Distribution, Competition, and Antitrust / IP Law

Archives for May 2012

It’s Tough to Prevail in Private Consumer Class Challenges to Mergers

Whole Foods Market

Whole Foods Market (Photo credit: Wikipedia)

In Kottaras v. Whole Foods Market, Inc. (D.D.C. Jan. 30, 2012), the court refused to certify a purported class of people who had bought premium, natural or organic products from Whole Foods in the Los Angeles area after Whole Foods purchased the Wild Oats food chain. On April 20, the D.C. Circuit refused to hear an appeal from the court’s order, and last week the plaintiff agreed to entry of judgment against her.

Several years ago, the FTC had sought to enjoin the merger, but ultimately reached a divestiture deal with Whole Foods. (No Los Angeles County stores were divested.) As to the private consumer challenge, which was brought after the FTC settlement, the district court concluded that injury to individual class members could not be proven through class-wide evidence. Although some shoppers may have paid more because of the merger, others may have paid less, depending upon the mix of products they purchased. (The prices of many products apparently did decline post-merger.) Figuring out which shoppers suffered “net” harm because of price movements resulting from the merger would require analyzing each consumer’s purchases and individual product price fluctuations. These very granular inquiries prevented class-wide proof or even a conclusion that all class members had been injured.

The moral of the story is that establishing injury through class-wide proof remains an important hurdle in antitrust class actions, one that can be especially difficult to surmount in a merger case.

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Patent Law and Self-Replicating Technologies

I blogged about patents, the first-sale doctrine, and self-replicating technologies (genetically-modified plants) here.

I recently came across an interesting post by Jeremy Sheff on application of the first-sale doctrine in the context of self-replicating technologies.  You can find it on the Patently-O blog.  Link below.

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Potential Patent Licensing “No-No” #7: Royalty Provisions Not Reasonably Related to the Licensee’s Sales

Yes or No?

This is the seventh in a series on potential licensing “no-nos.” You can find the previous installment here.

Even monopolists are entitled to engage in business and earn a profit. Hence, as a general rule, patentees – even assuming that they have a monopoly (and as I’ve noted repeatedly, just having a patent does not mean that a patentee is a monopolist) – can charge what this wish for their patents.

Often, a patentee will charge royalties based on the number of units of product sold, or that equal a percentage of licensee revenues. If the license is conditioned on royalties on products “which do not use the teaching of the patent,” then it may be unlawful as a matter of patent law. See Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100, 135 (1969). “[J]ust as the patent’s leverage may not be used to extract from the licensee a commitment to purchase, use, or sell other products according to the desires of the patentee, neither can that leverage be used to garner as royalties a percentage share of the licensee’s receipts from sales of other products; in either case, the patentee seeks to extend the monopoly of his patent to derive a benefit not attributable to use of the patent’s teachings.” Id. at 136.

But this rule is probably no longer per se.  Under the Patent Misuse Reform Act of 1988, 35 U.S.C. § 271(d)(5), a patentee can condition a patent license on the purchase of a separate product, unless, in view of the circumstances, the patent owner has market power in the relevant market for the patent or patented product.  If a patentee has the greater power to condition purchase on a non-patented product, it would seem to have the lesser power to charge royalties based on purchases of non-patented products.

Despite the general Zenith rule, royalties can be calculated according to sales of non-patented goods when the “convenience of the parties rather than patent power dictates the total-sales royalty provision.” Id. at 138. If the licensee is given the option of paying only for patented goods, but for convenience’s sake chooses to pay a fee calculated according to all goods sold, the arrangement is permissible.  However, determining when a royalty is “conditioned” as opposed to when it is “convenient” can be difficult to do in practice.

The Supreme Court in Zenith was addressing patent misuse doctrine. There is a separate inquiry as to whether “metered tying” – where a patentee charges a relatively low price for a patented product, and then ties the product to non-patented products (usually parts or supplies) – should be viewed as an antitrust violation. I covered that issue in a series of three posts here, here, and here.  Under current tying law, such a tie could indeed violate the antitrust laws. I won’t repeat the full tying analysis here.  Feel free to check out my recent presentation on tying law and avoiding liability, which is available in the downloads section.  However, a broad royalty base — one which includes non-patented products — doesn’t really amount to a tie; the element of forced purchases from the patentee seems to be lacking.

Instead, the potential antitrust danger with a broad royalty base is that it could, at least in theory, curtail competition in the non-patented product market, because if a licensee is already paying a royalty on non-patented products, it may have a disincentive to purchase or use competing products.  In that connection, I should note the Microsoft case (United States v. Microsoft Corp., 56 F.3d 1448 (D.C. Cir. 1995)). There, the government challenged operating system license fees paid by OEMs calculated according to the number of computers shipped, regardless of whether the computers were loaded with Microsoft’s OS. In other words, Microsoft licensed the OEMs on a “per processor” basis.  Since OEMs had to pay Microsoft for each computer shipped, they were arguably less likely to pay to install a competing OS on their computers. Microsoft agreed in a consent decree to charge the OEMs license fees only for computers actually loaded with the Microsoft OS. The precedential value of a consent decree is of course quite limited.

From an economics point of view, a broad royalty base may have no significance if the non-patented product and the patented product are used in fixed proportions.  For example, if for some strange reason a patentee had a patent on a type of left shoe, and charged royalties on left shoes and right shoes, the royalties would not affect competition for right shoes (assuming left and right shoes are always sold together).

Maybe Technology Will Enable Consumers to Unbundle Cable TV Channels

I recently covered a Ninth Circuit decision that denied consumers the opportunity to insist upon unbundled cable TV channels.  See this post.

Is this the end of the road for unbundling efforts?  Maybe not.  As this recent article suggests, the much-rumored next generation Apple TV may be a truly disruptive technology that enables consumers to unbundle channels and bypass the cable TV companies — or at least bypass them as content providers.  (They still would provide bandwidth.)

I have no idea whether there really is a new Apple TV in the works, or if so, when it might appear.  Nor do I know whether it will be the holy grail of new TV technology.  However, the article does illustrate an important principle: today’s dominant or entrenched market players can be reduced to empty shells by disruptive technology that no one (or almost no one) can foresee.  Remember Kodak and RIM?  In not many more years, they may be nothing more than historical footnotes.  These possibilities must be kept in mind when analyzing antitrust markets and market power issues.  Exactly how to do that is a non-trivial problem.

In the meantime, maybe cable TV companies should learn more about these potential threats; at least some may be caught off guard.

Archer Daniels Midland Price-Fixing Video from “Fair Fight in the Marketplace”

I recently stumbled upon this YouTube video from “Fair Fight in the Marketplace.”  This segment shows the real story of the Archer Daniels Midland (ADM) price-fixing case, the basis for the movie “The Informant!“, and includes excerpts from the actual FBI undercover footage of conspiracy meetings shot by Mark Whitacre, played by Matt Damon in the movie.

From the YouTube description: “Fair Fight in the Marketplace provides an engaging look at our antitrust laws that give protection to both American consumers and businesses. The half-hour program also considers a more fundamental question: can a set of regulations created by the Sherman Act at the end of the 19th century be relevant in todays era of digital technology and high-speed communications?

Hosted by NPR and Fox News commentator Mara Liasson, the program provides a short, colorful history of the antitrust laws in America and features three recent case studies.”

Archer Daniels Midland Segment from Fair Fight in the Marketplace

Much of the ADM conspiracy took place overseas.  In related news, the recently convicted AU Optronics Corp. executive apparently intends to appeal his conviction on the basis that, among other things, the Sherman Act doesn’t reach the foreign activity at issue in his case.  (Although he apparently will now file his appeal without former acting Solicitor General Neal Katyal.  Katyal was previously the lead counsel for the Guantanamo Bay detainees in the Supreme Court case Hamdan v. Rumsfeld, which held that military commissions set up by the Bush administration to try detainees at Guantanamo Bay violate both the UCMJ and the four Geneva Conventions, so he probably would have had some interesting things to say about extraterritoriality.)

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iPad Note-taking Apps for Lawyers Reviewed

Last time I looked at apps, I looked at PDF readers/annotators. In this post, I’ll look at note-taking apps. There really aren’t any note-taking apps for lawyers per se, so I’m going to take a look at some of the more popular note-taking apps from a lawyer’s perspective.

Can you use a note-taking app to replace your paper notes and notebook? Although I haven’t done so completely – at least not yet – I think the answer is “yes.” The advantage of doing so is that you can take all your notes with you wherever you are, because if you own an iPad you almost always have it nearby. And of course you don’t have to buy and store paper. Some apps also allow tagging so that you can index your notes.  The iPad novelty has worn off by now, so no one pays much attention any more if you use one for notes.

For all apps of the handwritten note type, I recommend using some sort of stylus. Doing so allows you to write notes as if you were, well, sort of using a pen. Otherwise, you’re stuck drawing with your finger, which is definitely not equivalent to using a real pen. Note, though, that a capacitive stylus is also not quite as good as a real pen on paper. It’s not as precise (the tip is larger than the average pen), and there is more resistance. The cosmonaut is a good choice, but there are others.

Also, for all apps of the handwritten note type, you’ll probably want one that has what I’ll call a “zoom box” feature – i.e., the ability to write in a separate section of the screen that effectively magnifies the area of the virtual paper on which you are writing. This makes it much easier to write notes given the inherent limitations of a capacitive stylus (or indeed of a finger, if that’s what you use).

When looking at a note-taking app, I think there are three things you want to consider:

  1. Ease of use
  2. Security (are my notes backed up somehow?)
  3. Ease of exportability (can I easily get my notes into other formats and applications? Can I print them out and save them as old-fashioned paper notes?)

With those primary factors in mind, here’s a quick look at five note-taking apps.

  1. Notability (on sale right now for $0.99 – 80% off). This is my favorite of the apps mentioned here. It has a clean and easy-to-use interface, and a decent filing system for notes. Its handwriting “engine” seems particularly smooth, especially when used with a stylus. It has some nice pen and highlighting tools and a choice of background papers. It lets you backup to your Dropbox account (if you have one), iDisk (soon to be discontinued by Apple), or a WebDAV service. (Automatic syncing to Dropbox is a nice, secure feature.) It also lets you e-mail notes and has a left-handed mode for lefties.
  2. Noteshelf ($5.99). My second favorite app. It has a very nice looking user interface and a nice offering of standard types of notebooks and papers from which to choose. (There is also an in-app store where you can buy additional types of “papers” and notebooks.) It also offers the ability to “tag” notes, and has a number of pens and highlighters from which to choose. Noteshelf also lets you type text (as if you were using a typewriter) and offers a number of stamps which you can use to “stamp” your documents. Noteshelf enables export of notes to various applications, including email, Dropbox, Evernote, and iTunes.
  3. Penultimate ($0.99). One of the first note-taking apps, and still a best seller. I like the somewhat minimalist interface – this app does not get in the way of taking notes. There are the usual pen and highlighter tools, as well as a “leftie” mode. The app lets you sync to Dropbox and Evernote, and you can e-mail pages or entire notebooks. Penultimate also has an in-app “Paper Shop” where you can buy additional “paper” formats. No “zoom box” feature, though, which is one reason I rated it #3.
  4. Note Taker HD ($4.99). This is a very powerful note taking app that is chock-full of features, including tags, flags, the ability to reorder and duplicate notes, and a powerful file organizing system. There are so many customizable features (zoom box size, paper type, pen “memory,” ink smoothing, etc.) that I find it a bit overwhelming, which is why I rated it #4. If you were to take the time and truly learn how it works, however, I could see that it would be a powerful application.
  5. Elements ($4.99). Finally, I throw in Elements as the last choice here. Unlike the first four apps, Elements is not a handwriting app. Instead, it is a text note or document app. It lets you type plain text via the on-screen typewriter. It is essentially a minimalist word processor that is easier and quicker to use than, say, Pages. Of course it doesn’t offer all the text formatting features Pages offers. But if you need to type out a quick letter (or indeed a quick blog post), Elements does a very nice job. It syncs with Dropbox.

Quoted in Law (Competition) 360 on Leegin and Resale Price Maintenance

I was quoted in yesterday’s edition of Law360 in an article entitled “Kansas’ Take On Leegin Shows Risks Of Vertical Price Deals.”  You can find the article here (though the full article is behind a paywall).

Northern District of California Reiterates That You Can Monopolize a Technology Market

Not every antitrust market is a physical product market.

In Apple, Inc. v. Samsung Electronics Co., Ltd., Case No. 11-CV-01846 (N.D. Cal. May 14, 2012) (Koh, J.), a patent case, the court refused to dismiss Apple’s counterclaims, including a Sherman Act § 2 counterclaim, against Samsung arising out of Samsung’s alleged manipulation of the mobile phone standard-setting process (which alleged resulted in the industry being “locked in” to technology owned and controlled by Samsung). The decision features three holdings of note:

  1. The court rejected Samsung’s argument that Apple had not pled a relevant antitrust market because it alleged monopolization of a technology market, and not a physical product market. Samsung’s argument that only physical product markets are cognizable was novel, but many courts have accepted technology markets as relevant markets. As have the DOJ and the FTC.
  2. The court also rejected Samsung’s argument that Apple had not adequately alleged market or monopoly power. Under Illinois Tool Works, of course, patents do not establish market power. But where a patent is incorporated into an industry standard, and where the standardization of the patented technology prevented the development of other proprietary technologies, the entity that caused the Standard Setting Organization (“SSO”) to adopt its technology may have market power, the court held.
  3. Finally, the court reiterated that an SSO can be used to obtain monopoly power and create anticompetitive effects on the relevant markets.  That can occur in a consensus-oriented private standard-setting environment, when a patent holder’s intentionally false promises to license essential proprietary technology on FRAND (fair, reasonable, and non-discriminatory) terms is coupled with the SSO’s reliance on that promise when including the technology in a standard, and the patent holder subsequently breaches that promise. Allegations of false FRAND commitments are subject to Federal Rule of Civil Procedure 9(b)’s heightened pleading standard, which Apple met.

Moral of the story: a robust and properly-framed SSO manipulation complaint can be difficult (though not impossible) to dismiss.

Court Refuses to Dismiss Antitrust Claims in Apple E-Book Case

I previously covered the allegations in the Apple E-Book case here.

Today (May 15), the Southern District of New York (Cote, J.) refused to dismiss the class plaintiffs’ antitrust claims against Apple and the e-book sellers.  See In re: Electronic Books Antitrust Litigation, Case No. 11-MD-2293 (DLC).  In doing so, the court indicated that the plaintiffs’ claims are subject to a per se analysis and not a Rule of Reason treatment. 

The court viewed the alleged conspiracy as fundamentally horizontal in nature, with Apple sitting at the “hub” of a hub and spoke conspiracy. 

Other notable aspects of the decision include:

  1. The court’s determination that the plaintiffs had sufficiently alleged direct evidence of a conspiracy.
  2. The court’s refusal to weigh competing evidence as to whether alternative, non-conspiratorial explanations account for the defendants’ conduct.  If the conspiracy claim is plausible, the court held, it cannot be dismissed.
  3. The court’s relative uninterest in the specific “motivations” of the various defendants.  The complaint plausibly alleged that each defendant (including Apple) shared the basic “twin purposes of raising the price of eBooks and eliminating retail competition even though their motives for joining the conspiracy were different.”
  4. The court’s ruling that even though the alleged agreements did not render all eBook pricing uniform, they were subject to antitrust challenge because the plaintiffs had alleged that the defendants “conspired to eliminate retail price competition and to raise the price of eBooks above the $9.99 price set by Amazon.” (emphasis in original).

Resale Price Maintenance: Toto, We’re In Kansas Again

No, Not That Kind of RPM

To bookend my recent discussion of the New York appellate division’s decision in Tempur-Pedic, I’ll mention here the Kansas Supreme Court’s decision in O’Brien v. Leegin Creative Leather Products, Inc., No. 101,000 (May 4, 2012).  There, the court held that vertical RPM is subject to challenge under Kansas state law, and that the Rule of Reason does not apply.  The relevant Kansas statutes forbid all vertical price-fixing by two or more persons or between persons.

Thus, despite the U.S. Supreme Court’s decision in Leegin Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007), that RPM is subject to the Rule of Reason under federal law, per se challenges remain viable under some states’ laws.  Manufacturers and suppliers should take note.

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