Distribution, Competition, and Antitrust / IP Law

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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