Distribution, Competition, and Antitrust / Intellectual Property (IP) Law

Basketball, Surreptitious Recordings, and Antitrust

Donald Sterling — yes, that Donald Sterling — filed an antitrust lawsuit a few days ago against the National Basketball Association.  You can download a copy here: Sterling Antitrust Complaint.

It’s not clear if the complaint has now been mooted — Mr. Sterling apparently filed it after reaching an agreement to sell the Los Angeles Clippers to Steve Ballmer only because the NBA allegedly refused to confirm that it was cancelling the June 3, 2014 owners’ meeting(*) regarding a forced sale of the franchise.

The complaint asserts causes of action for breach of contract and the like.  The gist of the single antitrust claim is that there is a market for ownership of NBA franchises and that a collective decision to force a sale of the Los Angeles Clippers would injure not only Mr. Sterling but also competition in the market.  It would “mak[e] the relevant market unresponsive to consumer preference and to the operation of the free market.”

The complaint seeks at least $1 billion in damages.

The issue raised is an interesting one: can a sports league collectively control its membership?  If the answer is “no,” how far does the principle extend?  Is there a “market” for golf club memberships which cannot be constrained by collective action to vote out a club member for boorish behavior?  What about membership in non-profit associations generally?  If you think these latter restraints are OK, is the limiting principle found in the relevant market definition (i.e., being banned from one golf club out of dozens or hundreds in a metropolitan area isn’t competitively significant)– or somewhere else?

(*) Technically, a meeting of the NBA Board of Governors.

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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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Single-Brand Market Claims Are Not Dead

A photo of the Logo of the National Football L...

A photo of the Logo of the National Football League (NFL) (Photo credit: Wikipedia)

Modern antitrust law’s focus on inter-brand competition has made it much more difficult to plead and prove single-brand market claims. The law’s concern with inter-brand competition is so strong that some observers have all but written off such claims as essentially impossible to maintain.

But that would be a mistake. Proper, careful pleading in appropriate cases can at least take single-brand claims past a motion to dismiss.

For example, on August 2, the Northern District of California denied a motion to dismiss challenging antitrust claims arising out of the National Football League’s exclusive license deal with Reebok International, Inc. See Dang v. San Francisco Forty Niners, et al., Case No. 5:12-CV-5481 (EJD) (August 2, 2013) (Davila, J.). The court held that the putative class plaintiffs had adequately alleged a relevant market for the licensing of the trademark, logos, and other emblems of individual NFL teams for use in/on clothing.

True, the court noted that the plaintiffs had alleged “a market consisting of the intellectual property of at least thirty different and competing professional football teams as well as the intellectual property owned by the NFL itself.” But in doing so, it was rejecting the defendants’ argument that the market was “sports apparel or apparel in general.” Because the NFL decides which teams are its members, NFL-branded products in some sense constitute or belong to a single brand.  As the court wrote, “the logos and trademarks of the NFL and NFL teams may very well be the products themselves that consumers seek topurchase” (emphasis added).

The court in Lima LS PLC v. PHL Variable Ins. Co., Case No. 3:12-cv-1122 (WWE) (July 1, 2013) (Eginton, J.), was even clearer that a single-brand product market can be cognizable. There, the plaintiff advanced a Kodak-type aftermarket lock-in claim and alleged that the defendant insurance company monopsonized, or attempted to monopsonize, the secondary market for its own life insurance products. (Full disclosure: I worked on the briefs for the plaintiff.)

It is certainly true that it is not easy to prevail upon these sorts of claims — but it is not in all cases impossible.

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Mad Men Meets Antitrust

Don Draper

Don Draper (Photo credit: Christina Saint Marche)

Steven Pearlstein, writing for the Washington Post’s Wonkblog in an article entitled “Don Draper, your antitrust attorney is on line 2,” argues that the proposed merger of advertising / p.r. firms Omnicom and Publicis is not a good idea, and further argues that the “failing business model” defense makes little sense:

antitrust law, at least in the United States, is meant to protect consumers, not companies. There is nothing in the antitrust law that says companies, or industries, that are threatened by disruptive innovation should be protected from extinction. The process of creative destruction, which the antitrust laws are meant to encourage, entails a fair amount of, well, destruction — of jobs, of companies, of shareholder value. It’s painful for some people, but, as we used to say at summer camp, “tough noogies.”

There’s nothing to prevent either Omnicom or Publicis from independently responding to these market changes by building up its already considerable digital marketing capabilities, or partnering or contracting with Google and Facebook if those repositories of consumer data are willing, or launching some sort of rival service if they are not.

I’m not familiar with the Omnicom / Publicis facts, and so express no opinion about them.  But the above argument I think misses the point.  If disruptive technologies (a.k.a. Google and Facebook) are both expanding the relevant market definition and making it difficult or impossible for two or more legacy firms to compete (a factual question), then antitrust law should in theory allow legacy firm mergers to maintain competition.  The alternative — and again, everything depends on the facts — is the possible loss of firms and increasing market concentration and market power.  The received wisdom is that result is not good for consumers.

In any event, it’s nice to see the issue debated in the Post.

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Reading Between the Lines vs. Twilight Movies: The Most “Creative” Market Definition I’ve Ever Read

Twilight (series)

Twilight (series) (Photo credit: Wikipedia)

I think the award for most creative market definition (at least for 2013) has to go to the plaintiff in Between the Lines Productions, LLC v. Lions Gate Entertainment Corp., Case No. 13-cv-3584 (S.D.N.Y. May 30, 2013). There, the producers of a parody film called “Twiharder” recently filed suit against Lion Gate, the makers of, among other things, the popular Twilight movie series.

“Defendants’ anticompetitive conduct sets the benchmark example for why James Madison and Thomas Jefferson were apprehensive in the months leading up to the Philadelphia Convention about granting authors even limited copyright monopolies over their works,” Between the Lines writes in its complaint.

According to the (219!) page complaint, the defendants have sought to monopolize the “conversation” in “adjacent” or downstream markets, i.e., in markets downstream of the primary market “of original intention targeted to consumers of teen fantasy romance.” One of the downstream markets is the “Z Market,” defined as the market for the creation of novel works that are repulsed by the Twilight movies. Allegedly, defendants have achieved the monopolization of these “Fair Use Zones” through a highly oppressive intellectual property enforcement policy that uses sham cease and desist notices and a compendium of prohibited trademark / service mark registrations to chill speech and exclude all competition from the “Z Market.”

The complaint actually details five (!) different relevant antitrust markets and contains a full-page chart (at page 112) detailing them all.

The plaintiff seeks $375 million in damages for alleged breaches of federal antitrust laws.

Look, this is fun and creative. It illustrates nicely what happens when Hollywood bumps into antitrust law. But all I can say about these market definitions is: good luck with that.  To the extent the plaintiff was hoping to get some publicity for its creativity, kudos.

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Do iPads or Tablet Computers Constitute Their Own Product Market?

David Golden has an interesting article in Law360 this week entitled “Interchangeability in the Tablet Product Market.”  (The full article may be behind a paywall.) I had some earlier, preliminary thoughts here.

Why does this issue matter? Because the smaller the relevant market, the higher the participants’ market shares. At the extremes, you may end up with a monopolist (or several monopolists in different markets). Monopolists are subject to special rules of dealing that do not apply to other firms.

David makes the following reasonable points:

  1. Reasonable interchangeability is the touchstone of product market definition.
  2. Product specifications and technical abilities (screen size, storage capacity, etc.) are unlikely (at least in all cases) to capture the concept of reasonable interchangeability from a consumer’s perspective. Instead, it may be more worthwhile to look at product functions (such as the ability to run an operating system, to load and run applications, to browse the Internet, to send e-mail, etc.).
  3. Cost of substitution may also be relevant – if one tablet manufacturer raises prices substantially, will consumers substitute away to other tablets? To other smartphones?
  4. Network effects are one aspect of cost of substitution. Consumers who have all their music, documents, and data tied to one tablet / OS may find it difficult to switch to another one easily, because they want/need to share with others on the same platform.

I think all these points are good ones. David goes on to note that given the diversity of tablets on the market, courts might conclude that there are a number of submarkets. Although David notes some courts have not viewed the concept of “submarkets” favorably, I would go further – many courts have correctly held that the concept has no real meaning. A market is a market, and it must be defined appropriately. Labeling a market as a “submarket” is usually just the equivalent of waving hands.

As far as I know, we haven’t yet seen a case tackle the question of product market definition in the tablet computing area. It’s only a matter of time, though.

 

Industry Disruption and Market Definition

The Gears of Industry

Horace Dediu has a recent interesting post on “What is [industry] disruption and how can it be harnessed?”  According to Horace,

The nominal definition I work with is that disruption is the “transfer of wealth in an industry from dominant incumbents to disadvantaged entrants.” It’s a convenient definition because it’s brief, it puts the emphasis on economic value and because it alludes to a reversal of fortune and the implied extraordinariness.

Horace goes on to note some nuances of the general definition, and suggests that industry disruption is common and regular.

What does this have to do with market definition?  In the standard approach, relevant antitrust markets are defined with reference to the cross-elasticities of demand and supply.  Basically, courts ask: “to which products can consumers reasonably turn as substitutes?” (cross-elasticity of demand) and “which companies can realistically substitute production and make products to compete with the products in question?” (cross-elasticity of supply).  See, e.g., Brown Shoe v. United States, 370 U.S. 294, 325 (1962) (elasticity of demand).

But these tests tend to focus on the current state of affairs.  They look to which products consumers can buy now, and which products companies can produce now (or within a short time).  Given the rapid and accelerating pace of technological change, perhaps industry disruption is not only common and regular, as Horace suggests, but actually more and more frequent.  In which case, looking at elasticities today may tell you very little about the state of the industry six or twelve months later.

In short, the monopolist or quasi-monopolist of today may be, in a few years, fighting for its life.  See this example (assuming for the sake of argument that it once had a monopoly — I’m not taking a position on that issue).  All of this may counsel in favor of caution when assessing market power in high technology industries.

As Teece and Coleman have written,

The paradigmatic nature of industrial and technological evolution, with waves of creative destruction occurring episodically, suggests an antitrust enforcement regime that is not hair trigger in its operation.  While each wave of creative destruction is by no means predictable as to timing and strength, antitrust authorities need to be cognizant of the self-corrective nature of dominance engendered by regime shifts.  This is true even when there are significant network externalities and installed base effects.  Except for the intelligent and swift, market dominance is likely to be transitory, as regime shifts dramatically lower entry costs.

David J. Teece and Mary Coleman, The Meaning of Monopoly: Antitrust Analysis in High-Technology Industries, 43 Antitrust Bull. 801, 808-09 (1998).  What was true in 1998 is probably even more true today.  As Teece and Coleman write, “the analysis of supply and demand substitution possibilities and opportunities is quite complicated in regimes of rapid technological change.  Simply analyzing the market from a static perspective will almost always lead to the identification of markets that are too narrow.”  Id. at 826.

These considerations may be one reason why the FTC’s and DOJ’s merger analysis under the new merger guidelines “need not start with market definition. Some of the analytical tools used by the Agencies to assess competitive effects do not rely on market definition, although evaluation of competitive alternatives available to customers is always necessary at some point in the analysis.”  Awareness of the possibility of rapid paradigm shifts in the high-technology marketplace is important.

Can A Franchisor Require Franchisees to Buy Supplies, Ingredients, or Products From It?

Tied in Knots?

The antitrust laws sometimes forbid product “tying.” A tying arrangement is an agreement by a party to sell one product on the condition that the buyer also purchases a different (or tied) product. In the franchise context, franchisors sometimes require franchisees to buy products from them or affiliated companies. Are these arrangements lawful?

Franchisors and franchisees see these arrangements differently. The franchisees – perhaps upset with the pricing of the franchisor-supplied products – may allege an antitrust violation, claiming that the franchise is the “tying” product and the required supplies or ingredients are the “tied” products. (Such ties can hurt competition in the tied product market – for example, if fast food franchises are at issue, ties could deny an important customer base to a competing supplier of food ingredients. That is what makes ties potentially anti-competitive.) The franchisor, of course, will argue that it is entitled on quality, reputation, uniformity, and consistency grounds to require that only certain supplies, ingredients, or products be used in its franchised operations.

The courts’ treatment of these claims has been somewhat complicated and not entirely uniform. It’s probably safe to say that these claims will fail if the franchisor lacks “market power” in the tying product market, or if the plaintiff does not adequately allege product market definitions. In the past, these market power and market definition requirements have stymied plaintiffs. But, as I note below, these claims have not been entirely foreclosed.

In Queen City Pizza, Inc. v. Domino’s Pizza, Inc., 124 F.3d 430, reh’g denied, 129 F.3d 724 (3d Cir. 1997), the Third Circuit took a strict view of how to determine the relevant product markets. The plaintiff franchisees argued that Domino’s had tied the franchise to the purchase of ingredients and supplies, and that the ingredients and supplies used in the operation of a Domino’s pizza shop constituted a relevant market. (The plaintiffs also alleged, among other things, that Domino’s had power in the market for “Domino’s approved” pizza dough and used that power to force plaintiffs to buy unwanted ingredients and supplies in the “aftermarket” for sales of supplies to Domino’s franchisees, and that Domino’s had monopolized the market for ingredients and supplies used in Domino’s stores.)

The court disagreed, holding that the relevant product market could not be limited to Domino’s franchisees. The ingredients and supplies used in a Domino’s franchise were interchangeable with products from other suppliers used in the broader market. The question was not whether a Domino’s franchisee could use both approved and non-approved products, but whether pizza makers generally could use such products interchangeably. They could. The franchise agreement’s contractually-imposed exclusivity restraints could not amount to or create market power; the question was whether the franchisor had pre-contract market power, not whether it had post-contractual “power” under the franchise agreement.

However, two relatively recent cases illustrate that the law in this area may not be entirely settled, or at least that tying claims in the franchise context are not completely dead. For example, in Burda v. Wendy’s International, Inc., 659 F. Supp. 2d 928 (S.D. Ohio 2009), the court refused to dismiss a franchise tying claim. Wendy’s had allegedly insisted that franchisees purchase foods or ingredients from it (or its affiliates) after franchisees entered into a franchise agreement that, at least according to the pleadings, did not contemplate such exclusivity. The lack-of-disclosure-at-time-of-franchising allegation was significant. Because the Wendy’s franchisees allegedly did not know that the “market power” was contractually established by the franchise agreements, the court concluded that Queen City Pizza was not controlling. (In Queen City Pizza, the standard form franchise agreement expressly provided that Domino’s reserved the right to require ingredients and supplies to be purchased exclusively from it.)

Compare Burda with Martrano v. The Quizno’s Franchise Co., L.L.C. (W.D. Pa. 2009). There, the court rather quickly dismissed a tying claim, reasoning that the alleged market for “Quick Service Toasted Sandwich Restaurant Franchises” was improper as a matter of law. Before plaintiffs signed their franchise agreements, they could have chosen among other fast food franchises, or, more narrowly, among other fast-food sandwich franchises. In such markets, Quizno’s did not have market power. Therefore, plaintiffs had no tying claim.

So what’s the upshot? First, franchisors still have broad abilities to impose supply and ingredient restrictions. But they are much safer if they do so as part of the franchise disclosures and the franchise agreement, rather than imposing them later. Such surprise restrictions may stimulate arguments that franchisees are suddenly “locked in” to exclusive sources of supply in connection with a market where the franchisor has market power, and ultimately prompt the filing of antitrust claims.

Second, in rejecting an aftermarket claim, the Queen City Pizza court stressed that the ingredients and supplies at issue were interchangeable with other ingredients and supplies on the broader market. The only factor that differentiated them was that they were approved by Domino’s. There may be cases, however, where products are not interchangeable. If the franchisor supplies truly unique products, and requires franchisees to purchase the products exclusively from it, some caution and further analysis is warranted.

Is the iPad a Personal Computer?

Horace Dediu has an in-depth look at the PC industry entitled “The rise and fall of personal computing.” You can read the whole thing here.  Here are some of his conclusions:

“If iOS and Android are added as potential substitutions for personal computing, the share of PCs suddenly collapses to less than 50%. It also suggests much more collapse to come.

I will concede that this last view is extremist. It does not reflect a competition that exists in real life. However, I put this data together to show a historic pattern. Sometimes extremism is a better point of view than conservatism.”

Horace’s data analysis is quite interesting.  I don’t know for certain whether there are any problems in the way he has gathered and presented the data.  Nor do I know whether or not an iPad is in the same market as a PC.  But the data raise an interesting and relatively frequent question in competition law cases: how does one determine when two products are in the same relevant market?

Sherman Act Section 2 claims require a plaintiff to establish a relevant market.  See, e.g., Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 456 (1993) (attempted monopolization claims).  “Without a definition of [the] market, there is no way to measure [a defendant’s] ability to lessen or destroy competition.”  Walker Process Equip., Inc. v. Food Mach. & Chem. Corp., 382 U.S. 172, 177 (1965).

“The outer boundaries of a product market are determined by the reasonable interchangeability of use or the cross-elasticity of demand between the product itself and substitutes for it.”  Brown Shoe Co. v. United States, 370 U.S. 294, 325 (1962).  The cross-elasticity of demand is an economic variable that measures the change in the quantity demanded by consumers of one product relative to the change in price of another.  A high cross-elasticity indicates that two products are close substitutes for each other and may be in the same market.

This, then, is the essential (but not the only) question in determining whether the iPad is in the same market as PCs — at least for antitrust law purposes: do iPads and PCs have a relatively high cross-elasticity of demand?  In other words, if PC prices increase, will consumers substitute away from PCs and buy iPads instead?  Also relevant is the inverse question: if iPad prices go up, will consumers buy more PCs?

I don’t know the answers to these questions, but the answers could be very important in any future case where PC market share is at issue.  You may have your own opinions, based on ancedotal impressions and data.

 

 

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