Distribution, Competition, and Antitrust / IP Law

The NCAA Ruling : How Far Should Courts Go In Redefining Market Rules?

English: National Collegiate Athletic Associat...

(Photo credit: Wikipedia)

In O’Bannon v. National Collegiate Athletic Association, Case No. 14-16601 (9th Cir. Sept. 30, 2015), the Ninth Circuit applied the Rule of Reason to the NCAA’s amateurism rules, and concluded that while the NCAA can ban cash compensation to student athletes for the use of their names, images and likenesses (“NILs”), it cannot bar member colleges from offering full “cost of attendance” scholarships.(*)

Much has already been written about this opinion – its application of the Rule of Reason to NCAA rules; its finding that the amateurism rules have anticompetitive effects in the college education market; and its determination that, while promoting amateurism is pro-competitive – because it tends to increase consumer demand for college sports, and may marginally help integrate academics with athletics – there is a less-restrictive way to achieve the same result.

The interesting part of the opinion is what it portends for future cases – including outside the area of college athletics. Some amici argued that the Ninth Circuit’s approach would open the floodgates to numerous challenges to organizations’ rules, and that an antitrust court’s function is not “to tweak every market restraint that the court believes could be improved.”

Acknowledging this concern, the Ninth Circuit wrote:

We agree . . . that, as a general matter, courts should not use antitrust law to make marginal adjustments to broadly reasonable market restraints . . . .

in holding that setting the grant-in-aid cap at student-athletes’ full cost of attendance is a substantially less restrictive alternative under the Rule of Reason, we are not declaring that courts are free to micromanage organizational rules or to strike down largely beneficial market restraints with impunity. Rather, our affirmance of this aspect of the district court’s decision should be taken to establish only that where, as here, a restraint is patently and inexplicably stricter than is necessary to accomplish all of its procompetitive objectives, an antitrust court can and should invalidate it and order it replaced with a less restrictive alternative.

Id. at 55 (emphasis in original). It’s a good thing the Court was so explicit about its intentions. But time will tell whether the Court’s discussion is truly strong enough to prevent future judicial micro-management of “broadly reasonable” market restraints.

(*) The NCAA already allows “grant in aid” scholarships for tuition and fees, room and board, and required course-related books. “Cost of attendance” includes these items ask well as non-required books and supplies, transportation, and other expenses related to attendance at the institution. The difference between a grant in aid and the cost of attendance is a few thousand dollars at most schools, so striking down the scholarship limit will have little practical effect.

Obama Antitrust Not Much More Aggressive Than Bush?

That’s what the Wall Street Journal reports, citing data from the FTC and DOJ, reflecting that the antitrust agencies challenged 2.9% of mergers reviewed between 2009 and 2014, vs. 2.61% that they challenged between 2001 and 2008.  Antitrust enforcers are “not stepping up enforcement,” said Diana Moss, president of the American Antitrust Institute, an independent, non-profit research group.

Ummm . . . . did anything happen starting around the end of 2008 that might have caused a decline in mergers, or prompt a less vigilant approach to merger enforcement?  Maybe something in the general economy?

Marginal Evidence of Customer Diversion Won’t Support a Price Discrimination Claim

In Cash & Henderson Drugs, Inc v. Johnson & Johnson, Case No. 12-4689 (2nd Cir. Aug. 27, 2015), the Second Circuit upheld a summary judgment in favor of defendant pharmaceutical manufacturers accused of price discrimination.

Retail pharmacies alleged – and the defendant manufacturers conceded – that the drug companies had offered lower drug pricing to staff-model HMOs and pharmacy benefit managers. The retail pharmacies alleged that the price discounts amounted to unlawful price discrimination under the Robinson-Patman Act.

Through court-supervised discovery, the plaintiffs attempted to assemble “matching” evidence showing that customers they lost ended up purchasing from the favored purchasers. However, the evidence showed that only 1%-3% of potential lost customers in plaintiffs’ records could be identified as customers who later filled prescriptions with a favored purchaser.

The Second Circuit held that this de minimis loss of customers was insufficient to establish a competitive injury. The court held that although FTC v. Morton Salt Co., 334 U.S. 37, 50-51 (1948), also permits a discrimination claim to be predicated upon a substantial discount to a competitor over a significant period of time, after Volvo Trucks North America v. Reeder-Simco GMC, Inc., 546 U.S. 164, 180 (2006) (holding that price discrimination must affect “substantially” competition between the favored purchaser and the plaintiff), “if the loss attributable to impaired competition is de minimis, then the challenged practice cannot be said to have had a ‘substantial’ affect [sic] on competition.”

Cash & Henderson is yet further evidence of the courts’ repeated attempts to limit the reach of the Robinson-Patman Act and harmonize it with the intent to protect competition (not competitors) that animates the Sherman Act.

Are Mutual Index Funds Anti-Competitive?

They may be, according to a thought-provoking article by Harvard Law School Professor Einer Elhauge entitled “Horizontal Shareholding as an Antitrust Violation” (July 21, 2015), available here.

In a nutshell, Professor Elhauge’s argument is:

  • Large institutional investors (mutual funds and, presumably, ETFs) own fairly large shareholdings in horizontal competitors throughout the economy – for example, from 2013-15, seven shareholders controlled 60% of United Airlines, 27.5% of Delta airlines, 22.3% of Southwest Airlines, and 20.7% of JetBlue Airlines. The problem is particularly acute for index funds, which routinely invest in horizontal competitors in an industry;
  • Basic economic theory suggests that this sort of “horizontal shareholding” may result in diminished incentives to compete – because if firm A gains profit/market share by lowering prices, shareholders who own stock in both firm A and competitor B (or competitors B and C, or B and C and D, etc.) will see at least some loss in profitability in their other holdings;
  • Recent econometric studies suggest that in markets where shareholdings are concentrated in this manner, higher prices are not only observed, but are also attributable to the “excess” concentration;
  • These horizontal shareholdings explain some persistent economic puzzles, including (a) executive compensation being based on industry performance, rather than corporate performance, (b) the failure of high corporate profits to lead to high growth, and (c) the recent rise in economic inequality; (*)
  • Antitrust law – as it is currently formulated – can reach these horizontal shareholdings under Clayton Act Section 7, and the passive investor exception is not a bar to legal action, because (a) funds actively insert themselves into management discussions and so are not purely “passive” and (b) even if they are, the passive exception does not apply if the acquired stock is actually used (by voting or otherwise) to lessen competition substantially or to attempt to do so; and
  • Regardless of the Section 7 passive investor exception, Sherman Act Section 1 and FTC Act Section 5 apply to horizontal shareholding acquisitions.

As I said, provocative and intriguing stuff. But I have some questions.

  • Mutual fundsandETFs are owned (I assume predominantly) by individuals. Many (most?) of those individuals are also employees in the labor markets. Why would those owners want to see unduly high executive compensation, lower growth, or higher income inequality? If the answer is there is an information gap or asymmetry, why does it persist? If firms subject to fund ownership can figure out (even without communication) that they shouldn’t vigorously compete due to their common owners, why can’t mutual/ETF fund managers figure out that fund owners don’t want fund managers tocontribute to anticompetitive behavior?
    • Perhaps most stock is ultimately held by investors who benefit more in their role as investors than they do as workers.  Additionally, perhaps there is a collective action problem at the fund investor level – even though we would all be better off with a stronger economy, when choosing to invest money, we each have incentives to pick the fund with the highest rate of return.
  • All things being equal, the higher level of horizontal holdings, the moremonopoly-level profits one would expect to be extracted. Yet we apparently see horizontal shareholdings by funds in the 4-6% range (and in any event usually under 10% for any particular fund). If the horizontal ownership strategy were so successful, wouldn’t we expect to see even higher ownership levels? What does it mean that we don’t?
    • Perhaps regulatory obligations kick in at 5% and 10%, and over 15% may require a Hart-Scott-Rodino filing. If there’s no current appetite to bring enforcement actions in this space, however, I wouldn’t think these modest expansion barriers (filing requirements) would be much of an impediment to larger holdings.
    • Perhaps it would be just as profitable to have 5% stakes in four anticompetitive marketsrather than a 20% stake in one anticompetitive market. But:
      • If 4×5% is just as profitable as one 20% holding, doesn’t that suggest that 20×1% is also just as profitable? But we apparently don’t typically see 20×1%, and if we did, it’s not clear to me it would be objectionable. It seems to me that, if the horizontal shareholdings theory is generally correct, one would expect to see higher rates of return (and more anticompetitive effects) with higher levels of shareholding (though the effect may not be linear). So I still wonder about the relatively low levels here.
      • Also, it may be more difficult and expensive to amass and manage a portfolio of many small holdings as opposed to one larger one. Again, if that’s true, how do we explain the absence of larger horizontal shareholdings?
    • Is there anything in securities law and regulation that allows for horizontal ownership and/or communication with management and that would otherwise preempt the application of antitrust law?
    • Would antitrust enforcement lessen fund diversification? And if so, can the pro-competitive effects of antitrust enforcement be balanced against the reduction in diversification in a quantitative manner?
    • To the extent there is an issue, can it be solved by giving funds a choice – either limit their holdings, or agree not to become actively involved in firm management or governance? The article suggests the answer may be yes – “if index funds alone would create a problem of anticompetitive horizontal shareholding in a concentrated market, and those index funds feel the benefits of diversification across all firms in that market exceed the benefits of influencing corporate governance, they could commit not to communicate with management or vote their shares.”

In short – it’s a very interesting theory. But it’s early days, and I think we need some more consideration – and evidence – to evaluate it.

P.S. – The paper also argues that increased antitrust enforcement in the 1930s under Thurman Arnold was a substantial reason for the United States’ emergence from the Great Depression. Certainly the timing of AAG Arnold’s appointment lines up neatly with the decrease in the unemployment rate. As they say, correlation is not causation – but again it’s a very interesting point.

(*) The basic arguments are that (a) the use of industry performance measures is not a bug but a feature for institutional investors who are invested across the industry, because managers who increase individual corporate performance by competing with rivals decrease institutional investor profits across the industry by decreasing industry profits; (b) with horizontal shareholdings, firms acting in the interests of their shareholders have incentives to constrain output rather than expand; and (c) anticompetitive markets raise returns on capital (which is invested in firms whose product prices are inflated) but also lower the effective returns to labor through (i) higher product prices that lower the purchasing power of wages and (ii) the exercise of monopsony power over labor rates.

Milk expiration dates and clever cartels

A glass of milk Français : Un verre de lait

(Photo credit: Wikipedia)

The Planet Money podcast this week has a story about the Greek economy.  According to the podcast, there is a Greek milk producer “cartel.”  Of course cartels are unlawful in Europe, just as they are in the U.S.  So it seems that Greek milk producers have engineered a clever “cartel” — they have lobbied the Greek government to require that bottled milk have an expiration date no more than 7 days after the milk is obtained from the cow.  As a result, milk produced elsewhere in Europe either isn’t available in Greece or is (I assume) more difficult and more expensive to obtain.

The story is an interesting one, and caused me to pause for a moment about the use of the word “cartel.”  In the U.S., this sort of lobbying would almost certainly be protected by the Noerr-Pennington petitioning immunity.  But what if the milk producers got together and agreed on expiration date rules without obtaining a regulation?

Such an agreement might be a form of a “cartel.”  But it wouldn’t be focused on price — at least not directly.  So it probably wouldn’t be subject to the per se rule.  But I think there’s not much reason to worry about such “cartels,” because they wouldn’t work.  Such a milk “cartel” wouldn’t stop manufacturers outside of Greece from exporting milk to Greece (indeed, it might make longer-shelf-life milk produced outside Greece more attractive to Greek consumers), so Greek manufacturers have little or no incentive to form one.  Only the force of government regulation interferes with distribution of non-Greek milk in Greece.

Price Erosion and Restricting Online Distribution Rights

English: Vegetables reseller at rue Mouffetard...

An early vegetables reseller. (Photo credit: Wikipedia)

A reader who works with clients who sell online asked me to address online distribution restrictions.  This is more-or-less the reverse of the question I addressed in “Can My Supplier Refuse to Sell Products to Me?”  As always, I offer general thoughts here, not specific legal advice.

First, to frame the issue a bit further – if you sell products online, particularly through third-party sites such as Amazon, eBay, etc., then you very well may have concerns about controlling not only product quality and service but also price.  Many online sellers are seeing price erosion caused by multiple distributors or resellers, and they want to know what they can do about it.

Before getting to the several possibilities below, keep in mind that if you – or anyone in your distribution chain – is a monopolist or near-monopolist, many of these possibilities may be problematic.  It’s often more difficult than you might think to figure out if a firm is a monopolist, but you can use market share as a sort of rough proxy.  A share above 40% starts putting you in the potential yellow zone.  A share above 60%-70% is often (though not always) evidence of monopoly power.

But let’s assume that neither you, nor your supplier (to the extent you have one), has a market share close to these levels.  In that case, what can you do to control product distribution – and particularly product pricing – on third-party Internet sites?

Exclusive distribution

First, you can be appointed (or appoint yourself) as the exclusive distributor of the product.  You can define the rights as they best work for your business.  You could have the exclusive rights to:

  • Distribute product anywhere;
  • Distribute product online; or
  • Distribute product on certain third-party sites (like Amazon).

By having exclusive distribution rights, you can of course maintain better control over product pricing.  (Note – I’m not talking here about actual price agreements – only the natural result of having a limited distribution network.)

Online distribution “territories”

You can appoint distributors, sub-distributors, or resellers for limited purposes – for example, you can have a single authorized sub-distributor for Amazon, another for eBay, etc.  Again, by limiting your distributors, you should see less intra-brand price competition.  Because the antitrust laws are designed to encourage inter-brand competition, a loss of intra-brand competition is not usually a matter of significant (or indeed any) concern.

Minimum advertised price programs

If you use a number of sub-distributors, or if you are one of many sub-distributors, you can use minimum advertised price (“MAP”) programs.  These do not limit actual consumer pricing (e.g., the pricing in an online checkout cart), but they impose limits on what prices can be advertised.  Sometimes advertising coop dollars are awarded for compliance with the program and withheld for non-compliance.  It is important to properly structure any MAP program.  If structured properly, they are lawful throughout the country.

Resale price agreements

This one is a little tricky.  Under federal law, agreements on resale prices are no longer per se unlawful.  They can still be condemned if they are anti-competitive, but it is usually quite difficult to establish that they are.

The problem is that at least several states still consider agreements on minimum resale prices to be per se unlawful.  So before entering into such agreements, you need to consider whether you are going to be selling or distributing products in those states.  If you’re selling on a national platform like Amazon, you may have to assume that you will be selling in all 50 states.

Price discrimination

Can you offer (or be offered) different (e.g., better) pricing than other distributors or sub-distributors?  Maybe, maybe not — there is a complex law called the Robinson-Patman Act that governs such price “discrimination.”  The law makes discrimination unlawful, but there are many exceptions, and I don’t have space to get into all of them here.

Terminations for price

If your sub-distributor is pricing product in a way you don’t like, you can always terminate him/her (putting aside any contract rights he may have).  However, it is very important that you make a clean termination – promises, commitments, and suggestions followed by a reinstatement can amount to an agreement, which again may still be per se unlawful in several states.


There are a number of options for limiting online distribution to maintain better control over product placement and pricing.  Keep in mind, however, that you should never agree on such options with your competitors – or else you may have a horizontal agreement on pricing, which can be extremely problematic.

“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


(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


(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.

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