Distribution, Competition, and Antitrust / IP Law

Archives for May 2013

What To Do With a DOJ Antitrust Subpoena

My article on the ten things to do if you ever receive a DOJ antitrust subpoena is now up over at InHouse Blog.

The Risks (and Benefits) of Most Favored Nations Clauses

The latest issue of Antitrust magazine features several articles on Most Favored Nations (“MFN”) clauses, which prompted me to riff a little bit about them.

An MFN is in principle a fairly simple device. It usually protects a buyer, and says that if the buyer’s supplier offers better pricing to any of the buyer’s competitors, the buyer also gets to enjoy the same discounted pricing.

MFNs have not received a great deal of antitrust scrutiny by the courts. To the extent MFNs have been the subject of lawsuits, issues concerning their application have frequently been resolved by settlement or consent decree.  We therefore do not have a wealth of reasoned opinions about them or their effects.

It’s fairly clear that MFNs are not subject to any per se rule, and should be evaluated under the Rule of Reason. Whether an MFN is pro-competitive or anti-competitive depends in part on whether the parties to the MFN have market power. An MFN could not lessen competition unless it affects the prices of products in markets in which buyers or sellers, either individually or collectively, have market power. See W. Stephen Smith, When Most-Favored Is Disfavored: A Counselor’s Guide to MFNs, ANTITRUST (Vol. 27, No. 2, Spring 2013) at 10.

The major pro-competitive effect of an MFN is obvious: it tends to lower cost for buyers. See id. at 13. MFNs may also reduce bargaining costs, and, where buyers and sellers must contract in advance in order for a new product to be developed, facilitate product investment and promotion. See id.

On the other hand, MFNs can lessen price competition. For example, if a larger buyer imposes an MFN, sellers may decide not to discount pricing to other buyers to avoid the effect of the MFN. And so in United States v. Delta Dental of Rhode Island, 943 F. Supp. 172, 176-80 (D.R.I. 1996), the DOJ alleged that Delta had MFN agreements with about 90% of the dentists actively practicing in Rhode Island, and that its insurance plans covered about 35% to 45% percent of persons with dental insurance in the state. In its complaint, DOJ argued that the MFNs lessened price competition from smaller insurers: “Because Delta represents such a large source of income for most Rhode Island dentists . . . Delta’s MFN clause makes it unprofitable for a dentist to accept lower fees from non-Delta patients, even if the dentist would have otherwise been willing to accept those lower fees.” The court refused to dismiss the complaint, and the matter was subsequently settled by a consent judgment. See case information here.   

The law about MFNs remains somewhat inchoate. I would recommend the following rules of thumb (which are just that – rules of thumb, and not definitive guidelines):

1. An MFN should only permit the buyer to insist that the supplier meet, and not beat, competitive pricing.

2. If neither buyer nor seller has market power, it is most unlikely that an MFN could cause competitive concerns. However, the parties may nevertheless want to give the issue of competitive impact at least a cursory glance.

3. If the buyer has market power, then you should consider the extent to which the MFN impacts the supply side of the market. For example, if a buyer accounts for 80% of the market, and has an MFN with only one of 10 equal-sized suppliers, the MFN is unlikely to affect the prices available to the buyer’s competitors.  90% of the suppliers/supply remain free and clear of the MFN.

4. The biggest concern arises when the buyer has market power and uses MFNs with a substantial number of its suppliers. That is the scenario that at least poses the most potential concern – although there may be various mitigating factors or market features that prevent an MFN even here from being net anti-competitive.

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Patent Exhaustion Doctrine Does Not Protect Farmers Who Replant Patented Seeds

In a brief, unanimous opinion written by Justice Kagan, the Supreme Court yesterday agreed with Monsanto that the patent exhaustion doctrine does not enable farmers to replant and reproduce patented seeds without the patentee’s permission. The Court emphasized the well-established rule that the doctrine restricts a patentee’s rights only as to the particular articles sold, and leaves untouched the patentee’s ability to prevent a buyer from making new copies of the patented item.

The Court did expressly note that its holding was limited – addressing the situation before it, rather than every one involving a self-replicating product. “In another case, the article’s self-replication might occur outside the purchaser’s control. Or it might be an incidental step in using the item for another purpose . . . . We need not address here whether or how the doctrine of patent exhaustion would apply in such circumstances.”

I covered the patent exhaustion doctrine previously – see, for example, here, here, and here.

The decision likely has implications in other industries. For example, BSA/The Software Alliance filed a brief arguing that a contrary decision might “facilitate software piracy on a broad scale” because software can be easily duplicated. However, it also noted that a decision that went too in favor of protecting patent rights might unduly encourage nuisance software patent infringement suits.

The opinion, styled Bowman v. Monsanto Co., No. 11-796 (May 13, 2013), is available here.

More Evidence that California May No Longer Follow the Per Se Rule in Vertical Pricing Fixing Cases

 In Kaewsawang v. Sara Lee Fresh, Inc., Case No. BC360109 (Cal. Los Angeles Superior Ct. May 6, 2013), the trial court dismissed a challenge to Sara Lee’s pricing practices brought under California’s state antitrust law, the Cartwright Act.

The plaintiffs were a purported class of distributors of Sara Lee products, and challenged Sara Lee agreements with chain retailers that gave Sara Lee the right to set pricing (to the chain stores) for Sara Lee products. The distributor agreements required the distributors to comply with the terms of the Sara Lee-chain store agreements.

In dismissing the claim, the court first ruled that plaintiffs had not alleged a price-fixing allegation. The court’s discussion is somewhat unclear, but it appears to have rejected an argument that there was some sort of horizontal agreement between and among Sara Lee and the chain stores.

The court then turned to the question of per se unlawful vertical price-fixing, and held that, despite the California Supreme Court’s decision in Mailand v. Burckle, 20 Cal. 3d 367 (1978), following the U.S. Supreme Court’s decision in Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007), “it remains unlikely that the Mailand’s court holding is still applicable . . . .”

The court then rejected the plaintiffs’ rule of reason claim for vertical price fixing.

It is conceivable that the court did not even need to reach the issue.  Unlike the traditional vertical price-fixing scenario, Sara Lee apparently did not agree with its distributors on downstream pricing — it had the power to set the downstream pricing directly.  The distributors were more similar to middlemen or agents than true distributors with pricing authority.

Sara Lee is but one trial court decision, but it is further evidence that California courts will be receptive to arguments based on developments in federal law that vertical price-fixing is not per se unlawful.

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