Distribution, Competition, and Antitrust / IP Law

Archives for September 2012

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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Does Amazon Engage in “Razor and Blade” Pricing?

Third generation Amazon Kindle, showing text f...

(Photo credit: Wikipedia)

Some people have suggested that Amazon’s pricing of products such as the Kindle e-reader is similar to the pricing strategies of razor manufacturers: sell the primary product cheaply (and maybe even at a loss), and make it up on the back end through the sale of complementary products (in the case of razors, razor blades; in the case of Kindles, e-books).

The courts have not uniformly settled on an approach to this pricing strategy. When the products are actually bundled together for sale, some courts have concluded that bundled pricing is lawful so long as the price of the entire bundle exceeds some appropriate measure of its cost. See, e.g., Cascade Health Solutions v. PeaceHealth, 515 F.3d 383 (9th Cir. 2008).  But compare LePage’s Inc. v. 3M, 324 F.3d 141 (3d Cir. 2003) (en banc).  State law is often even less clear in this area.  (California, for example, has a specific loss leader statute.)  And of course, Kindles aren’t actually bundled with e-books; you can buy a Kindle and never buy an e-book (you could use the Kindle to read your own PDF files, for example), so bundled pricing may not technically be involved.  (Razors are almost always sold with some blades, by contrast.)

Given the somewhat unsettled nature of the law, I was interested to see a Wall Street Journal / AllThingsD interview last week with Amazon’s founder and CEO Jeff Bezos.

Mr. Bezos stated that Amazon does not like the razor and razor blade model, but also does not like the “other” model, “where you make a lot of money on the device.” As to the Kindle specifically, Amazon does not want to “lose a lot of money on the device.” Mr. Bezos wouldn’t disclose specifics, though.

So for whatever reason, even though Amazon perhaps arguably could do so, it apparently isn’t losing money on Kindles and making it up on e-books. (If it were doing that, it’s hard to see how Amazon could be engaged in e-book price predation, as some have alleged.)

The Kindle price points are impressive, though. I have no actual information, but I would guess that, given Mr. Bezos’ comments, Amazon is probably just about breaking even on the Kindle hardware (in total – maybe not on each device, especially the newer, more sophisticated ones). Amazon seems happy to sell you a Kindle, but they are equally happy to sell you books that you read on a tablet or a PC. In the very long run, selling Kindles helps create and maintain demand for e-books, and Amazon still hopes to be king of e-book distribution.

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Court Approves DOJ Antitrust Settlement with Three E-Book Publishers

Last week the Southern District of New York approved the DOJ’s settlement with Hachette Book Group Inc., HarperCollins Publishers LLC, and Simon & Schuster, Inc. (I previously covered the Apple e-book case here and here.)

Under the Tunney Act, consent settlements with the DOJ are subject to court review and public comment. The three e-book publishers reached a settlement with the DOJ before the Department filed its antitrust suit.

Under the settlement agreements, the publishers must end their e-book agency agreements with Apple within seven days of final judgment. They must also end any contracts with other e-book retailers that prevent them from setting their own prices or include most-favored nation (“MFN”) clauses that guarantee that retail competitors are not receiving better terms. Additionally, under the settlements, distribution provisions limiting retailers’ ability to set e-book pricing are banned for several years.

The DOJ has received hundreds of Tunney Act comments about the settlements. Additionally, Apple, Penguin, and others have filed amicus briefs with the court criticizing one or more aspects of the settlements. Bob Kohn, the founder of eMusic, has been a particularly vocal critic. You may have read about his creative five-page cartoon or graphic novel format brief (which he filed due to the court’s page constraints).

Kohn (and perhaps others) have argued that DOJ essentially accused Amazon of price predation, and that the Apple e-book deals were a lawful and appropriate response to such predation.

Apple, Macmillan, and Penguin remain in the DOJ suit.

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Why You Need to Pay Close Attention to Antitrust Standing

In a nutshell, you need to pay attention to antitrust standing doctrine because the doctrine has real teeth and can result in dismissal of claims.

That’s what the plaintiff in Static Control Components, Inc. v. Lexmark International, Inc., Nos. 09-6287/6288/6449 (6th Cir. Aug. 29, 2012), recently discovered. The case concerns Lexmark’s alleged conspiracy with unidentified microchip suppliers and resellers of Lexmark-manufactured printers to restrain trade and otherwise monopolize the market for printer toner cartridges. (Like many printer manufacturers, Lexmark employs technology and microchips to ensure that only its cartridges will work with its printers.) The plaintiff sells microchips to remanufacturers of Lexmark toner cartridges along with other parts to facilitate the repair and resale of Lexmark toner cartridges.

The Sixth Circuit affirmed dismissal of Static Control’s antitrust claims on antitrust standing grounds. Normally, only claimants who are competitors or consumers within the injured market have standing to sue. Static Control – a chip manufacturer – was neither a competitor nor a consumer in the market for toner cartridges.

Noting the exception for injuries in adjacent markets if “inextricably intertwined” with the injury sought to be inflicted upon the relevant market or participants, see Blue Shield of Va. v. McCready, 457 U.S. 465 (1982), the Sixth Circuit held that the exception is a narrow one and not designed to give standing to claimants whose injuries are a “tangential byproduct” of monopolistic conduct in a related market. To succeed, a claimant must show that the defendants “manipulated or utilized [the claimant] as a fulcrum, conduit or market force to injure competitors or participants in the relevant product and geographical markets.”

The court held that Static Control had not made such allegations. Its claim made no mention of being used by Lexmark as a fulcrum, and it did not allege that it was harmed because it was manipulated into harming the remanufacturers. Instead, the allegations made clear that Lexmark was using the end users to obtain the desired anticompetitive effects (through, e.g., “prebate” programs), rather than using Static Control.

In short, Static Control’s allegations “resemble a classic case of a supplier seeking standing to recover for indirect damages following anticompetitive conduct directed at its customers’ market.” It therefore lacked antitrust standing.

It’s too simplistic to say that only a direct competitor or a customer has antitrust standing. That said, it’s a good idea when evaluating a claim to ask whether the plaintiff or potential plaintiff is a direct competitor or a customer. If the answer is “no,” careful though should be given as to whether the plaintiff or potential plaintiff  in fact has antitrust standing.

P.S. I covered an earlier, related Lexmark decision on patent exhaustion here.

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