I recently became part of the team that will be revising the ABA Antitrust Jury Instruction Handbook. This book contains model jury instructions that are often used in antitrust cases throughout the United States.
The White House today issued a fact sheet on high-tech patent issues, recommending seven legislative actions and taking five executive actions. According to the White House’s statement, innovators continue to face challenges from Patent Assertion Entities (PAEs), companies that, in the President’s words “don’t actually produce anything themselves,” and instead develop a business model “to essentially leverage and hijack somebody else’s idea and see if they can extort some money out of them.” These entities are commonly known as patent “trolls.”
Of the seven legislative recommendations, I think the following four are the most interesting and potentially most significant:
Require patentees and applicants to disclose the “Real Party-in-Interest,” by requiring that any party sending demand letters, filing an infringement suit or seeking Patent and Trademark Office (PTO) review of a patent to file updated ownership information, and enabling the PTO or district courts to impose sanctions for non-compliance.
Permit more discretion in awarding fees to prevailing parties in patent cases, providing district courts with more discretion to award attorney’s fees under 35 USC Sec. 285 as a sanction for abusive court filings (similar to the legal standard that applies in copyright infringement cases).
Protect off-the-shelf use by consumers and businesses by providing them with better legal protection against liability for a product being used off-the-shelf and solely for its intended use. Also, stay judicial proceedings against such consumers when an infringement suit has also been brought against a vendor, retailer, or manufacturer.
Change the International Trade Commission (ITC) standard for obtaining an injunction to better align it with the traditional four-factor test in eBay Inc. v. MercExchange, to enhance consistency in the standards applied at the ITC and district courts.
The executive actions are more limited, including new and expanded PTO education and outreach materials. But of some note is a new PTO rulemaking process to require patent applicants and owners to regularly update ownership information when they are involved in proceedings before the PTO, specifically designating the “ultimate parent entity” in control of the patent or application. And the PTO will provide new targeted training to its examiners on scrutiny of functional claims and will, over the next six months, develop strategies to improve claim clarity, such as by use of glossaries in patent specifications to assist examiners in the software field. Also of note is an interagency review of existing Customs and Border Protection (CBP) and ITC procedures used to evaluate the scope of exclusion orders.
The following White House chart shows the remarkable recent growth of PAE litigation:
Antitrust lawsuits spiked by 48% last year, according to an article this week in Law360. This was the first increase since 2008 (the year after the Supreme Court decided Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), which raised pleading standards for antitrust and other suits).
According to Law360:
During the 12-month period ending Sept. 30, 702 antitrust suits were filed in federal courts, an increase of about 48 percent over the 475 cases brought the previous year, according to court data. The figures include lawsuits filed by private plaintiffs, as well as cases brought by and against the U.S.
Of those antitrust cases brought in 2012, 677 were brought by private plaintiffs, a 50 percent increase over the 452 private cases brought the previous year, according to the court data.
We’ll see what 2013 brings, but the recent spike may suggest that there is a positive correlation between the economy as a whole and antitrust suits. The dip since 2008 may be as much associated with the recession as with Twombly.
So the court in Federal Trade Commission v. Watson Pharmaceuticals, Inc., No. 10-12729 (11th Cir. Apr. 25, 2012) held (or more accurately reconfirmed). I’ve written about this issue previously (see my 2009 article on “The Lawfulness of Antitrust Settlements” in the downloads section of this blog).
In Watson, despite previous rejections of its position, the FTC once again argued that a patent litigation settlement between a branded pharmaceutical manufacturer (the patentee) and a generic pharmaceutical manufacturer that results in a payment from the branded manufacturer to the generic in return for the generic’s agreement to stay off the market can violate the antitrust laws. The FTC added a new gloss in Watson: such an agreement violates the antitrust laws if, at the time of the patent settlement, the patent was more likely than not invalid.
The Eleventh Circuit rejected the FTC’s argument. Unless a patent is obtained fraudulently, or unless the patent litigation is itself a sham, a settlement of patent litigation cannot violate the antitrust laws. (The one exception to this rule: if the settlement imposes restrictions beyond the terms of the patent itself, e.g., if it restricts competition beyond the remaining term of the patent.) As the court wrote, “absent sham litigation or fraud in obtaining the patent, a reverse payment settlement is immune from antitrust attack so long as its anticompetitive effects fall within the scope of the exclusionary potential of the patent.” (emphasis supplied).
The court articulated a number of rationales for its ruling, including the fact that patent litigation is usually high stakes, and parties rationally may want to settle even if the probability of a finding of validity or infringement is, strictly speaking, less than 50%. Additionally, the FTC’s approach would require an after-the-fact calculation of how “likely” a patent holder was to succeed in a settled lawsuit if it had not settled. Making such predictions is very difficult, and “is too perilous an enterprise to serve as a basis for antitrust liability and treble damages.” The FTC’s approach would also impose heavy burdens on the parties and the courts to essentially re-litigate patent issues. And finally, circuit courts other than the Federal Circuit have no expertise in the patent area, and they are not well-equipped to make determinations about patent infringement.
The best lines of the opinion are the following: “In closing, it is worth emphasizing that what the FTC proposes is that we attempt to decide how some other court in some other case at some other time was likely to have resolved some other claim if it had been pursued to judgment. If we did that we would be deciding a patent case within an antitrust case about the settlement of the patent case, a turducken task. Even if we found that prospect palatable, we would be bound to follow the simpler recipe for deciding these cases that is laid out in our existing precedent.”
In a November 17 speech, Acting Assistant Attorney General Sharis A. Pozen provided an overview of DOJ’s 2011 antitrust activity.
In Fiscal Year 2011, DOJ and FTC received 1,450 Hart-Scott-Rodino merger filings, up from 1,166 in 2010. (Perhaps this is good news for the economy.)
DOJ filed 90 criminal cases, the highest number in the last 20 years. It agreed to over $250 million in fines, charged 27 companies, and 82 individuals. Courts imposed jail terms on 21 individuals.
DOJ was fairly active in civil non-merger enforcement work, including its ongoing American Express litigation, the Blue Cross Blue Shield of Michigan case (concerning most favored nation clauses with hospitals), and settlements with MasterCard and Visa over merchant rules.
AAG Pozen also reviewed the 2010 Horizontal Merger Guidelines, noting that the DOJ has defined relevant markets in all public cases since the new guidelines were released, and opining that the Guidelines have not displaced traditional or predictable merger analysis.
The speech is available here.
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.
In EA Independent Franchisee Ass’n, LLC v. Edible Arrangements International, Inc. (D. Conn. No. 3:10-cv-1489-WWE, July 19, 2011) (no link yet), the court denied the franchisor’s motion to dismiss for lack of standing, allowing an association of franchisees to assert a declaratory judgment claim. (The association alleges various failures to disclose affiliate relationships and undisclosed fees associated with franchisees’ mandatory use of an online ordering system, among other things.)
The court allowed the suit to proceed even though the EA franchise agreement requires arbitration of disputes. The association has no right or obligation to arbitrate on behalf of its members, the court concluded.
Lesson: even if a franchisor has arbitration clauses in all its franchise agreements, its franchisees may neverthless find (or invent) a novel vehicle that takes them directly to federal court.
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.
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.)