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

Can you ever successfully Daubert an antitrust economist?

English: The iPod family with, from the left t...

The iPod family with, from the left to the right : the shuffle 4G, the nano 6G, the classic 6G and the touch 4G (Photo credit: Wikipedia)

It’s really a very difficult thing to do — and query whether it’s worth the effort.  See, e.g., The Apple iPod iTunes Antitrust Litigation, 2014 U.S. Dist. LEXIS 136437 (N.D. Cal. Sept. 26, 2014) (Gonzalez Rogers, J.) (denying Daubert motions all around).  At least that’s true when the economist is a well-known professor at a major university.

The iPod litigation is, by the way, quite interesting . . . the court has refused to grant Apple summary judgment on the claim that an iTunes update caused consumer lock in.  In an earlier summary judgment order, the court found a triable issue of fact as to whether iTunes update 7.0 was a genuine product improvement so as to not be anticompetitive.

If Your Allegations Don’t Establish a Price Effect, You May Lack Antitrust Standing

ipod shuffle loja online leilao

ipod shuffle (Photo credit: sucelloleiloes)

In Somers v. Apple, Inc., Case No. 11-16896 (9th Cir. Sept. 3, 2013), the Ninth Circuit affirmed the district court’s dismissal of a putative class action against Apple, Inc., alleging antitrust violations in connection with Apple’s iPod and its Tunes Music Store.  The case illustrates the dangers of failing to adequately allege a price effect caused by a defendant’s purportedly anticompetitive conduct.

On behalf of a putative class, Somers alleges that she suffered injury in the form of inflated music prices. The premise of her overcharge theory is that Apple used software updates to thwart competitors (e.g., Real Networks) and gain a monopoly in the music download market, which permitted Apple to charge higher prices for its music than it could have in a competitive market. Specifically, Somers alleges that if Apple had not engaged in anti-competitive conduct to exclude Real Networks from the market, “it would have had to price Audio Downloads to compete on price with Real Networks.”

(Slip Opinion at 19-20.)

But, unfortunately for Somers, her allegations did not square with her overcharge theory.  Apple’s price for music downloads remained stable before the time it allegedly acquired a monopoly and afterwards.

Moreover,

if Somers’ overcharge theory were correct, then Apple’s music prices from 2004 to 2008 were supracompetitive as a result of software updates that excluded competition, and the emergence of a large seller such as Amazon would have caused iTS [iTunes] music prices to fall. But Somers alleges no such price reduction. Somers’ overcharge theory is thus implausible in the face of contradictory market facts alleged in her complaint. As Somers herself acknowledges, under basic economic principles, increased competition—as Apple encountered in 2008 with the entrance of Amazon—generally lowers prices.

(Id. at 20.)  “The fact that Apple continuously charged the same price for its music irrespective of the absence or presence of a competitor renders implausible Somers’ conclusory assertion that Apple’s software updates affected music prices.”  (Id. at 21.)

The Ninth Circuit agreed that price “is only one possible indicator in assessing competitive markets.  Monopoly power may be evaluated by other factors, such as barriers to entry or structural evidence of a monopolized market.”  (Id. at 21.)  “But if Apple did not charge inflated prices for its music, then this fact contradicts Somers’ overcharge theory, and there would be no basis for damages in the first place.”  (Id.)

While Somers suggested that it was conceivable that Apple’s music was not priced higher because of some other factor, such as superior product or greater efficiency, the court found that to state a plausible antitrust injury, a plaintiff must allege facts that rise beyond mere conceivability or possibility.  “We are only left to speculate on what factors could have permitted Apple to charge 99 cents continuously.”  (Id. at 22.)  Somers therefore failed to plead a plausible, non-speculative claim.

Enhanced by Zemanta

Court Approves DOJ Antitrust Settlement with Three E-Book Publishers

Last week the Southern District of New York approved the DOJ’s settlement with Hachette Book Group Inc., HarperCollins Publishers LLC, and Simon & Schuster, Inc. (I previously covered the Apple e-book case here and here.)

Under the Tunney Act, consent settlements with the DOJ are subject to court review and public comment. The three e-book publishers reached a settlement with the DOJ before the Department filed its antitrust suit.

Under the settlement agreements, the publishers must end their e-book agency agreements with Apple within seven days of final judgment. They must also end any contracts with other e-book retailers that prevent them from setting their own prices or include most-favored nation (“MFN”) clauses that guarantee that retail competitors are not receiving better terms. Additionally, under the settlements, distribution provisions limiting retailers’ ability to set e-book pricing are banned for several years.

The DOJ has received hundreds of Tunney Act comments about the settlements. Additionally, Apple, Penguin, and others have filed amicus briefs with the court criticizing one or more aspects of the settlements. Bob Kohn, the founder of eMusic, has been a particularly vocal critic. You may have read about his creative five-page cartoon or graphic novel format brief (which he filed due to the court’s page constraints).

Kohn (and perhaps others) have argued that DOJ essentially accused Amazon of price predation, and that the Apple e-book deals were a lawful and appropriate response to such predation.

Apple, Macmillan, and Penguin remain in the DOJ suit.

Enhanced by Zemanta

Is the Apple-Samsung Verdict Anti-Consumer?

I’ve shied away from writing about the Apple-Samsung patent verdict, in part because I don’t know the details of the patents involved or the evidence that went to the jury.  And so I offer no opinions on the specific patents.

However, this recent post by Randy Picker entitled “Apple v. Samsung: What Are Patents Good For?” and found on the University of Chicago Law School’s faculty blog seems spot on.  Randy makes the point that patents are inherently exclusionary.  They confer a negative monopoly — the right to exclude others.  As Randy writes, “[t]he only way to use a patent is to enforce it against someone else or to at least be able to threaten to do so, so that they will license rights from you.”

Randy goes on to talk about three “flavors” of the “we have too many patents” argument that has surfaced recently.  First is the “patent thicket” problem — many small patents are granted and an actual innovative product in the area needs access to all of them, but the issues only become apparent after the product has proven itself in the market and is subject to hold-up.  But this problem doesn’t really apply to Apple/Samsung.

Second is the argument that patents are supposed to induce R&D, but if relevant innovation would occur anyway, the patent isn’t really inducing anything meaningful.  And the third argument is closely related — that an invention’s reward is sufficiently large that society doesn’t need to reward its inventor with a new property right.  As Randy points out, we could try to run the patent system to take these notions into account, but we don’t, and so they really aren’t relevant to the Apple/Samsung verdict.

(My own view is that it’s much easier to talk about trying to take such notions into account than to actually do so.  How would the PTO or a court determine, for example, that a firm would have innovated anyway even if a patent were not issued?)

Randy concludes that Apple is a “hardcore” vertically integrated firm, producing and enforcing its IP rights against another very successful producing firm.  “We can undertake to revamp the patent system, and that could be within-patent reforms about the balance of utility patents and design patents or larger scale reforms that focus on the incremental incentives question, but given the system we have today, it isn’t at all surprising that an innovative firm like Apple holds patents that, by design, make it possible for Apple to block sales by competitors to eager customers. That is, after all, the point of the patent system in the first place.”

This general conclusion strikes me as entirely correct.

P.S. — for more about patent and R&D incentives in the context of patent tying and price discrimination, see my prior posts here and here.  My concluding thoughts on this issue are here.

Enhanced by Zemanta

Do iPads or Tablet Computers Constitute Their Own Product Market?

David Golden has an interesting article in Law360 this week entitled “Interchangeability in the Tablet Product Market.”  (The full article may be behind a paywall.) I had some earlier, preliminary thoughts here.

Why does this issue matter? Because the smaller the relevant market, the higher the participants’ market shares. At the extremes, you may end up with a monopolist (or several monopolists in different markets). Monopolists are subject to special rules of dealing that do not apply to other firms.

David makes the following reasonable points:

  1. Reasonable interchangeability is the touchstone of product market definition.
  2. Product specifications and technical abilities (screen size, storage capacity, etc.) are unlikely (at least in all cases) to capture the concept of reasonable interchangeability from a consumer’s perspective. Instead, it may be more worthwhile to look at product functions (such as the ability to run an operating system, to load and run applications, to browse the Internet, to send e-mail, etc.).
  3. Cost of substitution may also be relevant – if one tablet manufacturer raises prices substantially, will consumers substitute away to other tablets? To other smartphones?
  4. Network effects are one aspect of cost of substitution. Consumers who have all their music, documents, and data tied to one tablet / OS may find it difficult to switch to another one easily, because they want/need to share with others on the same platform.

I think all these points are good ones. David goes on to note that given the diversity of tablets on the market, courts might conclude that there are a number of submarkets. Although David notes some courts have not viewed the concept of “submarkets” favorably, I would go further – many courts have correctly held that the concept has no real meaning. A market is a market, and it must be defined appropriately. Labeling a market as a “submarket” is usually just the equivalent of waving hands.

As far as I know, we haven’t yet seen a case tackle the question of product market definition in the tablet computing area. It’s only a matter of time, though.

 

iPhone Owners Not Necessarily Required to Arbitrate Monopolization Claims Against Apple

iPhone, iPhone 3G and 3GS

(Photo credit: Wikipedia)

In In re Apple iPhone Antitrust Litig., No. C 11-06714 JW (N.D. Cal. July 11, 2012) (Ware, J.), the court found that arbitration provisions in consumers’ service agreements with AT&T Mobility, LLC (“ATTM”) did not necessarily apply to antitrust claims brought by a class of consumers against Apple. Two of the plaintiffs’ three causes of action involved an alleged aftermarket for applications for the iPhone, and thus might pertain solely to Apple’s solitary actions with regard to applications for its iPhones. They thus might not be “intertwined with” the service agreement issued by ATTM. Because ATTM was a necessary party but had not been joined, the court gave the plaintiffs leave to amend their complaint to add ATTM, and denied Apple’s motion to compel arbitration without prejudice.

Enhanced by Zemanta

Litigation Costs Are Monopolization Damages

In the ongoing Apple v. Samsung war, on June 30, 2012, Judge Lucy H. Koh of the Northern District of California denied Samsung’s bid for summary judgment on the basis that Apple had failed to offer any evidence of antitrust damages. 

(Apple alleges that Samsung violated a Fair, Reasonable and Non-Discriminatory (“FRAND”) obligation to license patents to a standard-setting organization and its members.  See the first related article link below.)

The court held that litigation expenses stemming directly from Samsung’s alleged anticompetitive behavior are recoverable as antitrust damages.  It also held that Apple’s limited amount of factual (non-expert) evidence of litigation expenses was sufficient to avoid summary judgment.

Enhanced by Zemanta

Using iPads at Trial

Nice guest post on using iPads at trial over at the Virginia Appellate Law Blog.

“The advantages are perhaps at their clearest when we pack up to leave court for the day. We pick up our iPads and walk out, knowing that absolutely everything we need is in there. No more trial bags. Heck, this is true even during coffee breaks or the lunch hour — each lawyer can walk out of the courtroom holding, under his or her arm, all of the documents, transcripts and notes that may be useful.”

Enhanced by Zemanta

The eBooks Case: A Canadian Perspective

This is a guest post authored by Steve Szentesi & Mark Katz.  Steve blogs at ipvancouverblog.com.  Thanks to the guest authors for sharing their thoughts on perspectives from Canada.

(A version of this piece was first published in Competition Policy International, Antitrust Chronicle.)

“As a result of this alleged conspiracy, we believe that consumers paid millions of dollars more for some of the most popular titles. We allege that executives at the highest levels of these companies—concerned that e-book sellers had reduced prices—worked together to eliminate competition among stores selling e-books, ultimately increasing prices for consumers.”

(Attorney General Eric Holder, April 11, 2012)

“This was competition on the merits, with Apple providing a superior reading platform on a beautiful 10 inch iPad screen, with color, multi-media, and fixed display, and access to millions of future iPad purchasers. This is classic procompetitive behavior that should be celebrated, not condemned through litigation.”

(Apple Answer, May 22, 2012)

Before Shortly after the U.S. Department of Justice (“DOJ”) filed its claim in the eBooks case earlier this year, Canadian class action plaintiffs followed suit by commencing commenced their own proceedings in the provinces of British Columbia, Ontario, and Quebec. The Competition Bureau has not, however, yet announced any investigation.

As in the United States, the Canadian actions are challenging the agency eBook distribution model adopted by Apple and five of the world’s largest book publishers, three of which have settled claims brought against them by the U.S. DOJ. Specifically, the Canadian plaintiffs allege that Apple and the defendant publishers violated Canada’s price-fixing offense under section 45 of the Competition Act (the “Act”). The publishers allegedly committed the offense by collectively agreeing to discontinue their former wholesale distribution models, under which publishers sold eBooks at wholesale prices to distributors who in turn set retail prices, for a new agency model under which publishers set prices with distributors receiving sales commissions.

The Canadian plaintiffs also allege that the publisher defendants illegally agreed not to set eBook prices below Apple’s iBookstore prices (a “most-favored-nation” provision) and plead a variety of non-statutory grounds for recovery, including certain common law torts and, in Québec, claims under the Quebec Civil Code.

As in the United States, the key substantive issue in Canada will be whether the conduct of Apple and the defendant publishers constitutes an illegal conspiracy. The case also raises some uniquely Canadian issues relating to jurisdiction and certification and the interpretation of Canada’s conspiracy offense.

Threshold Issues: Jurisdiction and Certification

Fully litigated competition civil actions are still rare in Canada, including class actions. To the extent that litigation has occurred in the class action context, most of it has revolved under the threshold issue of whether or not the class should be certified to proceed and, specifically, whether “indirect purchasers” claims are permissible.

The ability of indirect purchasers to commence price-fixing class actions in Canada is currently unsettled, with conflicting provincial appellate decisions in British Columbia, Ontario, and Québec. The issue is now scheduled to be heard by the Supreme Court of Canada in the fall of 2012.

Depending on how and when the Court decides the “indirect purchaser” issue, the publisher defendants could argue that certification in Canada should be denied on the grounds that the plaintiffs purchased their eBooks indirectly, i.e., through distributors such as Amazon and Apple rather than from the publishers themselves. The plaintiffs’ claims anticipate this argument, as they go to some effort to characterize the eBook sales as direct sales between publishers and consumers, with publishers retaining title and physical possession of the eBooks.

The Canadian plaintiffs also claim that damages are capable of being assessed on an aggregate basis calculated as the difference (i.e., overcharge) between eBook prices in the presence and absence of the alleged agreement. This approach avoids the necessity of making individual damages arguments at the certification stage and is another strategy to counter indirect purchaser related arguments by defendants.

Another defense that can be raised in Canada in the context of “foreign” cartels is that the courts lack jurisdiction over extra-territorial defendants. The Supreme Court of Canada recently pronounced on the substantive aspect of this question in a trilogy of decisions considering the ability of Canadian courts to assert substantive jurisdiction in civil claims involving foreign defendants.

The basic test is that Canadian courts can assume jurisdiction where there is a “real and substantial connection” between the matter at issue and Canada. In its trilogy of decisions, the Supreme Court of Canada clarified that, in establishing whether such a connection exists, a court should consider if: (i) the defendant is domiciled or resident in the province, (ii) the defendant carries on business in the province, (iii) the tort was committed in the province, and (iv) a contract connected with the dispute was made in the province. The Court also held that, even where substantive jurisdiction is established, the claim should proceed subject to a court’s discretion to stay the proceedings on the basis of forum non conveniens.

As a general observation, it is difficult to succeed in contesting competition cases on jurisdictional grounds unless the defendant has no business presence in Canada at all. Even then, the real issue is often that of establishing “personal” jurisdiction over the defendant rather than “substantive” jurisdiction. Given that the majority of the defendants in the eBooks case carry on business in Canada, the chances of successfully contesting certification on jurisdictional grounds appear remote.

Substantive Issues

The key issue in Canada—as in the United States—is whether the agency agreements between the publishers and Apple are illegal at all involved any illegal coordination at all.

As noted, the plaintiffs in Canada principally rely upon section 45 of the Act, which is analogous to section 1 of the U.S. Sherman Act.

Section 45 makes it a per se criminal offense for competitors (or potential competitors) to enter into agreements to: (i) fix, maintain, increase, or control the price for the supply of a product; (ii) allocate sales, territories, customers, or markets for the production or supply of a product; or (iii) fix, maintain, control, prevent, lessen, or eliminate the production or supply of a product.

In the United States, the defendants have argued vigorously that the agency agreements are the product of a series of separately negotiated bilateral agreements that did not involve any form of illegal horizontal collusion. They also dispute allegations that circumstantial evidence of meetings and information exchanges support the existence of illegal agreements. The defendants argue that the occasional meetings between publishers were only for social purposes or to discuss market trends or legitimate joint ventures, and that the similarity among the agency agreements can be explained by Apple’s desire for uniform supplier agreements.

Proof of the existence of an “agreement” will obviously be a key issue in Canada as well. In Canada, as in the United States, information exchanges between competitors are not in and of themselves illegal. However, they can form the basis for concluding that an illegal agreement was reached, circumstantial evidence being commonly relied upon for that purpose in civil proceedings under section 36 (and in criminal prosecutions as well).

Another issue that has been raised by the U.S. proceedings is whether the shift by the publishers from a wholesale to an agency model was illegal simply because the new model could adversely affect pricing for eBooks, even if there were no express agreements between the publishers (and Apple) to “fix” these prices. In other words, is an arrangement illegal if it does not literally fix prices, but has the effect of increasing prices nonetheless?

This could be an issue in Canada as well, now that liability under section 45 requires that conduct fit within defined categories, i.e., in this case, that there be an agreement to “fix, maintain, increase or control the price for the supply of [a] product”. There is no case law on point yet, but it is interesting to note the Bureau’s approach to the issue in its enforcement guidelines on section 45 (the “Collaboration Guidelines”). In the discussion of price-fixing agreements in these Guidelines, the Bureau takes the very broad view that section 45 prohibits any arrangements between competitors to fix or increase the prices paid by customers (or a component of price, such as a surcharge or credit terms). According to the Bureau, this can include agreements to “fix prices at a predetermined level, to eliminate or reduce discounts, to increase prices, to reduce the rate or amount by which prices are lowered, to eliminate or reduce promotional allowances and to eliminate or reduce price concessions or other price related advantages provided to customers.”

The Bureau also notes that price fixing can be accomplished in many ways, and need not establish an actual price for the relevant product; rather, prohibited price-fixing agreements could involve agreements between competitors to use a common price list in their negotiations with customers, to apply specific price differentials between grades of products, to apply a pricing formula or scale, or not to sell products below cost.

Of note, however, the Bureau also states that it does consider arrangements between competitors to fall under section 45 “solely on the basis that they have the effect of increasing prices charged by competitors”. For example, the Bureau would not proceed against an agreement among competitors to implement certain measures designed to protect the environment or implement a new industry standard simply because this may increase the costs of producing a product and ultimately result in an increase in price to consumers.

While the Bureau’s Collaboration Guidelines are not binding on the courts, one can see the defendants in the eBooks case potentially relying on a similar line of thinking to assert that their distribution arrangements cannot be condemned solely on the basis that an ancillary effect may be to raise prices, when these arrangements otherwise have benign or even beneficial effects.

In addition to the above, other specifically Canadian issues could arise, owing to the particular nature of the conspiracy offense in Canada, both in its current and recently repealed versions.

The current version of section 45 was enacted in March 2009 and came into force in March 2010. Importantly, the previous version of section 45 (i) did not limit the offense to horizontal agreements between competitors/potential competitors, or to the three categories of conduct specified above, and (ii) incorporated a “market effects” test that required proof (beyond a reasonable doubt) that the impugned agreement prevented or lessened competition “unduly” or resulted in an “unreasonable” enhancement in price. It is generally agreed that, by eliminating proof of market impact as a condition precedent to criminal liability, the new section 45 also arguably lowers the bar for civil recovery by private litigants under section 36.

Given the time frames involved, certain of the Canadian plaintiffs are purporting to rely on both the pre- and post-amendment versions of section 45. This could ultimately require these plaintiffs to prove that the pre-March 2010 conduct in question resulted in an “undue” lessening or prevention of competition, or an “unreasonable” enhancement of prices, in order to recover. Although the plaintiffs would not be required to meet the criminal burden of proof in this regard, given the civil nature of the proceeding, there is no doubt that having to prove market impact would significantly complicate their ability to prevail in any contested proceeding. For example, Apple and the publisher defendants would no doubt argue that the arrangements had a pro-competitive effect by facilitating Apple’s entry and accelerating innovation and increased competition and output.

While the assumption is that market impact considerations will not be relevant for civil litigation under the current version of section 45, this is not yet settled since there have not been any decided cases. For example, it is possible that a court might consider the effect of the agreements in this case, including any pro-competitive justifications, in deciding whether they qualify as per se prohibited price-fixing agreements under section 45 to begin with.

At the same time, one of the difficult issues facing plaintiffs with respect to post-amendment conduct will be how to characterize Apple as a “competitor” of the publishers, given that new section 45 only applies to agreements between competitors (or potential competitors). While there are historical precedents in Canada for parties being convicted for participating in cartels organized by upstream or downstream parties, these cases were decided under the old version of section 45, which was not limited to prohibiting anticompetitive agreements among “competitors.”

Conclusion

Although the key legal battles in the eBooks case will no doubt be fought in the United States, the litigation raises interesting issues for Canada as well. In particular, to the extent that the case actually proceeds to litigation, it could raise—and decide—important issues relating to the interpretation of the new per se conspiracy offense under the Act.

 

Northern District of California Reiterates That You Can Monopolize a Technology Market

Not every antitrust market is a physical product market.

In Apple, Inc. v. Samsung Electronics Co., Ltd., Case No. 11-CV-01846 (N.D. Cal. May 14, 2012) (Koh, J.), a patent case, the court refused to dismiss Apple’s counterclaims, including a Sherman Act § 2 counterclaim, against Samsung arising out of Samsung’s alleged manipulation of the mobile phone standard-setting process (which alleged resulted in the industry being “locked in” to technology owned and controlled by Samsung). The decision features three holdings of note:

  1. The court rejected Samsung’s argument that Apple had not pled a relevant antitrust market because it alleged monopolization of a technology market, and not a physical product market. Samsung’s argument that only physical product markets are cognizable was novel, but many courts have accepted technology markets as relevant markets. As have the DOJ and the FTC.
  2. The court also rejected Samsung’s argument that Apple had not adequately alleged market or monopoly power. Under Illinois Tool Works, of course, patents do not establish market power. But where a patent is incorporated into an industry standard, and where the standardization of the patented technology prevented the development of other proprietary technologies, the entity that caused the Standard Setting Organization (“SSO”) to adopt its technology may have market power, the court held.
  3. Finally, the court reiterated that an SSO can be used to obtain monopoly power and create anticompetitive effects on the relevant markets.  That can occur in a consensus-oriented private standard-setting environment, when a patent holder’s intentionally false promises to license essential proprietary technology on FRAND (fair, reasonable, and non-discriminatory) terms is coupled with the SSO’s reliance on that promise when including the technology in a standard, and the patent holder subsequently breaches that promise. Allegations of false FRAND commitments are subject to Federal Rule of Civil Procedure 9(b)’s heightened pleading standard, which Apple met.

Moral of the story: a robust and properly-framed SSO manipulation complaint can be difficult (though not impossible) to dismiss.

Optimization WordPress Plugins & Solutions by W3 EDGE
%d bloggers like this: