Distribution, Competition, and Antitrust / IP Law

“And the Plaintiffs Don’t Have to Sue My Competitors Because? . . . .”

One of the pet peeves of antitrust defendants is that the joint-and-several liability rule often means that plaintiffs can pick and choose which defendants to sue. (Plaintiffs will say – that’s a design feature of the antitrust laws, and not a bug.) In Ward v. Apple, Inc., the Northern District of California made it harder for plaintiffs to do the picking and choosing. Yesterday, the Ninth Circuit pushed the pendulum back, making it more difficult for defendants to argue that the picking and choosing is problematic.

In a nutshell, the plaintiffs (a putative class of consumers) alleged that Apple conspired with AT&T Mobility (ATTM) to violate the antitrust laws in connection with Apple’s agreement with ATTM that ATTM would be the exclusive provider of voice and data services for the iPhone. According to plaintiffs, the exclusivity agreement enabled ATTM to charge supra-competitive prices for wireless services; Apple allegedly shared in ATTM’s revenues. Simplifying here a complex procedural history, the plaintiffs eventually brought suit against Apple only. Despite the general rule that plaintiffs can pick the tortfeasors they want to sue, the district court held that ATTM was a “necessary party” under Federal Rule of Civil Procedure 19.

The Ninth Circuit reversed and remanded for further proceedings. It held that an absent (alleged) antitrust co-conspirator can, under certain circumstances, be a required party under Rule 19 – at least where the absent party has “legally protected” interests to defend. However, it set the bar fairly high. In particular, the court rejected:

  • Apple’s argument that ATTM’s possible increased regulatory scrutiny gives ATTM a legally protected interest (though the court did not decide whether such scrutiny could ever constitute a sufficient interest);
  • The argument that reputational interests can make a party a required party under Rule 19; and
  • The argument that ATTM’s particular contract rights amounted to legally protected interests.

In short, it is once again harder – though not impossible – to argue that all alleged co-conspirators must be joined as defendants in an antitrust suit.

Another Example of Why You Should Follow the “New York Times” Rule — the Bazaarvoice Decision

Have you heard of the New York Times rule? The rule is: don’t write something down in a business communication unless you’re comfortable with its text appearing in the New York Times. If everyone followed this rule, lawyers would be substantially less busy than they are. Unfortunately for clients, employees and other stakeholders often seem to forget the rule.

And so in the recent decision in United States v. Bazaarvoice, Inc., Case No. 13-cv-00133-WHO (N.D. Cal. Jan. 8, 2014) (Orrick, J.), the Court agreed with the Department of Justice and held that Bazaarvoice violated the Clayton Act when it acquired its primary competitor, PowerReviews. (The two companies compete in the area of online commerce known as “Ratings and Reviews” platforms for e-retailers and others.) The court found the evidence that Bazaarvoice and PowerReviews expected the transaction to have anticompetitive effects was “overwhelming.” The court cited numerous internal Bazaarvoice communications – including:

  • that the transaction would enable the combined company to “avoid margin erosion” caused by “tactical ‘knife-fighting’ over competitive deals”;
  • that the acquisition was an opportunity to “tak[e] out [Bazaarvoice’s] only competitor, who . . . suppress[ed] [Bazaarvoice] price points . . . by as much as 15% . . . .”;
  • that there were “[l]iterally no other competitors,” and the acquisition would result in “[p]ricing accretion due to [the] combination” of the two firms;
  • that the executive team thought the transaction would improve “pricing power;”
  • that “taking out one of your biggest competitors can be game-changing;”
  • that a “pro” of the deal was “[e]limination of our primary competitor”; and
  • that the deal would “[c]reate[] significant competitive barriers to entry and protect[] [Bazaarvoice’s] flank.”

Even the Bazaarvoice court recognized that intent itself doesn’t prove a likelihood of competitive harm, but the court clearly thought the pre-merger intent was probative and persuasive.  It rejected Bazaarvoice’s argument that the premerger documents merely evinced competitive strengths and opportunities in adjacent markets.

If there had been no such hot documents in the case, the result might have been the same anyway. But why take the chance? You’re much better off following the New York Times rule.

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Excited to Help Revise ABA Antitrust Jury Instructions

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.

 Model Jury Instructions

White House Targets Patent “Trolls”

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:

patent_troll_chart

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Antitrust Suits Increased 48% in 2012

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.

Settling a Patent Lawsuit Can’t Violate the Antitrust Laws

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.”

DOJ Reviews 2011 Activity

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.

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.

A Way To Avoid Arbitration?

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.

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.

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