southwest, 96 DPL and Stoneville have a much smaller competitive presence than they do in the MidSouth or Southeast, in large part because their germplasm is not uniquely suited for the Southwest region. As reflected by the 2006 market shares for traited cottonseed in this region, there are a number of competing companies: Bayer 46%; DPL 26%; Stoneville 15% (Stoneville branded seed 5% and NexGen branded seed 10%); Americot 5%; All-Tex 3%; UAP 3% and Croplan 1%. 97 The divestiture of the Enhanced Stoneville Assets to Bayer and Americot does not significantly alter the competitive situation. Because Stoneville developed its NexGen brand seed specifically for the Southwest market and Americot acquired Stoneville's NexGen-related assets, the Southwest market will continue to have three seed companies with significant shares (Bayer/Fibermax, Monsanto/DPL and Americot/NexGen) and three additional companies with a smaller presence (All-Tex, Croplan, and UAP). 96 Though the USDA classifies the Southwest as comprising Texas, Oklahoma and Kansas, we have included New Mexico in our analysis of the region. New Mexico has two distinct cotton growing areas that can be roughly described as Eastern New Mexico and the Mesilla Valley. The same cotton varieties that grow successfully in Texas and Oklahoma are used in Eastern New Mexico whereas acala varieties are primarily grown in the Mesilla Valley. Because the vast majority of cotton acreage in New Mexico is in the eastern region, we have included data from that region in our analysis of the Southwest. 97 The United States derived the above estimated shares of traited cottonseed sales in the Southwest (including New Mexico for the reasons discussed above) from USDA data and other data received during the course of the United States's investigation. These shares discount “saved seed”—conventional seed that a farmer saves from one year's crop to plant the next year (a practice that is more prevalent in the Southwest than the other regions due to the greater use of conventional seed which seed companies do not prohibit farmers from saving). USDA data ascribes saved seed to the seed company that originally produced the seed—even if the actual sale of that seed occurred in a previous year—and thus significantly overstates branded seed companies' shares in the region. With respect to the West, a proper analysis must recognize that Arizona and California are very different and relatively small markets. 98 In California, nearly all of the cotton grown is either pima or acala (a form of upland cotton) 99 Stoneville does not sell pima or acala varieties. Based on 2006 market shares for traited upland varieties grown in California (which ignores the large volume of pima cotton grown in California), Stoneville has only a 3% share, while Dow has a 43% share, Bayer 38%, DPL 13% and UAP 3%. Accordingly, the transaction does not significantly affect traited cottonseed competition in California. 98 As noted above, while classified by the USDA as part of the West, most of New Mexico's cotton production occurs in the eastern part of the state and requires the same varieties that perform well in the Southwest. 99 There are two species of cotton grown in the United States: Pima and upland. Furthermore, there are different types of upland cotton grown in the United States. In California, most of the upland cotton grown are acala varieties. Like the MidSouth and Southeast, the USDA data suggest there are two significant sources of upland cottonseed in Arizona: DPL with 73% and Stoneville with 20%. Because the proposed Final Judgment adequately addresses competition issues in the MidSouth and Southeast by requiring divestiture of the Enhanced Stoneville Assets, it also resolves any potential issues for Arizona. Further, because Arizona's geography is well-suited for seed production of Southeast and MidSouth varieties, a significant amount of the upland cotton planted in Arizona is grown by farmers under contract with DPL and Stoneville for the purpose of producing cottonseed (rather than cotton fiber). 100 Thus, DPL's and Stoneville's shares in Arizona primarily reflect that they perform a substantial amount of seed production there. 100 The USDA survey data does not distinguish between cotton grown primarily for seed production and cotton grown as a crop. D. Prices for Cottonseed Sold for Livestock Feed OFU predicts that prices paid for cottonseed used in livestock feed will increase due to the merger. 101 The comment appears to misunderstand the source of cottonseed used for feed. Such seed does not come directly from the cottonseed companies. Rather, seed used for feed is the by-product of the cotton production process. The licensing agreements farmers sign in order to plant transgenic seed prevent them from planting the seed from their crop; hence, they typically sell any seed extracted from the cotton during the ginning process for oil or feed. 102 That seed does not pass through the hands of a cottonseed company on its way to be sold as feed. Nor does the OFU explain how the merger would affect prices of cottonseed sold for feed. Historically, the price of cottonseed used as livestock feed has remained fairly stable even as the price of transgenic planting seed has increased. Over the past ten years the price of seed for feed has averaged $107 per short ton, a fraction of what farmers pay per bag of transgenic seed. 103 Moreover, the price of cottonseed sold for feed is likely affected by other sources of livestock feed. Finally, even if the price paid by farmers for cottonseed for planting did affect the price of feed cottonseed, since the proposed Final Judgment preserves traited cottonseed competition, the merger should have no adverse impact on the price of feed cottonseed. 101 OFU Comments at 1. 102 There would be excess seed even if farmers were able to replant transgenic seed because an acre of cotton yields far more seed than is necessary to replant that acre. 103 USDA, Oil crop Situation and Outlook Yearbook, May 2007, at 47. The price of $107 per short ton translates to a price of $2.75 per 50 pound bag. In contrast, a 50 pound bag-equivalent of DP555BGRR would cost a farmer in Georgia roughly $130 for the seed alone, plus an additional $292 for the trait fee. E. Alleged Monsanto Exclusionary Business Practices The States contend that Monsanto will engage in exclusionary business practices post merger, such as “acquisitions of independent seed companies and germplasm providers to enhance its monopoly position in both seed and traits; long-term, highly restrictive licensing agreements that encourage the sale of Monsanto's biotech traits exclusively; licensing restrictions that prevent independent seed companies from combining Monsanto biotech traits with non-Monsanto traits; and bundling rebates on seeds, traits and chemicals to exclude competitors from retail distribution channels.” 104 104 States Comments at 8. Given both the breadth and lack of specificity of this contention, it is difficult to discern how it relates to the transaction at issue here. The actions on the laundry list articulated by the States are ones Monsanto could undertake with or without this merger, and the States do not explain why the transaction would change Monsanto's incentive or ability to engage in them. Nor do the States explain why such actions, if designed to have an anticompetitive effect, would be successful in light of the preservation of competition achieved by the required divestiture of the Enhanced Stoneville Assets. 105 105 Bayer, Dow, DuPont and Syngenta all have agricultural products that could be added to a bundle that includes cottonseed. Furthermore, though the United States made no determination regarding the competitive effect of certain business practices, some aspects of the proposed Final Judgment would make it difficult for Monsanto to engage in certain of the purportedly anticompetitive practices suggested by the States. For example, the proposed Final Judgment requires Monsanto to remove anti-stacking provisions in its licenses to other seed companies and penalties for working with competing trait providers. Also, it requires Monsanto to notify the United States in advance of purchases of independent cottonseed companies and germplasm providers, affording an opportunity to investigate and if necessary challenge any that might be anticompetitive. 106 106 Proposed Final Judgment at 19. Finally, and most fundamentally, the antitrust laws will continue to apply and would proscribe conduct by Monsanto that runs afoul of applicable legal standards. VII. Conclusion After careful consideration of the public comments, the United States remains of the view that the proposed Final Judgment provides an effective and appropriate remedy for the antitrust violation alleged in the Complaint and that its entry would therefore be in the public interest. Although the proposed Final Judgment, like any settlement, was a product of negotiation and compromise, 107 it fully achieved the United States's goals in this action. Even if the court might be inclined to view the issues differently, the purpose of Tunney Act review is not for the court to engage in an “unrestricted evaluation of what relief would best serve the public” 108 or to determine the relief “that will best serve society,” 109 it is simply to determine whether the proposed decree is within the reaches of the public interest—“even if it falls short of the remedy the court would impose on its own.” 110 107 In this context, it is important to bear in mind that because Monsanto had committed to selling Stoneville as a condition of its acquisition agreement with DPL, a challenge to the acquisition by the United States would have had to overcome the adequacy of a Stoneville divestiture to remedy any alleged harm. 108 *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)). 109 Bechtel, 648 F.2d at 666. 110 *United States* v. *AT&T Co.* , 552 F. Supp. 131, 151 (D.D.C. 1982). The Court is to consider “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” 111 Because the markets identified in the Complaint are the only ones in which competition is likely to be lessened as a result of the merger, the impact of entry of the proposed Final Judgment will be to restore any competition lost as a result of the merger. Farmers in the MidSouth and Southeast who might have otherwise suffered injury from the violation set forth in the Complaint will retain their current and prospective competitive choices for traited cottonseed by virtue of the contemplated divestitures. Based on the factors set forth in the Tunney Act, the proposed Final Judgment is in the public interest. 111 15 U.S.C. 16(e)(l)(B). Pursuant to Section 16(d) of the Tunney Act, the United States is submitting the public comments and its Response to the **Federal Register** for publication. Our response is also being provided to each of the commenters. After the comments and the United States's Response to Comments are published in the **Federal Register** , the United States will move this Court to enter the proposed Final Judgment. Dated: March 05, 2008. Respectfully submitted, For Plaintiff: Jill A. Ptacek (WA Bar #18756) *Trial Attorney, U.S. Department of Justice, Antitrust Division, Transportation, Energy & Agriculture Section, 325 7th Street, NW., Suite 500, Washington, DC 20004, Telephone:

(202)307-6607, Facsimile:

(202)307-2784.* Tunney Act Comments of the American Antitrust Institute on the Proposed Final Judgement The American Antitrust Institute

(AAI)is an independent Washington-based nonprofit education, research, and advocacy organization. The AAI's mission is to increase the role of competition, assure that competition works in the interests of consumers, and challenge abuses of concentrated economic power in the American and world economy. The AAI has had an interest in this proceeding because it raises critical issues of competition policy and consumer choice involving a key agricultural supply chain cotton. The AAI White Paper issued in November 2006 discusses some of the key issues raised by the merger. 1 1 See *http://www.antitrustinstitute.org/Archives/552.ashx.* Pursuant to Section 2(b) of the Antitrust Procedures and Penalties Act (APPA), 15 U.S.C. 16 (the “Tunney Act”), The AAI submits these comments on the Proposed Final Judgment (PFJ or consent decree) in the above-mentioned case. Congress has made this Court the final arbiter of the propriety of mergers under the antitrust laws. The Court must “determine that the entry of such judgment is in the public interest.” 2 If the Court cannot make this finding, it must reject the PFJ unless more adequate provisions are made to protect the public interest. In the following analysis, the AAI respectfully argues that for the numerous reasons set forth in these comments, the PFJ is not in the public interest and must be rejected by the Court. 2 15 USC. 16(e). See. *e.g.* , *United States* v. *Microsoft Corp.* , 56 F.3d 1448, 1458 (D.C. Cir. 1995). I. Competitive Issues Raised by the Proposed Merger At first blush, the products and markets affected by the proposed merger of Monsanto and Delta and Pine Land (Monsanto/D&PL) appear technical and complex. But some background provides ample basis for a clear understanding of the competitive issues raised by the merger. Cotton can be grown with three major types of seed:

(1)Organic;

(2)conventional, and

(3)genetically modified or “traited.” Cotton is also grown in four regions of the U.S.—the Southeast, Mid-South, Southwest, and West. This has generated demand for cotton varieties that thrive in different soil types and climates. Cotton is also an insect-intensive crop and competes for space with weeds. As a result, agricultural biotechnology has played a major role in the development of cotton varieties that contain genetically engineered “traits” that make the plants resistant to insects (insect-resistant) and tolerant to herbicides (herbicide-tolerant), which are sprayed on the plants. Conventional cottonseed does not contain such genetic traits. Organic cotton contains neither genetic traits and is grown in a way that meets organic growing standards. The merger involves two major markets. One is the market for development of “cotton traits.” Monsanto has a 95% share of this market with its hugely attractive and successful insect-resistant traits Bollgard and successor Bollgard II and herbicide-tolerant traits Roundup Ready and successor Roundup Ready Flex. The second market is that for “traited cottonseed.” Cotton traits are “introgressed” (i.e., inserted through genetic engineering) into cotton “germplasm,” which is the genetic material that gives a cotton variety its specific characteristics. Commercially successful varieties are obtained at the very high risk of failure, i.e., after years of costly breeding and cross-breeding that ultimately produces desirable plant characteristics demanded by cotton farmers. D&PL has a 79-87% share of the Mid-South and Southeast relevant markets for traited cottonseed. The merger raises three competitive issues: • *Horizontal-elimination of actual competition.* The merger combines two competitors—Monsanto's Stoneville business and D&PL—in the market for traited cottonseed. • *Horizontal-elimination of a potential competitor.* The merger eliminates D&PL as a potential partner for cotton traits developers that compete with Monsanto. • *Vertical-combination of two firms in a vertically integrated chain.* The merger combines upstream cotton traits developer Monsanto with downstream traited cottonseed seller D&PL in a vertical combination. II. Summary of the DOJ Documents A. Complaint/Competitive Impact Statement The Complaint focuses on two of the three major competitive effects listed above. It first alleges that the merger of Monsanto and D&PL will substantially lessen competition in the product market for the “development, commercialization and sale of traited cottonseed.” Farmers likely would have fewer choices of, and face higher prices for, traited cottonseed (Complaint at 11-12.) Relevant geographic markets are the Southeast and the Mid-South. (Complaint at 10.) Together, these regions account for 50% of cotton grown in the U.S. Cottonseed containing both (i.e., “stacked”) insect-resistant and herbicide-tolerant traits comprises the vast majority of cottonseed planted in these regions. In the Southeast, D&PL has an 87% market share and Monsanto's Storteville has 8%. Combining Monsanto and D&PL increases concentration by 1,489 HHI, for post-merger concentration of 9,184 HHI. In the Mid-South, D&PL has a 79% market share and Monsanto's Stoneville has 17%. The merger increases concentration by 3,310 HHI for a post-merger HHI of 9,110. (Complaint at 11.) The Complaint explains that entry into the traited cottonseed market requires both the assets and expertise to breed high-performing varieties of cottonseed and to develop or access traits to breed into the cottonseed. Each step requires many years and tens of millions of dollars. (Complaint at 12.) Moreover, traits developers must have access to a sufficient supply of high-quality cotton germplasm. (CIS at 11.) The Complaint thus alleges that: If there were a small but significant increase in the price of traited cottonseed within regions such as the Mid-South and Southeast, it is not likely that farmers would switch to other crops or switch purchases to conventional (non-traited) cottonseed or cottonseed varieties that are not suited to their region in sufficient volumes to make the price increase unprofitable. (Complaint at 10-11.) The second adverse competitive effect identified by the Complaint is the elimination of D&PL as a partner for traits developers that compete with Monsanto. D&PL has partnered with Monsanto to produce traited cottonseed. However, D&PL has recently pursued more lucrative alternative partnerships with rival firms such as Syngenta. After the merger, those efforts would be “substantially delayed or prevented,” as would “efforts to develop other traits that would compete with Monsanto traits and that would provide benefits to United States cotton farmers * * *” This would likely reduce choice and raise prices for traited cottonseed. (Complaint at 12.) B. Proposed Final Judgment The PFJ sets forth a three-pronged remedy to address horizontal issues raised by the merger:

(1)Divestiture of the Enhanced Stoneville Assets;

(2)divestiture to Syngenta of D&PL germplasm containing the jointly developed VipCot traits; and

(3)modification of Monsanto's Cotton States and other third-party traits licenses. 1. Enhanced Stoneville Assets The PFJ proposes divestiture of the Enhanced Stoneville Assets. Three components make up the package of assets. First, Monsanto's Stoneville cotton business will be sold, including: Breeding facilities, tangible assets, brand names, breeder records, and other intangible assets. Second, the PFJ requires that Monsanto germplasm be divested. This includes four sources:

(1)The “exclusive right” to commercialize varieties from the Advanced Exotic Yield lines;

(2)all germplasm from the Marker-Assisted Breeding populations—the primary development source for Stoneville varieties;

(3)a “non-exclusive, royalty free license” to sell and breed with varieties from the Cotton States program currently sold by Stoneville; and

(4)all other germplasm in Monsanto's possession. Third, the PFJ requires the divestiture of 20 lines of “elite” D&PL germplasm. (CIS at 12-19.) 2. Syngenta/VipCot Divestiture This divestiture includes 43 lines of “promising” D&PL germplasm into which D&PL has incorporated the VipCot insect-resistance traits. The lines will be sold to rival traits joint developer Syngenta along with performance data and certain other information. Anticipated commercialization of five of the germplasm lines is expected by 2009, three lines by 2010/2011, and the remaining lines by 2011 or beyond. Under the divestiture, Syngenta has exclusive rights to commercialize varieties developed from the lines to be divested as long as they contain one or more Syngenta-developed traits, including the VipCot traits. 3 (CIS at 19-20.) 3 Monsanto will also provide the recurrent parent conventional germplasm for each line until December 21, 2014 and offer Syngenta a license to its Roundup-Ready Flex so that it can commercialize VipCot lines with stacked traits. 3. Modifications to Monsanto's Cotton States and Seed Company Licenses The PFJ requires that Monsanto modify their Cotton States and third-party cottonseed traits licenses to remove restrictions on ability of licensees to develop, market, or sell cottonseed containing non-Monsanto traits. This includes combining (i.e., stacking) Monsanto with non-Monsanto traits. The PFJ also requires Monsanto to modify its Cotton States license to eliminate any provision that allows for termination if the licensee sells cottonseed containing non-Monsanto traits. (CIS at 20-21.) III. Mismatches Between the Complaint and the PFJ The AM respectfully argues that the PFJ falls seriously short of remedying the violations alleged in the Complaint. In *Microsoft,* the Court explained that in making a public interest determination under the APPA, it should consider (among other things), the relationship between the remedy secured and the specific allegation 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. 4 4 Microsoft, 56 FJd at 1458-62. The Supreme Court has emphasized that the purpose of a remedy is to restore or protect competition. 5 The CIS recognizes that “the acquirer of the Enhanced Stoneville Assets” * * * must have a credible commitment to the traited cottonseed market and have the intent and capability of competing effectively in the market.” (CIS at 12.) The Antitrust Division Policy Guide to Merger Remedies (“Policy Guide”) 6 emphasizes this point: 5 Ford Motor Co., 405 U.S. at 573; du Pont, id. 6 United Statement Department of Justice, Antitrust Division. Antitrust Division Policy Guide to Merger Remedies. October 2004. pp. 3-4. The goal of a divestiture is to ensure that the purchaser [footnote omitted) possesses both the means and the incentive to maintain the level of premerger competition in the market(s) of concern. * * * (Policy Guide at 9.) The *Policy Guide* further states that: There must be a significant nexus between the proposed transaction, the nature of the competitive harm, and the proposed remedial provisions (Policy Guide at 2.) The consent decree meets neither of these objectives, for four major reasons. Any and all of these reasons undermine the requisite nexus between the remedy and the alleged violation that is required for the PFJ to fully restore competition and therefore be in the public interest. A. The “strings attached” approach to the divestitures of Monsanto and D&PL germplasm make it, in effect, a conduct-based remedy. Divestiture of germplasm is a key component of the remedial approach taken in the consent decree. The Complaint recognizes the crucial role of germplasm in developing and commercializing traited cottonseed when it states: A company with a large collection of high quality, or elite, germplasm has a competitive advantage because the company has the ability to identify the best genetic material and use it in a wide variety of possible cross combinations, resulting in a greater likelihood of developing a successful variety. (Complaint at 5.) In attempting to address the Complaint's concerns regarding actual and potential competition, the consent decree requires Monsanto and D&PL to divest various lines of germplasm. However, these divestitures come with significant “strings attached,” essentially making it an inadequate conduct-based remedy that masquerades as structural reform. The consent decree is replete with exceptions, exclusions, and conditions on the to-be-divested lines of germplasm. For example, Monsanto will be allowed to obtain a license back from the acquirer to continue to use the Advanced Exotic Yield lines for its ongoing trait research project. (CIS at 15.) The PFJ also requires the divestiture of a “non-exclusive, royalty-free license” to sell and breed with varieties from the Cotton States program sold by Stoneville. (CIS at 15.) And Monsanto “* * * may retain, with certain limitations, certain categories of [other] Monsanto germplasm used predominantly in its trait development and licensing business.” (CIS at 16.) Moreover, under the terms of the PFJ, the merged company can retain a license to use the 20 lines of D&PL germplasm to breed new varieties and sell exclusively varieties that contain only Monsanto traits. Monsanto/C&PL can continue to sell (for a limited time) conventional versions of divested varieties. The merged company may also prevent the acquirer from triple-stacking Monsanto's herbicide-tolerant and insect-resistant traits and non-Monsanto traits for a period of seven years after the divestiture. (CIS at 17-18.) Finally, divestiture of the exclusive right to the D&PL VipCot germplasm is contingent on Syngenta commercializing varieties that contain at least one of the VipCot insect-resistance traits. (CIS at 19-20.) There is little precedent, or logic, to support the highly-qualified divestiture of tangible germplasm assets set out in the consent decree. 7 For example, the contingency on the VipCot divestiture ignores the possibility that Syngenta might undertake development of traits that are superior to or supersede the VipCot lines. The divestiture thus binds Syngenta to a current “snapshot” of the market and undermines the possibility that to effectively compete, the firm might make changes to its R&D strategy. The remedy will require:

(1)Compliance with complex and varied licensing terms;

(2)monitoring of the applicable time periods attached to various exclusions and limitations; and

(3)policing of the specific purposes for which the merged company can retain use of the divested germplasm lines. All of this is costly, burdensome baggage that the consent decree necessarily attaches to the divestiture. 7 The remedy is still problematic even if the PFJ treats the various lines of germplasm to be divested as intangible property. For example, the PFJ provides no explanation as to why germplasm would be considered an intangible asset or, lilt is, why anything short of relinquishing all rights to the germplasm assets is justified. Moreover, even if germplasm legitimately constitutes intangible property, the PFJ fails to address key issues such as how non-exclusivity and other restrictions on the use of the germplasm assets will fully restore competition. Such conditions may make it more difficult for the acquirer to differentiate its product from the merged firms' products. Moreover, if the acquirer is required to “share” rights to the germplasm, it may not invest in R&D and marketing to the extent that it would have if the Monsanto and D&PL had fully relinquished all rights to the germplasm. As a result, the germplasm “divestitures” required in the PFJ are really not a structural remedy at all. Rather, they are a conduct-based, regulatory-style “fix” that imposes on this Court a monitoring and compliance burden that it should be loathe to undertake. The logic behind the antitrust agencies' preference for structural antitrust remedies is well known. For example, the *Policy Guide* states that: A carefully crafted divestiture decree is “simple, relatively easy to administer, and sure” to preserve competition [footnote omitted]. A conduct remedy, on the other hand, typically is more difficult to craft, more cumbersome and costly to administer, and easier than a structural remedy to circumvent. (Policy Guide at 8.) In sum, the “divesture” of germplasm is crippled by competition-impairing restrictions and provides the merged company with ongoing access to the assets. This “strings attached” approach to the divestiture of tangible property is unprecedented and will virtually ensure that the acquirer does not possess the means or incentive to maintain the level of pre-merger competition in the relevant markets. B. The PFJ fails to create a viable competitor because it creates a patchwork of assets with no proven track record in the market. The Antitrust Division's policy guidelines make the point that time and incentive are of the essence in restoring competition lost by the merger: The package of assets to be divested must not only allow a purchaser quickly to replace the competition lost due to the merger, but also provide it with the incentive to do so [footnote omitted]. ( *Policy Guide* at 11.) The CIS appears to recognize this imperative when it explains that the divestiture of Stoneville alone would be inadequate to restore the lost competition between Monsanto and D&PL (CIS at 14.) Thus, the PFJ requires that additional Monsanto and D&PL germplasm accompany Stoneville, collectively making up the Enhanced Stoneville Assets. This approach, however, is inadequate to remedy the alleged violation because it creates a “patchwork” of assets with no proven track record in the market. A number of facts clearly illustrate this problem. First, the PJF merely requires the transfer of some “promising” and “developmental” lines of Monsanto and D&PL germplasm to the acquirer that have no demonstrated, immediate commercial value. For example, the CIS explains that four of the eight lines of elite D&PL germplasm include the “recurrent conventional parents” that account for 55% of the cotton varieties sold in the Southeast. 8 (CIS at 16.) It is important to note, however, that the commercial varieties that make up this 55% resulted from breeding and cross-breeding the recurrent conventional parents. The acquirer is therefore obtaining only the raw inputs necessary to breed varieties that could be commercially successful at some time in the future and only after considerable expenditure. As they currently exist (i.e., without further breeding), the eight D&PL germplasm lines to be divested account for varieties that are planted on a mere 1% of the cotton acres in the Mid-South and Southeast. 9 8 This 55% encompasses cotton grown in only one of the two relevant markets. 9 See U.S. Department of Agriculture, Agricultural Marketing Service—Cotton Program. Cotton Varieties Planted: 2006 Crop, Memphis, Tennessee, August 2006, Table I and U.S. Department of Agriculture, National Agricultural Statistics Service, Louisiana Farm Reporter 7(10), May 17, 2007. Moreover, twelve of the 20 D&PL germplasm lines are only in the breeding “pipeline,” and could produce commercial varieties only over the next 10 years. (CIS at 16) This is perilously close to the expiration of the PFJ and the time frame the CIS identifies as necessary for new entry into the market for developing, commercializing, and selling traited cottonseed. Eighty percent of the D&PL VipCot germplasm to be divested under the decree is also unlikely to prove up commercially success varieties for at least another five years. (CIS at 19.) Finally, the Advanced Exotic Yield lines and Marker-Assisted Breeding populations of germplasm are of extremely limited value to the acquirer. The CIS itself notes that this germplasm provides a “* * * limited platform for introducing non-Monsanto traits because many are already introgressed with Monsanto traits.” (CIS at 15, n. 2.) The consent decree requires the merged company to allow the acquirer to breed out Monsanto traits. Breeding out Monsanto traits and then breeding in competing traits will take a long time, assuming the acquirer even has the wherewithal to do so. Second, the success of the Enhanced Stoneville Assets, in part, rides on the ability of the government to pick “winning” lines of germplasm that can be bred into commercially successful cotton varieties. The Complaint emphasizes the importance of possessing both high-quality, and large quantities of, germplasm for competitive success. (Complaint at 5.) And the CIS, for example, describes the importance of D&PL's “ * * * extensive breeding programs, elite germplasm collection, technical service capabilities, know-how, brand recognition, and market position.” (CIS at 8.) Given this complexity, the chances that the government picked winners in selecting the germplasm lines to be divested are low. And it is possible that Monsanto/D&PL influenced the selection of germplasm lines through the information they did or did not disclose to the government (which would have been at an information disadvantage). If so, the merged firm would have no incentive to provide germplasm lines that could strengthen a rival in the market. Pairing a smattering of unproven lines of germplasm that could be years away from producing successful, commercial cottonseed varieties with Stoneville in an untested combination will not create the capability for extensive breeding and cross-breeding that is essential for commercial success. Arguably, to fully restore competition, the acquirer would need access to sufficiently large quantities of germplasm that is currently producing commercial varieties or that could produce successful commercial varieties in far less than 10 years. As it stands, there exists no compelling evidence that the unproven, untested combination called the Enhanced Stoneville Assets would survive in the market, regardless of the identity of the acquirer. C. The proposed divested assets, if acquired by Bayer, will not provide the firm with the tools necessary to be a viable competitor. Under the terms of the consent decree, it is highly unlikely that the proposed acquirer (Bayer) of the Enhanced Stoneville Assets will be a viable competitor to the vertically-integrated firm created by the merger. The *Policy Guide* specifically addresses the importance of the size and market position of the merged firm in crafting divestitures. For example, it states that: * * * integrated firms can provide scale and scope economies that a purchaser may not be able to achieve after obtaining the divested assets. When available evidence suggests that this is likely to be the case (such as where only *large integrated* [emphasis added] firms manage to remain viable in the marketplace), the entity that needs to be divested may actually be the firm itself, and blocking the entire transactions rather than accepting a divestiture may be the only effective solution. ( *Policy Guide* at 14-15.) The Complaint acknowledges that the merged firm is enormous, with a 95% share of the cotton traits market and a 79-87% share of the relevant traited cottonseed markets. (Complaint at 2.) Presumably, it was the integration of traits development and traited seed that Monsanto wanted to achieve when it stated that the purpose of the merger was to “ * * * provide a complete platform of cutting-edge seed technologies to our global farmer customer base for years to come.” 10 To address the alleged violation, therefore, the remedy must consider both the vertically-integrated nature and the scale and scope of the merged firm. The consent decree stops well short of fulfilling these requirements, for the following reasons. 10 “Monsanto Company to Acquire Delta and Pine Land Company for $1.5 Billion in Cash,” Press Release dated August 15, 2006. Online, Available *http://www.monsanto.com/monsanto/layout/media/06/08-15-06.asp.* Many a commentator has noted the logic of vertical integration in traits development and traited seed: “A new gene is worthless without a quality seed base to put it in and the infrastructure to deliver it. William Lesser, “Intellectual Property Rights and Concentration in Agricultural Biotechnology,” AgBioForum 1(2), 1998, p. 59, quoting from Furman Seltz LLC investment report. First, without a complement of sufficient, market-tested assets in both the cotton traits and traited seed markets, it will be extraordinarily difficult for the acquirer to effectively engage in head-to-head “platform” competition with a behemoth Monsanto/D&PL—a firm that is likely to be impervious or even hostile to competition. Even the government recognizes the importance of this level of competition. For example, the CIS explains that the purpose of divesting the Enhanced Stoneville Assets is to provide: “* * * the scale and scope necessary in the Southeast and MidSouth to be an effective and competitive platform for trait development.” (CIS at 16.) and a “ * * * foundation on which to replicate the platform for trait development and commercialization that D&PL previously provided.” (CIS at 13.) Moreover, the Complaint admits the inextricable link between the upstream traits development and downstream traited cottonseed market: “Entry into the traited cottonseed business requires the assets and expertise *both* [emphasis added] to breed high-performing varieties of cottonseed and to develop or access traits to breed into the cottonseed.” (Complaint at 12.) Second, the consent decree's failure to include a requirement that human capital and know-how accompany the Enhanced Stoneville Assets only increases the chances that the buyer will have neither the wherewithal nor the incentive to compete against Monsanto/D&PL. Pairing only “promising” and “developmental” lines of germplasm with Stoneville in an untested, inadequate combination is injury enough. Omitting the human capital that is essential for viably maintaining the specific, technically complex assets that are being divested is akin to turning over the keys to a nuclear power plant without any personnel to operate it. Third, and significantly, Bayer operates primarily in the Southwest where it sells its Fibermax brand of long-fiber cottonseed. As a result, it lacks experience with cotton varieties planted in the Mid-South and Southeast. 11 Bayer has also been a limited player in traits development, with one commercially successful herbicide-tolerant trait—Liberty Link. 11 “Bayer's Fibermax brand has only a 2-3% share of cotton planted in the Mid-South and Southeast markets. See USDA, Cotton Varieties Planted: 2006 Crop, p. 2. In light of the large, vertically integrated nature of the merged company, it is incumbent upon the government to ensure that the consent decree produces a strong rival that can quickly and fully restore competition in the affected markets. This imperative takes on even more importance when the consent decree maintains the duopoly market structure in the Mid-South and Southeast markets. In sum, the remedy delivers none of the basic requirements to ensure that the acquirer has the tools necessary to compete with a large, integrated Monsanto/D&PL. D. The PFJ requirement that Monsanto modify its Cotton States and other third-party seed licenses fails to address the alleged violation. The final condition set forth in the consent decree is that Monsanto will modify its Cotton States and third-party seed licenses to remove restrictions on the ability of licensees to develop, market, or sell cottonseed containing non-Monsanto traits. The intent of this requirement is to: “* * * give these rival cottonseed companies the ability to partner with trait developers other than Monsanto without financial penalty * * * and to provide traits developers with “* * * access to close to half of the current U.S. cottonseed market without having to deal with Monsanto/D&PL” (CIS at 21.) This prong of the consent decree fails on numerous counts to establish a nexus with the alleged violations in the Complaint. First, the consent decree essentially directs Monsanto to cease and desist from restrictive, potentially anticompetitive practices. The Complaint notes that “Monsanto's trait licenses with most other cottonseed companies * * * severely restrict the ability of these companies to work with other trait developers * * *” (Complaint at 8.) Indeed, competitors have alleged that Monsanto's trait licensing and pricing practices for cotton and other crops go beyond intellectual property protection and punish licensees if they sell non-Monsanto traits or other competing products. 12 By imposing the licensing modification requirement, the government seems to be trying to correct for these practices through the remedy, although they are not alleged violations in the Complaint. These practices deserve to be the subject of a complaint in an appropriate case 13 and not merely mentioned on a list of conditions here. 12 For a summary of pending legal proceedings, see, e.g., Monsanto Company, Form 10-K. 2005. Online. Available *http://www.monsanto.com/monsanto/content/media/pubs/2005/MON_2005_10-K.pdf* . More detail on specific allegations regarding Monsanto's conduct involving cotton and corn is available in, e.g., *American Seed Co., Inc.* v. *Monsanto,* Case I:05-cv-00535-SLR, U.S. District Court for the District of Delaware, July 26, 2005, *Monsanto Company* v. *Syngenta Seeds, Inc.,* Second Amended Complaint, Civil Action No. 04-305-SLR (consol.), U.S. District Court for the District of Delaware, August 12, 2005; and *E.I. DuPont de Nemours and Company* v. *Monsanto Company,* Amended Complaint and Jury Demand, Civil Action No. 4:00-952-23, U.S. District Court for the District of South Carolina, May 24, 2001. These cases are provided for illustrative purposes—some are still pending and therefore outcomes are undecided. 13 Moreover, Monsanto's practices should be examined not only with regard to the licensing of cotton traits, but corn and soybeans as well. It is not unusual for a company to adopt parallel competitive practices in various of its divisions, and what has been advantageous in another market might well be applied in the cottonseed market. Second, the license modifications are designed to eliminate prohibitions on rivals stacking their own traits with Monsanto traits. Such a restraint prevents—among other things—a rival producer of traited cottonseed from bringing varieties to market with both the insect-resistant and herbicide-tolerant traits that farmers demand. At the same these restrictions are ostensibly to be removed in one part of the PFJ, however, they are to be imposed in another. For example, the consent decree prevents the acquirer of the 20 lines of D&PL germplasm from stacking Monsanto and non-Monsanto traits for a period of seven years. Perversely, therefore, the remedy attempts to finally deal (albeit in the wrong venue) with Monsanto's restrictive practices but allows Monsanto to continue to apply them to the acquirer of the Enhanced Stoneville Assets. Third, the licensing modification requirement does not address the alleged violation that competition in the Mid-South and Southeast relevant markets will be adversely affected by the merger. The CIS refers instead to a “U.S. cottonseed market,” which is not defined in the Complaint at all. Had the remedy been tied to the alleged violation, it would be clear that rivals would have access—not to half of the market—but only to between 8% and 17% of the market not occupied by D&PL in the Mid-South and Southeast. Fourth, the consent decree contains little information on the scope of the license modification requirement. The *Policy Guide* warns explicitly against vagueness and lack of clarity in crafting merger remedies: “Remedial provisions that are vague or that can be construed when enforced in such a manner as to fall short of their intended purposes can render the enforcement effort useless” (Policy Guide at 5.) and that “A defendant will scrupulously obey a decree only when the decree's meaning is clear * * *” ( *Policy Guide* ” at 5-6.) It is unclear as to whether the requirement applies to current and/or prospective licenses or how the specific language of the Monsanto licenses will be revised. Moreover, the license modification requirement will require burdensome monitoring and compliance which, as noted earlier, the Court should be loathe to undertake. In sum, the licensing modification requirement contained in the PFJ represents a vague, inconsistent, and misplaced attempt to finally address restrictive, potentially anticompetitive practices long-employed by Monsanto. And while these practices should be addressed elsewhere, they do not respond to any particular violation in any defined relevant market in the Complaint. As such, the remedy will not fully restore competition in the relevant markets. IV. Conclusion The Court should not give DOJ “a pass” in its review of this merger. The merger raises serious questions regarding a key agricultural supply chain and the many consumers that it will indelibly affect. There is little in the PFJ that is likely to preserve effective competition in the relevant markets, or to prevent the consumer harm that will flow from the impairment of competition. The proposed remedies are largely conductbased and really do not go beyond the scope of the original proposals offered up-front by Monsanto. Moreover, the PFJ ignores the fact that the acquirer of the divested assets must have both the means and incentive to compete with a large, vertically firm that possesses an unrivaled “platfonn” for trait development and traited seed commercialization. On this basis, the Court should reject the PFJ as insufficient and contrary to the public interest. Respectfully Submitted, Diana Moss, *Vice President and Senior Fellow American Antitrust Institute, 2919 Ellicott Street, NW., Washington, DC 20008, phone: 720-233-5971, e-mail: dmoss@antitrustinstitute.org, web: http://www.antitrustinstitute.org.* August 20, 2007 Ms. Donna N. Kooperstein, *Chief, Transportation, Energy & Agriculture Section, Antitrust Division, United States Department of Justice, 325 Seventh Street, NW., Suite 500, Washington, DC 20530.* Re: *United States* v. *Monsanto Company, et al.* Dear Ms. Kooperstein: I am writing you today as the Board President of California Consumers United to voice my concerns not only for the State of California but for the nation as a whole. As a consumer protection coalition, California Consumers United advocates for sound legislation and strong regulations that safeguard all California consumers against unfair business and marketplace predatory practices. Increased agricultural concentration, which is occurring at an alarming rate, is harmful to our nation's economy and well-being. This concentration harms consumers and farmers in the state of California—and throughout the country—by leading to limited choices, higher prices, and increased costs. Monsanto's acquisition of Delta & Pine Land Company is one more example of this distressing trend. Monsanto, an agriulture conglomerate, already has monopoly-like shares of biotech traits in several crops, including cotton. The Department of Justice's consent decree regarding Monsanto's acquisition of Delta & Pine Land Company will only reinforce Monsanto's control over the markets for cotton seeds and cotton biotech traits. This likely will result in severe consequences to Californians and cause damage to consumers in the form of higher prices and fewer choices. The remedy proposed by the Department of Justice to cure the anticompetitive effects of this deal—divestiture of a weak cotton seed company and a few lines of germplasm—are incapable of safeguarding competition. There is already not enough competition in agriculture; the Department of Justice should not allow one company to control access to the cotton market. We therefore urge the Department of Justice to reconsider its consent decree or, if the Department will not change course, for the Court to reject it. Sincerely, Linda Love, *Board President, California Consumers United.* Submitted August 27, 2007 United States of America, Department of Justice, Antitrust Division, 325 7th Street, NW., Suite 500, Washington, DC 20530, Plaintiff, v. Monsanto Company, 800 North Lindbergh Boulevard, St. Louis, MO 63167 and Delta and Pine Land Company, 1 Cotton Row, Scott, MS 38772, Defendants.; Case: I:07-cv-00992 Assigned To: Urbina, Ricardo M. Assign Date: May 31, 2007 Description: Antitrust Comments of Dupont on Proposed Final Judgment This case raises critical issues regarding the future competitiveness of American agriculture. The transaction at issue combines the dominant supplier of biotech traits with the dominant cottonseed company. Among other things, it eliminates head-to-head competition in the development of new traits to challenge Monsanto's established monopoly. Since biotech is as important to agriculture as agriculture is to the U.S. economy, the competitive implications cannot be overstated. There is no question that Monsanto's acquisition of DPL would violate the antitrust laws, and the Complaint filed by the Justice Department's Antitrust Division details the serious harm to farmers and consumers that will result. Nor is there any question that significant remedies are necessary, including divestitures and reform of Monsanto's restrictive licensing practices as proposed. The only question before the Court under the Tunney Act is whether the Antitrust Division settled for too little, i.e., whether the patchwork quilt of proposed remedies provides a viable alternative to the competitive presence of an independent DPL, such that trait developers will continue to incur the significant cost and risk of competing with Monsanto. The answer to that key question, DuPont respectfully submits, is “no.” The objective facts on the face of the Complaint make plain that the “Enhanced Stoneville” collection of assets, even combined with their new owner Bayer, does not come close to creating a viable trait development partner that can replace DPL in terms of resources and market access for cottonseed. Accordingly, DuPont has determined that it cannot justify further investment in developing competing cotton traits, and is terminating that work. The bottom line is that, without substantial additional remedies, this transaction will reduce choices and raise prices for farmers and consumers. A. Standard of Review The Tunney Act imposes a duty on the reviewing court to evaluate the remedies proposed in light of the competitive injury detailed in the Division's Complaint. The statute requires that “[b]efore entering any consent judgment proposed by the United States * * *, the court shall determine that the entry of such judgment is in the public interest.” 16 U.S.C. 15(e)(1). In applying this “public interest” standard, the burden is on the government to “provide a factual basis for concluding that the settlements are reasonably adequate remedies for the alleged harms.” *United States* v. *SBC* v. *Verizon* , 2007 WL 1020746, *16 (D.D.C. 2007), citing *United States* v. *Microsoft Corp.* , 56 F.3d 1448, 1460-61 (D.C. Cir. 1995). The Government has an extra burden, we submit, when it changes its view on an identical transaction within a span of only a few years. In 1999, the Division decided to challenge Monsanto's proposed acquisition of DPL, 1 indicating that no acceptable remedy was available. Since that time, the marketplace has changed in ways that make this combination even more competitively harmful: 1 As a senior Antitrust Division official testified before Congress, Monsanto called off its 1999 attempt to purchase DPL after DOJ “indicated that it was prepared to sue to prevent consummation of the transaction.” John M. Nannes, Statement Before the Subcommittee on Antitrust, Business Rights, and Competition, United States Senate Judiciary Committee (Sept. 8, 2000) (available at *http://www.usdoj.gov/atr/public/testimony/6581.pdf* ). • Monsanto's share of traits in cotton is higher; • DPL's seed share in key cotton-growing regions is higher; • DPL is actively engaged in joint development of traits that, but for this acquisition, would compete with Monsanto's trait monopoly. In light of these heightened competitive concerns, the Court should expect that the Division will explain in detail the basis for the different outcome. B. Acknowledged Competitive Harm For the benefit of the reviewing Court, this section will distill the salient allegations underlying the violation alleged in the Complaint. The Complaint begins with an arresting fact: Monsanto's share of biotech traits in cotton is “over 96%.” Complaint ¶ 3. The Division's subsequent characterization of Monsanto as the “dominant” supplier of traits thus is an understatement. Id. at ¶ 6. For important traits that are used in “almost all” cottonseed planted today to lower farming costs and increase yield (i.d. at ¶ 18-19, 22), Monsanto is essentially the only game in town. There are challengers to Monsanto's trait monopoly, and that competition is what is at stake in this proceeding. As the Complaint recognizes, DPL was working with other biotech companies including DuPont to develop and commercialize traits and seed “that would compete with” Monsanto's existing traits. Id. at ¶ 26. DPL's competitive activity “jeopardized” Monsanto's trait monopoly, id. at ¶ 6, as Monsanto “recognize[ed] the potential for a successful pairing of DPL's cottonseed with competing traits.” Id. at ¶ 7. So Monsanto now has acquired DPL in a transaction that “will * * * eliminate DPL as a partner independent of Monsanto for developers of traits that would compete against Monsanto,” and therefore “will *likely delay if not deter efforts to develop other traits that would compete with Monsanto traits* .” Id. at ¶ 42 (emphasis added). As a result, “farmers likely will have *fewer choices* of, and face *higher prices* for, traited cottonseed.” Id. (emphasis added). Importantly, the Complaint backs up these conclusions of severe competitive harm in violation of the Clayton Act with key facts regarding DPL's unique role as a trait development partner. Developing and commercializing a new trait to compete with Monsanto's entrenched position is no mean feat. It not only takes time and money, but requires specialized resources that DuPont and others do not have so were relying on DPL to supply, in several categories. 1. *Germplasm:* First, the Complaint explains the importance of germplasm, which is the genetic material that encodes agronomic characteristics of a plant, such as yield. Id. at ¶¶ 14-16. Successful cottonseed is created by combining (or “crossing”) different lines of germplasm to enhance the performance characteristics of the plant. Id. As stated in the Complaint, this is not a one-shot effort, but rather an on-going one: “to be competitive, cottonseed companies must continually work on developing new and improved cottonseed varieties through their breeding programs.” Id. at ¶ 15 (emphasis added). The product of the initial cross is then “further cross[ed]” with still other germplasm lines. Id. This breeding process “often requires thousands of attempts” before germplasm with the right genetics is created that will be the basis for a successful commercial variety. Id. at ¶ 28 (emphasis added). It generally “takes eight to ten years * * * until a new cottonseed variety is ready for market.” Id. at ¶ 15 (emphasis added). So there is no dispute that one very important key to successful breeding is the “quantity and quality” of germplasm lines available to be used in the thousands of crosses required to breed competitive cottonseed. Id. at ¶ 16. The Complaint states that a “large collection of high quality * * * germplasm” creates a “competitive advantage.” Id. The obvious reason is that a company with such assets is best positioned to engage in the “wide variety of possible crossing combinations” necessary to produce a “successful variety.” Id. In this regard, the Complaint acknowledges that DPL is unique. Not only is it the “largest cottonseed producer in the world,” but it has “the largest cotton germplasm collection.” ID. at ¶¶ 13, 17 (emphasis added). Indeed, the Complaint recounts that Monsanto itself chose DPL as its development partner because it had, quite simply, “the best germplasm.” Id. at ¶ 20 (emphasis added). And DPL remains an “attractive partner” because of “the strength and breadth of its germplasm base.” Id. at ¶ 26 (emphasis added). 2. *Breeding Infrastructure:* Another key factor is the specialized facilities to effectively use the germplasm collection in a successful breeding program over time. Again, the Complaint sets DPL apart from other cotton companies. Its large network of facilities gives it “more breeding capabilities than any competitor.” Id. at ¶ 17 (emphasis added). 3. *Experienced Breeders:* The Complaint recognizes DPL has “experienced and knowledgeable cotton breeders” (id. at ¶ 5) with the “know how” and “technical service capabilities” to use all these assets in a highly effective manner that well exceeds that of any alternative cottonseed company. Id at ¶ 26. The Complaint states in unequivocal terms that DPL's “over ninety years of germplasm development” has produced not just the greatest breeding track record, but “by far the greatest track record of success” in the breeding of cottonseed varieties that are attractive to farmers. Id. at ¶ 17 (emphasis added). 4. *Market access:* This success is manifest in DPL's high share. It is again an understatement for the Complaint to say DPL has the best “brand recognition” and “market position” to support development and commercialization of competing traits. Id. at ¶ 26. In the “important” cotton growing regions of the Southeast and MidSouth, id. at ¶ 8, DPL has breathtakingly high shares of 87% and 79%. Id. at ¶ 4. Obviously, this level of market access is not only unique, but is extremely valuable to a trait development partner seeking a return on investment through a successful commercial launch. 5. *Stacking rights:* Another advantage of partnering with DPL is it has IP rights that the Complaint says “most other cottonseed companies” do not. Id. at ¶ 27. Since farmers want multiple traits, seed increasingly is sold with multiple traits “stacked” in it. Monsanto generally uses licensing terms that “severely restrict” the ability of a seed company to stack a non-Monsanto trait with a Monsanto trait. Id. DPL, as further evidence of its strong competitive presence, had stacking rights that are important in introducing new traits. 6. *Business Strategy:* Finally, DPL was motivated to support Monsanto's competitors like DuPont. It “publicly stated its intent” to work with other trait developers to “replace Monsanto traits in its products.” Id. at ¶ 6. This business “strategy to replace (or `trade-out') the Monsanto traits” would be “profitable for DPL.” Id. at 25 * * *. For all these reasons, DPL was not just an “attractive partner” for Monsanto's trait competitors (id. at ¶ 26), it was “an unparalleled avenue through which to commercialize and market” traits. Id. at ¶ 5 (emphasis added). No other cottonseed company has the combination of key resources, again in the superlative terms of the Division's Complaint: • The “LARGEST” cotton germplasm collection, and • The “BEST” germplasm, and • “MORE” breeding capabilities “than any competitor,” and • “BY FAR THE GREATEST” track record of success in breeding new cotton varieties, and • “87% and 79%” of cottonseed sales in “important” regions, and • STACKING RIGHTS “most other cottonseed companies” do not have, and • An announced “STRATEGY” of working with Monsanto's competitors to develop and commercialize competing traits. DuPont agrees with the Antitrust Division that this combination of resources is what makes DPL “unparalleled” in its ability to support the development and launch of competing traits. That is why DuPont was partnered with DPL to develop Optimum(tm) GAT(tm) for cotton, a new trait offering resistance to two different classes of herbicide that would provide a competitive alternative to Monsanto's RoundUp Ready monopoly. And DuPont agrees that significant divestitures and reform of Monsanto's “severely restrict[ive]” licensing terms are necessary parts of effective relief. But DuPont respectfully submits that, even upon cursory review, the Complaint's exposition of DPL's competitive significance as a trait development partner makes clear that the remedies proposed fall far short of creating a viable alternative. Therefore they do not satisfy the legal standard of “restoring competition” to Monsanto's current trait monopoly. The following section analyzes why the proposed remedy does not adequately address the violation alleged in the Complaint. C. Inadequacy of the Proposed Remedy To settle the case, the Division offers a Proposed Final Judgment (“PFJ”) that is explained in the Competitive Impact Statement (“CIS”). The CIS sets the bar correctly: To “ensure the continued presence of a cottonseed company independent of Monsanto with sufficient germplasm and breeding capabilities to serve as an effective platform for development of cottonseed traits in competition with Monsanto.” Id. at 12. But the PFJ does not deliver: The remedies are self-evidently insufficient to provide a viable alternative to DPL as a trait development partner and thereby restore the competitive harm alleged in the Complaint. As discussed below, there is no “factual basis” on which the Court could conclude that the Proposed Final Judgment contains “reasonably adequate remedies for the alleged harms” and is in the public interest. 1. Proposed Remedy a. *Stoneville:* First, Monsanto is required to divest its U.S. Stoneville business, including Stoneville's germplasm and assets, together with expanded stacking rights. PFJ at 3-4; CIS at 13-14. Describing Stoneville as “the second largest traited cottonseed company in the MidSouth and Southeast” (CIS at 9) greatly overstates its relative position. The CIS itself contains the share data making clear Stoneville pales in comparison to DPL: “In the MidSouth, DPL and Stoneville account for approximately 79% and 16%, respectively, of traited cottonseed sales. In the Southeast, DPL and Stoneville account for approximately 87% and 8%, respectively, of traited cottonseed sales.” Id. at 10. Further, published data from USDA demonstrates that Stoneville's share in those regions has declined over the past three years. 2 2 USDA Agricultural Marketing Service—Cotton Program, “Cotton Varieties Planted” 1998-2006, Table 1 [hereafter “USDA Cotton Data”]. Stoneville's germplasm pipeline is said to include: “Approximately 35 mid-to full- and full-season lines for potential commercialization in the MidSouth and Southeast between 2008 and 2012.” Id. at 13. The CIS does not explain what the likelihood this “potential” will come to fruition is, nor what share Stoneville predicts it could achieve. Nor, tellingly, does it state comparable figures for the number of lines DPL will offer in the same regions. Although divesting Stoneville “remedies” the horizontal effect of increased concentration at the cottonseed level, it does not address the competitive harm at the trait level, as Stoneville is clearly an inadequate trait development platform. b. *Additional Monsanto Cotton Germplasm:* Because of the inferiority of the Stoneville assets, Monsanto is required to divest other cotton germplasm that was not integrated into the Stoneville business. PFJ at 3-4, Schedule B. These assets are described as follows:

(i)“ *Advanced Exotic Yield Lines:* ” These “promising developmental germplasm lines” are derived from “exotic cotton plants that could be bred into commercial varieties to increase yield.” Monsanto reportedly “anticipated” that seed varieties that could be developed from this germplasm would be “well-suited” for the Mid-South and Southeast regions. Although the rights are termed “exclusive,” Monsanto retains the ability to obtain a “license back” for “ongoing trait research.” CIS at 14-15 (emphasis added).

(ii)“ *Marker Assisted Breeding

(MAW)Populations:* ” This germplasm was developed in a “program * * * *intended* to enable breeders to use sophisticated molecular technology to aid in the selection of promising lines * * *” Id. at 15. Again, Monsanto is said to have “ *anticipated* ” that this germplasm could be used to develop seed products over four years. But the CIS acknowledges it is only a “ *limited platform* ” for competing traits because the purchaser will have to take the time and expense of first breeding out Monsanto traits. Id. at n. 2.

(iii)“ *Cotton States Germplasm* ” and “ *Other Germplasm:* ” Monsanto must divest only a *non-exclusive* license “to sell and breed with varieties from Monsanto's recently established Cotton States program *that Stoneville currently sells today.* ” Monsanto also must divest only its rights “to commercialize varieties that result from pre-existing crosses of Stoneville germplasm and Cotton States Licensors germplasm.” And Monsanto must divest “all other germplasm” it currently holds, “except * * * certain categories of germplasm used predominantly in its trait development and licensing business.” Id. at 15-16. c. *DPL Germplasm:* Yet a third tranche of divested germplasm consists of twenty DPL conventional varieties, including eight “ *in the pedigrees* of many of DPL's popular current varieties in the MidSouth and Southeast.” PFJ at Schedule B; CIS at 16 (emphasis added). The CIS does not disclose how many other DPL germplasm lines are represented in the lineage of these currently popular varieties. Nor does it explain how many “parents” are required to develop a single competitive cotton variety. The other twelve varieties reportedly “constitute a *significant* portion of DPL's breeding pipeline for the MidSouth and Southeast and represent the varieties, and breeding stock for the varieties, that DPL had chosen to bring to market over the next decade.” Id. Although we are told that “[o]ver the past four years, each of these twelve varieties has been ranked by DPL * * * as falling within DPL's top category for conventional lines * * *” Id. at 17, important questions remain unanswered, including: • Where do these lines rank? • How many other varieties are so ranked? • How many other germplasm lines were required to create the twelve lines to be divested? • How many would be required to create the next generation of these varieties? The twenty DPL varieties to be divested will, like the non-Stoneville Monsanto germplasm, be released to their purchaser as stand-alone assets. They are not integrated within the Stoneville cotton development program, so will have several competitive disadvantages, including: • They will not be accompanied by any of the development resources (breeding experts, infrastructure, etc.) used to create them at DPL. • They will not be divested with access to “performance data and other information” deemed necessary to the divestiture of certain germplasm to Syngenta. Id. at 19. The CIS does not explain how an acquirer could integrate all these disparate germplasm lines into an effective breeding program that might produce commercial varieties, or how long that would take. Moreover, divestiture of the DPL germplasm is non-exclusive, in that Monsanto and DPL will “retain a license to continue using these twenty lines to breed new varieties and to sell exclusively varieties that contain only Monsanto's traits.” Id. at 17. That unusual weakening of the remedy is defended as necessary “to preserve DPL's current competitiveness, prevent disruption to its breeding program, and provide DPL the ability to compete effectively in the future.” Id. There is no explication of factual support for those conclusory statements. The bottom line is that the acquirer of “Enhanced Stoneville” has the right to breed certain parent lines but not, in Dupont's experience, the resources to create commercial varieties in any reasonable amount of time. It must do so in competition with a combined Monsanto/DPL that retains all those resources, know how, and marketplace advantages. Nor, given that Monsanto/DPL retains parallel rights, does the CIS explain how the purchaser would have an incentive comparable to the incentive DPL's exclusive rights gave it invest in developing these lines before the merger. 2. Independent DPL vs. “Enhanced Stoneville” This is not a close call. The monopolist has acquired the premier development partner with all the necessary resources its rivals were relying on to be competitive. As a substitute, it proffered a cobbled-together combination of disparate germplasm and other assets with all sorts of strings attached that have no comparable competitive presence today or in the future, and then sold them to a company that brings no meaningful complementarity. This remedy plainly does not return the marketplace to the level of competitive trait development resources eliminated by the transaction. Taken alone, each element lacks attributes that DPL brings to the competitive landscape. Taken together, they are a “mix and match” group of assets that lack the necessary prospect of competitive viability the Antitrust Division itself says is critical to effective merger remedies. Rather, the combined Monsanto/DPL team is off and running in this competitive race while the Bayer/Stoneville team is stuck at the starting line trying to find the right shoes to put on. First, the CIS acknowledges that “[d]ivesting Stoneville by itself would not fully restore the lost competition between Monsanto and DPL.* * *” Id. at 14. As has been discussed, Stoneville has a perennially low, and of late declining, share in areas identified as important for traits by the DOJ. The fact that DPL is 5 to 10 times larger than Stoneville reflects the inferiority of the Stoneville germplasm and breeding program. There is no evidence Stoneville's germplasm is likely to improve significantly over time. Stoneville's breeding program lags DPL's significantly. For example, DPL has “ *eleven* strong worldwide plant breeding programs developing new elite genetics to integrate existing and new biotechnology,” compared to just two at Stoneville. “Cotton and Soybean Seed Research,” *http://www.deltaandpine.com/research.asp;* “Delta & Pine Land Quarterly Summary,” GARP Research and Securities (April 10, 2007). Other industry participants have acknowledged Stoneville's inferiority as a development partner by their conduct. Although Stoneville was an independent cottonseed company between 1999 and 2005, the period during which various partnerships began work on non-Monsanto traits for cotton, companies like Dow, DuPont, Syngenta, and Bayer did not choose to collaborate with Stoneville, but with DPL. See Complaint ¶ 26. Even Monsanto would prefer to work with DPL rather than continue “building its own cotton business” with Stoneville. CIS at 8. Divestitures of “other Monsanto germplasm” and select strains of DPL germplasm do not close the wide gap between DPL and Stoneville. The CIS contains many carefully chosen descriptions of the “Enhanced Stoneville” that clearly are damning with faint praise. For example, the CIS characterizes the “Enhanced Stoneville Assets” as providing “tools” that can be “a significant base” and even a “foundation” for competing trait developers. Id. at 13. Further, the CIS repeatedly describes the divested germplasm in aspirational terms, as “promising” and “anticipated” to be developed into competitive seeds at some point in the future. These characterizations are not a sufficient basis to conclude the remedy will meet the Division's own standard of creating a cottonseed company that competing trait developers can rely upon in making investment decisions. Analysis of the USDA data further demonstrates the divested assets are inadequate to create a viable development partner. First, very few newly introduced varieties become commercial successes. DPL introduced 64 unique cotton varieties incorporating traits in the past eight years, but only 14 ever came to represent 1% or more of annual U.S. cottonseed acres USDA Agricultural Marketing Service—Cotton Program, “Cotton Varieties Planted” 1998-2006, Table 1. Thus, current expectations about the germplasm lines likely to produce competitive products in the future are not reliable, and clearly no substitute for DPL's “by far the greatest track record of success” in developing new cottonseed. Moreover, what is successful for certain growing conditions will not necessarily be successful in others. That is why DPL has offered consistently over 20 commercial varieties in a single growing region. Indeed, again based on the USDA data, we find that 30 of the 40 varieties DPL offered in the Southeast or MidSouth regions in 2006 had less than 1% share in both of those regions. well over half of the varieties DPL offered in the Southeast or Mid South regions (48/73) never achieved a 1% share. Id. Second, current market success is not a good predictor for the future commercial appeal of existing varieties or their offspring. Each year, roughly a third of American cotton acres are planted with new varieties that were commercialized within the previous three years, and roughly two-thirds of acres are planted with varieties less than five years old. 4. Even if the proposed germplasm divestitures created a lineup of competitive varieties in 2008, there is no assurance they will address the longer term loss of competition. This point is key for trait developers facing major investment decisions. Traits must be sold in successive generations of popular cotton varieties, because most trait value is realized through sales in varieties that were not yet invented on the date of the trait's commercial introduction. For instance, analysis of the USDA data shows that, just three years after Monsanto's BollgardfRoundup Ready trait stack was introduced in 1997, over half of the acres planted with that stack were cotton varieties introduced after 1997. For that reason, firms will only invest in trait development if they are working with a development partner with the germplasm and other resources to support the consistent introduction of new, commercially appealing varieties over the longer term. The “Enhanced Stoneville” assets do not warrant such a significant financial commitment. Further, divestiture of the other Monsanto and DPL germplasm under the proposed terms is even less likely to restore lost competition because it is, in many cases, nonexclusive and/or bound up with Monsanto intellectual property. In a broader sense, the proposed divestitures are flawed because they lack organizational and developmental context. In its policy statements about remedies, the Division has explained that “[r]estoring competition requires replacing the competitive intensity lost as a result of the merger.” *Policy Guide to Merger Remedies* at 5. To ensure that this is the case, the Division emphasizes its preference for “divestiture of an existing business entity that has already demonstrated its ability to compete in the relevant market.” Id. at 12. By contrast, the collections of germplasm to be divested are unrelated to one another and are not integrated into a single breeding program, as DPL was. These disparate assets thus lack many of the complements required to restore competition, including the breeders who have experience working with the assets in question, key historical information about performance and breeding history, and regional breeding facilities well-suited to the growing of distinct varieties. Stripped of their context in an existing business entity, the additional germplasm assets have “not demonstrated the ability effectively to compete” as set forth in the Division's internal policies. Id. at 13. Bayer, which acquired the “Enhanced Stoneville,” offers no solace to trait developers. Bayer's 2006 share of cotton acres planted was just 3.1% in the Southeast region and 2.5% in the Mid South region. Between 1999 and 2006, according to USDA, Bayer introduced just one cotton variety that gained a share of 5% or more in either of these regions, compared to ten such varieties from DPL. So it has no track record of success in these key regions to build on. Adding “Enhanced Stoneville” and stacking rights is simply too little too late to make Bayer a viable trait development partner. All these factors obviously increase the risk for any trait developer, and DuPont is no exception. It has invested millions of dollars in its joint development project with DPL. But, after evaluating its options in the wake of this transaction, it concluded that further investment with a cobbled-together Bayer/Stoneville does not make economic sense. DuPont therefore has initiated the process of terminating the project. The result, of course, is that Monsanto's monopoly in herbicide tolerant cotton traits will be preserved, so farmers will face fewer choices and higher prices. D. Additional Remedies The Complaint is clear that what makes the opportunity for cotton trait development attractive is the availability of an exceptional cottonseed company as a development partner. As discussed above, that company, DPL, has the best of all necessary attributes as a trait development partner: The best market access, best germplasm, best breeding programs, best track record of introducing successful new varieties, best IP rights, and best incentive to compete. The Complaint makes clear that DPL is by far the most attractive and efficient development partner, indeed in DuPont's view the only viable partner in cotton. The remedy therefore that would restore competition is one that maintains the competitive resources needed to develop new traits. Any remedy that eliminates an independent DPL has significant risks. But the only remedy DuPont can envision that would have a reasonable chance of preserving competition would be divesting all of DPL's germplasm and its breeding operations, as well as associated IP rights. E. Conclusion The Complaint sets forth a clear and compelling story of the competitive injury that will result from the proposed transaction. The remedy proposed in the Final Judgment falls far short of what would be necessary to have a reasonable prospect of maintaining competition in trait development. The result is clear: harm to farmers and consumers from a further entrenched Monsanto monopoly. For the foregoing reasons, DuPont respectfully submits that the Proposed Final Judgment does not meet the “public interest” standard of the Tunney Act. Respectfully submitted, Thomas L. Sager, *Vice President and Assistant General Counsel, E.I. du Pont de Nemours & Company, 1007 Market Street, D-7038-3, Wilmington, DE 19898.* Dated: August 27, 2007. Of Counsel: Wm. Randolph Smith, Jeane A. Thomas, Ryan C. Tisch, Crowell & Moring LLP, 1001 Pennsylvania Avenue, NW., Washington, DC 20004. August 10, 2007 Donna N. Kooperstein, Chief, Transportation, Energy & Agriculture Section, Antitrust Division, United States Department of Justice, 325 Seventh Street, NW., Suite 500, Washington, DC 20530. Re: *United States* v. *Monsanto Company, et al., Case No. 1:07-cv-00992* Ms. Kooperstein: I am writing on behalf of our organization to object to the proposed final judgment that the U.S. Department of Justice (“DOJ”) has filed in the above-referenced lawsuit. Monsanto's acquisition of Delta and Pine Land Company (“Delta”) will solidify Monsanto's monopoly in the market for cotton seed and will have harmful ripple effects for Illinois's farmers, consumers and agricultural economy. The State of Illinois has the second largest acreage of corn and soybeans planted in the United States. We are concerned that Monsanto's proposed acquisition of Delta is another step in its efforts to monopolize the market for seeds and biotech traits not just in cotton, but also in corn and soybeans. Monsanto is rapidly acquiring a variety of seed companies to commercialize its monopoly traits. In fact, its current iron grip on the corn seed market is an issue of extreme concern to our member farmers. With monopoly control over cotton, Monsanto will be able to prevent competing varieties from coming to market—alternative varieties that could have important application in corn and soybeans. The result will be devastating to Illinois farmers who need new and improved varieties to increase productivity in their crops and battle environmental conditions that threaten their livelihoods. Without market competition, our farmers will suffer from lack of alternative products and higher prices. We are disappointed that, by allowing this acquisition to proceed, the DOJ is ignoring the interests of our farmers and consumers. The clear reason for Monsanto's acquisition of Delta is elimination of competition in seeds. There is nothing about the acquisition or the DOJ's proposed final judgment that will increase competition in cotton, or for that matter, in corn or soybeans. The divestiture of Stoneville, a much smaller cotton company, together with limited access to a limited line of seed germplasm, is not an adequate remedy. The acquisition hurts farmers and consumers, while only benefiting Monsanto. Sincerely, Bridget Holcomb, *Agricultural Policy Coordinator.* Tunney Act Comments of the International Center for Technology Assessment and Center for Food Safety on the Proposed Final Judgement The International Center for Technology Assessment

(CTA)is a non-profit, bipartisan organization committed to providing the public with full assessments and analyses of the impacts of technologies on society. CTA is devoted to fully exploring the economic, legal, ethical, social and environmental impacts that can result from applications of technologies or technological systems. The Center for Food Safety

(CFS)is a national nonprofit membership organization founded by CTA to educate the general public and decisionmakers on the social, environmental and other impacts of agricultural technologies and systems; to secure adequate regulations to protect the general public and farmers from ill effects of agricultural technologies and systems; and to promote sustainable agriculture. In February 2007, CTA and CFS published a comprehensive review of the proposed merger entitled “Cotton Concentration Report: An Assessment of Monsanto's Proposed Acquisition of Delta and Pine Land” (which we are also submitting as part of these comments). CTA and CFS submit these comments and attachments pursuant to Section 2(b) of the Antitrust Procedures and Penalties Act (APPA), 15 U.S.C. 16 (the “Tunney Act”). For the reasons discussed below, CTA and CFS believe that the Dept. of Justice's proposed final judgement

(PJF)in this case is not in the public interest, and therefore must be rejected by this Court. I. Background on the Cotton Seed Industry Some basic background on the cotton seed industry is required to understand the competitive issues raised by the proposed merger. 1 There are two major types of cotton seed:

(1)Conventional; and

(2)genetically modified or “traited” cotton seed. Cotton is grown in four major regions of the U.S.: The Mid-South, Southeast, Southwest and West. Many different varieties of cotton have been developed by breeders. Cotton varieties have been bred for different combinations of properties, such as yield, disease resistance, suitability to certain climates or soil types, as well as quality characteristics such as fiber strength and length. “Traited” cotton seed is developed from conventional cotton varieties by means of genetic modification, which is used to introduce or “introgess” “cotton traits.” At present, cotton traits are limited to “herbicide-tolerance”

(HT)and “insect-resistance” (IR). The HT trait allows farmers to spray herbicides on the cotton plant to kill surrounding weeds. The IR trait protects cotton from certain insect pests. Conventional cotton does not contain these traits. In 2006, the USDA identified 203 cotton varieties planted in the U.S.: 36 conventional varieties and 167 traited varieties (CTA, Figure 7). 2 1 Throughout these comments, we reference the attached “Cotton Concentration Report” for fuller discussion of issues raised. References are of the form “CTA, Section #”). 2 Unless otherwise noted, statistics on cotton varieties planted in the U.S. are derived from USDA, Agricultural Marketing Service, “Cotton Varieties Planted” report for 2006, which contains detailed information on varieties of cotton planted. Reference in CTA, Bibliography. The merger involves two major markets. One market is the development, commercialization, and sale of cottonseed, both conventional and traited. The top three firms in this market are responsible for 92-93% of U.S. sales: DPL (51%), Bayer CropScience (30%) and Monsanto's Stoneville (12%) (CTA, Figure 1). The second is the “upstream” market for development of cotton traits. Monsanto has a 96% market share in traits, with Bayer and Dow accounting for the rest. Monsanto's HT traits are Roundup Ready and Roundup Ready Flex, both of which confer resistance to glyphosate herbicide; Monsanto's IR traits are Bollgard and its successor, Bollgard II. The only other commercialized cotton traits are Bayer's LibertyLink

(HT)and Dow's Widestrike (IR). 95% of traited cottonseed contains only Monsanto trait(s); 4% only Bayer's trait; and 1% a combination of a Monsanto and either a Bayer or Dow trait (CTA, Figure 2). II. DoJ Construes Relevant Product Market Too Narrowly DoJ defines the relevant product and geographic markets as “the development, commercialization, and sale of traited cottonseed for the MidSouth and Southeast” (CIS, p. 9). The DoJ bases its product market definition (“traited cottonseed”) on several empirically false statements. First “Farmers grow substantially all of this important crop [cotton] from cottonseed that has been enhanced through the introduction of biotechnology traits (“traited cottonseed”)” (Complaint at 2). Second: “Today, almost all cottonseed varieties planted in the United States are traited. * * *” (Complaint at 22). In fact, USDA data show that this is far from the case. First, of the 203 cotton varieties planted in 2006, just 167, or 82%, were traited. The remaining 36 varieties (18%) were conventional varieties. Hence, more than 1 of every 6 cotton varieties was conventional in 2006. Thus, traited cottonseed can by no stretch of the imagination be considered to comprise “almost all of cottonseed varieties planted in the United States.” Acreage planted to traited vs. conventional cottonseed breaks down in a similar manner. USDA data report 88% of U.S. cotton acreage planted to transgenic varieties, versus 12% planted to conventional varieties. 12% of the 15 million acres of cotton planted in 2006, or 1.8 million acres, were hence conventional. To say the least, it is difficult to understand how DoJ can claim “substantially all” U.S. cotton is produced from traited seed when nearly one in eight acres, comprising almost 2 million acres, is planted to conventional seed. This overly narrow definition of the relevant product market leads DoJ to neglect several anticompetitive effects of the merger. A. Declining Availability of Conventional Cottonseed, Higher Seed Prices As noted above, DoJ defines the relevant product market as “traited cottonseed.” This definition implicitly ignores the very existence of conventional cottonseed, which forms a significant share of both cotton varieties and acreage planted in the U.S. However, the PJF proposes a partial remedy, albeit in an incidental and unsatisfactory manner, for this sector of the cottonseed market (i.e., conventional cotton varieties) that goes completely unanalyzed in the Complaint and CIS: “The proposed Final Judgement allows Defendants to continue, for a limited period of time, to sell conventional versions of some of the divested DPL varieties currently being sold by DPL in and outside the United States, *providing for a continuity of supply of conventional cottonseed* ” (PJF, pp. 17-18, emphasis added). The evident need for a remedy expressed in the PJF stands in stark contradiction to DoJ's complete neglect of conventional cottonseed in its definition of the relevant product market in the Complaint and CIS. Because the CIS completely lacks an analysis of conventional cottonseed, and in fact virtually ignores its existence, DoJ has absolutely no basis for proposing, or assessing the adequacy of, the remedy cited above. In fact, the merger will very likely have a number of serious anticompetitive impacts related to the conventional cottonseed market. First, availability of conventional cottonseed varieties will decline. DPL sold 15 conventional varieties in 2006, 40% of the 36 conventional varieties planted in 2006 (CTA, 3.2). Monsanto intends to reduce the number of conventional varieties offered by DPL, through “accelerat[ing] biotech trait penetration” (CTA, 3.2). Secondly, because conventional seed varieties are on average two to four times less expensive than traited seeds (CTA, 3.3, Figure 5, Appendix 3, and related discussion in text), farmers who prefer conventional seeds but cannot find suitable varieties will face substantially increased seed costs. See CTA, 2.4 for further discussion of the merger's adverse impacts on the conventional cottonseed market. B. Declining Availability of Less Costly Traited Seeds, Increasing Seed Prices A closely related impact of the merger is reduced offerings of cotton varieties with less expensive single vs. more expensive “stacked”

(two)traits, and reduced offerings of less expensive first-generation vs. more expensive second-generation Monsanto traits. For instance, Monsanto has pledged to “invest in penetration of higher-margin traits in Delta and Pine Land offerings.” These proposed changes to DPL's product offerings (with respect to both conventional and traited seeds) are clearly not merely Monsanto's anticipated responses to farmer demand, but are expressions of a Monsanto strategy to increase profits through exercize of market power. These anticompetitive effects of the merger (reduced choices, increased seed prices) are addressed in detail in CTA 2.5, 3.3; Figures 5 & 6, Table 1 and Appendix 3). III. DoJ Construes the Relevant Geographic Markets Too Narrowly A striking feature of DoJ's settlement documents is the lack of any broader analysis of the cottonseed industry. One searches in vain for some argument or justification to explain DoJ's failure to analyze either

(1)the national market in cottonseed; or

(2)DoJ's restriction of the relevant geographic markets to the MidSouth and Southeast regions. On the first point, the CIS states clearly that: “The Complaint alleges that the likely effect of this acquisition would be to substantially lessen competition in the market for the development, production, and sale of traited cottonseed * * *” (CIS, p. 1), without, initially at least, restricting the anticompetitive impacts to specific geographic regions. On the second point, beyond a bare mention of the existence of the Southwest and West geographic markets, neither the Complaint nor the CIS discusses the Defendants' involvement in these markets. Yet despite DoJ's failure to analyze either of these two markets, or the national market, the CIS and PJF propose one remedy that explicitly addresses anticompetitive issues relevant to the national market in cottonseed, thus the Southwest and West markets as well as the MidSouth and Southeast (CIS, p. 21, discussed further below). In fact, analysis of USDA data show that the Defendants together have a substantial presence in both markets: 29.16% of cottonseed sales in the important Southwest market (which includes Texas, the nation's leading cotton producer); and a still greater 40.51% of sales in the West. 3 3 USDA AMS 2006, cited above and attached. See Table entitled “Estimated percentage of upland cotton planted to leading specified brands by growth area, 2006 crop” p. 3. Note that DPL owns the Paymaster as well as the Deltapine brand. For documentation, see CTA, 2.1.1. In the Southwest market, the merger would effectively result in Monsanto increasing its market share from 8.04% (Stoneville) to 21.12% (DPL), or an increase of over 2.5-fold. In the West market, Monsanto's post-merger share of cottonseed sales increases 3.6-fold, from 8.80% (Stoneville) to 31.71% (DPL). 4 4 Here, we assume that the market shares cited in the following discussion will not be altered by the Defendants' divestitures beyond that of Stoneville. The additional divestitures (e.g. of 20 DPL lines to Stoneville's acquirer and 43 lines to Syngenta) are described only in relation to the MidSouth and Southeast markets. At present, these two geographic markets represent the only cottonseed markets in which the Defendants' competitors have a significant presence. The DoJ's CIS provides absolutely no analysis of how this substantial increase in Monsanto's post-merger market presence in these two important markets would affect competitiveness in the West and Southwest regions. The concentration in these markets would increase substantially as a result of the merger, especially when considered in combination with Bayer's prospective acquisition of the Enhanced Stoneville Assets. Even without Stoneville, Bayer has a commanding 60.28% share of the Southwest market. 5 With Stoneville, this presence increases to 68.32%, or over two-thirds of the market. In the West, acquisition of Stoneville would increase Bayer's market share from 20.22% (note that Bayer purchased CPCSD in 2006, see CTA, 2.11 for documentation) to 29.02%. 5 USDA AMS 2006, see table cited above. Note that Bayer owns not only the Bayer CropScience Fibermax brand, but also AFD Seed, which it purchased in 2005, and CPCSD (California Planting Cotton Seed Distributors), which it purchased in 2006. For documentation, see CTA, 2.1.1. Post-merger, the combined market share of the top two firms in the important Southwest market (which as noted above includes Texas, the nation's largest cotton producer) increases to an astounding 89.44%, and the corresponding market share in the West market to 60.73%. Top 3 market share would become 93.29% in the Southwest, and 96.60% in the West. The post-merger share of the national cottonseed market of just the top two firms rises to 92%, creating a virtual duopoly in cottonseed, with the Defendants controlling roughly 50% of the national market and Bayer controlling 42% (CTA, Figure 1). Clearly, DoJ was remiss in not analyzing the merger's potential anticompetitive effects in the Southwest, the West, and nationally. The need for such an analysis is clearly indicated by DoJ's proposed remedy to the anticompetitive effects of Monsanto's restrictive licensing practices with third parties, which have allowed Monsanto to terminate licenses granted to cottonseed firms (licensees) which sell cottonseed containing non-Monsanto traits: “These changes will give these competing cottonseed companies the ability to partner with trait developers other than Monsanto without any financial penalty and to offer traits desired by farmers. Trait developers will thereby have access to close to half of the current U.S. cottonseed market, without having to deal with the combined Monsanto/DPL” (CIS, p. 21, emphasis added). Without having conducted any analysis of the national market in cottonseed, and having excluded from consideration two important geographical markets, DoJ is in no position to propose, or assess the adequacy of, a remedy that involves consideration of the national market in cottonseed. The truth of this assertion is brought home by DoJ's reference, in the passage cited above, to “competing cottonseed companies.” If DoJ had analyzed the national market, it would have found that there are virtually no “competing cotton seed companies” of any size still active, due primarily to numerous acquisitions over the past decades, and particularly the last few years, resulting in an extremely high level of concentration in the cottonseed industry. USDA data show clearly that the number of cottonseed firms with sales appreciable enough to register in its surveys has declined dramatically over the past several decades (CTA, 21.1, Appendices I & 2), and particularly over the last four years: From 19 in 2003, to just 9 in 2006. Accordingly, the number of smaller cottonseed suppliers other than the top three firms (pre-merger) has declined from 16 to just six (CTA, 3.1). In short, DoJ's proposed remedy in favor of “competing cottonseed companies” may soon be irrelevant, if the exit of smaller companies from the market continues, and is accelerated by the merger, as appears likely. Clearly, DoJ should have analyzed the merger's potential to accelerate the exit of smaller companies from the cottonseed market, and the associated anticompetitive harms this would likely have (declining choice of cottonseed varieties, increased costs). IV. DoJ's PJF Represents an Unwieldy and Unenforceable Conduct-Based Remedy Masquerading as a Structural Remedy Based on “Divestitures” of Germplasm The primary means by which DoJ addresses the anticompetitive harms presented by the merger involves “divestiture” of germplasm. DoJ acknowledges the crucial role of germplasm in developing and commercializing cottonseed in the Complaint: “A company with a large collection of high quality, or elite, germplasm has a competitive advantage because the company has the ability to identify the best genetic material and use it in a wide variety of possible cross combinations, resulting in a greater likelihood of developing a successful variety.” (Complaint at 5.) In addition, DoJ recognizes that divesting Stoneville alone would not be sufficient to restore competition lost by the merger Monsanto and DPL (CIS, p. 14). Accordingly, the PJF requires Monsanto and DPL to “divest” various lines of germplasm beyond that represented by Stoneville. Below, we discuss a few of the many exceptions and conditions attached to these divestitures of germplasm that render them ineffective as a remedy. A. DPL Germplasm DoJ states that: “Defendants will divest twenty DPL conventional varieties” (CIS, p. 16). First, only 8 of these 20 varieties are either commercial lines, and/or parents of lines that have been sold commercially. Six of these eight lines are listed as commercially sold varieties in 2006, when they comprised, collectively, just 1.76% of U.S. cotton planted in that year. 6 DoJ makes much of the fact that some of DPL's best-selling cotton varieties were derived, over years of breeding efforts, from four of these eight lines (CIS, p. 16). Yet as DoJ also acknowledges elsewhere, development of successful commercial cotton varieties from even high-quality parental lines can take 8-10 years, and cost tens of millions of dollars. Whether an acquirer will be able to develop commercially successful varieties from such parental lines at all, especially given the presence in the marketplace of successful varieties already developed from them, is extremely uncertain. The time required for breeding work that might result in commercially successful varieties is also uncertain, but could be substantial, and too long to promptly redress competitive harm, as merger guidelines require. 6 See Table B of Schedule B—Enhanced Stoneville Assets. Reference to USDA AMS 2006, cited above, shows that collectively, 00W12 (DP393), Delta Pearl, DP5690, DP491, DP565 and DP5415 comprised 1.76% of U.S. cotton acreage in 2006. Twelve of the 20 lines are experimental lines with unproven and hence uncertain commercial potential. The acquirer (Bayer) may also lack the requisite expertise with cotton varieties of this type to effectively utilize them in breeding programs. Still more troubling, Monsanto retains, or has the right to reacquire, substantial rights with respect to these 20 varieties (see Schedule B, Section 2, DPL Germplasm for the following discussion). For instance, Monsanto is entitled to re-acquire an exclusive license to sell varieties that are derived or bred from the DPL lines, and also contain only Monsanto traits. Recall that the chief value of these lines is as breeding stock. Secondly, Monsanto retains exclusive rights to sell any of the “divested” lines for sale in foreign countries where DPL is currently selling them and retain sufficient quantities of these lines for breeding purposes. Again, Monsanto can continue to breed with lines that DoJ chooses to designate as “divested.” Similarly, the “divestiture” of “advanced exotic yield hues” also comes with numerous strings attached. As with DPL Germplasm, Monsanto may retain “research quantities” of these lines “to enable them to continue their trait development research.” This exception is particularly curious in that DoJ's rationale for the exceptions (here and elsewhere) is to allow Monsanto “to retain assets (and research rights to germplasm) that directly relates to trait development, while the advanced exotic yield lines were developed by Monsanto as part of a non-transgenic yield enhancement project; that is, as part of a project that involving traditional, non-biotech breeding work for development of higher-yielding varieties (CIS, p. 14-15). We note also that even DoJ admits that these lines will likely be unsuitable, at least within the term of the PFJ. Finally, the “divestiture” of 43 of DPL's VipCot lines to Syngenta is similarly conditioned. Syngenta's “exclusive rights” to commercialize varieties developed from these lines is restricted to varieties that contain one of four traits (see Schedule C). If Syngenta were to develop a new trait not listed in Schedule C, and introgress it into one of these 43 lines, it could no longer commercialize it. This limitation is a significant restriction in light of the extremely high failure rate in agricultural biotechnology (CTA, 3.11, Appendix 7). This condition in effect puts DoJ in the unenviable position of “picking a winner” in a field littered with failed development projects. The commercial prospects of any of these 43 lines is also highly uncertain. DPL once promised commercialization of VipCot varieties by 2006 (CTA, 3.4.1). The commercialization date for eight of these lines is now projected for 2009-2011, with the majority pushed off until beyond 2011. These projected commercialization dates are notoriously unreliable, and DoJ's reliance on them as remedies to restore competition is naive. These are just a few of the many exceptions, exclusions and conditions related to the “divestiture” which renders them ineffective as remedies. We would note that such restrictions have two weakening effects. First, they limit the ability of extremely weak competitors to successfully develop competing traited cottonseed varieties in a field in which Monsanto already has overwhelming dominance (as evidenced by its 95-96% market share in traits). Secondly, they provide the virtual monopolist Monsanto with rights to continue to sell certain of the “divested” lines, and/or to utilize “divested” germplasm in further breeding work, advantages which can only act to consolidate its monopoly position and forestall meaningful competition. For a fuller discussion of the competitive strength of a post-merger Monsanto-DPL, see CTA, 3.10 and Appendix 5. B. DoJ's Conduct-Based Remedy Imposes Undue Obligations for Regulatory Oversight, Which DoJ Has Neither Time Nor Resources To Oversee The numerous conditions attached to the sharing of rights to “divested” germplasm between Monsanto-DPL and Bayer-Stoneville and Syngenta imposes oversight obligations on DoJ which the Antitrust Division is ill-equipped to undertake. For instance, DoJ may be called upon to rule as to whether Monsanto has in fact complied with its obligation to provide Bayer with materials the latter needs to obtain regulatory approval of varieties Bayer develops from Null Lines derived from the “divested” advanced exotic yield lines, or as to whether compensation Monsanto seeks from Bayer for this task is in fact “reasonable” (Definitions, Null Line). Or, DoJ may have to rule on whether any retention by Monsanto of research quantities of advanced exotic yield lines does or does not adversely affect Bayer (Schedule B, clause 4c). Clause 4d of Schedule B may further require DoJ to police Bayer with respect to acquisition of certain patents, as well as enforce breeding and resale restrictions, in relation to the advanced exotic yield lines. These are just a very few of the oversight and enforcement responsibilities with which DoJ has saddled itself in the PJF. An examination of Schedules reveals many, many more. Not only is DoJ likely unequipped, in terms of expertise, to fairly adjudicate these matters, the resource burdens placed on DoJ in attempting to do so are unacceptable. Finally, the exceedingly complex terms in the PJF provide numerous opportunities for evasion of the terms of the settlement, which could easily subvert the remedies proposed. V. Conclusion DoJ's PJF is clearly inadequate to remedy the substantial anticompetitive impacts of the proposed merger. We have shown that DoJ has construed the relevant product and geographic markets too narrowly, and thereby failed to account for the merger's likely impact of reducing availability of conventional and less expensive traited cottonseed, thereby leading to reduced seed choices and increased seed costs for cotton growers. Likewise, by ignoring the national and two important regional markets, DoJ has neglected the precipitous decline in competition in the cottonseed industry as a whole that would likely be wrought by the merger, which also promises reduced choices and increased costs for cotton growers. We have also pointed out the unwieldy, “regulatory” nature of this supposed structural remedy, which in fact is an extremely burdensome conduct-based remedy of just the sort that DoJ has neither the resources nor the expertise to police. Finally, the proposed merger will create an extremely concentrated cottonseed industry dominated by two huge, vertically-integrated players (Monsanto and Bayer) which together will control 92% of the cottonseed market. Monsanto will consolidate and extend its near-monopoly position in cotton traits, with adverse impacts on U.S. agriculture as a whole (CTA, 2.7 to 2.9, 3.10) as well as anticompetitive impacts resulting in fewer choices and higher seed and cotton production prices for America's cotton farmers. Therefore, we respectfully request the Court to reject DoJ's proposed final judgement as insufficient and contrary to the public interest. Respectfully Submitted, Bill Freese, *Science Policy Analyst, International Center for Technology Assessment, Center for Food Safety, 660 Pennsylvania Ave., SE, Suite 302, Washington, DC 20003, Phone: 202-547-9359, e-mail: bfreese@icta.org, Web site: http://www.icta.org; http://www.centerforfoodsafety.org* . Cotton Concentration Report An Assessment of Monsanto's Proposed Acquisition of Delta and Pine Land Bill Freese, *Science Policy Analyst, Center for Food Safety (CFS), International Center for Technology Assessment (CTA)* February 2007 Center for Food Safety is a national non-profit membership organization working to protect human health and the environment by curbing the use of harmful food production technologies and promoting organic and other forms of sustainable agriculture. The International Center for Technology Assessment

(CTA)is a non-profit, bi-partisan organization committed to providing the public with full assessments and analyses of technological impacts on society. CTA is devoted to fully exploring the economic, ethical, social, environmental and political impacts that can result from the applications of technology or technological systems. Main Office, 660 Pennsylvania Avenue, SE., Suite 302, Washington, DC 20003, *http://www.centerforfoodsafety.org, http://www.icta.org* . Table of Contents Executive Summary 1. Introduction 2. Current Status of the Cotton Industry 2.1 Cotton Industry Already Highly Concentrated 2.1.1 Concentration in cotton seeds 2.1.2 Concentration in cotton traits and research and development 2.1.3 Concentration in cotton farms 2.2 Cotton Seed Price Increase with the Rise of Biotechnology 2.3 Biotechnology Trait Premiums and Added Value 2.3.1 Herbicide tolerance 2.3.2 Insect resistance 2.3.3 Yield 2.3.4 Pesticide use 2.3.5 Summary of added value 2.4 Biotech versus Conventional Seed: Farmers' Choice? 2.5 Single-Trait versus Stacked Cotton 2.6 Biotech Cotton Failures 2.7 Glyphosate-Resistant Weeds 2.8 Glyphosate Use Linked to Plant Disease, Mineral Deficiencies and Reduced Yields; Roundup Toxic to Amphibians 2.9 Inadequate Regulatory Oversight 3. Assessment of the Proposed Merger 3.1 Further Concentration in Cotton Seed 3.2 Declining Availability of Conventional Cotton Seed 3.3. Accelerated Rise in Cotton Seed Prices 3.4 Reduced Availability of Cotton with Non-Monsanto Traits 3.4.1 Cotton with Syngenta's VipCot insecticidal protein 3.4.2 Cotton with DuPont's GAT herbicide tolerance 3.4.3 Other biotech cotton trait R&D 3.5 Production Costs and Productivity of Cropland 3.6 Impacts on Growers of Other Crops 3.6.1 Concentration in seeds and traits other than cotton 3.6.2 Cross-crop trait deployment 3.6.3 Fewer trait choices and adverse impacts on other crops 3.7 Organic Cotton 3.8 Seed Sterility Technology (Terminator) 3.9 International Perspective 3.9.1 Monsanto in India 3.9.2 Monsanto's bribery in Indonesia 3.9.3 Monsanto's questionable soya lawsuits in Europe 3.10 Monsanto-DPL a Virtually Unchallengeable Competitor 3.11 Conduct-Based Solutions in Light of the High Failure Rate in Agricultural Biotechnology 4. Conclusion 5. Recommendations Bibliography Figures Figure 1: U.S. CottonSeed Market Share by Firm: 2006 Figure 2: U.S. Cotton Trait Market Share by Firm: 2006 Figure 3: Number and Average Size of U.S. Cotton Farms: 1987 to 2002 Figure 4: Per Acre Cotton Seed Cost versus Transgenic Share of U.S. Cotton Figure 5: Technology Fees as Proportion of Cotton Seed Price Figure 6: Breakdown of Traits in Biotech Cotton in the U.S.: 2006 Figure 7: Number of Conventional and Biotech Cotton Varieties Planted: 2003 to 2006 Figure 8: Percentage of U.S. Cotton Planted to Bayer's Two Top Conventional Lines vs. Biotech Variants of the Same Lines: 2004-2006 Tables Table 1: Per Acre Cost of Biotech Seed by Trait and Generation Table 2: Potential for Further Trait Penetration in Cotton Seed Table 3: Monsanto's Acquisitions Through American Seeds, Inc.: 2004 to 2006 Appendices Appendix 1: Cotton Seed Market Share of Selected Companies in the U.S.: 1970 to 2006 Appendix 2: Market Share of Four Largest Private Seed Firms: Cotton, Corn and Soybeans Appendix 3: Cost of Cotton Seed: Conventional versus Biotech Appendix 4: Average Cotton Yields in the U.S.: 1930 to 2006 Appendix 5: Acreage of Biotech Cotton Field Trials in the U.S.: 2000 to 2006 Appendix 6: Monsanto's Acquisitions and Collaborations Appendix 7: Approved versus Commercially Grown Genetically Engineered Crops Acknowledgements The author and the Center for Food Safety would like to thank the Cornerstone Campaign for their generous support, without which this report would not have been possible. The author would also like to thank those who reviewed a draft of the manuscript and otherwise offered valuable suggestions, in particular Will Rostov, senior attorney at CFS; Diana Moss, Vice-President of the American Antitrust Institute; and Martha Crouch, PhD in biology. However, the author is solely responsible for the content of this report. Executive Summary On August 15, 2006, Monsanto announced that it would acquire the Delta and Pine Land Company (DPL). DPL is the eleventh largest seed company in the world, sells over half of the cotton seed in the U.S., and holds a pivotal position as the only major cotton seed firm that is not also a biotechnology trait provider. Monsanto dominates the market for biotechnology traits in cotton and other crops, and is also the largest seed firm in the world. The proposed merger deserves close scrutiny, particularly in light of the extraordinarily high degree of concentration already existing in the cotton industry. Cotton Industry Already Highly Concentrated Pre-Merger *Cotton seed:* Just three firms sell 92% of U.S. cotton seed to farmers (Section 2.1.1, Figure 1, Appendix 1), a much higher concentration than other major crops (Appendix 2) *Biotechnology traits:* Over 87% of U.S. cotton is biotech. 96% of biotech cotton contains Monsanto traits, and 95% contains only Monsanto traits (Section 21.2, Figure 2) *Research and development:* Monsanto has similar dominance in R&D for future cotton traits, accounting for 94% of the experimental biotech cotton planted in the U.S. from the year 2000 to present (Section 3.4.3, Appendix 5) *Cotton farms:* The average size of U.S. cotton farms more than doubled from 1987 to 2002. One of every five cotton farms ceased operations in just the five years from 1997 to 2002 (Section 2.1.3, Figure 3). Market Power and Anticompetitive Effects *High cost of cotton seed:* The cost of cotton seed has risen 3.4-fold from 1995 to 2005, due primarily to rising technology fees charged for biotech traits (Section 2.2, Figures 4 & 5, Table 1, Appendix 3). The value added by biotech traits does not justify these steep premiums (Section 2.3), as the trend of increasing cotton yield since 1930 has not accelerated during the biotech era (Appendix 4) *Limited choice:* Farmers have fewer choices of quality conventional cotton seed, and fewer choices of cotton varieties with one trait vs. two, as cotton seed firms and trait providers aggressively pursue “increased technology penetration” to maximize profits (Sections 2.4 & 2.5, Figures 7 & 8) Agronomic, Environmental Consequences of Monsanto's Trait Monopoly *Crop failures:* Monsanto's biotech cotton has failed numerous farmers since its introduction, often resulting in sharp drops in yield. Near-total reliance on any agricultural technology, including one company's limited set of biotech traits, is unwise (Section 2.6) *Resistant weeds:* The dramatically increased use of glyphosate-based herbicides (e.g. Roundup) associated with Roundup Ready cotton and other crops has fostered a rapid and dangerous development of weeds resistant to the herbicide, a threat to the cotton industry compared by one expert to the boll weevil (Section 2.7) *Other impacts:* Recent scientific studies suggest that excessive use of glyphosate, which has increased six-fold from 1992-2002, is linked to plant disease, crop mineral deficiencies, reduced yields and (in the case of Roundup) amphibian mortality, and may pose a long-term threat to the productivity of American agriculture (Section 2.8). Anticompetitive Effects of the Merger *Oligopoly to duopoly?* USDA data show that the number of significant cotton seed firms other than the top three has declined by more than half from 2003 to 2006. Bayer's rising market share since 1999 is concentrated in the Southwest, and has not diversified other regional seed markets. A divested Stoneville may well be uncompetitive and ripe for takeover, possibly resulting in a cotton seed duopoly controlling over 90% of the market (Section 3.1). *Reduced choice:* Monsanto's commitment to “increased technology penetration” would likely lead to accelerated phase-out of DPL's conventional cotton varieties, which comprised 40% of conventional lines planted in 2006, and fewer high-quality “generation one” and “single-trait” options, reducing choices for farmers (Sections 3.2 & 3.3). *Increasing cotton seed prices:* Monsanto's pledge to “invest in penetration of higher-margin traits in DPL offerings” would accelerate the steep rise in cotton seed prices (Section 3.3, Table 2). *Consolidation of trait monopoly:* DPL is the only seed firm among the top four (Bayer, MonsantoStoneville, Dow-Phytogen) that is not also a trait provider. Acquisition of DPL by Monsanto would likely result in exclusion of non-Monsanto traits in over half of U.S. cotton, extending Monsanto's current trait monopoly in cotton (Section 3.4) and other crops (Section 3.5) well into the future. It would also exacerbate the adverse agronormic and environmental impacts of trait monopoly in all crops. The high failure rate in agricultural biotechnology means that conduct-based solutions, such as compulsory licensing agreements to force Monsanto to deploy competitors' traits in DPL germplasm, are risky and likely to fail to achieve their competitive ends (Section 3.11). Other Likely Impacts of the Merger *Organic cotton:* The booming market in organic cotton is threatened by transgenic contamination, herbicide spray drift damage, and potentially by decreased conventional seed availability. The proposed combination would exacerbate such risks for organic cotton growers in the U.S. and overseas, and potentially reduce U.S. consumers' choice of organic cotton products (Section 3.7). *Seed sterility:* DPL holds major patents on seed sterility technology (i.e. Terminator), a biological means to eliminate the millennia-old farmer's practice of saving and replanting seeds. Monsanto is known for aggressive prosecution of farmers who (allegedly) save its patented seeds. The merger would increase the likelihood that internationally-condemned Terminator cotton and other crops will be introduced, to the detriment of the world's farmers (Section 3.8). *International impacts:* Monsanto is known for questionable business practices to promote its interests overseas, including illegal actions such as bribery of Indonesian government officials, which resulted in SEC prosecution and a $1.5 million fine in 2002. Acquisition of DPL's substantial international cotton seed business would give Monsanto, already the world's largest seed firm (Appendix 6), additional scope for such activities (Section 3.9). Conclusion and Recommendations The proposed combination would negatively impact farmers through reduced seed choices, increased seed prices, rising production costs and increased reliance on one company's technology well into the future. The merger would also increase the cotton industry's already near-total dependence on one company's herbicide-tolerance traits, exacerbating glyphosate-resistant weeds and potentially endangering the productivity of American agriculture through the effects of excessive glyphosate use. Finally, acquisition of DPL would invest Monsanto with more power to pursue questionable business practices overseas, and increase the likelihood of introduction of internationally-condemned sterile seed technology. The Center for Food Safety and International Center for Technology Assessment call on the Department of Justice

(DoJ)to unconditionally oppose the proposed acquisition of Delta and Pine Land by Monsanto, and to oppose future acquisitions leading to increased concentration in the cotton seed industry. We also urge the U.S. Dept. of Agriculture to increase funding for public-sector development of affordable, conventional seed varieties neglected by the private sector and to deny applications by entities seeking to field test any seed sterility technology. 1. Introduction The Center for Food Safety

(CFS)and International Center for Technology Assessment

(ICTA)have conducted an independent assessment of the proposed acquisition of Delta and Pine Land Company by the Monsanto Company. CFS and ICTA are sister non-profit public interest groups with more than a decade of experience in the legal, agronomic, environmental and public health issues raised by agricultural biotechnology. On August 15, 2006, the Monsanto Company announced its intention to acquire the Delta and Pine Land Company

(DPL)for $1.5 billion in cash (Monsanto 2006a). Monsanto previously attempted to acquire DPL in 1998, but abandoned its bid in December 1999 (Kilman 2006) due to stiff conditions imposed by antitrust regulators (Kaskey 2006). DPL countered that Monsanto did not try hard enough to win approval, and sued the company for $2 billion in damages. The current agreement requires Monsanto to pay DPL up to $600 million if regulatory approvals are not obtained (Pollack 2006). After the transaction was dropped, a Department of Justice official testified that the Antitrust Division would have opposed the merger because it “would have significantly reduced competition in cotton seed biotechnology to the detriment of farmers” (Nannes 2001). Monsanto has proposed to divest its Stoneville cotton seed business in order to gain approval of the merger (Monsanto 2006a). Monsanto first acquired Stoneville in 1997, divested it in 1999 as part of its prior attempt to acquire DPL (Fernandez-Comejo 2004, Table 20, ft. 4), then re-acquired it from Emergent Genetics, Inc. in 2005 (Monsanto 2005b). Stoneville accounts for about 12 percent of the U.S. cotton seed market. The proposed merger deserves close scrutiny for many reasons, particularly in light of the extraordinarily high degree of concentration already existing in the cotton industry. Delta and Pine Land is the eleventh largest seed company in the world (ETC 2005), the biggest cotton seed firm in the U.S., and holds a pivotal position as the only major cotton seed seller that is not also a biotechnology trait provider. Monsanto dominates the market for biotechnology traits in cotton and other major crops, and is also the largest seed firm in the world (ETC 2005). Our analysis suggests that the merger would result in:

(1)Increased cotton seed prices;

(2)Reduced choice of conventional and some types of biotech cotton seed;

(3)Consolidation of Monsanto's virtual trait monopoly in cotton and other crops well into the future; and

(4)Adverse agronomic and environmental effects, as well as increased production costs, stemming from Monsanto's near-monopoly in herbicide-tolerance traits. The merger could also result in:

(5)Increased concentration in the cotton seed market;

(6)Harm to organic cotton growers, and reduced choice of organic cotton products for consumers;

(7)Harm to farmers in the U.S. and elsewhere by facilitating the introduction of sterile seed technology (“Terminator”); and

(8)Increased scope for Monsanto to pursue illegal and questionable business activities overseas, to the detriment of the world's farmers. We first examine the recent history and current state of the cotton industry (Section 2). This helps inform our analysis of the likely impacts of the proposed combination between Monsanto and Delta and Pine Land (Section 3) The conclusion (Section 4) is followed by recommendations (Section 5). 2. Current Status of the Cotton Industry 2.1 Cotton Industry Already Highly Concentrated The cotton industry is by most measures the most highly concentrated of any major crop industry. Below, we briefly discuss four major aspects of this concentration: cotton seeds, biotechnology traits in cotton, research and development for biotechnology traits in cotton, and cotton-growing land. 2.1.1 Concentration in Cotton Seeds Over the past 16 years, the market in cotton seeds has become highly concentrated. Appendix I shows some degree of competition from 1970 to 1989, with the top four private suppliers selling from 46 to 70% of total cotton seeds sold to farmers. The “top four” market share rose rapidly in the 1990s, reaching the 90% level in 1996. Concentration increased still further from 2000-2006, with just the top three firms—Delta and Pine Land, Bayer and Stoneville—controlling on average 91% of the market. In 2006, the combined market share of the top three stood at 92% (Figure 1). Based on available data, concentration in cotton seed exceeds that in other major crops, such as corn and soybeans, and by a considerable margin (Appendix 2). 1 1 In this report, we focus on “upland cotton,” which accounts for about 97% of U.S. production. The remaining 3% is American Pima or extra-long staple, grown primarily in CaIi[ornia, and used mainly for high-value products such as sewing thread and expensive apparel (USDA ERS 2006a). Major factors driving this concentration include (see Appendix I and Fernandez-Cornejo 2004, Table 20)):

(1)The virtual disappearance of public sector (university) breeding efforts, from 12-25% of cotton seed sold to farmers in the 1970s and 1980s, to less than 1% today;

(2)Numerous mergers and acquisitions, such as DPL's acquisition of Lankart and Paymaster brands in 1994 (SEC 1996) and Sure-Grow in 1996; and Stoneville's acquisition of Coker Pedigreed Seed and McNair in 1990, Brownfield Seed and Delinting Co. in 2000, and Germain's Cotton Seeds in 2001 (SEC 1997, Stoneville 2001);

(3)The rise of biotechnology and utility patents on biotech traits and plants, which prompted large chemical biotechnology firms to vertically integrate through acquisition of cotton germplasm, as seen with Monsanto's acquisition and re-acquisition of Stoneville in 1997 and 2005; Bayer's acquisition of Aventies CropScience in 2001 (Bayer 2001), AFD Seed in 2005, and California Planting Cotton Seed Distributors (CPCSD) in 2006 (Bayer 2006); and Dow's joint-venture with J.G. Boswell, Phytogen, in 1998 (DFP 2005). 2.1.2 Concentration in Cotton Traits and Research and Development Biotechnology traits are specific properties conferred on a crop variety through the process of genetic engineering. As shown in Figure 2, the market in biotechnology traits (hereinafter “traits”) deployed in cotton seed is even more concentrated than the cotton seed market, with the top three trait providers accounting for the traits in l00% of biotech seed planted in 2006. Yet market share is far from evenly distributed even among these few competitors. In 2006, over 96% of biotech cotton planted in the U.S. contained Monsanto traits, and 95% contained only Monsanto traits. Cotton with only Bayer (3.7%) or only Dow (0.06%) traits accounted for less than 4% of biotech cotton, with roughly one percent stacked with traits from Monsanto and either Bayer or Dow. 2 2 Unless otherwise noted, all statistics on conventional and biotech cotton varieties planted from 2003 to 2006 are derived from government data in “Cotton Varieties Planted” reports for the relevant year, based on surveys conducted by the U.S. Dept. of Agriculture's Agricultural Marketing Service. See USDA-AMS (2003-2006) in the Bibliography. A graph appearing here in the comment is illegible upon reprinting. The graph is available at the Department of Justice Antitrust Division, 325 Seventh Street, NW., Room 215, Washington, DC 20530,

(202)514-2481, 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. A graph appearing here in the comment is illegible upon reprinting. The graph is available at the Department of Justice Antitrust Division, 325 Seventh Street, NW., Room 215, Washington, DC 20530,

(202)514-2481, 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. Interestingly, the market in cotton traits was once at least slightly less concentrated. In 1998 and 1999, Bayer's herbicide-tolerant Buctril cotton (resistant to the herbicide bromoxynil) had a 13% share of biotech cotton (calculated from May *et al.* 2003, Table 1). Research and development (R&D) efforts are also highly concentrated. Here too, Monsanto has overwhelming dominance, with 94% of experimental biotech cotton acreage since the year 2000 (see Section 3.4.3 and Appendix 5). 2.1.3 Concentration in cotton farms Finally, the rise of biotechnology in cotton has also been accompanied by accelerating concentration of cotton-producing land in fewer hands. Figure 3 shows a drop in the number of cotton farms from 1987 to 1992, followed by a smaller decline through 1997, the beginning of the biotech era. In just the following five years, the number of cotton farms declined steeply by over 21%, representing a loss of one of every five U.S. cotton farms. Cotton farm size has also risen dramatically, particularly since 1997, when the size of the average cotton farm already exceeded that of any other major field crop. In addition, the percentage of cotton farms 500 acres or larger has increased from 12% in 1987 to 29% in 1997 (Meyer and MacDonald 2001). While, the declining number and increasing size of cotton farms is a long-term historical trend in 1949, 1.1 million presumably mixed crop farms harvested an average of 24 acres of cotton each) (USDA ERS 1996), biotechnology has helped facilitate consolidation over the past decade, as discussed further below. A graph appearing here in the comment is illegible upon reprinting. The graph is available at the Department of Justice Antitrust Division, 325 Seventh Street, NW., Room 215, Washington, DC 20530,

(202)514-2481, 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. 2.2 Cotton Seed Price Increase With the Rise of Biotechnology The increasing use of transgenic cotton since 1995 has been accompanied by a dramatic rise in cotton seed prices paid by farmers. 1-listorical price data from USDA show that the per acre cost of cotton seed has risen 3.4-fold in just the eleven years from the start of the biotech era in 1995 to 2005, when transgenic varieties accounted for 83% of U.S. cotton (Figure 4). The proportion of overall on-farm operating expenses attributable to seed expenditures increased nearly three-fold in the same brief time span (data not shown). A graph appearing here in the comment is illegible upon reprinting. The graph is available at the Department of Justice Antitrust Division, 325 Seventh Street, NW., Room 215, Washington, DC 20530,

(202)514-2481, 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. A comparison of present-day prices for conventional and transgenic cotton seed shows that biotech traits are indeed primarily responsible for this rapid price increase. Appendix 3 plots the prices of 140 varieties of cotton seed sold in the Lubbock, Texas area in 2006, broken down by conventional and various biotech trait categories. The data show that the average per acre cost of transgenic cotton seed ranges from two to over four times as much as that of conventional seed. (We will discuss these findings in more detail below.) The price differential is attributable primarily to “technology fees” charged by trait providers. Figure 5, based on prices for the same 140 varieties portrayed in Appendix 3, shows that technology fees comprise from 31% to 59% of the overall price paid by farmers for cotton seed. Technology fees increase with a) newer generation traits; and b) number of incorporated traits. Table I shows that the price of cotton seed rises roughly 40% when a second transgenic trait is “stacked” with a first and for a variety with second generation versus first generation trait(s). 3 A farmer pays on average nearly twice as much for a second generation variety with two traits as for a first generation variety with one trait. 4 At present, biotech cotton is limited to one or two (stacked) traits, though three or more are possible in the future, as we are starting to see in the corn seed market, with so-called triple-stack corn (Gullickson 2006). 3 Note that seed prices vary considerably based on numerous factors: Region, time of purchase, package deals with chemicals. etc. 4 The term “generation 2” was originally used to denote promised biotech crops with “output” traits desirable to consumers, such as enhanced nutrition, versus “generation 1” crops with “input” traits of interest to farmers, such as herbicide tolerance

(HT)and insect resistance (IR). However, the biotech industry has failed to make a commercial success of any true generation 2 “output” trait biotech crop. Monsanto chooses to call its Roundup Ready Flex and Bollgard II traits “second generation” even though they are merely variations on the original generation 1 input traits, Roundup Ready and Bollgard. EN04AP08.006 Cotton seed providers are actively transitioning the cotton varieties they offer from conventional to biotech, from one to two biotech traits, and from first to second generation traits. For instance, the short-term goals cited in a 2004 Delta and Pine Land presentation to investors EDPL 2004, slide 6) are: *“Increased technology penetration (share, stacked traits vs. single trait);” and *“Accelerated transition to MON [Monsanto] second generation traits.” Table 1.—Per Acre Cost of Biotech Seed by Trait and Generation One trait

(HT)Two traits (HT/IR) Price rise 1 → 2 traits (percent) First Generation Roundup Ready, $31.91 Roundup Ready/Bollgard I, $45.20 42 Second Generation Roundup Ready Flex, $44.02 Roundup Ready Flex/Bollgard II, $61.90 41 Price Rise 1st gen. → 2nd 38% 37% * 94 Source: Jones, MA (2006). HT = herbicide tolerance; IR = insect resistance. Per acre seed prices based on 38 inch rows and 4.0 seed/ft. Variety not specified. Prices quoted for Virginia, N. & S. Carolina with 25% discount. * 94% signfies the price rise from 1 trait/first generation to 2 traits/second generation. What is the nature and magnitude of the value added by biotech traits? Does this added value justify the substantial price premiums of biotech versus conventional cotton seed? Is increased technology penetration being driven solely by farmer demand? These questions are addressed in the following two sections. 2.3 Biotechnology Trait Premiums and Added Value Conventional wisdom has it that the added value of biotech cotton seed fully justifies its two-to four-fold increased price over conventional seed. It is said that farmers wouldn't pay these high premiums if the seeds didn't deliver added value commensurate with their added cost; they would buy conventional seed, instead. However, the extreme concentration in both cotton seeds and traits at least suggests the possibility that market power might be restricting farmers' choice of both conventional and biotech seeds and thus artificially raising prices. An assessment of this possibility, provided in Section 2.4, requires a basic understanding of added value in the context of biotech traits deployed in cotton. In 2006, almost 88% of U.S. cotton was transgenic (USDA AMS 2006). Nearly three-fourths of transgenic cotton acreage was planted to so-called “stacked” varieties modified for both of two traits: Herbicide tolerance

(HT)and insect resistance (IR). Varieties with HT alone comprised one-fourth and those with IR alone comprised less than 1% (Figure 6). HT and IR are the only biotech traits available in cotton. 2.3.1 Herbicide Tolerance Herbicide tolerance permits the cotton plant to survive application of a single herbicide that would otherwise kill the [non-biotech] plant, thus allowing “over-the-top” application of the herbicide to more easily kill nearby weeds without killing or severely injuring the cotton plant itself. 5 HT cotton permits greater flexibility in the timing of herbicide applications, allows for herbicide use over greater time spans, and in general simplifies weed management by reducing the number of different weed killers applied. The chief advantages cited for HT cotton are convenience and ability to cover more acres (i.e. reduced labor inputs per acre) (Duffy 2001), both of which are of particular value to larger farmers (Benbrook 2005, p. 9). Thus, HT cotton has helped facilitate the shift to fewer and larger cotton farms noted above. 5 “Over-the-top” is one form of “post-emergence” herbicide application, or spraying after the cotton seed has “emerged” or sprouted. The alternative herbicide regime more common with conventional, non-HT varieties is called “pre-emergence.” That is, a herbicide that retains its activity for weeks is applied to the soil before the cotton plant actually sprouts so as to suppress “weed competition” in the critical early life of the cotton plant. Pre-emergence herbicides are also used, though to a lesser extent, with HT cotton. EN04AP08.007 Monsanto's HT cotton traits, Roundup Ready and Roundup Ready Flex, comprised 96% of HT cotton in 2006. Both Roundup Ready versions are engineered to survive spraying with glyphosate-based herbicides, sold by Monsanto under the name of Roundup. 6 The remaining 4% of HT cotton acreage contained Bayer's LibertyLink trait, which confers tolerance to glufosinate, sold by Bayer under the name of Liberty. Monsanto's dominance in herbicide-tolerant cotton is attributable to three major factors: 6 Generation I Roundup Ready cotton permits over-the-top application only during the early seedling stage, after which time spray shields are required to direct the herbicide to the base of the plant, so-called “post-directed” application. Note that post-directed applications are also used with conventional cotton. Generation 2 Roundup Ready Flex cotton permits over-the-top application of higher doses of glyphosate throughout the growing season (Bennett 2005).

(1)The effectiveness of glyphosate, an extremely broad-spectrum herbicide (i.e., it kills a broader range of weed species than most other weed killers), and the popularity of the Roundup Ready system with many farmers;

(2)The low cost of glyphosate, due to Monsanto's “brilliant strategy of dropping its price years ahead of patent expiration [in 2000] and tying its use to the early growth of genetically modified crops” (Barboza 2001), as well as subsequent competition from low-cost generic manufacturers of glyphosate;

(3)Aggressive acquisition of high-quality germplasm in which to incorporate its traits, as well as licensing agreements for incorporation of its traits in other firms' germplasm. The dominance of Roundup Ready cotton has driven a many-fold increase in the use of glyphosate and reductions in the use of other herbicides. The growing reliance on this single herbicide has led to rapid development of glyphosate-resistant weeds, which is beginning to seriously erode the value of this technology (see Section 2.7). 2.3.2 Insect Resistance Insect resistance involves introduction of a gene encoding an insecticidal protein from a soil bacterium (known as Bt) into the tissues of the cotton plant, and protects cotton from some (but by no means all) cotton pests, thus reducing the use of insecticides. However, the value added by the IR trait is limited by several factors. First, most IR cotton 7 is highly effective only against the tobacco and pink bollworm caterpillars, but only partially effective against “some of the most damaging insect species,” such as cotton and American bollworms (May et al. 2003); it provides no protection against other pests such as the boll weevil, stink bugs, plant bugs and mirids (Caldwell 2002). Because farmers continue to spray for these latter pests, IR cotton often provides only a modest reduction in the number of insecticide applications (NAS 1999, p. 114). Secondly, to the extent that insecticide applications are reduced on IR cotton, this ironically often results (over years) in larger populations of the pests not affected by the built-in insecticide, which can then lead to increased chemical applications in later years and erosion or even reversal of the original benefit. For instance, Bt cotton growers in China, who originally benefited through reduced expenditures on insecticides, found themselves applying more (and paying more for) insecticides than non-transgenic cotton growers by year seven due to such secondary pest problems (Connor 2006). Similar problems, though not so severe, have been reported in North Carolina (Caldwell 2002) and Georgia (Hollis 20Q06). 7 As used here, “IR cotton” signifies any cotton with the IR trait; as shown in Figure 6, the IR trait nearly always comes in cotton varieties “stacked” with HT. Cotton with Monsanto's Bollgard or Bollgard II cotton traits comprised 99% of IR cotton planted in the U.S. in 2006, with Dow AgroScience's Widestrike accounting for the rest. 2.3.3 Yield One often hears unqualified assertions that biotechnology increases crop yields. Yet this is simply not the case. As recently noted by a USDA researcher, biotechnology does not increase the plant's genetic yield potential, the only meaningful sense in which such claims could be true: “Currently available GE [genetically-engineered] crops do not increase the yield potential of a hybrid variety. In fact, yield may even decrease if the varieties used to carry the herbicide-tolerant or insect-resistant genes are not the highest yielding cultivars.” (Fernandez-Cornejo & Casweli 2006, p. 9) These higher-yielding cultivars have been developed over decades with conventional breeding. USDA data reveal a nearly four-fold increase in average cotton yield from 1930 to the early years of the biotech era in 1998, due to conventional breeding in combination with the introduction of fertilizers and pesticides (Fernandez-Cornejo 2004, pp. 5-6). 8 Appendix 4 illustrates this trend of increasing yield, and shows that it has not accelerated since 1995, during biotech cotton's rise to dominance, with five years of yield increase offset by six years of yield decline. 8 Though it is difficult to disentangle the various factors, by one account 67% of the increased yield of cotton from 1936-1960 was attributable to conventional breeding (see Fuglie et al. 1996, cited in Fernandez-Corneo 2004, pp. 5-6). Yields of cotton or any crop are influenced by many complex, interacting factors beyond the plant's genetic yield potential. These include soil quality, the amount and timing of rainfall, temperature, severe weather events, insects, weeds and disease. Of great importance, too, is a farmer's management skills and preferences in responding to the particular challenges s/he faces in a given year. Though generalizations are hazardous, studies tend to show that IR cotton has helped farmers reduce yield Losses from damage by bollworms (but not other pests) in some areas and situations where bollworm infestation is heavy (e.g. lower Southern states), but has no yield impact in other areas where bollworms are not so troublesome (e.g. upper Southern states) Likewise, most studies of HT cotton have shown no yield gains, while others suggest lesser yield reductions from weed competition versus conventional varieties (see USDA ERS 2001, pp. 11-12 for a review of studies). Of course, additional income from any increased yield must exceed the additional cost of traits (see Table 1) for biotech seed to be profitable for farmers. This hurdle becomes higher as biotech seed premiums rise with stacked and newer generation traits (Figure 5, Appendix 3). Farmer preferences are also important. For instance, growers who prefer mechanical tillage and/or pre-emergence herbicides for weed control, or organic methods to control insects or weeds, may find little use for biotech traits, as would growers in areas less plagued by bollworms and weeds. Others who like the traits may still not find them worth the steep premiums, and prefer conventional seeds for cost reasons. Clearly, it is of vital importance for farmers to have access to a wide variety of seeds, including conventional varieties, to meet the particular challenges confronting him/her in any given situation, using the methods s/he prefers. 2.3.4 Pesticide Use The most comprehensive independent study to date, based on USDA data, demonstrates that adoption of biotech cotton in the U.S. has led to a 3.7% increase in pesticide 9 use on cotton from 1996 to 2004. A decrease in insecticide use attributable to IR traits has been swamped by a bigger increase in herbicide use facilitated by herbicide-tolerance traits (Benbrook 2004, Appendix Table 11). The cost of the increased use of pesticides has been largely offset by the declining price of glyphosate, the chief herbicide used on cotton. The declining cost of glyphosate-based herbicides from 140-45/gallon in the 1990s to 12-16/gallon in 2005-06 (Brown 2006a, slide 46)—is extremely important to keep in mind, as it is largely responsible for steady or declining expenditures on pesticides despite increasing amounts applied as biotech cotton share rises. 10 9 The term “pesticides” encompasses both herbicides (weed killers) and insecticides. 10 USDA data show a constant, roughly $60/acre, expenditure on “chemicals” applied to cotton from 1997-2005, though these figures appear to be uncorrected for inflation (see USDA ERS 2007b). Even in the case of IR traits, however, any cost savings from reduced insecticide expenditures must be balanced against the IR trait premium; where bollworm infestation is low, conventional seeds often prove more profitable (Caldwell 2002). 2.3.5 Summary of Added Value To sum up, biotech cotton has provided added value to many farmers, but this value is highly dependent on the particular region and situation, as well as farmer preference. In general, it can be said that cotton with the HT trait has simplified weed management through greater convenience, lower labor requirements and a decrease in the number of herbicides used. Cotton with the IR trait has slightly reduced insecticide use, and reduced yield losses where bollworm infestation is heavy. Offsetting these advantages are the overall increase in pesticide use, the rise in glyphosate-resistant weeds (Section 2.7), the growing problems with secondary insect pests, and facilitation of the trend to fewer and bigger cotton farms. As discussed further below, the first two problems are exacerbated by near-exclusive reliance on one company's HT traits to the exclusion of other methods of weed control. These limitations to the value added by biotech traits raise a simple question. Is farmer demand alone responsible for the 88% adoption rate of seeds that cost two to four times as much conventional varieties? Or are other factors at play? 2.4 Biotech Versus Conventional Seed: Farmers' Choice? While biotech seeds are popular with many farmers, there is evidence that some growers purchase them for reasons other than added value. For instance, anecdotal reports suggest that some cotton farmers choose Roundup Ready

(RR)cotton varieties to protect their cotton from damage due to glyphosate spray drift from an RR cotton-growing neighbor's field (Arax and Brokaw 1997). Given the ubiquity of RR cotton (82% of total U.S. cotton acreage in 2006), this explanation could apply to a large number of RR cotton farmers, who might otherwise choose to grow conventional varieties. Studies simulating glyphosate spray drift confirm that it can damage cotton (Thomas et al. 2005; Lyon & Keeling; Muzzi 2004). Arkansas state officials are considering regulations to minimize glyphosate drift damage to non-RR crops (Bennett 2007). This “defensive” reason for purchase of more expensive RR seeds is not added value, but rather a costly consequence of sloppy weed control practices by neighbors. Farmers who buy RR seeds for this reason say they prefer paying the price premium to the time and hassle of paperwork involved in lodging crop insurance claims to obtain reimbursement for spray drift damage to a conventional cotton crop, not to mention the uncertainty of reimbursement. EN04AP08.008 Another explanation given by cotton growers for purchasing biotech cotton is that seed firms are offering fewer and fewer high-quality conventional cotton varieties. This explanation is supported by independent experts. For instance, Donate Miller, associate professor with the Louisiana State University AgCenter, stated that one of the “bigger problems” facing cotton growers is that fewer conventional varieties are being developed and released (Bennett 2005). Similarly, Texas cotton consultant Francis Krenek says that some farmers in his area are constrained to use Roundup Ready cotton because in many cases, certain desirable seed varieties are only available in versions that carry the RR trait (PANUPS 2006). These assessments by farmers and independent cotton experts are confirmed by hard data. First, the number of conventional varieties planted has fallen steeply since just 2003, from 78 to 36. The percentage of planted varieties that are conventional has fallen even more steeply, from 53% in 2003 to just 18% in 2006, reflecting both reduced conventional and increased transgenic cotton seed offerings (Figure 7). This dramatic decline in the availability of conventional seed occurred during a period when the transgenic share of U.S. cotton acreage increased only modestly, from 76% to 88%. The top three firms (DPL, Bayer and Monsanto's Stoneville) offer a disproportionately small share of the planted conventional cotton varieties, 54% over the past four years, despite seed sales responsible for over 90% of 2006 cotton acreage. For instance, Stoneville's conventional varieties declined from 5 in 2003 to just 2 in 2006, while the number of its planted biotech varieties climbed from 11 to 32 over the same time period. DPL had 21 conventional lines planted in 2003, shrinking to 15 in 2006. The number of planted varieties from Bayer fell from 15 in 2003 to 6 in 2006. 11 11 For purposes of comparison, the numbers for Bayer include conventional varieties offered by Bayer (Fibermax) and by AFD Seed in both 2003 and 2006, even though Bayer only acquired AFD Seed in 2005. Nearly half the conventional varieties planted from 2003 to 2006 came from smaller suppliers, and the number of smaller cotton seed suppliers (i.e. other than DPL, Bayer and Monsanto's Stoneville) listed in USDA data covering virtually 100% of planted upland cotton has declined from 16 in 2003 to just 6 in 2006. This all portends continuing reductions in the availability of conventional cotton seed. Equally important is the lower quality of the few conventional varieties that are still being offered. The top firms either do not offer conventional versions of their top-selling transgenic cotton varieties, or only limited supplies of the same. As noted in Section 2.3, biotech traits are limited to herbicide tolerance and insect resistance. All other characteristics—such as boll size, fiber quality, disease resistance, and above all, yield—are properties of the specific germplasm, not biotechnology. 12 This means that farmers who want the desirable, non-biotech attributes of the best varieties (especially high yield) may have no alternative but to purchase costly biotech seed, whether or not they want the HT and/or IR traits at all, or at least at the substantial premium over conventional seeds. 12 This assumes no adverse consequences from the genetic modification process. Actually, there is some suggestive evidence that fiber quality may be lower in certain biotech varieties (Edmisten 2000), but this issue lies beyond the scope of this report and will not be addressed here. One indication of the lower quality of conventional varieties offered by industry leaders is the steeply falling acreage planted to them. For instance, U.S. cotton acreage planted to all DPL's conventional varieties declined from 6.36% in 2003 to just 1.47% in 2006. Acreage planted to all of Stoneville's few conventional varieties over the same time period is negligible, roughly 0.3% of U.S. cotton in 2003 to less than 0.1% in 2006. The decline in acreage planted to DPL's and Stoneville's conventional varieties in this four-year period is more than twice as steep as the overall decline in conventional acreage, from 23.78% of U.S. cotton in 2003 to 12.36% in 2006. Many popular varieties of cotton are offered only in biotech versions. For instance, Stoneville's ST 5599 BR has been a leading variety since at least 2003. “BR” designates it as Monsanto's Bollgard/Roundup Ready IR/HT stack; Stoneville does not appear to offer a conventional version of this line (i.e. “ST 5599” is absent from USDA data). DPL's enormously popular DP 555 BG/RR (also Bollgard/Roundup Ready) was the top-selling cotton variety from 2003 (8.68% of planted cotton acreage) to 2006 (17.3%). According to University of Georgia cotton expert Steve M. Brown, DP 555 BG/RR is popular chiefly because it outyields other varieties by 100-300 lbs./acre (personal communication). No conventional version of this variety is listed in USDA data, nor is one listed on DPL's Web site. It seems likely that at least some farmers would buy conventional versions of these top-selling cultivars, if only they were made available. The evidence from other cultivars suggests they would. For instance, in 2006, DPL's conventional lines DP 5415 and DP 5690 were planted on slightly more combined acreage (0.76% of all cotton) than their Roundup Ready counterparts DP 5415 RR and DP 5690 RR (0.67%). Despite this demand, DPL's Web site no longer lists conventional DP 5415 or DP 5690, suggesting they will not be sold in 2007, while the Roundup Ready versions are still being offered. 13 This would be entirely consistent with DPL's goal of “increased technology penetration.” A similar comparison is unavailable for Monsanto's Stoneville, because there do not appear to be conventional variants of any of Stoneville's transgenic lines. 13 For availability, see *http://www.deltaandpine.com* (last accessed 12/28/06). Select “Cotton Varieties” tab at the top, then “conventional” for each of the given regions to confirm the absence of DP 5415/5690; select “Roundup Ready” to confirm that DP 5415/5690 RR are still being offered. For percentages of DP 5415 & 5690 varieties, see USDA AMS (2004.2006). Note that the 0.76% figure for conventional DP 5415/5690 represents over 113,000 of the 14.95 million acres of upland Cotton planted in the U.S. in 2006 (USDA NASS 2007). Another example comes from Bayer CropScience, the number two supplier of cotton seed with 30% of the U.S. market (Fibermax, AFD Seed and CPCSD brands). Bayer does not feature a single conventional cotton variety in its “2006 Fibermax Variety Guide,” merely noting in fine print that three conventional Fibermax lines “are available for 2006 in limited supply. Please contact your local seed dealer for additional information” (Bayer Fibermax 2006). It is surprising that Bayer would have limited supplies of these varieties, since two of them were the top-selling conventional varieties offered by any company, planted on 7.14% of U.S. cotton, or over 1 million acres, in 2006. Why would Bayer have limited supplies of these two popular conventional varieties, designated FM 958 and FM 832? One possible explanation is that Bayer did not produce enough seed because it did not expect them to be so popular. Yet this seems unlikely, given the fact that FM 958 and FM 832 represented an even greater share of cotton planted in 2004 and 2005, as shown in Figure 8. Figure 8 also demonstrates that farmers prefer the conventional versions of each line to their biotech variants (FM 958B and FM 832B with the IR trait; FM 958LL and FM 832LL with HT). This strongly suggests that the increasing acreage planted to the biotech variants is attributable to Bayer's intentional limitation of conventional supplies. In other words, farmers who want the desirable properties of FM 958 and FM 832, but cannot obtain the conventional versions due to limited supplies, have no recourse but to purchase the more expensive biotech variants. Per acre price data show that the herbicide-tolerant biotech variants are nearly twice as expensive as the corresponding conventional versions: $33.26 versus $18.09 for FM 958, and $31.48 versus $17.45 for FM 832 (Plains Cotton Growers 2006). 14 14 Per acre price data were not available for the insect-resistant versions of the two lines. Together, Bayer (73%) and DPL (13%) account for 86% of conventional cotton acreage. The remaining 14% of conventional cotton seed planted in 2006 was supplied by regional cotton suppliers: Phytogen, mainly in California (7.2%); and All-Tex (2.6%), Americot (2.5%) and Beitwide Cotton Genetics (1.4%), mainly in Texas. These smaller firms, with limited seed varieties adapted to the growing environments of their regional markets, are unlikely to be able to meet farmer demand for high-quality conventional varieties in most areas of the country. The public sector, which once might have met this lower profit margin-market, virtually disappeared in 1992 (see Appendix 1). EN04AP08.009 Conventional upland cotton seed was planted on 1.85 million acres in 2006, representing nearly one-eighth of the 14.95 million upland cotton acres planted. 15 Thanks to oligopolistic market power, many farmers may soon have little choice but to plant biotech cotton, whether or not they want biotech traits at all, or at least at the prices at which they are offered. Indeed, it appears this is already happening. The elimination of more affordable conventional cotton seed is not only unfair to farmers, it has troubling implications for the future of the U.S. cotton industry. 15 12.36% of planted upland cotton acreage was conventional (USDA AMS 2006). 14.95 million acres of upland cotton were planted in 2007 (USDA NASS 2007). 2.5 Single-Trait Versus Stacked Cotton Nearly three-fourths of biotech cotton planted in 2006 was stacked with two traits, HT and IR (Section 23, Figure 6). According to some experts, many farmers are being constrained to purchase cotton with two traits when they want only one. Keith Edmisten, associate professor and cotton specialist at North Carolina State University, explains that some of his state's growers would prefer to purchase HT-only cotton, 16 but end up buying HT/IR varieties because the better quality (e.g. higher-yielding) cultivars come only in stacked, not HT-only, versions. University of Georgia cotton expert Steve M. Brown agrees that the available cotton varieties with the Roundup Ready

(Flex)trait alone tend to be lower-yielding than stacked Monsanto varieties (personal communications). 16 The chief reason is that North Carolina farmers must usually spray for stink bugs whether or not their cotton has the JR trait (see Section 2.32), and so would prefer not to waste money on the IR trait premium. In addition, some growers wish to avoid planting “refuges” of non-IR cotton, a requirement for growers of IR cotton imposed by the Environmental Protection Agency to slow development of insects resistant to the built-in insecticide(s). DPL and Monsanto are committed to “increased technology penetration” (DPL 2004) and “accelerate[d] biotech trait penetration” (Monsanto 2006b) for “increased returns from technology to the business” (DPL 2004) in other words, higher profit margins. We have discussed several tactics employed by companies to implement this strategy: Phasing out or limiting supplies of desirable conventional varieties, and offering the best cultivars only in biotech versions, or only in stacked versus single-trait versions. As a result, farmers often purchase, and pay more for, technology they do not need or want. 2.6 Biotech Cotton Failures While many farmers have been satisfied with biotech cotton, others have experienced erratic performance. Cotton bearing the traits of market-leader Monsanto has been plagued by numerous failures since the introduction of insect-resistant Bollgard cotton in 1996 and glyphosate-tolerant Roundup Ready cotton in 1997. For example, farmers in Texas, Oklahoma, Louisiana and Mississippi who planted Bollgard cotton in 1996 were surprised to find that cotton bollworms thrived in up to 50% of their fields, even though the cotton was supposed to be immune to these pests (Lambrecht 1998; Consumers Union 1999). As a result, farmers who had already paid a premium for “bollworm-resistant” cotton had to purchase and spray insecticides, or risk losing their crop (Benson *et al.* 1997). These first Bollgard cotton varieties also exhibited poor germination, late maturity, lower yield, and other defects. The failures were so severe that the cotton growers filed a class action suit against Monsanto; according to the plaintiffs' attorney, Monsanto paid the farmers a substantial sum in an out-of-court settlement (Consumers Union 1999). A second generation of Bt cotton (Bollgard II) with better resistance to bollworms was introduced in 2003. Yet Bollgard II cotton varieties are predicted to facilitate increased infestations of pests unaffected by the built-in insecticides, such as stink bugs (Yancy 2004). Roundup Ready

(RR)cotton has also failed farmers repeatedly. In 1997, growers in Mississippi, Arkansas, Tennessee, Louisiana, Texas and Missouri reported that the cotton-bearing boils on their RR cotton simply dropped off, or were deformed, causing substantial yield losses (Lambrecht 1998; Chattanooga Times 1997; Kerby Voth 1998). The director of Mississippi's Bureau of Plant Industry, Robert McCarty, stated that only Monsanto varieties seemed to fail, over an area totaling 30,000 acres (Meyerson 1997). While Monsanto blamed cold, wet weather for the cotton failures, arbitrators at the Mississippi Seed Arbitration Council decided otherwise, issuing a non-binding resolution calling on Monsanto to reimburse three farmers $194 million for their damages (NYU 1998), which Monsanto refused to do (Steyer 1998). Monsanto and Delta and Pine Land eventually pulled five varieties of Roundup Ready seed due to substandard quality (Lambrecht 1998), and Monsanto paid 55 Mississippi growers an estimated $5 million in compensation (NYU 1998). In 1998, 190 growers in Georgia, Florida and North Carolina reported similar problems with Roundup Ready cotton (Augusta Chronicle 1999, Edmisten 1998). Andrew Thompson of Georgia reported losing nearly a quarter of his crop, costing him 250,000. Farmers and cotton experts say Monsanto rushed its RR cotton to market, without giving university researchers (May *et al.* 2003, p. 1596) or even a USDA scientist opportunity to test it. USDA geneticist William Meredith was denied seeds to test at a government lab, because in order to obtain the seeds, he would have had to sign an agreement with Monsanto not to test them. “You need a good referee in the ball game, which is what I am,” he reportedly said. “But some of the Monsanto people thought they knew all they needed to know about cotton” (as quoted in Lambrecht 1998). In 2005, there were once again widespread yield losses with Roundup Ready cotton, this time in Texas (PANUPS 2006). Many of the cotton bolls fell off, others were misshapen, still others didn't open before harvest, and so could not be picked by machine. These are all symptoms of Roundup damage, and scientists have confirmed that under certain conditions RR cotton is not immune to glyphosate (Cerdeira & Duke 2006). As with the failures of Bollgard cotton cited above, farmers experienced double losses: From payment of large premiums for a non-performing trait, and lost income from large drops in yield. These farmers also filed suit against Monsanto to recover their losses; at this writing, the outcome is still pending. There are likely many more incidents of this sort that have gone unreported by farmers. Defective RR cotton that is damaged by Roundup early in the season may recover later, and in some cases yield may not be affected (Jones & Snipes 1999). Monsanto also has a program to reimburse farmers for defective cotton, but only when stringent conditions are met. While these conditions vary by region and seed supplier, they can include having planted at least 70% of one's total acreage with cotton bearing Monsanto's trait(s); near total loss of the crop (yield < 150 lbs./acre, or less than one-fifth the 2006 national average yield of 798 lbs./acre), and exclusive use of Monsanto's more expensive Roundup brand of glyphosate (Smith 2004). Many farmers who do not meet these conditions have likely suffered losses without compensation. Substandard performance and outright failure of Monsanto biotech cotton has been frequently reported in India and Indonesia as well (see Section 3.9). Other Roundup Ready crops have exhibited similar problems. For instance, RR soybeans have been observed to perform poorly during hot, dry conditions, and are more subject to “stem-splitting” (Coghlan 1999), which can result in higher yield losses relative to conventional soy. In both Brazil and Paraguay, RR soy was reported to suffer greater yield losses than conventional soy during drought conditions over the past two years (FoE International 2007). Benbrook

(2001)discusses a number of additional agronomic problems with RR soybeans. The sometimes erratic performance of biotech cotton and other biotech crops underscores the need to maintain vigorous breeding programs for continued production of high-quality conventional seed, which as described above is on the decline. 2.7 Glyphosate-Resistant Weeds Monsanto provides the traits deployed in 95-96% of U.S. transgenic cotton (Figure 2), representing 82-83% of U.S. cotton overall. Such extreme market power is undesirable in any industry, as it tends to hamper innovation, restrict choice and raise prices. In agriculture, however, this high degree of concentration can also have grave agronomic consequences. In this and the following section, we discuss the adverse effects of increasing reliance on use of a single herbicide, glyphosate, fostered by Monsanto's virtual monopoly in transgenic cotton traits. Farmer adoption of glyphosate-tolerant, “Roundup Ready” cotton has led directly to a 753% increase in glyphosate use on cotton in the U.S. from 1997 to 2003 (Steckel et al 2006) Just as overuse of an antibiotic breeds resistant bacteria, so overuse of glyphosate has spawned rapidly growing populations of weeds the chemical is no longer able to kill, except perhaps at greatly increased rates of application. North Carolina weed scientist Alan York has called it “potentially the worst threat (to cotton) since the boll weevil,” the devastating pest that virtually ended cotton-growing in the U.S. until an intensive spraying program eradicated it in some states in the late 1970s and early 1980s (Minor 2006). And York isn't alone. University of Georgia weed scientist Stanley Culpepper has found over 100,000 acres of Georgia cotton infested with glyphosate-resistant pigweed that survives up to twelve times the normal rate of Roundup (Laws 2006c). Glyphosate resistance in weeds has developed with incredible rapidity over just six years, corresponding with the period of widespread introduction of Roundup Ready cotton and soybeans. In contrast, there was only one confirmed glyphosate-resistant weed in the U.S. in the 22 years from 1976, when Monsanto first introduced the chemical in the U.S. (Monsanto 2007), through 1998. 17 Concern began building in 2001, when a farm journal reported: 17 The sole resistant weed by 1998 was rigid ryegrass in California. See Web site of The Weed Science Society of America. *http:// www.weedscience.org/Summary/UspeciesMOA.asp?lstMOAlD=12&FmHRACGroup=Go* “Resistance to glyphosate (Roundup) is emerging all around the world, potentially jeopardizing the 25 billion dollar market for genetically modified herbicide tolerant crops” (Farmers Weekly 2001). According to a joint statement by ten prominent weed scientists (Boerboom *et al.* 2004): “It is well known that glyphosate-resistant horseweed (also known as marestail) populations have been selected in Roundup Ready soybean and cotton cropping systems. Resistance was first reported in Delaware in 2000, a mere 5 years after the introduction of Roundup Ready soybean. Since that initial report, glyphosate-resistant horseweed is now reported in 12 States and is estimated to affect 1.5 million acres in Tennessee alone.” The list of confirmed glyphosate-resistant weeds in the U.S. now stands at seven, with the latest addition (giant ragweed) reported in January 2007 (Ohio Farm Bureau 2007). A number of additional weed species are under investigation for resistance (Roberson 2006), and the acreage affected is growing rapidly. An online farm journal recently devoted an extensive special edition, with contributions from leading weed scientists across the country, to glyphosate-resistant weeds (Crop News Weekly 2006). Farmers have several options to deal with such weeds They can:

(1)Apply more glyphosate (resistance is not an all-or-nothing phenomenon, and is defined as the ability to survive the normal rate of herbicide application, not absolute immunity).

(2)Switch to an herbicide with a different “mode of action”.

(3)Stop planting Roundup Ready crops and applying glyphosate every year in order to lessen the “selection pressure” that accelerates development of glyphosate-resistance.

(4)Switch [from no-till or conservation tillage to conventional tillage. Option 1—using more glyphosate—is probably the most common response. While this can be effective in the short-term, it leads to a vicious cycle of escalating resistance, followed by still more glyphosate use. Monsanto's introduction in 2006 of a “second generation” Roundup Ready cotton known as Roundup Ready

(RR)Flex may well facilitate this misguided approach. RR Flex is engineered to withstand higher application rates of Roundup than first generation RR cotton, and to permit application throughout the growing season, rather than only in the early growth stages as with original RR (Bennett 2005). Producers who adopt RR Flex cotton in the hopes of better controlling resistant weeds will not only pay for more glyphosate, but also spend roughly 40% more for RR Flex (see Table 1). Weed scientists recommend use of different herbicides (option 2) to stem development of resistant weeds, but often in combination with heavier applications of glyphosate (Yancy 2005). An Arkansas weed scientist estimated that the state's growers would have to spend as much as $9 million to combat glyphosate-resistant horseweed in 2004 (AP 2003). The alternative is even more expensive. Left unchecked, horseweed can reduce cotton yields by 40-70%. Larry Steckel, weed scientist at the University of Tennessee, estimates that on average, glyphosate-resistant pigweed will cost cotton growers in the South an extra $40 or more per acre to control (Laws 2006a). This represents a substantial burden, as cotton farmers' average expenditure on all pesticides (insecticides and herbicides) was $61 per acre in 2005 (USDA ERS 2007b). Option 3—reducing glyphosate use through growing non-RR cotton or non-RR crops in rotation with RR cotton—is also recommended (Yancy 2005), but is becoming progressively more difficult with the declining availability of quality conventional seed, 18 and the continuing paucity of non-RR biotech varieties. The only non-RR HT trait planted commercially is Bayer's LibertyLink (LL). 19 Only nine varieties of LL cotton were planted in 2006, representing only 4% of cotton acreage, versus a total of 149 varieties with RR or RR Flex, comprising 82% of U.S. cotton. 18 While farmers of course could grow RR cotton without using glyphosate, it would represent wasted expenditure on the premium (technology fee) paid for the trait. In other words, payment of the premium is a strong inducement to make use of the trait through application of glyphosate. 19 USDA data list two varieties of bromoxynil-tolerant cotton in 2006, one from Stoneville and one from Bayer, but their aggregate acreage amounted to less than 0.05% of U.S. cotton. Stoneville reportedly retired all of its bromoxynil-tolerant cotton seed offerings after the 2004 season (Robinson 2004). Option 4 is to physically remove the weeds through mechanical tillage or hand weeding. Mechanical tillage, once common, has been on the decline for years as farmers switch to “no-till” or conservation (minimal) tillage practices in order to reduce labor costs and fuel expenditures, as well as decrease the soil erosion that often accompanies plowing. The rise of glyphosate-resistant weeds is beginning to reverse this trend. 20 For instance, acreage under conservation tillage in Tennessee dropped by 18% in 2004, as farmers turned back to the plow to control glyphosate-resistant horseweed; Tennessee counties with the largest cotton acreage experienced the largest decline in conservation tillage, from 80% to just 40% (Steckel et al. 2006). It is estimated that resistant horseweed has reduced the area under conservation tillage in Arkansas by 15%, with similar trends reported in Missouri and Mississippi (Ibid). In particularly bad cases of glyphosate-resistant pigweed in Georgia, the necessity of hand-weeding can cost growers $92 an acre (Laws 2006a). 20 Some attribute the rise of conservation tillage to adoption of RR crops, yet a USDA expert notes that the steep rise in conservation tillage (at least in soybeans) came from 1990-1996, before their introduction, and that the share of soybean acres grown with conservation tillage stagnated after 1996 (Fernandez-Cornejo & McBride 2002, p. 29). The over-reliance on a single herbicide fostered by Monsanto's near-monopoly in cotton traits is confronting cotton and other growers with an extremely serious agronomic problem. Aside from non-chemical weed control methods used in organic cotton production, the only real solution is use of herbicides other than glyphosate. But this is unlikely as long as glyphosate-tolerant, Roundup Ready cotton comprises over 80% of U.S. cotton. In fact, over-reliance on Roundup Ready crops and glyphosate has dampened research into new herbicides, meaning none are on the horizon (Mueller et al. 2005, p. 925; Yancy 2005). Meanwhile, growers will increasingly turn to older, more toxic herbicides, such as paraquat and 2,4-D, to control glyphosate-resistant weeds (Roberson 2006). A growing body of research suggests other serious consequences of farmers' growing dependence on glyphosate and Roundup Ready crops. 2.8 Glyphosate Use Linked to Plant Disease, Mineral Deficiencies and Reduced Yield; Roundup Toxic to Amphibians Overall glyphosate use in the U.S. increased six-fold from 1992 to 2002, due largely to the widespread introduction of Roundup Ready soybeans and cotton (Cerdeira & Duke 2006, p. 1633); area planted to Roundup Ready corn is growing as well (Monsanto 2006c). RR versions of these crops are increasingly grown in rotation, meaning that each year, more prime cropland is sprayed more frequently with glyphosate, with increasing rates applied in many areas to control resistant weeds. While glyphosate is generally regarded as less toxic than many weed killers, a growing body of research suggests that continual use of this chemical may make RR plants more susceptible to disease and prone to mineral deficiencies than conventional crops, as well as reducing their yields. In addition, recent studies suggest that Roundup is much more toxic to amphibians than previously thought. When Roundup is sprayed on RR crops, much of the herbicide ends up on the surface of the soil, where it is degraded by microorganisms. However, some is absorbed by the plant and distributed throughout its tissues. Small amounts of glyphosate “leak” from the roots of RR plants and spread throughout the surrounding soil (Motavalli et al. 2004; Krerner et al. 2005; Neumann et al. 2006). This root zone is home to diverse soil organisms, such as bacteria and fungi, that play critical roles in plant health and disease; and it is also where the roots absorb essential nutrients from the soil, often with the help of microorganisms. The presence of glyphosate in the root zone of RR crops can have several effects. First, it promotes the growth of certain plant disease organisms that reside in the soil, such as Fusarium fungi (Kremer et al. 2005). Even non-RR crops planted in fields previously treated with glyphosate are more likely to be damaged by fungal diseases such as Fusarium head blight, as has been demonstrated with wheat in Canada (Fernandez et al. 2005). This research suggests that glyphosate has long-term effects that persist even after its use has been discontinued. Second, glyphosate can alter the community of soil microorganisms, interfering with the plant's absorption of important nutrients. For instance, glyphosate's toxicity to nitrogen-fixing bacteria in the soil can depress the absorption of nitrogen by RR soybeans under certain conditions, such as water deficiency, and thereby reduce yield (King et al. 2001). Some scientists believe that this and other nutrient-robbing effects may account for the roughly 6% lower yields of RR versus conventional soybeans (Benbrook 2001). Other research shows that Roundup Ready crops themselves are less efficient at taking up essential minerals such as manganese through their roots (Gordon 2006), and that glyphosate inside plant tissues can make such minerals unavailable to the plant (Bernards et al. 2005). The resultant mineral deficiencies have been implicated in various problems, from increased disease susceptibility to inhibition of photosynthesis. While much of this research involves RR crops other than cotton, similar impacts are likely with cotton, given the heavy use of glyphosate common to all RR crops. In addition, it should be recalled that many farmers rotate RR cotton with RR soy and to a lesser extent with RR corn. Finally, recent studies (Relyea 2005a, 2005b) demonstrate that common versions of Roundup herbicide that contain a surfactant (i.e. POEA, or polyethoxylated tallowamine) to aid penetration of the active ingredient (glyphosate) into plant tissue are extremely toxic to the tadpoles and juvenile stages of certain species of frogs, killing 96-100% of tadpoles after three weeks exposure and 68-86% of the juveniles after just one day. 2.9 Inadequate Regulatory Oversight While the U.S. Dept. of Agriculture's Animal and Plant Health Inspection Service (APHIS) is primarily responsible for assessing the potential environmental impacts of biotech crops, it has by many accounts failed to do its job. A National Academy of Sciences committee identified numerous regulatory deficiencies in 2002 (NAS 2002), and since then several federal courts have ruled against APHIS for failure to adhere to U.S. environmental laws with respect to biotech crops (e.g. *CFS et al.* vs. *Johanns et al.* 2006; *CTA et al.* vs. *Johanns et al.* 2007). In February 2007, the U.S. District Court for Northern California ruled that APHIS must perform an environmental impact statement on Roundup Ready alfalfa, which APHIS de-regulated in 2005 despite having failed to prepare one. Among the Court's concerns was the potential for RR alfalfa to increase the prevalence of glyphosate-resistant weeds, a concern that APHIS ignored: “The Court notes, however, that it is unclear from the record whether any federal agency is considering the cumulative impact of the introduction of so many glyphosate resistant crops; one would expect that some federal agency is considering whether there is some risk to engineering all of America's crops to include the gene that confers resistance to glyphosate” ( *Geertson Seed Farms et al.* v. *Johanns et al.* 2007, pp. 16-17). The growing dependence of American farmers on the use of glyphosate poses long-term risks to the productivity of U.S. agriculture and the environment, risks which U.S. regulators are largely ignoring. There is little hope of breaking this dangerous dependence as long as Monsanto maintains a near-monopoly in transgenic HT traits with its Roundup Ready crops. 3. Assessment of the Proposed Merger To assess the impacts of the merger, one must compare the likely effects on the cotton seed and traits industry of DPL as a subsidiary of Monsanto versus as an independent entity, informed by an analysis of existing trends, as described above. In our view, the merger must be evaluated in terms of its potential impacts on:

(1)Concentration in cotton germplasm;

(2)Availability of quality conventional seed;

(3)Cotton seed prices;

(4)Concentration in biotech traits;

(5)Production costs and the productivity of American cropland;

(6)Growers of other major crops;

(7)Grower and consumer choice for organic cotton seeds and products; and

(8)Introduction of DPL's seed sterility technology, known as Terminator. We also believe that potential international impacts of the merger deserve consideration. Finally, we will discuss the feasibility of conduct-based solutions to address anti-competitive effects of the merger. 3.1 Further Concentration in Cotton Seed As discussed in Section 2.1.1 and portrayed in Appendix 1, concentration in the cotton seed market has increased dramatically since 1970, and especially since the early 1990s. Top four market share reached 90% by 1996, while top three market share has averaged 91% since the year 2000. Despite these facts, some still try to argue that there are more competitors in the cotton seed market today than in 1998, when Monsanto first attempted to acquire DPL, and imply that the merger should be permitted for this reason (e.g. Leonard 2006). This argument is without merit for several reasons. First, it seems to rest exclusively on Bayer's rising market share since 1999. Yet competitiveness is not ensured by having three rather than two firms controlling 90% or more of the national market. More relevant is that the number of smaller suppliers (i.e. other than DPL, Bayer and Stoneville) with sales appreciable enough for listing in USDA data fell by more than half in just the last four years, from 16 in 2003 to 6 in 2006. 21 Second, Bayer's seed sales are concentrated heavily in the Southwest, particularly Texas, and thus the company's rising market share has done little or nothing to increase competition in other regions. Indeed, DPL's market share in the importation Southeastern

(SE)and South Central

(SC)markets 22 has actually increased during the years of Bayer's rise, from 81%

(SE)and 61%

(SC)of acreage planted in 2003 to 86%

(SE)and 73%

(SC)in 2006. 21 Based on USDA AMS reports, 2003-2006, which lists market share by brand rather than supplier. The number of suppliers is arrived at by subtracting brands known to be owned by another supplier. Of 21 brands listed in 2003, Paymaster and Sure-Grow are owned by DPL, leaving 19 suppliers, or 16 other than the top three. Of the 13 listed brands in 2006, we subtract Paymaster and Sure-Grow as well as AFD Seed and California Planting Cotton Seed Distributors (the latter two purchased by Bayer in 2005 and 2006, respectively) to arrive at 9 suppliers, or 6 suppliers other than the top three. Note also that USDA AMS figures show generally declining market share for the “Miscellaneous” category comprising all suppliers too small for listing in its reports: From 1.36% of upland cotton acreage planted in 2003 to just 0.68% in 2006. 22 The Southeastern market comprises Alabama, Florida, Georgia, N. & S. Carolina and Virginia. The South Central market comprises Arkansas, Louisiana, Mississippi, Missouri and Tennessee. Another argument presented by proponents of the proposed acquisition is that it would not change overall market concentration, provided Monsanto divests Stoneville (Leonard 2006). This assumes, however, the viability of Stoneville as an independent entity. Sandy Stewart, Associate Professor and Extension Cotton Specialist with the Louisiana State University AgCenter, has questioned whether a divested Stoneville would be competitive in 2008 (Laws 2006b). Without the advantage of affiliation with the world's largest seed and traits firm, Stoneville might well be ripe for takeover. The history of the cotton seed industry is rife with takeovers (Appendix 1). Stoneville could succumb to the fate of Lankart, Paymaster, Sure-Grow, AFD Seed and others. For instance, in 1993, Paymaster's 29% market share in cotton seed was more than double Stoneville's current 12%. DPL acquired the company the following year. If the merger goes through, Stoneville might well become an attractive target for Bayer, which has acquired at least two cotton seed firms in the past two years. If Bayer were to acquire a divested Stoneville, the virtual oligopoly of three in cotton germplasm would become a duopoly: Monsarito-DPL would control 51%, and Bayer-Stoneville 42%, of the cotton seed market, for a top two market share of 93%. This enhanced market power would likely hasten the already precipitous exit of smaller cotton seed firms from the market. 3.2 Declining Availability of Conventional Cotton Seed The discussion above clearly shows a decline in the number and quality of conventional cotton seed varieties planted, despite continued demand from farmers. Among the top three, Monsanto's Stoneville has gone furthest in purging conventional cotton lines from its offerings, with only two varieties planted to negligible acreage in 2006. These two unpopular varieties represent only 6% of 34 planted Stoneville varieties, whereas conventional varieties comprise a more than 3-fold larger share of planted varieties from other cotton seed firms. Judging by its conduct with Stoneville, it seems reasonable to assume that post-merger, Monsanto would similarly reduce the number of conventional seed varieties offered by DPL. This assumption is strengthened by Monsanto's announced strategy, in a presentation to investors on the DPL acquisition, to “accelerate biotech trait penetration” (Monsanto 2006b). Increased trait penetration would come at the expense of conventional seed offerings. Given the fact that DPL's 15 non-transgenic lines comprise over 40% of conventional cotton varieties planted in 2006, the merger would likely further restrict farmers' ability to choose quality conventional cotton seed. 3.3 Accelerated Rise in Cotton Seed Prices As discussed above, cotton seed prices have risen dramatically with the advent of biotechnology. Relative to industry-wide figures for 2006, Stoneville offers slightly higher percentages of the highest price seed categories—stacked varieties and varieties with 2nd generation traits (data not shown)—both of which increase the average price of its seed (see Figure 5 and Table 1). In its presentation to investors, Monsanto announced its intention to “invest in penetration of higher-margin traits in Delta and Pine Land offerings” (Monsanto 2006b). Since DPL currently sells more than four times as much cotton seed as Stoneville, Monsanto's pursuit of this policy with an acquired DPL would lead to an acceleration of the already steep rise in cotton seed prices. EN04AP08.010 The potential for seed price increases can be gauged by breaking down the composition of 2006 cotton acreage by:

(a)Conventional versus biotech;

(b)one versus two traits; and

(c)generation 1 versus generation 2 traits (Table 2). First, replacement of conventional varieties with biotech cultivars offers the greatest per unit potential for increasing profit margins/prices, since no tech fees at all are collected on these seeds. As shown in Appendix 3 and Figure 5, single-trait cotton seed is on average twice the price, and stacked cotton roughly four times the price, of conventional seed. Second, the potential for increasing prices through trait stacking is limited, but still substantial, with 26% of 2006 biotech cotton acreage from seeds bearing just one trait. As shown in Table 1, companies charge roughly 40% more for seed with two traits versus just one. The greatest potential for increasing the price of cotton seed, however, lies in replacement of popular first-generation traits with their second-generation counterparts (this applies only to Monsanto), which also entails a price increase of roughly 40% (Table 1). Bollgard II was introduced in cotton in 2003, Roundup Ready Flex in 2006 (Monsanto 2007). 78% of 2006 biotech cotton acreage was planted to varieties containing only generation I trait(s), 8% to those with only second-generation trait(s), and 10% to stacked varieties with mixed generation 1 and 2 traits. Replacement of first generation with higher-margin second-generation traits in seeds planted to upwards of 78% of biotech cotton acreage represents a large profit potential, which as indicated above Monsanto intends to exploit postmerger in DPL cotton seed offerings. Another portent of increased seed prices is provided by University of Georgia cotton expert, Steve Brown, who already predicts cotton seed prices rising from $44 to a range of $80-$120 per acre (Brown 2006a, slide 46). It is unclear whether or not this $80-$120 figure accounts for the price-increasing effects of the proposed combination. 3.4 Reduced Availability of Cotton With Non-Monsanto Traits As a subsidiary of Monsanto, only one (3%) of Stoneville's 32 biotech cotton varieties planted in 2006 carried a non-Monsanto trait, versus 17 of 135 (13%) biotech varieties with non-Monsanto traits for the rest of the industry. This one variety—bromoxynil-tolerant cotton BXN 47—was planted to negligible (<0.05%) acreage. 23 In other words, biotech varieties with non-Monsanto traits are more than four times more common in cotton seed sold by Stoneville's competitors (chiefly Bayer and Phytogen). If Monsanto were allowed to acquire DPL, one would expect it to pursue the same policy (exclusion of competitors' traits) with its new subsidiary's germplasm. In 2006, all 46 of DPL's biotech cotton varieties carried Monsanto traits. Yet over the past few years, DPL has taken significant steps to diversify its future biotech trait offerings, steps which could easily be undone in the event of a merger. Below, we examine DPL's diversification efforts and the broader field of experimental biotech traits being developed in cotton. 23 In 2004, Emergent Genetics, Inc., then owner of Stoneville, announced a phase-out of bromoxynil-tolerant cotton varities (Robinson 2004). 3.4.1 Cotton With Syngenta's VipCot Insecticidal Protein In 2004, DPL acquired global licenses to incorporate VipCot insecticidal proteins developed by Syngenta in its cotton varieties, in return for $47 million to be paid over three years (DPL-Syngenta 2004). Though DPL expected to market limited quantities of VipCot-containing seed in 2006, this did not come to pass. In 2006, DPL acquired Syngenta's global cotton seed business, including cotton germplasm in the U.S. In the company's 2006 press release, commercial introduction of VipCot-containing cotton varieties was pushed back 2-3 years, to 2008-09, “subject to receiving regulatory approvals” (DPL-Syngenta 2006). Syngenta received USDA clearance for VipCot in 2005 (USDA APHIS 2005), but since 2004 has obtained only a series of time-limited provisional approvals from the Environmental Protection Agency

(EPA)for the VipCot insecticidal protein VIP3A (for the first, see EPA 2004). 24 The latest provisional approval expires on May 1, 2007 (EPA 2006), at which point Syngenta might seek a renewal of the temporary exemption from EPA, or apply for final clearance. Marketing of VipCot is unlikely to proceed without final clearance from EPA. 24 While most genetically engineered crops require only USDA approval for commercial introduction, those like VipCot that produce pesticides require additional approval of the pesticide by the EPA. Companies normally seek time-limited approvals for GM crop pesticidal proteins from EPA while the pertinent crop is undergoing field trials. The merger could only reduce DPL's incentive to market cotton containing VipCot, given the fact that VipCot (assuming final EPA clearance) would compete with its new owner's latest IR trait, Bollgard II, or other new IR traits Monsanto develops to complement or succeed Bollgard II. 3.4.2 Cotton With DuPont's GAT Herbicide Tolerance In 2006, DPL obtained licenses from DuPont to deploy an experimental dual herbicide-tolerance trait known as Optimum GAT in cotton and soybeans (DPL-DuPont 2006). The GAT trait is being developed in cotton by a DPL-DuPont joint venture known as DeltaMax Cotton LLC. The GAT trait provides tolerance to two herbicides rather than one, as with all previous HT traits. GAT crops, if successfully developed, will be tolerant to both glyphosate and ALS inhibitors, a popular class of herbicides used on cotton, soybeans and corn. GAT is being advertised by DuPont as a means for farmers to continue using the popular herbicide glyphosate, while at the same time permitting application of a second herbicide to deal with the growing problem of glyphosate-resistant weeds (DuPont-Pioneer 2006a). The merger would present Monsanto with an interesting dilemma—whether to allow its new subsidiary to market DPL cotton varieties with a competitor's glyphosate-tolerance trait. Monsanto's glyphosate-tolerance traits (Roundup Ready & RR Flex) are the pillar of the company's biotech crop empire. Not only is Roundup Ready by far the dominant trait in cotton, it represents the only trait deployed in biotech soybeans (and 89% of U.S. soybeans were transgenic in 2006 (USDA ERS 2006b)), and the dominant HT trait in both corn and canola. Monsanto might well be reluctant to allow DPL to market cotton varieties with a competitor's glyphosate-tolerance trait. This reluctance can only be increased by the plans of DuPont and Syngenta to jointly incorporate GAT in soybeans, corn and perhaps other crops, further challenging Monsanto's dominance in HT technology (Greenleaf Genetics 2006; StLPD 2006). Growers in the Southeast, where DPL's market share exceeds 86% (USDA AMS 2006), are concerned that the proposed merger would reinforce DPL's “inordinate control” of their seed market and deny them needed new varieties. According to University of Georgia cotton agronomist Steve Brown: The collective technology pool of the merged company would conceivably include not only Monsanto's Bollgard, Bollgard II, Roundup Ready, and Roundup Ready Flex traits but also the Verdia GAT gene, the DuPont ALS-tolerant gene, and Syngenta's VIP system. These latter technologies could be developed * * * or shelved. The fact that they are not in another company's laboratory or greenhouse prevents the introduction of products that could effectively compete with Monsanto's current portfolio. Shelving such technology—or even physically eliminating existing transgenic lines in which these new genes have successfully been introduced—establishes serious, lengthy hurdles for other would-be competitors. Growers in Georgia are already frustrated with the inordinate control exercised by one company. Unless issues of traits are adequately addressed in the proposed merger, things could get worse. The real answer to the overwhelming control of varieties and technology by a single provider is legitimate competition (Brown 2006b). 3.4.3 Other Biotech Cotton Trait R&D Companies wishing to conduct outdoor field trials of experimental biotech crops (i.e. environmental releases) must submit “notifications” to USDA's Animal and Plant Health Inspection Service (APHIS). Notifications give basic information about the proposed field trials, such as the type of crop and genetic modification, containment measures, and overall acreage. APHIS normally responds by issuing “acknowledgements,” allowing the trials to proceed. APHIS makes some of the notification information available to the public in a searchable database. The following analysis is based on these data for biotech cotton field trials from the year 2000 through the end of 2006. Monsanto has received over half (53%) of the 449 USDA permits for transgenic cotton field trials since the year 2000, three times more than its closest competitor, Bayer, at 17%. These two companies, plus Syngenta and Dow, received 91% of all permits, with the remainder divided among DPL and six other institutions. While these data show Monsanto's clear dominance in cotton trait R&D, they greatly overestimate the degree of competition in transgenic cotton trait research and development. Aggregate field trial acreage is a better measure of R&D efforts than number of permits. This is because new biotech crops require extensive field testing that can take 5-10 years, and the majority fail early on. Stage of development correlates roughly with size of field trials. Permits for small trials from fractions to dozens of acres indicate early-phase development, and high likelihood of failure. Permits for larger field trials in the hundreds to thousands of acres, especially if conducted in multiple locations over consecutive years, indicate a greater likelihood of eventual USDA clearance. The significance of field trial acreage as a measure of R&D progress is indicated by the fact that companies sometimes claim permit acreage as confidential business information

(CBI)so as to prevent competitors from learning the R&D status of a given experimental crop (personal communication, James White, APHIS). 25 25 Alternately or additionally, the company will claim the trait or gene being field tested as confidential business information. When one compares acreage figures (see Appendix 5), Monsanto's dominant position as measured by number of permits becomes overwhelming. Monsanto was responsible for nearly 94% of experimental biotech cotton acreage (80,956 acres) over the past seven years—26 times more than Bayer (3.6% or 3073 acres) and 47 times more than Syngenta (2.3% or 1943 acres), its closest competitors. By the more accurate measure of acreage, then, Monsanto has roughly the same predominant position in R&D for future cotton traits as it does for currently marketed cotton traits. In the event of a merger, Monsanto would have a natural incentive to exclude competitors' traits from DPL seeds. Its overwhelming dominance in cotton trait R&D demonstrates that it would have no need to license traits from Syngenta, Bayer or other firms. 3.5 Production Costs and Productivity of Cotton Cropland Glyphosate-resistant weeds are on the rise, and they are already increasing growers' production costs, in some cases dramatically. Continued increases in the use of glyphosate promise an accelerated development of glyphosate-resistant weeds, with concomitant rise in production costs to control them and adverse agronomic impacts, such as increased erosion from reduction in conservation tillage and a return to the use of more toxic herbicides (Section 2.7). The negative effects of rising Roundup use on soil microorganisms and plant nutrition may pose an increased long-term risk of plant disease and yield losses, both in cotton and other crops, and potential threats to amphibian populations (Section 2.8). Finally, the sometimes erratic performance of Monsanto's cotton—problems such as deformed bolls and dramatic yield losses first noted in the 1990s, but still occurring today (Section 2.6)—makes near-total dependence on cotton with Monsanto technology unwise. All of these adverse impacts are direct consequences of the growing dominance of Monsanto's traits, particularly its Roundup Ready

(Flex)traits, in cotton. The merger would exacerbate these problems by enhancing Monsanto's ability to incorporate its traits in a large portion of U.S. cotton seeds well into the future. 3.6 Impacts on Growers of Other Crops While the cotton industry is the most relevant context for assessment of the proposed combination, the merger would likely contribute to further increasing Monsanto's seed and trait dominance in other crops as well. This is because Monsanto has extensive germplasm holdings and/or trait penetration in corn, soybeans, canola, vegetables, fruits and other major crops, while DPL is a major presence in soybeans as well as cotton; and essentially the same traits are often deployed, or deployable, in multiple crops. One effect of this increased dominance in seeds and traits is that growers of other crops will experience an exacerbation of the adverse agronomic and environmental impacts discussed above with respect to Monsanto's technology, particularly Roundup Ready (Flex), in cotton. Indeed, in many cases cotton growers are also growers of other crops, such as soybeans and corn. 3.6.1 Concentration in Seeds and Traits Other Than Cotton In 2005, Monsanto became the largest seed firm in the world, with seed sales of $2.8 billion, to surpass the traditional leader, DuPont Pioneer (ETC 2005). Appendix 6 illustrates the company's dramatic rise to dominance. Monsanto undertook two major “shopping sprees” 26 in the mid-90s and the middle of this decade. Here, we will treat only the North American acquisitions (see Section 3.9 for international deals). 26 Sec *http://www.americanseedsinc.com/news/2005-03-01.htm.* From 1996-1998, Monsanto's aggregate multi-billion dollar acquisitions of DeKalb Genetics, Asgrow, Agracetus, Holden's Foundation Seeds, Calgene and smaller firms catapulted it to number one in U.S. soybean and number two in U.S. corn seed sales (Fernandez-Cornejo 2004, Tables 16 & 19). In 2005, Monsanto reportedly had 41% and 25% market shares in global corn and soybean seed sales, respectively (ETC 2005). The second, and ongoing, wave of acquisitions in this decade has focused on regional U.S. seed firms, which Monsanto is purchasing through its holding company, American Seeds, Inc. (ASI). In the two years from ASI's formation in November 2004 to December 2006, Monsanto spent $350 million to acquire 15 firms, giving it an additional share in U.S. corn and soybean seed sales of more than 6.5% and 2.0%, respectively (Table 3). 27 Monsanto's $1.4 billion acquisition of the world's largest fruit and vegetable seed firm, Seminis (Monsanto 2005a), in 2005 reportedly gave the company from 23% to 38% shares of the global seed markets for tomatoes, onions, peppers, cucumbers and beans (ETC 2005). The $300 million buyout of Emergent Genetics, also in 2005, included 12% of U.S. cotton seed sales represented by the Stoneville and NexGen brands (Monsanto 2005b). Monsanto also acquired significant canola germplasm with buyouts of Limagrain Canada (Monsanto 2001) and the Advanta and Interstate canola brands (Monsanto 2004a). In addition, Delta and Pine Land is fast becoming a major player in soybeans as well as cotton (DPL 2004). 27 Compiled from information in news releases at *http://www.americanseedsinc.com/news.htm.* EN04AP08.011 3.6.2 Cross-Crop Trait Deployment A given trait, or slightly differing versions thereof, is deployable in multiple crops. The pre-eminent example of cross-crop trait deployment and dominance is Monsanto's Roundup Ready. According to Monsanto's figures, 102.6 million acres of Roundup Ready soybeans (66.4), corn (24.8), cotton (10.8) and canola (0.6) were planted in 2005. Monsanto's corresponding estimate for 2006 is 113-117 million acres (Monsanto 2006c). Monsanto has also received commercial clearance for Roundup Ready versions of beets and alfalfa, though neither of these are grown to a significant extent due to rejection by consumers and the food industry. Monsanto dropped efforts to gain USDA approval for Roundup Ready wheat in 2004 for similar reasons, though it could re-apply in the future. USDA is currently considering de-regulation of Roundup Ready turfgrass for lawns and golf courses. Monsanto is field-testing a number of other Roundup Ready crops, including onions, peas and Kentucky bluegrass (Cerdeira & Duke 2006). The majority of commercialized Roundup Ready crops utilize the same mechanism, a modified version of a bacterial enzyme that is immune to glyphosate, CP4 EPSPS, from soil bacteria of the genus Agrobacterium (Cerdeira & Duke 2006). 28 28 Roundup Ready canola contains 2 mechanisms of glyphosate resistance: EPSPS and glyphosate oxidase (GOX), an enzyme that degrades glyphosate. The only other significant transgenic HT trait is Bayer's LibertyLink (glufosinate tolerance). LibertyLink

(LL)versions of canola, corn, cotton, soybeans, beets and rice have received USDA approval, 29 though only LL canola, cotton and corn are being grown commercially. 30 Though we have not found precise figures, commercial acreage of LL crops in the U.S. is estimated at roughly 1 million acres, 31 or about one percent of Roundup Ready crop acreage. LibertyLink crops utilize the glufosinate-inactivating enzyme phosphinothricin acetyl transferase

(PAT)generated from either one of two closely related genes (bar and pat) derived from soil bacteria of the genus Streptomyces (USDA APHIS 2006, p. 29). 29 See “phosphinothricin-tolerant” listings for Bayer CropScience and two companies it has since acquired, AgrEvo and Aventis, at *http://www.aphis.usda.gov/brs/not_reg.html* . Phosphinothricin is another name for glufosinate, the active ingredient in Bayer's Liberty-brand herbicides. 30 LL soybeans received USDA approval in 1996, but were never marketed due to concerns over export market rejection (Illinois Extension 1999), though Bayer reportedly plans to introduce them in 2008 (Gullickson 2006). Three LL rice varieties have also received USDA approval, but have not been marketed for similar reasons (Weiss 2006). 31 USDA AMS data for 2006 show that 3.64% of 14.95 million acres of upland cotton, or 550,000 acres, were planted to LL cotton; Monsanto's estimate that 3% of transgenic HT corn was LibertyLink in 2003 suggests roughly 350,000 acres of LL corn in that year (Monsanto 2004b); since 75% of the 1.08 million acres of canola in 2003 were Roundup Ready (Cerdeira & Duke 2006, p. 1635), LL canola represents some fraction of the remaining 270,000 acres. One finds similar cross-crop deployment in the smaller market for IR traits, although only in corn and cotton. Monsanto's Bollgard and Bollgard II IR traits are found in 99% of IR cotton acreage. While we have not found figures for IR trait market shares in corn, Monsanto is likely dominant here as well, though Syngenta, Dow, and Dow-Pioneer all have competing traits. IR traits in corn include a handful of slightly differing versions of insecticidal proteins that kill differing insect pests; the most notable difference is found in corn, where differing IR traits kill pests of grains and leaves (e.g. corn-borers) and root pests (corn rootworm). 3.6.3 Fewer Trait Choices and Adverse Impacts on Other Crops With DPL's additional germplasm in cotton and soybeans, a post-merger Monsanto-DPL would have secure access to more seed varieties in which to incorporate its traits. Since essentially the same trait can be deployed in multiple crops, an investment in development of a single trait brings returns roughly commensurate with the number of trait-bearing seeds, of whatever crop, that are sold. 32 For instance, Monsanto's recent acquisition of Seminis gives it broad new opportunities for introduction of its current and future traits in a number of new vegetable crops. Conversely, a trait provider with lesser germplasm has fewer opportunities to recoup its investment in the development of a given trait, and is thus at a competitive disadvantage in all crops. This vertical integration effect is clearly at play in the proposed combination with respect to Monsanto's industry-leading Roundup Ready

(Flex)traits. Thus, the merger would consolidate Monsanto's current overwhelming dominance in traits and seeds for all major crops, and help extend its trait dominance to minor crops such as vegetables in the future. Vertical integration efficiencies are generally adduced in support of mergers. Yet in this case, the additional vertical integration of traits and germplasm in a combined Monsanto-DPL will only increase market power and discourage competition. Monsanto-DPL's near monopoly in traits and predominance in (cotton) seeds means that vertical integration would not bring lower seed prices for farmers. 32 This applies to early-stage research and development of the trait. Incorporation of the trait requires later-stage development expenditures specific to the individual crop. Less competition in traits will mean fewer choices for growers of other crops. In addition, the adverse agronomic and environmental impacts discussed above for cotton will be exacerbated in other crops, particularly for cotton growers who also grow other crops. Government research would seem to support this assessment of fewer seed choices. Researchers with the USDA's Economic Research Service have found that “consolidation in the private seed industry over the past decade may have dampened the intensity of private research undertaken on crop biotechnology relative to what would have occurred without consolidation, at least for corn, cotton and soybeans.” They add: “Also, fewer companies developing crops and marketing seeds may translate into fewer varieties offered” (Fernandez-Cornejo & Schimmelpfennig 2004). 3.7 Organic Cotton Organic cotton production by definition excludes use of genetically engineered seeds, chemical fertilizers and pesticides under USDA organic standards (OCA 2004). Though it still represents a very small market, organically grown cotton has enjoyed tremendous growth recently at the retail, manufacturing and farm levels. Global retail sales of organic cotton products increased from $245 million in 2001 to $583 million in 2005, an annual average growth rate of 35%. Global organic cotton fiber sales increased nearly six-fold, from 5,720 metric tonnes in 2000 to 32,326 metric tonnes in 2005 (Organic Exchange 2006). Major retailers are largely responsible for this booming market. For instance, Patagonia converted its entire line of sportswear to 100% organic cotton in the 1990s, and 2.5% of Nike's total cotton use in 2003 was organic, 33 making it the largest user of organic cotton in that year (Organic Exchange undated). In 2004, Wal-Mart and Sam's Club began marketing an organic cotton line of yoga outfits, and since then have introduced organic cotton baby clothes, bed sheets, towels, and ladies apparel. The popularity of these products spurred Wal-Mart to become the largest single purchaser of organic cotton in 2006. Other retailers with organic cotton lines include Eileen Fisher and Timberland (Gunther 2006). This strong growth is expected to accelerate in the coming years (Organic Exchange 2006). 33 The common practice of blending organic and conventional cotton accounts for the greater increase in global organic cotton fiber sales vs. retail sales, since products must contain over 95% organic cotton to be labeled “organic cotton.” Conventional and biotech cotton production is extremely chemical-intensive, accounting for approximately 25% of global insecticide use, and 10% of overall pesticide use (Organic Exchange undated). Thus, organic cotton production means significantly less chemical pollution of the environment, avoidance of chemical-related threats to the health of growers, 34 and no contribution to the rapidly growing problem of herbicide-resistant weeds. Equally important is the increased revenue from organic cotton, which offers smaller growers an opportunity to survive in a ruthless cotton industry marked by fewer and ever-bigger farms (see Figure 3). By one estimate, organic cotton producers can increase their income by 50%: They receive a 20% premium over the price paid for conventional/biotech cotton, and spend less on inputs (which includes seeds and fertilizers as well as pesticides) (Fashion United). 34 See *http://www.organicexchange.org/Farm/cotton_facts_intro.htm.* Organic cotton is grown in the U.S. (primarily Texas, but also Arizona, Missouri and New Mexico), 35 but increasingly in a number of African nations as well as India, China, Turkey, Peru and Paraguay. 36 An in-depth, two-year study in India showed that organic cotton producers spent 40% less on inputs, and had slightly higher yields, than conventional cotton producers (Ramakrishnan 2006). Low input costs are particularly important for resource-poor farmers in developing countries, who frequently incur debt at high interest rates to purchase seeds and chemicals. The high price of biotech cotton seed has been a major complaint of developing country farmers induced to buy it in expectation of better performance (see Section 39.1). 35 See *http://www.aboutorganiccotton.org/stewards.html.* 36 See *http://www.organicexchange.org/Map/oce.html.* Biotech cotton poses a number of potential threats to organic producers. First, biotech cotton could contaminate organic cotton and render in unsaleable. Contamination can occur when pollen from transgenic plants blows or is carried by insect pollinators to fertilize neighboring conventional/organic fields, through admixture of transgenic seeds in conventional/organic seeds, by the sprouting of transgenic “volunteer” plants from unharvested seeds in a subsequently grown field of conventional/organic crops, and by other means (UCS 2004). There are numerous examples of inadvertent transgenic contamination mining markets for conventional/organic producers in other crops. For example, as reported in Nature Biotechnology, “[t]he introduction of transgenic, herbicide-tolerant canola in western Canada destroyed the growing, albeit limited, market for organic canola,” which commands a 100% premium over conventional canola (Smyth et al. 2002). The extremely widespread contamination of grain supplies and food products with transgenic StarLink corn in 2000/2001 resulted in extremely costly recalls of over 300 corn products, sharp drops in exports as contaminated corn shipments were rejected, and lower prices for corn farmers (Freese 2001). Both canola and corn are considered “outcrossing” crops, while cotton is generally “self-pollinated” 37 But even self-pollinating transgenic crops like rice can pose a threat, as seen in the recent episode in which an unapproved variety of transgenic rice (LLRICE6OI) widely contaminated commercial rice supplies, wreaking havoc with rice markets and causing losses to rice farmers projected at up to $150 million (Weiss 2006). CFS

(2006)gives additional examples of transgenic contamination. 37 “Self-pollinated” means that a particular plant's

(male)pollen fertilizes primarily its own (female) ova, while the pollen of “outcrossing” plants normally fertilizes other plants of the same species. But the terms are relative. For instance, insect pollinators like honeybees can carry cotton pollen for hundreds of feet to fertilize other cotton plants, see: *http://www.aphis.usda.gov/brs/cotton.html.* Contamination episodes are seldom adequately explained, but are generally blamed on slipshod management practices on the part of the biotech company or farmers growing the crop, or on deficient regulatory oversight by governmental authorities. For instance, the USDA's Inspector General recently issued a scathing audit lambasting the USDA's Animal and Plant Health Inspection Service for numerous fundamental flaws in its oversight of genetically engineered crop field trials (USDA IG 2005). A less charitable interpretation was suggested by Don Westfall, of the biotech consultancy firm Promar International, who reportedly stated in connection with the StarLink corn episode noted above: “The hope of the industry is that over time the market is so flooded [with GMOs] that there's nothing you can do about it. You just sort of surrender” (Laidlaw 2001). The production practices associated with biotech cotton may also reduce yields of nearby organic cotton producers through spray drift damage. Herbicides are sprayed liberally to kill weeds in virtually all non-organic cotton production. Sprayed herbicides can drift several miles, especially when applied via airplane, as is common with cotton, and damage other farmers' crops (Bennett 2007, see also Section 2.4). The potential for spray drift damage has increased with the introduction of Roundup Ready cotton, since it permits application of glyphosate over a wider time window than conventional cotton. Roundup Ready Flex cotton widens the application window still further, since it withstands glyphosate throughout the growing season, and moreover survives higher application rates than original RR cotton (see Section 2.7). A third potential risk to organic cotton producers is the rapidly declining availability of high-quality conventional seeds, since organic standards prohibit use of transgenic seeds. Acquisition of DPL would give Monsanto the world's largest cotton seed holdings, with substantial presence in both U.S. and many foreign markets (see Section 3.9). Monsanto has explicitly stated that important goals of its acquisition of DPL are “to create a new global platform in cotton” and “to accelerate biotech trait penetration” (Monsanto 2006b, emphasis added). Therefore, the merger would likely lead to increased acreage of Monsanto biotech cotton planted overseas, posing the significant threats outlined above to organic cotton producers in African and other developing country nations, where governmental oversight of biotech crops is often even weaker than in the U.S. Since organic cotton products sold in the United States increasingly come from organic fiber grown overseas, the merger could have the effect of restricting the choice of organic cotton products for American consumers. 3.8 Seed Sterility Technology (Terminator) DPL and USDA jointly hold at least three major patents on a transgenic method for genetic sterilization of seeds (ETC 2003). Known as the Technology Protection System, or Terminator, it involves genetically manipulating seeds such that, upon application of a chemical trigger, mature plants arising from the treated seeds themselves produce seeds that are sterile (UCS 1998). The purpose of Terminator technology is to prevent farmers from saving seeds from their harvest for the purpose of replanting. The USDA and DPL regard Terminator as a way to provide U.S. seed and trait firms with a biological means to prevent “unauthorized” reproduction of seeds bearing their patented biotech or other traits (USDA ARS 2001). This is regarded as particularly important in developing countries, home to most of the world's 1.4 billion people who depend on farm-saved seed and seeds exchanged with their neighbors as their primary seed source (Shand 1999). 38 38 Seed saving is also practiced in developed countries, however. As recently as 1997 in the US., it is estimated that 63% of wheat, 22% of cotton, and 19% of soybeans came from saved seeds (Fernandez-Cornejo 2004, Table 5). However, the dramatic rise of patented biotech cotton and soybeans varieties that cannot be legally saved has almost certainly reduced these figures. Terminator proponents often argue that poor farmers would continue to be free to save and replant their own varieties. Yet if a farmer's neighbor plants a Terminator crop, cross-pollination could render a portion of the first farmer's seed sterile (CGIAR 1998). And if shipments of Terminator seed-containing grain are sent to developing countries, the common practice of planting seed from grain ostensibly meant for consumption (e.g. food aid) could also lead to farmers unknowingly planting their fields with sterile seeds, resulting in significant drops in yield (FAO 2002, p. 5; ETC 2003, pp. 3-4). The growing number of often unexplained episodes in which biotech crops inadvertently contaminate conventional crops demonstrates that these are real possibilities (CFS 2006). Proponents also argue that resource-poor farmers would continue to have access to non-Terminator seeds developed by the public sector. Yet this is by no means assured. After all, it is a public agency (the USDA) that helped develop sterile seed technology in the first place, and stands to earn an estimated 5% royalties on net sales (RAFI 1998). And public sector plant breeding has declined dramatically in the past two decades, both in the U.S. and around the world, increasingly supplanted by private sector seed (Femandez-Cornejo 2004; Shand 1999). We have already discussed how university-bred cotton varieties virtually disappeared in the U.S. in the early 1990s (Section 2.1.1, Appendix 1), and how farmers' choice of both conventional and biotech cotton seeds is being restricted due to oligopolistic market power (Sections 2.4 and 2.5). These developments help explain the international outcry against Monsanto's proposed acquisition of DPL in 1998. Critics feared that Monsanto would deploy seed sterility technology in its growing stocks of the world's germplasm (see Sections 3.6 & 3.9 and Appendix 6). Criticism of Terminator came from many sources, including Jacques Diouf, Director General of the United Nations' Food and Agriculture Organization; the Consultative Group on International Agricultural Research (CGIAR), the world's largest international agricultural research network (RAFI 2000); and Gordon Conway, former President of the pro-biotech Rockefeller Foundation, a major funder of the Green Revolution (Rockefeller 1999). Opposition to Terminator is strong in developed countries and near universal in the developing world (RAFI 2000). 39 World Food Prize winner M.S. Swaminathan of India warned that deployment of Terminator technology would erode the right of farmers to save and breed seed varieties appropriate to their areas, as well as foster genetic uniformity, increasing the vulnerability of crops to pests and disease (Swaminathan 1998). 39 See also *http://www.banterminator.org/news_updates/news_updates.* Such criticism impelled Monsanto, before the merger fell through, to make “a public commitment not to commercialize sterile seed technologies” (Shapiro 1999). In its 2005 Pledge Report, however, Monsanto initially restricted its pledge to read “nor to commercialize sterile seed technologies in food crops.” When challenged over this apparent change of policy, Monsanto apologized and eventually restored the original language (ETC 2006). Nevertheless, the company left the door open to future deployment of Terminator in food or non-food crops with the proviso: “* * * but Monsanto people constantly reevaluate this stance as technology develops” (Monsanto 2005c, p. 29). Should the proposed combination take place, there are several reasons to be concerned about an imminent “reevaluation” leading to possible deployment of Terminator technology in cotton.

(1)DPL has always been a zealous proponent of Terminator. In 2000, DPL's Harry Collins declared: “We've continued right on with work on the Technology Protection System. We never really slowed down. We're on target, moving ahead to commercialize it. We never really backed off” (as quoted in RAFI 2000). DPL and USDA have reportedly tested Terminator cotton and tobacco in greenhouses (ETC 2003).

(2)Despite its pledge, at least one Monsanto officer has reportedly been promoting genetic use restriction technologies (a category that includes Terminator) at numerous international meetings (Dr. Roger Krueger, see ETC 2006).

(3)Monsanto's restriction of its “no-Terminator” pledge to “food crops” (altered only after a public challenge), coming just one year before its renewed attempt to acquire DPL, holder of Terminator patents and the dominant player in non-food cotton, is at the very least suspicious.

(4)Since objections to Terminator have focused heavily on its threat to the food security of developing countries, initial deployment in a fiber crop like cotton may be regarded as less likely to provoke the same level of opposition.

(5)In 2001, USDA confirmed that commercial introduction of Terminator would likely be in cotton: “Delta and Pine Land Co. researchers are further developing the technology to ready it for commercial use. However, even the most optimistic predictions estimate that commercial cotton with built-in TPS technology may not be available until 2004” (USDA ARS 2001).

(6)Monsanto's aggressive investigations and/or prosecution of thousands of U.S. farmers for (allegedly) saving the company's patented Roundup Ready soybeans demonstrate the lengths to which the company will go to discourage the practice of seed-saving (CFS 2005). 40 Terminator would provide it with a more effective, biological means to the same end. As former DPL president Murray Robinson put it: “We expect [the new technology] to have global implications, especially in markets or countries where patent laws are weak or non-existent” (as quoted in Shand 1999). 40 Monsanto budgets $10 million annually for a department of 75 employees to investigate and prosecute farmers. Through 2004, Monsanto had won over $15 million in damages from U.S. farmers in cases that went to court, and likely much more in confidential out-of-court settlements (CFS 2005, pp. 23, 33-34).

(7)Monsanto could profit substantially from deployment of Terminator. In 1998, DPL projected that Terminator could generate revenues in excess of $1 billion (Shand 1999). Should Monsanto choose to “reevaluate” its current “pledge” not to deploy Terminator, its acquisition of DPL would give it a much expanded germplasm base in which to roll out sterile seed technology in a fiber crop less likely to arouse public opposition, thereby threatening the millennia-old tradition of farmer-led seed-saving and breeding. 3.9 International Perspective The potential international impacts of the merger also deserve consideration, for at least two reasons. First, a combined Monsanto-DPL would have large market shares of cotton and other crops in a number of countries, raising anti-competitive concerns. Second, Monsanto is known for questionable and in some cases illegal business practices in foreign countries, practices that may raise red flags with government regulators outside of the U.S. DPL is the eleventh largest seed company in the world, with 2004 seed sales of $315 million (ETC 2005). An unknown portion of these sales occur overseas. According to a 2004 presentation to investors, DPL controls 86% of the Mexican cotton seed market, and has an 85% share in South Africa, 70% (estimated) in Colombia, 30% (estimated) in Brazil, 30% in Greece, 27% in Spain, 25% (estimated) in Australia, 14% in Argentina, and 5% in Turkey and China (DPL 2004). In May 2006, DPL announced acquisition of Syngenta's global cotton seed business, comprised of operations and assets in India, Brazil, Europe, and certain cotton germplasm in the United States. The Indian acquisitions included a research facility and “cotton seed germplasm and distribution assets in each of the three primary growing regions of India” (DPL-Syngenta 2006). In addition to its international cotton operations in India (see next section), Monsanto has also gained a substantial international presence in other crops (Appendix 6). For instance, its purchase of at least four Brazilian seed firms in the 1990s gave it a 63% market share in Brazilian corn seed in 1998-99 (Pardey *et al* . 2004, p. 19) and a substantial stake in Brazil's soybean market as well. Other notable international deals in the 1990s include acquisition of Cargill's international seed division ($1.4 billion), and two major South African seed firms (mainly corn). The large international marker presence of a combined Monsanto-DPL in cotton seed and other major crop markets would be of great concern, particularly in light of Monsanto's history of questionable and illegal business practices overseas. 3.9.1 Monsanto in India Monsanto has undertaken a major effort to introduce GM cotton internationally, notably in India and Indonesia (for the following discussion, see FoEI 2007, pp. 42-55). For instance, Monsanto acquired a 26% share of India's largest seed firm, Maharashtra Hybrid Seed Company (Mahyco), in the 1990s, and established a 50:50 joint venture with Mahyco known as Mahyco Monsanto Biotech to market Bt cotton there (Cyber India 2004). India plants more cotton (over 20 million acres) than any country in the world, making it a lucrative market. Controversy over the commercial introduction of Mahyco-Monsanto Bt cotton in India from 2002 to 2005 has centered on allegedly deceptive advertising campaigns portraying the Bt cotton as endowed with magical qualities, the more than three-fold higher price of biotech cotton seed, 41 and numerous crop failures. Many Indian farmers went into debt to purchase the high-priced seed, based on promises of greatly increased yields and reduced insecticide expenditures. However, reports from Indian state government officials arid farm organizations document that the Bt cotton often yielded less than conventional cotton, and did not resist pests as promised by Mahyco-Monsanto. In consequence, Indian government officials in various states, most recently in Tamil Nadu (Sharma 2007), have demanded compensation for farmers who have suffered Bt cotton failures. 41 Acting on a complaint from the government of Andhra Pradesh, India's Monopolies and Restrictive Trade Practices Commission issued notices to Monsanto and its Indian affiliates for taking undue advantage of its monopoly in Bt cotton seed by charging a royalty of 1,250 rupees on a 450 gm packet of seed, raising its price to 1,800 rupees (Mitta 2006). As reported in Nature Biotechnology, a study by the Nagpur-based Central Institute of Cotton Research revealed a constellation of problems with Mahyco-Monsanto's Bt cotton varieties, which were developed for U.S. farmers but often proved unsuitable to Indian conditions (for the following discussion, see Jayaraman 2005). First, the built-in insecticide was not produced at sufficient levels in cotton bolls to adequately control the cotton bollworm, India's chief cotton pest, especially late in the growing season, which is longer than in the U.S. This meant both greater-than-expected insect damage for some farmers, and in the longer term, increased probability of development of pests resistant to the Bt insecticide. Second, an estimated one-quarter of the hybrid Bt cotton seeds didn't produce any insecticide at all, a problem not seen in the U.S., where true-breeding varieties are planted. Suman Sahai, president of the Indian civil society group, Gene Campaign, reportedly charged Monsanto with promoting the use of hybrids in India to force farmers to buy fresh seeds every year even though it is aware that true-breeding varieties (whose seeds can be saved for subsequent crops) perform better. The deficient insect-resistance of Bt cotton in India has meant that Indian cotton growers purchase and spray more chemical insecticides than Bt cotton growers in other parts of the world. Due to such agronomic problems, the Indian government refused to renew the licenses for three Bt cotton varieties in many states. The recent spate of farmer suicides in Indian cotton-growing regions has many causes, including drought-related crop failures and low cotton prices, but indebtedness arising from purchase of high-priced biotech cotton seeds that sometimes failed to perform was by many accounts a significant factor (FoEI 2007, p. 50). 3.9.2 Monsanto's Bribery in Indonesia Monsanto's abortive bid to introduce biotech cotton to the Indonesian market involved bribery of and illicit payments to Indonesian government officials. According to a U.S. Securities and Exchange Commission

(SEC)complaint (SEC 2005a), in 2002 a senior Monsanto manager based in the U.S. authorized payment of a $50,000 bribe to a senior Indonesian Ministry of Environment official to repeal a decree requiring environmental impact assessments of biotech crops prior to their introduction, a decree applying to Monsanto's Bt cotton (the decree was never repealed). In addition, Monsanto's Indonesian affiliates made at least $700,000 in illicit payments to 140 Indonesian government officials and their family members from 1997 to 2002. Monsanto was fined $1 million by the U.S. Department of Justice for violation of the U.S. Foreign Corrupt Practices Act and an additional $500,000 by the SEC (SEC 2005b). As in India, many Indonesian farmers were extremely disappointed with the performance of Monsanto's cotton, which was sold at a substantial premium to conventional seed but in many cases failed to deliver the promised added value (FoEI 2007, pp. 52-53). 3.9.3 Monsanto's Questionable Soya Lawsuits in Europe A third example of questionable business practices involves Monsanto's lawsuits against eight European importers of Argentine soy meal, which is largely derived from Roundup Ready soybeans. Monsanto is demanding that the importers pay royalties on these imports based on the company's European patents on Roundup Ready

(RR)soybeans (MarketWatch 2006). Monsanto's attempts to collect royalties from Argentine soybean farmers have failed, chiefly because the company does not have a patent on RR soy in Argentina (FoEI 2007, p. 24), and the country's 1973 seed law allows farmers to legally save and replant RR soy from their harvests (Valente 2004). Monsanto chose to introduce RR soy in Argentina despite the lack of patent protection (Benbrook 2005, p. 14). Measures ostensibly introduced to penalize the illegal practice of selling saved RR seed also affect farmers who legally save their own seed for replanting. For instance, an “extended royalty” scheme introduced in 1999 requires farmers to sign a contract obligating them, upon purchase of RR soybean seeds, to pay a surcharge of $2 for each 50 kg of saved seed, and is associated with lengthy interrogations of farmers and intrusive inspections of farmers' field by seed dealers (Nellen-Stucky & Meienberg 2006 Valente 2006). Argentine farmers are generally opposed to such schemes, which recall Monsanto's practices in the U.S. Monsanto's U.S. patents on RR soybeans have allowed the company to aggressively investigate and/or prosecute thousands of American farmers for (allegedly) replanting saved RR soy, resulting in decisions awarding the company over $15 million through 2004 (CFS 2005). Monsanto's lawsuits against European importers of Argentine soy meal are widely regarded as having little chance of success, because they illegitimately assert a right to collect royalties on a processed derivative (soy meal) of the patented RR soy based on the mere presence of the RR gene, whereas the European patents at issue confer protection only to seeds in which the RR gene performs its function of conferring resistance to glyphosate, which is only true of planted seeds, not seeds or seed derivatives meant for (animal) consumption (Nellen-Stucky & Meienberg 2006). Argentina has reportedly obtained a legal opinion to this effect from the European Commission's Internal Market and Services Directorate-General (MarketWatch 2006). Some regard Monsanto's lawsuits as a stratagem to impose costly delays on Argentine soy meal exports to Europe, and thereby pressure the Argentine government to change its seed laws to suit the company (Nellen-Stucky & Meienberg 2006). 3.10 Monsanto-DPL a Virtually Unchallengeable Competitor DPL's cotton seeds are generally considered the highest-quality germplasm in the industry, as suggested by its 51% share of the cotton seed market and the fact that it has the two top-selling cotton varieties sold by any company (USDA AMS 2006). Monsanto is the undisputed leader in cotton traits, with an over 95% market share, and has a similarly dominant position in R&D, with 94% of experimental transgenic cotton acreage since the year 2000 (Appendix 5). On this basis alone, a merger of these two giants can only exacerbate concentration in an already highly concentrated industry. But the merger's impacts look still more dire when one considers the strong linkage between quality germplasm and trait dominance. Access to limited high-quality germplasm—regarded as the “delivery mechanism” for traits—is absolutely crucial to effectively marketing biotech cotton. Seed proved to be the delivery mechanism of choice for agrobiotechnology, and, because high quality proprietary germplasm was in short supply, the strategic value of certain seed companies rose quickly (Kalaitzandonakes 1998). At present, in the U.S., Monsanto has sure access only to its Stoneville subsidiary's germplasm, representing 12% of U.S. cotton. While its traits are currently offered widely in other firms' seeds via licensing agreements, these agreements are limited in duration and subject to expiration or cancellation. Acquisition of DPL would give Monsanto control of the highest-quality seeds, planted on more than four times as much acreage as Stoneville's, in which to incorporate its traits. The acquisition could also lead to cancellation of DPL's plans to diversify its trait offerings, as described in Section 3.4. If Monsanto's competitors are prevented from deploying their traits in DPL's germplasm, they will be forced to seek access to a much smaller pool of mostly lower-quality germplasm in which to incorporate their traits via licensing agreements or acquisition. They would thus face two, likely insurmountable, obstacles: First, marketing new and unfamiliar traits to farmers committed from long experience and habit to Monsanto's industry-leading traits and doing so in germplasm whose quality in terms of yield and other desirable (non-biotech) attributes is unlikely to match Monsanto-DPL's. The extremely high concentration in seeds post-merger would make acquisition of quality germplasm by Monsanto's competitors effectively impossible. High-quality cotton germplasm is a naturally limited form of capital that accrues slowly over many years of patient breeding efforts. Unlike brick and mortar factories or other capital equipment, it cannot be fabricated, given only sufficient funds. This limitation makes entry considerably more difficult for a would-be innovative competitor than would be the case in a nuts-and-bolts or information technology industry. Perhaps the single, most important factor to consider in assessing the merger is Monsanto's extraordinary success in deploying its traits in the seeds of its competitors, even competitors that are also trait providers themselves, via licensing agreements. In other words, Monsanto has come to overwhelmingly dominate traits in cotton (and other crops) even without the substantial additional vertical integration represented by acquisition of DPL. Since at present there is little room left for Monsanto traits in cotton, the proposed acquisition could only act to extend Monsanto's already unacceptably high level of trait dominance into the indefinite future. Despite the undeniable attractiveness of the Roundup Ready system, however, there are also clear signs that transgenic trait “adoption” is a push as well as a pull affair, a product of oligopolistic market power as well as farmer demand. As demonstrated above, even popular conventional seed varieties are being eliminated or restricted in supply, while conventional versions of leading transgenic lines popular mainly for their yield (or other non-biotech attributes) are simply not available (Section 2.4). Thus, an accelerated decline in the availability of high-quality conventional seed is another likely outcome of the merger. 3.11 Conduct-Based Solutions in Light of the High Failure Rate in Agricultural Biotechnology One might imagine that the anticompetitive effects of the merger could be adequately addressed by requiring Monsanto-DPL to incorporate competitors' traits-for instance, Syngenta's VipCot IR and DuPont's Optimum GAT HT traits (Section 3.4). However, this sort of solution runs a high risk of failure due to the high failure rate associated with this relatively new technology, a factor easily overlooked by those inexperienced in the world of biotech crops. In brief, the overwhelming majority of biotech traits developed in the laboratory are never effectively commercialized. Failure occurs at several stages in the research, development, regulatory review and commercialization process. A trait developed in the laboratory may well not reach the stage of outdoor field trials due to unexpected technical difficulties. The great majority of biotech plant varieties that do undergo outdoor field testing never receive government clearance for commercial cultivation, most often because the company drops development because of trait instability, poor agronomic performance in certain environments, and/or unforeseen health or environmental risks. And even the majority of those few biotech crops that do receive government clearance fail in the marketplace. This high failure rate is often obscured by overly optimistic public relations material from biotech companies, which are understandably optimistic about future prospects for their traits and loathe to air their failures. An approximate measure of the failure rate is provided by USDA data, which show that 976 genes, 42 and thus nearly as many biotech traits, 43 have been tested in roughly 50,000 outdoor field trials (Caplan 2005) involving more than 100 different plant species 44 since the late 1980s. Yet only 71 biotech “events,” or particular crop-trait combinations, have received commercial clearance. 45 Of these 71, only four crops with HT and/or IR traits have succeeded commercially, representing virtually 100% of the world's biotech acreage (see Appendix 7 and ISAAA 2006). 46 42 See *http://www.tsb.vt.edu/cfdocs/isblists2.cfm/opt=16,* last accessed Feb. 12, 2007. 43 In the great majority of cases, a biotech trait is conferred by a single gene. A limited number of the 976 genes noted above are marker genes employed to facilitate the crop development process and do not themselves express a trait. USDA also lists alternative designations for some genes separately. On the other hand, an unknown but substantial number of genes claimed as “confidential business information”

(CBI)of the biotech crop developer do not appear in this list (see Caplan 2005 on the growing number of CBI claims for genes), so the true number of biotech traits tested in field trials surely exceeds 1,000. 44 *http://www.tsb.vt.edu/cfdocs/isblists2.cfm/opt=3,* last accessed Feb. 12, 2007. 45 *http://www.aphis.usda.gov/brs/not_reg.html* , last accessed Feb. 12, 2007. 46 Approved biotech crops other than HT and/or IR soybeans, corn, cotton and canola account for well under 1% of global biotech crop acreage. While Syngenta's VipCot cotton has received USDA clearance, the EPA has not given final approval to VipCot's VIP3A insecticidal protein, perhaps due to concerns that it will kill non-target organisms as well as insect pests by virtue of its broad-spectrum activity. As noted in Section 3.4.1, DPL has already pushed back the introduction date of VipCot from 2006 to 2008-09, and there is no guarantee it will be released then, even assuming that a compulsory licensing agreement is imposed on Monsanto as a condition of the merger. DuPont's Optimum GAT trait is even less certain to succeed. DuPont optimistically projects commercial introduction of GAT in soybeans in 2009 (StLPD 2006), to be followed by introduction in corn and cotton some years later, by one account 2012 (Polaris 2005). DuPont's Web site indicates that GAT cotton is at the early phase 1 (proof of concept) of 4 phases of development (DuPont-Pioneer 2006b). USDA field trial data show that to date, DeltaMax Cotton LLC has received only two permits to conduct small field trials of GAT cotton, on 5 and 10 acres, both in 2006. 47 The small scale of these field trials confirms that GAT cotton is at an early stage of development. 47 At *http://www.tsb.vt.edu/cfdocs/fieldtests1.cfm* , search on “Institution,” then “DeltaMax Cotton LLC.” Interestingly, DuPont received commercial clearance for a transgenic cotton resistant to ALS-inhibitor herbicides in 1996, but either did not try or was unable to market it. 48 (We find no record that this HT trait was ever incorporated into a commercial cotton cultivar.) Tolerance to ALS-inhibitors is the trait paired with glyphosate-tolerance in Optimum GAT. One limitation of ALS-inhibitor tolerance is the prevalence of weeds already resistant to this class of herbicides. 49 This, combined with rapidly increasing glyphosate-resistance in weeds, may limit the usefulness and marketability of Optimum GAT. 48 Go to USDA's list of GM crops cleared for commercial use (i.e. petitions for non-regulated status granted) at *http://www.aphis.usda.gov/brs/not_reg.html* . Petition 95-256-01, for sulfonylurea tolerant cotton, line 19-51a, was cleared on Feb. 21, 1996 Sulfonylurea is an ALS-inhibitor type herbicide. 49 The Weed Science Society of America lists 95 weeds resistant to ALS inhibitors worldwide. *http://www.weedscience.org/Summary/UspeciesMOA.asp?1stMOAlD=3&FmHRACGroup=Go* . History clearly demonstrates that any given experimental biotech crop is very unlikely to become commercialized. Conduct-based solutions to correct the anticompetitive effects of a merger naturally rely on “picking a winner.” Given the high failure rate in agricultural biotechnology, this is a risky strategy that is very likely to fail. 4. Conclusion Based on our analysis, the Center for Food Safety and International Center for Technology Assessment believe that the proposed merger would have a number of anticompetitive effects, including increased cotton seed prices; restricted choice of cotton seed varieties with no traits (i.e. conventional seed) or one trait; and increased obstacles to entry of and/or greater market penetration by Monsanto's cotton trait competitors. Other possible effects include an accelerated exit of smaller cotton seed firms from the market; acquisition of a uncompetitive, divested Stoneville, leading to a duopoly in seeds; harm to organic cotton growers, particularly overseas, and potentially reduced choice of organic cotton products for U.S. consumers. However, agriculture is not software. Production of food and fiber to meet basic needs is a far more serious affair than computer operating systems. Agriculture requires competition in seeds and traits for all the reasons that apply to other industries, but also to ensure the diversity that is essential to sustain the health and productivity of American agriculture. As discussed in Sections 2.6 to 2.8, the near-monopoly in biotech traits promises a future of unprecedented reliance on a single herbicide, glyphosate. Excessive use of glyphosate leads to increasingly stubborn weeds, a threat to the cotton industry compared by one expert to the boll weevil; disease-prone, mineral deficient crops; and heightened risks of widespread yield reductions and failures. Increased use of Roundup may also endanger amphibian populations. From an international perspective, the merger will give Monsanto, a company known for questionable and illegal activities overseas, increased access to foreign markets, particularly in cotton. Monsanto's acquisition of DPL's seed sterility technology increases the potential for eventual introduction of Terminator cotton and other crops, with adverse equity impacts on resource-poor farmers. 5. Recommendations I. We call on the Department of justice to unconditionally oppose the acquisition of Delta and Pine Land Company by Monsanto to protect farmers from higher seed prices, reduced seed choices and other adverse impacts as outlined in this report. II. We call on the Department of Justice to oppose future acquisitions of cotton seed firms by the oligopolists—Delta and Pine Land, Bayer and Monsanto—to avert the negative effects of increased concentration in the cotton seed industry. III. We urge the US Department of Agriculture to resume its historical role of promoting the interests of American farmers, through: A. Increased funding of public sector breeding efforts to supply American farmers with affordable, high-quality seed varieties in cotton and other crops, in particular conventional seed varieties neglected by the private seed industry; B. Denial of any and all permits to entities applying to field test any crop incorporating Delta and Pine Land's Technology Protection System, or any other other genetic use restriction technologies that render the seeds of harvested plants sterile (popularly known as “Terminator” technology); and C. Otherwise following the recommendations of eleven members of the USDA's Advisory Committee on Agricultural Biotechnology

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(ACAB)to Dennis Eckart, ACAB Chair, on August 25, 2000. *http://www.biotechinfo.net/dennis_eckart2.html.* USDA AMS (2006). “Cotton Varieties Planted: 2006 Crop,” U.S. Dept. of Agriculture, Agricultural Marketing Service, Cotton Program, August 2006. *http://www.ams.usda.gov/cottonrpts/MNXLS/mp_cn833.xls.* USDA AMS (2005). “Cotton Varieties Planted: 2005 Crop,” U.S. Dept. of Agriculture, Agricultural Marketing Service, Cotton Program, August 2005. USDA AMS (2004). “Cotton Varieties Planted, United States: 2004 Crop,” U.S. Dept. of Agriculture, Agricultural Marketing Service, 2004. USDA AMS (2003). “Cotton Varieties Planted, United States: 2003 Crop,” U.S. Dept. of Agriculture, Agricultural Marketing Service, 2003. USDA APHIS (2006). “Finding of No Significant Impact: Extension of Nonregulated Status to Rice Line LLRICE601,” U.S. Dept. of Agriculture, Animal and Plant Health Inspection Service. *http://www.aphis.usda.gov/brs/aphisdocs2/06_23401p_com.pdf.* USDA APHIS (2005). “Syngenta Seeds, Inc.; Determination of Nonregulated Status for Cotton Genetically Engineered for Insect Resistance,” **Federal Register** , Vol. 70, No. 138, July 20, 2005. *http://www.epa.gov/fedrgstr/EPA-IMPACT/2005/July/Day-20/i14263.htm.* USDA ARS (2001). “Why USDA's Technology Protection System (aka “Terminator”) Benefits Agriculture,” USDA Agricultural Research Service, a December 28, 2001 revision of an article originally posted in 1999. *http://www.ars.usda.gov/is/br/tps/.* USDA Census (1992). 1992 Census of Agriculture: Size of Farms, Table 49, p. 17 *http://www.nass.usda.gov/census/census92/volume1/us-51/v1-tbl49.pdf.* USDA Census (1997). 1997 Census of Agriculture: Size of Farms, Table 49, p. 17 *http://www.nass.usda.gov/census/census97/volume1/us-51/us1_49.pdf.* USDA Census (2002). 2002 Census of Agriculture: Size of Farms, Table 55, p. 21 *http://www.nass.usda.gov/census/census02/volume1/us/st99_1_055_055.pdf.* USDA ERS (2007a). Cost and return data for cotton production: 1975-1996. USDA Economic Research Service, last accessed January 12, 2007. *http://www.ers.usda.gov/Data/CostsAndReturns/data/history/Cott/HUSCott.xls.* USDA ERS (2007b). Cost and return data for cotton production: 1997-2005. USDA Economic Research Service, last accessed January 12, 1997. *http://www.ers.usda.gov/data/CostsandReturns/data/recent/Cott/RUSCott.xls.* USDA ERS (2006a). “Cotton: Background,” USDA Cotton Briefing Room, updated August 2006. *http://www.ers.usda.gov/Briefing/Cotton/background.htm.* USDA ERS (2006b). “Adoption of Genetically Engineered Crops in the U.S.,” USDA Economic Research Service spreadsheet, 2006. *http://www.ers.usda.gov/Data/BiotechCrops/alltables.xls.* USDA ERS (2001). “Economic Issues in Agricultural Biotechnology,” ed. Robbin Shoemaker, USDA, Economic Research Service, Agricultural Information Bulletin No. 762, Feb. 2001. *http://www.ers.usda.gov/publications/aib762/.* USDA ERS (1996), “Cotton Acreage Gains of Past Decade Reverse 60-Year Decline,” U.S. Dept. of Agriculture, Economic Research Service, AER-739, July 1996. *http://www.ers.usda.gov/Publications/Summaries/cotton.htm.* USDA IG (2005). “Audit Report: Animal and Plant Health Inspection Service Controls Over Issuance of Genetically Engineered Organism Release Permits,” USDA's Office of Inspector General, Southwest Region, Audit 50601-8-Te, December 2005. *http://www.thecampaign.org/USDA_IG_1205.pdf.* USDA NASS (2007). “Quick Stats” for acreage of upland cotton planted in 2006, accessed 2/1/07. *http://www.nass.usda.gov/QuickStats/.* Valente, M. (2006). “Monsanto fights with farmers in Argentina over seed saving,” Inter Press Service, February 10, 2004. *http://www.organicconsumers.org/monsanto/argentina021204.cfm.* Weiss, R. (2006). “Gene-altered profit-killer,” The Washington Post, Sept. 21, 2006. *http://www.washingtonpost.com/wpdyn/content/article/2006/09/20/AR2006092001903.html.* Yancy, C.H. (2005). “Weed scientists develop plan to combat glyphosate resistance,” Southeast Farm Press, June 1, 2005. *http://southeastfarmpress.com/mag/farming_weed_scientists_develop/.* Yancy, C.H. (2004). “Cotton insect shifis documented in North Carolina”, Southeast Farm Press, October 25, 2004: *http://southeastfarmpress.com/news/102504-insect-shifts* Appendix 1: Cotton Seed Market Share of Selected Companies in U.S.: 1970 to 2006 A graph appearing here in the comment is illegible upon reprinting. The graph is available at the Department of Justice Antitrust Division, 325 Seventh Street, NW., Room 215, Washington, DC 20530,

(202)514-2481, 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. Appendix 2 Market Share of Four Largest Private Seed Firms: Cotton, Corn and Soybeans A graph appearing here in the comment is illegible upon reprinting. The graph is available at the Department of Justice Antitrust Division, 325 Seventh Street, NW., Room 215, Washington, DC 20530,

(202)514-2481, 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. BILLING CODE 4410-11-M EN04AP08.012 EN04AP08.013 Appendix 5 Acreage of Biotech Cotton Field Trials in the U.S.: 2000 to 2006 A graph appearing here in the comment is illegible upon reprinting. The graph is available at the Department of Justice Antitrust Division, 325 Seventh Street, NW., Room 215, Washington, DC 20530,

(202)514-2481, 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. EN04AP08.014 BILLING CODE 4410-11-C Appendix 7—Approved Versus Commercially Grown Genetically Engineered Crops A graph appearing here in the comment is illegible upon reprinting. The graph is available at the Department of Justice Antitrust Division, 325 Seventh Street, NW., Room 215, Washington, DC 20530,

(202)514-2481, 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. August 8, 2007. Donna N. Kooperstein, Chief, Transportation, Energy & Agriculture Section, Antitrust Division, United States Department of Justice, 325 Seventh Street, NW., Suite 500, Washington, DC 20530. Re: *United States* v. *Monsanto Company et al.* Case No. 1:07-cv-00992. Dear Ms. Kooperstein: Ohio Farmers Union submits this letter to object to the DOJ's Proposed Final Judgment (“PFJ”), which allows Monsanto to acquire Delta and Pine Land Company (“Delta and Pine Land”). Monsanto's acquisition of Delta and Pine Land will have serious implications for independent family farmers throughout the state of Ohio. Cotton seed is important to Ohio's livestock producers as a high-quality, alternative feed source. Monsanto's acquisition of Delta and Pine Land, the largest cotton seed company in the country, will give Monsanto a profound measure of control over the supply of cotton seed, especially over the transgenic cotton seed market. Competing seed trait developers will have great difficulty gaining acccess to the market. With fewer alternatives, the cost of seed to farmers is very likely to increase, adding additional economic stress to Ohio's livestock producers. Also, Monsanto's growing dominance in the cotton markets could magnify their impact on the soybean and corn markets. Soybean and corn farmers in Ohio rely on an affordable, competitive seed market when they plant in the spring allowing them to grow food and fuels. The soybean and corn transgenic seed markets are already concentrated. This acquisition could easily drive costs up for Ohio's grain farmers and lead to increased prices for consumers. Innovation will also suffer, as competing transgenic trait developers are pushed out of the markets. The DOJ's PFJ does not remedy the harms that will occur from Monsanto's acquisition. The divestiture of Stoneville plus 20 lines of germplasm will not take the place of an independent Delta and Pine Land with its breeding expertise and resources. The PFJ does not restore competition and is not in the public interest. Sincerely, Joe Logan. *Ohio Farmer's Union.* August 7, 2007. Donna N. Kooperstein, Chief, Transportation, Energy & Agriculture Section, Antitrust Division, United States Department of Justice, 325 Seventh Street, NW., Suite 500, Washington, DC 20530, Via fax (202-307-2784) and U.S. Mail. RE: *United States* v. *Monsanto Company, et al.* , Case No. 1:07-cv-00992 (D.D.C., filed May 31, 2007) (Urbina, J.) Dear Ms. Kooperstein: The Organization for Competitive Markets (“OCM”) is an independent, nonpartisan, and nonprofit group comprised of farmers, ranchers, academics, attorneys, and policymakers dedicated to preserving and protecting competitive markets in agriculture. The OCM submits these comments pursuant to the Antitrust Procedures and Penalties Act, 15 U.S.C. 16, to register its objections to the Department of Justice's (“DOJ”) proposed final judgment (“PFJ”) regarding the acquisition by Monsanto Company (“Monsanto”) of Delta and Pine Land Company (“Delta and Pine”), the largest cotton seed company in the United States. With agricultural, consolidation and concentation occurring at an unprecedented rate, OCM is disappointed that the DOJ has once again failed to preserve competition and protect American farmers and consumers. Monsanto's acquisition of Delta and Pine promises to substantially damage transgenic seed trait competition in cotton. Farmers throughout this country are being harmed by Monsanto's aggressive tactics aimed at denying them competitive alternatives. As the DOJ acknowledged in its complaint, Monsanto is the largest producer and supplier of cotton transgenic seed traits in the United States. Monsanto controls over 96% of the market for herbicide-tolerant cotton traits and approximately 99% of the market for insect-resistant cotton traits. Monsanto has used its monopoly power to impose significant price increases on cotton farmers, including a 229% increase in Monsanto's Roundup Ready® herbicide-tolerant trait over the past four years. The technology fees Monsanto charges farmers for its traits accounts for more than 50%, and sometimes even as much as 70%, of the cost of a bag of seed. These statistics illustrate the extent to which greater competition is needed in the cotton transgenic seed trait market where farmers are struggling under the weight of Monsanto's dominance. Together with its separate joint development partners, Delta and Pine offers the best hope of breaking Monsanto's monopoly in cotton transgenic seed traits. As the DOJ indicated in its complaint, Delta and Pine is an attractive joint development partner because of its extensive germplasm library, personnel and facilities, and superior track record of breeding success. Also, Delta and Pine's high market shares make it an indispensable vehicle for competing trait developers to distribute their competing cotton biotech traits to farmers. By acquiring Delta. and Pine, Monsanto will be positioned to undermine these joint development efforts, close the distribution channel for competing traits, and thereby solidify its monopoly position. The DOJ's own complaint and PFJ clearly acknowledge the very significant anticompetitive effect of Monsanto's acquisition of Delta and Pine on the future development of competing cotton traits. Yet the DOJ's proposed remedy to cure these anticompetitive effects—divestiture of Stoneville plus providing Stoneville nonexclusive access to 20 lines of germplasm and certain Monsanto cotton germplasm lines—is woefully inadequate and does not restore competition. First, Stoneville simply lacks the required infrastructure and expertise to challenge Delta and Pine. Second, the “divestiture” to Stoneville of 20 lines of Delta and Pine germplasm does little to enhance Stoneville's capabilities. Putting aside that it is not even a true divestiture, these 20 lines are either in development and not commercially viable or account for only about 1% of the cotton acres planted in the Southeast and MidSouth. Plus, ongoing germplasm line improvements mean that old lines quickly become obsolete. Even if Stoneville is eventually capable of bringing competing biotech traits to market, the DOJ acknowledges that it will take 815 years for them to be commercially viable. By then, it will simply be too late and Monsanto's hegemony in transgenic seed traits will have been cemented permanently. Third, because Monsanto will have more than a 50% post-acquisition share of the highly concentrated cotton-seed market, competing trait developers may well lack the incentive to continue their efforts due to a lack of non-Delta and Pine outlets through which to license their traits. Monsanto's acquisition of Delta and Pine also promises to have harmful spillover applications to other agricultural crops vital to our national economy. With Delta and Pine under Monsanto's control, competing trait developers will be foreclosed from market opportunities that would provide them with necessary revenue to justify the significant research and development costs associated with the development of competing traits in cotton and other crops. Encouraging and promoting alternative, competing transgenic seed traits is especially critical in key crops like corn and soy, where Monsanto already controls more than 95% of the market for herbicide-tolerant corn traits, more than 80% of the market for insect-resistant corn traits, and over 98% of the market for herbicide-tolerant soybean traits. Unless competition is preserved, Monsanto will soon be able to eliminate competition in the trait markets, to the detriment of farmers and consumers everywhere. Promoting and preserving competition and choice in transgenic seed traits is critical to ensuring the success of the vitally important agriculture sector of the national economy. If the PFJ is approved, the opposite will occur—Monsanto's acquisition of Delta & Pine will lead to diminished competition, fewer choices, and higher prices for farmers and consumers. Respectfully, Keith Mudd, *President.* August 16, 2007. Donna N. Kooperstein, Chief, Transportation, Energy & Agriculture Section Antitrust Division, United States Department of Justice, 325 Seventh Street, NW., Suite 500, Washington, DC 20530. Re: *United States* v. *Monsanto Company, et al.* , Case No. 1:07-cv-00992 (D.D.C., filed May 31, 2007) (Urbina, J.) Dear Ms. Kooperstein: We submit this letter pursuant to the Antitrust Procedures and Penalties Act, 15 U.S.C. 16, to voice our objections to the DOJ's Proposed Final Judgment (“PFJ”) which permits Monsanto to acquire Delta and Pine Land Company (“Delta and Pine Land”). The interests of Iowa's farmers, rural communities, and consumers will be harmed by Monsanto's acquisition of Delta and Pine Land. Agriculture is a vital part of Iowa's history, environment, and economy. In 2006 and 2007, Iowa was ranked #1 in the United States in acres of corn and soybeans planted. See “Acreage,” National Agricultural Statistics Service, USDA (June 30, 2006, and June 29, 2007). While Monsanto's acquisition of Delta and Pine Land directly impacts the cotton markets, Monsanto's stronghold in the cotton markets will have serious effects on the corn and soybean markets as well. Farmers and consumers benefit from competition in the marketplace. Monsanto's acquisition of Delta and Pine will end competition in cotton biotech seed traits, by cutting off competing trait developers from access to Delta and Pine's superlative breeding and distribution programs. These competing trait developers will have no incentive to invest in R&D for cotton seed traits, and they will not have the needed resources to invest in trait development for other crops, such as the key crops of corn and soybeans. With no alternatives, the cost of seed to farmers will continue to climb through the roof, and the end costs to consumers will likewise rise dramatically. Further, innovation will be stifled and seed quality will suffer. The DOJ's PFJ does not remedy the harms that will occur from Monsanto's monopoly position. The divestiture of Stoneville plus a sell-off of a few lines of germplasm, will not take the place of an independent Delta and Pine. The PFJ does not restore competition and is not in the public interest. Sincerely, Carrie La Seur, *Founder & President, Plains Justice.* Denise O'Brien, *President, Women, Food & Agriculture Network.* Chris Peterson, *President, Iowa Farmers Union.* August 24, 2007. Donna N. Kooperstein, Chief, Transportation, Energy & Agriculture Section, Antitrust Division, United States Department of Justice, 325 Seventh Street, NW., Suite 500, Washington, DC 20530. Re: *United States* v. *Monsanto Company et al.* , No 1:07-cv-00992 (D.D.C. filed May 31, 2007) (Urbina, J.) Dear Ms. Kooperstein: Pursuant to 15 U.S.C. 16(b), the Attorneys General of Virginia, Arkansas, Delaware, Kentucky, Maryland, New Mexico, North Carolina, Ohio, Oklahoma, Rhode Island, Tennessee, Utah, and West Virginia hereby submit the attached comments related to the Proposed Final Judgment pending in the above-referenced matter. Please contact me at

(804)786-6557 if you have any questions. Sincerely, Sarah Oxenharn Allen, *Assistant Attorney General, Antitrust and Consumer Litigation Section, Office of the Virginia Attorney General.* Attachment Comments of the Attorneys General of Virginia, Arkansas, Delaware, Kentucky, Maryland, New Mexico, North Carolina, Ohio, Oklahoma, Rhode Island, Tennessee, Utah, and West Virginia on the Proposed Final Judgment in United States v. Monsanto Company, et al. Pursuant to ¶ 2(b) of the Antitrust Procedures and Penalties Act, 15 U.S.C. 16, the Attorneys General of Virginia, Arkansas, Delaware, Kentucky, Maryland, New Mexico, North Carolina, Ohio, Oklahoma, Rhode Island, Tennessee, Utah, and West Virginia (hereinafter, “the Attorneys General”), submit the following comments on the Proposed Final Judgment (“PFJ”) produced to the court by the United States Department of Justice (“the United States” or “DOJ”) in the above-referenced matter. I. Introduction As the chief law enforcement officers of their respective states, the Attorneys General are charged with enforcing state and federal antitrust laws. The Attorneys General often are called upon to evaluate and gauge the competitive benefit or harm of proposed business acquisitions to the citizens and economies of their respective states. The Attorneys General strive to preserve fair competition, protect their citizens from unlawful restraints, and promote the development, production and distribution of alternative product choices in the marketplace. As a result, the Attorneys General have a strong interest in antitrust enforcement actions by the United States that will impact their states. Agriculture is an important industry affecting local and state economies, as well as the Gross National Product. Its gross outputs account for more than $250 billion of the gross domestic product and more than $68 billion in exports. See “Gross Domestic Product by Industry Accounts,” U.S. Department of Commerce, Bureau of Economic Analysis, available at *http://www.bea.gov/industry/gpotables/gpo_action.cfm?anon=52440&table&_id=19025&format&_type=0* ; “Foreign Agricultural Trade of the United States,” U.S. Department of Agriculture (“USDA”), available at *http://www.ers.usda.gov/Data/FATUS/monthlysummary.htm* . Cotton, together with corn and soybeans, accounts for nearly 60% of the value of all U.S. crops. See “Crop Values—2003 Summary,” USDA, National Agricultural Statistics Service. These three crops have a combined annual value of more than $58 billion. See “Crops & Plants—National Statistics,” USDA, National Agricultural Statistics Service. In 2006, the cotton market alone generated more than $5 billion in annual revenues for U.S. farmers. See DOJ Complaint (“Complaint”), at ¶ 1. Biotechnology (alternatively, “biotech”) has revolutionized U.S. agriculture by enabling farmers to protect crops from certain insects, the effects of herbicides, and other soil and plant conditions that evolve over time. By altering the genetic makeup of seeds to produce crops with desirable traits, such as insect resistance and herbicide tolerance, biotechnology has made it possible for farmers to increase production yields and decrease costs, particularly the costs of pesticides sprayed on crops after planting. Today, approximately 87% of cotton, 91% of soybeans, and 73% of corn grown in the United States is from genetically modified seeds. See “U.S. Farmers Plant Largest Corn Crop in 63 Years,” USDA, available at *http://www.nass.usda.gov/Newsroom/2007/06_29_2007.asp* . Despite the increasingly important role of biotech seeds in U.S. agriculture, barriers to entry in the market are extremely high. Successful entry requires long lead times, large capital expenditures, highly trained and experienced personnel, retail distribution outlets, and access to a broad collection of elite germplasm (the genetic material required for the development of traits that gives the plants their characteristics. See Complaint, at ¶ 5.). Desirable traits have to be developed in laboratories, successfully crossed with varieties of elite germplasm to produce seeds that have the proven desirable qualities, and field-tested in conditions farmers actually confront. See generally Jane Dever and E. Margaret Hamill, “Breeding: Approaches to Fiber Quality Improvement,” 2005 EFS Systems Conference Presentations, available at *http://www.cottoninc.com/2005/ConferencePresentations* ; and Monsanto.com, “The DNA of Our Business,” available at *http://www.monsanto.com/Monsanto/content/media/pubs/2005/MON_2005_DNA_of_our_business.pdf* . The process often requires thousands of attempts before a trait can be developed and used to breed commercial seed varieties. See Complaint, at ¶ 28. Once a trait is successfully developed, it must receive regulatory approval by multiple agencies, in both the United States and abroad, which can cost millions of dollars. Id. Market acceptance of new biotech traits also takes time. Farmers tend to be conservative in adopting new biotech seed varieties, and therefore these seed varieties often take several seasons to attain maximum penetration and market share in various regions. As the United States acknowledges in its Complaint, the development of a single trait “typically takes eight to twelve years and costs over $40 million.” Id. at ¶ 28. See also id. at ¶ 43. Because of these extraordinarily high barriers to entry, there are a limited number of companies in the world capable of successfully developing biotech traits. Monsanto Company (“Monsanto”) is the dominant biotech trait company in the United States. Delta and Pine Land Company (“DPL”) is the largest cotton seed company in the United States. The Attorneys General are concerned that Monsanto's acquisition of DPL will eliminate competition in the market for cotton biotech traits and seeds, stifle innovation and product choice, and result in supra-competitive prices to U.S. farmers and consumers. Monsanto will be able to eliminate competition in cotton biotech trait development and commercialization by foreclosing other companies from developing cotton biotech traits with DPL or from incorporating competing traits into DPL seeds. The Attorneys General also are concerned that the acquisition will have ripple effects that will stall or eliminate the development of competing biotech traits for other crops, such as corn and soybeans, allowing Monsanto to maintain a degree of control over U.S. agriculture that has never before been possessed by a single company. The acquisition also may allow Monsanto to engage in exclusionary business practices in cotton. Such exclusionary business practices could include long-term, highly restrictive licensing agreements, “loyalty” programs, bundling requirements, and other restrictions that effectively could prevent competing cotton traits from coming to market. While DOJ recognizes the serious anticompetitive effects of the acquisition, its PFJ fails to sufficiently remedy those effects and, therefore is not in the public interest. II. The Acquisition Cements Monsanto's Current Monopoly Position in Biotech Traits and Will Give the Company Market Power in Cotton Seeds No other company has experienced Monsanto's level of success in the development, production and distribution of biotech traits. It is undisputed that Monsanto enjoys large monopoly shares with respect to every commercially important trait in cotton, corn and soybean seeds. In 2006, over 96% of all cotton planted with biotech traits contained Monsanto traits, while 95% contained only Monsanto traits—the 1% difference is attributable to Monsanto traits that were combined with either Bayer CropScience or Dow's Phytogen traits. See Complaint, at ¶ 3. See also Bill Frecse, “Cotton Concentration Report: An Assessment of Monsanto's Proposed Acquisition of Delta and Pine Land,” International Center for Technology Assessment, February 2007, at 8-9. DPL also has had unparalleled success, with a 50% national share of the U.S. cotton seed market. See Evren Ergin, “DPL-Monsanto: Antitrust/Merger Analysis,” Lehman Brothers, September 12, 2006, at 3. In the cotton-growing states of the South, where biotech traits are especially valued, DPL's dominance is even greater. It holds an 86% market share in the Southeast region, which includes the states of Florida, Georgia, Alabama, South Carolina, North Carolina, and Virginia, and a 73% market share in the MidSouth region, which includes the states of Louisiana, Arkansas, Mississippi, Tennessee, and Missouri. See “Cotton Varieties Planted, 2006 Crop,” USDA, Agricultural Marketing Service Cotton Program, September 22, 2006, available at *http://www.ams.usda.gov/cottonrpts/MNPDF/mp_cn833.PDF* . These market shares are slightly higher for DPL seeds that include biotech traits—an 87% share of traited cottonseeds in the Southeast and a 79% share in the MidSouth. See Complaint, at ¶ 4. DPL's success reflects the high quality of its germplasm library and its proven ability to develop and commercialize new cotton biotech seed varieties. See id. at ¶ 26. As a result, DPL is the primary and most important vehicle for biotech trait developers to get competing cotton biotech traits to market. No other seed company can match DPL as a development partner because of DPL's extensive and unique library of elite germplasm—which is suitable across a full range of geographic regions—brand name loyalty, and industry-leading technical personnel with unmatched breeding expertise and capabilities. See Competitive Impact Statement, at ¶ II(B)(2). In fact, DPL claims to have three times the breeding capabilities of any other seed company in the world. See Tom Jagodinski, “Delta and Pine Land” (presentation, 2006 Merrill Lynch Agricultural Chemicals Conference, June 14, 2006 (Slide #3)). In 2006 alone, DPL spent almost $25 million, or 6% of revenues, on research and development. See Delta & Pine Land Co., Annual Report (Form 10-K)(November 14, 2006), at 42. The Attorneys General are concerned that, if approved, the PFJ will enhance Monsanto's monopoly power in cotton biotech trait markets. Requiring Monsanto to divest itself of its current cotton seed company, Stoneville 1 , as a condition to approve the acquisition, the United States only strengthens Monsanto's monopoly position by permitting Stoneville's 12% market share to be traded for DPL's market shares of 50-86%. Further, Monsanto secures complete control of DPL's breeding programs and seed sales. As a result, Monsanto could, and likely will, undermine DPL's collaborations with Monsanto's competitors to the detriment of U.S. cotton farmers and consumers. 1 With only four significant seed companies prior to the PFJ (DPL, Bayer CropScience, Stoneville and Dow's Phytogen Seed Company) and a handful of smaller seed companies, the cotton seed market is highly concentrated. Stoneville, which was recently acquired by Bayer CropScience in connection with the PFJ, has a 12% share of the cotton seed market, making it the third largest cotton seed company. See Evren Ergin, “DPL-Monsanto: Antitrust/Merger Analysis,” Lehman Brothers, September 12, 2006, at 3. III. The Acquisition Has Serious Anticompetitive Effects The acquisition threatens to substantially reduce competition in the development, production and distribution of cotton biotech traits and seeds. DPL, in partnership with other companies, is a significant trait development competitor of Monsanto, which now will have the ability and incentive to eliminate, or at least significantly delay, DPL's trait development partnerships with competitors. See Competitive Impact Statement, at ¶ 11(A). As the United States acknowledges in its Complaint, DPL “is an attractive partner that is well suited to quickly introduce new trait technologies due to the strength and breadth of its germplasm base and breeding programs as well as its technical service capabilities, know-how, brand recognition and market position.” Complaint, at ¶ 26. No other seed company has the combination of assets and experience to foster trait development collaborations and bring to market competing cotton biotech traits and seeds. Monsanto's acquisition of DPL likely will end DPL's development partnerships, eliminating the only near-term challenges to Monsanto's monopoly position in cotton biotech. DeltaMax, DPL's joint venture with E.I du Pont de Nemours and Company (“DuPont”) and Pioneer Hi-Bred International, Inc. (“Pioneer”) to develop a trait known as OptimumTM GATM, would provide cotton farmers a competitive herbicide-tolerant trait alternative for the first time. However, the Attorneys General understand that DuPont and Pioneer have exercised their right to terminate DeltaMax as a result of DOJ's decision to allow their competitor, Monsanto, to consummate its merger agreement with DPL during the pendency of the Tunney Act proceeding. DeltaMax's demise is a serious loss of potential competition that threatened Monsanto's dominance in herbicide-tolerant traits. Herbicide tolerance is considered the most important biotech trait by farmers in most states. See “2007 Acreage Report,” USDA, National Agricultural Statistics Service, at 25, available at *http://usda.mannlib.cornell.edu/usda/current/Acre/Acre-06-29-2007.pdf* (report generally shows that market penetration for herbicide-tolerant seeds is higher in most states than that of insect-resistant seeds). Because of DeltaMax's termination, Monsanto's cotton herbicide-tolerant trait dominance is assured for the foreseeable future. The Attorneys General are not aware of the current status of DPL's collaboration with Syngenta AG to develop an insect-resistant cotton biotech trait called VipCotTM, which would pose a competitive threat to Monsanto's almost complete monopoly of insect-resistant traits in cotton. The acquisition also harms competition by eliminating DPL as the vehicle for biotech trait developers to commercialize and distribute competing cotton biotech traits. Once under Monsanto's control, DPL will lack the incentive to sell competing traits at the expense of Monsanto's monopoly biotech traits. With its 50-86% shares of the highly concentrated cotton seed market, DPL is the primary engine of biotech trait developers to bring competing new traits to market through finished seeds. Without an independent DPL, competing cotton biotech trait developers may not have sufficient non-DPL outlets to license their traits. In addition, as DOJ acknowledged in its Complaint at ¶ 27, certain aspects of Monsanto's current license provisions to seed companies harm competitors by prohibiting combining, or “stacking,” of non-Monsanto biotech traits with Monsanto traits. The Attorneys General understand that Monsanto's licenses with regional corn and soybean seed companies, which, like DPL, are known as independent seed companies, contain similar restrictions. These restraints severely limit the ability of Monsanto licensees to deal with Monsanto competitors and appear to lack any legitimate business purpose. The PFJ addresses this competitive concern by requiring Monsanto to modify its biotech trait licenses with cotton seed companies to remove the stacking prohibitions. See Competitive Impact Statement, at ¶ 111(C). The Attorneys General applaud this remedy. Unfortunately, as discussed below, this remedy, along with the divestiture of Stoneville to Bayer CropScience (“Bayer”) and the nonexclusive licensing of a small number of germplasm lines, will not restore the competition that will be lost as a result of Monsanto's acquisition of DPL. If biotech trait developers are unable to commercialize and distribute to farmers the competing traits they develop, they will not be able to justify their significant research and development expenditures and will be deterred from entering the cotton biotech market. The lack of opportunities in cotton biotech may spill over to other important cash crops where Monsanto also enjoys a dominant position in biotech traits. The cottonseed traits that DPL is developing in partnership with Monsanto's competitors have numerous cross-crop applications. Denying biotech trait developers market opportunities in cotton will deprive them of the revenues required to sustain expensive research and development programs in other important crops, such as corn and soybeans. Knowledge that otherwise would have been transferable to other crops will be lost, putting other trait developers at a competitive disadvantage. Monsanto's domination in cotton also may increase its leverage over retailers, particularly national retailers who sell DPL cotton seed in the South, possibly making it even more difficult to compete effectively with the bundles Monsanto packages that include crop protection chemicals and seeds across multiple crops. These anticompetitive effects are more significant today than in 1999, when DOJ blocked Monsanto's first attempt to acquire DPL. Biotech traits are more important and valued today than in 1999. DPL's market shares, particularly in the cotton-growing regions of the South, are even higher today. Compare “Cotton Varieties Planted, 1999 Crop” and “Cotton Varieties Planted, 2006 Crop,” USDA, Agricultural Marketing Service—Cotton Program. Unlike 1999, however, Monsanto's monopoly traits were about to face real and meaningful competition in the near future as a result of joint development partnerships that did not exist then. The harm to competition today is real and immediate, and regrettably, the PFJ does not remedy it. IV. The PFJ Does Not Remedy the Anticompetitive Effects In its Complaint, the United States acknowledges the significant anticompetitive effects that the acquisition will have on the development, production and distribution of cotton biotech traits and seeds. Complaint, at ¶¶ 37-42. The United States concludes that the acquisition violates the antitrust laws because it “will eliminate competition between DPL and Monsanto for the development, breeding, and sale of traited cottonseed.” Id. at ¶ 41. Nonetheless, the United States has agreed to settle its action against Monsanto and DPL by requiring Monsanto to

(1)divest Stoneville to an approved buyer, which DOJ has subsequently approved to be Bayer, and

(2)provide nonexclusive access to Stoneville of

(a)twenty lines of elite DPL germplasm and

(b)certain Monsanto cotton germplasm lines. See Competitive Impact Statement, at ¶ 111(A). The settlement fails to remedy the likely anticompetitive effects of the acquisition. A. The Divestiture of Stoneville Fails To Preserve Meaningful Competition in Cotton A divested Stoneville falls far short of replicating the assets and expertise that DPL offers. The United States has recognized that “[a] company with a large collection of high quality, or elite, germplasm has a competitive advantage because the company has the ability to identify the best genetic material and use it in a wide variety of possible crossing combinations, resulting in a greater likelihood of developing a successful variety.” Complaint, at ¶ 16. As DOJ acknowledges, DPL has “over ninety years of germplasm development.” Id. at ¶ 17. DPL also has “the largest cotton germplasm collection, with by far the greatest track record of success in the important MidSouth and Southeast regions, and an extensive breeding program,” and “more breeding capabilities than any competitor.” Id. The new Bayer-Stoneville entity will have access to only 20 lines from DPL's extensive germplasm library, the largest collection of cotton germplasm in the United States. Complaint, at ¶ 17. Stoneville was first acquired by Monsanto in 1996, see Competitive Impact Statement, at ¶ II (B)(3), but then sold in 1999 and reacquired in 2005 as part of Monsanto's efforts to develop a cotton seed unit. See Complaint, at ¶ 32. The divestiture of Stoneville appears to conflict with DOJ's own Antitrust Division Policy Guide To Merger Remedies (“Policy Guide”) (Oct. 2004). Those guidelines make clear that “[t]he Division favors the divestiture of an existing business entity that already has demonstrated its ability to compete in the relevant market.” See id. at 12. As Monsanto's cotton seed unit, Stoneville has only a limited track record in demonstrating its “ability to compete in the relevant market.” In fact, the divested “parts” that the PFJ pieces together have never been operated as a unit and would require substantial reconfiguration. Even if Stoneville could operate as a single unit with the licensed parts, it necessarily will have to start from scratch to duplicate DPL's success in the breeding of commercial varieties—a process DOJ acknowledges takes at least eight to ten years. See Complaint, at ¶ 15. The time and expense required to establish the Bayer-Stoneville combination as a viable and effective partner for competing biotech trait developers necessarily precludes any real competition with Monsanto for a period of time that is well outside of the two-year window typically used by the federal competition authorities to define effective new entry under ¶ 12 of the 1992 Horizontal Merger Guidelines, jointly issued by DOJ and the Federal Trade Commission. In the meantime, Monsanto will use its head start in the development and distribution of cotton biotech traits to its competitive advantage. Furthermore, it is clear that DPL's technology, infrastructure, breeding capabilities and expertise are significantly superior to Stoneville's. The PFJ does not remedy the disparity by providing the divested Stoneville with any of DPL's breeding expertise, personnel, facilities or development assets that the United States acknowledged made DPL an attractive development partner. See Complaint, at ¶ 26. In this respect, the PFJ is inconsistent with DOJ's Policy Guide, which provides that “[a]n existing business entity should possess not only all the physical assets, but also the personnel, customer lists, information systems, intangible assets, and management infrastructure necessary for the efficient production and distribution of the relevant product.” See Policy Guide, at 12. Without the breeding assets and personnel that have made DPL the partner of choice for biotech trait developers, a divested Stoneville cannot replace DPL's ability to bring to market biotech traits that can compete with Monsanto's monopoly varieties. In addition, Stoneville has been divested to Bayer, a trait development competitor of Monsanto. Because of this, Stoneville can never duplicate DPL's unique position as an independent cotton seed company that can use its successful and high-quality germplasm to partner with several different biotech companies to develop viable competitive alternatives to Monsanto's monopolies in traits. Even if it were technically possible for a rival trait company to successfully develop a biotech trait that could compete against a Monsanto trait, it must have a seed vehicle with which to partner to commercialize the trait and bring it to market so that farmers could actually benefit from having the choice of which trait to buy. Stoneville will not have the motivation, as DPL did, to partner with outside trait developers since it is owned by a trait development company, so there will no longer be a feasible alternative to DPL's independence as a cottonseed company and a trait development partner. Even apart from the loss of an independent cottonseed company, DOJ also implicitly recognizes that a divested Stoneville is not the equivalent of DPL by requiring Monsanto to provide Stoneville access to 20 lines of DPL germplasm. However, the availability of 20 lines of DPL germplasm does not “restore competitive conditions the merger would remove.” Policy Guide, at 4. The PFJ makes clear that Stoneville's access to those germplasm lines is non-exclusive. See Competitive Impact Statement, at ¶ III(A)(2). Thus, even post-acquisition, Monsanto retains the right to sell the most popular seeds from those lines and even preclude their use with non-Monsanto cotton biotech traits. This also is inconsistent with DOJ's Policy Guide, which recognizes that permitting a merged firm “to retain access to the critical intangible assets may present a significant competitive risk.” Policy Guide, at 16. Because the PFJ fails to enhance Stoneville's breeding capabilities, access to such lines will not challenge Monsanto's monopoly position, even with respect to any of those 20 lines. B. Access to Identified Cotton Germplasm Ignores the Evolving Nature of Biotech Traits and Seeds The PFJ's requirement that Monsanto provide access to certain lines of cotton germplasm lines does not remedy the anticompetitive effects of the acquisition for yet another reason. The PFJ ignores the reality that elite germplasm is constantly being improved upon to enhance the effectiveness of the underlying traits to address evolving plant, soil, and other conditions that change over time. As a result, the best germplasm today becomes obsolete in a relatively short period of time. See generally declining market shares of existing germplasm lines as newer lines are introduced in “Cotton Varieties Planted, 1999 Crop” through “Cotton Varieties Planted, 2006 Crop,” USDA, Agricultural Marketing Service—Cotton Program. Thus, to stay competitive, cotton biotech trait developers must have access to new and improved lines of germplasm. The availability of certain existing lines of cotton germplasm cannot replace the need for Monsanto's competitors to have ongoing access to improved germplasm. One of DPL's strengths has been its ability to continually develop new lines of elite germplasm. Once DPL falls captive to Monsanto's control, access by Monsanto's competitors to DPL's next generation of germplasm will terminate. With an overwhelming monopoly in biotech traits, Monsanto will have no incentive or obligation to make DPL's next generation of germplasm available to competitors. See Complaint, at ¶¶ 16-17. In addition, the 20 lines of cotton germplasm that the PFJ licenses to Stoneville constitute only a very small subset of DPL's extensive germplasm library. Some of those lines are merely under development, and there is no guarantee that they will be commercially successful in the future. Further, the PFJ does not provide the divested Stoneville with any of DPL's facilities or personnel with expertise handling those lines. Instead, it allows Monsanto to retain access to those lines, as well as the facilities and expertise DPL has employed to develop them. Consequently, the availability of a limited number of cotton germplasm lines does not guarantee or enhance Stoneville's ability to effectively compete against Monsanto. V. The Acquisition Potentially Allows Monsanto To Engage in Exclusionary Business Practices The acquisition potentially allows Monsanto to engage in exclusionary behavior, which could include a series of acquisitions of independent seed companies and germplasm providers to enhance its monopoly position in both seeds and traits; long-term, highly restrictive licensing agreements that encourage the sale of Monsanto's biotech traits exclusively; licensing restrictions that prevent independent seed companies from combining Monsanto biotech traits with non-Monsanto traits; and bundling rebates on seeds, traits and chemicals to exclude competitors from retail distribution channels. These restrictions potentially could stymie innovation, limit product choices and result in higher prices. With DPL under its control, Monsanto will have the ability to foreclose competing cotton biotech traits from entering the cotton seed markets. Monsanto's monopolization of the cotton biotech trait market also may create an incentive to impose supra-competitive technology fees for seeds containing Monsanto's traits, which would eliminate any efficiencies farmers otherwise would realize from the merger or in a competitive cotton biotech trait market. The Attorneys General are concerned that the acquisition of DPL may permit Monsanto to maintain and consolidate its monopoly position in biotech traits. The lack of viable competition in cotton traits, coupled with Monsanto's market power in the other seed trait markets, compels a closer examination of the potential anticompetitive effects of Monsanto's business practices in all markets. VI. Conclusion The PFJ fails to remedy the anticompetitive effects of the acquisition in the markets for cotton biotech traits. If approved in its present form, the acquisition will further cement Monsanto's monopoly in those markets with severe and unwarranted consequences for farmers and consumers. With Monsanto's huge head start, biotech trait developers will have no incentive to expend the necessary research and development costs that are required for the successful entry of competing traits and seeds. Current joint development efforts with DPL will terminate or stagnate—eliminating the only near-term opportunities for meaningful competition in cotton—innovation will be stifled, and cotton farmers and consumers will suffer from the lack of market choices and the imposition of supra-competitive product prices. The adverse consequences of the acquisition also will extend beyond cotton. The loss of revenue that the acquisition will cause in cotton will impact the ability of trait developers to bring to market biotech traits in other crops, such as corn and soybeans. Research and development efforts investigating traits in cotton that could be developed and incorporated into other crops now will be lost. The PFJ fails to effectively restore competition in the market for cotton biotech traits, and should be rejected. Respectfully Submitted, Robert F. McDonnell, *Attorney General of Virginia, Office of the Attorney General, 900 E. Main Street, Richmond, VA 23219.* Comments of the Attorneys General on Proposed Final Judgment in United States v. Monsanto Company, et al. Respectfully submitted, Dustin McDaniel, *Attorney General of Arkansas, Office of the Attorney General, 323 Center Street, Suite 1100, Little Rock, AR 72201.* Comments of the Attorneys General on Proposed Final Judgment in United States v. Monsanto Company, et al. Respectfully submitted, Joseph R. Biden, III, *Attorney General of Delaware, Office of the Attorney General,820 N. French Street,Wilmington, DE 19801.* Comments of the Attorneys General on Proposed Final Judgment in United States v. Monsanto Company, et al. On Behalf of the Commonwealth of Kentucky Respectfully submitted, Gregory D. Stumbo, *Attorney General, Office of the Attorney General, 700 Capitol Avenue, Suite 118, Frankfort, Kentucky 40601,

(502)696-5300.* Comments of the Attorneys General on Proposed Final Judgment in United States v. Monsanto Company, et al. Respectfully submitted, Douglas F. Gansler, *Attorney General of Maryland, Office of the Attorney General, 200 St. Paul Place, Baltimore, Maryland 21202.* Comments of the Attorneys General on Proposed Final Judgment in United States v. Monsanto Company, et al. Respectfully submitted, Gary K. King, *Attorney General of New Mexico, Office of the Attorney General, 408 Galisteo Street, Santa Fe, New Mexico 87501.* Comments of the Attorneys General on Proposed Final Judgment in United States v. Monsanto Company, et al. Sincerely, Roy Cooper, *Attorney General of North Carolina, Office of the Attorney General, 114 W. Edenton Street, 9001 Mail Service Center, Raleigh, NC 27699-9001.* Comments of the Attorneys General on Proposed Final Judgment in United States v. Monsanto Company, et al. Respectfully submitted, Marc Dann, *Attorney General of Ohio, Office of the Attorney General, 30 East Broad Street, Columbus, OH 43215.* Comments of the Attorneys General on Proposed Final Judgment in United States v. Monsanto Company, et al. Respectfully submitted, W.A. Drew Edmondson, *Oklahoma Attorney General, 313 NE. 21st Street, Oklahoma City, OK 73105.* Comments of the Attorneys General on Proposed Final Judgment in United States v. Monsanto Company, et al. Respectfully submitted, Patrick C. Lynch, *Attorney General of Rhode Island, Department of the Attorney General, 150 South Main Street, Providence, RI 02903.* Comments of the Attorneys General on Proposed Final Judgment in United States v. Monsanto Company, et al. Respectfully submitted, Robert E. Cooper, Jr., *Attorney General of Tennessee, Office of the Attorney General and Reporter, 425 Fifth Avenue North, Nashville, TN 37202.* Comments of the Attorneys General on Proposed Final Judgment in United States v. Monsanto Company, et al. Respectfully submitted, Mark L. Shurtleff, *Attorney General of Utah, Office of the Attorney General of Utah, State Capitol Complex, Suite E320, Salt Lake City, Utah 84114-2320.* Comments of the Attorneys General on Proposed Final Judgment in United States v. Monsanto Company, et al. Respectfully submitted, Darrell v. McGraw, Jr., *Attorney General of West Virginia, Office of the Attorney General, State Capitol, Charleston, WV 25305.* August 20, 2007. Ms. Donna N. Kooperstein, Chief, Transportation, Energy & Agriculture Section, Antitrust Division, United States Department of Justice, 325 Seventh Street, NW., Suite 500, Washington, DC 20530. Re: *United States* v. *Monsanto Company, et al., Case No. 1:07-cv.00992.* Dear Ms. Kooperstein: Preserving competition in agriculture biotechnology markets is essential for greater choice and lower costs to Texas farmers and consumers. The lack of competition in these markets hurts farmers and consumers, who wind up paying higher prices. Today, Texas farmers and consumers are already struggling in the face of rapid agricultural consolidation and concentration. The latest example of this dangerous trend is Monsanto's acquisition of Delta & Pine Land, which promises to strike a crushing blow to the Texas cotton industry. It is for this reason that we submit this letter and urge the court to reject the Department of Justice's “Proposed Final Judgment” regarding this acquisition. Cotton is a critical thread in the fabric of the Texas and national economy. Texas is the #1 producer of cotton in the United States. Each year Texas farmers plant over 6 million acres of cotton seed—the 2006 crop had a value of over $1.4 billion. Cotton growers in Texas and throughout the country are increasingly reliant on biotechnology, which allows farmers to grow cotton resistant to certain insects and tolerant of certain herbicides. In 2007, 87% of cotton acreage in the U.S. was planted with biotech seed varieties. See United States Department of Agriculture, U.S. Farmers Plant Largest Corn Crop in 63 Years ( *http://www.nass.usda.gov/Newsroom/2007/06_29_2007.asp* ). Monsanto currently enjoys monopolies in cotton traits. Monsanto controls approximately 96% of herbicide tolerant cotton traits and approximately 99% of insect resistant cotton traits. Monsanto has already used its dominant position to dramatically increase the prices farmers are paying for these traits. This ultimately leads to consumers paying higher prices for products containing cotton. If Monsanto is permitted to acquire Delta & Pine Land, the largest cotton seed company in the world, there will be even more anticompetitive consequences for Texas cotton farmers and consumers throughout the country. First, Monsanto will shut out all competition in cotton traits because all of the competing cotton traits are being developed with Delta & Pine Land, which Monsanto will now control. Second, once it acquires Delta & Pine Land, Monsanto will control over 50% of the national cotton seed market and even higher percentages in key cotton growing areas such as the South Central and Southeast regions of the U.S. Given its dominance in cotton traits and cotton seeds, Monsanto will be able to effectively kill competition in cotton and leave farmers and consumers with no choice except the monopolist Monsanto's products. The remedy devised by the Department of Justice to remedy the clear anticompetitive effects of acquisition will do little to protect farmers and consumers. Requiring Monsanto to divest a weak cotton seed company and approximately 20 lines of germplasm is entirely inadequate to replace the loss of an independent, thriving competitor to Monsanto in the development of biotechnology traits and a critical distribution channel for those traits. With its acquisition of Delta & Pine Land, Monsanto is poised to enhance its position as an agricultural titan. This deal will significantly diminish competition and stifle innovation in the cotton biotech seed trait markets and cotton seed market, leading to higher prices for farmers and consumers. Because the Department of Justice's proposed final judgment will not restore much needed competition in cotton, it should be rejected. Sincerely, Heethe Burleson, On Behalf of the Associated Cotton Growers, Crosbyton, Texas. Arvil Campbell, For the Texas Farmers Union. Jeff Turner, On Behalf of the Willacy Co-op Gin, Raymondville, Texas. Chris Breedlove, For Olton Co-Op Gin, Olton, Texas. Glen Campbell, On Behalf of Lorenzo Co-Operative Gins, Inc., Lorenzo, Texas. Johnny Shepard, On Behalf of Citizens Co-Op Gin, Shallowater, Texas. Randy Arnold, Founder, High Plains Cotton Growers Association, Crosbyton, Texas. Jonathan Hernandez, For the Texas Oaks Neighborhood Association, Austin, Texas. Lynda Rodriguez, For the South San Antonio Chamber of Commerce, San Antonio, Texas. Benny Robertson, Seed and Feed Supplier, Star Feed and Seed Supply, Spur, Texas. Larry Thornbough, On Behalf of Trans-Pecos Cotton Association, Coyanosa, Texas. Sid Brough, On Behalf of EdCot Co-Op Gin, Odem, Texas. Glen Ivens, On Behalf of Cotton Center Farmers Co-Op Gin, Cotton Center, Texas. Tom Byars, On Behalf of the Lockney Co-Op Gin, Lockney, Texas. Bobby Moss, For the Fiber-Tex Co-Op Gin, Brownfield, Texas. Charles Macha, United Cotton Growers, Levelland, Texas. Glenn Klesel, On Behalf of Posey Gin, Slaton, Texas. Scott LaRue, For the Blackland Prairie Gin, Deport, Texas. August 27, 2007 Ms. Donna N. Kooperstein, Chief, Transportation, Energy & Agriculture Section, Antitrust Division, United States Department of Justice, 325 Seventh Street, NW., Suite 500, Washington, DC 20530. Re: *United States* v. *Monsanto Company, et al, Case No. 1:07-cv-00992.* Dear Ms. Kooperstein: Monsanto's acquisition of Delta & Pine Laud promises to stifle innovation, limit choice for Wisconsin farmers and consumers, and ultimately drive prices higher. The agricultural sector is already highly concentrated, including biotechnology traits where one company—Monsanto—controls monopoly trait shares in cotton, corn, and soybeans. By acquiring Delta & Pine Land, Monsanto is effectively removing its principal cotton trait competitor and positioning itself to limit farmer choice to Monsanto branded traits. In addition, by acquiring Delta & Pine Land and its 50% market share of the cotton seed market, Monsanto will control not only cotton traits but cotton seeds. Permitting one company to be the dominant company in cotton traits and cotton seeds is just bad policy and increases the vulnerability of farmers and consumers by subjecting them to the whims of one company. The Department of Justice's proposed consent decree regarding this acquisition offers little hope in terms of greater competition and increased choice for Wisconsin farmers and consumers. The consent decree, which requires Monsanto to divest Stoneville (with its limited market share) and a few lines of germplasm, does not even come close to replacing an independent Delta & Pine Land, and is inadequate to restore competition. Wisconsin Farmers Union therefore urges the Department of Justice to withdraw its consent decree or, if it does not do so, for the court to reject it. Sincerely, Susan Beitlich, *President.* [FR Doc. E8-5578 Filed 4-3-08; 8:45 am] BILLING CODE 4410-11-M 73 66 Friday, April 4, 2008 Proposed Rules Part III Department of Health and Human Services Centers for Medicare & Medicaid Services 42 CFR Parts 431, 440, and 441 Medicaid Program: Home and Community-Based State Plan Services; Proposed Rule DEPARTMENT OF HEALTH AND HUMAN SERVICES Centers for Medicare & Medicaid Services 42 CFR Parts 431, 440, and 441 [CMS-2249-P] RIN 0938-AO53 Medicaid Program: Home and Community-Based State Plan Services AGENCY: Centers for Medicare & Medicaid Services (CMS), HHS. ACTION: Proposed rule. SUMMARY: This proposed rule would amend the Medicaid regulations to define and describe home and community-based State plan services implementing new section 1915(i) of the Social Security Act as added by section 6086 of the Deficit Reduction Act of 2005. DATES: *Comment date:* To be assured consideration, comments must be received at one of the addresses provided below, no later than 5 p.m. on June 3, 2008. ADDRESSES: In commenting, please refer to file code CMS-2249-P. Because of staff and resource limitations, we cannot accept comments by facsimile

(FAX)transmission. You may submit comments in one of four ways (please choose only one of the ways listed): 1. *Electronically.* You may submit electronic comments on this regulation to *http://www.regulations.gov* . Follow the instructions for “Comment or Submission” and enter the filecode to find the document accepting comments. 2. *By regular mail* . You may mail written comments (one original and two copies) to the following address ONLY: Centers for Medicare & Medicaid Services, Department of Health and Human Services, Attention: CMS-2249-P, P.O. Box 8016, Baltimore, MD 21244-8016. Please allow sufficient time for mailed comments to be received before the close of the comment period. 3. *By express or overnight mail* . You may send written comments (one original and two copies) to the following address ONLY: Centers for Medicare & Medicaid Services, Department of Health and Human Services, Attention: CMS-2249-P, Mail Stop C4-26-05, 7500 Security Boulevard, Baltimore, MD 21244-1850. 4. *By hand or courier* . If you prefer, you may deliver (by hand or courier) your written comments (one original and two copies) before the close of the comment period to either of the following addresses: a. Room 445-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW., Washington, DC 20201; or (Because access to the interior of the HHH Building is not readily available to persons without Federal Government identification, commenters are encouraged to leave their comments in the CMS drop slots located in the main lobby of the building. A stamp-in clock is available for persons wishing to retain a proof of filing by stamping in and retaining an extra copy of the comments being filed.) b. 7500 Security Boulevard, Baltimore, MD 21244-1850. If you intend to deliver your comments to the Baltimore address, please call telephone number

(410)786-7195 in advance to schedule your arrival with one of our staff members. Comments mailed to the addresses indicated as appropriate for hand or courier delivery may be delayed and received after the comment period. *Submission of comments on paperwork requirements* . You may submit comments on this document's paperwork requirements by following the instructions at the end of the “Collection of Information Requirements” section in this document. For information on viewing public comments, see the beginning of the SUPPLEMENTARY INFORMATION section. FOR FURTHER INFORMATION CONTACT: Kathy Poisal,

(410)786-5940. SUPPLEMENTARY INFORMATION: *Inspection of Public Comments:* All comments received before the close of the comment period are available for viewing by the public, including any personally identifiable or confidential business information that is included in a comment. We post all comments received before the close of the comment period on the following Web site as soon as possible after they have been received: *http://www.regulations.gov* . Follow the search instructions on that Web site to view public comments. Comments received timely also will be available for public inspection as they are received, generally beginning approximately 3 weeks after publication of a document, at the headquarters of the Centers for Medicare & Medicaid Services, 7500 Security Boulevard, Baltimore, Maryland 21244, Monday through Friday of each week from 8:30 a.m. to 4 p.m. To schedule an appointment to view public comments, phone 1-800-743-3951. I. Background [If you choose to comment on issues in this section, please include the caption “BACKGROUND” at the beginning of your comments.] On February 8, 2006, the Deficit Reduction Act of 2005 (DRA 2005) (Pub. L. 109-171) was signed into law. Section 6086 of the DRA is entitled “Expanded Access to Home and Community-Based Services for the Elderly and Disabled.” Section 6086(a) of the DRA adds a new section 1915(i) to the Social Security Act (the Act) that allows States, at their option, to provide home and community-based services

(HCBS)under their regular State Medicaid plans. This option allows States to receive Federal financial participation

(FFP)for services that were previously eligible for the funds only under waiver or demonstration projects, including those under sections 1915(c) and 1115 of the Act. Section 1915(i) of the Act sets forth several conditions that States must meet, and actions they must take, if they choose to add State plan HCBS to services available through the State plan. Section 6086(b) of the DRA provides for the Secretary to develop, through the Agency for Healthcare Research and Quality, quality of care measures to assess Medicaid HCBS. Under section 1915(i) of the Act, States can provide HCBS to individuals who require less than institutional level of care and who would therefore not be eligible for HCBS under 1915(c) waivers. Section 1915(i) of the Act does not link HCBS to institutional level of care or require cost savings over institutional services, permitting States to provide the State Plan HCBS benefit to individuals whether or not they meet an institutional level of care, and based on need for support rather than population characteristics. Section 1915(i) of the Act does impose other limits not required by section 1915(c) waivers, including a prescribed set of services States may choose to offer, and exclusion of individuals with income above 150 percent of the Federal Poverty Level (FPL). HCBS under the State plan are limited to elderly and disabled individuals. HCBS are available in some States in demonstration programs under section 1115 of the Act. Each demonstration under section 1115 of the Act is unique with respect to the Medicaid requirements waived, type and scope of services offered and population served, and cannot be generally characterized. Therefore, we are not including HCBS provided under section 1115 demonstrations in this discussion except to note that the section 1115 authority has been used by States to provide services in the home and community. States can also provide Medicaid long-term care services to individuals in the community through the mandatory State plan home health benefit, and the optional State plan personal care services benefit. These services are occasionally referred to as home and community-based, but are not included as HCBS in this discussion. The section 1915(i) benefit does not diminish the State's ability to provide any of these existing community services. States opting to offer State plan HCBS under section 1915(i) of the Act can continue to provide the full array of community services under section 1915(c) waivers, section 1115 demonstration programs, mandatory State plan home health benefits, and the optional State plan personal care services benefit. Before 1981, the Medicaid program provided limited coverage for long-term care services in non-institutional, community-based settings. Medicaid's complex eligibility criteria and other factors made institutional care much more accessible than care in the community. Medicaid HCBS were established in 1981 as an alternative to care in Medicaid institutions, by permitting States to waive certain Medicaid requirements upon approval by the Secretary. Section 1915(c) of the Act was added to title XIX by the Omnibus Budget Reconciliation Act of 1981 (OBRA 1981) (Pub. L. 97-35). Programs of HCBS under section 1915(c) of the Act are known as “waiver programs”, or simply “waivers” due to the authority to waive Medicaid requirements. Since 1981, the section 1915(c) HCBS waiver program has afforded States considerable latitude in designing services to meet the needs of people who would otherwise require institutional care. In 2007, approximately 300 HCBS waivers under section 1915(c) of the Act serve over 1 million elderly and disabled individuals in their homes or alternative residential community settings. States have used HCBS waiver programs to provide numerous services designed to foster independence; assist eligible individuals in integrating into their communities; and promote self-direction, personal choice, and control over services and providers. The addition of section 1915(i) of the Act affords some of the same flexibility through the State plan. Another important aspect to this background is the passage of the Americans with Disabilities Act of 1990

(ADA)and the *Olmstead* v. *L.C.* , 527 U.S. 581

(1999)U.S. Supreme Court decision. In particular, Title II of the ADA prohibits discrimination on the basis of disability by State and local governments and requires these entities to administer services, programs, and activities in the most integrated setting appropriate to the needs of qualified individuals with disabilities. In applying the most integrated setting mandate, the U.S. Supreme Court ruled in *Olmstead* v. *L.C.* that unnecessary institutionalization of individuals with disabilities may constitute discrimination under the ADA. Under *Olmstead* , States may not deny a qualified individual with a disability a community placement when:

(1)Treating professionals determine that community placement is appropriate;

(2)the community placement is not opposed by the individual with a disability; and

(3)the community placement can be reasonably accommodated. In the following discussion and the proposed regulation, we refer to particular home and community-based service(s) offered under section 1915(i) of the Act as “State plan HCBS” or simply “HCBS”. 1 We refer to the “State plan home and community-based services benefit” when describing the collective requirements of section 1915(i) of the Act that apply to States electing to provide one, or several, of the authorized HCBS. We choose to use the term “benefit” rather than “program” to describe section 1915(i) of the Act to avoid possible confusion with HCBS waiver programs. The State plan HCBS benefit shares many features with section 1915(c) waiver programs, and in other respects is similar to other State plan services, but differs from both in important respects. 1 Note that the abbreviation HCBS does not distinguish between singular and plural. Where this could be confusing, we spell out home and community-based service(s). The Secretary has delegated administration of the Medicaid program, including the State plan HCBS benefit furnished under Medicaid, to the Centers for Medicare & Medicaid Services (CMS). Effective January 2007, States that demonstrate they meet certain requirements may choose to furnish HCBS under the State plan. States may elect to provide HCBS through waiver programs, State plan services, or both. The availability of the State plan HCBS benefit does not foreclose, or otherwise restrict, a State's ability to operate its HCBS waiver programs, nor does the availability of HCBS waiver services within a State affect its ability to add the HCBS benefit to its State plan. A. Overview of the State Plan HCBS Benefit The following overview describes the provisions of the DRA in the order they are presented in section 1915(i) of the Act. The proposed regulation and the explanation of each proposed requirement in section II. are arranged so that related requirements are grouped for clarity. 1. General Provisions of the State Plan Amendment Option To Provide Home and Community-Based Services for Elderly and Disabled Individuals Section 1915(i)(1) of the Act grants States the option to provide, under the State plan, the services and supports listed in section 1915(c)(4)(B) of the Act governing HCBS waivers, not including the “other services” described therein. The services specifically listed in section 1915(c)(4)(B) of the Act are as follows: Case management, homemaker/home health aide, personal care, adult day health, habilitation, respite care, and for individuals with chronic mental illness: Day treatment, other partial hospitalization services, psychosocial rehabilitation services, and clinic services (whether or not furnished in a facility). The HCBS may not include payment for room and board (see additional discussion in section I.D.3.). We interpret the statute as authorizing the services as titled in section 1915(c)(4)(B) of the Act. Therefore, we would expect States to define State plan HCBS with sufficient specificity that the nature and scope of the service clearly relates to those listed in section 1915(c)(4)(B) of the Act. Section 1915(i) of the Act explicitly provides that State plan HCBS may be provided without determining that, but for the provision of such services, individuals would require the level of care provided in a hospital, a nursing facility (NF), or an intermediate care facility for the mentally retarded (ICF/MR) as is required in section 1915(c) HCBS waivers. While HCBS waivers must be “cost-neutral” to Medicaid, no cost neutrality requirement applies to the section 1915(i) State plan HCBS benefit. States are not required to produce comparative cost estimates of institutional care and the State plan HCBS benefit. This significant distinction allows States to offer HCBS to individuals whose needs are substantial, but not severe enough to qualify them for institutional or waiver services, and to individuals for whom there is not an offset cost savings in NFs, ICFs/MR, or hospitals. While eligibility for State plan HCBS does not require that the individual would otherwise need an institutional level of care, the services are intended to prevent progression to institutionalization and to enable individuals to receive needed services in their own homes, or in alternative living arrangements in what is collectively termed the “community” in this context. (See additional discussion in section I.D.2. regarding institutions not considered to be in the community, and in which State plan HCBS will not be available.) Section 1915(i)(1) of the Act requires that in order to receive State plan HCBS, individuals must be eligible for Medicaid under an eligibility group covered by the State plan. This section does not create a new eligibility group. Individuals who have not been found eligible for Medicaid cannot be enrolled in the State plan HCBS benefit, even if they otherwise meet the requirements for the benefit. In addition, individuals may not be enrolled in the State plan benefit if their income exceeds 150 percent of the FPL. 2 In determining whether the 150 percent of the FPL requirement is met, the regular rules for determining income eligibility for the individual's eligibility group apply, including any more liberal income disregards used by the State for that group under section 1902(r)(2) of the Act. 2 The statute refers to “the poverty line as defined in section 2110(c)(5)”. The poverty guidelines are formally referenced as “the poverty guidelines updated periodically in the **Federal Register** by the U.S. Department of Health and Human Services under the authority of 42 U.S.C. 9902(2).” Commonly referred to as the “Federal Poverty Level” or “Federal Poverty Line” (FPL), we will adopt the term FPL in this regulation. 2. Needs-Based Criteria In contrast to the institutional level of care requirement for eligibility in HCBS waivers, section 1915(i)(1)(A) of the Act requires States to impose needs-based criteria for eligibility for the State plan HCBS benefit. Additionally, the State may establish needs-based criteria for each specific State plan home and community-based service that an individual would receive. Section 1915(i) of the Act does not authorize States to waive the requirement of section 1902(a)(10)(B) of the Act relating to comparability, as does section 1915(c) of the Act. Waiver of comparability is a key feature of HCBS waivers, permitting the State to target the HCBS benefit to certain populations by defining which groups will be eligible for waiver services, and by having separate waivers for different groups. Through use of eligibility criteria, States can provide services for certain high need target groups that are not comparable to the services received by other Medicaid beneficiaries in the State. Under section 1915(i) of the Act, States are not authorized to establish eligibility criteria in order to target services to certain populations. Since comparability may not be waived, States must determine eligibility for State plan HCBS on the basis of the following criteria only: • The individual is eligible for medical assistance under the State plan. • The individual's income does not exceed 150 percent of the FPL. • The individual resides in the home or community. • The individual meets the needs-based criteria established by the State. Needs-based criteria for an individual service are subject to the same requirements as needs-based eligibility criteria, and may not limit or target any service based on age, nature or type of disability, disease, or condition. The heading of section 1915(i) of the Act describes the State plan HCBS benefit as “for Elderly and Disabled Individuals.” However, section 1915(i) of the Act does not include definitions of the terms “elderly” or “disabled” in setting forth eligibility criteria, and instead requires eligibility to be based on need and on eligibility for medical assistance under a State plan group. Thus, we believe that the use of these terms in the statute is descriptive. Individuals who are eligible for medical assistance under a group covered in the State's plan and who meet the needs-based eligibility criteria for State plan HCBS will have needs stemming either from a disability or from being elderly. We note that section 1902(b)(1) of the Act prohibits the Secretary from approving any plan for medical assistance that imposes an age requirement of more than 65 years as a condition of eligibility. The statute does not define “needs-based.” We are proposing to define the nature of needs-based criteria to distinguish them from targeting criteria, which are not permitted under the statute. However, we would propose to provide States with the flexibility to define the specific needs-based criteria they will establish. (See discussion below of section 1915(i)(1)(D) of the Act.) Section 1915(i)(1)(B) of the Act additionally requires that the needs-based criteria for determining whether an individual requires the level of care provided in a hospital, NF, or ICF/MR or under a waiver of the State plan be more stringent than the needs-based eligibility criteria for the State plan HCBS benefit. “Stringency” is not defined in the statute. States establish stringency in defining particular needs-based criteria. There is no expectation that States will modify institutional levels of care to make them more stringent, in order to satisfy this requirement. If the State's existing criteria for receipt of institutional and HCBS waiver care are needs-based, and more stringent than the criteria it will use for the State plan HCBS benefit, the State need not modify its institutional criteria. We anticipate that States will adopt the much simpler strategy of defining the new State plan HCBS needs-based eligibility criteria at a less stringent level than existing institutional criteria. In order to implement the State plan HCBS benefit, States may need to add needs-based criteria to their institutional level of care requirements, if none presently exist. Section 1915(i) of the Act does not require that such added needs-based institutional level of care criteria necessarily result in excluding individuals who would be served without the added criteria. In fact, the purpose of section 1915(i) of the Act appears to be to expand access to HCBS to individuals who are not at an institutional level of care, rather than to reduce access to institutional and waiver services. We note that section 1915(i) of the Act does not modify the statutory coverage provisions of institutional benefits. States must be cautious not to establish more stringent needs-based criteria for hospitals, NFs or ICFs/MR that would reduce access to services mandated elsewhere in title XIX, since those other provisions of the statute were not amended. For example, the NF benefit is defined in section 1919(a)(1) of the Act as an institution that is primarily engaged in providing to residents skilled nursing care, rehabilitation services, and “[o]n a regular basis, health-related care and services to individuals who because of their mental or physical condition require care and services (above the level of room and board) which can be made available to them only through institutional facilities.” To the extent that needed health-related care and services above the level of room and board are not available in the community, the NF institutional benefit must remain available to all Medicaid eligible individuals described in section 1919(a)(1)(C) of the Act. We interpret the reference to hospitals in section 1915(i)(1)(B) of the Act to mean facilities certified by Medicaid as hospitals that are providing long-term care services or services related to the HCBS to be provided under the State plan HCBS benefit. General acute care Medicaid hospital services are not subject to level of care determinations by the State. We interpret the reference in section 1915(i)(1)(B) of the Act “under any waiver of such plan” to apply to section 1915(c) waivers, as well as those section 1115 waivers that include HCBS. Section 1915(c) waivers by definition will have more stringent criteria than the State plan HCBS benefit, as the waivers are required to use level of care assessments equivalent to one or more of the institutional levels of care. In summary, the needs-based eligibility criteria for the State plan HCBS benefit must have the effect of potentially admitting to the benefit some individuals who do not meet the needs-based criteria for institutionalized care, and may admit to the benefit individuals who do meet the institutional needs-based eligibility criteria. We note that individuals who meet eligibility requirements for both an institutional benefit and the State plan HCBS benefit must be offered a choice of either benefit. 3. Number Served Section 1915(i)(1)(C) of the Act contains two provisions regarding the number of individuals served. The first provision requires a State to provide to the Secretary a projection of the number of individuals expected to receive services. If this projection is exceeded, section 1915(i)(1)(D)(ii) permits the State to constrict its needs-based eligibility thresholds for State plan HCBS. The second provision allows the State to impose a maximum limit to the number of individuals to be served through the State plan HCBS benefit. The latter provision carries with it authority for the State to establish waiting lists for the State plan HCBS benefit. Section 1915(i)(1)(C)(i) of the Act requires that the State submit projections of the number of individuals to be provided HCBS, in the form and manner, and upon the frequency as the Secretary specifies. We would propose to follow the practice used in HCBS waivers to calculate the number served as unduplicated persons receiving services during a 12-month period. We would specify that States annually submit both the projected number of individuals to be served and the actual number of individuals served in the previous year. We refer to individuals served under the benefit and included in the annual number served as having been enrolled in the benefit. The statute refers to “enrollment” in section 1915(i)(1)(D)(ii) of the Act concerning Adjustment Authority. Because there are a number of steps involved in an individual initiating service under the State plan HCBS benefit, “enrollment” is a useful term to indicate individuals for whom those steps have been completed, services have been authorized or provided, and who will be accounted for in the annual number served under the benefit. If the State exceeds its enrollment estimate, the State would report the number of individuals actually served in the required annual report to the Secretary, and revise the estimate for succeeding years. Section 1915(i)(1)(C)(ii) of the Act provides an option for the State to limit the number of eligible individuals to whom it will provide the State plan HCBS benefit. The limit does not need to be the same as the projected number of individuals to be served. As with the projected number, we would specify that the limit be expressed in terms of the number of unduplicated recipients eligible to receive the State plan HCBS benefit, for a period of 12 months. We would propose that States may establish limits for individuals to be served annually. States may establish a phase-in and phase-out schedule for limits. The State may also elect to place a limit on the number of individuals to be served at any given time in the year (“slot” methodology), so long as the State also provides the annual report of actual unduplicated recipients. We would specify that the State submit a State plan amendment to initiate or adjust the limit on the number of individuals to be served. Consistent with 42 CFR 430.20, we would permit a service expansion to become effective on the first date of the calendar quarter in which an approvable amendment is received in CMS. A State electing to use a waiting list must develop policies for establishing and maintaining the list, if it elects to establish a limit to the number of individuals served. We do not believe it would be appropriate for us to describe waiting list policies that must operate in each State. Rather, we would require the State to assure that its policies are published with opportunity for comment, equitable, and meet all applicable State and Federal requirements. Those requirements include but are not limited to Medicaid provisions such as timely evaluation and right to fair hearing; civil rights protections such as the State's compliance with the Americans with Disabilities Act

(ADA)and the decision of the United States Supreme Court in *Olmstead* v. *L.C.* and, in some cases, other judicial decisions or procedures for court monitoring. Waiting list policies will also be affected by the option in section 1915(i)(3) of the Act for the State to elect not to comply with the requirement for statewideness (see discussion in section I.14. of this proposed rule). 4. Independent Evaluation Section 1915(i)(1)(D) of the Act sets forth a requirement for an individual evaluation of need for each person applying for the State plan HCBS benefit. The statute here uses the term “assessment,” while sections 1915(i)(1)(E) and

(H)of the Act refer to the initial eligibility determination as the “independent evaluation.” We would use the latter term for consistency. “Independent evaluation,” as understood in light of section 1915(i)(1)(H) of the Act, means free from conflict of interest on the part of the evaluator. The independent evaluation applies the needs-based HCBS eligibility criteria (established by the State according to section 1915(i)(1)(A) of the Act), to an applicant for the State plan HCBS benefit. Section 1915(i)(1)(D) of the Act establishes that determining whether an individual meets the needs-based eligibility criteria specified in sections 1915(i)(1)(A) and

(B)of the Act requires an individualized and independent evaluation of each person's support needs and capabilities. We interpret “needs and capabilities” to mean a balanced approach that considers both needs and strengths. However, the words “capability” and “ability” are historically connected with a deficit-oriented approach to assessment, which is the opposite of the statute's person-centered approach. Therefore, we would refer to needs and strengths in this discussion and in the regulation. We believe that the statute distinguishes needs-based criteria from other possible descriptors of an individual's medical condition or demographic situation, for example a diagnosis. We interpret needs-based criteria as describing the individual's particular need for support, regardless of the conditions and diagnoses that may cause the need. Therefore, we would propose that a useful test of whether a criterion is needs-based will be the type of data that would be needed to complete that item in an evaluation. A needs-based criterion requires the evaluator to determine the unique requirements of the applicant, through interview if necessary. Institutional/waiver level of care

(LOC)criteria in some States do not include needs-based criteria. We believe that States must include a needs-based evaluation component of the institutional/waiver LOC determination process so that stringency of those criteria can be compared to stringency of eligibility criteria for the State plan HCBS benefit. Section 1915(i)(1)(D) of the Act indicates that the independent evaluation may “take into account” the inability of the individual to perform two or more activities of daily living (ADLs), (which the statute defines by reference to section 7702B(c)(2)(B) of the Internal Revenue Code of 1986), or the need for significant assistance to perform these activities. The State may also assess other risk factors it determines to be appropriate in determining eligibility for, and receipt of, HCBS. The statute does not limit the factors a State may take into account in the evaluation. For example, instrumental activities of daily living (IADLs) could be considered. 5. Adjustment Authority Section 1915(i)(1)(D)(ii) of the Act permits the State to adjust the needs-based criteria described in section 1915(i)(1)(B) of the Act in the event that enrollment exceeds the annual maximum number of individuals that the State has projected it would serve. The purpose of such an adjustment would be to revise its needs-based criteria in order to reduce the number of individuals in the State who would be eligible for the HCBS benefit. To preserve the requirement of 1915(i)(1)(B) that more stringent needs-based criteria be in place for institutionalized care, the adjusted eligibility criteria must still be less stringent than those applicable to institutional levels of care. If the State chooses to make this adjustment, it must provide at least 60 days written notice to the Secretary and the public, stating the revisions it proposes. While the adjustment authority is granted to States without having to obtain prior approval from the Secretary, we believe that the statute requires the State to amend the State plan to reflect the adjusted criteria. We believe that the State's adjustment authority does not prevent the Secretary from disapproving a State plan amendment that fails to comply with the statute and regulations. Therefore, the Secretary would evaluate the State's adjusted criteria for compliance with the provisions of this subparagraph and all requirements of subpart K. A State may implement the adjusted criteria as early as 60 days after notifying all required parties. Section 430.16 provides the Secretary 90 days to approve or disapprove a State plan amendment, or request additional information. If the State implements the modified criteria prior to the Secretary's final determination with respect to the State plan amendment, the State would be at risk for any actions it takes that are later disapproved. After needs-based criteria are adjusted under this authority, the statute provides for a period during which individuals previously served under the State plan HCBS benefit would continue to receive HCBS. Section 1915(i)(1)(D)(ii)(II) of the Act provides that an individual who is receiving HCBS before the effective date for modified needs-based criteria, (based on the most recent version of the criteria in effect before the modification), must be deemed by the State to continue to be eligible for State plan HCBS for a period of at least 12 months, beginning on the date on which the individual first received a covered State plan HCBS. In order to ensure that an individual who has been receiving HCBS for a year or more would not be subject to immediate discontinuation of service, we are proposing to apply the phrase “at least” in this context to require that regardless of the length of time HCBS has been provided, the State must continue to deem the individual eligible for services for no less than 60 days after official notification of all required parties. The statute does not provide any new remedy for individuals who will lose services due to the adjustment in eligibility criteria for the HCBS benefit. However, the requirements of 42 CFR subpart E would apply. Loss of eligibility for the HCBS benefit does not affect eligibility for other services for which the individual would be eligible under the State plan. We interpret section 1915(i)(1)(D)(III) of the Act to require that if the State chooses to modify the needs-based criteria under the adjustment authority of section 1915(d)(1)(D)(ii) of the Act, the eligibility criteria for institutional levels of care (hospital, NF, ICF/MR, and HCBS waiver services) applied by the State may be no less stringent than those that were in effect before the inception of the State plan HCBS benefit. Criteria for determining whether an individual requires an institutional level of care must also be more stringent than the adjusted needs-based eligibility criteria for the State plan HCBS benefit. Finally, we conclude that the State may choose to modify its needs-based criteria at any time through the usual process of a State plan amendment, whether or not the projected enrollment is exceeded. 6. Independent Assessment Section 1915(i)(1)(E) of the Act describes the relationship of several required functions. Section 1915(i)(1)(E)(i) of the Act refers to the independent evaluation of eligibility in section 1915(i)(1)(A) and (B), emphasizing the independence requirement. Section 1915(i)(1)(E)(ii) of the Act introduces the requirement of an independent assessment following the independent evaluation. Thus, there are two steps to the process: the eligibility determination, which requires the application of the needs-based criteria, and the assessment for individuals who were determined to be eligible under the first step, to determine specific needed services and supports. The assessment also applies the needs-based criteria for each service (if any). Like the eligibility evaluation, the independent assessment is based on the individual's needs and strengths. More specifically, both physical and mental needs and strengths are assessed. These requirements describe a person-centered assessment including mental health, which will take into account the individual's total support needs as well as need for the HCBS to be offered. The State must use the assessment to: determine the necessary level of services and supports to be provided; prevent the provision of unnecessary or inappropriate care; and establish a written individualized plan of care. In order to achieve the three purposes of the assessment listed above, the assessor must be independent; that is, free from conflict of interest with providers, with the individual and related parties, and with concern for budget. HCBS provided under the State plan may be limited only by the needs-based criteria and medical necessity, not budget controls. Therefore, we would propose specific requirements for independence of the assessor in accord with section 1915(i)(1)(H)(ii) of the Act, and we would apply these also to the evaluator and the person involved with developing the plan of care, where the effects of conflict of interest would be equally deleterious. These considerations of independence inform the discussion below under section 1915(i)(1)(H)(ii) of the Act regarding conflict of interest standards. Section 1915(i)(1)(F) of the Act provides detailed requirements for the independent assessment: • An objective evaluation of the individual's inability to perform two or more ADLs, or the need for significant assistance to perform such activities is required. We do not interpret “objective” to refer to the independence required of the assessor as discussed above, but to refer to an additional requirement for reliance on some level of valid measurement appropriate to the ADLs. For example, an occupational therapy

(OT)or physical therapy

(PT)evaluation could be required, the results of which would be utilized by the assessor. We note that the trained assessor is not necessarily responsible for performing the objective evaluation, but should make sure that the objective evaluation is performed by qualified individuals. We do not propose methods to achieve this requirement, as the nature of the HCBS to be provided and the needs-based criteria for the State plan HCBS benefit will determine the appropriate means of evaluating ADLs. Section 1915(i)(1)(F) of the Act defines ADLs in terms of section 7702B(c)(2)(B) of the Internal Revenue Code of 1986, which includes the following: Bathing, dressing, toileting, transferring, eating, and continence. This section of the Internal Revenue Code does not define the terms “inability” or “significant assistance.” While States have some flexibility to define these factors, we interpret “inability” to mean need for total support to perform an ADL, and “significant assistance” to mean assistance from another individual or from assistive technology necessary for the successful performance of the task. An objective evaluation of ability to perform two or more ADLs is a required element of the assessment but only a suggested element of the eligibility evaluation. We conclude that partial or complete inability to perform two or more ADLs is not a statutory prerequisite to receive State plan HCBS, but is a required element of the assessment. • A face-to-face evaluation of the individual by an assessor trained in the assessment and evaluation of persons whose physical or mental conditions trigger a potential need for HCBS. To fulfill this statutory requirement, we would propose that the State shall develop standards and determine the qualifications necessary for agencies and individuals who will perform independent assessments and be involved with developing the plans of care. • Consultation with any responsible persons appropriate to the individual and the needed supports, including family, spouse, guardian, or healthcare and support providers. We do not believe the examples listed in the statute to be prescriptive or limiting. The assessor must give the individual and, if applicable, the individual's authorized representative, the opportunity to identify appropriate persons who should be consulted during this process. The role of the assessor is to facilitate free communication from persons relevant to the support needs of the individual, while protecting privacy, and promoting the wishes and best interests of the individual. In necessary circumstances, such as telephone communication with parties not available for the meeting, consultations are not required to be performed in person or at the same time and place as the face-to-face evaluation, so long as any ancillary contacts are with persons the individual has identified, are divulged and discussed with the individual/representative, and documented. • An examination of the individual's relevant history, medical records, and care and support needs. • Knowledge of best practices, and research on effective strategies that result in improved health and quality of life outcomes. The statute requires that the examination of the individual's history, medical records, and care and support needs be guided by this knowledge, and we would propose that this evidence-based approach should apply to the entire process for assessment and plan of care development. • If the State offers the option of self-direction and the individual so elects, the assessment should include gathering the information required to establish self-direction of services. We do not propose to require States to conduct a separate or additional assessment process for self-direction. As long as States comply with all provisions related to conducting the eligibility evaluation, independent assessment, and developing the plan of care, States have flexibility in determining whether they will require that the functions be performed as one activity by a single agency or individual, or whether they wish to separate those functions and have different entities involved. 7. Plan of Care Section 1915(i)(1)(G) of the Act requires that the State plan HCBS benefit be furnished under an individualized plan of care based on the assessment. The statute describes a person-centered planning process, which can only be achieved when States affirmatively and creatively support individuals in the planning process. We would propose certain requirements for developing the plan of care, but note that the degree to which the process achieves the goal of person-centeredness can only be known with appropriate quality monitoring by the State. Unless the State has elected to impose a limit on the number of individuals it would serve through its State plan HCBS benefit, the State must make the services available to all eligible individuals as they are assessed to need them. We conclude that the statute permits determining the level of services required by an individual only according to assessment of the individual's need, not according to available funds. Individuals who qualify for HCBS may not be compelled to receive them. Individuals may exercise their freedom to choose among qualified providers in the planning process. The State Medicaid agency may delegate other agents to develop the plan of care, but remains responsible for ensuring compliance with all requirements and must approve each plan of care developed. Section 1915(i)(1)(G)(ii)(I)(aa) of the Act requires that the plan of care is developed in consultation with the individual. The requirements for who is consulted in developing the plan of care parallel those describing who may be consulted during the assessment process. Section 1915(i)(1)(G)(ii)(I)(bb) of the Act requires that the development of the plan of care take into account the extent of, and need for family or other supports for the individual, and section 1915(i)(1)(G)(ii)(II) of the Act requires that the individualized plan of care identify needed services. We interpret these provisions to indicate that natural supports are explicitly included in the plan of care. This means that individuals with equivalent need for support but differing levels of family or other natural supports may be authorized for different levels of HCBS. In the context of person-centered planning and consultation with natural supports, we conclude that the statute requires that the plan of care should neither duplicate, nor compel, natural supports. Section 1915(i)(1)(G)(ii)(III) of the Act provides that plans of care will be reviewed at least annually and upon significant change in the individual's circumstances. We interpret this provision to indicate that diagnostic or functional changes are not required in order to adjust a plan of care. Changes in external factors such as gain or loss of other supports may trigger a review. We would require revision of the plan of care if the review indicates that revision is appropriate. By “annually,” we mean not less often than every 12 months. Finally, we would relate this requirement to the independent assessment, since developing or revising the plan of care is based on the assessment. We therefore would propose that the independent assessment (number 6. above) is required at least annually, and when needed upon change in circumstances, in order to comply with the requirement to review plans of care with that frequency. 8. Self-Direction Section 1915(i)(1)(G)(iii)(I) and

(II)provides that States may offer enrolled individuals the option to self-direct some or all of the State Plan HCBS that they require. Many States have incorporated elements of self-direction into section 1915(c) waiver programs as well as section 1115 demonstration programs. Self-directed State plan HCBS allow States another avenue by which they may afford individuals maximum choice and control over the delivery of services, while comporting with all other applicable provisions of Medicaid law. We have urged all States to afford waiver participants the opportunity to direct some or all of their waiver services. With the release of an updated, revised section 1915(c) waiver application in 2005, we refined the criteria and guidance to States surrounding self-direction (also referred to as participant-direction), and established a process by which States are encouraged, to whatever degree feasible, to include self-direction as a component of their overall HCBS waiver programs. While section 1915(i) of the Act does not require that States follow the guidelines for section 1915(c) waivers in implementing self-direction in the HCBS State plan benefit, we anticipate that States will make use of their experience with 1915(c) waivers to offer a similar pattern of self-directed opportunities with meaningful supports and effective protections. Individuals who choose to self-direct will be subject to the same requirements as other enrollees in the State plan HCBS benefit. Section 1915(i)(1)(G)(iii)(II) of the Act defines self-direction, and requires that there be an assessment and plan of care. We do not interpret these requirements to indicate assessments and plans in addition to those required in sections 1915(i)(1)(F) and

(G)of the Act. Accordingly, we would propose that the requirements for a self-directed plan of care at section 1915(i)(1)(G)(iii)(III) of the Act be components of the assessment and plan of care required for all enrollees in the State plan HCBS benefit. Section 1915(i)(1)(G)(iii)(III) of the Act contains specific requirements for the self-directed plan of care, for which we describe proposed regulations in Section II. of this proposed rule. The proposed regulations are consistent with our requirements for self-direction under section 1915(c) HCBS waivers. Section 1915(i)(1)(G)(iii)(III)(dd) of the Act requires that the plan of care be developed with a person-centered process, which we would propose to require of all plans of care for the State plan HCBS benefit. Section 1915(i)(1)(G)(iii)(IV) of the Act describes certain aspects of a self-directed budget, which we have termed budget authority. Section 1915(i)(1) (G)(iii)(III)(bb) of the Act provides for self-directed selecting, managing, or dismissing of providers of the State plan HCBS, which we term employer authority. The proposed rule explains both budget authority and employer authority in a manner consistent with Section 1915(c) HCBS waiver policy. Individuals require information and assistance to support them in successfully directing their services. Therefore, we would require States to design and provide functions in support of self-direction that are individualized according to the support needs of each enrollee. These functions should include information and assistance consistent with sound principles and practice of self-direction, and financial management supports. Section 6087 of the DRA also amended the Act to add a new section 1915(j), that permits States to provide medical assistance for the “Optional Choice of Self-Directed Personal Assistance Services (Cash and Counseling).” Section 6087 of the DRA is similar, but more expansive than, the self-direction provisions in section 6086 of the DRA. States should carefully examine the opportunities for providing self-directed HCBS under either or both sections 1915(i) or 1915(j) of the Act, depending on the goals and objectives of their Medicaid programs. 9. Quality Assurance Section 1915(i)(1)(H)(i) of the Act requires the State to ensure that the State plan HCBS benefit meets Federal and State guidelines for quality assurance, which we interpret as assurances of quality improvement. Consistent with current trends in health care, the language of quality assurance has evolved to mean quality improvement, a systems approach designed to continuously improve care and prevent or minimize problems prior to occurrences. This approach to quality is consistent with guidelines developed by CMS in the *CMS Quality Improvement Roadmap* and *The Medicaid/SCHIP Quality Strategy* . Guidelines for quality improvement have also been made available through CMS policies governing section 1915(c) HCBS waivers. Additionally, section 6086(b) of the DRA requires the Secretary to act through the Agency for Healthcare Research and Quality to develop program performance and quality of care measures for Medicaid HCBS. The Secretary is to use the indicators and measures to assess and compare State plan HCBS, particularly with respect to the health and welfare of the recipients of the services. We would require States to have a quality improvement strategy, and to measure and maintain evidence of quality improvement, including system performance and individual quality of care indicators approved or prescribed by the Secretary. We would require States to make this information available to CMS upon request. 10. Conflict of Interest Section 1915(i)(1)(H)(ii) of the Act provides that the State will establish conflict of interest standards for the independent evaluation and independent assessment. For reasons described above under independent assessment, we believe that the same independence is necessary for those involved with developing the plan of care. In this discussion, we will refer to persons or entities responsible for the independent evaluation, independent assessment, and the plan of care as “agents” to distinguish them from “providers” of home and community-based services. The design of services, rates and payment, and method of administration by the State Medicaid agency all may contribute to potential conflicts of interest. These contributing factors can include obvious conflicts such as incentives for either over-or under-utilization of services, subtle problems such as interest in retaining the individual as a client rather than promoting independence, or practices that focus on the convenience of the agent or service provider rather than being person-centered. The independent agent must not be influenced by variations in available funding, either locally or from the State. Within the services the State decides to offer, the plan of care must offer to each enrollee the home and community-based services for which they demonstrate need. The plan of care must be based on medical necessity only, not funding levels. When local entities directly expend funds or direct allocated resources for services, in accordance with § 433.53(c)(2), the State must have a mechanism to ensure that availability of local funds does not affect access to services, for example, using State resources to compensate for variability in local funding. However, States may elect not to apply statewideness requirements, making the benefit available only in selected localities, possibly those that can provide greater resources. We would require States to define conflict of interest standards, to include criteria that reflect our experience with the issue in administering HCBS waivers, and that reflect the principles of section 1877 of the Act. We are aware that in certain areas there may be only one provider available to serve as both the agent performing independent assessments and developing plans of care, and the provider of one or more of the home and community-based services. To address this potential problem we would propose to permit providers in some cases to serve as both agent and provider of services, but with guarantees of independence of function within the provider entity. In certain circumstances, we may require that States develop “firewall” policies, for example, separating staff that perform assessments and develop plans of care, from those that provide any of the services in the plan; and meaningful and accessible procedures for individuals and representatives to appeal to the State. We would not permit States to circumvent these requirements by adopting State or local policies that suppress enrollment of any qualified and willing provider. We do not believe that under any circumstances determination of eligibility for the State plan HCBS benefit should be performed by parties with an interest in providers of HCBS. We invite comment on practical solutions to this important balance of independence and access. 11. Eligibility Redeterminations; Appeals Section 1915(i)(1)(I) of the Act requires the State to conduct redeterminations of eligibility at least annually. We interpret “annually” to mean not less than every 12 months. The State must conduct redeterminations and appeals in the same manner as required under the State plan. States must grant fair hearings consistent with the requirements of part 431, subpart E. 12. Option for Presumptive Eligibility for Assessment Section 1915(i)(1)(J) of the Act gives States the option of providing for a period of presumptive eligibility, not to exceed 60 days, for individuals the State has reason to believe may be eligible for the State plan HCBS benefit. We interpret this provision as follows: • “Presumptive” we interpret to indicate that medical assistance will be available for evaluation even when an individual is subsequently found not to be eligible for the State plan HCBS benefit. • “Eligibility” does not connote eligibility for Medicaid generally, as this provision “shall be limited to medical assistance for carrying out the independent evaluation and assessment” under section 1915(i)(1)(E) of the Act. For clarity, we would refer to this limited option as “presumptive payment”. Individuals not eligible for Medicaid may not receive State plan HCBS. • “Evaluation and assessment” under section 1915(i)(1)(E) of the Act, is described as evaluation for eligibility for the benefit and assessment to determine necessary services. We believe the statutory phrase “and if the individual is so eligible, the specific home and community-based services that the individual will receive” is further describing the assessment under section 1915(i)(1)(E) of the Act for which presumptive payment is available, and that this phrase is not offering presumptive payment for the actual services. • “Medical assistance” we interpret to mean FFP for administration of the approved State plan, as we believe that determination of eligibility for the State plan HCBS benefit and assessment of need for specific HCBS are administrative activities of the Medicaid or single State agency rather than a medical service to individuals. Even if the evaluation and assessment could be considered a medical service, none of the services permitted under section 1915(i) of the Act could be construed to include these activities. “Medical assistance” in this provision would not refer to other Medicaid State plan services because individuals being considered for eligibility for the State plan HCBS benefit must be Medicaid eligible and so already have access to those services. Therefore, we interpret section 1915(i)(1)(J) of the Act to offer the State an option for a period of presumptive payment, not to exceed 60 days, for Medicaid eligible individuals the State has reason to believe may be eligible for the State plan HCBS benefit. FFP would be available as administration of the approved State plan for evaluation of eligibility for the State plan HCBS benefit and assessment of need for specific HCBS. During the period of presumptive payment, the individual would not receive State plan HCBS, and would not be considered to be enrolled in the State plan HCBS benefit for purposes of computing the number of individuals being served under the benefit. We invite comments that offer other interpretations of this presumptive payment option and comport with existing Federal requirements. 13. Individual's Representative When an individual is not capable of giving consent, or requires assistance in making decisions regarding his or her care, the individual may be assisted or represented by another person. Section 1915(i)(2) of the Act defines the term “individual's representative” by listing certain examples, but also provides that “* * * any other individual who is authorized to represent the individual” [m]ay be included. We believe that “authorized” refers to State rules concerning guardians, legal representatives, power of attorney, or persons of other status recognized under State law or under the policies of the State Medicaid program. States should ensure that such representatives conform to good practice concerning free choice of the individual, and assess for abuse or excessive control. 14. Nonapplication Section 1915(i)(3) of the Act allows States to be exempted from the requirements of two sections of the Medicaid statute: section 1902(a)(1) of the Act, regarding statewideness; and section 1902(a)(10)(C)(i)(III) of the Act, regarding income and resource rules for the medically needy in the community. The statute uses the terms “nonapplication” and “may chose not to comply with” rather than “waive”. We would use this terminology to maintain clarity between HCBS waiver programs under section 1915(c) of the Act, and State plan HCBS under section 1915(i) of the Act. However, these non-applications apply only with regard to the provision of State plan HCBS. The State is not exempted from these requirements as they apply to the provision of any other medical assistance under the plan, or with regard to the provision of institutional services. Non-application of the requirement of statewideness allows States to furnish the State plan HCBS benefit in particular areas of the State, for example, where the need is greatest, or where certain types of providers are available. States may choose to be exempted from the requirements of statewideness in order to begin services on a limited basis, perhaps with a view towards later expansion. If a State intends to offer the HCBS State plan benefit throughout the State, but anticipates that services would be phased in as providers and enrollees are identified, it is not necessary to elect non-application of statewideness requirements. Being exempt from the requirements of section 1902(a)(10)(C)(i)(III) of the Act enables States to provide medical assistance to medically needy individuals in the community by electing to treat such individuals as if they are living in an institution for purposes of determining income and resources. This would result in the State not deeming income and resources from an ineligible spouse to an applicant or from a parent to a child with a disability. Section 1915(i)(4) of the Act emphasizes that State election to provide the State plan HCBS benefit does not in any way affect the State's ability to offer programs through a section 1915(b) or

(c)waiver, or under section 1115 of the Act. However, we note that section 1915(c) HCBS waivers may be affected when a State implements a State plan HCBS benefit if institutional levels of care are modified to make them more stringent than needs-based eligibility criteria for the State plan HCBS benefit. 15. Federal Financial Participation for Institutional Level of Care Shall Continue for Individuals Receiving Services as of the HCBS State Plan Amendment's Effective Date If the State modifies institutional level of care requirements so that they will be more stringent than the needs-based criteria for the State plan HCBS benefit, Section 1915(i)(5) of the Act provides protection for individuals who are receiving services in NFs, ICFs/MR, applicable hospitals or under section 1915(c) or section 1115 HCBS demonstration projects before the modification. These individuals need not satisfy the more stringent institutional eligibility criteria. FFP under the unmodified criteria continues until such time as the individual is discharged from the institution, waiver program, or demonstration, or no longer requires this level of care. States may avoid this requirement and the complications of implementing a dual institutional level of care process by preserving existing level of care requirements, and defining the State plan HCBS benefit needs-based criteria as less stringent than the existing institutional criteria. B. Effective Date The effective date on which States may provide HCBS through the State plan, as set forth by the DRA of 2005 is January 1, 2007. C. The State Plan HCBS Benefit in the Context of the Medicaid Program as a Whole The section 1915(i) State plan HCBS benefit is subject to provisions of the Medicaid program as a whole. Therefore, it is useful to note certain requirements of the Medicaid program that have an impact on the administration of the State plan HCBS benefit. To be eligible for the State plan HCBS benefit, an individual must be included in an eligibility group that is contained in the State plan. Each individual must meet all financial and non-financial criteria set forth in the plan for the applicable eligibility group. Section 1902(a)(8) of the Act requires States to furnish Medicaid services with reasonable promptness to individuals found eligible. However, under section 1915(i) of the Act, States may place limits on the number of persons that they would serve via the State plan HCBS benefit. If a State chooses to set a capacity limit for the State plan HCBS benefit as permitted in section 1915(i)(1)(C)(ii) of the Act, when the HCBS benefit reaches capacity, the requirements of reasonable promptness do not apply, since the option to choose these services is no longer available to additional individuals. When individuals apply for the State plan HCBS benefit after the State has reached capacity, the State would not be required to provide the State plan HCBS to the individuals, even when they meet otherwise applicable eligibility criteria. Children included in eligibility groups under the State plan may meet the needs-based criteria and qualify for benefits under the State plan HCBS benefit. HCBS benefits that are not otherwise available under Medicaid's Early and Periodic Screening, Diagnosis and Treatment (EPSDT) benefit may be furnished to Medicaid eligible children who meet the State plan HCBS needs-based eligibility criteria, and who meet the State's medical necessity criteria for the receipt of services. State plan HCBS and EPSDT services may be provided concurrently. A mandate for EPSDT services applies only to services authorized by section 1905(a) of the Act. Therefore, HCBS under section 1915(i) of the Act are not included in the EPSDT program. Children who are eligible for the State plan HCBS benefit are eligible to receive medically necessary State plan HCBS, but the State is not required to provide HCBS as part of its EPSDT program. States may not reserve or protect “slots” for either adults or children, but must allow all individuals who meet eligibility and medical necessity criteria equal access to the State plan HCBS benefit. Clinic services (whether or not furnished in a facility) for individuals with chronic mental illness are listed in section 1915(c)(4)(B) of the Act and therefore may be covered in the State plan HCBS benefit. If a State chooses to offer these services, they will be subject to the clinic upper payment limit

(UPL)at 42 CFR 447.321. We also note that these services are defined differently than other clinic services offered under the State Plan in that they include services whether or not they are offered in a facility. D. Other Background 1. Comparability and State Control of Costs Section 1915(i) of the Act contains no provisions for waiving Medicaid amount, duration, and scope (“comparability”) requirements described under section 1902(a)(10)(B) of the Act. This provision has two important implications. First, States may not “target” the State plan HCBS benefit as is permitted with HCBS provided under section 1915(c) of the Act, which does provide the Secretary authority to waive comparability. Second, without targeting, States may not offer multiple versions of the State Plan HCBS benefit, each designed to serve different groups, as is permitted with HCBS waivers. States may design one State plan HCBS benefit, in which one or any combination of the permitted services is offered, and which includes needs-based eligibility and (optionally) service criteria. However, all individuals who meet the needs-based and other eligibility criteria for the State plan HCBS benefit must be served in the benefit (up to any limit the State optionally sets to the number of individuals the benefit will serve) regardless of how individuals may relate to target groups or other classifications. States may assure appropriate utilization of the State plan HCBS benefit through application of the following provisions of 1915(i). • The requirement to set eligibility standards built on needs-based criteria. States choose the needs-based criteria used to establish the thresholds of program eligibility. States must set a lower threshold of need, but may also optionally define an upper threshold of need beyond which individuals may not be served on the benefit. • Optionally, establishing needs-based criteria to determine eligibility for each State plan HCBS. These additional criteria may vary from service to service, and should assist States in identifying the individuals who could benefit from receipt of a particular State plan HCBS. • The scope of services that the State chooses to offer may include any, but need not include all, of the services permitted under Section 1915(c)(4)(B). States can elect to offer a limited number of services under the State plan HCBS benefit. • Limits on the amount or duration of each service. • Since all State plan HCBS must be provided under a written plan of care, States have the opportunity to review an individual's plan of care to ensure that HCBS continue to be responsive to the needs of the individual, without being excessive. General Medicaid requirements apply to the State plan HCBS benefit. All Medicaid services are to be provided only to those who need them according to medical necessity as defined by the State. Prior authorization or other utilization controls methods are available to the State. 2. HCBS Provided in the Community, Not in Institutions Home and community-based services are not available in Medicaid-certified NFs, ICFs/MR, and hospitals, as these institutions are defined in statute and regulation. HCBS are available in private homes, apartments, or other non-institutional residential settings. While a simple definition of “home and community-based” would be any residence other than the three Medicaid certified institutions referenced above, this definition is insufficient to ensure that enrollees in this State plan benefit receive services in the type of setting intended. There are other public and private, large and small, residences whose character is equally institutional in the experience of residents. Therefore, we would propose that at the outset of this new Medicaid benefit, States should distinguish between institutional and community living arrangements for individuals being evaluated for enrollment in the State plan HCBS benefit. Opportunities for independence and community integration in a variety of alternative living arrangements have been demonstrated for those receiving HCBS provided under section 1915(c) waivers and section 1115 demonstrations. The new Medicaid State plan HCBS benefit should be implemented based on those practices, and in the context discussed previously of the ADA and the *Olmstead* decision. We recognize that defining home and community is complex, and invite comments on this aspect of the proposed rule. We also believe that enough is known about methods to provide elderly and disabled individuals with housing that encourages independence and community participation to justify the need to establish standards around this important issue at the inception of a new benefit offering HCBS. We interpret the distinction between “institutional services” and “home or community-based services” in terms of opportunities for independence and community integration as well as the size of a residence. Applicable factors include the resident's ability to control access to private personal quarters, and the option to furnish and decorate that area; if the personal quarters are not a private room, then unscheduled access to private areas for telephone and visitors, and the option to choose with whom they share their personal living space; unscheduled access to food and food preparation facilities; assistance coordinating and arranging for the resident's choice of community pursuits outside the residence; and the right to assume risk. Services provided in settings lacking these characteristics, with scheduled daily routines that reduce personal choice and initiative, or without personal living spaces, cannot be considered services provided in the home or community. We would propose two mechanisms for the State to determine that residents are residing in the community rather than in an institution. First, we would require minimum standards, as prescribed by the Secretary, for community living facilities that take into account the factors discussed above. Individuals vary widely in both support needs and preferences, so that a residence that meets the minimum standards for community living facilities may be homelike and community-integrated for one individual but may not be for another individual. While we do not find there to be any objective criteria, such as numbers of residents, to reliably distinguish facilities with institutional character from those with community character, we do believe that it is reasonable to use number of residents to trigger an assessment of the nature of the residence for a specific individual. We would therefore additionally propose that for individuals in larger residential settings there be an individualized determination that the residence is a community setting appropriate to the individual's need for independence, choice, and community integration. We believe that the person-centered assessment and plan of care required by section 1915(i) of the Act offers an efficient opportunity for such an individualized assessment of community residence. Therefore, we would propose to require that for individuals in residential settings meeting the standards for community living facilities, that house four or more persons unrelated to the proprietor and provide one or more services or treatments to the residents, the person-centered assessment and plan of care must include a determination that the residence is a community setting appropriate to the individual's need for independence, choice, and community integration. We believe that these two mechanisms will provide States the flexibility to approve a variety of settings appropriate to the needs of the individuals served while also maximizing independence and opportunities for community integration. For example, we anticipate that States could devise standards indicating that a residence with multiple independent living units (apartments) would not be considered to be housing four or more people together, and would therefore not trigger the requirement for the assessment to include documentation of community character. The State plan HCBS benefit may be defined by States to serve individuals with widely varying degrees of independence. The person-centered assessment and plan of care will provide flexibility to approve different types of living arrangements according to need. For example, if physical or cognitive impairment makes unsupervised access to some food preparation facilities unsafe, and the person-centered plan reflects that there must be safeguards against this risk, then those portions of the kitchen would be made inaccessible when staff is not present. In this example, barring residents from the home's kitchen altogether would be an institutional, rather an integrated solution in all but the rarest of circumstances. A residence in which only the high risk equipment would be inaccessible when staff are not present, and the resident would have access to the kitchen, food, and equipment that does not pose a danger, could be approved as a community living arrangement. While HCBS are not available while an individual resides in an institution, HCBS should be available to individuals once they leave an institution. Recognizing that individuals leaving institutions require assistance to establish themselves in the community, we would allow for transition services to be claimed after the date of discharge from the institution. We propose that of the HCBS permitted under section 1915(i) of the Act, case management is the only service that could be commenced prior to discharge and could be used to assist individuals during the transition period of institutional residence. 3. HCBS Do Not Provide Room and Board Payments for room and board are prohibited by section 1915(i)(1) of the Act. Except for respite care furnished in a facility approved by the State that is not a private residence, no service or combination of services may be used to furnish a full nutritional regimen (3 meals a day) through the State plan HCBS benefit. FFP for State plan HCBS is not available in the cost of meals that are furnished in alternative residential facilities in the community, regardless of whether services (other than respite care) are provided by or through the setting in which the individual resides. When an individual must be absent from his or her residence in order to receive a service authorized by the individualized plan of care, it may be impractical to obtain a meal outside the venue in which the service is provided. This may occur during the receipt of facility-based respite care, adult day care, or site-based habilitation. In these instances, the individual may be unable to leave the site to obtain food at mealtime. Therefore, the State plan HCBS provider may elect to furnish the meal. When meals are furnished as an integral component of the service, the State may consider the cost of food in setting the rate it would pay for the State plan HCBS as the cost is then considered part of the service itself. We would not consider the meal to be an integral part of the State plan HCBS when two rates are charged to the public, one that includes a meal and one that does not include a meal. II. Provisions of the Proposed Rule [If you choose to comment on issues in this section, please indicate the caption “Provisions of the Proposed Rule” at the beginning of your comments.] To incorporate the policies and implement the statutory provisions described above, we are proposing the following revisions: Part 431 (State Organization and General Administration) • In § 431.40, we are proposing to amend paragraph (a)(7), by adding reference to section 1915(i) of the Act to the scope of subpart B, as an exception to statewide operation, and correcting the paragraph to include reference to sections 1915(d) and

(e)of the Act. • In § 431.50, we are proposing to amend paragraph

(c)to include HCBS (under waivers and the State plan) as an exception to statewide operation. Part 440 (Services: General Provisions) • In § 440.1, we are proposing to add a reference to a new statutory basis to read “1915(i) Home and community-based services furnished under a State plan to elderly and disabled individuals under the provisions of part 441, subpart K.” • In § 440.180, we are proposing to revise the heading “Home or community-based services” to read “Home and community-based waiver services” to standardize the term “home and community-based services” and clarify that this section concerns only HCBS provided through 1915(c) waivers. • In part 440 subpart A, we are proposing to add § 440.182, “State plan home and community-based services”, which would define a new optional Medicaid service for which FFP is available to States, as specified in part 441, subpart K. Section 440.182 (State Plan Home and Community-Based Services Benefit) In § 440.182(a), we propose that the services authorized in section 1915(i) of the Act, and meeting the requirements outlined in proposed subpart K, be known as “State plan home and community-based services.” When referring to the specific service(s) offered under the State plan HCBS benefit listed in § 440.180(b), we use the term “State plan HCBS.” When referring to overall State activities under section 1915(i) of the Act as described in subpart K, we use the term “benefit”, or “State plan HCBS benefit”. In § 440.182(b) and § 440.182(c)(1), we propose that the optional State plan HCBS benefit may consist of any or all of the HCBS listed in section 1915(c)(4) for waiver programs, as specified in regulation at § 440.180, except for the “other” services which the Secretary has the authority to approve for an HCBS waiver. Because section 1915(i) of the Act defines services by reference to section 1915(c) of the Act, we believe that the regulatory requirements should be parallel. Therefore, we list the permitted services for the State plan HCBS benefit in § 440.182 identically to the services specified in § 440.180 for HCBS waivers. We further specify that the conditions set forth in § 440.180(b) for services to individuals with chronic mental illness, and in § 440.180(c) for expanded habilitation services, apply to State plan HCBS services. In particular, due to concern over duplication of habilitation services, we propose to require at § 441.562(a)(2)(vix) an explanation of the manner in which nonduplication of services will be documented in the assessment of each individual receiving habilitation services. Section 1915(i) of the Act prohibits reimbursement for room and board. At § 440.182(c)(2) we define the term “room” to mean shelter type expenses, including all property-related costs such as rental or purchase of real estate and furnishings, maintenance, utilities, and related administrative services. The term “board” means three meals a day or any other full nutritional regimen. We propose in § 440.182(c)(2) to require an assurance that the State has a methodology to prevent claims and ensure that no payment is made for room and board in State plan HCBS. We propose to specify three types of service costs involving food and housing that are not considered room and board. We adopt the existing requirement for HCBS waivers in § 441.310(a)(2), to permit the cost of food and residence to be claimed for respite services furnished in State-approved settings that are not private residences. We clarify that a State may claim FFP for the costs of meals that are furnished as part of a program of adult day health or a similar activity conducted outside the participant's living arrangement on a partial day basis. Finally, we propose that a State may claim FFP for a portion of the housing expense and food that may be reasonably attributed as a service cost to compensate an unrelated caregiver providing State plan HCBS, who is residing in the same household with the recipient. We propose, as is the policy in HCBS waivers that FFP is available only for the reasonable additional costs of the caregiver residing in the recipient's home, not to support the cost of a caregiver's household in which the recipient resides. We would therefore provide that FFP not be available for caregiver living costs when the residence is owned or leased by the caregiver. Part 441 (Services: Requirements and Limits Applicable to Specific Services) In part 441, “Requirements and Limits Applicable to Specific Services,” we are proposing to add a new subpart K titled “State Plan Home and Community-Based Services for Elderly and Disabled Individuals,” consisting of § 441.550 through § 441.577, which describes requirements for providing the State plan HCBS benefit. This construction parallels that for HCBS waivers, which are the subject of subpart G of part 441. In this new subpart, it is necessary in several paragraphs to indicate that certain provisions apply to an individual or an individual's representative. To reduce redundancy, we indicate in those paragraphs that “individual” means the eligible individual and, if applicable, the individual's representative, to the extent of the representative's authority recognized by the State. “Individual and representative” more accurately convey the person-centered process than “individual or representative”. This provision clarifies that there is no implication that individuals will or will not have representatives. Section 441.550 (Basis and Purpose) We set forth in § 441.550 language to implement the provisions of section 1915(i) of the Act permitting States to offer HCBS to qualified elderly and disabled individuals under the State plan. Those services are listed in § 440.182, and are described by the State, including any limitations of the services. This optional benefit is known as the State plan HCBS benefit. This subpart describes what a State Medicaid plan must provide, and defines State responsibilities. Section 441.553 (State Plan Requirements) In § 441.553, we propose that a State plan that includes home and community-based services for elderly and disabled individuals must meet the requirements of this subpart. We would require that the State plan amendment in which the State establishes the State plan HCBS benefit satisfy the requirements set forth in this proposed regulation. Section 441.556 (Eligibility for Home and Community-Based Services Under Section 1915(i)(1) of the Act) We propose in § 441.556(a)(1) to require that the individual be eligible for Medicaid under an eligibility group covered under the State's Medicaid plan. Enrollment in the State plan HCBS does not confer Medicaid eligibility. In addition to meeting State Medicaid eligibility requirements, the statute requires that applicants for State plan HCBS must have income that does not exceed 150 percent of the Federal Poverty Level (FPL). (The poverty guidelines are updated periodically in the **Federal Register** by the U.S. Department of Health and Human Services under the authority of 42 U.S.C. 9902(2).) We propose in § 441.556(a)(2) that determinations that the individual's income does not exceed 150 percent of FPL must be made using the applicable rules for income eligibility for the individual's eligibility group, including any more liberal income disregards used by the State for that group under section 1902(r)(2) of the Act. We see no authority in the statute for States to choose income limits other than 150 percent of FPL. To implement the intent of the Congress that the benefit be “home and community-based,” we would require in § 441.556(a)(3) that the individual reside in the home or community, not in an institution, according to standards for community living facilities prescribed by the Secretary. As discussed in section I.D.2., there are a variety of living arrangements other than a private home or apartment that promote independence and community integration, as well as arrangements that do not. We propose that the person-centered assessment and plan of care required under the State plan HCBS benefit provides an opportunity to make individualized determinations of community residence. Therefore, we propose to require that if the individual resides in a setting with four or more persons unrelated to the proprietor, and which furnishes one or more services or treatments, the independent assessment must include documentation that the individual is living in a community setting, and not in an institution. We would require in § 441.556(a)(4) that the individual must meet the needs-based eligibility criteria as set forth in § 441.559. We propose in § 441.556(a)(5) that individuals are not eligible for the State plan HCBS benefit until they have met all eligibility requirements, including the need for at least one service provided under the State plan as part of the HCBS benefit. We propose in § 441.556(b) that States may elect to follow institutional income and resource eligibility rules for the medically needy living in the community. Waiving the requirements of section 1902(a)(10)(C)(i)(III) of the Act allows States to treat medically needy individuals as if they are living in an institution by not deeming income and resources from an ineligible family member. We use the term “non-application” instead of “waive” as does the statute. We further propose that States may elect non-application of section 1902(a)(1) of the Act, concerning statewide application of Medicaid, which permits the State plan HCBS benefit to be offered only in certain defined geographic areas of the State. Section 441.559 (Needs-Based Criteria and Evaluation) The statute uses a number of terms at times interchangeably. We adopt the wording used most frequently in the law, and specify a term for each requirement. For example, regarding the terms “assessment” and “evaluation,” we would adopt the language in section 1915(i)(1)(H)(ii) of the Act, which refers to the “independent evaluation” and the “independent assessment.” • Needs-based eligibility criteria. In § 441.559(a), we propose that States establish needs-based criteria for determining an individual's eligibility under the State plan for HCBS, and may establish needs-based criteria for each specific service. We do not define support needs, as we believe that States should have the flexibility to match eligibility criteria to the nature of the services they would provide under the HCBS benefit. By statute, the needs-based criteria would consist of needs for specified types of support, such as assistance with ADLs, or risk factors defined by the State. We propose to require that State-defined risk factors affecting eligibility must be included as needs-based eligibility criteria in the State plan amendment. While we do not propose requirements for State-defined risk factors, we believe that as needs-based criteria, risk factors should be related to support needs, such as availability of family members or other unpaid caregivers and their willingness and ability to provide necessary care. We distinguish support needs from other types of characteristics. We propose that a distinguishing characteristic of needs-based criteria is that they can only be ascertained for a given person through an individual evaluation. This differentiates a targeting criterion such as a diagnosis, which many individuals may identically share, from a support need, which will vary widely among those individuals with the same diagnosis. Also set forth in § 441.559(a) are the examples of needs-based eligibility criteria and factors to consider that are supplied in the statute. Section 1915(i) of the Act defines ADLs by reference to section 7702B(c)(2)(B) of the Internal Revenue Code of 1986. This section of the Internal Revenue Code lists eating, toileting, transferring, bathing, dressing, and continence. This mobility-oriented definition of ADLs is one that States may consider, meaning that States are free to define criteria in other domains such as cognitive or behavioral needs for support. We note that the regulation requires only that the needs-based criteria for the State plan HCBS benefit establish the lowest threshold of need to enroll in the benefit. There is an upper limit of need to be eligible for the HCBS benefit only if the State so specifies in the needs-based eligibility criteria. The more stringent institutional criteria required in § 441.559(b) of this section do not constitute an upper limit of need to be eligible for the State plan HCBS benefit. The institutional criteria are only a lowest threshold of need to receive institutional services. We also note that section 1915(i)(1) of the Act clarifies that State plan HCBS are not required to be direct alternatives to institutional care. The statute specifically provides that the State plan HCBS benefit does not need to meet the section 1915(c) requirement that, but for the services provided under the HCBS waiver, the individual would require institutional care. • More stringent institutional and waiver needs-based criteria In § 441.559(b), we propose that the State plan HCBS benefit is available to a State only if individuals may demonstrate a lower level of need to obtain State plan HCBS than is required to obtain institutional or waiver services. States that have functional level of care criteria for institutions (that meet the requirements in § 441.559(a)(1)), may have no need to modify their existing institutional criteria so long as the needs-based eligibility criteria established for State plan HCBS are less stringent. States without need-based institutional level of care criteria must add need-based requirements to their level of care assessments in order to establish the State plan HCBS benefit. We propose in § 441.559(b) to define by reference to statute and regulation the institutions for which section 1915(i) of the Act requires more stringent eligibility criteria. Nursing facility and intermediate care facilities for the mentally retarded are so cited. We interpret reference in section 1915(i)(1)(B) of the Act to hospitals to mean facilities certified by Medicaid as hospitals that are providing long-term care services or services related to the HCBS to be provided under the benefit. The proposed regulation requires that States have or establish for such hospitals (if any), needs based criteria for admission that are more stringent than those for eligibility in the State plan HCBS benefit. We further propose, when the State covers more than one service in the State plan HCBS benefit, to require that any needs-based criteria for individual HCBS, combined with the needs-based eligibility criteria for the benefit, must be less stringent than needs-based eligibility criteria for any related institutional services. Without this provision, it would be possible for States to define needs-based eligibility criteria that are less stringent than those for institutions, but then set each needs-based service criteria at a more stringent level, effectively requiring all persons served by the benefit to be at a higher level of need than the statute intends. In § 441.559(b), we further propose to require that the more stringent needs-based criteria for institutions and waivers be part of the State's level of care processes, to ensure that the criteria are uniformly utilized. We would require that these more-stringent needs-based criteria be submitted for comparison with the State plan amendment that establishes the State plan HCBS benefit. We note that needs-based criteria, as defined in § 441.559(a) require an evaluation to determine the individual's support needs. Therefore, the assessment process for institutional levels of care that include needs-based criteria must include an individual evaluation of support needs. We also propose to require that the State's more stringent institutional and waiver needs-based criteria be in effect on or before the effective date of the State plan HCBS benefit. Finally, in § 441.559(b)(2), we propose that if States modify their institutional levels of care in order to satisfy the requirement that the levels of care be more stringent than the needs-based eligibility criteria for the State plan HCBS benefit, individuals receiving institutional and waiver services as of the date that more stringent eligibility criteria for those services become effective, would not be subject to the more stringent criteria. Exemption from the more stringent criteria is indefinite, but ends when the individual is discharged from the facility or waiver, or the individual no longer meets the criteria for the applicable level of care. We note that in long-term care facilities a transfer is not a discharge and would not cause the individual to lose this exemption. States would determine the effect of any subsequent changes to general level of care requirements (unrelated to the more stringent criteria) upon individuals with this exemption. • Adjustment authority In § 441.559(c), we propose to permit States under certain conditions to adjust, without prior approval from the Secretary, the needs-based eligibility criteria and service criteria (if any) established under § 441.559(a), in the event that the State experiences enrollment in excess of the number projected to be served by the HCBS benefit. We propose a retroactive effective date, as approved by the Secretary, for the State plan amendment modifying the needs-based criteria under § 441.559(c)(1). We set forth the following conditions required by the statute. The State must provide for at least 60 days notice to the Secretary, the public, and we would add, each enrollee. Since the effect of adjusted criteria would be to reduce the scope of services, eligibility for services, or eligibility for the entire State plan HCBS benefit, the adjusted criteria would not apply to individuals already enrolled in the State plan HCBS benefit for at least 12 months from inception of such services, and we would add, for the additional length of the required minimum 60 day notification period. If the State also adjusts institutional levels of care, the adjusted institutional levels of care may not be less stringent than the institutional level of care prior to the effective date of the State plan HCBS benefit. In § 441.559(c), we further propose to require explicitly that the adjusted needs-based eligibility criteria for the State plan HCBS benefit must be less stringent than all needs-based institutional level of care criteria in effect at the time of the adjustment. We propose that the notice to the Secretary be submitted as a State plan amendment. In order to implement the adjustment authority without prior approval of the Secretary, the Secretary would approve a State plan amendment adjusting the needs-based HCBS benefit eligibility criteria with a retroactive effective date, as early as 60 days after the State notified each enrollee, the Secretary, and the public, (or whichever is later). Under the provision of section 1915(i)(1)(D)(ii) of the Act, the Secretary will evaluate the State's adjusted criteria for compliance with the provisions of this paragraph and subpart K. We also note that while the State may under this provision implement the adjusted criteria as early as 60 days after notification and before the State plan amendment is retroactively approved, the State is at risk for any actions it takes that are later disapproved. Finally, we would require that the State notify affected individuals of their right to a fair hearing according to 42 CFR part 431, subpart E. • Independent evaluation and determination of eligibility In § 441.559(d), we propose that eligibility for the State plan HCBS benefit be determined by an independent evaluation of each individual, applying the general eligibility requirements in § 441.556 of this subpart, and the needs-based criteria that the State has established under § 441.559(a). Independence of the review requires meeting the conflict of interest standards set forth in § 441.568, where provider qualifications for evaluators are specified. The evaluation must assess an individual's support needs and strengths. We interpret this provision of the statute to indicate that the evaluation process draws conclusions about supports that the individual requires because of age or disability, and supports that the individual does not require because of abilities to perform those functions independently. The evaluation compares those conclusions with the needs-based eligibility criteria for the State plan HCBS benefit to determine eligibility for the benefit. Section 1915(i)(1)(D)(i) of the Act provides that the State may take into account the need for significant assistance to perform ADLs, indicating that the statute does not require that eligibility be dependent upon lack of natural supports. We note that appraisal of whether an individual has medical necessity for, and meets additional needs-based criteria (if any) for specific HCBS offered under the benefit, is part of the independent assessment and plan of care development process. However, this assessment affects eligibility for the benefit in that we propose at § 441.562 that individuals are considered enrolled in the State plan HCBS benefit only if they are assessed to require at least one home and community-based service offered under the State plan benefit in addition to meeting the eligibility and needs-based criteria for the benefit. The evaluation process designed by the State would reflect the nature of the State plan HCBS benefit designed by the State. However, in order to meet the forgoing requirements, all independent evaluations require specific information about each individual's support needs, sufficient to draw the appropriate conclusions. In some cases this information may be well documented and current in the individual's existing records. In other cases, we would require that the evaluator obtain this information by whatever means are appropriate to secure a valid appraisal of the individual's current needs. This requirement could include professional assessment of certain functional abilities. State evaluation procedures that rely solely on review of medical records would not meet these requirements. • Periodic redetermination In § 441.559(e), we propose that individuals receiving the State plan HCBS benefit must be reevaluated at a frequency defined by the State, but not less than every 12 months, to determine whether the individuals continue to meet eligibility requirements. The independent reevaluations must meet the requirements for initial independent evaluations specified in § 441.559(d). Section 441.562 (Independent Assessment) In § 441.562, we propose requirements for independent assessment of need of each individual who has been determined by the independent evaluation to be eligible for the State plan HCBS benefit. The purpose of the assessment is to obtain, in combination with the findings of the independent eligibility evaluation, all the information necessary to establish a plan of care. The assessment is based on the needs of the individual, which we believe precludes assessment protocols that primarily determine diagnoses, or only assess function. Assessment protocols must not assign supports automatically by functional limitation. The independent assessment must determine the specific supports needed to address the individual's unique circumstances and needs. The assessment also applies the State's needs-based criteria for each service (if any). We propose that an individual be considered enrolled in the State plan HCBS benefit only if the assessment finds that the individual needs and meets the needs-based criteria (if any) for, at least one State plan HCBS. This proposed requirement is to provide States with a mechanism to prevent the situation of an individual being eligible for the State plan HCBS benefit but not able to receive any of the services it offers. Such a circumstance would, among other problems, be of no utility to the individual, may make it difficult for the State to meet an assessed need, and would count towards the maximum number of individuals the State could serve, using up a “slot” for no purpose. We make clear that the assessment must include an objective evaluation of the individual's inability to perform two or more activities of daily living

(ADL)as defined in the Internal Revenue Code of 1986, or need for significant assistance to perform ADLs. We interpret the statutory term “objective” to require an accepted method of measuring functioning appropriate to the ADL. We propose to require in § 441.562(a)(2) that the assessment include a face-to-face meeting with the individual (“individual” meaning in this context, if applicable, the individual and the individual's authorized representative). In § 441.562(a)(2)(i), we propose to require that the assessment is performed by an agent that is independent and qualified as defined in § 441.568. The assessment is to be guided by best practice and research on effective strategies that result in improved health and quality of life outcomes. We further propose that the assessment includes consultation, as appropriate, with other responsible parties. The assessment must include an examination of the individual's relevant history, medical records, and care and support needs, including the findings from the independent eligibility evaluation. If self-direction of services is offered by the State and elected by the individual, the independent assessment must include a self-direction appraisal as described in § 441.574. We propose documentation requirements in the assessment to address two specific circumstances. For individuals living in a residence with four or more persons unrelated to the proprietor, that furnishes one or more treatments or services and meets the criteria listed in paragraph (a)(3) of § 441.556, we propose that the assessment must include documentation that the individual is living in a community setting, and not in an institution. For individuals receiving habilitation services, we propose to require documentation that no services are provided under Medicaid that would otherwise be available to the individual, specifically including but not limited to services available to the individual through a program funded under section 110 of the Rehabilitation Act of 1973, or the Individuals with Disabilities Improvement Act of 2004. We believe that these documentation requirements would provide a clear method for States to comply with Federal requirements, focus only on the individuals for whom these circumstances could apply, and would not add significantly to the burden of the assessment. Finally, in § 441.562(b), we propose to require that the independent assessment of need is conducted at least every 12 months and as needed when the individual's needs and circumstances change significantly, in order to revise the plan of care. Section 441.565 (Plan of Care) In § 441.565 we propose to require that based on the independent assessment specified in § 441.562, the State develops (or approves, if the plan is developed by others) a plan of care through a person-centered planning process. Section 1915(i)(1)(G)(iii)(III)(dd) of the Act requires a person-centered approach to establishing a plan of care for an individual (“individual” meaning in this context, if applicable, the individual and the individual's authorized representative) electing to direct his or her own services. We propose to require that person-centered principles guide all plans of care for the State plan HCBS benefit. We propose that the plan of care must be developed jointly with the individual. While we propose several specific requirements for the process of developing a plan of care, we note that the intent of these requirements is to ensure a process with shared authority between the individual and the agency or agent. To achieve this intent, States must affirmatively and creatively work to establish such shared authority. The assessment must include consultation with appropriate persons. Definition of appropriate persons would be determined in each case, and while we include examples, we do not propose any required or excluded category of persons to consult. When the plan of care is finalized between the parties, a written copy is provided to the individual. Also, in § 441.565(a), we propose certain content to be required in the plan of care. The plan of care must identify the specific State plan HCBS to be provided to the individual, that take into account the individual's strengths, preferences, and desired outcomes, as well as support needs arising from the individual's disability. In the planning process, the degree of assistance with ADLS available to the individual outside of the State plan HCBS benefit may be taken into account in planning the scope and frequency of HCBS to be provided. Thus, the plan of care provides for all needed services to the individual while preventing provision of unnecessary services. We propose a single plan of care for both self-directed and non self-directed services. When an individual self-directs some or all of their HCBS, the plan of care includes the information required in § 441.574. We further propose to require that the plan of care be reviewed and revised at least every 12 months, and as needed when the individual's circumstances or needs change significantly. Section 441.568 (Provider Qualifications) In § 441.568, we propose to require that the State provide assurance that necessary safeguards have been taken to protect the health and welfare of the enrollees in State plan HCBS by provision of adequate standards for all types of providers of HCBS. States must define qualifications for providers of HCBS services, and for those persons who conduct independent evaluation of eligibility for State plan HCBS, independent assessment of need, and are involved with developing the plan of care. We propose at § 441.568(b) and

(c)to require minimum qualifications for individuals and agencies who conduct independent evaluation of eligibility for State plan HCBS, independent assessment of need, and are involved with developing the plan of care. We will refer to these individuals and entities involved with determining access to care as “agents” to distinguish this role from providers of services. We believe that these qualifications are important safeguards for individuals enrolled in the State plan HCBS benefit and propose that they be required whether activities of the agents are provided as an administrative activity or whether some of the activities are provided as a Medicaid service. At a minimum, these qualifications include conflict of interest standards, and for providers of assessment and plan of care development, these qualifications must include training in assessment of individuals whose physical or mental condition may trigger a need for home and community-based services and supports, and an ongoing knowledge of current best practices to improve health and quality of life outcomes. The minimum conflict of interest standards we propose to require ensure that the provider is not a relative of the individual or responsible for the individual's finances or health-related decisions. Relatives and decision makers are required to be permitted in the assessment and planning process, as appropriate, but we do not see any necessity or value in family members being responsible for evaluation, assessment, or planning. Our experience with HCBS in waivers indicates that assessment and plan of care development should not be performed by providers of the services prescribed. However, we recognize, as discussed in Section I., that in some circumstances there are acceptable reasons for a single provider of service that performs all of those functions. In this case, the Secretary would require the State Plan to include provisions assuring separation of functions within the provider entity. Section 441.571 (Definition of Individual's Representative) In § 441.571, we propose to define the term “individual's representative” to encompass any party that is authorized to represent the individual for the purpose of making personal or health care decisions, either under State law or under the policies of the State Medicaid agency. We do not propose to regulate the relationship between an individual enrolled in the State plan HCBS benefit and his or her authorized representative, but note that States should have policies to assess for abuse or excessive control and ensure that representatives conform to applicable State requirements. Section 441.574 (Self-Directed Services) We propose in § 441.574 to permit States to offer an election for self-directing HCBS. In § 441.574(a), we would define “self-direction.” Provisions related to self-direction apply to an individual or an individual's representative. In § 441.574(b), we propose that when an individual chooses self-direction, the independent assessment and person-centered planning required under §§ 441.562 and 441.565 would include examination of the support needs of the individual to self-direct the purchase of, or control the receipt of, such services. The evaluation should not reject election to self-direct based solely on the individual's disability or a manifestation of his or her disability. We therefore propose to require that the evaluation for self-direction result in a determination of ability to self-direct both with and without specified supports. We propose regulations containing the specific requirements for self-direction found in section 1915(i)(1)(G)(iii) of the Act. These regulations are consistent with our policy for self-direction under section 1915(c) HCBS waivers. We propose to require in § 441.574(b) that the plan of care indicate the HCBS to be self-directed and the methods by which the individual will plan, direct, or control the services; the role of family or others who will participate in the HCBS; and risk management techniques. Our experience with HCBS waivers indicates that contingency plans are an important protection for the individual, in the absence of an agency that would otherwise be responsible for absent workers or other common problems. Contingency plans are most effective when designed for the unique circumstances of each self-directing individual. We propose that the plan of care describe the process for facilitating voluntary and involuntary transition from self-direction. When the plan of care is finalized between the parties, a written copy is provided to the individual, as required in § 441.565(a). In § 441.574(c) and (d), we define self-direction of services in terms of employer authority and budget authority, as we have with self-directed HCBS in Medicaid section 1915(c) waivers. In § 441.574(c), employer authority is defined as the ability to select, manage, or dismiss providers of the State plan HCBS. We propose that the plan of care must specify the authority to be assumed by the individual and the individual's representative, any parties responsible for functions outside the assumed authority, and the financial management supports to be provided as required in § 441.574(e). In § 441.574(d), we propose to define budget authority as an individualized budget which identifies the dollar value of the services and supports under the control and direction of the individual. We propose that the plan of care must specify the method for calculating the dollar values in the budget, a process for adjusting the budget to reflect changes in assessment and plan of care, a procedure to evaluate expenditures under the budget, and the financial management supports, as required in § 441.574(e), to be provided. We clarify here that while budget authority grants control of expenditures to the individual, it does not include performing the transactions or conveying cash to the individual or representative. In § 441.574(e), we propose to define functions in support of self-direction that the State must offer, based on our experience with self-directed HCBS in section 1915(c) waivers and section 1115 demonstrations. These provisions are required in order to equip individuals for success in managing their services, and to comply with Federal, State, and local requirements, particularly the many tax, labor, and insurance issues that arise when the self-directing individual is the employer of record. Supports for self-direction should provide the technical expertise and business functions that will free individuals to exercise choice and control over their experience of the HCBS provided to them. Section 441.577 (State Plan HCBS Administration: State Responsibilities and Quality Improvement) • State responsibilities. We would require in § 441.577(a)(1)(i) that the State annually provide CMS with the projected number of individuals to be enrolled in the benefit, and the actual number of unduplicated individuals enrolled in the State plan HCBS benefit in the previous year. States may choose to limit the number to be served at any point in time, as provided in § 441.577(a)(1)(ii). If the State so chooses, we propose that it would also provide annually to CMS the maximum number enrolled at one time. In § 441.577(a)(1)(ii) we propose that a State may elect to set a limit on the number of individuals enrolled in the State plan HCBS benefit, either as an annual limit or as limit at any one point in time. The State must establish or adjust the limit by amending the State plan. The State may, but is not required to, establish a waiting list. States must consider many legal requirements and competing demands in establishing waiting list policy, including the Americans with Disabilities Act (ADA). We do not specify waiting list requirements, but propose to require that if a State elects to maintain a waiting list, it must do so with written and publicly published policies to ensure fairness and consistency. The public should have opportunity for notice and comment on this important limitation to access. We propose to require a formally established schedule and procedure for reevaluation and revision to waiting list policy. We also would require assurance that States will adhere to all applicable Federal and State requirements. For example, individuals who may be denied access to services would have all rights required under 42 CFR part 431, subpart E. Because section 1915(i) of the Act does not authorize waiver of comparability requirements, we clarify in § 441.577(a)(1)(iii) that the State may not limit enrollee access to services in the benefit for any reason other than assessed need, including limits based on type of disability or other targeting, or limiting the number of persons receiving particular services. This is an important distinction between the limits States place on the services to be offered when they design the benefit, as opposed to limiting access to the services that are in the benefit for particular enrolled individuals. As discussed in Section I.D.1 above, States have a number of permitted methods to control utilization by placing limits on the overall benefit and particular services offered. We propose that once an individual is found eligible and enrolled in the benefit, access to offered services can only be limited by medical necessity. Medical necessity in the State plan HCBS benefit is determined by the independent assessment and person-centered plan of care. By not limiting access, we mean that an enrollee must receive any or all of the HCBS offered by the benefit, in scope and frequency up to any limits on those services defined in the State plan, to the degree the enrollee is determined to need them. Enrollees should receive no more, and no fewer, services than they are determined to require. We note that one function of the plan of care as proposed at § 441.565(a)(3) is to prevent the provision of unnecessary or inappropriate care. • Administration. We propose in § 441.577(a)(2)(i) an option for presumptive payment. The State may provide for a period of presumptive payment, not to exceed 60 days, for evaluation of eligibility for the State plan HCBS benefit and assessment of need for HCBS. This period of presumptive payment would be available for individuals who have been determined to be Medicaid eligible, and whom the State has reason to believe may be eligible for the State plan HCBS benefit. We propose that FFP would be available for evaluation and assessment as administration of the approved State plan prior to an individual's determination of eligibility for and receipt of other 1915(i) services. If the individual is found not eligible for the State plan HCBS benefit, the State may claim the evaluation and assessment as administration, even though the individual would not be considered to have participated in the benefit for purposes of determining the annual number of individuals served by the benefit. FFP would not be available during this presumptive period for receipt of State plan HCBS. In § 441.577(a)(2)(ii), we propose that a State plan amendment submitted to establish the State plan HCBS benefit must include a reimbursement methodology for each covered service. In some States, reimbursement methods for self-directed services may differ from the same service provided without self-direction. In such cases, the reimbursement methodology for the self-directed services must also be described. In § 441.577(a)(2)(iii), we propose that the State Medicaid agency describe the line of authority for operating the State plan HCBS benefit. The State plan HCBS benefit requires several functions to be performed in addition to the service(s) provided, such as eligibility evaluation, assessment, and developing a plan of care. To the extent that the State Medicaid agency delegates these functions to other entities, we propose that the agency describe the methods by which it will retain oversight and responsibility for those activities, and for the operation and quality improvement of the benefit as a whole. • Quality improvement strategy. We propose in § 441.577(b) the guidelines for quality assurance required in the statute at section 1915(i)(1)(H)(i) of the Act. We propose to require a State to maintain a quality improvement strategy for its State plan HCBS benefit. The State's quality improvement strategy should reflect the nature and scope of the benefit the State will provide. As discussed in section I of this preamble, section 6086(a) of the DRA established section 1915(i) of the Act, the optional State plan HCBS benefit. Section 6086(b), Quality of Care Measures, sets forth requirements for the Secretary to develop through the Agency for Healthcare Research and Quality

(AHRQ)indicators and measures for program performance and quality of care to assess HCBS at the State and national level, and service outcomes, particularly regarding health and welfare of recipients. Likewise, we propose that measures in the State quality improvement strategy consist of indicators for program performance and quality of care as approved and prescribed by the Secretary, and applicable to the nature of the benefit. In § 441.577(b)(2), we propose to require States to have program performance measures, appropriate to the scope of the benefit, designed to assess the State's overall system for providing HCBS. In § 441.577(b)(3), we propose to require States to have quality of care measures as approved or prescribed by the Secretary that may be used to assess individual outcomes of participants in home and community-based services, such as client function indicators and measures of client satisfaction. Outcome measures may be reflective of the design and scope of the benefit and the specific HCBS provided. III. Response to Comments Because of the large number of public comments we normally receive on **Federal Register** documents, we are not able to acknowledge or respond to them individually. We will consider all comments we receive by the date and time specified in the “DATES” section of this preamble, and, when we proceed with a subsequent document, we will respond to the comments in the preamble to that document. IV. Collection of Information Requirements Under the Paperwork Reduction Act of 1995, we are required to provide 60-day notice in the **Federal Register** and solicit public comment before a collection of information requirement is submitted to the Office of Management and Budget

(OMB)for review and approval. In order to fairly evaluate whether an information collection should be approved by OMB, section 3506(c)(2)(A) of the Paperwork Reduction Act of 1995 requires that we solicit comment on the following issues: • The need for the information collection and its usefulness in carrying out the proper functions of our agency. • The accuracy of our estimate of the information collection burden. • The quality, utility, and clarity of the information to be collected. • Recommendations to minimize the information collection burden on the affected public, including automated collection techniques. We are soliciting public comment on each of these issues for the following sections of this document that contain information collection requirements: Section 441.559 Needs-Based Criteria and Evaluation Section 441.559(a) requires a State to establish needs-based criteria for determining an individual's eligibility under the State plan for the HCBS benefit, and may establish needs-based criteria for each specific service. The burden associated with this requirement is the time and effort put forth by the State to establish such criteria. We estimate it would take 1 State 24 hours to meet this requirement. We estimate that on an annual basis, 3 States will submit a State plan amendment to offer the State plan HCBS benefit, and be affected by this requirement; therefore, the total annual burden hours for this requirement is 72 hours. This would be a one-time burden. Section 441.559(c) reads that a State may modify the needs-based criteria established under paragraph

(a)of this section, without prior approval from the Secretary, if the number of individuals enrolled in the State plan HCBS benefit exceeds the projected number submitted annually to CMS. Section 441.559(c)(1) requires the State to provide at least 60 days' notice of the proposed modification to the Secretary, the public, and each individual enrolled in the State plan HCBS benefit. The State notice to the Secretary will be considered an amendment to the State plan. Section 441.559(c)(2) reads that the State may under this provision implement the adjusted criteria as early as 60 days after submitting the State plan amendment and notifying all required parties. The burden associated with the requirements found under 441.559(c) is the time and effort put forth by the State to modify the needs-based criteria and provide notification of the proposed modification to the Secretary. We estimate it would take 1 State 24 hours to make the modifications and provide notification. This would be a one-time burden. The total annual burden of these requirements would vary according to the number of States who choose to modify their needs-based criteria. We do not expect any States to make this modification in the next 3 years. Section 441.559(d) states that eligibility for the State plan HCBS benefit is determined, for individuals who meet the requirements of 441.556(a)(1) through (3), through an independent evaluation of each individual that meets the specified requirements. Section 441.559(d)(5) requires the evaluator to obtain information from existing records, and when documentation is not current and accurate, obtain any additional information necessary to draw a valid conclusion about the individual's support needs. Section 441.559(e) requires at least annual reevaluations. The burden associated with this requirement is the time and effort put forth by the evaluator to obtain information to support their conclusion. We estimate it would take one evaluator 2 hours per participant to obtain information as necessary. The total annual burden of this requirement would vary according to the number of participants in each State who may require and be eligible for home and community-based services under the State plan. Section 441.562 requires the State to provide for an independent assessment of need in order to establish a plan of care. At a minimum, the plan must meet the requirements as discussed under 441.565. Section 441.568 requires the State to define in writing adequate standards for providers of HCBS services and for providers conducting independent evaluation, independent assessment, and plan of care development. While the burden associated with the requirements under §§ 441.562 and 441.568 is subject to the PRA, we believe the burden is exempt as defined in 5 CFR 1320.3(b)(2) because the time, effort, and financial resources necessary to comply with this requirement would be incurred by persons in the normal course of their activities. Section 441.574 Self-Directed Services Section 441.574 reads that a State may choose to offer an election for self-directing HCBS. The burden associated with this requirement is the time and effort put forth by the State to elect for self-directing HCBS. We estimate it would take one State 5 hours to meet this requirement; therefore, if all of the States and territories estimated to apply for State plan HCBS on an annual basis

(3)chose to offer an election for self-directing HCBS the total annual burden would be 15 hours. This would be a one-time burden. Section 441.577 State Plan HCBS Administration: State Responsibilities and Quality Improvement Section 441.577(a)(1)(i) reads that a State will annually provide CMS with the projected number of individuals to be enrolled in the benefit, and the actual number of unduplicated individuals enrolled in State plan HCBS in the previous year. If the State chooses to limit the number to be served at any point in time, as provided in § 441.577(a)(1)(ii), the State will annually provide to CMS the maximum number enrolled at one time. The burden associated with this requirement is the time and effort put forth by the State to annually project the number of individuals who will enroll in State plan HCBS. We estimate it will take one State 2 hours to meet this requirement. The total annual burden of these requirements would vary according to the number of States offering the State plan HCBS benefit. The maximum total annual burden is 112 hours (56 States × 2 hours = 112 hours). Section 441.577(a)(1)(ii)(B) reads that if a State elects to maintain a waiting list for State plan HCBS, the State establishes and adheres to policies and procedures for formation and maintenance of a waiting list that complies with all applicable Federal and State requirements. While this burden associated with this requirement is subject to the PRA, we believe the burden is exempt as defined in 5 CFR 1320.3(b)(2) because the time, effort, and financial resources necessary to comply with this requirement would be incurred by persons in the normal course of their activities. Section 441.577(a)(2)(ii) reads that the State plan amendment to provide State plan HCBS must contain a description of the reimbursement methodology for each covered service. The burden associated with this requirement is the time and effort put forth by the State to describe the reimbursement methodology for each State plan HCBS. We estimate that it will take one State an average of 2 hours to determine the reimbursement methodology for one covered HCBS. This would be a one-time burden. The total annual burden for this requirement would vary according to the number of services that the State chooses to include in the State plan HCBS benefit. Section 441.577(a)(2)(iii) reads that the State plan amendment to provide State plan HCBS must contain a description of the State Medicaid agency line of authority for operating the State plan HCBS benefit, including distribution of functions to other entities. The burden associated with this requirement is the time and effort put forth by the State to describe the State Medicaid agency line of authority. We estimate it will take one State 2 hours to meet this requirement. Since we have estimated that 3 States will annually request State plan HCBS, the total annual burden associated with this requirement is estimated to be 6 hours. This would be a one-time burden. Section 441.577(b)(1) requires States to maintain a quality improvement strategy that includes methods for ongoing measurement of program performance and mechanisms of intervention to assure quality of care, proportionate to the scope of services in the State plan HCBS benefit, the needs-based criteria, and the number of individuals to be served. The burden associated with this requirement is the time and effort put forth by the State to prepare and maintain a quality improvement strategy. We estimate it will take one State 45 hours for the preparation and maintenance of the strategy. The total annual burden of these requirements would vary according to the number of States offering the State plan HCBS benefit. The maximum total annual burden is estimated to be 2,520 hours (56 States × 45 hours = 2,520 hours). We have submitted a copy of this proposed rule to OMB for its review of the information collection requirements described above. These requirements are not effective until they have been approved by OMB. If you comment on these information collection and recordkeeping requirements, please do either of the following: 1. Submit your comments electronically as specified in the ADDRESSES section of this proposed rule; or 2. Mail copies to the address specified in the ADDRESSES section of this proposed rule and to the Office of Information and Regulatory Affairs, Office of Management and Budget, Room 10235, New Executive Office Building, Washington, DC 20503, Attn: Carolyn Lovett, CMS Desk Officer, CMS-2249-P, *carolyn_lovett@omb.eop.gov* . Fax

(202)395-6974. V. Regulatory Impact Analysis [If you choose to comment on issues in this section, please indicate the caption “Regulatory Impact” at the beginning of your comments.] A. Overall Impact We have examined the impacts of this rule as required by Executive Order 12866 (September 1993, Regulatory Planning and Review), the Regulatory Flexibility Act

(RFA)(September 19, 1980, Pub. L. 96-354), section 1102(b) of the Social Security Act, the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4), Executive Order 13132 on Federalism, and the Congressional Review Act (5 U.S.C. 804(2)). Executive Order 12866, as amended, directs agencies to identify the specific market failure or other problem that warrants agency action, assess all costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). A regulatory impact analysis

(RIA)must be prepared for major rules with economically significant effects ($100 million or more in any 1 year). We estimate that, adjusted for a phase-in period during which States gradually elect to offer the State plan HCBS benefit, in fiscal year 2009 the estimated cost would be $114 million. The estimated 5-year (FY 2007 through FY 2011) cost of this proposed rule would be $563 million. Therefore, we estimate that this rulemaking is “economically significant” as measured by the $100 million standard, and hence also a major rule under the Congressional Review Act. Accordingly, we have prepared a Regulatory Impact Analysis. The RFA requires agencies to analyze options for regulatory relief of small businesses if a rule would have a significant impact on a substantial number of small businesses or small entities. For purposes of the RFA, small entities include small businesses, nonprofit organizations, and small governmental jurisdictions. Most hospitals and most other providers and suppliers are small entities, either by nonprofit status or by having revenues of $6.5 million to $31.5 million in any 1 year. Individuals and States are not included in the definition of a small entity. This rule imposes no requirements or costs on providers or suppliers for their existing activities. The rule implements a new optional State plan benefit established in section 1915(i) of the Act. Small entities that meet provider qualifications and choose to provide HCBS under the State plan would have a business opportunity under this proposed rule. The Secretary certifies that this proposed rule would not have a significant economic impact on a substantial number of small entities. In addition, section 1102(b) of the Act requires us to prepare a regulatory impact analysis if a rule may have a significant impact on the operations of a substantial number of small rural hospitals. This analysis must conform to the provisions of section 603 of the RFA. For purposes of section 1102(b) of the Act, we define a small rural hospital as a hospital that is located outside of a Core-Based Statistical Area and has fewer than 100 beds. We have determined that this proposed rule would not have a significant effect on the operations of a substantial number of small rural hospitals because there would be no change in the administration of the provisions related to small rural hospitals. Therefore, the Secretary has determined that this proposed rule would not have a significant impact on the operations of a substantial number of small rural hospitals. Section 202 of the Unfunded Mandates Reform Act of 1995 also requires that agencies assess anticipated costs and benefits before issuing any rule whose mandates require spending in any 1 year of $100 million in 1995 dollars, updated annually for inflation. That threshold level is currently approximately $127 million. This proposed rule does not mandate any spending by State, local, or tribal governments or the private sector. Executive Order 13132 establishes certain requirements that an agency must meet when it promulgates a proposed rule (and subsequent final rule) that imposes substantial direct requirement costs on State and local governments, preempts State law, or otherwise has Federalism implications. Since this regulation does not impose any costs on State or local governments, the requirements of E.O. 13132 are not applicable. B. Anticipated Effects 1. Effects on Medicaid Beneficiaries The Medicaid beneficiaries who receive the State plan HCBS benefit will be substantial and beneficial. The State plan HCBS benefit will afford business opportunity for providers of the HCBS. 2. Effects on Other Providers We do not anticipate any effects on other providers. Section 1915(i) of the Act delinks the HCBS from institutional level of care, and requires that eligibility criteria for the benefit include a threshold of need less than that for institutional level of care, so that it is unlikely that large numbers of participants in the State plan HCBS benefit will be discharged from the facilities of Medicaid institutional providers. There may be some redistribution of services among providers of existing non-institutional Medicaid services into State plan HCBS, but providers who meet qualifications for the State plan HCBS benefit have the option to enroll as providers of HCBS. 3. Effects on the Medicare and Medicaid Programs This rule has no effect on the Medicare program. State Medicaid programs will make use of the optional flexibility afforded by the State plan HCBS benefit to provide needed long-term care home and community based services to eligible elderly or disabled individuals the State has not had means to serve previously, or to provide services to these individuals more efficiently and effectively. The State plan HCBS benefit will afford States a new means to comply with requirements of the Olmstead decision, to serve individuals in the least restrictive setting. The cost of these services will be dependent upon the number of States electing to offer the benefit, the scope of the benefits States design, and the degree to which the benefits replace existing Medicaid services. States have more control over expenditures for this benefit than over other State plan services. For States that choose to offer these services, States may specify limits to the scope of HCBS, cap the number of recipients, and have the option to tighten eligibility requirements if costs escalate too rapidly. Use of the State plan HCBS benefit is unlikely to result in increased access to other Medicaid services, because eligibility for the benefit is limited to individuals who are already eligible for Medicaid, and whose income is less than 150 percent of the FPL. Moreover, costs of the State plan HCBS benefit may be offset by lowered potential Federal and State costs of more expensive institutional care. Additionally, the requirement for a written individualized plan of care may discourage inappropriate utilization of costly services such as emergency room care for routine procedures. After taking the above factors into account, the Federal and State cost estimates are shown in the table below. Medicaid Cost Estimate [In millions] FY08 FY09 FY10 FY11 FY12 5-year total Federal Cost $68 $114 $169 $189 $210 $750 State Cost 51 86 127 142 159 565 C. Alternatives Considered This proposed rule incorporates provisions of new section 1915(i) of the Act into Federal regulations, providing for Medicaid coverage of a new optional State plan benefit to furnish home and community-based State plan services. The statute provides States with an option under which to draw Federal matching funds; it does not impose any requirements or costs on existing State programs, on providers, or upon beneficiaries. States retain their existing authority to offer HCBS through the existing authority granted under section 1915(c) waivers and under section 1115 waivers. States can also continue to offer, and individuals can choose to receive, some but not all components of HCBS allowable under section 1915(i) through existing State plan services such as personal care or targeted case management services. Therefore, this rule is entirely optional for States. Alternatives to this rule as proposed include: 1. Not Publishing a Rule Section 1915(i) of the Act is effective January 1, 2007. States may propose State plan amendments to establish the State plan HCBS benefit with or without this proposed rule. We considered whether this statute could be self-implementing and require no regulation. Section 1915(i) of the Act is complex; many States have contacted us for technical assistance in the absence of published guidance, and some have indicated they are waiting to submit an amendment until there is a rule. We further considered whether a State Medicaid Director letter would provide sufficient guidance regarding CMS review criteria for approval of a State plan amendment. We conclude that section 1915(i) of the Act establishes significant new features in the Medicaid program, and that States and the public should be afforded the published invitation for comment provided by this proposed rule. Finally, State legislation and judicial decisions are not alternatives to a Federal rule in this case since section 1915(i) of the Act provides Federal benefits. 2. Modification of Existing Rules We considered modifying existing regulations at 42 CFR 440.180, part 441 subpart G, Home And Community-Based Services: Waiver Requirements, which implement the section 1915(c) HCBS waivers, to include the authority to offer the State plan HCBS benefit. This would have the advantage of not duplicating definitions of HCBS and certain requirements common to both types of HCBS. However, we believe that any such efficiency would be outweighed by the substantial discussion that would be required of the differences between the Secretary's discretion to approve waivers under section 1915(c) of the Act, and authority to offer HCBS under the State plan at section 1915(i) of the Act. While Congress clearly considered the experience to date with HCBS under waivers when constructing section 1915(i) of the Act, it did not choose to modify section 1915(c) of the Act, but chose instead to create a new authority at section 1915(i) of the Act. We, therefore, chose to propose a separate rule. 3. Alternative Methods for Delivering HCBS CMS considered using existing operational methods for delivering State plan HCBS, but the unique and specific requirements in section 1915(i) of the Act are substantially different from currently-existing authorities, and ultimately required stand-alone implementation tailored to the particular characteristics of the State plan HCBS option as described in statute. CMS considered whether section 1915(i) of the Act permits States to:

(1)Disregard comparability,

(2)define HCBS other than the services specifically listed in statute, as allowable under section 1915(c),

(3)offer HCBS to Medicaid beneficiaries without a 150 percent of FPL income test unique to this benefit, or

(4)provide State plan HCBS in place of mandatory institutional benefits for some individuals. However, CMS determined that none of these options is allowable under section 1915(i) of the Act. D. Accounting Statement and Table As required by OMB Circular A-4 (available at *http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf* ), in the table below, we have prepared an accounting statement showing the classification of the expenditures associated with the provisions of this proposed rule. This table provides our best estimate of the proposed increase in Federal Medicaid outlays resulting from offering States the option to provide the State plan HCBS benefit established in section 1915(i) of the Act and implemented by CMS-2249-P (Medicaid program; Home and Community-Based State Plan Services). Table: Accounting Statement: Classification of Estimated Expenditures, From FY 2008 to FY 2012 [In millions] — — — Category Transfers Annualized Monetized Transfers 3% Units Discount Rate $147.9 7% Units Discount Rate $145.1 From Whom To Whom? Federal Government to Providers Other Annualized Monetized Transfers 3% Units Discount Rate $111.4 7% Units Discount Rate $109.3 From Whom To Whom? State Governments to Providers E. Conclusion We anticipate that States will make widely varying use of the section 1915(i) State plan HCBS benefit to provide needed long-term care services for Medicaid beneficiaries. These services will be provided in the home or alternative living arrangements in the community, which is of benefit to the beneficiary and is less costly than institutional care. Requirements for independent evaluation and assessment, individualized care planning, and requirements for a quality improvement program will assure efficient and effective use of Medicaid expenditures for these services. For the reasons stated above, we are not preparing analyses for either the RFA or section 1102(b) of the Act because we have determined, and the Secretary certifies, that this proposed rule will not have a significant economic impact on a substantial number of small entities or a significant impact on the operations of a substantial number of small rural hospitals. In accordance with the provisions of Executive Order 12866, this regulation was reviewed by the Office of Management and Budget. List of Subjects 42 CFR Part 431 Grant programs—health, Health facilities, Medicaid, Privacy, Reporting and recordkeeping requirements. 42 CFR Part 440 Grant programs—health, Medicaid. 42 CFR Part 441 Family planning, Grant programs—health, Infants and children, Medicaid, Penalties, Prescription drugs, Reporting and recordkeeping requirements. For the reasons set forth in the preamble, the Centers for Medicare & Medicaid Services proposes to amend 42 CFR chapter IV as set forth below: PART 431—STATE ORGANIZATION AND GENERAL ADMINISTRATION 1. The authority citation for part 431 continues to read as follows: Authority: Sec. 1102 of the Social Security Act (42 U.S.C. 1302). Subpart B—General Administrative Requirements 2. Section 431.40 is amended by revising paragraph (a)(7) to read as follows: § 431.40 Basis and scope.

(a)* * *

(7)Exceptions to, and waiver of, State plan requirements—sections 1915(a) through (e), and

(i)of the Act, and section 1916(a)(3) and (b)(3) of the Act. 3. Section 431.50 is amended by— A. Redesignating paragraph (c)(2) as paragraph (c)(3). B. Adding a new paragraph (c)(2). The revisions read as follows: § 431.50 Statewide operation.

(c)* * *

(2)Home and community-based services for the elderly and disabled under sections 1915(c), (d), and

(i)of the Act; and PART 440—SERVICES: GENERAL PROVISIONS 4. The authority citation for part 440 continues to read as follows: Authority: Sec. 1102 of the Social Security Act (42 U.S.C. 1302). 5. Amend § 440.1 by adding the new statutory basis in numerical order. The addition reads as follows: § 440.1 Basis and purpose. 1915(i) Home and community-based services furnished under a State plan to elderly and disabled individuals under the provisions of part 441, subpart K. 6. Section 440.180 is amended by revising the heading to read as follows: § 440.180 Home and community-based waiver services. 7. A new § 440.182 is added to read as follows: § 440.182 State plan home and community-based services.

(a)*Definition. State plan home and community-based services benefit* means the services listed in paragraph

(b)of this section when provided under an amendment to the State's Medicaid plan under the provisions of part 441, subpart K of this chapter.

(b)*Services.* The State plan home and community-based services

(HCBS)benefit provided by the State may consist of any or all of the following services as they are described by the State and included in the State's plan for medical assistance approved by the Secretary:

(1)Case management services.

(2)Homemaker services.

(3)Home health aide services.

(4)Personal care services.

(5)Adult day health services.

(6)Habilitation services, which include expanded habilitation services as specified in § 440.180(c).

(7)Respite care services.

(8)Subject to the conditions in § 440.180, for individuals with chronic mental illness:

(i)Day treatment or other partial hospitalization services;

(ii)Psychosocial rehabilitation services;

(iii)Clinic services (whether or not furnished in a facility.

(c)*Exclusions.* State plan HCBS do not include either of the following:

(1)Other services. The other services that the Secretary has the authority to approve under § 440.180 for a home and community-based services

(HCBS)waiver;

(2)*Room and board.* For purposes of this provision, “board” means 3 meals a day or any other full nutritional regimen. “Room” means expenses for shelter, including all property-related costs, furnishings, maintenance, utilities, and related administrative services. FFP is not available for the cost of room and board in State plan HCBS. The following service costs are not considered room or board:

(i)The cost of food and housing in respite care services provided in a facility approved by the State that is not a private residence.

(ii)Meals provided as part of a program of adult day health services as long as the meals provided do not constitute a “full” nutritional regimen.

(iii)A portion of the housing expense and food that may be reasonably attributed to an unrelated caregiver providing State plan HCBS who is residing in the same household with the recipient, but not if the recipient is living in the home of the caregiver or in a residence that is owned or leased by the caregiver. PART 441—SERVICES: REQUIREMENTS AND LIMITS APPLICABLE TO SPECIFIC SERVICES 8. The authority citation for part 441 continues to read as follows: Authority: Sec. 1102 of the Social Security Act (42 U.S.C. 1302). 9. A new subpart K, consisting of § 441.550 through § 441.577, is added to part 441 to read as follows: Subpart—K State Plan Home and Community-Based Services for Elderly and Disabled Individuals Sec. 441.550 Basis and purpose. 441.553 State plan requirements. 441.556 Eligibility for home and community-based services under section 1915(i)(1) of the Act. 441.559 Needs-based criteria and evaluation. 441.562 Independent assessment. 441.565 Plan of care. 441.568 Provider qualifications. 441.571 Definition of individual's representative. 441.574 Self-directed services. 441.577 State plan HCBS administration: State responsibilities and quality improvement. Subpart K—State Plan Home and Community-Based Services for Elderly and Disabled Individuals § 441.550 Basis and purpose. Section 1915(i) of the Act permits States to offer one or more home and community-based services

(HCBS)to qualified elderly and disabled individuals under their State Medicaid plans. Those services are listed in § 440.182 of this chapter, and are described by the State, including any limitations of the services. This optional benefit is known as the State plan HCBS benefit. This subpart describes what a State Medicaid plan must provide, and defines State responsibilities. § 441.553 State plan requirements. A State plan that includes home and community-based services for elderly and disabled individuals must meet the requirements of this subpart. § 441.556 Eligibility for home and community-based services under section 1915(i)(1) of the Act.

(a)*Eligibility.* To be eligible for State plan HCBS under section 1915(i) of the Act, an individual must meet the following requirements:

(1)Be eligible for Medicaid under an eligibility group covered under the State's Medicaid plan.

(2)Have income that does not exceed 150 percent of the Federal Poverty Level (FPL). In determining whether the 150 percent of FPL requirement is met, the rules for determining income eligibility for the individual's eligibility group under the State's Medicaid plan, including any more liberal income disregards used by the State for that group under section 1902(r)(2) of the Act, apply.

(3)Reside in the home or community, not in an institution, in accordance with the following:

(i)According to standards for community living facilities, as prescribed by the Secretary.

(ii)If the individual living in a residence with four or more persons unrelated to the proprietor, which furnishes one or more treatments or services, the independent assessment must include documentation that the individual is living in a community setting, and not in an institution.

(4)Meet needs-based criteria for eligibility for the State plan HCBS benefit, as required in § 441.554(d).

(5)Be assessed to require at least one home and community-based service, as required in § 441.562(a)(vi).

(b)*State options.* The State may elect in the State plan amendment approved under this subpart not to apply the following requirements:

(i)Section 1902(a)(10)(C)(i)(III) of the Act, pertaining to income and resource eligibility rules for the medically needy living in the community, but only for the purposes of providing State plan HCBS.

(ii)Section 1902(a)(1) of the Act, pertaining to statewide application of Medicaid, but only for the purposes of providing State plan HCBS. § 441.559 Needs-based criteria and evaluation.

(a)*Needs-based criteria.* The State must establish needs-based criteria for determining an individual's eligibility under the State plan for the HCBS benefit, and may establish needs-based criteria for each specific service.

(1)Needs-based criteria are factors used to determine an individual's requirements for support. The criteria are not characteristics that describe the individual or the individual's condition. A diagnosis is not a sufficient factor on which to base a determination of need. A criterion can be considered needs-based if it is a factor that can only be ascertained for a given person through an individualized evaluation of need.

(2)Needs-based criteria defined by the State may include:

(i)Need for total support to perform two or more activities of daily living

(ADLs)(as defined in section 7702B(c)(2)(B) of the Internal Revenue Code of 1986).

(ii)Need for significant assistance to perform ADLs.

(iii)Other risk factors as the State determines to be appropriate and describes in the State Medicaid plan.

(b)*More stringent institutional and waiver needs-based criteria.* The State plan HCBS benefit is available only if the State has in effect needs-based criteria (as defined in paragraph (a)(1) of this section), for receipt of services in nursing facilities as defined in section 1919(a) of the Act, intermediate care facilities for the mentally retarded as defined in § 440.150 of this chapter, and hospitals as defined in § 440.10 of this chapter under the State plan and for which the State has established long-term level of care criteria, or waivers offering HCBS, and these needs-based criteria are more stringent than the needs-based criteria for the State plan HCBS benefit. If the State defines needs-based criteria for individual State plan home and community-based services, the needs-based institutional eligibility criteria must be more stringent than the combined effect of needs-based State plan HCBS benefit eligibility criteria and individual service criteria.

(1)These more stringent criteria must meet the following requirements:

(i)Be included in the level of care determination process for each institutional service and waiver.

(ii)Be submitted for inspection by CMS with the State plan amendment that establishes the State Plan HCBS benefit.

(iii)Be in effect on or before the effective date of the State plan HCBS benefit.

(2)In the event that the State modifies institutional level of care criteria to meet the requirements under paragraph

(b)of this section that such criteria be more stringent than the State plan HCBS needs-based eligibility criteria, individuals receiving Medicaid in an institution or waiver HCBS, as of the effective date of the State plan amendment, will continue to be eligible for the institutional services or waiver HCBS under the level of care criteria previously in effect. Such individuals will not be subject to the more stringent modified institutional criteria, until such time as the individual is discharged from the institution or waiver, or no longer requires that level of care.

(c)*Adjustment authority.* The State may modify the needs-based criteria established under paragraph

(a)of this section, without prior approval from the Secretary, if the number of individuals enrolled in the State plan HCBS benefit exceeds the projected number submitted annually to CMS. The Secretary will approve a retroactive effective date for the State plan amendment modifying the criteria, as early as the day following the notification period required under paragraph (c)(1) of this section, if all of the following conditions are met:

(1)The State provides at least 60 days notice of the proposed modification to the Secretary, the public, and each individual enrolled in the State plan HCBS benefit.

(2)The State notice to the Secretary is submitted as an amendment to the State plan.

(3)The adjusted needs-based eligibility criteria (in combination with service-specific needs-based criteria, if any) for the State plan HCBS benefit are less stringent than all needs-based institutional and waiver level of care criteria in effect after the adjustment.

(4)Individuals who were found eligible for the State plan HCBS benefit before modification of the needs-based criteria under this adjustment authority must remain eligible for the HCBS benefit and specific services on the basis of the unmodified criteria, for at least 12 months, beginning on the date the individual first received medical assistance for such services.

(5)Individuals continue to receive HCBS under the unmodified criteria during the not less than 60-day notification period, irrespective of the date the individual first received medical assistance for such services.

(6)Any changes in service due to the modification of needs-based criteria under this adjustment authority are treated as actions as defined in § 431.201 and are subject to the requirements of part 431 subpart E of this chapter.

(7)In the event that the State modifies institutional level of care criteria to meet the requirements under paragraph

(b)of this section that such criteria be more stringent than the State plan HCBS needs-based eligibility criteria, the State may adjust the modified institutional level of care criteria under this adjustment authority. The adjusted institutional level of care criteria must be at least as stringent as those in effect before they were modified to meet the requirements in paragraph

(b)of this section.

(d)*Independent evaluation and determination of eligibility.* Eligibility for the State plan HCBS benefit must be determined through an independent evaluation of each individual according to the requirements of § 441.556(a)(1) through (4). The independent evaluation complies with the following requirements:

(1)Is performed by an agent that is independent and qualified as defined in § 441.568 of this section.

(2)Applies the needs-based eligibility criteria that the State has established under paragraph

(a)of this section, and the general eligibility requirements under § 441.556(a)(1) through (3).

(3)If applicable, includes the individual's authorized representative.

(4)Assesses the individual's strengths as well as support needs.

(5)Uses only current and accurate information from existing records, and obtains any additional information necessary to draw valid conclusions about the individual's support needs.

(6)Evaluations finding that an individual is not eligible for the State plan HCBS benefit are treated as actions defined in § 431.201 and are subject to the requirements of part 431 subpart E of this chapter.

(e)*Periodic redetermination.* Independent reevaluations of each individual receiving the State plan HCBS benefit must be performed at least every 12 months, to determine whether the individual continues to meet eligibility requirements. Redeterminations must meet the requirements of paragraph

(d)of this section. § 441.562 Independent assessment.

(a)For each individual determined to be eligible for the State plan HCBS benefit, the State must provide for an independent assessment of need in order to establish a plan of care. The independent assessment must include the following:

(1)An objective evaluation of the individual's inability to perform two or more activities of daily living

(ADLs)(as defined in section 7702(c)(2)(B) of the Internal Revenue Code of 1986) or need for significant assistance to perform ADLs.

(2)A face-to-face assessment of the individual. The face-to-face assessment must meet the following requirements:

(i)The assessment must be performed by an agent that is independent and qualified as defined in § 441.568 of this section.

(ii)If applicable, the assessment must include the individual's authorized representative.

(iii)The assessment must be conducted in consultation with the individual, the individual's spouse, family, guardian, appropriate treating and consulting health and support professionals caring for the individual, support staff, and other responsible parties.

(iv)The assessment must include an examination of the individual's relevant history, medical records (including the independent evaluation of eligibility), physical and mental health care and support needs and all information needed to develop the plan of care as required in § 441.565.

(v)The assessment must be guided by best practice and research on effective strategies that result in improved health and quality of life outcomes.

(vi)The assessment must apply the State's needs-based criteria for each service (if any) that the individual may require. Individuals are considered enrolled in the State plan HCBS benefit only if they meet the eligibility and needs-based criteria for the benefit, and are also assessed to require at least one home and community-based service offered under the State plan for medical assistance.

(vii)If the State offers individuals (including, if applicable, the individual's authorized representative) the option to self-direct the purchase of, or control the receipt of, a home and community-based State plan service or services, the assessment must include an evaluation of the support needs of the individual and the ability of the individual (with and without supports) to self-direct the purchase of, or control the receipt of, these services if the individual so elects.

(viii)For individuals living in a residence with four or more persons unrelated to the proprietor, that furnishes one or more treatments or services, the assessment must include documentation of whether the individual resides in the community, according to § 441.556(a)(3).

(ix)For individuals receiving habilitation services, documentation that no Medicaid services are provided which would otherwise be available to the individual, specifically including but not limited to services available to the individual through a program funded under section 110 of the Rehabilitation Act of 1973, or the Individuals with Disabilities Improvement Act of 2004.

(b)The independent assessment of need must be conducted at least every 12 months and as needed when the individual's support needs or circumstances change significantly, in order to revise the plan of care. § 1.565 Plan of care.

(a)*Plan of care.* Based on the independent assessment required in § 441.562, the State must develop (or approve, if the plan is developed by others) a written plan of care jointly with the individual (including, for purposes of this paragraph, the individual and the individual's authorized representative if applicable). The person-centered planning process must identify the individual's physical and mental health support needs, strengths and preferences, and desired outcomes. The plan must be developed in consultation with the individual's health care or support professionals, or other appropriate persons, as determined by the State, and where appropriate, with the individual's family, spouse, caregiver, guardian, or representative. When the plan of care is finalized between the parties, a written copy is provided to the individual. At a minimum, the plan must determine HCBS to be provided that meet the following requirements:

(1)Take into account the extent of, and need for, any family or other supports for the individual.

(2)Be consistent with the individual's strengths and support needs arising from the individual's physical, sensory, or intellectual disability.

(3)Prevent the provision of unnecessary or inappropriate care, and provide the HCBS that the individual is assessed to require.

(4)Include those services, the purchase or control of which the individual elects to self-direct, meeting the requirements of § 441.574(b) through (d).

(b)*Reassessment.* The plan of care must be reviewed and revised upon independent reassessment, as required in § 441.562, at least every 12 months and when the individual's circumstances or needs change significantly.

(c)*Shared authority.* The plan of care must afford the individual the opportunity, with information and supports, for active participation and shared authority in developing the plan of care. § 441.568 Provider qualifications.

(a)The State must provide assurances that necessary safeguards have been taken to protect the health and welfare of enrollees in State plan HCBS, and must define in writing adequate standards for providers (both agencies and individuals) of HCBS services and for agents conducting independent evaluation, independent assessment, and plan of care development.

(b)The State must define conflict of interest standards that ensure the independence of individual and agency agents who conduct (whether as a service or an administrative activity) independent evaluation of eligibility for State plan HCBS, independent assessment of need, or are involved in developing the plan of care. The conflict of interest standards apply to all individuals and entities, public or private. At a minimum, these agents must not be any of the following:

(1)Related by blood or marriage to the individual, or to any paid caregiver of the individual.

(2)Financially responsible for the individual.

(3)Empowered to make financial or health-related decisions on behalf of the individual.

(4)Providers of State plan HCBS for the individual, or those who have an interest in or are employed by a provider of State plan HCBS for the individual, except when the only willing and qualified agent to perform independent assessments and develop plans of care in a geographic area also provides HCBS, and the State devises conflict of interest protections including separation of agent and provider functions within provider entities, which are described in the State plan for medical assistance and approved by the Secretary.

(c)Qualifications for agents performing independent assessments and plans of care must include training in assessment of individuals whose physical or mental conditions trigger a potential need for home and community-based services and supports, and current knowledge of best practices to improve health and quality of life outcomes. § 441.571 Definition of individual's representative. In this subpart, the term *individual's representative* means, with respect to an individual being evaluated for, assessed regarding, or receiving State plan HCBS, the following:

(a)The individual's legal guardian or other person who is authorized under State law to represent the individual for the purpose of making decisions related to the person's care or well-being.

(b)Any other person who is authorized by policy of the State Medicaid Agency to represent the individual including but not limited to a parent, a family member, or an advocate for the individual. When the State authorizes representatives pursuant to this paragraph, the State must have policies describing the process for appointment; the extent of decision-making authorized; and safeguards to ensure that the representative functions in the best interests of the participant. § 441.574 Self-directed services.

(a)*State option.* The State may choose to offer an election for self-directing HCBS. The term “self-directed” means, with respect to State plan HCBS listed in § 440.182 of this chapter, services that are planned and purchased under the direction and control of the individual, including the amount, duration, scope, provider, and location of the HCBS. For purposes of this paragraph, *individual* means the individual and, if applicable, the individual's representative as defined in § 441.571.

(b)*Plan of care requirement.* Based on the independent assessment required in § 441.562, the State develops (or approves, if the plan is developed by others) a plan of care jointly with the individual as required in § 441.565. If the individual chooses to direct some or all HCBS, the plan of care must meet the following requirements:

(1)Be developed through a person-centered process that is directed by the individual, builds upon the individual's ability (with and without support) to engage in activities that promote community life, respects individual preferences, choices, strengths, and involves families, friends, and professionals as desired or required by the individual.

(2)Specify the State plan HCBS that the individual will be responsible for directing.

(3)Identify the methods by which the individual will plan, direct or control services, including whether the individual will exercise authority over the employment of service providers or authority over expenditures from the individualized budget.

(4)Specify the role of family members and others whose participation is sought by the individual with respect to the State plan HCBS.

(5)Include appropriate risk management techniques, including contingency plans, that recognize the roles and sharing of responsibilities in obtaining services in a self-directed manner and assure the appropriateness of this plan based upon the resources and support needs of the individual.

(6)Describe the process for facilitating transition from self-direction and any circumstances under which transition out of self-direction is involuntary.

(c)*Employer authority.* If the plan of care includes authority to select, manage, or dismiss providers of the State plan HCBS, the plan must meet the following requirements:

(1)Specify the authority to be assumed by the individual, any limits to the authority, and specify parties responsible for functions outside the authority to be assumed.

(2)Specify the financial management supports, as required in paragraph

(e)of this section, to be provided.

(d)*Budget authority.* If the plan of care includes an individualized budget (which identifies the dollar value of the services and supports under the control and direction of the individual), the plan must meet the following requirements:

(1)Describe the method for calculating the dollar values in the budget, based on reliable costs and service utilization.

(2)Define a process for making adjustments in dollar values to reflect changes in an individual's assessment and plan of care.

(3)Provide a procedure to evaluate expenditures under the budget.

(4)Specify the financial management supports, as required in paragraph

(e)of this section, to be provided.

(5)Not result in payment for medical assistance to the individual.

(e)*Functions in support of self-direction.* When the State elects to offer self-directed State plan HCBS, it must also offer the following supports to individuals receiving the services and their representatives:

(1)Information and assistance consistent with sound principles and practice of self-direction.

(2)Financial management supports to meet the following requirements:

(i)Manage Federal, State, and local employment tax, labor, worker's compensation, insurance, and other requirements that apply when the individual functions as the employer of service providers.

(ii)Function as employer of record when the individual elects to exercise supervisory responsibility without employment responsibility.

(iii)Make financial transactions on behalf of the individual when the individual has personal budget authority.

(iv)Maintain separate accounts for each individual's budget and provide periodic reports of expenditures against budget in a manner understandable to the individual. § 441.577 State plan HCBS administration: State responsibilities and quality improvement.

(a)*State plan HCBS administration* —(1) *State responsibilities.* The State must carry out the following responsibilities in administration of its State plan HCBS:

(i)*Number served.* The State will annually provide CMS with the projected number of individuals to be enrolled in the benefit and the actual number of unduplicated individuals enrolled in State plan HCBS in the previous year. If the State chooses to limit the number to be served at any point in time, as provided in § 441.577(a)(1)(ii), the State will annually provide to CMS the maximum number enrolled at one time.

(ii)*Optional limit to number served.* If the State chooses to set a limit for the maximum number of individuals to be enrolled in the State plan HCBS benefit (either annually or at any point in time), the following conditions must be met:

(A)The maximum number of individuals to be enrolled in the benefit is established and adjusted by a State plan amendment.

(B)If the State elects to maintain a waiting list for State plan HCBS, the State establishes and adheres to policies and procedures for formation and maintenance of a waiting list that complies with all applicable Federal and State requirements. Waiting list criteria and a formally established schedule and procedure for reevaluation and revision must be made public.

(iii)*Access to services.* The State must grant access to all State plan HCBS assessed to be needed, to individuals who have been determined to be eligible for the State plan HCBS benefit. The State may not limit access to one or more State plan HCBS according to type of disability or other characteristic, or limit the number of persons served by particular services. The State must not restrict the number of State plan HCBS that enrolled individuals may receive, or the scope and frequency of the HCBS (up to the approved service limitations, if any,) for reasons other than medical necessity as determined by the plan of care according to § 441.565.

(2)*Administration* —(i) *Option for presumptive payment.*

(A)The State may provide for a period of presumptive payment, not to exceed 60 days, for Medicaid eligible individuals the State has reason to believe may be eligible for the State plan HCBS benefit. FFP is available as administration of the approved State plan for evaluation of eligibility for the State plan HCBS benefit under § 441.559(d) and assessment of need for specific HCBS under § 441.562(a), prior to an individual's receipt of State plan HCBS services or determination of ineligibility for the benefit.

(B)If an individual the State has reason to believe may be eligible for the State plan HCBS benefit is evaluated and assessed under the presumptive payment option and found not to be eligible for the benefit, FFP as administration of the approved State plan will be available for the evaluation and assessment. The individual so determined will not be considered to have enrolled in the State plan HCBS benefit for purposes of determining the annual number of participants in the benefit.

(ii)*Reimbursement methodology.* The State plan amendment to provide State plan HCBS must contain a description of the reimbursement methodology for each covered service. To the extent that the reimbursement methodologies for any self-directed services differ from those descriptions, the method for setting reimbursement methodology for the self-directed services must also be described.

(iii)*Operation.* The State plan amendment to provide State plan HCBS must contain a description of the State Medicaid agency line of authority for operating the State plan HCBS benefit, including distribution of functions to other entities.

(b)*Quality improvement strategy: Program performance and quality of care* —(1) *Quality improvement strategy.* States will maintain an HCBS quality improvement strategy that includes methods for ongoing measurement of program performance, quality of care, and mechanisms for remediation and improvement proportionate to the scope of services in the State plan HCBS benefit and the number of individuals to be served.

(2)*Program performance measures.* The States' quality improvement strategy must be designed to measure and provide evidence of program performance. Program performance measures must be made available to CMS upon request and include indicators approved or prescribed by the Secretary.

(3)*Quality of care measures.* The State's quality improvement strategy must be designed to measure outcomes associated with the receipt of home and community-based services, particularly with respect to the health and welfare of the recipients of these services. Quality of care measures must be made available to CMS upon request and include indicators approved or prescribed by the Secretary. (Catalog of Federal Domestic Assistance Program, No. 93.778, Medical Assistance Program.) Dated: October 31, 2007. Kerry Weems, Acting Administrator, Centers for Medicare & Medicaid Services. Approved: December 20, 2007. Michael O. Leavitt, Secretary. **Editorial Note:** This document was received at the Office of the Federal Register on March 27, 2008. [FR Doc. 08-1084 Filed 3-28-08; 11:11 am]

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