Distribution, Competition, and Antitrust / IP Law

Maryland Lawsuit Shows Resale Price Maintenance Claims Are Not Dead


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.

Ninth Circuit Rejects Irrational Market Allocation Claim

In Stanislaus Food Products Co. v. USS-Posco Industries, No. 13-15475 (9th Cir. Oct. 13, 2015), the Ninth Circuit affirmed a defense summary judgment in a case alleging that U.S. Steel and its joint venture conspired to allocate the sale of “hot band steel” in the western United States to the joint venture.

The evidence of a market allocation scheme was circumstantial. The problem for the plaintiff was that U.S. Steel had nationwide supply contracts with all of the major tin can manufacturers (consumers of hot band steel). Under these contracts, U.S. Steel sells tin mill products F.O.B. U.S. Steel’s mill, which means that the customer selects where U.S. Steel is to ship the products and pays for shipping costs. As a result, “the price and other terms are negotiated without U.S. Steel knowing whether a customer will request items be sent, say, to California or to New York.” This “geographic neutrality” is a significant practical obstacle to the viability of the alleged conspiracy, because in order not to compete on price in the Western U.S., “U.S. Steel would need to stop competing on price nationwide or refuse customers. Both options risk losses to U.S. Steel’s bottom line and make little economic sense.”

In other words, the alleged scheme would not be rational “unless U.S. Steel had little competition outside of the western United States or the potential payoff through ownership of [the JV] was likely to be significant.” The court found that U.S. Steel faced significant competition, making the alleged agreement implausible. The plaintiff’s proffered circumstantial evidence of an agreement (much of which the Ninth Circuit found to be ambiguous at best) was insufficient to overcome this finding of implausibility.

The case reinforces the requirement that allegations of a conspiracy must tend to exclude the possibility that the alleged conspirators acted independently.

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?

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