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...

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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.

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)

“Anti-Patent Troll” Fails to Secure Dismissal of Amended Antitrust Complaint

 

No-Troll

No-Troll (Photo credit: Wikipedia)

Back in January, I covered the case of Cascades Computer Innovation LLC v. RPX Corp., 2013 U.S. Dist. LEXIS 10526 (N.D. Cal. Jan. 24, 2013), where Judge Yvonne Gonzalez Rogers dismissed – with leave to amend – Cascades’ antitrust complaint against RPX, Dell, HTC, LG Electronics, Motorola Mobility, and Samsung. On December 3, 2013, Judge Rogers refused to dismiss Cascades’ amended complaint. See 2013 U.S. Dist. LEXIS 170517.

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.

In granting defendants’ motions to dismiss the original complaint, the Northern District of California agreed that Cascades had not adequately alleged a conspiracy, had not properly defined a relevant market, and had not adequately alleged harm to competition. In its amended complaint,(*) Cascades provided much greater detail about the negotiation history with RPX. Those alleged facts were sufficient for the Court to conclude that Cascades had adequately alleged both a horizontal conspiracy – an agreement among manufacturers not to deal with Cascades except through RPX – and a vertical conspiracy, i.e., an agreement between each manufacturing defendant and RPX. “[W]hile the [amended complaint] alleges a written agreement between RPX and each Manufacturing Defendant which permits individual negotiation, it also suggests that in this instance each Manufacturing Defendant understood that it should refrain from exercising its right to negotiate individually with Cascades and instead deal with Cascades either through RPX or not at all.”

The Court also rejected various other arguments advanced by the defendants, including the argument that defendants did not want to deal with Cascades individually because Cascades had overpriced its patents. While that theory was “plausib[le],” the Court did “not find it so fully and convincingly explanatory as to render Cascades’ revised allegations implausible by comparison.” The Court also determined that the conspiracy alleged by Cascades “makes economic sense because it would permit potential licensees . . . to realize RPX’s publically stated promise of ‘wholesale’ pricing, provided they refrained from competitively bidding against each other and sent RPX to the market in their stead, where it would be the sole viable purchaser.”

Cascades raises novel issues involving the application of antitrust law to the activities of defensive patent aggregators. It will be interesting to see how the case develops after discovery is completed.

(*) Cascades voluntarily dismissed its claims against LG and did not name Dell as a defendant in its amended complaint.

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Can An “Anti-Patent Troll” Be a Monopsonist or a Section 1 Conspirator?

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A recent interesting case suggests that “anti-patent trolls” may in theory face antitrust liability. In Cascades Computer Innovation LLC v. RPX Corp., 2013 U.S. Dist. LEXIS 10526 (N.D. Cal. Jan. 24, 2013), Judge Yvonne Gonzalez Rogers dismissed – with leave to amend – Cascades’ antitrust complaint against RPX, Dell, HTC, LG Electronics, Motorola Mobility, and Samsung.

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.

In granting defendants’ motions to dismiss the complaint, the Northern District of California agreed that Cascades had not adequately alleged a conspiracy, had not properly defined a relevant market, and had not adequately alleged harm to competition.

The court also agreed that Cascades had not adequately pled a conspiracy that made economic sense. According to RPX, a more plausible explanation for the manufacturing defendants’ decision to decline a $5 million licensing offer was that the offer price was too high. RPX had been negotiating a $10 million deal for all of its 110 members, which made a $5 million offer to each of LG, Motorola, Samsung and HTC too high (collectively $20 million). Although the court did not endorse this and several other “economic sense” arguments, it concluded that Cascades

ha[d] fastidiously avoided providing specific facts with respect to the timing of the alleged negotiations and the interplay with the filing of [actions] for patent infringement. Cascades also will need to provide specific facts to clarify why, absent a conspiracy, it is economically irrational for the Manufacturing Defendants—who are being sued by Cascades for infringement of one patent, the ‘750 Patent—to decline an offer to license Cascades’ entire portfolio of 38 patents. Without clarification and specificity, the Court will not presume economic [ir]rationality where the circumstances giving rise to the lawsuit plausibly suggest nothing more than a tactical ploy to regain economic leverage that Plaintiff lost in the licensing negotiations.

However, the court also refused to hold that the alleged group boycott activity could not constitute a per se Section 1 violation. And the court rejected defendants’ argument that Cascades failed to allege antitrust injury because of the lack of allegations regarding possible consumer injury. “Anticompetitive conduct need not harm consumers specifically in order to cause antitrust injury.”

Although Cascades now has an uphill battle, given leave to amend the complaint, only time will tell whether it can allege sufficient facts to establish its conspiracy, competitive harm, and relevant market allegations.

As Professor Hovenkamp cogently wrote in a comment to the article below — a comment which still applies to the likely amended complaint:

As a matter of antitrust law, a great deal will depend on whether this is a naked agreement to refuse to license (or to suppress the price), or whether it is an ancillary agreement setting standards so as to exclude the plaintiff. A naked agreement among a group of competing manufacturers not to purchase a license or to pay only a low fee would be illegal per se under the antitrust laws. On the other hand, joint licensees who are actively engaged in standard setting do set standards that exclude some technologies. Standard setting is addressed under the rule of reason and generally upheld if there is an objectively reasonable basis for the exclusion. An objectively reasonable basis could include a decision that a patent offered by an outsider is not valid or that the manufactures already have suitable alternatives to the offered patent or are not infringing it.

Another possibility is that the defendant device manufacturers are not acting in concert at all, but are individually deciding not to purchase a license from the plaintiff. The firms are not monopolists, and in any event there is no law in the United States that requires even a monopolist (acting unilaterally) to purchase a license from an outside patentee.

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Under Agency Law, Standard Setting Organizations May Be Liable for Antitrust Violations of Their Members

As noted in this recent blog post, in TruePosition, Inc. v. LM Ericsson Telephone Co., No. 11-4574 (E.D. Pa. Oct. 4, 2012), the court held that a Standard Setting Organization (SSO) known as 3GPP may be liable for alleged Sherman Act Section 1 antitrust claims involving the wrongful actions of persons who acted on behalf of the SSO, even when those persons are representatives of the SSO’s corporate members.  (Hat tip to this LinkedIn posting which informed me about the blog post.)

The case involves allegations that defendants conspired to exclude plaintiff’s technology from industry standards (for Long Term Evolution, or LTE, telephone technology).  The SSO argued that the plaintiff’s claims were insufficient because the plaintiff’s theory of liability was one of “acquiescence.”  The SSO characterized the plaintiff’s claims as alleging that the SSO was on notice of the corporate defendants’ alleged misconduct but that the SSO failed to remedy it.  This “inaction,” according to the SSO, did not show the requisite agreement necessary to support a Sherman Act Section 1 claim.

Applying American Society of Mechanical Engineers, Inc. v. Hydrolevel Corp., 456 U.S. 556 (1982), the district court rejected the SSO’s acquiescence argument. 

“As Chairmen of the pertinent 3GPP subcommittees, the Corporate Defendants were agents of 3GPP acting on behalf of 3GPP, even when their actions violated 3GPP’s rules and regulations . . . .  As the facts are set forth in the Amended Complaint, and granting all reasonable inferences to TruePosition, 3GPP is charged with acting through agents whom it has imbued with apparent authority.  Such alleged action involved concerted action.  This is not a case involving mere membership in a standard-setting organiztion . . . .  It is the Corporate Defendants’ alleged unlawful conspiratorial conduct taken with 3GPP’s apparent authority as Chairmen of the relevant committees that makes 3GPP potentially liable for their actions. Under the facts presented in the Amended Complaint, 3GPP cannot consider itself as separate and distinct from the actions of the Corporate Defendants when they were acting with 3GPP’s apparent authority.”

The court also determined that the complaint adequately alleged minimally sufficient facts to plausibly suggest that 3GPP assented to the alleged conspiracy through the corporate defendants’ actions taken with the apparent authority of 3GPP holding leadership positions within its committees.  “This is not a case where most of the alleged unlawful activities were conducted by the Corporate Defendants outside the confines of 3GPP but, rather, the majority of the allegations specifically involve the actions of the Corporate Defendants as Chairmen of 3GPP’s committees thwarting and using its standardization process to disadvantage a competitor.”

The case is a useful reminder that an SSO has potential antitrust exposure for the activities of its members when the members act under color of authority of the SSO.

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.

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What You Need to Know About the Four Basic Types of Pricing Claims (Part 4)

In the last post, we saw that price information exchanges that do not impact pricing are not unlawful. However, we also saw that such exchanges can facilitate collusion and can provide plaintiffs with evidence supporting a price fixing charge.

A comment to the last post asked about how to structure information exchanges to avoid these potential problems.

In their antitrust healthcare guidelines, DOJ and FTC have provided guidance on this issue. Although the guidance comes in the context of the healthcare industry, there is little or no reason to suspect that the guidance would vary according to industry. Note, however, that DOJ/FTC guidelines are not binding on the courts, which may or may not accept them.

With those caveats out of the way, what do DOJ and FTC say about competitors’ collection or provision of price information? According to DOJ and FTC,

“Participation by competing providers in surveys of prices for health care services, or surveys of salaries, wages or benefits of personnel, does not necessarily raise antitrust concerns. In fact, such surveys can have significant benefits for health care consumers. Providers can use information derived from price and compensation surveys to price their services more competitively and to offer compensation that attracts highly qualified personnel. Purchasers can use price survey information to make more informed decisions when buying health care services.”

DOJ and FTC go on to note that without appropriate safeguards, however, information exchanges among competing providers may facilitate collusion or otherwise reduce competition on prices or compensation, resulting in increased prices, or reduced quality and availability of health care services. “A collusive restriction on the compensation paid to health care employees, for example, could adversely affect the availability of health care personnel.”

DOJ and FTC then articulate a “safety zone” for exchanges of price and cost information among providers that they will not challenge, absent extraordinary circumstances. The safety zone applies to a written survey where:

  1. the survey is managed by a third-party (e.g., a purchaser, government agency, health care consultant, academic institution, or trade association);
  2. the information provided by survey participants is based on data more than 3 months old; and
  3. there are at least five providers reporting data upon which each disseminated statistic is based, no individual provider’s data represents more than 25% on a weighted basis of that statistic, and any information disseminated is sufficiently aggregated such that it would not allow recipients to identify the prices charged or compensation paid by any particular provider.

These conditions are designed to prevent the sort of facilitation of collusion discussed in the last post.

Note that a price information exchange that does not meet these criteria is not automatically unlawful; it just does not enjoy the DOJ/FTC safety zone. But there is little reason to design a program that does not meet the safety zone criteria from the outset.

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What You Need to Know About The Four Basic Types of Pricing Claims (Part 3)

This is the third in a series of posts.  The last post can be found here.

Price information exchanges that do not impact pricing.  Such an exchange by itself is probably not subject to private challenge. See, e.g., Blomkest Fertilizer, Inc. v. Potash Corp. of Sask., Inc., 203 F.3d 1028 (8th Cir. 2000) (price verifications only concerned charges on particular completed sales, not future market prices; no evidence supported inference that the verifications had an impact on price increases; the only evidence was that prices were possibly cut as a result; defense summary judgment affirmed).

Note, however, that a price information exchange could be viewed as a “plus factor” that tends to support an inference of an actual price agreement.  Therefore, it is always advisable to consider the antitrust implications of any exchange of price information before engaging in such an exchange.

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