Distribution, Competition, and Antitrust / IP Law

Private Standard-Setting Efforts Pose Antitrust Risks

English: Stateic Ram chip form a NES clone. 2K...

SRAM (Photo credit: Wikipedia)

By “private” standard-setting, I’m referring to agreements between or among competitors outside the context of a Standard-Setting Organization (“SSO”) open to the industry and governed by (at least relatively transparent) rules.

Such agreements carry antitrust risks, as illustrated by the recent case of GSI Technology, Inc. v. Cypress Semiconductor Corp., Case No. 5:11-cv-03613 EJD (N.D. Cal. July 6, 2012) (Davila, J).

GSI, a competitor of Cypress in the field of development and manufacture of static random access memory (“SRAM”), alleged that Cypress and other competitors agreed to share information for the development of new “networking” SRAM products. The alleged “consortium” used its agreement to exclude GSI and others from participation in development of product standards intended to serve the market, and allegedly injured their ability to enter the market in a timely manner and to compete effectively for customers. Delayed market entry — even by just a few months — allegedly enable the consortium to lock in the market’s relatively few purchasers, including Cisco.

The court held that the complaint sufficiently alleged, among other things, a Sherman Act Section 1 (unreasonable restraint of trade) violation.

Now, not every non-price agreement between competitors will survive a motion to dismiss. However, in the GSI case, the plaintiff alleged that the consortium supplied 2/3 of the “fast” SRAM worldwide, and that the goal of the consortium was monopolization. The defendant allegedly was the largest networking SRAM supplier in 2010. Given these allegations, the court concluded that the complaint sufficiently alleged that the defendant had market power.

I express no opinion on the facts of the case. However, the decision refusing to dismiss the complaint nicely illustrates the dangers inherent in competitor collaborations — especially those that are not open to the industry.  Any such collaboration should be evaluated for antitrust risk, especially where the firms have substantial market shares.

(Open SSOs pose their own share of antitrust issues, however. See the related article below, for example.)

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Explanation of the Alleged LIBOR Manipulation Scheme

Good background on the alleged scheme to manipulate LIBOR.  Via NPR’s Planet Money program, again.  About halfway through, the program discusses allegations of interbank agreements to manipulate reported LIBOR rates.  (It’s NPR show #384 on the page that opens if you click the link.)

But does an interbank LIBOR conspiracy even make sense?  Below in the link from economicpolicyjournal.com there’s an argument that the scandal is really a tempest in a teapot, because the banks can’t set the interest rates:

Interest rates are market prices. If banks got together and claimed to be paying less than they were, which resulted in lower rates overall, this would result in a situation where the demand for loans would be greater than the supply. If banks claimed they were paying more than they were, then the demand for loans would be less than the supply.

Well, perhaps . . .  But — and without knowing anything about the actual facts of what has transpired here — it seems to me that there might nevertheless, purely as a matter of economic theory, be short-term opportunities for agreements to adjust or affect the reported LIBOR rates.  Although the economicpolicyjournal.com article argues that those opportunities are “infinitesimal,” it would be interesting to see some actual data or analysis.  They may back up the article’s intuition.

P.S. — the rather archaic way in which LIBOR is actually calculated — covered in the NPR story — is really quite fascinating.

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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.”


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.


Court Refuses to Dismiss Antitrust Claims in Apple E-Book Case

I previously covered the allegations in the Apple E-Book case here.

Today (May 15), the Southern District of New York (Cote, J.) refused to dismiss the class plaintiffs’ antitrust claims against Apple and the e-book sellers.  See In re: Electronic Books Antitrust Litigation, Case No. 11-MD-2293 (DLC).  In doing so, the court indicated that the plaintiffs’ claims are subject to a per se analysis and not a Rule of Reason treatment. 

The court viewed the alleged conspiracy as fundamentally horizontal in nature, with Apple sitting at the “hub” of a hub and spoke conspiracy. 

Other notable aspects of the decision include:

  1. The court’s determination that the plaintiffs had sufficiently alleged direct evidence of a conspiracy.
  2. The court’s refusal to weigh competing evidence as to whether alternative, non-conspiratorial explanations account for the defendants’ conduct.  If the conspiracy claim is plausible, the court held, it cannot be dismissed.
  3. The court’s relative uninterest in the specific “motivations” of the various defendants.  The complaint plausibly alleged that each defendant (including Apple) shared the basic “twin purposes of raising the price of eBooks and eliminating retail competition even though their motives for joining the conspiracy were different.”
  4. The court’s ruling that even though the alleged agreements did not render all eBook pricing uniform, they were subject to antitrust challenge because the plaintiffs had alleged that the defendants “conspired to eliminate retail price competition and to raise the price of eBooks above the $9.99 price set by Amazon.” (emphasis in original).

Here’s the Skinny on the Apple E-Book Case

The Apple e-book case has been front-and-center in the media this last week. For those not following it carefully, here is a quick sketch of the allegations and what’s at stake. (I hasten to emphasize that the government’s allegations are only allegations at this point in time.)

What’s at stake? The pricing of electronic books, or “e-books.” The government (the DOJ antitrust division) alleges that several years ago Amazon lowered e-book pricing dramatically (often to $9.99 per e-book) in connection with its Kindle e-book readers, a move which dissatisfied the book publishers.(*) Other e-book retailers began to match or approach Amazon’s pricing (which the government alleges was profitable).

Who is alleged to have done what? The government alleges that the book publishers and Apple agreed to raise retail e-book prices and to otherwise limit competition in the sale of e-books. The allegations of agreement or conspiracy are important, because absent proof of such, it’s not at all clear that anything unlawful occurred.

What is the nature of the alleged conspiracy? The government alleges that the book publishers agreed to move away from a “wholesale” pricing model, whereby the book or e-book retailer retains retail pricing authority, towards an “agency” model, where the book publishers retain retail pricing authority and the online bookstores are mere “agents.” (According to the government, the wholesale model has prevailed in the book publishing industry for over 100 years.)

What would be the rationale for such an agreement? Again, according to the government, the book publishers wanted to raise e-book pricing. The publishers also allegedly feared Amazon’s e-book pricing spilling over into the hardcopy market. And – again, according to the government – the publishers feared that Amazon’s distribution system would enable it to become a strong rival publisher that could and would deal with authors directly, ultimately threatening the publisher’s business model.

Apple allegedly went along with the plan because under it, Apple would receive a guaranteed and significant 30% commission on books, each of which would presumably be sold at a higher price than otherwise absent the agreement. Apple allegedly communicated with each publisher to coordinate common agreement terms. Relatedly, the government alleges that the book publishers indicated that they would impose the agency model on other retailers and raise e-book prices at all other e-book outlets, too. (Without such a commitment, one presumes that higher pricing only at the Apple online store would not be very effective.)

How did the e-book pricing work? The government alleges that “Apple Agency Agreements” entered into by the book publishers specified price tiers for books tied to hardcopy pricing ranges. Apple also received an “unusual” Most-Favored Nations (“MFN”) clause requiring each publisher to guarantee that it would lower the retail price of each e-book in Apple’s iBookstore to match the lowest price offered by any other retailer, even if the publisher did not control the other retailer’s ultimate consumer price. The government alleges this MFN meant Apple did not have to compete on price at all, while still maintaining its 30% margin.

What is the nature of the government’s evidence? The government alleges, among other things, regular meetings and communications among the publisher defendants; direct discussions and agreements among those defendants; the publisher defendants’ attempts to conceal the “illicit nature” of their communications; parallel pricing or price increases following the April 3, 2010 effective date of the Apple Agency Agreements between each publisher and Apple; and various acts contrary to economic interests (i.e., it would have been contrary to the interests of any single publisher to attempt to impose agency pricing on all of its retailers and then raise its retail e-book prices). The government’s complaint recites many details about alleged communications between the book publishers at high levels, including at the CEO level.

What was the alleged result of the parties’ cooperation? The government contends that e-book pricing went up substantially, from $9.99 per e-book under the Amazon approach to $12.99 or $14.99.

What is the government suing for? Injunctive relief, under Section 1 of the Sherman Act.

What is notable about the relief sought? Although the Complaint reads like a classic conspiracy case, the government is not seeking monetary fines, nor is it exercising its criminal price-fixing authority. Instead, it is seeking only injunctive relief.

Who is left in the suit? Apple, Penguin, and MacMillan. On Wednesday of last week, Hachette, HarperCollins, and Simon & Schuster settled the charges by agreeing to a proposed consent decree. Those publishers have agreed, among other things, not to use the sort of MFN arrangements present in the Apple Agency Agreements.

Are those settling admitting liability? No, and the publishers have also said that the approach with Apple was pro-competitive because it counter-balanced Amazon’s stranglehold on the market.

Are the remaining defendants going to fight the allegations? Presumably. Penguin’s CEO in particular has denied any wrongdoing.  Because the government is seeking only injunctive relief, it’s not clear that a loss-after-litigation would be any worse for the remaining companies than a settlement.

Where is the case pending? In the Southern District of New York, presumably because New York is where the publishers are located.

Is there other related litigation? Yes. Sixteen State Attorneys General have filed suit seeking damages on behalf of consumers. Private class action litigation is also pending.

(*) Hachette Book Group, HarperCollins, Holtzbrinck Publishers (MacMillan), Penguin Group (USA), and Simon & Schuster. The government alleges that these defendants are five of the six largest publishers of trade books in the United States. (Trade books are alleged not to include specialty books such as children’s picture books, academic textbooks, and reference materials.)

Can a Litigation Settlement Violate the Antitrust Laws? — Part II

In a blog post about a week ago, I discussed the issue of litigation settlements potentially violating the antitrust laws, and suggested a basic framework for analyzing the problem. How would this analysis work in practice? Here, I address that second question.

Consider the following hypothetical. Suppose that the plaintiff complains the defendant has engaged in attempted monopolization by entering into exclusive contracts with the majority of distributors throughout the country. Suppose further that, although the relevant market is nationwide, distributors, by law, are licensed on a state-by-state basis. Let us further stipulate that the Section 2 claim is bona fide and has some significant chance of being successful if tried. The following are potential settlement agreement restrictions, and analyses of the same:

1. Defendant agrees to terminate some or all exclusive distribution relationships. Analysis: unproblematic; restriction itself highly unlikely to violate Section 1.

2. Defendant and plaintiff agree to allocate the distributors, with defendant keeping some under exclusive contracts and plaintiff keeping some under exclusive contracts. Analysis: problematic, because plaintiff is not entitled, under Section 2, to such an arrangement, which may itself be anti-competitive (it could, for example, foreclose competition by other competitors or potential competitors at the level of the defendant and plaintiff).

3. Defendant agrees to pricing no less than X for period of time Y to allow plaintiff the ability to compete. Analysis: problematic, because this restriction is not directly related to the alleged Section 2 violations, and a Section 2 remedy would most likely not include court-imposed restrictions on the defendant’s pricing.

4. Defendant and plaintiff agree on reciprocal pricing commitments. Analysis: a fortiori, even more problematic than No. 3, because we now have a bilateral agreement between competitors regarding prices or price levels.

In short, I am suggesting that one look at the likely injunctive relief available in the underlying litigation, and compare it to the settlement agreement. If the settlement agreement is within the boundaries of injunctive relief that is likely to be awarded by the court (or at least possibly awarded), then its provisions may be lawful.

Can a Litigation Settlement Violate the Antitrust Laws? — Part I

Here’s a longer post on a substantive legal issue.  I hope to do these from time-to-time.

On the one hand, the law strongly favors settlements. On the other, Section 1 of the Sherman Act, 15 U.S.C. § 1, condemns certain horizontal agreements between or among competitors, including certain agreements relating to price, as per se illegal.

In light of these potentially competing principles, I consider here whether the settlement of litigation by two rivals (for example, one company’s Section 2 attempted monopolization claim against another) can lawfully include provisions that, but for the ongoing litigation and its settlement, might be argued (most likely, by third parties) to constitute Section 1 violations. For example, what if one company, in a settlement of attempted monopolization litigation, promises the other company that it will not give certain discounts to certain classes of customers?

Although some of the general principles here would also apply to other types of claims, I’ll largely stick with Section 2 claims as an example, for the sake of simplicity. (It makes little sense to consider horizontal restraints in the context of a settlement of Section 1 horizontal restraint litigation, but such restraints are conceivable.)

A starting point for consideration is the treatment of the settlement of patent claims. In the context of settling patent claims, courts generally have taken the view that if the settlement does not impose restrictions (even horizontal ones) that are broader than the plaintiff’s rights under the patent(s) in question, then the restrictions are not per se unlawful. Instead, they can only be condemned after, at a minimum, a “quick look”-type analysis that considers various factors, including potential anti-competitive effects. See generally Christopher M. Holman, Do Reverse Payment Settlements Violate the Antitrust Laws?, 23 SANTA CLARA COMPUTER & HIGH TECH. L.J. 489 (2007). One of the reasons courts have ruled as they have is that a patent is presumably valid under patent law – and if it is, the patentee enjoys a right to exclude granted by the federal government.1

How does the patent approach translate to the settlement of antitrust litigation that does not involve, or does not primarily involve, patent claims? In this context, unlike in the patent context, there is no underlying legal right to exclude a competitor. We have to reason by analogy, given a relative dearth of case law. To some extent, we may have to assume that the general principles derived from intellectual property (“IP”) cases still hold in cases where IP rights are not at issue, and we cannot completely eliminate the risk that a court would conclude that the same principles do not apply.

There are reasons to think the analogy holds, and reasons to think that it may not. Supporting application of the same principles are the following: (i) the law’s strong policy in favor of settlements and (ii) the fact that while a patent confers a lawful background, or baseline, against which to measure a horizontal agreement, so too does an antitrust Section 2 judgment, or the right to obtain such a judgment under Section 4 of the Clayton Act. Cf. Blackburn v. Sweeney, 53 F.3d 825 (7th Cir. 1995) (at least suggesting that a settlement agreement imposing restrictions within the zone that might be imposed by future litigation would not be per se unlawful); Clorox Co. v. Sterling Winthrop, Inc., 117 F.3d 50 (2d Cir. 1997) (trademark agreement precluding certain advertisements and uses of trademark not per se unlawful, in part because trademarks are themselves not exclusionary).

On the other hand, patent law is unique. U.S. patent law confers upon patent holders the right to exclude others from practicing the patents. Although patents no longer are presumed to create market power, see Illinois Tool Works Inc. v. Independent Ink, Inc., 547 U.S. 28 (2006), in many cases they do just that. Furthermore, patents are presumed to be valid, by statute, even if the patent holder has doubts about validity. Because a patent confers the power to exclude some (or all) competition in a market, it is not surprising that courts have reasoned that settlements of patent disputes or patent litigation that prohibit competition in a zone no broader than the zone authorized by the patent itself are either not unlawful, or are subject to a quick look or full Rule of Reason analysis. The “lawful monopoly” created by many patents, and the statutory presumption of patent validity, are features not found outside patent law. Additionally, in the patent area the general policy favoring the settlement of litigation is affected not merely by the parties’ “private ends” that are at issue, but also the public interest in limiting the grant of patent monopolies to “novel and useful invention[s].” United States v. Singer Mfg. Co., 374 U.S. 174, 199 (1963) (White, J., concurring).

Assuming that the analogy is valid, we still need to consider whether the settlement exceeds the scope of any other pre-existing rights. The rights to which the plaintiff is entitled are essentially defined by the world in which no antitrust violation takes place. In other words, the plaintiff has a right to be free from antitrust violations. But what, in practice, does this mean?

It is clear that a Section 2 court can impose prohibitions on a monopolist as a form of injunctive relief. See generally Areeda ¶ 653. For example, a Section 2 court, in condemning exclusive dealing, may impose equitable remedies aimed at halting the exclusive dealing. See United States v. Dentsply Int’l, Inc., 399 F.3d 181 (3d Cir. 2005), cert. denied, 546 U.S. 1089 (2006). Similarly, a Section 2 court, in condemning certain licensing arrangements, can forbid per-processor licensing and tying. See United States v. Microsoft Corp., 56 F.3d 1448, 1451 (D.C. Cir. 1995). And the Federal Trade Commission, at least, believes that it can require a patent holder who has violated Section 2 to license its technology at specified reasonable and non-discriminatory (“RAND”) rates. (The D.C. Circuit reversed this decision on causation grounds. See Rambus Inc. v. Federal Trade Comm’n, 522 F.3d 456, 466 (D.C. Cir. 2008), cert. denied, 129 S.Ct. 1318 (2009).) Additionally, courts hearing predatory pricing cases presumably have the power to order monopolists to refrain from price predation. In other words, they presumably have the power to order pricing be above some measure of variable cost. “Little is lost from enjoining conduct already determined to be anticompetitive, provided that the conduct makes little or no contribution to competition or efficiency. Further, there is no unfairness or disincentive to meritorious competition in simply preventing the conduct at the outset or ordering the monopolist to stop.” Areeda ¶ 653b at 145.

To the extent that a settlement agreement restriction prohibits an activity that would itself constitute a Section 2 violation, and the restriction is no broader than the Section 2 plaintiff’s right to be unburdened by such activity, there is an argument that the restriction is ancillary to a legitimate litigation settlement. Under this argument, at the very least, such restrictions should not be condemned as per se illegal, but should be considered under a Rule of Reason analysis that takes into account both the possible anti-competitive effects, as well as the pro-competitive efficiencies, of the overall arrangement, or under a not too dissimilar quick-look analysis.

In an upcoming post, I will discuss how this analysis might work in practice.

1 Note, however, that the law here is evolving, and that government antitrust enforcers have recently taken a harsher view of so-called “reverse payments” whereby a patentee sues a generic manufacturer, and then settles with it by making a payment and in return receiving a commitment not to market product. (This occurs most often in the pharmaceutical industry, and raises complexities under the Hatch-Waxman Act.)

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