Distribution, Competition, and Antitrust / IP Law

Archives for August 2012

Is the Apple-Samsung Verdict Anti-Consumer?

I’ve shied away from writing about the Apple-Samsung patent verdict, in part because I don’t know the details of the patents involved or the evidence that went to the jury.  And so I offer no opinions on the specific patents.

However, this recent post by Randy Picker entitled “Apple v. Samsung: What Are Patents Good For?” and found on the University of Chicago Law School’s faculty blog seems spot on.  Randy makes the point that patents are inherently exclusionary.  They confer a negative monopoly — the right to exclude others.  As Randy writes, “[t]he only way to use a patent is to enforce it against someone else or to at least be able to threaten to do so, so that they will license rights from you.”

Randy goes on to talk about three “flavors” of the “we have too many patents” argument that has surfaced recently.  First is the “patent thicket” problem — many small patents are granted and an actual innovative product in the area needs access to all of them, but the issues only become apparent after the product has proven itself in the market and is subject to hold-up.  But this problem doesn’t really apply to Apple/Samsung.

Second is the argument that patents are supposed to induce R&D, but if relevant innovation would occur anyway, the patent isn’t really inducing anything meaningful.  And the third argument is closely related — that an invention’s reward is sufficiently large that society doesn’t need to reward its inventor with a new property right.  As Randy points out, we could try to run the patent system to take these notions into account, but we don’t, and so they really aren’t relevant to the Apple/Samsung verdict.

(My own view is that it’s much easier to talk about trying to take such notions into account than to actually do so.  How would the PTO or a court determine, for example, that a firm would have innovated anyway even if a patent were not issued?)

Randy concludes that Apple is a “hardcore” vertically integrated firm, producing and enforcing its IP rights against another very successful producing firm.  “We can undertake to revamp the patent system, and that could be within-patent reforms about the balance of utility patents and design patents or larger scale reforms that focus on the incremental incentives question, but given the system we have today, it isn’t at all surprising that an innovative firm like Apple holds patents that, by design, make it possible for Apple to block sales by competitors to eager customers. That is, after all, the point of the patent system in the first place.”

This general conclusion strikes me as entirely correct.

P.S. — for more about patent and R&D incentives in the context of patent tying and price discrimination, see my prior posts here and here.  My concluding thoughts on this issue are here.

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You Can’t Try to Monopolize a Market In Which You Don’t Compete

That message was delivered, again, by the court in Infostream Group, Inc. v. PayPal, Inc., 2012 U.S. Dist. LEXIS 122255 (N.D. Cal. Aug. 28, 2012) (Illston, J), which dismissed antitrust claims against PayPal.

In Infostream, adult, “nontraditional” online dating services objected to PayPal’s refusal to deal with them, and alleged that PayPal’s contractual excuse was pretextual because PayPal was dealing with competitors such as Ashley Madison.com and ArrangementFinders.com. Plaintiffs alleged that PayPal has a monopoly in the “Confidential Payment Services” market and exercised its monopoly power in that market to injure competition in downstream markets, including the “Specialty Online Dating Services” market in which plaintiffs compete.

The problem for plaintiffs is that PayPal does not compete in the plaintiffs’ market. In Alaska Airlines, Inc. v. United Airlines, Inc., 948 F.2d 536 (9th Cir. 1991), the Ninth Circuit rejected monopoly leveraging doctrine as an independent theory of liability under the Sherman Act.

Although plaintiffs alleged that they had a “belief” that PayPal has an ownership interest in plaintiffs’ competitors, that allegation raised plausibility concerns under Iqbal and Twombly. Moreover, plaintiffs did not allege a dangerous probability of success in the downstream market, and in fact “wholly failed to allege any specific facts with respect to market power of their competitors . . . .”

The court gave plaintiffs leave to amend.

Drug Makers Win Summary Judgment on De Minimis Price Discrimination Claim

A recent case reminds us that price discrimination under the Robinson-Patman Act may be so de minimis that it is not actionable.

In Drug Mart Pharmacy Corp. v. American Home Products Corp. (No. 1:93-cv-05148-ILG-SMG) (August 16, 2012) (a so-called secondary line discrimination case involving disfavored retailers), retail pharmacies brought a Robinson-Patman Act price discrimination claim against various drug manufacturers, alleging that the manufacturers had effectively given price breaks to hospitals, HMOs, and mail order pharmacies but not to the smaller retailers. Plaintiffs argued that they could identify specific customers lost to competitors as a result of the price discrimination, and selected a test sample of plaintiffs to evaluate.

Upon evaluation, the 28 sample plaintiffs were only able to match 5,147 potential lost customers (about 3% of their customer base) and 15,043 potential lost transactions.

On these facts, the court concluded that the plaintiffs had failed to demonstrate an anti-competitive effect or antitrust injury. Although FTC v. Morton Salt Co., 334 U.S. 37 (1948), allows an inference of anti-competitive effect where there is a significant price difference over a substantial period of time, this presumption is subject to rebuttal, and here the plaintiffs themselves undertook an extensive, costly, and time-consuming effort to trace the customers they claim to have lost to favored purchasers because of price discrimination, but “essentially c[a]me up empty.”

Additionally, plaintiffs could not show antitrust injury, because they could not match up any alleged losses with gains to favored customers — at least not beyond a de minimis amount.

Price discrimination is not per se unlawful, and winning a price discrimination case, while not impossible, is in fact very difficult.

Do iPads or Tablet Computers Constitute Their Own Product Market?

David Golden has an interesting article in Law360 this week entitled “Interchangeability in the Tablet Product Market.”  (The full article may be behind a paywall.) I had some earlier, preliminary thoughts here.

Why does this issue matter? Because the smaller the relevant market, the higher the participants’ market shares. At the extremes, you may end up with a monopolist (or several monopolists in different markets). Monopolists are subject to special rules of dealing that do not apply to other firms.

David makes the following reasonable points:

  1. Reasonable interchangeability is the touchstone of product market definition.
  2. Product specifications and technical abilities (screen size, storage capacity, etc.) are unlikely (at least in all cases) to capture the concept of reasonable interchangeability from a consumer’s perspective. Instead, it may be more worthwhile to look at product functions (such as the ability to run an operating system, to load and run applications, to browse the Internet, to send e-mail, etc.).
  3. Cost of substitution may also be relevant – if one tablet manufacturer raises prices substantially, will consumers substitute away to other tablets? To other smartphones?
  4. Network effects are one aspect of cost of substitution. Consumers who have all their music, documents, and data tied to one tablet / OS may find it difficult to switch to another one easily, because they want/need to share with others on the same platform.

I think all these points are good ones. David goes on to note that given the diversity of tablets on the market, courts might conclude that there are a number of submarkets. Although David notes some courts have not viewed the concept of “submarkets” favorably, I would go further – many courts have correctly held that the concept has no real meaning. A market is a market, and it must be defined appropriately. Labeling a market as a “submarket” is usually just the equivalent of waving hands.

As far as I know, we haven’t yet seen a case tackle the question of product market definition in the tablet computing area. It’s only a matter of time, though.


FTC May Expand Premerger Reporting Requirements to Include Pharmaceutical Patent Exclusive Marketing and Sales Licenses

Earlier this week, the FTC (in cooperation with the DOJ) announced that it is considering making changes to the premerger notification rules that would require pharmaceutical companies to make Hart-Scott-Rodino (HSR) filings for patent deals that grant exclusive marketing and sales rights to another company.

Apparently, the FTC has become concerned that where a licensor manufactures solely for the use of a licensee, and the licensee has exclusive marketing and sales rights, the transaction may be economically indistinguishable from one actually giving the licensee the exclusive right to manufacture. It thus proposes to focus the new rule on “all commercially significant rights”:

[I]n licensing arrangements in the pharmaceutical industry, the right to manufacture is far less important than the right to commercialize. In fact, the right to manufacture is often retained by the licensor who has the relevant manufacturing expertise and facilities. As a result, pharmaceutical companies often enter into licenses in which the licensee receives the exclusive right to use and sell under the license, but the licensor retains the right to manufacture exclusively for the licensee. As the licensor is manufacturing solely for the use of the licensee, this is substantively the same as giving the licensee the exclusive right to manufacture, use and sell the product(s) covered by the license.

The proposed rule would treat this kind of exclusive license agreement as a potentially reportable asset acquisition. This aspect of the rule is a significant change in the weight given to manufacturing rights in determining whether or not exclusive rights to a patent are being transferred. Under the proposed rules, if the licensor retains the right to manufacture exclusively for the licensee, it is a potentially reportable asset acquisition because all commercially significant rights, as discussed below, will still have passed to the licensee.

The FTC has in recent years taken a special interest in the pharmaceutical industry, and has been relatively hostile to so-called reverse patent settlements, where a pharmaceutical patentee settles patent litigation against a would-be generic manufacturer, and the generic manufacturer agrees to stay off the market for some time period in return for a cash payment. The FTC’s proposed HSR amendment, which is limited to the pharmaceutical industry, continues its efforts to pay special attention to pharmaceuticals.

It is not clear how many additional transactions will be reported if the amended rule goes into effect (the FTC itself estimates about 30 more per year). Comments to the proposed rule are due on or by October 25, 2012.

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What You Need to Know About the Four Basic Types of Pricing Claims (Part 4)

In the last post, we saw that price information exchanges that do not impact pricing are not unlawful. However, we also saw that such exchanges can facilitate collusion and can provide plaintiffs with evidence supporting a price fixing charge.

A comment to the last post asked about how to structure information exchanges to avoid these potential problems.

In their antitrust healthcare guidelines, DOJ and FTC have provided guidance on this issue. Although the guidance comes in the context of the healthcare industry, there is little or no reason to suspect that the guidance would vary according to industry. Note, however, that DOJ/FTC guidelines are not binding on the courts, which may or may not accept them.

With those caveats out of the way, what do DOJ and FTC say about competitors’ collection or provision of price information? According to DOJ and FTC,

“Participation by competing providers in surveys of prices for health care services, or surveys of salaries, wages or benefits of personnel, does not necessarily raise antitrust concerns. In fact, such surveys can have significant benefits for health care consumers. Providers can use information derived from price and compensation surveys to price their services more competitively and to offer compensation that attracts highly qualified personnel. Purchasers can use price survey information to make more informed decisions when buying health care services.”

DOJ and FTC go on to note that without appropriate safeguards, however, information exchanges among competing providers may facilitate collusion or otherwise reduce competition on prices or compensation, resulting in increased prices, or reduced quality and availability of health care services. “A collusive restriction on the compensation paid to health care employees, for example, could adversely affect the availability of health care personnel.”

DOJ and FTC then articulate a “safety zone” for exchanges of price and cost information among providers that they will not challenge, absent extraordinary circumstances. The safety zone applies to a written survey where:

  1. the survey is managed by a third-party (e.g., a purchaser, government agency, health care consultant, academic institution, or trade association);
  2. the information provided by survey participants is based on data more than 3 months old; and
  3. there are at least five providers reporting data upon which each disseminated statistic is based, no individual provider’s data represents more than 25% on a weighted basis of that statistic, and any information disseminated is sufficiently aggregated such that it would not allow recipients to identify the prices charged or compensation paid by any particular provider.

These conditions are designed to prevent the sort of facilitation of collusion discussed in the last post.

Note that a price information exchange that does not meet these criteria is not automatically unlawful; it just does not enjoy the DOJ/FTC safety zone. But there is little reason to design a program that does not meet the safety zone criteria from the outset.

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What You Need to Know About The Four Basic Types of Pricing Claims (Part 3)

This is the third in a series of posts.  The last post can be found here.

Price information exchanges that do not impact pricing.  Such an exchange by itself is probably not subject to private challenge. See, e.g., Blomkest Fertilizer, Inc. v. Potash Corp. of Sask., Inc., 203 F.3d 1028 (8th Cir. 2000) (price verifications only concerned charges on particular completed sales, not future market prices; no evidence supported inference that the verifications had an impact on price increases; the only evidence was that prices were possibly cut as a result; defense summary judgment affirmed).

Note, however, that a price information exchange could be viewed as a “plus factor” that tends to support an inference of an actual price agreement.  Therefore, it is always advisable to consider the antitrust implications of any exchange of price information before engaging in such an exchange.

What You Need to Know About The Four Basic Types of Pricing Claims (Part 2)

This is the second in a series of posts.  The first can be found here.

Price information exchanges that impact pricing.  Such an exchange is not per se illegal. However, it may be unlawful under a rule of reason analysis. See, e.g., United States v. Container Corp. of America, 393 U.S. 333 (1969).

To successfully challenge such an exchange, it is necessary to prove price impact. This can become complicated. For example, if market pricing is instantaneous and entirely transparent, how would one prove that an agreement to exchange price information has impacted prices? Generally, the less transparent the market pricing is, the more opportunity for a price information exchange to work mischief.

The Airline Tariff Publishing Company (ATP) case is informative and illustrates some of the complexities. In December 1992, DOJ sued eight of the largest U.S. airlines and the Airline Tariff Publishing Company (ATP) for price fixing and for operating ATP, their jointly-owned fare exchange system, in a way that facilitated collusion, in violation of §1 of the Sherman Act.

According to the DOJ, ATP was a complex information exchange system among airlines that was widely and openly operated to disseminate fare information through computer reservation systems and travel agents. ATP provided both a means for the airlines to disseminate fare information to the public and a means for them to engage in essentially a private dialogue on fares.

Again, according to the DOJ, the defendants designed and operated ATP’s computerized fare exchange system in a way that unnecessarily facilitated coordinated interaction among them so that they could (1) communicate more effectively with one another about future fare increases, restrictions, and elimination of discounted fares, (2) establish links between proposed fare changes in one or more city-pair markets and proposed changes in other city-pair markets, (3) monitor each other’s changes, including changes in fares not available for sale, and (4) reduce uncertainty about each other’s pricing intentions.

The ATP case involved “cheap talk”– communication that does not commit firms to a course of action — such as announcing a future price increase but leaving open the option to rescind or revise it before it takes effect. If the terms of agreement are complex (e.g., specifying prices in numerous markets) but there is a common desire to reach agreement, cheap talk can help firms reach a collusive equilibrium.

ATP collected fare information from the airlines and distributed it daily to all the airlines and to the major computer reservation systems (CRSs) that serve travel agents. This arrangement was an efficient instrument for cheap talk.

The case was resolved with a consent decree crafted to ensure that the airline defendants did not continue to use any fare dissemination system in a manner that unnecessarily facilitated price coordination or that enable them to reach specific price-fixing agreements.

Note that the final judgment did not prevent the settling defendants from disseminating currently available fares through ATP, from advertising currently available fares to consumers, or from offering for sale fares good only for future travel. Also, the settling defendants remained free to give consumers general information on impending fare changes.

Next post: a price information exchange that does not impact pricing.

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