Distribution, Competition, and Antitrust / IP Law

Archives for January 2013

From the Law of Supply and Demand File: Law School Applications Plummet

Oral arguments about to begin.

Density of future law school classrooms? (Photo credit: Wikipedia)

From today’s New York Times:

Law school applications are headed for a 30-year low, reflecting increased concern over soaring tuition, crushing student debt and diminishing prospects of lucrative employment upon graduation.

As of this month, there were 30,000 applicants to law schools for the fall, a 20 percent decrease from the same time last year and a 38 percent decline from 2010, according to the Law School Admission Council.

(Quote from “Law Schools’ Applications Fall as Costs Rise and Jobs Are Cut,” by Ethan Bronner.)

This is a painful but almost certainly necessarily market correction.

I covered competition issues relating to lawyer oversupply here.

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Can An “Anti-Patent Troll” Be a Monopsonist or a Section 1 Conspirator?

The official online color is: #A4C639 . 한국어: 공...

(Photo credit: Wikipedia)

A recent interesting case suggests that “anti-patent trolls” may in theory face antitrust liability. In Cascades Computer Innovation LLC v. RPX Corp., 2013 U.S. Dist. LEXIS 10526 (N.D. Cal. Jan. 24, 2013), Judge Yvonne Gonzalez Rogers dismissed – with leave to amend – Cascades’ antitrust complaint against RPX, Dell, HTC, LG Electronics, Motorola Mobility, and Samsung.

Cascades is a non-practicing entity (“NPE”), accused by the defendants of being a “patent troll.” It holds the rights to a portfolio of patents relating to technology that optimizes the use of the Android mobile phone/tablet operating system. Dell, HTC, LG, Motorola Mobility, and Samsung (the manufacturing defendants) sell mobile devices, including those employing the Android operating system. Together, they allegedly sell more than 95% of all Android devices in the United States.

Cascades alleged that the manufacturing defendants, along with RPX, engaged in a group boycott to not license Cascades’ patents. RPX is a defensive patent aggregator – an “anti-troll” – formed to protect its members from NPEs. It frequently acts as an intermediary for its members for purposes of acquiring patents and negotiating licenses on behalf of its members.

In a nutshell, Cascades alleged that the manufacturing defendants, through or with RPX, refused to negotiate separately with Cascades for patent licenses, or at least refused to negotiate independently in a “serious” manner with Cascades, and that the defendants agreed not to license Cascades’ patents. Allegedly, the object of the conspiracy was to force Cascades to abandon its efforts to license and enforce its patents, accept a below market-value offer from RPX, or go out of business by virtue of expensive litigation. In this manner, defendants would allegedly obtain a monopsony position.

In granting defendants’ motions to dismiss the complaint, the Northern District of California agreed that Cascades had not adequately alleged a conspiracy, had not properly defined a relevant market, and had not adequately alleged harm to competition.

The court also agreed that Cascades had not adequately pled a conspiracy that made economic sense. According to RPX, a more plausible explanation for the manufacturing defendants’ decision to decline a $5 million licensing offer was that the offer price was too high. RPX had been negotiating a $10 million deal for all of its 110 members, which made a $5 million offer to each of LG, Motorola, Samsung and HTC too high (collectively $20 million). Although the court did not endorse this and several other “economic sense” arguments, it concluded that Cascades

ha[d] fastidiously avoided providing specific facts with respect to the timing of the alleged negotiations and the interplay with the filing of [actions] for patent infringement. Cascades also will need to provide specific facts to clarify why, absent a conspiracy, it is economically irrational for the Manufacturing Defendants—who are being sued by Cascades for infringement of one patent, the ‘750 Patent—to decline an offer to license Cascades’ entire portfolio of 38 patents. Without clarification and specificity, the Court will not presume economic [ir]rationality where the circumstances giving rise to the lawsuit plausibly suggest nothing more than a tactical ploy to regain economic leverage that Plaintiff lost in the licensing negotiations.

However, the court also refused to hold that the alleged group boycott activity could not constitute a per se Section 1 violation. And the court rejected defendants’ argument that Cascades failed to allege antitrust injury because of the lack of allegations regarding possible consumer injury. “Anticompetitive conduct need not harm consumers specifically in order to cause antitrust injury.”

Although Cascades now has an uphill battle, given leave to amend the complaint, only time will tell whether it can allege sufficient facts to establish its conspiracy, competitive harm, and relevant market allegations.

As Professor Hovenkamp cogently wrote in a comment to the article below — a comment which still applies to the likely amended complaint:

As a matter of antitrust law, a great deal will depend on whether this is a naked agreement to refuse to license (or to suppress the price), or whether it is an ancillary agreement setting standards so as to exclude the plaintiff. A naked agreement among a group of competing manufacturers not to purchase a license or to pay only a low fee would be illegal per se under the antitrust laws. On the other hand, joint licensees who are actively engaged in standard setting do set standards that exclude some technologies. Standard setting is addressed under the rule of reason and generally upheld if there is an objectively reasonable basis for the exclusion. An objectively reasonable basis could include a decision that a patent offered by an outsider is not valid or that the manufactures already have suitable alternatives to the offered patent or are not infringing it.

Another possibility is that the defendant device manufacturers are not acting in concert at all, but are individually deciding not to purchase a license from the plaintiff. The firms are not monopolists, and in any event there is no law in the United States that requires even a monopolist (acting unilaterally) to purchase a license from an outside patentee.

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The Continuing Saga of Reverse Payment Patent Litigation

Lower generic drug costs

Lower generic drug costs (Photo credit: BC Gov Photos)

In FTC v. Watson Pharmaceuticals, Inc. (Supreme Court No. 12-416), the FTC unsurprisingly filed a merits brief this month again arguing that pay-for-delay (or “reverse payment”) patent settlements are presumptively anti-competitive.

These settlements often occur in connection with the Hatch-Waxman Act and patent lawsuits filed by a patent-owning pharmaceutical manufacturer against a would-be generic manufacturer. Following a patent lawsuit, the branded manufacturer will pay the generic compensation in return for the generic’s agreement to stay off the market for some period of time.  According to the FTC:

Given the significant difference between monopoly and competitive drug prices, a brand-name manufacturer has a strong economic incentive to induce its would-be generic competitor to forgo competition. And while the generic manufacturer will profit if it prevails in paragraph IV [Hatch-Waxman] litigation and enters the market, its profits will be much less than the brand-name manufacturer stands to lose. As a result, both the brand-name and generic manufacturers may benefit (at the expense of consumers) if the brand-name manufacturer agrees to share its monopoly profits in exchange for the generic manufacturer’s agreement to defer its own entry into the market.

FTC brief at 8-9. The FTC’s position is contra that of the Eleventh Circuit and mostly in line with that of the Third Circuit, which in In re K-Dur Antitrust Litigation, 686 F.3d 197, 214 (3d Cir. 2012), held that reverse payment agreements are subject to a “quick look rule of reason analysis” under which “any payment from a patent holder to a generic patent challenger who agrees to delay entry into the market [is] prima facie evidence of an unreasonable restraint of trade.” Id. at 218.

Oral argument is set for March 25.

I previously covered Watson and K-Dur.

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Site Update

I’ve been updating the formatting of the site (but not changing any of the content).  It’s a work in progress, but I hope that the site will look both fresher and more streamlined and load faster.  Thanks for reading and for your patience.

Antitrust Suits Increased 48% in 2012

Antitrust lawsuits spiked by 48% last year, according to an article this week in Law360.  This was the first increase since 2008 (the year after the Supreme Court decided Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), which raised pleading standards for antitrust and other suits).

According to Law360:

During the 12-month period ending Sept. 30, 702 antitrust suits were filed in federal courts, an increase of about 48 percent over the 475 cases brought the previous year, according to court data. The figures include lawsuits filed by private plaintiffs, as well as cases brought by and against the U.S.

Of those antitrust cases brought in 2012, 677 were brought by private plaintiffs, a 50 percent increase over the 452 private cases brought the previous year, according to the court data.

 We’ll see what 2013 brings, but the recent spike may suggest that there is a positive correlation between the economy as a whole and antitrust suits.  The dip since 2008 may be as much associated with the recession as with Twombly.

When Price Fixing Is Not Price Fixing

Seal of the United States Court of Appeals for...

Seal of the United States Court of Appeals for the Seventh Circuit. (Photo credit: Wikipedia)

According to a recent decision by Judge Posner in the Seventh Circuit in In re Sulfuric Acid Antitrust Litigation, the following scenario is not subject to the per se rule against price fixing:

  1. Companies outside the United States, as an unwanted manufacturing byproduct, produce what is to them a waste chemical for which there is little or no market in their home country.
  2. There is a U.S. market for the chemical and U.S. producers who manufacture it.
  3. The foreign companies have no U.S. distribution network and so sign up the U.S. producers as distributors (giving them exclusive territories), in return for “shutdown” agreements that preclude the U.S. producers from manufacturing their own supplies of the chemical.
  4. Absent the shutdown agreements, there would be an oversupply, and the foreign companies might sell into the U.S. at a loss. They might be willing to do that to avoid the environmental and storage costs they would otherwise incur, but then they could be subject to antidumping proceedings brought by the U.S. manufacturers.

Under these facts, the shutdown agreements are subject to a Rule of Reason analysis, and not the per se rule, so they still could in theory be unlawful. But the fact that the plaintiffs in Sulfuric Acid abandoned a Rule of Reason case suggests that they thought it would be very difficult to win.  After all, the agreements facilitated market entry, which is pro-competitive.

Update: In response to a reader question, there was no agreement on prices in this case.  There was an alleged output agreement, though, and economically the two types of agreements are thought to be equivalent.  An agreement to raise prices will decrease demand and output; an agreement to cut output will raise prices.  The shutdown agreements would tend to raise prices.

In applying the Rule of Reason, Judge Posner noted that this case was unique, “combining such elements as involuntary production and potential antidumping exposure.” He rightly concluded that “[i]t is a bad idea to subject a novel way of doing business (or an old way in a new and previously unexamined context . . . .) to per se treatment under antitrust law.”

However, in reaching his conclusion, Judge Posner made some other remarks which are less persuasive. For one thing, in analogizing the analysis to that of Broadcast Music, Inc. v. Columbia Broadcasting System, Inc., 441 U.S. 1 (1979), which allowed blanket music licenses to be sold, he wrote that the blanket copyright licenses were not a product, new or old, but a “contractual instrument” for marketing music, which was the product. But that seems to beg the question of whether a “contractual instrument” for marketing is an unlawful per se agreement. In the alternative, he suggested that the foreign-supplied chemical could itself be the “new [BMI-type] product.” However, that analysis seems to open the door to an argument that any jointly-sold product is a “new product,” even if it is identical to other commodities being sold.

Additionally, Judge Posner noted that exclusive dealing agreements (where a distributor agrees not to carry competing lines) are not per se illegal, so “what difference should it make that the competing line is produced by the distributor himself?  And so the shutdown agreements might be found to be an innocent species of exclusive dealing.”  There is a looseness to this language that may be exploited in unanticipated ways in future cases.  Two competitors cannot agree to curtail output simply by appointing one as the “distributor” of the other.

In short, the opinion seems like the right result on the facts, but it opens the door to Rule of Reason arguments in the future about other arrangements whose status and pro-competitive effects may be less clear.

On the FTC-Google Settlement

Much has already been written about the specific terms of the settlement, so I will not attempt duplicate that effort. You can find the actual settlement here.  There is some interesting background /behind-the-scenes information on Google’s “antitrust escape” in this Wall Street Journal article.

In a nutshell, the settlement addressed three areas: (1) standard-essential patents (SEPs); (2) advertisers’ management of their ad campaigns; and (3) website “scraping.”

1. The settlement restricts Google (and its subsidiary, Motorola Mobility) from seeking injunctions on SEPs against potential licensees who are willing to enter into a license on fair, reasonable, and non-discriminatory (FRAND) terms. As a result, Google is generally prohibited from seeking injunctions for FRAND-encumbered SEPs. Although Google is allowed to seek injunctions in certain narrow situations—e.g., when a potential licensee refuses to enter into a license agreement on FRAND terms and is an “unwilling” licensee —the settlement outlines specific procedures that Google must follow when negotiating with potential licensees for its SEPs.

Practical result: The settlement reinforces the general rule that SEP owners may not seek injunctions. It also makes clear that potential licensees should pay particular attention to notices of alleged SEP infringement, because failure to respond could be interpreted as being an unwilling licensee.  However, the settlement’s complex license negotiation procedures may encourage opportunistic efforts to portray companies as “unwilling” licensees who can be enjoined.

2. Google agreed to remove restrictions on the use of its online search advertising platform, AdWords, that may make it more difficult for advertisers to coordinate online advertising campaigns across multiple platforms.

Practical result: Some advertisers may have at least a marginally easier time pursuing their advertising goals on non-Google platforms thanks to this commitment. However, it is not clear how robust the effects of the commitment will be.

3. Google committed to refrain from “scraping” the content of certain competing websites, passing the content off as its own, and threatening to de-list rivals entirely from Google’s search results if and when they protest about the alleged misappropriation of content. Websites will now have the ability to “opt out” of display on Google “vertical” properties (websites that focus on specific categories such as shopping or travel).

Practical result: Unclear, although arguably at least somewhat pro-competitive by removing a possible obstruction to innovation on the Internet.

The elephant in the room, however, is that although the Commission did investigate the central issue for many observers – allegations of so-called search algorithm bias favoring Google properties over others – the Commission’s settlement does not address this issue. Instead, the FTC “concluded that the introduction of Universal Search, as well as additional changes made to Google’s search algorithms – even those that may have had the effect of harming individual competitors – could be plausibly justified as innovations that improved Google’s product and the experience of its users. It therefore has chosen to close the investigation.”

Many observers think that the FTC missed the boat on this one.

The European Commission is still investigating Google’s search practices, and it may not be deterred by the FTC’s decision. EU competition law is generally more protective of competitors’ interests than U.S. law, which tends to focus more narrowly on competition itself and on consumer welfare. 

Rivals — including Microsoft, which owns search engine bing — are also not terribly impressed with the settlement, see the report in the linked article below.  Whether competitors, advertisers, or consumer classes attempt to bring their own challenges to alleged Google search engine bias remains to be seen.

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