Distribution, Competition, and Antitrust / Intellectual Property (IP) Law

SCOTUS Holds Natural Gas Act Does Not Preempt State Law Antitrust Claims

In Oneok, Inc. v. Learjet, Inc., Case No. 13-271 (Apr. 21, 2015), the U.S. Supreme Court held that the Natural Gas Act did not preempt retail customers’ state law antitrust claims against interstate gas pipeline operators for price manipulation.

Historically, the gas industry in the United States has been divided into three segments: (i) natural gas producers, (ii) interstate pipelines that ship the gas from gas fields to distant markets, and (iii) local gas distributors.  In the 1920s, Congress enacted the Natural Gas Act to regulate interstate gas shipments.  The Act created a regulator, now known as the Federal Energy Regulatory Commission (“FERC”), which has jurisdiction (including rate-setting authority) over interstate gas transportation.

Over time, the interstate gas pipelines were deregulated, with FERC adopting an approach that relied on the competitive marketplace, rather than classical regulatory rate-setting, as the main mechanism for keeping wholesale natural gas rates at a reasonable level.  The interstate pipeline operators also began to ship gas directly to retail consumers for direct consumption rather than resale.  FERC does not regulate retail rates.

In Oneok, a group of these retail customers claimed that they overpaid for natural gas due to the interstate pipelines’ alleged manipulation of certain natural gas price indices.  The Ninth Circuit held that their state law claims were not preempted by the Natural Gas Act.  The Supreme Court affirmed.

The pipelines (supported by the Solicitor General) did not argue that the Natural Gas Act expressly preempted state antitrust laws.  Nor did they argue that compliance with those laws would conflict with the Act.  Instead, they argued that the Natural Gas Act preempted the field of state regulation.  The Supreme Court rejected field preemption, noting that “where (as here) a state law can be applied to nonjurisdictional as well as jurisdictional sales, we must proceed cautiously, finding pre-emption only where detailed examination convinces us that a matter falls within the pre-empted field as defined by our precedents.”

In determining whether state law is preempted, the Court focused on the “target” at which the state law “aims.”  This focus on the “target” of state law is appropriate, the Court held, because the question of preemption cannot be resolved by looking only to the physical activity that a state regulates.  “After all, a single physical action, such as reporting a price to a specialized journal, could be the subject of many different laws – including tax laws, disclosure laws, and others . . . . no one could claim that FERC’s regulation of this physical activity for purposes of wholesale rates forecloses every other form of state regulation that affects those rates.”  In Oneok, the state lawsuits were directed at practices affecting retail natural gas rates – which are “firmly on the States’ side of [the] dividing line.”  “Antitrust laws, like blue sky laws, are not aimed at natural-gas companies in particular, but rather all businesses in the marketplace . . . . .  This broad applicability of state antitrust law supports a finding of no pre-emption here.”

Because the case was presented to the Court as raising the issue of field preemption, the Court did not resolve conflict of law issues.  “To the extent any conflicts arise between state antitrust law proceedings and the federal rate-setting process, the doctrine of [conflict] preemption should prove sufficient to address them.”

Justice Thomas concurred in the Court’s judgment, but wrote separately to question the continuing vitality of implied preemption doctrines.  Justice Scalia and Chief Justice Roberts dissented, noting that the Natural Gas Act makes exclusive FERC’s powers in general, not just its rate-setting power in particular.  “The Act does not give the Commission the power to aim at particular effects; it gives it the power to regulate particular activities.  When the Commission regulates those activities, it may consider their effects on all parts of the gas trade, not just on wholesale sales.”  In the dissent’s view, the test for preemption in this setting is whether the matter on which the State asserts the right to act is in any way regulated by federal statute.  “Because the Commission’s exclusive authority extends to the conduct challenged here, state antitrust regulation of that conduct is preempted.”

Why It’s Hard to Tell Good Monopolies From Bad

Marketplace.org has the story.  A nice little summary of the new Google case and the principle that while “[h]aving a big market share by itself is OK,” “the problem is when companies abuse that market share by taking anticompetitive actions that hurt [] competitors and []customers.”  A good link to share with non-antitrusters.

Sixth Circuit Applies Cost Screen to Tying by Differential Pricing

English: Eastman Kodak model B

Eastman Kodak model B (Photo credit: Wikipedia)

In Collins Inkjet Corp. v. Eastman Kodak Co., No. 14-3306 (6th Cir. March 16, 2015), the U.S. Court of Appeals for the Sixth Circuit held that differential pricing – charging more for one product when the customer does not also purchase a second product – can constitute an unlawful tying arrangement only when the price differential in effect discounts the second product below the seller’s cost.

Eastman Kodak sells refurbished printer components for industrial printers. It also sells ink. Its competitor, Collins, competes for the sale of ink. In 2013, Kodak announced a new pricing policy – it discounted print heads for customers that also buy Kodak ink. Collins sought, and obtained in the district court, a preliminary injunction against the pricing policy.

The Sixth Circuit affirmed the grant of the preliminary injunction, but clarified the test for what it termed “non-explicit tying via differential pricing.” In the Court’s view, differential pricing becomes equivalent to an unlawful tying arrangement when the price discount, as applied to the original price of the second (or “tied”) product, in effect lowers the price of the tied product below the seller’s cost. “[D]ifferential pricing . . . is unlawful only if it might [force] a more efficient competitor out of business.” The below-cost test is required because

differential pricing, unlike other forms of indirect coercion, can be employed legitimately without illegal anticompetitive influence from the defendant’s control over the tying product market . . . . [I]f the defendant merely offers a discount on the tying good to buyers who also purchase the tied good, then buyers are only ‘forced’ to buy the tied good elsewhere at a price low enough to offset the forgone discount for the tying product. The defendant uses its market power over the tying good to shift the discount from the tied good to the tying good, but this in itself does not ‘force’ buyers to purchase the tied product any more than a discount on the tied product would.

In applying a below-cost screen, the Sixth Circuit followed the Ninth Circuit’s approach to bundled discounts in Cascade Health Solutions v. PeaceHealth, 515 F.3d 883, 906 (9th Cir. 2008), and criticized the Third Circuit’s approach in LePage’s, Inc. v. 3M, 324 F.3d 141, 154-57 (3d Cir. 2003 (en banc).

Application of a cost screen has the obvious advantage of providing a relatively bright line test that firms can apply themselves to avoid potential violations in the first instance.

Return of Robinson-Patman Act and Resale Price Maintenance Litigation?

A quick note on a few recent developments suggesting that RP and RPM litigation is not yet dead.

First, on February 2, 2015, a court refused to dismiss claims against Clorox arising from its refusal to sell a small regional grocery chain the same large packs of products as Clorox sells to big box retailers. Clorox didn’t refuse to sell the smaller retailer products – it simply didn’t sell it the same large packs, which have a lower per unit cost. The court held that the practice might violate Section 2(e) of the Robinson-Patman Act, which prohibits discrimination in the furnishing of services or facilities in connection with the processing, handling, sale or offering for sale of a commodity purchased for resale. See Woodman’s Food Market, Inc. v. The Clorox Co., No. 14-cv-734-slc (W.D. Wis. Feb. 2, 2015).

Second, a slew of recently-filed suits have accused contact lens manufacturers of conspiring to set minimum resale prices for contact lenses sold at certain outlets. The manufacturers have been sued both by putative indirect purchaser classes as well as by Costco. The lawsuits generally allege that the manufacturers started to implement so-called “unilateral pricing policies” because they were concerned about deep discounts being offered by Wal-Mart, Costco, and others.

These cases do remind us to be careful about the design and implementation of pricing policies.

San Jose Strikes Out in Baseball Antitrust Challenge

23:22, 24 July 2006 . . Coasttocoast . . 2272×...

(Photo credit: Wikipedia)

“Baseball? It’s just a game — as simple as a ball and a bat. Yet, as complex as the American spirit it symbolizes. It’s a sport, business — and sometimes even religion.” Ernie Harwell, “The Game for All America,” 1955.

In City of San Jose v. Office of the Commissioner of Baseball, Case No. 14-15139 (9th Cir. Jan 15, 2015), the United States Court of Appeals for the Ninth Circuit applied the judge-made antitrust exemption for baseball to bar a challenge by the City of San Jose, California to a rule adopted by Major League Baseball (“MLB”) that three-quarters of MLB teams must approve a baseball franchise relocation – a rule which San Jose argued has been interfering with its ability to lure the Oakland A’s to San Jose.

Those who are not antitrust aficionados may find it somewhat surprising that baseball enjoys an antitrust exemption. In fact, the court-crafted exemption has a long pedigree and has been discussed in three U.S. Supreme Court opinions. Almost a century ago, in Federal Baseball Club of Baltimore, Inc. v. National League of Professional Baseball Clubs, 259 U.S. 200 (1922), the Supreme Court held that the “business [of] giving exhibitions of base ball” did not constitute interstate commerce and was therefore not subject to the reach of the Sherman Antitrust Act. Id. at 208-09.

A quarter century later, in Toolson v. New York Yankees, Inc., 346 U.S. 356 (1953), the Supreme Court affirmed Federal Baseball Club, but on stare decisis rather than interstate commerce grounds. (Under the modern interpretation of the Commerce Clause, it would be difficult if not impossible to argue that Major League Baseball – which requires teams to travel to each other’s stadiums throughout the country – does not involve interstate commerce.) The Court noted that “Congress [had] the [Federal Baseball Club] ruling under consideration [and had] not seen fit to bring [baseball] under the [antitrust] laws by legislation . . . .” Id. at 357. Baseball was thus left for thirty years to develop on the understanding that it was not subject to antitrust regulation. If there were circumstances that warranted application of the antitrust laws, the Court wrote, those circumstances should be legislatively specified. Id.

After another quarter century, the Supreme Court reaffirmed the exemption in its third baseball decision, Flood v. Kuhn, 407 U.S. 258 (1972). The Court noted that Congress had acquiesced in the exemption, id. at 283-84, emphasized “the confusion and the retroactivity problems that inevitably would result with a judicial overturning of Federal Baseball,” and reiterated its “preference that if any change is to be made, it come by legislative action . . . .” Id. at 283.

With the above background in mind, we can return to the saga of San Jose. San Jose planned to welcome the Oakland A’s to a new stadium within the geographic territory allocated by MLB to the San Francisco Giants’ franchise. That fact required, under league rules, approval of the relocation by three-quarters of MLB’s members. After MLB – in San Jose’s view – delayed a vote on the relocation, San Jose sued MLB, arguing, among other things, that the delay was an attempt to stymie the relocation and preserve the Giants’ local monopoly. MLB argued that the baseball exemption barred San Jose’s suit.

The Ninth Circuit agreed with MLB. Although it acknowledged that the baseball exemption originated in the 1922 Federal Baseball Club case, which was erroneously decided on the basis that baseball is not in interstate commerce, the Ninth Circuit refused to set aside what it described as an anomalous exemption, noting that MLB has built its business in reliance on the decision, and that the Congress has not acted to change the law in light of the Supreme Court’s precedents. In the court’s view, the congressional acquiescence rationale was particularly applicable to the issue of franchise relocation, because the 1988 Curt Flood Act (codified at 15 U.S.C. § 26b(b)(3)) withdrew baseball’s antitrust exemption with respect to certain labor issues but explicitly maintained it for franchise relocation.   “[W]hen Congress specifically legislates in a field and explicitly exempts an issue from that legislation, our ability to infer congressional intent to leave that issue undisturbed is at its apex.”

The court also rejected San Jose’s argument that the court-made exemption should be limited to the subject matter of some of the prior cases (e.g., limits on movements of players between teams), reasoning that “[t]he designation of franchises to particular geographic territories is the league’s basic organizing principle” and that “[i]nterfering with franchise relocation rules . . . indisputably interferes with the public exhibition of professional baseball.” The baseball exemption extends to the entire “business of providing public baseball games for profit between clubs of professional baseball players . . . .” Toolson, 346 U.S. at 357.

“Like Casey [at the Bat], San Jose has struck out here,” concluded the Ninth Circuit. “Only Congress and the Supreme Court are empowered to question [prior Supreme Court decisions’] continued vitality, and with it, the fate of baseball’s singular and historic exemption from the antitrust laws.”

It is expected that San Jose will attempt to seek review in the U.S. Supreme Court, although on a statistical basis, of course, the Court accepts only a small percentage of cases for review. In January, the San Jose Mercury News reported that a bill to repeal the baseball exemption is pending in Congress, sponsored by Sens. John McCain, R-Ariz., and Richard Blumenthal, D-Conn., among others, but political experts do not expect it to pass.

If there were a clean slate upon which to write, few would predict that the courts would grant baseball an antitrust exemption. City of San Jose is a testament to the power of stare decisis.

Can the State Seek Restitution After a Class Action Settlement?

In The People of the State of California v. IntelliGender, LLC, 771 F.3d 1169 (9th Cir. Nov. 7, 2014) (Wardlaw, J.), the Ninth Circuit said the answer is “no.”  A federal court had approved a class action settlement involving false advertising and unfair competition claims that, among other things, awarded $10 per approved claim.  Subsequently, the California Attorney General’s Office San Diego City Attorney(*) brought its own Section 17200 suit challenging the same practices and seeking civil penalties and injunctive relief as well as restitution under its parens patriae authority.

The Ninth Circuit held that the State could maintain its action for penalties and injunctive relief.  However, its claim for restitution was barred under the doctrine of res judicata, because as to the sought-after restitution, the State stood in privity with the settlement class members.  Res judicata barred the claim for restitution even though the State did not participate in the private class action.

The decision will help simplify the settlement calculus for defendants sued in class actions who otherwise would remain exposed to subsequent similar monetary claims brought by a state enforcer under its parens patriae authority.

(*) The Court repeatedly references the State, but in actuality the suit was brought by San Diego.  Apologies for the confusion — and thanks to a reader in government who noticed.

Motorola’s FTAIA Quest Ends With a Whimper in the Seventh Circuit

Deutsch: Motorola M3888 ca. 2000

Deutsch: Motorola M3888 ca. 2000 (Photo credit: Wikipedia)

On November 26, 2014, the Seventh Circuit (Posner, J.) issued its order upon rehearing of Motorola Mobility LLC v. AU Optronics Corp. (Case No. 14-8003). Motorola still effectively lost the appeal, but the Court’s more circumspect reasoning means that the decision doesn’t have nearly the same significance as Judge Posner’s initial decision.

 
In a nutshell, Motorola’s foreign subsidiaries bought LCD panels overseas, which were allegedly subject to a price-fixing cartel. The subsidiaries assembled mobile phones and sold and shipped the phones to Motorola in the U.S. Motorola sued in federal court in the U.S. for overcharges from the alleged conspiracy.

On rehearing, the Seventh Circuit applied the Foreign Trade Antitrust Improvements Act (“FTAIA”), and assumed that the FTAIA’s first requirement – that the alleged cartel had a direct, substantial, and reasonably foreseeable effect on domestic (U.S.) commerce – was met.

But, the Court held, Motorola’s claims foundered on the FTAIA’s other requirement, namely that the domestic effect give rise to Motorola’s Sherman Act claims. The Court refused to view Motorola as a single entity, insisting that “[h]aving submitted to foreign law, the subsidiaries must seek relief for restraints of trade under the law either of the countries in which they are incorporated or do business or the countries in which their victimizers are incorporated or do business. The parent has no right to seek relief on their behalf in the United States.”  Motorola’s foreign subsidiaries, the direct purchasers from the makers of the LCD panels, “are legally distinct foreign entities and Motorola cannot impute to itself the harm suffered by them.”
Even if Motorola and its subsidiaries were viewed as a single entity, the Court continued, that entity “would have been injured abroad when ‘it’ purchased the price-fixed components,” and thus would not have been injured in U.S. commerce.

The Court went out of its way – at the request of the Justice Department and the FTC – to hold that a ruling against Motorola would not interfere with criminal and injunctive remedies sought by the government against antitrust violations of foreign companies.

So Motorola still lost, but it lost because it decided to do business through subsidiaries abroad, and in the Court’s view, was forced to live with that choice for all purposes. Had Motorola decided to buy parts directly from Asian manufacturers, the result of the case may have been very different. While it is true that there are strong reasons why multinational corporations decide to do business through often complex chains of subsidiaries, that is a choice they make, and does not relate to or reflect any fundamental principle of antitrust law. And it is for that reason the recent decision ends not with a bang, but with a whimper – it merely follows principles of corporate law to what many might argue is a plausible if not obvious endpoint.

Three Billy Goats Gruff

(You know . . .  the fairy tale about trolls.)

This summer, PwC published its 2014 Patent Litigation Study.  The tagline of the study is “[a]s case volume leaps, damages continue general decline.”

Some of they key findings — which are quite fascinating — are:

  • Median damages awards continue to trend down—to $4.3 million in recent years.
  • Damages awards for NPEs averaged more than triple those for practicing entities over the last four years.
  • The median jury award amounted to nearly 37.5 times the median bench award between 2010 and 2013.
  • NPEs have been successful 25% of the time overall, versus 35% for practicing entities, due to the relative lack of success for NPEs at summary judgment. However, both types of entities win about two-thirds of their trials.

You can read the whole thing at the link above.

Is the NCAA a Cartel?

English: National Collegiate Athletic Associat...

The usually good Planet Money program has an excellent recent podcast setting forth the arguments for and against the NCAA [National Collegiate Athletic Association] being an unlawful cartel.

Could Amazon Possibly Be a Monopolist? (Updated) (Again)

Deutsch: Logo von Amazon.com

(Photo credit: Wikipedia)

Franklin Foer, at the New Republic, argues that the answer is yes.  The alleged “crime”: predatory pricing — if not express, than at least in spirit.

In “There’s one huge problem with calls for anti-trust action against Amazon” at vox.com, Matthew Yglesias rightly points out that market share does not by itself a monopoly make, and further argues that

One important hint about Amazon’s non-monopoly status can be found in its quarterly financial reports. That’s where you find out about a company’s profits. In its most recent quarter, for example, Amazon lost $126 million. Losing money is pretty typical for Amazon, which is not really a profitable company. If you’d like to know more about that, I published 5,000 words on the subject in January. But suffice it to say that “low and often non-existent profits” and “monopoly” are not really concepts that go together.

Competitors hate Amazon because retail was an ultra-competitive low-margin game before Jeff Bezos ever came to town. To delve into this field and make it even more competitive and even lower-margin seems somewhere between unseemly and insane — but it’s the reverse of a monopoly.

Of course, U.S. price predation law can be violated when a firm prices below cost — and loses money — if it is likely to recoup its losses later after its competitors exit the market and it raises prices.  Query whether that is a possibility with online distribution — I don’t know, and am not taking a position for now, but there are certainly reasons to be pretty skeptical — low entry barriers and the like.

Interesting discussion, though.

Update: Paul Krugman says that “Amazon’s Monopsony Is Not O.K.”  But the problems he identifies seem largely theoretical.

Update II: The Wall Street Journal reports that Amazon just reported its biggest operating loss.

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