Distribution, Competition, and Antitrust / IP Law

Archives for July 2012

What You Need to Know About the Four Basic Types of Pricing Claims (Part 1)

To every even casual reader of this blog, it is obvious that antitrust and competition law apply to the pricing behavior of competing firms. But what exactly are the danger zones, and what sorts of claims can be brought? In the next few posts, I will provide some basic information about pricing issues and claims. I will focus on horizontal pricing issues (i.e., pricing between and among “horizontally” situated firms which compete with each other).

We can consider four basic types of claims: (i) an actual price-fixing claim, (ii) a claim for a price information exchange that impacts pricing, (iii) a claim regarding a price information exchange that does not impact pricing, and (iv) a claim for parallel pricing behavior. This discussion focuses on the federal Sherman Act, but the California Cartwright Act (and many other states’ laws) is largely similar.

An actual price-fixing claim. This type of claim requires allegation and proof of an actual agreement to fix or set prices. An agreement need not be formal and written; it can be oral and informal. A “wink and a nod” are enough. But there needs to be a meeting of the minds. If competitors enter into such an agreement, it is per se illegal. Pro-competitive justifications, lack of impact, etc. are irrelevant. (Though to get damages in a private suit, you still need to prove damages.)

An agreement can be proven up directly or through circumstantial evidence. If proven circumstantially, the evidence must essentially exclude the possibility that the defendants’ actions are as consistent with independent action as they are with conspiracy. This is the Matsushita summary judgment rule.

Evidence of a price information exchange (next post) can tend to support the inference of a price-fixing agreement, because price information exchange can help defendants to implement, monitor, and enforce a price-fixing agreement. But price information exchange alone does not prove a price-fixing agreement. It is one of several “plus factors” that can help move permissible parallel pricing over the line into the zone of impermissible agreement.

Compare In re Coordinated Pretrial Proceedings in Petroleum Products Antitrust Litigation, 906 F.2d 432 (9th Cir. 1990) (evidence of parallel pricing in a relatively concentrated market, plus evidence that defendants publicly announced, in press releases, their advance pricing decisions, in order to facilitate either interdependent or plainly collusive price coordination, is sufficient to survive a defense motion for summary judgment on a price-fixing claim) with Reserve Supply Corp. v. Owens-Corning Fiberglas Corp., 971 F.2d 37 (7th Cir. 1992) (defendants’ practices of maintaining price lists for products and of announcing price increases 30 to 60 days before their effective date did not amount to an improper information exchange; discounts were widely used in the industry, making the price lists a poor candidate to coordinate pricing; publicly pre-announcing price increases served a legitimate purpose because customers, who were mostly rehandlers and contractors, needed to be able to inform their customers of price increases or to figure such increases into their bidding).

Next post: price information exchanges that impact pricing.

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Weekend Miscellany: Will Congress Repeal the Antitrust Laws?

I recently stumbled upon this bill (Senate Bill 2269) introduced by Senator Rand Paul a couple months ago.  It is a bill “[t]o permit voluntary economic activity.”  Who isn’t in favor of voluntary economic activity?

The bill is entitled “the Anti-Trust Freedom Act of 2012.”  But the bill probably should be named “A Bill To Repeal the Sherman, Clayton, and FTC Acts as to Individuals.”  Because here is its full text:

The Sherman Act (15 U.S.C. 1 et seq.), the Clayton Act (15 U.S.C. 12 et seq.), and section 5 of the Federal Trade Commission Act (15 U.S.C. 45) shall not be construed to prohibit, ban, or otherwise extend to any voluntary economic coordination, cooperation, agreement, or  other association, compact, contract, or covenant entered into by or between any individual or group of individuals.

I don’t know what motivated the introduction of this bill, nor do I understand why it’s limited to individuals.  (I’d read the bill as not exempting corporations from the antitrust laws — Congress knows how to specify corporations when it wants to.  But what if corporations and individuals conspire together?  Are the corporations subject to antitrust laws, while the individuals are exempt?  Would that make any sense?  Since corporations can act only through individuals, does the bill by indirect implication exempt corporations, too?)

There are interesting and robust debates about whether there is too much, or too little, antitrust enforcement in the U.S.  But this bill goes much further than anything I’ve recently seen (and I for one think it goes much too far).  I suspect it’s not going anywhere, but in today’s difficult economic times, who knows for certain?

iPhone Owners Not Necessarily Required to Arbitrate Monopolization Claims Against Apple

iPhone, iPhone 3G and 3GS

(Photo credit: Wikipedia)

In In re Apple iPhone Antitrust Litig., No. C 11-06714 JW (N.D. Cal. July 11, 2012) (Ware, J.), the court found that arbitration provisions in consumers’ service agreements with AT&T Mobility, LLC (“ATTM”) did not necessarily apply to antitrust claims brought by a class of consumers against Apple. Two of the plaintiffs’ three causes of action involved an alleged aftermarket for applications for the iPhone, and thus might pertain solely to Apple’s solitary actions with regard to applications for its iPhones. They thus might not be “intertwined with” the service agreement issued by ATTM. Because ATTM was a necessary party but had not been joined, the court gave the plaintiffs leave to amend their complaint to add ATTM, and denied Apple’s motion to compel arbitration without prejudice.

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Third Circuit Rules that Reverse Patent Payment Agreements May Violate the Sherman Act

On Monday, in In Re: K-Dur Antitrust Litigation, No. 10-2078 (3rd Cir. July 16, 2012), the Third Circuit ruled that reverse patent payments (where a pharmaceutical product patentee pays a generic manufacturer to stay off the market for some period of time) are prima facie evidence of an antitrust violation. Under the Third Circuit’s “quick look rule of reason” standard, parties to reverse payment agreements can then rebut the evidence by showing either that the payment is pro-competitive or is for something other than delayed market entry.

The Third Circuit rejected the scope of the patent test, endorsed by courts including the Eleventh Circuit in FTC v. Watson Pharmaceuticals, Inc. (Under that test, if the settlement is even arguably within the scope of the patent, it is not subject to antitrust attack, absent sham litigation or fraud in obtaining the patent.) “The judicial preference for settlement, while generally laudable, should not displace countervailing public policy objectives or, in this case, Congress’ determination — which is evident from the structure of the Hatch-Waxman Act and the statements in the legislative record — that litigated patent challenges are necessary to protect consumers from unjustified monopolies by name-brand drug manufacturers,” the Third Circuit concluded.

The Third Circuit’s decision opens the door for possible review by the Supreme Court of a circuit split on the issue of reverse patent payments.

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ATM Users Lack Standing to Challenge Bank ATM Fees

In In re: ATM Fee Antitrust Litigation, No. 10-17354 (9th Cir. July 12, 2012), the Ninth Circuit ruled that consumers (ATM cardholders) could not challenge ATM fees paid by ATM card issuing banks to the owner of the ATMs accessed by the cardholders. Those fees were allegedly fixed by the banks. However, the fees were not directly paid by cardholders, who instead may have paid higher charges passed on by the banks. The cardholders’ claims were, therefore, indirect price-fixing claims, for which the cardholders had no Sherman Act monetary remedy.

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Law Grad Salaries Down, Automated Legal Analysis Systems Marketed – Evidence of the Effects of Technology on Production and Distribution?

English: The famous red eye of HAL 9000

HAL 9000 (Photo credit: Wikipedia)

Below are two fresh links from the InterTubes, the juxtaposition of which is highly suggestive. What’s the connection, and how do they relate to distribution law? Before answering those questions, let me describe the linked materials.

First, the National Association for Legal Career Professionals (“NALP”) reports that

The median starting salary for new law school graduates from the Class of 2011 fell 5% from that for 2010 and has fallen nearly 17% just since 2009. The mean salary fell 6.5% compared with 2010, and since 2009 the mean has plunged almost 16% according to new research released today from NALP. The research also reveals that the median starting private practice salary fell over 18% from 2010 and since 2009 has fallen an astonishing 35%.

Second, a company called Neota Logic is marketing a technology that it says “solves problems in many fields just as Microsoft Excel solves financial and numerical problems – without programmers, quickly and efficiently.”

In a nutshell, Neota Logic seems to be selling expert systems (maybe something like IBM’s Watson?) that, among other things, can help answer legal questions for companies and law firms. I don’t think Neota Logic can yet replace attorneys altogether. It appears the company is marketing its expert systems more as supplements to human advice rather than as replacements. Nevertheless, this is to some extent likely the shape of things to come.

So, what is the connection between these two links? I suspect that the short-term difficulties in the legal field’s labor market are masking a longer-term trend. The Internet began reshaping and (as some like to say) “dis-intermediating” economic relations in the 1990s. But the effect wasn’t initially perceived because of (a) the dot.com bubble which was quickly followed by (b) the housing bubble. The bubbles – by inflating asset prices – for a time successfully obscured an ongoing and fundamental shift in how goods and services are provided and distributed in the global economy. But that shift is now increasing apparent.  What used to require substantial numbers of people to deliver locally can now be done by smaller numbers of people, often remotely.

That is true even in law. In most law firms, it used to be typical for two lawyers to share one secretary. Now the ratio is more like 5 to 1. Document review used to require dozens of attorneys. Now it can be automated with “smart” software that can search thousands of pages a second. Previously, a technician would need to physically service a lawyer’s computer.  Now software can be updated and fixed remotely by technicians thousands of miles away. Some have thought that the core service provided by lawyers – advice – is unassailable by technology. But given Watson, Neota Logic, and other systems, that may no longer be true (or may not be true forever, at least not entirely).

What does all this have to do with distribution and competition law? Well, maybe not that much, but maybe everything. Amazon, for example, is reportedly working on same-day delivery of products – perhaps the “Holy Grail” of retail. If successful, the system may make life very, very difficult for local retailers, who will lose their immediate delivery advantage. This is just another example of the growing effects of technology (and particularly the Internet) on various distribution and labor markets. Lower prices and better service are likely to result – but at the cost of, in this case, retailing jobs.

For better or for worse, antitrust law generally doesn’t consider such labor force effects when analyzing business arrangements. These effects are likely to only accelerate.

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Private Standard-Setting Efforts Pose Antitrust Risks

English: Stateic Ram chip form a NES clone. 2K...

SRAM (Photo credit: Wikipedia)

By “private” standard-setting, I’m referring to agreements between or among competitors outside the context of a Standard-Setting Organization (“SSO”) open to the industry and governed by (at least relatively transparent) rules.

Such agreements carry antitrust risks, as illustrated by the recent case of GSI Technology, Inc. v. Cypress Semiconductor Corp., Case No. 5:11-cv-03613 EJD (N.D. Cal. July 6, 2012) (Davila, J).

GSI, a competitor of Cypress in the field of development and manufacture of static random access memory (“SRAM”), alleged that Cypress and other competitors agreed to share information for the development of new “networking” SRAM products. The alleged “consortium” used its agreement to exclude GSI and others from participation in development of product standards intended to serve the market, and allegedly injured their ability to enter the market in a timely manner and to compete effectively for customers. Delayed market entry — even by just a few months — allegedly enable the consortium to lock in the market’s relatively few purchasers, including Cisco.

The court held that the complaint sufficiently alleged, among other things, a Sherman Act Section 1 (unreasonable restraint of trade) violation.

Now, not every non-price agreement between competitors will survive a motion to dismiss. However, in the GSI case, the plaintiff alleged that the consortium supplied 2/3 of the “fast” SRAM worldwide, and that the goal of the consortium was monopolization. The defendant allegedly was the largest networking SRAM supplier in 2010. Given these allegations, the court concluded that the complaint sufficiently alleged that the defendant had market power.

I express no opinion on the facts of the case. However, the decision refusing to dismiss the complaint nicely illustrates the dangers inherent in competitor collaborations — especially those that are not open to the industry.  Any such collaboration should be evaluated for antitrust risk, especially where the firms have substantial market shares.

(Open SSOs pose their own share of antitrust issues, however. See the related article below, for example.)

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Is There Too Much Antitrust Enforcement in High Tech Industries?

The Washington Post last week ran an article covering this topic entitled “In Silicon Valley, fast firms and slow regulators.”

The Post quoted Ed Black, president of the Computer & Communications Industry Association, a trade group that supported the Justice Department’s case against Microsoft: “In tech, market definitions are difficult because companies are changing so fast, and that makes antitrust a blunt tool.”

The issue of “over-enforcement” is a perennial one.  But it’s hard to figure out if, as a global matter, over-enforcement really exists.

Let’s stipulate that from the perspective of an omniscient market observer, there is some optimal level of antitrust enforcement, “O.”

The problem is that it is very, very difficult to objectively determine that overall, actual enforcement exceeds (or fails to meet) “O.”

Antitrust issues and cases are highly fact-specific, and often require detailed and painstaking investigation.  That’s part and parcel of enforcement.  And while one can argue that in any given investigation, enforcement is either appropriate or not, it’s quite difficult to say that overall enforcement levels are not optimal.  Only with 20/20 hindsight from some future vantage point is it really feasible to make such a pronouncement.

Dominant firms, all things being equal, tend to think that enforcement is overly robust.  Their competitors naturally tend to disagree.  Although sometimes it is obvious who is right, often it’s not.  That’s what investigations, pretrial proceedings, motions to dismiss, and settlement discussions are for.

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Explanation of the Alleged LIBOR Manipulation Scheme

Good background on the alleged scheme to manipulate LIBOR.  Via NPR’s Planet Money program, again.  About halfway through, the program discusses allegations of interbank agreements to manipulate reported LIBOR rates.  (It’s NPR show #384 on the page that opens if you click the link.)

But does an interbank LIBOR conspiracy even make sense?  Below in the link from economicpolicyjournal.com there’s an argument that the scandal is really a tempest in a teapot, because the banks can’t set the interest rates:

Interest rates are market prices. If banks got together and claimed to be paying less than they were, which resulted in lower rates overall, this would result in a situation where the demand for loans would be greater than the supply. If banks claimed they were paying more than they were, then the demand for loans would be less than the supply.

Well, perhaps . . .  But — and without knowing anything about the actual facts of what has transpired here — it seems to me that there might nevertheless, purely as a matter of economic theory, be short-term opportunities for agreements to adjust or affect the reported LIBOR rates.  Although the economicpolicyjournal.com article argues that those opportunities are “infinitesimal,” it would be interesting to see some actual data or analysis.  They may back up the article’s intuition.

P.S. — the rather archaic way in which LIBOR is actually calculated — covered in the NPR story — is really quite fascinating.

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Litigation Costs Are Monopolization Damages

In the ongoing Apple v. Samsung war, on June 30, 2012, Judge Lucy H. Koh of the Northern District of California denied Samsung’s bid for summary judgment on the basis that Apple had failed to offer any evidence of antitrust damages. 

(Apple alleges that Samsung violated a Fair, Reasonable and Non-Discriminatory (“FRAND”) obligation to license patents to a standard-setting organization and its members.  See the first related article link below.)

The court held that litigation expenses stemming directly from Samsung’s alleged anticompetitive behavior are recoverable as antitrust damages.  It also held that Apple’s limited amount of factual (non-expert) evidence of litigation expenses was sufficient to avoid summary judgment.

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