Distribution, Competition, and Antitrust / IP Law

Archives for April 2012

Speaking at a Tying Arrangements Webinar on May 1 — 50% Discount Offer

As I blogged recently, I’ll be speaking at a webinar tomorrow on tying arrangements.  (It’s at 1:00 p.m. Eastern Time.)

If you use this link to register for the program, you’ll receive a 50% discount.  I hope you can make it.

P.S. For readers of the blog, here’s a bonus question: why doesn’t the 50% discount offer above implicate the Robinson-Patman Act?  Answer later this week; feel free to comment and leave an answer.

Settling a Patent Lawsuit Can’t Violate the Antitrust Laws

So the court in Federal Trade Commission v. Watson Pharmaceuticals, Inc., No. 10-12729 (11th Cir. Apr. 25, 2012) held (or more accurately reconfirmed). I’ve written about this issue previously (see my 2009 article on “The Lawfulness of Antitrust Settlements” in the downloads section of this blog).

In Watson, despite previous rejections of its position, the FTC once again argued that a patent litigation settlement between a branded pharmaceutical manufacturer (the patentee) and a generic pharmaceutical manufacturer that results in a payment from the branded manufacturer to the generic in return for the generic’s agreement to stay off the market can violate the antitrust laws. The FTC added a new gloss in Watson: such an agreement violates the antitrust laws if, at the time of the patent settlement, the patent was more likely than not invalid.

The Eleventh Circuit rejected the FTC’s argument. Unless a patent is obtained fraudulently, or unless the patent litigation is itself a sham, a settlement of patent litigation cannot violate the antitrust laws. (The one exception to this rule: if the settlement imposes restrictions beyond the terms of the patent itself, e.g., if it restricts competition beyond the remaining term of the patent.) As the court wrote, “absent sham litigation or fraud in obtaining the patent, a reverse payment settlement is immune from antitrust attack so long as its anticompetitive effects fall within the scope of the exclusionary potential of the patent.” (emphasis supplied).

The court articulated a number of rationales for its ruling, including the fact that patent litigation is usually high stakes, and parties rationally may want to settle even if the probability of a finding of validity or infringement is, strictly speaking, less than 50%. Additionally, the FTC’s approach would require an after-the-fact calculation of how “likely” a patent holder was to succeed in a settled lawsuit if it had not settled. Making such predictions is very difficult, and “is too perilous an enterprise to serve as a basis for antitrust liability and treble damages.” The FTC’s approach would also impose heavy burdens on the parties and the courts to essentially re-litigate patent issues. And finally, circuit courts other than the Federal Circuit have no expertise in the patent area, and they are not well-equipped to make determinations about patent infringement.

The best lines of the opinion are the following: “In closing, it is worth emphasizing that what the FTC proposes is that we attempt to decide how some other court in some other case at some other time was likely to have resolved some other claim if it had been pursued to judgment. If we did that we would be deciding a patent case within an antitrust case about the settlement of the patent case, a turducken task. Even if we found that prospect palatable, we would be bound to follow the simpler recipe for deciding these cases that is laid out in our existing precedent.”

Patent Licensing “No-Nos”

I have not forgotten about the series, which will continue in the very near future.  As you can see from recent posts, other case developments have pushed the schedule back just a bit.

SanDisk’s Flash Memory Patent Licenses and Royalties Do Not Support Antitrust Claims

In PNY Technologies, Inc. v. SanDisk Corp., Case No. C-11-04689 YGR (April 20, 2012) (Gonzalez Rogers, J.), the court dismissed (with leave to amend) PNY’s antitrust claims against SanDisk Corp. The case again demonstrates the vital necessity of alleging exactly how a defendant dominates which market, and how its activity has allegedly harmed competition in each relevant market. Absent such allegations, complaints will fail.

At issue in the case is computer flash memory. Flash memory is developed by licensors of flash technology (such as SanDisk). Device manufacturers make the flash memory chips. “Aggregators” purchase component parts and assemble usable products. Finally, resellers purchase finished products for resale. SanDisk is vertically integrated, and both owns an extensive patent portfolio and produces its own branded consumer products.

PNY, an aggregator, challenged SanDisk’s licensing and royalty practices. It alleged that SanDisk used the specter of expensive and endless patent infringement litigation to coerce competitors into signing (under the guise of a settlement) its uniform, non-negotiable license, “which gives SanDisk control over the pricing of flash memory technology and products sold to its competitors and, ultimately, to consumers.” Specifically, PNY alleged that SanDisk required licensees to:

  1. Pay multiple royalties on the same product as it is sold downstream through the distribution chain;
  2. Pay a royalty on worldwide sales (including in countries where SanDisk does not have any patent rights);
  3. License an omnibus patent portfolio, rather than specific individual patents; and
  4. Grant back to SanDisk a worldwide, royalty-free cross-license to future flash memory-related technological innovations within the scope of the portfolio.

The court accepted that PNY had adequately alleged monopoly power and barriers to entry in the upstream market for flash memory technology. However, as to the downstream markets for flash memory devices, systems, and products, PNY failed to allege monopoly power. Its allegation that SanDisk uses licenses to extract a royalty on the same patented technology on all downstream market sales did not establish that SanDisk has the power to control downstream prices, so PNY had not directly alleged market power. Nor did PNY adequately allege that SanDisk had the power to exclude downstream competitors.

As to indirect proof of market power, PNY alleged a 40% share of retail sales of flash memory products, but did not allege SanDisk’s market shares in other downstream markets. This left PNY with, at most, an attempted monopolization claim of the retail market. However, because it did not allege barriers to entry and expansion in the retail market (as opposed to the technology market), it had no retail market attempt claim, either.

Finally, the court also found that PNY had not alleged anticompetitive conduct. As to the technology market, where SanDisk owns patents, the complaint did not allege any willful acquisition of a monopoly. As to the other downstream markets, the complaint did not clearly allege the collection of “double royalties” outside the patent exhaustion doctrine, but rather suggested SanDisk was enforcing its patent rights by collecting a separate royalty for separate sets of patent rights. The complaint also did not adequately allege that the grantback provision was anticompetitive, because PNY did not allege that the provision actually has stifled innovation. And as to the licensed patent portfolio, “[t]he fact that PNY entered into a form license over which SanDisk was able to negotiate more favorable terms does not constitute anticompetitive conduct for antitrust purposes.”

Northern District of California Antitrust Roundup

The Roundup

There have been several notable developments in the past few days in antitrust cases in the Northern District of California. I’ll summarize them briefly here.

In In re High-Tech Employee Antitrust Litigation, Case No. 11-CV-02509-LHK, 2012 U.S. Dist. LEXIS 55302 (N.D. Cal. Apr. 18, 2012) (Koh, J.), the court granted in part and denied in part a motion to dismiss in the private case alleging a conspiracy to fix and suppress employee compensation and to restrict employee mobility among high-tech companies. According to plaintiffs, the conspiracy consisted of an interconnected web of express bilateral agreements, each with the active involvement and participation of a company under the control of the late Steve Jobs and/or a company whose board shared at least one member of Apple’s board of directors. From 2005 to 2007, each pair of defendants in a bilateral agreement allegedly entered into nearly identical “Do Not Cold Call” agreements, whereby each company allegedly placed the names of the other company’s employees on a “Do Not Cold Call” list and instructed recruiters not to cold call the employees of the other company.

In its order, the court rejected Defendants’ argument that the plaintiffs had not pled the “who, what, where and when” of an alleged overarching conspiracy. “Plaintiffs here have alleged much more than mere parallel conduct, despite not having any discovery before filing . . . . Plaintiffs’ [complaint] details the actors, effect, victims, location, and timing of the six bilateral agreements between Defendants.” The court also determined that the plaintiffs’ conspiracy theory was plausible in light of basic economic principles, despite the fact that many “pairings” of the companies allegedly involved did not feature Do Not Cold Call arrangements. In the court’s view, “it is plausible to infer that even a single bilateral agreement would have the ripple effect of depressing the mobility and compensation of employees of companies that are not direct parties to the agreement. Plaintiffs’ allegations of six parallel bilateral agreements render the inference of an anticompetitive ripple effect that much more plausible.” The court also determined that plaintiffs had alleged antitrust injury.

The court did dismiss the plaintiff’s California Unfair Competition Law (Bus. and Prof. Code § 17200) claim because higher compensation (in absence of the alleged conspiracy) did not support restitution or disgorgement relief under Section 17200.

In In re Optical Disk Drive Antitrust Litigation, Case No. 3:10-md-2143 RS, 2012 U.S. Dist. LEXIS 55300 (N.D. Cal. Apr. 19, 2012) (Seeborg, J.), the court found that an amended conspiracy complaint alleging a “substantially narrower, and more plausible” conspiracy was adequately pled and survived a motion to dismiss. The amended complaint makes clear that the defendants allegedly fixed the prices only of Optical Disc Drives (“ODDs”), and not also products that contain ODDs. (In a prior order, the court had found that allegations that the defendants fixed prices of ODD-containing products was implausible.) The court also determined, among other things, that purchasers of “external” ODDs, consisting of little more than an internal ODD in a case, are direct purchasers of ODDs and within the Illinois Brick rule.

Finally, in the LCD cases, In re TFT-LCD (Flat Panel) Antitrust Litigation, Case No. 3:07-MD-1827 SI (Apr. 20, 2012) (Illston, J.)., the court split the price-fixing litigation into two stages, following the suggestion of direct purchasers’ counsel. The first stage will focus on whether defendants conspired to raise prices and overcharged direct purchasers; the second stage will be devoted to indirect purchaser claims. Both the direct and indirect purchasers will be able to present conspiracy evidence in the first phase; only the directs will be able to present damages evidence in the first phase.

(See here for prior LCD coverage.)

Speaking at a Tying Arrangements Webinar on May 1

I will be speaking at an upcoming Strafford live telephone / Internet seminar on “Tying Arrangements: Avoiding Antitrust Liability.”  The seminar will take place Tuesday, May 1 from 1:00 p.m. to 2:30 p.m. EDT.  You can find more information about the seminar, and also register for it, by following the link above.

This CLE webinar will offer guidance to sellers of technological or other bundles of products on avoiding antitrust violations, discuss approaches based on regulations and jurisprudence for sellers of all kinds, and will outline special considerations for intellectual property owners.

As readers of this blog know, tying arrangements are offers by sellers to sell two or more products together, on the condition that both/all the products are purchased. The U.S. Supreme Court and lower federal and state courts have frequently addressed claims of tying arrangements that run afoul of antitrust laws.

Confusion over the legality of tying arrangements persists, despite rulings that tying can be illegal per se. The Supreme Court has focused on an analysis of tying based on a Rule of Reason, examining the seller’s market power among other factors.

The nature of the product involved presents other challenges, such as IP and products in the aftermarket setting. Opportunities exist in the form of special defenses that can shield some tying arrangements from antitrust liability.

The panel will examine the current state of antitrust issues affecting tying practices, and offer approaches to sellers for avoiding violations and seeking legal alternatives.  We will have a question and answer period at the end.

I hope that you can join.

N.D. Cal. Rejects Retail Shelf Space Discounting Claims

Discounting is usually pro-competitive.  A recent case in the Northern District of California illustrates just how difficult it is to challenge discounts under the antitrust laws.

Church & Dwight Co. (“C&D”), which makes Trojan-branded condoms, uses discounts.  Retailers get “planogram” or “POG” rebates if they dedicate a specified minimum percentage of the available condom “facings” on their in-store displays to C&D condom products.  The C&D POG program has several tiers, ranging from about 7% to 8% discounts, corresponding to about 65% to 75% of the facings.  These discounts are apparently all above cost. 

C&D has a large (>75%) market share, and its much smaller competitor, Mayer Labs, challenged its rebates, and some other practices, in Church & Dwight Co. v. Mayer Laboratories, Inc., 2012 U.S. Dist. LEXIS 51770 (N.D. Cal. Apr. 12, 2012) (Chen, J.).  In a thorough opinion, the Court granted C&D summary judgment on Mayer Lab’s Sherman Act Section 1 and Section 2 claims.

The Court focused on Mayer Lab’s inability to show any actual harm to competition:

  • Mayer failed to obtain evidence from any retailer’s employees or other third parties as to the supposed coercive or anticompetitive effect of C&D’s rebate program.
  • Over 50% of the industry display space is not even covered by C&D’s POG program.
  • C&D does not force retailers to purchase anything, much less a certain percentage, of products from C&D.  Nor do the agreements force retailers to give any specified amount of shelf space to C&D over its rivals.  Instead, retailers are free to give C&D as much or as little shelf space as they want.  The only consequence is that retailers may not receive a rebate based on those decisions.
  • The C&D agreements are terminable at any time, for any reason, on 30 days notice.

Following Allied Orthopedic Appliances, Inc. v. Tyco Healthcare Group LP, 592 F.3d 991 (9th Cir. 2010), the court ruled that Mayer had not shown any actual injury to competition at the retail level as a result of actual and substantial foreclosure of rivals.

The court considered, and rejected, Mayer’s argument that notwithstanding Allied Orthopedic, C&D’s discontinuous rebate structure (where the rebate percentages jumped up or down instantaneously at certain “facing” percentage points) creates “cliffs” whereby retailers face harsh “penalties” (in the form of lost rebates applicable to all sales starting with the first dollar, thus increasing the costs to the retailer) for moving downward on the rate schedule.  Even assuming this argument had merit and could distinguish Allied Orthopedic, the court concluded that Mayer had no evidence that the POG program in fact has such a coercive effect.  A significant number of large retailers do not participate in the POG program; C&D’s average share of sales at non-POG retailers is roughly on par with its share of sales at POG retailers; and C&D’s shelf share rarely exceeds its overall market share.  Other manufacturers (Durex and Lifestyles) have remained in the market despite the POG program.

In short, a foreclosure rate of perhaps 45% to 50%, coupled with the facts above and the easy terminability of the C&D contracts, is not enough to support either a Section 1 or a Section 2 claim — even when the defendant has a monopoly market share.

The court also rejected Mayer’s arguments that C&D, as a category “captain” (i.e., a manager of shelf space for a category of products) had abused its power to harm competition.  It found no evidence similar to that in Conwood Co., L.P. v. U.S. Tobacco Co., 290 F.3d 768 (6th Cir. 2002).

New Download Available — Antitrust and IP

Downloads

I’ve posted a new file in the Downloads section — a PowerPoint presentation covering basic issues at the convergence of antitrust and intellectual property (IP).  If you haven’t checked out the Downloads section yet, now’s a good time to do so.  Just click the Downloads navigation button in the menu bar above.  Or you can click here.

Here’s the Skinny on the Apple E-Book Case

The Apple e-book case has been front-and-center in the media this last week. For those not following it carefully, here is a quick sketch of the allegations and what’s at stake. (I hasten to emphasize that the government’s allegations are only allegations at this point in time.)

What’s at stake? The pricing of electronic books, or “e-books.” The government (the DOJ antitrust division) alleges that several years ago Amazon lowered e-book pricing dramatically (often to $9.99 per e-book) in connection with its Kindle e-book readers, a move which dissatisfied the book publishers.(*) Other e-book retailers began to match or approach Amazon’s pricing (which the government alleges was profitable).

Who is alleged to have done what? The government alleges that the book publishers and Apple agreed to raise retail e-book prices and to otherwise limit competition in the sale of e-books. The allegations of agreement or conspiracy are important, because absent proof of such, it’s not at all clear that anything unlawful occurred.

What is the nature of the alleged conspiracy? The government alleges that the book publishers agreed to move away from a “wholesale” pricing model, whereby the book or e-book retailer retains retail pricing authority, towards an “agency” model, where the book publishers retain retail pricing authority and the online bookstores are mere “agents.” (According to the government, the wholesale model has prevailed in the book publishing industry for over 100 years.)

What would be the rationale for such an agreement? Again, according to the government, the book publishers wanted to raise e-book pricing. The publishers also allegedly feared Amazon’s e-book pricing spilling over into the hardcopy market. And – again, according to the government – the publishers feared that Amazon’s distribution system would enable it to become a strong rival publisher that could and would deal with authors directly, ultimately threatening the publisher’s business model.

Apple allegedly went along with the plan because under it, Apple would receive a guaranteed and significant 30% commission on books, each of which would presumably be sold at a higher price than otherwise absent the agreement. Apple allegedly communicated with each publisher to coordinate common agreement terms. Relatedly, the government alleges that the book publishers indicated that they would impose the agency model on other retailers and raise e-book prices at all other e-book outlets, too. (Without such a commitment, one presumes that higher pricing only at the Apple online store would not be very effective.)

How did the e-book pricing work? The government alleges that “Apple Agency Agreements” entered into by the book publishers specified price tiers for books tied to hardcopy pricing ranges. Apple also received an “unusual” Most-Favored Nations (“MFN”) clause requiring each publisher to guarantee that it would lower the retail price of each e-book in Apple’s iBookstore to match the lowest price offered by any other retailer, even if the publisher did not control the other retailer’s ultimate consumer price. The government alleges this MFN meant Apple did not have to compete on price at all, while still maintaining its 30% margin.

What is the nature of the government’s evidence? The government alleges, among other things, regular meetings and communications among the publisher defendants; direct discussions and agreements among those defendants; the publisher defendants’ attempts to conceal the “illicit nature” of their communications; parallel pricing or price increases following the April 3, 2010 effective date of the Apple Agency Agreements between each publisher and Apple; and various acts contrary to economic interests (i.e., it would have been contrary to the interests of any single publisher to attempt to impose agency pricing on all of its retailers and then raise its retail e-book prices). The government’s complaint recites many details about alleged communications between the book publishers at high levels, including at the CEO level.

What was the alleged result of the parties’ cooperation? The government contends that e-book pricing went up substantially, from $9.99 per e-book under the Amazon approach to $12.99 or $14.99.

What is the government suing for? Injunctive relief, under Section 1 of the Sherman Act.

What is notable about the relief sought? Although the Complaint reads like a classic conspiracy case, the government is not seeking monetary fines, nor is it exercising its criminal price-fixing authority. Instead, it is seeking only injunctive relief.

Who is left in the suit? Apple, Penguin, and MacMillan. On Wednesday of last week, Hachette, HarperCollins, and Simon & Schuster settled the charges by agreeing to a proposed consent decree. Those publishers have agreed, among other things, not to use the sort of MFN arrangements present in the Apple Agency Agreements.

Are those settling admitting liability? No, and the publishers have also said that the approach with Apple was pro-competitive because it counter-balanced Amazon’s stranglehold on the market.

Are the remaining defendants going to fight the allegations? Presumably. Penguin’s CEO in particular has denied any wrongdoing.  Because the government is seeking only injunctive relief, it’s not clear that a loss-after-litigation would be any worse for the remaining companies than a settlement.

Where is the case pending? In the Southern District of New York, presumably because New York is where the publishers are located.

Is there other related litigation? Yes. Sixteen State Attorneys General have filed suit seeking damages on behalf of consumers. Private class action litigation is also pending.

(*) Hachette Book Group, HarperCollins, Holtzbrinck Publishers (MacMillan), Penguin Group (USA), and Simon & Schuster. The government alleges that these defendants are five of the six largest publishers of trade books in the United States. (Trade books are alleged not to include specialty books such as children’s picture books, academic textbooks, and reference materials.)

Please Standby . . . .

Mydistributionlaw.com is taking a few days off.  Regularly-scheduled programming will resume next week.

(Of course I decided to take a few days off just as the government was preparing its new suit against Apple in the e-book space.  I’ll cover that development, plus continue the series on IP licensing issues, when “broadcasting” resumes.  I also am planning to look at issues regarding store shelf space — which are more interesting than one might think.)

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