Distribution, Competition, and Antitrust / IP Law

Third Circuit Rejects Single-Product Bundling Claim – But Holds Its Fire on What Test to Apply

English: A CG rendering of a deoxygenated Red ...

Red Blood Cell (Photo credit: Wikipedia)

In Eisai, Inc. v. Sanofi Aventis U.S., LLC, No. 14-2017 (3d Cir. May 4, 2016), the Third Circuit addressed a mix of allegedly exclusionary conduct, including the defendant’s discounting of its anti-coagulant drug Lovenox, and held that the discounting was not unlawful.

The defendant offered discounts, including up to 30% of a customer’s total Lovenox purchases if the customer bought some 90% of its anti-coagulant drugs from Sanofi.  Eisai argued that Sanofi was effectively foreclosing competition by “bundling” the different types of demand for Lovenox – the “uncontestable” demand for the product (i.e., the inelastic and always-present demand) with the “contestable” portion for which Eisai would like to compete.

The Third Circuit declined to extend its Rule of Reason bundled-product discounting analysis in LePage’s Inc. v. 3M, 324 F.3d 141 (3d Cir. 2003) (en banc), cert. denied, 542 U.S. 953 (2004), to a single-product market.  And “[e]ven if bundling of different types of demand for the same product could, in the abstract, foreclose competition, nothing in the record indicates that an equally efficient competitor was unable to compete with Sanofi,” the Court held.

While rejecting application of LePage’s, in analyzing the evidence of competitive harm, the Third Circuit nevertheless engaged in an exclusive dealing-type analysis, focusing on the relatively mild consequences of not obtaining the defendant’s discounts.  In the Court’s view, Eisai failed to demonstrate that hospitals were foreclosed from purchasing competing drugs as a result of Sanofi’s discounting.

However, the Court also refused to apply a price-cost screen to Sanofi’s conduct.  When pricing “predominates over other means of exclusivity, the price-cost test applies.  This is usually the case when a firm uses a single-product loyalty discount or rebate to compete with similar products.”  In that situation, “an equally efficient competitor can match the loyalty price and the firms can compete on the merits.  More in-depth factual analysis is unnecessary because we know that ‘the balance always tips in favor of allowing above-cost pricing practices to stand.’”  However, Eisai alleged that Sanofi, having obtained a unique FDA indication, offered a discount that bundled incontestable and contestable demand.  “On Eisai’s telling, the bundling – not the price – served as the primary exclusionary tool.”  The Third Circuit therefore did not apply a price-cost screen, and declined to opine “on when, if ever, the price-cost test applies to this type of claim.”

Whether the distinction between bundling and discounting the Third Circuit sought to draw makes sense is less than clear – the only real effect of the bundling was to enable a discount, and the discount was offered in connection with the bundling.  They are two sides of the same coin.  Eisai continues the tension between the Third Circuit and others on the treatment of bundled discounts.  See, e.g., Cascade Health Solutions v. PeaceHealth, 515 F.3d 883 (9th Cir. 2008) (applying price-cost screen to bundled discounts).

Speaking About Discounted Pricing Clauses

I’m happy to be speaking on “Discounted Pricing Clauses: Drafting Enforceable and Compliant Provisions After Collins.”  We’ll be addressing potential pitfalls in drafting discounted pricing clauses in commercial contracts, particularly in light of the Sixth Circuit’s decision in Collins Inkjet Corp. vs. Eastern Kodak, 14-3306 (6th Cir. 2015). The panel will review the efficacy of bundled pricing provisions, minimum requirements contracts, and tiered or volume-based pricing schemes and provide best practices for drafting compliant clauses.

The presentation is on Tuesday, May 17, 2016.  Information can be found here.  I wrote about Collins previously.

Sixth Circuit Opens a Pandora’s Box of Joint Venture Challenges

Say you’re a group of hospitals that get together under a Joint Operating Agreement.   You agree to form an integrated health system. You agree to total your net incomes into a single “network net income” that is allocated to the parties based on predetermined percentages. That means that no hospital has an incentive to poach patients from another. You also agree to share losses according to the same predetermined percentages.

And you go further – you grant significant operational authority over each hospital to a central operator. That operator can, among other things, require coordination of activities. The operator has authority to manage all hospital operations and is in charge of centralized managed care and legal functions. The operator also has authority and control over strategic plans, budgets, and business plans, and controls hospitals’ debt incurrence and negotiates with insurance companies on behalf of the hospitals. The operator’s CEO has the power to remove each defendant hospital’s CEO.

All of these steps suggest that you’re an integrated joint venture and that the hospitals cannot conspire to violate Sherman Act Section 1 (at least insofar as JOA activities go). See Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752 (1984), and American Needle, Inc. v. National Football League, 560 U.S. 183 (2010).

However, on March 22, 2016, the Sixth Circuit, in The Medical Center at Elizabeth Place, LLC v. Atrium Health System, No. 14-4166, said that all of the above evidence is insufficient to support a summary judgment in favor of the hospitals on conspiracy claims brought by a competing hospital. Why? Because there was also evidence that the intent of the arrangement was (at least in part) to prevent plaintiff hospital from entering the local healthcare market. The Sixth Circuit also held that evidence that the defendants sought insurance exclusives – which the Court characterized as a form of “boycott” – meant that summary judgment was inappropriate.

In dissent, Judge Griffin wrote that

As the majority states, American Needle “eschewed formalistic distinctions in favor of a functional consideration of how the parties involved in the alleged anticompetitive conduct actually operate.” Am. Needle, 560 U.S. at 191. Guided by the rule of reason, my colleagues interpret this directive to mean that we should ask how defendants “actually operate” with regard to plaintiff—specifically, their intent to keep plaintiff out of the market as expressed through apparent threats by Premier’s [the JOA entity] executives and the boycott defendants allegedly arranged among the insurance companies. This view is flawed. Defendants’ intent to exclude others from the market is irrelevant to determining whether defendants themselves constitute a single entity. To resolve that question, we should consider how defendants “actually operate” amongst each other.

Id. at 20. Due to the allocation of profits and losses, no single hospital had any incentive to become more profitable by attracting more patients than the other. “The majority is therefore incorrect to say ‘defendant hospitals compete with each other . . . for patients.’ They do not.” Id. at 22 (Griffin, J., dissenting). Judge Griffin then analyzed the various powers granted under the JOA and determined that they evinced more than adequate integration to defeat any conspiracy claim.

Putting aside whether the dissent was right that this particular hospital network had adequate integration, the Sixth Circuit’s decision is troubling. The majority opinion focuses on intent (which may be relevant once one gets to a Rule of Reason analysis of restraints) to analyze the preliminary question of whether joint venture defendants’ structure even allows for a Sherman Act Section 1 claim. And so, on little more than one or two slips of possibly self-serving evidence or testimony, plaintiffs may get to go to trial against joint ventures that are appropriately and conservatively structured. Needless to say, this makes designing and advising joint ventures considerably more difficult. The Sixth Circuit should have followed Judge Griffin’s dissent and disposed of the claims on structural grounds.

Maryland Lawsuit Shows Resale Price Maintenance Claims Are Not Dead

Acuvue

Acuvue (Photo credit: Wikipedia)

On March 4, 2016, the Maryland Attorney General announced a civil suit for alleged unlawful resale price maintenance against Johnson & Johnson Vision Care Inc. (“J&J”) in connection with its sale of contact lenses. The Maryland AG alleges that J&J’s resale price maintenance imposed on club membership discount stores has inflated the cost of “Acuvue” lenses by 35%.

According to the AG:

Optometrists complained to Johnson & Johnson that discount stores such as Costco were undercutting their prices. The company responded in 2014 by establishing a Resale Price Maintenance Policy, which set minimum prices for all sellers, including discounters.

Costco objected, and said they would stop selling Acuvue lenses. Johnson & Johnson tried to keep Costco as a seller, but also threatened to pull Acuvue products from the stores and not allow them to be sold unless Costco agreed to the minimum price.

According to documents obtained by the Office of the Attorney General during an investigation, Johnson & Johnson struck a deal with Costco: The club store agreed to abide by the minimum price, but the manufacturer agreed that Costco could provide a $50 in-store cash card – to be used only on other products but not contact lenses – to customers who purchased a monthly supply.

The Maryland AG is seeking to halt implementation of any resale price agreement as well as civil penalties.

The suit illustrates that although RPM is usually lawful under federal law, some states still view it as problematic – at least in certain instances.  It’s the last paragraph of the AG’s press release (quoted above) that is the heart of the case — the AG’s allegation that J&J did more than unilaterally impose an RPM policy, but reached an agreement on resale prices.

Antitrust Claims Against “Anti-Patent Troll” Dismissed

I previously covered the case of Cascades Computer Innovation LLC v. RPX Corp., (N.D. Cal.) (Gonzalez Rogers, J.).  As I wrote in connection with the court’s refusal to dismiss the plaintiff’s amended complaint in December 2013:

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.

The court stayed the case pending resolution of a claim of infringement regarding the primary patent at issue.  Many defendants settled those claims, but Samsung went to trial and ultimately prevailed, receiving a jury verdict of non-infringement.

On February 23, 2016, the Court dismissed the remaining antitrust claims (on a motion for judgment on the pleadings).  The court wrote that failure to license an invalid patent cannot serve as the basis for a cognizable antitrust injury.

Plaintiff alternatively argued that it suffered antitrust injury in connection with the other patents in the portfolio, but the court viewed any such purported injury as de minimis.  Moreover,

only Samsung is alleged to have infringed any of the other patents. However, the complaint never specifies which other patent Samsung purportedly infringed. Only in its opposition brief does plaintiff finally claim that Samsung purportedly infringed the ‘130 Patent. As described above, the market power assertions are premised on a combination of the manufacturing defendants’ shares. Plaintiff does not contend that Samsung’s share alone—17 percent of Android-based phones, a subset of a larger smartphone market and an even larger cellular phone market—is sufficient to undergird its theory. It is also not plausible, in light of the application of the collateral estoppel doctrine regarding non-infringement, that plaintiff’s failure to license the ‘130 Patent was an antitrust injury where only Samsung is alleged to have infringed the patent. In such circumstances, the complaint does not provide a convincing motive for the other alleged participants to conspire against plaintiff or allege sufficient market power by Samsung individually.

Even if plaintiff could establish antitrust standing, the motion would be granted for plaintiff’s failure to state any viable federal antitrust claim. The Court previously articulated the elements of these federal antitrust claims in connection with its order denying defendants’ motions to dismiss. After supplementing the picture with the patent jury’s finding of non-infringement of the “primary” ‘750 Patent, the FAC utterly fails to satisfy the elements necessary to state federal antitrust claims. Indeed, if the complaint were amended to insert the word “non-infringed” before each of its more than seventy references to the ‘750 Patent, then the lack of plausibility would shine through acutely.

2016 U.S. Dist. LEXIS 22727 (cit. omit.).  The court also wrote that it was not inclined to maintain supplemental jurisdiction over state law antitrust and unfair competition claims.

Because the decision turns on a finding of non-infringement, it is not clear to what it extent it presages future dismissals of antitrust claims against defensive patent aggregators.

Patent Law Can Stop Product Resale/Reuse

English: Sleepy Head

A different type of exhaustion. (Photo credit: Wikipedia)

Most people know that inkjet printers are pretty cheap; the real money is in the ink cartridges.  Not surprisingly, printer/cartridge manufacturers often want to stop the resale of used ink cartridges (which can be refilled by third-party ink companies).  In the past, some manufacturers have relied on patent law (many cartridges are patented) to do so.  Their position has raised two questions: can patent law support resale/reuse restrictions in the U.S., and do foreign sales allow the buyer to import the product and sell it in the United States without infringing on the patent(s)?

I previously covered this issue here.  The en banc Federal Circuit recently took up the issue in Lexmark Int’l, Inc. v. Impression Products, Inc., No. 2014-1617, ___ F.3d ____ (Fed. Cir. Feb. 12, 2016) (en banc).   The ABA’s Journal has a good summary of the case and issues (written just before the en banc decision).

In short(*), the Federal Circuit held a seller can use its patent rights to block both resale and reuse of a product.  According to the majority:

First, we adhere to the holding of Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992), that a patentee, when selling a patented article subject to a
single-use/no-resale restriction that is lawful and clearly communicated to the purchaser, does not by that sale give the buyer, or downstream buyers, the resale/reuse authority that has been expressly denied. Such resale or reuse, when contrary to the known, lawful limits on the authority conferred at the time of the original sale, remains unauthorized and therefore remains infringing conduct under the terms of § 271. Under Supreme Court precedent, a patentee may preserve its § 271 rights through such restrictions when licensing others to make and sell patented articles; Mallinckrodt held that there is no sound legal basis for denying the same ability to the patentee that makes and sells the articles itself. We find Mallinckrodt’s principle to remain sound after the Supreme Court’s decision in Quanta Computer, Inc. v. LG Electronics, Inc., 553 U.S. 617 (2008), in which the Court did not have before it or address a patentee sale at all, let alone one made subject to a restriction, but a sale made by a separate manufacturer under a patentee-granted license conferring unrestricted authority to sell.

While a “naked” sale means that the product is free and clear of restrictions, a patentee can restrict reuse or resale by imposing express license restrictions on the first sale.

The Court also held that authorized sales of a product abroad does not exhaust the U.S. patent rights associated with that product.

Second, we adhere to the holding of Jazz Photo Corp. v. International Trade Comm’n, 264 F.3d 1094 (Fed. Cir. 2001), that a U.S. patentee, merely by selling or authorizing the sale of a U.S.-patented article abroad, does not authorize the buyer to import the article and sell and use it in the United States, which are infringing acts in the absence of patentee-conferred authority. Jazz Photo’s no-exhaustion ruling recognizes that foreign markets under foreign sovereign control are not equivalent to the U.S. markets under U.S. control in which a U.S. patentee’s sale presumptively exhausts its rights in the article sold. A buyer may still rely on a foreign sale as a defense to infringement, but only by establishing an express or implied license—a defense separate from exhaustion, as Quanta holds—based on patentee communications or other circumstances of the sale. We conclude that Jazz Photo’s no-exhaustion principle remains sound after the Supreme Court’s decision in Kirtsaeng v. John Wiley & Sons, Inc., 133 S. Ct. 1351 (2013), in which the Court did not address patent law or whether a foreign sale should be viewed as conferring authority to engage in otherwise-infringing domestic acts. Kirtsaeng is a copyright case holding that 17 U.S.C. § 109(a) entitles owners of copyrighted articles to take certain acts “without the authority” of the copyright holder. There is no counterpart to that provision in the Patent Act, under which a foreign sale is properly treated as neither conclusively nor even presumptively exhausting the U.S. patentee’s rights in the United States.

The non-exhaustion rule effectively allows patentees to price discriminate, i.e., to charge lower prices abroad and higher prices in the U.S.  Some have argued that the position now adopted by the Federal Circuit helps consumers in low-income countries, perhaps at the expense of U.S. consumers.

Given the stakes here — as noted in the ABA Journal article — a Supreme Court petition for certiorari is almost certain, and the chances of it being granted may be reasonably high.

(*) The Federal Circuit’s decision is over 90 pages long.  So an “in short” discussion is good, but obviously omits some of the details.

 

An Unaccepted Offer of Judgment Won’t Moot a (Class) Claim

In Campbell-Ewald Co. v. Gomez, 577 U.S. ___ (2016), the Supreme Court held that an unaccepted offer of judgment under Federal Rule of Civil Procedure 68 does not moot a named plaintiff’s claim, and, therefore, the named plaintiff can still seek class certification.

The case involves text messages allegedly sent without consumers’ consent in violation of the Telephone Consumer Protection Act. Prior to class certification, the defendant offered judgment in the form of the named plaintiff’s full alleged damages and costs as well as an injunction against the defendant’s involvement in unsolicited text messaging. (The Act does not provide for attorney’s fees.) The plaintiff rejected the offer.

Applying “basic principles of contract law,” the Court (Ginsburg, J.) held that the defendant’s offer of judgment, once rejected, had no continuing efficacy. The parties therefore remained adverse.   Further, a would-be class representative with a live claim of her own must be accorded a fair opportunity to show that certification is warranted. The Court did not decide whether the result would be different if a defendant deposits the full amount of the plaintiff’s individual claim in an account payable to plaintiff and the court then enters judgment for the plaintiff in that amount.

Justice Thomas concurred in the judgment but would have rested on the common-law history of “tenders.” Chief Justice Roberts dissented, emphasizing that the federal courts must independently evaluate whether there is a live case or controversy. “[A] plaintiff is not the judge of whether federal litigation is necessary, and a mere desire that there be federal litigation – for whatever reason – does not make it necessary.” (Emphasis in original.) Under constitutional principles, “[t]he agreement of the plaintiff is not required to moot a case.” “If the defendant is willing to give the plaintiff everything he asks for, there is no case or controversy to adjudicate, and the lawsuit is moot.”  Chief Justice Roberts also noted that Gomez did not have standing to seek relief based solely on the alleged injuries of others, and Gomez’s interest in sharing attorney’s fees among class members or in obtaining a class incentive award does not create Article III standing.

Although the Supreme Court has in recent years been tightening up the standards for class certification, see, e.g., Comcast Corp. v. Behrend, 133 S.Ct. 1426 (2013), Gomez is evidence that the Court will not automatically approve arguments that limit the ability of plaintiffs to seek class certification.

Twombly’s Teeth

Occasionally a would-be plaintiff (or counter-claimant) asks whether one can file an antitrust claim and then get some discovery to back it up.

This is not a good game plan.

In Eastman v. Quest Diagnostics Inc., 2016 U.S. Dist. LEXIS 1282 (N.D. Cal. Jan. 6, 2016) (Orrick, J.), the plaintiffs sought pre-complaint discovery from the defendant, including its fee-for-service pricing for the years 2013 and 2015 for six geographic areas.  The court refused to allow such discovery.  Citing Twombly’s concerns about the expense of antitrust discovery, the court wrote that “[t]he Rule 8 screening function would be rendered toothless if [plaintiff] were entitled to pre-complaint discovery in order to fish for conduct that gives rise to an antitrust violation.” (cit. omit.).

The court noted that not all the information necessary to plead a plausible claim was in the hands of the defendant.  Nor was it clear how the pricing information would be sufficient, on its own, to enable plaintiffs to cure the deficiencies in their complaint, because plaintiffs would still lack pricing information for the defendant’s competitors, and “would lack a coherent and plausible explanation as to why it is appropriate to assume that Quest’s pricing is attributable to its alleged antitrust violations.”

In antitrust cases, perhaps more than in others, it is important to gather the facts first before filing the claim.

Happy Holidays

Blogging will resume after New Year’s.

Plaintiffs’ Antitrust Experts Are Dauberted More Often

According to a new study by the Law & Economics Center at George Mason University (as reported in MLex), 59% of the time, antitrust defendants succeeded on some aspect of their Daubert motions in class action cases, while antitrust plaintiffs won their challenges only 38% of the time.

These rates compare with 50% for defendants across case types and 40% for plaintiffs across case types.

The difference between the figures for plaintiffs is quite small and may be statistical noise.  But it does appear that antitrust defendants are more successful at Dauberting plaintiffs’ experts than are defendants overall.

This is a somewhat surprising and interesting finding, and I wonder what causes the difference.  It seems to me the possibilities are:

  • There is some institutional bias against antitrust plaintiffs as opposed to other plaintiffs.  This seems unlikely;
  • Either the class action rules, the antitrust laws, or both just make it harder for the typical antitrust plaintiff than the typical plaintiff; or
  • Antitrust plaintiffs’ experts do a worse job on average than the typical antitrust defendant’s expert — and also do worse on average than the typical plaintiff’s expert.

I lean to the third possibility, based on anecdotal evidence and speculation.

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