Distribution, Competition, and Antitrust / IP Law

Archives for 2012

Top Posts of 2012

Happy new year

Happy New Year (Photo credit: Amodiovalerio Verde)

 

Here’s a quick summary of the top five blog posts from 2012.

 

1. American Express Can’t Enforce Arbitration Agreement Antitrust Class Action Waiver.  Discussing the Second Circuit case refusing to enforce an American Express arbitration agreement with a class action waiver provision.

 

2. Nine Potential Patent Licensing “No-Nos.” Discussing antitrust issues arising from patent licenses.

 

3. iPad Note-taking Apps for Lawyers Reviewed.  Reviewing several note-taking apps for the iPad.

 

4. Can My Supplier Refuse to Sell Products to Me?  Discussing antitrust issues arising from a supplier’s refusal to supply product.

 

5. You Can’t Try to Monopolize a Market In Which You Don’t Compete.  Discussing the Infostream Group case (which dismissed antitrust claims against PayPal).

 

For those interested, in this blog’s first full year of operation, I’m happy to report that it received just shy of 20,000 visits.  If you enjoy reading it, please share a link to it (or to this post); I’d like to see the traffic continue to grow.

 

Happy Holidays and best wishes for the New Year.

 

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Are Bar Associations Anti-Competitive?

English: Title page of Adam Smith's Wealth of ...

Title page of Adam Smith’s Wealth of Nations, 1776. (Photo credit: Wikipedia)

From the abstract of a recent paper (via Antitrust & Competition Policy Blog):

 

The European Commission Report on Competition in Professional Services found that recommended prices by professional bodies have a significant negative effect on competition since they may facilitate the coordination of prices between service providers and/or mislead consumers about reasonable price levels. Professional associations argue, first, that a fee schedule may help their members to properly calculate the cost of services avoiding excessive charges and reducing consumers’ searching costs and, second, that recommended prices are very useful for cost appraisal if a litigant is condemned to pay the legal expenses of the opposing party. Thus, recommended fee schedules could be justified to some extent if they represented the cost of providing the services. We test this hypothesis using cross-section data on a subset of recommended prices by 52 Spanish bar associations and cost data on their territorial jurisdictions. Our empirical results indicate that prices recommended by bar associations are unrelated to the cost of legal services and therefore we conclude that recommended prices have merely an anticompetitive effect.

Aitor Ciarreta (Universidad del Pais Vasco), Maria Paz Espinosa (Universidad del Pais Vasco) and Aitor Zurimendi (Universidad del Pais Vasco), Are Bar Associations Anticompetitive? An Empirical Analysis of Recommended Prices for Legal Services in Spain.  This recalls Adam Smith’s famous statement in The Wealth of Nations: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”  Of course, recommended prices — in a vertical distribution situation — are perfectly lawful.  But where a bar association is involved, there are horizontal (or possibly horizontal) aspects to the arrangement.  Cf. Goldfarb v. Virginia State Bar, 421 U.S. 773 (1975) (minimum-fee schedule for lawyers published by the Fairfax County Bar Association not immune from the Sherman Act); Arizona v. Maricopa County Medical Soc., 457 U.S. 332 (1982) (maximum physicians’ fee schedule violated the antitrust laws).

 

No doubt there is a current oversupply of lawyers.  However, the better way to address concerns about fees is to (lawfully) reduce the supply.  See this blog post, for example.

 

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Supreme Court Grants Cert in Watson Pay-For-Delay Case

On December 7, 2012, the Supreme Court granted certiorari in FTC v. Watson Pharmaceuticals.  The Supreme Court is now poised to resolve the circuit split on the treatment of so-called “pay for delay” Hatch-Waxman Act patent litigation settlements.

The Second, Eleventh, and Federal Circuits have all allowed such settlements where they do not exceed the duration or scope of the patent (or involve sham litigation or fraudulently-obtained patents).  The Third Circuit has disagreed, finding that payments from patent-holding pharmaceutical manufacturers to generics to stay off the market are prima facie evidence of an antitrust violation.

You can find past blog entries on pay-for-delay issues and the Hatch-Waxman act by using the search feature.

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Direct Purchasers Can Bring Walker Process Claims

In Ritz Camera & Image v. SanDisk Corp., No. 2012-1183 (Fed. Cir. Nov. 20, 2012), the Federal Circuit held that direct purchasers have antitrust standing to bring Walker Process claims.

In a typical Walker Process claim, an alleged patent infringer claims that the patentee fraudulently obtained a patent or patents from the Patent and Trademark Office.  Usually the claim is brought as a type of monopolization claim.

In Ritz Camera, a direct purchaser of SanDisk products (not an alleged patent infringer) brought a Walker Process claim, alleging that by fraudulently obtaining patents, SanDisk was able to raise prices above competitive levels.  The Federal Circuit found that the plaintiff had antitrust standing.  “Ritz’s status as a direct purchaser gives it standing to pursue its Walker Process claim even if it could not have sought a declaratory judgment of patent invalidity or unenforceability.”

The ruling increases patentees’ potential exposure to antitrust claims arising out of patent prosecution and enforcement.

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Third Circuit Rules That Long-Term Agreements Featuring Market Share Rebates, Coupled With Other Exclusionary Behavior, Are Not Subject to a Price-Cost Screen

In ZF Meritor, LLC v. Eaton Corp., 2012 U.S. App. LEXIS 20342 (3d Cir. Sept. 28, 2012) (opinion available here), the Third Circuit ruled that long-term supply agreements predicated upon market share rebates or discounts should be evaluated under the Rule of Reason, rather than under the Brooke Group above-cost pricing test. As such, they can be exclusionary even if all of a defendant’s prices are above cost.

The defendant Eaton, a monopolist in the heavy-duty truck transmissions market, had entered into long-term supply agreements with all of the customers (OEMs) in the market. The agreements conditioned rebates on the purchase of a specified percentage of the OEMs’ requirements from Eaton.

The rebates did not reduce Eaton’s prices below cost, and Eaton argued that under a price-cost screen it therefore did not violate the antitrust laws. The Third Circuit conceded that predatory pricing principles, including the price-cost test, would control in cases solely presenting a challenge to pricing practices. “Moreover, a plaintiff’s characterization of its claim as an exclusive dealing claim does not take the price-cost test off the table . . . . [W]hen price is the clearly predominant mechanism of exclusion, the price-cost test tells us that, so long as the price is above-cost, the procompetitive justifications for, and the benefits of, lowering prices far outweigh any potential anticompetitive effects.”

However, the court declined to adopt Eaton’s “unduly narrow” characterization of the case as a “pricing practices” case, i.e., a case in which price is the “clearly predominant mechanism of exclusion.” The court noted other forms of exclusionary behavior, including (i) Eaton’s efforts to make itself the standard offering in the OEMs’ “data books” (which provided product information to end users); (ii) the removal of competitors’ products from two data books; (iii) preferential prices for Eaton products required by the long-term agreements; and (iv) evidence that Eaton’s continued compliance with the long-term agreements was also conditioned on the market penetration targets.

“Accordingly,” the Third Circuit concluded, “this is not a case in which the defendant’s low price was the clear driving force behind the customer’s compliance with purchase targets, and the customers were free to walk away if a competitor offered a better price . . . . Rather, Plaintiffs introduced evidence that compliance with the market penetration targets was mandatory because failing to meet such targets would jeopardize the OEMs’ relationships with the dominant manufacturer of transmissions in the market.”

In a long footnote, the Third Circuit distinguished its decision in LePage’s, while reaffirming its vitality. According to the ZF Meritor Court, LePage’s involved bundled product tying claims. “LePage’s is inapplicable where, as here, only one product is at issue and the plaintiffs have not made any allegations of bundling or tying. The reasoning of LePage’s is limited to cases in which a single-product producer is excluded through a bundled rebate program offered by a producer of multiple products, which conditions the rebates on purchases across multiple different product lines.”

The court went on to find that Eaton’s long-term contracts were, in fact, exclusionary and supported a finding of antitrust injury.

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Is Price Gouging Immoral? Should It Be Illegal?

In the wake of Hurricane Sandy, here are two takes on the question of price gouging in a time of emergency.

First, Matt Zwolinski (University of San Diego) presents the libertarian argument that price “gouging” provides an incentive to move products from lower areas of demand to higher areas of demand, and makes everyone better off.  (This is a nice little video argument.)

Second, Planet Money recently had a blog post entitled “Why Economists Love Price Gouging, and Why It’s So Rare.”

The people [Nobel Laureate Daniel] Kahneman surveyed said they would punish businesses that raised prices in ways that seemed unfair. While I would have paid twice the normal price for my groceries yesterday, I would have felt like I was getting ripped off. After the storm passed, I might have started getting my groceries somewhere else.

Businesses know this. And, Kahneman argues, when basic economic theory conflicts with peoples’ perception of fairness, it’s in a firm’s long-term interest to behave in a way that people think is fair.

I think there is much merit in the Kahneman/Planet Money point.

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Under Agency Law, Standard Setting Organizations May Be Liable for Antitrust Violations of Their Members

As noted in this recent blog post, in TruePosition, Inc. v. LM Ericsson Telephone Co., No. 11-4574 (E.D. Pa. Oct. 4, 2012), the court held that a Standard Setting Organization (SSO) known as 3GPP may be liable for alleged Sherman Act Section 1 antitrust claims involving the wrongful actions of persons who acted on behalf of the SSO, even when those persons are representatives of the SSO’s corporate members.  (Hat tip to this LinkedIn posting which informed me about the blog post.)

The case involves allegations that defendants conspired to exclude plaintiff’s technology from industry standards (for Long Term Evolution, or LTE, telephone technology).  The SSO argued that the plaintiff’s claims were insufficient because the plaintiff’s theory of liability was one of “acquiescence.”  The SSO characterized the plaintiff’s claims as alleging that the SSO was on notice of the corporate defendants’ alleged misconduct but that the SSO failed to remedy it.  This “inaction,” according to the SSO, did not show the requisite agreement necessary to support a Sherman Act Section 1 claim.

Applying American Society of Mechanical Engineers, Inc. v. Hydrolevel Corp., 456 U.S. 556 (1982), the district court rejected the SSO’s acquiescence argument. 

“As Chairmen of the pertinent 3GPP subcommittees, the Corporate Defendants were agents of 3GPP acting on behalf of 3GPP, even when their actions violated 3GPP’s rules and regulations . . . .  As the facts are set forth in the Amended Complaint, and granting all reasonable inferences to TruePosition, 3GPP is charged with acting through agents whom it has imbued with apparent authority.  Such alleged action involved concerted action.  This is not a case involving mere membership in a standard-setting organiztion . . . .  It is the Corporate Defendants’ alleged unlawful conspiratorial conduct taken with 3GPP’s apparent authority as Chairmen of the relevant committees that makes 3GPP potentially liable for their actions. Under the facts presented in the Amended Complaint, 3GPP cannot consider itself as separate and distinct from the actions of the Corporate Defendants when they were acting with 3GPP’s apparent authority.”

The court also determined that the complaint adequately alleged minimally sufficient facts to plausibly suggest that 3GPP assented to the alleged conspiracy through the corporate defendants’ actions taken with the apparent authority of 3GPP holding leadership positions within its committees.  “This is not a case where most of the alleged unlawful activities were conducted by the Corporate Defendants outside the confines of 3GPP but, rather, the majority of the allegations specifically involve the actions of the Corporate Defendants as Chairmen of 3GPP’s committees thwarting and using its standardization process to disadvantage a competitor.”

The case is a useful reminder that an SSO has potential antitrust exposure for the activities of its members when the members act under color of authority of the SSO.

The Case for Abolishing Patents?

Patented!!!

Patented!!! (Photo credit: @MSG)

This September 2012 paper issued under the auspices of the Federal Reserve Bank of St. Louis argues that patents should be abolished.  While they may initially promote innovation, “entrenched players like intellectual property lawyers who make their living filing lawsuits and old, established corporations that want to keep new players out of their markets lobby to expand the breadth of patent rights. And as patent rights get stronger, they take a serious toll on the economy, including our ability to innovate.”   See this short article in the Atlantic Monthly about the Fed paper.

Of course, the debate over the actual utility of patents — particularly software patents — is not new.  See this recent New York Times article.  But while some reforms are undoubtedly needed, abolishing all patents — particularly when other countries continue to protect IP through patents — seems like it might be throwing the baby out with the bath water and might lead to non-optimal outcomes in the U.S.

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DOJ Antitrust Head Cautions on Patent Risks

According to this article in Law360 (may be behind a paywall), acting assistant attorney general Joseph Wayland recently warned at a conference that patent holders could get themselves into difficulties even if they are not trying to enforce standard-essential patents. 

“I have made this a priority at the division … use or misuse of patents that goes beyond standard-essential patents,” Wayland said. “Let’s suppose that there are contractual terms that a holder of intellectual property has and insists that in order to license this patent you need to promise the following things, some of which may impact competition outside of that market or may lock in, attempt to lock in an advantage outside the expiration of the patent. Those are the kinds of things that might be of interest of us.”

Readers of this blog can read about patent / antitrust issues in other posts on, inter alia, the nine potential patent licensing no-nos.  You can browse by category or use the search function to find them.

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Is Razor and Blade Pricing a Myth?

A heavy duty style safety razor. This is a fun...

(Photo credit: Wikipedia)

Speaking of razor and blade pricing, I just recently found this 2010 paper by Randal C. Picker entitled “The Razors-and-Blades Myth(s).”  From the abstract:

Gillette’s 1904 patents gave it the power to block entry into the installed base of handles that it would create. While other firms could and did enter the multi-blade market with their own handles and blades, no one could produce Gillette handles or blades during the life of the patents.

From 1904-1921, Gillette could have played razors-and-blades – low-price or free handles and expensive blades – but it did not do so. Gillette set a high price for its handle – high as measured by the price of competing razors and the prices of other contemporaneous goods – and fought to maintain those high prices during the life of the patents. For whatever it is worth, the firm understood to have invented razors-and-blades as a business strategy did not play that strategy at the point that it was best situated to do so.

It was at the point of the expiration of the 1904 patents that Gillette started to play something like razors-and-blades, though the actual facts are much more interesting than that. Before the expiration of the 1904 patents, the multi-blade market was segmented, with Gillette occupying the high end with razor sets listing at $5.00 and other brands such as Ever-Ready and Gem Junior occupying the low-end with sets listing at $1.00.

Given Gillette’s high handle prices, it had to fear entry in handles, but it had a solution to that entry: it dropped its handle prices to match those of its multi-blade competitors. And Gillette simultaneously introduced a new patented razor handle sold at its traditional high price point. Gillette was now selling a product line, with the old-style Gillette priced to compete at the low-end and the new Gillette occupying the high end. Gillette foreclosed low-end entry by doing it itself and yet it also offered an upgrade path with the new handle.

But what of the blades? Gillette’s pricing strategy for blades showed a remarkable stickiness, indeed, sticky doesn’t begin to capture it. By 1909, the Gillette list price for a dozen blades was $1 and Gillette maintained that price until 1924, though there clearly was discounting off of list as Sears sold for around 80 cents during most of that time. In 1924, Gillette reduced the number of blades from 12 to 10 and maintained the $1.00 list price, so a real price jump if not a nominal one. That was Gillette’s blade pricing strategy.

In sum: “Gillette hadn’t played razors-and-blades when it could have during the life of the 1904 patents and didn’t seem well situated to do so after their expiration, but it was exactly at that point that Gillette played something like razors-and-blades and that was when it made the most money. Razors-and-blades seems to have worked at the point where the theory suggests that it shouldn’t have.”

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