Distribution, Competition, and Antitrust / IP Law

Archives for June 2011

Can a Litigation Settlement Violate the Antitrust Laws? — Part II

In a blog post about a week ago, I discussed the issue of litigation settlements potentially violating the antitrust laws, and suggested a basic framework for analyzing the problem. How would this analysis work in practice? Here, I address that second question.

Consider the following hypothetical. Suppose that the plaintiff complains the defendant has engaged in attempted monopolization by entering into exclusive contracts with the majority of distributors throughout the country. Suppose further that, although the relevant market is nationwide, distributors, by law, are licensed on a state-by-state basis. Let us further stipulate that the Section 2 claim is bona fide and has some significant chance of being successful if tried. The following are potential settlement agreement restrictions, and analyses of the same:

1. Defendant agrees to terminate some or all exclusive distribution relationships. Analysis: unproblematic; restriction itself highly unlikely to violate Section 1.

2. Defendant and plaintiff agree to allocate the distributors, with defendant keeping some under exclusive contracts and plaintiff keeping some under exclusive contracts. Analysis: problematic, because plaintiff is not entitled, under Section 2, to such an arrangement, which may itself be anti-competitive (it could, for example, foreclose competition by other competitors or potential competitors at the level of the defendant and plaintiff).

3. Defendant agrees to pricing no less than X for period of time Y to allow plaintiff the ability to compete. Analysis: problematic, because this restriction is not directly related to the alleged Section 2 violations, and a Section 2 remedy would most likely not include court-imposed restrictions on the defendant’s pricing.

4. Defendant and plaintiff agree on reciprocal pricing commitments. Analysis: a fortiori, even more problematic than No. 3, because we now have a bilateral agreement between competitors regarding prices or price levels.

In short, I am suggesting that one look at the likely injunctive relief available in the underlying litigation, and compare it to the settlement agreement. If the settlement agreement is within the boundaries of injunctive relief that is likely to be awarded by the court (or at least possibly awarded), then its provisions may be lawful.

Cloud Computing and Antitrust

Here’s a nice little summary of some of the issues.

Can a Litigation Settlement Violate the Antitrust Laws? — Part I

Here’s a longer post on a substantive legal issue.  I hope to do these from time-to-time.

On the one hand, the law strongly favors settlements. On the other, Section 1 of the Sherman Act, 15 U.S.C. § 1, condemns certain horizontal agreements between or among competitors, including certain agreements relating to price, as per se illegal.

In light of these potentially competing principles, I consider here whether the settlement of litigation by two rivals (for example, one company’s Section 2 attempted monopolization claim against another) can lawfully include provisions that, but for the ongoing litigation and its settlement, might be argued (most likely, by third parties) to constitute Section 1 violations. For example, what if one company, in a settlement of attempted monopolization litigation, promises the other company that it will not give certain discounts to certain classes of customers?

Although some of the general principles here would also apply to other types of claims, I’ll largely stick with Section 2 claims as an example, for the sake of simplicity. (It makes little sense to consider horizontal restraints in the context of a settlement of Section 1 horizontal restraint litigation, but such restraints are conceivable.)

A starting point for consideration is the treatment of the settlement of patent claims. In the context of settling patent claims, courts generally have taken the view that if the settlement does not impose restrictions (even horizontal ones) that are broader than the plaintiff’s rights under the patent(s) in question, then the restrictions are not per se unlawful. Instead, they can only be condemned after, at a minimum, a “quick look”-type analysis that considers various factors, including potential anti-competitive effects. See generally Christopher M. Holman, Do Reverse Payment Settlements Violate the Antitrust Laws?, 23 SANTA CLARA COMPUTER & HIGH TECH. L.J. 489 (2007). One of the reasons courts have ruled as they have is that a patent is presumably valid under patent law – and if it is, the patentee enjoys a right to exclude granted by the federal government.1

How does the patent approach translate to the settlement of antitrust litigation that does not involve, or does not primarily involve, patent claims? In this context, unlike in the patent context, there is no underlying legal right to exclude a competitor. We have to reason by analogy, given a relative dearth of case law. To some extent, we may have to assume that the general principles derived from intellectual property (“IP”) cases still hold in cases where IP rights are not at issue, and we cannot completely eliminate the risk that a court would conclude that the same principles do not apply.

There are reasons to think the analogy holds, and reasons to think that it may not. Supporting application of the same principles are the following: (i) the law’s strong policy in favor of settlements and (ii) the fact that while a patent confers a lawful background, or baseline, against which to measure a horizontal agreement, so too does an antitrust Section 2 judgment, or the right to obtain such a judgment under Section 4 of the Clayton Act. Cf. Blackburn v. Sweeney, 53 F.3d 825 (7th Cir. 1995) (at least suggesting that a settlement agreement imposing restrictions within the zone that might be imposed by future litigation would not be per se unlawful); Clorox Co. v. Sterling Winthrop, Inc., 117 F.3d 50 (2d Cir. 1997) (trademark agreement precluding certain advertisements and uses of trademark not per se unlawful, in part because trademarks are themselves not exclusionary).

On the other hand, patent law is unique. U.S. patent law confers upon patent holders the right to exclude others from practicing the patents. Although patents no longer are presumed to create market power, see Illinois Tool Works Inc. v. Independent Ink, Inc., 547 U.S. 28 (2006), in many cases they do just that. Furthermore, patents are presumed to be valid, by statute, even if the patent holder has doubts about validity. Because a patent confers the power to exclude some (or all) competition in a market, it is not surprising that courts have reasoned that settlements of patent disputes or patent litigation that prohibit competition in a zone no broader than the zone authorized by the patent itself are either not unlawful, or are subject to a quick look or full Rule of Reason analysis. The “lawful monopoly” created by many patents, and the statutory presumption of patent validity, are features not found outside patent law. Additionally, in the patent area the general policy favoring the settlement of litigation is affected not merely by the parties’ “private ends” that are at issue, but also the public interest in limiting the grant of patent monopolies to “novel and useful invention[s].” United States v. Singer Mfg. Co., 374 U.S. 174, 199 (1963) (White, J., concurring).

Assuming that the analogy is valid, we still need to consider whether the settlement exceeds the scope of any other pre-existing rights. The rights to which the plaintiff is entitled are essentially defined by the world in which no antitrust violation takes place. In other words, the plaintiff has a right to be free from antitrust violations. But what, in practice, does this mean?

It is clear that a Section 2 court can impose prohibitions on a monopolist as a form of injunctive relief. See generally Areeda ¶ 653. For example, a Section 2 court, in condemning exclusive dealing, may impose equitable remedies aimed at halting the exclusive dealing. See United States v. Dentsply Int’l, Inc., 399 F.3d 181 (3d Cir. 2005), cert. denied, 546 U.S. 1089 (2006). Similarly, a Section 2 court, in condemning certain licensing arrangements, can forbid per-processor licensing and tying. See United States v. Microsoft Corp., 56 F.3d 1448, 1451 (D.C. Cir. 1995). And the Federal Trade Commission, at least, believes that it can require a patent holder who has violated Section 2 to license its technology at specified reasonable and non-discriminatory (“RAND”) rates. (The D.C. Circuit reversed this decision on causation grounds. See Rambus Inc. v. Federal Trade Comm’n, 522 F.3d 456, 466 (D.C. Cir. 2008), cert. denied, 129 S.Ct. 1318 (2009).) Additionally, courts hearing predatory pricing cases presumably have the power to order monopolists to refrain from price predation. In other words, they presumably have the power to order pricing be above some measure of variable cost. “Little is lost from enjoining conduct already determined to be anticompetitive, provided that the conduct makes little or no contribution to competition or efficiency. Further, there is no unfairness or disincentive to meritorious competition in simply preventing the conduct at the outset or ordering the monopolist to stop.” Areeda ¶ 653b at 145.

To the extent that a settlement agreement restriction prohibits an activity that would itself constitute a Section 2 violation, and the restriction is no broader than the Section 2 plaintiff’s right to be unburdened by such activity, there is an argument that the restriction is ancillary to a legitimate litigation settlement. Under this argument, at the very least, such restrictions should not be condemned as per se illegal, but should be considered under a Rule of Reason analysis that takes into account both the possible anti-competitive effects, as well as the pro-competitive efficiencies, of the overall arrangement, or under a not too dissimilar quick-look analysis.

In an upcoming post, I will discuss how this analysis might work in practice.

1 Note, however, that the law here is evolving, and that government antitrust enforcers have recently taken a harsher view of so-called “reverse payments” whereby a patentee sues a generic manufacturer, and then settles with it by making a payment and in return receiving a commitment not to market product. (This occurs most often in the pharmaceutical industry, and raises complexities under the Hatch-Waxman Act.)

Even the Girl Scouts Can Violate Fair Dealership Laws

In a very interesting opinion, Judge Posner of the Seventh Circuit last week ruled that the Girl Scouts could violate Wisconsin’s Fair Dealership Law, and that they were not immune to that law’s reach by virtue of the First Amendment.  See Girl Scouts of Manitou Council, Inc. v. Girl Scouts of the United States of America, Inc., No. 10-1986 (7th Cir. May 31, 2011).

The national Girl Scouts organization granted exclusive territories to some 300 local “councils.”  Each council was authorized to sell Girl Scouts cookies and other merchandise under the Girl Scout trademark.  The councils earned income from the sales of cookies and merchandise, as well as from charitable donations, and paid membership fees to the national organization.  The national organization concluded that there were too many councils, and so decided to dissolve the Manitou Council and reallocate its entire territory to other councils.  This plan would not have put the Manitou Council out of business per se, but it would have precluded it from using the Girl Scout trademark or representing itself as a Girl Scout organization.

The Manitou Council sought a preliminary injunction to prevent its exclusive territory from being dissolved.  It lost in the district court, but that decision was reversed in the Seventh Circuit in 2007.  Later, the district court granted the national organization summary judgment, reasoning that to apply the Fair Dealership Law to the national organization would violate the organization’s freedom of expression guaranteed by the First Amendment to the United States Constitution.

The Seventh Circuit disagreed.  The Wisconsin Fair Dealership Law is a state law of general applicability with only a remote, hypothetical impact on the organization’s message.  Originally, the national organization justified its reorganization plan on the basis that it would improve marketing of cookies, exploit economies of scale, and promote effective fundraising.  These justifications did not directly implicate First Amendment concerns.  On appeal, the national organization emphasized a goal of increasing the racial and ethnic diversity of the Girl Scouts (picking up on the district court’s First Amendment reasoning).  However, the Seventh Circuit found no evidence of a connection between realignment of the councils and the promotion of diversity.  “How changing the territorial boundaries would increase the recruitment of girls from minority groups is nowhere shown.”  The possibility that a law of general application might indirectly and unintentionally impede an organization’s efforts to communicate its message effectively cannot be enough to condemn the law.

The Seventh Circuit also addressed several arguments relating to the Fair Dealership Law itself.  First, the court rejected the argument that the statute is inapplicable to nonprofit entities.  “No gulf separates the profit from the nonprofit sectors of the American economy.”  The principal objective of dealer protection laws is to prevent franchisors from appropriating good will created by their dealers.  That concern is applicable to nonprofit enterprises that enter dealership agreements.

Second, the Seventh Circuit rejected the national organization’s argument that its alteration of the Manitou Council’s territory did not change the competitive circumstances of the dealership agreement.  “Altering a franchisee’s territorial boundaries can have the same effect as opening new stores in his territory; the narrower those boundaries, the less protection the franchisee has against competition from other franchisees.  But when as in this case the franchisor, though authorized to alter boundaries, attempts to use that authority to terminate the franchise altogether, he runs up against the provision of the Wisconsin act that requires ‘good cause’ to cancel a dealership.  Wis. Stat. § 135.03.”  Although the franchisor’s goal of increasing sales constitutes “good cause” under various franchise laws, the national organization rested its good-cause argument on the proposition that realignment was necessary to its expressive activity – an argument that the Court had already rejected.  “The purpose of the realignment remains an enigma; like many corporate and governmental reorganizations, it may reflect internal bureaucratic pressures unrelated to the organization’s professed legitimate concerns.”

* * *

So what is the take-away from the Seventh Circuit’s decision? I think there are four fundamental points.

First, state franchise statutes and fair dealership laws can have wide application – sometimes much wider than you might think.  They can even apply, for example, to the distribution of Girl Scout cookies.

Second, courts are not very receptive to the argument that nonprofits are exempt from the reach of these statutes.

Third, creative arguments – such as application of one of these statutes would interfere with First Amendment rights – must be backed up by actual (and probably compelling) evidence, otherwise they will be easily dismissed.

And fourth, franchisors’ significant decisions that may effectively amount to a de facto termination should be supported by solid, and adequately documented, business reasons.

Special Franchise Statutes

Franchise relationships can be subject to various special statutes. One such statute is the Petroleum Marketing Practices Act (PMPA), 15 U.S.C. §§ 2801, et seq.  Unsurprisingly, the PMPA applies to gasoline stations.  Among other things, it prohibits gasoline refiners and distributors from terminating, or failing to renew, franchises absent the fulfillment of certain conditions, and unless one or more enumerated grounds for termination or non-renewal is met.

Of course, if a franchisee is offered and signs a renewed franchise agreement, the franchisee probably cannot maintain a claim for unlawful renewal under the PMPA.  See Poquez v. Suncor Holdings-CPOII, LLC, N.D. Cal., No. 3:11-cv-328-SC (5/26/11) (no public link available yet).

Bottom line, make certain you understand what statutes apply to your business relationship, and whether actions you have taken allow you to establish, or preclude you from establishing, elements of statutory claims.

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