Distribution, Competition, and Antitrust / IP Law

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

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

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

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

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

In dissent, Judge Griffin wrote that

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

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

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

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.

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.

Is the NCAA a Cartel?

English: National Collegiate Athletic Associat...

The usually good Planet Money program has an excellent recent podcast setting forth the arguments for and against the NCAA [National Collegiate Athletic Association] being an unlawful cartel.

Basketball, Surreptitious Recordings, and Antitrust

Donald Sterling — yes, that Donald Sterling — filed an antitrust lawsuit a few days ago against the National Basketball Association.  You can download a copy here: Sterling Antitrust Complaint.

It’s not clear if the complaint has now been mooted — Mr. Sterling apparently filed it after reaching an agreement to sell the Los Angeles Clippers to Steve Ballmer only because the NBA allegedly refused to confirm that it was cancelling the June 3, 2014 owners’ meeting(*) regarding a forced sale of the franchise.

The complaint asserts causes of action for breach of contract and the like.  The gist of the single antitrust claim is that there is a market for ownership of NBA franchises and that a collective decision to force a sale of the Los Angeles Clippers would injure not only Mr. Sterling but also competition in the market.  It would “mak[e] the relevant market unresponsive to consumer preference and to the operation of the free market.”

The complaint seeks at least $1 billion in damages.

The issue raised is an interesting one: can a sports league collectively control its membership?  If the answer is “no,” how far does the principle extend?  Is there a “market” for golf club memberships which cannot be constrained by collective action to vote out a club member for boorish behavior?  What about membership in non-profit associations generally?  If you think these latter restraints are OK, is the limiting principle found in the relevant market definition (i.e., being banned from one golf club out of dozens or hundreds in a metropolitan area isn’t competitively significant)– or somewhere else?

(*) Technically, a meeting of the NBA Board of Governors.

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Collusion Regarding Terms of Medical Resident Employment?

Did you ever wonder why teaching hospitals can conduct their medical residency “match” program?  And why they can share data and use it to help set wages for residents?  And why the match program effectively forbids salary negotiation?  The apparent result is that medical residents’ wages have remained flat for about 40 years.

Slate has the story — including the explanation for the above phenomenon, an antitrust exemption granted by Congress.  Discuss among yourselves the wisdom of that exemption.

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A Rare Challenge to a Class Action Settlement . . . From a Named Plaintiff

One of the named class plaintiffs in the high-tech employee antitrust case has filed an objection to the proposed class settlement.  The plaintiff, Mr. Michael Devine, analogized the approximately $300 million settlement (worth approximately 10% of alleged damages) to a “shoplifter . . . caught on video stealing a $400 iPad from the Apple Store” and a resulting settlement of $40, with the shoplifter keeping the iPad and making no admission of wrongdoing.

Objections by named plaintiffs are quite rare — though a single objection, even by a named plaintiff, is unlikely to carry the day.

The New York Times has the details here.


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Can Competitors Agree to Share Profits?

I just wrote an article about this issue, and the Ninth Circuit’s recent decision in the Safeway case, for the American Bar Association’s Antitrust Counselor newsletter.

You can view the whole article here.

Working On An Article

I’m working on an article on profit-sharing arrangements, and the labor antitrust exemption, for the American Bar Association’s Antitrust Counselor.  Should be out in a few months.

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