Distribution, Competition, and Antitrust / IP Law

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

The answer is (surprise!) “yes.”

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

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

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

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

SHOPPING FOR GROCERIES IN A WASHINGTON, DISTRI...

(Photo credit: Wikipedia)

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

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

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

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

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

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

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

Do State Bar Associations Have Antitrust Risk?

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

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

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

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

Can Trademark Abuse Constitute Monopolization?

English: Trademark

Trademark (Photo credit: Wikipedia)

As far as antitrust law is concerned, trademarks are the unwanted stepchildren of intellectual property. The conventional wisdom is that trademarks – whose exclusionary effect is very attenuated, if it exists at all – do not confer market power, so their use (or refusal to license) can’t support a Sherman Section 2 claim. But is there an argument against the conventional wisdom?

The answer may be: “yes, in unusual circumstances.”(*)

Fraudulently obtaining a trademark

Let’s start by considering other types of IP that present clearer issues.  When a patentee obtains a patent through fraud on the PTO, it engages in exclusionary conduct.  See Walker Process Equip., Inc. v. Food Mach. & Chem. Corp., 382 U.S. 172, 177 (1965).  Of course if the patentee never enforces his patent, there is likely no injury; the injury occurs when the patentee enforces or attempts to enforce a fraudulently-obtained patent.

Courts have extended the reasoning of Walker Process to the fraudulent procurement of copyrights.  See, e.g., Knickerbocker Toy Co. v. Winterbrook Corp., 554 F. Supp. 1309, 1321 (D.N.H. 1982).  See also Michael Anthony Jewelers v. Peacock Jewelry, Inc., 795 F. Supp. 639, 647-48 (S.D.N.Y. 1992) (allegations of enforcement of fraudulently-obtained copyright and other conduct were sufficient to support a monopolization claim).

Fraudulent procurement of a trademark also might be exclusionary.  See, e.g., Northwestern Corp. v. Gabriel Mfg. Co., 1996 U.S. Dist. LEXIS 19275 (N.D. Ill. 1996) at *19 (“Trademark monopolization or attempted monopolization claims often fall into one of two general categories.  The first involves the use of an illegally obtained trademark and focuses on the power of the trademarked product to monopolize a relevant economic market solely as a consequence of its illegal registration.”); Caplan v. Am. Baby, Inc., 582 F. Supp. 869, 871 (S.D.N.Y. 1984) (denying motion to dismiss attempted monopolization counterclaim challenging an attempt to register an unenforceable trademark and to enjoin others from its use despite its cancellation).  See also G. Heileman Brewing Co. v. Anheuser-Busch, Inc., 676 F. Supp. 1436, 1473 (E.D. Wis. 1987) (test to be applied in determining whether a particular trademark constitutes a Section 2 violation is the same as in any other case where an unlawful monopoly or attempt to monopolize is alleged; Section 2 is violated only when the trademark owner’s “actions have led to or resulted in a dangerous probability that it will gain a monopoly over the relevant market”), aff’d, 873 F.2d 985 (7th Cir. 1989).

Note that fraud on the PTO is not itself actionable under the Sherman Act; a plaintiff must still plead and prove all the other elements of a Section 2 violation.  That is particularly true after Illinois Tool Works Inc. v. Indep. Ink, Inc., 547 U.S. 28, 42-43 (2006), where the Supreme Court held that even patents do not presumptively confer market power.  Plaintiffs therefore cannot rely on the existence of IP to establish market power.  Nor does fraud on the PTO itself establish antitrust injury (i.e., harm to competition).  Nevertheless, PTO fraud can constitute the core of a Section 2 claim.

Market power?

That leaves the question of whether trademarks can confer market power. As a general rule, “[b]ecause trademarks, unlike patents, do not confer exclusionary power over products or services, excluding others from the use of a trademark will not support an attempt to monopolize claim.”  II Antitrust Law Developments (7th ed. 2012) at 1131. Still, as one court wrote:

There is no controlling case law addressing whether the attempted enforcement of a trademark can constitute an antitrust violation, but there is persuasive precedent which indicates that if a plaintiff could demonstrate the other elements of a violation of Section 2 of the Sherman Act, then the attempted enforcement of a trademark may constitute an antitrust violation. Specifically, Justice Blackmun noted in his concurring opinion in Vendo Co. v. Lektro-Vend Corp., that “the enforcement of restrictive provisions in a license to use . . . a trademark may violate the Sherman Act.”  Moreover, even the case upon which SnoWizard relies, Car-Freshner Corp. v. Auto Aid Mfg. Corp., states [“[t]here is no doubt that a trademark may be utilized in such a manner as to constitute a violation of antitrust laws,” and “trademark laws may not be used to monopolize with respect to a certain product.”  Although it is equally clear that the nature of a trademark, which does not in any way represent a monopoly conferred upon a particular product, will make it particularly difficult to establish that “the plaintiffs’ actions have led to or resulted in a dangerous probability that it will gain a monopoly over the product in issue.”  Nonetheless, such a claim is possible as a matter of law.

Southern Snow Mfg. Co. v. SnoWizard Holdings, Inc., 2013 U.S. Dist. LEXIS 22157 (E.D. La. Feb. 18, 2013) at *17-18 (footnotes omit.).

The question is whether a fraudulently-obtained trademark protects just the mark itself or some functional aspect of the product. (The PTO shouldn’t issue trademarks that cover the latter.) For example, in RJ Machine Co. v. Canada Pipeline Accessories Co., Case No. 1:13-cv-00579-SS (W.D. Tex. Nov. 22, 2013), the court dismissed antitrust claims predicated upon alleged trademark misuse – but left the door open to future claims based on similar conduct.  RJ Machine Co. involved flow conditioners in oil pipelines. The defendant had a patent on a type of flow conditioner which expired in 2011. The defendant also obtained a trademark registration for the terms “50E” and “CPA-50E” for certain flow conditioners. Additionally, the defendant allegedly claimed the design of its 50E flow conditioner comprised non-functional, distinctive, and protectable trade dress.

The plaintiff (a potential market entrant) claimed that the defendant threatened to sue if the plaintiff advertised or marketed a flow conditioner using the design taught in the expired patent or used the term “50E” to identify its flow conditioner, and brought antitrust and other claims. The court dismissed the antitrust claims because the defendant was allegedly enforcing registered trademarks, and the exercise and enforcement of those marks could not be a “sham” or in “bad faith” under a Noerr-Pennington (petitioning immunity) type analysis.  However, the court did not entirely agree with the defendant that enforcement of trademarks and claimed trade dress can never be considered an antitrust injury because the plaintiff “in order to escape the clutches of an alleged trademark monopoly” can just market its product under a different name. The court noted that

RJ Machine contends the term “50E”, based on the history and development of the market for this product, is the only term consumers associate with this flow conditioner. In addition, according to RJ Machine’s allegations, Canada Pipeline has been able to “lock in” consumers of 50E conditioners because they can only be replaced by flow conditioners with the same 50E design. The anticompetitive argument is even more persuasive when it comes to trade dress. If the 50E design is as functional as RJ Machine alleges, it would be difficult, if not impossible, for RJ Machine to compete in the flow conditioner market without using the same functional design Canada Pipeline is claiming to be its trade dress.

Id. at 7.

See also General Physiotherapy, Inc. v. Sybaritic, Inc., 2006 U.S. Dist. LEXIS 3796 (E.D. Mo. Feb. 1, 2006):

While the configurations of the massage head/applicators have always been represented to the public as functional, they were represented to the Patent and Trademark Office (“PTO”) as non-functional.  Defendants also claim Muchisky provided other false and/or misleading information to the PTO.  This, Defendants contend, indicates the trademark registrations were issued by the PTO based on Muchisky’s fraud and that the trademark registrations are not, and were never, entitled to trademark protection.  Defendants argue this evidence, and the evidence of Muchisky’s bullying tactics and intent to monopolize the market, supports a finding that antitrust laws have been violated and creates a genuine issue of material fact regarding General and Muchisky’s claim that they acted in good faith in asserting trademark rights. This Court agrees.  General and Muchisky’s motion for summary judgment on this ground will be denied.

Id. at *12 (footnote omit). Consider also the scenario where a fraudulently-obtained trademark is actually an important search term on the Internet.

So – there might be circumstances where a fraudulently-obtained trademark could be used in a way that violates Section 2. But proving a Section 2 violation based on trademark abuse may in practice be difficult to do.

(*) These are just some thoughts. There are responses and rejoinders. My disclaimer is: feel free to read, but I’m not necessarily endorsing this train of thought.

Pay-for-delay and the Rule of Reason

Last week, I co-authored an article in the Los Angeles/San Francisco Daily Journal on the California Supreme Court’s recent decision in the Cipro Cases.  There, the Court held that so-called “reverse payment” patent settlements are evaluated under a specific “structured” Rule of Reason analysis, and rejected plaintiffs’ arguments that settlement payments exceeding the costs of litigation or the value of services provided by a generic manufacturer are per se unlawful.

The article is behind a pay wall.  When I get clearance to republish it, I will do so here.

* Updated 06/08/2015: The article is attached. * FNL-Orrick (DJ-5.14.15)

Can Computers Conspire to Fix Prices?

English: The famous red eye of HAL 9000

The famous red eye of HAL 9000 (Photo credit: Wikipedia)

Strange as it sounds, maybe we’re getting closer to the day we have to seriously consider liability for computer conspiracies.

On April 6, David Topkins, a former executive of an e-commerce seller of posters, prints and framed art agreed to plead guilty for conspiring to fix the prices of posters sold online.  Given the ongoing DOJ investigation, details are sketchy, but according to the DOJ press release,

Topkins and his co-conspirators agreed to fix the prices of certain posters sold in the United States through Amazon Marketplace.  To implement their agreements, the defendant and his co-conspirators adopted specific pricing algorithms for the sale of certain posters with the goal of coordinating changes to their respective prices and wrote computer code that instructed algorithm-based software to set prices in conformity with this agreement.

 Apparently the computers weren’t completely in control — but what if they are?  According to a recent paper, that time may be coming:

The development of self-learning and independent computers has long captured our imagination. The HAL 9000 computer, in the 1968 film, 2001: A Space Odyssey, for example, assured, “I am putting myself to the fullest possible use, which is all I think that any conscious entity can ever hope to do.” Machine learning raises many challenging legal and ethical questions as to the relationship between man and machine, humans’ control — or lack of it — over machines, and accountability for machine activities.

While these issues have long captivated our interest, few would envision the day when these developments (and the legal and ethical challenges raised by them) would become an antitrust issue. Sophisticated computers are central to the competitiveness of present and future markets. With the accelerating development of AI, they are set to change the competitive landscape and the nature of competitive restraints. As pricing mechanisms shift to computer pricing algorithms, so too will the types of collusion. We are shifting from the world where executives expressly collude in smoke-filled hotel rooms to a world where pricing algorithms continually monitor and adjust to each other’s prices and market data.

Our paper addresses these developments and considers the application of competition law to an advanced ‘computerised trade environment.’ After discussing the way in which computerised technology is changing the competitive landscape, we explore four scenarios where AI can foster anticompetitive collusion and the legal and ethical challenges each scenario raises.

Ariel Ezrachi & Maurice E. Stucke, AI & Collusion (Apr. 8, 2015).

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.

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