Distribution, Competition, and Antitrust / IP Law

Archives for June 2015

“And the Plaintiffs Don’t Have to Sue My Competitors Because? . . . .”

One of the pet peeves of antitrust defendants is that the joint-and-several liability rule often means that plaintiffs can pick and choose which defendants to sue. (Plaintiffs will say – that’s a design feature of the antitrust laws, and not a bug.) In Ward v. Apple, Inc., the Northern District of California made it harder for plaintiffs to do the picking and choosing. Yesterday, the Ninth Circuit pushed the pendulum back, making it more difficult for defendants to argue that the picking and choosing is problematic.

In a nutshell, the plaintiffs (a putative class of consumers) alleged that Apple conspired with AT&T Mobility (ATTM) to violate the antitrust laws in connection with Apple’s agreement with ATTM that ATTM would be the exclusive provider of voice and data services for the iPhone. According to plaintiffs, the exclusivity agreement enabled ATTM to charge supra-competitive prices for wireless services; Apple allegedly shared in ATTM’s revenues. Simplifying here a complex procedural history, the plaintiffs eventually brought suit against Apple only. Despite the general rule that plaintiffs can pick the tortfeasors they want to sue, the district court held that ATTM was a “necessary party” under Federal Rule of Civil Procedure 19.

The Ninth Circuit reversed and remanded for further proceedings. It held that an absent (alleged) antitrust co-conspirator can, under certain circumstances, be a required party under Rule 19 – at least where the absent party has “legally protected” interests to defend. However, it set the bar fairly high. In particular, the court rejected:

  • Apple’s argument that ATTM’s possible increased regulatory scrutiny gives ATTM a legally protected interest (though the court did not decide whether such scrutiny could ever constitute a sufficient interest);
  • The argument that reputational interests can make a party a required party under Rule 19; and
  • The argument that ATTM’s particular contract rights amounted to legally protected interests.

In short, it is once again harder – though not impossible – to argue that all alleged co-conspirators must be joined as defendants in an antitrust suit.

SCOTUS Reaffirms that in Antitrust Cases, It Gives Less Deference to Precedent

Spiderman-exclusive-rooftop

(Photo credit: Wikipedia)

Yesterday, in Kimble v. Marvel Entertainment, LLC, the U.S. Supreme Court upheld the rule first announced in Brulotte v. Thys Co., 379 U.S. 29 (1964), that a patentee cannot collect royalties on sales made after expiration of the patent.

The patent law decision upholds a probably anticompetitive rule that from an economic perspective makes little sense. That said, the decision is not particularly surprising, resting as it does on stare decisis (settled law) grounds – though it is amusingly chock-full of references to Spiderman (Marvel Entertainment had licensed a Spiderman product from the plaintiff-patentee, who had a patent on a toy that lets children shoot “webs” from a device held in the palm of the hand). Somewhat disappointingly, the decision does not expressly address an important issue – whether, when a patent portfolio is licensed, license fees must decrease as patents expire.

Perhaps the most important portion of the decision is the following discussion of stare decisis and antitrust law:

If Brulotte were an antitrust rather than a patent case, we might [address the issues] as Kimble would like. This Court has viewed stare decisis as having less-than-usual force in cases involving the Sherman Act. See, e.g., Khan, 522 U. S., at 20–21. Congress, we have explained, intended that law’s reference to “restraint of trade” to have “changing content,” and authorized courts to oversee the term’s “dynamic potential.” Business Electronics Corp. v. Sharp Electronics Corp., 485 U. S. 717, 731–732 (1988). We have therefore felt relatively free to revise our legal analysis as economic understanding evolves and (just as Kimble notes) to reverse antitrust precedents that misperceived a practice’s competitive consequences. See Leegin, 551 U. S., at 899–900. Moreover, because the question in those cases was whether the challenged activity restrained trade, the Court’s rulings necessarily turned on its understanding of economics. See Business Electronics Corp., 485 U. S., at 731. Accordingly, to overturn the decisions in light of sounder economic reasoning was to take them “on [their] own terms.” Halliburton, 573 U. S., at ___ (slip op., at 9).

This is a strong reaffirmation of the Court’s ability to reshape antitrust law according to economic principles and new economic understandings – despite the traditional rule of stare decisis. In other words, for stare decisis principles, some animals really are more equal than others.

Update (06/26/15): I was quoted in Law360 about this (may be behind a paywall).

Is Antitrust Relevant for Startups, Emerging, and Non-Dominant Firms?

The answer is (surprise!) “yes.”

There are a number of ways in which antitrust law is relevant to emerging and non-dominant companies. Those firms may:

  • Need to deal with the dominant firms in their markets, including by (i) responding to threats or actions by dominant firms to foreclose access to products, services or markets, or (ii) negotiating to acquire or maintain access to needed IP;
  • Need access to standard-essential patents (“SEPs”) and to understand their rights to and under FRAND licenses;
  • Want to exploit and license their own IP and put restrictions on its use without triggering antitrust issues;
  • Want to collaborate with other firms – including (dominant) competitors – in producing products or delivering services (i.e., entering into joint ventures);
  • Want to merge with, acquire, or be acquired by another firm, including a dominant one;
  • Want to impose vertical price or non-price restraints, or offer different customers, dealers or distributors different prices; or
  • Need to respond to a government merger or conduct investigation as a third party.

All of the above issues (and more) require the consideration of antitrust law. This is not to say that, for example, every complaint by an emerging firm against a dominant firm is the nucleus of a valid antitrust claim. There are many considerations – including whether there is harm to competition, whether a party has antitrust standing, and the like – and often there is no claim, just the rough-and-tumble of normal business competition. But it’s always helpful to understand the legal landscape, and to consider whether Congress and the courts have struck the appropriate balance between robust competition and truly exclusionary conduct. And on the defensive end, it’s always a good idea to understand how far you can push restraints.

Wholesale Grocery Products Case Raises Questions About How and When to Apply Per Se Rule and Rule of Reason

SHOPPING FOR GROCERIES IN A WASHINGTON, DISTRI...

(Photo credit: Wikipedia)

The Supreme Court today denied review in In re: Wholesale Grocery Products Antitrust Litigation, an action that came up from the District of Minnesota and the Eighth Circuit. Substantively, the case is a useful reminder about the potential dangers of non-compete agreements; procedurally, it raises some troubling questions for future Sherman Act cases.

In brief, two large grocery wholesalers entered into an asset purchase agreement. The New England wholesaler (which did some limited business in the Midwest) acquired the Midwest’s wholesaler’s New England assets. The New England wholesaler – which had acquired the assets of a bankrupt wholesaler’s nationwide assets – also agreed to designate the Midwestern wholesaler as the receiver of the bankrupt firm’s Midwestern assets. As part of the agreement, each wholesaler agreed not to supply the customers of the business it sold for two years and not to solicit those customers for five years. The written terms did not include any express restrictions as to the solicitation or supply of other customers or any geographic market division.

The plaintiff – a small “mom and pop” grocery store – alleged that the non-compete agreement was unlawful, and that it went beyond the written terms of the contract to include not only former customers, but also new and existing customers. The district court granted summary judgment to the wholesalers, but the Eighth Circuit reversed.

On the substance of the issue, the outcome may not be terribly surprising: if there were evidence of a non-compete as to new and existing customers, that evidence might support a judgment that the agreement was an anti-competitive and unlawful market or customer division – at least under the Rule of Reason – although many ancillary non-competes have been found to be perfectly lawful.(*)

The procedural issue is perhaps the more interesting one. The Eighth Circuit held that because there were material issues of fact as to what the wholesalers actually agreed to do, the district court could not resolve on summary judgment the question of whether to apply the per se rule or the Rule of Reason. (Other circuits have concluded that where there are fact issues regarding the exact nature or effects of the restraint, per se treatment is inappropriate.) And so, as the wholesalers told the Supreme Court in their cert. brief, “[t]he holding below creates a twilight zone in which litigants ‘d[o]n’t know what kind of trial to prepare for . . . . A per se trial looks vastly different than a rule-of-reason trial.” “Equally troubling,” the wholesalers wrote, “plaintiffs can easily avoid facing rule-of-reason review at summary judgment by concocting fact issues about a restraint’s ‘terms’: Even if the written agreement triggers the rule of reason . . . plaintiffs need only allege a ‘knowing nod and wink’ . . . that signaled different terms to force defendants into a costly trial or coerced settlement.”

Presumably there are evidentiary and Rule 11 requirements that preclude plaintiffs from “concocting” fact issues about a given restraint’s terms. And if the question were simply whether factual issues about whether the defendants entered into a naked market-allocation agreement precluded summary judgment, the opinion would not be remarkable. But the bigger problem with the Eighth Circuit’s decision is its broad language – e.g., “The district court erred by assuming that because the record did not establish an undisputed per se violation, then the rule of reason necessarily applied.” But if there is no per se violation, then what’s left is the Rule of Reason. By not allowing the district courts to resolve the standard of review question before trial, the Eighth Circuit leaves defendants wondering how they can prepare for a trial without knowing whether the per se rule or the Rule of Reason applies. Wholesale Grocery Products offers no guidance as to how defendants (and plaintiffs) should handle this dilemma.

(*) The Eighth Circuit seemed to think that a geographic market division – even one ancillary to a legitimate sale of assets – would be subject to the per se rule. This blanket conclusion seems questionable. Had the Eighth Circuit rejected the argument that an ancillary geographic division could be per se unlawful, its holding would have avoided the problems caused by deferring resolution of the question whether to apply the per se rule or the Rule of Reason.

Do State Bar Associations Have Antitrust Risk?

It was only a matter of time after the Supreme Court’s decision in North Carolina State Board of Dental Examiners v. Federal Trade Commission, 135 S. Ct. 1101 (2015) (*), that a state bar association would face an antitrust suit.  But the suit happened quickly: on June 3, LegalZoom sued the North Carolina State Bar for violations of Sherman Act Sections 1 and 2 in the U.S. District Court for the Middle District of North Carolina.  LegalZoom.Com, Inc. v. North Carolina State Bar, Case No. 1:15-CV-439 (M.D.N.C.).

In a nutshell, LegalZoom alleges that the Bar does not enjoy antitrust immunity because it is controlled by lawyers (market participants) and its activities are not actively supervised by the state.  LegalZoom challenges the Bar’s refusal to register its prepaid legal plans, which it sells in 42 states and the District of Columbia.  LegalZoom seeks not only injunctive relief, but also $3.5 million in damages (before statutory trebling).

This may be the leading edge of a wave of lawsuits challenging activities of state boards staffed by industry participants.

(*) I covered the Fourth Circuit’s decision in Dental Examiners here.

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