Distribution, Competition, and Antitrust / IP Law

Archives for June 2013

U.S. Criminal Antitrust Enforcement in 2012 Was Robust

The U.S. DOJ recently reported its 2012 enforcement statistics.  In FY 2012, the Antitrust Division recovered over $1.1 billion (yes, billion with a “b”) in criminal fines.  See here.  That figure does not include alternative penalties, disgorgement, and restitution — e.g., the more than $200 million secured for state and federal agencies in the municipal bonds investigation.  So all told, DOJ recovered over $1.3 billion in 2012.  This appears to be an all-time record (at the least, it’s the highest number since 2003).

The link above also reveals that the average prison sentence for individuals has been steadily increasing (up to 25 months for the 2010-2012 period). 

Interestingly, although total fines were at a record level, the number of criminal cases dropped — from 90 in 2011 to 67 in 2012.  But that appears to be statistical noise;  in most years since 2003, the number of cases has fluctuated between 32 and 72.

Two companies account for the lion’s share of the 2012 fines: Yazaki Corporation (auto parts) — $470 million, and AU Optronics (LCD screens) — $500 million.  Furukawa Electric Co. (automotive wire harnesses) was fined $200 million.   See here.

Price fixing is not cool.

Reverse-Payment Patent Settlements Subject to Antitrust Analysis

The Supreme Court today decided FTC v. Actavis, Inc. and held, in a 5-3 decision authored by Justice Breyer, that so-called reverse-payment patent settlements are subject to full antitrust Rule of Reason analysis.

In a reverse-payment settlement, which often occurs in the context of pharmaceuticals and the Hatch-Waxman Act, the patentee sues an alleged infringer, and the parties settle the litigation with the patentee agreeing to pay the alleged infringer monetary consideration in return for an agreement that the alleged infringer will stay out of the market during some period of time up to the full remaining duration of the patent.  Some circuit courts and many commentators had agreed that such settlements — as long as they do not extend the patent monopoly or involve sham patents or sham patent litigation — are lawful under the antitrust laws.

The Supreme Court disagreed and largely sided with the FTC on this issue (although it declined to apply the truncated “Quick Look” Rule of Reason to such settlements, instead preferring the full Rule of Reason inquiry into pro-competitive and anticompetitive effects).  Instead, the Court discussed a handful of factors that led it to believe reverse-payment settlements, even if their anticompetitive effects fall within the zone of exclusion of the patent, can be unlawful under the Rule of Reason.

I covered reverse-payment settlements previously (check out the settlement tags/categories).  As the Patently-O blog correctly notes, as a result of Actavis, “antitrust implications should be considered for any major patent settlement. In addition, the decision opens the door further for antitrust action against patent enforcement entities willing to settle cases at rates below the likely litigation costs of the accused infringers.”

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The Top Nine Things You Need to Know About Below-Cost Pricing Law in California : Part II

This is the second of two posts on California below-cost pricing law.  The first post is here.

5. What does it mean to sell below “cost?”

Unlike federal law, California law expressly defines the concept of below-cost sales (although there remain many questions about how California law applies in practice and in detail). Under California law, the cost referred to in the UPA is a fully allocated cost or fully distributed cost.

For distribution, cost means the invoice or replacement cost, whichever is lower, of the article or product to the distributor and vendor, plus the cost of doing business by the distributor and vendor. So here’s an example: if you are a distributor and you are selling product X, the cost will be the invoice/replacement cost of X, plus an appropriate allocation to product X of a portion of your overhead costs (including lease costs, depreciation, maintenance costs, insurance and advertising costs, administrative costs, labor costs, etc.). Developing proof of the appropriate cost allocation can be time-consuming and complex.

In the absence of proof of cost of doing business, a markup of six percent on such invoice or replacement cost is prima facie proof of such cost of doing business. Thus, absent actual evidence, a plaintiff can still make out a case by establishing that your pricing is below invoice cost plus six percent. This is another relatively unique feature of California law that makes it more difficult to secure early dismissals of below-cost claims.

6. What if I lower my prices temporarily – can’t I average them over time?

Although there are good arguments that you should be able to average out temporary price reductions, the case law in this area is somewhat conflicting and unclear. Therefore, you should not simply assume that you can lower prices for a few days or weeks and enjoy immunity because over a period of months or years your prices are above cost. Before deciding on such a pricing strategy, you should consider its legal implications more closely.

7. Does California law average costs over time?

Here, the answer is a bit better for sellers. At least one California appellate court has held that the costs of selling items should be measured as the average costs over a reasonable time, rather than the cost of the item on a particular occasion. Thus, if your costs happen to temporarily increase, you may be able to argue that the costs should be measured over a longer period of time (and thus are lower than the dip prices). This is important, because you want your pricing to be above your cost.

8. Are there defenses to below-cost pricing claims?

Yes. Both Section 17043 and Section 17044 are subject to an affirmative defense for sales made in good faith in an endeavor to meet the legal prices of a competitor selling the same article or product, in the same locality or trade area and in the ordinary channels of trade. This is the so-called “meeting competition” defense. Note that the defense allows you to meet (not beat) competitive pricing, and it only applies when you meet the legal prices of a competitor. Thus, if two sellers know they are each selling below cost and nevertheless pursue a price war, the defense will probably not apply.

There are other less important defenses as well. For example, you can engage in below cost sales of perishable goods to close out your stock, or price below cost when goods are damaged or deteriorated in quality.

9. What are the remedies for a violation of California’s below-cost pricing statute?

For violations of the UPA’s pricing provisions, a plaintiff can recover treble damages, attorney’s fees, and costs. A plaintiff can also secure injunctive relief against the pricing practices at issue. Violations can also amount to criminal misdemeanors and subject violators to fines and imprisonment, but the UPA is almost never enforced in this manner.

Conclusion

It may be surprising to some that companies cannot price as they wish, but that is in fact the case. In California, below-cost pricing remains actionable, and below-cost pricing suits are filed almost every year. Because California does not require proof of the possibility of recoupment, because it provides plaintiffs with powerful (but rebuttable) presumptions, and because the defenses to a below-cost claim under California law are limited, companies that do business in California should make sure that aggressive promotions, discounts, or rebates do not violate California’s below-cost pricing law.

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Excited to Help Revise ABA Antitrust Jury Instructions

I recently became part of the team that will be revising the ABA Antitrust Jury Instruction Handbook.  This book contains model jury instructions that are often used in antitrust cases throughout the United States.

 Model Jury Instructions

The Top Nine Things You Need to Know About Below-Cost Pricing Law in California : Part I

Fair Pricing

Fair Pricing (Photo credit: Wikipedia)

As of 2012 (at least according to Wikipedia), California was the 12th largest economy in the world. Most national and international firms do at least some business in the Golden State. Like other states, California has laws prohibiting the below-cost pricing of goods and services. Although below-cost pricing claims are not filed with great frequency, they are indeed filed, and they can become a trap for those who are unfamiliar with the law in this area.

In fact, California’s below-cost pricing law features some unique plaintiff-friendly provisions that can, at least in theory, expose your company to more potential liability than the analogous laws of other states. You might unwittingly find yourself on the wrong side of California law, especially if your firm at least on occasion uses discounts, promotions, or rebates. In the next few posts, I will briefly review California’s below-cost pricing law and the top nine things you need to know about it to minimize your exposure to below-cost pricing claims.

1. What statute is at issue?

California Business & Professions Code section 17043 prohibits “sell[ing] any article or product at less than the cost thereof to [a] vendor, or . . . giv[ing] away any article or product, for the purpose of injuring competitors or destroying competition.” Section 17043 is part of California’s Unfair Practices Act, or “UPA.”

California law also expressly prohibits the use of loss leaders. Section 17044 prohibits “sell[ing] or us[ing] any article or product as a ‘loss leader’ as defined in Section 17030 of this chapter.” Section 17030 defines “loss leader” as “any article or product sold at less than cost: (a) Where the purpose is to induce, promote or encourage the purchase of other merchandise; or (b) Where the effect is a tendency or capacity to mislead or deceive purchasers or prospective purchasers; or (c) Where the effect is to divert trade from or otherwise injure competitors.” Although the loss leader provision was probably designed to protect small retailers, the statute is not expressly limited to retailers and it could apply to other links in the distribution chain. For most purposes, you can safely think of a loss leader claim as a specific type of below-cost pricing claim.

2. Why would a statute address below-cost pricing?

California developed the below-cost sections of the UPA during the Great Depression to, among other things, protect existing firms against market price erosion as a result of distress sales, bankruptcy liquidations, and unscrupulous practices. The UPA is in some ways similar to, and in some ways significantly different from, the federal Robinson-Patman Act, 15 U.S.C. § 13, which also concerns itself with, among other things, below-cost pricing. Some of the notable differences between California and federal law are discussed below.

3. What products does the statute cover?

The UPA defines “article or product” broadly to include “any article, product, commodity, thing of value, service or output of a service trade.” Section 17024. One court has written that this definition is “remarkably open-ended.” As such, the UPA may apply to technology or software licensing – which usually does not fall under the federal Robinson-Patman Act because such licensing involves neither commodities nor sales.

4. Do sales below cost themselves violate the statute? Isn’t harm to competition also required?

Proof of harm to competition is one of the major differences between federal law and California law. Under federal law, below-cost sales are only actionable when the seller is likely to recoup the losses at a later time period (e.g., after the seller has driven its competitors out of the market and jacks up the prices). Because likelihood of recoupment is so difficult to prove, below-cost pricing claims under federal law have become relatively rare. California law, however, imposes no such requirement, and so considerably lowers the bar for below-cost pricing claims.

That said, to violate the statute, the seller must act with the purpose, i.e., the desire, of injuring competitors or destroying competition. Such intent could be shown through the seller’s internal documents, which might be obtained in discovery. Often, of course, no such documents exist. Some courts have also indicated, citing Section 17071 of the UPA, that proof of one or more acts of selling or giving away any article or product below cost or at discriminatory prices, together with proof of the injurious effect of such acts, is presumptive evidence of the purpose or intent to injure competitors or destroy competition. Although such evidence can be rebutted, the presumption may make it more difficult for a seller to dismiss at an early stage a below-cost pricing claim.

Up next: What does it mean to sell below “cost?”

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White House Targets Patent “Trolls”

The White House today issued a fact sheet on high-tech patent issues, recommending seven legislative actions and taking five executive actions. According to the White House’s statement, innovators continue to face challenges from Patent Assertion Entities (PAEs), companies that, in the President’s words “don’t actually produce anything themselves,” and instead develop a business model “to essentially leverage and hijack somebody else’s idea and see if they can extort some money out of them.” These entities are commonly known as patent “trolls.”

Of the seven legislative recommendations, I think the following four are the most interesting and potentially most significant:

Require patentees and applicants to disclose the “Real Party-in-Interest,” by requiring that any party sending demand letters, filing an infringement suit or seeking Patent and Trademark Office (PTO) review of a patent to file updated ownership information, and enabling the PTO or district courts to impose sanctions for non-compliance.

Permit more discretion in awarding fees to prevailing parties in patent cases, providing district courts with more discretion to award attorney’s fees under 35 USC Sec. 285 as a sanction for abusive court filings (similar to the legal standard that applies in copyright infringement cases).

Protect off-the-shelf use by consumers and businesses by providing them with better legal protection against liability for a product being used off-the-shelf and solely for its intended use. Also, stay judicial proceedings against such consumers when an infringement suit has also been brought against a vendor, retailer, or manufacturer.

Change the International Trade Commission (ITC) standard for obtaining an injunction to better align it with the traditional four-factor test in eBay Inc. v. MercExchange, to enhance consistency in the standards applied at the ITC and district courts.

The executive actions are more limited, including new and expanded PTO education and outreach materials. But of some note is a new PTO rulemaking process to require patent applicants and owners to regularly update ownership information when they are involved in proceedings before the PTO, specifically designating the “ultimate parent entity” in control of the patent or application. And the PTO will provide new targeted training to its examiners on scrutiny of functional claims and will, over the next six months, develop strategies to improve claim clarity, such as by use of glossaries in patent specifications to assist examiners in the software field. Also of note is an interagency review of existing Customs and Border Protection (CBP) and ITC procedures used to evaluate the scope of exclusion orders.

The following White House chart shows the remarkable recent growth of PAE litigation:

patent_troll_chart

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Reading Between the Lines vs. Twilight Movies: The Most “Creative” Market Definition I’ve Ever Read

Twilight (series)

Twilight (series) (Photo credit: Wikipedia)

I think the award for most creative market definition (at least for 2013) has to go to the plaintiff in Between the Lines Productions, LLC v. Lions Gate Entertainment Corp., Case No. 13-cv-3584 (S.D.N.Y. May 30, 2013). There, the producers of a parody film called “Twiharder” recently filed suit against Lion Gate, the makers of, among other things, the popular Twilight movie series.

“Defendants’ anticompetitive conduct sets the benchmark example for why James Madison and Thomas Jefferson were apprehensive in the months leading up to the Philadelphia Convention about granting authors even limited copyright monopolies over their works,” Between the Lines writes in its complaint.

According to the (219!) page complaint, the defendants have sought to monopolize the “conversation” in “adjacent” or downstream markets, i.e., in markets downstream of the primary market “of original intention targeted to consumers of teen fantasy romance.” One of the downstream markets is the “Z Market,” defined as the market for the creation of novel works that are repulsed by the Twilight movies. Allegedly, defendants have achieved the monopolization of these “Fair Use Zones” through a highly oppressive intellectual property enforcement policy that uses sham cease and desist notices and a compendium of prohibited trademark / service mark registrations to chill speech and exclude all competition from the “Z Market.”

The complaint actually details five (!) different relevant antitrust markets and contains a full-page chart (at page 112) detailing them all.

The plaintiff seeks $375 million in damages for alleged breaches of federal antitrust laws.

Look, this is fun and creative. It illustrates nicely what happens when Hollywood bumps into antitrust law. But all I can say about these market definitions is: good luck with that.  To the extent the plaintiff was hoping to get some publicity for its creativity, kudos.

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