Notices. Notice

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BILLING CODE 4810-70-P DEPARTMENT OF VETERANS AFFAIRS [OMB Control No. 2900-0171] Agency Information Collection (Application and Enrollment Certification for Individualized Tutorial Assistance) Activities Under OMB Review AGENCY: Veterans Benefits Administration, Department of Veterans Affairs. ACTION: Notice. SUMMARY: In compliance with the Paperwork Reduction Act

(PRA)of 1995 (44 U.S.C. 3501-3521), this notice announces that the Veterans Benefits Administration (VBA), Department of Veterans Affairs, will submit the collection of information abstracted below to the Office of Management and Budget

(OMB)for review and comment. The PRA submission describes the nature of the information collection and its expected cost and burden; it includes the actual data collection instrument. DATES: Comments must be submitted on or before July 10, 2008. ADDRESSES: Submit written comments on the collection of information through *http://www.Regulations.gov* or to VA's OMB Desk Officer, OMB Human Resources and Housing Branch, New Executive Office Building, Room 10235, Washington, DC 20503

(202)395-7316. Please refer to “OMB Control No. 2900-0171” in any correspondence. FOR FURTHER INFORMATION CONTACT: Denise McLamb, Records Management Service (005R1B), Department of Veterans Affairs, 810 Vermont Avenue, NW., Washington, DC 20420,

(202)461-7485, FAX

(202)273-0443 or e-mail *denise.mclamb@mail.va.gov* . Please refer to “OMB Control No. 2900-0171.” SUPPLEMENTARY INFORMATION: *Title:* Application and Enrollment Certification for Individualized Tutorial Assistance (38 U.S.C. Chapters 30, 32, 35; 10 U.S.C. Chapter 1606; Section 903 of Public Law 96-342, and the Omnibus Diplomatic Security and Antiterrorism Act of 1986), VA Form 22-1990t. *OMB Control Number:* 2900-0171. *Type of Review:* Extension of a currently approved collection. *Abstract:* Students receiving VA educational assistance and need tutoring to overcome a deficiency in one or more course complete VA Form 22-1990t to apply for supplemental allowance for tutorial assistance. The student must provide the course or courses for which he or she requires tutoring, the number of hours and charges for each tutorial session and the name of the tutor. The tutor must certify that he or she provided tutoring at the specified charges and that he or she is not a close relative of the student. Certifying officials at the student's educational institution must certify that the tutoring was necessary for the student's pursuit of program; the tutor was qualified to conduct individualized tutorial assistance; and the charges for the tutoring did not exceed the customary charges for other students who receive the same tutorial assistance. An agency may not conduct or sponsor, and a person is not required to respond to a collection of information unless it displays a currently valid OMB control number. The **Federal Register** Notice with a 60-day comment period soliciting comments on this collection of information was published on February 15, 2008, at pages 8932-8933. *Affected Public:* Individuals or households. *Estimated Annual Burden:* 600 hours. *Estimated Average Burden per Respondent:* 30 minutes. *Frequency of Response:* On occasion. *Estimated Number of Respondents:* 600. *Number of Responses Annually:* 1,200. Dated: May 30, 2008. By direction of the Secretary. Denise McLamb, Program Analyst, Records Management Service. [FR Doc. E8-12897 Filed 6-9-08; 8:45 am] BILLING CODE 8320-01-P DEPARTMENT OF VETERANS AFFAIRS [OMB Control No. 2900-0079] Agency Information Collection (Employment Questionnaire) Activities Under OMB Review AGENCY: Veterans Benefits Administration, Department of Veterans Affairs. ACTION: Notice. SUMMARY: In compliance with the Paperwork Reduction Act

(202)395-7316. Please refer to “OMB Control No. 2900-0079” in any correspondence. FOR FURTHER INFORMATION CONTACT: Denise McLamb, Records Management Service (005R1B), Department of Veterans Affairs, 810 Vermont Avenue, NW., Washington, DC 20420,

(202)461-7485, FAX

(202)273-0443 or e-mail *denise.mclamb@mail.va.gov* . Please refer to “OMB Control No. 2900-0079.” SUPPLEMENTARY INFORMATION: *Title:* Employment Questionnaire, VA Forms 21-4140 and 21-4140-1. *OMB Control Number:* 2900-0079. *Type of Review:* Extension of a currently approved collection. *Abstract:* Claimants who are under the age of 60 and receiving individual unemployability compensation at 100 percent rate are required to complete VA Forms 21-4140 and 21-4140-1 certifying that they are still unable to secure or follow a substantially gainful occupation because of a service connected-disability. VA will use the information collected to determine the claimant's continued entitlement to individual unemployability benefits. An agency may not conduct or sponsor, and a person is not required to respond to a collection of information unless it displays a currently valid OMB control number. The **Federal Register** Notice with a 60-day comment period soliciting comments on this collection of information was published on March 25, 2008, at pages 15843-15844. *Affected Public:* Individuals or households. *Estimated Annual Burden:* 10,833 hours. *Estimated Average Burden per Respondent:* 5 minutes. *Frequency of Response:* Annually. *Estimated Number of Respondents:* 130,000. Dated: May 30, 2008. By direction of the Secretary. Denise McLamb, Program Analyst, Records Management Service. [FR Doc. E8-12899 Filed 6-9-08; 8:45 am] BILLING CODE 8320-01-P DEPARTMENT OF VETERANS AFFAIRS [OMB Control No. 2900-0067] Agency Information Collection (Application for Automobile or Other Conveyance and Adaptive Equipment) Activities Under OMB Review AGENCY: Veterans Benefits Administration, Department of Veterans Affairs. ACTION: Notice. SUMMARY: In compliance with the Paperwork Reduction Act

(202)395-7316. Please refer to “OMB Control No. 2900-0067” in any correspondence. FOR FURTHER INFORMATION CONTACT: Denise McLamb, Records Management Service (005R1B), Department of Veterans Affairs, 810 Vermont Avenue, NW., Washington, DC 20420,

(202)461-7485, FAX

(202)273-0443 or e-mail *denise.mclamb@mail.va.gov.* Please refer to “OMB Control No. 2900-0067.” SUPPLEMENTARY INFORMATION: *Title:* Application for Automobile or other Conveyance and Adaptive Equipment (under 38 U.S.C. 3901-3904), VA Form 21-4502. *OMB Control Number:* 2900-0067. *Type of Review:* Extension of a currently approved collection. *Abstract:* Veterans and servicepersons complete VA Form 21-4502 to apply for automobile or other conveyance allowance, and reimbursement for the cost and installation of adaptive equipment. The claimants must possess one of the following disabilities that resulted from injury or a disease that was incurred or aggravated during active military service:

(1)Loss or permanent loss of use of one or both feet, or hands;

(2)permanent impairment of vision in both eyes with a central visual acuity of 20/200 or less in the better eye with corrective glasses, or central visual acuity of more than 20/200 if there is a field defect in which the peripheral field had contracted to such an extent that the widest diameter of visual field has an angular distance no greater than 20 degrees in the better eye. VA uses the information to determine the claimant's eligibility for such benefits. An agency may not conduct or sponsor, and a person is not required to respond to a collection of information unless it displays a currently valid OMB control number. The **Federal Register** Notice with a 60-day comment period soliciting comments on this collection of information was published on March 10, 2008, at pages 12802-12803. *Affected Public:* Individuals and households. *Estimated Annual Burden:* 388. *Estimated Average Burden per Respondent:* 15 minutes. *Frequency of Response:* One time. *Estimated Number of Respondents:* 1,552. Dated: May 30, 2008. By direction of the Secretary. Denise McLamb, Program Analyst, Records Management Service. [FR Doc. E8-12903 Filed 6-9-08; 8:45 am] BILLING CODE 8320-01-P DEPARTMENT OF VETERANS AFFAIRS [OMB Control No. 2900-0710] Proposed Information Collection (VSO Access to VHA Electronic Health Records) Activity; Comment Request AGENCY: Veterans Health Administration, Department of Veterans Affairs. ACTION: Notice. SUMMARY: The Veterans Health Administration

(VHA)is announcing an opportunity for public comment on the proposed collection of certain information by the agency. Under the Paperwork Reduction Act

(PRA)of 1995, Federal agencies are required to publish notice in the **Federal Register** concerning each proposed collection of information, including each proposed extension of a currently approved collection, and allow 60 days for public comment in response to the notice. This notice solicits comments on information needed to establish computer accounts for Veteran Service Officers to access VA's Veterans Health Information Systems Technology Architecture (VistA). DATES: Written comments and recommendations on the proposed collection of information should be received on or before August 11, 2008. ADDRESSES: Submit written comments on the collection of information through *http://www.Regulations.gov* ; or to Mary Stout, Veterans Health Administration (193E1), Department of Veterans Affairs, 810 Vermont Avenue, NW., Washington, DC 20420; or e-mail: *mary.stout@va.gov* . Please refer to “OMB Control No. 2900-0710” in any correspondence. During the comment period, comments may be viewed online through the Federal Docket Management System

(FDMS)at *http://www.Regulations.gov.* FOR FURTHER INFORMATION CONTACT: Mary Stout

(202)461-5867 or FAX

(202)273-9381. SUPPLEMENTARY INFORMATION: Under the PRA of 1995 (Pub. L. 104-13; 44 U.S.C. 3501-3521), Federal agencies must obtain approval from the Office of Management and Budget

(OMB)for each collection of information they conduct or sponsor. This request for comment is being made pursuant to Section 3506(c)(2)(A) of the PRA. With respect to the following collection of information, VHA invites comments on:

(1)Whether the proposed collection of information is necessary for the proper performance of VHA's functions, including whether the information will have practical utility;

(2)the accuracy of VHA's estimate of the burden of the proposed collection of information;

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

(4)ways to minimize the burden of the collection of information on respondents, including through the use of automated collection techniques or the use of other forms of information technology. *Title:* VSO Access to VHA Electronic Health Records, VA Form 10-0400. *OMB Control Number:* 2900-0710. *Type of Review:* Extension of a currently approved collection. *Abstract:* VSO's complete VA Form 10-0400 to request authorization to access VA VistA database. VA will use the data collected to provide VSO's who were granted power of attorney by veterans with medical information recorded in VHA electronic health records system, authorization to access medical information needed to process a veteran's compensation and pension claim. *Affected Public:* Individuals or households. *Estimated Total Annual Burden:* 400 hours. *Estimated Average Burden per Respondent:* 2 minutes. *Frequency of Response:* One time. *Estimated Number of Respondents:* 12,000. Dated: May 30, 2008. By direction of the Secretary. Denise McLamb, Program Analyst, Records Management Service. [FR Doc. E8-12905 Filed 6-9-08; 8:45 am] BILLING CODE 8320-01-P DEPARTMENT OF VETERANS AFFAIRS [OMB Control No. 2900-0120] Agency Information Collection (Report of Treatment by Attending Physician) Activities Under OMB Review AGENCY: Veterans Benefits Administration, Department of Veterans Affairs. ACTION: Notice. SUMMARY: In compliance with the Paperwork Reduction Act

(OMB)for review and comment. The PRA submission describes the nature of the information collection and its expected cost and burden; it includes the actual data collection instrument. DATES: Comments must be submitted on or before July 10, 2008. ADDRESSES: Submit written comments on the collection of information through *http://www.Regulations.gov;* or to VA's OMB Desk Officer, OMB Human Resources and Housing Branch, New Executive Office Building, Room 10235, Washington, DC 20503

(202)395-7316. Please refer to “OMB Control No. 2900-0120” in any correspondence. FOR FURTHER INFORMATION CONTACT: Denise McLamb, Records Management Service (005R1B), Department of Veterans Affairs, 810 Vermont Avenue, NW., Washington, DC 20420,

(202)461-7485, fax

(202)273-0443 or e-mail *denise.mclamb@mail.va.gov* . Please refer to “OMB Control No. 2900-0120.” SUPPLEMENTARY INFORMATION: *Title:* Report of Treatment by Attending Physician, VA Form 29-551a. *OMB Control Number:* 2900-0120. *Type of Review:* Extension of a currently approved collection. *Abstract:* VA Form 29-551a is used to collect information from attending physician to determine a claimant's eligibility for disability insurance benefits. An agency may not conduct or sponsor, and a person is not required to respond to a collection of information unless it displays a currently valid OMB control number. The **Federal Register** Notice with a 60-day comment period soliciting comments on this collection of information was published on March 25, 2008, at pages 15842-15843. *Affected Public:* Individuals or households. *Estimated Annual Burden:* 5,069 hours. *Estimated Average Burden per Respondent:* 15 minutes. *Frequency of Response:* On occasion. *Estimated Number of Respondents:* 20,277. Dated: May 30, 2008. By direction of the Secretary. Denise McLamb, Program Analyst, Records Management Service. [FR Doc. E8-12912 Filed 6-9-08; 8:45 am] BILLING CODE 8320-01-P DEPARTMENT OF VETERANS AFFAIRS [OMB Control No. 2900-0014] Proposed Information Collection (Authorization and Certification of Entrance or Reentrance Into Rehabilitation and Certification of Status) Activity: Comment Request AGENCY: Veterans Benefits Administration, Department of Veterans Affairs. ACTION: Notice. SUMMARY: The Veterans Benefits Administration (VBA), Department of Veterans Affairs (VA), is announcing an opportunity for public comment on the proposed collection of certain information by the agency. Under the Paperwork Reduction Act

(PRA)of 1995, Federal agencies are required to publish notice in the **Federal Register** concerning each proposed collection of information, including each proposed extension of currently approved collection, and allow 60 days for public comment in response to the notice. This notice solicits comments for information needed to determine claimants training program attendance. DATES: Written comments and recommendations on the proposed collection of information should be received on or before August 11, 2008. ADDRESSES: Submit written comments on the collection of information through *http://www.Regulations.gov* or to Nancy J. Kessinger, Veterans Benefits Administration (20M35), Department of Veterans Affairs, 810 Vermont Avenue, NW., Washington, DC 20420 or e-mail to *nancy.kessinger@va.gov* . Please refer to “OMB Control No. 2900-0014” in any correspondence. During the comment period, comments may be viewed online through the Federal Docket Management System

(FDMS)at *http://www.Regulations.gov* . FOR FURTHER INFORMATION CONTACT: Nancy J. Kessinger at

(202)461-9769 or FAX

(202)275-5947. SUPPLEMENTARY INFORMATION: Under the PRA of 1995 (Pub. L. 104-13; 44 U.S.C. 3501-3521), Federal agencies must obtain approval from the Office of Management and Budget

(OMB)for each collection of information they conduct or sponsor. This request for comment is being made pursuant to section 3506(c)(2)(A) of the PRA. With respect to the following collection of information, VBA invites comments on:

(1)Whether the proposed collection of information is necessary for the proper performance of VBA's functions, including whether the information will have practical utility;

(2)the accuracy of VBA's estimate of the burden of the proposed collection of information;

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

(4)ways to minimize the burden of the collection of information on respondents, including through the use of automated collection techniques or the use of other forms of information technology. *Title:* Authorization and Certification of Entrance or Reentrance into Rehabilitation and Certification of Status, VA Form 28-1905. *OMB Control Number:* 2900-0014. *Type of Review:* Extension of a currently approved collection. *Abstract:* VA case managers use VA Form 28-1905 to identify program participants and provide specific guidelines on the planned program to facilities providing education, training, or other rehabilitation services. Facility officials certify that the claimant has enrolled in the planned program and submit the form to VA. VA uses the data collected to ensure that claimants do not receive benefits for periods for which they did not participate in any rehabilitation, special restorative or specialized vocational training programs. *Affected Public:* Not-for-profit institutions, Individuals or households, Business or other for-profit, Farms, Federal Government, and State, Local or Tribal Government. *Estimated Annual Burden:* 7,500 hours. *Estimated Average Burden per Respondent:* 5 minutes. *Frequency of Response:* One time. *Estimated Number of Respondents:* 90,000. Dated: May 30, 2008. By direction of the Secretary. Denise McLamb, Program Analyst, Records Management Service. [FR Doc. E8-12916 Filed 6-9-08; 8:45 am] BILLING CODE 8320-01-P DEPARTMENT OF VETERANS AFFAIRS [OMB Control No. 2900-0004] Proposed Information Collection (Application for Dependency and Indemnity Compensation, Death Pension and Accrued Benefits by a Surviving Spouse or Child) Activity: Comment Request AGENCY: Veterans Benefits Administration, Department of Veterans Affairs. ACTION: Notice. SUMMARY: The Veterans Benefits Administration (VBA), Department of Veterans Affairs (VA), is announcing an opportunity for public comment on the proposed collection of certain information by the agency. Under the Paperwork Reduction Act

(PRA)of 1995, Federal agencies are required to publish notice in the **Federal Register** concerning each proposed collection of information, including each proposed extension of currently approved collection, and allow 60 days for public comment in response to the notice. This notice solicits comments for information needed to determine entitlement to dependency and indemnity compensation (DIC), death pension and accrued benefits. DATES: Written comments and recommendations on the proposed collection of information should be received on or before August 11, 2008. ADDRESSES: Submit written comments on the collection of information through *http://www.Regulations.gov* or to Nancy J. Kessinger, Veterans Benefits Administration (20M35), Department of Veterans Affairs, 810 Vermont Avenue, NW., Washington, DC 20420 or e-mail to *nancy.kessinger@va.gov* . Please refer to “OMB Control No. 2900-0004” in any correspondence. During the comment period, comments may be viewed online through the Federal Docket Management System

(FDMS)at *http://www/Reglations.gov* . FOR FURTHER INFORMATION CONTACT: Nancy J. Kessinger at

(202)461-9769 or FAX

(202)275-5947. SUPPLEMENTARY INFORMATION: Under the PRA of 1995 (Pub. L. 104-13; 44 U.S.C. 3501-3521), Federal agencies must obtain approval from the Office of Management and Budget

(1)Whether the proposed collection of information is necessary for the proper performance of VBA's functions, including whether the information will have practical utility;

(2)the accuracy of VBA's estimate of the burden of the proposed collection of information;

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

(4)ways to minimize the burden of the collection of information on respondents, including through the use of automated collection techniques or the use of other forms of information technology. *Titles:* a. Application for Dependency and Indemnity Compensation, Death Pension and Accrued Benefits by a Surviving Spouse or Child (Including Death Compensation if Applicable), VA Form 21-534. b. Application for Dependency and Indemnity Compensation by a Surviving Spouse or Child—In-service Death Only, VA Form 21-543a. *OMB Control Number:* 2900-0004. *Type of Review:* Extension of a currently approved collection. *Abstract:* a. VA Form 21-534 is used to gather the necessary information to determine surviving spouse and/or children of veterans entitlement to dependency and indemnity compensation (DIC), death benefits,(including death compensation is applicable), and any accrued benefits not paid to the veteran prior to death. b. Military Casualty Assistance Officers complete VA Form 21-534 to assist surviving spouse and/or children of veterans who died on active duty in processing claims for dependency and indemnity compensation benefits. Accrued benefits and death compensation are not payable in claims for DIC. *Affected Public:* Individuals or households. *Estimated Annual Burden:* a. VA Form 21-534—76,136 hours. b. VA Form 21-534a—600 hours. *Estimated Average Burden per Respondent:* a. VA Form 21-534—75 minutes. b. VA Form 21-534a—15 minutes. *Frequency of Response:* One time. *Estimated Number of Respondents:* a. VA Form 21-534—76,136. b. VA Form 21-534a—600. Dated: May 30, 2008. By direction of the Secretary. Denise McLamb, Program Analyst, Records Management Service. [FR Doc. E8-12917 Filed 6-9-08; 8:45 am] BILLING CODE 8320-01-P DEPARTMENT OF VETERANS AFFAIRS [OMB Control No. 2900-0166] Agency Information Collection (Application for Ordinary Life Insurance) Activities Under OMB Review AGENCY: Veterans Benefits Administration, Department of Veterans Affairs. ACTION: Notice. SUMMARY: In compliance with the Paperwork Reduction Act

(OMB)for review and comment. The PRA submission describes the nature of the information collection and its expected cost and burden; it includes the actual data collection instrument. DATES: Comments must be submitted on or before July 10, 2008. ADDRESSES: Submit written comments on the collection of information through *http://www.Regulations.gov* ; or to VA's OMB Desk Officer, OMB Human Resources and Housing Branch, New Executive Office Building, Room 10235, Washington, DC 20503

(202)395-7316. Please refer to “OMB Control No. 2900-0166” in any correspondence. FOR FURTHER INFORMATION CONTACT: Denise McLamb, Records Management Service (005R1B), Department of Veterans Affairs, 810 Vermont Avenue, NW., Washington, DC 20420,

(202)461-7485, fax

(202)273-0443 or e-mail *denise.mclamb@mail.va.gov* . Please refer to “OMB Control No. 2900-0166.” SUPPLEMENTARY INFORMATION: *Titles:* a. Application for Ordinary Life Insurance, Replacement Insurance for Modified Life Reduced at Age 65, National Service Life Insurance, VA Form 29-8485. b. Application for Ordinary Life Insurance, Replacement Insurance for Modified Life Reduced at Age 70, National Service Life Insurance, VA Form 29-8485a. c. Application for Ordinary Life Insurance, Replacement Insurance for Modified Life Reduced at Age 65, National Service Life Insurance, VA Form 29-8700. d. Application for Ordinary Life Insurance, Replacement Insurance for Modified Life Reduced at Age 70, National Service Life Insurance, VA Form 29-8701. e. Information About Modified Life Reduction, VA Forms 29-8700a-e and VA Forms 29-8701a-e. *OMB Control Number:* 2900-0166. *Type of Review:* Extension of a currently approved collection. *Abstract:* Policyholders use the forms to apply for replacement of Modified Life insurance. Modified Life insurance coverage is reduced automatically by one-half from its present face value on the day before a policyholder's 65th and 70th birthdays. Policyholders who wish to maintain the same amount of coverage must purchase whole life insurance prior to their 65th and 70th birthdays to replace the coverage that will be lost when the Modified Life insurance is reduced. An agency may not conduct or sponsor, and a person is not required to respond to a collection of information unless it displays a currently valid OMB control number. The **Federal Register** Notice with a 60-day comment period soliciting comments on this collection of information was published on March 25, 2008, at pages 15845-15846. *Affected Public:* Individuals or households. *Estimated Annual Burden:* 1,284 hours. *Estimated Average Burden per Respondent:* 5 minutes. *Frequency of Response:* One time. *Estimated Number of Respondents:* 15,400. Dated: May 30, 2008. By direction of the Secretary. Denise McLamb, Program Analyst, Records Management Service. [FR Doc. E8-12921 Filed 6-9-08; 8:45 am] BILLING CODE 8320-01-P DEPARTMENT OF VETERANS AFFAIRS [OMB Control No. 2900-0469] Agency Information Collection (Certificate Showing Residence and Heirs of Deceased Veteran or Beneficiary) Activities Under OMB Review AGENCY: Veterans Benefits Administration, Department of Veterans Affairs. ACTION: Notice. SUMMARY: In compliance with the Paperwork Reduction Act

(OMB)for review and comment. The PRA submission describes the nature of the information collection and its expected cost and burden; it includes the actual data collection instrument. DATES: Comments must be submitted on or before July 10, 2008. ADDRESSES: Submit written comments on the collection of information through *http://www.Regulations.gov* ; or to VA's OMB Desk Officer, OMB Human Resources and Housing Branch, New Executive Office Building, Room 10235, Washington, DC 20503

(202)395-7316. Please refer to “OMB Control No. 2900-0469” in any correspondence. FOR FURTHER INFORMATION CONTACT: Denise McLamb, Records Management Service (005R1B), Department of Veterans Affairs, 810 Vermont Avenue, NW., Washington, DC 20420,

(202)461-7485, fax

(202)273-0443 or e-mail *denise.mclamb@mail.va.gov* . Please refer to “OMB Control No. 2900-0469.” SUPPLEMENTARY INFORMATION: *Title:* Certificate Showing Residence and Heirs of Deceased Veteran or Beneficiary, VA Form 29-541. *OMB Control Number:* 2900-0469. *Type of Review:* Extension of a currently approved collection. *Abstract:* VA uses the information collected on VA Form 29-541 to establish a claimant's entitlement to Government Life Insurance proceeds in estate cases when formal administration of the estate is not required. An agency may not conduct or sponsor, and a person is not required to respond to a collection of information unless it displays a currently valid OMB control number. The **Federal Register** Notice with a 60-day comment period soliciting comments on this collection of information was published on March 25, 2008, at page 15844. *Affected Public:* Individuals or households. *Estimated Annual Burden:* 1,039 hours. *Estimated Average Burden per Respondent:* 30 minutes. *Frequency of Response:* On occasion. *Estimated Number of Respondents:* 2,078. Dated: May 30, 2008. By direction of the Secretary. Denise McLamb, Program Analyst, Records Management Service. [FR Doc. E8-12922 Filed 6-9-08; 8:45 am] BILLING CODE 8320-01-P 73 112 Tuesday, June 10, 2008 Proposed Rules Part II Securities and Exchange Commission 17 CFR Parts 229, 230, 232, 239, 240, and 249 Interactive Data To Improve Financial Reporting; Proposed Rule SECURITIES AND EXCHANGE COMMISSION 17 CFR Parts 229, 230, 232, 239, 240 and 249 [Release Nos. 33-8924; 34-57896; 39-2455; IC-28293; File No. S7-11-08] RIN 3235-AJ71 Interactive Data To Improve Financial Reporting AGENCY: Securities and Exchange Commission. ACTION: Proposed rule. SUMMARY: We are proposing rules requiring companies to provide financial statement information in a form that would improve its usefulness to investors. Under the proposed rules, financial statement information could be downloaded directly into spreadsheets, analyzed in a variety of ways using commercial off-the-shelf software, and used within investment models in other software formats. The rules would apply to domestic and foreign public companies that prepare their financial statements in accordance with generally accepted accounting principles as used in the United States (U.S. GAAP), and foreign private issuers that prepare their financial statements using International Financial Reporting Standards

(IFRS)as promulgated by the International Accounting Standards Board (IASB). Companies would provide their financial statements to the Commission and on their corporate Web sites in interactive data format using the eXtensible Business Reporting Language (XBRL). The interactive data would be provided as an exhibit to periodic reports and registration statements, as well as to transition reports for a change in fiscal year. The proposed rules are intended not only to make financial information easier for investors to analyze, but also to assist in automating regulatory filings and business information processing. Interactive data has the potential to increase the speed, accuracy, and usability of financial disclosure, and eventually reduce costs. DATES: Comments should be received on or before August 1, 2008. ADDRESSES: Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission's Internet comment form ( *http://www.sec.gov/rules/proposed.shtml* ); or • Send an e-mail to *rule-comments@sec.gov* . Please include File Number S7-11-08 on the subject line; or • Use the Federal eRulemaking Portal ( *http://www.regulations.gov* ). Follow the instructions for submitting comments. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090. All submissions should refer to File Number S7-11-08. This file number should be included on the subject line if e-mail is used. To help us 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/proposed.shtml* ). Comments are also available for public 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. All comments received will be posted without change; we do not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. FOR FURTHER INFORMATION CONTACT: James C. Lopez, Legal Branch Chief, Division of Corporation Finance at

(202)551-3790; Mark W. Green, Senior Special Counsel (Regulatory Policy), Division of Corporation Finance at

(202)551-3430; Jeffrey W. Naumann, Assistant Director, Office of Interactive Disclosure at

(202)551-5352; or Melanie Jacobsen, Office of the Chief Accountant at

(202)551-5300, U.S. Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-3628. SUPPLEMENTARY INFORMATION: We propose to add Rules 405 and 406 to Regulation S-T, 1 and revise Item 601 2 of Regulation S-K, 3 Rules 11, 4 201, 5 202, 6 305, 7 401, 8 and 402 9 of Regulation S-T, Rule 144 10 under the Securities Act of 1933 (Securities Act), 11 and Rules 13a-14 12 and 15d-14 13 under the Securities Exchange Act of 1934 (Exchange Act). 14 We also propose to revise Forms S-3, 15 S-8, 16 and F-3 17 under the Securities Act and Forms 20-F 18 and 6-K 19 under the Exchange Act. 1 17 CFR 232.10 *et seq.* 2 17 CFR 229.601. 3 17 CFR 229.10. *et seq.* 4 17 CFR 232.11. 5 17 CFR 232.201. 6 17 CFR 232.202. 7 17 CFR 232.305. 8 17 CFR 232.401. 9 17 CFR 232.402. 10 17 CFR 230.144. 11 15 U.S.C. 77a *et seq.* 12 17 CFR 240.13a-14. 13 17 CFR 240.15d-14. 14 15 U.S.C. 78a *et seq.* 15 17 CFR 239.13. 16 17 CFR 239.16b. 17 17 CFR 239.33. 18 17 CFR 249.220f. 19 17 CFR 249.306. Table of Contents I. Introduction and Background A. Introduction B. Current Filing Technology and Interactive Data C. The Commission's Multiyear Evaluation of Interactive Data and Overview of Proposed Rules II. Discussion of the Proposed Amendments A. Submission of Financial Information Using Interactive Data B. Phase-In Under the Proposed Rules 1. Overview 2. Companies and Filings Covered by the Proposed Rules and Phase-In 3. Documents and Information Covered by the Proposed Rules a. Financial Statements and Financial Statement Schedules b. Registration Statements Covered by the Proposed Rules 4. Initial Filing Grace Period 5. Web Site Posting of Interactive Data C. Accuracy and Reliability of Interactive Data 1. Voluntary Program 2. Use of Technology To Detect Errors 3. Integration of Interactive Data and Business Information Processing 4. Continued Traditional Format and Interactive Data Cautionary Disclosure D. Required Items 1. Data Tags 2. Regulation S-T and the EDGAR Filer Manual E. Consequences of Non-Compliance and Hardship Exemption III. General Request for Comments IV. Paperwork Reduction Act V. Cost-Benefit Analysis VI. Consideration of Burden on Competition and Promotion of Efficiency, Competition and Capital Formation VII. Initial Regulatory Flexibility Act Analysis VIII. Small Business Regulatory Enforcement Fairness Act IX. Statutory Authority and Text of Proposed Amendments I. Introduction and Background A. Introduction Over the last several decades, developments in technology and electronic data communication have significantly decreased the time and cost of filing disclosure documents with us. Technological developments also have facilitated greater transparency in the form of easier access to, and analysis of, financial reporting and disclosures. Most notably, in 1993 we began to require electronic filing on our Electronic Data Gathering, Analysis and Retrieval System (EDGAR). 20 Since then, widespread use of the Internet has vastly decreased the time and expense of accessing disclosure filed with us. 20 In 1993, we began to require domestic issuers to file most documents electronically. Release No. 33-6977 (Feb. 23, 1993) [58 FR 14628]. Electronic filing began with a pilot program in 1984. Release No. 33-6539 (June 27, 1984) [49 FR 28044]. We continue to update our filing standards and systems as technologies improve. These developments assist us in our goal to promote efficient and transparent capital markets. For example, since 2003 we have required electronic filing of certain ownership reports 21 filed on Forms 3, 22 4, 23 and 5 24 in a format that provides interactive data, and recently we adopted similar rules governing the filing of Form D. 25 In addition, recently we have encouraged, and in some cases required, public reporting companies and mutual funds to provide disclosures and communicate with investors using the Internet. 26 Now, as part of our continuing efforts to assist filers as well as investors who use Commission disclosures, we propose to require that financial statements be provided in a format that makes the information they contain interactive. 21 Release No. 33-8230 (May 7, 2003) [68 FR 25788 and 37044 (correction)] (required electronic filing of ownership reports) and Release No. 33-8891 (Feb. 6, 2008) [73 FR 10592] (required electronic filing of Form D [17 CFR 239.500]). 22 17 CFR 249.103 and 274.202. 23 17 CFR 249.104 and 274.203. 24 17 CFR 249.105. 25 17 CFR 239.500. 26 See, *e.g.* , Release No. 34-56135 (July 26, 2007) [72 FR 42222]; Release No. 34-55146 (Jan. 22, 2007) [72 FR 4148]; Release No. 34-52056 (July 19, 2005) [70 FR 44722]; Release No. 33-8861 (November 21, 2007) [72 FR 67790]; and Release No. 34-57172 (Jan. 18, 2008) [73 FR 4450]. Our proposal builds on our voluntary filer program, started in 2005, 27 that allowed us to evaluate the merits of interactive data. The voluntary program allows companies to submit financial statements on a supplemental basis in interactive format as exhibits to specified filings under the Exchange Act and the Investment Company Act of 1940 (Investment Company Act). 28 Companies that participate in the program still are required to file their financial statements in American Standard Code for Information Interchange (ASCII) or HyperText Markup Language (HTML). 29 27 Release No. 33-8529 (Feb. 3, 2005) [70 FR 6556]. 28 15 U.S.C. 80a-1 *et seq.* 29 HTML is a standardized language commonly used to present text and other information on Web sites. In 2007, we extended the program to enable mutual funds voluntarily to submit in interactive data format supplemental information contained in the risk/return summary section of their prospectuses. 30 Over 75 companies have participated in the voluntary program. These companies span a wide range of industries and company characteristics, and have a total public float of over $2 trillion. 30 Release No. 33-8823 (July 11, 2007) [72 FR 39290]. Financial reporting based on interactive data would create new ways for investors, analysts, and others to retrieve and use financial information in documents filed with us. For example, users of financial information could download it directly into spreadsheets, analyze it using commercial off-the-shelf software, or use it within investment models in other software formats. Through interactive data, what is currently static, text-based information can be dynamically searched and analyzed, facilitating the comparison of financial and business performance across companies, reporting periods, and industries. Interactive data also could provide a significant opportunity to automate regulatory filings and business information processing, with the potential to increase the speed, accuracy, and usability of financial disclosure. Such automation could eventually reduce costs. A company that uses a standardized interactive data format at earlier stages of its reporting cycle could reduce the need for repetitive data entry and, therefore, the likelihood of human error. In this way, interactive data may improve the quality of information while reducing its cost. Also, to the extent investors currently are required to pay for access to annual or quarterly report disclosure that has been extracted and reformatted into an interactive data format by third-party sources, the availability of interactive data in Commission filings could allow investors to avoid additional costs associated with third party sources. We believe that requiring issuers to file their financial statements using interactive data format would enable investors, analysts, and the Commission staff to capture and analyze that information more quickly and at less cost than is possible using the same financial information provided in a static format. Any investor with a computer would have the ability to acquire and download interactive financial data that have generally been available only to large institutional users. The proposed interactive data requirements would not change what is currently reported, but would add a requirement to include financial statements in a new format as an exhibit. Thus, the proposal to require that filers provide financial statements using interactive data will not alter the disclosure or formatting standards of periodic reports, registration statements, 31 or transition reports, 32 which would continue to be available as they are today for those who prefer to view the traditional text-based document. 31 Although registration statements can be filed under federal securities laws other than the Securities Act, we use the term “registration statement” in this release only to refer to those filed under the Securities Act unless we expressly state otherwise. 32 Transition reports generally must be filed when an issuer changes its fiscal closing date. The transition report covers the resulting transition period between the closing date of its most recent fiscal year and the opening date of its new fiscal year. Rule 13a-10 [17 CFR 240.13a-10]; Rule 15d-10 [17 CFR 240.15d-10]. Unless otherwise stated, when we refer to Exchange Act reports, periodic reports, or “reports,” we mean quarterly and annual periodic reports as well as transition reports. Throughout this release, we solicit comment on many issues concerning the use of interactive data, including specifically whether financial information in interactive data format should be required as exhibits to Securities Act registration statements and Exchange Act periodic and transition reports filed with us. We are seeking comment from investors, registrants, accountants, analysts and any other parties or individuals who may be affected by the use of interactive disclosure in Commission filings, and any other members of the public. B. Current Filing Technology and Interactive Data Companies filing electronically are required to file their registration statements, quarterly and annual reports, and transition reports in ASCII or HTML format. 33 Also, to a limited degree, our electronic filing system uses other formats for internal processing and document-type identification. For example, our system uses eXtensible Markup Language

(XML)to process reports of beneficial ownership of equity securities on Forms 3, 4, and 5 under section 16(a) of the Exchange Act. 34 33 Rule 301 under Regulation S-T [17 CFR 232.301] requires electronic filings to comply with the EDGAR Filer Manual, and Section 5.1 of the Filer Manual requires that electronic filings be in ASCII or HTML format. Rule 104 under Regulation S-T [17 CFR 232.104] permits filers to submit voluntarily as an adjunct to their official filings in ASCII or HTML unofficial PDF copies of filed documents. Unless otherwise stated, we refer to filings in ASCII or HTML as traditional format filings. 34 15 U.S.C. 78p(a). Electronic formats such as HTML, XML, and XBRL are open standards 35 that define or “tag” data using standard definitions. The tags establish a consistent structure of identity and context. This consistent structure can be recognized and processed by a variety of different software applications. In the case of HTML, the standardized tags enable Web browsers to present Web sites' embedded text and information in predictable format. In the case of XBRL, software applications, such as databases, financial reporting systems, and spreadsheets, recognize and process tagged financial information. 35 The term “open standard” is generally applied to technological specifications that are widely available to the public, royalty-free, at minimal or no cost. XBRL was derived from the XML standard. It was developed and continues to be supported by XBRL International, a collaborative consortium of approximately 550 organizations representing many elements of the financial reporting community worldwide in more than 20 jurisdictions, national and regional. XBRL U.S., the international organization's U.S. jurisdiction representative, is a non-profit organization that includes companies, public accounting firms, software developers, filing agents, data aggregators, stock exchanges, regulators, financial services companies, and industry associations. 36 In 2006, the Commission contracted with XBRL U.S. to develop the standard list of tags necessary for financial reporting in interactive format consistent with U.S. GAAP and Commission regulations. 36 XBRL U.S. supports efforts to promote interactive financial and business data specific to the U.S., including U.S. GAAP. Financial reporting in interactive format requires a standard list of tags. These tags are similar to definitions in an ordinary financial dictionary, and they cover a variety of financial concepts that can be read and understood by software applications. For financial statements prepared in accordance with U.S. GAAP, a filer would use the list of tags for U.S. financial statement reporting. 37 This list of tags contains descriptive labels, definitions, authoritative references to U.S. GAAP and Commission regulations where applicable, and other elements, all of which provide the contextual information necessary for interactive data 38 to be recognized and processed by software. 39 37 Unless stated otherwise, when we refer to the “list of tags for U.S. financial statement reporting” we mean the interactive data taxonomy as approved by XBRL U.S. that is based on U.S. GAAP, Commission regulations, and common financial reporting practices used in the preparation of financial statements in the U.S. 38 The proposed rules would define the interactive data necessary to create human-readable disclosure as the “interactive data file,” which would be required with every interactive data submission. The EDGAR Filer Manual would identify any necessary supporting files. 39 For example, contextual information would identify the entity to which it relates, usually by using the filer's CIK number. A hypothetical filer converting its traditional electronic disclosure of $1,000,000 of net sales would have to create interactive data that identify what the 1,000,000 represents, net sales, and the currency in which it is disclosed, dollars. The contextual information would include other information as necessary; for example, whether it relates to an annual report or quarterly report, the financial reporting period, continuing or discontinued operations, or actual, restated, forecast, pro forma or other type of disclosure. Applying data tags to financial statements is accomplished using commercially available software that guides a preparer in mapping information in the financial statements to the appropriate tags in the standard list. Each element in the standard list of tags has a standard label. A company can therefore match the standard labels to each caption in its financial statements. Occasionally, because filers have considerable flexibility in how financial information is reported under U.S. reporting standards, it is possible that a company may wish to use a non-standard financial statement line item that is not included in the standard list of tags. 40 In this situation, a company would create a company-specific element, called an extension. 40 In other cases, without a relevant and appropriate tag in the list of tags, a company would be required to create an extension in order to provide interactive data that appears the same as the corresponding portion of traditional format filing. For example, what a company identifies in its traditional format financial statements as “operating revenues” may be associated with an element that has “net revenues” as the standard label. In this situation, a company would need to change, or extend, the standard label to become “operating revenues” when tagging that disclosure with the element. 41 41 Unless otherwise stated, extensions, whether relating to an element or a label, are not part of the standard list of tags. A company may choose to tag its own financial statements using commercially available software, or it may choose instead to outsource the tagging process. In the event a company relies upon a service provider to tag the company's financial statements, the company would want to carefully review the tagging done by the service provider in order to make sure that the tagged financial statements are accurate and consistent with the information the company presents in its traditional format filing. Similarly, to create interactive data-formatted financial statements prepared in accordance with IFRS as issued by the IASB, a filer would use the IFRS list of tags. 42 The IFRS list of tags contains descriptive labels, authoritative references to IFRS where applicable, and other elements and concepts that provide the contextual information necessary for interactive data to be recognized and processed by software. The International Accounting Standards Committee Foundation (IASCF) has developed the IFRS list of tags. 43 To create interactive data using the IFRS list of tags, an issuer generally would need to follow the same mapping, extension and tagging process as would a company that uses the list of tags for U.S. financial statement reporting. As further discussed below, the IASCF is collaborating with XBRL U.S. and other parties to align practices designed to develop the IFRS list of tags. This collaboration involves the development of the appropriate scope for the IFRS list of tags' content and technology architecture. 44 42 Unless stated otherwise, when we refer to the “IFRS list of tags” we mean the list of tags for financial statements prepared in accordance with IFRS as issued by the IASB. 43 See *http://www.iasb.org/xbrl/index.html.* The IASCF released the 2008 taxonomy (list of tags) on March 31, 2008. See IASB Press Release, The IASC Foundation publishes IFRS Taxonomy 2008, (March 31, 2008). 44 As previously noted, in 2006 we contracted with XBRL U.S. to develop the standard tags necessary for financial reporting in interactive format consistent with U.S. GAAP and Commission regulations. That contract has been completed. Because financial statements in interactive data format, referred to as the interactive data file, 45 are intended to be processed by software applications, the unprocessed data is not readable. Thus, viewers are necessary to convert the interactive data file to human readable format. Some viewers are similar to Web browsers used to read HTML files. 45 See note 40 above. The Commission's Web site currently provides links to four viewers that allow the public to easily read company disclosures filed using interactive data. 46 These viewers demonstrate the capability of downloading interactive data into software such as Microsoft Excel as well as into other applications that are widely available on the Internet. In addition, we are aware of other applications under development that may provide additional and advanced functionality. 46 See viewers available at *http://www.sec.gov/xbrl.* C. The Commission's Multiyear Evaluation of Interactive Data and Overview of Proposed Rules In 2004, we began assessing the benefits of interactive data and its potential for improving the timeliness and accuracy of financial disclosure and analysis of Commission filings. 47 As part of this evaluation, we adopted rules in 2005 permitting filers, on a voluntary basis, to provide financial disclosure in interactive data format as an exhibit to certain filings on our electronic filing system. The voluntary program has been based on an earlier version of the list of tags for U.S. financial statement reporting, which does not include a full array of standard elements for financial statement footnotes and schedules. After more than two years of increasing participation, over 75 companies have chosen to provide interactive data financial reporting. 48 47 See Press Release No. 2004-97 (July 22, 2004). 48 A viewer for the voluntary program is available at *http://www.sec.gov/spotlight/xbrl/xbrlwebapp.shtml.* This viewer, one of several funded by the Commission to demonstrate interactive data, maintains a running total of companies and filers submitting data as part of the voluntary program. As of April 17, 2008, 78 companies had submitted 350 interactive data reports. During this time, we have kept informed of technology advances and other interactive data developments. We note that several U.S. and foreign regulators have begun to incorporate interactive data into their financial reporting systems. The Federal Deposit Insurance Corporation (FDIC), the Federal Reserve, and the Office of the Comptroller of the Currency

(OCC)require the use of XBRL. 49 As of 2006, approximately 8,200 U.S. financial institutions were using XBRL to submit quarterly reports to banking regulators. 50 Countries that have required or instituted voluntary or pilot programs for XBRL financial reporting include Australia, Belgium, Canada, China, Denmark, France, Germany, Ireland, Israel, Japan, Korea, Luxembourg, the Netherlands, New Zealand, Norway, Singapore, Spain, Sweden, Thailand and the United Kingdom. 51 49 Since 2005, the FDIC, Federal Reserve, and the OCC have required the insured institutions that they oversee to file their quarterly Consolidated Reports of Condition and Income (called Call Reports) in interactive data format using XBRL. Call Reports, which include data about an institution's balance sheet and income statement, are used by these federal agencies to assess the financial health and risk profile of the financial institution. 50 See Improved Business Process Through XBRL: A Use Case for Business Reporting, available at *http://www.xbrl.org/us/us/FFIEC%20White%20Paper%2002Feb2006.pdf.* 51 See XBRL International Progress Report (November 2007), available at *http://www.xbrl.org/ProgressReports/2007_11_XBRL_Progress_Report.pdf.* We also have kept informed of relevant advances and developments by hosting roundtables on the topic of interactive data financial reporting, 52 creating the Commission's Office of Interactive Disclosure, 53 and meeting with international securities regulators to discuss, among other items, timetables for implementation of interactive data initiatives for financial reporting. 54 Also, staff of the Commission have attended meetings of the Advisory Committee on Improvements to Financial Reporting (CIFiR) in which the committee discussed proposals for financial reporting using interactive data. 55 We also have reviewed written statements and public comments received by CIFiR on its XBRL developed proposal. 56 52 See materials available at *http://www.sec.gov/spotlight/xbrl/xbrl-meetings.shtml.* 53 See Press Release No. 2007-213 (October 9, 2007). 54 See Press Release No. 2007-227 (November 9, 2007). 55 For example, CIFiR conducted an open meeting on March 14, 2008 in which it heard reactions from an invited panel of participants to CIFiR's developed proposal regarding required filing of financial information using interactive data. An archived webcast of the meeting is available at *http://sec.gov/about/offices/oca/cifir.shtml.* The March 14, 2008 panelists presented their views and engaged with CIFiR members regarding issues relating to requiring interactive data tagged financial statements, including tag list and technological developments, implications for large and small public companies, needs of investors, necessity of assurance and verification of such tagged financial statements, and legal implications arising from such tagging. Also, CIFiR has provided to the Commission an interim progress report that contains a developed proposal that the Commission, over the long term, require the filing of financial information using interactive data once specified conditions are satisfied. See Progress Report of the Advisory Committee on Improvements to the Financial Reporting to the United States Securities and Exchange Commission (Feb. 14, 2008) (Progress Report), available at *http://www.sec.gov/about/offices/oca/acifr/acifr-pr-021408-final.pdf.* CIFiR's developed proposal is discussed more fully in Part II.C.2 below. 56 The XBRL developed proposal appears in chapter 4 of the Progress Report. Written statements of panelists at the March 14, 2008 meeting and public comments received on the Progress Report are available at *http://sec.gov/comments/265-24/265-24.shtml.* Building on our experience monitoring the voluntary program, and our participation in the other initiatives described above, we are now proposing rules to require financial reporting using interactive data. The proposed rules would apply to domestic and foreign public companies that prepare their financial statements in accordance with U.S. GAAP, and foreign private issuers 57 that prepare their financial statements in accordance with IFRS as issued by the IASB. Interactive data would be required to be provided on a company's Web site 58 and with the filer's Securities Act registration statements, 59 annual reports, quarterly reports if applicable, 60 and transition reports. 61 We believe this has the potential to provide advantages for the investing public by making financial data more accessible, timely, inexpensive and easier to analyze. 57 Exchange Act Rule 3b-4(c) [17 CFR 240.3b-4(c)] defines “foreign private issuer” as a foreign issuer other than a foreign government that either has 50 percent or less of its outstanding voting securities held of record by U.S. residents or, if more than 50 percent of its outstanding voting securities are held by U.S. residents, about which none of the following is true:

(1)A majority of its executive officers or directors are U.S. citizens or residents;

(2)more than 50 percent of its assets are located in the U.S.; or

(3)the issuer's business is administered principally in the U.S. 58 The proposed Web site posting requirement would apply only to the extent a filer already maintains a corporate Web site. 59 Interactive data would be required as an exhibit to a Securities Act registration statement that contains financial statements, such as a Form S-1 [17 CFR 239.11] used in connection with an initial public offering. Interactive data would not be required as an exhibit to a Securities Act registration statement that does not contain financial statements, such as a Form S-3 filed by an issuer that is eligible to and does incorporate by reference all required financial statements from its periodic reports. 60 Foreign private issuers filing on Form 10-Q would be required to provide financial statements in quarterly reports using interactive data. 61 The proposed rules would not include any investment company that is registered under the Investment Company Act or any “business development company,” as defined in Section 2(a)(48) of that Act [15 U.S.C. 80a-2(a)(48)]. Business development companies are a category of closed-end investment companies that are not required to register under that Act. The proposed rules also would not include any entity that reports under the Exchange Act and prepares its financial statements in accordance with Article 6 of Regulation S-X [17 CFR 210.6-01 *et seq.* ]. The proposed rules would not apply to these entities because the standard list of tags for investment management is not yet fully developed. By enabling filers to further automate their financial processes, interactive data may eventually help filers improve the speed at which they generate financial information, while reducing the cost of filing and potentially increasing the accuracy of the data. For example, with standardized interactive data tags, registration statements and periodic reports may require less time for information gathering and review. Also, standardized interactive data tagging may enhance the ability of an issuer's in-house financial professionals to identify and correct errors in the issuer's registration statements and periodic reports filed in traditional electronic format. Filers also may gain benefits not directly related to public financial disclosures. For example, filers that use interactive data may be able to consolidate enterprise financial information more quickly and potentially more reliably across operating units with different accounting systems. However, we recognize that at the outset, filers would most likely prepare their interactive data as an additional step after their financial statements have been prepared. The principal elements of the proposal are as follows: • Domestic and foreign large accelerated filers 62 that use U.S. GAAP and have a worldwide public common equity float above $5 billion 63 as of the end of their most recently completed second fiscal quarter would provide to the Commission a new exhibit. 64 The exhibit would contain their financial statements, 65 and any applicable financial statement schedules in interactive data format. The requirement would apply beginning with fiscal periods ending on or after December 15, 2008. 66 62 Exchange Act Rule 12b-2 [17 CFR 240.12b-2] generally defines “large accelerated filer” as an issuer that has common equity held by unaffiliated persons with a value of at least $700 million, has been subject to the Exchange Act's periodic reporting requirements for at least 12 months, has filed at least one annual report, and is not eligible to use the disclosure requirements available to smaller reporting companies for its periodic reports. 63 As of the end of 2006, the $5 billion cutoff would establish a category of approximately 500 filers. 64 The exhibit would be required with such filers' registration statements, quarterly, if applicable, and annual reports, and transition reports. 65 When we refer to financial statements, we mean the face of the financial statements and accompanying footnotes. The face of the financial statements refers to the statement of financial position (balance sheet), income statement, statement of comprehensive income, statement of cash flows, and statement of owners' equity, as required by Commission regulations. References to the financial statements as required for interactive data reporting include any required schedules to the financial statements, unless we expressly state otherwise. 66 The proposed schedule is premised on the rules being adopted this fall in time for affected filers to implement this schedule, and could be adjusted depending on when the Commission adopts any final rules. • All other domestic and foreign large accelerated filers using U.S. GAAP would be subject to the same interactive data reporting requirements the following year, beginning with fiscal periods ending on or after December 15, 2009. • All remaining filers using U.S. GAAP, including smaller reporting companies, 67 and all foreign private issuers that prepare their financial statements in accordance with IFRS as issued by the IASB, 68 would be subject to the same interactive data reporting requirements beginning with fiscal periods ending on or after December 15, 2010. 69 67 Item 10(f)(1) of Regulation S-K [17 CFR 229.10(f)(1)], Rule 405 under the Securities Act [17 CFR 230.405] and Rule 12b-2 under the Exchange Act [17 CFR 240.12b-2] define the term “smaller reporting company,” in general, as a company that has common equity securities held by non-affiliates with a market value of less than $75 million or, if that value cannot be calculated, had less than $50 million in revenue in the prior fiscal year. 68 The proposed rules would not require foreign private issuers that prepare their financial statements in accordance with a variation of IFRS as issued by the IASB to provide interactive data. 69 We do not propose to require foreign private issuers to provide in interactive data format interim financial information contained in Form 6-K or any financial information prepared in accordance with non-U.S.GAAP that must be reconciled to U.S. GAAP in the foreign private issuer's Exchange Act reports. • Filers providing financial statements in interactive data format would be required to use the most recent and appropriate list of tags released by XBRL U.S. or the IASCF as required by the EDGAR Filer Manual. Filers also would be required to tag a limited number of document and entity identifier elements, such as the form type, company name, and public float. As with interactive data for the financial statements, these document and entity identifier elements would be formatted using the appropriate list of tags as required by the EDGAR Filer Manual. 70 70 The appropriate list of tags for document and entity identifier elements would be a list released by XBRL U.S., but would not be specific to U.S. GAAP or IFRS as issued by the IASB and would be required to be used by all issuers required to submit interactive data regardless of whether reporting in U.S. GAAP or IFRS as issued by the IASB. • A filer required to provide financial statements in interactive data format to the Commission also would be required to post those financial statements in interactive data format on its corporate Web site on the same day it filed or was required to file the related registration statement or report with the Commission, whichever is earlier. 71 71 The day the registration statement or report is submitted electronically to the Commission may not be the business day on which it was deemed officially filed. For example, a filing submitted after 5:30 p.m. generally is not deemed officially filed until the following business day. Under the proposed rules, the Web posting would be required to be posted at any time on the same day that the related registration statement or report is deemed officially filed or required to be filed, whichever is earlier. • The proposed rules would not alter the requirements to provide financial statements and any required financial statement schedules with the traditional format filings. 72 72 When we established the voluntary program, we stated in the adopting release that the interactive data submission would be supplemental to filings and not replace the required traditional electronic format of the financial information it contains. We also said that volunteers would be required to continue to file their traditional electronic filings. See Part II.D of Release No. 33-8529 (Feb. 3, 2005) [70 FR 6556, 6559]. • Financial statements in interactive data format would be provided as exhibits identified in Item 601(b) of Regulation S-K and Form 20-F. • Financial statement footnotes and financial statement schedules initially would be tagged individually as a block of text. After a year of such tagging, a filer also would be required to tag the detailed disclosures within the footnotes and schedules. • Viewable interactive data as displayed through software available on the Commission's Web site, and to the extent identical in all material respects to the corresponding portion of the traditional format filing, would be subject to all the same liability provisions of the federal securities laws as the corresponding data in the traditional format part of the official filing. • Data in the interactive data file submitted to us generally would be subject to the federal securities laws in a manner similar to that of the voluntary program and, as a result, would be ○ Excluded from the officer certification requirements under Rules 13a-14 and 15d-14 of the Exchange Act; 73 73 17 CFR 240.13a-14 and 17 CFR 240.15d-14. ○ Deemed not filed for purposes of specified liability provisions; and ○ Protected from liability for failure to comply with the proposed tagging and related requirements if the interactive data file either ☐ Met the requirements; or ☐ Failed to meet those requirements, but the failure occurred despite the issuer's good faith and reasonable effort, and the issuer corrected the failure as soon as reasonably practicable after becoming aware of it. • The proposed rules would require the financial information and document and entity identifier elements to be tagged according to Regulation S-T and the EDGAR Filer Manual. 74 74 Proposed Rule 405 of Regulation S-T would directly set forth the basic tagging requirements and indirectly set forth the rest of the tagging requirements through the requirement to comply with the EDGAR Filer Manual. Consistent with proposed Rule 405, the Filer Manual would contain the technical tagging requirements. • The initial interactive data exhibit of a filer would be required within 30 days of the earlier of the due date or filing date of the related report or registration statement, as applicable. In year two, a filer would have a similar 30 day grace period for its first interactive data exhibit that includes detailed tagging of its footnotes and schedules. All other interactive data exhibits would be required at the same time as the rest of the related report or registration statement. • Filers that do not provide or post required interactive data on the date required would be deemed not current with their Exchange Act reports and, as a result, would not be eligible to use the short forms S-3, F-3, or S-8, or elect under Form S-4 or F-4 to provide information at a level prescribed by Form S-3 or F-3. Similarly, such filers would not be deemed to have available adequate current public information for purposes of the resale exemption safe harbor provided by Rule 144. 75 A filer that was deemed not current solely as a result of not providing an interactive data exhibit when required would be deemed current and timely upon providing the interactive data. Therefore it would regain the ability to incorporate by reference, short form registration statement eligibility, and current status for purposes of determining adequate current public information under Rule 144. As such, it would not lose its status as having “timely” filed its Exchange Act reports solely as a result of the delay in providing interactive data. 75 17 CFR 230.144. • Although we have not proposed at this time to require interactive data for executive compensation disclosure because a definitive list of tags for this purpose is not yet completed, we are soliciting comment on the usefulness to investors and others of such interactive data, as well as the extent of the related costs and associated questions. • We anticipate that if the proposed rules become effective, companies that are not required to provide interactive data until a later time would have the option to do so earlier. • We also anticipate that the voluntary program would be modified, if the proposed rules are adopted, to permit investment companies to participate, but to exclude non-investment company participation. As a result, the voluntary program would continue for the financial statements of investment companies that are registered under the Investment Company Act, and business development companies and other entities that report under the Exchange Act and prepare their financial statements in accordance with Article 6 of Regulation S-X. The voluntary program also would continue for the risk/return summary section of mutual fund prospectuses. 76 76 See Release No. 33-8823 (July 11, 2007) [72 FR 39290]. On May 21, 2008, the Commission voted to propose rules that would require interactive data for the risk/return summary section of mutual fund prospectuses. See Press Release No. 2008-94 (May 21, 2008). II. Discussion of the Proposed Amendments A. Submission of Financial Information Using Interactive Data For several years XBRL U.S. and its related entities have developed and refined the list of tags to classify and define financial information in accordance with U.S. financial reporting practices and Commission regulations. 77 Many investors, auditors, accountants, and others, including companies that have been providing interactive data disclosure in the voluntary program, have helped in this process. 77 See Press Release No. 2006-158 (Sept. 25, 2006). Interactive data financial statements using the list of tags for U.S. financial statement reporting have been submitted voluntarily to us by over 75 companies, some of which have done so since the start of the voluntary program approximately three years ago. The list of tags for U.S. financial statement reporting has improved significantly since the original version available for the voluntary program. 78 During this period, there has been a growing development of software products for users of interactive data, as well as of applications to assist companies to tag their financial statements using interactive data. 79 The growing number of software applications available to preparers and consumers is helping make interactive data increasingly useful to both institutional and retail investors, as well as to other participants in the U.S. and global capital markets. On this basis, we believe interactive data, and in particular the XBRL standard, have become widespread and that the updated list of tags for U.S. financial statement reporting is now sufficiently advanced to require that U.S. GAAP-reporting companies provide their interactive financial statements in interactive data format. 80 78 When we adopted the voluntary program, the list of tags for U.S. GAAP financial statement reporting contained approximately 4,000 data elements. The list of tags released on April 28, 2008 contains approximately 13,000 data elements, with the most significant additions relating to the development of elements for standard U.S. GAAP footnote disclosure. 79 See Press Release No. 2007-253 (Dec. 5, 2007). 80 As previously noted in Part I.C, however, the proposed rules would not apply to investment companies registered under the Investment Company Act and other entities. See footnote 61 above. With respect to the list of tags for IFRS financial reporting, the IASCF has, over several years, developed a list of tags designed to classify and define financial information in accordance with international accounting standards as promulgated by the IASB. Over the course of the past year, the IASCF has worked to strengthen the development of its list of tags by forming an XBRL Advisory Committee and an XBRL Quality Reporting Team, both consisting of international representatives from investors, auditors, accountants, regulators and others. On March 31, 2008, the IASCF published a near final version of the list of tags for IFRS financial reporting, 81 which is subject to public comment through May 30, 2008. 82 In addition, the IASCF is collaborating with XBRL U.S. and other parties to align practices designed to develop the IFRS list of tags. This collaboration involves the development of the appropriate scope for the IFRS list of tags' content and technology architecture. On this basis, we believe that the updated IFRS list of tags will be sufficiently advanced to require that foreign private issuers that prepare their financial statements in accordance with IFRS as issued by the IASB provide their financial statements in interactive data format under the phase-in schedule we are proposing. 81 Unless stated otherwise, when we refer to the “list of tags for IFRS financial reporting” we mean the interactive data taxonomy that is based on IFRS as issued by the IASB. 82 See Press Release, The IASC Foundation publishes IFRS Taxonomy 2008 (March 31, 2008), available at *http://www.iasb.org/News/Press+Releases/The+IASC+Foundation+publishes+IFRS+Taxonomy+2008.htm.* As discussed in more detail below, our proposed rules would set forth a phase-in period beginning with domestic and foreign large accelerated U.S. GAAP filers with a worldwide public common equity float above $5 billion as of the end of their most recently completed second fiscal quarter. These large accelerated filers would be subject to the proposed rules beginning with their Securities Act registration statements, periodic reports, and transition reports that contain financial statements for fiscal periods ending on or after December 15, 2008. Although it would not be required, we encourage other U.S. GAAP filers to provide financial information in interactive data format during the phase-in period. We also encourage foreign private issuers that prepare their financial statements in accordance with IFRS as issued by the IASB to provide financial information in interactive data format during the phase-in period. In each instance, these filers' voluntary interactive data submissions would be under the proposed rules instead of the existing rules of the voluntary program. We are proposing that filers be required to provide the same information in interactive data format that companies have been providing in the voluntary program, 83 together with the following items: The footnotes to the financial statements; any applicable schedules to the financial statements; financial statements for Securities Act registration statements; and document and entity identifier tags, such as company name and public float. As was the case in the voluntary program, the proposed requirement for interactive data reporting is intended to be disclosure neutral. We do not intend the rules to result in companies providing more, less, or different disclosure for a given disclosure item depending upon the format whether ASCII, HTML, or XBRL. 83 Unlike the voluntary program, unless otherwise stated, an interactive data file would be required to be provided with the traditional format filing to which it relates. Companies would not be permitted to provide the interactive data file with a Form 8-K or 6-K. We propose to continue requiring the existing electronic formats now used in filings because we believe it is necessary to monitor the usefulness of interactive data reporting to investors and the cost and ease of providing interactive data before attempting further integration of the interactive data format. However, the proposed rules would treat viewable interactive data as displayed through software available on the Commission's Web site, and interactive data generally, 84 as part of the official filing, instead of a supplement as is the case in the voluntary program. Further evaluation will be useful with respect to the availability of inexpensive, sophisticated interactive data viewers. Currently there are many software providers and financial printers that are developing interactive data viewers. We anticipate that these will become widely available and increasingly useful to investors. 84 As further discussed below in Part II.C, interactive data generally would be deemed not filed for purposes of specified liability provisions. We expect that the open standard feature of XBRL format will facilitate the development of applications and software, and that some of these applications may be made available to the public for free or at a relatively low cost. The expected continued improvement in this software would give the public increasingly useful ways to view and analyze company financial information. After evaluating the use of the new interactive data technologies, software, and lists of tags, we may consider proposing rules to eliminate financial statement reporting in ASCII or HTML format. Or we may consider proposing rules to require a filing format that integrates ASCII or HTML with XBRL. We believe XBRL is the appropriate interactive data format with which to supplement ASCII and HTML. Our experience with the voluntary program and feedback from company, audit, and software communities point to XBRL as the appropriate open standard for the purposes of this rule. As a derivative of the XML standard, XBRL data would be compatible with a wide range of open source and proprietary XBRL software applications. As discussed above, many XBRL-related products exist for analysts, investors, public and private companies, and others to more easily create and compare financial data; still others are in development, and that process would likely be hastened by public company reporting using interactive data. Comments on our 2004 concept release and proposed rules in 2004 and 2007 generally supported interactive data and XBRL in particular. 85 Several other factors support our views regarding XBRL's broad and growing acceptance, internationally as well as in the U.S. For example, as noted above, in addition to the use of XBRL by other U.S. agencies, 86 several foreign securities regulators have adopted voluntary or required XBRL financial reporting. 87 We understand that several U.S. public and private companies use XBRL in connection with financial reporting or analysis. 88 85 Release No. 33-8497 (Sept. 27, 2004) [69 FR 59111] (Concept Release); Release No. 33-8496 (Oct. 1, 2004) [69 FR 59098]; Release No. 33-8781 (Feb. 12, 2007) [72 FR 6676]. See, *e.g.* , letter from Deloitte & Touche LLP regarding the Adopting Release and letter from PR Newswire Association LLC regarding the Concept Release. We also note that participants in the voluntary program provided positive feedback with respect to possible required use of XBRL. For example, the vast majority of voluntary program participants that submitted responses and views to a questionnaire answered in the affirmative to the question “Based on your experience to date, do you think it would be advisable for the Commission to continue to explore the feasibility and desirability of the use of interactive data on a more widespread and, possibly, mandated basis?” See question V.f in the Interactive Data Voluntary Program Questionnaire available at *http://www.sec.gov/cgi-bin/XBRL_Questionnaire.* 86 See note 49 above. Also we note CIFiR's support of XBRL as referenced above in Part B.2 87 For example, such countries include Canada, China, Israel, Japan, Korea and Thailand. 88 Whenever we seek comment in this release, we request that commenters distinguish in their responses, as appropriate, between the proposed requirements applicable to U.S. GAAP filers and those applicable to foreign private issuers that prepare their financial statements in accordance with IFRS as issued by the IASB, regardless of whether our question distinguishes between or references one or both of these types of issuers. *Request for Comment:* • Should we adopt rules that require each filer's financial statements to be provided in interactive data format? If we do so, should we include a phase-in period or temporary exception for detailed tagging of the financial statement footnotes? Should schedules to the financial statements be tagged? What are the principal factors that should be considered in making these decisions? Is it useful to users of financial information to continue to have, in addition to interactive data, duplicate, human-readable financial statements in ASCII or HTML format? • What opportunities exist to improve the display of financial statements prepared using interactive data? For example, if the technology is sufficiently developed, should we propose rules to encourage or require a format that embeds interactive data tags in HTML so that the entire set of financial statements can be viewed in a browser? How should these affect any continued requirement to file ASCII- or HTML-formatted financial statements? What obstacles exist to making such improvements in the display of XBRL information? • Is it appropriate to require public companies to provide interactive data using XBRL? Alternatively, in place of such a requirement, should the Commission instead wait to see whether interactive data reporting by public companies is voluntarily adopted? Without a requirement, would the development of products for producing and using interactive data from private and public companies meet the needs of investors, analysts, and others who seek interactive data? Would a large percentage of public companies provide interactive data voluntarily, and following the same standard, if not required to do so? • If we do not adopt the proposed rules and instead wait to see whether companies on their own expand their use of interactive data, would such data be less comparable among companies? Is there a “network effect,” such that interactive data would not be useful unless many or all filers provide their financial statements using interactive data? Would the development of software for retail investors to obtain and make use of such data be slowed without a requirement that companies provide interactive data? • What advantages are there to investors having the company responsible for preparing financial information in interactive data format, as opposed to a model in which third parties independently prepare the information in interactive format and charge a fee for it? • Do commenters agree that compared to reports using ASCII and HTML, interactive data would require less manually-transferred data? If so, do commenters believe that the proposed rules would result in less human error and therefore contribute to reduced costs? • If we require interactive data reporting and the proposed rules result in more effective and efficient financial reporting with reduced human error and cost, would fees charged by financial printers or other service providers be likely reduced to reflect such lower costs? • If we adopt rules requiring interactive data financial reporting, is the XBRL standard the one that we should use? Are any other standards becoming more widely used or otherwise superior to XBRL? What would the advantages of any such other standards be over XBRL? • Is the XBRL format for interactive data sufficiently developed to require its use at this time with regard to both U.S. GAAP and IFRS as issued by the IASB? If not, what indicators should we use to determine when it has become sufficiently developed to require its use? • Are vendors likely to develop and make commercially available software applications or Internet products that will be able to deliver the functionality of interactive data to retail investors? • How important is it that many different types of viewers with varying levels of sophistication and functionality be available to investors? In addition to the free viewer provided on the SEC Web site, are there likely to be other such products available at low or no cost? • If we require interactive data financial reporting, what are the principal challenges facing the eventual integration of such reporting with the current filing formats, ASCII and HTML, so that filing in all three formats would no longer be necessary? B. Phase-In Under the Proposed Rules 1. Overview The proposed rules initially would require interactive data reporting only by domestic and foreign large accelerated filers that use U.S. GAAP and have a worldwide public common equity float above $5 billion as of the end of their most recently completed second fiscal quarter. 89 If the rules are adopted by this fall, we anticipate that the first required submissions would be for periods ending on or after December 15, 2008. For calendar year companies, this would first apply to their December 31, 2008 annual reports filed on Form 10-K or 20-F and any Securities Act registration statement that contains financial statements for a period ended on or after December 15, 2008. 90 We are sensitive to concerns that undue expense and burden should not accompany the adoption of required interactive data financial reporting. We therefore propose a 30-day grace period for each filer's initial interactive data submission, and a 30-day grace period in year two of each filer's interactive data reporting when its footnotes and schedules initially would be required to be tagged in detail. 91 89 This would amount to approximately 500 companies. We propose the end of the most recently completed second fiscal quarter because that date is consistent with when a filer is required to determine its status as an accelerated and large accelerated filer. 90 For companies with a September 30 fiscal year end, the requirement would first apply to their December 31, 2008 quarterly report filed on Form 10-Q and any Securities Act registration statement that contains financial statements for a period ended on or after December 15, 2008. 91 We discuss more fully at Part II.C liability related to required submissions of interactive data in general and the continuation of some of the limitations on liability used in the voluntary program in particular. Filers under the proposed rules would be required to convert their financial statements into an interactive data file using the list of tags for U.S. financial statement reporting or the IFRS list of tags, in either case as approved for use by the Commission. The submission also would be required to include any supporting files as prescribed by the EDGAR Filer Manual. Interactive data would be required for the entirety of the financial statements, although tagging of the footnotes and schedules by increasing level of detail would be phased in the following year. We are not proposing at this time that filers be required to provide interactive data for their Management's Discussion and Analysis, executive compensation, or other financial, statistical or narrative disclosure. We solicit comment, however, on the advisability of permissible optional interactive data for financial disclosures that are not part of the current lists of tags for U.S. GAAP financial statement reporting and IFRS financial reporting. We also solicit comment on the usefulness to investors of interactive data of executive compensation and the burden such reporting would have on companies. For example, we solicit comment on whether the scope of interactive data available on the Executive Compensation Reader, which we posted on our Web site on December 21, 2007, 92 would be an appropriate level of executive compensation data. Our requests for comment regarding interactive data and executive compensation follow up and expand on previous requests in 2006. 93 We also note substantial interest in interactive disclosure of executive compensation, for example a draft list of tags for executive compensation that has been made available for public comment 94 and financial Web pages that link to our Executive Compensation Reader to provide streamlined Internet viewers of executive compensation. We ask detailed questions at the end of Part II.B.3.a. 95 92 See Press Release No. 2007-268 (Dec. 21, 2007). 93 Release No. 33-8655 (Jan. 27, 2006). Two commenters addressed this series of questions. One commenter supported tagging executive compensation disclosure using XBRL; the other commenter believed it would not be helpful. 94 See “ *Broadridge Releases Draft XBRL Proxy Statement Taxonomy for Public Comment,* ” Reuters December 4, 2007. 95 See Part II.B.3.a, below. The following tables identify the registration statements and periodic reports that would be required to include interactive data according to the company's filing status. 96 96 Transition reports that contain financial statements of the type and for the periods specified also would be required to be submitted in interactive data format under the proposed rules. Note that these dates apply to the initial required interactive data disclosure and that detailed tagging of the financial statement footnotes and schedules would not be required for an additional year, as described below in section II.B.3.a. Domestic and Foreign Large Accelerated Filers Using U.S. GAAP with Worldwide Public Common Equity Float above $5 Billion as of the End of Their Most Recently Completed Second Fiscal Quarter Registration statements containing financial statements for a period ending on or after December 15, 2008, Form 10-Q 97 for quarterly periods or Form 10-K 98 or 20-F 99 for annual periods ending on or after December 15, 2008. All Other Large Accelerated Filers Using U.S. GAAP Registration statements containing financial statements for a period ending on or after December 15, 2009, Form 10-Q for quarterly periods or Form 10-K or 20-F for annual periods ending on or after December 15, 2009. All Remaining Filers Using U.S. GAAP Registration statements containing financial statements for a period ending on or after December 15, 2010, Form 10-Q for quarterly periods or Form 10-K or 20-F for annual periods ending on or after December 15, 2010. Foreign Private Issuers with Financial Statements Prepared in Accordance with IFRS as Issued By the IASB Registration statements containing financial statements for a period ending on or after December 15, 2010 or Form 20-F for annual periods ending on or after December 15, 2010. 2. Companies and Filings Covered by Proposed Rules and Phase-In The proposed rules would cover all companies reporting in either U.S. GAAP, including smaller reporting companies and foreign private issuers that report in U.S. GAAP or, in the case of foreign private issuers, in accordance with IFRS as issued by the IASB. 100 The proposed phase-in would require domestic and foreign large accelerated filers that report in U.S. GAAP and meet the minimum worldwide common equity float of greater than $5 billion to provide their initial interactive data submissions in year one of the phase-in period discussed above. All other U.S. GAAP filers that meet the definition of large accelerated filer would be required to provide their initial interactive data submissions in year two of the phase-in period. All remaining U.S. GAAP filers, including smaller reporting companies and companies not previously subject to periodic reporting requirements, would be required to provide their initial interactive data submissions in year three of the phase-in period. 97 17 CFR 249.308a. 98 17 CFR 249.310. 99 17 CFR 249.220f. 100 As noted in Part I.C, however, the proposed rules would not apply to investment companies registered under the Investment Company Act, business development companies, or other entities that report under the Exchange Act and prepare their financial statements in accordance with Article 6 of Regulation S-X. Foreign private issuers that prepare their financial statements in accordance with IFRS as issued by the IASB would be required to provide their initial interactive data submissions in year three of the phase-in period. The additional phase-in time for all but the largest accelerated filers is intended to permit companies to plan and implement their data tagging with the benefit of the experience of year one filers. It also is intended to enable us to monitor implementation and, if necessary, make appropriate adjustments during the phase-in period. In the case of IFRS filers, the phase-in also would provide the necessary time for development and testing of the list of tags for IFRS financial reporting. Our multiyear experience with the voluntary program has helped us understand the extent to which a filer would incur additional costs to create and submit its existing financial disclosures in interactive data format. Based on that experience, we believe that the process of converting a filer's existing ASCII or HTML financial statements into interactive data would not impose a significant burden or cost. The voluntary program clearly demonstrated that companies can, if they choose, tag their financial statements using currently available software without need of outside services or consultants; alternatively, they could rely on financial printers, consultants, and software companies for assistance, although they would retain ultimate responsibility for both their financial statements and their tagged data. As discussed in more detail in the cost-benefit analysis below,1 101 we believe that modest first-year costs for a company would decrease in subsequent periods, particularly once footnote tagging is implemented. We also believe that these costs would be justified by interactive data's benefits. As with domestic registrants, we believe foreign private issuers that report in U.S. GAAP or prepare their financial statements in accordance with IFRS as issued by the IASB would be able to comply with the rules without incurring significant costs. 101 See Part V. We expect that smaller companies, which generally are disproportionately affected by regulatory costs, also would be able to provide their reports in interactive data format without undue effort or expense. While interactive data reporting involves changes in reporting procedures mostly in the initial reporting periods, we expect that these changes would provide efficiencies in future periods. As a result, there may be potential net savings to the filer, particularly if interactive data become integrated into the filer's financial reporting process. While we recognize that requiring interactive data financial reporting would likely result in start-up expenses for smaller companies, these expenses may be substantially lower than those of larger filers, given that smaller filers tend to have simpler financial statements than larger companies, with fewer elements and disclosures to tag. In addition, we expect that both software and third-party services will be available to help meet the needs of smaller filers. We also intend that the third year phase-in for smaller reporting companies would permit them to learn from the experience of the earlier filers. It would also give them a longer period of time across which to spread first-year data tagging costs. As noted above, 102 CIFiR has issued a Progress Report that contains a developed proposal that the Commission phase in the requirement that companies file financial statements using interactive data after the satisfaction of specified preconditions relating to: 102 See Part I.C above. • Successful testing of the list of tags for U.S. financial statement reporting; • The capacity of reporting companies to file interactive data using the new list of tags for U.S. financial statement reporting; and • The ability of the Commission's electronic filing system to provide an accurate human-readable version of the interactive data. 103 103 We are giving careful consideration to CIFiR's developed proposal. We believe that the factors they cite as preconditions will occur before the start of a requirement to provide interactive data. We expect to consider the factors in connection with determining whether to adopt the proposed interactive data submission requirements with regard to companies that prepare their financial statements in accordance with U.S. GAAP. We also expect to consider the same factors for companies that prepare their financial statements in accordance with IFRS as issued by the IASB. The Progress Report's developed proposal recommends that we phase in financial statements using interactive data by requiring the largest 500 domestic registrants, 104 as determined by the value of shares held by unaffiliated persons, to furnish (rather than file) interactive data for the face of their financial statements and, in block-tagged form, 105 the footnotes to the financial statements. The Progress Report's developed proposal also recommends that, one year after we impose this requirement on the first group of registrants, we impose the same requirement on the remaining domestic registrants that fall within the definition of “large accelerated filer.” Finally, the Progress Report's developed proposal recommends that, once the specified conditions have been satisfied and the second phase-in period has been implemented, we evaluate whether and when to require that the domestic large accelerated filers file rather than furnish financial statements in interactive data format, as well as the inclusion of all other reporting companies. 104 The developed proposal does not address foreign companies. We do not believe that whether a U.S. GAAP reporting company is domestic or foreign should determine the applicability of the proposed rules, and therefore foreign companies using U.S. GAAP would be included in the phase-in schedule along with their domestic counterparts. As noted, foreign private issuers that prepare their financial statements in accordance with IFRS as issued by the IASB also are included in the proposal, although they would not be phased in until year three. 105 By “block” text we mean that the entire footnote or other discrete item, such as a schedule or table, would be tagged as an individual element. We have carefully considered the Committee's thoughtful developed proposal, including the recommended phase-in of 500 initial companies and delayed consideration of non-accelerated and other filers until after two years. We propose a phase-in schedule similar to the one for which the Committee calls. 106 However, instead of waiting until after the second year to determine whether to propose extending the applicability of the rules to all filers, the proposed rules would establish a phase-in for the remaining companies' required interactive data submissions that would begin in the third year. Based on participants' experience with the voluntary program and our consultations with filers, software providers and filing intermediaries, we believe the proposed rules would accelerate the improvement and availability of inexpensive software. This, in turn, would generate more options and assistance for non-accelerated filers, smaller reporting companies, and foreign private issuers so that they could become proficient in the use of interactive data without undue burden. 106 As previously noted, the proposed worldwide public float cutoff of $5 billion would result in approximately 500 companies subject to the proposed rules in year one. Although including a larger number of filers in the initial phase-in might increase the overall commercial and analytical value of the interactive data, which in turn would likely increase the supply of software for analyzing and presenting interactive data to analysts and investors, we believe the establishment of a firm schedule for all U.S. GAAP- and IFRS-reporting companies to file their financial statements using interactive data would serve nearly as well to stimulate the further development of interactive data-related software and services while also affording most companies additional time to learn from the experience of others. We also believe that concurrently adopting a phase-in for non-accelerated filers, smaller reporting companies, and foreign private issuers using IFRS as issued by the IASB would establish an appropriate and measured timeline, which we would be able to monitor and, if necessary, reconsider during the first two years of the phase-in. *Request for Comment:* • Is the proposed schedule for implementation of interactive data tagging appropriate? • Should we delay the first required interactive data submissions until the second half of 2009 or later? What benefits would there be to advancing or delaying implementation of the proposed rules? How much lead time do large accelerated filers need to familiarize themselves with interactive data and the process of mapping financial statements using the list of tags for U.S. financial statement reporting or IFRS financial reporting? • Should the initial submission required by the proposed rules be a periodic report? If so, should it be a Form 10-Q for domestic issuers? 107 Would this be an easier report for companies to prepare, or would it be best for companies to begin providing interactive data with respect to the fiscal year end financial statements? 107 We note that when the Commission adoped the electronic filing requirements, the first required electronic filing was a Form 10-Q rather than a registration statement or Form 10-K. Release No. 33-6977 (Feb. 23, 1993) [58 FR 14628]. • Instead of a cut-off using a worldwide public common equity float of $5 billion at the end of the issuer's most recently completed second fiscal quarter, would an initial phase-in including all large accelerated filers or large accelerated filers with a smaller public float better accomplish the goals outlined in the release? If we use a public float, should it be $5 billion or some other amount lower or higher than the proposed cut-off, such as $3 billion or $10 billion? Would some other cut-off, or some other schedule be preferable? Would it be better to measure the public float as of a time other than the end of the issuer's most recently completed second fiscal quarter and, if so, when? • Would the initial phase-in include enough companies to encourage potential vendors of interactive data products and services to invest in the development and marketing of new and improved products and services? If not, how would such a level affect the markets for both filer and investor products and services? • Should the phase-in schedules differ as between U.S. GAAP non-accelerated and smaller reporting companies and foreign private issuers that prepare their financial statements in accordance with IFRS as issued by the IASB? • Is the proposed third-year phase-in approach for companies other than large accelerated filers necessary or sufficient for them to familiarize themselves with interactive data and the process of mapping financial statements using the list of tags for U.S. financial statement reporting or IFRS financial reporting? • Is the proposed third-year phase-in sufficient for smaller reporting companies and foreign private issuers to allocate the necessary resources and meet the proposed requirements, or would a more delayed schedule be appropriate? • Should smaller reporting companies and foreign private issuers reporting in U.S. GAAP be subject to the proposed rules at all? Should compliance with the proposed rules be solely voluntary for smaller reporting companies or foreign private issuers reporting in U.S. GAAP? • Would requiring interactive data from foreign private issuers reporting in U.S. GAAP create a disincentive for these issuers to use U.S. GAAP in preparing their financial statements? Is this offset by the proposed requirement that foreign private issuers reporting in IFRS as issued by the IASB use interactive data within three years? Should the requirements extend only to foreign private issuers reporting in U.S. GAAP that file on domestic forms? • Should foreign private issuers that prepare their financial statements in accordance with IFRS as issued by the IASB be subject to the new rules, as proposed? Should the proposed rules also apply to foreign private issuers that prepare their financial statements in their local GAAP and reconcile to U.S. GAAP for Exchange Act reporting purposes if their home jurisdictions have developed interactive data reporting programs? Would the proposed rules' current exclusion of such issuers create a disincentive for foreign private issuers to use IFRS as issued by the IASB for their Exchange Act reporting? • Are there extra burdens that foreign private issuers reporting in U.S. GAAP or IFRS as issued by the IASB would incur under the proposed rules? Do any such burdens necessitate a one year or other delay in the proposed phase-in requirement as and when it otherwise would apply to them? • Do foreign private issuers using foreign filing agents have comparable or sufficient access to interactive data software and support services? • Should the proposed new rules apply to a Canadian issuer's financial statements prepared in accordance with U.S. GAAP and filed with the Commission under cover of Form 40-F? 108 Should the proposed new rules apply to a Canadian issuer's registered offering on Form F-9 109 or F-10, or any other forms available under the Multijurisdictional Disclosure System? 110 108 17 CFR 249.240f. Certain Canadian foreign private issuers file registration statements and annual reports under the Multijurisdictional Disclosure System, which permits eligible Canadian companies to use their disclosure documents prepared in accordance with Canadian requirements in filings with the Commission. 109 17 CFR 239.39. 110 17 CFR 239.40. • Should we permit or require foreign private issuers filing their annual financial statements using U.S. GAAP also to provide in interactive data format any interim financial information that they furnish on Form 6-K? If so, what factors should we consider in determining whether to require or permit such submissions? Should such a requirement be phased in? What are the answers to these questions if the foreign private issuer uses IFRS as issued by the IASB? • Should investment companies registered under the Investment Company Act, business development companies or other entities that report under the Exchange Act and prepare their financial statements in accordance with Article 6 of Regulation S-X be subject to the proposed rules? Is the current investment management list of tags sufficiently developed for required use by these companies? • The Commission recently proposed to accelerate the filing deadline for annual reports filed on Form 20-F by foreign private issuers under the Exchange Act by shortening the filing deadline from 6 months to within 90 days after the foreign private issuer's fiscal year-end in the case of large accelerated and accelerated filers, and to within 120 days after a foreign private issuer's fiscal year-end for all other issuers, after a two-year transition period. 111 In light of this rule proposal, should we lengthen the proposed phase-in deadlines for foreign private issuers, for example, by one year if the issuer is not a large accelerated filer? 111 Release No. 33-8900 (Feb. 29, 2008) [73 FR 13404]. 3. Documents and Information Covered by the Proposed Rules a. Financial Statements and Financial Statement Schedules The proposed rules would require interactive data tagging of a filer's complete financial statements and any required financial statement schedules. 112 As with the voluntary program, the proposed rules would require companies to provide the interactive data in an exhibit. Interactive data would be required for all periods included in the filer's financial statements. The proposed rules would not, however, require interactive data submissions for other financial statements that may be required of filers, including those provided pursuant to Rules 3-05, 3-09, 3-10, 3-14, and 3-16 of Regulation S-X. 113 112 As previously noted, proposed Rule 405 of Regulation S-T would directly set forth the basic tagging requirements and indirectly set forth the rest of the tagging requirements through the requirement to comply with the EDGAR Filer Manual. Consistent with proposed Rule 405, the EDGAR Filer Manual would contain the detailed tagging requirements. 113 17 CFR 210.3-05, 17 CFR 210.3-09, 17 CFR 210.3-10, 17 CFR 210.3-14, 17 CFR 210.3-16. As with the voluntary program, the proposed rules would require that the line item descriptions and amounts presented on the face of the financial statements in the traditional format filing be the same as in the interactive data format. Also, the rules would prohibit partial presentation of face financial statements in interactive data format. For example, excluding comparative financial information for prior periods would not be permitted. Unlike the voluntary program, our proposed rules require companies using U.S. GAAP or foreign private issuers using IFRS as issued by the IASB to provide tagged data for the footnotes and schedules to the financial statements. At the time of our adopting release for the voluntary program in 2005, we stated that we recognized technical issues made it difficult to tag the notes to the financial statements. We did, however, provide volunteers with the option of tagging the notes to the financial statements. 114 Since the time of the adopting release, the necessary list of tags has been completed and the available software has advanced sufficiently to require that the financial statement footnotes and schedules be included in the proposed rules. 114 See section II.E. of Securities Act Release No. 8529 (February 3, 2005) [70 FR 6556, 6559]. The voluntary program adopting release recommended that if participants voluntarily provided footnotes in interactive data format, then they should provide enough detail so that the tagging would be of practical value to users. The release stated that a single tag for the entire group of footnotes in a filing would cover too much information to be useful to the user. We still believe that one tag for the entire group of footnotes would be confusing and provide little benefit. Tagging each footnote separately, however, would allow users the ability to compare footnote disclosure between periods and across filers while minimizing the burden on preparers. We are therefore proposing that the footnote disclosures in the traditional format filing be the same as in the interactive data format. This would be accomplished by tagging the footnotes using four different levels of detail:

(i)Each complete footnote tagged as a single block of text;

(ii)Each significant accounting policy within the significant accounting policies footnote tagged as a single block of text;

(iii)Each table within each footnote tagged as a separate block of text; and

(iv)Within each footnote, each amount ( *i.e.* , monetary value, percentage, and number) separately tagged and each narrative disclosure required to be disclosed by U.S. GAAP (or IFRS as issued by the IASB, if applicable), and Commission regulations separately tagged. To allow filers time to become familiar with tagging footnotes, we are proposing that in each filer's first year of interactive data reporting only level

(i)would be required. All four levels would be required starting one year from the filer's initial required submission in interactive data. In year two, when a filer would first be required to tag its footnotes and schedules using multiple levels of detail, the filer would be given an additional 30 days beyond the due date or filing date of its report or registration statement to file the interactive data exhibit. Subsequent interactive data exhibits using all of the levels would be required at the same time as the rest of the related report or registration statement. We believe the one-time 30-day grace period would help a filer comply with the more detailed tagging requirements. We propose requiring these various levels of detailed tagging for the financial statement footnotes after considering the range of needs of investors, analysts, and other consumers of financial information. We believe the block-text tagging required under levels

(i)through

(iii)would satisfy the need of those who desire disclosures within the context of an entire footnote or an entire table. The detail tagging of individual amounts and narrative disclosures within the footnotes required under level

(iv)would satisfy the need of those who desire to analyze specific pieces of information or data. The requirement that in the second year a filer tag separate each amount within a footnote ( *i.e.* , monetary value, percentage, and number) and each narrative disclosure required to be disclosed by U.S. GAAP (or IFRS as issued by the IASB, if applicable), and Commission regulations should not affect a filer's decisions regarding what to disclose in its traditional format filing. We are aware of questions as to whether the contextual information or data elements chosen from the standard list of tags could potentially reveal information that the rest of the related registration statement or periodic report would not otherwise make known. However, we do not believe that the contextual information or data elements chosen should provide any additional substantive disclosure. To clarify the intent of the rules, we propose to include an instruction to proposed Rule 405 of Regulation S-T stating that the rules require a disclosure format, but do not change substantive disclosure requirements. The rules also would state clearly that the information in interactive data format should not be more or less than the information in the ASCII or HTML part of the related registration statement or report. In connection with their annual and transition reporting on Forms 10-K or 20-F, filers may be required under existing financial reporting requirements to include certain supplementary financial statement schedules with their financial statements. The form and content of these schedules are governed by Article 12 of Regulation S-X. 115 The list of tags for U.S. financial statement reporting enables companies to tag individual facts in these financial statement schedules, or to block tag each entire schedule. 115 See Rules 5-04 and 7-05 of Regulation S-X and Items 17 and 18 of Form 20-F. We propose that filers also be required to include with their interactive data any financial statement schedules prescribed by Article 12 of Regulation S-X. These financial statement schedules would be tagged using two different levels of detail; only the first level would be required in the first year. Both levels would be required starting one year from the filer's initial required submission in interactive data format. Similar in concept to the tagging approach proposed for the financial statement footnotes, the required levels of detail would be:

(i)Each complete financial statement schedule tagged as a block of text; and

(ii)each amount ( *i.e.* , monetary value, percentage, and number) separately tagged and each narrative disclosure required to be disclosed by Commission regulations separately tagged. A filer may revise its previously filed financial statements for a variety of reasons, such as the retrospective application of a new accounting principle or the correction of an error. Our proposed rules would require a filer to provide revised interactive data at the same time it files the revised financial statements with the traditional format filing. 116 Under the proposed rules, filers also would be required to provide interactive data for transition reports on Forms 10-Q, 10-K, or 20-F. 116 Revised interactive data would be required so that the financial information would be the same in both the traditional format filing and the interactive data file. If the financial statements are not revised in connection with an amended registration statement, periodic report, or transition report, the exhibit index would indicate that the interactive data file was already provided. *Request for Comment:* • Are the proposed four levels of detail appropriate for footnote tagging? What alternative footnote disclosure items or criteria do commenters recommend we establish for tagging footnotes? Why would those be more appropriate than what we propose? • Should we require all four levels for footnotes in the first year instead of using the phase-in approach for the more detailed tagging? Should detailed tagging of a filer's footnotes and schedules not be required until more than one year after its initial interactive data submission, for example, in year three or four? • Are the proposed two levels of detail appropriate for financial statement schedule tagging? If not, what alternatives would be more appropriate? • Should we require both levels for financial statement schedules in the first year instead of using the phase-in approach for more detailed tagging? • Is the most detailed level of tagging too prescriptive, or is it too broad? Would it help to achieve comparability among filers? Would it impose an unnecessary burden on filers in preparing their XBRL data compared to the potential benefit to consumers of data? What problems or obstacles may be encountered in applying the proposed requirement? • Would the most detailed level of tagging result in the creation of a high number of company-specific extensions? If so, would the additional effort needed to create new extensions diminish once a filer has tagged at this level of detail? Should the tagging requirement instead be only to require detailed tagging to the extent a standard tag already exists in the standard list of tags? • Does the proposed rule provide adequate and effective guidance on how to tag information in the footnotes to the financial statements? For example, would it be feasible for companies to identify the narrative disclosure required by U.S. GAAP or IFRS as issued by the IASB that needs to be tagged separately? Should it be more principles-based? If so, what should those principles be? • Do the standards we propose for tagging provide clear enough guidance for preparers so that we can expect to achieve consistency among filers? • Should schedules to the financial statements be omitted from our proposed rule? If so, why? • What additional costs and burdens would there be with detailed tagging of the financial statement footnotes and financial statement schedules as opposed to “block” tagging? • Would investors and other users of tagged data benefit from the tagging of individual amounts ( *i.e.* , monetary values, percentages, and numbers) and narrative disclosures within each footnote together with block text? • Should we require that filers reporting in U.S. GAAP, or in IFRS as issued by the IASB, tag their document and entity 117 information? Would this information be useful in interactive data format? 117 See footnote 70 above. • Is it reasonable to expect that requiring interactive data-formatted financial statements in general or footnotes in particular will not change the discretionary content that companies provide in the traditional format filing? Would the availability of tagged data possibly cause competitive pressures on filers to choose to make more disclosures that are permissible, encouraged, or otherwise not required by Commission regulations? Alternatively, might the availability of tagged data possibly cause filers to choose to curtail such disclosures? What types of disclosures would those be? • Should transition reports not be subject to the proposed rules? If not, why not? • Would users of financial information find tagged financial statement schedules useful for analytical purposes? • Should the proposed rules require interactive data submissions for a filer's financial information provided under Forms 8-K and 6-K, such as earnings releases or interim financial information? If so, what level of tagging detail would be appropriate, and would a reasonable grace period from the date of the Form 8-K or 6-K to the deadline for interactive data ( *e.g.* , one, three, or five days) address concerns that filers require additional time to provide interactive data for such financial information? Does financial information provided under Form 8-K or 6-K, such as earnings releases, present additional burdens compared to other forms that would warrant excluding them from the proposed rules? • Should the proposed rules require interactive data submissions for other financial statements that may be provided by filers, including those provided pursuant to Rules 3-05, 3-09, 3-10, 3-14 and 3-16 of Regulation S-X? If so, how should a requirement be phased in? • Should we provide an opportunity for non-investment company issuers to submit voluntarily interactive data format information other than that which they would be required to submit as interactive data? If so, should we permit such interactive data format information to be subject to provisions governing the proposed required filing of interactive data? Should we instead permit such interactive data format information to be submitted under a modified voluntary program that would apply to such information in a manner similar to the way it applies to XBRL-Related Documents under the current voluntary program? • Should we require or permit interactive data submissions for executive compensation? Would interactive data of executive compensation be useful to investors? Approximately how much additional cost would interactive reporting of executive compensation require of companies? • If we were to require or permit interactive data for executive compensation, should all narrative and numerical disclosure required in the traditional electronic filing 118 be required in interactive data format? If we were to require only a subset of the required disclosure, what subset should be required? For example, would it be appropriate to required tagging of only the Summary Compensation Table and other tables as applicable? Would it present an accurate picture of the compensation? How should an interactive data requirement for executive compensation treat the footnotes and narrative disclosure? 118 See Item 402 of Regulation S-K, 17 CFR 229.402. • If we were to require or permit interactive data for executive compensation, should we require the same data provided by the Executive Compensation Reader currently available on our Web site? 119 119 The Executive Compensation Reader displays the Summary Compensation Table disclosure of 500 large companies that followed the new executive compensation rules in reporting 2006 compensation information in their proxy statements filed with the Commission. By using the reader, an investor can view amounts included in the Summary Compensation Table Stock Awards and Option Awards columns based on either the full grant date fair value of the awards granted during the fiscal year, or the compensation cost of awards recognized for financial statement reporting purposes with respect to the fiscal year, and recalculate the Total Compensation column accordingly. • If we were to require or permit interactive data for executive compensation, should the interactive data be filed with the proxy statement, which often contains the executive compensation disclosure, or as an amendment to the Form 10-K, which often incorporates the executive compensation disclosure by reference? 120 Would it diminish significantly the value to investors if interactive data for executive compensation were not required to be submitted until, for example, 30 or 45 days after it was required to be submitted in traditional format? If there were such a 30- or 45-day delay in the requirement, would it be advisable to permit the delayed submission to be made in an exhibit to a Form 8-K or to an amendment on Form 10-K? 120 General Instruction G.3. to Form 10-K. • How should a requirement to provide interactive data for executive compensation apply to foreign private issuers? 121 121 Item 6.B of Form 20-F. • Should we require or permit interactive data submissions for other financial, statistical or narrative disclosure, such as beneficial ownership of management and five percent or greater shareholders or tabular disclosure of contractual obligations? 122 122 17 CFR 229.403, 17 CFR 229.303(a)(5). b. Registration Statements Covered by the Proposed Rules We are proposing that, subject to the phase-in period described above, all registration statements filed under the Securities Act, including initial public offerings, be required to include interactive data when financial statements are included directly in the registration statement, rather than being incorporated by reference. This would include all periods included in the registration statement as required by Regulation S-X and our rules. We believe analysts, investors, the public, and others would benefit from the enhanced ability of interactive data to locate and compare financial data included in registration statements. Under the proposed rules, interactive data would be required for the acquiring company, the filer, but not for the company being acquired, in the context of a business combination. The additional burden of configuring disclosure from traditional electronic format into interactive data format in the context of a registered offering is not anticipated to significantly add to the time or expense of companies filing registration statements. 123 123 As noted above, if an amended registration statement is filed that does not involve any change in the financial statements, the interactive data exhibit would not be required to be re-filed. The exhibit index would simply note that the exhibit had already been filed. *Request for Comment:* • Should registration statement financial information be subject to the new rules, as proposed? In particular, should registrants making initial public offerings in year three (and later years) of the phase-in period be required to provide interactive data if, as would be typical, they were not already required to file periodic reports subject to the requirement to submit an interactive data exhibit? 124 Should we permit rather than require interactive data to be provided in initial public offerings or other registration statements? 124 An issuer might already be required to submit periodic reports subject to the requirement to submit an interactive data exhibit without ever having made an initial public offering registered under the Securities Act. An issuer could be in that position, even during year one of the phase-in, for example, if the issuer became publicly held as a result of the type of spin-off Staff Legal Bulletin No. 4 (Sept. 16, 1997) describes as not requiring registration under the Securities Act. • If we require interactive data, should the proposed rules apply to registration statement financial information based on the size of the registrant (for example, distinguishing between large accelerated filers and smaller reporting companies)? • Should the proposed rules require filers to include interactive data with respect to all filings of the registration statement when the registration statement is filed multiple times due to amendments? If not, which filings of the registration statement should be subject to the interactive data submission requirement? Should we, for example, limit the Securities Act filings that would require interactive data to those that contain a preliminary prospectus that is circulated? 125 Should the proposed rules apply to a final prospectus supplement filed under Securities Act Rule 424? 126 If we require interactive data with filings that do not currently include exhibits, such as final prospectuses, should we require that the interactive data be provided as schedules or exhibits? Once interactive data are provided with a registration statement, should we limit the requirement to provide interactive data for amendments to only the amendments that reflect substantive changes from or additions to the financial information? Would revising interactive data that previously were provided in connection with a registration to reflect changes to the registration statement involve much burden? 125 The instruction to Item 501(b)(3) of Regulation S-K [17 CFR 229.501(b)(3)] addresses disclosure requirements applicable to specified circulated preliminary prospectuses. 126 17 CFR 230.424. Currently, Rule 424 prospectuses do not have a provision for exhibits, so additional EDGAR programming would be needed. • Should interactive data be required only in connection with initial public offering registration statements under the Securities Act, rather than, as proposed, all Securities Act registration statements? • In a registration statement on Form S-4 or F-4, or proxy statement relating to a proposed merger, should interactive data be required for the company being acquired as well as the acquiring company? Should interactive data of the company being acquired be required only if that company already is subject to interactive data reporting under the proposed rules? • Should we also require interactive data to be provided in connection with Exchange Act registration statements on Form 10 and Form 20-F? 4. Initial Filing Grace Period As noted above, interactive data would be required at the same time as the rest of the filing to which it relates. Each company's initial interactive data submission, however, would be permitted as an amendment to a registration statement within 30 days of the date of filing or as an amendment to Form 10-K, 20-F, or 10-Q within 30 days of the due date for filing of the rest of the related report. In addition, as discussed above in Part II.B.3.a, in year two when a filer would first be required to tag its footnotes and schedules using all levels of detail, the interactive data exhibit would be required within 30 days of the due date or filing date of the related report or registration statement, as applicable. Currently in the voluntary program, filers may provide the interactive data at the time of filing or at any later time, without a deadline. 127 We believe that, consistent with our view regarding the value of widespread market use of the interactive data, companies should be required to provide the interactive data at the time the registration statement or report is required to be filed. We do not believe this timing requirement would place undue pressure on filers. We believe, for example, based on our experience with the voluntary program, that the time period for the quarterly or annual report is sufficient for filers to convert their ASCII or HTML financial statements into interactive data format. 127 The voluntary program permits filers to provide the initial and any such restated financial information in interactive data format using Form 8-K. The proposed rules, however, would require that interactive data be provided as an exhibit to the filing itself, including any restated Forms 10-K, 10-Q, or 20-F. *Request for Comment:* • Should we permit interactive data information to be provided later than the related filing for the first year, rather than just the first filing? Should we provide a grace period for the first filing as to which the issuer is required to tag financial statement footnotes in detail? Is a grace period not needed? • Should any grace period either for the first filing or for subsequent filings be for fewer or more than 30 days, such as five, 20 or 45 days? What would the impact of a grace period be on the usefulness of interactive data? 5. Web Site Posting of Interactive Data We believe interactive data, consistent with our proposed rules, should be easily accessible for all investors and other market participants. As such disclosure becomes more widely available, advances in interactive data software, online viewers, search engines and other Web tools may in turn facilitate access and usability of the data. Encouraging widespread accessibility to filers' financial information furthers our mission to promote fair, orderly, and efficient markets, and facilitate capital formation. We believe Web site availability of the interactive data would encourage its widespread dissemination, thereby contributing to lower access costs for users. We therefore propose that each filer covered by the proposed rules be required to provide the same interactive data on its corporate Web site, if it has one, that would be required to be provided to the Commission on the earlier of the day it filed or was required to file the related registration statement or report, as applicable. 128 128 Proposed Rule 405 would contain the Web site posting requirement. We also propose to provide, however, that Web site posting of the interactive data would not be required until the end of any applicable grace period that would apply to the submission of the interactive data to the Commission. Similarly, we propose to provide that Web site posting of the interactive data would not be required before submission of the interactive data when submission of the data is delayed in accordance with and during the term of any applicable hardship exemption provided under Rule 201 or 202 as proposed to be revised. Proposed revisions to Rules 201 and 202 are more fully discussed below in Part II.E. We believe access to the interactive data on corporate Web sites would enable search engines and other data aggregators to more quickly and cheaply aggregate the data and make them available to investors because the data would be available directly from the filer, instead of through third-party sources that may charge a fee. To help further our goals of decreasing user cost and increasing availability, we do not propose to allow companies to comply with the Web posting requirement by including a hyperlink to the documents available electronically on the Commission's Web site. We believe this requirement would be consistent with the increasing role that corporate Web sites perform in supplementing the information filed electronically with the Commission by delivering financial and other disclosure directly to investors. For example, we note that since 2003 issuers with corporate Web sites have been required to post on their Web sites beneficial ownership reports filed with respect to their securities on Forms 3, 4, and 5 under Section 16(a) of the Exchange Act. 129 We also note that many companies provide on their Web sites access to their periodic reports, proxy statements, and other Commission filings. 130 This proposal would expand such Web site posting by requiring companies with Web sites to post their interactive data as well. 131 129 Section 16(a)(4)(C) [15 U.S.C. 78p(a)(4)(C)], Rule 16a-3(k) [17 CFR 240.16a-3(k)]. 130 Companies filing registration statements and accelerated filers and large accelerated filers in their periodic reports are required to disclose whether or not they make available free of charge on or through their Web site, if they have one, their annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports. Companies that do not make their reports available in that manner also must disclose the reasons they do not do so and whether they voluntarily provide electronic or paper copies of their filings free of charge upon request. See Item 101(e) of Regulation S-K. 131 As further discussed in Part II.E, we propose that a company that failed to post its interactive data as required would be deemed ineligible to use short form registration Forms S-3, S-8, and F-3 and would be deemed not to have adequate public information available for purposes of Rule 144(c)(1) unless and until it posted. *Request for Comment:* • Should we adopt rules that require each filer to post interactive data from registration statements and periodic and transition reports on its corporate Web site, if it has one? • What advantages, if any, would dual Internet and EDGAR availability have for users, search engines, software developers, and others involved in the extraction and processing of financial data? Would it be helpful if our Web site provided the option to download the interactive data submission from our Web site or the issuer's Web site? Would it add a significant burden if an issuer were required to submit with its interactive data the URL that would link specifically to that interactive data as posted on the issuer's Web site or, alternatively, link to a part of the issuer's Web site from which there would be easy access to the interactive data as posted there? What would facilitate the realization of any advantages of Web site posting, for example the use of a standardized URL for interactive data? Would a standardized URL add significant cost to posting? • Instead of requiring Web site posting, should we require that filers disclose in their registration statements or reports whether or not they provide free access to their interactive data on their corporate Web sites and, if not, why not? • What impact would be realized by filers that do not currently provide Web sites? Would the proposed rules affect whether filers create or maintain Web sites? • Would Web site posting decrease the time and cost required for aggregators of financial information and users to access disclosure formatted using interactive data? • If we require Web site posting of interactive data, should we also require that the Web site include language stating that the entire registration statement, or periodic report also is available for free at the Commission's Web site? • If we require Web site posting of interactive data, should we require, as proposed, that each filer provide the interactive data on its corporate Web site on the same day as the related filing, instead of at the same time? C. Accuracy and Reliability of Interactive Data 1. Voluntary Program To help ensure the accuracy of interactive data in the voluntary program, the data has undergone validation upon receipt by our electronic filing system separate from the normal validation of the traditional format filing. 132 Potential liability also helps ensure the accuracy and reliability of the data. Although the voluntary program has provided limited protections from liability under the federal securities laws 133 and excluded interactive data from being subject to officer certification requirements under Exchange Act Rules 13a-14 and 15d-14, 134 interactive data in the voluntary program are subject to the anti-fraud provisions of the federal securities laws. The voluntary program also encourages participants' efforts to create accurate and reliable interactive data that is the same as the corresponding disclosure in the traditional electronic format filing by providing that a participant is not liable for information in its interactive data that reflects the same information that appears in the corresponding portion of the traditional format filing, to the extent that the information in the corresponding portion of the traditional format filing was not materially false or misleading. To further encourage reasonable efforts to provide accurate interactive data, the voluntary program treats interactive data that do not reflect the same information as the official version as reflecting the official version if the volunteer meets several conditions. The volunteer must have made a good faith and reasonable attempt to reflect the same information as appears in the traditional format filing and, as soon as reasonably practicable after becoming aware of any difference, the volunteer must amend the interactive data to cause them to reflect the same information. 135 132 If the traditional format filing meets its validation criteria, but any interactive data fail their own validation criteria, all interactive data are removed and the traditional format filing is accepted and disseminated without the interactive data file. 133 Rule 402 under Regulation S-T provides these liability protections. 134 See Rules 13a-14(f) [17 CFR 240.13a-14(f)] and 15d-14(f) [17 CFR 240.15d-14(f)]. 135 17 CFR 232.402(b). 2. Use of Technology To Detect Errors Complete, accurate, and reliable financial statements and other disclosures are essential to investors and the proper functioning of the securities markets. Our proposed requirement to submit interactive data with registration statements and reports is designed to provide investors with new tools to obtain, review, and analyze information from public filers more efficiently and effectively. To satisfy these goals, interactive data must meet investor expectations of reliability and accuracy. Many factors, including company policies and procedures buttressed by incentives provided by the application of technology by the Commission, market forces and the liability provisions of the federal securities laws, help further those goals. Building on the validation criteria referenced above for interactive data in the voluntary program, we plan to use validation software to check interactive data for compliance with many of the applicable technical requirements and to help the Commission identify data that may be problematic. For example, we expect the validation software to • Check if required conventions (such as the use of angle brackets to separate data) are applied properly for standard and, in particular, non-standard special labels and tags; • Identify, count, and provide the staff with easy access to non-standard special labels and tags; 136 136 For example, if a company uses the word “liabilities” as the caption for a value data tagged as “assets,” the software would flag the filing and bring it to the staff's attention. In contrast, if the company used “Total Assets” or “Assets, Total,” the software would identify the use of these terms as a low risk discrepancy. • Identify the use of practices, including some the XBRL U.S. Preparers Guide contains, that enhance usability; 137 137 The XBRL U.S. Preparers Guide, available from the XBRL U.S. Web site, would provide guidance to facilitate preparing information in the interactive data format that we propose to require. \ • Facilitate comparison of interactive data with disclosure in the corresponding traditional format filing; • Check for mathematical errors; and • Analyze the way that companies explain how particular financial facts relate to one another. 138 138 The technology used to show these relationships is known as a “linkbase.” The Commission will seek to ensure that linkbases not only comply with technical requirements but are not used to evade accounting standards. The availability of interactive data to the staff may also enhance its review of company filings. After the FDIC required submission of interactive data, it reported that its analysts were able to increase the number of banks they reviewed by 10% to 33%, and that the number of bank reports that failed to fully meet filing requirements fell from 30% to 0%. These bank reports require information that is more structured and less varied than the information we would require. As a result, the FDIC's efficiency gains from the use of interactive data likely would be greater than ours. We believe analysts, individual investors and others outside the Commission that use the interactive data submitted to us also will make use of software and other tools to evaluate the interactive data and, as a result, market forces will encourage companies to provide interactive data that accurately reflects the corresponding traditional format data in the traditional format filing. For example, the use of non-standard special labels or tags (extensions) could introduce errors, but we expect the open source and public nature of interactive data and the list of tags for U.S. financial statement reporting would enable software easily to detect and identify any modifications or additions to the approved list of tags. We believe such software and other technology will be widely available for free or at reasonable cost. Investors, analysts, and other users therefore would be able to identify the existence and evaluate the validity of any such modifications or additions. We also anticipate that companies preparing their interactive data and investors, analysts, and other users would use such devices to search for and detect any changes made to the standard list of tags. Because analysts and other users would rapidly discover mistakes or alterations not consistent with the desired use of interactive data, filers would have a powerful incentive to prepare such data with care and promptly correct any errors. With this proposal, we seek the rapid adoption and use of interactive data without imposing unnecessary cost and expense on filers. We therefore propose that the interactive data itself provided to us generally would be subject to a liability regime under the federal securities laws similar to that governing the voluntary program. We also propose that viewable interactive data as displayed through software available on the Commission's Web site, as described above and further discussed below, would be subject to the same liability under the federal securities laws as the corresponding portions of the traditional format filing. 139 139 Proposed Rule 406 of Regulation S-T would set forth the liability applicable to interactive data and viewable interactive data that is displayed through software available on the Commission's Web site. Proposed Rule 406 also would clarify that disclosures in the traditional format part of the related official filing with which the interactive data appear as an exhibit remain subject to the federal securities laws as in the past and that nothing in proposed Rule 405 of Regulation S-T (setting forth content, format and other requirements related to interactive data) or proposed Rule 406 would affect the liability otherwise applicable to the traditional format data. Proposed revised Rules 13a-14(f) and 15d-14(f) would exclude interactive data from the officer certification requirements. Interactive data would be subject to the following liability-related provisions: • Deemed not filed or part of a registration statement or prospectus for purposes of sections 11 and 12 of the Securities Act; • Deemed not filed for purposes of section 18 of the Exchange Act and section 34(b) of the Investment Company Act; • Not otherwise subject to the liabilities of these sections; • Subject to other liability under these Acts for the substantive content of the financial disclosures (as distinct from compliance with proposed Rule 405) in the same way and to the same extent as the traditional format part of the related official filing. The content of the financial disclosure refers, for example, to the numerical values in the financial statements or footnotes and the statements in the footnotes. The Rule 405 requirements generally refer to the process of tagging and formatting the content of the financial statements for the interactive data file; • Deemed filed for purposes of (and, as a result, benefit from) Rule 103 under Regulation S-T; 140 140 The viewed data would be deemed filed for purposes of Rule 103 under Regulation S-T [17 CFR 232.103] and, as a result, in general, the issuer would not be subject to liability for electronic transmission errors beyond its control if the issuer corrects the problem through an amendment as soon as reasonably practicable after the issuer becomes aware of the problem. • Protected from liability under these Acts for failure to comply with the requirements of proposed Rule 405 if the interactive data either: ○ Met the requirements of proposed Rule 405 of Regulation S-T; or ○ Failed to meet those requirements but the failure occurred despite the issuer's good faith and reasonable effort and the issuer corrected the failure as soon as reasonably practicable after becoming aware of it; and • Excluded from the officer certification requirements under Exchange Act Rules 13a-14 and 15d-14. None of the proposed liability-related provisions for interactive data submitted to the Commission, however, would affect the application of the anti-fraud provisions under the federal securities laws, whether the interactive data is submitted to the Commission or posted on an issuer's Web site. Rule 405 is being proposed, in part, under the Commission's authority to specify information required to be submitted to the Commission in, for example, registration statements and periodic reports. To encourage accurate filing of interactive data without fear of making good faith errors, the Commission is proposing Rule 406. Although not expressly addressed in proposed Rule 406, the Commission would have the authority to enforce compliance with proposed Rule 405 because it has the authority to enforce compliance with any of its rules. We believe these liability-related provisions strike an appropriate balance between avoiding unnecessary cost and expense and encouraging accuracy in light of the nature of the interactive data to which they apply and the additional accuracy incentives that may be provided by our validation software and market forces. Other aspects of the proposal would supplement the Commission's objective of supplying reliable and accurate information to investors. First, the financial statements and other disclosures in the traditional format part of the related official filing with which the interactive data appear as an exhibit would continue to be subject to the usual liability provisions of the federal securities laws. For example, the traditional format part of the related official filing would continue to be subject to section 10(b) and Rule 10b-5 141 of the Exchange Act and, in the appropriate circumstance, to section 11 of the Securities Act. Form 10-K would continue to be considered filed, while the information required by Items 1, 2, and 3 of Form 10-Q would continue to be considered furnished for purposes of section 18 of the Exchange Act. 142 141 17 CFR 240.10b-5. 142 General Instruction F. Form 10-Q: “Filed Status of Information Presented.” Second, we propose that the usual liability provisions of the federal securities laws also would apply to human-readable interactive data that is identical in all material respects to the corresponding data in the traditional format filing 143 as displayed by a viewer that the Commission provides. Under these circumstances, for example, a Form 10-K's viewable interactive data would be deemed filed and subject to section 18 of the Exchange Act, consistent with the liability applicable to the corresponding part of the traditional format Form 10-K, and a Form 10-Q's viewable interactive data would be deemed furnished and not subject to section 18 of the Exchange Act, consistent with the liability applicable to the corresponding part of the traditional format Form 10-Q. And a Securities Act registration statement's viewable interactive data as displayed through software available on the Commission's Web site and identical in all material respects to the corresponding data in the traditional format filing would be subject to section 11 of the Securities Act. In that regard, such viewable interactive data disclosure therefore would have exactly the same potential liability as the corresponding portions of the traditional format part of the filing. We believe applying liability for such viewable interactive data displayed through software on the Commission's Web site would further investors' interests in filers providing accurate interactive data under our proposal. 143 The human-readable interactive data would be identical to the corresponding data in the traditional format filing if the filer complied with the interactive data tagging requirements of proposed Rule 405. We expect that each filer would be in the best position to determine the appropriate manner in which to assure the accuracy of the interactive data it would be required to submit and the viewable interactive data that would result. We also expect that software providers and other private sector third parties would help develop procedures and tools to help in that regard. As an adjunct to those private sector efforts, we plan to make available to filers, on an optional basis, the opportunity to help assure accuracy by making a test submission with the Commission or using software we provide to create viewable interactive data. A filer would have the opportunity to submit an interactive data exhibit as part of a test submission just as a filer can make test submissions today. 144 The validation system would process the test submission with an interactive data exhibit similar to the way it processes test submissions today. If it found an error, it would advise the filer of the nature of the error and as to whether the error was major or minor. As occurs in the voluntary program, a major error in an interactive data exhibit that was part of a live filing would cause the exhibit to be held in suspense in the electronic filing system while the rest of the filing would be accepted and disseminated if there were no major errors outside of the interactive data exhibit. If that were to happen, the filer would need to revise the interactive data exhibit to eliminate the major error and submit the exhibit as an amendment to the filing to which it is intended to appear as an exhibit. A minor error in an interactive data exhibit that was part of a live filing would not prevent the interactive data exhibit from being accepted and disseminated together with the rest of the filing if there were no major errors in the rest of the filing. We believe it would be appropriate to accept and disseminate a filing without the interactive data exhibit submitted with it if only the exhibit has a major error, in order to disseminate at least as much information as timely as would have been disseminated were there no interactive data requirement. 144 The EDGAR Filer Manual addresses test submissions primarily at Section 6.6.5 of Volume II. We are not proposing that filers be required to involve third parties such as auditors or consultants in the creation of the interactive data provided as an exhibit to a filer's periodic reports or registration statements, including assurance. We are taking this approach after considering various factors, including: • The availability of a comprehensive list of tags for U.S. financial statement reporting from which appropriate tags can be selected, thus reducing a filer's need to develop new elements; 145 145 We expect the same would be true with respect to the tags for reporting under IFRS as issued by the IASB. • The availability of user-friendly software with which to create the interactive data file; • The multi-year phase-in for each filer, the first year of which entails the relatively straightforward process of tagging face financial statements, as was done during the voluntary program, and block tagging footnotes and financial statement schedules; • The availability of interactive data technology specifications, and of other XBRL U.S., and XBRL International resources for preparers of tagged data; • The advances in rendering/presentation software and validation tools for use by preparers of tagged data that can identify the existence of certain tagging errors; • The expectation that preparers of tagged data will take the initiative to develop sufficient internal review procedures to promote accurate and consistent tagging; and • The filer's and preparer's liability for the accuracy of the traditional format version of the financial statements that will also be provided using the interactive data format. *Request for Comment:* • Do the proposed rules strike an appropriate balance to promote the availability of reliable interactive data without imposing undue additional costs and burdens? If not, what balance of liability will best encourage filers to prepare reliable interactive data without subjecting them to undue fear of mis-tagging? How does the “extensibility” of interactive data, *i.e.* , a filer's ability to customize the standard list of tags to correspond more closely to the company's particular financial information, affect your answer? • What are the risks to investors under the proposed liability rules? Will investors still find the interactive data sufficiently reliable to use it? • Should interactive data be subject to liability if a filer does not tag its financial information in a manner consistent with the standards approved by the Commission, irrespective of the filer's good faith effort? If the answer is yes, what should the filer's liability be for such errors, and should liability attach even if the mistake is inadvertent? What if the error is the result of negligent tagging practices, but there was no affirmative intent to mislead? • If interactive data are subject to liability as proposed, is it necessary or appropriate for viewable interactive data to be subject to liability as and to the extent proposed or otherwise? Should the answer depend on the degree of liability to which the interactive data are subject? Should viewable interactive data be subject to liability in a manner or to an extent different than as proposed? • Should any or all interactive data be encompassed within the scope of officer certifications? Is there any reason to treat interactive data differently from traditional format data in this respect? • Should any or all interactive data be deemed filed for purposes of Section 34(b) of the Investment Company Act and, if so, should it be regardless of compliance with proposed rule 405 or a filer's good faith and reasonable efforts to comply? • Should the liability for interactive data be exactly the same as it is for XBRL-Related Documents under the voluntary program? • Would software be commercially available and reasonably accessible to all required interactive data filers, investors and analysts that would make detection of tagging errors, such as the use of inappropriate tags or improper extensions, easy and cost-effective? If so, would such monitoring by investors and analysts likely discourage the improper use of extensions or negligent conduct in the tagging process? • Would the use of software to search for and detect any differences between a filer's interactive data and the Commission-approved interactive data tags, financial statement captions, and other attributes depend on the degree of analyst coverage or investor interest? • Should a rule expressly state that the Commission retains the authority to enforce compliance with proposed Rule 405? • Should we require the involvement of auditors, consultants, or other third parties in the tagging of data? If assurance should be required, what should be its scope, and should any such requirement be phased in? • Should we phase in increasing levels of liability over time? Are the proposed limitations on liability necessary and appropriate at the outset, for example, the first year that a company is subject to the interactive data requirement, but inappropriate at a later time? Should we require that interactive data be subject to more liability later? • Should the validation software, as contemplated, cause an interactive data exhibit with a major error to be held in suspense in the electronic filing system while the rest of the filing would be accepted and disseminated if there were no major errors outside of the interactive data exhibit? In that case, should the validation software hold the entire filing in suspense or reject or accept the entire filing or interactive data exhibit? 3. Integration of Interactive Data and Business Information Processing As the technology associated with interactive data improves, issuers may integrate interactive data technology into their business information processing. When this integration occurs, the preparation of financial statements may become interdependent with the interactive data tagging process. As this occurs, an issuer and its auditor should evaluate these changes in the context of their reporting on internal control over financial reporting. 146 However, the evaluation would not require an auditor to separately report on an issuer's interactive data provided as an exhibit to a filers' reports or registration statements. 146 Exchange Act Rules 13a-15(f) [17 CFR 240.13a-15(f)] and 15d-15(f) [17 CFR 240.15d-15(f)] define the term “internal control over financial reporting,” in general, as a process designed by or under the supervision of specified persons and effected by the issuer's board of directors, management and other personnel “to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with [GAAP] and includes [specified] policies and procedures.” Rules 13a-15 and 15d-15 generally require specified issuers to maintain internal control over financial reporting and require the management of those issuers to evaluate the effectiveness of the issuer's internal control over financial reporting. In addition, the certifications specified by Item 601(b)(31) of Regulation S-K and Instruction B(e) of Form 20-F that relate to these specified issuers generally must address the establishment, maintenance, design, changes in and deficiencies and material weaknesses related to the issuer's internal control over financial reporting. SAS 8 (AU Section 550) was issued in December 1975 to address an auditor's consideration of information in addition to audited financial statements and the independent auditor's report on the audited financial statements included in documents that are published by an entity ( *e.g.* , an annual periodic report). Similarly, paragraph 18(f) of SAS 100 (AU Section 722) addresses an auditor's consideration of other information that accompanies interim financial statements included in quarterly periodic reports. With respect to registration statements, SAS 37 (AU Section 711) was issued in April 1981 to address the auditor's responsibilities in connection with filings under the federal securities statutes. With respect to our proposed rules, an auditor would not be required to apply AU Sections 550, 722, or 711 to the interactive data provided as an exhibit in a company's reports or registration statements, or to the viewable interactive data. 4. Continued Traditional Format and Interactive Data Cautionary Disclosure The proposed rules would not eliminate or alter existing filing requirements that financial statements and financial statement schedules be filed in traditional format. We believe investors and analysts may wish to use these electronic formats to obtain an electronic or printed copy of the entire registration statement or Form 10-Q, 10-K, or 20-F, either in addition to or instead of disclosure formatted using interactive data. In addition, we propose to no longer require or permit the cautionary disclosure from the voluntary program for required interactive data, which states that investors should not rely on the interactive data information in making investment decisions. We believe that such language would be inconsistent with the proposal that interactive data be part of the related registration statement or report. *Request for comment:* • Should the proposed rules eliminate the requirement that the financial information be submitted in traditional format, in addition to interactive data format? Should cautionary language from the voluntary program be eliminated or modified and, if not, why not? D. Required Items 1. Data Tags To comply with the proposed rules, filers using U.S. GAAP would be required to tag their financial information using the most recent list of tags for U.S. financial statement reporting, as released by XBRL U.S. and required by the EDGAR Filer Manual. 147 Each company would be required to use one or more of the five standard industry-specific lists identified in the EDGAR Filer Manual, as is appropriate for its business. 148 147 The latest list of data tags for U.S. financial statement reporting was released on April 28, 2008 and is available at *http://xbrl.us/pages/us-gaap.aspx* . See XBRL U.S. Press Release, XBRL U.S. Finalizes U.S. GAAP Taxonomies and Preparers Guide with Delivery to SEC (May 2, 2008). 148 We note that the vast majority of companies would fall under the Commercial and Industrial industry group. Additional guidance on the industry-specific lists is expected to appear in the EDGAR Filer Manual. Regular updates to the list of tags for U.S. financial statement reporting will likely be posted annually and be available for downloading. In addition, interim extensions may be made available for download in order to reflect changes in accounting and reporting standards. To provide companies sufficient time to become familiar with any such updates, we anticipate giving advance notice before requiring use of an updated list of tags. Based on experience to date with the most recent update to the list of tags, we believe that it is sufficiently developed to support the interactive data disclosure requirements in the proposed rules. Similarly, filers using IFRS as issued by the IASB would be required to tag their financial information using the most recent list of tags for international financial reporting, as released by the IASCF and specified in the EDGAR Filer Manual. 149 149 The International Accounting Standards Committee Foundation has been developing the IFRS financial reporting tag list since 2002. See *http://www.iasb.org/xbrl/index.html.* The 2008 version of the IFRS financial reporting tag list is planned to be finalized in June 2008 and updated annually for changes in accounting and reporting standards. One of the principal benefits of interactive data is its extensibility—that is, the ability to add to the standard list of tags in order to accommodate unique circumstances in a filer's particular disclosures. The use of customized tags, however, may also serve to reduce the ability of users to compare similar information across companies. In order to promote comparability across companies, our proposed rules would limit the use of extensions to circumstances where the appropriate financial statement element does not exist in the standard list of tags. We are also proposing that wherever possible, preparers change the label for a financial statement element that exists in the standard list of tags, instead of creating a new customized tag. For example, the standard list of tags for U.S. GAAP includes the financial statement element “gross profit.” The list does not include “gross margin,” because this is definitionally the same as “gross profit”—both are generally used to mean “excess of revenues over the cost of revenues.” A filer using the label “gross margin” in its income statement should use the tag corresponding to the financial statement element “gross profit.” It can then change the label for this item on the standard list to “gross margin.” Under Item 401(c) of Regulation S-T, voluntary filers' interactive data elements must reflect the same information as the corresponding traditional format elements. Further, no data element can be “changed, deleted or summarized” in the interactive data file. We do not propose to change this equivalency standard for financial statements provided in interactive data format as required by the proposed rules. *Request for Comment:* • Is our focus on comparability appropriate? Instead of stressing ease of financial statement comparability, should our rules permit greater use of customized data tags? • Should we codify any other principles to encourage comparability without unduly reducing the extensibility of interactive data? 2. Regulation S-T and the EDGAR Filer Manual We propose to require that filers provide interactive data in the form of exhibits to the related registration statements or reports. 150 Interactive data would be required to comply with our Regulation S-T 151 and the EDGAR Filer Manual. The EDGAR Filer Manual is available on our Web site. It includes technical information for making electronic filings to the Commission. Volume II of this manual includes guidance on the preparation, submission, and validation of interactive data submitted under the voluntary program. Before adoption of our proposed rules, we plan to update our manual with additional instructions for filers of interactive data. 150 The requirement to submit XBRL data as an exhibit would appear in Item 601(b)(101) of Regulation S-K and Item 101 of the Instructions to Exhibits of Form 20-F. 151 Proposed Rule 405 of Regulation S-T would directly set forth the basic tagging and posting requirements for the XBRL data and require compliance with the EDGAR Filer Manual. Consistent with proposed Rule 405, the EDGAR Filer Manual would contain the detailed tagging requirements. In addition to both Regulation S-T, which would include the rules we are proposing, and the instructions in our EDGAR Filer Manual, filers may access other sources for guidance in tagging their financial information. These include the XBRL U.S. Preparers Guide; user guidance accompanying tagging software; and financial printers and other service providers. New software and other forms of third-party support for tagging financial statements using interactive data are also becoming widely available. *Request for Comment:* • What specific guidance should be provided in Regulation S-T for interactive data filers? • Does the XBRL U.S. Preparers Guide provide useful guidance to promote consistent tagging between periods and among various companies? • Is the user guidance accompanying tagging software, and the guidance available from financial printers and other service providers helpful for filers to tag their financial statements? What other sources of guidance might prove useful? E. Consequences of Non-Compliance and Hardship Exemption We propose that if a filer does not provide the required interactive data submission, or post the interactive data on the company Web site, by the required due date, the filer would be unable to use short form registration statements on Forms S-3, F-3, or S-8. 152 This disqualification would last for so long as the interactive data are not provided. During the period of disqualification, the filer would be deemed not to have available adequate current public information for purposes of the resale exemption safe harbor provided by Rule 144. 153 Once a filer complies with the interactive data submission and posting requirements—provided it previously filed its financial statement information in traditional format on a timely basis—it would be deemed to have timely filed all of its periodic reports. 152 Forms S-3, F-3, and S-8 are regarded as short form registration statements because they enable eligible issuers to register securities for offer and sale under the Securities Act by providing information in a more streamlined manner than they otherwise could. In order to be eligible to use these short forms, an issuer must meet specified requirements, including being current in its filing of Exchange Act reports. In general, an issuer is current if it has filed all of its required Exchange Reports for the twelve months before filing the registration statement. Filers that are unable to use short form registration also are unable to incorporate by reference certain information into Forms S-4 and F-4. See Item 12 of Form S-4 and F-4. 153 Rule 144 under the Securities Act creates a safe harbor for the resale of securities under the exemption from Securities Act registration set forth in Section 4(1) of the Securities Act [15 U.S.C. 77d(1)]. In order for some resales of securities to comply with Rule 144, the issuer of the securities must be deemed to have adequate current public information available as specified by Rule 144(c)(1) [17 CFR 230.144(c)(1)]. Rule 144(c)(1) deems an issuer required to file reports under the Exchange Act to have adequate public information available if it is current in its filing of Exchange Act periodic reports. In general, an issuer would be deemed current for this purpose if it has filed all of its required Exchange Act periodic reports for the twelve months before the sale of securities for which the Rule 144 safe harbor is sought. We believe that precluding the use of short form registration statements during any period of failure to comply would appropriately direct attention to the proposed interactive data reporting requirement. And allowing filers to reestablish their current and timely status by later complying with the interactive data reporting requirement would strike a reasonable balance of negative consequences and recognition that the company's traditional format reports would have been filed. Consistent with the treatment of other applicable reporting obligations, we propose to provide hardship exemptions for the inability to timely electronically submit interactive data. Rule 201 under Regulation S-T provides for temporary hardship exemptions. Rule 202 under Regulation S-T provides for continuing hardship exemptions. Rule 201 generally provides a temporary hardship exemption from electronic submission of information, without staff or Commission action, when a filer experiences unanticipated technical difficulties that prevent timely preparation and submission of an electronic filing. The temporary hardship exemption permits the filer to initially submit the information in paper but requires the filer to submit a confirming electronic copy of the information within six business days of filing the information in paper. Failure to file the confirming electronic copy by the end of that period results in short form ineligibility. 154 154 Rule 201 of Regulation S-T. We recognize the inherently electronic nature of interactive data. In light of this and the consequences to an issuer of not timely submitting interactive data, we propose to revise Rule 201 to provide a temporary hardship exemption. This exemption would apply without staff or Commission action if a filer experiences unanticipated technical difficulties that prevent the timely preparation and electronic submission of interactive data. The proposed temporary hardship exemption would cause the filer to be deemed current for purposes of incorporation by reference, short form registration, and Rule 144 for a period of up to six business days from the date the interactive data were required to be submitted. 155 If the filer did not electronically submit the interactive data by the end of that period, from the seventh business day forward the filer would not be deemed current until it did electronically submit the interactive data. 155 The information would not have to be filed in paper first, as this would be meaningless in the case of interactive data. Rule 202 permits a filer to apply in writing for a continuing hardship exemption if information otherwise required to be submitted in electronic format cannot be so filed without undue burden or expense. If the staff, through authority delegated from the Commission, grants the request, the filer must file the information in paper by the applicable due date and file a confirming electronic copy if and when specified in the grant of the request. We propose to revise Rule 202 to provide that a grant of a continuing hardship exemption for interactive data would not require a paper submission and that filer would be deemed current until the end of the period for which the exemption is granted. Rule 202 also would provide that, if the exemption was granted for only a specified period rather than indefinitely, the filer would be deemed current up to the end of that period. If the filer did not electronically submit the interactive data by the end of that period, from the next business day forward the filer would not be deemed current until it did electronically submit the interactive data. Similarly, we propose to revise Rule 202 to provide an essentially mirror-image exemption from the proposed requirement for an issuer that has a corporate Web site to post the interactive data on its Web site. *Request for Comment:* • Are the consequences for failure to comply with the interactive data submission requirements appropriate? • Should the proposed rules treat companies that do not comply as not current? Should the proposed rules provide similar treatment whether the failure to comply relates to interactive data submission, or to corporate Web site posting? • Alternatively, should the proposed rules go further and treat companies that do not comply as not timely? • Should the proposed rules treat a filer's compliance with interactive data reporting as an express condition to the filer's registration statement's being declared effective? • Does our proposed rule strike the correct balance of positive and negative consequences when a filer meets its requirements to provide traditional format documents but fails to provide interactive data? • Do commenters believe that the proposed revisions to the hardship exemptions would be sufficient to cover unanticipated technical difficulties associated with interactive data? If insufficient, why would they be insufficient and how should the hardship exemptions be tailored to address technical difficulties associated with interactive data? For example, would six business days be an appropriate period for the temporary hardship exemption to apply? If not, would a shorter or longer period be appropriate, and why? III. General Request for Comments We request comment on the specific issues we discuss in this release, and on any other approaches or issues that we should consider in connection with the proposed amendments. We seek comment from any interested persons, including those required to file information with us on the EDGAR system, as well as investors, disseminators of EDGAR data, industry analysts, EDGAR filing agents, and any other members of the public. IV. Paperwork Reduction Act A. Background The proposed amendments contain “collection of information” requirements within the meaning of the Paperwork Reduction Act of 1995, or PRA. 156 The purpose of the proposed amendments is to make financial information easier for investors to analyze and to assist issuers in automating regulatory filings and business information processing. We are submitting the proposed amendments to the Office of Management and Budget (OMB), for review in accordance with the PRA. 157 An agency may not conduct or sponsor, and a person is not required to respond to, an information collection unless it displays a currently valid OMB control number. 156 44 U.S.C. 3501 *et seq.* 157 44 U.S.C. 3507(d) and 5 CFR 1320.11. The title for the new collection of information the proposed amendments would establish is “Interactive Data” (OMB Control No. 3235-XXXX). This collection of information relates to already existing regulations and forms adopted under the Securities Act and the Exchange Act that set forth financial disclosure requirements for registration statements and periodic reports. The proposed amendments would require issuers to submit specified financial information to the Commission and post it on their corporate Web sites, if any, in interactive data form. The specified financial information already is and would continue to be required to be submitted to the Commission in traditional format under existing registration statement and periodic report requirements. Compliance with the proposed amendments would be mandatory according to the phase-in schedule previously described. 158 Issuers not yet phased-in, however, could comply voluntarily with the proposed amendments. The information required to be submitted would not be kept confidential by the Commission. 158 See Part II.B. B. Reporting and Cost Burden Estimates 1. Registration Statement and Periodic Reporting Form S-1 (OMB Control No. 3235-0065), Form S-3 (OMB Control No. 3235-0073), Form S-4 (OMB Control No. 3235-0324), and Form S-11 (OMB Control No. 3235-0067) prescribe information that a filer must disclose to register certain offers and sales of securities under the Securities Act. Form F-1 (OMB Control No. 3235-0258), Form F-3 (OMB Control No. 3235-0256) and Form F-4 (OMB Control No. 3235-0325) prescribe information that a foreign private issuer must disclose to register certain offers and sales of securities under the Securities Act. Form 10-K (OMB Control No. 3235-0063) prescribes information that a filer must disclose annually to the market about its business. Form 10-Q (OMB Control No. 3235-0070) prescribes information that a filer must disclose quarterly to the market about its business. Form 20-F (OMB Control No. 3235-0288) is used by a foreign private issuer both to register a class of securities under the Exchange Act as well as to provide its annual report required under the Exchange Act. The information required by the new collection information we propose, would correspond to specified financial information now required by these forms and would be required to appear in exhibits to these forms and on filers' corporate Web sites. The compliance burden estimates for the proposed collection of information are based on the proposed phase-in, beginning with approximately 500 large accelerated filers subject to the rules in the first year, followed by approximately 1,300 more filers in year two and approximately 10,200 more filers in year three. Based on estimates from the voluntary filer participant questionnaire results, we estimate that interactive data filers would incur the following average: • Internal burden hours to tag the face financials: • 125 hours for the first filing under the proposed requirements; and • 17 hours for each subsequent filing. • Out-of-pocket cost for software and filing agent services: $6,140 for each filing. Based on qualitative assessments of time, we estimate that interactive data filers would incur the following average internal burden hours: • Footnotes • 7 hours to block tag for each filing made during the first year under the proposed requirements; • 100 hours to detail tag for the first filing made in the second year under the proposed requirements; and • 50 hours to detail tag for each subsequent filing. • Schedules • 1 hour to block tag for each filing made during the first year under the proposed requirements; • 10 hours to detail tag for the first filing made in the second year under the proposed requirements; and • 5 hours to detail tag for each subsequent filing. • Web site Posting: 4 hours to post all interactive data submissions made during each year. Based on the number of filers we expect to be phased in each of the first three years under the proposed requirements, the number of filings that we expect those filers to make that would require interactive data 159 and the internal burden hour and out-of-pocket cost estimates described, we estimate that the average yearly burden of the proposed requirements over the first three years would be 1,164,690 internal hours per year and $129 million in out-of-pocket expenses per year and would be incurred by an average of 4708 filers for an average yearly burden per filer of 247.4 internal hours and $27,400 in out-of-pocket expenses. 159 We include in the number of filings that would require interactive data both initial filings and amended filings but we estimate that the burden incurred in connection with an amended filing would be one half the burden that would be incurred if the amended filing were an initial filing. By the fifth year under the proposed requirements, filers to be phased in generally will have been subject to the proposed requirements for at least two years. As a result, filers generally would incur burdens applicable to interactive data filings made after the first filing in which the filer detail tagged footnotes and schedules. Consequently, we estimate that in the fifth year under the proposed requirements, the burden on filers would be 3,743,683 internal hours and $330.9 million in out-of-pocket expenses and would be incurred by 11,893 filers for an average burden per filer of 314.8 internal hours and $27,800 in out-of-pocket expenses. 160 160 We provide an estimate of the burden in the fifth year under the proposed requirements because we believe the burden in the fifth year may help indicate what the burden would be under the proposed requirements on an ongoing basis. 2. Regulation S-K and Regulation S-T Regulation S-K (OMB Control No. 3235-0071) specifies information that a registrant must provide in filings under both the Securities Act and the Exchange Act. Regulation S-T (OMB Control No. 3235-0424) specifies the requirements that govern the electronic submission of documents. The proposed changes to these items would add and revise rules under Regulations S-K and S-T. The filing requirements themselves, however, are included in the forms and we have reflected the burden for these new requirements in the burden estimate for the forms. These rules in Regulations S-K and S-T do not impose any separate burden. We assign one burden hour each to Regulations S-K and S-T for administrative convenience to reflect the fact that these regulations do not impose any direct burden on companies. C. Request for Comments We solicit comment on the expected Paperwork Reduction Act effects of the proposed amendments, including the following: • The accuracy of our estimates of the additional burden hours that would result from adoption of the proposed amendments; • Whether the proposed new collection of information is necessary for the proper performance of the functions of the Commission, including whether the information will have practical utility; • Ways to enhance the quality, utility and clarity of the information to be collected; • Ways to minimize the burden of the collection of information on those who respond, including through the use of automated collection techniques or other forms of information technology; and • Any effects of the proposed amendments on any other collections of information not previously identified. Any member of the public may direct to us any comments concerning these burden estimates and suggestions for reducing the burdens. Persons submitting comments on the collection of information requirements should direct their comments to the OMB, Attention: Desk Officer for the Securities and Exchange Commission, Office of Information and Regulatory Affairs, Washington, DC 20503, and send a copy of the comments to Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-9303, with reference to File No. S7-11-08. Requests for materials submitted to OMB by the Commission with regard to these collections of information should be in writing, refer to File No. S7-11-08, and be submitted to the Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549. OMB is required to make a decision concerning the collection of information between 30 and 60 days after publication of this release. Consequently, a comment to OMB is best assured of having its full effect if OMB receives it within 30 days of publication. V. Cost-Benefit Analysis The proposed rules would require submission of interactive data-formatted financial statements and other financial information and the posting of such information on an issuer's corporate Web site, if any, according to a phase-in schedule. The proposed rules likely would result in the benefits and costs described below. We base our belief on an economic analysis of data obtained from several sources, including voluntary program participant responses to a staff-prepared questionnaire, information on the experience of issuers that participated in an interactive data pilot program in Japan (covering a larger sample of issuers), and interviews conducted with parties knowledgeable about interactive data technology in order to learn their views on issues including those that might affect the interpretation of the questionnaire responses. 161 161 The proposed required program, similar to the voluntary program and the pilot program in Japan, would require use of interactive data in XBRL format. Interactive data are intended to remove a barrier in the flow of information between issuers and users of information that is conveyed through corporate financial reports. This should enable less costly dissemination of information and thereby improve the allocation of capital. The cost of implementation will depend primarily on the costs of transition by issuers to the new mode of reporting. The magnitudes of these benefits and costs from any individual issuer's adoption of interactive data reporting will depend on the number of other issuers who also adopt and on the availability of supporting software and other infrastructures that enable analysis of the information. To the extent that submitted information allows investors to make investment decisions based on market-wide comparison and analysis, the value to the investors of the reported information tends to increase with the total number of issuers adopting the regime. Likewise, issuers' incentives to report their information using interactive data depends on the interest level of the investors in this mode of reporting. By mandating implementation, the rule will expand the network of adopters and thereby create positive network externalities of reported information for the investors. A. Benefits of Interactive Data Submission and Web Site Posting The proposed rules have the potential to benefit investors both directly and by facilitating the exchange of information between issuers and the analysts and other intermediaries who receive and process the financial reports of public companies. 1. Information Access Benefits of the proposed rulemaking accrue from the acceleration of market-wide adoption of interactive data format reporting. The magnitudes of the benefits thus depend on the value to investors of the new reporting regime relative to the old reporting regime and on the extent to which the mandated adoption speeds up the market-wide implementation. Requiring issuers to file their financial statements using the interactive data format would enable investors, analysts, and the Commission staff to capture and analyze that information more quickly and at a lower cost than is possible using the same financial information provided in a static format. 162 Even though the new regime does not require any new information to be disclosed or reported, certain benefits accrue when issuers use an interactive data format to report their financial reports. These include the following. Through interactive data, what is currently static, text-based information can be dynamically searched and analyzed, facilitating the comparison of financial and business performance across companies, reporting periods, and industries. Any investor with a computer would have the ability to acquire and download interactive financial data that have generally been available only to large institutional users. For example, users of financial information could download it directly into spreadsheets, analyze it using commercial off-the-shelf software, or use it within investment models in other software formats. Also, to the extent investors currently are required to pay for access to annual or quarterly report disclosure that has been extracted and reformatted into an interactive data format by third-party sources, the availability of interactive data in Commission filings could allow investors to avoid additional costs associated with third-party sources. 162 See Part I. The magnitude of this informational benefit varies, however, with the availability of sophisticated tools that will allow investors to analyze the information. The growing development of software products for users of interactive data is helping to make it increasingly useful to both institutional and retail investors. 163 For example, currently there are many software providers and financial printers that are developing interactive data viewers. We anticipate that these will become widely available and increasingly accessible to investors. We expect that the open standard feature of the interactive data format will facilitate the development of applications, software, and that some of these applications may be made available to the public for free or at a relatively low cost. The continued improvement in this software would allow increasingly useful ways to view and analyze company financial information. 163 Press Release No. 2007-253 (Dec. 5, 2007). Interactive data also could provide a significant opportunity for issuers to automate their regulatory filings and business information processing, with the potential to increase the speed, accuracy, and usability of financial disclosure. This reporting regime may in turn reduce filing and processing costs. By enabling filers to further automate their financial processes, interactive data may eventually help filers improve the speed at which they generate financial information. For example, with standardized interactive data tags, registration statements and periodic reports may require less time for information gathering and review. Because a substantial portion of each financial report makes use of the same information, a filer that uses a standardized interactive data format at earlier stages of its reporting cycle may also increase the accuracy of its financial disclosure by reducing the need for repetitive data entry that could contribute human error and enhancing the ability of a filer's in-house financial professionals to identify and correct errors in the issuer's registration statements and periodic reports filed in traditional electronic format. A filer that uses a standardized interactive data format at earlier stages of its reporting cycle also may increase the usability of its internal financial information. Through interactive data, a filer can dynamically search and analyze what is currently static, text-based internal financial information, facilitating the comparison of financial and business performance across business units and reporting periods. For example, filers that use interactive data may be able to consolidate enterprise financial information more quickly and potentially more reliably across operating units with different accounting systems. 164 There has been a growing development of software products to assist filers to tag their financial statements using interactive data helping make interactive data increasingly useful. 165 164 However, we recognize that at the outset, filers would most likely prepare their interactive data as an additional step after their financial statements have been prepared. 165 Press Release No. 2007-253 (Dec. 5, 2007). Filers that automate their regulatory filings and business information processing in a manner that facilitates their generation and analysis of internal financial information could, as a result, realize a reduction in costs. 2. Market Efficiency The proposed requirements could benefit investors by making financial markets more efficient in regard to the following: 166 166 We believe the benefits would stem primarily from the requirement to submit interactive data to the Commission and the Commission's disseminating that data. We also believe, however, that the requirement that issuers with corporate Web sites post the interactive data required to be submitted would encourage its widespread dissemination thereby contributing to lower access costs for users and the related benefits described. We solicit comment in Part II.B.5 regarding what advantages, if any, dual Commission and corporate Web site availability would have. • Capital formation as a result of public companies being in a better position to attract investor capital because of greater (less costly) awareness on the part of the investors of issuer financial information; and • Capital allocation as a result of investors being better able to allocate capital among those issuers seeking it because of interactive data reporting facilitating innovations in efficient communication of issuer financial information. a. More Efficient Capital Formation An increase in the efficiency of capital formation is a benefit that may accrue to the extent that interactive data reduces some of the information barriers that make it costly for companies to find appropriate sources of external finance. In particular, smaller public companies are expected to benefit from enhanced exposure to investors. If interactive data financial reporting increases the availability, or reduces the cost of collecting and analyzing corporate financial data, then there could be improved coverage of small companies by analysts and commercial data vendors. At present, many small companies are not included in commercially available products that provide corporate financial data, possibly due to high data collection costs relative to the value of providing coverage. Their absence may reduce the likelihood that they receive coverage by financial analysts who use commercially available products to assess issuer performance. Hence, if interactive data reporting increases coverage of smaller companies by commercially available financial information products, and this increases their exposure to analysts and investors, then lower search costs for capital could result. In other words, smaller companies could realize a lower cost of capital, or less costly financing. While an increase in coverage should occur for some issuers, it is possible that less than full coverage will remain in more sophisticated products that provide analysis or reporting items beyond basic financial information. This conclusion is based on an assumption that many commercially available product offerings provide valuable information beyond what is reported in basic financial information, and the costs of providing this additional information for every company may make 100% coverage prohibitive. In particular, the smallest issuers may not offer sufficient market capitalization to make investment worthwhile to larger investors, for whom these commercial products are primarily designed. So while lower data collection costs are likely to increase the level of coverage that smaller issuers receive from investors and market analysts, there is no certainty that this will extend down to the very smallest set of issuers. As a result, it is possible that the capital-raising benefits of interactive data reporting for some issuers will not be as great as for others. Regardless, we are not aware of any data to suggest that any issuer would be made worse off with respect to analyst and investor coverage as it pertains to capital formation. b. More Efficient Capital Allocation An increase in the efficiency of capital allocation may accrue to the extent that interactive data increase the quality of information in financial markets by reducing the cost to access, collect and analyze corporate financial data or improves the content of issuer-reported information. 167 An increase in quality and improvement in content could enable investors to better allocate their capital among issuers. 168 167 In the context of the discussion below, quality refers to the ease with which end-users of financial data can access, collect and analyze the financial data. This issue is separate from the content of issuer-reported information. The higher the quality and the better the content, the more accurately investors can price the underlying securities. 168 Among the benefits to investors are some that are specific or most valuable to smaller money managers and retail investors, including the ability to acquire and download interactive financial reporting data that have generally been available only to large institutional users, and at substantial expense. Information quality in financial markets would likely be higher if interactive data reporting were required than if not, leading to more efficient capital allocation. As a result of the improved utility of information, investors may be able to better distinguish the merits of various investment choices, thereby facilitating capital flow into the favored investment prospects. This outcome is the main tenet of improved market efficiency, whereby providing more widespread access to information concerning the value of a financial asset such as a company's shares results in better market pricing. Consequently, reducing the costs of accessing, collecting and analyzing information about the value of a financial asset facilitates this end. Requiring companies to provide interactive data would improve the quality of financial information available to end users, and help spur interactive data-related innovation in the supply of financial services products, resulting from a potential increased competition among suppliers of such products due to lower entry barriers as a result of lower data collection costs. However, we have considered competing views of the informational consequences of interactive data. For example, a requirement to submit interactive data information could decrease the marginal benefit of collecting information and thus reduce the information quality to the extent it reduces third-party incentives to facilitate access to, collect or analyze information. Assuming that markets efficiently price the value of information, the amount of information accessed, collected (or enhanced) and analyzed will be determined by the marginal benefit of doing so. 169 Lowering information collection costs (through a requirement to submit interactive data information) should increase this benefit. If this is so, then there should be no degradation in the level of information quality as a result of changes in third-party provider behavior under an interactive data reporting regime. However, if one competitor in the industry can subsidize its operations through an alternative revenue stream, both quality and competition may suffer. 170 169 Also, we expect that because the proposed rules would require the use of the XBRL interactive data standard, XBRL's being an open standard would facilitate the development of related software, some of which may, as a result, be made available to the public for free or at a relatively low cost and provide the public alternative ways to view and analyze interactive data information provided under our proposed rules. 170 For illustration purposes only, assume that an Internet service company develops an interactive data-based tool that easily provides company financial data for free to all subscribers, and it uses this product as a loss leader to increase viewership and advertising revenue. If the data provided is of the same quality as data provided through subscription to other available commercial products, then there should be no informational efficiency loss. However, if a data aggregator's providing information that improves investor interpretation and goes beyond base financials is possible, but no longer profitable to produce for competitors without the subsidy, then valuable information production may be lost. Another potential information consequence of the proposed requirements may be changes to the precision and comparability of the information disseminated by data service providers since the interactive data requirements would shift the source of data formatting that allows aggregation and facilitates comparison and analysis from end-users to issuers submitting interactive data. At present, data service providers manually key financial information into a format that allows aggregation. As a result, the data service provider makes interpretive decisions on how to aggregate reported financial items so that they can be compared across all companies. Consequently, when a subscriber of the commercial product offered by a data service provider uses this aggregated data, it can expect consistent interpretation of the reported financial items. In contrast, a requirement for issuers to submit interactive data information would require the issuers to independently decide within the confines of applicable requirements which financial “tag” best describes each financial item—perhaps with the help from a filing agent or consultant—lessening the amount of interpretation required by data aggregators or end-users of the data. Once a tag is chosen, comparison to other companies is straightforward. However, since companies have some discretion in how to select tags, and can choose extensions (new tags) when they can not find an appropriate existing tag, unique interpretations by each company could result in reporting differences from what current data service providers and other end-users would have chosen. This view suggests that the information disseminated by data aggregators may be, on the one hand, less comparable because they have not normalized it across issuers but, on the other hand, more accurate because the risk of human error in the manual keying and interpretation of filed information would be eliminated and more precise because it will reflect decisions by the issuers themselves. Replication of prior methods of interpretation still would be possible, however, because issuers would continue to be required to file financial information in traditional format. As a result, nothing would prohibit data aggregators from continuing to provide normalized data. Nonetheless, interactive data benefits could diminish if other reporting formats are required for clarification in data aggregation. The content of issuer-reported information may improve because, as previously discussed, an issuer that uses a standardized interactive data format at earlier stages of its reporting cycle may increase the accuracy of its financial disclosure. 171 In contrast, the content of issuer-reported information may improve or decline to the extent that the interactive data process influences what issuers report. While the proposed requirements to submit and post interactive data information are intended to be disclosure neutral, it is possible they would affect what is reported. 172 171 See Part V.A.1. 172 We solicit comment on whether the proposed requirements would affect issuer disclosure in Part II.B.3.a. B. Costs of Requiring Submission and Posting of Interactive Data The primary cost of the rulemaking is the cost of filers' implementation of the rule, which includes the costs of submitting and posting interactive data. We discuss this cost element extensively below. In addition, because the rule allows an increase in the flow of financial information being reported directly to analysts and investors, there will be a cost of learning on the part of the investors in using and analyzing financial information at the interactive data level. As for the cost of implementation of the rule, based on currently available data, we estimate the average direct costs of submitting and posting interactive data-formatted financial statements and other information for all issuers under the proposed rules would, based on certain assumptions, be as follows: Table 1.—Estimated Direct Costs of Submitting Interactive Data-Formatted Financial Statements and Other Information First submission with block-text footnotes & schedules Subsequent submission with block-text footnotes & schedules First submission with detailed footnotes & schedules Subsequent submission with detailed footnotes & schedules Preparation face financials 173 $31,369 $4,312 $4,312 $4,312 Preparation footnotes 174 1,750 1,750 25,000 12,500 Preparation schedules 250 250 2,500 1,250 Software and filing agent services 175 6,140 6,140 6,140 6,140 Web site posting 176 1,000 1,000 1,000 1,000 Total cost 40,509 13,452 38,952 25,202 The above estimates are generated in part from a limited number of voluntary program participant questionnaire responses. In particular, these responses provided detail on the projected costs of preparing the face financials and for purchasing software or related filing agent services. A more detailed analysis of just the costs associated with voluntary program participation suggests that the estimated direct cost of submitting face financial statements in interactive data format falls within the range of $17,980 to $71,125 per issuer for the first submission. 177 This cost reflects expenditures on interactive data-related software, consulting or filing agent services used, and the market rate for all internal labor hours spent (including training) to prepare, review and submit the first interactive data format information face financial statements. Although the estimate accounts for estimation error resulting from the small sample statistics on which it is based, the future experiences of individual issuers regarding face financial statements still may vary due to differences between the voluntary program and the proposed required program 178 and may vary according to the issuers' size, complexity, prior experience with interactive data, and other factors not apparent from the voluntary program participant responses. 179 The discussion below summarizes the *direct cost* estimates of compliance regarding face financial statements based on voluntary program participant questionnaire responses and the specified assumptions. 180 173 Estimates based on voluntary filer program questionnaire responses, excluding participants with an interactive data-related business interest. These data suggest that the time required for tagging the face financials decreases by approximately 85% between the first and second submissions. A $250 wage rate is assumed for all preparation cost estimates. 174 The costs associated with block-tagging of footnotes and schedules are assumed to remain constant in subsequent filings. In contrast, anticipated learning benefits from more complicated detailed tagging of footnotes and schedules are assumed to result in a 50% reduction in cost for subsequent filings. 175 Software licensing and the use of a print agent can be substitutionary—companies can choose to do one or the other, or do both—and are thus aggregated. 176 This is an annual cost, and as such, will not be incurred for subsequent filings within the same year. 177 Voluntary program participants were not required to tag financial statement footnotes or schedules related to the financial statements except that registered management investment company participants were required to tag one specified schedule. Similarly, voluntary program participants were not required to post on their corporate Web sites, if any, the interactive data information they submitted. Consequently, the costs of requirements to tag financial statement footnotes and schedules related to financial statements and post interactive data information are not derived from the voluntary program participant questionnaire responses or discussed in our analysis of those responses. Those costs are, instead, derived from informal discussions with a limited number of persons believed to be generally knowledgeable about preparing, submitting and posting interactive data. 178 For example, the related list of tags would differ between the voluntary and proposed required program. When we adopted the voluntary program, the list of tags for U.S. GAAP financial statement reporting contained approximately 4,000 data elements. The list of tags released on April 28, 2008 contains approximately 13,000 data elements, with the most significant additions relating to the development of elements for standard U.S. GAAP footnote disclosure. 179 As such, caution should be used when referring to a particular estimate without also acknowledging the potential effect of these factors on future compliance costs. 180 The details of this analysis regarding face financial statements, including the underlying assumptions, concerns on extrapolating these results to a broader set of issuers, and other considerations related to both the costs and benefits of requiring submission of interactive data, are provided following the summary. • Average cost of first submission from voluntary program questionnaire data is $30,933. • Average cost of second submission is $9,060 (69% average reduction). • These average cost estimates increase by 20% after removing voluntary program participants in an interactive data-related business (these participants may have skills and incentives specific to interactive data, unrepresentative of other issuers). • Due to sampling error, 181 there is a 1% chance that the true costs are underestimated by up to 80%. Assuming this 1% likelihood and after removing participants in an interactive data-related business, estimated cost of first submission is $71,125. 181 In general, sampling error is the error that arises as a function of sampling in general and the sample chosen in particular. • Smaller financial issuers appear to have less complex financials and labor costs that tend to be 20-30% lower than for other issuers to submit interactive data information. • There also is some evidence to suggest that the smallest (non-accelerated) issuers might have submission costs or compliance difficulties in excess of other issuers. This analysis attempts to quantify some of the direct costs that issuers will incur if we require submission and posting of interactive data. 182 Whether issuers choose to purchase and learn how to use software packages designed for interactive data submissions or outsource this task to a third party, internal (labor) resources would be required to complete the task. The cost estimates provided here using voluntary program participant questionnaire responses shed light on the potential dollar magnitude of the costs of requiring interactive data submission other than with regard to tagging schedules and footnotes to financials statements. However, the small size of the participant response and the voluntary nature of participation suggest that the numbers may not reflect the costs that all issuers would incur in a required participation regime. 182 Because we are not proposing to require any kind of attestation or audit of interactive data in the rulemaking, the costs from attestation or auditing are not discussed in this analysis. At present, there are 76 issuers that have participated in the voluntary program. Of these, 35 were provided questionnaires on the details of their cost experience, and 22 responses were collected by the time of this analysis. Table 2 summarizes the average aggregate costs, including software and filing agent service costs and an estimated cost for the internal labor hours required to prepare and submit the interactive data format information. The low and high estimates of the cost for internal labor hours represent billing rates of $130 (internal junior accountant) and $250 (external accountant) per hour, respectively. 183 The reported costs are calculated using responses from all voluntary program participants that provided complete responses (20), and are also calculated using only those voluntary program complete responses

(15)from participants without an interactive data-related business activity. We also report the estimated bias in the reported cost when interactive data-related businesses are included, calculated as the percent difference between all participants and only those participants with no interactive data-related business activity. 183 These estimates are from the Securities Industry and Financial Markets Association's Management & Professional Earnings in the Securities Industry 2007, modified to account for an 1,800-hour work-year and multiplied by 5.35 to account for bonuses, firm size, employee benefits and overhead. Table 2.—Summary of Illustrative Survey Data on the Direct Cost Estimates for Voluntary Program and Confidence Intervals

(CIs)for Voluntary Program Participants All voluntary program participants (N=20) Low High No interactive data-related business (N=15) Low High Estimated bias (percent) Low High *First submission:* Estimated costs $17,980 $30,933 $21,424 $37,509 19.2 21.3 Upper bound using 5% CI 29,682 49,749 36,550 61,771 23.1 23.1 Upper bound using 1% CI 34,065 56,635 42,555 71,125 37.7 25.6 *Subsequent submissions:* Estimated costs 7,408 9,060 8,382 10,452 13.1 15.4 Upper bound using 5% CI 12,691 15,357 15,209 18,494 19.8 20.4 Upper bound using 1% CI 14,687 17,753 17,938 21,737 22.1 22.4 *Average reduction in cost:* From 1st to 2nd submission 69% 71% Although there is a great deal of consistency across the voluntary program questionnaire responses, three considerations become important when extending these questionnaire-based cost estimates from the voluntary program sample to the population of all issuers that would be required to submit interactive data. First, the sample size is small. There are only 22 voluntary program respondents to the questionnaire, representing approximately 0.21% of all issuers that ultimately would be required to submit interactive data. 184 The small sample size reduces the reliability of the cost estimates as a predictor of future costs, a result of sampling error. 185 184 This is based on 10,692 domestic and foreign issuers that filed an annual report in 2006. Under our proposed rules, not all foreign private issuers would be required to submit interactive data; only those foreign private issuers that prepare their financial statements in accordance with U.S. GAAP or IFRS as issued by the IASB would be required to submit interactive data. Foreign private issuers that report in accordance with other structures and reconcile to U.S. GAAP would not be required to submit interactive data. 185 For example, a 1% confidence interval (reported above) measures 80% of the reported mean, such that if a different set of randomly drawn respondents were surveyed about their interactive data cost experience, there is a 1% chance that this new group would have more than an 80% increase in costs from what is estimated in this analysis. As a result, for example, if a different group of randomly drawn voluntary program participants had responded to the questionnaire with their cost experience, there is a 1% chance that the new group would have more than an 80% increase in the lowest cost for the first submission above $34,065. The second and third factors to consider arise from the fact that the survey respondents may not be representative of the general population of issuers that would comply with a proposed rule. This is known as “sample selection bias.” The first of these factors arises from evidence that many voluntary program survey participants have a business interest in interactive data, such as filing agents, other filing service providers, financial services providers, and other consulting agents. Five of the 22 survey respondents had such an affiliation. These issuers may have incentives and skill sets unrepresentative of the average issuer, and as such, may cause their costs to depart from the likely submission cost of the average issuer if interactive data become required. Indeed, after removing the five respondents with an obvious interactive data related business interest, the average cost estimate increased by 20%. Thus, submission costs appear to be lower for issuers that have an interactive data-related business relative to other issuers. The other effect of sample selection relates to the size of the respondent companies. The voluntary program questionnaire evidence is based on responses of predominantly large issuers, and their cost experience may not be representative of the smaller issuers. As is evident from Figure 1, voluntary program participants are found among the largest of all issuers, with more than 64% in the largest market size decile, and more than 88% considered to be large accelerated filers (measured as greater than $750 million in market capitalization). 186 In contrast, only 1,846 of 10,692 filers (17.4% of all filers) were considered large accelerated filers in 2006. 186 “Large accelerated filers,” among other things, have shares held by unaffiliated persons with a value of at least $700 million. Our analysis instead uses as a threshold $750 million in the value of shares held by all persons (market capitalization) as an approximation of the value of shares held by non-affiliates. The use of market capitalization may overestimate the number of large accelerated filers. A size bias is plausible, since there are reasons to believe that the reported submission costs vary with the size of the issuer. For instance, larger issuers might have lower interactive data submission costs than smaller issuers, since they have a larger pool of internal resources to draw from, allowing them to more efficiently allocate available skill sets from their labor pools to implement interactive data reporting technology. Moreover, larger organizations might have greater excess capacity in their internal labor pool such that they are better able to absorb the short-term labor needs of “learning” interactive data. If so, the effect of sample selection in this instance may be to underreport the interactive data submission costs for smaller issuers. Alternatively, smaller issuers could have lower submission costs than larger issuers if their operations are less complex. This reasoning suggests that simpler business operations lead to simpler financial statements, requiring less effort to tag and submit using interactive data. Hence, any reduction in available resources to allocate to interactive data submission may be offset by lesser demand for resources. This view suggests a trade-off in submission costs as issuers become smaller, and as a typical result, less complex. EP10JN08.059 1. Survey Results From the Japanese Interactive Data Pilot Program We have also reviewed evidence from the Japanese interactive data pilot program. Starting in April 2008, Japanese filers are required to report financial statements with their Financial Services Agency

(JFSA)using interactive data technology. Before this requirement, 1,233 Japanese companies participated in a pilot program; 768 participants described their interactive data submission experience through a JFSA survey. Unlike the U.S. voluntary program participants, Japanese pilot program participants span a larger issuer size range, including a considerable number of the smallest issuers in the market (see Figure 3). The survey evidence suggests that smaller Japanese filers required less time to prepare and submit their first interactive data filing than larger Japanese filers, but even so, some of the smallest filers exhibited the greatest compliance difficulty. 187 Figure 2 plots the average number of labor hours required for a Japanese filer to successfully prepare and submit its first interactive data filing, disaggregated by approximate filer size measured by the book value of their capital. 188 The number of labor hours required is approximately 30% higher for the largest filers relative to the smaller, but not smallest, filers. However, the size-labor hour relation is not perfectly linear. The smallest size group deviates from the trend, with the average number of labor hours required being similar to that of larger filers. 187 Japanese filers did not tag financial footnotes. 188 Data provided by the JFSA reported firm sizes according to their book value of equity, in Yen. These values were converted into dollars at a rate of 108 Yen to the dollar. Although the Commission generally measures issuer size based on the market value of outstanding securities, market value is highly correlated to book value of equity. As a result, the use of book value of equity in Figures 2 and 3 should not impact the relevance of inferences drawn from those Figures. EP10JN08.060 While the number of labor hours required for the smallest filers is not greater than that of the largest filers, the smaller filers were far more likely to file late, or “fail” (Figure 3). The JFSA classified firms as “failures” for having not completed their first filing in the time required ( *i.e.* , before the filing deadline). This smallest filer size group has a failure rate of nearly 25% compared to less than 5% for the largest filer size group. EP10JN08.061 The JFSA indicated that most of the “failures” occurred among filers who underestimated the resources required for their first filing, with many of the failing firms (44%) electing to prepare and submit their documents on their own. In contrast, it is estimated that 87% of pilot program firms used a printing company to prepare and submit their documents. Of the Japanese pilot program participants that were classified as having failed to submit, 69% indicated that they would not have a problem for their next submission. The results of the JFSA survey yield two relevant conclusions. First, smaller, but not the smallest, issuers are likely to have lower submission costs as a result of fewer labor hours required to submit information using interactive data. Second, these submission cost savings may not accrue to the smallest issuers ( *i.e.* , those with total equity held by non-affiliates with a market value below $75 million). Moreover, there is a risk that the smallest issuers might have difficulty in complying with a time-specific requirement if implemented too quickly. These findings add to the evidence from the U.S. voluntary program questionnaire results given that they span a greater issuer size range. 2. U.S. Issuer Document Complexity Also Suggests Lower Costs for Smaller Issuers Although the Japanese pilot program findings document an important size-related cost consideration, extrapolating these results to what might be expected in a U.S. interactive data required program poses some risk given the potential differences between Japanese and U.S. regulatory regimes and filing requirements. For instance, implementing required interactive data reporting in the United States may be more complex, as a greater number of accounting concepts can be tagged. 189 Indeed, voluntary program results demonstrate an average of 101 hours to complete the first filing, more than three times the time required for the Japanese pilot program participants. 189 The technical differences between the two systems are beyond the scope of this analysis. To assess the likelihood that the Japanese survey results can be applied to the proposed program under which interactive data would be required, Form 10-K complexity is examined across issuer size. If reduced complexity in financial reporting is responsible for the lower labor costs among smaller Japanese issuers, then evidence of reduced complexity among Commission issuers as their size decreases would suggest that lower labor costs among small U.S. issuers as well. This analysis uses the number of items reported in a filer's financial document as the measure of document complexity. The evidence in Figure 4 reveals that there is roughly a 15% difference in the number of elements reported by the smallest and largest filers. 190 In other words, U.S. filer document complexity results are consistent with lower compliance costs for smaller firms (leaving aside the very smallest filers). 190 Edgar Online provided the number of reported items in each of the three main financial tables (balance sheet, income statement, and statement of cash flow) for all U.S. filers from 2001 and 2007, and this was matched to market data from CRSP (Center for Research in Security Prices) to be included in the analysis. EP10JN08.062 3. Scalability of Interactive Data-Related Support Services and Technology The final cost consideration in this section is the scalability of interactive data-related support services and technology. In particular, it is unclear how the market for interactive data support services and technology may change if the Commission required over 10,000 issuers to submit and post interactive data. The roles of each potential kind of service provider within the interactive data market are likely to develop further and are not yet clear, and there are many potential participants to consider, including the software vendors, financial reporting system providers ( *i.e.* , providers of widely used financial products), print/filing agents, auditors and other consultants, as well as the Commission. Until the market of issuers that submit interactive data information grows substantially larger (either by requirement or by expansion of the number of volunteers), it is difficult to predict how standard solutions will evolve. For example, we do not know whether issuers will adopt solutions that create interactive data submissions using third party software, a so-called “bolt-on” approach, or will seek integrated solutions that enable issuers to prepare interactive data submissions from their existing financial services software. Moreover, filing agents may maintain their role as an intermediary by offering interactive data technology or other service providers may cause that role to change. Others with financial and technical expertise may participate in the technology with unpredictable results. Combining the uncertainty over the source of future interactive data services with increased demand for these services could result in a new equilibrium market price that is different from what is currently reported by voluntary program participants. This price could be higher if the demand for interactive data services increases (from 76 voluntary program participants to more than 10,000 total participants) at a faster rate than the supply for these same services. For example, we are aware that one interactive data service provider offers a basic package to issuers that costs $15,000, and includes all software resources and training required (it suggests 40 hours is needed) for the issuer to submit its first quarterly interactive data information. This price schedule was based on an expectation of servicing as many as 100 voluntary participants in the first year of the program. However, the main pricing concern for the future is whether this or similar products could be scaled upwards to service a much larger market without material (adverse) impact to the stated price. More broadly, if an interactive data requirement resulted in clients subscribing for interactive data services faster than the rate at which these services can be supplied, then a price increase is the natural discriminator in how to allocate limited resources. The submission costs discussed in this section suggest that a phase-in program that is implemented too quickly could result in higher than necessary submission costs if the supply of interactive data-related resources is constrained, but the effect would likely diminish as a market place for interactive data services develops. Hence, this concern is mitigated to the extent that issuers are phased in at a rate that allows interactive data service suppliers to keep pace with demand. D. Comment Solicited We solicit comment on all aspects of this cost-benefit analysis, including the identification of any additional costs or benefits or, suggested alternatives to, the proposed rules. Commenters are requested to provide empirical data and other factual support for their views to the extent possible. We request comment regarding the costs and benefits to investors, companies, analysts, third-party information providers, software providers, filing agents, and others who may be affected by the proposed rules. We are particularly interested in information on the costs and benefits to smaller reporting companies. In particular, we request comment regarding: • The differences between start-up costs and the costs of providing interactive data on a continuing basis after the initial preparation; • The cost to prepare interactive data in block-text and detail for footnotes and schedules to financial statements; • Differences in interactive data preparation costs due to differences between U.S. GAAP and IFRS as issued by the IASB and the list of tags related to each; and the cost of Web site posting. VI. Consideration of Burden on Competition and Promotion of Efficiency, Competition and Capital Formation Section 23(a)(2) of the Exchange Act 191 requires us, when adopting rules under the Exchange Act, to consider the impact that any new rule would have on competition. In addition, section 23(a)(2) prohibits us from adopting any rule that would impose a burden on competition not necessary or appropriate in furtherance of the purposes of the Exchange Act. Furthermore, section 2(b) 192 of the Securities Act, section 3(f) 193 of the Exchange Act, and section 2(c) 194 of the Investment Company Act require us, when engaging in rulemaking where we are required to consider or determine whether an action is necessary or appropriate in the public interest, to consider, in addition to the protection of investors, whether the action will promote efficiency, competition, and capital formation. 191 15 U.S.C. 78w(a)(2). 192 15 U.S.C. 77b(b). 193 15 U.S.C. 78c(f). 194 15 U.S.C. 80a-2(c). The proposals to require issuers to submit interactive data to the Commission and post it on their corporate Web sites are intended to make financial information easier for investors to analyze while assisting in automating regulatory filings and business information processing. In particular, we believe that the proposed rules would enable investors and others to search and analyze the financial information dynamically; facilitate comparison of financial and business performance across issuers, reporting periods and industries; and, possibly, provide a significant opportunity to automate regulatory filings and business information processing with the potential to increase the speed, accuracy, and usability of financial disclosure. Further, as discussed in detail above, we believe that the proposals may lead to more efficient capital formation and allocation. 195 195 See Part V.A.2. We understand that private sector businesses such as those that access financial information and aggregate, analyze, compare or convert it into interactive format have business models and, as a result, competitive strategies that the proposed interactive data requirements might affect. Since interactive data technology is designed to remove an informational barrier, business models within the financial services industry that are currently adapted to traditional format document reporting may change, with possible consequences for the revenue stream of current product offerings due to the competitive effects of such a change. The competitive effects may relate to changes in the accessibility of financial information to investors, the nature of the information that investors receive, and the potential from new entry or innovation in the markets through which financial reports are transmitted from filers to investors. For example, lower entry barriers that result from lower data collection costs may increase competition among suppliers of financial services products and help spur interactive data-related innovation. It is also possible, however, that a requirement to submit interactive data information could decrease the marginal benefit of collecting information and thus cause suppliers of financial services products to produce information that is less robust to the extent the decreased marginal benefit reduces third-party incentives to facilitate access to, collect or analyze information. If markets efficiently price the value of information, the amount of information accessed, collected (or enhanced) and analyzed will be determined by the marginal benefit of doing so. 196 Lowering information collection costs (through a requirement to submit interactive data information) should increase this benefit. If this is so, then there should be no degradation in the level of information quality as a result of changes in third-party provider behavior under an interactive data reporting regime. However, if one competitor in the industry can subsidize its operations through an alternative revenue stream, both quality and competition may suffer. 196 Also, we expect that because the proposed rules would require the use of the XBRL interactive data standard, XBRL's being an open standard would facilitate the development of related software, some of which may, as a result, be made available to the public for free or at a relatively low cost and provide the public alternative ways to view and analyze interactive data information provided under our proposed rules. For the reasons described more fully above, we believe the liability protections for interactive data would be necessary or appropriate in the public interest and consistent with the protection of investors. Moreover, the protections would also be consistent with the purposes fairly intended by the policy and provisions of the Investment Company Act. We request comment on whether the proposals, if adopted, would promote efficiency, competition, and capital formation or have an impact or burden on competition. Commenters are requested to provide empirical data and other factual support for their views, if possible. VII. Initial Regulatory Flexibility Act Analysis This Initial Regulatory Flexibility Analysis has been prepared in accordance with 5 U.S.C. 603. It relates to proposed amendments that would require issuers to provide their financial statements to the Commission and on their corporate Web sites in interactive data format. A. Reasons for, and Objectives of, the Proposed Action The main purpose of the proposed amendments is to make financial information easier for investors to analyze while assisting in automating regulatory filings and business information processing. Currently, issuers are required to file their registration statements, quarterly and annual reports, and transitional reports in a traditional format that provides static text-based information. We believe that providing the financial statements these filings contain in interactive data format would • Enable investors and others to search and analyze the information dynamically; • Facilitate comparison of financial and business performance across issuers, reporting periods and industries; and • Possibly provide a significant opportunity to automate regulatory filings and business information processing with the potential to increase the speed, accuracy, and usability of financial disclosure. B. Legal Basis We are proposing the amendments under sections 7, 10, 19(a) and 28 of the Securities Act, 197 sections 3, 12, 13, 14, 15(d), 23(a), 35A and 36 of the Exchange Act, 198 sections 314 and 319 of the Trust Indenture Act 199 and sections 6(c), 8, 24, 30 and 38 of the Investment Company Act 200 and section 3(a) of the Sarbanes-Oxley Act. 201 197 15 U.S.C. 77g, 77j, 77s(a) and 77z-3. 198 15 U.S.C. 78c, 78l, 78m, 78n, 78o(d), 78w(a), 78ll and 78mm. 199 15 U.S.C. 77nnn and 77sss. 200 15 U.S.C. 80a-6(c), 80a-8, 80a-24, 80a-29 and 80a-37. 201 [Pub. L. No. 107-204, 116 Stat. 745.] C. Small Entities Subject to the Proposed Rules The proposed amendments would affect issuers that are small entities. Exchange Act Rule 0-10(a) 202 defines an issuer, other than an investment company, to be a “small business” or “small organization” for purposes of the Regulatory Flexibility Act if it had total assets of $5 million or less on the last day of its most recent fiscal year. 203 We estimate that there are approximately 1,100 issuers that file reports under the Exchange Act and may be considered small entities. 204 All of these issuers would become subject to the proposed rules in year three of the phase-in. 202 17 CFR 240.0-10(a). 203 Securities Act Rule 157(a) [17 CFR 230.157(a)] generally defines an issuer, other than an investment company, to be a “small business” or “small entity” for purposes of the Regulatory Flexibility Act if it had total assets of $5 million or less on the last day of its most recent fiscal year and it is conducting or proposing to conduct a securities offering of $5 million or less. For purposes of our analysis of issuers other than investment companies in this Part VII of the release, however, we use the Exchange Act definition of “small business” or “small entity” because that definition includes more issuers than does the Securities Act definition and, as a result, assures that the definition we use would not itself lead to an understatement of the impact of the amendments on small entities. 204 The estimated number of small entities that report under the Exchange Act is based on 2007 data including the Commission's internal computerized filing system and Thompson Financial's Worldscope database. D. Reporting, Recordkeeping and Other Compliance Requirements All issuers subject to the proposed rules would be required to submit financial information to the Commission in interactive data format and, if they have a corporate Web site, post the interactive data on their Web site. We believe that, in order to submit financial information in interactive data format, issuers in general and small entities in particular likely would need to prepare and then submit the interactive data by expending internal labor hours in connection with either or both of • Purchasing, learning and using software packages designed to prepare financial information in interactive format; and • Hiring and working with a consultant or filing agent. 205 205 Some issuers such as those that have participated in the voluntary program may already prepare financial information in interactive data format or already have the expertise and software to prepare financial information in interactive data format. Those issuers would incur fewer costs as a result of the proposed requirements. Based on our experience with the voluntary program, however, we believe that it would be unlikely that those issuers would include many small entities. We believe that issuers would incur relatively little cost in connection with the requirement to post the interactive data on the issuer's corporate Web site because the requirement applies only to issuers that already have a corporate Web site. 206 206 The internal labor and external costs required to comply with the proposed rules are discussed more fully in Parts IV and V above. E. Duplicative, Overlapping, or Conflicting Federal Rules We believe that the proposed amendments would not duplicate, or overlap or conflict with, other federal rules. F. Agency Action To Minimize the Effect on Small Entities The Regulatory Flexibility Act directs us to consider significant alternatives that would accomplish the stated objective, while minimizing any significant adverse impact on small entities. In connection with the proposed amendments, we considered several alternatives, including the following: • Establishing different compliance or reporting requirements or timetables that take into account the resources available to small entities; • Further clarifying, consolidating or simplifying the proposed requirements; • Using performance rather than design standards; and • Providing an exemption from the proposed requirements, or any part of them, for small entities. We believe that, as to small entities, differing compliance, reporting or non-phase-in timetable requirements, a partial or complete exemption from the proposed requirements or the use of performance rather than design standards would be inappropriate because these approaches would detract from the long-term completeness and uniformity of the interactive data format financial information database. Less long-term completeness and uniformity would reduce the extent to which the proposed requirements would enable investors and others to search and analyze the information dynamically; facilitate comparison of financial and business performance across issuers, reporting periods and industries; and, possibly, provide a significant opportunity to automate regulatory filings and business information processing with the potential to increase the speed, accuracy, and usability of financial disclosure. We note, however, that small entities would not be subject to the proposed requirements until year three of the phase-in and, as all other issuers, would not be required to tag in detail the footnotes and schedules to their financial statements until their second year subject to the requirements. 207 We solicit comment, however, on whether differing compliance, reporting or timetable requirements, a partial or complete exemption, or the use of performance rather than design standards would be consistent with our described main goal of making financial information easier for investors to analyze while assisting in automating regulatory filings and business information processing. 207 In this regard, in Part II.B.2 of this release we note that the additional time phase-in time for companies not required to submit interactive data in year one of the phase-in period is intended to permit them to plan for and implement the interactive data reporting process after having the opportunity to learn from the experience of year one filers. We also there solicit comment on the appropriate phase-in schedule for smaller reporting companies (which would include small entities) and note that the additional phase-in time also is intended to enable us to monitor implementation and, if necessary, make appropriate adjustments to the phase-in period. We are considering whether further clarifying, consolidating or simplifying the proposed interactive data submission and posting requirements would be appropriate. Based in part on our experience with the voluntary program, we believe that the proposed requirements are sufficiently clear and straightforward (although, we seek comment on this). G. Solicitation of Comment We encourage comments with respect to any aspect of this Initial Regulatory Flexibility Analysis. In particular, we request comments regarding: • The number of small entities that may be affected by the proposed amendments; • The existence or nature of the potential impact of the proposed amendments on small entities as discussed in this analysis; and • How to quantify the impact of the proposed amendments. We ask those submitting comments to describe the nature of any impact and provide empirical data supporting the extent of the impact. These comments will be considered in the preparation of the Final Regulatory Flexibility Analysis, if the proposed amendments are adopted, and will be placed in the same public file as comments on the proposed amendments themselves. VIII. Small Business Regulatory Enforcement Fairness Act For purposes of the Small Business Regulatory Enforcement Fairness Act of 1996, a rule is “major” if it has resulted, or is likely to result in: • An annual effect on the economy of $100 million or more; • A major increase in costs or prices for consumers or individual industries; or • Significant adverse effects on competition, investment or innovation. We request comment on whether our proposals would be a “major rule” for purposes of SBREFA. We solicit comment and empirical data on: • The potential effect on the U.S. economy on an annual basis; • Any potential increase in costs or prices for consumers or individual industries; and • Any potential effect on competition, investment or innovation. IX. Statutory Authority and Text of Proposed Amendments We are proposing the amendments outlined above under sections 7, 10, 19(a) and 28 of the Securities Act, 208 sections 3, 12, 13, 14, 15(d), 23(a), 35A, and 36 of the Exchange Act, 209 sections 314 and 319 of the Trust Indenture Act 210 and sections 6(c), 8, 24, 30, and 38 of the Investment Company Act 211 and section 3(a) of the Sarbanes-Oxley Act. 212 208 15 U.S.C. 77g, 77j, 77s(a), and 77z-3. 209 15 U.S.C. 78c, 78 *l* , 78m, 78n, 78o(d), 78w(a), 78 *ll,* and 78mm. 210 15 U.S.C. 77nnn and 77sss. 211 15 U.S.C. 80a-6(c), 80a-8, 80a-24, 80a-29, and 80a-37. 212 [Pub. L. No. 107-204, 116 Stat. 745.] List of Subjects in 17 CFR Parts 229, 230, 232, 239, 240 and 249 Reporting and recordkeeping requirements, Securities. For the reasons set out in the preamble, we propose to amend Title 17, Chapter II of the Code of Federal Regulations as follows: PART 229—STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND ENERGY POLICY AND CONSERVATION ACT OF 1975—REGULATION S-K 1. The authority citation for part 229 continues to read in part as follows: Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2, 77z-3, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 777iii, 77jjj, 77nnn, 77sss, 78c, 78i, 78j, 78 *l* , 78m, 78n, 78o, 78u-5, 78w, 78 *ll,* 78mm, 80a-8, 80a-9, 80a-20, 80a-29, 80a-30, 80a-31(c), 80a-37, 80a-38(a), 80a-39, 80b-11, and 7201 *et seq.;* and 18 U.S.C. 1350, unless otherwise noted. 2. Amend § 229.601 by revising the exhibit table in paragraph

(a)and by revising paragraph (b)(100) and adding paragraph (b)(101) to read as follows: § 229.601 (Item 601) Exhibits.

(a)* * * Exhibit Table Exhibit Table Securities Act Forms S-1 S-3 S-4 1 S-8 S-11 F-1 F-3 F-4 1 Exchange Act Forms 10 8-K 2 10-D 10-Q 10-K

(1)Underwriting agreement X X X X X X X X

(2)Plan of acquisition, reorganization, arrangement, liquidation or succession X X X X X X X X X X X

(i)Articles of incorporation X X X X X X X X X X

(ii)Bylaws X X X X X X X X X X

(4)Instruments defining the rights of security holders, including indentures X X X X X X X X X X X X X

(5)Opinion re legality X X X X X X X X

(6)[Reserved] N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

(7)Correspondence from an independent accountant regarding non-reliance on a previously issued audit report or completed interim review X

(8)Opinion re tax matters X X X X X X X

(9)Voting trust agreement X X X X X X X

(10)Material contracts X X X X X X X X X

(11)Statement re computation of per share earnings X X X X X X X X

(12)Statements re computation of ratios X X X X X X X X

(13)Annual report to security holders, Form 10-Q or quarterly report to security holders 3 X X

(14)Code of Ethics X X

(15)Letter re unaudited interim financial information X X X X X X X X X

(16)Letter re change in certifying accountant 4 X X X X X X

(17)Correspondence on departure of director X

(18)Letter re change in accounting principles X X

(19)Report furnished to security holders X

(20)Other documents or statements to security holders X

(21)Subsidiaries of the registrant X X X X X X X

(22)Published report regarding matters submitted to vote of security holders X X X

(23)Consents of experts and counsel X X X X X X X X X 5 X 5 X 5 X 5

(24)Power of attorney X X X X X X X X X X X X

(25)Statement of eligibility of trustee X X X X X X

(26)Invitation for competitive bids X X X X X X

(27)through

(30)[Reserved]

(i)Rule 13a-14(a)/15d-14(a) Certifications X X

(ii)Rule 13a-14/15d-14 Certifications X

(32)Section 1350 Certifications 6 X X

(33)Report on assessment of compliance with servicing criteria for asset-backed issuers X

(34)Attestation report on assessment of compliance with servicing criteria for asset-backed securities X

(35)Servicer compliance statement X

(36)through

(98)[Reserved] N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

(99)Additional exhibits X X X X X X X X X X X X X

(100)XBRL-Related Documents X X X X

(101)Interactive Data File X X X X X X X X X 1 An exhibit need not be provided about a company if:

(1)With respect to such company an election has been made under Form S-4 or F-4 to provide information about such company at a level prescribed by Form S-3 or F-3; and

(2)the form, the level of which has been elected under Form S-4 or F-4, would not require such company to provide such exhibit if it were registering a primary offering. 2 A Form 8-K exhibit is required only if relevant to the subject matter reported on the Form 8-K report. For example, if the Form 8-K pertains to the departure of a director, only the exhibit described in paragraph (b)(17) of this section need be filed. A required exhibit may be incorporated by reference from a previous filing. 3 Where incorporated by reference into the text of the prospectus and delivered to security holders along with the prospectus as permitted by the registration statement; or, in the case of the Form 10-K, where the annual report to security holders is incorporated by reference into the text of the Form 10-K. 4 If required pursuant to Item 304 of Regulation S-K. 5 Where the opinion of the expert or counsel has been incorporated by reference into a previously filed Securities Act registration statement. 6 Pursuant to §§ 240.13a-13(b)(3) and 240.15d-13(b)(3) of this chapter, asset-backed issuers are not required to file reports on Form 10-Q.

(b)* * *

(100)*XBRL-Related Documents.* Only an electronic filer that prepares its financial statements in accordance with Article 6 of Regulation S-X (17 CFR 210.6-01 *et seq.* ) is permitted to participate in the voluntary XBRL (eXtensible Business Reporting Language) program and, as a result, may submit XBRL-Related Documents (§ 232.11 of this chapter) in electronic format as an exhibit to: The filing to which they relate; an amendment to such filing; or a Form 8-K (§ 249.308 of this chapter) that references such filing, if the Form 8-K is submitted no earlier than the date of filing. Rule 401 of Regulation S-T (§ 232.401 of this chapter) sets forth further details regarding eligibility to participate in the voluntary XBRL program.

(101)*Interactive Data File.* An Interactive Data File (§ 232.11 of this chapter) is:

(i)*Required to be Submitted and Posted.* Required to be submitted to the Commission and posted on the registrant's corporate Web site, if any, in the manner provided by Rule 405 of Regulation S-T (§ 232.405 of this chapter) if the registrant does not prepare its financial statements in accordance with Article 6 of Regulation S-X (17 CFR 210.6-01 *et seq.* ) and is:

(A)A large accelerated filer (§ 240.12b-2 of this chapter) that had an aggregate worldwide market value of the voting and non-voting common equity held by non-affiliates of more than $5 billion as of the last business day of its most recently completed second fiscal quarter that prepares its financial statements in accordance with generally accepted accounting principles as used in the United States and the filing contains financial statements of the registrant for a period that ends on or after December 15, 2008;

(B)A large accelerated filer not specified in paragraph (b)(101)(i)(A) of this Item that prepares its financial statements in accordance with generally accepted accounting principles as used in the United States and the filing contains financial statements of the registrant for a period that ends on or after December 15, 2009;

(C)A filer not specified in paragraph (b)(101)(i)(A) or

(B)of this Item that prepares its financial statements in accordance with generally accepted accounting principles as used in the United States and the filing contains financial statements of the registrant for a period that ends on or after December 15, 2010; or

(D)A foreign private issuer (§ 240.3b-4(c) of this chapter) that prepares its financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and the filing contains financial statements of the registrant for a period that ends on or after December 15, 2010.

(ii)*Permitted to be Submitted.* Permitted to be submitted to the Commission in the manner provided by Rule 405 of Regulation S-T (§ 232.405 of this chapter) if the registrant:

(A)Prepares its financial statements

(1)In accordance with either

(a)Generally accepted accounting principles as used in the United States; or

(b)International Financial Reporting Standards as issued by the International Accounting Standards Board; and

(2)Not in accordance with Article 6 of Regulation S-X (17 CFR 210.6-01 *et seq.* ) and

(B)Is not required to be submitted to the Commission under paragraph (b)(101)(i) of this Item.

(iii)*Not Permitted to be Submitted.* Not permitted to be submitted to the Commission if the registrant prepares its financial statements in accordance with Article 6 of Regulation S-X (17 CFR 210.6-01 *et seq.* ). PART 230—GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933 3. The authority citation for part 230 continues to read in part as follows: Authority: 15 U.S.C. 77b, 77c, 77d, 77f, 77g, 77h, 77j, 77r, 77s, 77z-3, 77sss, 78c, 78d, 78j, 78 *l* , 78m, 78n, 78o, 78t, 78w, 78 *ll* (d), 78mm, 80a-8, 80a-24, 80a-28, 80a-29, 80a-30, and 80a-37, unless otherwise noted. 4. Amend § 230.144 by revising paragraph (c)(1) to read as follows: § 230.144 Persons deemed not to be engaged in a distribution and therefore not underwriters.

(c)* * *

(1)*Reporting issuers.* The issuer is, and has been for a period of at least 90 days immediately before the sale, subject to the reporting requirements of section 13 or 15(d) of the Exchange Act, has filed all required reports under section 13 or 15(d) of the Exchange Act, as applicable, and has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File (§ 232.11 of this chapter) required to be submitted and posted under either Item 601(b)(101) of Regulation S-K (§ 229.601(b)(101) of this chapter) or Item 101 of the Instructions as to Exhibits of Form 20-F (§ 249.220f of this chapter), during the 12 months preceding such sale (or for such shorter period that the issuer was required to file such reports), other than form 8-K reports (§ 249.308 of this chapter); or PART 232—REGULATION S-T—GENERAL RULES AND REGULATIONS FOR ELECTRONIC FILINGS 5. The authority citation for part 232 continues to read in part as follows: Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s(a), 77z-3, 77sss(a), 78c(b), 78 *l* , 78m, 78n, 78o(d), 78w(a), 78 *ll* , 80a-6(c), 80a-8, 80a-29, 80a-30, 80a-37, and 7201 *et seq.* ; and 18 U.S.C. 1350. 6. Amend § 232.11 by adding definitions for “Interactive Data File”, “ *Interactive Data in Viewable Form* ”, and “ *Related Official Filing* ” in alphabetical order to read as follows: § 232.11 Definition of terms used in part 232. *Interactive Data File.* The term *Interactive Data File* means the machine-readable computer code that presents information in eXtensible Business Reporting Language in electronic format in accordance with § 232.405. *Interactive Data in Viewable Form.* The term *Interactive Data in Viewable Form* means the financial statements, financial statement schedules and financial statement footnotes that

(1)Are displayed when an Interactive Data File is converted from machine-readable computer code into human-readable text through software the Commission provides; and

(2)Are displayed through such conversion identically in all material respects to the corresponding financial statements, financial statement schedules and financial statement footnotes in the Related Official Filing. *Related Official Filing.* The term *Related Official Filing* means the ASCII or HTML format part of the official filing with which an Interactive Data File appears as an exhibit. 7. Amend § 232.201 by: a. Revising paragraph

(a)introductory text; b. Amending paragraph

(b)by revising the headings to Notes 1 and 2; c. Adding paragraph (c). The revisions and additions read as follows: § 232.201 Temporary hardship exemption.

(a)If an electronic filer experiences unanticipated technical difficulties preventing the timely preparation and submission of an electronic filing, other than a Form 3 (§ 249.103 of this chapter), a Form 4 (§ 249.104 of this chapter), a Form 5 (§ 249.105 of this chapter), a Form ID (§§ 239.63, 249.446, 269.7 and 274.402 of this chapter), a Form TA-1 (§ 249.100 of this chapter), a Form TA-2 (§ 249.102 of this chapter), a Form TA-W (§ 249.101 of this chapter), a Form D (§ 239.500 of this chapter) or an Interactive Data File (§ 232.11 of this chapter), the electronic filer may file the subject filing, under cover of Form TH (§§ 239.65, 249.447, 269.10 and 274.404 of this chapter), in paper format no later than one business day after the date on which the filing was to be made.

(b)* * * Note 1 to paragraph (b): * * * Note 2 to paragraph (b): * * *

(c)If an electronic filer experiences unanticipated technical difficulties preventing the timely preparation and

(1)Submission of an Interactive Data File (§ 232.11) as an exhibit as required by either Item 601(b)(101) of Regulation S-K (§ 229.601(b)(101) of this chapter) or Item 101 of the Instructions as to Exhibits of Form 20-F (§ 249.220f of this chapter), the electronic filer still can timely satisfy the requirement to submit the Interactive Data File in the following manner:

(i)Substitute for the Interactive Data File in the required exhibit a document that sets forth the following legend: IN ACCORDANCE WITH THE TEMPORARY HARDSHIP EXEMPTION PROVIDED BY RULE 201 OF REGULATION S-T, THE DATE BY WHICH THE INTERACTIVE DATA FILE IS REQUIRED TO BE SUBMITTED HAS BEEN EXTENDED BY SIX BUSINESS DAYS; and

(ii)Submit the required Interactive Data File no later than six business days after the Interactive Data File originally was required to be submitted.

(2)Posting on its corporate Web site of an Interactive Data File as required by either Item 601(b)(101) of Regulation S-K or Item 101 of the Instructions as to Exhibits of Form 20-F, the electronic filer still can timely satisfy the requirement to post the Interactive Data File by so posting the Interactive Data File within six business days after the Interactive Data File was required to be submitted to the Commission. Note to paragraph (c): Electronic filers unable to submit or post, as applicable, the Interactive Data File under the circumstances specified by paragraph (c), must comply with the provisions of this section and cannot use Form 12b-25 (§ 249.322 of this chapter) as a notification of late filing. Failure to submit or post, as applicable, the Interactive Data File as required by the end of the six-business-day period specified by paragraph

(c)of this section will result in ineligibility to use Forms S-3, S-8 and F-3 (§§ 239.13, 239.16b and 239.33 of this chapter) and constitute a failure to have filed all required reports for purposes of the current public information requirements of Rule 144(c)(1) (§ 230.144(c)(1) of this chapter). 8. Amend § 232.202 by: a. Revising paragraphs

(a)introductory text, (a)(2), (b)(2), and (b)(3); b. Revising paragraph (c); c. Revising paragraph

(d)and; d. Revising the headings to Notes 1, 2, and 3 to the section; and e. Adding Note 4 to the section. The revisions and additions read as follows: § 232.202 Continuing hardship exemption.

(a)An electronic filer may apply in writing for a continuing hardship exemption if all or part of a filing, group of filings or submission, other than a Form ID (§§ 239.63, 249.446, 269.7, and 274.402 of this chapter) or a Form D (§ 239.500 of this chapter), otherwise to be filed or submitted in electronic format or, in the case of an Interactive Data File (§ 232.11), to be posted on the electronic filer's corporate Web site, cannot be so filed, submitted or posted, as applicable, without undue burden or expense. Such written application shall be made at least ten business days before the required due date of the filing(s), submission(s) or posting of the proposed filing, submission or posting date, as appropriate, or within such shorter period as may be permitted. The written application shall contain the information set forth in paragraph

(b)of this section.

(1)* * *

(2)If the Commission, or the staff acting pursuant to delegated authority, denies the application for a continuing hardship exemption, the electronic filer shall file or submit the required document or Interactive Data File in electronic format or post the Interactive Data File on its corporate Web site, as applicable, on the required due date or the proposed filing or submission date, or such other date as may be permitted.

(b)* * *

(1)* * *

(2)The burden and expense to employ alternative means to make the electronic submission or posting, as applicable;

(3)The reasons for not submitting electronically the document, group of documents or Interactive Data File or not posting the Interactive Data File, as well as the justification for the requested time period.

(c)If the request is granted with respect to:

(1)Electronic filing of a document or group of documents, not electronic submission or posting of an Interactive Data File, then the electronic filer shall submit the document or group of documents for which the continuing hardship exemption is granted in paper format on the required due date specified in the applicable form, rule or regulation, or the proposed filing date, as appropriate and the following legend shall be placed in capital letters at the top of the cover page of the paper format document(s): IN ACCORDANCE WITH RULE 202 OF REGULATION S-T, THIS (specify document) IS BEING FILED IN PAPER PURSUANT TO A CONTINUING HARDSHIP EXEMPTION.

(2)Electronic submission of an Interactive Data File, then the electronic filer shall substitute for the Interactive Data File in the exhibit in which it was required a document that sets forth one of the following legends, as appropriate: IN ACCORDANCE WITH A CONTINUING HARDSHIP EXEMPTION OBTAINED UNDER RULE 202 OF REGULATION S-T, THE DATE BY WHICH THE INTERACTIVE DATA FILE IS REQUIRED TO BE SUBMITTED HAS BEEN EXTENDED TO (specify date); or IN ACCORDANCE WITH A CONTINUING HARDSHIP EXEMPTION OBTAINED UNDER RULE 202 OF REGULATION S-T, THE INTERACTIVE DATA FILE IS NOT REQUIRED TO BE SUBMITTED.

(3)Web site posting by an electronic filer of its Interactive Data File, the electronic filer need not post on its Web site any statement with regard to the grant of the request.

(d)If a continuing hardship exemption is granted for a limited period of time for:

(1)Electronic filing of a document or group of documents, not electronic submission or posting of an Interactive Data File, then the grant may be conditioned upon the filing of the document or group of documents that is the subject of the exemption in electronic format upon the expiration of the period for which the exemption is granted. The electronic format version shall contain the following statement in capital letters at the top of the first page of the document: THIS DOCUMENT IS A COPY OF THE (specify document) FILED ON

(DATE)PURSUANT TO A RULE 202(d) CONTINUING HARDSHIP EXEMPTION.

(2)Electronic submission or posting of an Interactive Data File, then the grant may be conditioned upon the electronic submission and posting, as applicable, of the Interactive Data File that is the subject of the exemption upon the expiration of the period for which the exemption is granted. Note 1 to § 232.202: * * * Note 2 to § 232.202: * * * Note 3 to § 232.202: * * * Note 4 to § 232.202: Failure to submit or post, as applicable, the Interactive Data File as required by Rule 405 by the end of the continuing hardship exemption if granted for a limited period of time, will result in ineligibility to use Forms S-3, S-8, and F-3 (§§ 239.13, 239.16b and 239.33 of this chapter) and constitute a failure to have filed all required reports for purposes of the current public information requirements of Rule 144(c)(1) (§ 230.144(c)(1) of this chapter). 9. Amend § 232.305 by revising paragraph

(b)to read as follows: § 232.305 Number of characters per line; tabular and columnar information.

(b)Paragraph

(a)of this section does not apply to HTML documents, Interactive Data Files (§ 232.11) or XBRL-Related Documents (§ 232.11). 10. Amend § 232.401(a) by adding a new first sentence to read as follows: § 232.401 XBRL-Related Document submissions.

(a)Only an electronic filer that is an investment company registered under the Investment Company Act of 1940 (15 U.S.C. 80a-1 *et seq.* ), a “business development company” as defined in section 2(a)(48) of that Act, or an entity that reports under the Exchange Act and prepares its financial statements in accordance with Article 6 of Regulation S-X (17 CFR 210.6-01 *et seq.* ) is permitted to participate in the voluntary XBRL (eXtensible Business Reporting Language) program. * * * 11. Amend § 232.402 by removing the phrase “Public Utility Act,” from the first sentence of paragraph (b). §§ 232.403 and 232.404 [Reserved] 12. Reserve § 232.403 and § 232.404. 13. Add § 232.405 to read as follows: § 232.405 Interactive Data File submissions and postings. Preliminary Notes 1. Sections 405 and 406 of Regulation S-T (§§ 232.405 and 232.406) apply to electronic filers that submit or post Interactive Data Files. Item 601(b)(101) of Regulation S-K (§ 229.601(b)(101) of this chapter) and Item 101 of the Instructions as to Exhibits of Form 20-F (§ 249.220f of this chapter) specify when electronic filers are required or permitted to submit or post an Interactive Data File (§ 232.11), as further described below in the Note to Section 405. 2. Section 405 imposes content, format, submission and Web site posting requirements for an Interactive Data File, but does not change the substantive content requirements for the financial and other disclosures in the Related Official Filing (§ 232.11). 3. Section 406 addresses liability related to Interactive Data Files.

(a)*Content, Format, Submission and Posting Requirements—General.* An Interactive Data File must:

(1)Comply with the content, format, submission and Web site posting requirements of this section;

(2)Be submitted only by an electronic filer either required or permitted to submit an Interactive Data File as specified by Item 601(b)(101) of Regulation S-K (§ 229.601(b)(101) of this chapter) or Item 101 of the Instructions as to Exhibits of Form 20-F (§ 249.220f of this chapter), as applicable, as an exhibit to a form that contains the disclosure required by this section;

(3)Be submitted in accordance with the EDGAR Filer Manual and, as applicable, either Item 601(b)(101) of Regulation S-K or Item 101 of the Instructions as to Exhibits of Form 20-F; and

(4)Be posted on the electronic filer's corporate Web site, if any, in accordance with, as applicable, either Item 601(b)(101) of Regulation S-K or Item 101 of the Instructions as to Exhibits of Form 20-F.

(b)*Content—Categories of Information Presented.* An Interactive Data File must consist of only a complete set of information for all periods required to be presented in the corresponding data in the Related Official Filing, no more and no less, from all of the following categories:

(1)The complete set of the electronic filer's financial statements (which includes the face of the financial statements and all footnotes); and

(2)All schedules set forth in Article 12 of Regulation S-X (§§ 210.12-01-210.12-29) related to the electronic filer's financial statements. Note to paragraph (b): It is not permissible for the Interactive Data File to present only partial face financial statements, such as by excluding comparative financial information for prior periods.

(c)*Format—Generally.* An Interactive Data File must comply with the following requirements, except as modified by paragraph

(d)or

(e)of this section, as applicable, with respect to the corresponding data in the Related Official Filing consisting of footnotes to financial statements or financial statement schedules as set forth in Article 12 of Regulation S-X:

(1)*Data Elements and Labels.*

(i)*Element Accuracy.* Each data element ( *i.e.* , all text, line item names, monetary values, percentages, numbers, dates and other labels) contained in the Interactive Data File reflect the same information in the corresponding data in the Related Official Filing;

(ii)*Element Specificity.* No data element contained in the corresponding data in the Related Official Filing is changed, deleted or summarized in the Interactive Data File;

(iii)*Standard and Special Labels and Elements.* Each data element contained in the Interactive Data File is matched with an appropriate tag from the most recent version of the standard list of tags specified by the EDGAR Filer Manual. A tag is appropriate only when its standard definition, standard label and other attributes as and to the extent identified in the list of tags match the information to be tagged, except that:

(A)*Labels.* An electronic filer must create and use a new special label to modify a tag's existing standard label when that tag is an appropriate tag in all other respects ( *i.e.* , in order to use a tag from the standard list of tags only its label needs to be changed); and

(B)*Elements.* An electronic filer must create and use a new special element if and only if an appropriate tag does not exist in the standard list of tags for reasons other than or in addition to an inappropriate standard label; and

(2)*Additional Mark-Up Related Content.* The Interactive Data File contains any additional mark-up related content ( *e.g.* , the eXtensible Business Reporting Language tags themselves, identification of the core XML documents used and other technology related content) not found in the corresponding data in the Related Official Filing that is necessary to comply with the EDGAR Filer Manual requirements.

(d)*Format—Footnotes—Generally.* The part of the Interactive Data File for which the corresponding data in the Related Official Filing consists of footnotes to financial statements must comply with the requirements of paragraphs (c)(1) and (c)(2) of this section, as modified by this paragraph (d), unless the electronic filer is within one of the categories specified in paragraph

(f)of this section. Footnotes to financial statements must be tagged as follows:

(1)Each complete footnote must be block-text tagged;

(2)Each significant accounting policy within the significant accounting policies footnote must be block-text tagged;

(3)Each table within each footnote must be block-text tagged; and

(4)Within each footnote, each amount ( *i.e.* , monetary value, percentage, and number) must be tagged separately and each narrative disclosure required to be disclosed by generally accepted accounting principles as used in the United States, (or International Financial Reporting Standards as issued by the International Accounting Standards Board, if applicable) and Commission regulations must be tagged separately.

(e)*Format—Schedules—Generally.* The part of the Interactive Data File for which the corresponding data in the Related Official Filing consists of financial statement schedules as set forth in Article 12 of Regulation S-X must comply with the requirements of paragraphs (c)(1) and (c)(2) of this section, as modified by this paragraph (e), unless the electronic filer is within one of the categories specified in paragraph

(f)of this section. Financial statement schedules as set forth in Article 12 of Regulation S-X must be tagged as follows:

(1)Each complete financial statement schedule must be block-text tagged; and

(2)Within each financial statement schedule, each amount ( *i.e.* , monetary value, percentage and number) must be tagged separately and each narrative disclosure required by Commission regulations must be tagged separately.

(f)*Format—Footnotes and Schedules Eligible for Phased-In Detail.* The following electronic filers must comply with paragraphs (c)(1) and (c)(2) of this section as modified by paragraphs

(d)and

(e)of this section, except that they may choose to comply with paragraph (d)(1) rather than paragraphs (d)(1) through (d)(4) and may choose to comply with paragraph (e)(1) rather than paragraphs (e)(1) and (e)(2):

(1)Any large accelerated filer (§ 240.12b-2 of this chapter) that had an aggregate worldwide market value of the voting and non-voting common equity held by non-affiliates of more than $5 billion as of the last business day of its most recently completed second fiscal quarter that prepares its financial statements in accordance with generally accepted accounting principles as used in the United States, if none of the financial statements for which an Interactive Data File is required is for a period that ends on or after December 15, 2009;

(2)Any large accelerated filer not specified in paragraph (f)(1) that prepares its financial statements in accordance with generally accepted accounting principles as used in the United States, if none of the financial statements for which an Interactive Data File is required is for a period that ends on or after December 15, 2010;

(3)Any filer not specified in paragraph (f)(1) or

(2)that prepares its financial statements in accordance with generally accepted accounting principles as used in the United States, if none of the financial statements for which an Interactive Data File is required is for a period that ends on or after December 15, 2011; and

(4)Any foreign private issuer (§ 240.3b-4(c) of this chapter) that prepares its financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, if none of the financial statements for which an Interactive Data File is required is for a period that ends on or after December 15, 2011.

(g)*Posting.* Any electronic filer that maintains a corporate Web site and is required to submit an Interactive Data File must post that Interactive Data File on that Web site by the end of the business day on the earlier of the date the Interactive Data File is submitted or is required to be submitted. Note to § 232.405: Item 601(b)(101) of Regulation S-K specifies the circumstances under which an Interactive Data File must be submitted as an exhibit and be posted to the issuer's corporate Web site, if any, and the circumstances under which it is permitted to be submitted as an exhibit, with respect to Forms S-1 (§ 239.11 of this chapter), S-3 (§ 239.13 of this chapter), S-4 (§ 239.25 of this chapter), S-11 (§ 239.18 of this chapter), F-1 (§ 239.31 of this chapter), F-3 (§ 239.33 of this chapter), F-4 (§ 239.34 of this chapter), 10-K (§ 249.310 of this chapter) and 10-Q (§ 249.308a of this chapter). Similarly, Item 101 of the Instructions as to Exhibits of Form 20-F specifies the circumstances under which an Interactive Data File must be submitted as an exhibit and be posted to the issuer's corporate Web site, if any, and the circumstances under which it is permitted to be submitted as an exhibit, with respect to Form 20-F. Item 601(b)(101) of Regulation S-K and Item 101 of the Instructions as to Exhibits of Form 20-F both prohibit submission of an Interactive Data File by an issuer that prepares its financial statements in accordance with Article 6 of Regulation S-X (17 CFR 210.6-01 *et seq.* ). 14. Add § 232.406 to read as follows: § 232.406 Liability for Related Official Filing, Interactive Data in Viewable Form and Interactive Data File.

(a)*Liability for Related Official Filing Unaffected.* The disclosures in the Related Official Filing are subject to the liability provisions of the Securities Act, Exchange Act, Trust Indenture Act, and Investment Company Act and the rules and regulations under those Acts. Nothing in Rule 405 of Regulation S-T (§ 232.405) or this Rule 406 changes the liability otherwise applicable to an electronic filer's Related Official Filing.

(b)*Liability for Interactive Data in Viewable Form.* Interactive Data in Viewable Form are subject to liability under the Securities Act, Exchange Act, Trust Indenture Act, and Investment Company Act and the rules and regulations under those Acts in the same way and to the same extent as the Related Official Filing.

(c)*Liability for Interactive Data File.* An Interactive Data File submitted to the Commission:

(1)Will be deemed to comply with Rule 405 if:

(A)The electronic filer makes a good faith and reasonable attempt to comply with Rule 405; and

(B)As soon as reasonably practicable after the electronic filer becomes aware that the Interactive Data File does not comply with Rule 405, the electronic filer amends the Interactive Data File to comply with Rule 405.

(2)That complies or is deemed to comply with Rule 405 is not subject to liability under any provision of the Securities Act, Exchange Act, Trust Indenture Act and Investment Company Act or the rules and regulations under those Acts for failure to comply with Rule 405.

(3)In addition to paragraphs (c)(1) and (c)(2),

(A)Is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 and 12 of the Securities Act (15 U.S.C. 77k and 77 *l* ), is deemed not filed for purposes of section 18 of the Exchange Act (15 U.S.C. 78r) and section 34(b) of the Investment Company Act (15 U.S.C. 80a-33(b)), and otherwise is not subject to the liabilities of these sections;

(B)Is deemed filed for purposes of (and thereby benefits from the liability protection provided by) Item 103 of Regulation S-T (§ 232.103); and

(C)Other than as stated in subparagraph (c)(3)(A), is subject to liability for the substantive content of the financial and other disclosures, as distinct from its compliance with Rule 405, under the Securities Act, Exchange Act, Trust Indenture Act, and Investment Company Act and the rules and regulations under those Acts in the same way and to the same extent as the Related Official Filing. PART 239—FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933 15. The authority citation for part 239 continues to read in part as follows: Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-3, 77sss, 78c, 78 *l* , 78m, 78n, 78o(d), 78u-5, 78w(a), 78 *ll* , 78mm, 80a-2(a), 80a-3, 80a-8, 80a-9, 80a-10, 80a-13, 80a-24, 80a-26, 80a-29, 80a-30, and 80a-37, unless otherwise noted. 16. Amend § 239.13 by revising paragraph (a)(8) to read as follows: § 239.13 Form S-3, for registration under the Securities Act of 1933 of securities of certain issuers offered pursuant to certain types of transactions.

(a)* * *

(8)*Electronic filings.* In addition to satisfying the foregoing conditions, a registrant subject to the electronic filing requirements of Rule 101 of Regulation S-T (§ 232.101 of this chapter) shall have:

(i)Filed with the Commission all required electronic filings, including electronic copies of documents submitted in paper pursuant to a hardship exemption as provided by Rule 201 or Rule 202(d) of Regulation S-T (§ 232.201 or § 232.202(d) of this chapter); and

(ii)Submitted electronically to the Commission and posted on its corporate Web site, if any, all Interactive Data Files required to be submitted and posted under either Item 601(b)(101) of Regulation S-K (§ 229.601(b)(101) of this chapter) or Item 101 of the Instructions as to Exhibits of Form 20-F (§ 249.220f of this chapter) during the twelve calendar months and any portion of a month immediately preceding the filing of the registration statement on this Form. 17. Amend Form S-3 (referenced in § 239.13) by revising paragraph I.A.8 and adding paragraphs I.A.8(a) and I.A.8(b) of the General Instructions to read as follows: Note: The text of Form S-3 does not and this amendment will not appear in the Code of Federal Regulations. Form S-3 General Instructions I. * * * A. * * * 8. *Electronic filings.* In addition to satisfying the foregoing conditions, a registrant subject to the electronic filing requirements of Rule 101 of Regulation S-T (§ 232.101 of this chapter) shall have:

(a)Filed with the Commission all required electronic filings, including electronic copies of documents submitted in paper pursuant to a hardship exemption as provided by Rule 201 or Rule 202(d) of Regulation S-T (§ 232.201 or § 232.202(d) of this chapter); and

(b)Submitted electronically to the Commission and posted on its corporate Web site, if any, all Interactive Data Files required to be submitted and posted under either Item 601(b)(101) of Regulation S-K (§ 229.601(b)(101) of this chapter) or Item 101 of the Instructions as to Exhibits of Form 20-F (§ 249.220f of this chapter) during the twelve calendar months and any portion of a month immediately preceding the filing of the registration statement on this Form. 18. Amend § 239.16b by revising paragraph

(b)to read as follows: § 239.16b Form S-8, for registration under the Securities Act of 1933 of securities to be offered to employees pursuant to employee benefit plans.

(a)* * *

(b)*Electronic filings.* In addition to satisfying the foregoing conditions, a registrant subject to the electronic filing requirements of Rule 101 of Regulation S-T (§ 232.101 of this chapter) shall have:

(1)Filed with the Commission all required electronic filings, including electronic copies of documents submitted in paper pursuant to a hardship exemption as provided by Rule 201 or Rule 202(d) of Regulation S-T (§ 232.201 or § 232.202(d) of this chapter); and

(2)Submitted electronically to the Commission and posted on its corporate Web site, if any, all Interactive Data Files required to be submitted and posted under either Item 601(b)(101) of Regulation S-K (§ 229.601(b)(101) of this chapter) or Item 101 of the Instructions as to Exhibits of Form 20-F (§ 249.220f of this chapter) during the twelve calendar months and any portion of a month immediately preceding the filing of the registration statement on this Form. 19. Amend Form S-8 (referenced in § 239.16b) by revising paragraph A.3 and adding paragraphs A.3(a) and A.3(b) of the General Instructions to read as follows: Note: The text of Form S-8 does not and this amendment will not appear in the Code of Federal Regulations. Form S-8 General Instructions A. * * * 1. * * * 2. * * * 3. *Electronic filings.* In addition to satisfying the foregoing conditions, a registrant subject to the electronic filing requirements of Rule 101 of Regulation S-T (§ 232.101 of this chapter) shall have:

(a)* * *

(6)*Electronic filings.* In addition to satisfying the foregoing conditions, a registrant subject to the electronic filing requirements of Rule 101 of Regulation S-T (§ 232.101 of this chapter) shall have:

(ii)Submitted electronically to the Commission and posted on its corporate Web site, if any, all Interactive Data Files required to be submitted and posted under either Item 601(b)(101) of Regulation S-K (§ 229.601(b)(101) of this chapter) or Item 101 of the Instructions as to Exhibits of Form 20-F (§ 249.220f of this chapter) during the twelve calendar months and any portion of a month immediately preceding the filing of the registration statement on this Form. 21. Amend Form F-3 (referenced in § 239.33) by revising paragraph I.A.6 and adding paragraphs I.A.6(i) and I.A.6(ii) of the General Instructions to read as follows: Note: The text of Form F-3 does not and this amendment will not appear in the Code of Federal Regulations. Form F-3 General Instructions I. * * * A. * * * 6. *Electronic filings.* In addition to satisfying the foregoing conditions, a registrant subject to the electronic filing requirements of Rule 101 of Regulation S-T (§ 232.101 of this chapter) shall have:

(ii)Submitted electronically to the Commission and posted on its corporate Web site, if any, all Interactive Data Files required to be submitted and posted under either Item 601(b)(101) of Regulation S-K (§ 229.601(b)(101) of this chapter) or Item 101 of the Instructions as to Exhibits of Form 20-F (§ 249.220f of this chapter) during the twelve calendar months and any portion of a month immediately preceding the filing of the registration statement on this Form. PART 240—GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 1934 22. The authority citation for part 240 continues to read in part as follows: Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 78j, 78j-1, 78k, 78k-1, 78 *l* , 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 78w, 78x, 78 *ll* , 78mm, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, and 7201 *et seq.* ; and 18 U.S.C. 1350, unless otherwise noted. 23. Amend § 240.13a-14 by revising paragraph

(f)to read as follows: § 240.13a-14 Certification of disclosure in annual and quarterly reports.

(f)The certification requirements of this section do not apply to

(1)An Interactive Data File, as defined in Rule 11 of Regulation S-T (§ 232.11 of this chapter); or

(2)XBRL-Related Documents, as defined in Rule 11 of Regulation S-T. 24. Amend § 240.15d-14 by revising paragraph

(f)to read as follows: § 240.15d-14 Certification of disclosure in annual and quarterly reports.

(f)The certification requirements of this section do not apply to:

(1)An Interactive Data File, as defined in Rule 11 of Regulation S-T (§ 232.11 of this chapter); or

(2)XBRL-Related Documents, as defined in Rule 11 of Regulation S-T. PART 249—FORMS, SECURITIES EXCHANGE ACT OF 1934 25. The authority citation for part 249 continues to read in part as follows: Authority: 15 U.S.C. 78a *et seq.,* 7202, 7233, 7241, 7262, 7264, and 7265; and 18 U.S.C. 1350, unless otherwise noted. 26. Amend Form 20-F (referenced in § 249.220f) by revising paragraph 100 and adding paragraph 101 at the end of “Instructions as to Exhibits” to read as follows: Note: The text of Form 20-F does not and this amendment will not appear in the Code of Federal Regulations. Form 20-F Instructions as to Exhibits 100. *XBRL-Related Documents.* Only a registrant that prepares its financial statements in accordance with Article 6 of Regulation S-X (17 CFR 210.6-01 *et seq.* ) is permitted to participate in the voluntary XBRL (eXtensible Business Reporting Language) program and, as a result, may submit XBRL-Related Documents (§ 232.11 of this chapter). Rule 401 of Regulation S-T (§ 232.401 of this chapter) sets forth further details regarding eligibility to participate in the voluntary XBRL program. 101. * Interactive Data File.* An Interactive Data File (§ 232.11 of this chapter) is:

(a)Required to be submitted to the Commission and posted on the registrant's corporate Web site, if any, in the manner provided by Rule 405 of Regulation S-T (§ 232.405 of this chapter) if the Form 20-F is an annual report and the registrant is not specified by paragraph

(c)of this Instruction 101 and is:

(i)A large accelerated filer (§ 240.12b-2 of this chapter) that had an aggregate worldwide market value of the voting and non-voting common equity held by non-affiliates of more than $5 billion as of the last business day of its most recently completed second fiscal quarter that is a foreign private issuer (§ 240.3b-4(c) of this chapter) that prepares its financial statements in accordance with generally accepted accounting principles as used in the United States and the filing contains financial statements of the registrant for a period that ends on or after December 15, 2008;

(ii)A large accelerated filer not specified in paragraph (a)(i) of this instruction but is a foreign private issuer that prepares its financial statements in accordance with generally accepted accounting principles as used in the United States and the filing contains financial statements of the registrant for a period that ends on or after December 15, 2009;

(iii)A filer not specified in paragraph (a)(i) or

(ii)of this instruction that is a foreign private issuer that prepares its financial statements in accordance with generally accepted accounting principles as used in the United States and the filing contains financial statements of the registrant for a period that ends on or after December 15, 2010; and

(iv)A foreign private issuer that prepares its financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and the filing contains financial statements of the registrant for a period that ends on or after December 15, 2010.

(b)Permitted to be submitted to the Commission in the manner provided by Rule 405 of Regulation S-T (§ 232.405 of this chapter) if the registrant:

(i)Prepares its financial statements

(A)In accordance with either

(1)Generally accepted accounting principles as used in the United States; or

(2)International Financial Reporting Standards as issued by the International Accounting Standards Board; and

(B)Not in accordance with Article 6 of Regulation S-X (17 CFR 210.6-01 *et seq.* ); and

(ii)Is not required to be submitted to the Commission under paragraph

(a)of this Instruction 101.

(c)Not permitted to be submitted to the Commission if the registrant prepares its financial statements in accordance with Article 6 of Regulation S-X (17 CFR 210.6-01 *et seq.* ). 27. Amend Form 6-K (referenced in § 249.306) by revising paragraph

(5)to General Instruction C to read as follows: Note: The text of Form 6-K does not and this amendment will not appear in the Code of Federal Regulations. Form 6-K General Instructions C. * * *

(5)*XBRL-Related Documents.* Only a registrant that prepares its financial statements in accordance with Article 6 of Regulation S-X (17 CFR 210.6-01 *et seq.* ) is permitted to participate in the voluntary XBRL (eXtensible Business Reporting Language) program and, as a result, may submit XBRL-Related Documents (§ 232.11 of this chapter). XBRL-Related Documents submitted as an exhibit to a Form 6-K must be listed as exhibit 100. Rule 401 of Regulation S -T (§ 232.401 of this chapter) sets forth further details regarding eligibility to participate in the voluntary XBRL program. By the Commission. Dated: May 30, 2008. Florence E. Harmon, Acting Secretary. [FR Doc. E8-12596 Filed 6-9-08; 8:45 am] BILLING CODE 8010-01-P 73 112 Tuesday, June 10, 2008 Notices Part III Department of Justice Antitrust Division United States v. Abitibi-Consolidated Inc. et al.; Response to Public Comment on the Proposed Final Judgment; Notice DEPARTMENT OF JUSTICE Antitrust Division United States v. Abitibi-Consolidated Inc. et al.; Response to Public Comment on the Proposed Final Judgment Pursuant to the Antitrust Procedures and Penalties Act, 15 U.S.C. 16(b)-(h), the United States hereby publishes the public comment received on the proposed Final Judgment in *United States of America* v. *Abitibi-Consolidated Inc. et al.* , Civil Action No. 1:07-cv-1912 and the response to the comment. On October 23, 2007, the United States filed a Complaint alleging that the merger between Abitibi-Consolidated Inc. (“Abitibi”) and Bowater Inc. (“Bowater”) violated Section 7 of the Clayton Act, 15 U.S.C. 18. The proposed Final Judgment, filed on October 23, 2007, requires the combined company to divest Abitibi's Snowflake, Arizona paper mill. Public comment was invited within the statutory 60-day comment period. Copies of the Complaint, proposed Final Judgment, Competitive Impact Statement, Public Comment and the United States' Response to the Comment and other papers are currently available for inspection in Suite 1010 of the Antitrust Division, Department of Justice, 450 5th Street, NW., Washington, DC 20530, telephone:

(202)514-2481 and the Office of the Clerk of the United States District Court for the District of the District of Columbia, 333 Constitution Ave., 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 matter of: United States of America, Plaintiff, v. Abitibi-Consolidated Inc. and Bowater Inc., Defendants. Case No: [1:07-cv-01912] Judge: Collyer, Rosemary M.; Deck type: Antitrust. Response of Plaintiff United States to Public Comments on the Proposed Final Judgment Pursuant to the requirements of the Antitrust Procedures and Penalties Act (“APPA” or “Tunney Act”), 15 U.S.C. 16(b)-(h), the United States hereby files the Comment received from members of the public concerning the proposed Final Judgment in this case and the Response by the United States to the Comment. The United States will move the Court for entry of the proposed Final Judgment after the Comment and this Response have been published in the **Federal Register** , pursuant to 15 U.S.C. 16(d). The United States filed a civil antitrust Complaint under Section 15 of the Clayton Act, 15 U.S.C. 25, on October 23, 2007, alleging that the merger of Abitibi-Consolidated Incorporated (“Abitibi”) and Bowater Incorporated (“Bowater”) would violate Section 7 of the Clayton Act, 15 U.S.C. 18. Simultaneously with the filing of the Complaint, the United States filed a proposed Final Judgment and an Asset Preservation Stipulation and Order (“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 October 23, 2007, published the proposed Final Judgment and CIS in the **Federal Register** on November 8, 2007, see *United States* v. *Abitibi-Consolidated Inc. and Bowater Inc.* , 72 FR 63187 (November 8, 2007); 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 November 18, 2007, and ending on November 24, 2007. The 60-day period for public comments ended on January 7, 2008, and one comment was received as described below and attached hereto. I. Background: The United States' Investigation and the Proposed Resolution On January 29, 2007, Abitibi and Bowater announced plans to merge into a new company to be called AbitibiBowater Incorporated (“AbitibiBowater”). Over the next nine months, the United States Department of Justice (the “Department”) conducted an extensive, detailed investigation into the competitive effects of the proposed transaction. As part of this investigation, the Department obtained substantial documents and information from the merging parties and issued 37 Civil Investigative Demands to third parties. In response, the Department received and considered more than 150,000 pages of material. The Department conducted more than 60 interviews with customers, competitors and other individuals with knowledge of the industry. The sole commenter here, the Newspaper Association of America (the “NAA”), represents newspaper publishers in the United States. During the course of the Department's investigation into the proposed merger, the NAA shared with the investigative staff its concerns about the impact of the proposed merger on competition; the investigative staff carefully analyzed its concerns and submissions, as well as the data, market facts and opinions of other knowledgeable parties. The Department concluded that the combination of Abitibi and Bowater likely would lessen competition in the North American newsprint market. Newspapers are printed on newsprint, the lowest quality and generally the least expensive grade of groundwood paper. Newspaper publishers, who buy more than 80 percent of all newsprint sold in the United States, have no close substitutes to use for printing newspapers because of newsprint's price and physical characteristics. Because publishers' newsprint presses are optimized to use newsprint, switching to another grade of paper would be costly. A small but significant increase in price likely would not cause customers to switch sufficient newsprint tonnes to other products or otherwise curtail their newsprint usage so as to render the increase unprofitable. As explained more fully in the Complaint and CIS, the merger of Abitibi and Bowater would substantially increase concentration and lessen competition in the production, distribution and sale of newsprint in North America. After conducting a detailed analysis of the merger, the Department filed its Complaint alleging competitive harm in the newsprint market in North America and sought a remedy that would ensure that such harm is prevented. The proposed Final Judgment in this case is designed to preserve competition in the production, distribution and sale of newsprint in North America. It requires the divestiture of a newsprint mill that manufactures newsprint for sale in North America. Specifically, the proposed Final Judgment directs a sale of Abitibi's Snowflake, Arizona, newsprint mill (“Snowflake,” or the “Snowflake mill”) to a purchaser acceptable to the United States. In the Department's judgment, divestiture of the Snowflake mill to a qualified purchaser would remedy the violation alleged in the Complaint because the Snowflake mill, located in northeastern Arizona, is one of the most efficient and profitable newsprint mills in North America. Plans to improve the mill's efficiency in coming years with investments in energy and machinery are already underway. Snowflake's size and cost position ensure that its divestiture to a competitor of the merged firm will preserve competition in the North American newsprint market. Although entry of the proposed Final Judgment would terminate this action, the Court would retain jurisdiction to construe, modify, or enforce the provisions of the proposed Final Judgment and punish violations thereof. 1 1 The merger closed on October 29, 2007. In keeping with the United States' standard practice, neither the Stipulation nor the proposed Final Judgment prohibited closing the merger. See ABA Section of *Antitrust Law, Antitrust Law Developments* 406 (6th ed. 2007) (noting that “[t]he Federal Trade Commission (as well as the Department of Justice) generally will permit the underlying transaction to close during the notice and comment period”). Such a prohibition could interfere with many time-sensitive deals and prevent or delay the realization of substantial efficiencies. In consent decrees requiring divestitures, it is also standard practice to include a “preservation of assets” clause in the decree and to file a stipulation to ensure that the assets to be divested remain competitively viable. That practice was followed here. Proposed Final Judgment § IV(K). In addition, the Stipulation entered by the Court in this case required AbitibiBowater to hold separate the Snowflake newsprint mill, pending the divestiture contemplated by the proposed Final Judgment. II. Standard of Judicial Review Upon the publication of the Comment and this Response, the United States will have fully complied with the Tunney Act and will move for entry of the proposed Final Judgment as being “in the public interest.” 15 U.S.C. 16(e), as amended. The Tunney Act states that, in making that determination, the Court shall consider:

(A)the competitive impact of such judgment, including termination of alleged violations, provisions for enforcement and modification, duration of relief sought, anticipated effects of alternative remedies actually considered, whether its terms are ambiguous, and any other competitive considerations bearing upon the adequacy of such judgment that the court deems necessary to a determination of whether the consent judgment is in the public interest; and

(B)the impact of entry of such judgment upon competition in the relevant market or markets, upon the public generally and individuals alleging specific injury from the violations set forth in the complaint including consideration of the public benefit, if any, to be derived from a determination of the issues at trial. 15 U.S.C. 16(e)(1)(A)-(B); *see generally United States* v. *SBC Commc'ns, Inc.* , 489 F. Supp. 2d 1, 11 (D.D.C. 2007) (concluding that the 2004 amendments “effected minimal changes” to scope of review under Tunney Act, leaving review “sharply proscribed by precedent and the nature of Tunney Act proceedings”). 2 2 The 2004 amendments substituted “shall” for “may” in directing relevant factors for court to consider and amended the list of factors to focus on competitive considerations and to address potentially ambiguous judgment terms. Compare 15 U.S.C. 16(e) (2004), with 15 U.S.C. 16(e)(1) (2006). As the United States Court of Appeals for the District of Columbia Circuit has held, under the APPA a court considers, among other things, the relationship between the remedy secured and the specific allegations set forth in the government's complaint, whether the decree is sufficiently clear, whether enforcement mechanisms are sufficient, and whether the decree may positively harm third parties. *See United States* v. *Microsoft Corp.* , 56 F.3d 1448, 1458-62 (D.C. Cir. 1995). With respect to the adequacy of the relief secured by the decree, a court may not “engage in an unrestricted evaluation of what relief would best serve the public.” *United States* v. *BNS, Inc.* , 858 F.2d 456, 462 (9th Cir. 1988) (citing *United States* v. *Bechtel Corp.* , 648 F.2d 660, 666 (9th Cir. 1981)); *see also Microsoft* , 56 F.3d at 1460-62. Courts have held that: [t]he balancing of competing social and political interests affected by a proposed antitrust consent decree must be left, in the first instance, to the discretion of the Attorney General. The court's role in protecting the public interest is one of insuring that the government has not breached its duty to the public in consenting to the decree. The court is required to determine not whether a particular decree is the one that will best serve society, but whether the settlement is “ *within the reaches of the public interest* .” More elaborate requirements might undermine the effectiveness of antitrust enforcement by consent decree. *Bechtel* , 648 F.2d at 666 (emphasis added) (citations omitted). *Cf. BNS* , 858 F.2d at 464 (holding that the court's “ultimate authority under the [APPA] is limited to approving or disapproving the consent decree”); *United States* v. *Gillette Co.* , 406 F. Supp. 713, 716 (D. Mass. 1975) (noting that, in this way, the court is constrained to “look at the overall picture not hypercritically, nor with a microscope, but with an artist's reducing glass”). *See generally Microsoft* , 56 F.3d at 1461 (discussing whether “the remedies [obtained in the decree are] so inconsonant with the allegations charged as to fall outside of the `reaches of the public interest' ”). In making its public interest determination, a district court “must accord deference to the government's predictions about the efficacy of its remedies, and may not require that the remedies perfectly match the alleged violations” because this may only reflect underlying weakness in the government's case or concessions made during negotiation. *SBC Commc'ns* , 489 F. Supp. 2d at 17; *see also Microsoft* , 56 F.3d at 1461 (noting the need for courts to be “deferential to the government's predictions as to the effect of the proposed remedies”); *United States* v. *Archer-Daniels-Midland Co.* , 272 F. Supp. 2d 1, 6 (D.D.C. 2003) (noting that the court should grant due respect to the United States' prediction as to the effect of proposed remedies, its perception of the market structure, and its views of the nature of the case). Court approval of a consent decree requires a standard more flexible and less strict than that appropriate to court adoption of a litigated decree following a finding of liability. “[A] proposed decree must be approved even if it falls short of the remedy the court would impose on its own, as long as it falls within the range of acceptability or is `within the reaches of public interest.' ” *United States* v. *Am. Tel. & Tel. Co.* , 552 F. Supp. 131, 151 (D.D.C. 1982) (citations omitted) (quoting *United States* v. *Gillette Co.* , 406 F. Supp. 713, 716 (D. Mass. 1975)), *aff'd sub nom. Maryland* v. *United States* , 460 U.S. 1001 (1983); *see also United States* v. *Alcan Aluminum Ltd.* , 605 F. Supp. 619, 622 (W.D. Ky. 1985) (approving the consent decree even though the court would have imposed a greater remedy). To meet 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. Moreover, the Court's role under the APPA is limited to reviewing the remedy in relationship to the violations that the United States has alleged in its complaint, and does not authorize the Court to “construct [its] own hypothetical case and then evaluate the decree against that case.” *Microsoft* , 56 F.3d at 1459. Because the “court's authority to review the decree depends entirely on the government's exercising its prosecutorial discretion by bringing a case in the first place,” it follows that “the court is only authorized to review the decree itself,” and not to “effectively redraft the complaint” to inquire into other matters that the United States did not pursue. *Id.* at 1459-60. As this Court recently confirmed in *SBC Communications* , courts “cannot look beyond the complaint in making the public interest determination unless the complaint is drafted so narrowly as to make a mockery of judicial power.” *SBC Commc'ns* 489 F. Supp. 2d at 15. In its 2004 amendments, Congress made clear its intent to preserve the practical benefits of utilizing consent decrees in antitrust enforcement, adding the unambiguous instruction “[nlothing in this section shall be construed to require the court to conduct an evidentiary hearing or to require the court to permit anyone to intervene.” 15 U.S.C. 16(e)(2). The language wrote into the statute what the Congress that enacted the Tunney Act in 1974 intended, as Senator Tunney then explained: “[t]he court is nowhere compelled to go to trial or to engage in extended proceedings which might have the effect of vitiating the benefits of prompt and less costly settlement through the consent decree process.” 119 Cong. Rec. 24,598

(1973)(statement of Senator Tunney). Rather, the procedure for the public interest determination is left to the discretion of the court, with the recognition that the court's “scope of review remains sharply proscribed by precedent and the nature of Tunney Act proceedings.” *SBC Commc'ns* , 489 F. Supp. 2d at 11. 3 3 *See United States* v. *Enova Corp.* , 107 F. Supp. 2d 10, 17 (D.D.C. 2000) (noting that the “Tunney Act expressly allows the court to make its public interest determination on the basis of the competitive impact statement and response to comments alone”); *United States* v. *Mid-Am. Dairymen, Inc.* , 1977-1 Trade Cas.

(CCH)¶ 61,508, at 71,980 (W.D. Mo. 1977) (“Absent a showing of corrupt failure of the government to discharge its duty, the Court, in making its public interest finding, should * * * carefully consider the explanations of the government in the competitive impact statement and its responses to comments in order to determine whether those explanations are reasonable under the circumstances.”); S. Rep. No. 93-298, 93d Cong., 1st Sess., at 6

(1973)(“Where the public interest can be meaningfully evaluated simply on the basis of briefs and oral arguments, that is the approach that should be utilized.”). III. Summary of the Comment and Response During the 60-day comment period, the United States received one Comment, from the NAA. That Comment is attached to this memo. After reviewing the Comment, the United States continues to believe that the proposed Final Judgment is in the public interest. The Comment includes concerns relating to whether the proposed Final Judgment adequately remedies the harms alleged in the Complaint. The United States addresses these concerns below and explains how the remedy is appropriate. A. Summary of Comment Submitted by the NAA The NAA is an association whose members include daily and Sunday newspapers in the United States who purchase a significant proportion of North America's newsprint production. In its Comment of January 2, 2008, the NAA expressed concerns relating to whether the proposed Final Judgment adequately remedies the alleged harms. The NAA argued in its Comment that the Court should not enter the proposed Final Judgment without a hearing for two reasons:

(1)the newly merged AbitibiBowater, despite its agreement to divest the Snowflake mill, “has already begun to exercise the market power created by the merger to anticompetitively raise newsprint prices to North American newsprint customers”; and

(2)the United States “has not provided the Court with any factual or economic analysis to demonstrate that the proposed remedy will eliminate the incentive for AbitibiBowater to reduce industry capacity and raise prices to North American newsprint customers.” (NAA Comment at 2.) 1. The NAA's Argument That AbitibiBowater Has Already Begun To Exercise Market Power and Anticompetitively Raise Newsprint Prices The NAA notes that a little more than five weeks following the merger that created AbitibiBowater, the combined firm announced that it would remove 600,000 metric tonnes of newsprint capacity from the North American market and would raise newsprint prices by $60 per metric tonne, to be implemented in three $20 price increases. The NAA further notes that “[m]ost” North American newsprint manufacturers not only joined AbitibiBowater's price increase but also implemented a “previously stalled” price increase of $25 per metric tonne. The NAA estimated that, taken together, these two price increases constitute a 15 percent price increase as compared to the pre-merger, October 2007, price for newsprint. The NAA also noted that, at the time AbitibiBowater announced the removal of 600,000 metric tonnes of newsprint capacity from the North American market, it also announced that “more mills could close in Canada later [in 2008].” (Comment at 7.) The NAA claims that these post-merger actions by AbitibiBowater demonstrate that the United States “severely underestimated the risk that the merger posed to competition in the North American newsprint market and severely underestimated the incentive and ability of the merged firm to remove capacity from the market to raise the price of newsprint well above competitive levels.” (Comment at 7.) Accordingly, the NAA contends that a “significantly larger divestiture” than the Snowflake mill is required to prevent “the substantial anticompetitive price increases that are already occurring and will continue to occur as a result of the merger.” (Comment at 7.) 2. The NAA's Argument That the United States Has Not Provided Adequate Factual or Legal Analysis Upon Which To Base a Public Interest Determination The NAA concedes that in the Complaint, the United States “correctly identifies the competitive harm produced by the merger.” (Comment at 9.) The NAA argues, however, that the United States has not provided the Court with a factual or legal analysis to demonstrate that the divestiture of the Snowflake mill will “eliminate the incentive to reduce industry capacity and raise prices to North American newsprint customers,” and thus has provided the Court with no basis by which to determine if the proposed remedy is in the public interest. (Comment at 9.) Specifically, the NAA argues that, other than noting that Snowflake is “among the largest and most profitable mills in the United States,” the United States “provided no further explanation for its decision that Snowflake was both a sufficient remedy and the best solution, no detail regarding under what `circumstances' this conclusion was reached, and no scale against which it measured Snowflake as the best alternative.” (Comment at 17.) The NAA contends that the proposed Final Judgment should not be entered because the United States has not explained to the Court “why the remedy it proposes restores or preserves competition.” (Comment at 19.) In particular, the NAA criticizes the United States for failing to reference in the Complaint or CIS what the NAA describes as historical anticompetitive behavior of Abitibi and Bowater, and it contends that absent such references, it is impossible for the Court to determine if and how much of a factor such conduct played in the United States' evaluation and settlement of the merger. The NAA also criticizes the United States for failing to discuss the anticipated effects of alternative remedies actually considered. B. Response of the United States to the NAA's Comment The divestiture of the Snowflake mill adequately remedies the harm alleged in the Complaint. In negotiating this remedy, the United States carefully considered the capabilities and economic viability of the Snowflake mill as well as other assets of the merging parties; the extent of industry excess capacity; the history of declining demand for newsprint, and the forecasts for that decline to continue; the costs of production of all newsprint mills in North America; and the financial viability of the merging parties and their competitors. After considering these issues, the United States analyzed the merger using a comprehensive data set of prices, sales, production volumes and costs, capacities and forecasts of North American newsprint demand. In its analysis, which drew upon non-public information unavailable to the NAA, the United States concluded that the divestiture of the Snowflake mill to a viable qualified purchaser will adequately redress the competitive harm alleged in the Complaint and restore competition to the market for the sale of newsprint in North America. The United States and the NAA employed the same general economic model to examine the competitive effects of the merger. Accurate data about prices, manufacturing costs, the elasticity of demand and other factors can allow economists to model whether merging firms have an added incentive to exercise market power by reducing capacity after a merger. The United States and the NAA both attempted to determine whether the merger will cause the combined AbitibiBowater to eliminate newsprint capacity earlier than Abitibi and Bowater would have if they had remained independent competitors. Although the United States and the NAA used a similar framework to model competition, the results differed significantly because of several important differences in the data. First, the United States had more complete and accurate data. Unlike the NAA, the United States was able to use a compulsory process to gather information. See, e.g., 15 U.S.C. 1311-14 (empowering the Antitrust Division to subpoena documents and take oral testimony). In this case, the United States had access to extensive and mill-by-mill data on sales (including exports), production volumes, capacities and costs. The NAA, on the other hand, had to rely on less accurate and publicly available information relating to mill capacities, prices and costs in assessing the profitability of and competitors' likely response to a post-merger price increase. Second, the United States conducted its own analysis of the effect of price changes on the demand for newsprint, using confidential information, in addition to considering estimates provided by others. Based upon its analysis, the United States believes that the estimate used by NAA understates the sensitivity of newsprint consumption to changes in price. In other words, the United States believes that if the price for newsprint rose, customers would purchase less newsprint than the NAA estimates. Third, the United States and the NAA viewed 2007 differently. While the NAA assumed that the newsprint market in 2007 was in equilibrium—which would allow that year's prices to be used as a reference point from which to measure future changes—the United States' investigation revealed that much of 2007 was a period of instability. Unexpectedly large declines in demand for newsprint created excess capacity and caused prices to fall dramatically. The fact that AbitibiBowater and other firms responded to declining demand for newsprint by closing mills that were consistently losing money is discussed in further detail in the following section. The United States is confident that at the time it negotiated the proposed Final Judgment the divestiture of the Snowflake mill was in the public interest, based upon the best information available at that time. The United States remains confident that the divestiture of the Snowflake mill is in the public interest and adequately remedies the harms alleged in the Complaint. 1. AbitibiBowater's Recently Announced Decision To Reduce Excess Newsprint Capacity, and Industry-Wide Price Increases, Do Not Mean That the Parties Have Exercised Market Power The NAA's argument, that the Snowflake mill divestiture is insufficient to prevent the combined firm from exercising market power by shutting additional capacity in order to raise prices, assumes that the combined firm's post-merger capacity reductions are the result of the merger. The NAA's suggestions to the contrary events since the filing of the proposed Final Judgment appear to be unrelated to any exercise of market power. The ongoing sharp decline in demand for newsprint in North America, increases in the prices of key inputs into the production of newsprint, and the continued decline in the value of the United States dollar all have disrupted the supply and demand equilibrium for newsprint. Industry observers expect disruptions to continue as North American demand for newsprint declines. Manufacturers will respond by intermittently closing capacity, which will cause the market price to lurch from one equilibrium to another as it adjusts to these shocks to supply. Thus, in a market with declining demand, prices can be expected to fall when the decline in demand creates excess supply and increase when unprofitable capacity is closed in response to that decline in demand. In the remainder of this section, we will discuss the effects of these trends on the newsprint market and show that a careful analysis suggests that the NAA's claims are unfounded. Demand for newsprint in the North American market “has declined over the last several years at a rate of approximately 5 to 10 percent per year because of a significant decline in demand for newspapers. * * * This decline in the demand for newsprint is projected to continue, and the resulting excess newsprint capacity will likely lead Defendants and their competitors to close, idle or convert more newsprint mills.” (Complaint at ¶ 17; *see also* CIS at 5.) As North American demand continues to decline, notwithstanding the merger, all firms, including AbitibiBowater, will eventually have to close inefficient newsprint capacity. In its Comment, the NAA ignores the possibility that AbitibiBowater's post-merger decision to close some of its inefficient capacity was a natural reaction to the continued decline in demand for newsprint and may in fact be perfectly consistent with a competitive market. The pressure to close inefficient capacity also intensified in 2007 because the prices of key production inputs—specifically, recycled fiber, wood pulp and energy—rose sharply. This increase in input costs has raised the costs of all producers and put upward pressure on the price of newsprint. Further, the United States dollar has lost value relative to the Canadian dollar, which has the effect of raising the costs of Canadian producers of newsprint—the bulk of North American newsprint capacity is located in Canada—and hence the price of newsprint. Finally, the adjustment of the newsprint market to these disruptive market conditions will not be instantaneous or smooth. Because newsprint mills have very significant fixed costs and relatively smaller incremental costs, newsprint manufacturers may not be able to respond to declining demand by gradually withdrawing capacity. The market therefore can be expected to swing between periods of overcapacity and shortage as companies retire paper machines or entire paper mills. As these swings occur, there will not be smooth changes to the industry's overall capacity or its price levels. For example, while the price of newsprint has risen in the past six months, it is at the time of this filing at or below its lowest level in 2006 when input prices were lower. Further, the United States' investigation has found that the price is so low that many newsprint producers' mills do not cover their costs. Indeed, the three mills that AbitibiBowater closed after the merger were unprofitable. In summary, the NAA's conclusion that recent newsprint capacity closures and price increases necessarily are anticompetitive actions driven by the merger is misguided and fails to account for significant market facts affecting the supply and demand equilibrium of the North American newsprint market. 2. The United States Has Provided Sufficient Explanation of Why the Proposed Divestiture Is an Adequate Remedy to the Harm Alleged in the Complaint, and Entry of the Proposed Final Judgment Will Be in the Public Interest The proposed Final Judgment provides an effective and appropriate remedy for the antitrust violation alleged in the Complaint, and its entry, therefore, will be in the public interest. 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,” *BNS* , 858 F.2d at 462 (citing *Bechtel Corp.* , 648 F.2d at 666) or to determine the relief “that will best serve society,” *Bechtel Corp.* , 648 F.2d at 666. Instead, the purpose of Tunney Act review is simply to determine whether the divestiture of the Snowflake mill is within the reaches of the public interest, “even if it falls short of the remedy the court would impose on its own.” *AT&T* , 552 F. Supp. at 151. In other words, the purpose of Tunney Act review is to determine whether the divestiture is a “reasonably adequate” remedy for the harms alleged in the Complaint. *SBC Commc'ns* , 489 F. Supp. 2d at 17. Subsections

(A)and

(B)of 15 U.S.C. 16(e)(1) set forth a number of factors for courts to consider when assessing the competitive impact of proposed final judgments. Many of those factors are not at issue here. 4 Instead, the second argument in the NAA's Comment focuses on the competitive considerations relevant to the proposed Final Judgment, the divestiture it requires and the alternatives the United States considered. 4 The NAA does not contest several factors listed for courts to consider under subsection (A). For instance, with respect to “provisions for enforcement and modification,” 15 U.S.C. 16(e)(1)(A), the proposed Final Judgment contains the standard provisions that have been effective in numerous other cases brought by the United States. In particular, the proposed Final Judgment provides that the Court retains jurisdiction over this action, and the parties may apply to the Court for any order necessary or appropriate for the modification, interpretation, or enforcement of the Final Judgment. With respect to “duration of relief sought,” *id.* , the proposed divestiture is permanent. Finally, with respect to “whether its terms are ambiguous,” *id.* , no term in the proposed Final Judgment is ambiguous. The NAA questions whether the United States has adequately demonstrated to this Court that the divestiture eliminates AbitibiBowater's post-merger incentive to reduce capacity and raise prices to North American newsprint customers. It has. As explained previously, the United States conducted an extensive investigation and compiled comprehensive data on market shares, costs of production, estimations of rest-of-industry newsprint capacity and future reductions in newsprint demand gathered from public and non-public sources. This data was used in an economic model to determine if the merger would cause an anticompetitive increase in newsprint prices. 5 The United States concluded that a merger between Abitibi and Bowater, without a divestiture, would allow the merged firm to “close its capacity strategically, allowing the merged firm to raise newsprint prices and recoup its lost profits on the combined output.” (CIS at 8.) But, as the United States concluded in the CIS, “[d]ivesting Snowflake * * * will reduce the capacity over which the merged firm could profit to a level at which it would not have the ability to close capacity strategically.” ( *Id.* ) In other words, the United States' investigation found that without Snowflake, AbitibiBowater did not have enough newsprint capacity to benefit sufficiently from the post-merger price increase to offset the costs associated with shutting down profitable newsprint capacity. 5 To raise prices above competitive levels, the merged firm must create an artificial shortage by shutting down profitable newsprint mills. The merged firm has the incentive to follow this strategy when the costs of this strategy, which are the profits the merged firm forgoes by prematurely shutting down profitable newsprint mills, are less than its benefits, which are the increased prices the merged firm can expect to recoup across its remaining newsprint capacity. After completing its investigation, the United States concluded that without a divestiture AbitibiBowater would have the incentive to follow this strategy, that is, to create an artificial shortage by shutting down otherwise-profitable newsprint mills. The NAA further contends that the United States “has left the Court entirely in the dark with absolutely no basis for making a meaningful comparison between a Snowflake-only divestiture and any alternative course of action, including a full trial on the merits.” (Comment at 18.) This is incorrect; in the CIS the United States addressed both alternatives. (CIS at 10-11.) As the United States noted in the CIS, a full trial on the merits would require significant time and expense, and the outcome would be uncertain. In light of such uncertainty, the United States' decision to take an adequate and available remedy and forgo the risk of trial is well within “the reaches of the public interest.” *See SBC Commc'ns* , 489 F. Supp. 2d at 23 (“Success at trial was surely not assured, so pursuit of that alternative may have resulted in no remedy at all. While a trial may have created an even greater evidentiary record, that benefit may not outweigh the possible loss of the settlement remedies. * * *”). Similarly, the United States need not rehearse every permutation of possible divestiture in order to demonstrate to this Court that the divestiture of Snowflake would adequately address the competitive harm alleged in the Complaint. The competitive harm that the United States alleged—and that the NAA acknowledges—is AbitibiBowater's incentive and ability to raise newsprint prices above competitive levels in the North American market. Any divestiture that removes either the combined firm's incentive or its ability to raise prices above competitive levels would therefore be an adequate remedy. Given AbitibiBowater's ownership of all or part of 19 paper mills in the United States and Canada ( *see* Complaint ¶¶ 7 & 8), the United States could have selected different mills, individually or in combination, to remove the merged firm's ability and incentive to raise prices anticompetitively. In this instance, considering all the factors—including the inherent advantages of settlement and avoidance of the risk and uncertainty of litigation 6 —the United States reasonably chose to require the divestiture of one of “the largest and most profitable newsprint mills in the United States,” which its analysis determined would deprive the merged firm of the scale needed to recoup its lost profits. ( *See* CIS at 6, 11.) As discussed above, given the continuing decline in demand for newsprint, the United States anticipated that AbitibiBowater would continue to close inefficient newsprint capacity. ( *See* Complaint at ¶ 17, CIS at 5.) The United States determined that, coupled with the exit from the market of such inefficient capacity, the divestiture of the Snowflake mill will be sufficient to prevent AbitibiBowater from engaging in an anticompetitive closure of *efficient* capacity. Abitibi and Bowater, even before the merger, had the incentive to close money-losing mills. The question therefore is whether the merger somehow gave them the incentive to close profitable mills in order to raise prices above competitive levels. The United States determined that AbitibiBowater was not likely to have that incentive once it divested Snowflake. 6 As noted previously, when making its public interest determination, this Court “must accord deference to the government's predictions about the efficacy of its remedies, and may not require that the remedies perfectly match the alleged violations because this may only reflect underlying weakness in the government's case or concessions made during negotiation.” *SBC Commc'ns* , 489 F. Supp. 2d at 17. Finally, the NAA suggests that the proposed Final Judgment should not be entered because Abitibi and Bowater previously had engaged in anticompetitive conduct of the sort alleged in the Complaint, which it alleges the United States did not properly account for in negotiating the proposed Final Judgment. This suggestion is misplaced for two reasons. First, as mentioned earlier, the United States spoke with a number of market participants, including the NAA, and examined historical data on prices and costs in the course of its investigation. The evidence does not support the NAA's claims that the parties' prior behavior was in fact anticompetitive. Second, the NAA's allegations about the parties' prior behavior are irrelevant because the prior behavior does not address whether, after Snowflake is divested, AbitibiBowater will have the incentive and ability to unilaterally raise price above competitive levels. (And as the United States has already explained, the answer to this question is likely to be “no.”) Ultimately, in making its public interest determination, the district court “must accord deference to the government's predictions about the efficacy of its remedies.” *See SBC Commc'ns* , 489 F. Supp. 2d at 17. As already has been demonstrated, the United States' analysis supports the conclusion that divestiture of the Snowflake mill is an appropriate remedy to the harms alleged in the Complaint. IV. Conclusion The issues raised in the NAA's public Comment were among the many considered during the United States' extensive and thorough investigation. The United States has determined that the proposed Final Judgment as drafted provides an effective and appropriate remedy for the antitrust violations alleged in the Complaint, and is therefore in the public interest. The United States will move this Court to enter the proposed Final Judgment after the Comment and Response are published. Respectfully Submitted, Dated: April 18, 2008, Karl D. Knutsen, Ryan Danks, Rebecca Perlmutter, Michelle Seltzer (D.C. Bar No. 475482). *Trial Attorneys. United States Department of Justice, Antitrust Division, Litigation I Section, 1401 H St., N.W., Suite 4000, Washington, DC 20530, Telephone:

(202)514-0976, Facsimile:

(202)307-5802.* Certificate of Service I hereby certify that on April 18, 2008, I caused a copy of the foregoing Response of Plaintiff United States to Public Comments on The Proposed Final Judgment in this matter to the following individuals by electronic mail: Counsel for Defendant Abitibi-Consolidated Inc. Joseph J. Simons, Esq., Paul, Weiss, Rifkind, Wharton & Garrison LLP, 1615 L Street, NW., Suite 1300, Washington, DC 20036-5694, Telephone:

(202)223-7370, Facsimile:

(202)223-7470, E-mail: *jsimons@paulweiss.com* . Counsel for Defendant Bowater Incorporated R. Hewitt Pate, Esq., Hunton & Williams, 1900 K Street, NW., Washington, DC 20006, Telephone:

(202)955-1921, Facsimile:

(202)857-3894, E-mail: *hpate@hunton.com* . Counsel for the Newspaper Association of America Alan L. Marx, Esq., King and Ballow, 1100 Union Street Plaza, 315 Union Street, Nashville, TN 37201, Telephone:

(615)726-5455, Facsimile:

(615)726-5413, E-mail: *amarx@kingballow.com* . Karl D. Knutsen. Comments of the Newspaper Association of America Regarding Proposed Final Judgment in United States of America v. Abitibi-Consolidated, Inc. and Bowater, Incorporated In its Explanation of Consent Decree Procedures, the Justice Department requests the Court to enter the proposed Final Judgment settling *United States of America* v. *Abitibi-Consolidated, Inc. and Bowater, Incorporated* without a hearing “provided that the Court concludes that the Final Judgment is in the public interest.” 1 The main provision of the proposed Final Judgment is the requirement that the defendants divest Abitibi-Consolidated's Snowflake, Arizona newsprint mill in order to settle the Justice Department's Complaint 2 enjoining the proposed merger of Abitibi-Consolidated, Inc. (“Abitibi”) and Bowater, Incorporated (“Bowater”). 3 Shortly after the settlement agreement, Abitibi and Bowater completed their merger. The merged firm is named AbitibiBowater. 4 1 Plaintiff United States' Explanation of Consent Decree Procedures filed with the Court on October 23, 2007 at ¶ 6. 2 The Complaint and proposed Final Judgment were filed with the Court on October 23, 2007. 3 Proposed Final Judgment at pages 5-8. 4 Abitibi and Bowater completed their merger on October 29, 2007. AbitibiBowater press release, October 29, 2007. The Newspaper Association of America (“NAA”) is an association whose membership includes most of the daily and Sunday newspaper publishers in the United States. NAA represents the newsprint customers most significantly affected by the merger of Abitibi and Bowater and the provisions of the proposed Final Judgment. In its Competitive Impact Statement, the Justice Department asserts that the divestiture of the Snowflake mill “would adequately address the likelihood that the proposed merger substantially would reduce competition for newsprint in the United States.” 5 In its filings on this matter, including the Competitive Impact Statement and proposed Final Judgment, the Justice Department provides no information or analysis to the Court to support or justify this assertion. 5 Competitive Impact Statement at page 6. The Competitive Impact statement was also filed with the Court on October 23, 2007. In these Comments, the NAA makes two separate but related arguments explaining why it believes the Court should reject the Justice Department's request to approve the proposed Final Judgment without a hearing.

(1)The newly merged AbitibiBowater, despite its agreement to divest the Snowflake mill, has already begun to exercise the market power created by the merger to anticompetitively raise newsprint prices to North American newsprint customers. This post-settlement exercise of market power by AbitibiBowater shows that the proposed Final Judgment is not in the public interest.

(2)Even without the post-settlement evidence of anticompetitive conduct by AbitibiBowater, there would still be ample grounds to reject the proposed remedy. The Justice Department has not provided the Court with any factual or economic analysis to demonstrate that the proposed remedy will eliminate the incentive for AbitibiBowater to reduce industry capacity and raise prices to North American newsprint customers (the injury charged in the Complaint). Each argument, standing on its own, provides sufficient grounds for the rejection by the Court of the Justice Department's request to enter the proposed Final Judgment without a hearing. If the proposed Final Judgment is entered without modification, the newly merged AbitibiBowater will have the ability and incentive to unilaterally engage in anticompetitive conduct to raise newsprint prices above competitive levels to U.S. daily newspapers and other North American newsprint customers. The Court should reject the Justice Department's request to enter the proposed Final Judgment and conduct a hearing into this matter to determine a remedy sufficient to prevent the harm to competition and the economic harm to U.S. daily newspapers and other North American newsprint customers that will otherwise result from the merger and from the inadequate divestiture remedy as contained in the proposed Final Judgment. Analysis of the Competitive Impact of the Merger and the Adequacy of the Divestiture of the Snowflake Mill On November 8, 2007, the Justice Department published in the **Federal Register** the Proposed Final Judgment resolving a Complaint filed by the United States to enjoin the merger of Abitibi and Bowater. The Complaint describes the acquisition as creating a newsprint producer “three times larger than the next North American newsprint producer” that “will have the incentive and ability to withdraw capacity and raise newsprint prices in the North American newsprint market.” 6 Prior to the merger, Abitibi was the largest producer with 25 percent of the North American newsprint capacity. 7 With Bowater's second place share of 16 percent, the combined firm would own “over 40” percent of the North American newsprint capacity. 8 The Complaint seeks to enjoin the transaction because it will “provide the merged firm with an incentive to close capacity sooner than it otherwise would to raise prices and profit from the higher margins on its remaining capacity.” 9 6 Complaint at ¶ 2. 7 Complaint at ¶ 7, 16. 8 Complaint at ¶ 8, 16. 9 Complaint at ¶ 19. Newspaper publishers do not have alternatives to newsprint to turn to when newsprint prices rise. The Complaint states that “newspaper publishers have no close substitutes to use for printing newspapers,” 10 and that “demand for newsprint is highly inelastic to changes in price.” 11 Consequently, if North American newsprint manufacturers attempted to exercise market power by raising newsprint prices above competitive levels, U.S. newspaper publishers and other North American newsprint buyers could not successfully resist that exercise of market power. 12 Furthermore, U.S. newspaper publishers and other North American newsprint buyers would not be able to count on other suppliers to produce more newsprint or entry by new suppliers to roll back the price increase. According to the Complaint, “neither supply responses nor entry will defeat the exercise of market power.” 13 10 Complaint at ¶ 10. 11 Complaint at ¶ 11-12. 12 In Section 0.1 of the Horizontal Merger Guidelines, the Justice Department defines the exercise of market power by a seller or sellers as “the ability profitably to maintain prices above competitive levels for a significant period of time.” 1992 Horizontal Merger Guidelines, U.S. Department of Justice and Federal Trade Commission, Issued April 2, 1992 and revised April 8, 1997 (“Horizontal Merger Guidelines” or “Guidelines”). Available at *http://www.usdoj.gov/atr/public/guidelines/hmg.htm* . 13 Complaint at ¶ 20-26. In recent years, the U.S. newspaper industry has experienced declining circulation and advertising revenue. As a result, North American demand for newsprint has also declined, leading to excess newsprint capacity. The decline in newsprint demand is projected to continue. 14 In such circumstances, newsprint prices would ordinarily be expected to also decline. According to the Complaint, however, the merger will give the merged firm both the incentive and ability to strategically close enough capacity to raise newsprint prices above competitive levels. 15 The Complaint also concludes that absent the merger, neither Abitibi nor Bowater as separate firms would have the incentive or ability to strategically close capacity to raise newsprint prices. 16 In the words of the Justice Department, the “merger will substantially lessen competition in the production and sales of newsprint,” with the result that “prices charged for newsprint in North America likely will increase.” 17 14 Complaint at ¶ 17. 15 Complaint at ¶ 2-3, 16. 16 Complaint at ¶ 18. 17 Complaint at ¶ 3, 16, 28(c). In order to remedy the anticompetitive effects that the Justice Department concluded would otherwise result from the merger, the Department obtained the agreement of Abitibi and Bowater to divest Abitibi's Snowflake, Arizona newsprint mill. 18 In the Competitive Impact Statement, the Justice Department asserts that “[w]ithout Snowflake's capacity, the merged firm would not be of sufficient size to be able to recoup the losses from such strategic closures through increases in prices on its remaining newsprint production. The divestiture of Snowflake would adequately address the likelihood that the proposed merger substantially would reduce competition for newsprint in the United States.” 19 The Snowflake mill accounts for about 3 percent of North American newsprint capacity. 20 Thus, the Justice Department is claiming that with a newsprint capacity share of about 40 percent, the merged firm would have the incentive and ability to unilaterally exercise market power to raise newsprint prices above competitive levels but that with a slightly smaller capacity share of 37 percent the merged firm would not have the incentive and ability to unilaterally exercise market power. The Justice Department provides the Court with no data or analysis in support of these assertions. 18 Proposed Final Judgment at pp. 5-8, Competitive Impact Statement at pp. 8-11. 19 Competitive Impact Statement at p. 6. 20 Neither the Proposed Final Judgment nor the Competitive Impact Statement provides the North American newsprint capacity share of the Snowflake mill. At page 2, the Competitive Impact Statement states that the annual newsprint capacity of the Snowflake mill is 375,000 metric tonnes, which would be about 3 percent of current annual North American newsprint capacity of about 11.7 million metric tonnes based on November 2007 newsprint statistics provided by the Pulp and Paper Products Council. The Justice Department's prediction that the Snowflake divestiture would be sufficient to eliminate the incentive and ability of the merged firm to exercise market power by strategically removing newsprint capacity from the market to raise the price of newsprint has already been proven wrong. North American newsprint producers, including Abitibi and Bowater, had been trying to implement a $25 per tonne price increase since September of this year. Until November, newspaper publishers were successful in resisting the price increase. 21 On November 29, a little more than five weeks after the agreement to divest the Snowflake mill, the newly combined AbitibiBowater announced that it would remove about 600,000 metric tonnes of newsprint capacity from the North American market, representing about 5 percent of North American newsprint capacity. 22 In conjunction with the capacity closures, AbitibiBowater initiated a newsprint price increase of $60 per metric tonne to be implemented in three $20 per metric tonne monthly increments beginning in January 2008. Most North American newsprint manufacturers quickly joined the $60 per metric tonne price initiated by AbitibiBowater. 23 Also, as a result of AbitibiBowater' s announced newsprint capacity closures of 600,000 metric tonnes, the previously stalled $25 per metric tonne price hike has been successfully implemented by North American newsprint manufacturers. As described in the trade press, “[p]ublisher resistance to $25/tonne North American newsprint increase collapse[d]” and the price hike went in “like a hot knife through butter,” 24 Combined, these two price increases will raise the price of newsprint by $85 per metric tonne or about 15 percent over the October 2007 price of $560 per metric tonne. 25 As RISI economist Kevin Conley concluded, “AbitibiBowater's capacity closures will obviously provide the upward pressure for an extended price recovery in 2008, as operating rates soar past the magic 95% threshold generally needed for prices to rise.” 26 21 Publisher resistance to $25/tonne North American newsprint increase collapses; producers looking to fast track recovery, 29 Pulp & Paper Week 48 (Dec. 17, 2007) at 1. 22 AbitibiBowater plans to shut down one million tonnes/yr of capacity in 1Q; expects more closures could follow in 2Q, 29 Pulp & Paper Week 46 (Dec. 3, 2007) at 1. A capacity closure of 600,000 metric tonnes would be about 5 percent of current annual North American newsprint capacity of about 11.7 million metric tonnes based on November 2007 newsprint statistics provided by the Pulp and Paper Products Council. In addition to announcing the removal of 600,000 metric tonnes of newsprint capacity from the market, AbitibiBowater also announced the closure of about 400,000 metric tonnes of commercial printing paper capacity. 23 Most North American newsprint makers join $60/tonne 1Q 2008 hike, 29 Pulp & Paper Week 46 at 2. 24 29 Pulp & Paper Week 48 at 1. 25 Generally, if a merger creates market power resulting in a price increase of 5 percent or more, that price increase is considered to be “significant.” In Section 1.11 of its Merger Guidelines, the Justice Department states that in defining the relevant markets affected by a merger in most contexts it “will use a price increase of five percent lasting for the foreseeable future.” Horizontal Merger Guidelines at § 1.11. The October 2007 North American newsprint price is from 29 Pulp & Paper Week 45 (Nov. 19, 2007) at 3. 26 Newsprint giant AbitibiBowater embraces industry leadership, eyes $200/tonne North American newsprint price increase, 29 Pulp & Paper Week 47 at 5. The combined AbitibiBowater is seeking to “leverage the North American (newsprint) price up to the price in Europe and not the other way around,” according to AbitibiBowater President and CEO David Paterson. 27 If AbitibiBowater is successful in “leveraging” the North American newsprint price up to the price of newsprint in Europe, that will result in a $200 per metric tonne price increase or about 36 percent over the North American price of $560 per metric tonne in October 2007. 28 At the time AbitibiBowater announced the removal of 600,000 metric tonnes of newsprint capacity from the market, it also announced that “more mills could close in Canada later [in 2008].” 29 Based on these statements and other statements by AbitibiBowater executives and past and current actions by AbitibiBowater and its predecessor companies, it is very likely that AbitibiBowater will close additional capacity in 2008 to “leverage” the North American newsprint price up to the newsprint price in Europe. 27 29 Pulp & Paper Week 47 at 1. 28 *Id.* at 1, “Newsprint prices in Europe were close to $200/tonne higher than in the USA in November.” 29 29 Pulp & Paper Week 46 at 1. These post-settlement actions by AbitibiBowater show that the Justice Department severely underestimated the risk that the merger posed to competition in the North American newsprint market and severely underestimated the incentive and ability of the merged firm to remove capacity from the market to raise the price of newsprint well above competitive levels. It is evident that a significantly larger divestiture is required to prevent the substantial anticompetitive price increases that are already occurring and will continue to occur as a result of the merger. NAA Represents the Newsprint Customers Most Significantly Affected by AbitibiBowater's Exercise of Market Power These comments are timely submitted pursuant to the Antitrust Procedures and Penalties Act, 15 U.S.C. 16(b)-(e) (known as the “Tunney Act”), on behalf of the Newspaper Association of America (“NAA”). NAA members are the primary purchasers of newsprint. NAA has approximately 2,000 members, representing a broad range of newspaper-related companies ranging from independent, small market, and family owned publishers to the large newspaper chains. These members account for approximately 90 percent of the paid daily and Sunday newspaper circulation in the United States. U.S. daily newspapers are the primary purchasers of newsprint produced by North American newsprint mills and account for about 80 percent of the newsprint consumed in the U.S. and about 70 percent of the newsprint consumed in North America. Newsprint is an essential and irreplaceable input for newspapers. Because newsprint is second only to labor as a cost for newspapers, higher newsprint prices have a direct impact on the ability of newspaper companies to serve their customers, newspaper readers and newspaper advertisers. When confronted with newsprint price increases, newspapers are forced to restrict their use of newsprint by reducing their circulation, withdrawing from more distant geographic areas, ending editions, and reducing the size and number of pages published. The impact of these changes adversely impacts the interest of the public, with less news available in print to the millions of newspaper readers and less information available in print for the electorate. At price levels equal to the prevailing prices in Europe, $200 per tonne above the pre-settlement October 2007 price, some newspapers will be unprofitable and at risk of failure. This memorandum and the attached Economic Analysis 30 are submitted as a comment on the Justice Department's Competitive Impact Statement and proposed Final Judgment settling the proposed merger of Abitibi and Bowater. The Economic Analysis addresses, in particular, the inadequacy of the Snowflake divestiture to prevent the competitive harm from the merger that is identified in both the Complaint and Competitive Impact Statement. The attached Economic Analysis references “An Economic Analysis of Competitive Effects of the Proposed Abitibi-Bowater Merger” (“White Paper”) and two Supplements to the White Paper, which were provided to the Justice Department during its investigation of the merger. The White Paper and two Supplements, which are attached to the Economic Analysis, address the recent history of anticompetitive conduct by Abitibi and Bowater and explain why a merger of Abitibi and Bowater, if permitted, would lead to a continuation of that anticompetitive conduct. Also cited throughout the Comment are trade press articles relating to post-settlement newsprint capacity removals announced by Abitibi-Bowater and resulting price increases, which are attached to this Comment. 31 30 See “An Economic Analysis of the Adequacy of the Snowflake Divestiture in the Settlement of *United States of America* v. *Abitibi-Consolidated, Inc. and Bowater, Incorporated.* ” 31 See Attachment A: Trade Press Articles Relating to Post-Settlement Newsprint Capacity Removals Announced by AbitibiBowater and Resulting Newsprint Price Increases. NAA members are the primary victims that the Complaint identifies as suffering competitive injury from the transaction and on whose behalf the Government seeks relief. NAA agrees with the Justice Department that the alleged harm to competition identified in the Complaint is accurate, demonstrable, and unless adequately remedied, will cause significant economic harm to the U.S. newspaper industry. Indeed, NAA and its members produced documents, economic analyses, and other information to the Justice Department demonstrating the recent anticompetitive pricing and output history of the North American newsprint industry resulting from the joint dominant firm behavior of Abitibi and Bowater and showing how the proposed transaction would permit a merged AbitibiBowater to continue to strategically close capacity to raise newsprint prices well above competitive levels. But while the Complaint correctly identifies the competitive harm produced by the merger, the remedy in the proposed Final Judgment fails to satisfy even the most deferential standard for Tunney Act review. The Justice Department has not provided the Court with any factual or economic analysis to demonstrate that the proposed remedy will eliminate the incentive to reduce industry capacity and raise prices to North American newsprint customers (the injury charged in the Complaint). Recent events have already proven that the remedy set forth in the proposed Final Judgment is woefully inadequate to prevent the injury charged in the Complaint. Hence, reviewing the remedy “in relationship to the violations that the United States has alleged in its Complaint,” 32 and deferring to the Justice Department to whatever extent is required by law, the remedy does not provide any basis to allow the Court to find that it will ameliorate the harm alleged in the Complaint. This is not a case in which there is a debate as to whether the Justice Department inappropriately narrowed the alleged harm. Rather, this is the case in which the economics and recent history of the newsprint industry, along with the Justice Department's conclusions regarding the competitive harm created by the consolidation, compel the conclusion that the remedy is not a “reasonably adequate remed[y] for the alleged harms.” 33 32 This is the standard the Justice Department claims is “the Court's role under the APPA.” Competitive Impact Statement, at Section VII. 33 This is the standard that the Justice Department contends it must meet for approval of the decree: “the United States ‘need only provide a factual basis for concluding that the settlements are reasonably adequate remedies for the alleged harms.’ ” *id.,* citing SBC Commc'ns, 489 F. Supp. 2d at 17. The Proper Standard of Review for the Justice Department's Proposed Remedy for This Merger “The antitrust laws [* * *] were enacted for the protection of competition, not competitors.” 34 This means that antitrust remedies are designed to restore competition to the market, not to ensure profits to the competitors in that industry. 35 Since the Supreme Court accepted this notion first proposed by Congress, antitrust law enforcement has been guided by this principle. Since these Supreme Court decisions and Congressional mandates, antitrust law and its regulators have sought to preserve competition “in the public interest.” 36 The divestiture of the Snowflake mill is a remedy that fails to preserve competition in the North American newsprint market and is, therefore, not in the public interest. 34 *Brunswick Corp.* v. *Pueblo Bowl-O-Mat, Inc.,* 429 U.S. 477, 488; 97 S. Ct. 690,712; 50 L. Ed. 2d 701 (1977), citing *Brown Shoe Co.* v. *United States,* 370 U.S. 294, 320 (1962). 35 See Brunswick, 429 U.S. at 487-88 (In that case, the court would not grant relief to Respondents for profits that the Respondents would have gained had the acquired party exited the industry). 36 “In the public interest” is the standard for entry of proposed Final Judgments under the Tunney Act. 15 U.S.C. § 1 6(e)(1). Congress mandated considerations for determining whether a decree is in the public interest, but never defined the term, “in the public interest” itself. NAA believes that it is safe to assume that achieving the goals of the antitrust laws—including preserving competition—is “in the public interest.” As is discussed in the attached Economic Analysis, the economic model appropriate to evaluate the current merger as well as prior anticompetitive conduct by Abitibi and Bowater is the dominant firm model. 37 The description of the anticompetitive effects of the merger contained in both the Complaint and the Competitive Impact Statement suggests that the Justice Department applied the dominant firm model in its analysis of the merger. 38 The Merger Guidelines Commentary of the Justice Department and the Federal Trade Commission describes the dominant firm model as follows: 37 See Section B.1., “Unilateral Effects and the Dominant Firm Model,” and Appendix A, “Merger Analysis, Unilateral Effects, and the Dominant Firm Model.” 38 Complaint at ¶ 16-19 and Competitive Impact Statement at pp. 5-6. [The dominant firm] model posits that all competitors but one in an industry act as a “competitive fringe,” which can economically satisfy only part of total market demand. The remaining competitor acts as a monopolist with respect to the portion of total industry demand that the competitive fringe does not elect to supply. This model might apply, for example, in a homogeneous product industry in which the fringe competitors are unable to expand output significantly. 39 39 Commentary on the Horizontal Merger Guidelines, U.S. Department of Justice and Federal Trade Commission, March 2006 (“Guidelines Commentary”), at p. 25. In the Competitive Impact Statement, the Justice Department claims that the divestiture of the Snowflake mill will be sufficient to eliminate the incentive for AbitibiBowater to act as a dominant firm. 40 However, the large post-settlement capacity closures accompanied by a large price increase initiated by AbitibiBowater shortly after the Justice Department's settlement demonstrate that AbitibiBowater has the incentive and ability to act as a dominant firm and will likely retain that incentive and ability for future strategic capacity closures. 40 Competitive Impact Statement at p. 6. One consequence of AbitibiBowater's incentive and ability to act as the dominant firm in the North American newsprint market is that the merged firm will likely close at least some capacity that is more efficient than some of the capacity of the fringe firms. 41 The nature of the dominant firm model is that in closing capacity to raise the industry operating rate and newsprint prices, the dominant firm allows the fringe firms to operate at full capacity enjoying the price increasing benefits of AbitibiBowater's dominant firm behavior. Indeed, once they are at full capacity, the fringe firms would have no incentive to do anything other than to follow the price leadership of the dominant firm. Thus, in a declining market, such as the North American newsprint market, it is likely that some inefficient fringe firm capacity is preserved, which, in the absence of dominant firm behavior, would otherwise have to close as the price of newsprint dropped below the cash costs of operating the inefficient fringe capacity. 41 During the period 2002 to 2006, very little newsprint capacity was removed from the market by fringe firms as Abitibi and Bowater were responsible for the great majority of the North American newsprint capacity closures during this period. See the discussion of Abitibi's and Bowater's prior joint anticompetitive conduct below and in the attached Economic Analysis, Section B.2, “Abitibi and Bowater Engaged in Joint Dominant Firm Behavior to Raise NA Newsprint Prices Significantly above Competitive Levels 2002 to 2006,” which also contains references to the relevant portions of the White Paper and the Supplements to the White Paper. For instance, Pulp & Paper Week reported that newsprint industry analyst Claudia Shank of JP Morgan believes that AbitibiBowater's announced capacity closures for the first quarter of 2008 “together with Abitibi-Bowater's indication that it could cut more capacity in mid-2008, provided second- and third-tier producers some additional ‘breathing room’ and limit closures from the broader industry before the second half of next year.” 42 According to RISI economist Kevin Conley, “[w]ithout AbitibiBowater's bold move [to remove 600,000 metric tonnes of newsprint capacity from the market] operating rates and prices would have continued to languish at low levels until the highest-cost mills could no longer survive, eventually leading to the inevitable closures needed to balance the North American market.” 43 Even after the competitive “balancing” of the North American newsprint market, however, the prevailing newsprint price would be the competitive price, not the much higher anticompetitive prices resulting from AbitibiBowater's current and likely future strategic newsprint capacity closures. 42 29 Pulp & Paper Week 46 at 5. 43 29 Pulp & Paper Week 47 at 5. On the other hand, if the Justice Department had successfully blocked this merger, a separate Abitibi and Bowater would likely have considerably less incentive and ability to engage in joint dominant behavior than the current merged AbitibiBowater. 44 The principal effect of the merger is that U.S. newspaper publishers and other North American newsprint customers directly bear the cost of the dominant firm behavior in the form of significantly higher newsprint prices. As a secondary effect of the merger, it is likely some inefficient fringe firm capacity may be preserved by AbitibiBowater's dominant firm behavior. The misallocation of resources that likely results imposes a social cost on the economy that is inconsistent with the goals of the antitrust laws. 44 According to p. 6 of the CIS, “But for the merger, neither Defendant acting alone would be of sufficient size to profitably increase the price of newsprint by reducing its own output through strategically closing, idling, or converting its capacity.” The basic premise of the antitrust laws is to protect competition and consumers, not competitors. As interpreted by the courts and by Congress, the antitrust laws are not intended to protect inefficient suppliers to a market. Because the Justice Department is asking the Court to enter a proposed consent decree that would provide no remedy for the customer-victims of AbitibiBowater's dominant firm behavior and that would likely permit the survival of inefficient capacity of fringe firm competitors that would otherwise be forced to close down in a competitive newsprint market, the Justice Department has an obligation to explain the basis for its decision to the Court. By asking the Court to accept with no further analysis or explanation the Department's claim that the Snowflake divestiture will remedy the competitive harms alleged in the Complaint, the Department puts the Court in the position of having no basis upon which to determine if the proposed remedy

(a)is adequate to address these competitive problems,

(b)is consistent with the Justice Department's own prior positions, or

(c)is in accordance with the well established standards of the antitrust laws, all of which are relevant to the determination of “public interest.” The Complaint and Competitive Impact Statement Ignore Abitibi's and Bowater's Recent History of Anticompetitive Conduct Prior to Their Merger Announcement As is discussed above, shortly after Abitibi and Bowater reached their agreement with the Justice Department in October to divest the Snowflake mill and settle the case, the newly merged firm proceeded to announce significant capacity closures and to initiate a substantial price increase. Most other North American newsprint manufacturers quickly matched AbitibiBowater's announced price increase. During and immediately prior to the period when the merger was being reviewed by the Justice Department, 45 newsprint prices steadily declined from $675 per metric tonne to $560 per metric tonne, a decline of about 17 percent. Also, during this time, Abitibi and Bowater did not take strategic actions to raise the price of newsprint. As discussed immediately below, Abitibi and Bowater had engaged in joint dominant firm behavior to strategically close capacity to raise the price of newsprint well above competitive levels over the period 2002 to 2006. There are two plausible explanations as to why Abitibi and Bowater did not continue their joint dominant firm behavior during and immediately prior to the Department's merger review:

(1)Abitibi and Bowater determined, due to the extent of previous capacity closures that occurred between 2002 and 2006, that their ability and incentive to jointly engage in dominant firm behavior had been significantly diminished, thus leading to their decision to merge; and

(2)Abitibi and Bowater decided it would be imprudent to attempt to exercise market power during the merger review period as it might adversely affect the outcome of that review. 45 Abitibi and Bowater announced their merger on January 29, 2007. Presumably, the Justice Department began their review of the merger shortly after the merger announcement and continued their investigation until the filing of the Complaint, Competitive Impact Statement, and proposed Final Judgment on October 23, 2007. Between 2002 and 2006, the pricing analysis in the White Paper demonstrates that Abitibi and Bowater jointly acted as a dominant firm, strategically removing newsprint capacity from the market to significantly raise the newsprint industry operating rate, and, thus, increasing the price of newsprint above competitive levels. Due to these strategic capacity closures, the price of newsprint during that period increased by a total of 49 percent despite a steady decline in consumption by North American newsprint customers. The economic White Paper and the two Supplements, presented to the Justice Department during the course of its investigation, extensively document and analyze this joint dominant firm behavior by Abitibi and Bowater. 46 The prior anticompetitive actions of Abitibi and Bowater to close capacity strategically during this four-year period are identical to the anticompetitive strategic behavior alleged in ¶ 2 and ¶ 19 of the Complaint and described on page 6 of the Competitive Impact Statement. Since the Complaint and Competitive Impact Statement contain no references to this prior anticompetitive conduct by Abitibi and Bowater, it is impossible for the Court to determine if and how much of a factor the prior anticompetitive conduct played in the Justice Department's evaluation and settlement of this merger. 46 See Section B.2. of the attached Economic Analysis. Earlier mergers in the North American newsprint industry, especially the Abitibi-Donohue merger in 2000 and the Bowater-Alliance merger in 2001, created both the incentive and ability for Abitibi and Bowater to jointly engage in this anticompetitive conduct. Economic analysis in papers and presentations by representatives of NAA and the U.S. newspaper industry submitted to the Justice Department in 2000 and 2001 forecasted that these two mergers, if not challenged, would have significant anticompetitive results. The Justice Department took no action against either of these two earlier mergers and, as predicted by the economic analyses submitted to the Department, the two mergers enabled Abitibi and Bowater to engage in the anticompetitive conduct that occurred between 2002 and 2006. As a result, U.S. newspapers and other North American newsprint customers incurred significantly higher newsprint prices. Prior anticompetitive conduct is a highly relevant factor in most merger investigations, according to the Guidelines Commentary: Facts showing that rivals in the relevant market have coordinated in the past are probative of whether a market is conducive to coordination. Guidelines § 2.1. Such facts are probative because they demonstrate the feasibility of coordination under past market conditions. Other things being equal, the removal of a firm via merger, in a market in which incumbents already have engaged in coordinated behavior, generally raises the risk that future coordination would be more successful, durable, or complete. 47 47 Guidelines Commentary at p. 22. The Complaint, Competitive Impact Statement, and Proposed Final Judgment do not contain any explanation by the Justice Department as to what, if any, consideration was given to the evidence of Abitibi's and Bowater's prior joint anticompetitive conduct. Before determining whether the proposed relief “is in the public interest,” the Court is entitled to know whether the Justice Department considered evidence of prior anticompetitive conduct and if not, why not. By failing to provide that evidence in its Court filings, the Justice Department has deprived the Court of information vital to its review of the adequacy of the proposed divestiture. The Competitive Impact Statement and Proposed Final Judgment Fail To Address the Congressional Mandates of the Tunney Act As previously noted, the Tunney Act requires that a court determine whether entry of the proposed Final Judgment “is in the public interest.” 48 As the Justice Department outlines more thoroughly in its Competitive Impact Statement, the Court is required to consider certain factors in making that determination. 49 Among those considerations mandated by Congress are:

(1)“The competitive impact of such judgment, including * * * anticipated effects of alternative remedies actually considered,” and

(2)the “impact of entry of such judgment upon competition in the relevant market or markets.” 50 While evidence of other factors upon which the Court is asked to base its decision are certainly lacking, these two points are noticeably deficient. 48 15 U.S.C. § 16(e)(1). 49 Competitive Impact Statement at VII, citing 15 U.S.C. § 16(e)(1)(A)-(B), *United States* v. *SBC Commc'ns, Inc.* , 489 F. Supp. 2d 1, 11 (D.D.C. 2007). 50 15 U.S.C. 16(e)(1) The Anticipated Competitive Effects of Alternative Remedies Actually Considered by the Justice Department The Justice Department lists two alternative remedies to the one it chose:

(1)A full trial on the merits, and

(2)“a number of divestiture alternatives.” 51 After considering other options, the Justice Department “determined that divestiture of the Snowflake mill, under the circumstances, was the best solution given the size and efficiency of the Snowflake mill.” 52 Other than noting that Snowflake is “among the largest and most profitable mills in the United States,” the Justice Department provided no further explanation for its decision that Snowflake was both a sufficient remedy and the best solution, no detail regarding under what “circumstances” this conclusion was reached, and no scale against which it measured Snowflake as the best alternative. The Justice Department leaves the Court entirely in the dark as to what other divestitures it considered and why those were inferior to the divestiture of Snowflake. The Justice Department also failed to note why Snowflake alone—without an additional divestiture—was sufficient. While a detailed rank or scoring of each of the remedies the Justice Department considered may not be necessary, the Justice Department here has left the Court entirely in the dark with absolutely no basis for making a meaningflul comparison between a Snowflake-only divestiture and any alternative course of action, including a full trial on the merits. 51 Competitive Impact Statement at VI. 52 *Id.* Critically, the Justice Department also failed to account for the actual “anticipated effects” of the alternatives. Determining “anticipated effects,” such as whether a transaction will result in one firm having the unilateral power to profitably raise prices or close capacity without being restrained by other competitors in the market, or whether a transaction will result in the market becoming more conducive to competitors coordinating on price, is the essential element of any merger investigation. Yet, here, even though the Court is required to consider it, the Justice Department remains silent. How can the Court determine if the Justice Department chose an acceptable alternative as opposed to one so weak as to provide no meaningful relief? Is the Court expected to take on faith that this alternative is a viable one? The Court is given no support that would assist it in reaching a conclusion that the Justice Department's chosen alternative is in the public interest. If the recent actions by AbitibiBowater are placed on the scale, the Justice Department's silence fails to meet any reasonable burden of proof to establish that its chosen alternative is sufficient to meet the standard that the proposed remedy is “in the public interest.” The Impact of the Proposed Final Judgment in the Relevant Market The divestiture required under the proposed Final Judgment fails to restore the competition lost by the combination of North America's two largest newsprint producers. The Justice Department has an obligation to explain to the Court why the remedy it proposes restores or preserves competition. The formal policy guidance of the Antitrust Division regarding merger remedies is contained in the Antitrust Division Policy Guide to Merger Remedies. 53 In this policy statement, the Antitrust Division sets forth broad principles that it says guide its decisions to seek remedies to offset potential harms to competition from mergers. A controlling policy principle is that “restoring competition is the ‘key to the whole question of antitrust remedy.’ ” 54 53 Antitrust Division Policy Guide to Merger Remedies, U.S. Department of Justice, Antitrust Division, October 2004. Available at *http://www.usdoj.gov/atr/public/guidelines/205108.htm* . 54 *Id.* , citing *United States* v. *E.I. du Pont de Nemours & Co.* , 366 U.S. 316, 326 (1961). *Ford Motors Co.* v. *United States* , 405 U.S. 562, 573

(1972)(“relief in an antitrust case must be effective to redress the violations and ‘to restore competition’ * * * ”). The Horizontal Merger Guidelines “describe the analytical framework and specific standards normally used by the [Justice Department] in analyzing mergers.” 55 While the Complaint and Competitive Impact Statement do not directly reference the Guidelines, absent a disclaimer from the Justice Department, the Court can fairly assume the Department followed its own Guidelines in its investigation of this merger. 55 1992 Horizontal Merger Guidelines, U.S. Department of Justice and Federal Trade Commission, Issued April 2, 1992 and revised April 8, 1997 (”Guidelines”). Available at *http://www.usdoj.gov/atr/public/guidelines/hmg.htm* . The Guidelines also say that, “By stating its policy as simply and clearly as possible, the [Justice Department] hopes to reduce the uncertainty associated with enforcement of the antitrust laws in this area.” *Id.* The “unifying theme of the Guidelines,” like the Merger Remedy Policy noted above, “is that mergers should not be permitted to create or enhance market power or to facilitate its exercise.” *Id* at § 0.1. The Guidelines identify two analytical frameworks for assessing whether a merger between competing firms may substantially lessen competition. Those frameworks require the Justice Department to ask whether the merger may increase market power by facilitating coordinated interaction among rival firms (“coordinated effects”) and whether the merger may enable the merged firm to raise price unilaterally or otherwise exercise market power (“unilateral effects”). 56 Though the Justice Department provides the Court with no indication of what framework it applied or why, the allegations in the Complaint appear to be consistent with the application of the unilateral effects framework. 56 Guidelines Commentary at p. 17. A merger may diminish competition because the “merging firms may find it profitable to alter their behavior unilaterally following the acquisition by elevating price and suppressing output.” 57 How a merger generates anticompetitive unilateral effects is relatively straightforward: “The merger provides the merged firm a larger base of sales on which to enjoy the resulting price rise and also eliminates a competitor to which customers otherwise would have diverted their sales.” 58 57 Merger Guidelines at § 2.2. 58 Merger Guidelines at § 2.22. The Complaint states that the combined post-merger share of newsprint held by AbitibiBowater is “over 40 percent.” 59 The Complaint also states that “neither supply responses nor entry will defeat an exercise of market power.” 60 The Complaint further states that “[t]he proposed transaction would combine Defendants' large share of newsprint capacity, thereby expanding the quantity of newsprint sales over which the merged firm would benefit from a price increase. This would provide the merged firm with an incentive to close capacity sooner than it otherwise would to raise prices and profit from the higher margins on its remaining capacity.” 61 59 Complaint at ¶ 16. 60 Complaint at ¶ 20-26. 61 Complaint at ¶ 19. Given these market circumstances, which are highly conducive to the unilateral exercise of market power, the Justice Department fails to explain to the Court why the divestiture of just the Snowflake mill will be sufficient to prevent the merged firm from exercising market power. As noted above, the Snowflake mill represents only 3 percent of North American newsprint capacity. The divestiture of the Snowflake mill would reduce AbitibiBowater's North American newsprint capacity share from about 40 percent to about 37 percent. The Justice Department fails to explain to the Court how reducing AbitibiBowater's capacity share from 40 percent to a slightly smaller share of 37 percent, a difference of 3 percent, will be sufficient to restore the market to competitive conditions. In the absence of a convincing explanation, the Court should reach the conclusion that the Justice Department's assertion that the divestiture of the Snowflake mill will be sufficient to prevent unilateral anticompetitive conduct by AbitibiBowater is simply wrong. A Previous Application of the Guidelines by the Justice Department to a Comparable Paper Industry Merger Resulted in a Much Larger Divestiture Than the Department Has Proposed for This Merger In the Justice Department's November 2000 challenge to Georgia-Pacific's proposed acquisition of Fort James Corporation, the two parties were the two largest producers of “away-from-home” tissue products. Georgia-Pacific's capacity share of “away-from-home” parent tissue rolls was 11 percent and Fort James' capacity share was 25 percent. The combined share of the two companies in the “away-from-home” parent tissue roll market would have been 36 percent. The Justice Department challenged the merger using the same basic theory applied here—unilateral effects. The Justice Department's investigation revealed that the industry was operating at nearly full capacity, that the capacity could not be quickly expanded, and that demand for parent rolls was relatively inelastic with respect to price. These factors combined to create the likelihood that, after the merger, Georgia-Pacific would act as a dominant firm by restricting output of parent rolls and thereby forcing up prices for away-from-home tissue products. As a result, the Justice Department settled the case by a consent decree requiring the complete divestiture of Georgia-Pacific's parent tissue roll capacity share of 11 percent. 62 62 *See* Competitive Impact Statement describing DOJ's Complaint and settlement of the proposed Georgia-Pacific/Fort James merger at pp. 8-10. For copies of the DOJ's Complaint and Competitive Impact Statement in this matter see the Justice Department Web site at *http://www.usdoj.gov/atr/cases/indx276.htm.* Nothing in the Competitive Impact Statement for the AbitibiBowater merger explains or even suggests to the Court why a divestiture comparable to that in the Georgia-Pacific/Fort James merger is not required for this merger. 63 AbitibiBowater's post-merger actions have already shown that the divestiture remedy proposed by the Justice Department for this merger will not prevent the exercise of market power. 63 The complete divestiture of Georgia-Pacific's pre-acquisition capacity share reduced Georgia-Pacific's post-acquisition parent tissue roll capacity share to 25 percent. With respect to the Abitibi-Bowater merger, a comparable divestiture would reduce the combined pre-merger newsprint capacity share of “over 40 percent” to 25 percent. The Justice Department's action in the Georgia-Pacific/Fort James merger strongly suggests that significantly more capacity needs to be divested by AbitibiBowater to ensure that the merged firm will not have the incentive and ability to unilaterally exercise market power. Conclusion U.S. newspaper publishers, the primary victims who will bear the cost of the conduct challenged in the Complaint and the inadequate Snowflake mill divestiture, see the proposed divestiture as ineffective and inadequate. The Justice Department has not provided the Court with sufficient information with which the Court can enter an informed judgment that the remedy proposed by the Justice Department is “in the public interest.” Furthermore, events subsequent to the Justice Department's settlement of the Abitibi-Bowater merger have already demonstrated that the proposed Final Judgment does not remedy the public interest harms presented to the Court in the Complaint. The Court should not enter the proposed Final Judgment. NAA requests that the Court conduct a hearing to determine the amount of divestiture sufficient to prevent the anticompetitive effects that will otherwise result from this merger and the inadequate proposed Final Judgment. Submitted on behalf of the Newspaper Association of America by Alan L. Marx, King & Ballow, Union Street Plaza 1100, 315 Union Street, Nashville, TN 37201,

(615)259-3456, *amarx@kingballow.com* . January 2, 2008. Attachment A—Trade Press Articles Relating to Post-Settlement Newsprint Capacity Removals Announced by AbitibiBowater and Resulting Newsprint Price Increases Pulp & Paper Week Dec. 3, 2007 Vol. 29, No. 46 AbitibiBowater Plans to Shut Down One Million Tonnes/yr of Capacity in 1Q; Expects More Closures Could Follow in 2Q AbitibiBowater unveiled the first phase of its long-awaited post-merger rationalization plan and announced the closure of four money-losing mills in Canada in the first quarter 2008. A total of 600,000 tonnes/yr of newsprint capacity and 400,000 tonnes/yr of commercial printing papers will be removed. AbitibiBowater said more mills could close in Canada later next year, and added that it wanted to reopen its Canadian union contracts to “explore ways to reduce overall labor costs and provide enhanced flexibility in the workplace.” Salaried employees would also be asked to take cuts. Under what it called “phase one of an action plan to address company challenges,” AbitibiBowater will permanently close its Belgo mill in Shawinigan, QC, and Dalhousie, NB, mill, and indefinitely idle its Donnacona, QC, and Mackenzie, BC, paper mills. Additionally, the company will permanently close its previously idled Fort William mill in Thunder Bay, ON, and Lufkin, TX, paper mills, as well as paper machine 3 at its Gatineau, QC, mill. The previously idled operations run total capacity of about 650,000 tonnes/yr. Execution is key. “(AbitibiBowater) has done what I expect them to do and be really aggressive, but the issue is going to be execution,” said one newsprint buyer contact with a major U.S. publishing group. “It is going to be impossible to take out 600,000 tonnes on Jan 1 and people will be looking to see how much comes out in February and March. That will be the test.” The reaction from Wall Street analysts was broadly favorable. Citibank analyst Chip Dillon said the newsprint capacity reduction figure was double his expectations. JPMorgan's Claudia Shank said that while she believes another 300,000 tonnes/yr would need to come out next year, the closures, together with AbitibiBowater's indication that it could cut more capacity in mid 2008, provided second- and third-tier producers some additional “breathing room” and limit closures from the broader industry before the second half of next year. “AbitibiBowater will probably say ‘We've done our part’ to get ahead of the curve and gain momentum on the pricing front,” an analyst in Canada said. “But the market is looking for a million tonnes (of newsprint reductions) year-over-year so more capacity will have to be taken out if the market is going to be in balance in 2008.” While AbitibiBowater did not disclose the number of jobs that would be lost by its restructuring, the Communication, Energy and Paperworkers Union of Canada

(CEP)estimated at least 1,000 workers could be eliminated in Canada. CEP wants forestry “summit.” The CEP called for an emergency summit of union and industry leaders in the forestry sector. “Today's 1,000 or more victims in the mills in Dalhousie, Shawinigan, Donnacona, and Mackenzie bring the job losses in the sector to over 20,000 in the past two to three years,” said CEP pres Dave Coles. AbitibiBowater pres/CEO David Paterson said management had been very transparent with employees about their mills. Under phase two of the plan, which starts immediately, AbitibiBowater will continue reviewing all operations. More Canadian mills at risk. Company chmn John Weaver said several mills in eastern Canada were under particular pressure from high fiber, energy, and labor costs, and the company planned to involve government, communities, and labor to make the mills competitive at dollar parity. Decisions would be taken in the second quarter of 2008 and closures could start by mid-2008, he said. AbitibiBowater has increased its merger synergies target to $350 million from $250 million. It is also targeting another $500 million in asset sales, which could include overseas mills, non-core facilities, U.S. timberlands, and its Snowflake, AZ, newsprint mill, which it agreed to divest in return for U.S. Dept of Justice approval of the Abitibi-Consolidated/Bowater merger. Proceeds from the sales will go towards the company's three-year, $1-billion debt-reduction target. • Citing rising costs and “difficuit market conditions,” AbitibiBowater told customers that it would increase prices on its AbiBow high-bright product line by $65/ton effective Jan. 1. The increase applies to all basis weights, calipers, and finishes of Book, Book Cream, Select, Sert, and Form products. Separately, Blue Heron announced a $35/tonne ($31.75/ton) high-bright increase for its reBrite product range, also effective Jan. 1. Newsprint Most North American Newsprint Makers Join $60/Tonne 1Q 2008 Hike U.S. daily newspaper publishers face a New Year's perfect storm, with producers who account for more than 80% of North American production slating $60/tonne first quarter price hikes and AbitibiBowater closing 600,000 tonnes/yr of newsprint capacity, contacts said last week. The price increases will be phased in monthly increments of $20/tonne in January, February and March. AbitibiBowater, which with 5.7 million tonnes/yr of capacity accounts for about 45% of all North American newsprint production, initiated the hike. Among companies that contacts said would keep prices consistent with AbitibiBowater are White Birch, Kruger, SP Newsprint, Catalyst, Tembec, and Blue Heron. Other producers are still considering a price hike, contacts said last week. In addition to the 1Q 2008 hike almost all North American newsprint producers will seek this month to implement a $25/tonne fall increase that many producers have been trying to apply since September. Publishers start to panic. “There is a general panic in the market right now. Supply has tightened up and (producers) are really pushing this December hike. I'm sure there are (publishers) who have been particularly aggressive in the past that are going to get stuck and be told to pay or buy somewhere else,” said one publisher contact. One contact with a large supplier said the $25 hike had managed to gain traction in November. “Things happened in the back half of the month” buying sources conceded, saying that newsprint producers did have the strength to move November's price “a little bit.” Pulp & Paper Week's November Price Watch had showed newsprint prices on U.S. East and West coasts holding flat at $560/tonne. Suppliers are in dire need for higher prices given the current 10.4% year-to-date decline in North American demand, strong Canadian dollar and high input costs. “I've never before seen such a confluence of bad things on this side of the business. To save a dollar on production is a Herculean task,” said one producer contact in Canada. Sign of modest improvement. According to the latest Pulp and Paper Products Council data, the North American supply-demand balance improved modestly in October, with production falling almost in line with overall demand. The biggest barometer for newsprint consumption, the U.S. dailies, showed an 11.4% fall. But adjusting for four Sundays in October 2007 compared with five in October last year, the decline was closer to 7-8%. More significantly, overall inventories fell to 1.13 million tonnes, their lowest level since December 1979, after a two-month 242,000 tonnes or 18% plunge. Exports rose 29.0% in October, but those extra 49,000 tonnes were more than offset by a 69,000 tonnes drop in domestic shipments. Gloomy economic outlook. With the economy sagging and the outlook for newspaper advertising looking increasingly gloomy, contacts say capacity cuts remain the only answer if mills are going achieve the 95% operating rates that historically lead to higher prices. RISI economists say that despite higher exports, North American mills will have to shut 800,000 tonnes/yr of capacity by the end of next year (relative to third quarter 2007) if they are to push operating rates above the 95% mark in 2008. • With plans to eliminate 38,000 tonnes of newsprint production, Catalyst Paper last week extended the shutdown of PM 1 at its Elk Falls newsprint mill in Campbell River, BC, and keep the PM down for the entire first quarter because of a shortage of fiber. PM 1 was shut in September due to a fiber shortage. The company said the mill has been hurt by a coastal fiber strike that recently ended and a weak U.S. lumber market, Canadian Press said. In addition, the mill's kraft pulp line and white-top linerboard PM will also shut 18 days between Dec. 16 and Jan. 2—and could be shut for longer periods depending on fiber availability. PMs 2 and 5 will be shut Dec. 23, and restart Jan. 2 and Jan. 6, respectively. • Japan's Oji Paper plans to hike the price of newsprint exports by $50/tonne effective with December orders, citing higher energy and raw material prices that will add $460 million to its costs in the current financial year. The company will also hike the price of other export grades, ranging from $30/tonne for coated and uncoated products to $80/tonne for kraft paper. • Germany's Palm Paper received planning permission to construct a 400,000 tonnes/yr recycled newsprint mill at King's Lynn in eastern England, which would expand Palm's UK production to 550,000 tonnes/yr. Ecco Newsprint, which has plans for a recycled mill of its own at Middlesbrough in the north of the country, also has planning permission but has not yet begun construction. The UK currently imports about 1.2m tonnes of newsprint and exports 1.5m tonnes of waste paper annually. BILLING CODE 4410-11-M EN10JN08.000 BILLING CODE 4410-11-C Dec. 10, 2007 Vol. 29, No. 47 Newsprint Giant AbitibiBowater Embraces Industry Leadership, Eyes $200/Tonne North American Newsprint Price Increase Any doubts about AbitibiBowater's determination to regain profitability and retire a billion dollars in debt within three years were dispelled last week when pres/CEO David Paterson told analysts at the Citi Investment Research Basic Materials Symposium: “Our need is to leverage the North American (newsprint) price up to the price in Europe and not the other way around.” Newsprint prices in Europe were close to $200/tonne higher than in the USA in November. AbitibiBowater, the worlds largest newsprint maker, accounts for about 45% of all North American newsprint production capacity. Paterson said the company's $25/tonne fall price increase was in place, and he anticipated that the company's recently announced $60/tonne first quarter hike would be implemented entirely. A presentation slide showed the effect of a $25/tonne increase was an additional $126.8 million in operating income. The benefit to AbitibiBowater's bottom line from shuttering loss-making Canadian newsprint capacity was explained by CFO William Harvey, who said production costs for the entire 600,000 tonnes/yr slated for closure were $60/tonne higher than the company average. Most North American producers expect the closures to save the struggling North American newsprint industry, and have joined AbitibiBowater's call for a $60/tonne increase in the first quarter of 2008 implemented in three $20/tonne monthly increments. Upward price pressure. “AbitibiBowater's capacity closures will obviously provide the upward pressure for an extended price recovery in 2008, as operating rates soar past the magic 95% threshold generally needed for prices to rise,” said senior RISI economist Kevin Conley. “Without AbitibiBowater's bold move, operating rates and prices would have continued to languish at low levels until the highest-cost mills could no longer survive, eventually leading to the inevitable closures needed to balance the North American market.” European producers are also addressing overcapacity, and Europe's largest newsprint producer, Norske Skog, said that it would decide by Feb. 7 how to permanently close 300,000-400,000 tonnes/yr of newsprint capacity. “We now see 1.4 to 1.5 million tonnes of announced capacity removals in Europe and North America in just the past 10 weeks,” said Citi analyst Chip Dillon, who told investors in a research note that he expected a recovery in U.S. newsprint prices to close almost all of the gap with European prices over the next 12-18 months. Dismaying prospect for publishers. What a $60/tonne hike and imminent closure of 5% of North American newsprint capacity portends for U.S. daily newspapers had publishers shaking their heads. “There is a sense of inevitability that seems to be recognized by most on the publishing side. There's a sense of resignation in their voices that hasn't been there before,” said one contact with a major metropolitan daily. “It's a very different world from just a month ago. We certainly did not have these kind of increases in our plans for 2008, so if they are implemented we would have to find ways to use less newsprint,” said another contact with a major publishing group. Newspaper publishers have their own business issues which have largely brought about the decline in North American newsprint demand to under nine million tonnes in 2007, from a peak of slightly more than 13 million tonnes in 1999 and more than ten million tonnes as recently as 2005. Only 2.9% of the 11.4% drop in North American newsprint demand this year is due to lighter basis weights and reduced web widths, according to the Pulp and Paper Products Council. Of the rest, 2.2% is attributed to falling circulation and 6.3% to lost advertising. The bulk of the lost advertising is in real estate and automotive sectors, neither of which show signs of a rebound anytime soon. 2008 a challenging year. “From a fiscal standpoint 2008 will be a challenging year almost without precedent for publishers. It's an alignment of circumstances and realities that none of us have ever seen before,” said one publishing source. But while the domestic market for newsprint is undeniably shrinking, the global market is still growing. Industry consultant Dave Allan told RISI's 2nd annual Latin American Pulp & Paper Outlook Conference in Sao Paulo, Brazil, last week that world demand showed flat growth in 2007 only because of North America's 10% plunge. Allan said he expected North American demand decline would slow to 2.5% by the end of 2008, and that global demand would see a 2%/yr upturn and grow at close to 1.0 million tonnes/yr in 2008 and 2009. AbitibiBowater, which like some other North American producers is growing its overseas exports, sees its key destinations as Europe, Latin America and the Middle East and India. Chmn John Weaver said last week that because the company's Canadian export mills were located on ocean ports, the cost of bulk shipments to Europe were comparable with shipments to North American destinations. • Members of Canada's largest pulp and paper union, the Communications, Energy & Paperworkers union

(CEP)want to go to the bargaining table a year earlier than scheduled to tackle the issue of mill closures and job losses. The measure was adopted last week by delegates representing AbitibiBowater paper workers and will go to a conference of eastern Canada union Locals early next year. The CEP opposes reopening negotiated contracts to cut wages and benefits but says there are ways the union could help cut costs that do not involve concessions. Dec. 17, 2007\Vol. 29, No. 48 Publisher Resistance to $25/Tonne North American Newsprint Increase Collapses; Producers Looking To Fast Track Recovery Trenchant publisher resistance to a $25/tonne fall newsprint price increase that persisted as late as mid-November vanished toward the end of the month, and the hike went in “like a hot knife through butter” in December, sources said last week. Contacts said the market was tightening and order books filling up due to some newspaper buyers trying to stock up ahead of next year's fresh round of price increases and some commercial printers switching to newsprint because of a shortage of specialty grades. The price of 30-lb standard newsprint on the U.S. East and West Coasts increased to $585/tonne this month, up $15 from a revised $570/tonne in November, according to Pulp & Paper Week. The revised November level represented a $10/tonne increase. The price of 27.7 lb newsprint was $625/tonne in December, up from $610/tonne in November. Newspaper publishers' rapid change of heart came after the combination of AbitibiBowater's larger than expected 600,000 tonnes/yr of newsprint capacity cuts along with a $60/tonne first quarter price increase, contacts said. Analysts believe the closures remove sufficient newsprint capacity to match North American market demand—at least temporarily—in the first quarter. 70% 1Q price recovery? AbitibiBowater accounts for about 45% of all North American newsprint capacity, and producers that account for almost all the rest also announced $60/tonne hikes. If these are successfully implemented, by the end of March suppliers will have recovered $85 of the past year's $115/tonne price drop. “You've got to take your hat off to this guy. He's determined to show value to his shareholders and gained the upper hand very quickly, while we are going to be fighting for our lives,” remarked one publisher contact, referring to AbitibiBowater CEO David Paterson. Both buyers and sellers expected that 2008 would bring higher newsprint prices and many contacts believed suppliers would seek a second price hike later in the year. Three years of increases? “If you are not building 10% price increases into your budget for the next three years you are foolish. Suppliers are pretty cocky right now and there's no sympathy for publishers,” commented a buyer contact with a major U.S. newspaper group. “I think what is going to drive (AbitibiBowater's) decisions is their income statements and balance sheets, and I think they would tell you they have been too deferential to their customers historically—to their own detriment,” said one contact. “There's 800,000 tonnes compared to 2007 that will be closed and I'd say the odds are 50-50 or better that we will get north of $700/tonne in 2008, because even with a $150 increase Canadian mills are not going to make money with the dollar at parity,” said a producer contact in Canada. Consumption will be key. “When you start hearing big numbers thrown out, there is a tendency by some publishers to panic, but my concerns are how many tonnes are really coming out and will consumption continue to fall at the same rate we have seen this past year,” said one big U.S. newsprint buyer. “Seeing a company like Kruger that rarely takes downtime closing 100,000 tonnes will curl your toes, but how much consumption is going to fall is more important from my point of view.” Publishers in Canada would be hurt less by higher newsprint prices because the stronger Canadian dollar has shrunk their newsprint costs to the lowest level in almost two decades. “AbitibiBowater has shown what should be done to get the price up to a level where they can make a dollar or two, but at the same time I don't think U.S. publishers can afford to pay the price,” said a contact with a major Canadian publisher. “I am pretty sure they will cut the size (of U.S. newspapers) and at the end of the day demand is going to go down big time—another million tonnes I'm sure.” Dailies will shrink page size. Supplier sources also said they anticipated consumption cutbacks, but said that given the 6% demand drop in 2006 and near 11% drop in 2007, producers would have difficulty increasing conservation significantly in the first quarter. “I think it's a given that everybody will go to 44-in. webs as quickly as they can, cut out what they can from editorial, and make the standard U.S. newspaper page 11 inches. That will cut demand 6-8%,” said one supplier contact. Still, AbitibiBowater has said it is ready to shutter more mills in eastern Canada if they cannot be made competitive. “Their goal is to align capacity with demand, and whatever that entails in terms of demand decline they are committed to matching that,” noted one U.S. publisher source. But although suppliers are desperate to push prices higher, some producers are wary of them going too high. AbitibiBowater's weight and the world. “There has to be an upper limit. At $550/tonne, or even $600 or $625, we don't have any issues with imports. But at $675, $700, or $725 we will see Chinese tonnes here. It's one thing for AbitibiBowater to carry the North American market on its back, but it's another to carry the whole world,” remarked one producer contact in Canada. • Europe's Holman Paper intends to close 150,000 tonnes/yr. of standard newsprint capacity at its 795,000 tonnes/yr. Hallsta mill at Hallstavik, Sweden. • Norway's Norske Skog, the world's second-largest newsprint producer behind AbitibiBowater, may spin off its Asian operations. The company said it has been looking into a separate stock market listing for its South Korean, Chinese, and Thai mills, which run capacity of 1.6 million tonnes/yr. or a quarter of the company's total. Some of Norske's investors want the company to sell its Asian operations to reduce debt, but Norske has ruled out selling the mills outright, saying the price would not reflect their value in a market currently suffering from significant overcapacity, according to a Financial Times report. Economists Incorporated An Economic Analysis of the Adequacy of the Snowflake Divestiture in the Settlement of United States of America v. Abitibi-Consolidated, Inc. and Bowater, Incorporated Submitted on Behalf of the NAA John H. Preston, Kent W. Mikkelsen, PhD, Economists Incorporated, Washington, DC. January 2, 2008. Table of Contents Section A. Introduction Section B. Economic Analysis 1. Unilateral Effects and the Dominant Firm Model 2. Abitibi and Bowater Engaged in Joint Dominant Firm Behavior to Raise NA Newsprint Prices Significantly Above Competitive Levels 2002 to 2006 3. While the Proposed Merger of Abitibi and Bowater Was Under Review by DOJ, Abitibi and Bowater Suspended Their Dominant Firm Behavior and, As a Result, NA Newsprint Prices Declined Significantly 4. AbitibiBowater Resumed the Dominant Firm Behavior in November 2007 Following the October 23, 2007 Settlement Agreement With DOJ to Divest the Snowflake Mill 5. DOJ Required a Much More Significant Divestiture to Settle a Comparable Paper Industry Merger in 2000 Section C. Conclusion Appendix A—Merger Analysis, Unilateral Effects, and the Dominant Firm Model Attachments Attachment A Curricula Vitae of John H. Preston and Kent W. Mikkelsen, Ph.D. Attachment B White Paper by Economists Incorporated, Submitted on Behalf of the NAA to DOJ on April 11, 2007 Attachment C Supplement 1 to the White Paper by Economists Incorporated, Submitted on Behalf of the NAA to DOJ on July 9, 2007 Attachment D Supplement 2 to the White Paper by Economists Incorporated, Submitted on Behalf of the NAA to DOJ on July 20, 2007 A. Introduction On January 29, 2007, Abitibi-Consolidated, Inc. (“Abitibi”) and Bowater Incorporated (“Bowater”) announced that they had reached an agreement to merge the two companies. 1 Following an investigation of the merger, the U.S. Department of Justice (“DOJ”) filed a civil antitrust complaint (“Complaint”) with the United States District Court for the District of Columbia (“Court”) on October 23, 2007 seeking to enjoin the merger. 2 Paragraphs 2, 3 and 19 of the Complaint explain why DOJ was challenging the proposed merger. 1 At the time of the merger announcement, newsprint accounted for about 48 percent of the value of the combined sales of the two companies. Other products produced by the two companies include coated papers, uncoated papers, market pulp and wood products. Source: The presentation accompanying the merger announcement, “AbitibiBowater: Creating a Global Leader in Paper and Forest Products,” January 29, 2007, page 10. 2 The Complaint is captioned *United States of America* v. *Abitibi-Consolidated, Inc. and Bowater, Incorporated* . 2. Abitibi and Bowater are the two largest newsprint producers in North America. The combination of these two firms will create a newsprint producer three times larger than the next largest North American newsprint producer. After the merger, the combined firm will have the incentive and ability to withdraw capacity and raise newsprint prices in the North American newsprint market. 3. Unless the proposed transaction is enjoined, Defendants' merger will substantially lessen competition in the production and sale of newsprint, in violation of Section 7 of the Clayton Act, 15 U.S.C. § 18. 19. The proposed transaction would combine Defendants' large share of newsprint capacity, thereby expanding the quantity of newsprint sales over which the merged firm would benefit from a price increase. This would provide the merged firm with an incentive to close capacity sooner than it otherwise would to raise prices and profit from the higher margins on its remaining capacity. At the same time the Complaint was filed, DOJ also filed a proposed Final Judgment (“PFJ”) which, if approved by the Court, would settle DOJ's case against defendants Abitibi and Bowater. As a condition of the settlement, the defendants are required to sell Abitibi's Snowflake, Arizona newsprint mill (“Snowflake mill”) to an acquirer acceptable to DOJ. 3 Following the filing of the Complaint and PFJ, Abitibi and Bowater completed their merger on October 29, 2007. 4 The newly merged company is named AbitibiBowater. 3 See the PFJ, Section IV.A. 4 AbitibiBowater press release, October 29, 2007. Prior to the completion of the merger, Abitibi's share of North American (“NA”) newsprint capacity was about 25 percent and Bowater's share was about 16 percent. 5 According to the Complaint, the post-merger share of the combined company would be “over 40 percent.” The NA newsprint capacity share of the Snowflake mill is about 3 percent. 6 Thus, the divestiture of the Snowflake mill would reduce the combined NA newsprint capacity share of the merged firm from about 40 percent to about 37 percent. 5 See the Complaint, paragraph 16. 6 The annual newsprint capacity of the Snowflake mill is 375,000 metric tonnes, according to page 2 of the CIS. However, none of the documents filed by DOJ with the court in this case provides the NA newsprint capacity share of the Snowflake mill nor the amount of total NA newsprint capacity that would be necessary to calculate that share. Based on total NA newsprint production and operating rates for November 2007, current total annual NA newsprint capacity is about 11.7 million metric tonnes, which would give the Snowflake mill a NA newsprint capacity share of about 3 percent. Source: The November 2007 North American Newsprint Flash Report (“Flash Report”), published by the Pulp and Paper Products Council (“PPPC”). The members of the PPPC are NA pulp and paper manufacturers, including most if not all NA newsprint manufacturers. In its Competitive Impact Statement (“CIS”), 7 DOJ explains why it believes the divestiture of the Snowflake mill will be an adequate remedy to prevent anticompetitive conduct by the merged firm. 7 The CIS was also filed with the Court on October 23, 2007. The combination enhances Defendants' incentives to exercise market power because the merged firm will control a greater base of capacity over which the merged firm would benefit from an increase in newsprint prices after strategically closing, idling, or converting some of its capacity. Without Snowflake's capacity, the merged firm would not be of sufficient size to be able to recoup the losses from such strategic closures through increases in prices on its remaining newsprint production. The divestiture of Snowflake would adequately address the likelihood that the proposed merger substantially would reduce competition for newsprint in the United States. 8 8 See the CIS, page 6. The CIS does not specifically define the terms “strategically closing, idling, or converting some of its capacity” or “strategic [capacity] closures.” However from the context of the paragraph on page 6 of the CIS quoted above, it is evident that a newsprint manufacturer with a relatively large capacity share will, acting by itself, have the incentive and ability to “strategically” close capacity if the newsprint manufacturer expects to recoup the losses from the capacity closure through increases in prices on the manufacturer's remaining newsprint production. The larger the newsprint manufacturer's capacity share, the more likely the manufacturer will have the incentive and ability to engage in such unilateral strategic behavior. Newsprint manufacturers with relatively small capacity shares will likely have neither the incentive nor ability to strategically close capacity. It is evident that DOJ has concluded that with a capacity share of about 40 percent, the merged firm would have the incentive and ability to unilaterally engage in anticompetitive conduct to raise the price of newsprint but that with a slightly smaller capacity share, about 37 percent, the merged firm would lose that incentive and ability. DOJ provides no information or analysis in the CIS or any other document it filed with the Court to support this claim. We have been asked by the Newspaper Association of America (“NAA”) and its attorneys to provide an economic antitrust analysis of the Snowflake divestiture to determine whether that divestiture will likely be sufficient to eliminate the anticompetitive effects that would otherwise result from the merger. The purpose of this analysis 9 is to assist the Court in its evaluation of the adequacy of the Snowflake divestiture under the Antitrust Procedures and Penalties Act (known as the “Tunney Act”). During the course of DOJ's investigation of the proposed merger of Abitibi and Bowater, we also submitted to DOJ an economic White Paper and two Supplements to the White Paper on behalf of the NAA. These submissions to DOJ are attached to this analysis. 10 9 The authors of this analysis, John H. Preston and Dr. Kent W. Mikkelsen, are both Senior Vice Presidents at Economists Incorporated, an economic consulting firm headquartered in Washington, DC and specializing in the economic analysis of antitrust and regulation matters for over 25 years. Many economists at Economists Incorporated, including Mr. Preston and Dr. Mikkelsen, worked at DOJ as economists before joining Economists Incorporated. The curricula vitae of Mr. Preston and Dr. Mikkelsen are attached to this analysis as Attachment A. 10 The White Paper and the two Supplements to the White Paper are attached to this analysis as Attachment B (“White Paper,” submitted to DOJ on April 11, 2007), Attachment C (“Supplement 1,” submitted to DOJ on July 9, 2007), and Attachment D (“Supplement 2,” submitted to DOJ on July 20, 2007.) The White Paper is titled “An Economic Analysis of the Competitive Effects of the Proposed Abitibi-Bowater Merger,” Supplement 1 to the White Paper is titled “Response to Issues Raised at Our Meeting With the DOJ Staff on April 20, 2007,” and Supplement 2 is titled “Revision to the July 9, 2007 Response.” In addition, we met with the DOJ staff on four occasions and participated in a number of conference calls with the DOJ staff, including calls with newsprint buyers for newspapers, to discuss the competitive issues raised by the proposed merger. The NAA is an association whose membership includes newspaper chains of all sizes and independent, small market, and family-owned newspaper publishers. The NAA is headquartered in Arlington, Virginia. NAA members account for nearly 90 percent of the daily newspaper circulation in the U.S. 11 U.S. daily newspapers are the primary purchasers of newsprint produced by NA newsprint mills accounting for about 80 percent of the newsprint consumed in the U.S. and about 70 percent of the newsprint consumed in NA. 12 If the divestiture of the Snowflake mill proves to be inadequate to eliminate the anticompetitive effects of the merger in the NA newsprint market, NAA member newspapers and other purchasers of newsprint in NA will bear the cost of that inadequacy in terms of higher newsprint prices. 11 Source: NAA Web site. 12 Source: November 2007 Flash Report. Newsprint is also used in the printing of nondaily newspapers and certain advertising materials such as newspaper inserts and grocery store flyers. As discussed in more detail below, less than six weeks after its agreement to divest the Snowflake mill, AbitibiBowater announced plans to remove a large amount of capacity from the newsprint market and, at about the same time, initiated a significant newsprint price increase. Additional AbitibiBowater capacity closures leading to further price increases appear likely in 2008. The CIS claims that “[w]ithout Snowflake's capacity, the merged firm would not be of sufficient size to be able to recoup the losses from such strategic closures through increases in prices on its remaining newsprint production.” 13 This recent unilateral price-increasing action by AbitibiBowater shows that DOJ has seriously misjudged the incentive and ability of the merged firm to engage in strategic behavior to raise the industry operating rate and the price of newsprint. This misjudgment will likely cost U.S. newspapers and other U.S. newsprint customers billions of dollars in coming years. 13 See the CIS, p. 6. Even without this recent price-increasing action by AbitibiBowater, there already existed substantial evidence that the merger would likely provide AbitibiBowater with significant market power and that the divestiture of just the Snowflake mill would be unlikely to prevent AbitibiBowater from exercising that market power. As documented and analyzed in the White Paper and in Supplement 1 to the White Paper, Abitibi and Bowater jointly acted as a dominant firm over the period 2002 to 2006 to strategically remove newsprint capacity from the market to raise the price of newsprint, the same type of anticompetitive strategic behavior alleged in Paragraphs 2 and 19 of the Complaint and described on page 6 of the CIS. Neither the Complaint nor the CIS, however, mentions this prior anticompetitive behavior. In our opinion, a history of prior anticompetitive conduct in the market affected by a merger is relevant to merger analysis in two main respects:

(1)It provides both support and a justification for the filing of the Complaint; and

(2)in cases that are settled with a consent decree, it allows the Court and other interested parties to more accurately evaluate the adequacy of a proposed remedy. By failing to mention the prior anticompetitive conduct of Abitibi and Bowater in the North American newsprint market, DOJ has deprived the Court of information highly relevant to an evaluation of the adequacy of the Snowflake divestiture. The Complaint and CIS also ignore the significant decline in newsprint prices during the period the proposed merger was under review by DOJ, a period of approximately 9 months. Abitibi and Bowater did not engage in strategic behavior during this period or in the months leading up to their merger announcement. It is plausible that Abitibi and Bowater suspended their strategic capacity closures to maximize the likelihood of a favorable merger review by avoiding conduct that DOJ would likely find anticompetitive. It is also plausible that the incentive and ability of AbitibiBowater to jointly engage in strategic behavior had been significantly weakened by previous capacity closures over the period 2002 to 2006, which led to the decision to merge. The decline in newsprint prices during the merger review period is also information highly relevant to an evaluation of the Snowflake divestiture, information which DOJ did not provide in any of the documents it filed with the Court. To summarize, from 2002 to 2006, Abitibi and Bowater jointly engaged in strategic dominant firm behavior causing newsprint prices to rise significantly above competitive levels. During DOJ's review of the proposed merger, Abitibi and Bowater suspended their joint strategic dominant firm behavior and, as a result, newsprint prices declined significantly. Shortly after Abitibi and Bowater agreed to divest the Snowflake mill, the newly merged AbitibiBowater resumed the dominant firm behavior by announcing significant newsprint capacity closures and initiating significant newsprint price increases. This resumption of strategic dominant firm behavior was made possible by the merger and was not deterred by the Snowflake divestiture. B. Economic Analysis 1. Unilateral Effects and the Dominant Firm Model The type of anticompetitive effect alleged in Paragraphs 2 and 19 of the Complaint and described on page 6 of the CIS is called a “unilateral effect.” That is, a unilateral effect results if the merger provides the merged firm with the incentive and ability to unilaterally engage in anticompetitive conduct without the need to coordinate with non-merging firms in the market. A dominant firm model is a model of unilateral conduct often applied in circumstances where the product is relatively homogeneous and where there is a single dominant firm with a relatively large capacity share and a “competitive fringe” consisting of a number of firms with relatively small capacity shares. These characteristics apply to the newsprint industry. While we have no direct knowledge of the model or models used by DOJ to analyze the competitive effects of the proposed merger of Abitibi and Bowater, the allegations in Paragraphs 2 and 19 of the Complaint and described on page 6 of the CIS are consistent with an application of the dominant firm model. See Appendix A below for additional discussion of merger analysis, unilateral effects, and the dominant firm model. The method by which AbitibiBowater could unilaterally raise newsprint prices is straightforward. In the newsprint industry, newsprint prices increase at industry operating rates of about 95 percent and above. At industry operating rates below 95 percent, newsprint prices are likely to remain constant or decline. 14 If there is a significant amount of excess capacity, as has recently been the case in the newsprint industry, then newsprint prices are unlikely to increase unless enough capacity is removed from the market to raise the operating rate above 95 percent. Newsprint customers are beneficiaries of the lower prices that result from the excess capacity. 14 See the White Paper, Section F, pages 83 to 87, and Section 11, pages 94-105, for a discussion and analysis of the relationship between the newsprint operating rate and the price of newsprint. A firm with a sufficiently large capacity share would have the incentive and ability to unilaterally remove capacity from the market to raise the price of newsprint if the increased profit from the price increase on its remaining capacity exceeds the loss in profit from the closed capacity. DOJ's Complaint and CIS are evidently based on the theory that a merger creating a firm with about a 40 percent newsprint capacity share would enable that firm to profitably remove capacity from the market in order to raise the industry operating rate to a high enough level to also raise the price of newsprint. 2. Abitibi and Bowater Engaged in Joint Dominant Firm Behavior to Raise NA Newsprint Prices Significantly above Competitive Levels 2002 to 2006 An argument that the merger will provide AbitibiBowater with the incentive and ability to strategically close capacity to raise the price of newsprint is not based solely on a theoretical model. The White Paper and Supplement 1 to the White Paper submitted to DOJ document and analyze prior anticompetitive conduct of Abitibi and Bowater that occurred between the third quarter of 2002 and the third quarter of 2006. See the following sections of the White Paper for this analysis: Section F: Evidence from Presentations to Investment Analysts and Other Public Information That Abitibi and Bowater Have Used Their Control Over Newsprint Capacity and the Newsprint Industry Operating Rate to Significantly Raise the Price of Newsprint 2002 to 2006 (pp. 73-87) Section G: An Analysis of Permanent Newsprint Capacity Reductions Between 2002 and 2006 (pp. 88-93) Section H: Four Articles by Two Newsprint Industry Experts Describing the Abitibi-Bowater Strategy to Raise Prices by Closing Capacity (pp. 94-105) See also the following section from Supplement 1 to the White Paper: Section C: Additional Evidence that Abitibi and Bowater Exercised Market Power Over the Period 2002 to 2006 (pp. 16-23) As explained in these analyses, Abitibi and Bowater jointly acted as a dominant firm to strategically remove newsprint capacity from the NA market to raise the price of newsprint to NA customers significantly above competitive levels during this four-year period. During this four-year period of strategic capacity closures, NA newsprint prices steadily increased by an aggregate of 49 percent between the third quarter of 2002 and the third quarter of 2006 despite a steady decline in the consumption of newsprint by U.S. newspapers. These newsprint price increases were far in excess of the price increases for closely-related uncoated groundwood specialty grades during this period. 15 15 See the White Paper, Section J: A Comparison of Newsprint Prices with the Prices of Uncoated Groundwood Specialty Grades 3Q 1999 to 4Q 2006 (pp. 109-119). Earlier mergers in the NA newsprint industry, especially the Abitibi-Donohue merger in 2000 and the Bowater-Alliance merger in 2001, created both the incentive and ability for Abitibi and Bowater to jointly engage in this anticompetitive conduct. In papers and presentations to the DOJ staff submitted on behalf of the NAA and the U.S. newspaper industry, Economists Incorporated explained in 2000 and 2001 that these two mergers, if not challenged, would have significant anticompetitive results. DOJ took no action against either of these two earlier mergers and, as predicted by Economists Incorporated, the two mergers enabled Abitibi and Bowater to engage in the anticompetitive conduct that occurred between 2002 and 2006. 16 U.S. newspapers and other NA newsprint customers bore the cost of DOJ's inaction in the form of significantly higher newsprint prices. 16 The implementation of strategic capacity closures by Abitibi and Bowater following their mergers was likely delayed by the U.S. economic recession in 2001 and the economic aftermath of the events of 9/11. During this time, U.S. newspapers suffered a significant decline in the sale of newspapers and newspaper advertising, resulting in a significant decline in the demand for newsprint by U.S. newspapers. Despite its obvious relevance to an evaluation of the adequacy of DOJ's settlement with Abitibi and Bowater, this prior history of anticompetitive conduct by Abitibi and Bowater is not mentioned in the CIS, Complaint or PFJ. This is surprising since the documentation of prior anticompetitive conduct would strengthen the grounds for DOJ's challenge of the merger. The Commentary on the Horizontal Merger Guidelines (“Merger Guidelines Commentary”), jointly published by DOJ and the Federal Trade Commission, explains why evidence of prior anticompetitive effects by finns in a relevant market is probative to the agencies' evaluation of a merger of two firms in that market. Facts showing that rivals in the relevant market have coordinated in the past are probative of whether a market is conducive to coordination. Guidelines § 2.1. Such facts are probative because they demonstrate the feasibility of coordination under past market conditions. Other things being equal, the removal of a firm via merger, in a market in which incumbents already have engaged in coordinated behavior, generally raises the risk that future coordination would be more successful, durable, or complete. 17 17 See Merger Guidelines Commentary, p. 22. Two DOJ cases are cited to illustrate the significance of prior anticompetitive conduct in DOJ's merger analysis and, in each of these cases, the anticompetitive conduct was described in the complaint challenging the merger. 18 While these two cases identified in the Merger Guidelines Commentary were challenged on a coordinated interaction theory, 19 evidence of prior anticompetitive conduct should logically also be highly relevant to the agencies' analysis of mergers based on a unilateral effects theory. 18 The two cited DOJ examples are *Premdor-Masonite*

(2001)and *Suiza-Broughton* (1999). 19 On page 22, the Merger Guidelines Commentary describes an increase in the likelihood of “coordinated interaction” that might result from a merger as follows: “A horizontal merger is likely to lessen competition substantially through coordinated interaction if it creates a likelihood that, after the merger, competitors would coordinate their pricing or other competitive actions, or would coordinate them more completely or successfully than before the merger.” See Appendix A for additional discussion of the distinctions between unilateral effects theories and coordinated interaction theories. 3. While the Proposed Merger of Abitibi and Bowater Was Under Review by DOJ, Abitibi and Bowater Suspended Their Dominant Firm Behavior and, as a Result, NA Newsprint Prices Declined Significantly Abitibi and Bowater began their merger discussions in June 2006, which culminated in their joint merger announcement on January 29, 2007. 20 The four-year run-up in newsprint prices described in the previous section reached a peak of $675 per metric tonne in May 2006. That price prevailed through September 2006. Between September 2006 and December 2006, the NA newsprint price declined slightly to $660 per metric tonne. 21 Between December 2006 and October 2007, the price of newsprint dropped by $100 to $560 per metric tonne, a decline of about 15 percent. 22 The $115 per metric tonne decline in the NA price of newsprint between September 2006 and October 2007 was about 17 percent. 20 See Supplement 1 to the White Paper, page 11. 21 Source: the following editions of Pulp & Paper Week; June 19, 2006, p. 3; September 18, 2006, p. 3; November 20, 2006, p. 3; February 19, 2007, p. 3; and November 19, 2007, page 3. 22 Between September 2006 and October 2007, the NA price of newsprint dropped $115 per metric tonne, a decline of about 17 percent. Between September 2006 and October 2007, Abitibi and Bowater did not engage in joint dominant firm behavior despite a decline in NA newsprint prices of about 17 percent. It is plausible that Abitibi and Bowater suspended their joint dominant firm behavior during this period for two reasons:

(1)Abitibi and Bowater wanted to maximize their chances of a favorable merger review by DOJ by avoiding conduct that DOJ would likely construe as anticompetitive; and

(2)their ability and incentive to jointly engage in strategic capacity closures had been significantly weakened by their previous strategic capacity closures over the period 2002 to 2006. It is also plausible that a weakened incentive and ability to engage in joint dominant firm behavior led to the decision to merge. 23 23 The continued decline in NA newsprint demand likely also contributed to the decision to merge. A continued decline in NA newsprint demand would require continued strategic capacity closures in order to maintain high newsprint industry operating rates and increasing newsprint prices. By merging, Abitibi and Bowater increased their incentive and ability to strategically close capacity in the face of declining demand. From the trade press commentary during the merger review period, it is apparent that newsprint industry analysts and newsprint competitors of Abitibi and Bowater were waiting for the merger to be completed in anticipation that a merged AbitibiBowater would increase NA newsprint prices by shutting down enough newsprint capacity to create a tight market. It is also apparent that these same analysts and competitors believed that Abitibi and Bowater would not take any significant actions to remove capacity from the market until after their merger review was completed. 24 24 See Section B.3., “Newsprint Industry Analysts and Competitors of Abitibi and Bowater Do Not Expect Abitibi and Bowater to Take Any Significant Action to Remove Newsprint Capacity from the Market Until After They Have Merged,” in Supplement 1 to the White Paper, pp. 13-15. The following quotation is typical of comments that appeared in the trade press during the merger review period. “No one will close any capacity because they figure AbitibiBowater will do it for them. And Abitibi kind Bowater will figure they can't be too aggressive on pricing or close capacity until their deal closes, said one contact.” 25 For other similar trade press commentary see Supplement 1 to the White Paper, pp. 13-14. 25 “Market abuzz over merger: concerns center on pricing and customer relationships,” Pulp & Paper Week, February 5, 2007, p. 11. 4. AbitibiBowater Resumed the Dominant Firm Behavior in November 2007 Following the October 23, 2007 Settlement Agreement With DOJ to Divest the Snowflake Mill Less than five weeks after the filing of the Complaint and MFJ, AbitibiBowater announced the removal of about 600,000 metric tonnes of capacity from the NA newsprint market 26 amounting to about a 5 percent reduction in total NA newsprint capacity. These capacity closures will occur during the first quarter of 2008. At approximately the same time, AbitibiBowater initiated a $60 per metric tonne newsprint price increase. This price increase will also take place during the first quarter of 2008. Most other NA newsprint manufacturers quickly joined AbitibiBowater in this $60 price increase. 27 26 Source: Press release on AbitibiBowater Web site, November 29, 2007. 27 Source: Pulp & Paper Week, Dec. 3, 2007, pp. 1, 2, and 5. In addition, AbitibiBowater's announced capacity closures have permitted the successful implementation of a previously announced $25 per metric tonne price increase. 28 Newsprint manufacturers, including Abitibi and Bowater, had previously been unable to successfully implement this price increase, originally scheduled for September 2007, because of excess NA newsprint industry capacity. 29 Combined, these two price increases will raise the price to NA newsprint customers by $85 per metric tonne, which is about a 15 percent price increase over the October 2007 price of $560 per metric tonne. 30 28 Source: Pulp & Paper Week, Dec. 17, 2007, pp. 1 and 11. 29 On p. 9 in its October 22, 2007 edition, published the day before DOJ's settlement agreement with Abitibi and Bowater, Pulp & Paper Week reported on the failure of NA newsprint producers to implement the September price increase in an article titled “North American newsprint hikes lack market traction, price declines $5/tonne more.” 30 Source for October 2007 newsprint price: Pulp & Paper Week, Nov. 19, 2007, p. 3. These post-settlement events are captured in headlines from the trade press newsletter Pulp & Paper Week during the first three weeks of December 2007 following the capacity closure announcement of AbitibiBowater on November 29, 2007 and the $60 per metric tonne newsprint price increase initiated by AbitibiBowater. 31 31 Pulp & Paper Week is published by RISI, which describes itself as “the leading source of global news for the forest products industry.” These articles are attached as Attachment A to the Comments of the Newspaper Association of America. “AbitibiBowater plans to shut down one million tonnes/yr of capacity in 1Q; expects more closures could follow in 2Q,” December 3, 2007, p. 1. 32 32 The capacity reduction announced by AbitibiBowater totaled about 600,000 metric tonnes of newsprint capacity and 400,000 metric tonnes of commercial printing papers according to the Pulp & Paper Week article. “Most North American newsprint makers join $60/tonne 2008 hike,” December 3, 2007, p. 2. 33 33 The Pulp & Paper Week article states that the $60 per metric tonne increase was initiated by AbitibiBowater. “Newsprint giant AbitibiBowater embraces industry leadership, eyes $200/tonne North American newsprint price increase,” December 10, 2007, p. 1. “Publisher resistance to $25/tonne North American newsprint increase collapses; producers looking to fast track recovery,” December 17, 2007, p. 1. In comments reported in Pulp & Paper Week, RISI economist Kevin Conley explains the cause and effect between AbitibiBowater's capacity closures and the increase in newsprint prices. “AbitibiBowater's capacity closures will obviously provide the upward pressure for an extended price recovery in 2008, as operating rates soar past the magic 95% threshold generally needed for prices to rise. Without AbitibiBowater's bold move [to remove 600,000 metric tonnes of newsprint capacity from the market] operating rates and prices would have continued to languish at low levels until the highest-cost mills could no longer survive, eventually leading to the inevitable closures needed to balance the North American market.” 34 34 Source: Pulp & Paper Week, Dec. 10, 2007, p. 5. The combined AbitibiBowater is seeking to “leverage the North American (newsprint) price up to the price in Europe and not the other way around,” according to AbitibiBowater President and CEO David Paterson. 35 If AbitibiBowater is successful in “leveraging” the North American newsprint price up to the price of newsprint in Europe, that will result in a $200 per metric tonne price increase or about 36 percent over the North American price of $560 per metric tonne in October 2007. 36 At the time AbitibiBowater announced the removal of 600,000 metric tonnes of newsprint capacity from the market, it also announced that “more mills could close in Canada later [in 2008].” 37 Based on these statements and other statements by AbitibiBowater executives and past and current actions by AbitibiBowater and its predecessor companies, it is very likely that AbitibiBowater will close additional newsprint capacity in 2008 to “leverage” the North American newsprint price up to the newsprint price in Europe. 35 Source: Pulp & Paper Week, Dec. 10, 2007, p. 1. 36 “Newsprint prices in Europe were close to $200/tonne higher than in the USA in November.” Source: Pulp & Paper Week, Dec. 10, 2007, p. 1. 37 Source, Pulp & Paper Week, Dec. 3, 2007, p. 1. In the CIS, DOJ asserts that “[w]ithout Snowflake's capacity, the merged firm would not be of sufficient size to be able to recoup the losses from such strategic closures through increases in prices on its remaining newsprint production.” These strategic closures announced by AbitibiBowater less than five weeks after the filing of the Complaint, CIS, and PFJ show that DOJ seriously misjudged the incentive and ability of the merged firm to strategically close capacity despite the agreement to divest the Snowflake mill. Furthermore, based on comments by AbitibiBowater, additional strategic capacity closures will likely occur later in 2008. 38 In the absence of a significantly larger divestiture, DOJ's misjudgment will likely cost U.S. newspapers and other U.S. newsprint customers billions of dollars in coming years. 39 38 Source: Pulp & Paper Week Dec. 3, 2007, pp. 1 and 5. 39 Based on the November 2007 Flash Report, current annual U.S. newsprint consumption is about 7.8 million metric tonnes. The $85 per metric tonne price increase resulting from AbitibiBowater's recently announced capacity closures will increase the aggregate cost of newsprint to U.S. newsprint customers by about $663 million per year. If the NA newsprint price rises by a total of $150 per metric tonne due to continued strategic behavior by AbitibiBowter (an increment of $65 per metric tonne over the current price increase of $85 per metric tonne), the cost to U.S. newsprint consumers would be about $1.2 billion on an annual basis. If AbitibiBowater is able to “leverage the North American (newsprint) price up to the price in Europe,” as David Paterson, President and CEO of AbitibiBowater, is apparently seeking to do, the annual cost to U.S. newsprint consumers resulting from the $200 per metric tonne price increase (an increment of $115 per metric tonne over the current price increase of $85 per metric tonne) would be about $1.6 billion. These calculations are based on the assumption that the U.S. consumption of newsprint remains at the November 2007 level. In practice, U.S. newsprint consumption will likely continue to decline, as discussed above. Therefore, the magnitudes of the aggregate cost increases to U.S. newsprint customers calculated in this footnote would be reduced somewhat by a continued decline in consumption. Regardless, the aggregate cost increases to U.S. consumers will be substantial. 5. DOJ Required a Much More Significant Divestiture To Settle a Comparable Paper Industry Merger in 2000 In August 2000, Georgia-Pacific announced plans to acquire Fort James. At the time of the acquisition Georgia-Pacific was a broadly-based forest products company and Fort James was the largest manufacturer of tissue paper in the United States. Both companies operated paper mills that produced parent tissue rolls used to make tissue products sold to commercial customers (known as “away-from-home” tissue products). At the time of the proposed acquisition, Fort James and Georgia-Pacific were the two largest producers of parent tissue rolls in NA. Fort James' share of NA parent tissue role capacity was 25 percent and Georgia-Pacific's share was 11 percent for a combined capacity share of 36 percent. On November 21, 2000, DOJ filed a complaint challenging the merger in the parent tissue roll market. At the same time, DOJ filed a proposed final judgment requiring the divestiture of all of Georgia-Pacific's parent tissue roll capacity. 40 40 For an explanation of the allegations in the complaint and the provisions of the proposed final judgment, as well as background information relating to the merger, see the Georgia-Pacific/Fort James competitive impact statement, dated January 25, 2001. DOJ also required the divestiture of certain downstream tissue converting capacity. As described in the competitive impact statement for the Georgia-Pacific/Fort James merger, the theory DOJ relied upon to challenge the proposed acquisition of Fort James by Georgia-Pacific in the NA tissue parent roll market merger appears to be based on the same basic theory of unilateral anticompetitive conduct DOJ used in its challenge of the Abitibi-Bowater merger. Georgia-Pacific has approximately 11 percent of North American capacity for the production of AFH tissue, and Fort James has approximately 25 percent. Hence, the acquisition would result in Georgia-Pacific accounting for approximately 36 percent of available North American AFH parent roll capacity. This increase in industry capacity controlled by Georgia-Pacific would give it sufficient capacity to profit from the increase in price caused by a unilateral reduction in output after this merger. 41 41 Georgia-Pacific/Fort James competitive impact statement, p. 7. It is evident that DOJ concluded that the combination of firms with a 26 percent capacity share and an 11 percent capacity to create a firm with a 36 percent capacity share would give Georgia-Pacific the incentive and ability to unilaterally exercise market power in the NA parent tissue roll market. It is also evident that DOJ concluded that the divestiture of Georgia-Pacific's entire 11 percent of its NA parent tissue roll capacity share was necessary to eliminate Georgia-Pacific's incentive and ability to engage in unilateral strategic behavior. The divestiture left Georgia-Pacific with a capacity share of 25 percent in the NA parent tissue roll market. Nothing in the Abitibi-Bowater CIS explains the great disparity between the divestiture required to settle the Abitibi-Bowater merger and the divestiture required to settle the Georgia-Pacific/Fort James merger. The prior recent and well-documented unilateral anticompetitive conduct of Abitibi and Bowater (unacknowledged by DOJ in the Complaint and CIS) makes this disparity all the more puzzling. If the former Bowater's newsprint capacity, which accounts for 16 percent of NA newsprint capacity according to the Complaint, were divested, the merged firm (AbitibiBowater) would have a NA newsprint capacity share of 25 percent. This divestiture would be comparable to the divestiture DOJ required to settle the Georgia-Pacific/Fort James merger, which left Georgia-Pacific with a 25 percent capacity share in the NA parent roll tissue market. C. Conclusion Based on the economic analysis contained in this memorandum and the economic analyses we have previously submitted to DOJ, we conclude that the Snowflake divestiture will not be sufficient to eliminate the anticompetitive effects of the merger and that a substantially larger divestiture is needed to ensure that AbitibiBowater no longer has the incentive and ability to engage in the type of anticompetitive conduct alleged in Paragraphs 2 and 19 of the Complaint and described on page 6 of the CIS. Appendix A-Merger Analysis, Unilateral Effects, and the Dominant Firm Model In determining the competitive effects of a merger, DOJ utilizes the analytical framework set out in the U.S. Department of Justice and Federal Trade Commission (“FTC”) Horizontal Merger Guidelines (“Merger Guidelines”). 42 In March 2006, DOJ and the FTC jointly issued a Commentary on the Merger Guidelines (“Merger Guidelines Commentary”) to provide interested parties with a greater understanding of how the agencies apply the Merger Guidelines to the investigation of specific mergers. 42 The Merger Guidelines were issued on April 2, 1992 and revised on April 8, 1997. Section 2 of the Merger Guidelines describes two general types of anticompetitive effects that potentially could result from a merger:

(1)Unilateral effects and

(2)coordinated interaction. The Merger Guidelines Commentary describes these anticompetitive effects as follows: A horizontal merger is likely to lessen competition substantially through coordinated interaction if it creates a likelihood that, after the merger, competitors would coordinate their pricing or other competitive actions, or would coordinate them more completely or successfully than before the merger. A merger is likely to lessen competition substantially through unilateral effects if it creates a likelihood that the merged firm, without any coordination with non-merging rivals, would raise its price or otherwise exercise market power to a greater degree than before the merger. 43 43 See the Merger Guidelines Commentary, p. 22. Paragraph 2 of DOJ's Complaint against Abitibi and Bowater alleges that After the merger, the combined firm will have the incentive and ability to withdraw capacity and raise newsprint prices in the North American newsprint market. Paragraph 19 of DOJ's Complaint against Abitibi and Bowater alleges that The proposed transaction would combine Defendants' large share of newsprint capacity, thereby expanding the quantity of newsprint sales over which the merged firm would benefit from a price increase. This would provide the merged firm with an incentive to close capacity sooner than it otherwise would to raise prices and profit from the higher margins on its remaining capacity. While DOJ has not disclosed the economic models it used in its investigation of the Abitibi-Bowater merger, these allegations in Paragraphs 2 and 19 of the Complaint are consistent with a unilateral effects theory of competitive harm, specifically a unilateral effects theory of competitive harm based on the application of a dominant firm model. The Merger Guidelines Commentary describes the application of the dominant firm model as follows: The Agencies' analysis of unilateral competitive effects draws on many models developed by economists. The simplest is the model of monopoly, which applies to a merger involving the only two competitors in the relevant market. One step removed from monopoly is the dominant firm model. That model posits that all competitors but one in an industry act as a “competitive fringe,” which can economically satisfy only part of total market demand. The remaining competitor acts as a monopolist with respect to the portion of total industry demand that the competitive fringe does not elect to supply. This model might apply, for example, in a homogeneous product industry in which the fringe competitors are unable to expand output significantly. 44 44 See Merger Guidelines Commentary, p. 25. In our opinion, a dominant firm model is the appropriate model to assess the competitive effects of the Abitibi-Bowater merger. In our submissions to DOJ, we described our application of the dominant firm model to this merger. 45 Our dominant firm model incorporated the key characteristics of the newsprint industry including the capacity share of the dominant firm (i.e., a combined Abitibi and Bowater), the variable cost of the dominant firm, the industry price elasticity of demand, the industry operating rate, the excess capacity of fringe firms, and prevailing price levels. In our application of the dominant firm model we took into consideration multi-period dynamics, a decline in the NA demand for newsprint, and an increase in the rate of decline in the NA demand for newsprint. 45 See Section K of the White Paper: Dominant Firm Model (pages 120-124); Attachment K to the White Paper: Technical Appendix to Section K Dominant Firm Model (pages 1-8), and Supplement 1 to the White Paper: Additional Analysis Based on the Dominant Firm Model

(DFM)Including a Revision of the DFM Designed to Consider Multi-period Dynamics (pages 24-33). Based on our application of the dominant firm model, we predicted that, under a wide range of dominant firm capacity shares and other assumptions, the merged firm would have both the incentive and ability to remove capacity from the market to raise the price of newsprint. In particular, we were able to show that under a wide range of assumptions the dominant firm would hypothetically be able to close newsprint capacity to raise newsprint prices well above competitive levels at dominant firm capacity shares well below 37 percent. The results of our application of the dominant firm model are consistent with the observed joint dominant firm behavior of Abitibi and Bowater during the period 2002 to 2006 as discussed in Section B.2. above and with the observed dominant firm behavior of the newly-merged AbibitiBowater as discussed in Section B.4 above. Attachment A—Curricula Vitae of John H. Preston and Kent W. Mikkelsen, PhD Curriculum Vitae John H. Preston Office Economists Incorporated, 1200 New Hampshire Avenue, NW., Suite 400, Washington, DC 20036,

(202)833-5237, *preston.j@ei.com* Home 18505 SE Heritage Oaks Lane, Tequesta, FL 33469,

(561)575-2310, *jhp2004@comcast.net* Education A.B. English, Dartmouth College (1966), M. A. Economics, University of Michigan (1972), Candidate in Philosophy in Economics, University of Michigan

(1974)Professional Experience (Consulting) Senior Vice President, Economists Incorporated (December 1998-Present), Vice President, Economists Incorporated (December 1995-December 1998), Senior Economist, Economists Incorporated (April 1985-December 1995) Selected Matters *Timberlawn* v. *Tenet Healthcare, et al.* Provided affidavit, deposition testimony, and trial testimony on behalf of defendants in the alleged monopolization of psychiatric hospitals in the Dallas area by NME. Proposed *Abitibi-Consolidated/Donohue newsprint merger.* On behalf of NAA, provided analysis to DOJ concerning the likely anticompetitive effects of the merger. Proposed *MCI/Sprint Merger.* Provided affidavits to DOJ, FCC, and European Commission analyzing the competitive effects of the proposed merger on behalf of British Telecom and AT&T. Testified before the European Commission on this matter. *Coated Groundwood Paper Anti-Dumping Investigation.* Helped prepare response to Antidumping investigation of the ITC on behalf of European groundwood paper manufacturers. Participated in presentation to ITC. Proposed *SBC/AT&T and Verizon/MCI mergers.* On behalf of BT, analyzed competitive effects of the two telecommunications mergers. Provided affidavits to DOJ, FCC and European Commission and made presentations to DOJ and FCC staffs. *British Telecom/AT&T Global Venture.* Provided economic analysis on a wide range of competition issues concerning the global venture, including presentations to the European Commission and DOJ. *PacifiCare/FHP merger.* Analysis of the impact of this proposed merger on the provision of Medicare HMO services in California. Made written and oral presentations to the FTC staff and senior management. *WellPoint/HSI merger.* Analysis of the competitive effects of this proposed merger of two of the largest HMOs in California and participation in meetings with DOJ. *Sale of General Dynamics' Missile Division to Hughes Aircraft and General Dynamics' Jet Fighter Division to Lockheed.* Helped prepare antitrust analysis and participated in presentations to DOJ and FTC on these defense industry mergers. Professional Experience (Antitrust Division) Economist (January 1975-April 1985), Economic Policy Office, Antitrust Division, U.S. Department of Justice Honors Special Achievement Award for work on *U.S.* v. *Hospital Affiliates International, Inc. and American Health Services, Inc.*

(1980)Outstanding Performance Rating (1980-1981) Outstanding Performance Rating (1981-1982) Outstanding Performance Rating (1982-1983) Outstanding Performance Rating (1983-1984) Meritorious Award

(1983)Selected Matters Testimony Affidavit *U.S.* v. *Hospital Affiliates International, Inc., and American Health Services, Inc.* In 1980, submission of an affidavit to the U.S. District Court in New Orleans analyzing the competitive effects of the proposed merger of three psychiatric hospitals in New Orleans, LA. Selected Matters Deposition Testimony *U.S.* v. *British Columbia Forest Products, et al.* In 1981, deposition testimony on the preparation of the trial exhibits for the challenge of an acquisition of a coated groundwood paper plant by a firm partially owned by two other manufacturers of coated groundwood paper. *U.S.* v. *State Board of Certified Public Accountants of Louisiana.* In 1984, deposition testimony on product and geographic market definition and competitive effects of restrictions on advertising and solicitation by the Louisiana board of accountants. Grand Jury Testimony *U.S.* v. *Gary L. McAliley et al.* In 1980, testimony before a grand jury in Alabama on the effects of an alleged agreement between attorneys in Coffee County, Alabama to raise fees for real estate closings. Other Filed Cases *U.S.* v. *National Medical Enterprises, et al.* Hospital merger case. *U.S.* v. *American Consulting Engineers Council* . Prohibitions on free designs and on participation in design competitions. *U.S.* v. *Alaska Board of Registration for Architects, Engineers and Land Surveyors* . Competitive bidding ban. *U.S.* v. *First Multiple Listing Service* . Alleged exclusion of competitors by owners of an essential facility. Investigations *Georgia-PacifIc Acquisition of Hudson Pulp & Paper.* This merger was investigated by DOJ for antitrust implications in a number of paper and paperboard product lines. *Acquisition of Hospital Affiliates International by Hospital Corporation of America* (1981). Merger of two major hospital management companies. *South Florida Physicians' Boycott* (1983). Boycott by physicians to place pressure on the legislature to enact malpractice insurance legislation favorable to physicians. *Stanislaus Preferred Provider Organization (SPPO)* (1984). Agreement by physician members of SPPO not to contract with any other PPOs allegedly in order to forestall the development of PPO competition in Stanislaus County. Policy Matters *The Division's position on the Health Care Cost Containment Act of 1983* (1984). This position was delivered in testimony by Charles F. Rule, Deputy Assistant Attorney General, to a Senate Subcommittee. *Letter to the Health Care Financing Administration (HCFA)* (1984). This letter expressed the Division's views on certain proposals which would restrict the dissemination of information collected by Professional Review Organizations. *The Division's policy toward the health care sector in general and preferred provider organizations

(PPOs)in particular* (1985). This policy was expressed in a paper presented by J. Paul McGrath, Assistant Attorney General, to the National Health Lawyers Association and the ABA. *Business Review commenting on plans by the Southwest Michigan Health Systems Agency (HSA)* (1982). The HSA wanted to publish rates charged by hospitals within the HSA. *Business Review commenting on a proposal by the Maryland Health Care Coalition* (1982). The Coalition wanted to collect and disseminate information concerning the incentive effects of different types of insurance policies. *Letters to the ABA and State Supreme Courts* (1982-1984). These letters expressed the Division's views on restrictions on advertising and solicitation contained in the ABA's Model Rules. Publications “An antitrust analysis of the *Alliant* decision and defense industry mergers,” *International Merger Law,* April 1993 (w/Philip B. Nelson) [Note: a shorter version appeared in *Economists Ink* (Winter 1993), a newsletter published by Economists Incorporated.] “Coated Groundwood Paper Anti-Dumping Investigation,” *Economists Ink* (Winter 1993). Curriculum Vitae Kent W. Mikkelsen Office Economists Incorporated, 1200 New Hampshire Ave., NW., Suite 400, Washington, DC 20036,

(202)833-5240, *mikkelsen.k@ei.com* Home 3012 Fayette Road, Kensington, MD 20895,

(301)946-8901 Background Born: September 20, 1954, married, 3 children Education Ph.D., Economics, Yale University, 1984 M.Phil., Economics, Yale University, 1981 M.A., Economics, Yale University, 1980 B.A., Economics, Brigham Young University, 1978, *summa cum laude* Fellowships, Honors and Awards College Valedictorian, Brigham Young University, 1978 H. B. Earhart Fellow, 1978-1979 University Fellow, Yale University, 1978-1980 Richard Bernhard Fellow, 1980-1981 Research Scholar, International Rice Research Institute, 1981 Fields of Concentration Industrial Organization, Economic Development Professional Experience 1986-present: Senior Vice President, Economists Incorporated 1984-1986: Economist, Economic Analysis Group, Antitrust Division, U.S. Department of Justice 1983-1984: Visiting Assistant Professor, University of Michigan 1982: Acting Instructor, Yale University 1981-1982: Teaching Fellow, Yale University 1979-1983: Research Fellow, Yale University Testimony Expert witness for Government in *United States* v. *Calmar Inc. and Realex Corp.,* United States District Court, District of New Jersey, Civil Action No. 84-5271. Expert witness for Defendant in *Sunbelt Television, Inc.* v. *Jones Intercable, Inc.,* United States District Court, Central District of California, Case No. CV-91-3506 WDK (Kx). Expert witness for Defendant in *Stag-Parkway, Inc.* v. *The Dometic Corporation,* United States District Court, Northern District of Georgia, Case No. 1-91-CV-2579-JOF. Expert witness for Plaintiff in *Thomas L. Hopkins (Commonwealth of Virginia)* v. *Smithfield Foods, Inc.,* Virginia Circuit Court, Isle of Wight County, No. 96-125. Expert witness for Defendant in *Elpizo Limited Partnership* v. *Marriott International, Inc.* and *Host Marriott Corporation* v. *Maryland Hospitality, Inc.,* Court of Common Pleas for Philadelphia County, Pennsylvania, October Term, 1994, No. 607. Expert witness for Plaintiff in *Thomas L. Hopkins (Commonwealth of Virginia)* v. *Smithfield Foods, Inc.,* Virginia Circuit Court, Isle of Wight County, No. 97-80. Expert witness for Defendant in *Consumer Health Foundation* v. *Humana Group Health Plan, Inc., et al.* , United States District Court, District of Columbia, Case No. 1:98CV02920 (GK). Expert witness for Defendant in *United States* v. *Broadcast Music, Inc.* United States District Court, Southern District, New York, 64 Cir. 3787 (LLS). Expert witness for Defendants Advance Stores Company, Inc. and Discount Auto Parts, Inc. in *Coalition for a Level Playing Field LLC et al.* v. *AutoZone, Inc., et al.* , United States District Court, Eastern District of New York, No. CV 00 0953

(LDW)(ETB). Expert witness for Defendant in *United States* v. *Broadcast Music, Inc.* United States District Court, Southern District, New York, 64 Cir. 3787 (LLS), remand proceeding. Expert witness for Defendants in *Ramallo Bros. Printing, Inc.* v. *El Dia, Inc. et al.* , United States District Court, District of Puerto Rico, Civil No. 02-2400 (JAF). Expert witness for Defendant in *Marco Island Cable, Inc.* v. *Comcast Cablevision of the South, Inc.,* United States District Court, Middle District of Florida, Case No. 2:04cv-26-FtM-29-DNF. Testimony, *Federal Communications Commission En Banc Hearing Regarding Local Television Ownership Rules,* February 12, 1999. Testimony, *United States Senate Committee on Commerce, Science, and Transportation, Hearing on Media Ownership,* May 22, 2003. Selected Consulting Matters *Detroit Free Press and Detroit News Joint Operating Agreement (JOA)* —Prepared economic and business analysis used in hearing before Administrative Law Judge. *Soft Drink Price Fixing* —Analysis of evidence of price fixing and estimation of damages in Department of Justice investigations and private damage suits against various CocaCola bottlers. *Federal Communications Commission Inquiry into Cable Television* —Supervised and wrote up research projects regarding cable rates and vertical market structure submitted with briefs filed by TCI. *GenCorp acquisition from Goodyear, Department of Justice review* —Analyzed demand and supply-side substitution for vinyl laminates. *York acquisition of Hyster, Federal Trade Commission review* —Analyzed geographic market definition in forklift trucks. *Stag-Parkway* v. *Dometic* —For defendant, testified regarding lack of injury and damages due to price discrimination in sales to distributors. *Sunbelt Television* v. *Jones Intercable* —For defendant, testified regarding market definition and monopoly power in local advertising and critiqued plaintiff's damage study. *Kiwifruit antidumping investigation by International Trade Commission* —Coordinated preparation of economic analysis for New Zealand respondents. *State of Virginia* v. *Smithfield Foods* —For plaintiff, evaluated the economic gain defendant received through non-compliance with environmental laws. *Federal Communications Commission Inquiries into Broadcast Television* —For three broadcast networks, prepared comments on the economic effects of prime-time access rules and station ownership rules. *Elpizo Ltd Partnership* v. *Marriott* —For defendant, analyzed plaintiff's damages model and testified regarding inappropriateness of plaintiff's damages model. *Media Ownership Rules* —Researched and submitted three separate papers to FCC on behalf of ABC, CBS and Newspaper Association of America. *Cable & Wireless Optus acquisition of AAPT* —Presented analysis of multiple telecommunications markets to Australian Competition and Consumer Commission. *TeleCell Cellular, Inc. et al.* v. *GTE Mobilnet of South Texas Limited Partnership* —For defendant, analyzed damages claims of plaintiffs for compensation allegedly less favorable than another cellular agent. *Kesmai Corp. et al.* v. *America Online* —For defendant, analyzed plaintiff's claim of damages to Internet games business. *Federal Communications Commission En Banc Hearing* —Presented testimony on FCC local television ownership rules. *Consumer Health Foundation* v. *Humana* —For defendant, evaluated damages from alleged delay in releasing payment. *API* v. *Granite* —Advisor to court-appointed special master making findings on below-cost pricing in road construction. *Hearst Acquisition of San Francisco Chronicle* —For Hearst, prepared analysis showing prospects for competition by San Francisco Examiner outside the JOA and incremental contribution of Examiner to JOA profits. *Denver Post-Denver Rocky Mountain News JOA* —For applicants, analyzed probable failure and incremental unprofitability of the News. *United States* v. *BMI* —For defendants, testified about a reasonable royalty rate for a music performing right blanket license. *Vitamin Price Fixing Case* —Submitted expert reports finding no incentive for two vitamin producers to participate in conspiracies involving vitamins they did not manufacture. *Newspaper-Broadcast Cross-Ownership Rule* —For the Newspaper Association of America, submitted a paper to the FCC on structural change since 1975 and potential benefits of joint ownership. *Advance-Discount Robinson-Patman Case* —For defendants, testified about drawing cost inferences from pricing data. *U.S. Senate Commerce Committee Hearing* —Presented testimony supporting elimination of three FCC rules governing ownership of broadcast stations. *IPSCO* v. *Mannesmann Steel Mill Case* —For defendant, analyzed damages from deficiencies of a steel mill. *TRICO* v. *NKK et al. Steel Mill Case* —For plaintiff, analyzed damages from deficiencies of a steel mill. *FCC “Omnibus” Broadcast Ownership Proceeding* —For CBS, Fox and NBC, analyzed station ownership, news broadcast and diversity issues. *FCC Cable Bundling and Retransmission* —For Disney, submitted analysis of proposals to mandate a la carte cable programming and value of cable retransmission rights for ABC stations. *Heavy-Duty Trucks* —For defendant Mack Trucks, submitted expert report discussing market definition, market power, alleged anticompetitive practices and damages. *Printing Monopolization* —For defendant El Dia, testified on market definition, dangerous probability, and alleged anticompetitive practices including predatory pricing. *Dissolution of Birmingham JOA* —For Birmingham News Post-Herald and Birmingham Post-Herald, presented to DOJ an analysis of the incremental unprofitability of the Post Herald. *Cable Monopolization* —For defendant Comcast, testified on alleged monopolization and anticompetitive practices including exclusive contracts and on damages. *Regulatory Impact* —For a consortium of telecommunications firms in Bermuda, analyzed the impact of proposed regulatory changes. Attachment B—White Paper by Economists Incorporated, Submitted on Behalf of the NAA to DOJ on April 11, 2007 Economists Incorporated An Economic Analysis of the Competitive Effects of the Proposed Abitibi-Bowater Merger Submitted to DOJ on Behalf of NAA John H. Preston, Kent W. Mikkelsen, PhD, Economists Incorporated, Washington, DC, April 11, 2007. Table of Contents Section A. Overview of the White Paper 1. Introduction. 2. Summary of Our Analysis and Our Main Conclusions. 3. A Note on Our Sources. Section B. Product and Geographic Market Definition 1. Introduction. 2. A Description of Newsprint and Uncoated Groundwood Specialty Grades. 3. Product Market Definition. 4. Geographic Market Definition. Section C. Analysis of the Increase in Concentration That Would Result From the Proposed Merger 1. Analysis of the Increase in Concentration in the NA Newsprint Market Based on Estimated 2006 Capacity. 2. Analysis of the Increase in Concentration in the East of the Rockies Newsprint Market Based on Estimated 2006 Capacity. Section D. Analysis of the Increase in Concentration and Decrease in Capacity in the NA Newsprint Market 1995-2006 1. The Increase in Concentration in the NA Newsprint Market 1995-2005 as Described by Abitibi and Bowater. 2. Concentration in the NA Newsprint Market in 1995. 3. Acquisitions and Exits of NA Newsprint Manufacturers since 1995. 4. Analysis of the Reduction of Newsprint Capacity in North America 1995 to 2006. Section E. NA Newsprint Demand and Supply 1. Introduction. 2. NA Demand (Quantity Purchased) 1999-2006. 3. Causes of the Decline in NA Newsprint Demand 1999-2006. 4. Projected NA Newsprint Demand 2006-2008. 5. Production, Shipments and Operating Rates of NA Newsprint Mills 1999-2006. 6. The Price of Newsprint per Metric Tonne (Eastern U.S., 30 lb.) 1999 to 2006 by Quarter. Section F. Evidence From Presentations to Investment Analysts and Other Public Information That Abitibi and Bowater Have Used Their Control Over Newsprint Capacity and the Newsprint Industry Operating Rate To Significantly Raise the Price of Newsprint 2002 to 2006 1. Introduction. 2. Presentation by John Weaver, President and CEO of Abitibi, at the Citigroup Conference in December 2006. 3. Presentation by David Paterson, President and CEO of Bowater, at the Citigroup Conference in December 2006. 4. Presentation by John Weaver, President and CEO of Abitibi, at the Credit Suisse First Boston Investment Analysts Conference in March 2004. 5. Interview of John Weaver Titled “Tighter supply/demand balance boosts newsprint hike prospects says Abitibi's Weaver.” Section G. An Analysis of Permanent Newsprint Capacity Reductions Between 2002 and 2006 1. Introduction. 2. Chart G1: Shares of NA Newsprint Capacity by Manufacturer 2002 arid 2006. 3. Chart G2: Permanent Reduction of NA Newsprint Capacity by Manufacturer During the Period 2002-2006. 4. Chart G3: Percentage of Total NA Permanent Newsprint Capacity Reduction by Manufacturer During the Period 2002-2006. 5. Chart G4. Permanent Reduction of Newsprint Capacity Over the Period 2002-2006 as a Percentage of Own 2002 NA Capacity by Manufacturer. Section H. Four Articles by Two Newsprint Industry Experts Describing the Abitibi-Bowater Strategy To Raise Price by Closing Capacity 1. Introduction. 2. Article by Harold M. Cody Titled “New Paradigm: Newsprint Demand Falls, Prices Soar.” 3. Three Articles by RISI Senior Economist Andrew Battista Analyzing the Strategy of Abitibi and Bowater to Shut Down Capacity to Maintain High Operating Rates and Increasing Prices. Section I. Abitibi's Newsprint Capacity Closures 1999 to 2001 Section J. A Comparison of Newsprint Prices With the Prices of Uncoated Groundwood Specialty Grades 3Q 1999 to 4Q 2006 1. Introduction. 2. The Adverse Impact of the Increases in Input Prices and the Appreciation of the Canadian Dollar Has Fallen More Heavily on Producers of Uncoated Groundwood Specialty Grades Than on Producers of Newsprint. 3. Comparing Quarterly Prices tbr Newsprint and Uncoated Groundwood Grades from 3Q 1999 Though 4Q 2006. 4. Abitibi's Variable Costs to Produce Newsprint and Uncoated Groundwood Specialty Grades Have Been Relatively Constant for the Period 2001-2005. 5. Applying the Percentage Price Changes for the Uncoated Groundwood Specialty Grades to the 3Q 1999 Price of Newsprint to Determine the Effect on Newsprint Revenues from Sales to NA Customers. Section K. Dominant Firm Model Section L. Conclusions Attachments Attachment A Links to Newsprint-Related Web Sites Attachment B Additional Analysis of Uncoated Groundwood Specialty Grades and Tables B1 to B7 for Section B Attachment C Tables C1 to C3 for Section C Attachment D Tables D1 to D4 for Section D Attachment K Technical Appendix to Section K Dominant Firm Model Section A. Overview of the White Paper 1. Introduction Economists Incorporated has been asked by the Newspaper Association of America (“NAA”), an association of U.S. daily newspapers, to prepare an economic analysis of the likely competitive effects of the proposed Abitibi-Bowater merger in the North American (“NA”) newsprint market (“White Paper”) with the intent to provide that analysis to the U.S. Department of Justice to assist the department in its investigation of the proposed merger. The objective of this White Paper is to analyze the economic effects of the proposed merger of Abitibi and Bowater and to identify any anticompetitive consequences of the proposed merger. In Section A below, we summarize our analysis and main conclusions of each section. Sections A, B, C, D, and K have attachments containing data and analysis related to the analysis in the section. The last subsection of Section A contains a table of contents to the White Paper. Attachment A to Section A provides a list of the Internet addresses of newsprint manufacturers and other Web sites most frequently cited in the White Paper. 2. Summary of Our Analysis and Our Main Conclusions a. Introduction This section provides a summary of our analysis and our main conclusions reached in Sections B through L. b. Section B. Market Definition In Section B, we conclude that the relevant product market is newsprint and that the relevant geographic market is NA. We also provide some evidence that East of the Rockies may be a relevant geographic market. Our analysis shows that new Chinese capacity is likely to be largely if not entirely absorbed in Asia over the next couple of years and will not have a significant impact on the NA market. That is also the expectation of Abitibi, Bowater, and the PPPC. If there is an effect on the NA newsprint market from the new Chinese capacity, it is likely to be indirect. Some NA mills may be displaced from some Asian accounts by the new Chinese capacity. However, the effect on the NA newsprint market of any displacement is not likely to be significant. Abitibi and Bowater, who combined account for about 70% of exports from North America, expect strong export growth in 2007. Abitibi expects its exports from NA to grow by 10% in 2007 and Bowater expects its exports from NA to grow by 5% to 6% in 2007. Attachment B to Section B provides additional analysis of the relation between uncoated groundwood specialty grades and newsprint. One analysis compares prices of four uncoated groundwood grades with the price of newsprint. A second analysis shows the estimated combined Bowater and Abitibi capacity share of several uncoated groundwood specialty segments. c. Section C. Analysis of the Increase in Concentration That Would Result From the Proposed Merger In Section C, we identify all of the suppliers to the NA newsprint market and estimate their 2006 newsprint capacity by mill. Based on estimated 2006 capacity, we show that the combined Abitibi-Bowater would have a capacity share of 45.0%. The premerger HHI is 1,380, the change in the HHI that would result from the merger is 962 and the post-merger HHI is 2,342. According to § 1.51(c) of the Merger Guidelines, markets with post-merger HHIs above 1,800 are highly concentrated and that HHIs of this magnitude create the presumption that the merger would be “likely to create or enhance market power or facilitate its exercise.” Based on estimated 2006 capacity, we also calculate capacity shares and HHIs for a possible East of the Rockies relevant newsprint market. We show that the combined Abitibi-Bowater would have a capacity share of 54.3%. The pre-merger HHI is 1,876, the change in the HHI that would result from the merger is 1,445 and the post-merger HHI is 3,321. Attachment C to Section C contains tables showing 2006 estimated capacity by NA mill and the capacity share and HHI calculations for the NA newsprint market and the East of the Rockies market. d. Section D. Analysis of the Increase in Concentration and Decrease in Capacity in the NA Newsprint Market 1995-2006 Due primarily to acquisitions by Abitibi and Bowater between 1995 and 2001, the NA newsprint market was transformed from an unconcentrated market in 1995 to a highly concentrated market in 2000 with Abitibi's acquisition of Donohue in April 2000. Bowater's acquisition of Alliance in 2001 and Norske Skog's acquisition of Pacifica, also in 2001, further increased concentration in an already highly concentrated market. This section analyzes the mergers and increase in concentration that occurred between 1995 and 2006. Both John Weaver, President and CEO of Abitibi, and David Paterson, President and CEO of Bowater, have made presentations to investment analyst conferences describing the significant consolidation in the NA newsprint market and the roles of Abitibi and Bowater in achieving that consolidation. Slides from their presentations illustrating the increase in consolidation are included in this section. This section also shows that there has been a 20.7% reduction in NA newsprint capacity between 1995 and 2006. Most of that reduction has occurred since 2002. Of the 16 firms that remain in the NA newsprint market today, Abitibi and Bowater combined account for 83.6% of that capacity reduction and Catalyst accounts for 15.9%. The other 13 firms account for 0.5%. Attachment D to Section D contains tables showing how Abitibi and Bowater significantly increased their shares of newsprint capacity between 1995 and 2001 and tables showing that Abitibi and Bowater account for most of the reduction in NA newsprint capacity between 1995 and 2006, which primarily occurred after 2002. e. Section E. NA Newsprint Demand and Supply This section provides charts showing annual and quarterly data concerning NA newsprint demand and supply from 1999 through 2006. Almost all of the data are from standard industry sources PPPC and RISI. Chart E7 in Section E shows a steady decline in quarterly NA newsprint demand (quantity purchased) between 1999 and 2006. The chart also shows quarterly newsprint prices (30 lb., Eastern U.S.) over that same period. Chart E7 shows that while NA newsprint demand (quantity purchased) fell 18.0% between the third quarter of 2002 and the third quarter of 2006, the price of news print increased an aggregate of 49.0% over that same period. Section E also analyzes the causes of the decline in newsprint consumption over time by U.S. daily newspapers. We conclude that the primary causes are declining newspaper circulation, declining advertising lineage, and newspaper efforts to reduce the consumption of newsprint by reducing the width of newspaper pages, by switching to lower basis weight paper, and by moving some content to the newspaper Web site. Declining circulation and advertising lineage should be regarded as exogenously shifting the newspapers' demand curve for newsprint downward. These declines are unrelated to the price of newsprint. While newspaper efforts to conserve on newsprint are largely in reaction to increasing newsprint prices, they should be regarded as efforts to permanently shift the demand curve for newsprint downward. If the price of newsprint drops significantly, it is improbable that newspapers will respond by increasing the width of newspaper pages or return content to the newspaper that was placed on Web sites. As long as the relative prices for higher and lower basis weight paper remain approximately the same, as seems likely, newspapers will have no incentive to switch back to higher basis weight paper. f. Section F. Evidence From Presentations to Investment Analysts and Other Public Information That Abitibi and Bowater Have Used Their Control Over Newsprint Capacity and the Newsprint Industry Operating Rate To Significantly Raise the Price of Newsprint 2002 to 2006 As noted above, the price of newsprint increased 49.0% from the third quarter of 2002 to the third quarter of 2006 while the demand for newsprint (quantity demanded) declined 18.0%. Since the reductions in newsprint demand were largely caused by exogenous factors, the price of newsprint would be expected to decline holding the supply curve constant. However, the supply was not held constant during this period. Abitibi and Bowater responded to continual downward shifts in the demand curve by indefinitely idling and permanently closing their own capacity. Each downward shift in the demand curve was met with an upward shift in the supply curve sufficient to maintain maximum practical NA newsprint industry operating rates. At maximum practical operating rates price increases can successfully be imposed as they were throughout this four-year period by Abitibi and Bowater. The remaining firms in the industry generally followed the announced price increases of Abitibi and Bowater within a month or two. John Weaver, President and CEO of Abitibi, has been describing this strategy in slide show presentations at investment analyst conferences since 2003. David Paterson, who became President and CEO of Bowater in April 2006, discussed this strategy at an investment analysts' conference in December 2006. Section F documents the AbitibiBowater strategy to use their control of capacity to raise the price of newsprint through an analysis of relevant slides presented and described by Weaver and Paterson at investment analyst conferences. This section also contains excerpts from an interview of Weaver that relate to this strategy. g. Section G. An Analysis of Permanent Newsprint Capacity Reductions Between 2002 and 2006 Section G contains an analysis of permanent newsprint capacity reduction in NA between 2002 and 2006. The analysis shows that 18.0% of NA newsprint capacity was removed from the market between the end of 2000 and the end of 2006. Abitibi and Bowater combined were responsible for 80.0% of the permanent capacity removals and Catalyst was responsible for 7.3%. Of manufacturers that remain in the market today, Abitibi and Bowater combined account for 89.4% of the total capacity removals and Catalyst accounts for 8.1%. The other 13 remaining firms account for 2.5% of the capacity removals. Through these permanent capacity removals, Abitibi reduced its own capacity by 30.7% and Bowater reduced its own capacity by 24.0%. Catalyst also reduced its newsprint capacity by a significant proportion—22.7%. The other 13 newsprint manufacturers that remain in the market today reduced their capacity by a combined 1.0%. h. Section H. Four Articles by Two Newsprint Industry Experts Describing the Abitibi-Bowater Strategy to Raise Price by Closing Capacity The Abitibi-Bowater strategy to use their control of capacity to raise newsprint prices is well known within the newsprint industry. Every newspaper newsprint buyer that we talked to described the Abitibi-Bowater strategy. This section analyzes four articles by two newsprint experts. These articles accurately describe the Abitibi-Bowater strategy. The titles of the articles are “(1) New Paradigm: Newsprint Demand Falls, Prices Soar,”

(2)“Will operating rates climb high enough in 2003 to support rising newsprint prices in the U.S.?,”

(3)“Is rising newsprint demand necessary to support higher prices in 2004?,” and

(4)“Newsprint producers must rely on supply reductions to support rising prices.” i. Section I. Abitibi's Newsprint Capacity Closures 1999 to 2001 Between the third quarter of 1999 and the second quarter of 2001, newsprint prices increased 30.2% as shown in Section E6. Abitibi's permanent capacity removals immediately before and during that period were a significant cause of the price increases. Abitibi removed 450,000 metric tonnes of newsprint capacity from the market in 1999 or almost 3% of NA capacity. In conjunction with its acquisition of Donohue in April 2000, Abitibi announced that it would remove an additional 400,000 metric tonnes of newsprint capacity from the market during 2000 and 2001. Section I documents Abitibi's permanent newsprint capacity removals between 1999 and 2001. j. Section J. A Comparison of Newsprint Prices With the Prices of Uncoated Groundwood Specialty Grades 3Q 1999 to 4Q 2006 Over the last four years there have been significant increases in energy, fiber, and transportation costs faced by NA newsprint manufacturers. Newsprint mills in Eastern Canada have been especially hard hit. In addition, the appreciation of the Canadian dollar relative to the U.S. dollar has effectively raised the cost of Canadian newsprint mills while lowering the cost of U.S. newsprint mills. In this section, we compare the price of newsprint from the third quarter of 1999 to the second quarter of 2006 with the prices of four uncoated groundwood specialty grades. We find that the quarterly prices for newsprint as a percentage of its price in 3Q 1999 were significantly higher than the quarterly prices for three of the four uncoated groundwood specialty grades over the period 4Q 1999 to 2Q 2006. Based on these results, it is implausible that the increases in newsprint prices were caused by the increases in input prices. We find that the price trend of one uncoated groundwood specialty grade was similar to that of newsprint. It appears that Abitibi and Bowater are the dominant providers of that grade as well. Section J presents a slide from an Abitibi presentation showing that Abitibi's variable cost of newsprint production has been virtually flat between 2001 and 2005. Since all or nearly all of the newsprint price increases over the period 2002 to 2006 were led by Abitibi, it seems unlikely that increases in Abitibi's input costs are a plausible justification for the price increases. In Section J, we also calculate quarterly newsprint revenues over the period 3Q 1999 to 2Q 2006 based on actual NA newsprint consumption and actual newsprint prices. We then apply the quarter to quarter percentage price changes for each of the four uncoated groundwood specialty grades to the 3Q 1999 newsprint price and multiply the resulting adjusted newsprint prices by actual NA demand. For the three grades with percentage changes in prices significantly below the percentage changes in newsprint prices, total revenues over the period are reduced by $4.7 billion to $7.4 billion. k. Section K. Dominant Firm Model Based on our analysis in Sections B through J, we conclude that Abitibi and Bowater have acted as a joint dominant firm since at least the end of 2002 and perhaps since 2000. Abitibi and Bowater have jointly used capacity closures to raise the price of newsprint well above competitive levels. By removing capacity from the newsprint market in a timely way Abitibi and Bowater have been able to maintain maximum practical operating rates for the newsprint industry which has directly led to the price increases. Section K presents a theoretical dominant firm model which formally explains the joint behavior of Abitibi and Bowater. Using current data, we use the dominant firm model to predict whether it would be profitable for a merged Abitibi-Bowater to further increase the price of newsprint through additional capacity closures. We show that it would be profitable for the merged firm to close additional capacity to achieve a 5% price increase. Attachment K of Section K is a technical appendix in which the equations of the dominant firm model are formally derived. l. Section L. Conclusions Based on our analysis in Sections B through J, we conclude that the joint strategy of Abitibi and Bowater to close NA newsprint capacity to raise the price of newsprint is anticompetitive and has caused significant economic harm to U.S. daily newspapers and other NA purchasers of newsprint. We predict that if the proposed merger is allowed to proceed, the ability of the merged entity to pursue the Abitibi-Bowater strategy of closing capacity to raise the price of newsprint will be strengthened. The market power of the merged firm will be more effectively employed than Abitibi and Bowater were able to do as separate but coordinating firms. The possibility that one of the two firms would stop coordinating, resulting in a price decrease, will be eliminated once the two firms are merged. The merged entity will have an increased incentive and ability to use its control over capacity to raise the price of newsprint significantly above competitive levels. Newsprint consumers, whom the antitrust laws are designed to protect, will suffer additional significant competitive harm. 3. A Note on Our Sources In conducting our analysis of the competitive effects of the proposed AbitibiBowater merger, we relied on a wide variety of newsprint industry sources. Amongst the most important sources for data and other information concerning the NA newsprint industry are RISI and the Pulp and Paper Products Council (“PPPC”). RISI is the leading source of information about the pulp, paper, and forest products industries in NA and worldwide. The PPPC is a private organization that compiles demand and supply data and conducts forecasts for North American producers of pulp and paper products, including manufacturers of newsprint. We also relied on information that Abitibi and Bowater make publicly available on their Web sites as well as similar information on the Web sites of other newsprint manufacturers. We interviewed a number of U.S. newspaper newsprint buyers who gave us their perspective on the NA newsprint market and the likely competitive effects of the proposed merger. The NAA also provided us with data. B. Product and Geographic Market Definition 1. Introduction The principles of product and geographic market definition are set out in the U.S. Department of Justice (“DOJ”) and Federal Trade Commission (“FTC”) Horizontal Merger Guidelines (“Merger Guidelines”). 1 Following the Merger Guidelines methodology, product and geographic markets are defined from the perspective of consumers of the products of the merging firms. With respect to the proposed merger of Abitibi and Bowater, the two companies manufacture newsprint, uncoated groundwood specialty grades, and other pulp, paper, and forest products which they sell in NA and, in some cases, in other regions of the world. We have been asked to determine likely competitive effects of an Abitibi-Bowater merger on the sale of newsprint in NA. Our provisional product market is newsprint and our provisional geographic market is NA. 2 1 The Merger Guidelines were issued on April 2, 1992 and revised on April 8, 1997. 2 In Section B2 in Attachment B and Section J below, we provide some evidence that suggests that the proposed merger of Abitibi and Bowater may have an adverse competitive effect concerning at least one uncoated groundwood specialty grade. 2. A Description of Newsprint and Uncoated Groundwood Specialty Grades a. Introduction The main focus of this analysis is on the production and sale of newsprint in NA, but in applying the methodology of the Merger Guidelines to a provisional newsprint product market, it is necessary to consider demand and supply substitution possibilities regarding closely related uncoated groundwood specialty grades. While we do not reach any firm conclusions on relevant product markets within the uncoated groundwood specialty grade segment, we provide considerable information about the grade structure of that segment and the manufacturers of uncoated groundwood specialty grades in this section. b. Newsprint Newsprint is used to print newspapers, inserts, flyers and other advertising materials. In the U.S., the main purchasers of newsprint are newspaper publishers (both daily and non-daily) and commercial printers. In 2006, U.S. daily newspapers accounted for 80.0% of the U.S. consumption of newsprint. 3 U.S. demand for newsprint accounted for 88.9% of total NA demand for newsprint in 2006. 4 The PPPC estimated 2006 NA newsprint capacity at 12,625,000 metric tonnes. 5 3 Source: December 2006 PPPC Flash Report. 4 Source: December 2006 PPPC Flash Report. The PPPC Flash Report does not provide data on Canadian consumption of newsprint nor does it provide data on purchases of newsprint by Canadian daily newspapers. The difference between annual demand and annual consumption is the change in inventories from the prior December. 5 See PPPC's March 29, 2006 NA Mechanical Printing Papers Forecast. Newsprint is the lowest quality and least expensive uncoated groundwood paper. The main ingredient of newsprint is groundwood pulp, also known as mechanical pulp, recycled fiber (old newspapers

(ONP)and old magazines (OMG)), or a combination of groundwood pulp and recycled fiber. Chemical pulp is usually added to the pulp furnish to improve runnability on printing presses. Although newsprint must meet the exacting standards of modem printing presses, it is a commodity grade. About half the newsprint sold in NA today has a basis weight of 30 lb. (48.8 grams per square inch) and about half has a basis weight of 27.7 lb. (45.0 grams per square inch). Over the last four or five years newspapers have been gradually switching from the heavier basis weight newsprint to the lighter basis weight newsprint. 6 6 There is a financial gain for a newspaper from switching to the lower basis weight paper, but it is not a large gain. The switch to the lower basis weight reduces a newspaper's consumption of newsprint by 8.5% holding the square footage of newsprint purchased constant, but the gain to the newspaper from the reduced consumption is mostly offset by the higher price that the newspaper must pay for the lower basis weight paper. Based on February newsprint prices, the net gain to a newspaper from switching would be a cost saving per metric tonne of about 2.7% or $16.94. c. Uncoated Groundwood Specialty Grades (1). The Similarities and Differences Between Newsprint and Uncoated Groundwood Specialty Grades To evaluate demand and supply substitution possibilities in a provisional newsprint market, it is necessary to describe in some detail the similarities and differences between newsprint and higher quality and higher value uncoated groundwood specialty grades. See Attachment B for

(a)a comparison of the price of newsprint with the prices of four uncoated groundwood specialty grades and

(b)Abitibi-Bowater HHIs based on estimated 2006 capacity and capacity shares by manufacturer for uncoated groundwood specialty grade segments. Newsprint is a type of uncoated groundwood paper, but to distinguish newsprint from other uncoated groundwood grades, the paper industry refers to the other uncoated groundwood grades as uncoated groundwood specialty grades or higher value uncoated groundwood grades. Uncoated groundwood paper is also referred to as uncoated mechanical paper. RISI estimated the 2006 NA capacity of uncoated groundwood specialty grades as 6,915,000 metric tonnes or somewhat more than half of 2006 NA newsprint capacity. 7 Some uncoated groundwood specialty grades are produced on machines that never produced newsprint, some uncoated groundwood specialty grades are produced on machines that have been converted from newsprint production, and some uncoated groundwood grades are produced on machines that also produce newsprint. Machines that produce both newsprint and uncoated groundwood specialty grades are called “swing” machines. 7 See the 2006 RISI Fact and Price Book, p. 163. The PPPC forecast 2006 NA capacity for uncoated groundwood specialty grades as 6,360,000 metric tonnes. See the PPPC March 2006 forecast. We can account for some but not all of the difference between the RISI estimate and the PPPC forecast. There are significant similarities in the production process for newsprint and the production processes for uncoated groundwood specialty grades. Indeed, many machines that currently produce uncoated groundwood specialty grades were formerly newsprint machines. The main ingredient of newsprint and uncoated groundwood specialty grades is pulp produced from some combination of groundwood pulp, recycled fiber, and chemical pulp. The grades vary by brightness, gloss, basis weight, opacity, and strength. Generally, newsprint has the lowest value combination of these characteristics. Higher value uncoated groundwood specialty grades are glossier and brighter than newsprint. Slide 13 below, which is from Abitibi's presentation of financial results for Q1 2006 in June 2006, shows uncoated and coated printing paper grades. 8 8 This presentation is available on Abitibi's Web site under Investor Relations/Presentations & Webcasts. A graph appearing in this comment is not able to be reprinted here. Copies of the comment with the graph are available at the Department of Justice Antitrust Division Web site, *http://www.usdoj.gov/atr,* at the Antitrust Documents Group of the Department of Justice Antitrust Division, 450 Fifth Street, NW., Suite 1010, 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. The slide is titled “Paper Spectrum” and states that “Two key properties, brightness and gloss, define paper grade groups.” The blue ovals in Slide 13 represent printing paper products produced by Abitibi. The blue ovals also identify the main uncoated groundwood specialty grades. The white ovals identify coated groundwood grades (all of coated #5 and some of coated #4) and coated free sheet grades (some of coated #4 and all of coated #3). 9 These coated grades are not produced by Abitibi. However, Bowater does produce #3, #4, and #5 coated paper. 9 There are two additional coated free sheet grades not shown in Slide 13, coated #1 and coated #2. The uncoated groundwood specialty grades can be divided into two categories: Glossy and non-glossy. The glossy grades are distinguished primarily by their degree of glossiness. The non-glossy grades are distinguished primarily by their degree of brightness. These distinctions are apparent in Slide 13. Newsprint is a non-glossy grade. Newsprint is the least bright and, with the exception of the bulky book grade (ABIbook), the least smooth of the non-glossy grades. In terms of smoothness and brightness, the bulky book grade is closest to newsprint followed by the directory grade and the Hi-Brite grade (ABIbrite). Bulky book paper is typically used for paperback books and coloring books. Directory paper is somewhat brighter and smoother than newsprint and is also lighter (basis weight typically 22.1 lb. vs. 30 lb. or 27.1 lb. for newsprint) and is used primarily for the printing of telephone directories. The typical brightness of newsprint is 58. The brightness of Hi-Brite grades ranges from 65 to 75. Hi-Brite grades are used for printing inserts and flyers and in other similar commercial printing applications. The brightness of Super Hi-Brite grades (Abitibi grades EO, IO, and AO) ranges from 75 to 85. 10 Abitibi's Super Hi-Brite Grades compete with uncoated free sheet for the printing of books and may also be used in commercial printing applications. 10 We follow two practices of Abitibi in terminology and brightness ranges. Abitibi calls the Highbright and Super-bright grades Hi-Brites and Super Hi-Brites, respectively. Abitibi sells Hi-Brites in the brightness range 65-75 and Super Hi-Brites in the brightness range 75 and over. The PPPC categorization limits High-brights to the brightness range ≥ 65 to less than 75. Super-brights, according to the PPPC have a brightness level ≥ 75. The glossy uncoated groundwood specialty grades are supercalendered

(SC)and soft nip calendered

(SNC)grades. The gloss in SC and SNC grades is produced by adding clay fillers to the pulp furnish. After the SC paper roll comes off of the paper machine, gloss and smoothness are imparted to the paper by running the paper through a series of rolls called supercalenders. The gloss of SNC paper is typically achieved by an on-machine soft-nip calender. Slide 13 shows several SC grades (SCA, SCB+, SCB) which vary primarily by the degree of glossiness. SC and SCN grades are used in printing inserts, flyers, and catalogs. SC grades are also used in printing magazines. 11 The New York Times Sunday Magazine is printed on SC paper. 11 The PPPC classifies uncoated groundwood specialty grades into three categories: High-Gloss, Standard, and Lightweight. The High-Gloss category includes all grades with a gloss ≥ 26, a smoothness ≤ 2.5 (the lower the smoothness measure, the smoother the surface of the paper), and a brightness ≥ 65. The grades included in this category ranked from highest to lowest gloss, highest to lowest smoothness, and highest to lowest brightness are SCA+, SCA, SCB, and SNC+. The low gloss SNC and SCC grades have a gloss ≥ 20 but less than 26, a smoothness measure greater than 2.5 and a brightness measure ≥ 60 ISO. The PPPC places these latter two grades in the Standard Category even though the other Standard Category grades are non-glossy. The Standard Category is defined primarily in terms of brightness and is not defined in terms of smoothness or gloss except for the SNC and SCC grades. The other grades in the Standard Category are Superbright (brightness ≥ 75 ISO), High-bright (brightness ≥ 65 but less than 75 ISO), Bulky book (brightness ≤ 60 ISO), and Other (no brightness requirement). All High-Gloss and Standard grades have a basis weight ≥ 40 grams per square meter. The Lightweight category contains one grade: Directory paper. Directory paper has a basis weight of less than 40 grams per square meter. Slide 23 below is from the presentation of John Weaver, President and CEO of Abitibi, to a Credit Suisse First Boston Global Basics investment analysts conference on March 4, 2004. 12 This slide provides additional information on the relation between uncoated groundwood grade categories, the brand names of Abitibi products in each category, and the end uses served by each category. 13 12 This presentation is available on Abitibi's Web site under Investor Relations/Presentations & Webcasts. 13 MFS means machine-finished surface. Hi-Brite and Bulky Book grades are MFS grades. All finishing to the surface of the paper is accomplished on the paper machine. In contrast, the surface finishing to SC grades is usually accomplished on off-machine supercalenders. The Abitibi Alternative Offset and Equal Offset grades are primarily sold as a substitute for uncoated free sheet

(UFS)grades for the printing of books. The Alternative Offset and Equal Offset grades as well as the Innovative Offset grade (not shown in Slide 23) are also MFS grades. EN10JN08.001 Slide 12 below is from the presentation at the announcement of the AbitibiBowater merger. 14 Compared to Slide 13 discussed above, it provides a somewhat different perspective on the relation between the quality and value of uncoated and coated printing paper grades. It shows that newsprint is the lowest valued and lowest quality grade. The qualities indicated in the slide are brightness, opacity, paper gloss, print gloss, basis weight, and strength. Slide 12 shows that the two closest grades to newsprint in terms of value and quality are the Bulky Book and Hi-Brite grades. 15 14 See the AbitibiBowater merger announcement presentation, “Creating a Global Leader in Paper and Forest Products,” January 29, 2007. This presentation is available on Abitibi's Web site under Investor Relations/Presentations & Webcasts. 15 Directory paper is not shown in Slide 12. If it were included in Slide 12, it would probably be placed between the Bulky Book and Hi-Brite grades as is indicated in Slide 13. A graph appearing in this comment is not able to be reprinted here. Copies of the comment with the graph are available at the Department of Justice Antitrust Division Web site, *http://www.usdoj.gov/atr* , at the Antitrust Documents Group of the Department of Justice Antitrust Division, 450 Fifth Street, NW., Suite 1010, 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. 3. Product Market Definition a. Likely Demand Substitution Responses by NA Newsprint Customers Assuming a hypothetical monopolist of newsprint imposed “a ‘small but significant and nontransitory’ increase in price”, would current newsprint customers switch in sufficient numbers to other paper grades to defeat the attempted price increase? 16 There are four pieces of evidence that suggest current newsprint customers are unlikely to switch to other grades of paper in sufficient numbers to defeat such an attempted price increase. 16 See the Merger Guidelines, § 1.1 Product Market Definition.

(1)Newsprint is the lowest quality and least expensive uncoated groundwood grade. Newsprint is designed to run on the printing presses of daily newspapers. We are unaware of any daily newspaper that has responded to increases in the price of newsprint in the past by switching to a higher quality and higher priced uncoated groundwood specialty grade. We believe it is implausible that in the future newspapers will switch to any higher quality and higher priced uncoated groundwood specialty grade if there is a relative increase in the price of newsprint. Every newspaper newsprint buyer we talked to said that if the price of newsprint rose 5% to 10% following the proposed merger they would have no alternative but to pay the increased price. They said they could not switch to other types of paper nor could they turn to suppliers outside of NA for any significant quantity of newsprint.

(2)Estimates of the elasticity of demand for newsprint have consistently been quite low (i.e., consistently quite inelastic). A 2004 study estimated that the U.S. demand elasticity for newsprint was 0.36. 17 A hypothetical monopolist could profitably raise the price 5% to 10% and considerably more in a market with a demand elasticity of 0.36. 17 While we have not attempted to estimate the demand elasticity for the NA newsprint market, we note that an article in 2004 reported on an analysis that estimated the elasticity of the U.S. demand for newsprint at 0.36 taking into account structural changes in U.S. demand. See Jari Kuuluvainen, “Structural Change in U.S. Newsprint Demand: GDP and Price Elasticities,” University of Helsinki, Department of Forest Economics, Reports #34, 2004, p. 8. A demand elasticity of 0.36 is in the same range as demand elasticities reported in earlier articles. An article in 1997 reported the demand elasticity in NA at 0.22. Other estimates cited in this article have been about twice as large. Estimates of demand elasticity vary from 0.22 to 0.44. These estimates all indicate a fairly inelastic demand curve for newsprint. See Ylbing Zhang and Joseph Buongiorno, “Communication Media and Demand for Printing and Publishing Papers in the United States,” Forest Science 43(3) (August) 1997, p. 372. The results of our analysis of the proposed Abitibi-Bowater merger are consistent with an inelastic demand curve.

(3)Over the period 2002 to 2006, average annual newsprint prices rose a total of 42.6%. Over that same period the consumption by U.S. daily newspapers declined by 13.6%. The ratio of the percentage decline in newsprint consumption by U.S. daily newspapers to the percentage increase in the price of newsprint was 0.32. 18 Daily newspapers account for 80% of U.S. newsprint consumption and non-daily newspapers and commercial printers account for the remaining 20%. Over the four-year period 2002-2006, newsprint consumption for this latter category of newsprint customers declined 15.2%. The absolute ratio of the percentage decline in newsprint consumption by U.S. non-daily newspapers and commercial printers to the percentage increase in the price of newsprint was 0.36. When total U.S. newsprint consumption is considered, the percentage decline over the four-year period was 13.9% and the absolute ratio of the percentage decline in newsprint consumption to the percentage increase in the price of newsprint was 0.33. These results are consistent with the estimated U.S. newsprint demand elasticity of 0.36 discussed immediately above. 18 The ratio is expressed as an absolute number. Sources: PPPC NA Monthly Newsprint Bulletins and PPPC Flash Reports. As discussed in Section E below, much of the decline in the demand of U.S. daily newspapers has not been caused by the rise in newsprint prices.

(4)As shown in Table B1 in Attachment B, the prices of three major uncoated groundwood specialty grades are significantly above the price of newsprint even before the reduction in printing surface due to the switch to a heavier basis weight is taken into account. Taking the reduction in printing surface into account, as a newsprint customer rationally would, a buyer of 30.0 lb. newsprint who switched to 35 lb. SCB, Hi-Brite 65, or SCA, would face an equivalent price increase per metric tonne of 30.0 lb. newsprint ranging from 34.0% to 47.0% based on February 2007 prices. 19 Table B1 in Attachment B does show a financial gain to a newsprint buyer of 27.7 lb. from switching to 22.1 lb. directory paper. However, the information provided to us by newsprint buyers leads us to conclude that the lower basis weight and thinner directory paper would not be suitable for use in a newspaper or for running on newspaper printing presses. The lowest basis weight newsprint that we are aware of that is being used to print newspapers is 26.4 lb. (43.0 g/m 2 ) newsprint. Our understanding is that 26.4 lb. newsprint is used primarily if not entirely on flexographic printing presses and not on the predominant offset printing presses. 20 19 RISI Pulp & Paper Week does not publish prices for the lowest quality uncoated groundwood specialty glossy grades, SNC and SCC. Abitibi-Bowater Slide 12 above, which plots quality against the value of uncoated groundwood grades, placed SNC and SCC in between SCB and Hi-Brite in terms of value and quality. In Table B1 in Attachment B, 35 lb. SCB is priced 8.8% below the price of 35 lb. SCA. If 35. lb. SNC and SCC grades were priced 8.8% below the price of 35 lb. SCB, their prices would still be 22.1% above the price of 30 lb. newsprint. 20 According to RISI 2006 Fact and Price Book, p. 145, offset presses account for 85% of the presses at U.S. daily newspapers, letterpress presses account for 10%, and flexographic presses account for 5%. b. Identifying Participants in the NA Newsprint Market

(1)Introduction In Section C below we identify NA capacity to produce newsprint by manufacturer mill. This capacity participates in the NA newsprint market. According to the Merger Guidelines, it is also necessary to identify those firms that could participate in the NA newsprint market through a supply response. The antitrust agencies' methodology for determining whether such capacity should be included is described in “§ 1.32 Firms That Participate Through Supply Response” of the Merger Guidelines. § 1.32 notes that the agencies “will identify other firms [or capacity] not currently producing or selling the relevant product in the relevant area as participating in the relevant market if their inclusion would more accurately reflect probable supply responses. These firms are termed ‘uncommitted entrants.’ These supply responses must be likely to occur within one year and without the expenditure of significant sunk costs of entry and exit, in response to a ‘small but significant and nontransitory’ price increase.” § 1.32 further notes that “[i]f a firm [or capacity] has the technological capability to achieve such an uncommitted supply response, but likely would not (e.g., production would render such a response unprofitable), that firm [or capacity] will not be considered to be a market participant.” The most likely type capacity for inclusion as a participant in the newsprint market would be uncoated groundwood specialty grades produced on so-called “swing” machines. The next most likely type of capacity would be newsprint machines that have been converted to the exclusive production of groundwood specialty grades without the expenditure of capital funds to rebuild the machine, to add or reconfigure pulping capability, or add off-machine finishing equipment. In cases where the conversion of a newsprint machine to an uncoated groundwood specialty grade has required a significant expenditure of capital funds, it is the least likely that that capacity should be included as a participant in the newsprint market. Similar analytical considerations apply to uncoated groundwood specialty machines that have never produced newsprint.

(2)Swing Machines A certain amount of newsprint is produced on so-called “swing” machines. That is, the same machine is used to produce both newsprint and one or more higher quality and higher priced uncoated groundwood specialty grades. For example, some manufacturers may be able to produce Hi-Brite grades and Directory paper on the same machine as newsprint. It is likely that Bulky Book paper can also be produced on the same machine as newsprint. The Catalyst 2006 annual report, p. 9, states that “Capacities in the above table can vary as the Company is able to switch production between products, particularly newsprint, directory, and machine-finished [i.e., Hi-Brite] uncoated grades.” Bowater's 2005 Annual Report states on p. 4 that it has newsprint and uncoated groundwood swing machines at the following mills: Calhoun, TN, Thunder Bay, ON, Gatineau, QC, and Dalhousie, NB. Abitibi's 2005 Annual Report, p. 10, indicates that Abitibi may have swing newsprint machines at its Belgo, QC, Iroquois Falls, ON, and Grand Falls, NL mills. Since the annual report does not provide a capacity breakdown by machine, it cannot be determined from the table on p. 10 which, if any, of the machines at these mills are producing both newsprint and uncoated groundwood paper. The annual report also indicates that Abitibi's Fort William mill in Thunder Bay, ON has a newsprint and uncoated groundwood swing machine. The mill's only paper machine is shown with a capacity of 107,000 metric tonnes for newsprint and 38,000 metric tonnes for uncoated groundwood grades. The PPPC 2003 NA Newsprint Capacity Survey (March 3, 2003) states on p. 2 that at the time of the survey there were 17 machines in NA that were classified as “swing” machines. The PPPC noted that the number of swing machines had been declining due to increased machine specialization and the conversion of newsprint machines to other grades. We do not know the total current capacity of NA “swing” machines by NA mill, but believe that the newsprint capacity of each swing machine is reported by manufacturers to the PPPC in proportion to the actual or anticipated production of newsprint on the machine. As the Merger Guidelines suggest, it would be necessary to determine if it would be profitable to switch the capacity on swing machines used to make uncoated groundwood specialty grades to newsprint production in the event of an increase in the price of newsprint. If it would be profitable, then the capacity of the swing machine used to make uncoated groundwood specialty grades should be included as participating in the newsprint market through a supply response. If it would not be profitable, then that capacity would not be included. We are aware of no publicly-available information that could be used to address this issue.

(3)Machines That Have Been Converted From Newsprint Production In contrast to the use of swing machines to produce both newsprint and uncoated groundwood specialty grades, some newsprint manufacturers have converted newsprint machines to the production of higher quality and higher priced uncoated groundwood grades (e.g., SC grades). That is, these machines are no longer used to manufacture newsprint. In some cases, these machine conversions required significant investment expenditures and non-trivial down times. To the extent that it would not be profitable to produce newsprint on a converted newsprint machine “in response to a ‘small but significant and nontransitory’ price increase,” the capacity of that machine should not be regarded as participating in the market (supply response within one year) or as en entrant (entry within two years). See § 1.32 as discussed above and “§ 3 Entry Analysis” of the Merger Guidelines. In some cases, however, it may be profitable to produce newsprint on a converted newsprint machine “in response to a ‘small but significant and nontransitory’ price increase.” This analysis can also be applied to machines that have never produced newsprint but are used to produce closely related uncoated groundwood specialty grades. Below we provide two examples of recent conversions by Abitibi from newsprint to uncoated groundwood specialty grades. In 2005, Abitibi removed about 118,000 metric tonnes of newsprint capacity by converting a newsprint machine at its Shawinigan (Belgo). QC mill to Hi-Brite production. The conversion consisted of an increase in bleaching capacity at the Belgo mill. The cost was about C$15 million. 21 It seems likely that the Belgo machine could still technically produce newsprint. Hi-Brites are essentially brighter newsprint, once called improved newsprint. If the Belgo mill were owned by a firm that could not influence the price of newsprint through the removal of capacity from the market, that firm potentially might have the incentive to switch some of the capacity of the converted machine back to newsprint in response to a relative increase in the price of newsprint. To determine whether that incentive exists requires knowledge of alternative profitability scenarios involving different mixes of Hi-Brite and newsprint production. Abitibi is quite unlikely to use the Belgo machine to produce newsprint in the event of an increase in the price of newsprint since part of Abitibi's objective in converting the machine to Hi-Brites was likely to remove newsprint capacity from the newsprint market in order to raise the price of newsprint. 21 Sources: Abitibi 2005 Annual Report p. 28, Abitibi 2004 Annual Report, p. 42, and Abitibi-Bowater Merger Announcement Presentation, p. 17. In 2003 and 2004, Abitibi converted about 170,000 metric tonnes of newsprint capacity at its Alma, QC mill to the production of Super Hi-Brites. The total cost of the conversion exceeded C$200 million. The conversion likely included an expansion of bleaching capacity and a rebuild of the paper machine. It seems unlikely that this machine would be used to produce newsprint under any foreseeable circumstances. In 2002, Great Northern Paper rebuilt its No. 11 uncoated groundwood specialty machine at its Millinocket, ME at a cost of $103 million. After the mill was sold to Katahdin in 2003, the new owners made additional improvements to the machine to enable it to produce high quality SCA and SCA+ paper for magazines and catalogs. The machine was down 17 months before being restarted in 2004. Part of this downtime was due to the bankruptcy of Great Northern. 22 We do not know if the investment and lost downtime required to convert the Katahdin machine to SC paper is representative nor do we know if SC machines are technically capable of producing newsprint. Assuming SC machines are technically capable of producing newsprint, it seems unlikely to us that owners of SC capacity would find it profitable to divert part of their SC capacity to the production of newsprint in the absence of a substantial increase in the relative price of newsprint. 23 22 Source: “Katahdin Paper, The Maine Chance,” Manufacturing in Action, September 2004. While, strictly speaking, this machine was not converted from newsprint to SC grades, it seems likely that prior to the conversion the machine was producing paper close to the quality of newsprint. 23 SNC grades are typically made on former newsprint machines with an on-machine soft-nip calendar added to the paper machine. SNC grades are comparable to SCB and SCC grades as discussed above. While technically they likely could produce newsprint, it seems unlikely that an SNC machine that has switched away from newsprint production would switch back to newsprint production in the event of a 5% to 10% increase in the price of newsprint relative to the price of SNC grades. Both Abitibi and Bowater manufacture SNC grades. Referring to Slide 13 in Section B.2.b.(1) above, the most likely capacity to be converted to the production of newsprint in the event of a relative increase in the price of newsprint would be Directory, Bulky Book, and Hi-Brite. The machines used to produce these grades are technically closest to the machines used to produce newsprint. As discussed above, the machines used to produce SC grades and Super Hi-Brite grades have been significantly upgraded from newsprint machines or from lower quality uncoated groundwood grades. It seems unlikely that it would be profitable to use these machines to produce newsprint even if the price of newsprint were increased significantly. Directory paper is sold under one- to three-year contracts that specify both price and volume. About 80% to 90% of directory paper is sold under contract. The other 10% to 20% is sold on the spot market. The main buyers of Directory paper are RBOCs and independent publishers of telephone directories. The demand for Directory paper has shown strong growth since 2004 and contract price increases of 10% are expected in 2007. 24 It seems unlikely to us that owners of Directory capacity could divert Directory capacity that is being sold under contract. To the extent that some owners of Directory capacity have excess capacity, they might use that capacity to produce newsprint in the event of a relative increase in the price of newsprint. However, with a growing demand for Directory paper, the use of that capacity to produce newsprint is likely to be short-lived. 24 RISI Fact & Price Book, pp. 168-169. As shown in Table B-7 in Attachment B, Abitibi and Bowater control 76.5% of the NA Hi-Brite capacity and 100% of the Hi-Brite capacity East of the Rockies. Abitibi and Bowater also appear to control most of the Bulky Book capacity although we were not able to obtain a Bulky Book capacity figure for Bowater.

(4)Machines Producing Uncoated Groundwood Specialty Grades That Have Never Produced Newsprint There are at least three machines producing uncoated groundwood specialty grades that have been designed specifically to produce those grades. These are high-speed, high-capacity machines use to produce high-quality SC paper. These machines are owned by Stora Enso and Madison paper. It is highly unlikely that these machines would ever be used to produce newsprint under any conceivable circumstances. c. Conclusions Regarding Product Market Definition

(1)Newsprint Market Based on our analysis in Section B.3.a. above of the likelihood of demand substitution in the event of a relative increase in the price of newsprint, we conclude that the relevant product market is no larger than newsprint.

(2)Participating Manufacturers in the NA Newsprint Market Current newsprint suppliers are participants in the NA newsprint market. 25 Based on our analysis in Section B.3.b., we considered whether it was likely that capacity used to manufacture uncoated groundwood grades could be considered likely participants through a supply response following the Merger Guidelines methodology. Our conclusion is that there is undoubtedly some swing capacity that should be included as likely participants in the NA newsprint market. There are no public data available to quantify the amount of swing capacity that should be included but a significant portion of that swing capacity is likely controlled by Abitibi and Bowater. 25 In Section B.4 below, we consider whether the geographic market is narrower or broader than NA. Abitibi and Bowater also control a very large portion of Bulky Book and Hi-Brite, the next most likely capacity to participate in the NA newsprint market, and control virtually all of that capacity East of the Rockies. 26 26 As explained in Section B.3.b.(3) above, it is unlikely that manufacturers of Directory paper would divert more than a small amount of Directory capacity to the production of newsprint and that diversion is likely to be short-lived. Several of the newspaper newsprint buyers we interviewed said that they were unaware of any newsprint machine that had been converted to production of uncoated groundwood specialty grades that had subsequently been converted back to the production of newsprint. Given the steady decline in the NA demand for newsprint since at least 1999 this is not a surprising result. As shown in Section E2 below, NA demand (quantity purchased) for newsprint has declined every year from 1999 to 2006 for a total decline of 25.5% over that period. 27 27 The last de novo entry into the NA American newsprint market was in 1990 by Atlantic Newsprint and Alberta Newsprint. Inland Empire installed a small newsprint machine in 2001 to replace an old newsprint machine. That machine is the only new newsprint machine installed in NA since 1991. Source: “Newsprint: A Pulp & Paper Market Focus Book (1999), pp. 19-20. These facts and the 25.5% decline in NA consumption since 1999 indicate that de novo entry into this high capital cost industry is unlikely for the foreseeable future. We conclude that the participants in the NA newsprint market are the current NA newsprint producers. These 16 NA newsprint producers are identified in Tables C1 and C2 attached to Section C1. 4. Geographic Market Definition a. Introduction The methodology for geographic market definition is described in § 1.2 of the Merger Guidelines. The methodology is similar to the methodology used to define relevant product markets. Absent price discrimination, the Agency will delineate the geographic market to be a region such that a hypothetical monopolist that was the only present or future producer of the relevant product at locations in that region would profitably impose at least a “small but significant and nontransitory” increase in price, holding constant the terms of sale for all products produced elsewhere. That is, assuming that buyers likely would respond to a price increase on products produced within the tentatively identified region only by shifting to products produced at locations of production outside the region, what would happen? 28 28 See the Merger Guidelines, § 1.21 General Standards. In this section we consider whether the relevant geographic market is narrower or broader than our provisional geographic market of NA. b. Is the Relevant Geographic Market Narrower Than NA? There is evidence that the relevant market may be narrower than NA. Based on interviews with buyers of newsprint for newspaper publishers, newsprint mills located West of the Rockies rarely ship to customers located East of the Rockies and vice versa. 29 According to these buyers, the high cost to transport newsprint from West Coast newsprint mill locations to customers located East of the Rockies makes newsprint produced in West Coast mills non-competitive with newsprint manufactured at mills located East of the Rockies. Even if there were a relative 5% to 10% increase in the price of newsprint sold East of the Rockies, these buyers believe that it would not be profitable for West Coast mills to begin shipping newsprint in significant quantities to customers located East of the Rockies. 29 This evidence also implies that newsprint sold to customers West of the Rockies may also be a relevant market. Since Bowater is not a majority owner of any mill on the West Coast the merger would not have a competitive effect in a West of the Rockies newsprint market. Bowater does have a 40% minority interest in the Ponderay Newsprint mill, which is located in Usk, WA. Abitibi does own two newsprint mills West of the Rockies. These mills are located in Snowflake, AZ and Mackenzie, BC. We do not have the information necessary to determine if newsprint sold to customers located East of the Rockies is a relevant geographic market for the purposes of assessing the competitive effects of the merger. Primary sources of information on whether such a geographic market can be properly defined would include West Coast newsprint mills and customers located East of the Rockies. An analysis of comparative freight rates from West Coast mills and mills located East of the Rockies to East of the Rockies newsprint customers would also be useful in determining whether there is a relevant East of the Rockies market. For the purposes of calculating capacity shares and HHIs in Section C below, it is assumed that East of the Rockies is a relevant geographic market. c. Is the Relevant Geographic Market Broader Than NA?

(1)Introduction There has been considerable speculation in the trade press concerning the likely impact of new Chinese newsprint capacity on NA purchasers of newsprint and NA newsprint mills. While some buyers of newsprint have shown an interest in newsprint from China, it appears from press reports that the only newsprint that they have bought from Chinese mills is for test runs. There is no current indication that they intend to buy significant amounts of newsprint from China within the next one to two years. To the extent that there are imports of newsprint from China in the near-term, it is likely that the phenomena will be short-lived. If there is an effect of the new Chinese capacity on NA newsprint mills, it will likely be on the displacement of export sales from NA mills to current customers located in Asia. It is likely that the new Chinese newsprint capacity will be largely absorbed in Asia over the next several years.

(2)Current and Past NA Import Levels Imports of newsprint into NA have not been a significant source of supply for NA newspaper publishers and other NA purchasers of newsprint. In 1999, imports accounted for only 3.3% of NA newsprint purchases. 30 Since 1999, imports have accounted for 2.0% or less of NA purchases. See Section E2 below. Imports have been falling since 2004 both in absolute quantities and as a percentage of NA demand. In 2006, imports accounted for just 1.5% of NA newsprint purchases. For the first two months of 2007, imports have fallen 56.1% compared to the first two months of 2006. Imports accounted for 0.7% of NA newsprint purchases for the first two months of 2007. 31 30 Sources: December 2006 and December 2005 PPPC NA Newsprint Statistics-Flash Report (“Flash Report”) and December 2001-2004 PPPC NA Newsprint Statistics Monthly Bulletin (“PPPC Monthly Bulletin”). 31 Source: February 2007 Flash Report. In the latter part of the 1990s, there was an increase in NA imports to about 555,000 metric tonnes in 1998 (about 4.3% of NA consumption). 32 Almost all of the increase was due to imports from South Korea and Russia. 32 Sources: RISI 2006 Fact and Price Book, p. 142, and Pulp & Paper 2000 NA Factbook, p. 190. There were a number of unique circumstances that accounted for the increase in imports from South Korea to NA. These include

(1)significant new efficient capacity coming on line in South Korea;

(2)a very steep devaluation of the South Korean won relative to the U.S. dollar;

(3)a significant recession in South Korea and Asia which reduced Asian demand for newsprint; and

(4)strikes at newsprint mills in British Columbia which removed about 1 million metric tonnes of annual newsprint capacity from the NA market. 33 As the South Korean and Asian economies began to recover, as the South Korean won began to appreciate against the U.S. dollar, and as the strikes at the British Columbia mills were settled, the new South Korean capacity was largely absorbed in Asia. NA publishers, however, have continued to import some newsprint from South Korea, although at significantly reduced amounts from the 1998 peak. NA imports from all sources, including South Korea and Russia, declined from the 1998 peak of 555,000 metric tonnes to about 221,000 metric tonnes in 2000. NA imports have remained at the 2000 level or slightly below until declining to 142,000 metric tonnes in 2006. 33 See Economists Incorporated's submission to DOJ concerning the proposed acquisition of Alliance by Bowater, dated May 7, 2001, pp. 15-18. Imports from Russia also increased during the latter part of the 1990's though not as significantly as imports from South Korea. Newspaper publishers found that newsprint from Russian mills was unreliable both in terms of quality and delivery. As a consequence, imports from Russia declined to a low level by 2000.

(3)The Likelihood of Imports From China

(a)Projected Growth in Global Newsprint Demand Martine Hamel, head of market research for the PPPC, estimates growth in newsprint demand for all regions of the world over the period 2006 to 2008. 34 See Slide 39 below. The slide shows negative growth for NA for all three years. Western Europe is expected to have positive growth in 2006 and 2007 before experiencing negative growth in 2008. All other regions are shown with positive growth for all three years. 34 Source: At the November 2, 2006 joint NPA/NAA Newsprint Conference, Martine Hamel, VP, COO and head of market research for the PPPC, presented a report titled “Review and Forecast of Newsprint Demand and Supply” (“PPPC 2006 NPA/NAA Presentation”). The Presentation reviews global demand and supply of newsprint for the first nine months of 2006 and earlier years and forecasts global demand and supply of newsprint for the period 2006-2008. EN10JN08.002

(b)Projected Growth in Chinese and Other Asian Newsprint Demand Slide 36 below from Martine Hamel's presentation shows the forecast growth of Chinese demand for newsprint. Chinese newsprint demand is projected to increase by 3.1% in 2006, 8.7% in 2007, and 14.0% in 2008. EN10JN08.003 Slide 37 shows growing demand in the rest of Asia (excludes Japan, South Korea, and China). The projected demand growth in China and the rest of Asia 35 was likely the primary reason for the installation of the new newsprint capacity in China. 35 We assume that the growth projections in Slides 36, 37, and 39 above correspond to similar projections that were available to Chinese officials responsible for investments in new newsprint capacity. EN10JN08.004

(c)Projected Growth in Global Newsprint Supply Slide 42 below from Martine Hamel's presentation shows that virtually all of the growth in global newsprint capacity over the period 2005-2008, is expected to come from the installation of new Chinese capacity. This growth in Chinese newsprint capacity is partially offset by reductions in NA newsprint capacity. EN10JN08.005

(d)Evidence From the PPPC 2006 NPA/NAA Presentation That the New Chinese Newsprint Capacity Is Expected To Be Mostly Absorbed in Asia Over the Next Several Years Martine Hamel of the PPPC also estimates that exports from Asia to other regions of the world will total 60,000 metric tonnes per year over the period 2005 to 2008. 36 See Slide 49 below. The slide shows that despite the significant increase in Chinese newsprint capacity, exports from Asia to other regions of the world are not expected to be significant. 36 While Slide 49 does not specify whether the 60,000 metric tonnes of exports from Asia is per year or for the entire four-year period, we conservatively assume that the figure is an annual average estimate. EN10JN08.006 We expect that many of these exports from Asia would be to regions other than NA since, as shown in Slide 39 above, demand in those regions is growing while demand in NA is decreasing significantly. To the extent there were exports from Asia in 2005 and 2006, these exports did not have a significant impact on the NA newsprint market since imports into NA in 2005 and 2006 actually declined each year from the prior year. Slide 49 also shows exports from Asia during the period 1996 to 1999 at a rate of 360,000 metric tonnes per year. For five of the six years 1995 to 2000, Asian newsprint capacity increased by a greater percentage than is projected for the three years 2006 to 2008. As was discussed above, this capacity came on line at the same time that the Asian region was undergoing a steep economic decline and steep decline in the demand for newsprint. The new Chinese capacity is coming on line at a time of significant growth in demand for newsprint in China and in the rest of Asia. See Slides 36 and 37 above. This significant projected growth in newsprint demand increases the likelihood that the new Chinese capacity will be absorbed in Asia over the next several years. This projected growth was undoubtedly a major factor in the PPPC's forecast of 60,000 metric tonnes of exports per year from Asia for the period 2005-2008, compared to the much higher export total of 360,000 metric tonnes per year from Asia that occurred over the period 1996-1999.

(e)Evidence From the Heads of Abitibi and Bowater That the New Chinese Newsprint Capacity Is Expected To Be Mostly Absorbed in Asia Over the Next Several Years The heads of Abitibi and Bowater also expect that the new Chinese capacity will be absorbed in Asia over the next several years. John Weaver, President and CEO of Abitibi, gave a presentation to Citigroup's 11th Annual Global Pulp & Forest Products Conference on December 7, 2006 (“Citigroup Conference”). During the Q&A that followed his slide show presentation, Weaver was asked about the impact of the new Chinese newsprint capacity on the global and NA newsprint markets. 37 37 We have provided DOJ with a copy of the audio recording of Weaver's remarks at the Citigroup Conference. The copy is a .wma file and can be played on Windows Media Player (“WMP”). If the copy is played on WMP, the time expressed as minutes and seconds is shown as the recording proceeds. Weaver's discussion of the possibility of imports from the new Chinese capacity begins at 24:04 into the recording. We have also provided DOJ with a copy of the slide show that Weaver presented to the Citigroup Conference. The slide show of Weaver's presentation is available under Investor Relations/Presentations & Webcasts on Abitibi's Web site. According to Abitibi's Web site, the audio recording of Weaver's remarks at the Citigroup Conference is no longer available on the Web site. Weaver begins his response by saying that “There will be a trend in the international market in [2007] but it won't be China.” He said that he does not know of any deal that a publisher has signed that is not a trial. He said that there had been only 242 tonnes of imports from China so far in 2006. “So I don't really expect to see any significant imports of Chinese paper to North America [in 2007],” he said. He also said that based on most of the calculations he has seen, including those by Abitibi, “it's hard to see the economic benefit of the Chinese coming.” 38 38 While he does not elaborate further on this statement, he appears to be saying that it would be more profitable for the Chinese mills to sell their newsprint closer to home rather than to incur the additional freight costs to ship newsprint to NA. He said that he does expect there will be some Chinese exports. He specifically mentions that Abitibi has seen Chinese exports in India. He said, “I really feel that the phenomena of Chinese oversupply may be short-lived.” He gives several reasons. He mentions 1.7% growth in global newsprint demand. He also says that the Chinese government recently announced that they would close their smaller polluting newsprint mills in 2007 and 2008, which would reduce the amount of Chinese newsprint capacity. David Paterson, President and CEO of Bowater, also gave a presentation at the 2006 Citigroup Conference. Paterson addressed the issue of new Chinese capacity during his slide show presentation (Slides 14 and 15). 39 He notes the strong growth in demand globally for newsprint except in the U.S. He also notes the strong growth in the demand for newsprint in China. 39 We have provided DOJ with a copy of the audio recording of Paterson's remarks at the Citigroup Conference. The copy is a .wma file and can be played on Windows Media Player (“WMP”). If the copy is played on WMP, the time expressed as minutes and seconds is shown as the recording proceeds. Paterson's discussion of the possibility of imports resulting from the new Chinese capacity begins at 11:59 into the recording. We have also provided DOJ with a copy of the slide show that Paterson presented to the Citigroup Conference. The slide show of Paterson's presentation is available under Investor Relations/Presentations on Bowater's Web site. According to Bowater's Web site, the audio recording of Paterson's remarks at the Citigroup Conference is no longer available on the Web site. He asks, “Where will those Chinese tonnes go as they start up and come into the market?” Paterson said Bowater believes they will flow into Asia and that there will be some coming into NA. He said that U.S. newspapers were talking openly about importing newsprint from China into the east coast and the west coast of the U.S. But, he said, “Having said that, I think most of the tonnes will show up in places like Singapore, Malaysia, India, Brazil. These are all high growth markets.” He said that newsprint consumption in India was up 17% so far this year. He said that Bowater sees the Chinese in India and that Chinese newsprint sales are growing. He said, “There is room for those tonnes to go. It will be a difficult 12 to 18 months as they find a home.” He said there were also other forces affecting Chinese tonnage, primarily Chinese demand as well as the change in their tariff system. He said if the government does what it said it is going to do and eliminates tariff protection for exports, then high-cost Chinese capacity will start shutting down. 40 40 Paterson appears to referring to a 13% rebate to Chinese newsprint exporters on a 17% import tax that newsprint mills must pay on imported raw materials. If this rebate has been eliminated, the cost of newsprint exports has been increased, especially exports made from recycled paper (ONP). Chinese newsprint mills are major importers of recycled paper. The two newest Chinese newsprint machines are recycled paper machines. The price of ONP has nearly doubled since last fall to $180 per tonne. This will make the new Chinese newsprint capacity and other Chinese capacity that relies on ONP less competitive against Abitibi and Bowater who rely primarily on wood fiber for their pulp needs. See “Paper Chase,” by Andrew Bary, Barron's On-Line, April 5, 2007. In their audio remarks, both Weaver and Paterson, emphasized the export opportunities for NA newsprint manufacturers created by the global growth in the demand for newsprint. Abitibi and Bowater foresee a healthy increase in overseas shipments in 2007 due to the projected growth in newsprint demand in other regions. Abitibi and Bowater account for about 70% of total exports from NA to overseas locations. In a news report, Weaver said he expected Abitibi to increase its offshore shipments by 10% in 2007 and Paterson anticipated a 5% to 6% increase in offshore shipments from NA. 41 41 See “Abitibi, Bowater turning to export markets to counter declines in NA,” RISI, February 12, 2007.

(f)Evidence That Buyers of Newsprint for U.S. Daily Newspapers Generally Do Not Have Plans To Buy Newsprint From China Within the Next Several Years Several of the newspaper newsprint buyers we talked to indicated that they had tested Chinese newsprint but that they had no immediate plans to purchase newsprint from Chinese mills. Factors that they cited were an unknown track record, the lack of a relationship, the need to assure reliability of delivery and quality, and the need to assure service. While price is an extremely important factor to a newsprint buyer, another important factor is the need to assure an adequate and reliable supply of newsprint at all times since newspapers print on a daily basis. 42 42 Two newspaper publishers, Gannett and the Tribune Co., have been publicly identified as conducting test runs using Chinese newsprint. See “Tribune's Second Test of Chinese Newsprint a Success,” by Jim Rosenberg, Editor & Publisher, December 11, 2006. According to the article, Gannett and the Tribune Co. said the results of the tests were successful. According to the article, a Gannett executive said last year that Gannett expects to buy Chinese newsprint but would not specify the quantity it planned to purchase or when purchases might commence. The Tribune Co. continues to run tests on Chinese newsprint for its Los Angeles Times printing operation. After the Tribune's first successful test run in November 2006 at its Orlando

(FL)Sentinel printing plant. John Cannizzo, Tribune's senior manager of group operations, is quoted as saying “‘If it turns out we can get, say, 1,000 tons shipped in a reasonable time and on a consistent basis, (buying Chinese newsprint) might be a viable option in 2007’. [* * *] We're not in a great hurry. We just want to see if this might work.” “Tribune marks ‘successful’ test of Chinese mill's newsprint,” by Chuck Moozakis, Newspapers & Technology, December 2006. The newsprint tested in Orlando was originally intended for a test at the Los Angeles Times plant. However, the paper's cores and chucks were not compatible with the Chinese rolls, according to the article. That problem has since been solved. It seems unlikely that it would be profitable to ship newsprint from China through the Panama Canal to an east coast location, given the much greater shipping costs. The buyers emphasized the need to develop a very close relationship with their suppliers. Buyers emphasized that it would take several years of low-volume purchases to establish the trust and track record needed to increase their level of purchases. Several buyers believed that if Chinese newsprint were shipped to the U.S., it would only be economically feasible to ship the paper to west coast ports to supply newspaper printing plants located close to the docks. d. Conclusions Regarding Geographic Market Definition

(1)Relevant Geographic Market We conclude that the geographic market is no larger than NA. It is possible that the relevant geographic market may be narrower than NA. Some evidence suggests that there may be a relevant East of the Rockies geographic market. To conclude that there is a relevant East of the Rockies market it would be necessary to determine if West of the Rockies newsprint mills could profitably ship newsprint to East of the Rockies customer locations in response to a “small but significant and nontransitory” increase in price in sufficient quantities to make the price increase unprofitable.

(2)The Likely Effect of New Chinese Newsprint Capacity on the NA Newsprint Market While there is new Chinese newsprint capacity that has come on line recently, it appears that that capacity will be largely absorbed in Asia over the next couple of years. There may be some limited sales to U.S. publishers by Chinese mills over the next couple of years. Most publishers we talked to showed little interest in buying newsprint from Chinese mills. They placed great emphasis on trust, reliability and a close relationship with their newsprint suppliers. Currently they have no relationship with any of the Chinese mills and believe that establishing the trust and reliability necessary to buy more than nominal amounts of newsprint would take at least a couple of years if not longer. If there is to be an effect on the NA newsprint market from the new Chinese newsprint capacity, it would likely be an indirect one. It is possible that some NA suppliers who currently export to Asia will be displaced from some of their customers by the new Chinese capacity. If so, that would create excess capacity at their NA mills used to supply the Asian market. As discussed above, however, Abitibi and Bowater expect newsprint exports from NA to increase, not decrease. The export growth opportunities that Abitibi and Bowater expect to be able to take advantage of should be available to other NA mills that export newsprint, including those that may be displaced from Asian customers by the new Chinese capacity. C. Analysis of the Increase in Concentration That Would Result From the Proposed Merger 1. Analysis of the Increase in Concentration in the NA Newsprint Market Based on Estimated 2006 Capacity According to § 1.51(b) of the DOJ/FTC Horizontal Merger Guidelines (“merger guidelines”) the NA newsprint market is currently moderately concentrated. Based on estimated 2006 NA newsprint capacity, the pre-merger HHI is 1,380. If the merger is consummated, the change in the HHI would be 962 and the post-merger HHI would be 2,342. 43 See Chart CI below. 43 Table C1 in Attachment C identifies the owner, location and capacity for each NA newsprint mill. Table C1 also provides detailed information on the methods and sources relied upon for the estimate of the market shares. Table C2 in Attachment C shows the calculation of the capacity shares and HHIs by manufacturer based on the mill-level data contained in Table C1. Table C2 is the source for both Charts C1 and C2. EN10JN08.007 According to § 1.51(c) of the merger guidelines, markets with post-merger HHIs above 1,800 are highly concentrated and HHIs of the magnitude shown in Chart C1 create the presumption that the merger would be “likely to create or enhance market power or facilitate its exercise.” This section of the merger guidelines states in part that: Where the post-merger HHI exceeds 1800, it will be presumed that mergers producing an increase in the HHI of more than 100 points are likely to create or enhance market power or facilitate its exercise. The presumption may be overcome by a showing that factors set forth in Sections 25 of the Guidelines make it unlikely that the merger will create or enhance market power or facilitate its exercise, in light of market concentration and market shares. Pre-merger, Abitibi has a 27.4% market share based on estimated 2006 capacity and Bowater has a 17.5% share. Following the merger Abitibi-Bowater would have a combined share of 45.0%. The next largest newsprint manufacturer, White Birch would have a 9.0% share. See Chart C2 below. EN10JN08.008 2. Analysis of the Increase in Concentration in the East of the Rockies Newsprint Market Based on Estimated 2006 Capacity Based on estimated 2006 east of the Rockies newsprint capacity, the pre-merger HHI is 1,876. If the merger is consummated, the change in the HHI would be 1,445 and the post-merger HHI would be 3,321. See Chart C3 below. 44 In terms of pre-merger and post-merger HHIs, an east of the Rockies newsprint market would be more concentrated than a NA newsprint market. 44 The source for Charts 3 and 4 is Table C3 in Attachment C. EN10JN08.009 Abitibi has only two west of the Rockies mills (Mackenzie, BC and Snowflake, AZ) and, as noted above, Bowater does not own a majority interest in any west of the Rockies newsprint mill. Virtually all of their combined capacity is located east of the Rockies. Pre-merger, Abitibi has a 30.8% market share based on estimated 2006 east of the Rockies capacity and Bowater has a 23.4% share. Following the merger, AbitibiBowater would have a combined share of 54.3%. The next largest newsprint manufacturer, White Birch, would have a 12.1% share. See Chart C4 below. 45 45 The following North America newsprint manufacturers have all of their newsprint capacity in mills located west of the Rockies: Catalyst, North Pacific, Blue Heron, Ponderay, Howe Sound, and Inland Empire. In addition, the following NA newsprint manufacturers have some but not all of their newsprint capacity in mills located west of the Rockies: Abitibi (561,000 metric tonnes) and SP Newsprint (395,000 metric tonnes). EN10JN08.010 D. Analysis of the Increase in Concentration and Decrease in Capacity in the NA Newsprint Market 1995-2006 1. The Increase in Concentration in the NA Newsprint Market 1995-2005 as Described by Abitibi and Bowater a. Description of the Increase in Concentration by John Weaver, President and CEO of Abitibi John Weaver, the President and CEO of Abitibi, has discussed the increase in consolidation in the NA newsprint market in a number of presentations to investment analysts. Slide 5 below is from a presentation that Weaver made at the UBS Global Paper and Forest Products Conference on September 18, 2003. The presentation was titled “Is the Industry Positioned to Reap the Benefits of Its Restructuring?” and is available on the Abitibi Web site. Slide 5 shows Abitibi with a 32% capacity share and Bowater with a 19% capacity share in NA. EN10JN08.011 Slide 3 below from Abitibi's UBS presentation states that the capacity share of the top 5 NA newsprint producers more than doubled from 35% in 1995 to 73% in 2002. Slide 3 also identifies the acquisitions and mergers that occurred over the period 1995 to 2002 that enabled the share of the top 5 newsprint producers in North America to rise from 35% to 73%. 46 Some of these mergers involved companies that Abitibi and Bowater eventually acquired. 46 Seven mergers identified in the lower right hand corner of the slide involve overseas transactions. In 2003, Abitibi was a 50% owner of PanAsia, a large Asian newsprint producer. In 2005, Abitibi sold its interest in PanAsia to the other 50% owner, Norske Skog, in order to reduce its debt, part of which was incurred in the Donohue acquisition in 2000. See Abitibi presentation “Divesting PanAsia: A Good Price at the Right Time,” September 2005, pp. 5-6. This presentation is available on the Abitibi Web site. EN10JN08.012 Slide 4 below from Abitibi's UBS presentation shows the acquisitions that enabled Abitibi to increase its NA newsprint capacity share from 11.2% in 1995 47 to 32% in 2003. All of these acquisitions occurred between 1995 and 2000. 47 Source: “Newsprint: A Pulp & Paper Market Focus Book,” p. 113, 1999. EN10JN08.013 b. Description of the Increase in Concentration by David Paterson, President and CEO of Bowater In a slide show presentation at the Annual Citigroup Paper and Forest Products Conference on December 7, 2006, David Paterson, President and CEO of Bowater, spoke to investment analysts about Bowater's product lines, efforts to reduce costs, and financial results. Referring to Slide 12, 48 Paterson noted that there had been significant consolidation in the newsprint industry and that he expected that consolidation would continue. See Slide 12 below. Slide 12 shows that in 1995 the top 5 producers had a combined share of 49%. 49 If the Abitibi-Bowater merger is allowed to be completed, the chart shows that the merged entity will have a share equal to the 49% share of the top 5 firms in 1995. The chart also shows the pre-merger share of the top 5 firms increased from 49% in 1995 to 75% in 2006. 48 The slide show is titled “Bowater: Citigroup Global Paper and Forest Products Conference, December 2006” (“Paterson 2006 Citigroup slide show”). Both the slide show and an audio recording of Paterson's remarks are available on the Bowater Web site. 49 Slide 3 in the Weaver UBS presentation discussed above shows the top 5 NA newsprint producers with a 35% capacity share in 1995, 14% lower than the capacity share shown in the Paterson presentation. Page 113 of “Newsprint: A Pulp & Paper Market Focus Book”

(1999)shows the top 5 newsprint producers with a 42.5% capacity share. EN10JN08.014 2. Concentration in the NA Newsprint Market in 1995 In 1995, Abitibi Price was the largest newsprint manufacturer with a capacity share of 11.2% and Bowater was the third largest firm with a capacity share of 8.1%. Their combined share was 19.4%. If Abitibi-Price and Bowater had merged in 1995, the pre-merger HHI would have been 545, the change in the HHI would have been 183 and the post-merger HHI would have been 728. According to § 1.51(a) of the Merger Guidelines, markets with post-merger HHIs below 1,000 are unconcentrated. See Chart D1 below which includes both the HHIs for the 1995 hypothetical AbitibiBowater merger and the HHIs for the proposed 2007 AbitibiBowater merger. 50 50 The sources for Chart D1 are Table D1 (1995 capacity shares) in Attachment D and Table C2 (2006 capacity shares) in Attachment C. EN10JN08.015 3. Acquisitions and Exits of NA Newsprint Manufacturers Since 1995 See Table D1 in Attachment D for capacity shares and HHIs for all 33 NA manufacturers of newsprint in 1995. Based on Table D1, Table D2 in Attachment D identifies all acquisitions and exits in the NA newsprint market since 1995. See Chart D2 below, which shows capacity shares for the top 20 newsprint manufacturers in 1995. 51 51 The source for Chart 2 is Table D1 in Attachment D. The source for Table D1 is “Newsprint: A Pulp & Paper Market Focus Book,” (1999), p. 113. In 1995 Avenor was a 40% minority owner of Ponderay Newsprint. For the purposes of this analysis, Ponderay is listed as a separate firm. Bowater acquired its current 40% interest in Ponderay when it acquired Avenor in 1998. In 1998, Ponderay had a capacity of 240,000 metric tonnes (1998 Bowater Annual Report, p. 3). EN10JN08.016 The chart also shows which of the top 20 newsprint manufacturers in 1995 were acquired directly and indirectly by Abitibi and Bowater after 1995. 52 As Table D2 shows, Abitibi also indirectly acquired Finley Forest Industries, the 27th largest newsprint manufacturer in 1995 with a capacity share of 1.2%. Bowater also directly acquired Alliance, the 24th largest manufacturer in 1995 with a capacity share of 1.3%. 52 An example of a direct acquisition is Abitibi's acquisition of Donahue in 2000. Donahue had acquired QUNO in 1996. When Abitibi acquired Donahue in 2000, it also indirectly acquired QUNO. 4. Analysis of the Reduction of Newsprint Capacity in North America 1995 to 2006 In 1995, there were 16,093,000 metric tonnes of NA newsprint capacity. In 2006, there were an estimated 12,760,000 metric tonnes of NA newsprint capacity, a reduction of 20.7%, most of it occurring since 2002. 53 Utilizing the data and other information in Table C2 in Attachment C and Tables D1 and D2 in Attachment D, it is possible to identify the sources for the reduction of newsprint capacity in North America since 1995. This is a two-step process. The first step is to adjust the 1995 capacities and shares shown in Table D1 to account for subsequent acquisitions while eliminating the acquired firms from the list of manufacturers, See Table D3 in Attachment D. As shown in Table D2, there were 34 manufacturers of newsprint in North America. After all acquisitions since 1995 are accounted for, 21 manufacturers remain. There has been a reduction of 14 newsprint manufacturers through acquisition since 1995. 54 Through direct and indirect acquisitions, Abitibi accounted for five of those newsprint manufacturer reductions and Bowater four. Table D3 shows that Abitibi also accounted for 46.8% of the acquired capacity and Bowater 21.2% for a combined total of 68.0%. Through these acquisitions, Abitibi increased its capacity share by 22.7% from 11.2% to 34.0% and Bowater increased its capacity share by 10.3% from 8.1% to 18.4%. Abitibi and Bowater increased their combined capacity share by 33.0% from 19.4% to 52.4%. The second step is to subtract estimated 2006 newsprint capacity from adjusted 2005 newsprint capacity. See Table D4 in Attachment D. Table D4 shows that the total net reduction in capacity between 1995 and 2006 was 3,333,000 metric tonnes. Table D5 below summarizes the results in Table D4. 53 Sources: See Table DI in Attachment D and Table C2 in Attachment C. 54 The net reduction in firms is 13 because a new firm was added to the NA newsprint market in 1999 when Bowater sold its East Millinocket, ME newsprint mill to Great Northern Paper. Following Great Northern's subsequent bankruptcy, Katahdin acquired the East Millinocket mill in 2003 and produced newsprint until it converted its newsprint capacity to uncoated groundwood specialty grades in 2005-2006. In 1998, the newsprint capacity of the East Millinocket mill was $168,000 metric tonnes (1998 Bowater Annual Report, p. 4). Table D5.—Summary of the Net Capacity Reduction in NA Newsprint Capacity 1995-2006 Net capacity changes 1995-2006 Percent of total net capacity changes 1995-2006 Percent of net capacity reductions 1995-2006 for 5 firms that remain in the market Abitibi (1,964) 58.9 60.9 Bowater

(731)21.9 22.7 Catalyst

(514)15.4 15.9 Tembec

(15)0.5 0.5 North Pacific

(2)0.1 0.1 Net Capacity Reductions for 5 Firms That Remain in the NA Newsprint Market Today (3,226) 96.8 100.0 Net Capacity Additions or No Capacity Change for 11 Firms That Remain in the NA Newsprint Market Today 630 (18.9) Net Capacity Reduction of the 16 Firms That Remain in the NA Newsprint Market Today (2,596) 77.9 5 Firms That Exited from the NA Newsprint Market Between 1995 and 2006

(737)22.1 Total Net Capacity Reduction 1995-2006 (3,333) 100.0 The firms in Table D5 can be divided into three categories:

(1)Firms remaining today in the NA newsprint market that had a net reduction in capacity over the period 1995 to 2006;

(2)firms remaining today in the NA newsprint market that had a net addition in capacity over the period 1995 to 2006; and

(3)firms who exited from the NA newsprint market between 1995 and 2006. 55 As Table D5 shows, there are 5 firms in the first category, 11 firms in the second category, and 5 firms in the third category. 55 Of the five firms that exited from the NA newsprint market, four of those firms converted their newsprint capacity to other groundwood grades. Only Garden State exited by permanently closing its newsprint mill. The first and third categories total 3,963,000 metric tonnes in net capacity reductions. These net capacity reductions are partially offset by 630,000 metric tonnes in net capacity additions by 10 of the 16 firms that remain in the market today. 56 After this offset is taken into account, the total net reduction in NA newsprint capacity is 3,333,000 metric tonnes. 56 One of the remaining firms had no change in capacity. There could be several reasons for the net increases in capacity. These may include speed-ups and other improvements to existing newsprint capacity and switching capacity from the production of uncoated groundwood grades to newsprint. The increase for Inland Empire is due to the installation of a new newsprint machine in 2001 and the permanent closure of the machine it replaced. There were no other installations of new newsprint machines in North America between 1995 and 2006. Some of the additions may not be real (e.g., they may result from methodological differences in reporting or estimating capacity in 1995 and 2006 or they may result from errors). The first category in Table D5 shows that the reductions by Abitibi, Bowater, and Catalyst account for 99.5% of NA capacity reductions by firms that

(a)had net capacity reductions between 1995 and 2006 and

(b)remain in the market today. 57 Abitibi accounts for 60.9% of the net capacity reduction, Bowater for 22.7% of the net capacity reduction, and Catalyst for 15.9% of the net capacity reduction. 58 Combined, Abitibi and Bowater account for 83.6% of the net reduction in NA newsprint capacity since 1995 shown in the first category. See Chart D3 below. 57 The net capacity reduction shown for North Pacific is not meaningful. In 2004, Tembec permanently closed one newsprint machine at its mill in Kapuskasing, ON. 58 It should be noted that some of the net capacity reduction for Abitibi, Bowater, and Catalyst occurred in acquired firms after 1995 but prior to their acquisitions by Abitibi, Bowater, or Catalyst. The most significant such capacity reduction is the closure of a 184,000 metric tonne capacity newsprint machine by MacMillan Bloedel in 1996. MacMillan Bloedel was subsequently acquired by Pacifica which was subsequently acquired by Norske Canada (later renamed Catalyst). This machine closure accounts for 35.8% of Catalyst's total net capacity reduction shown in Table D5 and Chart D3. Capacity reductions after 1995 by firms before they were acquired by Abitibi or Bowater make up a much smaller percentage of their respective net capacity reductions. Taking into account these prior capacity reductions for the three acquiring firms, Abitibi's share of the net capacity reduction of firms that remain in the market would increase to 66.2%, Bowater's share would increase to 21.8% and Catalyst's share would decrease to 11.4%. Source: “Newsprint: A Pulp & Paper Market Focus Book,” p. 20 (1999). EN10JN08.017 As Table D4 indicates, Abitibi lost 6.5% in capacity share. Bowater lost 0.9% in capacity share, and Catalyst lost 2.1% in capacity share between 1995 (adjusted 1995 capacity) and 2006 due to their net capacity reductions. Combined, the three firms lost 9.5% in newsprint capacity share. The 5 firms that exited the NA newsprint market lost a combined 4.6% in newsprint capacity share. E. NA Newsprint Demand and Supply 1. Introduction The demand for newsprint by daily newspapers is derived from the demand for newspapers by readers and advertisers. Demand, as used in this sense, means the demand curve for newsprint and the demand curve for newspapers. If the demand for newspapers declines independent of the price of newsprint, the demand curve for newspapers will shift downward causing the newspaper's derived demand curve for newsprint to also shift downward. Chart E2 below shows the total NA average quarterly demand for newsprint 1999 to 2006. 59 Demand, as used in this sense, means the quantity of newsprint purchased during a quarter. The same is true with respect to Chart E1 below, except that the period over which quantity is purchased is a year. Chart E2 shows that while there were quarters where demand increased from the prior quarter the overall trend is declining in demand. Demand in Q4 2006 was 24.5% lower than demand in Q1 1999. Chart E2 cannot explain the causes of this decline in demand (i.e., quantity purchased); it can only show that demand (i.e., quantity purchased) did generally decline over the 32 quarters. 59 Annual demand equals annual consumption plus the change in inventories held by customers from the prior December. Chart E6 shows quarterly prices for newsprint. Prices declined from the Q1 1999 to Q3 1999, generally increased from Q3 1999 to Q2 2001, declined significantly from Q2 2001 before bottoming out in Q2 and Q3 2002, and generally increasing from Q3 2002 to Q3 2006 before declining somewhat in Q4 2006. Just considering the period from Q3 2005 to Q3 2006 the price of newsprint increased by an aggregate of $222 or 49.0% while demand (quantity purchased) declined by an aggregate of 521,000 metric tonnes or 18.0%. This section, as well as Sections D and F, explores the likely causes of the significant and sustained increase in newsprint prices over the two periods described above while newsprint demand (quantity purchased) was either flat or steadily declining. See Chart 7 below, which combines Chart 2 and Chart 6. In seeking the explanation for the likely causes, we make three main observations:

(1)The decline in demand (quantity purchased) over the period 1999 to 2006 was due primarily by downward shifts in the demand curve for newspapers caused by declining circulation and advertising lineage independent of increases in the price of newsprint. The downward shifts in the demand curve for newspapers caused downward shifts in the derived newsprint demand curve.

(2)Holding the newsprint supply curve constant, downward shifts in the newsprint demand curve would be expected to lead to lower newsprint prices. That has not happened. The steady rise in newsprint prices over the two periods was primarily caused by the strategic and coordinated removals of newsprint capacity from the market by Abitibi and Bowater in response to the downward shifts in the newsprint demand curve, These upward shifts of the supply curve maintained maximum operating rates and increased newsprint prices. Both Abitibi and Bowater pursued the approach of reducing capacity, which was highly successful in achieving a steady increase in the price of newsprint.

(3)It is not plausible that increases in the price of inputs used to manufacture newsprint or the appreciating Canadian dollar are a significant cause of the price increases. The reduction in newsprint capacity by Abitibi and Bowater and its relationship to the maintenance of high operating rates and rising prices was recognized as a strategic move by newsprint producers, newsprint buyers, and newsprint industry analysts, as this passage from The Global Pulp & Paper Fact Book 2006 60 on p. 152 indicates. 60 The Global Pulp & Paper Fact Book 2006 is published by RISI. Even though demand continued to decline during the 2003-2006 period, newsprint producers have steadily raised prices during the past several years. Through a policy of closing mills and either shutting newsprint machines or converting them to added-value grades, newsprint producers have kept supply and demand relatively balanced, and operating rates high enough to support the progression of supply-driven price increases. By third quarter of 2006 the market average stood at $675/tonne with another $20/tonne increase proposed by some producers for August 1 and by others for September 1. The Global Pulp & Paper Fact Book 2006 does not identify any newsprint manufacturers but noted that unnamed newsprint manufacturers had a “ *policy* of closing mills and either shutting newsprint machines or converting them to added-value grades” in order to keep “supply and demand relatively balanced, and operating rates high enough to support the progression of supply-driven price increases.” (Emphasis added) The identification of those newsprint manufacturers will be the subject of Section F. 2. NA Demand (Quantity Purchased) 1999-2006 NA annual newsprint demand (quantity purchased) has fallen 25.5% on an annual basis between 1999 and 2006. See Chart E1 below. 61 In 1999, imports accounted for 3.3% of NA demand. Since 1999, imports have accounted for 2.0% or less of NA purchases. As Chart E1 shows, imports of newsprint into North America have not been a significant source of supply for NA newspaper publishers and other NA purchasers of newsprint. In 2006, imports supplied just 1.5% of NA newsprint consumption. For the first two months of 2007, imports have fallen 56.1% compared to the first two months of 2006. 62 61 Sources: December 2006 and December 2005 PPPC NA Newsprint Statistics-Flash Report (“Flash Report”). and December 2001-2004 PPPC NA Newsprint Statistics Monthly Bulletin (“PPPC Monthly Bulletin”). 62 Source: February 2007 Flash Report. EN10JN08.018 Chart E2 below shows NA demand (quantity purchased) by quarter from Q1 1999 to Q4 2006. Quarterly NA demand (quantity purchased) has decreased from Q4 1999 to Q4 2006 by 28.8% EN10JN08.019 3. Causes of the Decline in NA Newsprint Demand 1999-2006 a. Estimates of the Causes of the Decline in NA Newsprint Demand by the PPPC There are three main causes of the decline in NA newsprint demand over the period 1999-2006:

(a)Declining newspaper circulation;

(b)declining newspaper ad linage; and

(c)newspaper efforts to conserve on the consumption of newsprint. 63 These conservation efforts include reducing the width of newspapers, switching to lighter basis weight paper (i.e., thinner paper), and eliminating certain sections of the newspaper and placing them on the newspaper's Web site (e.g., stock tables and TV listings). 63 In 2006, U.S. daily newspapers accounted for 71.3% ofNA newsprint demand and 80.2% of US. newsprint demand and U.S. newsprint demand accounted for 88.7% of NA newsprint demand. Source: December 2006 Flash Report. In the March 2007 edition of Pulp & Paper Magazine, Bill Moore of Moore & Associates, a recycled paper consulting firm, states that “[t]he decline in newsprint consumption in North America is structural and very little can be done at this point to change the situation.” 64 64 “Another side of the decline of newspapers.” Mr. Moore believes that local governments should put more effort into encouraging citizens in their communities to recycle old newspapers. Mr. Moore described how the decline in newspapers has led to the decline in the production of newsprint. The reasons for this decline in NA newsprint production have been well documented and are related to a series of factors in the decline of newspapers: • Newspaper readership in the U.S. has been steadily declining for a number of years and the downward trend has accelerated in the last few years. • Many newspapers have moved to smaller formats, tighter margins, and also the use of a lower basis weight sheet. • More advertising and classifieds have moved to the web. • Stock pages, and even the classical in-depth reporting that newspapers were known for, have been eliminated from many papers. The recent Wall Street Journal changes resulted in a 15% reduction in the use of newsprint [by that newspaper]! Martine Hamel, head of market research for the PPPC, has estimated the relative size of each of these effects 65 on the consumption of newsprint by U.S. daily newspapers. 66 Slide 17 of the 2005 PPPC Presentation below shows that for the first nine months of 2005 compared to the first nine months of 2004, consumption by U.S. daily newspapers declined 4.9%. Declines in ad linage and circulation accounted for about 63% of the consumption decline and switching to lower basis weight paper (i.e., grammage reduction) accounted for about 31% of the consumption decline. Other (presumably other conservation methods including width reductions) accounted for 6%. 65 See the presentations to the November 2005 and 2006 Joint NPA/NAA Newsprint Conference titled “Review and Forecast of Newsprint Demand and Supply” (“PPPC 2005 and 2006 NPA/NAA Presentations”). NPA is the Newsprint Producers Association. 66 Annual NA demand equals shipments to North America by NA mills plus imports from overseas. Annual newsprint consumption by NA customers equals NA demand minus the change in newsprint inventories from the prior December. In 2006, the change in inventories at U.S. daily newspapers was a decline of 58,000 metric tonnes or 0.8% (absolute) of NA consumption and demand. The PPPC publishes inventory data for U.S. newsprint customers but not Canadian newsprint customers. EN10JN08.020 Slide 8 of the PPPC 2006 NPA/NAA Presentation shows a 7.8% decline in U.S. daily newsprint consumption for the first nine months of 2006 compared to the first nine months of 2005. 67 The decline in ad linage and circulation account for about 55% to 60% of the decline and grammage reduction and other conservation methods such as width reductions account for 40% to 45% of the decline. 67 U.S. daily newspapers accounted for 83.7% of the decline in NA demand between 2005 and 2006. Other US. newsprint customers accounted for 14.1% of the decline and Canadian customers accounted for 23% of the decline. EN10JN08.021 b. Distinguishing Between Shifts in the Newsprint Demand Curve and Movements Along the Newsprint Demand Curve If the newsprint supply curve shifts upward and to the left due, say, to the permanent closure of newsprint capacity, a new equilibrium price and quantity will be established. The new price will be higher than the old price and the new quantity purchased will be lower than the old quantity purchased. This can be described as a movement along the demand curve caused by the shift of the supply curve upward and to the left. The effect of the supply curve shift on equilibrium price and quantity will depend upon the price elasticity of demand. If the demand curve is highly inelastic in the region of the supply curve shift, 68 then price would likely rise significantly and quantity of newsprint purchased would be little reduced from the previous level. If demand were elastic in the region of the supply curve shift, then, compared to an inelastic demand curve, the resulting equilibrium price would be lower and the resulting quantity reduction would be greater. 68 While we have not attempted to estimate the demand elasticity for the NA newsprint market, we note that an article in 2004 reported on an analysis that estimated the elasticity of the U.S. demand for newsprint at 0.36 taking into account structural changes in U.S. demand. See Jari Kuuluvainen, “Structural Change in U.S. Newsprint Demand: GDP and Price Elasticities,” University of Helsinki, Department of Forest Economics, Reports #34, 2004, p. 8. A demand elasticity of 0.36 is in the same range as demand elasticities reported in earlier articles. An article in 1997 reported the demand elasticity in North America at 0.22. Other estimates cited in this article have been about twice as large. Estimates of demand elasticity vary from 0.22 to 044. These estimates all indicate a fairly inelastic demand curve for newsprint. See Ylbing Zhang and Joseph Buongiorno, “Communication Media and Demand for Printing and Publishing Papers in the United States,” Forest Science 43(3) (August) 1997, p. 372. The results of our analysis of the proposed Abitibi-Bowater merger are consistent with an inelastic demand curve. Newspapers, of course, buy newsprint to help meet the demands of their customers, the readers and advertisers. Their demands for newspapers are exogenous to the newspapers' demand for newsprint. That is, their demand for newspapers is shaped by factors completely independent of the market for newsprint. 69 If the demand for newspapers declines because, say, readers and advertisers are moving from newspapers to the Internet, this movement will result in the newspaper demand curve for newsprint shifting downward and to the left. As a result of the shift of the demand curve down the supply curve, both price and quantity purchased will decline. 69 While it is certainly possible that some newspapers have been able to pass some portion of the last four years' of newsprint price increases on to newspaper customers, we are unaware of any such examples. To the extent there are such examples, they are likely to be insignificant in comparison to the aggregate magnitude of the newsprint price increases. When newspapers narrow the width of the page or buy lower basis weight newsprint or move stock tables from the newspaper to their web sites, they are permanently removing newsprint demand from the market. In so doing, they are shifting the demand curve downward and to the left. While the conservation efforts are no doubt largely in response to the four years of newsprint price increases, they do not indicate movements along the demand curve. They indicate shifts in the demand curve. If newsprint prices declined by 10 percent, it is implausible that newspapers would go back to wider webs or start running stock tables in the newspaper again. As long as the relative prices for higher and lower basis weight paper remain approximately the same, as seems likely, newspapers will have no incentive to switch back to higher basis weight paper. The demand removal through conservation efforts is directly analogous to the capacity removal that has been taking place in the NA newsprint market, particularly since 2002. The capacity removals shift the supply curve upward and to the right. The demand removals shift the demand curve downward and to the left. The major difference between the two is that the capacity removals occur more quickly and have a much greater impact on price than the demand removals. The narrowing of the width of newspapers from 50 inches to 48 inches would be the equivalent of a 4 percent reduction in price. The move from 30 lb. newsprint to 27.7 lb. newsprint 70 will only save a newspaper an equivalent of a 2.7% reduction in the price of 30 lb. newsprint. 71 If the price of 30 lb. newsprint were $630 per metric tonne (as it was in February 2007), a 2.7% net savings in newsprint purchases would be equivalent to a $16.94 reduction per metric tonne in the price of 30 lb. newsprint. 70 Basis weight correlates with the thickness of the newsprint sheet. The higher the basis weight, the thicker the newsprint sheet and vice-versa. Most newsprint in North America is sold in two basis weights 30 lb. and 27.7 lb. Many of the largest newspapers and newspaper chains in the U.S. have switched from 30 lb. basis weight to 27.7 lb. basis weight newsprint in the last several years. 71 Holding constant the square footage of printing surface purchased, the move to 27.7 lb. newsprint by the customer will reduce the tonnage needed by 8.5%. However, the newspaper will be paying more per metric tonne for the reduced amount of newsprint. According to Pulp & Paper Week, the February 2007 price of 30 lb. newsprint delivered in the eastern U.S. was $630 per metric tonne and the price of 27.7 lb. newsprint was $670 per metric tonne. At these prices, the cost per tonne purchased will increase by 6.3%. When these two effects are combined, the newspaper will save 2.7% or $16.94. per metric tonne. Whether the newsprint manufacturer will financially benefit from the switch depends on the relationship between the manufacturer's variable costs to produce the lower basis weight paper and the higher basis weight paper. If the manufacturer's variable cost to produce the lower basis weight paper is not too far above the variable cost to product the higher basis weight paper, the profits of the manufacturer could actually increase as a result of the switch. Slide 5 of the 2006 PPPC presentation shows that in 2006, about half of the newsprint shipped by NA mills to NA customers was 27.7 lb. newsprint. That implies that only half of the 2.7% or $16.94 cost savings potentially available to newsprint customers had been realized even though prices had steadily risen over the prior four years. Slide 6 in the same presentation also shows that conservation efforts on the part of newsprint customers take years to accomplish in the aggregate and even then, some and perhaps many customers will never convert. The same general comments can be made with respect to the reduction of page widths to 48 inches from 50 inches. Finally, newsprint buyers have said that the low-hanging fruit has been picked and that the opportunities for cost savings from future efforts to conserve on newsprint are reaching the point of diminishing returns. 4. Projected NA Newsprint Demand 2006-2008 The PPPC forecasts a 5.9% decline in NA newsprint demand in 2007 and an additional 3.3% decline in NA newsprint demand in 2008. 72 See Slide 10 below. 73 72 While Slide 10 forecasts a 4.9% decline in NA demand for 2006, the actual decline was 6.0%. Source: December 2006 PPPC Flash Report. 73 Source: 2006 NPA/NAA Presentation. EN10JN08.022 Assuming the PPPC forecast is reasonably accurate, NA demand will fall by a total of 879,000 metric tonnes over the two-year period. Assuming no change in overseas shipments from NA mills or in imports by NA customers from 2006 levels, NA manufacturers would have to temporarily idle or permanently shut down 1,055,000 metric tonnes of capacity during 2007 and 2008 in order to maintain a 95% industry operating rate. 74 That amount of capacity reduction would represent 8.4% of current NA capacity and 19.1% of the current combined Abitibi-Bowater capacity. 74 The industry operating rate for 1996 was 94% down 2% from a 96% operating rate in 2005 and 2004. Source: December 2005 and 2006 PPPC Flash Reports. 5. Production, Shipments, and Operating Rates of NA Newsprint Mills 1999-2006 Shipments by NA mills to NA customers and overseas customers declined significantly over the period 1999 to 2006. See Chart E3 below. 75 Shipments to NA customers declined by 24.1% and shipments to overseas customers declined by 25.8%. 75 Sources: December 2005 and 2006 PPPC Flash Reports and December 2001-2004 PPPC NA Newsprint Statistics Monthly Bulletin (“PPPC Monthly Bulletin”). EN10JN08.023 As a result of the decline in shipments to NA and overseas customers, NA newsprint production declined by 24.5% between 1999 and 2006. Due to newsprint mill closures, newsprint machine shut downs, and newsprint machine conversions to other grades, NA newsprint capacity has declined by 23.7% during the same period. Chart E4 below shows capacity and production by quarter over the period 1999 to 2006. The chart shows that both capacity and production have declined steadily from the beginning of 2001 through the end of 2006. EN10JN08.024 Chart E5 below shows the quarterly operating rates 76 of NA newsprint mills for the period 1999-2006. After the operating rate reached 97.3% in the third and fourth quarters of 2000, the operating rate dropped slightly to 96.0% in the first quarter of 2001 and then plunged sharply for the rest of 2001 reaching a low of 86.0% in the third quarter of 2001. This plunge corresponds to the widening gap between capacity and production shown in Chart E4 over the same period. The sharp decline in the operating rate was caused by the 18.7% decline in the NA demand for newsprint that occurred between the third quarter of 1999 and the first quarter of 2002. The decline in newsprint demand followed the significant slowing of the U.S. economy that began in the first quarter of 2001 and which was exacerbated by the economic disruption caused by the attacks of September 11, 2001. 77 After the third quarter of 2001, the operating rate increased fairly steadily reaching 96.3% in the first quarter of 2004 and remaining at about 96% for the next two years. The operating rate then mostly declined throughout 2006 falling to 93.0% in the fourth quarter of 2006. 76 The operating rate is production as a percentage of capacity. 77 From the fourth quarter of 2000, the U.S. Real Gross Domestic Product declined for three consecutive quarters before increasing in the fourth quarter of 2001. Source: Economic Report of the President, February 2003, Table B.2—Real Gross Domestic Product 1959-2002, p. 278. EN10JN08.025 6. The Price of Newsprint per Metric Tonne (Eastern U.S., 30 lb.) 1999 to 2006 by Quarter Chart E6 below shows the price of newsprint per metric tonne by quarter for the period 1999 to 2006. 78 The price is the delivered price per metric tonne in the eastern United States for 30 lb. basis weight newsprint. 78 The source for the quarterly prices is RISI. RISI calculates quarterly prices based on monthly prices that appear in the RISI publication Pulp & Paper Week. EN10JN08.026 The price of newsprint increased $145 or 30.2% from the third quarter of 1999 to the second quarter of 2001 before falling by $172 or 27.5% through the second quarter of 2002. As Chart E6 shows, price increased in 5 of the 7 quarters during the period of the price rise. In the other two quarters, price was unchanged. After the bottom was reached in the second and third quarters of 2002, the price of newsprint steadily increased over the next four years from $453 to $675 in the third quarter of 2006. This was an increase of $222 or 49.0%. As Chart E6 shows, price increased in 14 of the 16 quarters over this four-year period. In one quarter, the price was unchanged and in one quarter the price declined by $5. In the fourth quarter of 2006, price decreased slightly to $660. Combining Chart E2 and Chart E6, shows the two sustained price increases from the end of 1999 to the beginning of 2001 and from the end of 2002 to the end of 2006. During the first period demand was more or less flat and during the second period demand was steadily trending downward. See Chart E7 below. EN10JN08.027 F. Evidence From Presentations to Investment Analysts and Other Public Information That Abitibi and Bowater Have Used Their Control Over Newsprint Capacity and the Newsprint Industry Operating Rate To Significantly Raise the Price of Newsprint 2002 to 2006 1. Introduction In Section D above, the significant increase in concentration in the NA newsprint industry between 1995 and 2006 and the significant decrease in newsprint capacity over that same period were analyzed. Due primarily to acquisitions by Abitibi and Bowater between 1995 and 2001, the NA newsprint market was transformed from an unconcentrated market in 1995 to a highly concentrated market in 2000 with Abitibi's acquisition of Donohue in April 2000. Bowater's acquisition of Alliance in 2001 and Norske Skog's acquisition of Pacifica, also in 2001, further increased concentration in an already highly concentrated market. The key to increasing newsprint prices is maintaining high newsprint industry operating rates. Before 1995 no newsprint producer had a market share large enough to cause an increase in the market price. Without the acquisitions of newsprint capacity that they made between 1995 and 2001 (described in Section D above), Abitibi and Bowater could not have profitably pursued a strategy to increase the market price even through coordinated interaction. With the increased capacity under their control, Abitibi and Bowater gained that power and have jointly used it to play the role of a dominant firm. Publicly available information shows that Abitibi and Bowater have acted in a coordinated manner to strategically idle and shut down newsprint capacity sufficient to maintain high industry operating rates and increase the price of newsprint. With the possible exception of Catalyst, 79 the remaining firms in the market have played the role of fringe firms. As fringe firms, they have been generally allowed to operate at full capacity while Abitibi and Bowater determine the amount of their own capacity to idle and shut down as needed to maintain high operating rates for the NA newsprint industry. 79 If there is a West of the Rockies relevant market (as well as an East of the Rockies relevant market), it seems possible that Catalyst has played the role of a dominant finn in that market in much the same way that Abitibi and Bowater have played that role in the NA newsprint market or in an East of the Rockies relevant market should such a market exist. Catalyst's newsprint mills are located entirely within British Columbia. Evidence relating to the possibility of Catalyst acting as a dominant firm in a West of the Rockies market is discussed at the end of Section G.5. Since the end of 2002, Abitibi and Bowater have used their dominant control over NA newsprint capacity to raise operating rates and the price of NA newsprint significantly above competitive levels. Between the third quarter of 2002 and the third quarter of 2006, the price of newsprint has increased by an aggregate of 49.0 percent even though the demand for newsprint declined 16.5 percent over that same period. 80 80 As analyzed in Section E above, the decline in newspaper demand for newsprint was due mostly to downward shifts of the demand curve for NA newsprint and does not indicate a movement up the demand curve in response to upward shifts of the supply curve. John Weaver, the President and CEO of Abitibi, and David Paterson, the President and CEO of Bowater, made separate presentations at the 11th Annual Citigroup Global Paper and Forest Products Conference on December 7, 2006 (“Citigroup Conference”). These presentations are discussed in more detail in Sections F.2. and F.3. below. Weaver emphasized the importance of maintaining a “balance” in the demand and supply of newsprint. Weaver introduced a slide which shows the positive relationship between the level of the newsprint industry operating rate and the percentage change in the list price of newsprint. 81 He said that industry demand and supply had been in “balance” since 2003 and that manufacturers had been able to improve pricing significantly since 2003. He also said that the industry was currently operating at full capacity. 81 The percentage change shown in the slide is the percentage change of a price in a given month from the June 2000 price of newsprint. Paterson of Bowater stated that the “industry” had “responded fairly aggressively” to declines in demand and that Bowater was “taking action” to remove capacity from the market. He described the removal of more than 10% of Bowater's newsprint capacity from the market during 2006. During the Q&A, he said that to maintain cash flow and dividend payments, Bowater needed to stay ahead of the demand curve to maintain an operating rate that would give Bowater “pricing leverage”. He said “I can do that” by shutting down Bowater's high cost assets hopefully before price erosion has set in with any significance. From these remarks, it is clear that that the control of capacity is used by Abitibi and Bowater not only to raise newsprint prices but to prevent prices from falling from current levels. This section discusses information primarily from Abitibi and Bowater presentations to investment analysts. This evidence is consistent with and supportive of our hypothesis that Abitibi and Bowater acted as a joint dominant firm to raise the price of newsprint significantly above competitive levels from the end of 2002 through 2006. Section I below discusses Abitibi's closures of newsprint capacity over the period 1999 to 2001 and the relation of those closures to increases in the operating rate and increases in newsprint prices. This section provides evidence of Abitibi's and Bowater's anticompetitive conduct for the period 2002-2006, based on

(a)John Weaver's presentation at the December 2006 Citigroup Conference (Section F.2.);

(b)David Paterson's presentation at the same Citigroup Conference (Section F.3.);

(c)John Weaver's presentation to the Credit Suisse First Boston investment analysts conference in March 2004 (Section F.4.); and

(d)an interview of John Weaver by paperloop.com in February 2004 (Section F.5.). 2. Presentation by John Weaver, President and CEO of Abitibi, at the Citigroup Conference in December 2006 John Weaver, president and CEO of Abitibi, spoke for about 30 minutes at the December 2006 Citigroup Conference. His presentation consisted of commentary on slides prepared by Abitibi 82 and a follow-up Q&A session with investment analysts. 83 82 The 27 page slide show is titled “Our Story on Paper.” 83 The slide show is available on Abitibi's Web site under Investor Relations/Presentations and Web casts. According to Abitibi's Web site, the audio recording of Weaver's comments at the Citigroup Conference is no longer available on the Web site. Slide 9 of Weaver's presentation shows the relation between the level of the newsprint operating rate and percentage change in the list price of newsprint between July 2000 and September 2006. 84 The list price is expressed as a percentage of the June 2000 list price. List prices are based on RISI data and operating rates are based on PPPC data. See Slide 9 below. This slide with some variations has been presented by Abitibi to investment analyst groups since June 5, 2003. These presentations are archived on the Abitibi Web site. 84 John Weaver's presentation to the June 5, 2003 Scotia Capital Materials Conference appears to be the first presentation where Abitibi provided a slide (Slide 15) showing the relation between the newsprint operating rate and the price of newsprint. See the investment analyst presentations on the Abitibi Web site. As discussed in Section H.3.a. below, Slides 9 and 15 may have been inspired by a similar figure published in an article by a RISI senior economist in *paperloop.com* on February 20, 2003. While there are obvious differences between Slides 9 and 15 and the figure that appeared in the RISI economist's article, the differences are superficial. The fundamental economic relationships that are illustrated in Slide 9 and in the figure in RISI economist's article are identical. EN10JN08.028 Slide 9 and Slide 10, which follow are titled “Industry Supply/Demand Balance.” Slide 9 is sub-titled “Newsprint List Price and Operating Rate.” Slide 9 shows that beginning in September of 2000, price rose about 12% above the June 2000 price by April 2001. As the U.S. economy went into negative growth in 2001, price plunged by 33% (from 12% above the June 2000 price to 21% below the June 2000 price) reaching the bottom in July 2002. Price then rose in a fairly uninterrupted path from 21% below the June 2000 price to 20% above the June 2000 price by September 2006. The operating rate bottomed out at the end of 2001, about 6 months before the bottoming out of price. The operating rate then rose in fits and starts to above 95% by early 2004. Price rose accordingly, lagging the increase in the operating rate by several months. As will be discussed below, Weaver describes a 95% operating rate as a full capacity rate for the industry. Weaver said that demand and supply have more or less been in balance since 2003. 85 He said that manufacturers have been able to improve pricing significantly over this period [as is clearly depicted in Slide 9]. 85 Weaver's remarks on Slides 9 and 10 begin at about 5:31 into the copy of the audio recording that we have provided to DOJ. Weaver said that the industry had been at a 95%+ operating rate for past 2 years and since mill inventories were declining, a 95% operating rate is “for all intents and purposes the full operating rate. 86 We can't really make any more tonnes than we are making now. I am talking about the industry there.” 86 Full operating capacity is usually considered to be 98% of theoretical full capacity. How can 95% be full operating capacity as Weaver stated? Newsprint operating rates are calculated by the PPPC. If Abitibi indefinitely idles a machine in order to maintain the maximum practical industry operating rate, that machine is still counted as available capacity by the PPPC even though the machine has been strategically idled. If the Abitibi newsprint machine remains idled for a long enough period of time the PPPC will eventually remove that capacity from its capacity forecasts and Flash Reports. At the time Weaver spoke to the Citigroup Conference in December 2006, Abitibi and Bowater had each indefinitely idled one newsprint machine. In addition, Stora Enso's newsprint machine had been shut down for almost a year due to labor and energy problems. If the capacity of these three machines were not included in the calculation of industry operating rates, the industry would be operating at 98% of total capacity. The Stora Enso machine was re-started at about the time Weaver was giving his presentation at the December 2006 Citigroup Conference. There is also a distinction between market-related downtime and the strategic idling of capacity. If a relatively small newsprint producer takes market-related downtime, it is because the producer does not have enough orders to keep operating. It is likely that the producer intends to restart the machine as soon as it can book enough orders, perhaps through offers of discounts. With Abitibi and Bowater, the motivation is generally, though not always, different. [Both Abitibi and Bowater have taken market-related downtime since 2002.] Their goal is maximum operating rates. They are using the indefinite idling of capacity as a lever to raise prices. We are unaware of any Abitibi or Bowater indefinitely idled newsprint capacity that has been restarted. The capacity has either been shut down or has remained indefinitely idled. The subject of determining the “real” operating rate as opposed to the PPPC official operating rate is discussed further in Section H.3.c. below. Slide 10 below shows the newsprint industry supply/demand balance from January 2004 through September 2006. EN10JN08.029 Demand (quantity purchased) is defined as NA consumption plus net exports. Referring to Slide 10, Weaver said “month after month production is equal to consumption” and since mill inventories are flat or trending down, “there is no excess capacity in the marketplace today. It [i.e., production] is all being consumed.” 3. Presentation by David Paterson, President and CEO of Bowater, at the Citigroup Conference in December 2006 David Paterson of Bowater, also made a presentation at the Citigroup Conference on December 7, 2006. The format was similar to Weaver's presentation. 87 87 The slide show is available on Bowater's Web site under Investor Relations/Presentations. According to Bowater's Web site, the audio recording of Paterson's comments at the Citigroup Conference is no longer available on the Web site. The note at the bottom of Slide 13 of Paterson's presentation says “Balanced newsprint capacity & demand.” See Slide 13 below. The slide plots the quantity of NA demand and supply over the period 2000 to 2006. The slide shows similar downward slopes over time for both demand and supply. Paterson said “North American demand. That's not the slope you want clearly but the industry has responded fairly aggressively.” 88 He said that “I think that the real challenge is that if that slope continues at the rate it is in the fourth quarter, clearly actions will need to be taken.” He said that Bowater has removed 300,000 metric tonnes of newsprint capacity (or more than 10% of Bowater's total capacity) in 2006 from the NA market. The capacity removals were accomplished by a machine conversion at Bowater's Calhoun, TN mill to uncoated groundwood specialty grades (150,000 metric tonnes) and by a shut down of PM #4 at Bowater's Thunder Bay, ON mill (150,000 metric tonnes). He said that Bowater also took significant downtime on PM #5 at Thunder Bay in the fall. 89 “We are taking action,” he said. 88 Paterson's remarks on Slide 13 begin at about 10:44 of the copy of the audio recording we have provided to DOJ. 89 PM #5 at Thunder Bay was only temporarily idled and has been restarted. PM #4 at Thunder Bay has been indefinitely idle. If it is restarted it is unlikely that it will be producing newsprint according to news reports. EN10JN08.030 During the Q&A that followed the slide show, Paterson was asked about maintaining cash flow and dividend payments. Paterson said that in the near term, newsprint pricing is stable but that any significant decline in prices would cause another round of closures, primarily Canadian assets. 90 Paterson said that Bowater's U.S. mills are more efficient than Bowater's Canadian mills. He said if Bowater just had U.S. mills, the newsprint business would be pretty good at today's prices. But in Canada, due to energy and currency issues, age of equipment and other reasons, “there is not a lot of margin left in the Canadian assets.” 90 Paterson's response to the question on how Bowater will sustain its cash flow begins at about 27:35 of the copy of the audio recording we have provided to DOJ. Paterson said he thinks about near-term cash management as using two tools to sustain cash flow.—“One is newsprint pricing and the ability to manage that and that's critical. I've got two and a half million tonnes [of capacity], so the math is pretty compelling. Every $10 bucks, with a company our size, that's $25 million in revenue that I've got to protect. So that's number one.” Paterson then elaborated on the second tool that Bowater uses to sustain near-term cash flow: “Number two is we have to stay ahead of that curve, that demand curve that you mentioned to sustain cash flow. So my belief [* * *] is that we have to move faster to stay ahead of that [demand] curve to maintain an operating rate that gives us some pricing leverage in the market and I can do that. We know which our high cost assets are and we will shut them down hopefully before rather than after price erosion with any significance. So that's the second tool. Now what does that do? My spread between best and worst assets is quite significant. So without doing anything else, I can lower my total manufacturing costs pretty significantly. I've got to balance that against—you know these assets are generating cash and we need to pay down debt and do other things.” He said that the Bowater Board of Directors is committed to paying dividends and that the board challenges management to generate operating cash flow on a sustainable basis to pay dividends and interest payments. 4. Presentation by John Weaver, President and CEO of Abitibi, at the Credit Suisse First Boston Investment Analysts Conference in March 2004 John Weaver gave a presentation at the Credit Suisse First Boston Credit Global Basics Conference on March 3, 2004 (“Credit Suisse Conference”). Three consecutive slides presented by Weaver relate to the closure of Abitibi's capacity in order to raise industry operating rates and prices. Slide 13 below is an earlier version of Slide 9 that Weaver presented at the December 2006 Citigroup Conference. Slide 13 shows that the price of newsprint lags the NA operating rate by about a quarter. When the operating rate begins to fall, the newsprint price will begin to fall several months later. Similarly, when the operating rate begins to rise, the newsprint price will begin to rise several months later. EN10JN08.031 Slide 14 below shows NA monthly newsprint production, capacity and operating rate from mid-1996 through January 2004. EN10JN08.032 Note that capacity hit a monthly high of 1,378 metric tonnes in 1998. Between 1998 and 2001, capacity declined by about 5%. Abitibi began removing newsprint capacity from the newsprint market in 1999 and announced additional newsprint capacity removals in conjunction with its acquisition of Donohue in April 2000. These capacity closures are discussed in Section I below. Between the end of 2001 and the end of 2003, an additional 7% of capacity, compared to the 1998 peak, was removed from the market. Some of this capacity removal was due to the closure of the Garden State mill at the end of 2001. In addition, several other manufacturers converted small newsprint machines to other groundwood grades as is discussed in Sections D.3. and D.4. above. Slide 14 projects additional capacity reduction in 2004 to bring the total reduction as a percentage of the 1998 peak to 12.8%. Between the 1998 peak through projected 2004, Abitibi and Bowater accounted for almost 80% of the total reduction. Slide 15 below shows that Abitibi removed 977,000 metric tonnes of capacity from the NA newsprint market in 2003. About 43% of the removal was due to temporary rotating downtime (i.e., market related downtime). The remaining 57% of the 2003 capacity removal was due to the indefinite idling of capacity. Abitibi calculated the 2003 industry operating rate at 87%. This calculation excludes Abitibi's indefinitely idled capacity from total NA newsprint capacity (i.e., the denominator of the operating rate calculation). The exclusion of Abitibi's indefinitely idled capacity from total NA capacity indicates that the capacity was withheld from the market for the strategic purpose of raising the industry operating rate and increasing the price of newsprint. EN10JN08.033 Slide 15 also shows Abitibi's projected 2004 capacity removals. In 2004, Abitibi was projected to remove 1,075,000 metric tonnes of newsprint capacity from the NA market. Rotating downtime was not expected to account for any of the capacity removal in 2004. Abitibi projected that it would achieve its capacity removal in 2004 by increasing indefinitely idled capacity by 202,000 metric tonnes, by permanently closing 230,000 metric tonnes of capacity, and by converting 85,000 metric tonnes of capacity to uncoated groundwood specialty grades. Slide 15 also shows projected 2004 NA capacity (excluding indefinitely idled capacity) declining by 498,000 metric tonnes from 2003. Abitibi's projected increase in capacity removal in 2004 accounts for all of the projected reduction in total NA newsprint capacity from 2003. 91 The 2004 industry operating rate was projected to rise from 87% in 2003 to 99% in 2004. This calculation does not include Abitibi's indefinitely idled capacity in NA capacity. Slide 15 illustrates numerically the key role that Abitibi's indefinitely idled capacity played in achieving the projected maximum industry newsprint operating rate in 2004. 91 In fact, Abitibi's projected increase in capacity removals between 2003 and 2004 exceeds the projected decline in industry capacity by 19,000 metric tonnes. 5. Interview of John Weaver Titled “Tighter Supply/Demand Balance Boosts Newsprint Hike Prospects Says Abitibi's Weaver” John Weaver, President and CEO of Abitibi, was interviewed by Will Mies, Editorial Director, Paperloop Information Products. The interview was published on *paperloop.com* on February 11, 2004. The article describes Abitibi's aggressive “focused downtime” strategy. While the term “focused downtime” strategy is not explicitly defined in the article, it clearly means that the newsprint machine or newsprint mill has been indefinitely idled. It should be noted that none of the mills mentioned in the article subject to Abitibi's “focused downtime” strategy in December 2003 have re-opened. The Port-Alfred, QC and Sheldon, TX mills have been permanently closed. The Lufkin, TX mill remains indefinitely idled. Abitibi-Consolidated has been aggressively pursuing a “focused downtime” strategy. On Dec. 14 the company indefinitely idled its Lufkin, Texas, and Port-Alfred, Que., newsprint mills, extended downtime at its Sheldon, Texas, mill and permanently shut two machines at the latter two mills with 230,000 tonnes/yr. of capacity. As a result, the company began the year with one million tonnes of newsprint capacity removed from the market—and this excludes the conversion of the company's Alma, Que., to Equal Offset paper production later this year. Last year the company took 977,000 tonnes of newsprint downtime and 887,000 tonnes in 2002. As used by Abitibi, “focused downtime” or the indefinite idling of capacity means that this capacity has been removed from the market to maintain high newsprint industry operating rates. The capacity would not be restarted if the effect would be to lower the operating rate from its current and, presumably, high level. However, it seems plausible that indefinitely idled capacity would be restarted if there were sufficient increases in newsprint demand that the restart would not adversely affect the industry operating rate. Since demand has been consistently declining in recent years, none of Abitibi's indefinitely idled machines has been restarted. As noted above, most have been permanently closed. “Focused downtime” or the indefinite idling of capacity should not he confused with market related downtime. As discussed in Section F.4 above market related downtime, called “rotating downtime” in Slide 15, was a temporary idling of capacity that would be brought back on line as demand rebounds to expected levels. When asked about Abitibi's pricing goal, “Weaver said that AbitibiConsolidated's goal is to ‘return newsprint prices back to their trend line level’ which would eventually bring prices on standard newsprint up to around $585-595/tonne level.” Weaver was asked if consolidation is working (i.e., Abitibi's acquisitions of Stone-Consolidated and Donohue that occurred in 1997 and 2000). His reply was included in the quote below. *The acquisition of Donohue followed the 1997 merger with Stone-Consolidated; both events were followed by significant capacity shutdowns, downtime and rationalization. Has all of the money spent on the vision of consolidation begun to pay off for shareholders?* “There have been a number of signs that consolidation is working, such as the inventory control we have seen over the past several years and *several supply-driven price increases over the last two years,* ” Weaver said. *“All of the consolidators have taken out significant cost by closing their high cost capacity and reconfiguring their companies,”* 92 he said. But none of the acquiring companies could foresee at the time of their acquisitions that they would have to carry the debt through a three-year economic downcycle, he added. “When the economy recovers, we will see the real returns from consolidation.” (Emphasis added) 92 This statement can only apply to Abitibi, Bowater and Catalyst. G. An Analysis of Permanent Newsprint Capacity Reductions Between 2002 and 2006 1. Introduction Section D.4. above analyzed the permanent capacity reductions that occurred in the NA newsprint industry between 1995 and 2006. The analysis showed that of the firms that

(a)had net capacity reductions between 1995 and 2006 and

(b)remain in the market today, Abitibi and Bowater combined accounted for 83.6% of those permanent capacity reductions. Catalyst accounted for most of the remaining permanent capacity reductions. The analysis in this section focuses on permanent newsprint capacity reductions in North America between 2002 and 2006. As documented in Section E.6., newsprint prices rose an aggregate of 49.0% between the third quarter of 2002 and the third quarter of 2006. Of the newsprint manufacturers that remain in the market today, Abitibi and Bowater combined accounted for 89.4% of the permanent reductions of NA newsprint capacity between the end of 2002 and the end of 2006. Charts G1 to G4 provide an analysis of the NA permanent capacity reductions during this period. 2. Chart G1: Shares of NA Newsprint Capacity by Manufacturer 2002 and 2006 Chart G1 below shows the shares of NA newsprint capacity by manufacturer for 2002 and 2006. 93 At the end of 2002, NA newsprint capacity was 15,555,000 metric tonnes and at the end of 2006, estimated NA newsprint capacity was 12,760,000 metric tonnes. 93 The Sources for Charts G1 to G4 are as follows:

(I)For estimated 2006 NA newsprint capacity, see Tables C1 and C2 in Attachment C.

(2)The sources for 2002 newsprint capacity are as follows:

(a)Abitibi 2002 Annual Report, p. 28;

(b)Bowater 2002 Annual Report, p. 6;

(c)for Catalyst, Katahdin Paper, and Irving Paper, see 2003 capacity shown in PPPC's July 9, 2004 “Update of North American Mechanical Printing Papers Capacity Forecast”;

(d)for total 2002 NA newsprint capacity, see “North American Newsprint Capacity: Results of PPPC's 2003 Capacity Survey,” March 3, 2003. The Abitibi and Bowater annual reports are available on their respective Web sites. The two PPPC capacity surveys are available on the PPPC Web site under Press Releases. EN10JN08.034 Chart G1 shows that the combined Abitibi and Bowater NA capacity share declined from 51.4% to 45.0% between the end of 2002 and the end of 2006 and that Catalyst's share declined by 0.3%. Including Katahdin and Irving, the shares of all other NA newsprint manufacturers increased from 42.8% to 49.6%. 94 Katahdin and Irving converted their newsprint capacity to the production of uncoated groundwood specialty grades in 2005-2006. Excluding Katahdin and Irving, the shares of all other NA newsprint manufacturers increased from 41.0% to 49.6% from the end of 2002 to 2006. 94 At the end of 2006 there were 16 newsprint manufacturers operating in North America. This total includes the Ponderay newsprint mill in which Bowater has a 40% ownership-interest. The category “All Other NA Manufacturers 2006” includes 13 firms. See Tables C1 and C2 in Attachment C for more details. 3. Chart G2: Permanent Reduction of NA Newsprint Capacity by Manufacturer During the Period 2002-2006 Chart G2 below shows the permanent reduction of NA newsprint capacity by manufacturer during the period 2002 to 2006. EN10JN08.035 There were 2,795,000 metric tonnes of capacity permanently removed from the NA newsprint market from the end of 2002 to the end of 2006. Abitibi and Bowater combined accounted for 2,258,000 metric tonnes that were permanently removed 95 and Catalyst accounted for 205,000 metric tonnes. The conversion of the Katahdin and Irving newsprint capacity to uncoated groundwood specialty grades accounted for 270,000 metric tonnes of capacity removal. All other NA newsprint manufacturers accounted for 62,000 metric tonnes of capacity removal. 95 The capacity reduction totals for Abitibi and Bowater do not include the capacity of their newsprint machines that are currently indefinitely idled. Abitibi has two indefinitely idled newsprint machines. One machine (PM 2) is at its indefinitely idled Lufkin, TX mill. It has a capacity of 150,000 metric tonnes and has been idled since December 2003. The other machine (PM 7) is at Abitibi's Grand Falls, NL mill. It has a capacity of 60,000 metric tonnes and has been indefinitely idled since the end of 2005. Bowater's #4 paper machine at its Thunder Bay, ON mill has been indefinitely idled since September 2006. It has a capacity of 146,000 metric tonnes. Tembec's closure of a 35,000 metric tonne capacity newsprint machine at its Kapuskasing, ON mill accounted for more than half of this total. 4. Chart G3: Percentage of Total NA Permanent Newsprint Capacity Reduction by Manufacturer During the Period 2002-2006 Chart G3 below shows the percentage of total NA permanent newsprint capacity reduction by manufacturer during the period 2002 to 2006. EN10JN08.036 The percentage calculations are based on the capacity reduction figures shown above in Chart G3. Combined, Abitibi and Bowater accounted for 80.8% of the permanent capacity removals over this period and Catalyst accounted for 7.3%. Of manufacturers that remain in the market today, Abitibi and Bowater combined account for 89.4% of the total capacity removals and Catalyst accounts for 8.1%. The two manufacturers who converted their newsprint capacity to uncoated groundwood specialty grades accounted for 9.7% of the total permanent capacity reduction. All other NA newsprint manufacturers accounted for 2.2% of the total capacity removals and 2.5% of the capacity removals by the manufacturers that remain in the market today. 5. Chart G4. Permanent Reduction of Newsprint Capacity Over the Period 2002-2006 as a Percentage of Own 2002 NA Capacity by Manufacturer Chart G4 below shows the permanent reduction of NA newsprint capacity over the period 2002 to 2006 as a percentage of each manufacturer's own capacity at the end of 2002. EN10JN08.037 Between the end of 2002 and the end of 2006, NA newsprint capacity was reduced by 18.0%. Through permanent capacity removals, Abitibi reduced its own capacity by 30.7% and Bowater reduced its own capacity by 24.0%. Catalyst also reduced its newsprint capacity by a significant proportion—22.7%. The other 13 newsprint manufacturers that remain in the market today reduced their capacity by a combined 1.0%. Catalyst is the largest newsprint manufacturer West of the Rockies. Catalyst's removal of a significant amount of its own newsprint capacity from the market suggests the possibility of a relevant West of the Rockies newsprint market and a relevant East of the Rockies newsprint market. Norske Skog's acquisition of Pacifica in 2001 may have given it the incentive and ability to shut down capacity to raise the industry operating rate and increase prices in a West of the Rockies market. 96 If there is a West of the Rockies relevant newsprint market, Catalyst may have been playing the same role in a West of the Rockies market as Abitibi and Bowater were playing in an East of the Rockies market (i.e., shut down capacity to raise the industry operating rate and increase prices). All of Abitibi's and Bowater's capacity reductions have occurred in mills located East of the Rockies. Bowater has no mills West of the Rockies and Abitibi has only a limited newsprint manufacturing presence West of the Rockies. 96 See Section D.1. above for more details. The Norske Skog and Pacifica newsprint mills were all located in British Columbia. Norske Skog's Canadian newsprint assets were renamed Norske Canada after the Pacifica acquisition and then renamed Catalyst in 2005. Norske Skog sold its interest in Catalyst in 2006. H. Four Articles by Two Newsprint Industry Experts Describing the AbitibiBowater Strategy to Raise Price by Closing Capacity 1. Introduction Four articles by two newsprint industry experts are cited in this section describing the strategy of Abitibi and Bowater to raise the price of newsprint through the closure of capacity. The first article does not specifically identify Abitibi and Bowater, but the events described can only apply to Abitibi, Bowater and, possibly, Catalyst. The four articles are evidence that the Abitibi-Bowater strategy is well understood throughout the newsprint industry by buyers and sellers alike. The four articles also provide confirmation of our analysis in this White Paper. 2. Article by Harold M. Cody Titled “New Paradigm: Newsprint Demand Falls, Prices Soar.” Harold M. Cody, Contributing Editor to Paper Age, published an article in the May/June 2006 edition of Paper Age titled “New Paradigm: Newsprint Demand Falls, Prices Soar.” The following passage confirms how newsprint industry consolidation has permitted unnamed manufacturers to strategically shut down capacity to raise newsprint prices despite a “steady five year decline in demand.” North American newsprint consumption continued its steady five-year decline last year and newspaper publishers faced similar difficulties. *In early 2006, demand continued to drop at an accelerating rate. But producers continue to fight the fight as evidenced by the almost hard-to-believe fact that prices are now reaching the highest levels in five years in spite of all this* . Continuing the boxing parallel, these prolonged tribulations clearly illustrate just how adept U.S. and Canadian newsprint producers really are at fighting. *They have been able to quickly and decisively cut supply in response to these challenging conditions, masterfully reducing capacity via either shutdowns or conversions to other grades* . *The closure of 3.5 million metric tpy of newsprint capacity since 2001 has kept operating rates for the most part above 95%, fueling the steady increase in prices from a bottom of about $475/mton in 2002 to more than $650/mton or higher on lightweight grades by early 2006. Consolidation has also had an impact, as the top five newsprint producers control nearly 75% of capacity, and maybe even more importantly, the top three hold more than 50%* . (Emphasis added.) Cody notes that, despite the continual decline in newsprint demand, “[t]hey have been able to quickly and decisively cut supply in response to these challenging conditions, masterfully reducing capacity via either shutdowns or conversions to other grades.” Cody does not identify who “they” are, but his description of events can only apply to Abitibi, Bowater, and, possibly, Catalyst. He says that the capacity reductions have “kept operating rates for the most part above 95%, fueling the steady increase in prices.” 3. Three Articles by RISI Senior Economist Andrew Battista Analyzing the Strategy of Abitibi and Bowater to Shut Down Capacity to Maintain High Operating Rates and Increasing Prices a. “Will operating rates climb high enough in 2003 to support rising newsprint prices in the U.S.?” (February 20, 2003) Andrew Battista, senior economist at RISI, published an article 97 in February 2003 titled “Will operating rates climb high enough in 2003 to support rising newsprint prices in the U.S.” This was the first of three articles Battista wrote over a two year period analyzing the unfolding AbitibiBowater strategy to use their control over capacity to raise the price of newsprint. 97 Source: *paperloop.com,* February 20, 2003. RISI is the major NA and global source of data, information, news, and analysis on the pulp, paper, and forest products industries. At the time Battista wrote this article, newsprint prices were just starting to increase after the 28% decline in newsprint prices between the second quarter of 2001 and the second and third quarters of 2002, caused primarily by the U.S. recession that began in late 2000/early 2001 and the economic aftermath of 9/11. Producers finally got the ball moving in the other direction with a $35/tonne rise (of the proposed $50/tonne) last autumn. Newsprint manufacturers hope to capitalize on this momentum and push hard for the next $50/tonne increase announced for March 1. Battista describes the economic relationships between production costs, operating rates and the price of newsprint. There are two predominant drivers of product prices: Production costs and operating rates. Both are highly and positively correlated with newsprint prices through mechanisms that are well understood. When production costs inflate, newsprint profit margins fall. Buyers may balk at paying more for newsprint when ONP [recycled old newspapers] gets more expensive, but as cost pressure mounts, the least competitive mills edge closer to shutdown unless newsprint prices also rise. The closure of a mill will result in higher operating rates. Likewise, a rise in demand usually leads to a tighter market (higher operating rates) in which paper becomes increasingly scarce, and hence, more valuable. Rising costs support higher prices, but do not guarantee them in the short term. We still need to forecast the supply/demand balance in order to get a handle on pricing. Battista provides an analysis of the relationship between operating rates and changes in newsprint prices. When we plot operating rates against the (quarter-to-quarter) percent change in prices (as in Figure 1), we clearly see a high degree of correlation between the two series. 98 98 Note that Slide 9 contained in John Weaver's presentation to the Citigroup Conference in December 7, 2006 is a close variation of Battista's Figure 1. In presentations to investment analyst conferences by John Weaver and Pierre Rougeau, a close variation of the Battista figure is included in all or almost all such presentations beginning with Weaver's presentation to the June 5, 2003 Scotia Capital Materials Conference. The Scotia investment analysts conference was held a little bit more than three months after the Battista article was published. A similar slide is included in the most recent Abitibi presentation on March 20, 2007, which was by Rougeau, who is Abitibi's Senior Vice-President for Corporate Development and CFO. EN10JN08.038 Furthermore, we observe that the goodness of fit in this relationship is best with a one-quarter lag on operating rates. This fact reinforces the hypothesis of a causal relationship; higher operating rates lead to higher prices. In other words, a tight market in the summer tends to yield higher prices in the autumn. But how tight is ``tight”? Closer examination of Figure 1 shows us that sustained operating rates in excess of 95% are typically required to lift newsprint prices. Battista then analyzes the newsprint price increase that had occurred since the market hit bottom in mid-2002 and the prospects for further price increases in 2003 and 2004. Last autumn's increase stands as an exception to that rule [that sustained operating rates in excess of 95% are required to lift newsprint prices]. The oddly timed price hike led publishers to complain that the market fundamentals did not justify an increase and forced producers to argue that they needed a rise just to stay alive. But the massive market downtime taken by producers held inventory levels in check and led to a compromise increase (buyers accepted $35/tonne of the proposed $50/tonne). And although market recovery seems to be on hold during the winter months, with operating rates hovering between 92% and 93%, signs point to a tighter market in 2003. Abitibi-Consolidated Inc. and Bowater Inc. recently announced plans to withdraw 270,000 tonnes of combined capacity at Alma, Que., and Calhoun, Tenn. In addition, ad lineage will likely continue along a gradual growth path and support a steady rise in newsprint demand. These factors should push operating rates above 94% this spring and summer before cresting [at] 95% toward the end of 2003. *Therefore, rising ONP costs and the threat of additional mill shutdowns may spur some positive pricing momentum this spring and once again, a portion of the $50/tonne sought on March 1 may be accepted. Continued market discipline through downtime will support prices a bit by keeping mill inventories low, but downtime does not affect the market as powerfully as the permanent removal of capacity* . North American newsprint producers will struggle to get prices to crest [at] $500/tonne by the fourth quarter of this year because operating rates will struggle to get above the 95% threshold in time to have much impact. No new capacity will come online in North America in 2004, and we forecast newspaper advertising lineage growth to accelerate. Operating rates will likely top 97% for the year next year, and cost pressure probably will not subside. [Emphasis added] b. “Is rising newsprint demand necessary to support higher prices in 2004?” (December 11, 2003) Battista followed up his February 2003 article with an article 99 published in December 2003 titled “Is rising newsprint demand necessary to support higher prices in 2004?” His answer is that capacity closures will be sufficient to cause rising prices. He describes the removal of significant amounts of newsprint capacity from the market. The only capacity closures and conversions he describes are by Abitibi and Bowater. Like Weaver and Paterson in Section F above, Battista describes industry efforts to restore “balance” between supply and demand and forecasts the likelihood of a price increase, as the following excerpt indicates. 99 Source: *paperloop.com,* December 11, 2003. Just yesterday, Abitibi-Consolidated announced its intention to idle, or keep idle, its mills at Sheldon, Lufkin, and Port-Alfred. Over 750,000 metric tonnes per year

(mtpy)will be indefinitely removed from the market. Perhaps more importantly, though, the company will permanently shut down two machines, one in Port-Alfred and one in Sheldon. This latter action will remove 230,000 mtpy from the North American newsprint market, permanently. Furthermore, closures and conversions at Abitibi-Consolidated's mill at Alma and Bowater's mills at Calhoun and Catawba in addition to any market-related downtime taken next year by anyone will further exacerbate the 7-year downward trend in North American newsprint supply. *The point is that producers' efforts to reconcile supply with demand have come a long way toward restoring balance in the market* . A strong rebound in demand next year would undoubtedly spark a sharp rise in newsprint prices, but *as capacity continues to fall, prices could jump even without a recovery in newsprint consumption* . (Emphasis added) The extremely tight market for newsprint in 2000 pushed the average transaction price over $600/tonne by the end of the year. Several successive years of approximately 2% annual gains in demand against virtually flat supply led to extraordinarily high operating rates (near 100%) in the autumn of 2000. However, the turnaround in 2001 proved to be bitterly sharp for newspapers and newsprint manufacturers, alike. In the three years since, flailing newspaper advertising lineage pulled North American newsprint demand down by over 12% or approximately 1.4 million tonnes on an annual basis. Mills struggled and eventually succeeded in matching the declines in demand with permanent closures and downtime. True operating rates (which count temporarily idled capacity as if it were available capacity) stayed below 90% throughout 2003, and we further know that production corresponded with demand during 2002-2003 because producer inventories remained low. This producer discipline had its first impact last summer when it effectively stopped the year-and-a-half long slide in prices, and has since permitted three partially successful increases (thanks also to rising production costs and the Canadian dollar). If we now include Abitibi-Consolidated's latest permanent cuts to the announced list of newsprint capacity withdrawals, we see that the drop in North American newsprint supply over the last three years amounts to nearly 1.3 million mtpy. This reduction nearly matches the aforementioned (1.4 million tonne) drop in domestic demand over the same period. If domestic shipments or exports improve at all next year over the four levels endured during the second half of 2003, the industry operating rate will move to between 93% and 95% for the year. We predict that a moderate rise in both demand and exports will cause the gap between shipments and practical capacity (98% of theoretical capacity) to vanish, just as it did during the tight market of 2000 (see Figure 1). Thus, operating rates could top 97% in late 2004 not adjusting for any ongoing downtime. EN10JN08.039 What then will happen to newsprint prices in 2004? Given that, in all likelihood, the North American operating rate in newsprint will climb above 95% sometime in 2004 perhaps as early as the spring—prices will surely rise. When we plot operating rates against the (quarter-to-quarter) percent change in prices (as in Figure 2), we clearly see a high degree of correlation between the two series. Furthermore, we observe that the goodness-of-fit in this relationship is best with a one-quarter lag on operating rates. This fact reinforces the hypothesis of a causal relationship; higher operating rates lead to higher prices. In other words, a tight market in the summer tends to yield higher prices in the autumn. But how tight is “tight”? EN10JN08.040 Closer examination of Figure 2 shows us that sustained operating rates in excess of 95% are typically required to lift newsprint prices. The half-successful increases since last summer provide a very noteworthy exception, but are attributable to the massive downtime and rising production costs borne by North American newsprint mills over the period. *Therefore, should downtime continue to be taken through 2004 as the true industry operating rate crests 95%, paper will be extremely scarce even though demand may be not much higher than during 2003. The average transaction price for newsprint might not get above $600/tonne next year, but this latest move by Abitibi-Consolidated brings the supply-and-demand balance much closer to where it stood 3 years ago, when newsprint last topped $600/tonne* . (Emphasis added) c. “Newsprint producers must rely on supply reductions to support rising prices” (October 14, 2004) In October 2004, Battista wrote a third article on the use of reductions and downtime of newsprint capacity to raise the price of newsprint. 100 The article was titled “Newsprint producers must rely on supply reductions to support rising prices.” By this time it had become clear to Battista that increases in demand were likely to be anemic at best, and that higher newsprint prices would come about as a result of the manufacturers' “zeal” in further reducing capacity. 100 Source: *paperloop.com,* October 14, 2004. Last year, in the RISI Viewpoint, I wrote that rising newsprint demand would not be necessary to support higher North American newsprint prices in 2004. Over the first eight months of the year, U.S. demand is off 0.8%, and Canadian demand is down 2.0% from 2003. And yet, average prices climbed $30/tonne higher this spring and are in the midst of another bitterly fought $50/tonne hike that could take them above $575/tonne before the end of the year. After three consecutive years of declines in newsprint demand, seasonally adjusted U.S. consumption among all users is finally showing marginal improvement on a quarterly basis. The year-over-year figures will probably show some growth in the current quarter if only because the market during 4Q03 was so weak. And even though we expect to see solid, 3%, expansion in North American GDP in 2005, print advertising and newspaper circulation will likely continue to underperform and, at best, yield a meager 0.8% gain in domestic newsprint consumption. Nevertheless, we foresee U.S. newsprint prices climbing above $600/tonne in 2005 owing to producers' ongoing zeal to match the declining market with supply reductions. Battista then discusses the removal of idled Abitibi and Bowater newsprint capacity from the official PPPC total. His discussion illustrates why it is misleading to rely on official PPPC capacity numbers to calculate operating rates. Based on these misleading capacity numbers, the official PPPC newsprint operating rate was 92%. In reality, the “real” operating rates were 98% to 99% which explains the sustained rise in newsprint prices from the end of 2002 through the time the article was written. According to Battista, the capacity the PPPC had removed from its official total a few weeks before his article was published raised the official operating rate to over 95% but still below the “real” operating rate of 98% to 99%. Battista anticipated that the PPPC would remove additional capacity from the official total in the first quarter of 2005, which would then align the official operating rate with the “true” operating rate. Note that with one minor exception, 101 Abitibi and Bowater account for all of the capacity removals in 2004 and 2005 that are discussed by Battista. 101 Tembec closed paper machine #1 at its Kapuskasing, ON mill. The machine had a newsprint capacity of 35,000 metric tonnes. Several weeks ago, the PPPC officially removed some idled capacity that had been inoperative for more than one year: Bowater's PM3 at Thunder Bay, and Abitibi's PM5 and PM7 at Sheldon. The move suddenly took 480,000 tpy from the North American capacity base and lifted operating rates by more than 3% to over 95%. Furthermore, over the next two to three months, several more idled machines will have to come out of the official numbers. Abitibi's remaining machines at La Baie (Port Alfred) and PM2 at Lufkin were officially idled last December and account for approximately 430,000 tonnes of annual capacity. Also, accounting for Tembec's idled PM1 at Kapuskasing will pull an additional 35,000 tpy in early 2005. The supply reductions in 2005 could run deeper still. Abitibi may soon announce the conversion of yet another newsprint machine to Alternative Offset/Equal Offset. The company has high expectations for this growing market. Such a conversion would probably be in addition to possible permanent closures at Sheldon and La Baie. (The PPPC reporting change temporarily removes those machines from the books, but Abitibi is rumored to be considering permanent shutdowns at these sites.) Bowater is also expected to make aggressive moves out of newsprint in the year ahead, although no details have yet been made public. The forthcoming PPPC cuts will effectively boost the North American newsprint operating rate to 98%-99% in the first quarter of 2005. If another machine or two were to stop manufacturing newsprint, the market would be as tight as the white-hot market in 2000 and paper would be extremely hard to find. Prices next year will almost certainly rise even if demand fails to show any improvement at all. Battista next discusses, as he did in his two previous articles, the relation between operating rates and price changes and he forecasts high operating rates for 2005. Also, as he did before, he includes a figure plotting NA newsprint operating rates against changes in price with one adjustment. In the figure below, Battista adjusts the operating rate for “downtime,” presumably to reflect the “true” operating rate rather than the PPPC official operating rate. The comparable figure that was included in his December 2003 article above reflects the PPPC official operating rate. The figure shows the PPPC official operating rate bottoming out at 84% at the end of 2001 and then rising to about 90% by the third quarter of 2002 before leveling out at or slightly below 90% through the third quarter of 2003. The figure below, which adjusts for downtime, shows the “real” operating rate bottoming out at perhaps 89% at the end of 2001 and then rising very quickly to above 95% by mid-2002 and generally remaining at that level or above through the third quarter of 2004. 102 102 The figure shows a dip in the “real” operating rate below 95% to 94% in the second quarter of 2004 before returning above 95% in the third quarter of 2004. Slide 15 discussed in Section F.4. above shows that Abitibi believed that the “true” operating rate was 87% in 2003 but that it would rise to 99% in 2004 due almost entirely to additional capacity removals by Abitibi. Historically speaking, when the North American operating rate climbs above 95% for two or more consecutive quarters, prices rise. This relationship exhibits a very tight correlation and makes good intuitive sense as well. Newsprint prices inflate when either demand jumps or supply falls such that the market is tighter than average. As noted above, the current operating rate is slightly higher than 95%, which means—in conjunction with rising ONP costs and a strong Canadian dollar—the current price increase ought to be moderately successful. Indeed, despite the fact that some suppliers have opted to delay implementation to October 1, other mills tell us that their order books are full through the balance of 2004. *Looking ahead, to 2005, it seems highly unlikely that operating rates will dip below 95%. The tiny projected gains in demand may fail to materialize, but falling capacity will lift the newsprint industry's utilization rate.* Moreover, ongoing ONP inflation and persistent appreciation of the Canadian dollar will further induce producers to push for higher newsprint prices next year. The rise of the loonie, since the end of 2002, effectively wiped out all of the newsprint pricing gains for Canadian mills, and we expect the Canadian dollar to appreciate further over the next several months. Because of all of these factors, average pricing will consequently crest the $600/tonne threshold by next spring, and could get a second boost in the autumn. *The size of a second increase in 2005 and the ease of its acceptance, of course, will depend on:

(1)Whether leading producers shutter more capacity, and

(2)demand not evaporating as it did in 2001.* (Emphasis added) EN10JN08.041 I. Abitibi's Newsprint Capacity Closures 1999 to 2001 This section briefly reviews Abitibi's newsprint capacity closures between 1999 and 2001 and their likely impact on newsprint operating rates and prices. 103 103 On behalf of the NAA and U.S. daily newspaper publishers, Economists Incorporated submitted to DOJ analyses of the likely competitive effects of the proposed acquisition of Donohue by Abitibi in 2000 and the proposed acquisition of Alliance by Bowater in 2001. Those analyses are still relevant to an understanding of the competitive conditions in the newsprint industry at that time as well as an understanding of the likely competitive effects of the currently proposed Abitibi-Bowater merger. There were two submissions to DOJ concerning the proposed acquisition of Donohue by Bowater. They are dated March 1, 2000 and March 31, 2000. The submission to DOJ concerning the proposed acquisition of Alliance by Bowater is dated May 7, 2001. According to the Abitibi 1999 Annual Report (p. 6), Abitibi removed 450,000 metric tonnes of newsprint capacity from the market in 1999 almost 3% of NA capacity. “We want to fully implement our capacity rationalization program in 1999, and together with the planned newsprint conversion next year, you'll see us close or convert 350,000 tonnes ”—John Weaver, 1998 Annual Report In fact, Abitibi-Consolidated permanently removed 450,000 tonnes of excess newsprint capacity in 1999, or nearly 3% of NorthAmerican capacity. We will continue to be a results-driven Company that benchmarks objectives and accomplishes them. According to the Abitibi 2000 Annual Report, (p. 23), Abitibi announced in conjunction with its acquisition of Donohue in April 2000 that Abitibi would remove an additional 400,000 metric tonnes of newsprint capacity from the market during 2000 and 2001. High-cost newsprint capacity rationalization program. In conjunction with the acquisition of Donohue, the Company announced its intention to permanently remove 400,000 tonnes of high-cost newsprint capacity. As part of this program, the Company shut down its 130,000 tornne West Tacoma newsprint mill, located in Steilacoom, Washington, in December 2000. One paper machine with an annual capacity of 70,000 tonnes was shut down at the Lufkin, Texas mill, on November 1st, 2000 as part of the modernization program of the mill. At the end of December 2000, the Company shut down a value-added paper machine with an annual capacity of 45,000 tonnes at the Ke nogami, Que bec mill. The value-added groundwood paper grades produced on these machines will replace newsprint production at other mills. Abitibi closed 200,000 metric tonnes of newsprint capacity in 2000 and 200,000 metric tonnes in 2001 for a total removal of 850,000 metric tonnes of newsprint capacity over the three year period or about 5% of NA newsprint capacity that existed at the beginning of 1999. Abitibi's removal of 450,000 metric tonnes of newsprint capacity in 1999 raised the industry operating rate by almost 3%. In Section E.6., we noted that newsprint prices increased $145 or 30.2% between the third quarter of 1999 and the second quarter of 2001. As Chart E5 in Section E shows, the operating rate increased from 93.0% in the second quarter of 1999 to 97.7% in the fourth quarter of 1999, and, except for one quarter, remained above 97% through the end of 2000. Without the newsprint capacity removals of Abitibi during 1999, the industry operating rate would have been at 95% or somewhat below during the period 4Q 1999 to 2Q 2001. While prices may still have increased at these lower operating rates, the magnitude of the price increases would likely have been significantly lower than what actually occurred. The “Pulp & Paper North American 2000 Factbook,” p. 194, summarizes the effect of Abitibi's capacity closures on the three $50 per metric tonne price increases that occurred between September 1999 and September 2000. The Factbook does not identify any other manufacturers that closed capacity from the market during this period. Adding to market tightness and lending support to the price increases was Abitibi-Consolidated's vow to remove 400,000 mtons of newsprint from the North American market by 2001. In July 2000, Abitibi announced the closure of its 130,000 mtpy West Tacoma, Wash., newsprint mill at year-end. The company had already idled the No. 2 paper machine at the mill in 1999. Also in 1999, Abitibi idled the No. 7 paper machine at Iroquois Falls, Ont. (24,000 mtpy of newsprint). In addition, Abitibi idled and then subsequently sold its 125,000 mtpy Chandler, Que., mill with the condition that the new owners not produce newsprint. The Factbook excerpt above notes that Abitibi's Chandler, QC newsprint mill was sold with the condition that the new owners not make newsprint. Abitibi closed the Chandler mill in 1999 and sold it in 2000. The condition that the Chandler mill not be used by the new owners to produce newsprint suggests that the mill's variable costs for producing newsprint were below prevailing newsprint prices at the time and that it would have been profitable for the new owners to use the mill to produce newsprint. J. A Comparison of Newsprint Prices With the Prices of Uncoated Groundwood Specialty Grades 3Q 1999 to 4Q 2006 1. Introduction In Section B above we described the similarities and differences between newsprint and uncoated groundwood specialty grades. The higher value uncoated groundwood grades generally are brighter than newsprint (i.e., the fibers in the pulp furnish have been subjected to more bleach) or glossier (i.e., clay is added to the pulp furnish). While newsprint is the lowest-quality and lowest value groundwood grade, the main inputs used to produce newsprint and uncoated groundwood specialty grades, in particular energy and fiber, are the same. Rises in common input costs should have a very similar impact on both NA newsprint mills and NA mills that produce uncoated groundwood specialty grades, other things being equal. In Section J.2. below we explain why the impact of the increase in input prices over the past several years has been greater on Canadian mills than U.S. mills. In addition, the appreciation of the Canadian dollar to the U.S. dollar has also adversely affected Canadian mills compared to U.S. mills. We explain why these twin effects fall more heavily on NA manufacturers of uncoated groundwood paper in the aggregate than on NA manufacturers of newsprint in the aggregate. In Section J.3. we compare the quarterly price of newsprint from the third quarter of 1999 to the second quarter of 2006 with the quarterly prices of four uncoated groundwood specialty grades. We find that the quarterly prices for newsprint as a percentage of its quarterly price in 3Q 1999 were significantly higher than the quarterly prices for three of the four uncoated groundwood specialty grades over the period 4Q 1999 to 2Q 2006. Based on these results, it is implausible that the increases in newsprint prices were caused by the increases in input prices. We find that the price trend of one uncoated groundwood specialty grade was similar to that of newsprint. It appears that Abitibi and Bowater are the dominant providers of that grade as well. Section J.4. presents evidence that Abitibi's variable costs have been relatively constant since 2001. Since nearly all of the newsprint price increases over the period 2002 to 2006 were led by Abitibi, it seems unlikely that increases in Abitibi's input costs are a plausible justification for the price increases. In Section J.5. we calculate quarterly newsprint revenues over the period 3Q 1999 to 2Q 2006 based on actual NA newsprint demand and actual newsprint prices. We then apply the quarter to quarter percentage price changes for each of the four uncoated groundwood specialty grades to the 3Q 1999 newsprint price and multiply the resulting adjusted newsprint prices by actual NA demand. For the three grades with percentage changes in prices significantly below the percentage changes in newsprint prices, total revenues over the period are reduced by $4.7 billion to $7.4 billion. 2. The Adverse Impact of the Increases in Input Prices and the Appreciation of the Canadian Dollar Has Fallen More Heavily on Producers of Uncoated Groundwood Specialty Grades Than on Producers of Newsprint Both newsprint producers and producers of uncoated groundwood specialty grades have been subjected to increasing costs of inputs in recent years. The inputs that have increased in cost include fiber (both wood and recycled), energy and transportation. Advantages that Canadian mills once enjoyed in lower energy and fiber costs have been reversed. 104 Canadian mills are now at a cost disadvantage. 104 Source: “Global Pulp & Paper Fact & Price Book 2006,” pp. 149-152, which is published by RISI. (“RISI Fact & Price Book”). While the discussion of the increasing costs and declining fortunes faced by Canadian newsprint mills is in the newsprint section of the RISI publication, the discussion clearly would also apply to Canadian mills that produce uncoated groundwood specialty grades. At the December 2006 Citigroup Conference, David Paterson of Bowater stated that Bowater's U.S. mills (which are all in the southeastern U.S. with the exception of the Ponderay mill in Washington) were more efficient than Bowater's Canadian mills (which are all in Eastern Canada). He said that due to energy and currency issues (discussed immediately below), the age of the equipment and other reasons, there is not much margin left at Bowater's Canadian newsprint mills. He also said that if Bowater had only U.S. mills, the Bowater's newsprint business would be pretty good at “today's” prices. 105 105 Source: Audio recording of Paterson's comments at the December 2006 Citigroup Conference, starting at about 27:35. We have provided a copy of this audio recording to DOJ. The recording is no longer available on the Abitibi Web site. In addition to increases in the cost of inputs, Canadian mills have been adversely affected by a significant increase in the value of the Canadian dollar relative to the U.S. dollar. 106 For a given price increase, U.S. mills will benefit more than Canadian mills if the value of the Canadian dollar is rising relative to the U.S. dollar. The combined effects of the input cost increases and the increasing value of the Canadian dollar have reduced the profitability of Canadian mills relative to U.S. mills. 106 Newsprint is priced in U.S. dollars per metric tonne but the costs to the Canadian mill of producing a metric tonne of newsprint are denominated in Canadian dollars. If the value of the Canadian dollar increases relative to the U.S. dollar, the Canadian mill will receive fewer Canadian dollars from the sale of a metric tonne of newsprint to a U.S. customer when the U.S. dollars from the sale are converted to Canadian dollars. A greater percentage of NA uncoated groundwood capacity is in Canada compared to the percentage of NA newsprint capacity in Canada. 107 In addition, Canadian uncoated groundwood specialty mills ship a greater percentage of their output to U.S. customers than the percentage of output that Canadian newsprint mills ship to U.S. customers. 108 As a result, the impact of increases in input costs and the appreciating Canadian dollar should fall more heavily on NA uncoated groundwood specialty manufacturers in the aggregate than on NA newsprint manufacturers in the aggregate. 109 107 In 2005, 71.9% of uncoated groundwood specialty grade capacity was in Canada and 28.1% was in the U.S. By comparison, 61.4% of NA newsprint capacity was in Canada and 38.6% was in the U.S. Source: RISI Fact & Price Book, pp. 147, 148, and 164. 108 In 2005, Canadian manufacturers of uncoated groundwood specialty grades shipped 76.6% of their output to U.S. customers. In contrast, Canadian newsprint mills shipped 61.2% of their output to U.S. customers. Source: RISI Fact & Price Book, pp. 142, 149, and 164. 109 About 65.3% of Abitibi's NA newsprint capacity is in Canada and about 57.1% of Bowater's NA newsprint capacity is in Canada. For Abitibi and Bowater combined, 62.1% of their NA newsprint capacity is in Canada. See Table C1 in Attachment C. The increase in costs at their Canadian newsprint mills implied by the appreciation of the Canadian dollar is partially offset by the implied corresponding decrease in costs at the U.S. newsprint mills of Abitibi and Bowater. After Abitibi and Bowater, the next two largest newsprint manufacturers in NA in terms of capacity are White Birch and Kruger. See Table C2 in Attachment C. As can be determined from Table C1, 79.6% of White Birch's capacity is in Canada and 100.0% of Kruger's capacity is in Canada. The appreciation of the Canadian dollar has adversely affected White Birch's and Kruger's manufacturing costs more than it has Abitibi's or Bowater's manufacturing costs. 3. Comparing Quarterly Prices for Newsprint and Uncoated Groundwood Grades From 3Q 1999 Though 4Q 2006 There are two reasons to assume that price increases over the period should be greater for uncoated groundwood specialty grades than for newsprint over the period 3Q 1999 to 4Q 2006. First, the growth rate in consumption over this period has been positive for uncoated groundwood specialty grades in the aggregate, while the growth rate in consumption has been negative for newsprint. Between 1999 and 2006, total NA uncoated groundwood specialty grade consumption grew at a compound average growth rate of 3.1% per year. Over that same period, the compound average growth rate of NA newsprint consumption was a negative 4.0%. 110 Positive growth rates in consumption are usually associated with rising prices and negative growth rates in consumption are usually associated with falling prices. 111 110 Source: RISI Fact & Price Book, p. 142 and p. 169. The RISI Fact & Price Book does not provide annual consumption data by uncoated groundwood specialty grade. 111 The 3Q 1999 price per metric tonne for each grade was as follows: newsprint = $480; Directory (22.1 lb.) = $733; Hi-Brite 65 (35 lb.) = $621; SCA (35 lb.) = $717; SCB (35 lb.) = $623. Source: RISI Fact and Price Book, p. 150 and p. 167. Second, as described in Section J.2. above, the rise in input costs and the appreciation in the Canadian dollar relative to the U.S. dollar have fallen more heavily on NA producers of uncoated groundwood specialty grades in the aggregate than on NA newsprint manufacturers in the aggregate. Chart J1 below reflects the quarterly average price of newsprint and four uncoated specialty grades over the period 3Q 1999 to 2Q 2006. 112 The prices for each grade are expressed as a percentage of that grade's price for 3Q 1999. Three $50 per metric tonne price increases were implemented from September 1999 to September 2001. 113 3Q 1999 was selected for the initial date of the analysis shown in Chart J1, because that was the quarter when the initial $50 price increase was announced. As was described in Section I above, Abitibi began closing capacity in 1999. The “Pulp & Paper North American 2000 Factbook,” p. 194. cited Abitibi's past closures and announced future closures as “[a]dding to market tightness and lending support to the price increases.”. 112 Source: RISI Fact and Price Book, p. 150 and p. 167 and Pulp & Paper Week. Except for newsprint, the prices are the average of the high and low prices for each quarter. The uncoated groundwood specialty grades were priced in short tons. These prices were converted to price per metric ton by multiplying by the ratio of the number of pounds in a metric tonne to the number of pounds in a short ton (2205/2000). The price for Directory paper is a spot price. About 80% to 90% of Directory paper is sold under one- to three-year contracts to RBOCs and independent directory publishers. 113 Source: “Pulp & Paper North American 2000 Factbook,” p. 194. EN10JN08.042 Chart J1 shows in a broad sense similar price movements for newsprint and the four uncoated specialty grades. For each of these grades, price rose from 3Q 1999 to 2001, followed by a rapid decline as the U.S. recession set in. Prices bottomed out in 2002 or so and began to climb until Q2 2006. However, the magnitudes and rates of the price movements are quite different for the five grades. The prices of both newsprint and Hi-Brites (brightness level = 65) rose significantly more than the other three grades between 3Q 1999 and 2001 and between bottoming out in 2002 and 4Q 2006. Chart J1 shows prices increasing within a quarter or two of bottoming out for these two grades. The price of both grades rose steadily from the bottom. The newsprint price rose to 39% above its 3Q 1999 price by 4Q 2006 and the Hi-Brite price rose to 36% above its 3Q 1999 price by 3Q 2005 before declining somewhat to 32% by 4Q 2006. In terms of dollars per metric tonne, the newsprint price in 4Q 2006 was $185 above its 3Q 1999 price and the Hi-Brite price was $196 above its 3Q 1999 price. The Directory, SCA and SCB grades had much smaller price increases in the run-up to 2001 and, after the decline to 2002, the recovery in prices took much longer to occur than for newsprint and the Hi-Brite grade. The bottoms for the SCA and SCB prices were much deeper as a percentage of their 3Q 1999 prices than was the case for the bottoms for newsprint and Hi-Brite prices. The prices for the SCA and SCB grades also stayed at their bottoms for a much longer period of time than was the case for the prices for newsprint and the Hi-Brite grade. By 4Q 2006, the SCA price was 1.3% below its 3Q 1999 price and the SCB price was 3.1% above its 3Q 1999 price. In terms of dollars per metric tonne, the SCA price in 4Q 2006 was $11 below its 3Q 1999 price and the SCB price was $24 above its 3Q 1999 price. The price of Directory paper as a percentage of its 3Q 1999 price did not fall nearly as deeply as did the SCA and SCB prices and it recovered more quickly. By 4Q 2006, the Directory paper price was 7.8% or $61 above its 3Q 1999 price. Why should 4Q 2006 prices for newsprint and Hi-Brites be so much higher than their 3Q 1999 prices both in percentage terms and as an absolute change in price compared to SCA, SCB, and Directory paper prices? One possible answer is that not only are Abitibi and Bowater dominant in newsprint, they are also dominant in Hi-Brites. During our interviews with newspaper newsprint buyers, we learned that there was also concern that the proposed Abitibi-Bowater merger could lead to higher Hi-Brite prices and Super Hi-Brite prices. 114 In addition to newsprint, these buyers also purchase these two uncoated groundwood specialty grades. We were told that Abitibi and Bowater are the only suppliers of Hi-Brite and Super Hi-Brite grades East of the Rockies. We were also told by the buyers that they were unaware of any European suppliers of Hi-Brites or Super Hi-Brites. 114 The RISI Fact & Price Book does not provide a price series for Super-Brites. Our analysis of uncoated groundwood specialty grades in Attachment B confirms the statements of the newspaper newsprint buyers cited above regarding the availability of Hi-Brite and Super Hi-Brite suppliers. See Tables B5 and B6 in Attachment B. Besides Abitibi and Bowater, the only suppliers of Hi-Brites and Super Hi-Brites in NA that we were able to identify 115 were Catalyst, North Pacific, and Blue Heron, all of whose mills are located West of the Rockies. 116 In an NA relevant geographic market, Abitibi and Bowater would have a combined share of 76.5% of capacity based on our analysis. In an East of the Rockies relevant geographic market, Abitibi and Bowater would have a combined share of 100.0% of capacity. 115 Because information on producers of specific uncoated groundwood specialty grades is often sketchy, our analysis should be regarded as a first approximation. 116 Neither Abitibi nor Bowater produce Hi-Brite and Super Hi-Brite grades at mills located West of the Rockies. The price comparisons shown in Chart J1 are not consistent with a hypothesis that newsprint price increases observed over the past four years are due to the rising costs of inputs. If the newsprint price increases were caused by input cost increases, we should at a minimum see similar price increases for newsprint and the four uncoated groundwood specialty grades. As argued above, the price increases should, in fact, be greater for uncoated groundwood specialty grades than for newsprint since the impact of the cost increases falls more heavily on uncoated groundwood specialty producers in the aggregate than it does on newsprint producers in the aggregate. In addition, the price increases should be greater for the uncoated groundwood specialty grades because of the steady demand growth for the specialty grades in contrast to the steady demand decline for newsprint. The price comparisons shown in Chart J1 are consistent with the hypothesis that Abitibi and Bowater have jointly exercised significant market power in the NA newsprint market. The price comparisons shown in Chart J1, the observations of newspaper newsprint buyers cited above, and our own confirming analysis strongly suggest that Abitibi and Bowater have also jointly exercised significant market power in the sale of Hi-Brite paper to NA customers. The newspaper newsprint buyers we talked to also noted that the price increase of newsprint and the price increases of Hi-Brites and Super Hi-Brites tend to track each other. As Chart J1 shows, that is certainly the case with respect to price increases of Hi-Brites and newsprint and, as argued above, it is likely due to Abitibi's and Bowater's joint exercise of market power in the newsprint market and in the sale of Hi-Brites. 4. Abitibi's Variable Costs To Produce Newsprint and Uncoated Groundwood Specialty Grades Have Been Relatively Constant for the Period 2001-2005 While there have been cost increases in inputs used to make newsprint and uncoated groundwood specialty grades in recent years, Abitibi has been able to implement cost-saving measures to maintain relatively constant variable costs of producing these grades over the period 2001 to 2005. See Slide 25 below from the December 2006 Citigroup Conference presentation of Abitibi's John Weaver. The slide shows the cost of goods sold (or variable costs) for uncoated groundwood specialty grades (called commercial printing papers or CPP by Abitibi), newsprint and wood products. The slide shows variable costs (in Canadian $) actually declining slightly for both newsprint and uncoated groundwood paper specialty grades from 2001 to 2005. 117 117 Slide 25 shows that Abitibi's variable cost to produce newsprint in 2005 was C$523. It was also C$523 in 2006. Source: presentation by Pierre Rogeau, Abitibi Senior VP for Corporate Development and CFO, at the Goldman Sachs Conference, 3/20/07, Slide 24. In the audio recording of Weaver's comments on Slide 25, he said that despite the Canadian dollar and all the increase in input costs such as energy and fiber, “You can see for the last 5 years Abitibi has basically managed to keep our costs relatively flat through all these escalating input costs. So I think this shows the focus of the company on cost reduction.” 118 118 These comments begin at about 17:30 of the audio recording of Weaver's presentation, a copy of which we have provided to DOJ. The audio recording of Weaver's presentation and the 2006 Citigroup conference is no longer available on Abitibi's Web site. The slide show, however, is still available. EN10JN08.043 Since all or nearly all of the newsprint price increases over the period 2002 to 2006 were led by Abitibi, it seems unlikely that increases in Abitibi's input costs are a plausible justification for the price increases. 5. Applying the Percentage Price Changes for the Uncoated Groundwood Specialty Grades to the 3Q 1999 Price of Newsprint to Determine the Effect on Newsprint Revenues from Sales to NA Customers We applied the percentage price changes calculated for the four uncoated groundwood specialty grades shown in Table J1 to the 3Q 1999 newsprint price ($480 per metric tonne) to generate four series of adjusted newsprint prices. Next we multiplied the actual newsprint price series and the four adjusted newsprint price series by quarterly NA demand (quantity purchased) shown in Chart E2. Finally, we summed over the 30 quarters to derive total revenues based on the five newsprint price series. The results are shown below. Table J1.—Total Newsprint Revenues Over the Period 3Q 1999 to 2Q 2006 Based on Quarterly Demand and Five Quarterly Newsprint Price Series [In billions of dollars] Actual newsprint price (30 lb) Actual newsprint price adjusted by directory (22.1 lb) price % change Actual newsprint price adjusted by hi-brite 65 (35 lb) price % change Actual newsprint price adjusted by SCA (35 lb) price % change Actual newsprint price adjusted by SCB (35 lb) price % change Total Revenues Based on Actual and Adjusted Newsprint Prices $44.1 $39.4 $44.4 $36.6 $37.5 Total Revenues Based on Actual Newsprint Prices Minus Total Revenues Based on Adjusted Newsprint Prices 0.0 4.7 (0.3) 7.5 6.6 Table J1 is broadly suggestive of the scope of overcharges to NA newsprint customers due to the behavior of Abitibi and Bowater over the period 3Q 1999 to 4Q 2006. In this context, it must be noted that we have done no analysis of the demand and supply conditions for the Directory, SCA, and SCB grades to ensure they are good “but for” world candidates. Nor have we done any analysis to determine the appropriate methodology to determine overcharges to NA newsprint customers. With this caveat and assuming that the price changes for Directory, SCA, and SCB paper over the period 3Q 1999 to 4Q 2006 represent a range of appropriate “but for” worlds and the methodology used to calculate the results in Table J1 is appropriate, overcharges to NA newsprint customers over the period 3Q 1999 to 4Q 2006 totaled in the range of $4.7 billion to $7.5 billion due to the anticompetitive behavior of Abitibi and Bowater. K. Dominant Firm Model The preceding sections, especially Sections F through J, have provided evidence that Abitibi and Bowater have acted to decrease newsprint output and increase the price of newsprint over the past four years. Their behavior can be interpreted as two firms acting together like a dominant firm. This section discusses a simple model of dominant firm behavior adapted to the newsprint industry. A more detailed description of this model can be found in Attachment 4. The model allows us to address two questions: • In theory, how could Abitibi and Bowater, acting together or as a merged entity, profitably raise price? • Do the current conditions in the newsprint industry suggest that Abitibi and Bowater actually have the ability profitably to raise price further? The model assumes that the industry is composed of a dominant firm (or firms) with a significant market share. The rest of the industry is made up of a large number of smaller firms, none of which is large enough to affect significantly the market price on its own. All firms produce the same undifferentiated product. Each firm is assumed to have a well-defined “full capacity” output level which cannot be exceeded at reasonable cost within the relevant time frame. It is further assumed that imports are unlikely to increase significantly from current low levels. These assumptions provide a reasonably accurate, if somewhat simplified, representation of the North American newsprint industry today. 119 119 The model makes the simplifying assumptions that a firm cannot expand its capacity and that imports do not increase. It may be more accurate to say that the supply response of capacity-constrained fringe firms and foreign producers is believed to be very small for small to moderate price increases. Relaxing the model's strict assumptions slightly does not change the general conclusions of the discussion. The effects of relaxing assumptions are discussed in Attachment 4. Dominant Firm Strategy Under the conditions outlined above, the strategy available to the dominant firm is to remove fringe firms as competitive constraints by allowing them to fill up their plants. Once the fringe firms are operating at full capacity, they no longer can compete to draw sales away from the dominant firm. The dominant firm can then effectively behave as a monopolist with respect to the “residual demand”—i.e., that portion of industry demand that is not satisfied by the fringe firms operating at full capacity. In this monopoly position, the dominant firm can raise price above the initial, competitive level. Conceptually, one can think of the dominant firm's strategy as involving two steps. In Step 1, the dominant firm allows the fringe firms to reach full capacity. One way to do this is for the dominant firm to remove some of its productive capacity from the market, either temporarily or permanently. Customers that previously purchased from the dominant firm must then increase their purchases from fringe firms. Total industry output is unchanged, but a portion of industry output shifts from the dominant firm to the fringe firms. Once the fringe firms have reached full capacity, the dominant firm can take Step 2 and raise price without fear of being undercut by the fringe firms. The fringe firms will tend to raise their price along with the dominant firm, since they cannot produce any more product. Failure to raise price to the level of the dominant firm's price would unnecessarily sacrifice profit. The same two conceptual steps can be achieved if the dominant firm simply announces a significant price increase. Initially, fringe firms behaving competitively do not follow the price increase. To the extent possible, customers divert their purchases from the higher-priced dominant firm to the lower-priced fringe firms. Once the fringe firms reach their capacity constraint, however, remaining purchases must be made from the dominant firm at its higher price. The dominant firm is the only available supplier capable of satisfying the “residual demand.” Applying the Model to the Newsprint Industry In Attachment 4, the model is expressed formally using equations and various parameters. Whether the dominant firm will adopt this strategy depends on the associated gains and losses. The gains and losses depend on various factors, including initial capacity utilization of the fringe firms, the current market price, the dominant firm's variable contribution margin, the percentage price increase and the elasticity of demand. These factors are set forth in Table K1 below. Public sources provide at least a rough estimate of the values of these parameters for the North American newsprint industry, as shown in Table KI. Using these estimated values, the model predicts that it would be profitable under current conditions for a dominant firm with the combined shares of Abitibi and Bowater to exercise market power through the dominant firm strategy. Table K1.—Estimated Parameter Values for Dominant Firm Model Factor Name Symbol Current value 1 Initial capacity utilization of fringe Uc 120 95% 1a Maximum cap. utilization of fringe Um 121 98% 2 Initial industry unit price P1 122 $625 3 Dominant firm's unit variable cost C 123 $531 4 Hypothetical price increase R 5% 5 Industry elasticity of demand E 124 0.36 6 Initial share of dominant firm S 125 41.5% Using the parameter values in Table K1, the model predicts that the price increase yielding the greatest profit for a dominant firm under these conditions would be approximately 48 percent. If price were to increase by such a large percentage, it is quite possible that some of the assumptions of the model would have to be modified. In particular, if extremely high prices were sustained for a period of years, fringe firms may invest to expand their capacity, and imports may become a more significant factor than they are at current price levels. To avoid triggering these responses, the price increase a dominant firm would take might be lower than the estimated 48 percent above current levels. 126 Even allowing for such adjustments, the simple model presented here points to the profitability of a significant price increase. Changing various estimated parameters within a reasonable range does not alter this finding. 120 The PPPC February 2007 Flash Report shows the operating rate for North American newsprint mills for the first two months of 1997 at 95%. 121 According to Andrew Battista, senior RISI economist, “practical [maximum] capacity” is “98% of theoretical capacity.” See. “Is rising newsprint demand necessary to support higher prices in 2004?” ( *paperloop.com* , December 11, 2003). 122 Pulp & Paper Week, February 19, 2007 and RISI news report, March 19, 2007. 123 Abitibi reported its average cost of newsprint production in 2006 as C$523 (US$461). Abitibi Senior VP for Corporate Development and CFO Pierre Rougeau presentation to 2007 Goldman Sachs Paper & Forest Products Investor Day, 3/20/07, Slide 24. Abitibi's firm-wide cost of distribution is 15.2 percent of its firm-wide cost of production, averaged over 2002-2005. Abitibi 2005 Annual Report, p. 42. Using Abitibi's average delivered cost is conservative. In reality, Abitibi and Bowater pursuing a dominant firm strategy would tend to idle their highest cost plants first, chiefly those located in Eastern Canada. 124 Jari Kuuluvainen, “Structural Change in U.S. Newsprint Demand: GDP and Price Elasticities,” University of Helsinki, Department of Forest Economics, Reports #34, 2004, p. 8. 125 Sum of Abitibi and Bowater current shares adjusted for partial ownership of certain machines and mills by Abitibi and Bowater. See Tables Cl and C2 in Attachment 2. Since Abitibi has announced its intention to buy the minority owner's share of Augusta newsprint, 100% of that capacity is assigned to Abitibi for the purposes of this analysis. 126 But note that the price of newsprint increased by 49% between the third quarter of 2002 and the third quarter of 2006 without triggering expansion by fringe firms or an increase in imports. The model assumes Abitibi's average cost of production as the unit variable cost. See Table K1 above. It is quite likely that the capacity that Abitibi and Bowater would idle when pursuing a dominant firm strategy would be their highest cost capacity. In his December 2006 presentation to the Citigroup Conference, Abitibi Bowater's David Paterson was asked how Bowater would be able to maintain sufficient cash flow to pay for dividends and interest payments if newsprint prices declined from current levels. As quoted in Section F.3 above from an audio recording of his remarks, Paterson responded, So my belief[. . .]is that we have to move faster to stay ahead of that [demand] curve to maintain an operating rate that gives us some pricing leverage in the market and I can do that. We know which our high cost assets are and we will shut them down hopefully before rather than after price erosion with any significance. Earlier in his presentation, Paterson had stated that Bowater's high-cost newsprint assets were located in Eastern Canada and that “there is not a lot of margin left in the Canadian assets.” Section L. Conclusions Based on our economic analysis of the likely competitive effects of the proposed Abitibi-Bowater merger contained in Sections B through K above, we conclude that the merger, if it is permitted to proceed, will have very significant adverse competitive and economic effects on U.S. newspaper publishers and other NA consumers of newsprint. Through their joint behavior over the past four years, Abitibi and Bowater have demonstrated that their combined share of NA newsprint capacity was large enough to enable them to consistently raise the price of newsprint in the face of steadily declining NA newsprint demand. Abitibi and Bowater matched declining consumption year after year with the amount of capacity removal needed to maintain high operating rates and increasing newsprint prices. This strategy has been remarkably successful as this White Paper documents. The title of one of the articles cited in Section H, “New Paradigm: Newsprint Demand Falls, Prices Soar,” captures this paradox of “soaring” prices in the face of declining consumption. The fact that Abitibi and Bowater have been able to profitably reduce their own capacity to raise the price of newsprint is direct evidence that they have jointly possessed and exercised market power over a sustained period of time. A small firm would have no incentive unilaterally to close capacity to raise the price of newsprint because the loss of net margin from the closed capacity would outweigh the gain in margin from the price increase on the capacity that it would still operate. As we have documented in this White Paper, the NA newsprint market was unconcentrated in 1995 but became highly concentrated by 2000 primarily due to mergers by Abitibi, Bowater, and the newsprint firms they acquired. Without these mergers, Abitibi and Bowater would have been unable to pursue their highly effective and highly anticompetitive joint strategy. The newspaper newsprint buyers whom we talked to believe that it is certain that a combined Abitibi and Bowater will continue to pursue this anticompetitive strategy, but the merged firm will be able to do so more effectively. Coordination difficulties, costs, and uncertainties that Abitibi and Bowater faced as separate firms in their exercise of joint dominance would be removed by a merger. Future capacity closures to raise the price of newsprint will be more optimal and timely from the viewpoint of the merged firm and more harmful to NA consumers of newsprint. Without a merger, imperfect coordination between Abitibi and Bowater may break down in the coming months or years. With a merger, perfect coordination is certain. Attachment A—Links to Newsprint-Related Web Sites Two tables appearing in this comment are not able to be reprinted here. Copies of the comment with the tables are available at the Department of Justice Antitrust Division Web site, *http://www.usdoj.gov/atr,* at the Antitrust Documents Group of the Department of Justice Antitrust Division, 450 Fifth Street, N.W., Suite 1010, Washington, D.C. 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, N.W., Washington, D.C. 20001. Attachment B—Additional Analysis of Uncoated Groundwood Specialty Grades and Tables B1 to B7 for Section B A. Comparing the Price of Newsprint With the Prices of Four Uncoated Groundwood Specialty Grades Since the quality and value of newsprint is lower than the quality and value of all uncoated groundwood specialty grades, we would expect that newsprint would have a lower price. Table B1 below compares the February 2007 price (Eastern U.S.) of 30 lb. newsprint with the price of 35 lb. Hi-Brites (65 brightness level), the price of 35 lb. SCA, and the price of 35 lb. SCB. Table B1 also compares the price of 27.7 lb. newsprint with the price of 22.1 lb. directory paper. 1 1 Source: RISI Pulp & Paper Week, February 19, 2007. Except for newsprint, the prices are the average of the high and low prices for February 2007. The price for directory paper is a spot price. About 80% to 90% of directory paper is sold under one to three year contracts to RBOCs and independent directory publishers. The prices in Pulp & Paper Week for the four uncoated groundwood specialty grades were per short ton. These prices were converted to price per metric tonne by multiplying the short ton prices by the ratio of the weight in pounds of a metric tonne (2,205 lbs.) to the weight in pounds of a short ton (2,000 lbs.). RISI notes that for the two newsprint grades and the four uncoated groundwood specialty grades that there had been some discounting below transaction prices. The SCB, Hi-Brite 65, and SCA 35 lb. February 2007 prices were 17.3% to 23.4% higher than the price of 30 lb. newsprint. If a newsprint buyer switched from 30 lb. newsprint to one of these higher basis weight grades, the buyer would incur a 14.3% reduction in printing surface. Taking the reduction in printing surface into account, a buyer of 30.0 lb. newsprint who switched to 35.0 lb. SCB, Hi-Brite 65, or SCA, would face an equivalent price increase per metric tonne of 30.0 lb. newsprint ranging from 34.0% to 47.0% based on February 2007 prices. Table B1.—Comparing February 2007 Newsprint Prices With the Prices of Four Uncoated Groundwood Specialty Grades February 2007 price per metric tonne Price difference over the newsprint price Percent price difference over the newsprint price Percent increase (decrease) in square footage per metric tonne Percent increase (decrease) in the effective price per metric tonne Newsprint (30.0 lb.) $630.00 Hi-Brite 65 (35 lb.) 777.26 $147.26 23.4 (14.3) 41.0 SCA (35 lb.) 810.34 180.34 28.6 (14.3) 47.0 SCB (35 lb.) 738.68 108.68 17.3 (14.3) 34.0 Newsprint (27.7 lb.) 670.00 Directory (22.1 lb.) 810.34 140.34 20.9 27.2 (12.0) Source: RISI Pulp & Paper Week, February 19, 2007, p. 3. Table B1 shows that the February 2007 price of 22.1 lb. directory paper was 20.9% higher than the price of 27.7 lb. newsprint. If a buyer of 27.7 lb. newsprint switched to the lower basis weight paper, the buyer would gain 27.2% in printing surface per metric tonne. Taking this increase in printing surface into account, a buyer of 27.7 lb. newsprint who switched to 22.1 lb. directory paper would receive an equivalent price reduction of 12.0% per metric tonne of 27.7 lb. newsprint based on February 2007 prices. However, as discussed in Section B.3.a.(4), the information provided to us by newsprint buyers leads us to conclude that the lower basis weight and thinner directory paper would not be suitable for use in a newspaper or for running on newspaper printing presses. B. An Analysis of Estimated 2006 Abitibi and Bowater Shares of Uncoated Groundwood Specialty Grade Segments 1. Introduction It is beyond the scope of this White Paper to delineate product markets composed of one or more uncoated groundwood specialty grades. Nonetheless, each of these grades is in some relevant product market. Both Abitibi and Bowater are significant producers of uncoated groundwood specialty grades. We have estimated capacities and capacity shares for the following uncoated groundwood specialty grade segments:

(1)All uncoated groundwood specialty grades;

(2)directory paper;

(3)SC/SNC glossy grades;

(4)Hi-Brites/Super Hi-Brites; and

(5)Bulky Book and Other. Attachment 1 contains tables showing capacity and capacity shares for NA mills for each of the first four segments shown above. 2 We also prepared a fifth table which shows East of the Rockies capacity for mills producing Hi-Brites and Super Hi-Brites. These five tables are discussed below. 2 We could only identify Bulky Book capacity for Abitibi and Tembec. It appears that Bowater produces paper for the Bulky Book segment but Bowater does not specifically identify the amount of its capacity used to produce bulky book paper. Other firms may also produce Bulky Book paper, but we have not been able to identify them. Our primary source for the estimated capacity and capacity shares was the Uncoated Mechanical Papers chapter from the RISI 2006 Fact and Price Book (pp. 161-173). RISI provides capacity by manufacturer for total uncoated groundwood specialty grades, directory paper, and SC/SNC grades. Because most of the remaining capacity is for Hi-Brites and Super Hi-Brites, RISI implicitly provides capacity estimates for those two grades combined. We supplemented the RISI uncoated groundwood specialty grade capacity data with the following sources:

(1)Reported capacity for Abitibi and Bowater shown on p. 17 of their merger announcement presentation; 3

(2)Web sites of manufacturers;

(3)annual reports and other public documents produced by manufacturers; and

(4)online searches for additional information about manufacturers and their uncoated groundwood specialty capacity. While the results of our data search are preliminary and were subject to some exercise of judgment, we believe these results provide a good first approximation of manufacturer shares in each of the five segments described above. Additional data search would likely further refine the data. 4 3 This capacity is reported as uncoated mechanical by Abitibi or Bowater mill. The capacity is not further broken down by specific grades. 4 The availability and accuracy of capacity data for manufacturers of uncoated groundwood specialty grades appears to be lower than for newsprint manufacturers. 2. Abitibi-Bowater HHIs Based on Estimated 2006 Capacity and Capacity Shares by Manufacturer for Uncoated Groundwood Specialty Grade Segments Tables B2 through B6 at the end of Attachment B show Abitibi-Bowater HHIs based on estimated 2006 capacity and capacity shares by manufacturer for the following uncoated groundwood specialty grade segments:

(a)All uncoated groundwood specialty grade capacity in NA;

(b)all directory paper in NA;

(c)all SC/SNC glossy paper capacity in NA;

(d)all Hi-Brite & Super Hi-Brite non-glossy paper capacity in NA; and

(e)all HiBrite & Super Hi-Brite non-glossy paper capacity East of the Rockies. The results from Tables B2 through B6 plus Bulky Book and Other are summarized in Table B7 below. Table B7.—Abitibi-Bowater HHIs Based on Estimated 2006 NA Capacity and Capacity Shares by Manufacturer for Uncoated Groundwood Specialty Grade Segments Total NA uncoated groundwood specialty grades NA directory lightweight paper NA SC/SNC paper NA hi-brites & super hi-brites non-glossy paper East of the rockies hi-brites & super hi-brites paper NA bulky book and other paper Total Segment Capacity (1,000 Metric Tonnes) 6,997 1,291 3,360 2,122 1,624 224 Abitibi Capacity Share 30.2% 10.7% 26.0% 44.8% 58.5% 66.5% Bowater Capacity Share 14.3% 0.0% 9.8% 31.8% 41.5% 0.0% Combined Abitibi-Bowater Capacity Share 44.5% 10.7% 35.8% 76.5% 100.0% 66.5% Pre-Merger HHI 1,516 2,319 1,454 3,286 5,144 0 Change in the HHI 749 0 511 1,392 4,856 0 Post-Merger HHI 2,265 2,319 1,965 4,679 10,000 0 Sources: RISI 2006 Global Pulp & Paper Fact & Price Book, pp. 163, 165, and 166, Abitibi-Bowater merger announcement presentation, p. 17, manufacturer Web sites, manufacturer annual reports, and other publicly available information. Assuming the uncoated groundwood specialty segments shown in Table B7 above were relevant product and geographic markets, four of the segments (total NA uncoated groundwood specialty grades, NA SC/SNC glossy paper, NA Hi-Brite/Super Hi-Brite non-glossy paper, and East of the Rockies Hi-Brite/Super Hi-Brite non-glossy paper) show an increase in the HHI significantly greater than 100 resulting from an Abitibi-Bowater merger and these same four segments show a post-merger HHI greater than 1,800. In the case of NA Hi-Brite/Super Hi-Brite capacity, the post-merger HHI is 4,679. In the case of East of the Rockies Hi-Brite/Super Hi-Brite capacity, the post-merger HHI is 10,000. Two of the segments (Directory Paper and Bulky Book and Other) show no change in the HHI resulting from an Abitibi-Bowater merger. According to § 1.51(c) of the Merger Guidelines: Where the post-merger HHI exceeds 1800, it will be presumed that mergers producing an increase in the HHI of more than 100 points are likely to create or enhance market power or facilitate its exercise. Imports into NA vary by segment:

(a)2005 imports of SC paper into NA were 13.5% of 2006 NA SC/SCA capacity;

(b)2005 imports of Lightweight (Directory) paper into NA were 6.5% of 2006 NA Directory paper capacity;

(b)all other 2005 imports were 1.9% of all other 2006 NA Uncoated Groundwood Specialty Grade capacity (i.e., Hi-Brite/Super Hi-Brite, Bulky Book, and Other). 5 5 The source for the 2005 import data is the RISI 2006 Fact & Price Book, pp. 164 and 169. Canadian imports were not broken by SC, lightweight, and other. We assumed that the Canadian percentage breakdown was the same as the U.S. percentage breakdown for these three categories. The sources for the 2006 NA capacities by category are shown in Tables B2-B5. BILLING CODE 4410-11-M EN10JN08.044 EN10JN08.045 EN10JN08.046 EN10JN08.047 EN10JN08.048 BILLING CODE 4410-11-C Attachment C—Tables C1 to C3 for Section C Table C1.—Estimate of 2006 U.S. and Canadian Newsprint Capacity by Mill U.S. Newsprint Mills State/city Company name and notes Est. 2006 capacity metric tonnes Alabama Claiborne Alabama River Newsprint Company 264,000 (Abitibi owns 100% of Alabama Newsprint.) Coosa Pines Bowater Incorporated 328,000 Arizona Snowflake Abitibi-Consolidated Inc 375,000 California Pomona Blue Heron Paper Company 150,000 (The company is owned by employees. The mill was acquired from Smurfit in 2005. Blue Heron recently announced the Pomona mill would be indefinitely idled beginning May 6, 2007.) Georgia Augusta Augusta Newsprint Company 426,000 (Abitibi owns 52.5% of Augusta Newsprint. Woodbridge Co. owns the other 47.5%. Abitibi has announced its intention to buy Woodbridge's 47.5% share in Augusta Newsprint.) Dublin SP Newsprint Company 565,000 (The company is owned by 3 newspaper publishers.) Louisiana DeRidder Boise Cascade Corporation 405,000 (Abitibi is the exclusive marketing and sales agent for the newsprint produced at the DeRidder mill.) Mississippi Grenada Bowater Incorporated 249,000 Oregon Newberg SP Newsprint Company 395,000 (The company is owned by 3 newspaper publishers. The mill was acquired from Smurfit in 1999.) Oregon City Blue Heron Paper Company 140,000 (The company is owned by employees. The mill was acquired from Smurfit in 2000.) Tennessee Calhoun Bowater Incorporated (Southern Division) 382,000 (Bowater owns 51% of one newsprint machine at the Calhoun mill with approx. 205,000 metric tonnes of capacity. The Herald Company, Inc. owns the other 49%. Bowater owns 100% of remaining Calhoun newsprint capacity.) Texas Lufkin Abitibi-Consolidated Inc 150,000 (The mill has been idled indefinitely since December 2003.) Virginia Ashland Bear Island Paper Company 235,000 (The mill is owned by White Birch, a privately-held company.) Washington Longview North Pacific Paper Company (NORPAC) 675,000 (JV between Weyerhauser and Nippon Paper (Japan)). Milwood Inland Empire Paper Company 135,000 (The mill is owned by 2 newspaper publishers.) Usk Ponderay Newsprint Company 249,00 (Bowater owns 40% of Ponderay and is managing partner. The remaining 60% of Ponderary is owned by 5 newspaper publishers.) Canadian Newsprint Mills Province/city Company name and notes Est. 2006 capacity metric tonnes Alberta Whitecourt Alberta Newsprint Company Ltd (JV between the Stern Group and West Fraser Timber.) 269,000 British Columbia Campbell River Catalyst (Norske Canada was re-named Catalyst in 2005. Norske Skog sold its minority interest in Norske Canada in 2005. Catalyst is publicly traded.) 321,000 Crofton Catalyst (Norske Canada was re-named Catalyst in 2005. Norske Skog sold its minority interest in Norske Canada in 2005. Catalyst is publicly traded.) 198,000 Mackenzie Abitibi-Consolidated Inc 186,000 Port Mellon Howe Sound Pulp & Paper Ltd (JV between Canfor

(BC)and Oji Paper (Japan)) 215,000 Powell River Catalyst (Norske Canada was re-named Catalyst in 2005. Norske Skog sold its minority interest in Norske Canada in 2005. Catalyst is publicly traded.) 181,000 Manitoba Pine Falls Pine Falls Paper Company Ltd (Mill is owned by Tembec, a publicly-traded company.) 185,000 New Brunswick Dalhousie Bowater Maritimes Inc Bowater now owns 100% of Bowater-Maritimes. It recently acquired minority interests from two Japanese paper companies. 213,000 Newfoundland Corner Brook Kruger Inc. (Corner Brook Pulp and Paper Ltd.) (Kruger is a privately-held company.) 440,000 Grand Falls Abitibi-Consolidated Inc (Includes capacity of PM 7 (capacity = 60,000 metric tonnes), which has been indefinitely idled since the end of 2005.) 191,000 Nova Scotia Liverpool Bowater Mersey Paper Company Ltd (Bowater owns 51% of Bowater Mersey. The Washington Post owns the other 49%.) 253,000 Nova Scotia Port Hawkesbury Stora Enso North American Corp. (Newsprint machine restarted at end of November 2006 after being idled for almost a year due to labor contract problems and high energy costs.) 190,000 Ontario Iroquois Falls Abitibi-Consolidated Inc 240,000 Kapuskasing Spruce Falls Inc (Mill is owned by Tembec, a publicly-traded company.) 330,000 Thorold Abitibi-Consolidated Inc 414,000 Thunder Bay Bowater Canadian Forest Products Inc (Includes capacity of PM 4 (capacity = 146,000 metric tonnes), which has been indefinitely idled since September 2005.) 380,000 Whitby Atlantic Newsprint Co. (Atlantic Newsprint is a business unit within the Atlantic Group, a privately-held company.) 150,000 Quebec Amos Abitibi-Consolidated Inc 207,000 Baie Comeau Abitibi-Consolidated Inc 577,000 Bromptonville Kruger Inc (Kruger is a privately-held company.) 310,000 Clermont Abitibi-Consolidated Inc (Abitibi owns 51% of one newsprint machine at the Clermont mill with approx. 219,000 metric tonnes of capacity. The New York Times Co. owns the other 49%. Abitibi owns 100% of the remaining Clermont newsprint capacity.) 354,000 Gatineau Bowater Canadian Forest Products, Inc 432,000 Masson Papier Masson Ltd (Acquired by White Birch in 2006.) 240,000 Quebec Stadacona, Inc (Acquired by White Birch in 2004.) 410,000 Riviere-du-Loup F.F. Soucy Inc (Owned by White Birch, a privately-held company) 265,000 Shawinigan (Belgo) Abitibi-Consolidated Inc 116,000 Trois-Rivieres Kruger Inc (Kruger is a privately-held company.) 370,000 Sources and Notes 1. The capacity estimates for Abitibi, Bowater and Ponderay Newsprint mills are from the Abitibi-Bowater merger announcement presentation, “Creating a Global Leader in Paper and Forest Products,” January 29, 2007, p. 17. *http://www.abitibiconsolidated.com/aciwebsitev3.nsf/site/en/images/pdf/Final_Investor_Presentation.pdf/$file/Final_Investor_Presentation.pdf.* 2. The capacity estimates for the White Birch Paper newsprint mills are from the White Birch Paper Web site: *http://www.whitebirchpaper.com/en/p2.html.* 3. The capacity estimates for the Kruger newsprint mills are from the Kruger Web site: *http://www.kruger.com/english/D_Newsprint/Newsprint_INTRO_A.html.* 4. The capacity estimates for the Catalyst newsprint mills are from the Catalyst Web site: *http://www.catalystpaper.com/aboutus/aboutus_ourdivisions.xml* . 5. The capacity estimates for the Tembec newsprint mills are from the Tembec 2006 Annual Report, p. 29. *http://www.tembec.com/public/Investisseurs/Rapports-financiers.html.* 6. The capacity estimate for the Alberta Newsprint mill is from the Alberta Newsprint Web site: *http://www.albertanewsprint.com/profile/information.htm.* 7. The capacity estimate for the Stora Enso's Port Hawkesbury, NS newsprint mill is from the Stora Enso Web site: *http://www.storaenso.com/CDAvgn/main/0,,1_-3429-4370-,00.html* . The Port Hawkesbury mill, including its newsprint machine, was idled on December 2005 due to labor contract and energy cost problems. The newsprint machine was restarted at the end of November 2006 following the resolution of these problems. See *http://www.paperage.com/2006news/11_27_2006stora.html.* 8. Annual capacity estimates for the SP Newsprint, North Pacific, Boise Cascade, Blue Heron, Howe Sound, Atlantic Newsprint, and Inland Empire mills in Table C1 are from the July 2004 preliminary forecast shown in the Pulp and Paper Products Council

(PPPC)July 9, 2004 update titled “Update of North American Mechanical Printing Papers Capacity Forecast.” This update can be found on the PPPC Web site under press releases: *http://www.pppc.org/en/1_0/index.html* . The Web sites for these seven manufacturers did not clearly and unambiguously identify their respective annual newsprint mill capacities. 9. Capacity at Abitibi's Kenora ON, La Baie (Port-Alfred) QC, and Stephenville NF newsprint mills are included in the PPPC July 2004 preliminary forecast. Those mills have been permanently closed. See the Abitibi 2005 Annual Report, p. 18 and the Abitibi 2004 Annual Report, p. 50. The PPPC July 2004 preliminary forecast also shows Abitibi's Alma, QC mill with newsprint capacity. The Alma mill's newsprint capacity has been converted to the production of higher value uncoated groundwood specialty grades. See the Abitibi 2004 Annual Report, p. 50. 10. The PPPC July 2004 update also notes on p. 1 that the capacities of three newsprint machines at Abitibi's Sheldon, TX mill and the #3 newsprint machine at Bowater's Thunder Bay ON mill that had been idled for over a year were no longer included in the forecast. The Abitibi Sheldon, TX mill has been permanently closed. See Abitibi 2004 Annual Report, p. 50. The Bowater Thunder Bay #3 newsprint machine will not be restarted according to Bowater. See Bowater February 6, 2007 news release “Bowater Announces Fourth Quarter and Full Year 2006 Financial Results,” Note 1. “Based on the continued decline of North American newsprint consumption through the third quarter of 2006, Bowater now has no plans to restart the machine.” 11. The PPPC March 2006 forecast of 2006 NA newsprint capacity is 12,625,000 metric tonnes. Compared to the total in Table C2 above, this is a difference of 135,000 metric tonnes or 1.4%. In its forecast, the PPPC does not provide a breakdown by manufacturer or by mill so the reasons for the difference cannot be ascertained with certainty. The PPPC does not include the 150,000 metric tonne capacity of Abitibi's Lufkin, TX mill in its 2006 forecast because the mill has been indefinitely idled since December 2003. The capacity of the Lufkin, TX mill is included in Tables C1-C3, however, because Abitibi continues to count the Lufkin capacity in its public documents, including the Abitibi-Bowater merger announcement presentation. See the Abitibi-Bowater merger announcement presentation, “Creating a Global Leader in Paper and Forest Products,” January 29, 2007, p. 17. From an antitrust perspective, it is appropriate to include the Lufkin, TX capacity in Abitibi's total newsprint capacity if the mill could be re-started within a year. See the product market discussion in Section B regarding “Firms That Participate Through Supply Response.” If the Lufkin, TX mill's capacity is added to the PPPC 2006 forecast, the difference between the Table C2 total and the PPPC forecast for 2006 is reduced to 15,000 metric tonnes or 0.1%. 12. Two other mills included in the PPPC July 2004 preliminary forecast, Katahdin Paper and Irving Paper, no longer manufacture newsprint. Their newsprint capacity has been converted to the production of higher value uncoated groundwood specialty grades. In addition, the PPPC July 2004 preliminary forecast shows a small amount of newsprint capacity at Kruger's Manistique, MI mill. The mill no longer produces newsprint and Kruger no longer owns the mill. 13. According to an article in Editor & Publisher by Debra Garcia, dated March 28, 2007,”Blue Heron Paper Co. [recently] announced it would indefinitely idle its 140,000 tonnes/year 100% recycled newsprint mill in Pomona, Calif., due to high wastepaper and energy costs and declining newsprint consumption. The shutdown is slated to begin about May 6.” 14. The information on which the notes in Table C1 are based can generally be found on manufacturer web sites, including annual reports and 10K reports available as pdf files on the web sites of publicly-traded newsprint manufacturers. The source for Abitibi's plans to purchase the remaining 47.5% interest in Augusta Newsprint is the Abitibi presentation “Our Story on Paper” by President and CEO John Weaver at the Citigroup 11th Annual Global Paper and Forest Products Conference, December 7, 2006, p. 26, which is available on the Abitibi Web site. BILLING CODE 4410-11-M EN10JN08.049 EN10JN08.050 Attachment D—Tables D1 to D4 for Section D EN10JN08.051 EN10JN08.052 EN10JN08.053 EN10JN08.054 BILLING CODE 4410-11-C Attachment K—Technical Appendix to Section K Dominant Firm Model Dominant Firm Model This section provides a formal model of a dominant firm in an industry with fixed capacity constraints producing a homogeneous product. Fringe firms are assumed to be price-takers. Imports are assumed to be fixed. Under these conditions, a dominant firm may find it profitable to remove fringe firms as competitive constraints by allowing them to fill up their plants (Step 1). Once the fringe firms are operating at full capacity, they no longer can compete to draw sales away from the dominant firm. The dominant firm can then effectively behave as a monopolist with respect to the “residual demand”—i.e., that portion of industry demand that is not satisfied by the fringe firms operating at full capacity. In this monopoly position, the dominant firm can raise price above the initial, competitive level (Step 2). Whether the dominant firm will adopt this strategy of reducing output to bring the fringe to capacity and then raising its price depends on the associated gains and losses from doing so. The gains and losses, in turn, depend on various factors discussed below. The losses can be thought of in two parts, L1 and L2, corresponding to Step 1 and Step 2. L1: In Step 1, the dominant firm gives up some of its sales to the fringe firms. The cost of doing this is the variable profit that the dominant firm would have earned on those sales. This variable profit can be calculated as the forgone quantity times the unit variable margin on those sales. The forgone quantity is the quantity needed to move the fringe firms from their initial capacity utilization to full capacity utilization. The unit variable margin is the difference between the initial industry price and the dominant firm's unit variable cost for the capacity that it idles. The greater is L1, the less likely it is that the benefits of the dominant firm strategy will outweigh the costs. Three factors are particularly important in determining the magnitude of L1. The first factor is the capacity utilization of the fringe firms, and the second and third factors pertain to the variable profit margins on the lost sales. • Factor 1. Initial capacity utilization of the fringe firms. if the fringe firms are operating at a high level of capacity utilization, the quantity that the dominant firm must give up to move them to full capacity is relatively small, and L1 is proportionately small. On the other hand, if initial capacity utilization is low, the dominant firm will have to give up a larger quantity to bring the fringe firms to full capacity, and L1 will tend to be large. • Factor 2. Initial price level. Suppose the initial industry price level is low relative to the variable cost of the capacity to be idled. This means that the dominant firm's variable margin is low for the idled capacity, and the profits it loses by giving up quantity to the fringe firms, L1, is correspondingly low. By contrast, if the initial price level is high relative to the variable cost of the capacity to be idled, the profits lost on each unit of quantity given up to the fringe firms are relatively high, making L1 large. • Factor 3. Dominant firm's variable cost of production. The variable cost of production operates as the flip side of the initial price level. The higher the variable cost (relative to price), the smaller is L1, and the lower is variable cost (relative to price), the greater is L1. (Note that the relevant variable margin is the margin in those plants that the dominant firm would remove from production. Rationally, the dominant firm would first remove its capacity with the highest costs. For this reason, using the firm-wide average variable cost margin overstates the loss of margin in L1. The same point applies to L2 below.) L2: In Step 2, when the dominant firm raises price above the initial level, industry customers will tend to respond by reducing their total purchases. This relationship between price and quantity demanded follows the basic “law of demand.” In order to keep the competitive fringe at full capacity, the dominant firm absorbs this entire decrease in quantity. As with L1, the reduction in profits in L2 is the reduction in quantity times the variable margin on those sales. We have already noted how the initial price and variable cost of production, Factor 2 and Factor 3, are important in determining the variable margin. Two additional factors also affect L2. • Factor 4. Percentage price increase. Obviously, the greater the percentage price increase, the larger will be the associated loss of quantity along the demand curve. • Factor 5. Elasticity of demand. Elasticity of demand is defined as the percentage change in quantity demanded that occurs in response to a one-percent change in price. The greater the elasticity of demand, the larger is the loss of quantity resulting from the price increase, and the larger is L2. Since the dominant firm is absorbing the quantity reduction for the entire industry, the appropriate demand elasticity to use is the industry demand elasticity. The dominant firm strategy will be adopted only if the benefit or gain

(G)exceeds the sum of L1 and L2. The gain the dominant firm receives from the strategy is that it receives a higher price on all of its remaining output. The relevance of the initial price level (Factor 2) and the percentage increase in price (Factor 4) is quite apparent. The other factor determining the dominant firm's profit gain is its initial sales and market share. • Factor 6. Initial sales and share of the dominant firm. To determine the quantity of sales on which the dominant firm will enjoy the price increase, one takes the dominant firm's initial quantity and subtracts the quantity reductions associated with L1 and L2. To see the role of initial share, take the rather extreme case in which the dominant firm has low initial sales due to a low share, and that its sales are approximately equal to the quantity losses associated with L1 and L2. In that position, the dominant firm could absorb the quantity needed to move the fringe to full capacity and absorb the decrease in quantity resulting from the increased price. However, the dominant firm would have little or no remaining sales to make at the higher price, and hence little or no benefit or gain from the strategy. In this situation, the dominant firm will not adopt the price increase strategy. By contrast, if the dominant firm has large initial sales due to a large initial share, it is more likely to still have a large quantity to sell after absorbing the losses (L1 and L2). In this situation, the dominant firm would realize a large gain from the price increase, and the price increase strategy is more likely to be adopted by the dominant firm than if it had a low initial share. Note that the share of the dominant firm also affects L1. A large initial share for the dominant firm indicates that there is a smaller competitive fringe. This would reduce the amount of quantity that must be absorbed in Step 1 to bring the fringe to full capacity (i.e., reduces L1) for any given level of fringe capacity utilization. Though mentioned last, the share of the dominant firm may have the greatest relevance because it is the only factor directly affected by merger enforcement policy. The initial share affects the likelihood of a significant price increase and the potential magnitude of a price increase, both of which are central antitrust concerns. Mathematical model Table K1 shows the six factors discussed above, the symbol used in this attachment to represent each factor, and an estimate of the current value of each factor. Factor 1a, the maximum potential capacity utilization rate for the fringe firms, is added to assist in calibrating the model to current industry conditions. Table K1.—Estimated Parameter Values for Dominant Firm Model Factor Name Symbol Current value 1 Initial capacity utilization of fringe Uc 1 95% 1a Maximum cap. utilization of fringe Um 2 98% 2 Initial industry unit price P1 3 $625 3 Dominant firm's unit variable cost C 4 $531 4 Hypothetical price increase R 5% 5 Industry elasticity of demand E 5 0.36 6 Initial share of dominant firm S 6 41.5% Under the strategy modeled here, the dominant firm first reduces its output through removal of capacity from the market to the point that the fringe firms reach their maximum capacity. The reduction in dominant firm profits in this first step is L1. The dominant firm then raises price. This price increase further reduces the dominant firm's profits through a further reduction in quantity. This profit reduction is L2. The firm increases its profits through an increase in the price at which it sells its remaining units. This profit increase is G. The dominant firm strategy is likely to be adopted if G − L1 − L2>O. 1 The PPPC February 2007 Flash Report shows the operating rate for North American newsprint mills for the first two months of 1997 at 95%. 2 According to Andrew Battista, senior RISI economist, “practical [maximum] capacity” is “98% of theoretical capacity.” See. “Is rising newsprint demand necessary to support higher prices in 2004?” (paperloop.com, December 11, 2003) 3 Pulp & Paper Week, February 19, 2007 and RISI news report, March 19, 2007. 4 Abitibi reported its average cost of newsprint production in 2006 as C$523 (U.S.$461). Abitibi Senior VP for Corporate Development and CFO Pierre Rougeau presentation to 2007 Goldman Sachs Paper & Forest Products Investor Day, 3/20/07, Slide 24. Abitibi's firm-wide cost of distribution is 15.2 percent of its firm-wide cost of production, averaged over 2002-2005. Abitibi 2005 Annual Report, p. 42. Using Abitibi's average delivered cost is conservative. In reality, Abitibi and Bowater pursuing a dominant firm strategy would tend to idle their highest cost plants first, chiefly those located in Eastern Canada. 5 Jan Kuuluvainen, “Structural Change in U.S. Newsprint Demand: GDP and Price Elasticities,” University of Helsinki, Department of Forest Economics, Reports #34, 2004, p. 8. 6 Sum of Abitibi and Bowater current shares adjusted for partial ownership of certain machines and mills by Abitibi and Bowater. See Tables C1 and C2 in Attachment 2. Since Abitibi has announced its intention to buy the minority owners share of Augusta newsprint, 100% of that capacity is assigned to Abitibi for the purposes of this analysis. LI is the product of the dominant firm's per-unit variable margin and the quantity reduction needed to bring the fringe firms to their maximum capacity. Per-unit variable margin is represented as P1−C. For convenience, and in the absence of more exact information about the actual shape of the cost curve, it is assumed that the dominant firm's unit variable costs are constant in the relevant range. 7 7 The dominant firm may be able to reduce its losses in L1 and L2 if, instead of idling capacity, it can “dump” some of its production in overseas markets from which they will not be re-imported. As a further convenience, quantity units will be chosen such that the industry's total nominal capacity is one unit. Under this assumption, the total capacity of the dominant firm is S and the total capacity of the fringe firms is 1−S. Maximum practical capacity, Um, is permitted to he below maximum nominal capacity. To change fringe firms' capacity utilization from the initial level, Uc, to Um requires that the fringe's quantity be increased, and the dominant firm's quantity be decreased, by (1−S) (Um−Uc). Thus [1] LI = (P1−C) (1−S) (Um−Uc) Once fringe firms are operating at maximum capacity, the dominant firm raises price by some percentage R. The dominant firm absorbs the entire reduction in industry quantity demanded resulting from the price increase. The quantity reduction is given by the product of R (the percentage price increase), E (the industry elasticity of demand), and Uc (initial industry quantity demanded). As before, unit variable margin for the dominant firm is given by P1−C. The profit reduction due to the loss of quantity resulting from the price increase is given by [2] L2 = (P1−C) (R E Uc) The profit increase the dominant firm gains from raising price is the price increase multiplied by the quantity the dominant firm will sell after the price increase. The change in price is R multiplied by P1. The quantity sold is the dominant firm's initial quantity, S Uc, less the quantity reductions associated with L1 and L2, which are (1−S) (Um−Uc) and (R E Uc), respectively. The profit increase can be written [3] G =

(RPI)[(SUc)−(1−S) (Um−Uc)−(R E Uc)] The entire profit consequences of the dominant firm strategy can be expressed as [4] G−L1−L2 = (R P 1) [(S Uc)−(1−S) (Um−Uc)−(R E Uc)] −[(P1−C) (1−S) (Um−Uc)]−[(P1−C) (R E Uc)] From Equation [4] one can find the profit-maximizing price increase, R*, by taking the first derivative with respect to R, setting the derivative equal to zero, and solving for R*. The resulting expression is EN10JN08.058 Results and Sensitivities Equation [5] can be solved using the parameter values in [Table 3.1]. The model predicts that the profit-maximizing price increase for a dominant firm under these circumstances would be approximately 48 percent above current levels. This result should not be viewed as a prediction that price will necessarily increase by 48 percent above current levels. If price were to increase by such a large percentage, it is quite possible that some fringe firms would make investments that would increase capacity. It is also possible that imported newsprint would become a significant factor. It also is possible that newsprint purchasers would consider additional alternatives if price were to increase by such a large percentage. Conceptually, reactions could be accommodated in the model by reflecting additional loss of quantity experienced by the dominant firm. 8 8 For instance, suppose that a 5 percent increase in price would result in a 1 percent loss of sales to imports or expanded fringe firms. The profit-maximizing price increase for a dominant firm with a 41.5 percent share would then be 27 percent rather than 48 percent. Several of the parameters in Table K1 are estimated; hence, their true value could be higher or lower than shown. Significant further price increases are predicted by the model even if some of the parameters are altered. As explained above, production cost in the plants that Abitibi and Bowater would idle when pursuing a dominant firm strategy would likely be higher than the average cost used in the model. However, suppose that the level of variable cost were 20 percent lower than shown in Table K1. Suppose further that the elasticity of demand were 20 percent larger than shown in Table K1. With these changed parameters, the profit-maximizing price increase would still be 30 percent. Attachment C—Supplement 1 to the White Paper by Economists Incorporated, Submitted on Behalf of the NAA to DOJ on July 9, 2007 Economists Incorporated An Economic Analysis of the Competitive Effects of the Proposed Abitibi-Bowater Merger • • • • • • Response to Issues Raised at Our Meeting With the DOJ Staff on April 20, 2007 Submitted to DOJ on Behalf of NAA John H. Preston, Kent W. Mikkelsen, Ph.D., Economists Incorporated, Washington, DC, July 9, 2007. A. Introduction On April 11, 2007, Economists Incorporated presented an economic analysis of the likely competitive effects of the proposed Abitibi-Bowater merger in the North American (“NA”) newsprint market (“White Paper”) to the U.S. Department of Justice (“DOJ”) to assist the Department in its investigation of the proposed merger. This economic analysis was prepared on behalf of the Newspaper Association of America (“NAA”), an association of U.S. daily newspapers. The evidence we presented to DOJ in the White Paper demonstrates that Abitibi and Bowater jointly exercised market power to raise newsprint prices significantly above competitive levels during the period 2002 to 2006. We do not believe that any alternative explanation of the aggregate 49% increase in newsprint prices from the third quarter of 2002 through the third quarter of 2006 is remotely plausible. 1 We label our hypothesis that Abitibi and Bowater jointly exercised market power over the period 2002 to 2006 the “Dominant Firm Hypothesis.” 2 We label the principal competing hypothesis the “Competitive Response Hypothesis.” 1 See especially Section J of the White Paper, which shows that it is implausible that the newsprint price increases were primarily due to input cost increases or the appreciation of the Canadian dollar relative to the U.S. dollar. The analysis in Section J is based on a comparison of price increases for newsprint and price increases for several closely related uncoated groundwood specialty grades over the period 3Q 1999 though 4Q 2006. [Note: When the Canadian dollar appreciates relative to the U.S. dollar, the cost of producing newsprint in Canadian mills increases in terms of U.S. dollars relative to the cost of producing newsprint in U.S. mills and vice versa. Newsprint is priced in U.S. dollars.J The implications of the divergence of NA operating rates between the production of newsprint and the production of uncoated groundwood specialty grades from 2002 to 2006 are discussed in Section C.3. below. This divergence in operating rates provides additional support for the conclusions in Section J of the White Paper. 2 Our analysis and evidence for the Dominant Firm Hypothesis were presented in Sections F through K of the White Paper. On April 20, 2007, we met with the DOJ staff investigating the proposed merger to discuss our White Paper. In our discussion with DOJ, several questions were raised concerning our analysis and evidence regarding the joint exercise of market power by Abitibi and Bowater. One staff member suggested that the rise in the price of newsprint might be explained as a competitive response by newsprint producers to the appreciation of the Canadian dollar relative to the U.S. dollar. Another staff member asked whether the maximum practical operating rate for the production of uncoated groundwood specialty grades might be lower than the maximum practical operating rate for the production of newsprint. 3 The staff also asked us if the acceleration in the rate of decline of NA newsprint consumption 4 might eliminate the ability of a merged Abitibi-Bowater to engage in the type of anticompetitive behavior that we had alleged. 3 During our meeting with DOJ, we had pointed out that the significantly lower price increases for uncoated groundwood specialty grades compared to the price increases for newsprint over the period 2002 to 2006 could be largely explained by the significantly lower operating rates for uncoated groundwood specialty grades. See Section J of the White Paper and Section C.3. below. 4 See the NA newsprint consumption and production statistics for the first five months of 2007 presented in Section B.1.a below. We divide our response to issues raised by the DOJ staff into the following five sections: Section A. Introduction Section B. Events Since the Merger Was Announced in January 2007 Confirm the Dominant Firm Hypothesis 1. In 2007, NA Newsprint Demand and Prices Have Declined Significantly While the Value of the Canadian Dollar Relative to the U.S. Dollar Has Increased Significantly 2. Abitibi and Bowater Have Not Taken Significant Actions To Remove Newsprint Capacity From the Market Since They Announced Their Merger in January 2007 3. Newsprint Industry Analysts and Competitors of Abitibi and Bowater Do Not Expect Abitibi and Bowater To Take Any Significant Action To Remove Newsprint Capacity From the Market Until After They Have Merged Section C. Additional Evidence That Abitibi and Bowater Exercised Market Power Over the Period 2002 to 2006 1. Based on Publicly Available Information, the Cash Costs of NA Newsprint Mills Were Below the Price of Newsprint in 2003 and 2005. 2. Based on Publicly Available Information, the Cash Costs of NA Newsprint Mills Were Below the Price of Newsprint in 4Q 2006 3. A Comparison of Operating Rates for Newsprint and Uncoated Groundwood Specialty Grades 1999 to 2006 Section D. Additional Analysis Based on the Dominant Firm Model

(DFM)Including a Revision of the DFM Designed To Consider Multi-Period Dynamics 1. Introduction 2. The Relevance of a Paper by Matthew Gentzhow to Our Conclusions Regarding the DFM 3. Would the Dominant Firm Strategy Be Profitable for Abitibi or Bowater Acting Independently? 4. What Are the Effects on Dominant Firm Behavior of a Decline in Demand? 5. A Description of a Revision of the DFM Designed to Consider Multi-period Dynamics Section E. Conclusion B. Events Since the Merger Was Announced in January 2007 Confirm the Dominant Firm Hypothesis 1. In 2007, NA Newsprint Demand and Prices Have Declined Significantly While the Value of the Canadian Dollar Relative to the U.S. Dollar Has Increased Significantly a. NA Newsprint Demand Declined Significantly During the First Five Months of 2007 Table 1 below shows the percentage change in selected newsprint statistics for the first five months of 2007 compared to the first five months of 2006. 5 Table 1 also shows the percentage change in selected newsprint statistics for the twelve months of 2006 compared to the twelve months of 2005. 5 See the Pulp and Paper Products Council (“PPPC”) Newsprint Flash Reports for May 2007, issued June 21, 2007, and December 2007, issued January 25, 2007. As apparently calculated by the PPPC, NA demand equals shipments from NA mills to NA customers plus imports from overseas mills to NA customers. Table 1.—Percentage Change From Prior Year for Selected PPPC Newsprint Statistics—May 2007 YTD vs. May 2006 YTD and December 2006 YTD vs. December 2005 YTD PPPC newsprint flash report category Percent change May 2007 year-to-date vs. May 2006 year-to-date Percent change December 2006 year-to-date vs. December 2005 year-to-date Total NA Demand −10.8 −6.0 Consumption by U.S. Dailies −9.1 −7.1 Imports from Overseas Mills −51.3 −25.2 Shipments from NA Mills to NA Customers −10.1 −5.6 Shipments by NA Mills to Overseas Customers 5.6 −9.8 Total Shipments by NA Mills −7.3 −6.4 During the period January 2007 to May 2007 NA demand declined by 10.8% compared to the first five months of 2006 and consumption by U.S. daily newspapers declined by 9.1%. Imports of newsprint from overseas mills to NA customers declined by 51 .3% to an annual rate of 79,000 metric tonnes. At this rate, imports will account for 0.8% of NA demand in 2007. 6 6 In the White Paper, we concluded that significant imports by NA customers from new Chinese newsprint capacity were unlikely. See Section BA. of the White Paper for our analysis. The import statistics for the first five months of 2007 support that conclusion. Table 1 also shows that shipments by NA newsprint mills to NA customers declined by 10.1% over the first five months of 2007. Partially offsetting the decline in shipments to NA customers, exports from NA mills to overseas customers increased by 5.6%. Total shipments by NA mills to both NA customers and overseas customers were down 7.3% for the five-month period. Since March 2007, there has been a gradual improvement in NA demand and total shipments from NA mills to NA customers and overseas customers. 7 See Table 2 below. 7 See PPPC Flash Reports for March and April 2007. This is a “gradual improvement” in the sense that the decline in NA demand and total shipments from NA mills was lower in April and May 2007 compared to the first three months of 2007. Table 2.—Percentage Change from Prior Year for Selected PPPC Newsprint Statistics—January 2007, February 2007, March 2007, April 2007 and May 2007 PPPC newsprint flash report category Percent change January 2007 vs. January 2006 Percent change February 2007 vs. February 2006 Percent change March 2007 vs. March 2006 Percent change April 2007 vs. April 2006 Percent change May 2007 vs. May 2006 Total NA Demand -10.5 −12.7 −13.4 −9.7 −8.7 Consumption by U.S. Dailies −9.1 −9.4 −8.7 −9.8 −9.2 Imports from Overseas Mills −58.1 −47.3 −62.6 −38.4 −68.7 Shipments from NA Mills to NA Customers −9.6 −12.3 −12.6 −9.4 −7.2 Shipments by NA Mills to Overseas Customers −17.2 10.1 7.0 −0.5 29.0 Total Shipments by NA Mills −10.8 −9.9 −8.6 −7.7 −0.7 Between January 2007 and March 2007, the rate of decline in total NA newsprint demand was higher than previously. In March 2007, NA demand was down 13.4% compared to March 2006. However, in April and May 2007, the rate of decline slowed. By May 2007, the decline in NA demand dropped to 8.7%. 8 The decline in shipments from NA mills to NA customers was almost cut in half: a decline of 12.6% in March vs. a decline of 7.2% in May. 9 In May 2007, total shipments from NA mills were down only 0.7% compared to May 2006 due to both the improvement in shipments to NA customers and strong export growth. After falling to 93% in March and April 2007, the operating rate for NA mills increased to 94% in May 2007. In 2006, the operating rate was 95% for all three months. 8 The decline in consumption by U.S. daily newspapers did not change significantly over the three months: −8.7% in March, −9.8% in April, and −9.2% in May. 9 The decline in imports was reduced from −62.6% in March to −38.4% in April before increasing to −68.7% in May. A comparison of the two columns in Table I reflects the gradual improvement in newsprint operating results over the period March 2007 to May 2007. The decline in consumption by U.S. daily newspapers increased from 7.1% for the twelve months of 2006 to 9.1% for the first five months of 2007, an increase of 2.0%. The decline in total shipments from NA newsprint mills increased from 6.4% for the twelve months of 2006 to 7.3% for the twelve months of 2006, and increase of 0.9%. Operating rates at NA newsprint mills for both the first five months of 2007 and the twelve months of 2006 were 94%. We conclude that while there has been a modest increase in the rate of decline in newsprint consumption by U.S. daily newspapers for the first five months of 2007 compared to the twelve months of 2006, the overall operating results for NA newsprint mills over the two periods are not significantly different. As Table 2 shows, the operating results between 2006 and 2007 have been narrowing over the period March to May, not widening. b. NA Newsprint Prices Declined Significantly During the First Five Months of 2007 While the Value of the Canadian Dollar Increased Significantly The price of newsprint (30 lb, Eastern U.S.) reached a peak of $675 per metric tonne in May 2006 and stayed at $675 through September 2006 before declining gradually to $660 in December 2006. From December 2006 to June 2007, the NA newsprint price fell $75 to $575, a decline of 11.4%. 10 10 The source for the monthly newsprint prices is the RISI publication Pulp & Paper Week. While the price of newsprint was declining by 11.4% between December 2006 and June 2007, the value of the Canadian dollar was increasing 8.2% from $0.868 per U.S. dollar in December 2006 to $0.939 per U.S. dollar in June 2007.” 11 11 The source for the average monthly exchange rates is FXHistory: Historical currency exchange rates, *Oanda.com* . The RISI Pulp & Paper Week edition of May 21, 2007 shows a chart on page 11 comparing the price of newsprint on one vertical axis with the value of the Canadian dollar per U.S. dollar on the other vertical axis from May 2005 to April 2007. The chart shows both values tracking each other fairly closely in the 20 months from May 2005 through December 2006. From January 2007 through April 2007 the two values continuously diverge with the value of the Canadian dollar steadily increasing and the price of newsprint steadily decreasing. Chart I below is an adaptation of the Pulp & Paper Week chart. It shows the percentage change from the respective May 2005 values for both the price of newsprint 12 and the exchange rate for the Canadian dollar in terms of U.S. dollars. 13 Between May 2005 and December 2006, the maximum difference between the two series in any month was 3.3%. In December 2006 the percentage changes from their respective May 2005 values were almost identical (a 9.1% increase for the price of newsprint and a 9.0% increase for the value of the Canadian dollar). In January 2007, the two series began to diverge. As Chart 1 shows, the divergence reached 21.2% in June 2007 as the value of the Canadian dollar increased to 17.9% above its May 2005 value and the price of newsprint declined to 3.3% below the May 2005 price. 12 Source: RISI publication Pulp & Paper Week. 13 Source: FXHistory: Historical currency exchange rates, *Oanda.com* . EN10JN08.055 c. Implications of the Recent Decline in NA Newsprint Demand and Price and the Appreciation of the Canadian Dollar Between the third quarter of 2002 and the third quarter of 2006, the price of NA newsprint rose an aggregate of 49% despite a steady decline in NA newsprint consumption. 14 As we argued in the White Paper, the strategic closure of newsprint capacity by Abitibi and Bowater was a joint exercise of market power responsible for the price increases. We believe these actions and their effects are well documented in the White Paper. As an alternative to the Dominant Firm Hypothesis, the Competitive Response Hypothesis asserts that the price increases are due to competitive responses to the appreciation of the Canadian dollar and increases in the prices of inputs. 14 See Chart E6 on p. 71 of the White Paper which shows steadily rising newsprint prices in the face of steadily declining newsprint demand. As discussed below, since the merger announcement in early January and likely several months earlier, Abitibi and Bowater have stopped strategically closing capacity to raise the price of newsprint. In our view and the view of newsprint industry analysts and newsprint competitors of Abitibi and Bowater, 15 the reason that Abitibi and Bowater have stopped strategically closing capacity is the concern that it could very well lead to the rejection of the merger by U.S. and/or Canadian antitrust authorities. It is also our view and the view of newsprint industry analysts and newsprint competitors of Abitibi and Bowater 16 that if the merger is approved in the U.S. and Canada, a merged AbitibiBowater will take the actions necessary to restore the “balance” between newsprint demand and supply to again raise the price of newsprint above competitive levels. 15 See Section B.3.a. below. 16 See Section B.3a. below. The current decline in newsprint prices is the true competitive response to the decline in NA newsprint demand. In our view, the decline in newsprint prices is occurring because Abitibi and Bowater perceive it would be imprudent to close significant capacity during the merger review period. The current decline in newsprint prices is indicative of the declines that would have occurred over the period 2002 to 2006 had Abitibi and Bowater not intervened with their strategic removal of capacity. The widening divergence between the percentage change in the appreciation of the Canadian dollar and the percentage change in NA newsprint prices from December 2006 to June 2007 as shown in Chart I is further evidence that the correlation between the appreciation of the Canadian dollar and the rise in the price of newsprint in prior years was due to the strategic behavior of Abitibi and Bowater and was not a competitive response to the appreciation. Of course, higher newsprint costs must be reflected in newsprint prices and, as newsprint demand declines, the highest cost capacity will be forced to exit from the market. In 2007, we observe newsprint prices approaching or dropping below the cash costs of the highest cost mills. One mill (the Blue Heron Pomona, CA mill) has been indefinitely idled because it apparently can no longer cover its cash costs. In our view, the operation of the NA newsprint market in the face of declining demand in 2007 is reflective of a competitive market due to the temporary absence of the exercise of market power by Abitibi and Bowater. 17 17 According to a RISI news note dated June 29, 2007, Kruger announced a $25 per metric tonne price increase for 30 lb. newsprint effective September 1, 2007, According to RISI, “Kruger is North America's fourth-largest newsprint producer in terms of capacity with 1.15 million tonnes/yr of production, all of it located in tEasterni Canada. Contacts said it was the first time they could remember that the company had sought to initiate a price increase round.” We view Kruger's announced price increase as a competitive response primarily to the appreciation of the Canadian dollar, an action taken in the absence of the exercise of market power by Abitibi and Bowater since their merger announcement in January 2007. It is plausible that NA newsprint prices have fallen close to the cash costs of one or more Kruger newsprint mills, necessitating the price increase announcement. See Section C.2. below for a discussion of 4Q 2006 cash costs of NA newsprint mills. Whether the price increase announced by Kruger will be successfully implemented or not will depend mainly on the amount of excess capacity at NA newsprint mills in September and succeeding months. 2. Abitibi and Bowater Have Not Taken Significant Actions To Remove Newsprint Capacity from the Market Since the Merger Was Announced in January 2007 Abitibi and Bowater began their merger discussions in June 2006 and concluded them with their merger announcement on January 29, 2007. As antitrust economists, we would expect that during the merger review by regulatory authorities neither Abitibi nor Bowater would take any actions that could be construed by antitrust regulators as anticompetitive, including the significant removal of capacity from the market to raise the price of newsprint. 18 It is likely that even before January 29, 2007, Abitibi and Bowater felt constrained from taking actions to aggressively remove capacity from the market. 18 See “Background of the Combination,” in AbitibiBowater Amendment 3 to the Form S-4 Registration Statement (“Form S-4”) filed with the SEC. June 4, 2007 pp. 70-78. We are not aware of any actions by Abitibi since June 2006 to indefinitely idle or permanently shut down newsprint capacity. No such actions are identified in the Abitibi 2006 Annual Report or in Abitibi's report on its 2007 first quarter results, 19 nor are we aware of any such actions identified in the trade press. In March 2007, Bowater indefinitely idled the No. 3 newsprint machine at its Gatineau, QC mill due to weak demand and increasing costs of recycled fiber and took downtime at other unidentified newsprint mills. 20 19 See Abitibi 2006 Annual Report, pp-23-34 and Abitibi First Quarter 2007 Report to Shareholders, pp. 6-7. In June 2007, Abitibi shut down its Grand Falls, NL mill for three weeks to repair the damage from a fire at the mill. See RISI news note, June 21, 2007. 20 See the Bowater 10-Q Report for 1Q 2007, p. 19. According to RISI economist Kevin Conley, “Bowater is also responding to the sharp decline in demand and rapid rise in fiber prices, curtailing newsprint production at their Gatineau mill in Quebec. The company also stated they have selected other machines for downtime that are heavily dependent on recycled fiber.” See “Surviving the downturn in North American newsprint”, by Kevin Conley, RISI Economist, RISI News Service, April 19, 2007. The newsprint capacity of the No. 3 machine at the Gatineau mill is approximately 115,000 metric tonnes per year. Bowater also indefinitely idled its No. 4 newsprint machine at its Thunder Bay, ON mill in September 2006. See the Bowater 10-Q Report for 1Q 2007, p. 19 and p. 23. Bowater subsequently stated that it would restart this paper machine in May 2007 producing specialty grades rather than newsprint. The newsprint capacity of the Thunder Bay machine was 146,000 metric tonnes. These actions by Bowater, however, fall far short of the capacity removals needed to restore the “balance” between NA newsprint supply and demand. According to RISI economist Kevin Conley, “At this point, the announced reduction in North American supply [ *i.e.* , the closure of Blue Heron's Pomona, CA mill and Bowater's curtailment of production at its Gatineau, QC mill] could not possibly keep pace with the continued decline in North American demand.” 21 21 “Surviving the downturn in North American newsprint”, by Kevin Conley, RISI Economist, RISI News Service, April 19, 2007. In our view, the current idling of newsprint capacity at Bowater's Gatineau, QC mill, is a competitive response and not a strategic capacity closure in pursuit of a joint dominant firm strategy. 3. Newsprint Industry Analysts and Competitors of Abitibi and Bowater Do Not Expect Abitibi and Bowater to Take Any Significant Action to Remove Newsprint Capacity from the Market Until After They have Merged a. Comments in the Trade Press

(1)“We would expect that Abitibi and Bowater will be focused primarily on closing the merger, and therefore, unlikely in our opinion to rationalize any newsprint capacity in IH 2007,” Goldman Sachs analyst Richard Skidmore told investors. 22 22 “Market abuzz over merger: concerns center on pricing and customer relationships,” Pulp & Paper Week, February 5, 2007, p. 11.

(2)“No one will close any capacity because they figure AbitibiBowater will do it for them. And Abitibi and Bowater will figure they can't be too aggressive on pricing or close capacity until their deal closes,” said one contact. 23 23 “Market abuzz over merger: concerns center on pricing and customer relationships,” Pulp & Paper Week, February 5, 2007, p. 11.

(3)North American newsprint capacity now exceeds orders, resulting in a declining market. Salman Partners indicated that the majority of newsprint producers are waiting to see what will happen after the merger of Abitibi-Consotidated Inc. with Bowater Inc. later this year before making any decisions on shutdowns. 24 24 “Steeper Decline in Newsprint Data Reported in February,” Debra Garcia, Editor & Publisher, March 28, 2007.

(4)At this point, the announced reduction in North American supply could not possibly keep pace with the continued decline in North American demand. It appears producers are waiting for the Abitibi/Bowater merger to be finalized in the hope that the new company will close necessary capacity to balance the market and bring an end to falling newsprint prices. However, this merger of North America's two largest newsprint producers will not be completed until the third quarter of 2007, at the earliest. 25 25 “Surviving the downturn in North American newsprint”, by Kevin Conley, RISI Economist, RISI News Service, April 19, 2007.

(5)Other suppliers are hoping the union of the two companies will go through smoothly in anticipation that AbitibiBowater will quickly make the industry's capacity cuts. They see it as a silver bullet for the whole industry, allowing them to reap the benefits of a tighter North American paper market without the necessity of cutting production themselves. 26 26 “The making of a merger: secret talks that could have derailed AbitibiBowater deal set tantalizing questions for analysts,” Pulp & Paper Week, May 7, 2007, p.8. The title of the Pulp & Paper Week article refers to other strategic options Bowater was considering as alternatives to a merger with Abitibi. According to the AbitibiBowater Form S-4 filing: “Throughout the period from July 2006 through December 2006, Bowater continued to consider a wide range of strategic alternatives with third parties, including acquisitions of assets or businesses and sales or distributions of certain of its businesses, and members of senior management had informal discussions with their counterparts at other paper companies. Bowater's Board of Directors was regularly updated on the status of these discussions. These discussions did not advance beyond intermediate stages in respect of transactions that would have precluded a combination with Abitibi. In August 2006, Bowater commenced discussions with a paper producer regarding a possible transaction in which Bowater would acquire the paper producer and possibly either sell or spin-off its newsprint assets. However, due to significant tax and structuring issues that would have made execution difficult and potentially adversely impact shareholder value, as well as significantly differing views as to the parties' respective valuations, the parties determined not to proceed with discussions regarding a possible transaction. During this period, Bowater also explored the potential sale of certain of its newsprint assets to another newsprint manufacturer. These discussions were terminated in January 2007.” See AbitibiBowater Amendment 3 to the Form S-4 Registration Statement (“Form S-4”) filed with the SEC. June 4, 2007, p. 71.

(6)Dillon expected a further newsprint price hike attempt later this year, despite the sluggish market. To be successful, the two biggest producers, Abitibi and Bowater, would have to support it, and that is not likely to occur until after the merger is completed “due to concerns that such a move might he misread by regulators,” said Dillon. 27 27 “Newsprint Prices Continue to Sink,” Debra Garcia, Editor & Publisher, July 5, 2007. Chip Dillon is a newsprint industry analyst with Citigroup Global Markets. b. Implications of Comments in the Trade Press From the trade press commentary above, it is apparent that newsprint industry analysts and newsprint competitors of Abitibi and Bowater are waiting for the merger to be completed in anticipation that a merged Abitibi-Bowater will increase NA newsprint prices by shutting down enough newsprint capacity to create a tight market. It is also apparent that these same analysts and competitors believe that Abitibi and Bowater will not take any significant actions to remove capacity from the market until after their merger review is completed “due to concerns that such a move might be misread by regulators.” 28 28 “Newsprint Prices Continue to Sink,” Debra Garcia, Editor & Publisher, July 5, 2007. C. Additional Evidence That Abitibi and Bowater Exercised Market Power Over the Period 2002 to 2006 1. Based on Publicly Available Information, the Cash Costs of NA Newsprint Mills Were Below the Price of Newsprint in 2003 and 2005 a. Description of RISI Newsprint Cash Cost Benchmarking Studies 2003 and 2005 RISI conducts periodic cost benchmarking studies analyzing the cash cost of producing newsprint for each NA newsprint mill. 29 The supply curve for NA newsprint can be shown by arraying the cash costs by NA mill in ascending order. 29 See the RISI Web site for more mformation on these benchmarking studies. RISI publishes these studies every two years. RISI also provides quarterly updates by CD. In addition, RISI provides cash cost benchmarking studies by newsprint machine. While NAA has not acquired any of the newsprint cost benchmarking studies ($12,500 for the 2006 NA newsprint mill study), we expect that the studies are available to DOJ from Abitibi, Bowater and other newsprint manufacturers through the discovery process. Chart 2 below compares the cash costs for NA mills in 2003 and 2005. Chart 2 has been adapted from a report by a Canadian securities analyst for CIBC World Markets (“CIBC report”) 30 The vertical axis shows the cash costs per metric tonne of newsprint in U.S. dollars for each NA mill in 2003 and 2005. The horizontal axis of Chart 2 shows the capacity per NA newsprint mill in 2003 and 2005 arrayed from lowest cost mill to highest cost mill. Each vertical bar represents one mill. The paler vertical bars in the foreground of the chart represent the capacities and cash costs of NA newsprint mills in 2003. The vertical darker bars in the background of the chart represent the capacities and cash costs of NA newsprint mills in 2005. As the chart shows, the mill locations in 2003 and 2005 are identified by region: Canada West, Canada East, U.S. Northeast, U.S. South, and U.S. West. The mills were not further identified in Slide 35 of the CIBC Report, but the mill owners and specific mill locations (as opposed to regional locations) are identified in the underlying paperloop.com cost benchmarking study available from RISI. 30 See “World Newsprint Market: Winners and Losers,” by Don Roberts, Managing Director, CIBC World Markets, April 24, 2006, Slide 35. CIBC World Markets was retained by Abitibi in June 2006 as its financial advisor with respect to the proposed merger with Bowater. See Form S-4, p. 70. The CIBC report states that the source for the cost curve comparison is “Paperloop Benchmarking Service,” a predecessor to RISI. We have added the four text boxes to the left of the chart and the two text boxes to the right. In addition, we have added the two horizontal green lines and the two horizontal red lines at the top of the chart. A chart appearing in this comment is not able to be reprinted here. Copies of the comment with the chart are available at the Department of Justice Antitrust Division web site, *http://www.usdoj.gov/atr* , at the Antitrust Documents Group of the Department of Justice Antitrust Division, 450 Fifth Street, NW., Suite 1010, 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. Chart 2 shows a reduction in NA newsprint capacity of about 1.4 million metric tonnes between 2003 and 2005. The aggregate NA capacity shown for 2003 is about 13.5 million metric tonnes and the aggregate NA capacity shown for 2005 is about 12.1 million metric tonnes. In Chart 2, the number of NA newsprint mills declined from 48 in 2003 to 44 in 2005. In 2003 and 2005, Chart 2 shows that most of the highest cost mills in NA were located in Eastern Canada. In 2005, the top half of the cost curve is dominated by Eastern Canadian mills with the exception of one U.S. Northeast mill, three U.S. West mills, and one Western Canadian mill. The bottom half of the cost curve in 2005 is dominated by mills located in the U.S. South and in Western Canada. Between 2003 and 2005, the cost disadvantage of mills in Eastern Canada increased relative to other NA mills, particularly those mills located in the U.S. South. CIBC attributes this increased cost disadvantage “largely to the strong C$,” stating that the “15% appreciation of the C$ made the cost curve steeper—up another 5% since then.” 31 31 See CIBC Report, Slide 35. CIBC Slide 35 does not identify the quarter in which the NA mill cash costs were estimated for either the 2003 or 2005 newsprint cost benchmarking studies. In Chart 2, the two horizontal green lines that we have drawn show the NA newsprint price (30 lb., Eastern U.S.) for 1Q 2003 ($475 per metric tonne) and 4Q 2003 ($527 per metric tonne). 32 As indicated by the lower text box on the right hand side of the chart, the highest mill cash cost in 2003 was about $430 per metric tonne, which was $45 per metric tonne lower than the 1Q 2003 newsprint price and $97 per metric tonne lower than the 4Q 2003 newsprint price. 32 The source of the quarterly newsprint prices is the RISI 2006 Fact & Price Book, p. 150. The price of newsprint increased in each quarter of 2003. See Chart E6 on p. 71 of the White Paper. In Chart 2, the two horizontal red lines that we have drawn show the NA newsprint price (30 lb., Eastern U.S.) for 1Q 2005 ($580 per metric tonne) and 4Q 2005 ($637 per metric tonne). 33 As indicated by the upper text box on the right hand side of the chart, the highest mill cash cost in 2005 was about $510 per metric tonne which was $70 per metric tonne lower than the 1Q 2005 newsprint price and $127 per metric tonne lower than the 4Q 2005 newsprint price. 33 The source of the quarterly newsprint prices is the RISI 2006 Fact & Price Book, p. 150. The price of newsprint increased in each quarter of 2005. See Chart E6 on p. 71 of the White Paper. b. Implications of the RISI 2003 and 2005 Cash Cost Studies The newsprint capacity removals by Abitibi and Bowater during the period 2002 to 2006 are analyzed in Sections F through H of the White Paper. During that time Abitibi and Bowater combined capacity removals accounted for 80.8% of total NA capacity removals. Catalyst accounted for 7.3% of the capacity removals and two firms that exited from the newsprint market to produce uncoated groundwood specialty grades accounted for 9.7%. The other thirteen newsprint manufacturers that remain in the NA newsprint market today accounted for just 2.2% of the capacity removals. 34 34 See Chart G3 on p.91 of the White Paper. If the variable cost of the newsprint capacity that Abitibi and Bowater removed from the market during the period 2002 to 2006 was less than the price of newsprint, that capacity removal would be consistent with the hypothesis that Abitibi and Bowater were jointly exercising market power. Firms in competitive markets do not generally remove capacity from the market if that capacity is generating positive profit margin (i.e., when price exceeds variable cost). Chart 2 above shows that the price of newsprint exceeded the 2003 cash cost of all NA newsprint mills in 1Q 2003 and 4Q 2003. 35 Similarly, Chart 2 shows that the price of newsprint exceeded the 2005 cash cost of all NA newsprint mills in 1Q 2005 and 4Q 2005. 36 Due to the limitations of Chart 2 discussed above, these results strongly suggest but do not prove that the cash cost of the newsprint capacity Abitibi and Bowater removed from the market during this period was less than the price of newsprint at the time of the capacity removal. However, as we pointed out at our meeting with the DOJ staff, DOJ should be able to determine if the cash cost of the capacity removed by Abitibi and Bowater was less than the price of newsprint at the time of the capacity removal with information available to DOJ through the discovery process, including the RISI NA newsprint mill cash cost benchmarking studies. Such a determination would provide additional evidence that the capacity removals were an exercise in market power in pursuit of their dominant firm strategy. 35 Since the price of newsprint increased in each quarter of 2003, the price exceeded the 2005 cash cost of each mill in the second and third quarters of 2003 as well. 36 Since the price of newsprint increased in each quarter of 2005, price exceeded the 2005 cash cost in the second and third quarters of 2005 as well. 2. Based on Publicly Available Information, the Cash Costs of NA Newsprint Mills Were Below the Price of Newsprint in 4Q 2006 a. Description of RISI Newsprint Cash Cost Benchmarking Study 4Q 2006 Chart 3 below shows cash costs of NA mills in 4Q 2006. The chart is adapted from a chart that appeared in a RISI article in April 2007. 37 37 See “Surviving the downturn in North American newsprint” by Kevin Conley, senior economist, RISI, April 19, 2007. EN10JN08.056 The interpretation of Chart 3 is similar to the interpretation of Chart 2 except that Chart 3 doesn't provide a color code to identify mills by region. As in Chart 2, the mill owners and specific mill locations are not identified. In Chart 3, 43 newsprint mills are shown and the aggregate NA total capacity is 11.9 million metric tonnes. The highest cost mill has a cash cost of about $630 per metric tonne which is $30 lower than the December 2006 newsprint price of $660 (30 lb., Eastern U.S.) as reported by RISI Pulp & Paper Week. The December 2006 newsprint price is indicated by the horizontal red line at the top of Chart 3. b. Implications of the RISI 4Q 2006 Cash Cost Study Since 4Q 2006, the price of newsprint has dropped from $660 per metric tonne to $585 in June 2007. In March 2007, Blue Heron announced that it would be indefinitely idling its Pomona, CA mill due primarily to significant increases in the cost of recycled fiber over the past year. 38 It seems likely that the high cost mill in Chart 3 at about $630 per metric tonne is the Blue Heron Pomona mill. If so, when the price of newsprint dropped below $630 to $625 in March 2007, the variable cost of production at the Pomona plant exceeded the price of newsprint. 38 The Blue Heron Pomona plant is a 100% recycled fiber plant. In March 2007, Bowater announced that it was indefinitely idling a newsprint machine at its Gatineau, QC mill due to high recycled fiber costs. See “Surviving the downturn in North American newsprint” by Kevin Conley, senior economist, RISI, April 19, 2007. SP newsprint, which also relies heavily on recycled fiber at its two mills, recently announced that it was evaluating its strategic options, including a possible sale of the two mills. One mill is located in Oregon and the other is located in Georgia. See RISI news note, May 17, 2007. 3. A Comparison of Operating Rates for Newsprint and Uncoated Groundwood Specialty Grades 1999 to 2006 Section J of the White Paper compared newsprint prices with the prices of uncoated groundwood specialty grades 3Q 1999 to 4Q 2006. We showed that price increases for newsprint between 2002 and 2006 greatly exceeded price increases for three of four uncoated groundwood specialty grades for which data were available. 39 Since these three uncoated groundwood specialty grades were more adversely affected by the increase in input prices and the appreciation of the Canadian dollar than newsprint was over the period 2002 to 2006, 40 we would expect to see greater price increases for these uncoated groundwood specialty grades than for newsprint if the price increases for newsprint were competitively determined. The fact that the price increases for these uncoated groundwood specialty grades were considerably lower than the price increases for newsprint over this period contradicts the hypothesis that the newsprint price increases were a competitive response to input price increases and the appreciation of the Canadian dollar and confirms the Dominant Firm Hypothesis that the newsprint price increases were due to the joint exercise of market power by Abitibi and Bowater. 39 The price changes were measured as a percentage of their respective 3Q 1999 prices. There was one exception to the significant divergence between newsprint prices and the prices of uncoated groundwood specialty grades over the period 2002 to 2006. The price of Hi-Brite 65 showed a similar increase to that of newsprint. The explanation for this similarity appears to be that Abitibi and Bowater are also dominant in the production of Hi-Brite grades. See p. 115 of the White Paper and Table B7 in Attachment B of the White Paper. 40 See the discussion on pages 110-112 of the White Paper. In addition, demand for uncoated groundwood specialty grades was growing over the period 2002-2006 whereas the demand for newsprint was declining. Other things equal, these divergent growth rates should have led to higher price increases for uncoated groundwood specialty grades than for newsprint. During our meeting with DOJ, we pointed out that the significantly lower price increases for uncoated groundwood specialty grades compared to the price increases for newsprint over the period 2002 to 2006 could be largely explained by the significantly lower operating rates for uncoated groundwood specialty grades. We were asked by the DOJ staff if the maximum practical operating rate for the production of uncoated groundwood specialty grades might be lower than the maximum practical operating rate for the production of newsprint. Chart 4 below shows that the operating rates for both newsprint and uncoated groundwood specialty grades were nearly identical from 1999 to 2001 before diverging in 2002. 41 In 1999 and 2000, the operating rates for both newsprint and uncoated groundwood specialty grades were 95% and 97% before falling to 90% in 2001. In 2002, the operating rate for newsprint exceeded the operating rate for uncoated groundwood specialty grades by 1%. This gap widened to 3% in 2003 and 6% in 2004 before narrowing to 2% in 2005 and 1% in 2006. These results show that high maximum practical operating rates are similarly attainable for uncoated groundwood specialty grades and provide further support for the hypothesis that the significantly greater increase in newsprint prices over the period 2002 to 2006 was due to the joint exercise of market power by Abitibi and Bowater. 41 Sources for Chart 4:

(a)Newsprint operating rates 1999 to 2003 from PPPC North American Newsprint Statistics Monthly Bulletin, December 2001 to December 2004, and PPPC Newsprint Flash Reports, December 2005 and December 2006;

(b)Uncoated groundwood specialty grade statistics from RISI Fact and Price Book, p. 164. The relevant statistics for the U.S. and Canada have been combined to calculate an NA operating rate for uncoated groundwood specialty grades for the period 1999 to 2006. The source for the uncoated groundwood specialty grades has been previously provided by NAA to DOJ. EN10JN08.057 D. Additional Analysis Based on the Dominant Firm Model

(DFM)Including a Revision of the DFM Designed to Consider Multi-period Dynamics 1. Introduction In Section K and Attachment K of the White Paper, we presented a model of dominant firm behavior adapted to the newsprint industry. The model allowed us to address two questions: • In theory, how could Abitibi and Bowater, acting together or as a merged entity, profitably raise price? • Do the current conditions in the newsprint industry suggest that Abitibi and Bowater actually have the ability profitably to raise price further? 42 42 As discussed in Section B.1.a. above, operating results at NA newsprint mills have gradually improved over the period March 2007 to May 2007 after declining over the first three months of 2007. In May 2007, total shipments from NA mills were down only 0.7% compared to May 2006. See Table 2. One of the questions asked by DOJ concerned the applicability of the DFM in the context of a significant accelerating decline in operating results for NA newsprint mills. Given that the gap in operating results between the first five months of 2007 and the twelve months of 2006 has been narrowing over the past three months, this question may be obviated. Using estimated values for the model's parameters, we showed that the model predicted that it would be profitable under current conditions 43 for a dominant firm with the combined shares of Abitibi and Bowater to exercise market power through the dominant firm strategy. We concluded that even allowing for adjustments to the parameter values, the model pointed to the profitability of a significant price increase. Changing various estimated parameters within a reasonable range did not alter this finding. 43 To estimate the parameter values, we used the most current data publicly available at the time we prepared the White Paper. In this section, we address the following issues: 1. Introduction 2. The Relevance of a Paper by Matthew Gentzhow to Our Conclusions Regarding the DFM. 3. Would the Dominant Firm Strategy be Profitable for Abitibi or Bowater Acting Independently? 4. What Are the Effects on Dominant Firm Behavior of a Decline in Demand? 5. A Description of a Revision of the DFM Designed to Consider Multiperiod Dynamics. 2. The Relevance of a Paper by Matthew Gentzhow to Our Conclusions Regarding the DFM In our April 20 meeting, the DOJ staff mentioned a paper by Matthew Gentzhow which analyzed how a newspaper's online activities affect the demand for its print edition. 44 Using information concerning the Washington Post, the author concluded that the Post's online edition reduced readership of the paid newspaper by a significant but very small amount: eliminating the online edition entirely would increase readership by only about 1.5% (p. 5). 44 We believe the article staff referred to is Matthew Gentzhow, “Valuing New Goods in a Model with Complementarity: Online Newspapers” National Bureau of Economic Research

(NBER)Working Paper 12562, January 24, 2006. The DOJ staff expressed interest in determining the rate at which the demand for newsprint will decline in the future. Extrapolating from Gentzhow's paper to newspapers other than the Post, demand for printed newspapers has been reduced very slightly by the introduction of newspaper websites. There is nothing in the article to suggest that newspaper websites (which are now quite widespread) will cause significant further reduction in the demand for printed newspapers (and hence newsprint) in the near future. Data recently published by the NAA on newspaper print copy and newspaper online advertising revenues are consistent with this conclusion. On-line advertising revenues at U.S. daily newspapers increased from 5.5% of total newspaper advertising revenues in the first quarter of 2006 to 7.1% of total newspaper advertising revenues in the first quarter of 2007. 45 While this is a non-trivial increase in on-line advertising revenues as a percentage of total newspaper advertising revenues, both the percentage increase and overall percentage of on-line revenues are still quite small relative to total newspaper advertising revenues. 45 See “Newspaper Online Ad Growth Slows—As Print Revenue Keeps Skidding,” by Jennifer Saba, Editor & Publisher, May 29, 2007. 3. Would the Dominant Firm Strategy be Profitable for Abitibi or Bowater Acting Independently? In the White Paper model, as well as in a revised model designed to consider multi-period dynamics, 46 a dominant firm with initial share of about 25.7% (like Abitibi) or about 15.8% (like Bowater) can increase its profits by acting as a dominant firm. However, the optimal percentage price increase that either firm would find is lower than the price increase that would be preferred by a firm with their combined share (modeled as 41.5%). 47 46 See the description of this revised model in Section D.5. below. 47 For the purposes our analysis of the DFM, the individual Abitibi and Bowater shares as well as their combined share have been adjusted to account for Abitibi aM Bowater partial ownership of certain newsprint mills and machines. See Table C.l. in Attachment C of the White Paper for information on their partial ownership of certain newsprint capacity. White Paper Model Dominant Firm Share No DF 41.5% 25.7% 15.8% Price $625 $922 $781 $692 Revised Model Dominant Firm Share No DF 41.5% 25.7% 15.8% Price $590 $1,166 $782 $647 Under the White Paper model, the lowest initial dominant firm share from which it is profitable to engage in the dominant firm strategy, given the other assumed parameters, is about 16%. Using the revised model, the corresponding share is about 14.5%. Both models indicate that it would be profitable for Abitibi or Bowater acting on its own to reduce capacity and elevate price. In both models, the dominant firm assumes that all other firms in the industry will act as fringe, increasing their output in response to a capacity reduction by the dominant firm. (In other words, there is no assumption of a coordinated anticompetitive response by the fringe.) As pointed out in the White Paper, however, both firms have been actively reducing capacity since at least 2002. We believe it unlikely that either of these firms assumes that the other firm will behave as part of the fringe. 4. What Are the Effects on Dominant Firm Behavior of a Decline in Demand? a. A Decline in Demand Resulting in a Lower Newsprint Industry Capacity Utilization Rate A decline in demand can be interpreted as affecting the initial conditions. Reducing demand starts the industry off with lower industry capacity utilization. Decreasing industry capacity utilization (i.e., increasing excess capacity in the initial conditions) reduces the optimal price increase for a dominant firm of a given size. This question can be addressed with a simple adjustment to the White Paper model. We assumed that capacity utilization was 95% and that a dominant firm could begin to raise newsprint prices by removing capacity to bring utilization to 98%. A fall in demand could be thought of as changing the starting position from 95% capacity utilization to something lower: e.g., 90%. Leaving all the other parameters in the model the same (see Table K1 of the White Paper), the profit-maximizing dominant firm price increase at various levels of initial capacity utilization is as follows: White Paper Model Initial Capacity Utilization 95% 90% 80% 70% 63% DF's profit-maximizing price increase 48% 43% 32% 18% 5% Even if demand for newsprint fell to such an extent that capacity utilization was 63%, it would still be profitable for the dominant firm with a 41.5% initial share to withdraw capacity and raise price 5%. Using a revised model, a fall in demand can be modeled as reducing the initial demand level such that, given the existing industry capacity and cost structure, the industry equilibrium output is at a lower level of capacity utilization. If demand were such that initial capacity utilization were as low as 73%, it would still be profitable for a dominant firm with a 41.5% initial share to engage in the dominant firm strategy. Revised Model Initial Capacity Utilization 95% 90% 80% 75% 73% DF's profit-maximizing price increase 98% 79% 47% 32% 26% b. The Effect of an Increase in the Rate of Decline of Demand Alternatively, a decline in demand can be interpreted as affecting the rate of decline of demand in future periods. A revised dominant firm model was created to consider multiple-period dynamics. To explore the effect of the rate of decline of demand, we contrasted the profits from two alternative strategies: DF: The dominant firm acts as a dominant firm in the first period by withdrawing capacity and raising price, then it accepts the equilibrium price (given the reduced capacity) in subsequent periods. No DF: The dominant firm accepts the equilibrium price and quantity in all periods. The dominant firm prefers the strategy that yields the greatest discounted profit flow. With an initial share of 41.5%, the DF strategy is preferred even if demand is declining by as much as 20% per year. 48 It appears that no reasonable rate of future decline in demand would cause a dominant firm with this initial share to abandon dominant firm behavior entirely. Future decline in demand does not deter the dominant firm from withdrawing capacity and elevating price in the first period. 48 This rate is almost double the rate of decline in recent months. Higher rates of decline were not explored. During the period January 2007 to April 2007, total NA demand for newsprint declined 11.2% compared to the first four months of 2006. See Section 2.b. above. If the dominant firm's initial share is sufficiently low (e.g., 15%), the No DF strategy is preferred when there is significant decline in future demand (e.g., 5% or 10% per year). Thus, it is possible that a dominant firm with a low initial share would act as a dominant firm when demand is declining slowly but choose not to act as a dominant firm when demand is declining rapidly. The intuition is as follows: with a small initial share, the dominant firm must close a major portion of its capacity to elevate the price in the first period. Accepting the competitive solution in subsequent periods, the dominant firm finds that the profits with a much-reduced output and slightly higher prices (as would result from the DF strategy) yields lower profits than taking its initial share of industry output at somewhat lower prices (as would result from the No DF strategy). When the two alternative strategies are considered for the initial period and multiple subsequent periods, the No DF strategy yields higher discounted profits. Note that if there is an incentive not to act as a dominant firm, it comes from the assumption that capacity withdrawn by the dominant firm is permanently withdrawn and cannot be restarted. If the dominant firm were simply to “idle” capacity but retain the option of restarting the capacity in the future, then it suffers no penalty in future periods when the dominant firm behavior is no longer profitable. If capacity can be withdrawn on a temporary basis, future decreases in demand would not deter a dominant firm from behaving as a dominant firm when it is otherwise profitable to do so. Using a model based on current industry conditions and plausible projected declines in North American demand for newsprint, we see no reason to believe that dominant firm behavior in the newsprint market will cease due to a more rapid decline in industry demand. The decline in newsprint demand is not new. With the exception of a few up-ticks in demand, the NA demand for newsprint has been steadily declining since the fourth quarter of 1999. 49 As separate firms, Abitibi and Bowater have been engaging in dominant firm behavior since at least the third quarter of 2002 in response to the decline in NA newsprint demand. Even if future rates of decline are higher than in previous years, the merger of two firms separately engaged in dominant firm activity in the past increases the likelihood that such behavior will be profitable in the future. 49 See Chart E2 on p. 61 of the White Paper. 5. A Description of a Revision of the DFM Designed to Consider Multiperiod Dynamics The model presented in the White Paper started with a stylized representation of current conditions and considered whether it would be profitable for a dominant firm to withdraw capacity. The revised model includes an expanded structure that permits calculation of an equilibrium price under various dominant firm behaviors and under different levels of industry demand. In particular, the revised model takes into account multi-period dynamics. 1. Information is available showing the variable cost per delivered tonne of all the mills in the industry as of 4Q 2006. See Chart 3 in Section C.2.a. above. Mills are arranged in order of increasing cost. Based on a slightly stylized version of this cost profile, it is assumed that the cost per tonne of the most efficient mill is $400, the cost per tonne of the least efficient mill is $600, and the cost per tonne of the rest of the capacity in the industry can be approximated by a straight line between these two end points. The industry cost of $600 per tonne occurs at full capacity of approximately 12,000,000 tonnes. This cost profile becomes the industry cost curve and is the supply curve under competitive conditions. Thus, if output were 12,000,000 tonnes, the cost of the least efficient mills would be $600 and, in a competitive equilibrium, $600 would be the price. C = 400 + Q/60,000. 2. For simplicity, it is further assumed that the dominant firm and the fringe have the same cost profile at corresponding degrees of capacity utilization, or in other words, that they have (approximately) the same mix of mills with various degrees of efficiency. The cost curve for the dominant firm runs from $400 at zero or low levels of output to $600 at full capacity utilization; likewise for the fringe. Added together, the two cost curves make up the industry supply curve. 3. There is an explicit industry demand equation: Q = A P α . This demand function is calibrated using the market elasticity of demand cited in the literature and assumed in the White Paper (α = −0.36). The parameter A is chosen so that price is equal to cost in the initial scenario of interest. Decreases in demand are modeled as reductions in A. Reducing A by 10%, for instance, means that the quantity demanded at any given price would be 90% of what it previously was. 4. We start by looking at a situation in which the industry is at competitive equilibrium with capacity utilization of 95%. (For simplicity, we assume that the maximum achievable capacity utilization is 100%, rather than a lower level such as 98% in the White Paper model.) Given the industry capacity assumed, 95% capacity utilization is achieved at an output level of 12,000,000 * 95% = 11,400,000. Given the industry cost curve assumed, cost at this output level is $590 per tonne. The demand curve is parameterized with A = 113,347,403 so demand equals supply at this price and output. The assumption that the industry is currently at a competitive equilibrium follows the observation that price has been falling and capacity has not been withdrawn by either Abitibi or Bowater in the past few months. 5. At this stage, the dominant firm decides whether it is more profitable to stay at the competitive equilibrium or behave as a dominant firm, removing capacity from the market to increase price. When the industry is at a competitive equilibrium, the profit of the dominant firm is calculated as the area of a right triangle. The base of the triangle is the segment from $400 to the current industry cost level. The height of the triangle is the output of the dominant firm. In the initial scenario, output of the dominant firm is 95% times the capacity of the dominant firm. 6. If the dominant firm decides to increase price, its profit has two components. The first is a triangle as described previously (but with a reduced quantity for the dominant firm). The second is a rectangle. The height of the rectangle is the dominant firm's output and the base of the rectangle is the difference between price and the dominant firm's cost at the relevant output level. (As the dominant firm reduces capacity, the capacity with highest cost is eliminated first. For this reason, the marginal cost of the dominant firm's output declines as it reduces capacity.) 7. With these initial conditions, it is profitable for a firm with 41.5% share of capacity to remove capacity and increase price—the profit-maximizing price is almost double the initial price of $590. (One reason that such a large price increase is predicted is the assumption that demand elasticity does not increase as price increases.) At lower initial capacity levels, the profit-maximizing price is reduced. At an initial capacity level of about 14.5%, the profit-maximizing price under a dominant firm strategy yields no more profit than the competitive equilibrium. Separately and combined, Abitibi and Bowater currently have shares above 14.5%. 8. Suppose that a firm is at 15% initial capacity share. It is slightly more profitable for the first period to behave as a dominant firm. However, if demand declines 10% in each subsequent period, it is not profitable in these subsequent periods to behave as a dominant firm. The “dominant firm” accepts the market equilibrium in the second period and thereafter. Because the firm gave up share in the first period, however, its profits in all subsequent periods are reduced. For a firm with an initial share of 15%, the multi-period discounted profit flow is greater if the firm does not engage in the dominant firm strategy even in the first period. 9. Intuitively, whether it will be profitable to behave as a dominant firm for some number of periods will depend on the firm's initial share of capacity, the degree of capacity utilization initially, the rate of decline in demand, and the relevant discount rate. As noted above, acting as a dominant firm brings no penalty in later periods if the dominant firm idles, rather than permanently removes, capacity. In this case, considerations about reduced capacity in future periods would no longer deter a firm from pursuing a dominant firm strategy. E. Conclusion We met with the DOJ staff on April 20, 2007 to discuss our White Paper analyzing the likely competitive effects of the proposed Abitibi-Bowater merger. 50 This memorandum responds to several questions raised by the DOJ staff at our meeting. In our White Paper we provided considerable evidence that Abitibi and Bowater had used a dominant firm strategy to successfully exercise market power through strategic capacity closures over the period 2002 to 2006. We concluded that Abitibi and Bowater, if allowed to merge, would have an increased incentive and ability to pursue a dominant firm strategy post-merger. The analysis contained in this response memorandum confirms our White Paper analysis and strengthens our conclusions. 50 The White Paper was submitted to DOJ on behalf of the Newspaper Association of America on April 11, 2007. In this response memorandum, we reach six main conclusions:

(1)Events in the NA newsprint market since the Abitibi-Bowater merger announcement in January 2007 demonstrate how the NA newsprint market would have functioned absent the exercise of market power by Abitibi and Bowater. As NA newsprint demand continued to decline in 2007, NA newsprint prices have declined to the cash costs of the highest cost NA newsprint mills. One mill (Blue Heron in Pomona, CA) has been indefinitely idled due to its high cash costs of newsprint production. In the absence of the exercise of a dominant firm strategy by Abitibi and Bowater while their proposed merger is under regulatory review, the NA newsprint market is performing competitively. See Sections B.1., B.2., B.3., and C.2. above.

(2)We conclude that if the merger is approved, Abitibi-Bowater will have an enhanced incentive and ability to engage in dominant firm behavior post-merger. As shown by trade press comments cited in Section B.3.a. above, it is widely anticipated by competitors of Abitibi and Bowater and by newsprint industry analysts that, once the merger is approved, Abitibi-Bowater will remove enough newsprint capacity from the market post-merger to create a tight market, thereby increasing newsprint prices above competitive levels.

(3)Prior to the merger announcement, changes in the price of newsprint were closely correlated with changes in the value of the Canadian dollar per U.S. dollar. Since the merger announcement in January, the value of the Canadian dollar has increased significantly while the price of newsprint has declined significantly. The divergence between the value of the Canadian dollar and the price of newsprint since the merger announcement provides strong support for the Dominant Firm hypothesis and contradicts the Competitive Response hypothesis. See Section B.1.b. and Chart 1 above.

(4)RlSI benchmarking cash cost studies for NA newsprint mills strongly suggest that Abitibi and Bowater closed newsprint capacity over the period 2002-2006 even though the cash cost of that capacity was below the price of newsprint at the time of the capacity closures. Such behavior is consistent with the Dominant Firm hypothesis and contradicts the Competitive Response hypothesis. See Section C.1. and Chart 2 above.

(5)Between 1999 and 2001, the aggregate operating rates for NA newsprint mills and NA mills producing uncoated groundwood specialty grades were nearly identical. Beginning in 2002, the gap between newsprint mill operating rates and the operating rates of mills producing uncoated groundwood specialty grades began to widen. In 2004, the aggregate operating rate for newsprint mills was 6% greater than the aggregate operating rate for mills producing uncoated groundwood specialty grades. This divergence in operating rates is consistent with the Dominant Firm hypothesis and contradicts the Competitive Response Hypothesis. See Section C.3. and Chart 4 above.

(6)In Section D above, we revise the Dominant Firm Model to account for multi-period dynamics and the effect of an increase in the decline of newsprint demand on dominant firm strategy. 51 We also analyze whether Abitibi and bowater, acting independently could profitably pursue a dominant firm strategy. Our analysis shows that while it would be profitable for both Abitibi and Bowater to independently pursue a dominant firm strategy, a merged Abitibi-Bowater would have the incentive and ability to achieve higher prices and profits though a dominant firm strategy compared to the firms acting independently. We also show that a dominant firm strategy would be profitable even in the face of declines in newsprint demand considerably greater than currently experienced and over multiple periods. 51 As shown in Section B.1.a. and Tables 1 and 2 above, the increase in the decline in NA newsprint mill operating results in the first three months of 2007 began to slow in April and May 2007. In May 2007, total shipments by NA newsprint mills were only 0.7% below the level for May 2006. Attachment D—Supplement 2 to the White Paper by Economists Incorporated, Submitted on Behalf of the NAA to DOJ on July 20, 2007 Economists Incorporated An Economic Analysis of the Competitive Effects of the Proposed Abitibi-Bowater Merger Response to Issues Raised at Our Meeting With the DOJ Staff on April 20, 2007 Revision to the July 9, 2007 Response Submitted to DOJ on Behalf of NAA John H. Preston, Kent W. Mikkelsen, Ph.D., Economists Incorporated, Washington, DC, July 20, 2007. A. Introduction On July 9, 2007, Economists Incorporated submitted a response (“DOJ Response”) to issues raised by the Department of Justice (“DOJ”) staff concerning the likely competitive effects of the proposed Abitibi-Bowater merger in the North American (“NA”) newsprint market. 1 In this paper, we submit two revisions to our DOJ Response based on publicly-available information that we have received since we submitted the DOJ Response. The first revision concerns the strategy of Abitibi-Bowater competitors in the NA newsprint market who have recently announced a newsprint price increase effective in September 2007. The second revision concerns the plausibility of cost savings that Abitibi and Bowater have claimed will result from the merger. 1 Our meeting with the DOJ staff was held on April 20, 2007. The purpose of the meeting was to discuss our economic analysis (“White Paper”) regarding the likely competitive effects of the proposed merger. We had submitted the White Paper on April 11, 2007 on behalf of the Newspaper Association of America (“NAA”), an association of U.S. daily newspapers. B. The Strategy of NA Newsprint Competitors of Abitibi and Bowater Who Have Recently Announced a Newsprint Price Increase Effective September 1, 2007 In footnote 17 of our DOJ Response, we stated the following: According to a RISI news note dated June 29, 2007, Kruger announced a $25 per metric tonne price increase for 30 lb. newsprint effective September 1, 2007. According to RISI, “Kruger is North America's fourth-largest newsprint producer in terms of capacity with 1.15 million tonnes/yr of production, all of it located in [Eastern] Canada. Contacts said it was the first time they could remember that the company had sought to initiate a price increase round.” We view Kruger's announced price increase as a competitive response primarily to the appreciation of the Canadian dollar, an action taken in the absence of the exercise of market power by Abitibi and Bowater since their merger announcement in January 2007. It is plausible that NA newsprint prices have fallen close to the cash costs of one or more Kruger newsprint mills, necessitating the price increase announcement. See Section C.2. below for a discussion of 4Q 2006 cash costs of NA newsprint mills. Whether the price increase will be successfully implemented or not will depend mainly on the amount of excess capacity at NA newsprint mills in September and succeeding months. Subsequent trade press reports have made it clear that we were mistaken in our conclusion that Kruger's announced price increase should be viewed as a “competitive response” to the appreciation of the Canadian dollar. Instead, these subsequent trade press reports make it clear that the announced price increase is an anticompetitive continuation of the Abitibi-Bowater Dominant Firm strategy supported by coordination between Abitibi-Bowater and some of its leading NA newsprint competitors. According to an article in the July 16, 2007 edition of Pulp & Paper Week (p.7): 2 2 See ``Newsprint: Price hike gains support; merger vote is dogged by asset sale uncertainties.'' See also RISI news notes ``$25/tonne US newsprint price hike gains momentum,'' July 12, 2007 and ``More North American newsprint supplies support $25/tonne price hike,'' July 16, 2007. Several newsprint producers including the largest North American supplier, Abitibi-Consolidated, began telling customers last week they planned to increase the price of 30-lb newsprint by $25/tonne effective Sept 1. The move to raise prices $25 was kicked off at the end of June by Canadian supplier Kruger, the fourth largest newsprint maker in North America based on capacity. Contacts said Catalyst and Blue Heron were among suppliers also planning the increase, and No. 3 ranked White Birch was considering it. “If this gets followed by capacity reduction announcements it would put some teeth into it,” said one contact last week. North American suppliers depend on Abitibi-Consolidated and Bowater, which hope to merge in the third quarter, to close sufficient capacity to move North American newsprint supply in line with demand. Contacts estimate North American newsprint supply outpaces demand by about 500,000 tonnes this year. No one expects the two companies to remove any capacity until after the U.S. Dept of Justice

(DOJ)and Canada's Competition Bureau

(CCB)disclose whether the terms of the deal require any asset divestments. In our view, the most economically reasonable interpretation of the comments in the Pulp & Paper Week article above is as follows:

(1)Kruger, Catalyst, and Blue Heron announced a $25/tonne price increase at the end of June and in early July effective September 1, 2007 timed for the anticipated completion of the Abitibi-Bowater merger.

(2)The price increase will not succeed unless substantial capacity is closed.

(3)Abitibi-Bowater's NA newsprint competitors “depend on Abitibi-Consolidated and Bowater * * * to close sufficient capacity to move North American newsprint supply in line with demand.” 3 3 See Section B.3. of the DOJ Response for our similar comments by newsprint industry analysts and competitors of Abitibi-Bowater.

(4)By also announcing a $25 price increase effective September 1, 2007, Abitibi has signaled to its NA newsprint competitors that it will close the capacity necessary to support the price increase.

(5)Abitibi-Bowater will not close the capacity necessary to support the price increase before their merger is approved by DOJ and the CCB, almost certainly out of concern that such an action would jeopardize regulatory approval of the merger. 4 4 See Section B.2. of the DOJ Response for our analysis of this issue.

(6)Abitibi-Bowater will close the capacity necessary to support the price increase after the merger review period assuming the merger is approved by DOJ and CCB.

(7)In initiating the $25 price increase to become effective at the time of the anticipated completion of the Abitibi-Bowater merger, Kruger and the other Abitibi-Bowater competitors who have announced the price increase have engaged in coordinated interaction in support of the Abitibi-Bowater Dominant Finn strategy. C. According to Abitibi's Largest Shareholder, the Probability is Low That the Merger Will Achieve the Efficiencies Claimed by Abitibi and Bowater In previous submissions to DOJ, we have not addressed the synergies and other cost savings that Abitibi and Bowater have claimed will result from the merger. There are two reasons. First, as we do not have access to the non-public analyses supporting those claims, we are not in a good position to analyze those claims. Second, even assuming for the sake of argument that the magnitude of the claimed efficiencies were likely to be achieved, it is our opinion that the cost savings would not come close to offsetting the likely anticompetitive harm from the merger that we have analyzed in the White Paper and in the DOJ Response. 5 5 Based on estimates on pages 5 and 8 of the Abitibi-Bowater presentation “Creating a Global Leader in Paper and Forest Products,” January 29, 2007, Abitibi and Bowater were claiming that the merger would achieve cost savings of 1.6% of combined Abitibi-Bowater sales over all product lines by the end of year 1 and 3.2% by the end of year 2 and in subsequent years. (For the purposes of this discussion, we assume these percentages approximately apply to the combined NA newsprint operations of the two companies.) These claimed cost savings are small in comparison to the anticompetitive price increases that we analyzed in the White Paper (an aggregate price increase of 49% from 3Q 2002 to 3Q 2006) and the anticompetitive price increases that are likely to occur in future years if the merger is approved by DOJ and the CCB. The announced price increase of $25 discussed in Section B above is a 4.3% increase over the June 2007 newsprint price of $585 per metric tonne (30 lb., East) as published in Pulp & Paper Week. Of course, if successfully implemented, the competitive harm from the price increase to NA newspaper publishers and other NA newsprint customers would result not just from an increase in the price of newsprint sales by a merged Abitibi-Bowater but also from an increase in the price of newsprint sales by all other NA newsprint suppliers. The U.S. Department of Justice and Federal Trade Commission Horizontal Merger Guidelines set out stringent standards for determining if claimed efficiencies would be sufficient to prevent a merger from being anticompetitive. 6 In our view, the proposed merger falls far short of satisfying those stringent standards, even assuming for the sake of argument that all claimed efficiencies are cognizable as defined in the Merger Guidelines. 6 See § 4. Efficiencies (Revised April 7, 1997) of the U.S. Department of Justice and Federal Trade Commission Horizontal Merger Guidelines. According to the Merger Guidelines, DOJ will consider only efficiencies that are merger-specific and cognizable. Cognizable efficiencies are defined as “merger-specific efficiencies that have been verified and do not arise from anticompetitive reductions in output or service.” The Merger Guidelines further state that “When the potential adverse competitive effect of a merger is likely to be particularly large, extraordinarily great cognizable efficiencies would be necessary to prevent the merger from being anticompetitiVe.” Third Avenue Management LLC

(TAM)is Abitibi's largest shareholder with an ownership share of 12.44%. 7 TAM is a professional asset management company. In its press releases, TAM describes itself as follows: 7 See RISI news note “Aitibi-Consolidated's biggest shareholder opposes merger with Bowater,” July 16, 2007. Third Avenue Management LLC is a New York-based investment advisory firm that offers its services to private and institutional clients. Third Avenue adheres to a disciplined bottom-up value investment strategy to identify investment opportunities in undervalued securities of companies with high quality assets, understandable businesses and strong management teams that have the potential to create value over the long term. Third Avenue Management has $30 billion in assets under management and offers value-oriented strategies through mutual funds, separate accounts and alternative investment vehicles. On July 16, 2007, TAM announced its opposition to the Abitibi-Bowater merger. Among the reasons cited for its opposition was that TAM has “low confidence” that the economic benefits and synergies claimed for the merger will be achieved. Mr. Wadhwaney noted that, “We have low confidence that the alleged economic benefits and synergies claimed by management will actually be realized, and urge shareholders to read carefully the risk factors and disclaimers that the companies have identified in their combined proxy circular.” 8 8 Amit Wadhwaney is Portfolio Manager for TAM. See TAM press release, “Third Avenue Management Opposes the Proposed Abitibi-Consolidated Merger with Bowater Incorporated,” July 16, 2006. TAM also submitted a 13D filing to the SEC stating its opposition to the merger. D. Conclusion If DOJ and the CCB approve the proposed Abitibi-Bowater merger, anticompetitive price increases to NA newsprint customers, beginning with the $25 per metric tonne price increase announced for September, 1, 2007, are virtually certain. If the Third Avenue Management analysis is correct, the synergies and other cost reductions claimed by Abitibi and Bowater are unlikely to be realized. [FR Doc. E8-11401 Filed 6-9-08; 8:45 am] BILLING CODE 4410-11-P 73 112 Tuesday, June 10, 2008 Rules and Regulations Part IV Department of Commerce Patent and Trademark Office 37 CFR Part 41 Rules of Practice Before the Board of Patent Appeals and Interferences in Ex Parte Appeals; Final Rule DEPARTMENT OF COMMERCE United States Patent and Trademark Office 37 CFR Part 41 [Docket No. PTO-P-2007-0006] RIN 0651-AC12 Rules of Practice Before the Board of Patent Appeals and Interferences in Ex Parte Appeals AGENCY: United States Patent and Trademark Office, Commerce. ACTION: Final rule. SUMMARY: The Under Secretary of Commerce for Intellectual Property and Director of the United States Patent and Trademark Office amends the rules governing practice before the Board of Patent Appeals and Interferences in *ex parte* patent appeals. Amendments to the rules governing practice before the Board in *ex parte* appeals are needed to permit the Board to handle an increasing number of *ex parte* appeals in a timely manner. DATES: *Effective Date:* December 10, 2008. *Applicability Date:* The final rule shall apply to all appeals in which an appeal brief is filed on or after the effective date. FOR FURTHER INFORMATION CONTACT: Fred E. McKelvey or Allen R. MacDonald at 571-272-9797. SUPPLEMENTARY INFORMATION: Background A notice of proposed rulemaking was published in the **Federal Register** (72 FR 41,472-41,490 (Jul. 30, 2007)). The notice was also published in the Official Gazette. 1321 Off. Gaz. Pat. Office 95 (Aug. 21, 2007). The public was invited to submit written comments. Comments were to be received on or before September 30, 2007. Comments received on or before October 15, 2007, were considered. Comments received after October 15, 2007, were not considered. Existing rules in Part 1 are denominated as “Rule x” in this supplementary information . A reference to Rule 136(a) is a reference to 37 CFR 1.136(a) (2007). Existing rules in Part 41 are denominated as “Rule 41.x” in this supplementary information . A reference to Rule 41.3 is a reference to 37 CFR 41.3 (2007). Proposed rules in the notice of proposed rulemaking and this final rule are denominated as “Bd.R. x” in this supplementary information . A reference to Bd.R. 41.3 is a reference to Bd.R. 41.3, as proposed to be amended in the notice of proposed rulemaking, or Bd.R. 41.3 as amended by this final rule. A portion of the Board's jurisdiction is to consider and decide *ex parte* appeals in patent applications (including reissue, design and plant patent applications) and *ex parte* reexamination proceedings. Presently, the Board is experiencing a rapid increase in *ex parte* appeals. In FY 2007, the Board received 4639 *ex parte* appeals. The number of appeals received in FY 2007 exceeded the appeals received in FY 2006 by more than 1000 appeals. In FY 2008, the Board expects to receive more than 6000 *ex parte* appeals. The amendments to the rules governing *ex parte* appeals are one item of a five point plan to ensure that the Board will be able to handle an increasing number of *ex parte* appeals in a timely manner. Some of the changes are modeled after the Federal Circuit rules. The amended rules make clear that the Board is not a tribunal for *de novo* examination. The rules establish procedures to determine whether an appellant has established that the examiner erred. For example, the rules require the appellant's argument shall explain why the examiner is believed to have erred as to each rejection to be reviewed. Arguments not made are waived. A major objective of the amended rules is to avoid unnecessary returns to examiners by the Appeals Center and the Board, along with the resulting delays in application and appeal pendency. The requirements of the amended rules are believed to be more objective and, therefore, both appellants and examiners will have a better understanding of what is required, thereby minimizing, if not eliminating, a need to hold appeal briefs defective. If a rule does not require an action to be taken in connection with an appeal brief, then a brief will not be held defective for failure to take that action. Some former rules have turned out in practice to be too subjective. For example, the former rules require a summary of the invention. Appellants, as well as examiners, have given different interpretations to the requirement for a summary of the invention. The amended rules replace the requirement for a summary of the invention with a claims and drawing analysis and a means or step plus function analysis. Appellants have also had difficulty complying with the evidence appendix requirement. Compliance with the amended rules is expected to ensure that the Appeals Center and the Board, working together, can minimize, possibly eliminate, unwarranted returns to examiners based on non-compliant appeal brief requirements. The amended rules are directed to improving appellant briefing. A 30-page limit for the brief will promote concise and precise writing. Any statement of the real party in interest, statement of related cases, table of contents, table of authorities, status of amendments, jurisdictional statement, signature block, and appendix are excluded from the 30-page limit. The amended rules also require a “statement of facts” section where the appellant is required to set out the material facts relevant to the rejections on appeal. The amended rules require an “argument” section where an appellant shall explain why the examiner is believed to have erred as to each rejection to be reviewed. Any explanation must address all points made by the examiner with which the appellant disagrees and must identify where the argument was made in the first instance to the examiner or state that the argument has not previously been made to the examiner. By having a clear focus on the dispute and making clear what arguments have been and have not been presented to the examiner, the USPTO reviewers as well as the examiner can make a well-informed decision on

(1)whether to proceed with the appeal or

(2)whether to withdraw the rejection. Finally, the amended rules improve uniform enforcement of the rules. Petitions are decided by the Chief Administrative Patent Judge of the Board. Under former rules, petitions are decided by the Director of each Technology Center. The rules also allow for sanctions which may be imposed against an appellant for failure to comply with an applicable rule. The rules do not amend any of the rules relating to *inter partes* reexamination appeals. Except for citation of authorities, the rules do not amend any of the rules relating to contested cases. Explanation of New Rules What follows is a discussion of the new appeal rules. Further information relevant to particular rules appears in the analysis of comments portion of this final rule. Definitions Bd.R. 41.2 amends Rule 41.2 to eliminate from the definition of “Board” any reference to a proceeding under Bd.R. 41.3 relating to petitions to the Chief Administrative Patent Judge. Action by the Chief Administrative Patent Judge is action on behalf of the Director by delegation to the Chief Administrative Patent Judge. *See* MPEP § 1002.02(f) (8th ed., Aug., 2006). Bd.R. 41.2 also amends Rule 41.2 to eliminate a petition under Bd.R. 41.3 from the definition of contested case. At the present time, there are no petitions authorized in a contested case. Petitions Bd.R. 41.3 is amended to include a delegation of authority from the Director to the Chief Administrative Patent Judge to decide certain petitions authorized by Part 41. The delegation of authority would be in addition to that already set out in the MPEP § 1002.02(f) (8th ed., Aug., 2006). The petitions would include

(1)seeking an extension of time to file certain papers after an appeal brief is filed in an *ex parte* appeal and

(2)enlarging the page limit of an appeal brief, reply brief, or request for rehearing. Bd.R. 41.3(b) is amended to define the scope of petitions which can be filed pursuant to the rules. Under Bd.R. 41.3(b), a petition could not be filed to seek review of issues committed by statute to a panel. *See,* *e.g.* , *In re Dickinson,* 299 F.2d 954, 958 (CCPA 1962). Timeliness Bd.R. 41.4(c) is amended to add the phrase “Except to the extent provided in this part” and to revise paragraph 2 to read: “Filing of a notice of appeal and an appeal brief ( *see* §§ 41.31(c) and 41.37(c)).” The amendment restricts Bd.R. 41.4(c)(2) to the notice of appeal and appeal brief. The Chief Administrative Patent Judge would determine whether extensions are to be granted for the filing of most other papers during the pendency of the appeal. Citation of Authority The notice of proposed rulemaking did not propose a change to Bd.R. 41.12 which concerns citation of authority. Rule 41.12 currently requires the public to cite to specific reporters, including some parallel citations. The Board, however, no longer follows the practice specified in Rule 41.12, and does not use parallel citations. Accordingly, Bd.R. 41.12 is being amended to make the rule consistent with Board practice and minimize the citation burden on the public. Under Bd.R. 41.12, as amended, a citation to a single source, in the priority order set out in the rule, will be sufficient. Definitions Bd.R. 41.30 is amended to add a definition of “Record.” The Record on appeal would be the official content of the file of an application or reexamination proceeding on appeal. In the rules, a reference to “Record” with a capital R is a reference to the Record as defined in Bd.R. 41.30. The definition advises applicants of what documents the Board will consider in resolving the appeal. The definition also makes it clear to any reviewing court what record was considered by the Board. Appeal to Board Bd.R. 41.31(a) provides that an appeal is taken from a decision of the examiner to the Board by filing a notice of appeal. The following language would be acceptable under the rule: “An appeal is taken from the decision of the examiner mailed [specify date appealed rejection was mailed].” An appeal can be taken when authorized by the statute 35 U.S.C. 134. The provision of Rule 41.31(b) that a notice of appeal need not be signed has been removed. Papers filed in connection with an appeal, including the notice of appeal, would need to be signed in accordance with § 1.33 of this title. Bd.R. 41.31(b) requires that the notice of appeal be accompanied by the fee required by law and would refer to the rule that specifies the required fee. Bd.R. 41.31(c) specifies the time within which a notice of appeal would have to be filed in order to be considered timely. The time for filing a notice of appeal appears in Rule 134. Bd.R. 41.31(d) provides that a request for an extension of time to file a notice of appeal in an application is governed by Rule 136(a). Bd.R. 41.31(d) also provides that a request for an extension of time to file a notice of appeal in an *ex parte* reexamination proceeding is governed by Rule 550(c). Bd.R. 41.31(e) defines a “non-appealable issue” as an issue that is not subject to an appeal under 35 U.S.C. 134. Non-appealable issues are issues

(1)over which the Board does not exercise authority in appeal proceedings and

(2)which are handled by a petition. Non-appealable issues include such matters as an examiner's refusal to

(1)enter a response to a final rejection,

(2)enter evidence presented after a final rejection,

(3)enter an appeal brief or a reply brief, or

(4)withdraw a restriction requirement. The rules contemplate that some petitions relating to non-appealable issues are to be decided by the Chief Administrative Patent Judge. Some of those non-appealable issues include:

(1)A petition to exceed the page limit and

(2)a petition to extend the time for filing a paper in the appeal after the filing of the appeal brief. An applicant or patent owner dissatisfied with a decision of an examiner on a non-appealable issue would be required to seek review by petition before an appeal is considered on the merits. Failure to timely file a petition seeking review of a decision of the examiner related to a non-appealable issue would generally constitute a waiver to have those issues considered. The language “[f]ailure to timely file” would be interpreted to mean not filed within the time set out in the rules. For example, Rule 1.181(f) provides that any petition under Rule 181 not filed within two months of the mailing date of the action or notice from which relief is requested may be dismissed as untimely. The object of the amendment to the rule is to maximize resolution of non-appealable issues before an appeal is considered on the merits. Under current practice, an applicant or a patent owner often does not timely seek to have non-appealable issues resolved, thereby necessitating a remand by the Board to the examiner to have a non-appealable issue resolved. The remand adds to the pendency of an application or reexamination proceeding and, in some instances, may unnecessarily enlarge patent term adjustment. The Office intends to strictly enforce the waiver provisions of Bd.R. 41.31(e) with the view of making the appeal process administratively efficient. While the Office will retain discretion to excuse a failure to timely settle non-appealable issues, it is expected that exercise of that discretion will be reserved for truly unusual circumstances. Amendments and Evidence Filed After Appeal and Before Brief Bd.R. 41.33(a) provides that an amendment filed after the date a notice of appeal is filed and before an appeal brief is filed may be admitted as provided in Rule 116. Bd.R. 41.33(b), under two circumstances, gives the examiner discretion to enter an amendment filed with or after an appeal brief is filed. A first circumstance would be to cancel claims, provided cancellation of claims does not affect the scope of any other pending claim in the proceedings. A second circumstance would be to rewrite dependent claims into independent form. Bd.R. 41.33(c) provides that all other amendments filed after the date an appeal brief is filed will not be admitted, except as permitted by

(1)Bd.R. 41.50(b)(1) (request for amendment after remand),

(2)Bd.R. 41.50(d)(1) (request to reopen prosecution after entry of new ground of rejection by the Board), and

(3)Bd.R. 41.50(e) (amendment after recommendation by the Board). Bd.R. 41.33(d) provides that evidence filed after a notice of appeal is filed and before an appeal brief is filed may be admitted if

(1)the examiner determines that the evidence overcomes at least one rejection under appeal and

(2)appellant shows good cause why the evidence was not earlier presented. The first step in an analysis of whether evidence may be admitted is a showing of good cause why the evidence was not earlier presented. The Office has found that too often an applicant or a patent owner belatedly presents evidence as an afterthought and that the evidence was, or should have been, readily available. Late presentation of evidence is not consistent with efficient administration of the appeal process. Under the rule, the Office would strictly apply the good cause standard. *Cf. Hahn* v. *Wong* , 892 F.2d 1028 (Fed. Cir. 1989). For example, a change of attorneys at the appeal stage or an unawareness of the requirement of a rule would not constitute a showing of good cause. If good cause is not shown, the analysis ends and the evidence would not be admitted. In those cases where good cause is shown, a second analysis will be made to determine if the evidence would overcome at least one rejection. Even where good cause is shown, if the evidence does not overcome at least one rejection, the evidence would not be admitted. Alternatively, the examiner could determine that the evidence does not overcome at least one rejection under appeal and does not necessitate any new ground of rejection and on that basis alone could refuse to admit the evidence. Bd.R. 41.33(e) provides that evidence filed after an appeal brief is filed will not be admitted except as permitted by

(1)Bd.R. 41.50(b)(1) (request to reopen prosecution after entry of a remand by the Board), and

(2)Bd.R. 41.50(d)(1) (request to reopen prosecution after new ground of rejection entered by the Board). Jurisdiction Over Appeal Bd.R. 41.35(a) provides that the Board acquires jurisdiction when the Board mails a docket notice. At an appropriate time after proceedings are completed before the examiner, a docket notice identifying the appeal number would be entered in the application or reexamination proceeding file and mailed to the appellant. A new docket notice identifying a new appeal number would be mailed upon return of the case to the Board following remand. By delaying the transfer of jurisdiction until the appeal is fully briefed and the position of the appellant is fully presented for consideration by the examiner and the Office reviewers (appeal conferees), the possibility exists that the examiner will find some or all of the appealed claims patentable without the necessity of proceeding with the appeal and invoking the jurisdiction of the Board. For this reason, jurisdiction transfers to the Board only after

(1)the appellant has filed an appeal brief,

(2)the examiner's answer has been mailed, and

(3)the appellant has filed a reply brief or the time for filing a reply brief has expired. Rule 41.35(a) provides that the Board acquires jurisdiction upon transmittal of the file, including all briefs and examiner's answers, to the Board. Under that practice, however, an appellant may or may not know the date when a file is transmitted to the Board. Most files are now electronic files (Image File Wrapper or IFW file) as opposed to a paper file wrapper. Accordingly, a paper file wrapper is no longer transmitted to the Board. Under current practice, the Board prepares a docket notice which is

(1)entered in the IFW file and

(2)mailed to appellant. Upon receipt of the docket notice, appellant knows that the Board has acquired jurisdiction over the appeal. Bd.R. 41.35(a) codifies current practice and establishes a precise date, known to all involved, as to when jurisdiction is transferred to the Board. Bd.R. 41.35(b) provides that the jurisdiction of the Board ends when

(1)the Board mails a remand order ( *see* § 41.50(b) or § 41.50(d)(1)),

(2)the Board mails a final decision ( *see* § 41.50(a) and judicial review is sought or the time for seeking judicial review has expired,

(3)an express abandonment is filed which complies with § 1.138 of this title, or

(4)a request for continued examination is filed which complies with § 1.114 of this title. The Board knows when it mails a remand order and when it mails a final decision. The Board does not know if an express abandonment or a request for continued examination is filed. One problem the Board has had in the past is that an appellant does not notify the Board that it has filed an express abandonment or a request for continued examination and the Board continues to work on the appeal. Often failure to notify occurs after oral hearing. Accordingly, an appellant should notify the Board immediately if an express abandonment or a request for continued examination is filed. If any notification reaches the Board after a remand order or a final decision is mailed, the remand order or final decision will not be removed from the file. There are two occasions when a remand is entered. First, a remand is entered when the Board is of the opinion that clarification on a point of fact or law is needed. *See* Bd.R. 41.50(b). Second, a remand is entered when an appellant elects further prosecution before the examiner following entry of a new ground of rejection by the Board. *See* Bd.R. 41.50(d)(1). Upon entry of a remand, the Board's jurisdiction ends. The Board also no longer has jurisdiction as a matter of law when an appeal to the Federal Circuit is filed in the USPTO. *See In re Allen* , 115 F.2d 936, 939 (CCPA 1940) and *In re Graves* , 69 F.3d 1147, 1149 (Fed. Cir. 1995). A final decision is a panel decision which disposes of all issues with regard to a party eligible to seek judicial review and does not indicate that further action is needed. *See* Rule 41.2 (definition of “final”). When a party requests rehearing, a decision becomes final when the Board decides the request for rehearing. A decision including a remand or a new ground of rejection is an interlocutory order and is not a final decision. If an appellant elects to ask for rehearing to contest a new ground of rejection, the decision on rehearing is a final decision for the purpose of judicial review. Bd.R. 41.35(c) would continue current practice and provide that the Director could *sua sponte* order an appeal to be remanded to an examiner before entry of a Board decision has been mailed. The Director has inherent authority to order a *sua sponte* remand to the examiner. Ordinarily, a rule is not necessary for the Director to exercise inherent authority. However, in this particular instance, it is believed that a statement in the rule of the Director's inherent authority serves an appropriate public notice function. Appeal Brief Bd.R. 41.37 provides for filing an appeal brief to perfect an appeal and sets out the requirements for appeal briefs. The appeal brief is a highly significant document in an ex parte appeal. Appeal brief experience under Rule 41.37 has been mixed. Bd.R. 41.37 seeks to

(1)take advantage of provisions of Rule 41.37 which have proved useful,

(2)clarify provisions which have been subject to varying interpretations by counsel, and

(3)add provisions which are expected to make the decision-making process more focused and efficient. Bd.R. 41.37(a) provides that an appeal brief shall be filed to perfect an appeal. Upon a failure to timely file an appeal brief, proceedings on the appeal would be considered terminated. The language “without further action on the part of the Office” gives notice that no action, including entry of a paper by the Office, would be necessary for the appeal to be considered terminated. Bd.R. 41.37(a) does not preclude the Office from entering a paper notifying an applicant or patent owner that the appeal has been terminated. Any failure of the Office to enter a paper notifying an applicant or patent owner that an appeal stands terminated would not affect the terminated status of the appeal. The language “proceedings are considered terminated” provides notice that when

(1)no appeal brief is filed and

(2)no claims are allowed, the time for filing a continuing application under 35 U.S.C. 120 would be before the time expires for filing an appeal brief. The language “terminated” is used because proceedings on appeal are over prior to mailing of a docket notice pursuant to Bd.R. 41.35(a). Dismissal of an appeal takes place after a docket notice is mailed since only the Board dismisses an appeal (Bd.R. 41.35(b)(2)). Bd.R. 41.37(b) provides that the appeal brief shall be accompanied by the fee required by Bd.R. 41.20(b)(2). Bd.R. 41.37(c) provides that an appellant must file an appeal brief within two months from the filing of the notice of appeal. Bd.R. 41.37(d) provides that the time for filing an appeal brief is extendable under the provisions of Rule 136(a) for applications and Rule 550(c) for *ex parte* reexamination proceedings. Consideration was given to proposing a requirement for a petition to extend the time for filing an appeal brief. However, in view of the pre-appeal conference pilot program ( *see* Official Gazette of July 12, 2005; *http://www.uspto.gov/web/offices/com/sol/og/2005/week28/patbref.htm* ), and in an effort to encourage continued participation in that pilot program, further consideration on whether to require a petition will be deferred pending further experience by the Office in the pre-appeal conference pilot program. Bd.R. 41.37(e) provides that an appeal brief must contain, under appropriate headings and in the order indicated, the following items:

(1)Statement of the real party in interest,

(2)statement of related cases,

(3)jurisdictional statement,

(4)table of contents,

(5)table of authorities,

(6)[reserved],

(7)status of amendments,

(8)grounds of rejection to be reviewed,

(9)statement of facts,

(10)argument, and

(11)an appendix containing

(a)claims section,

(b)claim support and drawing analysis section,

(c)means or step plus function analysis section,

(d)evidence section, and

(e)related cases section. The items are otherwise defined in other subsections of Bd.R. 41.37 and, where applicable, would apply to appeal briefs and reply briefs (Bd.R. 41.41). Bd.R. 41.37(f) requires a “statement of real party in interest” which would include an identification of the name of the real party in interest. The principal purpose of an identification of the name of the real party in interest is to permit members of the Board to assess whether recusal is required or would otherwise be appropriate. Another purpose is to assist employees of the Board to comply with the Ethics in Government Act. Since a real party in interest can change during the pendency of an appeal, there would be a continuing obligation to update the real party in interest during the pendency of the appeal. If an appeal brief does not contain a statement of real party in interest, the Office will assume that the named inventors are the real party in interest. Bd.R. 41.37(g) requires an appeal brief to include a “statement of related cases.” The statement of related cases would identify related cases by

(1)application number, patent number, appeal number or interference number or

(2)court docket number. The statement would encompass all prior or pending appeals, interferences or judicial proceedings known to any inventors, any attorneys or agents who prepared or prosecuted the application on appeal and any other person who was substantively involved in the preparation or prosecution of the application on appeal. A related case is one which would directly affect, or would be directly affected by or have a bearing on the Board's decision in the appeal. A copy of any final or significant interlocutory decision rendered by the Board or a court in any proceeding identified under this paragraph shall be included in the related cases section in the appendix (Bd.R. 41.37(u)). A significant interlocutory decision would include

(1)a decision on a patentability motion in an interference or

(2)a decision in an interference or a court interpreting a claim. A related case includes any continuing application of the application on appeal. If an appellant fails to advise the Board that it has filed a continuing application or a request for continued examination, or that it has filed an express abandonment of the application on appeal and the Board mails a decision on appeal in the application on appeal, the appellant should expect that the decision will not be removed from the file. The time to update a statement of related cases, or notify the Board that an application on appeal has been abandoned, is when the continuing application, request for continued examination, or express abandonment is filed. Appellant would be under a continuing obligation to update a statement of related cases during the pendency of the appeal. If an appeal brief does not contain a statement of related cases, the Office will assume that there are no related cases. Bd.R. 41.37(h) requires an appeal brief to contain a “jurisdictional statement” which would set out why an appellant believes that the Board has jurisdiction to consider the appeal. The jurisdictional statement would include a statement of

(1)the statute under which the appeal is taken,

(2)the date of the decision from which the appeal is taken,

(3)the date the notice of appeal was filed, and

(4)the date the appeal brief is being filed. If a notice of appeal or an appeal brief is filed after the time specified in the rules, the appellant also would have to indicate

(1)the date an extension of time was requested, and

(2)if known, the date the request was granted. A jurisdictional statement will minimize the chance that the Board will consider an appeal when the application on appeal is abandoned or a reexamination proceeding on appeal has terminated. An example of a jurisdictional statement is: “The Board has jurisdiction under 35 U.S.C. 134(a). The Examiner mailed a final rejection on August 1, 2006, setting a three-month shortened statutory period for response. The time for responding to the final rejection expired on November 1, 2006. Rule 134. A notice of appeal and a request for a one-month extension of time under Rule 136(a) was filed on November 15, 2006. The time for filing an appeal brief is two months after the filing of a notice of appeal. Bd.R. 41.37(c). The time for filing an appeal brief expired on January 16, 2007 (Monday, January 15, 2007, being a Federal holiday). The appeal brief is being filed on January 16, 2007.” If during the preparation of a jurisdictional statement, an appellant becomes aware that its application is abandoned, the appellant could then take steps to revive the application, if revival is appropriate. *See* Rule 137. Bd.R. 41.37(i) requires an appeal brief to contain a “table of contents” identifying the items listed in Bd.R. 41.37(e) along with a page reference where each item begins. In the case of a reply brief, the table of contents would identify the items required by the reply brief rule (Bd.R. 41.41(d)). Bd.R. 41.37(j) requires an appeal brief to contain a “table of authorities.” This item would list

(1)court and administrative decisions (alphabetically arranged),

(2)statutes, and

(3)other authorities, along with a reference to the pages of the appeal brief where each authority is cited. A similar requirement applies to a reply brief. Bd.R. 41.37(k) is reserved. Bd.R. 41.37(l) requires an appeal brief to indicate the “status of amendments” for all amendments filed after final rejection (e.g., entered or not entered). Examples of a status of amendments might read as follows:

(1)“No amendment was filed after final rejection.”

(2)“An amendment filed October 31, 2006, was *not* entered by the examiner.”

(3)“An amendment filed November 1, 2006, was entered by the examiner.”

(4)“An amendment filed October 31, 2006, was not entered by the examiner, but an amendment filed November 1, 2006, was entered by the examiner.” Bd.R. 41.37(m) requires an appeal brief to set out the grounds of rejection to be reviewed, including the claims subject to each rejection. Examples might read as follows:

(1)“Rejection of claim 2 as being anticipated under 35 U.S.C. 102(b) over Johnson.”

(2)“Rejection of claims 2-3 as being unpatentable under 35 U.S.C. 103(a) over Johnson and Young.”

(3)“Rejection of claim 2 as failing to comply with the written description requirement of the first paragraph of 35 U.S.C. 112.”

(4)“Rejection of claim 2 as failing to comply with the enablement requirement of the first paragraph of 35 U.S.C. 112.”

(5)“Rejection of claim 3 under 35 U.S.C. 251 based on recapture.” Bd.R. 41.37(n) requires a “statement of facts.” Appellant will set out in an objective and non-argumentative manner the material facts relevant to the rejections on appeal, preferably in numbered paragraphs. A clear, concise and complete statement of relevant facts will clarify the position of an appellant on dispositive issues and assist the examiner in reconsidering the patentability of the rejected claims. A significant requirement of Bd.R. 41.37(n) is that a fact would be required to be supported by a reference to the page number of the Record. Where appropriate, the citation should also be to a specific line or paragraph and to a drawing figure and element number of the Record ( *see* Bd.R. 41.37(t)). Statements of facts should be set out in short declarative sentences, and each sentence should address a single fact. For example, “In rejecting claims 1-5, the examiner cites Jones (col. 4, lines 1-4).” “Jones describes a widget (col. 5, lines 56-61 and Figure 1, elements 12 and 13).” A compound statement of fact is not proper, e.g., “Jones describes a widget (col. 8, lines 3-4) and Smith does not describe a widget.” A statement of facts would have to be non-argumentative, meaning that an appellant would not be able to argue its appeal in the statement of facts. Rather, the statement of facts is designed to require an appellant to set out the facts which the appellant considers material for resolution of the appeal, thereby assisting the examiner initially and, if necessary, the Board thereafter to focus on the dispositive portions of the record. For example, in the case of a rejection for obviousness under section 103, the facts should address at least the scope and content of the prior art, any differences between the claim on appeal and the prior art, and the level of skill in the art. In the past, some appellants have provided minimal factual development in an appeal brief, apparently believing that the Board will scour the record to divine the facts. It should be remembered that when the appeal reaches the Board, the panel members do not know anything about the appellant's invention or the prosecution history of the application on appeal. Likewise, too often an appellant will not support a statement of fact in an appeal brief by an explicit reference to the evidence. A statement of fact based on the specification would be proper if supported by a reference to page and line or paragraph (and where appropriate also to drawing figure and element number). A statement of fact based on a patent would be proper if it is supported by a reference to a column and line (and where appropriate also to a drawing figure and element number). A statement of fact based on an affidavit would be proper if supported by a reference to a page and line number or to a page and paragraph number of the affidavit; the affidavit would appear in the evidence section (Bd.R. 41.37(t)) in the appendix. A specific citation is required because an appellant should not expect the examiner or the Board to search the record to determine whether a statement of fact is supported by the evidence. Bd.R. 41.37(n) is consistent with the approaches taken by federal courts concerning appeal brief practice and other briefing practice:

(1)*Clintec Nutrition Co.* v. *Baxa Corp.* , 988 F. Supp. 1109, 1114, n.16 (N.D. Ill. 1997) (where a party points the court to a multi-page exhibit without citing a specific portion or page, the court will not pour over the documents to extract the relevant information);

(2)*Ernst Haas Studio, Inc.* v. *Palm Press, Inc.* , 164 F.3d 110, 112 (2d Cir. 1999) (“Appellant's Brief is at best an invitation to the court to scour the record, research any legal theory that comes to mind, and serve generally as an advocate for appellant. We decline the invitation.”);

(3)*Winner Int'l Royalty Corp.* v. *Wang* , 202 F.3d 1340, 1351 (Fed. Cir. 2000) (“[W]e will not search the record on the chance of discovering * * * whether the district court abused its discretion.”);

(4)*Gorence* v. *Eagle Food Centers, Inc.* , 242 F.3d 759, 762-63 (7th Cir. 2001) (“Little has been done * * * to make slogging through the record here either more efficient or more pleasant. And it is simply not true, we want to emphasize, that if a litigant presents an overload of irrelevant or non-probative facts, somehow the irrelevancies will add up to relevant evidence * * *”); and

(5)*DeSilva* v. *DiLeonardi* , 181 F.3d 865, 867 (7th Cir. 1999) (“[An appeal] brief must make all arguments accessible to the judges, rather than ask them to play archaeologist with the record.”) *See also*

(1)*Shiokawa* v. *Maienfisch* , 56 USPQ2d 1970, 1975 (Bd. Pat. App. & Int. 2000) and

(2)*LeVeen* v. *Edwards* , 57 USPQ2d 1406, 1413 (Bd. Pat. App. & Int. 2000). Bd.R. 41.37(o) requires that an appeal brief contain an argument comprising an analysis explaining, as to each rejection to be reviewed, why the appellant believes the examiner erred. The analysis would have to address all points made by the examiner with which the appellant disagrees. The presentation of a concise, but comprehensive, argument in response to the final rejection

(1)will efficiently frame any dispute between the appellant and the examiner not only for the benefit of the Board but also for consideration by the examiner and Office reviewers (appeal conferees) and

(2)provide the best opportunity for resolution of the dispute without the necessity of proceeding with the appeal. Where an argument has previously been presented to the examiner, the analysis would have to identify where any argument being made to the Board was made in the first instance to the examiner. Where an argument has not previously been made to the examiner, an appellant would be required to say so in the appeal brief so that the examiner would know that the argument is new. An example where an argument might not have been previously made to an examiner might occur under the following fact scenario. A first Office action rejects claims over Reference A. Applicant amends the claims to avoid Reference A. The examiner enters a final rejection now relying on References A and B. Applicant elects to appeal without filing a response under Rule 116. While applicants are encouraged to file a response under Rule 116 to possibly avoid an appeal all together, at the present time there is no requirement for an applicant to file a Rule 116 response as a condition to taking an appeal to the Board. Whether such a requirement should be made in the future will be held in abeyance pending experience under the rules. The Board has found that many arguments made in an appeal brief were never earlier presented to the examiner even though they could have been presented (without filing a Rule 116 response). To promote clarity, Bd.R. 41.37(o) also requires that each rejection for which review is sought shall be separately argued under a separate heading. Also, Bd.R. 41.37(o) provides that any finding made or conclusion reached by the examiner that is not challenged would be presumed to be correct. Bd.R. 41.37(o)(1) provides that when a ground of rejection applies to two or more claims, the claims may be argued separately (claims are considered by appellant as separately patentable) or as a group (claims stand or fall together). When two or more claims subject to the same ground of rejection are argued as a group, the Board may select a single claim from the group of claims that are argued together and decide the appeal on the basis of the selected claim alone with respect to the group of claims as to the ground of rejection. Any doubt as to whether an election has been made would be resolved against the appellant and the claims would be deemed to have been argued as a group. For each claim argued separately, a subheading identifying the claim by number would be required. The requirement for a separate subheading in the appeal brief is to minimize any chance the examiner or the Board will overlook an argument directed to the separate patentability of a particular claim. In the past, appellants have been confused about whether a statement of what a claim covers is sufficient to constitute an argument that the claim is separately patentable. It is not. A statement that a claim contains a limitation not present in another claim would not in and of itself be sufficient to satisfy the requirement of Bd.R. 41.37(o)(1) that a separate argument be made. Unless an appellant plans to argue the separate patentability of a claim, the appellant should not discuss or refer to the claim in the argument section of the appeal brief. A copy of the claims will be before the Board in the “claims section” (Bd.R. 41.37(p)). In an application containing claims 1-3 where the examiner has made

(1)a § 102 rejection or

(2)a § 103 rejection or

(3)both a § 102 and § 103 rejection, examples of a proper statement of “claims standing or falling together” would be as follows:

(1)“With respect to the rejection under § 102, claims 1-3 stand or fall together.”

(2)“With respect to the rejection under § 103, claims 1-2 stand or fall together; claim 3 is believed to be separately patentable.”

(3)“With respect to the rejection under § 102, claims 1-2 stand or fall together; claim 3 is believed to be separately patentable. With respect to the rejection under § 103, the claims stand or fall together.” Bd.R. 41.37(o)(2) provides that the Board would only consider arguments that

(1)are presented in the argument section of the appeal brief and

(2)address claims set out in the claim support and drawing analysis section in the appendix. Appellant would waive all arguments which could have been, but were not, addressed in the argument section of the appeal brief. A first example would be where Argument 1 and Argument 2 are presented in response to a final rejection, but only Argument 1 is presented in the appeal brief. Only Argument 1 would be considered. Argument 2 would be waived. A second example would be where an applicant presents an affidavit under Rule 131 or Rule 132 to the examiner, but does not rely on the affidavit in the argument section of the appeal brief. The Board would not consider the affidavit in deciding the appeal. Bd.R. 41.37(o)(3) requires that when responding to points made in the final rejection, the appeal brief shall specifically

(1)identify each point made by the examiner and

(2)indicate where appellant previously responded to each point or state that appellant has not previously responded to the point. In supporting any argument, the appellant shall refer to a page and, where appropriate, a line or paragraph, of the Record. Examples of argument formats that are acceptable under Bd.R. 41.37(o)(3) follow. Example 1. In the case where an argument had been previously presented to the examiner, the following format is acceptable under Bd.R. 41.37(o)(3). “The examiner states that Reference A teaches element B. Final Rejection mailed [insert date], page x, lines y-z. In response, appellant previously pointed out to the examiner why the examiner is believed to have erred. Amendment filed [enter date], pages 8-9. The response is [concisely state the response].” A similar format has been successfully used for some years in oppositions and replies filed in interference cases. Example 2. Alternatively, in the case where an argument has not been previously made to the examiner, the following format would be acceptable under Bd.R. 41.37(o)(3). “In response to the examiner's reliance on Reference C for the first time in the final rejection (page 4), appellant's response includes a new argument which has not been previously presented to the examiner. The response is [concisely state the response].” Use of this format will minimize any chance that the examiner will overlook an argument when preparing the examiner's answer. Bd.R. 41.37(p) would require an appeal brief to contain a “claims section” in the appendix which would consist of an accurate clean copy in numerical order of all claims pending in the application or reexamination proceeding on appeal. The claims section in the appendix would include all pending claims, not just those under rejection. The status of each claim would have to be indicated, (e.g., 1 (rejected), 2 (withdrawn), 3 (objected to), 4 (cancelled), and 5 (allowed)). Bd.R. 41.37(q) is reserved. Bd.R. 41.37(r) requires an appeal brief to contain a “claim support and drawing analysis section.” The claim support portion of Bd.R. 41.37(r) replaces Rule 41.37(c)(1)(v) which required a concise explanation of the subject matter defined in each of the independent claims on appeal. The claim support section, for each independent claim involved in the appeal and each dependent claim argued separately ( *see* Bd.R. 41.37(o)(1)), would consist of an annotated copy of the claim indicating in bold face between braces ({ }) after each limitation where, by page and line or paragraph numbers, the limitation is described in the specification as filed. Braces ({ }) are used instead of brackets ([ ]) because brackets are used in reissue claim practice. Unlike the “claims section” ( *see* Bd.R. 41.37(p)), only those independent claims and dependent claims being argued separately, would need to appear in the “claim support and drawing analysis section.” A significant objective of the claim support requirement is to provide the examiner and the Board with appellant's perspective on where language of the claims (including specific words used in the claims, but not in the specification) finds support in the specification. Finding support for language in the claims can help the examiner and the Board construe claimed terminology and limitations when applying the prior art. The claim support requirement will help the Board interpret the scope of claims, or the meaning of words in a claim, before applying the prior art. Practice under Rule 41.37(c)(1)(v) has not been efficient because of the diverse manners in which different appellants have attempted to comply with the current rule. One significant problem faced by the Board under Rule 41.37(c)(1)(v) occurs when the language of a claim does not have direct antecedent language in the specification. In order for the Board to understand the scope of a claim or the meaning of a term in the claim, the Board primarily relies on the specification. Moreover, in practice before the Office, a claim is given its broadest reasonable construction consistent with the specification. However, when the language of the claim does not find correspondence in the specification, as filed, often it is difficult to determine the meaning of a particular word in a claim or to give the claim its broadest reasonable interpretation. The claim support requirement will give the examiner and the Board the appellant's view on where the claim is supported by the application, as filed. The requirement is expected to significantly improve the efficiency of the Board's handling of appeals. The “claims support and drawing analysis section” also requires for each independent claim on appeal and each dependent claim argued separately ( *see* Bd.R. 41.37(o)(1)), that a drawing analysis consist of an annotated copy of the claim in numerical sequence, indicating in bold face between braces ({ }) (the same braces used to identify references to the specification) after each limitation where, by reference or sequence residue number, each limitation is shown in the drawing or sequence. A drawing analysis has been required in interference cases since 1998 and has proven useful to the Board in understanding claimed inventions described in applications and patents involved in an interference. The drawing analysis requirement is expected to be equally useful in *ex parte* appeals. Bd.R. 41.37(s) requires an appeal brief to contain a “means or step plus function analysis section.” The means or step plus function analysis section replaces the requirement of Rule 41.37(c)(1)(v) relating to identification of structure, material or acts for means or step plus function claim limitations contained in appealed claims. Under Bd.R. 41.37(s), the means or step plus function analysis section would include each independent claim and each dependent claim argued separately ( *see* Bd.R. 41.37(o)(1)) that contains a limitation that appellant regards as a means or step plus function limitation in the form permitted by the sixth paragraph of 35 U.S.C. 112. Further, for each such claim, a copy of the claim would be reproduced indicating in bold face between braces ({ }) the specific portions of the specification and drawing that describe the structure material or acts corresponding to each claimed function. The Office is requiring a particular format for the means or step plus function analysis section to avoid the confusion that arises from the variety of ways appellants employ under current practice in attempting to comply with the requirements of Rule 41.37(c)(1)(v). A means or step plus function analysis essentially tracking Bd.R. 41.37(s) has been used in interference cases since 1998 and has been helpful in determining the scope of claims involved. Bd.R. 41.37(t) would require an appeal brief to contain an “evidence section” in the appendix. The evidence section essentially continues the practice under Rule 41.37(c)(1)(ix). The evidence section would include

(1)table of contents,

(2)affidavits and declarations upon which the appellant relied before the examiner,

(3)other evidence upon which the appellant relied before the examiner, and

(4)evidence relied upon by the appellant and admitted into the file pursuant to Bd.R. 41.33(d). Documents in the evidence appendix would not have to be reformatted to comply with format requirements of the appeal brief. However, the affidavits, declarations and evidence required by Bd.R 41.37(t) which is otherwise mentioned in the appeal brief, but which does not appear in the evidence section will not be considered. Rule 41.37(c)(1)(ix) has a similar provision, but appellants have not attached the evidence appendix required by that rule. Appellants will now be on notice of the consequence of failing to comply with Bd.R. 41.37(t). If the examiner believes that other material should be included in the evidence section, the examiner would be able to attach that evidence to the examiner's answer. Pursuant to Bd.R. 41.37(v)(1), all pages of an appeal brief or a reply brief (including appendices to those briefs) will be consecutively numbered beginning with page 1. Bd.R. 41.37(u) requires an appeal brief to contain a “related cases section” in the appendix. The related cases section consists of copies of orders and opinions required to be cited pursuant to Bd.R. 41.37(g). Bd.R. 41.37(v) requires an appeal brief to be presented in a particular format. The appeal brief would have to comply with the format of Rule 52 as well as with other requirements set out in Bd.R. 41.37(v)(1),

(2)and

(4)through (6). Bd.R. 41.37(v)(1) requires that the pages of an appeal brief, including all sections in the appendix, be consecutively numbered using Arabic numerals beginning with the first page of the appeal brief, which would be numbered page 1. This practice would prevent

(1)re-starting numbering with each section in the appendix or

(2)using Roman numeral page numbers, e.g., I, II, V, etc., or page numbers with letters, e.g., “a”, “b”, “c”, “i”, “ii”, etc. If an appellant chooses to number the lines, line numbering may be within the left margin. Line numbering has been used for some time in interference cases and has been found to be useful when making reference in oppositions, replies, and opinions of the Board. Bd.R. 41.37(v)(2) would require that text in an appeal brief would be double spaced except in headings, tables of contents, tables of authorities, signature blocks and certificates of service. Block quotations would be indented, but could be presented in double spaced or space and a half format. Footnotes, which are discouraged, would be double spaced. Bd.R. 41.37(v)(3) is reserved. Bd.R. 41.37(v)(4) requires that the font size be 14 point, including the font for block quotations and footnotes. Bd.R. 41.37(v)(5) provides that an appeal brief may not exceed 30 pages, excluding any

(1)statement of the real party in interest,

(2)statement of related cases,

(3)jurisdictional statement,

(4)table of contents,

(5)table of authorities,

(6)status of amendments,

(7)signature block and

(8)appendix. To give meaning to the 30-page limitation, an appeal brief would not be permitted to incorporate by reference arguments from other papers in the evidence appendices or from any other source. The prohibition against incorporation by reference is necessary to prevent an appellant from adding to the length of an appeal brief. *Cf. DeSilva* v. *DiLeonardi,* 181 F.3d 865, 866-67 (7th Cir. 1999) (“[A]doption by reference amounts to a self-help increase in the length of the appellate brief. * * * [I]ncorporation [by reference] is a pointless imposition on the court's time. A brief must make all arguments accessible to the judges, rather than ask them to play archaeologist with the record.”) (citation omitted). A prohibition against incorporation by reference has been the practice in interference cases since 1998 and has minimized the chance that an argument is overlooked. A request to exceed the 30-page limit would be made by petition under Bd.R. 41.3 at least ten calendar days prior to the date an appeal brief is due. Bd.R. 41.37(v)(6) requires a signature block which would identify the appellant or appellant's representative, as appropriate, and a mailing address, telephone number, fax number and e-mail address. Examiner's Answer Bd.R. 41.39(a) provides that within such time and manner as may be directed by the Director and if the examiner determines that the appeal should go forward, the examiner shall enter an examiner's answer responding to the appeal brief. The specific requirements of what would be required in an examiner's answer would appear in the Manual of Patent Examining Procedure. Bd.R. 41.39(b) provides that a new ground of rejection can no longer be made in the examiner's answer. Generally, a new ground of rejection in an Examiner's Answer occurs when an applicant has not had a fair opportunity in the appeal brief to react to the “thrust of the rejection” made in the final rejection. *In re Kronig,* 539 F.2d 1300, 1302 (CCPA 1976). Stated in slightly different terms, a test for determining whether a rejection in the Examiner's Answer is “new” vis-à-vis the rejection made in the final rejection is whether the “basic thrust” of “rejection” in the Examiner's Answer and the rejection made in the final rejection “are different.” *In re Ansel,* 852 F.2d 1294 (Fed. Cir. 1988) (non-precedential). *In re DeBlauwe,* 736 F.2d 699, 706 n.9 (Fed. Cir. 1984) notes that “[w]here the board makes a decision advancing a position or rationale new to the proceedings, an applicant must be afforded an opportunity to respond to that position or rationale by submission of contradicting evidence [or argument].” Whether a new ground of rejection has been made in an Examiner's Answer is evaluated on a case-by-case basis. *See Kronig,* 539 F.2d at 1303 (CCPA did not find cited precedent “controlling in view of the distinctive facts at bar”). An applicant met with a new ground of rejection in an Examiner's Answer is entitled to a response to meet the new ground, including an opportunity to present new evidence, an amendment to claims or both. In *Kronig,* there was no new ground of rejection where

(1)the Examiner relied on Hoechst, Holzrichter, Yasui and Swift patents and

(2)the Board used the same basis as the Examiner, and, without disagreeing with the Examiner's approach, limited its discussion to the evidence contained in Holzrichter, Yasui and Swift. 539 F.2d at 1303. On the other hand in *Ansel,* a new ground of rejection occurred when

(1)the Examiner relied on Hodakowski and Bhatia,

(2)the Board dismissed Bhatia as superfluous, and

(3)for the first time relied on a general and brief description in Hodakowski as to what Hodakowski considered prior art. *In re Bush,* 296 F.2d 491 (CCPA 1961), states that where a “rejection is stated to be on A in view of B instead of on B in view of A, or to term one reference primary and the other secondary” is a matter of “no significance, but merely a matter of exposition” where the relevant part of each can be found. 296 F.2d at 760. *In re Kumar,* 418 F.3d 1361 (Fed. Cir. 2005), held that the Board erred in not treating as a new ground of rejection an affirmance based on calculations made by the Board in the first instance and where the Board declined to consider evidence in a petition for rehearing. In *In re Gately,* 69 Fed. Appx. 993 (Fed. Cir. 2003) (non-precedential), the Board designated as a new ground of rejection an affirmance based on calculations not previously made. In a request for rehearing to the Board, Gately elected to present only argument. On appeal to the Federal Circuit, Gately urged that he be given a further opportunity on remand to present contrary evidence. The Federal Circuit denied Gately's request, noting that the Board had given Gately the very opportunity he was then requesting, but that Gately had declined the opportunity before the Board. Under the rules, an applicant does not have to file a Rule 116 response after a final rejection citing a new reference to meet a limitation in a claim amended by the applicant in response to the first Office action. If the response to the new reference is made for the first time in the appeal brief, it would *not* be a new ground of rejection in an Examiner's Answer if the Examiner relies on any part of the record, or yet another reference, to meet the new argument made for the first time in the appeal brief. *Cf. In re Plockinger,* 481 F.2d 1327, 1330-1332 (CCPA 1973) (“the Solicitor should be allowed to point out to us the facts underlying Peras' concept of the index of basicity, all of which were before the board, in order to rebut appellants' contentions with regard thereto.”). Appellants can avoid the *Plockinger* scenario by filing a Rule 116 response after final rejection. By not filing a Rule 116 response after final rejection, an appellant runs a risk that it will be confronted for the first time in the Examiner's Answer with new rationale in support of the rejection or new evidence or both. The appellant would then have to elect whether to proceed with the appeal or refile the application. Reply Brief Bd.R. 41.41(a) provides that an appellant may file a single reply brief responding to the examiner's answer. On too many occasions, appellants have filed a first reply brief and thereafter a second reply brief. Only one reply brief is authorized under Bd.R. 41.41(a). A second reply brief will not be considered. Bd.R. 41.41(b) provides that the time for filing a reply brief would be within two months of the date the examiner's answer is mailed. Bd.R. 41.41(c) provides that a request for an extension of time shall be presented as a petition under Bd.R. 41.3(a) and (c). A decision on the petition shall be governed by Bd.R. 41.4(a) of this part. The provisions of Rule 136(a) would no longer apply to extensions of time to file a reply brief. Bd.R. 41.41(d) provides that a reply brief shall be limited to responding to points made in the examiner's answer. Except as otherwise set out in the rules, the form and content of a reply brief would be governed by the requirements for an appeal brief as set out in Bd.R. 41.37. A reply brief would not be able to exceed 20 pages, excluding any

(1)table of contents,

(2)table of authorities, and

(3)signature block. A reply brief would be required to contain, under appropriate headings and in the order indicated, the following items:

(1)Table of contents,

(2)table of authorities,

(3)statement of additional facts, and

(4)argument. Bd.R. 41.41(e) is reserved. Bd.R. 41.41(f) would require a statement of additional facts that appellant believes are necessary to respond to points raised in the examiner's answer. When there is a statement of additional facts, and the appellant has elected to number the facts in the appeal brief, any numbering of facts in the reply brief should start with the number following the last number in the appeal brief. For example, if Facts 1-10 are set out in the appeal brief and a statement of additional facts is required with a reply brief, the statement of additional facts in the reply brief should start with Fact 11. Bd.R. 41.41(g) requires that an argument made in the reply brief be limited to responding to points made in the examiner's answer. Any argument raised in a reply brief which is not responsive to a point made in the examiner's answer will not be considered and will be treated as waived. An example of an acceptable format for presenting an argument in a reply brief (where there was no new ground of rejection in the examiner's answer) might read as follows: First paragraph: “This is a reply to the examiner's answer mailed [insert the date the answer was mailed].” Last paragraph: “For the reasons given in this reply brief and in the appeal brief, reversal of the examiner's rejection is requested.” All paragraphs between the first and last paragraphs should read: “On page x, lines y-z of the examiner's answer, the examiner states that [state what the examiner states]. The response is [concisely state the response].” As part of each response, the appellant should refer to the page number and line or paragraph and drawing element number of any document relied upon to support the response. Frequently, new details and arguments surface in reply briefs. Bd.R. 41.41(g) seeks to confine reply briefs to what they ought to be—a response to points raised in the examiner's answer. If it turns out that too many resources of the Office are needed to enforce the reply brief rule and considerable time is wasted in resolving improper reply brief issues, consideration may be given to further limiting the nature of replies filed in *ex parte* appeals. Bd.R. 41.41(h) is reserved. Bd.R. 41.41(i) provides that an amendment or new evidence may not accompany a reply brief. The Office has found that appellants continue to attempt to file amendments and evidence with reply briefs. If an appellant, after reviewing the examiner's answer, believes that an amendment is appropriate, the appellant may file a continuing application or a request for continued examination or, in the case of a reexamination proceeding, ask that the proceeding be reopened. Examiner's Response to Reply Brief Bd.R. 41.43 is reserved. An examiner will no longer be responding to a reply brief. Supplemental Reply Brief Bd.R. 41.44 is reserved. A supplemental reply brief is no longer authorized because the examiner will no longer be filing a response to a reply brief. Oral Hearing Bd.R. 41.47(a) provides that if the appellant desires an oral hearing, appellant must file, as a separate paper, a written request captioned: “REQUEST FOR ORAL HEARING.” Bd.R. 41.47(b) provides that a request for oral hearing shall be accompanied by the fee required by § 41.20(b)(3). Bd.R. 41.47(c) provides that the time for filing a request for an oral hearing would be within two months from the date the examiner's answer is mailed. Bd.R. 41.47(d) provides that a request for an extension of time to request an oral hearing would have to be presented as a petition as specified in Bd.R. 41.3(a) and (c). A decision on the petition shall be governed by Bd.R. 41.4(a). Bd.R. 41.47(e) provides that if an oral hearing is properly requested, a date for the oral hearing would be set. Bd.R. 41.47(f) provides that if an oral hearing is set, then within such time as the Board may order, appellant shall confirm attendance at the oral hearing. Failure to timely confirm attendance would be taken as a waiver of any request for an oral hearing. Bd.R. 41.47(g) provides that at the time appellant confirms attendance at the oral hearing, appellant would be required to supply a list of technical terms and other unusual words which can be provided to any individual transcribing an oral hearing. The current practice of the Board is to transcribe all oral arguments. A list of technical terms provided by appellant should improve the accuracy of any transcript. Bd.R. 41.47(h) provides that unless otherwise ordered by the Board, argument on behalf of appellant at an oral hearing would be limited to 20 minutes. Bd.R. 41.47(i) provides that at oral hearing only the Record will be considered. No additional evidence may be offered to the Board in support of the appeal. Any argument not presented in a brief cannot be made at the oral hearing. Bd.R. 41.47(j) provides that notwithstanding Bd.R. 41.47(i), an appellant could rely on and call the Board's attention to a recent court or Board opinion which could have an effect on the manner in which the appeal is decided. Bd.R. 41.47(k) provides that visual aids may be used at an oral hearing. However, visual aids must be limited to copies of documents or artifacts in the Record or a model or exhibit presented for demonstration purposes during an interview with the examiner. When an appellant seeks to use a visual aid, one copy of each visual aid (photograph in the case of an artifact, a model or an exhibit) should be provided for each judge and one copy to be added to the Record. Bd.R. 41.47(l) provides that failure of an appellant to attend an oral hearing would be treated as a waiver of the oral hearing. Over the years, the Board has become concerned with the large number of requests for postponements. In some cases, multiple requests in a single appeal are submitted for postponement of an oral hearing. Apart from the fact that a postponement can lead to large patent term adjustments, efficiency dictates that the Board be able to set an oral hearing schedule with an expectation that in a large majority of the cases the oral hearing will timely occur or the appellant will waive oral hearing. The Board will continue to handle requests for postponement of oral hearings on an *ad hoc* basis. However, postponements would no longer be granted on a routine basis. A request for a postponement made immediately after a notice of oral hearing is mailed is more likely to receive favorable treatment, particularly since it may be possible to set an oral hearing date prior to the originally scheduled oral hearing date. Decisions and Other Actions by the Board Bd.R. 41.50(a) provides that the Board may affirm or reverse a decision of the examiner in whole or in part on the grounds and on the claims specified by the examiner. Bd.R. 41.50(a) continues a long-standing practice that an affirmance of a rejection of a claim on any of the grounds specified constitutes a general affirmance of the decision of the examiner on that claim, except as to any ground specifically reversed. Bd.R. 41.50(b) provides that the Board may remand an application to the examiner. Upon entry of a remand, the Board would no longer have jurisdiction unless an appellant timely files a request for rehearing. If the request for rehearing does not result in modification of the remand, the Board would then lose jurisdiction. Upon remand, should the examiner enter an examiner's answer in response to the remand, appellant would be required to exercise one of two options to avoid abandonment of the application or termination of the reexamination proceeding. Either option would have to be exercised within two months from the date of any examiner's answer mailed in response to the remand. Bd.R. 41.50(b)(1) specifies a first option and provides that appellant could request that prosecution be reopened before the examiner by filing a reply under Rule 111, with or without amendment or submission of evidence. Any amendment or evidence would have to be relevant to the issues set forth in the remand or raised in any examiner's answer mailed in response to the remand. A request that complies with this paragraph would be entered and the application or patent under reexamination would be reconsidered by the examiner under the provisions of Rule 112. A request under Bd.R. 41.50(b)(1) would be treated as a request to dismiss the appeal. Bd.R. 41.50(b)(2) specifies a second option and provides that appellant could request that the appeal be re-docketed. The request would have to be accompanied by a reply brief as set forth in Bd.R. 41.41. An amendment or evidence could not accompany the reply brief. A reply brief that is accompanied by an amendment or evidence would be treated as a request to reopen prosecution pursuant to Bd.R. 41.50(b)(1). Bd.R. 41.50(c) provides that a remand is not a final decision. Following proceedings on remand, and with respect to affirmed rejections and claims not involved in the remand, an appellant could request the Board to enter a final decision so that the appellant could then seek judicial review as to those rejections and claims. Only a final decision of the Board is subject to judicial review. *Copelands' Enter., Inc.* v. *CNV, Inc.,* 887 F.2d 1065 (Fed. Cir. 1989) ( *en banc* ). Bd.R. 41.50(d) provides that, should the Board have knowledge of a basis not involved in the appeal for rejecting a pending claim, the Board may enter a new ground of rejection. The pending claim could be a claim not rejected by the examiner. A new ground of rejection would not be considered final for purposes of judicial review. A new ground of rejection is not considered a final agency action because the appellant has not explained to the Board, without amendment or new evidence, or to the Office, with an amendment or new evidence or both, why the rejection is not proper. Bd.R. 41.50(d) places an appellant under a burden to explain to the Board or the Office why a new ground of rejection is not proper before it burdens a court with judicial review. A response by an appellant may convince the Office that a new ground of rejection should be withdrawn. If the Board enters a new ground of rejection, appellant would have to exercise one of two options with respect to the new ground of rejection to avoid dismissal of the appeal as to any claim subject to the new ground of rejection. Either option would have to be exercised within two months from the date of the new ground of rejection. Bd.R. 41.50(d)(1) specifies that a first option would be to submit an amendment of the claims subject to a new ground of rejection or new evidence relating to the new ground of rejection or both and request that the matter be reconsidered by the examiner. The proceedings would be remanded to the examiner. A new ground of rejection would be binding on the examiner unless, in the opinion of the examiner, the amendment or new evidence overcomes the new ground of rejection. In the event the examiner maintains the rejection, appellant would be able to again appeal to the Board. Bd.R. 41.50(d)(2) specifies that a second option would be to request rehearing pursuant to Bd.R. 41.52. The request for rehearing would have to be based on the record before the Board and no new evidence or amendments would be permitted. Bd.R. 41.50(e) continues a long-standing practice that the Board, in its opinion in support of its decision, could include a recommendation, explicitly designated as such, of how a claim on appeal may be amended to overcome a specific rejection. For the recommendation to be binding, it would have to be explicitly designated as a recommendation. For example, a conclusion or comment by the Board that a claim, notwithstanding appellant's argument, is so broad as to read on the prior art should not be taken as a recommendation that if some undefined limitation is added the claim would be patentable. When the Board makes a recommendation, appellant may file an amendment in conformity with the recommendation. An amendment in conformity with the recommendation would be deemed to overcome the specific rejection. An examiner would have authority to enter a rejection of a claim amended in conformity with a recommendation provided that the additional rejection constitutes a new ground of rejection. For example, the examiner may know of additional prior art not known to the Board that would meet the claim as amended. It is because of the possibility that an examiner may know of additional prior art that a recommendation would be expected to be a relatively rare event. Bd.R. 41.50(f) provides that the Board could enter an order requiring appellant to brief additional issues or supply additional evidence or both if the Board believes doing so would be of assistance in reaching a decision on the appeal. Bd.R. 41.50(f) continues a practice which has been in existence since 1999. *See, e.g.* ,

(1)37 CFR 1.196(d)

(1999)and

(2)Rule 41.50(d). Practice under Rule 41.50(d) has been highly useful and complements the authority of Office personnel to request additional material under Rule 105. Appellant would be given a non-extendable time period within which to respond to the order. In setting the length of the non-extendable time period, the Board would take into account the extent of the information requested and the time of year a response would be due. For example, it is not likely that the Board would set a date for response between Christmas Day and New Year's Day. Failure of appellant to timely respond to the order could result in dismissal of the appeal in whole or in part. An appeal might be dismissed-in-part if the order sought further briefing or evidence or both related to one rejection but not another rejection, particularly where the two rejections apply to different claims. Bd.R. 41.50(g) provides for extensions of time to respond to actions of the Board under Bd.R. 41.50(b) and (d). Bd.R. 41.50(g) provides that a request for an extension of time to respond to a request for briefing and information under Bd.R. 41.50(f) is not authorized. A request for an extension of time to respond to Board action under Bd.R. 41.50(b) and

(d)would be presented as a petition under Bd.R. 41.3(a) and (c). A decision on the petition shall be governed by Bd.R. 41.4(a). Rehearing Bd.R. 41.52(a) authorizes an appellant to file a single request for rehearing. In the past, appellants have filed a second request for rehearing, in effect supplementing a first request for rehearing. Filing a second or subsequent request for rehearing is not authorized. Any second or subsequent request for rehearing will not be considered. Bd.R. 41.52(b) provides that a request for rehearing is due within two months from the date the decision by the Board is mailed. Bd.R. 41.52(c) provides that a request for an extension of time would have to be presented as a petition under Bd.R. 41.3(a) and (c). A decision on the petition would be governed by Bd.R. 41.4(a). Bd.R. 41.52(d) provides that the form of a request for rehearing is governed by Bd.R. 41.37(v) except that a request for rehearing could not exceed 10 pages, excluding any table of contents, table of authorities, and signature block. A request for rehearing would have to contain, under appropriate headings and in the order indicated, the following items:

(1)Table of contents,

(2)table of authorities, and

(3)argument. Bd.R. 41.52(e) is reserved. Bd.R. 41.52(f) provides that a request for rehearing shall state with particularity the points believed to have been misapprehended or overlooked by the Board. In filing a request for rehearing, the argument shall adhere to the following format: “On page x, lines y-z of the Board's opinion, the Board states that [set out what was stated]. The point misapprehended or overlooked was made to the Board in [identify paper, page and line where argument was made to the Board]. The response is [state response].” As part of each response, appellant shall refer to the page number and line or drawing element number of the Record. A general restatement of the case will not be considered an argument that the Board misapprehended or overlooked a point. A new argument cannot be made in a request for rehearing, except in two instances. Bd.R. 41.52(f)(1) would authorize in a first instance an appellant to respond to a new ground of rejection entered pursuant to Bd.R. 41.50(d)(2). Bd.R. 41.52(f)(2) would authorize an appellant to rely on and call the Board's attention to a recent decision of a court or the Board that is relevant to an issue decided in the appeal. Generally, the recent court decision would be a decision of the Supreme Court or the Court of Appeals for the Federal Circuit. Bd.R. 41.52(g) provides that an amendment or new evidence could not accompany a request for rehearing. Bd.R. 41.52(h) provides that a decision will be rendered on a request for rehearing. The decision on rehearing would be deemed to incorporate the decision sought to be reheard except for those portions of the decision sought to be reheard specifically modified on rehearing. A decision on rehearing would be considered final for purposes of judicial review, except when otherwise noted in the decision on rehearing. Action Following Decision Bd.R. 41.54 provides that, after a decision by the Board and subject to appellant's right to seek judicial review, the proceeding will be returned to the examiner for such further action as may be consistent with the decision by the Board. Sanctions Bd.R. 41.56 is new and provides for sanctions. The rule is designed to put the public on notice of actions which the Office believes are detrimental to the efficient handling of *ex parte* appeals. Bd.R. 41.56(a) provides that the Chief Administrative Patent Judge or an expanded panel of the Board may impose a sanction against an appellant for misconduct. Misconduct would include

(1)failure to comply with an order entered in the appeal or an applicable rule,

(2)advancing or maintaining a misleading or frivolous request for relief or argument or

(3)engaging in dilatory tactics. A sanction would be entered by the Chief Administrative Patent Judge (for matters not before a panel) or an expanded panel of the Board (for matters before a panel). A sanction would be applied against the appellant, not against a registered practitioner. Conduct of a registered practitioner could result in a sanction against an appellant. Conduct of a registered practitioner believed to be inappropriate would be referred to the Office of Enrollment and Discipline for such action as may be appropriate. Bd.R. 41.56(b) provides that the nature of possible sanctions includes entry of

(a)an order declining to enter a docket notice,

(b)an order holding certain facts to have been established in the appeal,

(c)an order expunging a paper or precluding an appellant from filing a paper,

(d)an order precluding an appellant from presenting or contesting a particular issue,

(e)an order excluding evidence,

(f)an order holding an application on appeal to be abandoned or a reexamination proceeding terminated,

(g)an order dismissing an appeal,

(h)an order denying an oral hearing or

(i)an order terminating an oral hearing. Whether and what sanction, if any, should be imposed against an appellant in any specific circumstance would be a discretionary action. Changes Made to Rules as Proposed Several changes have been made to the rules as proposed in the notice of proposed rulemaking. Those changes follow with additions shown in [brackets] and deletions shown in {braces}. Only the paragraph of a rule where a change was made is reproduced. Petitions (§ 41.3) § 41.3(a), as proposed, would be revised as follows: *Deciding official.* A petition authorized by this part must be addressed to the Chief Administrative Patent Judge. {In addition to complying with all other requirements of this title, a copy of the petition must also be forwarded to the Office addressed to: Chief Administrative Patent Judge, Board of Patent Appeals and Interferences, United States Patent and Trademark Office, P.O. Box 1450, Alexandria, VA 22313-1450.} The Chief Administrative Patent Judge may delegate authority to decide petitions. Timeliness (§ 41.4) § 41.4(b), as proposed, would be revised as follows: *Late filings.*

(1)A request to revive an application which becomes abandoned or a reexamination proceeding which becomes terminated under §§ 1.550(d) or 1.957(b) or

(c)of this title as a result of a late filing may be filed pursuant to § 1.137 of this title.

(2)A late filing that does not result in an application becoming abandoned or a reexamination proceeding becoming terminated under §§ 1.550(d) or 1.957(b) or [limited under § 1.957]

(c)of this title may be excused upon a showing of excusable neglect or a Board determination that consideration on the merits would be in the interests of justice. Citation of Authority (§ 41.12) § 41.12 (a), as proposed, would be revised as follows: Authority. Citations to authority must include:

(1)*United States Supreme Court decision.* A citation to a single source in the following order of priority: United States Reports, West's Supreme Court Reports, United States Patents Quarterly, Westlaw, or a slip opinion.

(2)*United States Court of Appeals decision.* A citation to a single source in the following order of priority: West's Federal Reporter (F., F.2d or F.3d), West's Federal Appendix (Fed. Appx.), United States Patents Quarterly, Westlaw, or a slip opinion.

(3)*United States District Court decision.* A citation to a single source in the following order of priority: West's Federal Supplement (F.Supp., F.Supp. 2d), United States Patents Quarterly, Westlaw, or a slip opinion.

(4)*Slip opinions.* If a slip opinion is relied upon, a copy of the slip opinion must accompany the first paper in which an authority is cited.

(5)*Pinpoint citations.* Use pinpoint citations whenever a specific holding or portion of an authority is invoked. § 41.12(b), as proposed, would be revised as follows: *Non-binding authority.* Non-binding authority may be cited. If non-binding authority is not an authority of the Office and is not reproduced in one of the reporters listed in paragraph

(a)of this section, a copy of the authority shall be filed with the first paper in which it is cited.] Definitions (§ 41.30) § 41.30, as proposed, would be revised as follows: [ *Record* means the official content of the file of an application or reexamination proceeding an appeal.] { *Record on appeal.* The record on appeal consists of the specification, drawings, if any, U.S. patents cited by the examiner or appellant, published U.S. applications cited by the examiner or appellant, the appeal brief, including all appendices, the examiner's answer, any reply brief, including any supplemental appendix, any supplemental examiner's answer, any supplemental reply brief, any request for rehearing, any order or decision entered by the Board or the Chief Administrative Patent Judge, and any other document or evidence which was considered by the Board as indicated in any opinion accompanying any order or decision.} Appeal to Board (§ 41.31) § 41.31(e), as proposed, would be revised as follows: *Non-appealable issues.* A non-appealable issue is an issue not subject to an appeal under 35 U.S.C. 134. An applicant or patent owner dissatisfied with a decision of an examiner on a non-appealable issue shall timely seek review by petition before jurisdiction over an appeal is transferred to the Board ( *see* § 41.35). Failure to timely file a petition seeking review of a decision of the examiner related to a non-appealable issue may constitute a waiver to [having] {have} that issue considered [in the application or reexamination on appeal]. Amendments and Evidence After Appeal (§ 41.33) § 41.33(c), as proposed, would be revised as follows: *Other amendments.* No other amendments filed after the date an appeal brief is filed will be admitted, except as permitted by §§ {41.39(b)(1),} 41.50(b)(1), 41.50(d)(1) or 41.50(e) of this subpart. § 41.33(d), as proposed, would be revised as follows: *Evidence after notice of appeal and prior to appeal brief.* Evidence filed after the date a notice of appeal is filed and prior to the date an appeal brief is filed may be admitted if: [(1)] the examiner determines that the evidence overcomes [at least one rejection] {some or all rejections} under appeal [and does not necessitate any new ground of rejection], and [(2)] appellant shows good cause why the evidence was not earlier presented. § 41.33(e), as proposed, would be revised as follows: *Other evidence.* All other evidence filed after the date an appeal brief is filed will not be admitted, except as permitted by §§ {41.39(b)(1),} 41.50(b)(1) or 41.50(d)(1) of this subpart. Jurisdiction Over Appeal (§ 41.35) § 41.35(a), as proposed, would be revised as follows: *Beginning of jurisdiction.* The jurisdiction of the Board begins when a docket notice is [mailed] {entered} by the Board. § 41.35(b), as proposed, would be revised as follows: *End of jurisdiction.* The jurisdiction of the Board ends when[:

(1)The Board mails a remand order (see § 41.50(b) or § 41.50(d)(1) of this subpart),

(2)The Board mails a final decision (see § 41.2 of this part) and judicial review is sought or the time for seeking judicial review has expired,

(3)An express abandonment is filed which complies with § 1.138 of this title, or

(4)A request for continued reexamination is filed which complies with § 1.114 of this title.] {the Board orders a remand (see § 41.50(b) or § 41.50(d)(1) of this subpart) or enters a final decision (see § 41.2 of this subpart) and judicial review is sought or the time for seeking judicial review has expired.} Appeal Brief (§ 41.37) § 41.37(e), as proposed, would be revised as follows: *Content of appeal brief.* The appeal brief must contain, under appropriate headings and in the order indicated, the following items:

(1)Statement of the real party in interest [( *see* paragraph

(f)of this section)].

(2)Statement of related cases [( *see* paragraph

(g)of this section)].

(3)Jurisdictional statement [( *see* paragraph

(h)of this section)].

(4)Table of contents [( *see* paragraph

(i)of this section)].

(5)Table of authorities [( *see* paragraph

(j)of this section)].

(6)[[Reserved.]] {Status of claims.}

(7)Status of amendments [( *see* paragraph

(l)of this section)].

(8)[Grounds of rejection] {Rejections} to be reviewed ( *see* paragraph

(m)of this section)].

(9)Statement of facts [( *see* paragraph

(n)of this section)].

(10)Argument [( *see* paragraph

(o)of this section)].

(11)An appendix containing a claims section [( *see* paragraph

(p)of this section)], [a claim support and drawing analysis section ( *see* paragraph

(r)of this section)], {a claim support section, a drawing analysis section,} a means or step plus function analysis section [( *see* paragraph

(s)of this section)], an evidence section [( *see* paragraph

(t)of this section)], and a related cases section [( *see* paragraph

(u)of this section)]. § 41.37(f), as proposed, would be revised as follows: *Statement of real party in interest.* The “statement of the real party in interest” shall identify the name of the real party in interest. The real party in interest must be identified in such a manner as to readily permit a member of the Board to determine whether recusal would be appropriate. Appellant is under a continuing obligation to update this item during the pendency of the appeal. [If an appeal brief does not contain a statement of real party in interest, the Office will assume that the named inventors are the real party in interest.] § 41.37(g), as proposed, would be revised as follows: *Statement of related cases.* The “statement of related cases” shall identify, by application, patent, appeal, interference, or court docket number, all prior or pending appeals, interferences or judicial proceedings, known to [any inventors, any attorneys or agents who prepared or prosecuted the application on appeal and any other person who was substantively involved in the preparation or prosecution of the application on appeal,] {appellant, appellant's legal representative or any assignee,} and that are related to, directly affect, or would be directly affected by, or have a bearing on the Board's decision in the appeal. [A related case includes any continuing application of the application on appeal.] A copy of any final or significant interlocutory decision rendered by the Board or a court in any proceeding identified under this paragraph shall be included in the related cases section [( *see* paragraph

(u)of this section) in] {of} the appendix. Appellant is under a continuing obligation to update this item during the pendency of the appeal. [If an appeal brief does not contain a statement of related cases, the Office will assume that there are no related cases.] § 41.37(h), as proposed, would be revised as follows: *Jurisdictional statement.* The “jurisdictional statement” shall establish the jurisdiction of the Board to consider the appeal. The jurisdictional statement shall include a statement of the statute under which the appeal is taken, [the date of the Office action setting out the rejection on appeal from which the appeal is taken,] {the date of the decision from which the appeal is taken,} the date the notice of appeal was filed, and the date the appeal brief is being filed. If a notice of appeal or an appeal brief is filed after the time specified in this subpart, appellant must also indicate the date an extension of time was requested and, if known, the date the request was granted. § 41.37(i), as proposed, would be revised as follows: *Table of contents.* A “table of contents” shall list, along with a reference to the page where each item begins, the items required to be listed in the appeal brief ( *see* paragraph

(e)of this section) [or]{,} reply brief ( *see* § 41.41(d) of this subpart) {or supplemental reply brief (see § 41.44(d) of this subpart)}, as appropriate. § 41.37(j), as proposed, would be revised as follows: *Table of authorities.* A “table of authorities” shall list cases (alphabetically arranged), statutes and other authorities along with a reference to the pages where each authority is cited in the appeal brief [or]{,} reply brief, {or supplemental reply brief,} as appropriate. § 41.37(k), as proposed, would be revised as follows: [[Reserved.]] { *Status of pending claims.* The “status of pending claims” shall include a statement of the status of all pending claims ( *e.g.* , rejected, allowed, cancelled, withdrawn from consideration, or objected to).} § 41.37(m), as proposed, would be revised as follows: [ *Grounds of rejection* ] { *Rejections* } *to be reviewed.* The “[grounds of rejection] {rejections} to be reviewed” shall set out the [grounds of rejection] {rejections} to be reviewed, including the [statute applied, the claims subject to each rejection and references relied upon by the examiner] {claims subject to each rejection}. § 41.37(n), proposed, would be revised as follows: *Statement of facts.* The “statement of facts” shall set out in an objective and non-argumentative manner the material facts relevant to the rejections on appeal. A fact shall be supported by a reference to a specific page number [of a document in the Record] and, where applicable, a specific line or [paragraph, and] drawing numerals {of the record on appeal}. A general reference to a document as a whole or to large portions of a document does not comply with the requirements of this paragraph. § 41.37(o), as proposed, would be revised as follows: *Argument.* The “argument” shall explain why the examiner {is believed to have} erred as to each [ground of] rejection to be reviewed. Any explanation must address all points made by the examiner with which the appellant disagrees. Any finding made or conclusion reached by the examiner that is not challenged will be presumed to be correct. For each argument, an explanation {and} must identify where the argument was made in the first instance to the examiner or state that the argument has not previously been made to the examiner. {Any finding made or conclusion reached by the examiner that is not challenged will be presumed to be correct.} Each [ground of] rejection shall be separately argued under a separate heading. {For arguments traversing a rejection made under 35 U.S.C. 102, 103 or 112, see also paragraphs (o)(4) through (o)(7) of this section. For arguments traversing other rejections, see also paragraph (o)(8) of this section.}

(1)*Claims standing or falling together.* [For each ground of rejection applicable to two or more claims, the claims may be argued separately (claims are considered by appellants as separately patentable) or as a group (claims stand or fall together). When two or more claims subject to the same ground of rejection are argued as a group, the Board may select a single claim from the group of claims that are argued together to decide the appeal on the basis of the selected claim alone with respect to the group of claims as to the ground of rejection. Any doubt as to whether claims have been argued separately or as a group as to a ground of rejection will be resolved against appellant and the claims will be deemed to have been argued as a group. Any claim argued separately as to a ground of rejection shall be placed under a subheading identifying the claim by number.]{When a rejection applies to two or more claims, as to that rejection, the appellant may elect to have all claims stand or fall together, or argue the separate patentability of individual claims. If the appeal brief fails to make an explicit election, the Board will treat all claims subject to a rejection as standing or falling together, and select a single claim to decide the appeal as to that rejection. Any doubt as to whether an election has been made or whether an election is clear will be resolved against the appellant. Any claim argued separately shall be placed under a subheading identifying the claim by number.} A statement that merely points out what a claim recites will not be considered an argument for separate patentability of the claim.

(2)*Arguments considered.* Only those arguments which are presented in the argument section of the appeal brief and that address claims set out in the claim support [and drawing analysis] section of the appendix will be considered. Appellant waives all other arguments [in the appeal].

(3)*Format of argument.* Unless a response is purely legal in nature, when responding to a point made in the examiner's rejection, the appeal brief shall specifically identify the point made by the examiner and indicate where appellant previously responded to the point or state that appellant has not previously responded to the point. In identifying any point made by the examiner, the appellant shall refer to a page and, where appropriate, a line [or paragraph], of [a document in] the [Record]{record on appeal}. {(4) *Rejection under 35 U.S.C. 112, first paragraph.* For each rejection under 35 U.S.C. 112, first paragraph, the argument shall also specify the errors in the rejection and how the rejected claims comply with the first paragraph of 35 U.S.C. 112 including, as appropriate, how the specification and drawings, if any, describe the subject matter defined by the rejected claims, enable any person skilled in the art to which the invention pertains to make and use the subject matter of the rejected claims, or set forth the best mode contemplated by the inventor of carrying out the claimed invention.} {(5) *Rejection under 35 U.S.C. 112, second paragraph.* For each rejection under 35 U.S.C. 112, second paragraph, the argument shall also specify how the rejected claims particularly point out and distinctly claim the subject matter which appellant regards as the invention.} {(6) *Rejection under 35 U.S.C. 102.* For each rejection under 35 U.S.C. 102 (anticipation), the argument shall also specify why the rejected claims are patentable by identifying any specific limitation in the rejected claims which is not described in the prior art relied upon in support of the rejection.} {(7) *Rejection under 35 U.S.C. 103.* For each rejection under 35 U.S.C. 103, if appropriate, the argument shall specify the errors in the rejection and, if appropriate, specify the specific limitations in the rejected claims that are not described in the prior art relied upon in support of the rejection, and explain how those limitations render the claimed subject matter unobvious over the prior art. A general argument that all limitations are not described in a single prior art reference does not satisfy the requirements of this paragraph.} {(8) *Other rejections.* For each rejection other than those referred to in paragraphs (o)(4) through (o)(7), the argument shall specify the errors in the rejection, including where appropriate, the specific limitations in the rejected claims upon which the appellant relies to establish error.} § 41.37(p), as proposed, would be revised as follows: *Claims section.* The “claims section” of the appendix shall consist of an accurate clean copy in numerical order of all claims pending in the application or reexamination proceeding on appeal. The status of [every]{each} claim shall be set out after the claim number and in parentheses ( *e.g.* , 1 (rejected), 2 (withdrawn), 3 (objected to), [4 (cancelled), and 5 (allowed)]). {and 4 (allowed)).} [A cancelled claim need not be reproduced.] § 41.37(q), as proposed, would be revised as follows: [[Reserved.]] { *Claim support section.* For each claim argued separately (see paragraph (o)(1) of this section), the “claim support section” of the appendix shall consist of an annotated copy of the claim indicating in bold face between braces ({ }) the page and line after each limitation where the limitation is described in the specification as filed.} § 41.37(r), as proposed, would be revised as follows: [ *Claim support and* ] *drawing analysis section.* [For each independent claim involved in the appeal and each dependent claim argued separately ( *see* paragraph (o)(1) of this section), the claim support and drawing analysis section in the appendix shall consist of an annotated copy of the claim (and, if necessary, any claim from which the claim argued separately depends) indicating in bold face between braces ({ }) the page and line or paragraph after each limitation where the limitation is described in the specification as filed. If there is a drawing or amino acid or nucleotide material sequence, and at least one limitation is illustrated in a drawing or amino acid or nucleotide material sequence, the “claims support and drawing analysis section” in the appendix shall also contain in bold face between the same braces ({ }) where each limitation is shown in the drawings or sequence.] {For each claim argued separately (see paragraph (o)(1) of this section) and having at least one limitation illustrated in a drawing or amino acid or nucleotide material sequence, the “drawing analysis section” of the appendix shall consist of an annotated copy of the claim indicating in bold face between braces ({ }) where each limitation is shown in the drawings or sequence. If there is no drawing or sequence, the drawing analysis section shall state that there is no drawing or sequence.} § 41.37(s), as proposed, would be revised as follows: *Means or step plus function analysis section.* [For each independent claim involved in the appeal and each dependent claim argued separately ( *see* paragraph (o)(1) of this section) having a limitation that appellant regards as a means or step plus function limitation in the form permitted by the sixth paragraph of 35 U.S.C. 112, for each such limitation, the “means or step plus function analysis section” in the appendix shall consist of an annotated copy of the claim (and, if necessary, any claim from which the claim argued separately depends) indicating in bold face between braces ({ }) the page and line of the specification and the drawing figure and element numeral that describes the structure, material or acts corresponding to each claimed function.] {For each claim argued separately (see paragraph (o)(1) of this section) and for each limitation that appellant regards as a means or step plus function limitation in the form permitted by the sixth paragraph of 35 U.S.C. 112, the “means or step plus function analysis section” of the appendix shall consist of an annotated copy of the claim indicating in bold face between braces ({ }) the page and line of the specification and the drawing figure and element numeral that describes the structure, material or acts corresponding to each claimed function. If there is no means or step plus function limitation, the means or step plus function analysis section shall state that there are no means or step plus function limitations in the claims to be considered.} § 41.37(t), as proposed, would be revised as follows: *Evidence section* . The “evidence section” shall contain only papers which have been entered by the examiner. The evidence section shall include:

(1)A table of contents.

(2)[[Reserved.]] {The Office action setting out the rejection on appeal. If the Office action incorporates by reference any other Office action, then the Office action incorporated by reference shall also appear in the evidence section.}

(3)[[Reserved.]] {All evidence relied upon by the examiner in support of the rejection on appeal (including non-patent literature and foreign application and patent documents), except the specification, any drawings, U.S. patents or published U.S. applications.}

(4)[[Reserved.]] {The relevant portion of a paper filed by the appellant before the examiner which shows that an argument being made on appeal was made in the first instance to the examiner.}

(5)[ *Affidavits and declarations.* ] Affidavits and declarations, if any, and attachments to declarations, [before the examiner and which are relied upon by appellant in the appeal. An affidavit or declaration otherwise mentioned in the appeal brief which does not appear in the evidence section will not be considered.] {relied upon by appellant before the examiner.}

(6)[ *Other evidence filed prior to the notice of appeal.* ] Other evidence, if any, [before the examiner and filed prior to the date of the notice of appeal and relied upon by appellant in the appeal. Other evidence filed before the notice of appeal that is otherwise mentioned in the appeal brief and which does not appear in the evidence section will not be considered.] {relied upon by the appellant before the examiner.} [(7) *Other evidence filed after the notice of appeal.* Other evidence relied upon by the appellant in the appeal and admitted into the file pursuant to § 41.33(d) of this subpart. Other evidence filed after the notice of appeal that is otherwise mentioned in the appeal brief and which does not appear in the evidence section will not be considered.] § 41.37(v), as proposed, would be revised as follows: *Appeal brief format requirements* . An appeal brief shall comply with § 1.52 of this title and the following additional requirements:

(1)*Page and line numbering* . The pages of the appeal brief, including all sections [in] {of} the appendix, shall be consecutively numbered using Arabic numerals beginning with the first page of the appeal brief, which shall be numbered page 1. [If the appellant chooses to number the lines, line numbering may be within the left margin.] {The lines on each page of the appeal brief and, where practical, the appendix shall be consecutively numbered beginning with line 1 at the top of each page.}

(2)*Double spacing* . Double spacing shall be used except in headings, tables of contents, tables of authorities, [signature blocks and certificates of service.] {and signature blocks.} Block quotations must be {double spaced and} indented [and can be one and one half or double spaced].

(3)[[Reserved.]] { *Margins* . Margins shall be at least one inch (2.5 centimeters) on all sides. Line numbering may be within the left margin.}

(4)*Font* . The font [size] shall be [14 point,] {readable and clean, equivalent to 14 point Times New Roman,} including the font for block quotations and footnotes.

(5)*Length of appeal brief* . An appeal brief may not exceed [30] {25} pages, excluding any statement of the real party in interest, statement of related cases, [jurisdictional statement,] table of contents, table of authorities, [statement of amendments,] signature block, and appendix. An appeal brief may not incorporate another paper by reference. A request to exceed the page limit shall be made by petition under § 41.3 filed at least ten calendar days prior to the date the appeal brief is due. Examiner's Answer (§ 41.39) § 41.39(b), as proposed, would be revised as follows: [ *No new ground of rejection.* ] { *New rejection in examiner's answer.* } [An examiner's answer shall not include a new ground of rejection.] {An examiner's answer may include a new rejection. If an examiner's answer contains a rejection designated as a new rejection, appellant must, within two months from the date of the examiner's answer, exercise one of the following two options or the application will be deemed to be abandoned or the reexamination proceeding will be deemed to be terminated.} {(1) *Request to reopen prosecution* . Request that prosecution be reopened before the examiner by filing a reply under § 1.111 of this title with or without amendment or submission of evidence. Any amendment or evidence must be responsive to the new rejection. A request that complies with this paragraph will be entered and the application or patent under reexamination will be reconsidered by the examiner under the provisions of § 1.112 of this title. A request under this paragraph will be treated as a request to withdraw the appeal.} {(2) *Request to maintain the appeal* . Request that the appeal be maintained by filing a reply brief as set forth in § 41.41 of this subpart. A reply brief may not be accompanied by any amendment or evidence, except an amendment canceling one or more claims which are subject to the new rejection. A reply which is accompanied by evidence or any other amendment will be treated as a request to reopen prosecution pursuant to paragraph (b)(1) of this section.} § 41.39(c), as proposed, would be revised as follows: *Extension of time to file request* . The time for filing a request under § 41.39(b)(1) is extendable under the provisions of § 1.136(a) of this title as to applications and under the provisions of § 1.550(c) of this title as to reexamination proceedings. A request for an extension of time for filing a request under paragraph (b)(2) of this section shall be presented as a petition under § 41.3 of this part.} Reply Brief (§ 41.41) § 41.41(c), as proposed, would be revised as follows: *Extension of time to file reply brief* . A request for an extension of time to file a reply brief shall be presented as a petition under § 41.3 of this {sub}part. § 41.41(d), as proposed, would be revised as follows: *Content of reply brief* . {A reply brief shall be limited to responding to points made in the examiner's answer.} Except as otherwise set out in this section, the form and content of a reply brief are governed by the requirements for an appeal brief as set out in § 41.37 of this subpart. A reply brief may not exceed [20] {fifteen} pages, excluding any table of contents, table of authorities, {statement of timeliness,} [and] signature block, {and supplemental appendix} required by this section. {If the examiner enters and designates a rejection as a new rejection, the reply brief may not exceed twenty-five pages, excluding any table of contents, table of authorities, statement of timeliness, signature block, and supplemental appendix required by this section.} A request to exceed the page limit shall be made by petition under § 41.3 of this part and filed at least ten calendar days before the reply brief is due. A reply brief must contain, under appropriate headings and in the order indicated, the following items:

(1)Table of contents— *see* § 41.37(i) of this subpart.

(2)Table of authorities— *see* § 41.37(j) of this subpart.

(3)[[Reserved.]] {Statement of timeliness— *see* paragraph

(e)of this section}.

(4)Statement of [additional] facts— *see* paragraph

(f)of this section.

(5)Argument[— *see* paragraph

(g)of this section.] {(6) Supplemental appendix.} § 41.41(e), as proposed, would be revised as follows: [[Reserved.]] { *Statement of timeliness* . The “statement of timeliness” shall include the date that the examiner's answer was entered and the date that the reply is being filed. If the reply brief is filed after the time specified in this subpart, appellant must indicate the date an extension of time was requested and the date the request was granted.} § 41.41(g), as proposed, would be revised as follows: *Argument* . [Any arguments raised in the reply brief which are not responsive to points made in the examiner's answer will not be considered and will be treated as waived. {A reply brief is limited to responding to points made in the examiner's answer. Arguments generally restating the case will not be permitted in a reply brief.} § 41.41(h), as proposed, would be revised as follows: [[Reserved.]] { *Supplemental appendix* . If the examiner entered a new rejection in the examiner's answer and appellant elects to respond to the new rejection in a reply brief, this item shall include:

(1)A table of contents— *see* § 41.37(i) of this subpart.

(2)The examiner's answer.

(3)All evidence upon which the examiner relied in support of the new rejection that does not already appear in the evidence section accompanying the appeal brief, except the specification, any drawings, U.S. patents and U.S. published applications.} {Examiner's response to reply brief (§ 41.43)} § 41.43, as proposed, would be removed: {Upon consideration of a reply brief, the examiner may withdraw a rejection and reopen prosecution or may enter a supplemental examiner's answer responding to the reply brief.} {Supplemental reply brief (§ 41.44). [new rule number]} § 41.44(a), as proposed, would be removed: { *Supplemental reply brief authorized* . If an examiner enters a supplemental examiner's answer, an appellant may file a single supplemental reply brief responding to the supplemental examiner's answer.} § 41.44(b), as proposed, would be removed: { *Time for filing supplemental reply brief* . Appellant must file a supplemental reply brief within two months from the date of the mailing of the examiner's supplemental answer.} § 41.44(c), as proposed, would be removed: { *Extension of time to file supplemental reply brief* . A request for an extension of time shall be presented as a petition under § 41.3.} § 41.44(d), as proposed, would be removed: { *Content of supplemental reply brief* . Except as otherwise set out in this subparagraph, the form and content of a supplemental reply brief are governed by the requirements for appeal briefs as set out in § 41.37 of this subpart. A supplemental reply brief may not exceed ten pages, excluding the table of contents, table of authorities, and statement of timeliness and signature block. A request to exceed the page limit shall be made by petition under § 41.3 of this part and filed at least ten calendar days before the supplemental reply brief is due. A supplemental reply brief must contain, under appropriate headings and in the order indicated, the following items:

(1)Table of contents— *see* § 41.37(i) of this subpart.

(2)Table of authorities— *see* § 41.37(j) of this subpart.

(3)Statement of timeliness— *see* paragraph

(e)of this section.

(4)Argument— *see* paragraph

(f)of this section.} § 41.44(e), as proposed, would be removed: { *Statement of timeliness* . The “statement of timeliness” shall establish that the supplemental reply brief was timely filed by including a statement of the date the supplemental examiner's answer was entered and the date the supplemental reply brief is being filed. If the supplemental reply brief is filed after the time specified in this subpart, appellant must indicate the date an extension of time was requested and the date the request was granted.} § 41.44(f), as proposed, would be removed: { *Argument* . The “argument” shall be limited to responding to points made in the supplemental examiner's answer. Arguments generally restating the case will not be permitted in a supplemental reply brief.} § 41.44(g), as proposed, would be removed: { *No amendment or new evidence* . No amendment or new evidence may accompany a supplemental reply brief.} Oral Hearing (§ 41.47) § 41.47(c), as proposed, would be revised as follows: *Time for filing request for oral hearing* . Appellant must file a request for oral hearing within two months from the date of the examiner's answer {or supplemental examiner's answer}. § 41.47(i), as proposed, would be revised as follows: *Oral hearing limited to [Record] {record}* . At oral hearing only the [Record] {record on appeal} will be considered. No additional evidence may be offered to the Board in support of the appeal. Any argument not presented in a brief cannot be raised at an oral hearing. § 41.47(j), as proposed, would be revised as follows: *Recent legal development* . Notwithstanding {sub}paragraph

(i)of this section, an appellant or the examiner may rely on and call the Board's attention to a recent court or Board opinion which could have an effect on the manner in which the appeal is decided. § 41.47(k), as proposed, would be revised as follows: *Visual aids* . Visual aids may be used at an oral hearing, but must be limited to {copies of} documents [or artifacts] in the [Record] {record on appeal} [or a model or an exhibit presented for demonstration purposes during an interview with the examiner]. At the oral hearing, appellant should provide one copy of each visual aid [(photograph in the case of an artifact, a model or an exhibit)] for each judge and one copy [to be added to the Record] {for the record}. Decisions and Other Actions by the Board (§ 41.50) § 41.50(b), as proposed, would be revised as follows: *Remand* . The Board may remand an application to the examiner. If in response to [a] {the} remand [for further consideration of a rejection], the examiner enters [an] {supplemental} examiner's answer, within two months the appellant shall exercise one of the following two options to avoid abandonment of the application or termination of a reexamination proceeding:

(1)*Request to reopen prosecution* . Request that prosecution be reopened before the examiner by filing a reply under § 1.111 of this title with or without amendment or submission of evidence. Any amendment or evidence must be responsive to the remand or issues discussed in the {supplemental} examiner's answer. A request that complies with this paragraph will be entered and the application or patent under reexamination will be reconsidered by the examiner under the provisions of § 1.112 of this title. A request under this paragraph will be treated as a request to dismiss the appeal.

(2)*Request to [re-docket] {maintain} the appeal* . The appellant may request that the Board re-docket the appeal ( *see* § 41.35(a) of this subpart) and file a reply brief as set forth in § 41.41 of this subpart. A reply brief may not be accompanied by any amendment or evidence. A reply brief which is accompanied by an amendment or evidence will be treated as a request to reopen prosecution pursuant to paragraph (b)(1) of this section. § 41.50(d), as proposed, would be revised as follows: *New [ground of] rejection* . Should the Board have a basis not involved in the appeal for rejecting any pending claim, it may enter a new [ground of] rejection. A new [ground of] rejection shall be considered an interlocutory order and shall not be considered a final decision. If the Board enters a new [ground of] rejection, within two months appellant must exercise one of the following two options with respect to the new [ground of] rejection to avoid dismissal of the appeal as to any claim subject to the new [ground of] rejection:

(1)*Reopen prosecution* . Submit an amendment of the claims subject to a new [ground of] rejection or new evidence relating to the new [ground of] rejection or both, and request that the matter be reconsidered by the examiner. The application or reexamination proceeding on appeal will be remanded to the examiner. A new [ground of] rejection by the Board is binding on the examiner unless, in the opinion of the examiner, the amendment or new evidence overcomes the new [ground of] rejection. In the event the examiner maintains the new [ground of] rejection, appellant may again appeal to the Board.

(2)*Request for rehearing.* Submit a request for rehearing pursuant to § 41.52 of this subpart relying on the [Record]{record on appeal}. § 41.50(e), as proposed, would be revised as follows: *Recommendation.* In its opinion in support of its decision, the Board may include a recommendation, explicitly designated as such, of how a claim on appeal may be amended to overcome a specific rejection. When the Board makes a recommendation, appellant may file an amendment or take other action consistent with the recommendation. An amendment or other action, otherwise complying with statutory patentability requirements, will overcome the specific rejection. An examiner, however, [upon return of the application or reexamination proceeding to the jurisdiction of the examiner,] may enter a new [ground of] rejection of a claim amended in conformity with a recommendation, when appropriate. § 41.50(g), as proposed, would be revised as follows: *Extension of time to take action.* A request for an extension of time to respond to a request for briefing and information under paragraph

(f)of this section is not authorized. A request for an extension of time to respond to Board action under paragraphs

(b)and

(d)of this section shall be presented as a petition under § 41.3 of this {sub}part. Rehearing (§ 41.52) § 41.52(b), as proposed, would be revised as follows: *Time for filing request for rehearing.* Any request for rehearing must be filed within two months from the date of the decision [mailed]{entered} by the Board. § 41.52(c), as proposed, would be revised as follows: *Extension of time to file request for rehearing.* A request for an extension of time shall be presented as a petition under § 41.3 of this {sub}part. § 41.52(d), as proposed, would be revised as follows: *Content of request for rehearing.* {A request for rehearing shall state with particularity the points believed to have been misapprehended or overlooked by the Board.} The form of a request for rehearing is governed by the requirements of § 41.37(v) of this subpart, except that a request for rehearing may not exceed [10] {ten} pages, excluding any table of contents, table of authorities, {statement of timeliness,} and signature block. A request to exceed the page limit shall be made by petition under § 41.3 at least ten calendar days before the request for rehearing is due. A request for rehearing must contain, under appropriate headings and in the order indicated, the following items:

(1)Table of contents— *see* § 41.37(i) of this subpart.

(2)Table of authorities— *see* 41.37(j) of this subpart.

(3)[[Reserved.]] {Statement of timeliness— *see* paragraph

(e)of this section.}

(4)Argument— *see* paragraph

(f)of this section. § 41.52(e), as proposed, would be revised as follows: [[Reserved.]] { *Statement of timeliness.* The “statement of timeliness” shall establish that the request for rehearing was timely filed by including a statement of the date the decision sought to be reheard was entered and the date the request for rehearing is being filed. If the request for rehearing is filed after the time specified in this subpart, appellant must indicate the date an extension of time was requested and the date the request was granted.} § 41.52(f), as proposed, would be revised as follows: *Argument.* [A request for rehearing shall state with particularity the points believed to have been misapprehended or overlooked by the Board.] In filing a request for rehearing, the argument shall adhere to the following format: “On page x, lines y-z of the Board's opinion, the Board states that [set out what was stated]. The point misapprehended or overlooked was made to the Board in [identify paper, page and line where argument was made to the Board] [or the point was first made in the opinion of the Board]. The response is [state response].” As part of each response, appellant shall refer to the page number and line or drawing number of [a document in] the [Record] {record on appeal}. [A] {No} general restatement of the case [will not be considered an argument that the Board has misapprehended or overlooked a point.] {is permitted in a request for rehearing.} A new argument cannot be made in a request for rehearing, except:

(1)*New [ground of] rejection.* Appellant may respond to a new [ground of] rejection entered pursuant to § 41.50(d)(2) of this subpart.

(2)*Recent legal development.* Appellant may rely on and call the Board's attention to a recent court or Board opinion which is relevant to an issue decided in the appeal. Sanctions (§ 41.56) § 41.56(a), as proposed, would be revised as follows: *Imposition of sanctions.* [The Chief Administrative Patent Judge or an expanded panel of the Board may impose a sanction] {A sanction may be imposed} against an appellant for misconduct, including:

(1)Failure to comply with an order entered in the appeal or an applicable rule.

(2)Advancing or maintaining a misleading or frivolous request for relief or argument.

(3)Engaging in dilatory tactics. § 41.56(b), as proposed, would be revised as follows: *Nature of sanction.* Sanctions may include entry of:

(1)An order declining to enter a docket{ing} notice.

(2)An order holding certain facts to have been established in the appeal.

(3)An order expunging a paper or precluding an appellant from filing a paper.

(4)An order precluding an appellant from presenting or contesting a particular issue.

(5)An order excluding evidence.

(6)[[Reserved.]] {An order requiring terminal disclaimer of patent term.}

(7)An order holding an application on appeal to be abandoned or a reexamination proceeding terminated.

(8)An order dismissing an appeal.

(9)An order denying an oral hearing.

(10)An order terminating an oral hearing. Discussion of Comments Generally *Comment 1.* Several comments expressed a concern that many of the appeals rules, as proposed, are not necessary and will not help the Board resolve appeals. *Answer.* A review of the comments as a whole suggests that many have overlooked the fact that

(1)the overall appeal process begins with the notice of appeal and ends with a decision of the Board and

(2)that the process from notice of appeal to decision of the Board is bifurcated within the Office. The Office bifurcates the overall appeal process because some of the steps are carried out in the Technology Centers while other steps are carried out before the Board. The notice of appeal and appeal brief are filed while the appeal process is before the Technology Center. Many of the requirements of the rules will help the Board and Technology Center personnel. For example, a table of contents and table of authorities helps Technology Center personnel ( *e.g.* , the examiner and conferees in appeals) promptly locate information in a brief. A jurisdictional statement will provide a road map on whether an application on appeal is abandoned and will enable Technology Center personnel to promptly advise an applicant in the event an application is abandoned. Identification of whether an argument in an appeal brief is “new” will enable Technology Center personnel to evaluate the new argument and determine whether a rejection should be withdrawn. Additionally, if a “new” argument is made, Technology Center personnel will know that if the appeal is to go forward that the argument will need to be answered. The rules should be viewed as making the overall appeal process, albeit bifurcated, efficient so as to eliminate at an early stage appeals which should not go forward and make appeals which go forward capable of prompt resolution. *Comment 2.* A comment maintained that the proposed rule changes are “substantive and NOT interpretive.” *Answer.* The rules are promulgated pursuant to the Director's authority to establish regulations which govern the conduct of proceedings in the Office, including regulations governing *ex parte* appeals. 35 U.S.C. 2(b)(2)(A). The rules are merely procedural rules, not substantive rules. *Comment 3.* A comment suggested that the proposed appeals rules would increase application pendency, *inter alia,* because examiners would delay examination until the filing of an appeal brief. According to the comment, delays occur under the former rules. *Answer.* The premise of the comment is that under the former rules the examiners are not doing their job and are waiting for an appeal to examine a patent application. The Director has confidence that examiners are doing their job correctly. Furthermore, most applications are examined without the need for filing a notice of appeal. Therefore the comment is addressing a very small percentage of all applications filed in the Office. If there are some examiners who in the opinion of an applicant are not doing their job, the applicant has a responsibility to call the matter to the attention of a Director in the involved Technology Center. The Office cannot address and respond to general comments about perceived improper behavior of examiners. Like the examination of a patent application, perceived inappropriate examination can be dealt with only on a case-by-case and examiner-by-examiner basis. A Technology Center Director without knowledge of difficulties experienced by an applicant is not likely to be able take to steps to improve the examination process, whether before or after a notice of appeal is filed. *See Keebler Co.* v. M *urray Bakery Products,* 866 F.2d 1386, 1388 (Fed. Cir. 1989) (noting that prescience is not a required characteristic of Office personnel). Unless a matter is called to the attention of an Office manager in a position to look into the facts, it is unlikely the behavior which the comment alleges occurs can be corrected. *Comment 4.* A comment indicated that from 40 to 60 percent of appealed cases are reopened or allowed under existing rules. Another comment indicated that only 50% of the appeals are transmitted to the Board after the newly instituted appeal conferences in the Technology Centers. The comments go on to state that applicants should not have to file appeal briefs (either under the former rules or the new rules) when many appeals never reach the Board. Other comments made similar observations. *Answer.* For appellants taking advantage of the Office's newly instituted pre-appeal brief conferences, an appeal brief is not due until the results of the pre-appeal conference are mailed to appellant. Nevertheless, an increasing number of appeals proceed to the Board for resolution. These rules establish procedures which will permit those appeals reaching the Board to be resolved in an efficient manner. *Comment 5.* A comment suggested that many of the appeals rules place a burden on an applicant to establish patentability as opposed to requiring the Office to establish unpatentability. *Answer.* The comment misapprehends the nature of the rules. It is the examiner's function to establish that claims are unpatentable. An applicant dissatisfied with the examiner's unpatentability holding may appeal to the Board. The appeals rules are not designed to make the applicant prove patentability. However, they are designed to require the applicant on appeal to show that the examiner erred. The rules also require the applicant to provide enough information so that the Board can determine what fact or legal matter is in dispute and resolve any dispute. In many appeals, the Board has had to spend considerable time trying to determine what matters are in issue. *Comment 6.* The tenor of many comments is that applicants are concerned with post-issuance matters, such as infringement cases. The premise of the comments is that an applicant (soon to be a patentee) should not have to state its position on various matters, including, *e.g.* ,

(1)the meaning of claims,

(2)the level of skill in the art, and

(3)what element in a specification supports a means or step plus function claim. The comments imply that if an applicant has to tell the Board what its claim means, post-issuance doctrine of equivalents positions may be compromised. Some comments suggest that the more which needs to be said, the more likely an applicant will face allegations of inequitable conduct when a patent is sought to be enforced. *Answer.* The Office is not unsympathetic to some of the concerns expressed. However, it is also true that a patent file serves a public notice function. To the extent that an applicant has to explain the meaning of its claims, etc., to the Board to secure a reversal, no applicant should be concerned. The examination process should be a transparent process where prosecution reveals much about the scope and meaning of a patent. Patent prosecution is not a procedure whereby an applicant should be allowed to maneuver during prosecution only to surprise the public when the patent issues. For these reasons, it is difficult to see why an applicant would want to resist providing the information the Board needs to determine whether an examiner erred. In this respect, the Federal Circuit recently made the following observation: Where the applicant expressly and unambiguously states * * * [an] intention to claim broadly, the claim construction issue is easier and the question becomes one of validity—whether the specification supports the full breadth of the new claims. On the other hand, where—as in this case—the patentee has not been explicit about the scope of the new claims, the case can pose interdependent problems of both claim construction and validity. *Saunders Group, Inc.* v. *Comfortrac, Inc.,* 492 F.3d 1326, 1336 (Fed. Cir. 2007). The appeal rules address the Federal Circuit's observation, at least for those cases which require an appeal to be decided by the Board. *Comment 7.* Several comments called attention to events which are said to have transpired in particular patent applications prosecuted by those submitting the comments. According to the comments, examiners are said to have mishandled each of the applications. *Answer.* The rule making process is not a vehicle for correcting errors which are said to have occurred during the prosecution of particular patent applications. The comments were considered only to the extent that they provided general observations and suggestions relevant to a rule under consideration. *Comment 7A.* Several comments called attention to mathematical analysis of data compiled by the comment provider. According to the comments, the analysis argued against implementation of the rules. *Answer.* The data and analysis have been considered only to the extent that each is relevant to a rule under consideration. The data and analysis do not provide any justification for not implementing the rules. *Comment 8.* A comment suggested that a Regulatory Flexibility Act analysis is required. 5 U.S.C. 603. *Answer.* A Regulatory Flexibility Act certification or analysis is required only for proposed rules that are required to be published for notice and comment. Because these rules are procedural, they are not required to be published for notice and comment. Nevertheless, the Office chose to publish these rules for comment prior to adoption of the final rules in order to solicit valuable input from the public. See the Regulatory Flexibility Act section under Rule Making Considerations of this final rule for further information regarding certification of the rules under 5 U.S.C. 605(b). *Comment 8A.* Several comments stated that the notice of proposed rule making should have been published earlier than July 30, 2007. *Answer.* Although prior notice and an opportunity for public comment are not required for the procedural changes in the rules as proposed, the USPTO published a notice of proposed rule making in the **Federal Register** as soon as the proposed rules were in an appropriate form for publication. *Comment 9.* Two comments suggested that the Office has not complied with the Paperwork Reduction Act; specifically with regard to Bd.R. 41.37(t) and

(u)and 41.41(h)(2) and (3). *Answer.* Paragraphs

(t)and

(u)of section 41.37 have been revised and do not require the collection of information beyond what is already required by the current rules. Paragraph (h), including subparagraphs

(2)and (3), of section 41.41 have been reserved. *Comment 9A.* A comment suggested that the Office has not complied with Executive Order 12866. *Answer.* For reasons given at the end of this notice, the Office has complied with Executive Order 12866. Bd.R. 41.3(a) *Comment 10.* Several comments suggested that delegating authority to the Chief Administrative Patent Judge to decide certain petitions for extensions of time might result in delays. Other comments noted that there have been occasions when petitions have not been promptly forwarded to deciding officials within the Office. *Answer.* Bd.R. 41.3 requires that a petition for an extension be filed with the Office and addressed to the Chief Judge. Consideration of requests for extensions decided by a single Office employee will maximize uniform treatment of petitions for an extension of time. *Comment 11.* A comment suggested that the Chief Administrative Patent Judge would not be in a position to know examiner's hours and schedules and therefore would not be in a good position to decide petitions for an extension of time. *Answer.* An examiner's hours or schedule are not relevant to whether an applicant should receive an extension of time. Bd.R. 41.4(a) *Comment 12.* A comment observed that the **Federal Register** Notice (72 FR at 41,472), under “Timeliness of Petitions,” states that the Chief Administrative Patent Judge will determine (for the most part) whether extensions of time are to be granted. Other Board rules state that a request for an extension of time must be presented as a petition under Bd.R. 41.3. The comment felt that the Notice gives an impression that all requests for extensions of time under Bd.R. 41.4(a) would have to be by way of a petition under Bd.R. 41.3. If so, then the comment suggests that Bd.R. 41.4(a) should be amended to provide that a petition under Bd.R. 41.3 is required. *Answer.* The suggestion to change Bd.R. 41.4(a) is not being adopted. Bd.R. 41.4(a) provides that extensions of time will be granted only on a showing of good cause except as otherwise provided by rule. Bd.R. 41.3

(1)applies to all cases pending before the Board, including interference cases and requests for an extension of time by petition under Bd.R. 41.4, and

(2)sets the standard under which extensions of time are granted. A petition for an extension of time under Bd.R. 41.3 is required only where another rule requires the petition to be filed, e.g.

(1)Bd.R. 41.41(c) (reply brief),

(2)Bd.R. 41.47(d) (request for oral hearing), and

(3)Bd.R. 41.52(c) (request for rehearing). *Comment 13.* A comment noted that possible requests for extensions of time under the current appeal process might lead to unwarranted patent term adjustment. The comment suggests that an amendment could be made to Rule 704(c)(9) to deal with abuses of the extension of time practice and the need for a petition for an extension of time is not necessary. *Answer.* A possible amendment to Rule 704(c)(9) is beyond the scope of the notice of proposed rule making. Nevertheless, one factor in determining whether a petition for an extension of time should be granted is any possible patent term adjustment resulting from any extension. In the case where granting a petition for an extension of time would appear to result in unwarranted patent term adjustment, a decision on petition could make an extension conditioned on an appellant waiving its right to patent term adjustment equivalent to the length of the extension. Bd.R. 41.20 *Comment 14.* A comment suggested that if an examiner makes a new ground of rejection in an examiner's answer and the applicant elects further prosecution before the examiner, then the appeal fees (notice of appeal and appeal brief) should be refunded or applied to any future appeal. *Answer.* The rules are being amended to provide that a new ground of rejection cannot be made in the examiner's answer. Bd.R. 41.30 *Comment 15.* One comment suggested that the transcript of oral argument be considered part of the “record on appeal.” *Answer.* Since any “transcript of oral argument” is entered in the file of the application or reexamination on appeal, it is part of the Record. However, one concern in making the transcript part of the Record will be attempts by appellants at oral hearing to raise “new” issues not previously raised. A new argument raised for the first time at an oral hearing will not be considered. *See* Bd.R. 41.47(i), which is based on principles announced in *Packard Press, Inc.* v. *Hewlett-Packard Co.,* 227 F.3d 1352, 1360 (Fed. Cir. 2000); *Henry* v. *Department of Justice,* 157 F.3d 863, 865 (Fed. Cir. 1998); and *LeVeen* v. *Edwards,* 57 USPQ2d 1406, 1414 (Bd. Pat. App. & Int. 2000). *Comment 16.* A comment suggested that the definition of “record on appeal” is too broad because it could include, for example, U.S. patents cited in an IDS which are not mentioned by either the examiner or the appellant. The comment suggested that the definition be limited to documents relied upon in the appeal. *Answer.* The Record consists of the material in the official file of the application or reexamination on appeal. However, unless a particular document in the Record has been mentioned or relied upon, a document cannot form part of the “evidence” considered by the examiner or the Board. Patents cited in an IDS, but not relied upon by either the examiner or the appellant in the appeal will not be considered by the Board. Likewise, Office actions, responses to Office actions, prior art and evidence cited earlier in the prosecution, but not relied upon in the appeal, would not be considered. *Comment 17.* A comment suggested that the record on appeal (Bd.R. 41.30 and Bd.R. 41.37(t)) should be “the entire administrative record.” *Answer.* The suggestion is adopted. A definition of “Record” has been added to the definitions in Bd.R. 41.30. However, as the answer to the previous comments makes clear, a document in the Record not called to the attention of the examiner and the Board will not be considered. A document called to the Board's attention the first time in a petition for rehearing will almost always be denied consideration. Experience shows that after an adverse decision by the Board, on appeal to the Federal Circuit an appellant will refer to documents in the court brief which were not called to the attention of the Board. The Federal Circuit is entitled to know that the document relied upon in an appeal before it was addressed in the arguments made to the Board. The appeal brief, reply brief and request for rehearing will establish what part of the Record was relied upon in the appeal by the appellant, the examiner and the Board. *Comment 18.* A comment suggested that the definition of the record on appeal gives preferential status to U.S. patents and published U.S. applications. The comment goes on to say that published foreign applications and technical journal articles are also important. *Answer.* Given the added definition of Record in Bd.R. 41.30, it is believed that any concern in the comment has been answered. Bd.R. 41.31(c) *Comment 19.* A suggestion was made that Bd.R. 41.31(c) be amended to permit an appellant to file a notice of appeal without the payment of any “late” fee ( *see* Rule 136(a) and Rule 550(c)) when there is a delay in deciding a petition ( *see* Bd.R. 41.31(e)). *Answer.* The suggestion is beyond the scope of the notice of proposed rule making and will not be adopted. *Comment 20.* A comment suggested that an applicant should be able to appeal to the Board an examiner's refusal to enter an amendment. *Answer.* The suggestion is not adopted. However, consistent with long-standing practice, review of an examiner's decision not entering an amendment will remain available by petition. Bd.R. 41.31(e) *Comment 21.* A comment suggested that the “waiver” language of Bd.R. 41.31(e) would apply to a continuing application and a request for continued examination (RCE). The comment suggested that waiver would not be appropriate in a continuation or an RCE. *Answer.* The language “in the application or reexamination on appeal” has been added to the end of Bd.R. 41.31(e). From a practical point of view, however, a waiver in a reexamination may mean the issue has been ultimately waived for all time. Bd.R. 41.33(b) *Comment 22.* A comment suggested that Bd.R. 41.33(b) would preclude entry of an amendment requested by the examiner. The same comment noted that Bd.R. 41.37(d) would preclude entry of evidence requested by the examiner. *Answer.* The comment misperceives the authority of the examiner and the purpose of the appeal rules in general. Bd.R. 41.33(b) and Bd.R. 41.33(d) advise applicants when they can expect that an amendment or evidence will be entered. The rules advise an applicant when it would be futile to file an amendment or evidence. However, nothing in the rule should be construed as precluding an examiner from suggesting an amendment or evidence and entering the amendment or evidence if timely filed. An appellant should realize that the examiner may reopen the prosecution. With limited exceptions, the appeal rules do not purport to require or not require action by the examiner or other Office personnel. The rules advise applicants what the Office requires and expects from them. Practices applicable to what an examiner should do are best left to administrative orders and the Manual of Patent Examining Procedure. Stated in other terms, the Director does not need a rule to tell Office personnel what they can or cannot do; the Director has inherent authority to issue administrative instructions on how agency business is to be handled by Office personnel. Bd.R. 41.33(d) *Comment 23.* Several comments noted that Bd.R. 41.33(d) would permit evidence filed after a notice of appeal if the evidence overcomes some or all rejections. On the other hand, the supplementary information states (72 FR at 41,473, col. 3, near the end of the first full paragraph) that even where good cause is shown, if the evidence does not “overcome all rejections,” the evidence would not be admitted. *Answer.* The supplementary information should have said “overcome some or all rejections.” There is a possibility that the language “some or all rejections” could be read to mean that all rejections must be overcome. The language of Bd.R. 41.33(d) has been changed to read “at least one rejection”. *Comment 24.* A comment suggested that after the notice of appeal, if the examiner has considered evidence to the extent that the evidence does not overcome some or all rejections, the evidence should be entered in the record. *Answer* . The suggestion is not being adopted. There are two conditions which must be met for an applicant to have evidence “admitted” into the record after the filing of a notice of appeal. First, an applicant must show good cause for having not earlier presented the evidence. Second, the evidence must be of such weight and character as to overcome some or all rejections. Nothing in the rule should be construed as precluding an examiner from suggesting the presentation of particular evidence and entering the evidence if timely filed. An applicant should realize that the examiner may enter the evidence and reopen the prosecution. *Comment 25* . A comment suggested that an applicant should have a right to file additional evidence after a notice of appeal has been filed. *Answer* . The suggestion is not adopted. The time for evidence to be filed, except as otherwise provided in a rule, *e.g.* , Bd.R. 41.33(d) and (e), is prior to the notice of appeal. Bd.R. 41.33(e) *Comment 26* . A suggestion was made that an appellant be authorized to submit “new” evidence to respond to a “new” fact or conclusion made by the examiner for the first time in a final rejection or an Examiner's Answer responding to an appeal brief. *Answer* . The suggestion will not be adopted. The notice of proposed rulemaking does not address presentation of evidence in response to a final rejection. *See* Rule 116 for practice after final rejection. If the examiner's answer states a new fact or conclusion, an appellant may take the position that the rejection is a new ground of rejection and request that the examiner reopen prosecution to consider new evidence. If the examiner agrees, prosecution would be reopened and the evidence would be considered. If the examiner disagrees, then the evidence would not be admitted. An appellant dissatisfied with an examiner's decision should seek administrative relief by petition. Bd.R. 41.35(a) *Comment 27* . Several comments suggested that delays occur in the Office between the filing of the notice of appeal and transmittal of the appeal to the Board. Related comments suggested that the Office should impose a time limit on how long an application may remain with a Technology Center after a reply brief is filed. It was suggested that a maximum period of three months should be “imposed.” *Answer* . Under the rules, the Office expects that an application will be forwarded immediately to the Board after a reply brief is filed. Any delay in forwarding appeals to the Board following filing of a reply brief (or after the time expires for filing a reply brief) are an internal operating matter which is not appropriately addressed in a rule. Nevertheless, the Director agrees with the comment to the extent that a delay in transmitting an appeal to the Board is not appropriate. There are two steps an appellant can take which would help the Office minimize delays. First, if appellant does not intend to file a reply brief, a one-page notice to the Office to that effect would trigger the appeal being forwarded to the Board. Second, if after filing a reply brief, an appellant does not receive within a reasonable time a docket notice from the Board, a one-page notice to the Office to that effect would help the Office promptly transmit the appeal to the Board. Bd.R. 41.35(a) *Comment 28* . A comment suggested that Bd.R. 41.35(a) should be amended to provide that jurisdiction over an appeal begins when a notice of appeal is filed. According to the suggestion, transferring jurisdiction when a docket notice is mailed could mean that a successful appellant may not receive all patent term adjustments to which it may be entitled. *Answer* . The suggestion is not being adopted. Patent term adjustment associated with an *ex parte* appeal is governed by Rule 703(b)(4) and other provisions of Subpart F of Part 1 of 37 CFR. Bd.R. 41.37 *Comment 29* . A comment suggested that the appeal brief rules will result in unnecessary exposure to allegations of inequitable conduct. It appears the comment is particularly concerned with evidence in the application file not called to the attention of the Board in the evidence section (Bd.R. 41.37(t)). *Answer* . These rules limit the content of the evidence section compared to the content required by the rules as proposed. In any event, inequitable conduct requires intent to deceive. If in an appeal brief an appellant refers to and explains the significance of a document already in the official file of the application or reexamination on appeal, it is difficult to see how there can be intent to deceive. Bd.R. 41.37(a) *Comment 30* . A comment suggested that the language “proceedings on the appeal are terminated without further action on the part of the Office” needs clarification. *Answer* . The language is intended to put applicants on notice that if an appeal brief is not timely filed, the appeal is “over” and that no notice to that effect should be expected from the Office. An applicant knows when an appeal brief is due and whether the appeal brief is to be filed. Bd.R. 41.37(a) advises the applicant that it should not expect a notice that proceedings on the appeal are terminated (although the Office may nevertheless issue a notice in the form of a notice of abandonment). If there are no allowed claims, then any continuing applications (35 U.S.C. 120) would have to be filed before the date the appeal brief was due. If there are allowed claims, the application on appeal continues to be a pending application. The examiner would take such steps as may be needed to advance prosecution to issue, including making a requirement for the applicant to take certain action within a period of time. Rejected claims on appeal would be cancelled since a failure to file an appeal brief constitutes a waiver of any right to those claims in the application on appeal. The rule does not affect the pending status of any application in which there is an allowed claim. Bd.R. 41.37(c) *Comment 31* . Several comments suggested that a review should be taken in the Technology Center after a notice of appeal is filed and that an appeal brief should not be due until the review is complete. For example, it was suggested that an SPE (supervisory patent examiner) review the claims based on the last amendment filed. Alternatively, an applicant would be permitted to specify one claim for consideration and if that claim turned out to be allowable, the applicant would forego the appeal. *Answer* . The suggestions are not adopted principally on the ground that the reviews involved add to pendency. There are two problems associated with additional pendency. The first is overall pendency of an application. The second is patent term adjustment for time spent in appeals. Bd.R. 41.37(e) *Comment 32* . Several comments suggested that the appeal brief requirements seem disproportionately burdensome for applicants. *Answer* . The Director recognizes that some additional burden may be imposed by these appeal rules. As a result of comments received from the public, the requirement for content of appeal briefs has been reduced, particularly in the need for an evidence section. Nevertheless, it also must be recognized that the number of appeals is expected to rise significantly in the near future. A rise in the number of appeals should not mean that an applicant taking an appeal should have to wait an unreasonable period to receive a decision on appeal. One possible way to ensure continued prompt decisions is to add judges to the Board so that an increased volume can be handled within current time frames. However, continued hiring of new employees will not by itself reduce backlogs. There is a practical limit to the number of judges and employees the Office can hire. Alternative procedures and techniques must be found to permit the Board to efficiently handle the expected rise in appeals. Many of the comments are based on an underlying premise that the commentator's appeal will be considered and that the requirements of the rules impose an unwarranted burden in that appeal. Absent some adjustment which permits the agency to efficiently consider and decide appeals, the premise that the commentator's appeal will be considered promptly may turn out to be incorrect; while the appeal eventually will be reached and considered, the appeal may end up in a large backlog only to be reached when time permits. The rules seek to implement procedures which will assist the Office in avoiding delays in deciding appeals. However, to avoid delays, the Office needs help from applicants taking an appeal. The rules set out the help the Office needs. *Comment 33* . A comment made a suggestion that, under certain conditions, the Director consider a “mini-appeal brief” as an alternative to an appeal brief. Those conditions were identified as including

(1)a single rejection as to all claims on appeal,

(2)all claims stand or fall together, and

(3)no evidence is relied upon by the applicant ( *e.g.* , declarations or publications). The comment suggested that a “mini-appeal brief” could be limited to 10 pages and would not need to include all the sections required by Bd.R. 41.37(e). *See also* Comment 91. *Answer* . The suggestion is not being adopted, principally because the content of a possible mini-brief was not the subject of the notice of proposed rulemaking. Accordingly and apart from the suggestion, the Office does not have the necessary input or experience under these rules to determine the parameters for a mini-brief. The Office will continue to study the idea of a mini-brief and after some experience under the rules as amended may again consider the viability of a mini-brief. *Comment 34* . A comment suggested that rule changes are not needed because the Board was able to reduce a backlog of 9,000 appeals ten years ago to a manageable number of appeals. *Answer* . The comment is correct that the number of pending appeals was reduced. However, the reduction took place by adding judges. As earlier noted, however, the Office cannot solve all of its obligations by adding personnel. In FY 1998, the Board received 4,466 appeals and had 46 judges (some of whom were assigned to handle interference cases) to handle the appeals. In FY 2000, the Board received only 2,981 appeals, but had increased the number of judges to 65 (some of whom were assigned to handle interference cases). The Board faced a significant challenge in FY 2007. The two-year growth in FY 2006 and FY 2007, of approximately 50%, is by far the largest two-year growth in patent appeal receipts in the years tracked at the Board. In FY 2007, the Board received 4,639 appeals. The FY 2007 receipts represent over a 38% increase from the prior year. In contrast, FY 1994, FY 1995, and FY 1996 receipts were: 3,667; 4,318; and 4,466 appeals, respectively (not including returns). For this three-year growth, the percent rise in patent appeal receipts was only a 21.8% increase, but resulted in a 900 appeal backlog. Adding to the challenge, the Board has lost many experienced judges due to retirement. Since the high point of 66 judges in FY 2002, Board membership fell to 55 judges at the beginning of FY 2007. Of the 66 judges on board in FY 2002, only 40 are here today. Moreover, at the end of FY 2007, approximately 38% of the judges were newly hired within the last two years. This represents the highest proportion of newly hired judges in recent Board history. Bd.R. 41.37(f) *Comment 35* . A comment suggested that the language in Bd.R. 41.37(f) “in such a manner as to readily permit a member of the Board to determine whether recusal would be appropriate” is not clear. Rather than leaving it to the applicant, the comment suggests that the rule itself spell out what information is required. *Answer* . The requirement for an identification of a real party in interest is to avoid participation in an appeal by an administrative patent judge who has an ethical obligation of recusal. As the comment noted, when the real party in interest is an assignee, *e.g.* , a company, compliance with the rule is straightforward. However, often the real party in interest is a licensee prosecuting an application with the approval of the assignee. Sometimes, the real party in interest is a group of organizations each with varying interests. No rule can specify all possible circumstances under which an entity or individual needs to be identified. Accordingly, the rule identifies the purpose of why information is being requested so that registered practitioners, familiar with the entities and individuals involved, can exercise professional judgment to notify the Board of circumstances which might warrant recusal. Bd.R. 41.37(g) *Comment 36* . A comment suggested that the related proceedings be made clear. In addition, the comment suggested that the “known to appellant, the appellant's legal representative, or assignee” can be a very large number of people in a large corporate environment. *Answer* . The nature of the related cases to be identified is present in Rule 41.37(c)(1)(ii) and has not presented any known problem to date. Rather than attempt to change the language defining a related case, the Office will leave the language the same in Bd.R. 41.37(g) and observe whether problems arise in the future. The suggestion concerning large corporate entities has merit. If a corporation has a patent department with units in New York and Colorado or a law firm has offices in Chicago and Los Angeles, the patent department and law firm could find it difficult to comply with the rule. Accordingly, the language in Proposed Bd.R. 41.37(g) “known to appellant, appellant's legal representative or assignee” has been changed to “known to any inventors, any attorneys or agents who prepared or prosecuted the application on appeal and any other person who was substantively involved in the preparation or prosecution of the application on appeal.” The changed language conforms closely to the individuals mentioned in Rule 56(c) and narrows the individuals who need to be consulted. Bd.R. 41.37(h) *Comment 37* . Several comments suggested that a jurisdictional statement is not necessary. *Answer* . Reference is made to Comment 1 for an explanation of why a jurisdictional statement helps the overall appeal process. A prudent practitioner will always check prior to filing a notice of appeal that the notice is being timely filed. Likewise, a prudent practitioner will check prior to filing an appeal brief that the appeal brief is timely filed. The jurisdictional statement will simply memorialize the practitioner's check and will help Board personnel confirm that the application or reexamination proceeding on appeal is pending and not “abandoned” or “terminated.” In the event a check reveals that an abandonment or termination has occurred, the applicant or patent owner can take advantage of available revival remedies at an early date and avoid an unnecessary dismissal of an appeal. *Comment 38* . A comment asked the question: When is a petition for an extension of time under Rule 136(a) granted? *Answer* . Assuming that a petition for an extension of time complies procedurally with the rule and that the required fee is paid, a petition for an extension of time under Rule 136(a) is granted “automatically” upon its filing. In a jurisdictional statement it would be appropriate to state that: “A petition for an extension of time under Rule 136(a) was filed and granted on [state date petition filed].” Bd.R. 41.37(i) *Comment 39* . A comment suggested that subsection

(i)should precede subsections (f),

(g)and

(h)and that the Table of Contents should be item

(1)in Bd.R. 41.37(e). *Answer* . The suggestion is not being adopted because the comment does not indicate why a change is necessary. *Comment 40.* A comment suggested that a table of contents is not helpful and serves no useful purpose. *Answer* . Reference is made to Comment 1 for explanation of how the table of contents is useful in the overall appeals process. In addition, although not required by rule, the Board has received appeal briefs with tables of contents. The tables of contents have proved useful in the Board's consideration of those appeal briefs. Bd.R. 41.37(j) *Comment 41* . A comment asked the question: How will a list of authorities assist the Board in any meaningful way? *Answer:* Reference is made to Comment 1 for an explanation of how a table of authorities is useful during the overall appeals process. Modern word processors make creation of a table of authorities fairly easy. A table of authorities is often useful when an examiner or a member of the Board knows that a particular argument is associated with a citation of a particular statute or case. Consultation of the table of authorities will reveal where the citation, and therefore the argument, appears without a need to go through a brief page-by-page. Arguments based on a particular precedent therefore are less likely to be overlooked. *Comment 42* . A related comment suggested that a table of authorities is not needed because appeals to the Board often do not turn on legal issues. *Answer* . If the premise of the comment is accepted, then it would follow that few, if any, cases would be cited in a table of authorities and would involve minimal effort. Bd.R. 41.37(k) *Comment 43* . A comment suggested that the requirement of Bd.R 41.37(k) was redundant with the requirements of Bd.R. 41.37(q). *Answer* . While the requirements of Bd.R. 41.37(k) are not redundant with the requirements of Bd.R. 41.37(q), they are redundant with the requirements of Bd.R. 41.37(p). Both Bd.R. 41.37(k) and Bd.R. 41.37(p) deal with pending claims. Bd.R. 41.37(k) will be reserved. Bd.R. 41.37(n) *Comment 44* . Several comments noted that the rules in various places require citation to a page and line number. The comments suggest that, where appropriate, a citation to a paragraph number be authorized in place of a line number. An example where paragraph numbers are appropriate is a reference made to a published U.S. patent application. *Answer* . The suggestion is adopted. An amendment to Bd.R. 41.37(n) authorizes citation to paragraphs where a paragraph citation is appropriate. *Comment 45* . Several comments noted that it is difficult to present facts in a non-argumentative manner and therefore Bd.R. 41.37(n) is “unworkable” and unnecessary. By way of an example, the comment notes that the examiner may find that a reference describes certain subject matter, and applicant disagrees. The comment goes on to question why a specific reference to the record is necessary. Other comments suggested that the manner of presenting facts should be at the discretion of the applicant. On the other hand, still other comments expressed the view that a statement of facts “could be a useful innovation.” *Answer* . A specific reference to the record is necessary so that Office personnel, including the examiner and the Board, can verify the correctness of a fact. Applicants should not expect either the examiner or the Board to necessarily believe assertions of fact unsupported by a reference to the record. A statement of fact which is immediately verifiable to a specific point in the record is highly convincing. The observation that a statement of facts “could be a useful innovation” has merit. A well-written statement of facts can tell a “story” in an objective manner, particularly when each statement of fact is supported by a citation to a specific portion of the evidence. Often telling the story objectively convinces the trier of fact of the merit of a position. After reading an objective concise statement of facts, it is not unusual for a trier of fact to look with anticipation for an answer. There is no reason to expect that there should be any difficulty objectively setting out facts. An example follows involving Facts 1-5: *Fact 1* . The examiner found that Jones (the reference) describes a battery (col. 2, lines 4-9). *Fact 2* . Applicant disagrees. (Note that applicant disagrees is a “fact”. Fact 2 does not include an “argument” why applicant disagrees because the argument is reserved for the argument section). *Fact 3* . Jones describes [state what applicant believes Jones describes] (col. 1, lines 31-46). *Fact 4* . A battery must have electrodes (col. 8, lines 1-12). *Fact 5* . The device described by Jones does not have electrodes (Fig. 2). Note that no argument has been presented; only objective facts. From these objective facts the argument section can make out the case that the Jones device is not a battery. Objectively stated Facts 3-5, sans argument, speak for themselves and go a long way to convincing a trier of fact that applicant is correct thereby suggesting that the examiner's finding may be erroneous. *Comment 46* . Several comments suggested that the statement of facts addresses only the facts in dispute. *Answer* . The suggestion is not adopted. While the examiner and the appellant may have an idea of what is involved and disputed in an application, appeal conferees and the Board do not participate in the prosecution leading up to an appeal. An understanding of the issues on appeal requires an understanding of the facts, including

(1)those in dispute and

(2)those not in dispute which are relevant to understanding the nature of the invention on appeal and the issues. *Comment 47* . A comment suggested that in an *ex parte* context facts related to the level of skill in the art are not necessary. *Answer* . The level of skill can be manifested in several ways. *In re GPAC* , 57 F.3d 1573, 1579 (Fed. Cir. 1995). In the context of an *ex parte* appeal, the level of skill is often revealed in the prior art. *In re Kahn* , 441 F.3d 977, 988 (Fed. Cir. 2006) [for evidence of the level of skill, one may consider an applicant's disclosure and the prior art (references are generally entitled to great weight because they are almost always prepared without regard to their use as evidence in the particular examination in which they are used, *Velander* v. *Garner* , 348 F.3d 1359, 1371 (Fed. Cir. 2003))]. For example, in many pharmaceutical cases, a reference will say that determining a dose within disclosed ranges can be determined on the basis of weight of the patient. One skilled in the art, therefore, would know that dosage is a function of weight. Another example might be where a reference says that you cannot apply a voltage higher than 220, yet an appellant is claiming a voltage of 550. The reference would establish that one skilled in the art would not be inclined to exceed a voltage of 220. Bd.R. 41.37(o) *Comment 48* . Several comments suggested that the provision of Bd.R. 41.37(o) requiring an appellant to explain why the examiner is believed to have erred “unfairly shifts the burden of proving a *prima facie* case on appeal from the PTO to the patent applicant.” *Answer* . The necessary premise of the comment is that on appeal to the Board the examiner should be presumed to have erred and it is up to the examiner in an examiner's answer to show otherwise. The comment misperceives the difference between

(1)initial examination leading to a final rejection and

(2)an appeal from that final rejection. In responding to a rejection during examination, Rule 111(b) requires an applicant to specifically point out the supposed errors in the examiner's action. In most appellate administrative and court tribunals, a decision under review is presumed to be correct until an appellant can convince the appellate tribunal that the decision is incorrect, whether the decision involves a question of fact or an issue of law or both. As one comment correctly stated: “[t]he appellant has to make the case for error on the record.” On appeal to the Board, an appellant can overcome a rejection by showing insufficient evidence to support a *prima facie* case or rebutting any *prima facie* case with appropriate evidence. *See In re Kahn* , 441 F.3d 977, 985-86 (Fed. Cir. 2006). The rules impose no new burden on an appellant seeking review of an examiner's rejection before the Board. It is true that opinions of the former Court of Customs and Patent Appeals and Federal Circuit state that the initial burden is on the PTO to establish a *prima facie* case. However, the Director is not aware of any CCPA or Federal Circuit opinion which states that the decision of the Office on appeal is presumed to be erroneous. In fact, the opposite is the case because a decision of an administrative agency is presumed to be correct absent a statutory provision to the contrary. *Cf* .

(1)*Morgan* v. *Daniels* , 153 U.S. 120, 125

(1894)(a decision of the Office must be accepted as controlling unless the contrary is established), and

(2)*American Hoist & Derrick Co.* v. *Sowa & Sons, Inc.* , 725 F.2d 1350, 1359 (Fed. Cir. 1984) (deference is due to PTO examiners who are assumed to have some expertise in interpreting the references and to be familiar from their work with the level of skill in the art and whose duty it is to issue only valid patents). If an examiner is presumed to be correct when the examiner allows a claim (and a patent issues as a result), what possible rationale would justify a presumption that the examiner is wrong when the examiner rejects a claim? It is true that an examiner has an initial burden to make out a *prima facie* case. For example, 35 U.S.C. 102 states that an applicant “shall be entitled to a patent unless * * * ” Once an examiner determines that the applicant is not entitled to a patent, the “unless” provision of § 102 is facially satisfied until an interested party can show otherwise. *Cf. Hyatt* v. *Dudas* , 492 F.3d 1365, 1369-71 (Fed. Cir. 2007) (noting that the examiner made out a *prima facie* case and therefore Hyatt was under a duty to comply with PTO requirements). If an appellant believes the examiner has not satisfied the examiner's initial burden, then an appellant needs to convince the Board that there is no *prima facie* case. There is no “rule” which supports a notion that the examiner must be presumed on appeal to have erred; such a rule would be inconsistent with an efficient administration of the *ex parte* appeal process. A suggestion was made that placing the burden on the appellant to establish that the examiner erred is not consistent with the duties of the Board as provided by 35 U.S.C. 6. The suggestion is believed to be incorrect and overlooks similarities between an appeal to the Board and a subsequent appeal to the Federal Circuit. An *ex parte* appeal may be taken to the Board from an adverse decision of an examiner. 35 U.S.C. 134(a) and (b). On written appeal, the Board is to review the adverse decision by the examiner. 35 U.S.C. 6(b). An appellant dissatisfied with a decision of the Board may appeal to the Federal Circuit. 35 U.S.C. 141. On appeal, the Federal Circuit is to review the decision from which an appeal is taken. 35 U.S.C. 144. There is no known precedent of the Federal Circuit which holds that the Director has the burden on appeal. Why should the examiner have the burden on appeal to the Board? As noted earlier, no cogent rationale could justify such a burden on the Office. Just as the Board is presumed to have been correct in the Federal Circuit, until the contrary is shown to the satisfaction of the Federal Circuit, the examiner should be presumed to have been correct on appeal to the Board until the contrary is shown to the satisfaction of the Board. It has also been suggested that the Board is under an obligation to review a decision of the examiner *de novo* . The precise meaning of *de novo* is not apparent. No provision of law imposes an obligation for a *de novo* review and such a review is inconsistent with efficient administration of appeals. While the Board may have more latitude in an *ex parte* appeal than an Article III court, there is no cogent reason to review facts on a “no deference” basis. An examiner performs a quasi-judicial function. *Western Electric Co.* v. *Piezo Technology, Inc.* v. *Quigg* , 860 F.2d 428, 431 (Fed. Cir. 1988) (patent examiners are quasi-judicial officials); *Compagnie de St. Gobain* v. *Brenner* , 386 F.2d 985, 987 (D.C. Cir. 1967) (examiner performs quasi-judicial function based on the record before PTO). The question on appeal is whether an examiner's finding is supported by the evidence. If it is, the finding should not be second-guessed and set aside by the Board on the basis that the Board in the first instance would have made a different finding. The Board (like courts) is not in the business of substituting its judgment for that of an examiner when an examiner justifies a fact or conclusion with appropriate evidence. A contrary view undermines the authority of the examiner to carrying out the examination duties delegated by the Director to the examiner pursuant to 35 U.S.C. 131-132. On the other hand, if an examiner's finding is not supported by appropriate evidence, the Board has authority to set aside the finding and if the finding is essential to a rejection to also set aside the rejection. The question before the Board, then, is not an examination (that already took place under 35 U.S.C. 131-132); rather, the Board's chore is to review the examiner's decision and correct errors which an appellant can establish were made by the examiner. The review process is straightforward. An example and a question in a comment confirm how the process works. Suppose the examiner finally rejects claim 1 finding that reference A describes limitation Y of claim 1. Assume that the appeal brief (through a combination of a statement of facts and argument) convincingly establishes that reference A does not describe limitation Y. The comment asked what will happen. First, if the argument is convincing, the examiner may withdraw the rejection. Second, if the examiner does not withdraw the rejection and the Board agrees with the appellant, then the rejection would be set aside. *Comment 49* . A comment suggested clarification is needed for the meaning of “[e]ach rejection shall be separately argued under a separate heading” and “[a]ny claim argued separately shall be placed under a subheading identifying the claim by number.” According to the comment, similar language in Rule 41.37(c)(1)(vii) has “proven to be elusive to the USPTO.” Presumably, the comment suggests that the Office has not uniformly applied the quoted language. *Answer* . The comment is best answered in the form of an example. Suppose an application has claims 1-7. Claim 1 is an independent claim. Claims 2-7 depend from claim 1. Claims 1-7 are rejected under 35 U.S.C. 103(a) over Jones. Claims 1-4 are also rejected under 35 U.S.C. 102 as anticipated by Smith. With respect to the “Jones” rejection, applicant elects to argue claims 1 and 4 separately. Claims 2-3 and 5-7 would stand or fall with claim 1 as to the “Jones” rejection. With respect to the “Smith” rejection, applicant elects to argue claims 1 and 3 separately. Claims 2 and 4 would stand or fall with claim 1. The headings and subheadings of the argument section of the appeal brief would be the following: ARGUMENT Errors in Rejection Based on Jones Claim 1 Discussion of why the examiner erred in rejecting claim 1 under § 103 over Jones. Claim 4 Discussion of why the examiner erred in rejecting claim 4 under § 103 over Jones even if the examiner did not err in rejecting claim 1 over Jones. Note that when a dependent claim is separately argued, any argument should assume *arguendo* that the independent claim is unpatentable over Jones. Errors in Rejection Based on Smith Claim 1 Discussion of why the examiner erred in rejecting claim 1 under § 102 over Smith. Claim 3 Discussion of why the examiner erred in rejecting claim 3 under § 102 over Smith even if the examiner did not err in rejecting claim 1 over Smith. *Comment 50* . A comment suggested that requiring an appellant to challenge every finding and every conclusion reached by an examiner is not appropriate. *Answer.* There is no requirement that every finding and conclusion be challenged. The appeal brief should challenge only those findings made and conclusions reached by the examiner with which the appellant disagrees. *Comment 51* . A comment asked the following question: If a rejection of all claims is based on A or B in view of C or D, do there need to be four headings, one for A in view of C, B in view of C, A in view of D and B in view of D. *Answer* . There would need to be only a single heading: Rejection based on A or B in view of C or D. *Comment 52* . Several comments suggested that there is no need to identify a new argument made in an appeal brief. *Answer* . Reference is made to Comment 1 for an explanation of why identification of a new argument in an appeal brief is useful during the appeal process. Identification of an argument as a new argument should prevent timely made meritorious new arguments from being overlooked. *Comment 53* . A comment suggested that it is not always easy to determine whether an argument is “new” or not. *Answer* . Registered practitioners are sufficiently qualified to generally recognize a “new” argument. It can also be observed that, based on agency experience, a “new” argument often surfaces when the practitioner handling the appeal is different from the practitioner handling pre-appeal prosecution. In case of doubt, an appeal brief could use the following model: “On page 5, lines 4-12, the examiner found [state what was found]. In the response to the first action (page 3, lines 3-6), appellant disagreed arguing [state what was argued]. There was no response in the final rejection to the appellant's argument. Appellant continues to believe that the examiner erred in making the finding because [state the reason].” Alternatively, the last sentence could read “Appellant continues to believe that the examiner erred in making the finding because [state the reason]. In addition by way of possible new argument, the examiner is further believed to have erred [state the new argument].” *Comment 54* . A comment requested clarification on whether an unchallenged finding made by an examiner (which will be presumed to be correct) is binding in a subsequent continuing application or RCE (request for continued examination). *Answer* . While binding for the purpose of the appeal and any remand in the application which was on appeal, in a subsequent continuing application or RCE, the applicant would be free to challenge the finding. *Comment 55* . A comment suggested that it is often useful to provide technical background to assist the Board in understanding the invention and requested clarification on how that might be done in the context of Bd.R. 41.37. *Answer* . The comment is correct that a technical background is often useful to the examiner and the Board. The technical background can be presented as part of the statement of facts. Bd.R. 41.37(n). In presenting the technical background, reference should be made to the record. Relevant parts of the record might include

(1)the specification,

(2)technical literature in the record and

(3)any declaration in the record. Bd.R. 41.37(o)(1) *Comment 56* . A comment sought clarification of Bd.R. 41.37(o)(1) asking whether the appellant or the Board would “select a single claim to decide the appeal as to that rejection.” *Answer* . The language of Bd.R. 41.37(o)(1) has been changed from that in the notice of proposed rulemaking. If claims are argued as a group, then the Board may select a single claim and review any ground of rejection on the basis of the single claim. Bd.R. 41.37(o)(2) *Comment 57* . A comment suggested that Bd.R. 41.37(o)(2) may preclude an argument being presented in an appeal, because rationale in an examiner's answer may be more extensive than rationale in a final rejection and the appeal brief is limited to showing that the rationale in the final rejection is erroneous. According to the comment, since an argument in a reply brief (Bd.R. 41.41) was not made in the appeal brief, the argument may be waived. *Answer* . A reply brief may respond to a finding or conclusion made in an examiner's answer which was not made in a final rejection. If the finding was made in the final rejection and not addressed in the appeal brief, an appellant cannot address the finding for the first time in a reply brief or at oral hearing. However, where the finding is made for the first time in an examiner's answer, an appellant may respond in a reply brief indicating why the record supports a holding that the finding is erroneous. *Comment 58* . A comment suggested that it did not understand what is meant by only arguments presented in the argument section of the appeal brief would be considered and that all other arguments are waived. According to the comment, Rule 41.37(c)(1)(vii), providing that only arguments presented in the appeal brief and reply brief will be considered, is sufficient. *Answer* . There have been two practical problems with former Rule 41.37(c)(1)(vii). First, notwithstanding the language of the former rule, appellants erroneously continue to believe that an argument made anywhere in the record will be considered by the examiner and the Board during an appeal. Bd.R. 41.37(o)(2) advises appellants that the argument must appear in the argument section of the appeal brief. Arguments made in other places in the record will not be considered. Bd.R. 41.37(v)(5) precludes incorporating an argument from another paper by reference. Second, the former rule may give the impression that an argument may be made for the first time in a reply brief and will be considered. However, a new argument shall not appear for the first time in a reply brief. The “no new argument” in reply briefs policy is implemented in Bd.R. 41.41(g) providing that a reply brief may respond only to points raised in the examiner's answer. *Comment 59* . A comment expressed a concern that a “waiver” of an argument could mean that the argument could never again be raised in the Office. *Answer* . Any waiver is for the purpose of the appeal. Bd.R. 41.37(o)(2) has been changed to read: “Appellant waives all other arguments in the appeal.” If an argument is waived in the appeal and the appellant wants to have the argument considered, the appellant may file a continuing application or an RCE (request for continued examination). Bd.R. 41.37(o)(3) *Comment 60* . A comment asked the question: Is an argument characterized under this section as “not previously been made to the examiner” intended to be limited to an entirely new argument, or would it include any argument which is not repeated to the Board in the appeal brief exactly as it was presented to the examiner? *Answer.* There are at least two kinds of arguments presented in an appeal brief. The first is an argument which was made to, but rejected by, the examiner. Generally the argument will appear in a response to a first Office action or in a response to a final rejection. The second is an argument where there was no opportunity to present the argument to the examiner. For example, in an advisory action, the examiner may make a point for the first time. In responding in the appeal brief to the examiner's advisory action point, appellant would be presenting a response for the first time and therefore the argument was not previously made to the examiner. A response to a new point in an examiner's answer would be another instance where the argument could not have been presented to the examiner. An appeal brief would not have to use the same wording used in a response to an Office action. Pointing out where an argument was previously made will permit the Board to efficiently determine the nature of any dispute between the examiner and the appellant. Appellant needs some leeway to state the same argument in different words, particularly where subsequent events in the record (presentation of Rule 132 evidence or additional prior art) make the argument in the appeal brief more forceful. *Comment 61.* A comment suggested that there is no need for an appellant to indicate whether an argument previously has been made and, if made, where it was made. *Answer.* Indicating whether an argument previously has been made will help both the examiner and the Board recognize when a new argument has been made. When the examiner knows that a new argument is made in the appeal brief, the examiner can address the argument in the Examiner's Answer and it is less likely that a new argument will be overlooked. *Comment 62.* A comment suggested that a requirement that the appellant explain why an examiner has erred (Bd.R. 41.37(o)) and a need to identify a point made in the rejection (Bd.R. 41.37(o)(3)) unduly handicaps appellant in presenting a case on appeal. *Answer.* It is not apparent why the format handicaps an appellant in presenting its appeal case. After all, the appellant was under an obligation under Rule 111(b) to point out the “supposed errors” in an examiner's rejection. If an examiner made a point in a rejection which an appellant believes is erroneous, the appellant identifies the point and follows with a discussion of why an error has occurred. For example: “On page 5, line 8 of the final rejection, the examiner found that reference A teaches [state what the examiner says was taught] and therefore one skilled in the art would combine the teaching of reference A with the teachings of reference B. The examiner is believed to have erred because reference A does not teach what the examiner says it teaches. Note that col. 3, lines 3-36 of reference A explains that [say what reference A says]. The explanation at col. 3, lines 3-36 cannot be reconciled with the examiner's finding because a first element cannot be both parallel and perpendicular to a second element.” Bd.R. 41.37(o)(4) Through (o)(8) *Comment 63.* Several comments questioned the need for Bd.R. 41.37(o)(4) through (o)(8) and suggested that these rules not be enacted. *Answer.* The suggestion is adopted. An appellant is required to point out how an examiner is supposed to have erred. Bd.R. 41.37(o). Since the emphasis should focus on how the examiner erred, there is no benefit from having an appellant also comply with the requirements of Bd.R. 41.37(o)(4) through (o)(8). Bd.R. 41.37(p) *Comment 64.* A comment suggested clarification of the meaning of a “clean” copy of the claims. The comment assumed that a “clean” copy means a copy of the pending claims that is “free from underlining and bracketing and other extraneous information.” The comment also asked whether the status indicators of Rule 121(c) need to be present. *Answer.* The comment's assumption of the meaning of “clean” is correct. An example of a proper way to comply with Bd.R. 41.37(p) in an application with cancelled claim 1 and pending claims 2-5 is: Claim 1 (cancelled). Claim 2 (rejected). An apparatus comprising A, B, and C. Claim 3 (objected to). The apparatus of claim 2 further comprising D. Claim 4 (withdrawn from consideration). A method of using an apparatus comprising A, B, and C comprising the steps of x, y, and z. Claim 5 (allowed). An apparatus comprising A, B, C, D, and E. Cancelled claims need not be reproduced. The only status indicators of interest to the Board are

(1)“rejected,”

(2)“allowed,”

(3)“withdrawn from consideration”

(4)“objected to” and

(5)“cancelled”. However, if an appellant desires to say “Claim 1 (original—rejected)” or “Claim 2 (amended—objected to)” or otherwise use the Rule 121(c) status indicators, there is no objection as long as one of the five status indicators listed above is set out. *Comment 65.* A comment suggested that only the claims on appeal should be reproduced in the claims section. *Answer.* In considering an appeal, it is often useful to know what has been allowed, objected to, and withdrawn. If a claim has been allowed or is objected to and the claim has a significant limitation not present in the claims on appeal, this fact is highly useful and should be accessible with minimal effort to the examiner and the Board. Withdrawn claims also provide highly useful information. Often arguments relate to the subject matter of the withdrawn claims and not the claims on appeal. Additionally, the fact that an examiner has restricted out subject matter can be helpful in understanding the breadth of rejected claims. Bd.R. 41.37(q) *Comment 66:* Several comments suggested that duplication of effort could be eliminated if Bd.R. 41.37(q) and Bd.R. 41.37(r) are combined. *Answer.* The suggestions are being adopted. Bd.R. 41.37(q) and Bd.R. 41.37(r) are being combined in Bd.R. 41.37(r). Bd.R. 41.37(q) will be reserved. *Comment 67.* A comment questioned the need for Bd.R. 41.37(q) and asked for guidance on the meaning of “limitation.” *Answer.* As noted in the previous comment, Bd.R. 41.37(q) is being combined with Bd.R. 41.37(r). Nevertheless, the comment will be addressed at this point since the comment mentions Bd.R. 41.37(q) and could not have known that it would be combined with Bd.R. 41.37(r). Discussion appears in the notice of proposed rulemaking explaining why Bd.R. 41.37(q) was proposed. *See* 72 FR at 41477, col. 3 through 41478, col. 2. It is also worth noting that in the appeal process, Office personnel considering an appeal include several individuals beyond the examiner who handled pre-appeal prosecution. Additional Office personnel include conferees in the Technology Centers and members of the Board. Additional Office personnel will not be as familiar with the claims and specification as the examiner handling the application or reexamination. All Office personnel involved in the appeal process need to understand the invention on appeal. *See* also Comment 1. Reading just a claim may not be enough to get a cogent grasp of the claimed invention. A claim support section is designed to make the understanding of claimed inventions efficient. An applicant knows, at least subjectively, what is intended to be covered by a claim. A reference to the relevant portion of the specification and drawings (when there is a drawing) often helps. Examiners often go through the process of reproducing claims and inserting in the claims references to the specification and drawing. Applicants often disagree with the examiner's analysis. Since it is applicant who presents the claim and applicant knows what is intended, the efficient practice is to have applicant make the reference to the specification and drawing. What cannot be included in the claim support section is an argument why a particular portion of the specification supports the claim limitation. The comment suggests that there is some confusion about the meaning of the word “limitation.” Since Office actions, responses to Office actions, and Board and court decisions use the word routinely, it is somewhat difficult to understand why the word “limitation” is not generally understood in the context of a patent claim. The Office has not experienced any difficulty with a corresponding drawing analysis requirement in contested cases. *See* Bd.R. 41.110(c). Bd.R. 41.37(r) *Comment 68.* Several comments suggested that the claim support section (Bd.R. 41.37(q)) and the drawing analysis could be combined thereby eliminating a need to reproduce claims twice in applications with a drawing. *Answer.* The suggestion is being adopted. Bd.R. 41.37(q) is reserved and Bd.R. 41.37(r) is changed to incorporate the provisions of both Bd.R. 41.37(q) and Bd.R. 41.37(r). An example of how an applicant can comply with both rules in the case where there is a published U.S. application follows. An apparatus comprising

(1)a first valve {Fig. 2, element 25; ¶ 0005},

(2)a second valve {Fig. 2, element 31; ¶ 0006},

(3)a tank {Fig. 3, element 8; ¶ 0008},

(4)a pipe with the first valve disposed on one end and the tank disposed on the other end {Fig. 3, element 19; ¶ 0010}, and

(5)* * *. If a paragraph of a published U.S. application is long, reference to the line or lines of the paragraph may be added, *e.g.* {Fig. 3, element 19; ¶ 0010, lines 18-20}. *Comment 69.* Several comments inquired into whether the claim support and drawing analysis applies to all independent claims or just an independent claim being separately argued. *Answer.* The answer is all independent claims on appeal and any dependent claim separately argued. A change is made in the final rule to continue the practice of Rule 41.37(c)(1)(v) instead of the practice set out in proposed Bd.R. 41.37(q),

(r)and (s). Both Bd.R. 41.37(r) (claims support and drawing analysis section) and Bd.R. 41.37(s) (means or step plus function analysis section) have been changed to reflect the continuation of the practice of Rule 41.37(c)(1)(v). *Comment 70.* A comment suggested that a drawing analysis is not necessary, noting that in a large number of applications “drawings are fluff inserted because of Office rules, not because they are actually needed to understanding the invention.” *Answer.* A drawing analysis, along with the claim support analysis, is helpful because it assists Office personnel in understanding an invention. The statute requires a drawing in those cases which admit of a drawing. 35 U.S.C. 113. If an applicant submits a drawing responsive to § 113 and takes an appeal, it should not be difficult to prepare a drawing analysis. *Comment 71.* A comment “fully supports” the change proposed by Bd.R. 41.37(q), which has been combined with Bd.R. 41.37(r). It was suggested that clarification be given stating that an appellant not be required to identify every part of a specification which supports a given limitation. *Answer.* The clarification requested is appropriate. A specification can discuss a limitation in numerous places throughout the specification. A citation in the claims support section to all “places” is not necessary when those citations would be cumulative. What is necessary is a citation to the part or parts of the specification which will allow the Board to understand where the claimed limitation has antecedent basis in the specification. A significant difficulty the Board experiences is when the wording of the claim (original or amended) is not the same as the wording of the specification. The comment made an additional suggestion that the practice of Bd.R. 41.37(r) be required for all amendments filed during prosecution. The additional suggestion is beyond the scope of the rule making to the extent it seeks changes to the rules governing pre-appeal examination practice. *Comment 72.* A comment suggested that a drawing analysis is not necessary, indicating that the summary of the invention provisions of the former rule adequately serves the purpose which would be served by the drawing analysis section. *Answer.* It is true that in some appeal briefs, the appellant will describe the invention using the language of the claims along with parenthetical insertions of element numbers of the drawings. Those appeal briefs have been very useful, so much so that it has been determined that it would be useful to have a drawing analysis section in all cases. Moreover, when there is no drawing analysis section, appellants should understand that the Board itself will often undertake to create a drawing analysis. In doing so, the Board may not conclude that a particular drawing element is what was intended by the appellant. Having the appellant in the first instance tell the Office which drawing element corresponds to a claim limitation will avoid unnecessary misunderstandings. *Comment 73.* A comment suggested that if the only claim separately argued is a dependent claim, the drawing analysis should also annotate the claims from which the separately argued claims depend. *Answer.* The suggestion is adopted, both as to the required drawing analysis as well as the claim support analysis. The language “(and, if necessary, any claim from which the claim argued separately depends)” has been added to Bd.R. 41.37(r) and (s). Bd.R. 41.37(s) *Comment 74.* A comment requested guidance on how one would comply with Bd.R. 41.37(s). *Answer.* An example, based on a published U.S. application with a drawing follows. An apparatus comprising

(1)a first valve,

(2)a second valve,

(3)a tank,

(4)means for connecting the first valve to the tank {Fig. 3, element 19; ¶ 0010} and

(5)* * *. *Comment 75.* A comment suggested that Bd.R. 41.37(s) should be clarified to state whether means or step plus function limitations in just contested claims need to be analyzed or whether the analysis is necessary for all claims, including non-contested claims. *Answer.* A means or step plus function analysis is necessary only in contested claims. The rule specifies that the means or step plus function analysis is necessary “[f]or each independent claim involved in the appeal and each dependent claim argued separately.” A contested claim is a claim for which separate patentability arguments are presented, *e.g.* , claims 1 and 4 over the Jones reference mentioned in Comment 49. *Comment 76.* A comment “supports” Bd.R. 41.37(s), but suggested that it be made clear that there is more than one way to have a “means plus function” claim. *Answer.* There is a presumption that a limitation reciting “means” for performing a function or a step is a limitation within the meaning of the sixth paragraph of 35 U.S.C. 112. However, as the comment points out, “program instructions for __,” “component for __” or “module for __” may also be means plus function claims. In such a case, compliance with Bd.R. 41.37(s) would be necessary. The comment also indirectly suggested that appellants may try to sidestep the question of whether particular language is “means” language. The consequence of failing to identify “means” language as “means or step plus function language” may mean that the limitation will be construed to cover any element or step which performs the function. Bd.R. 41.37(t) *Comment 77.* Several comments were received questioning the need for an evidence section. According to the comments, the Office already has the material which an appellant would include in an evidence section. *Answer.* The comments have merit. As a result of comments, the Office has decided to insert a definition of the Record in Bd.R. 41.30. The Record is the official file of the application or reexamination on appeal. The appeal will be decided on the Record consistent with the arguments presented in the appeal brief and reply brief and observations made in the examiner's answer. Nevertheless, the Office has decided to continue current practice of requiring a significantly more limited evidence section. *See* Rule 41.37(c)(1)(ix), requiring an evidence appendix. Under Bd.R. 41.37(t), the evidence section is limited to

(1)affidavits and declarations, if any, and attachments to declarations, relied upon by appellant before the examiner,

(2)other evidence, if any, relied upon by the appellant before the examiner and filed prior to the date of the notice of appeal, and

(3)evidence relied upon by the appellant and admitted into the file pursuant to Bd.R. 41.33(d) of this subpart. The documents would be included in the evidence section only if they are relied upon in the appeal. Often numerous documents are relied upon during prosecution leading up to an appeal. The evidence section will eliminate any doubt about which documents an appellant intends to rely on in support of the appeal. While the scope of the evidence section is being narrowed considerably, the Office is still concerned with a potential problem that there can be confusion over a citation to a particular piece of evidence in the Record. The problem is not new with the image file wrapper

(IFW)system. Neither pre-IFW paper files nor IFW files have consecutively numbered pages to which applicants, examiners, and the Board may refer. Accordingly, in presenting appeal briefs and reply briefs, appellant will want to ensure that a reference to a document in the Record is absolutely identifiable. The best identification is

(a)the style of the document and

(b)the date it was filed in the Office, e.g., AMENDMENT UNDER RULE 116, filed 04 February 2008, or FINAL REJECTION mailed 04 February 2008. *Comment 78.* A comment suggested that an appellant should be authorized to include in the evidence section a clean copy of a document which may be poorly reproduced in “the current file.” *Answer.* Nothing in Bd.R. 41.37(t) would preclude an appellant from doing so. Presentation of clear documents is encouraged. *Comment 79.* A comment suggested that an appellant be permitted to refer to PAIR (Public Application Information Retrieval) instead of providing an evidence section. *Answer.* The suggestion is not adopted. The examiners and the Board use the IFW file to examine applications and decide appeals. Accordingly, an appellant will want to refer to documents in a precise manner consistent with the examples set out in Comment 77. Bd.R. 41.37(v)(1) *Comment 80.* A comment asked how pages of the evidence section are to be numbered. *Answer.* Any one of the following numbering systems would be acceptable:

(1)A number, *e.g.* , “31”, at the center of the bottom of the page or

(2)“Page x of y” at the center of the bottom of the page or

(3)“Page x” at the center of the bottom of the page. An appeal brief, including its sections, should be consecutively page-numbered beginning with “1” on the first page and continuing with consecutive numbers through the last page of the brief. Use of consecutive numbers will permit appellants, the examiner, and the Board to make precise references to the appeal brief and the reply brief, including sections of the appeal brief. *Comment 81.* A comment suggested that line numbers in appeal briefs and other papers are not necessary. *Answer.* Line numbers are highly useful within the Office. While line numbers will not be required, appellants are encouraged to use line numbers. When line numbers are used, they may appear inside the left margin. Why are line numbers encouraged? With a telework program in place within the Office, many members of the Board work remotely a considerable portion of the time. Board members communicate with other Board members through a telephone and computer system. The computer system permits all involved in a telephone conference to access the record. Discussion by phone is simplified if one Board member can refer another Board member to a page and line of a brief. Modern word processors permit adding line numbers to pages with minimal difficulty. Bd.R. 41.37(v)(2) *Comment 82.* A comment suggested that 1 1/2 line-spacing be authorized in place of double spacing. *Answer.* The suggestion is adopted-in-part to the extent that block quotes may be presented in 1 1/2 line-spacing. The last line of Bd.R. 41.37(v)(2) has been changed to read: “Block quotations may be 1 1/2 line-spacing.” As a general proposition, an appellant may wish to avoid long block quotes from documents in the record. Instead, for factual material (as opposed to incorporating an argument by reference), the appellant may state the fact and refer the reader to the page and line or paragraph of the document relied upon. *Comment 83.* A comment asked: Can line spacing greater than double-spacing (e.g., triple-spacing) be used in a brief? *Answer.* No. Bd.R. 41.37(v)(3) *Comment 84.* A comment asked: Can a header appear within the top margin? *Answer.* No. While Bd.R. 41.37(v)(3) has been reserved, a header cannot appear in the top margin. *Comment 85.* A comment asked: What is the difference between “clean” and “readable”? *Answer.* While Bd.R. 41.37(v)(3) has been reserved, Rule 52(a)(iv) requires papers in the file to be “plainly and legibly written.” Bd.R. 41.37(v)(4) *Comment 86.* Several comments suggested that a font size equivalent to 14 point Times New Roman is too large. Some comments suggested a font size equivalent to Times New Roman of 12 point referring to Rule 52(a)(1)(ii) and (b)(2)(ii) which states a preference for a 12 point font size. It was observed that a 12 point font size would provide some relief from the 25-page limit required by other provisions of the rules as proposed. *Answer.* The suggestion to amend Bd.R. 41.37(v)(4) is not being adopted, although the reference in Bd.R. 41.37(v)(4) to Times New Roman is being deleted. The Rule 52(b)(2)(ii) preference for a font size of 12 (equal to pica type) and 0.125 inch high capital letters was added in 2005 to supplement a requirement (added in 2001) that letters be at least 0.08 inch high (equal to elite type). Prior to 2001, Rule 52 merely required that papers be prepared on a typewriter or mechanical printer which inherently limited the font size to either pica or elite. The font sizes specified in Rule 52(b)(2)(ii) are a vestige of earlier times and do not meet the current needs of the Board. The Board no longer physically handles papers prepared by applicants. Rather, since 2006, all papers are handled as scanned images. The quality of any font degrades as it passes through scanning and other electronic processing ( *e.g.* , photocopying by applicant, filing by fax, scanning for image storage, and scanning the stored image again for optical character recognition). Smaller fonts present a particular problem after original papers pass through numerous levels of electronic image processing. A 14-point font size in the original paper will provide better results given the current technology used for handling applicants' papers. Bd.R. 41.37(v)(5) *Comment 87.* Several comments suggested that the 25-page limit is not sufficient to permit an appellant to properly present its case in the appeal brief. Some of those comments indicated that final rejections exceeding 25 pages had been received and suggested that when a final rejection exceeds 25 pages an appellant should be able to file an appeal brief where the statement of facts and argument is the same length as the final rejection. *Answer.* Initially it will be noted that many administrative and judicial tribunals have page limits on briefs. An informal survey of the argument and fact portions of appeal briefs in appeals before the Board conducted *prior* to the notice of proposed rule making revealed that less than ten

(10)percent of the appeal briefs exceeded 25 pages. An informal survey of 135 briefs taken *after* the notice of proposed rule making revealed that less than three

(3)percent of the argument and fact portion of appeal briefs exceeded 30 pages. Eighty-three

(83)percent of those appeal briefs had less than 17 pages of argument. Accordingly, Bd.R. 41.37(v)(5) addresses appeal brief length in a relatively small subgroup of appeal briefs which reach the Board. Even in appeal briefs which do not exceed 25 pages, the Board has found that many briefs contain discussion which is probably not necessary in an appeal brief before the PTO. For example, appeal briefs often contain lengthy sections explaining legal principles applicable to rejections under § 103. Appellants should assume that the examiner and the Board are aware of the basic principles governing evaluation of § 103 rejections, *e.g.* , those set out in *KSR International Co.* v. *Teleflex, Inc.,* 127 S. Ct. 1727 (2007); *Graham* v. *John Deere Co.,* 383 U.S. 1 (1966). The same is true for other routine rejections based on § 102 and § 112. For the most part, lengthy expositions in an appeal on applicable legal principles are not necessary in cases before the Board. Eliminating expositions on the law will also reduce the size of the table of authorities (Bd.R. 41.37(j)). An appellant should review any proposed appeal brief to determine if it has unnecessary “boilerplate” language which does not address why an examiner is believed to have erred. After setting out the facts (Bd.R. 41.37(n)), an argument section of an appeal brief should present arguments in the following format: “On page 4, lines 5-8 of the final rejection, the examiner found that * * *. The examiner's finding is not supported by the evidence because * * *.” “On page 5, lines 10-11 of the final rejection, the examiner held that one skilled in the art would have found it obvious to combine A with B. The examiner's conclusion is erroneous because * * *.” “On page 3, lines 2-6 of the final rejection, the examiner found that * * *. The examiner's finding, while correct, is not relevant to the § 103 rejection because * * *.” Generally while discussion to “educate” the Board on the technology involved is helpful, it should not appear in the argument. Rather, it can and should appear in the statement of facts (Bd.R. 41.37(n)), claims support and drawing analysis section (Bd.R. 41.37(r)), and the means or step plus function section (Bd.R. 41.37(s)). In the event the Board believes that it needs more information with respect to the nature of an invention, it has authority to ask for further briefing (Bd.R. 41.50(f)). Some have suggested that the statement of facts (Bd.R. 41.37(n)) should not be included in the 25-page limit. In motions practice in interferences, there was a time when there was a page limit for motions, including a statement of facts. At the suggestion of the bar, the statement of facts was excluded from the page limit. The result has been lengthy statements of fact which often

(1)include unnecessary facts,

(2)are not helpful to the Board and

(3)burden the opponent. The Office does not intend to repeat the failed experiment in interferences with appeal briefs. In response to the notice of proposed rulemaking, numerous comments suggested that a 25-page limit would restrict an appellant's ability to present its case. Taking into account the analysis set out above and the number of concerns expressed, the page limit will be increased to

(1)30 pages for appeal briefs (Bd.R. 41.37(v)(5)) and

(2)20 pages for reply briefs (Bd.R. 41.41(d)). An appellant needing more pages can obtain relief by a petition under Bd.R. 41.3 which shows good cause why additional pages are needed. The 30 pages do not include

(1)any statement of the real party in interest (Bd.R. 41.37(f)),

(2)statement of related cases (Bd.R. 41.37(g)),

(3)jurisdictional statement (Bd.R. 41.37(h)),

(4)table of contents (Bd.R. 41.37(i)),

(5)table of authorities (Bd.R. 41.37(j)),

(6)status of amendments (Bd.R. 41.37(l)),

(7)claims section (Bd.R. 41.37(p)),

(8)claims support and drawing analysis section (Bd.R. 41.37(r)),

(9)means or step plus function analysis section (Bd.R. 41.37(s)),

(10)evidence section (Bd.R. 41.37(t)), and

(11)signature block. It should be noted that Bd.R. 41.37(k) and Bd.R. 41.37(q) have been eliminated and changed to “reserved”. Bd.R. 41.37(v)(5) has been changed to explicitly set out what is not included in the 30-page limit. *Comment 88.* A comment suggested that 10 additional pages be authorized by rule for each additional rejection beyond a first rejection. *Answer.* The suggestion is not being adopted. Rather, increasing the page limit from 25 to 30 serves the function of authorizing an applicant to present an additional argument. Bd.R. 41.37(v)(6) *Comment 89.* A comment asked: If the correspondence address on the appeal brief differs from that “of record,” which will the Board use? *Answer.* The correspondence address in the appeal brief. *Comment 90.* A comment asked: Must appellant correspond with the Office in appeal matters via fax? If not, why is a fax number required? *Answer.* The fax and e-mail addresses are required by the rule so that the Board may easily communicate with counsel. Sometimes it is necessary for a paralegal to contact the office of counsel to obtain clarification on a particular matter. Examples include

(1)clarification of a patent identified in a specification by an incorrect patent number,

(2)a request for a copy of a brief in digitized form,

(3)attempting to schedule a date for oral argument, and

(4)a request for a legible copy of a document previously submitted by an applicant. *Comment 91.* A comment suggested the possibility of a “mini-appeal brief” for certain appeals. *Answer.* The suggestion has not been adopted. *See* Comment 33 for additional discussion. Bd.R. 41.39 *Comment 92.* Several comments suggested that the rules should include a provision for the content and nature of the examiner's answer. Other comments suggested that a time-limit should be placed on the examiner for entering an examiner's answer. Still other comments suggested that the format of the examiner's answer should be the same as the format for an appeal brief. *Answer.* While there can be rare exceptions, generally the rules are not the place for the Director to set out administrative practice for examiners and other Office employees. The content and nature of an examiner's answer, and the time within which it is to be filed, are best left for administrative instructions or the Manual of Patent Examining Procedure. Bd.R. 41.39(a) *Comment 92A.* A comment suggested that the terminology “new ground of rejection” be retained in the proposed rules. *Answer.* The suggestion is being adopted. *Comment 92B.* A comment expressed concern that there is a very limited ability to reply to a new ground of rejection in an examiner's answer because the appeal must continue on the current record. *Answer.* The rules are being amended to eliminate new grounds of rejection in an examiner's answer. Bd.R. 41.41 *Comment 93.* A comment suggested that an appellant should be able to present a new argument in a reply brief where the importance of the argument is not made apparent until a review of the examiner's answer. *Answer.* The suggestion is not being adopted. The same comment reveals that there are delays in resolving appeals and that the rules should be designed to eliminate those delays. One delay under the current practice is the perceived ability of an appellant to present a new argument in a reply brief. If a new point is made in the examiner's answer, then the appellant may fully respond to that new point apart from any argument in the appeal brief. However, prosecution of an appeal should not be delayed through presentation of new arguments which reasonably could have been made in an appeal brief. *Comment 93A.* A comment suggested that when presenting an amendment in a reply brief that an appellant should be given an unconditional waiver from any rule limiting continuations. *Answer.* The suggestion raises a matter beyond the scope of the notice of proposed rule making and will not be adopted. Bd.R. 41.43 *Comment 94.* Several comments suggested that an examiner not be allowed to reopen prosecution after a reply brief ( *see* Bd.R. 41.41) is filed. According to the comment, many practitioners believe the practice of “reopening” prosecution “is already abused” by some examiners. Some examiners are said to have re-opened prosecution “over and over again to allow them yet further and further opportunities at the bat.” One comment identified an application in which the examiner is said to have re-opened prosecution “four times.” *Answer.* The suggestion is not being adopted. Assuming, without deciding, that the comment is correct, then there is a plausible basis for holding that the conduct described might be characterized as an abuse of discretion. An abuse of discretion is not solved by an amendment to a rule. It is solved on a case-by-case basis via a petition. Alternatively, if an applicant believes the examination process is being abused, the applicant should call the matter to the attention of the SPE (supervisory patent examiner) or the Director of the Technology Center in which the application is being examined. *Comment 95.* Several comments suggested that a provision be added to Bd.R. 41.43 to preclude a new ground of rejection in a supplemental examiner's answer. *Answer.* The suggestion is adopted to the extent that a new ground of rejection will no longer appear in an examiner's answer. There is no supplemental examiner's answer replying to an appellant's reply brief. It should be noted that Bd.R. 41.43 (supplemental examiner's answer) and Bd.R. 41.44 (supplemental reply) are now reserved. Bd.R. 41.47(c) *Comment 96* . A comment asked whether the time for filing a request for oral argument runs from entry of the examiner's answer or the examiner's supplemental answer. *Answer.* Since there will no longer be an examiner's supplemental answer, the time for requesting oral argument is from the date the examiner's answer (Bd.R. 41.39) is mailed. Bd.R. 41.47(g) *Comment 97.* A comment suggested that individuals transcribing an oral hearing should be presumed to be competent and seems to question the need for a list of terms. With respect to the language “unusual terms,” the same comment asked: Unusual to whom? *Answer.* The rules authorize a list of terms to assist the court reporter. Often members of the Board supply a list so that the court reporter can prepare a more accurate transcript. Generally court reporters are not scientists familiar with technical terms. Sometimes, the names of patentees and others mentioned in the record (e.g., an affidavit) are difficult. The Board has sufficient confidence in practitioners being able to recognize when a list of terms may help a court reporter. Bd.R. 41.47(k) *Comment 98.* A comment suggested that the rule should explicitly authorize use of enlarged visual aids suitable for placing on an easel. *Answer.* Enlarged documents suitable for use on easel can be used at oral hearings, provided the required four copies (preferably 8 1/2 x 11; one for each judge and one to be added to the Record) are provided to the Board. *Comment 99.* Several comments suggested that three-dimensional objects illustrative of the claimed invention or the prior art be permitted as visual aids at oral argument. *Answer.* The suggestions are adopted to the extent that an appellant may use as a visual aid documents and evidence in the Record or a model or exhibit presented for demonstration purposes during an interview with the examiner. An applicant should be sure that the Record makes clear that the model or exhibit was shown to the examiner. See Rule 133 and MPEP 608.03(a) (8th ed., Rev. 5, Aug. 2006). For example, an applicant may wish to place a photograph of the object shown to the examiner in the application file. In addition to using a three-dimensional object as a visual aid, an appellant may provide copies of the photograph to the Board at oral hearing. Bd.R. 41.50 *Comment 100.* A comment asked: How does an appellant “signal” the Board that proceedings on a remand (Bd.R. 41.50(b)) are concluded? *Answer.* The rule provides the answer:

(1)Request that prosecution be reopened (Bd.R. 41.50(b)(1)) or

(2)request to re-docket the appeal (Bd.R. 41.50(b)(2)). Bd.R. 41.51(f) *Comment 101.* A comment suggested that the time period for response to an order of the Board under Bd.R. 41.51(f) should be extendable by petition under Bd.R. 41.3 so that an appellant need not be “forced to employ the unwieldy procedure of petitioning under” Rule 183. *Answer.* The suggestion is not being adopted. Experience under Bd.R. 41.51(f), and its predecessor rule, shows that appellants almost always timely respond to orders of the Board. The policy for setting times to respond to orders of the Board under Bd.R. 41.51(f) was set out in the supplementary information in the notice of proposed rulemaking (72 FR at 41,482, col. 2). Historically, there has not been a need for extensions of time. Accordingly, there is no need to authorize, or encourage, requests for extension of times by petition under Bd.R. 41.3. Should a circumstance develop where an appellant has an extraordinary reason for needing an extension, a petition may be filed under Rule 183 addressed to the Chief Administrative Patent Judge. Bd.R. 41.52 *Comment 102.* A comment was received that the word “rehearing” in the title and text of Bd.R. 41.52 should be changed to “reconsideration.” According to the commentator, the word “rehearing” implies, incorrectly, that an oral hearing may be held. *Answer.* The comment is correct in indicating that a “rehearing” under 35 U.S.C. 6 and Bd.R. 41.52 does not mean an oral hearing will be held. The word “rehearing” is used in the rule because it is the word used in the statute authorizing the Board to grant a “rehearing.” 35 U.S.C. 6(b). Bd.R. 41.52(d) *Comment 103.* Several comments suggested that a change be made to Bd.R. 41.52(d) and

(f)because it may not be appropriate for an appellant to indicate in a petition for rehearing filed pursuant to Bd.R. 41.50(d)(2) to discuss what points the Board may have misapprehended or overlooked. *Answer.* The suggestion is not being adopted. If an appellant is dissatisfied with a “new ground of rejection” under Bd.R. 41.50(d) and the appellant elects to ask the Board for a rehearing (as opposed to further consideration by the examiner), then it is entirely appropriate for the appellant to advise the Board what fact or issue of law was misapprehended or overlooked. In filing a request for rehearing, the appellant shall rely only on the record on appeal. *Comment 104.* A comment suggested that a request for rehearing should be able to address a new point made by the Board in its opinion in support of a decision on appeal. *Answer.* Bd.R. 41.52 should not be understood to preclude the presentation in a request for rehearing of an argument responding to a new point made by the Board. The argument in the request for rehearing would be that the Board misapprehended the point. Bd.R. 41.56 *Comment 105.* A comment claimed that Bd.R. 41.56 gives the Board authority to “assert” that an argument in an appeal brief is frivolous ( *see* Bd.R. 41.56(a)(2)) or hold a fact to have been established ( *see* Bd.R. 41.56(b)(2)). The comment goes on to state that it is not clear how an applicant “appeals” from such an order other than to the courts. *Answer.* The jurisdiction of the Board is to review adverse decisions of an examiner. 35 U.S.C. 134. If in the course of the review, the Board enters a sanction and holds a fact to have been established and based on that fact a rejection is affirmed, the applicant would have judicial review of the Board's decision in the Federal Circuit (35 U.S.C. 141-144) or the U.S. District Court for the District of Columbia (35 U.S.C. 145). If in the course of the appeal, a sanction is entered by anyone other than a panel of the Board, an applicant would have administrative review by petition. *Comment 106.* Several comments questioned the need for Bd.R. 41.56. *Answer.* Bd.R. 41.56 sets out conduct which is detrimental to the efficient administration of *ex parte* appeals before the Office. The comments suggest that Bd.R. 41.56 fails to give adequate notice of what might be considered “misconduct.” A similar rule has existed in interference cases. Bd.R. 41.128. Sanctions are very rare in interference cases. The presence of Bd.R. 41.128 advises practitioners and others with respect to behavior which is not consistent with efficient administration of interference cases. In like manner, Bd.R. 41.56 does the same for *ex parte* appeals. The rule also provides notice of the nature of a sanction in the event there has been a violation of the rules or an order entered in an appeal. It is expected that sanctions will be rare in *ex parte* appeals. The comments note that the “standards” for whether a sanction should be imposed are “subjective” and that sanctions will be entered as a matter of discretion by the Office. The sanction provisions of other tribunals are equally subjective and are entered (or not entered) as a matter of discretion. Courts and other agencies have administered sanction rules without any apparent difficulty. *Comment 107.* A comment asked whether Rule 11 of the Fed. R. Civ. P. and case law construing or applying the rule are relevant to the definition of “misleading” and “frivolous” in Bd.R. 41.56. *Answer.* Both words will be construed under Bd.R. 41.56 according to their ordinary meaning. Precedent of a court may or may not be helpful. The terms will be interpreted in the context of the appeals rules. *Cf. FirstHealth of the Carolinas, Inc.* v. *CareFirst of Maryland, Inc.,* 479 F.3d 825, 829 (Fed. Cir. 2007) (the TTAB has discretion to reasonably interpret the meaning of “excusable neglect” in the context of its own regulations, citing *Thomas Jefferson University* v. *Shalala,* 512 U.S. 504, 512

(1994)(an agency's interpretation of its own regulation is given controlling weight unless it is plainly erroneous or inconsistent with the regulation)). *Comment 108.* A comment noted that the sanctions rule (Bd.R. 41.56) does not provide for “an appeal” and therefore constitutes a denial of due process. *Answer.* If a sanction is entered prior to a final decision of the Board, review is available by petition and subsequently in a court to the extent authorized by Congress. As noted earlier, a sanction having an effect on the merits is reviewable along with the merits in the Federal Circuit (35 U.S.C. 141) or the U.S. District Court for the District of Columbia (35 U.S.C. 145). *Comment 109.* A comment suggested that the sanctions are unnecessary because the Office has not shown that any of the sanctions are necessary or have been used. *Answer.* The need for a sanction rule is based on experience in appeals over the years. A sanction rule provides important public notice of behavior which is prejudicial to the effective administration of appeals within the Office. The sanction to be applied in a particular case will depend on the facts. Generally, sanctions are not applied without giving an appellant an opportunity to explain and justify its behavior. A sanction of not entering a docket notice may be appropriate where an appellant repeatedly declines to comply with procedural requirements to perfect an appeal. An order holding certain facts to have been established or from contesting a certain issue might be appropriate where an appellant is asked (Bd.R. 41.50(f)) to brief certain matters and avoids directly answering specific questions posed by the Board. An order expunging a paper might be entered where an appellant repeatedly fails to file a paper complying with the rules. An order excluding evidence might be appropriate where an appellant refuses to properly file evidence or where knowingly “false” evidence is presented. Other sanctions may be appropriate depending on the situation, including sanctions not specifically listed in Bd.R. 41.56(b). The expectation is that sanctions will rarely be necessary. On the other hand, having notice in the rules of possible sanctions can avoid arguments by someone that the Office has not given notice of its intent to take action against an appellant when necessary. Rulemaking Considerations Administrative Procedure Act The changes in the rules relate solely to the procedure to be followed in filing and prosecuting an *ex parte* appeal to the Board. Therefore, these rule changes involve interpretive rules, or rules of agency practice and procedure under 5 U.S.C. 553(b)(A). Prior notice and an opportunity for public comment are not required pursuant to 5 U.S.C. 553(b)(A) (or any other law). *See Bachow Communications, Inc.* v. *F.C.C.,* 237 F.3d 683, 690 (D.C. Cir. 2001) (rules governing an application process are “rules of agency organization, procedure, or practice” and exempt from the Administrative Procedure Act's notice and comment requirement); *Merck & Co., Inc.* v. *Kessler,* 80 F.3d 1543, 1549-50 (Fed. Cir. 1996) (the rules of practice promulgated under the authority of former 35 U.S.C. 6(a) (now in 35 U.S.C. 2(b)(2)) are not substantive rules (to which the notice and comment requirements of the Administrative Procedure Act apply)); *Fressola* v. *Manbeck,* 36 USPQ2d 1211, 1215 (D.D.C. 1995) (“[i]t is extremely doubtful whether any of the rules formulated to govern patent or trade-mark practice are other than ‘interpretive rules, general statements of policy, * * * procedure, or practice' ”(quoting C.W. Ooms, The United States Patent Office and the Administrative Procedure Act, 38 Trademark Rep. 149, 153 (1948))); *Eli Lilly & Co.* v. *Univ. of Washington,* 334 F.3d 1264, 1269 n.1 (Fed. Cir. 2003). Regulatory Flexibility Act The Deputy General Counsel for General Law of the United States Patent and Trademark Office certifies to the Chief Counsel for Advocacy of the Small Business Administration that this final rulemaking, Rules of Practice Before the Board of Patent Appeals and Interferences in Ex Parte Appeals (RIN 0651-AC12), will not have a significant economic impact on a substantial number of small entities. *See* 5 U.S.C. 605(b). The United States Patent and Trademark Office (Office) is amending its rules in 37 CFR part 41 governing prosecution in ex parte appeals at the Board of Patent Appeals and Interferences (Board). There are fee changes associated with the final rules. The changes in this final rule involve interpretive rules, or rules of agency practice and procedure, and prior notice and an opportunity for public comment are not required pursuant to 5 U.S.C. 553(b)(A) (or any other law). Because prior notice and an opportunity for public comment are not required for the changes proposed in this rule, a Regulatory Flexibility Act analysis is also not required for the changes proposed in this rule. *See* 5 U.S.C. 603. Nevertheless, the Office published a notice of proposed rulemaking in the **Federal Register** and in the Official Gazette of the United States Patent and Trademark Office, in order to solicit public participation with regard to this rule package. In response to the notice of proposed rule making, a comment was submitted that contended that a Regulatory Flexibility Act analysis is required under 5 U.S.C. 603. Because these rules are procedural, they are not required to be published for notice and comment. The Office chose, however, to publish these rules for comment prior to adoption of the final rules in order to request valuable input from the public. The primary changes in this rule are:

(1)The requirements for an appeal brief include new sections for jurisdictional statement, table of contents, table of authorities, statement of facts, new format for arguments in the appeal brief and for claim support and drawing analysis section and means or step plus function analysis section in the appendix of the appeal brief, new section for table of contents in the evidence section of the appendix, new format in 14-point font, and 30-page limit for the grounds of rejection, statement of facts, and argument sections,

(2)the requirements for a reply brief include new sections for table of contents, table of authorities, statement of additional facts, new format for arguments in the reply brief, new format in 14-point font, and 20-page limit for the statement of additional facts and argument sections,

(3)the requirements for a request for rehearing include new sections for table of contents, table of authorities, new format for arguments in the request for rehearing, new format in 14-point font, and 10-page limit for the argument section,

(4)new grounds of rejection are no longer permitted in an examiner's answer,

(5)the examiner's response to a reply brief is eliminated,

(6)petitions to exceed the page limit for an appeal brief, reply brief or request for rehearing are made under Rule 41.3 which requires a $400 fee,

(7)petitions for an extension of time to file a reply brief, request for oral hearing, or request for rehearing are made under Rule 41.3 which requires a $400 fee, and

(8)a list of technical terms or unusual words to be provided to the transcriber at the oral hearing. The rules described in

(1)through

(5)and

(8)will apply to all appeal briefs filed with the Board. The rules described in

(6)and

(7)will apply only to those applicants filing certain petitions. Appeal Brief

(1)Little additional cost is associated with the new appeal brief requirements. The jurisdictional statement of the appeal brief is a highly structured, fact-based paragraph of a maximum of 5 to 6 simple sentences. It is estimated that this section would add 10 to 15 minutes to the preparation of the brief. Assuming that the jurisdictional statement is prepared by a law firm staff member at the paralegal level, at an average billing rate of $150 an hour, the added cost for preparation of the jurisdictional statement is $25 to $37.50. In some cases, however, the preparation of the jurisdictional statement will result in a substantial time and cost savings to the applicant. For instance, if in the preparation of the jurisdictional statement it becomes apparent that the application is abandoned, the applicant can take advantage of available revival remedies at an early date and avoid an unnecessary dismissal of the appeal. The table of contents and table of authorities sections add very little additional cost to the preparation of the appeal brief. Modern word processors make the creation of a table of contents or a table of authorities fairly easy when headings are used in a document. The current rules and the proposed rules require the use of headings in the appeal brief. Assuming that virtually all applicants create their documents with a word processor, it would add 5 to 10 minutes to the preparation of the brief to insert the table of contents and table of authorities. Assuming that the table of contents and table of authorities are prepared by a law firm staff member at the paralegal level, at an average billing rate of $150 an hour, the added cost for preparation of these two tables is $12.50 to $25. It should be noted that in many appeals pending before the Board, the briefs contain a table of contents or table of authorities even though these sections are not currently required. The statement of facts section will not add to the appeal brief preparation cost and in many cases it will be a small cost savings. While the statement of facts is a new section in the final rule, the information contained in this section is part of the argument section of appeal briefs submitted under the current rule. By separating the facts from the argument, the applicant needs only to list a fact once and refer to it in the argument. Under current practice, applicant often times repeats a fact if using it to support multiple arguments. Thus, in many cases the applicant will save time by not having to repeat a fact. Furthermore, the requirement for a fact to reference a specific portion of the Record does not impact the appeal brief preparation cost as it is a requirement under the current rule. Under the final rule, the argument section of the appeal brief has a new requirement for applicant to identify where an argument was made in the first instance to the examiner or state that it is a new argument. It is estimated that this requirement would add 10 minutes to the preparation of the brief. Assuming that the argument section is prepared by a law firm staff member at the attorney level, at an average billing rate of $310 an hour, the added cost for preparation of the argument section is $51.67. Compliance with this requirement should be relatively easy. An applicant can take an appeal following the second rejection of the claims by the examiner. In most cases, this will mean that the argument was made to the examiner either in response to a first Office action or in response to a second Office action, likely a final rejection. Additionally, identification of whether an argument in an appeal brief is “new” will enable senior Patent Corps personnel to evaluate the new argument and determine whether a rejection should be withdrawn. This will provide a savings to applicant in one of two ways:

(1)Eliminating at an early stage appeals which should not go forward or

(2)making appeals which go forward capable of prompt resolution. The identification of where an argument is made or if it is a new argument prevents arguments from being overlooked by the examiner and allows senior Patent Corps personnel to more readily assess all the arguments. If it is decided, based on the arguments in the appeal brief, that the claims are allowable, the applicant saves the time of a full appeal to the Board and waiting for a decision. The applicant also saves the possible expense of a request for oral hearing before the Board. In those appeals which are presented to the Board, the arguments in the case will be readily identifiable for the panel to review in deciding the issues. This allows the panel to be more efficient in their decision making and consequently reducing the pendency of applications at the Board. By aiding in increasing the efficiency of panel review, the applicant will reduce the time it takes to receive a Board decision. The claim support and drawing analysis section and the means or step plus function analysis section are analogous to the current summary of the claimed subject matter section in the appeal brief. The information required for these two newly titled sections is the same as that required by the current rules. The final rule, however, is explicit as to the format to be followed in these sections. The current rule requires an explanation of the subject matter, whereas the final rule sets forth the precise format to be used in mapping claim limitations to the support and description of the limitations in the specification and drawings. Bd. R. 41.37(r) and (s). The current rule leaves the format for the explanation of the claimed subject matter open to interpretation by the applicant. Rule 41.37(c)(1)(v). The final rule provides a standardized, easy to follow format for these sections. By following the prescribed format of the final rule, the applicant will save time in not having to create their own format to explain the claimed subject matter. Moreover, the final rule format is expected to reduce the number of applications returned to the examiner because the brief is not compliant with the explanation of the claimed subject matter section of the rule. Under the current rules, it is not uncommon for a case to be returned to the examiner because of deficiencies in the summary of the claimed subject matter section of the appeal brief. When a case is returned to the examiner for correction of a non-compliant brief, the applicant must prepare and file a corrected brief. This delays the applicant's appeal and costs the applicant money to prepare a compliant brief. By following the clear, standardized format in the final rule for the claim support and drawing analysis section and means or step plus function section, applicants can prevent a return of their application on either or both of these bases. This will save the applicant the time and expense incurred for filing a corrected appeal brief. The claim support and drawing analysis section and the means or step plus function analysis section will not add cost to the appeal brief and will provide a savings to applicants in some cases. As reasoned above, for the table of contents and table of authorities sections, the preparation of a table of contents for the evidence section of the appeal brief appendix will add about five minutes to the time for preparing the brief. Assuming that the table of contents is prepared by a law firm staff member at the paralegal level, at an average billing rate of $150 an hour, the added cost for preparation of the table of contents is $12.50. The final rule requires the font for the appeal brief to be 14 point in size. Assuming that virtually all applicants create their documents with a word processor, no additional time or cost is incurred in the selection of a 14-point font for the document. The final rule sets forth a 30-page limit on the combined length of grounds of rejection, statement of facts, and argument sections of the appeal brief. This limit will not have any economic impact on approximately 97% of applicants. A recent survey of appeal briefs revealed that less than 3% of appeal briefs filed exceeded 30 pages in the current grounds of rejection and argument sections. Reply Brief

(2)Very little additional economic impact is associated with the new reply brief requirements. As set forth above in the discussion of the table of contents and table of authorities in the appeal brief, the creation of these sections will add only 5 to 10 minutes to the preparation of the reply brief. Assuming that the table of contents and table of authorities are prepared by a law firm staff member at the paralegal level, at an average billing rate of $150 an hour, the added cost for preparation of the jurisdictional statement is $12.50 to $25. It should also be noted that in a recent survey of cases on appeal at the Board, only 68% of the cases contained reply briefs. This added cost applies only to cases in which a reply brief is filed. For the reasons listed above in the discussion of the statement of facts in the appeal brief, the statement of additional facts in the reply brief will not have any economic impact on the preparation of the reply brief and in many cases the applicant will save time. Under the final rule, the argument section of the reply brief has a new requirement that arguments be responsive to points made in the examiner's answer; otherwise the argument will not be considered and will be treated as waived. This requirement does not impose any additional economic burden on the applicant. It only makes clear what arguments in the reply brief will be considered by the Board. It saves the applicant the time and expense of preparing arguments that will not be considered. The final rule requires the font for the reply brief to be 14 point in size. Assuming that virtually all applicants create their documents with a word processor, no additional time or cost is incurred in the selection of a 14-point font for the document. The final rule sets forth a 20-page limit on the combined length of the statement of additional facts and argument sections of the reply brief. A recent survey of reply briefs revealed that less than 1% of reply briefs filed exceeded 20 pages. Request for Rehearing

(3)With regard to the third change, very little additional economic impact is associated with the new request for rehearing requirements. As set forth above in the discussion of the table of contents and table of authorities in the appeal brief, the creation of these sections will add 5 to 10 minutes to the preparation of the request for rehearing. Assuming that the table of contents and table of authorities are prepared by a law firm staff member at the paralegal level, at an average billing rate of $150 an hour, the added cost for preparation of the jurisdictional statement is $12.50 to $25. It should also be noted that in Fiscal Year 2007, there were only 123 requests for rehearing of a Board decision filed at the USPTO, out of 3,485 Board decisions rendered. This added cost applies only to cases in which a request for rehearing is filed. Under the final rule, the argument section of the request for rehearing has a new format requirement that requires the applicant to explicitly identify in the Record the point that applicant believes was misapprehended or overlooked by the Board. Under current Rule 41.52(a)(1), applicants are required to “state with particularity the points believed to have been misapprehended or overlooked by the Board.” Citation to the Record in compliance with the final rule will add 5 to 10 minutes to the preparation of a request for rehearing. Assuming that the argument section is prepared by a law firm staff member at the attorney level, at an average billing rate of $310 an hour, the added cost for preparation of the argument section is $25.83 to $51.67. The final rule requires the font for the reply brief to be 14 point in size. Assuming that virtually all applicants create their documents with a word processor, no additional time or cost is incurred in the selection of a 14-point font for the document. The final rule sets forth a 10-page limit for the argument section of the request for rehearing. This limit will have no economic impact on most applicants. A survey of the request for rehearing in 92 rehearing cases decided within the last year (FY 2007) revealed that only 21 requests for rehearing contained arguments exceeding 10 pages. Prohibition on New Grounds of Rejection in Examiner's Answer

(4)A savings to the applicant will result from the prohibition of new grounds of rejection in an examiner's answer. The current rules permit a new ground of rejection to be made in the examiner's answer. Rule 41.39(a)(2). In response to a new ground of rejection an applicant must request that prosecution be reopened before the examiner or file a reply brief with a request that the appeal be maintained. Rule 41.39(b). If the applicant elects to respond to the new ground of rejection by filing a reply brief, the reply brief may not be accompanied by any amendment, affidavit or other evidence. Rule 41.39(b)(2). In order to present an amendment, affidavit or other evidence, the applicant must expend additional time and resources to reopen prosecution before the examiner. Recent data from the Patent Corps reveals that in Fiscal Year 2007 (FY 2007) approximately 5% of examiner's answers written that year contained a new ground of rejection. The final rules prohibit a new ground of rejection in an examiner's answer and, thus, provide a savings to applicants in not having to prepare a response to a new ground of rejection late in the appeal process. Elimination of Examiner's Response to Reply Brief

(5)The final rules eliminate the requirement for an examiner's response following a reply brief. Under the current rules, examiners are required to respond to a reply brief either by filing a communication noting the reply brief or by filing a supplemental examiner's answer. Rule 41.43(a)(1). The final rules eliminate both types of examiner response to a reply brief. The elimination of the examiner's requirement to note the reply brief allows applications on appeal to proceed directly to the Board upon filing of the reply brief, without waiting for an examiner's response. This saves the applicant valuable time in the appeal process. It also saves the applicant the expense of tracking the examiner's response to the reply brief. The elimination of a supplemental examiner's answer in response to a reply brief also allows applications on appeal to proceed directly to the Board upon filing of the reply brief. The applicant realizes an additional savings by elimination of the supplemental examiner's answer. Current practice provides that the applicant may file another reply brief in response to a supplemental examiner's answer. In almost every appeal where a supplemental examiner's answer is provided, the applicant submits a reply brief. By eliminating the supplemental examiner's answer, it eliminates the need for applicant to respond with another reply brief. Therefore, elimination of the supplemental examiner's answer saves the applicant the cost of preparing another reply brief. Petition To Exceed the Page Limit

(6)A $400 cost is incurred for applicants who petition to exceed the page limit for filing an appeal brief, reply brief or request for rehearing. The final rules permit an applicant to petition under Rule 41.3 to exceed a page limit requirement. Petitions under Rule 41.3 must be accompanied by a $400 fee. Thus, the $400 petition fee is not a new fee, but the application of the existing petition fee to a new rule. Applicants can avoid this fee by filing a brief or request for rehearing within the page limits set forth in the rules. Petition for Extension of Time

(7)An additional $200 cost is incurred for applicants who petition for an extension of time to file a reply brief, request for oral hearing or request for rehearing. Under the current rules, an applicant may request an extension of time to file the above papers under Rule 1.136(b). Rule 1.136(b) requests must be accompanied by a $200 fee. The final rules still permit applicants to request such extensions of time; however, the request must be made by petition under Rule 41.3, which requires a $400 fee. Thus, the net additional cost for an extension of time is $200. Moreover, applicants can avoid this fee by filing documents within the time periods set forth in the rules. List of Technical Terms or Unusual Words

(8)A small additional cost is associated with the new requirement for a list of technical terms or unusual words for the transcriber at the oral hearing. It is estimated that the list would take 5 to 10 minutes or less to prepare. Assuming that the list of terms is prepared by a law firm staff member at the attorney level, at an average billing rate of $310 an hour, the added cost for preparation of the list of terms is $25.83 to $51.67. It is further assumed that this list will replace the current practice of a question and answer session with the transcriber at the end of the hearing to collect these same terms. Note that in Fiscal Year 2007, there were 965 requests for oral hearing filed at the USPTO out of 4,639 appeals received at the Board. This added cost applies only to cases in which a request for oral hearing is filed. If an applicant were to incur all the additional costs outlined above, the total would range from $778.33 to $880.01. In many cases, however, the costs will be less than $880.01 when the savings outlined for the appeal brief, reply brief, no new grounds of rejection in examiner's answer, and no examiner response to the reply brief are realized. Moreover, the additional legal costs are not significant when compared to the cost of legal fees when filing an appeal with the Board. The net additional legal services cost, minus the Office petition fees of $400 (to exceed page limit) and $200 (request for extension of time), is $178.33 to $280.01. According to the 2007 Report of the Economic Survey by the American Intellectual Property Law Association (AIPLA), page 21, the median charge in 2006 for an appeal to the Board without government fees and without oral argument was $4,000. An increase of $178.33 to $280.01, out of $4,000, represents an increase of only 4.5% to 7%. From the same 2007 AIPLA survey, the median charge in 2006 for an appeal to the Board without government fees and with oral argument was $6,500. Thus, an additional cost of $178.33 to $280.01, in a case with oral argument, represents an increase of only 2.7% to 4.3%. These additional costs apply equally to large and small entities, but do not disproportionately impact small entities for the following reasons. In examining the additional costs associated with the final rules, the largest single additional cost is the $400 petition fee to exceed the page limit for an appeal brief, reply brief, or request for rehearing. As will be shown the potential number of small entities impacted by this fee is a very small number. In FY 2007, the Office processed 4,808 appeal briefs filed by small entities and 18,337 appeal briefs filed by large entities. Assuming 3% of the appeal briefs filed by small entities contained sections for the grounds of rejection and argument exceeding 30 pages (see final paragraph of Appeal Brief

(1)section), this provides an estimate of 144 small entities that would find it necessary to petition to exceed the appeal brief page limitation. Similarly, in FY 2007, the Office processed 1,341 reply briefs filed by small entities and 3,606 reply briefs filed by large entities. Assuming 1% of the reply briefs filed by small entities contained sections for a statement of additional facts and argument exceeding 20 pages (see final paragraph of Reply Brief

(2)section), this provides an estimate of 14 small entities that would find it necessary to petition to exceed the reply brief page limitation. Finally, in FY 2007, the Office processed 33 requests for rehearing filed by small entities and 90 requests for rehearing filed by large entities. Assuming 23% of the requests filed by small entities contained argument sections exceeding 10 pages (see final paragraph of Request for Rehearing

(3)section), this provides an estimate of eight small entities that would find it necessary to petition to exceed the request for rehearing page limitation. Thus, at most, the maximum number of small entities affected by the $400.00 petition fee is 166 small entities. When this number is compared to the 5,977 small entities that filed a notice of appeal with the Office in FY 2007 (21,653 notices of appeal were filed by large entities in the same period), it demonstrates that the petition fee has the potential to affect only 2.8% of the small entities filing an appeal. An effect on 2.8% of the small entities filing an appeal is not a disproportionate impact on small entities, nor is the actual number of 166 impacted small entities a substantial number. For these reasons, the Office has concluded that the changes in the Final Rules will not have a significant economic impact on a substantial number of small entities. Executive Order 13132 This rulemaking does not contain policies with federalism implications sufficient to warrant preparation of a Federalism Assessment under Executive Order 13132 (Aug. 4, 1999). Executive Order 12866 This rulemaking has been determined to be not significant for the purpose of Executive Order 12866 (Sept. 30, 1993). Paperwork Reduction Act This rulemaking includes requirements for structuring information submitted to the USPTO by practitioners in order to process *ex parte* appeals before the Board of Patent Appeals and Interferences (BPAI). The agency has received comments from the public concerning the burden of these rules on the public. In order to ensure that there is opportunity for the burden impact of these actions to be open for public comment, the USPTO will be submitting to the Office of Management and Budget

(OMB)a request to consider this information subject to the Paperwork Reduction Act of 1995 (44 U.S.C. 3501 *et seq.* ). The USPTO will be submitting to OMB the following items associated with this rule making for inclusion in a new collection specific to the Board of Patent Appeals and Interferences: appeal brief, petition for extension of time for filing a paper after the brief, petition to increase the page limit, reply brief and request for rehearing before the BPAI. Per the requirements of submission of an information collection request to OMB, the USPTO will publish a 60-Day **Federal Register** Notice which will invite comments on:

(1)Whether the collection of information is necessary for proper performance of the functions of the agency;

(2)the accuracy of the agency's estimate of the burden;

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

(4)ways to minimize the burden of the collection of information to respondents. Interested persons are requested to send comments regarding this information collection, including suggestions for reducing this burden, to Kimberly Jordan, Chief Trial Administrator, Board of Patent Appeals and Interferences, United States Patent and Trademark Office, PO Box 1450, Alexandria, VA 22313-1450, (marked: Information Collection Comment) or to the Office of Information and Regulatory Affairs, OMB, 725 17th Street, NW., Washington, DC 20503, (Attn: PTO Desk Officer). Notwithstanding any other provision of law, no person is required to respond to nor shall a person be subject to a penalty for failure to comply with a collection of information subject to the requirements of the Paperwork Reduction Act unless that collection of information displays a currently valid OMB control number. List of Subjects in 37 CFR Part 41 Administrative practice and procedure, Inventions and patents, Lawyers. For the reasons stated in the preamble, the Under Secretary of Commerce for Intellectual Property and Director of the United States Patent and Trademark Office amends 37 CFR Chapter 1, part 41 as follows: PART 41—PRACTICE BEFORE THE BOARD OF PATENT APPEALS AND INTERFERENCES 1. The authority citation for part 41 is revised to read as follows: Authority: 35 U.S.C. 2(b)(2), 3(a)(2)(A), 21, 23, 32, 132, 133, 134, 135, 306, and 315. Subpart A—General Provisions 1. In § 41.2, revise the definitions of “Board” and “Contested case” to read as follows: § 41.2 Definitions. *Board* means the Board of Patent Appeals and Interferences and includes:

(1)For a final Board action in an appeal or contested case, a panel of the Board.

(2)For non-final actions, a Board member or employee acting with the authority of the Board. *Contested case* means a Board proceeding other than an appeal under 35 U.S.C. 134. An appeal in an *inter partes* reexamination proceeding is not a contested case. 2. In § 41.3, revise paragraphs

(a)and

(b)to read as follows: § 41.3 Petitions.

(a)*Deciding official.* A petition authorized by this part must be addressed to the Chief Administrative Patent Judge. The Chief Administrative Patent Judge may delegate authority to decide petitions.

(b)*Scope.* This section covers petitions on matters pending before the Board, petitions authorized by this part and petitions seeking relief under 35 U.S.C. 135(c); otherwise see §§ 1.181 to 1.183 of this title. The following matters are not subject to petition:

(1)Issues committed by statute to a panel.

(2)In pending contested cases, procedural issues. See § 41.121(a)(3) and § 41.125(c). 3. In § 41.4, revise paragraphs

(b)and

(c)to read as follows: § 41.4 Timeliness.

(b)*Late filings.*

(1)A request to revive an application which becomes abandoned or a reexamination proceeding which becomes terminated under §§ 1.550(d) or 1.957(b) or

(c)of this title as a result of a late filing may be filed pursuant to § 1.137 of this title.

(2)A late filing that does not result in an application becoming abandoned or a reexamination proceeding becoming terminated under §§ 1.550(d) or 1.957(b) or limited under § 1.957(c) of this title may be excused upon a showing of excusable neglect or a Board determination that consideration on the merits would be in the interests of justice.

(c)*Scope.* Except to the extent provided in this part, this section governs proceedings before the Board, but does not apply to filings related to Board proceedings before or after the Board has jurisdiction (§ 41.35), such as:

(1)Extensions during prosecution ( *see* § 1.136 of this title).

(2)Filing of a notice of appeal and an appeal brief (see §§ 41.31(c) and 41.37(c)).

(3)Seeking judicial review ( *see* §§ 1.301 to 1.304 of this title). 4. Revise § 41.12 to read as follows: § 41.12 Citation of authority.

(a)*Authority.* Citations to authority must include:

(4)*Slip opinions.* If a slip opinion is relied upon, a copy of the slip opinion must accompany the first paper in which an authority is cited.

(5)*Pinpoint citations.* Use pinpoint citations whenever a specific holding or portion of an authority is invoked.

(b)*Non-binding authority.* Non-binding authority may be cited. If non-binding authority is not an authority of the Office and is not reproduced in one of the reporters listed in paragraph

(a)of this section, a copy of the authority shall be filed with the first paper in which it is cited. Subpart B— Ex parte Appeals 5. Revise § 41.30 to add a definition of “Record” to read as follows: § 41.30 Definitions. *Record* means the official content of the file of an application or reexamination proceeding on appeal. 6. Revise § 41.31 to read as follows: § 41.31 Appeal to Board.

(a)*Notice of appeal.* An appeal is taken to the Board by filing a notice of appeal.

(b)*Fee.* The notice of appeal shall be accompanied by the fee required by § 41.20(b)(1).

(c)*Time for filing notice of appeal.* A notice of appeal must be filed within the time period provided under § 1.134 of this title.

(d)*Extensions of time to file notice of appeal.* The time for filing a notice of appeal is extendable under the provisions of § 1.136(a) of this title for applications and § 1.550(c) of this title for *ex parte* reexamination proceedings.

(e)*Non-appealable issues.* A non-appealable issue is an issue not subject to an appeal under 35 U.S.C. 134. An applicant or patent owner dissatisfied with a decision of an examiner on a non-appealable issue shall timely seek review by petition before jurisdiction over an appeal is transferred to the Board ( *see* § 41.35). Failure to timely file a petition seeking review of a decision of the examiner related to a non-appealable issue may constitute a waiver to having that issue considered in the application or reexamination on appeal. 7. Revise § 41.33 to read as follows: § 41.33 Amendments and evidence after appeal.

(a)*Amendment after notice of appeal and prior to appeal brief.* An amendment filed after the date a notice of appeal is filed and prior to the date an appeal brief is filed may be admitted as provided in § 1.116 of this title.

(b)*Amendment with or after appeal brief.* An amendment filed on or after the date an appeal brief is filed may be admitted:

(1)*To cancel claims.* To cancel claims provided cancellation of claims does not affect the scope of any other pending claim in the application or reexamination proceeding on appeal, or

(2)*To convert dependent claim to independent claim.* To rewrite dependent claims into independent form.

(c)*Other amendments.* No other amendments filed after the date an appeal brief is filed will be admitted, except as permitted by §§ 41.50(b)(1), 41.50(d)(1), or 41.50(e) of this subpart.

(d)*Evidence after notice of appeal and prior to appeal brief.* Evidence filed after the date a notice of appeal is filed and prior to the date an appeal brief is filed may be admitted if:

(1)The examiner determines that the evidence overcomes at least one rejection under appeal and does not necessitate any new ground of rejection, and

(2)appellant shows good cause why the evidence was not earlier presented.

(e)*Other evidence.* All other evidence filed after the date an appeal brief is filed will not be admitted, except as permitted by §§ 41.50(b)(1) or 41.50(d)(1) of this subpart. 8. Revise § 41.35 to read as follows: § 41.35 Jurisdiction over appeal.

(a)*Beginning of jurisdiction.* The jurisdiction of the Board begins when a docket notice is mailed by the Board.

(b)*End of jurisdiction.* The jurisdiction of the Board ends when:

(1)The Board mails a remand order ( *see* § 41.50(b) or § 41.50(d)(1) of this subpart),

(2)The Board mails a final decision ( *see* § 41.2 of this part) and judicial review is sought or the time for seeking judicial review has expired,

(3)An express abandonment is filed which complies with § 1.138 of this title, or

(4)A request for continued examination is filed which complies with § 1.114 of this title.

(c)*Remand ordered by the Director.* Prior to entry of a decision on the appeal by the Board ( *see* § 41.50), the Director may sua sponte order an application or reexamination proceeding on appeal to be remanded to the examiner. 9. Revise § 41.37 to read as follows: § 41.37 Appeal brief.

(a)*Requirement for appeal brief.* An appeal brief shall be timely filed to perfect an appeal. Upon failure to file an appeal brief, the proceedings on the appeal are terminated without further action on the part of the Office.

(b)*Fee.* The appeal brief shall be accompanied by the fee required by § 41.20(b)(2) of this subpart.

(c)*Time for filing appeal brief.* Appellant must file an appeal brief within two months from the date of the filing of the notice of appeal ( *see* § 41.31(a)).

(d)*Extension of time to file appeal brief.* The time for filing an appeal brief is extendable under the provisions of § 1.136(a) of this title for applications and § 1.550(c) of this title for *ex parte* reexamination proceedings.

(e)*Content of appeal brief.* The appeal brief must contain, under appropriate headings and in the order indicated, the following items:

(1)Statement of the real party in interest ( *see* paragraph

(f)of this section).

(2)Statement of related cases ( *see* paragraph

(g)of this section).

(3)Jurisdictional statement ( *see* paragraph

(h)of this section).

(4)Table of contents ( *see* paragraph

(i)of this section).

(5)Table of authorities ( *see* paragraph

(j)of this section).

(6)[Reserved.]

(7)Status of amendments ( *see* paragraph

(l)of this section).

(8)Grounds of rejection to be reviewed ( *see* paragraph

(m)of this section).

(9)Statement of facts ( *see* paragraph

(n)of this section).

(10)Argument ( *see* paragraph

(o)of this section).

(11)An appendix containing a claims section ( *see* paragraph

(p)of this section), a claim support and drawing analysis section ( *see* paragraph

(r)of this section), a means or step plus function analysis section ( *see* paragraph

(s)of this section), an evidence section ( *see* paragraph

(t)of this section), and a related cases section ( *see* paragraph

(u)of this section).

(f)*Statement of real party in interest.* The “statement of the real party in interest” shall identify the name of the real party in interest. The real party in interest must be identified in such a manner as to readily permit a member of the Board to determine whether recusal would be appropriate. Appellant is under a continuing obligation to update this item during the pendency of the appeal. If an appeal brief does not contain a statement of real party in interest, the Office will assume that the named inventors are the real party in interest.

(g)*Statement of related cases.* The “statement of related cases” shall identify, by application, patent, appeal, interference, or court docket number, all prior or pending appeals, interferences or judicial proceedings, known to any inventors, any attorneys or agents who prepared or prosecuted the application on appeal and any other person who was substantively involved in the preparation or prosecution of the application on appeal, and that are related to, directly affect, or would be directly affected by, or have a bearing on the Board's decision in the appeal. A related case includes any continuing application of the application on appeal. A copy of any final or significant interlocutory decision rendered by the Board or a court in any proceeding identified under this paragraph shall be included in the related cases section ( *see* paragraph

(u)of this section) in the appendix. Appellant is under a continuing obligation to update this item during the pendency of the appeal. If an appeal brief does not contain a statement of related cases, the Office will assume that there are no related cases.

(h)*Jurisdictional statement.* The “jurisdictional statement” shall establish the jurisdiction of the Board to consider the appeal. The jurisdictional statement shall include a statement of the statute under which the appeal is taken, the date of the Office action setting out the rejection on appeal from which the appeal is taken, the date the notice of appeal was filed, and the date the appeal brief is being filed. If a notice of appeal or an appeal brief is filed after the time specified in this subpart, appellant must also indicate the date an extension of time was requested and, if known, the date the request was granted.

(i)*Table of contents.* A “table of contents” shall list, along with a reference to the page where each item begins, the items required to be listed in the appeal brief (see paragraph

(e)of this section) or reply brief ( *see* § 41.41(d) of this subpart), as appropriate.

(j)*Table of authorities.* A “table of authorities” shall list cases (alphabetically arranged), statutes and other authorities along with a reference to the pages where each authority is cited in the appeal brief or reply brief, as appropriate.

(k)[Reserved.]

(l)*Status of amendments.* The “status of amendments” shall indicate the status of all amendments filed after final rejection ( *e.g.* , whether entered or not entered).

(m)*Grounds of rejection to be reviewed.* The “grounds of rejection to be reviewed” shall set out the grounds of rejection to be reviewed, including the statute applied, the claims subject to each rejection and references relied upon by the examiner.

(n)*Statement of facts.* The “statement of facts” shall set out in an objective and non-argumentative manner the material facts relevant to the rejections on appeal. A fact shall be supported by a reference to a specific page number of a document in the Record and, where applicable, a specific line or paragraph, and drawing numerals. A general reference to a document as a whole or to large portions of a document does not comply with the requirements of this paragraph.

(o)*Argument.* The “argument” shall explain why the examiner erred as to each ground of rejection to be reviewed. Any explanation must address all points made by the examiner with which the appellant disagrees. Any finding made or conclusion reached by the examiner that is not challenged will be presumed to be correct. For each argument an explanation must identify where the argument was made in the first instance to the examiner or state that the argument has not previously been made to the examiner. Each ground of rejection shall be separately argued under a separate heading.

(1)*Claims standing or falling together.* For each ground of rejection applicable to two or more claims, the claims may be argued separately (claims are considered by appellants as separately patentable) or as a group (claims stand or fall together). When two or more claims subject to the same ground of rejection are argued as a group, the Board may select a single claim from the group of claims that are argued together to decide the appeal on the basis of the selected claim alone with respect to the group of claims as to the ground of rejection. Any doubt as to whether claims have been argued separately or as a group as to a ground of rejection will be resolved against appellant and the claims will be deemed to have been argued as a group. Any claim argued separately as to a ground of rejection shall be placed under a subheading identifying the claim by number. A statement that merely points out what a claim recites will not be considered an argument for separate patentability of the claim.

(2)*Arguments considered.* Only those arguments which are presented in the argument section of the appeal brief and that address claims set out in the claim support and drawing analysis section in the appendix will be considered. Appellant waives all other arguments in the appeal.

(p)*Claims section.* The “claims section” in the appendix shall consist of an accurate clean copy in numerical order of all claims pending in the application or reexamination proceeding on appeal. The status of every claim shall be set out after the claim number and in parentheses (e.g., 1 (rejected), 2 (withdrawn), 3 (objected to), 4 (cancelled), and 5 (allowed)). A cancelled claim need not be reproduced.

(q)[Reserved.]

(r)*Claim support and drawing analysis section.* For each independent claim involved in the appeal and each dependent claim argued separately ( *see* paragraph (o)(1) of this section), the claim support and drawing analysis section in the appendix shall consist of an annotated copy of the claim (and, if necessary, any claim from which the claim argued separately depends) indicating in boldface between braces ({ }) the page and line or paragraph after each limitation where the limitation is described in the specification as filed. If there is a drawing or amino acid or nucleotide material sequence, and at least one limitation is illustrated in a drawing or amino acid or nucleotide material sequence, the “claims support and drawing analysis section” in the appendix shall also contain in boldface between the same braces ({ }) where each limitation is shown in the drawings or sequence.

(s)*Means or step plus function analysis section.* For each independent claim involved in the appeal and each dependent claim argued separately ( *see* paragraph (o)(1) of this section) having a limitation that appellant regards as a means or step plus function limitation in the form permitted by the sixth paragraph of 35 U.S.C. 112, for each such limitation, the “means or step plus function analysis section” in the appendix shall consist of an annotated copy of the claim (and, if necessary, any claim from which the claim argued separately depends) indicating in boldface between braces ({ }) the page and line of the specification and the drawing figure and element numeral that describes the structure, material or acts corresponding to each claimed function.

(t)*Evidence section.* The “evidence section” shall contain only papers which have been entered by the examiner. The evidence section shall include:

(1)*Contents.* A table of contents.

(2)[Reserved.]

(3)[Reserved.]

(4)[Reserved.]

(5)*Affidavits and declarations.* Affidavits and declarations, if any, and attachments to declarations, before the examiner and which are relied upon by appellant in the appeal. An affidavit or declaration otherwise mentioned in the appeal brief which does not appear in the evidence section will not be considered.

(6)*Other evidence filed prior to the notice of appeal.* Other evidence, if any, before the examiner and filed prior to the date of the notice of appeal and relied upon by appellant in the appeal. Other evidence filed before the notice of appeal that is otherwise mentioned in the appeal brief and which does not appear in the evidence section will not be considered.

(7)*Other evidence filed after the notice of appeal.* Other evidence relied upon by the appellant in the appeal and admitted into the file pursuant to § 41.33(d) of this subpart. Other evidence filed after the notice of appeal that is otherwise mentioned in the appeal brief and which does not appear in the evidence section will not be considered.

(u)*Related cases section.* The “related cases section” shall consist of copies of orders and opinions required to be cited pursuant to paragraph

(g)of this section.

(v)*Appeal brief format requirements.* An appeal brief shall comply with § 1.52 of this title and the following additional requirements:

(1)*Page and line numbering.* The pages of the appeal brief, including all sections in the appendix, shall be consecutively numbered using Arabic numerals beginning with the first page of the appeal brief, which shall be numbered page 1. If the appellant chooses to number the lines, line numbering may be within the left margin.

(2)*Double spacing.* Double spacing shall be used except in headings, tables of contents, tables of authorities, signature blocks, and certificates of service. Block quotations must be indented and can be one and one half or double spaced.

(3)[Reserved.]

(4)*Font.* The font size shall be 14 point, including the font for block quotations and footnotes.

(5)*Length of appeal brief.* An appeal brief may not exceed 30 pages, excluding any statement of the real party in interest, statement of related cases, jurisdictional statement, table of contents, table of authorities, status of amendments, signature block, and appendix. An appeal brief may not incorporate another paper by reference. A request to exceed the page limit shall be made by petition under § 41.3 filed at least ten calendar days prior to the date the appeal brief is due.

(6)*Signature block.* The signature block must identify the appellant or appellant's representative, as appropriate, and a registration number, a correspondence address, a telephone number, a fax number and an e-mail address. 10. Revise § 41.39 to read as follows: § 41.39 Examiner's answer.

(a)*Answer* . If the examiner determines that the appeal should go forward, then within such time and manner as may be established by the Director the examiner shall enter an examiner's answer responding to the appeal brief.

(b)*No new ground of rejection* . An examiner's answer shall not include a new ground of rejection. 11. Revise § 41.41 to read as follows: § 41.41 Reply brief.

(a)*Reply brief authorized* . An appellant may file a single reply brief responding to the points made in the examiner's answer.

(b)*Time for filing reply brief* . If the appellant elects to file a reply brief, the reply brief must be filed within two months of the date of the mailing of the examiner's answer.

(c)*Extension of time to file reply brief* . A request for an extension of time to file a reply brief shall be presented as a petition under § 41.3 of this part.

(d)*Content of reply brief* . Except as otherwise set out in this section, the form and content of a reply brief are governed by the requirements for an appeal brief as set out in § 41.37 of this subpart. A reply brief may not exceed 20 pages, excluding any table of contents, table of authorities, and signature block, required by this section. A request to exceed the page limit shall be made by petition under § 41.3 of this part and filed at least ten calendar days before the reply brief is due. A reply brief must contain, under appropriate headings and in the order indicated, the following items:

(1)Table of contents— *see* § 41.37(i) of this subpart.

(2)Table of authorities— *see* § 41.37(j) of this subpart.

(3)[Reserved.]

(4)Statement of additional facts— *see* paragraph

(f)of this section.

(5)Argument— *see* paragraph

(g)of this section.

(e)[Reserved.]

(f)*Statement of additional facts* . The “statement of additional facts” shall consist of a statement of the additional facts that appellant believes are necessary to address the points raised in the examiner's answer and, as to each fact, must identify the point raised in the examiner's answer to which the fact relates.

(g)*Argument* . Any arguments raised in the reply brief which are not responsive to points made in the examiner's answer will not be considered and will be treated as waived.

(h)[Reserved.]

(i)*No amendment or new evidence* . No amendment or new evidence may accompany a reply brief. § 41.43 [Removed] 12. Remove § 41.43. 13. Revise § 41.47 to read as follows: § 41.47 Oral hearing.

(a)*Request for oral hearing* . If appellant desires an oral hearing, appellant must file, as a separate paper, a written request captioned: “REQUEST FOR ORAL HEARING”.

(b)*Fee* . A request for oral hearing shall be accompanied by the fee required by § 41.20(b)(3) of this part.

(c)*Time for filing request for oral hearing* . Appellant must file a request for oral hearing within two months from the date of the examiner's answer.

(d)*Extension of time to file request for oral hearing* . A request for an extension of time shall be presented as a petition under § 41.3 of this part.

(e)*Date for oral hearing* . If an oral hearing is properly requested, the Board shall set a date for the oral hearing.

(f)*Confirmation of oral hearing* . Within such time as may be ordered by the Board, appellant shall confirm attendance at the oral hearing. Failure to timely confirm attendance will be taken as a waiver of any request for an oral hearing.

(g)*List of terms* . At the time appellant confirms attendance at the oral hearing, appellant shall supply a list of technical terms and other unusual words which can be provided to any individual transcribing an oral hearing.

(h)*Length of argument* . Unless otherwise ordered by the Board, argument on behalf of appellant shall be limited to 20 minutes.

(i)*Oral hearing limited to Record* . At oral hearing only the Record will be considered. No additional evidence may be offered to the Board in support of the appeal. Any argument not presented in a brief cannot be raised at an oral hearing.

(j)*Recent legal development* . Notwithstanding paragraph

(i)of this section, an appellant or the examiner may rely on and call the Board's attention to a recent court or Board opinion which could have an effect on the manner in which the appeal is decided.

(k)*Visual aids* . Visual aids may be used at an oral hearing, but must be limited to documents or artifacts in the Record or a model or an exhibit presented for demonstration purposes during an interview with the examiner. At the oral hearing, appellant shall provide one copy of each visual aid (photograph in the case of an artifact, a model or an exhibit) for each judge and one copy to be added to the Record.

(l)*Failure to attend oral hearing* . Failure of an appellant to attend an oral hearing will be treated as a waiver of oral hearing. 14. Revise § 41.50 to read as follows: § 41.50 Decisions and other actions by the Board.

(a)*Affirmance and reversal* . The Board may affirm or reverse an examiner's rejection in whole or in part. Affirmance of a rejection of a claim constitutes a general affirmance of the decision of the examiner on that claim, except as to any rejection specifically reversed.

(b)*Remand* . The Board may remand an application to the examiner. If in response to a remand for further consideration of a rejection, the examiner enters an examiner's answer, within two months the appellant shall exercise one of the following two options to avoid abandonment of the application or termination of a reexamination proceeding:

(1)*Request to reopen prosecution* . Request that prosecution be reopened before the examiner by filing a reply under § 1.111 of this title with or without amendment or submission of evidence. Any amendment or evidence must be responsive to the remand or issues discussed in the examiner's answer. A request that complies with this paragraph will be entered and the application or patent under reexamination will be reconsidered by the examiner under the provisions of § 1.112 of this title. A request under this paragraph will be treated as a request to dismiss the appeal.

(2)*Request to re-docket the appeal* . The appellant may request that the Board re-docket the appeal ( *see* § 41.35(a) of this subpart) and file a reply brief as set forth in § 41.41 of this subpart. A reply brief may not be accompanied by any amendment or evidence. A reply brief which is accompanied by an amendment or evidence will be treated as a request to reopen prosecution pursuant to paragraph (b)(1) of this section.

(c)*Remand not final action* . Whenever a decision of the Board includes a remand, the decision shall not be considered a final decision of the Board. When appropriate, upon conclusion of proceedings on remand before the examiner, the Board may enter an order making its decision final.

(d)*New ground of rejection* . Should the Board have a basis not involved in the appeal for rejecting any pending claim, it may enter a new ground of rejection. A new ground of rejection shall be considered an interlocutory order and shall not be considered a final decision. If the Board enters a new ground of rejection, within two months appellant must exercise one of the following two options with respect to the new ground of rejection to avoid dismissal of the appeal as to any claim subject to the new ground of rejection:

(1)*Reopen prosecution* . Submit an amendment of the claims subject to a new ground of rejection or new evidence relating to the new ground of rejection or both, and request that the matter be reconsidered by the examiner. The application or reexamination proceeding on appeal will be remanded to the examiner. A new ground of rejection by the Board is binding on the examiner unless, in the opinion of the examiner, the amendment or new evidence overcomes the new ground of rejection. In the event the examiner maintains the new ground of rejection, appellant may again appeal to the Board.

(2)*Request for rehearing* . Submit a request for rehearing pursuant to § 41.52 of this subpart relying on the Record.

(e)*Recommendation* . In its opinion in support of its decision, the Board may include a recommendation, explicitly designated as such, of how a claim on appeal may be amended to overcome a specific rejection. When the Board makes a recommendation, appellant may file an amendment or take other action consistent with the recommendation. An amendment or other action, otherwise complying with statutory patentability requirements, will overcome the specific rejection. An examiner, however, upon return of the application or reexamination proceeding to the jurisdiction of the examiner, may enter a new ground of rejection of a claim amended in conformity with a recommendation, when appropriate.

(f)*Request for briefing and information* . The Board may enter an order requiring appellant to brief matters or supply information or both that the Board believes would assist in deciding the appeal. Appellant will be given a non-extendable time period within which to respond to the order. Failure of appellant to timely respond to the order may result in dismissal of the appeal in whole or in part.

(g)*Extension of time to take action* . A request for an extension of time to respond to a request for briefing and information under paragraph

(f)of this section is not authorized. A request for an extension of time to respond to Board action under paragraphs

(b)and

(d)of this section shall be presented as a petition under § 41.3 of this part. 15. Revise § 41.52 to read as follows: § 41.52 Rehearing.

(a)*Request for rehearing authorized* . An appellant may file a single request for rehearing.

(b)*Time for filing request for rehearing* . Any request for rehearing must be filed within two months from the date of the decision mailed by the Board.

(c)*Extension of time to file request for rehearing* . A request for an extension of time shall be presented as a petition under § 41.3 of this part.

(d)*Content of request for rehearing* . The form of a request for rehearing is governed by the requirements of § 41.37(v) of this subpart, except that a request for rehearing may not exceed 10 pages, excluding any table of contents, table of authorities, and signature block. A request to exceed the page limit shall be made by petition under § 41.3 at least ten calendar days before the request for rehearing is due. A request for rehearing must contain, under appropriate headings and in the order indicated, the following items:

(1)Table of contents— *see* § 41.37(i) of this subpart.

(2)Table of authorities— *see* § 41.37(j) of this subpart.

(3)[Reserved.]

(4)Argument— *see* paragraph

(f)of this section.

(e)[Reserved.]

(f)*Argument* . A request for rehearing shall state with particularity the points believed to have been misapprehended or overlooked by the Board. In filing a request for rehearing, the argument shall adhere to the following format: “On page x, lines y-z of the Board's opinion, the Board states that (set out what was stated). The point misapprehended or overlooked was made to the Board in (identify paper, page and line where argument was made to the Board) or the point was first made in the opinion of the Board. The response is (state response).” As part of each response, appellant shall refer to the page number and line or drawing number of a document in the Record. A general restatement of the case will not be considered an argument that the Board has misapprehended or overlooked a point. A new argument cannot be made in a request for rehearing, except:

(1)*New ground of rejection* . Appellant may respond to a new ground of rejection entered pursuant to § 41.50(d)(2) of this subpart.

(2)*Recent legal development* . Appellant may rely on and call the Board's attention to a recent court or Board opinion which is relevant to an issue decided in the appeal.

(g)*No amendment or new evidence* . No amendment or new evidence may accompany a request for rehearing.

(h)*Decision on rehearing* . A decision will be rendered on a request for rehearing. The decision on rehearing is deemed to incorporate the underlying decision sought to be reheard except for those portions of the underlying decision specifically modified on rehearing. A decision on rehearing is final for purposes of judicial review, except when otherwise noted in the decision on rehearing. 16. Revise § 41.54 to read as follows: § 41.54 Action following decision. After a decision by the Board and subject to appellant's right to seek judicial review, the application or reexamination proceeding will be returned to the jurisdiction of the examiner for such further action as may be appropriate consistent with the decision by the Board. 17. Add § 41.56 to read as follows: § 41.56 Sanctions.

(a)*Imposition of sanctions* . The Chief Administrative Patent Judge or an expanded panel of the Board may impose a sanction against an appellant for misconduct, including:

(1)Failure to comply with an order entered in the appeal or an applicable rule.

(2)Advancing or maintaining a misleading or frivolous request for relief or argument.

(3)Engaging in dilatory tactics.

(b)*Nature of sanction* . Sanctions may include entry of:

(1)An order declining to enter a docket notice.

(2)An order holding certain facts to have been established in the appeal.

(3)An order expunging a paper or precluding an appellant from filing a paper.

(4)An order precluding an appellant from presenting or contesting a particular issue.

(5)An order excluding evidence.

(6)[Reserved.]

(7)An order holding an application on appeal to be abandoned or a reexamination proceeding terminated.

(8)An order dismissing an appeal.

(9)An order denying an oral hearing.

(10)An order terminating an oral hearing. Dated: May 29, 2008. Jon W. Dudas, Under Secretary of Commerce for Intellectual Property and Director of the United States Patent and Trademark Office. [FR Doc. E8-12451 Filed 6-9-08; 8:45 am] BILLING CODE 3510-16-P 73 112 Tuesday, June 10, 2008 Presidential Documents Part V The President Notice of June 6, 2008—Continuation of the National Emergency With Respect to the Actions and Policies of Certain Members of the Government of Belarus and Other Persons Undermining Democratic Processes or Institutions in Belarus Title 3— The President Notice of June 6, 2008 Continuation of the National Emergency With Respect to the Actions and Policies of Certain Members of the Government of Belarus and Other Persons Undermining Democratic Processes or Institutions in Belarus On June 16, 2006, by Executive Order 13405, I declared a national emergency and ordered related measures blocking the property of certain persons undermining democratic processes or institutions in Belarus, pursuant to the International Emergency Economic Powers Act (50 U.S.C. 1701-1706). I took this action to deal with the unusual and extraordinary threat to the national security and foreign policy of the United States constituted by the actions and policies of certain members of the Government of Belarus and other persons that have undermined democratic processes or institutions; committed human rights abuses related to political repression, including detentions and disappearances; and engaged in public corruption, including by diverting or misusing Belarusian public assets or by misusing public authority. Because these actions and policies continue to pose an unusual and extraordinary threat to the national security and foreign policy of the United States, the national emergency declared on June 16, 2006, and the measures adopted on that date to deal with that emergency, must continue in effect beyond June 16, 2008. Therefore, in accordance with section 202(d) of the National Emergencies Act (50 U.S.C. 1622(d)), I am continuing for 1 year the national emergency declared in Executive Order 13405. This notice shall be published in the **Federal Register** and transmitted to the Congress. GWBOLD.EPS THE WHITE HOUSE, June 6, 2008. [FR Doc. 08-1345 Filed 6-9-08; 8:54 am]

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