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

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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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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“Mavericks, Monopolies and Beer”

 

Anheuser-Busch pioneered the use of refrigerat...

Anheuser-Busch pioneered the use of refrigerated railroad cars for transporting beer to a national market. (Photo credit: Wikipedia)

NPR’s Planet Money team had a nice story/podcast last week on the Anheuser-Busch / Grupo Modelo deal and DOJ’s efforts to block it.  Available here.

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A Record “Flurry” of Antitrust Suits

According to this Bloomberg article, the DOJ’s recent suit to block Anheuser-Busch’s proposed takeover of Grupo Modelo SAB is the seventh civil DOJ antitrust case currently in litigation — the most ever at one time. As reported by Bloomberg:

“It represents an attitude of more skepticism of the efficiency benefits of merging that are often claimed by the parties in the transaction,” said John Connor, a professor of industrial economics at Purdue University. “There’s been a greater willingness to challenge mergers than there was” in the administration of former President George W. Bush.

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It’s Tough to Prevail in Private Consumer Class Challenges to Mergers

Whole Foods Market

Whole Foods Market (Photo credit: Wikipedia)

In Kottaras v. Whole Foods Market, Inc. (D.D.C. Jan. 30, 2012), the court refused to certify a purported class of people who had bought premium, natural or organic products from Whole Foods in the Los Angeles area after Whole Foods purchased the Wild Oats food chain. On April 20, the D.C. Circuit refused to hear an appeal from the court’s order, and last week the plaintiff agreed to entry of judgment against her.

Several years ago, the FTC had sought to enjoin the merger, but ultimately reached a divestiture deal with Whole Foods. (No Los Angeles County stores were divested.) As to the private consumer challenge, which was brought after the FTC settlement, the district court concluded that injury to individual class members could not be proven through class-wide evidence. Although some shoppers may have paid more because of the merger, others may have paid less, depending upon the mix of products they purchased. (The prices of many products apparently did decline post-merger.) Figuring out which shoppers suffered “net” harm because of price movements resulting from the merger would require analyzing each consumer’s purchases and individual product price fluctuations. These very granular inquiries prevented class-wide proof or even a conclusion that all class members had been injured.

The moral of the story is that establishing injury through class-wide proof remains an important hurdle in antitrust class actions, one that can be especially difficult to surmount in a merger case.

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Court of Appeal Rules Cartwright Act Does Not Reach Premerger Conduct

Merger

In State ex rel. Van de Kamp v. Texaco, Inc., 46 Cal. 3d 1147 (1988), the California Supreme Court held that the Cartwright Act does not reach mergers and acquisitions. In Asahi Kasei Pharma Corp. v. CoTherix, Inc., No. A129146 (Cal. Ct. App. 1st Dist. March 5, 2012), the Court of Appeal extended the Texaco rule to premerger activity, finding such activity to be beyond the reach of California’s main antitrust law, the Cartwright Act. Whether the decision immunizes all premerger agreements from Cartwright Act scrutiny is not perfectly clear, given the somewhat peculiar facts of the case.

In Asahi, the plaintiff argued that the Texaco rule does not apply to premerger activity.  The plaintiff developed and marketed a pharmaceutical product, and contracted with CoTherix to commercialize the product in the United States. Asahi’s competitor, Actelion, acquired CoTherix, and shortly thereafter discontinued development of plaintiff’s product. Asahi alleged that one of Actelion’s goals in acquiring CoTherix was to terminate the development of Asahi’s product, and that Actelion directed CoTherix to give Asahi false assurances after the merger was announced but before it was completed.

Asahi sued CoTherix and Actelion under the Cartwright Act, alleging that the premerger activity constituted a “combination” by which the defendants conspired together to mislead Asahi about Actelion’s intentions. Asahi alleged that had it known about Actelion’s true intentions, under its licensing agreement with CoTherix, Asahi could have terminated the agreement and sought injunctive relief. However, Asahi did not challenge the merger itself as unlawful, nor did it allege a premerger meeting of the minds; instead, it alleged that Actelion acted with anticompetitive intent.

In affirming a summary judgment for the defendants, the Court of Appeal discussed the Texaco rule, and declined to limit its application in the context of premerger activities. The court reviewed various federal precedents concerning actionable premerger activity, but distinguished them on the grounds that most related to Sherman Act Section 2, which has no counterpart in the Cartwright Act. Although Section 1 of the Sherman Act “may, at least under certain circumstances, reach premerger anticompetitive conduct, dependent upon the economic reality of the acquired and acquiring entities as independent actors . . . . Asahi directs our attention to no California case, and we have found none, applying the Cartwright Act to penalize conduct during the merger process that would unquestionably be exempt from antitrust scrutiny upon the consummation of the merger.”

Assuming a merger that is otherwise lawful, “the combination inherent in the merger is what eliminates competition that would otherwise exist, and which makes possible restraints that could not otherwise be achieved.” CoTherix’s loss of independent decision-making regarding the development of Asahi’s product, and the ultimate implementation of business objectives defined by Actelion as the parent company, “were inherent in the combination between the two companies. It is difficult to see how our antitrust policies are furthered by saying that parties may not, in the process of merging, reach agreement to do that which the combined entity may freely do.”

Even assuming that Actelion and CoTherix remained capable of conspiring in the premerger period, the court also found that Asahi had failed to present a viable Cartwright Act claim because it failed to produce evidence of any premerger meeting of the minds. The alleged anticompetitive purpose was attributed only to Actelion and not to CoTherix. Therefore, there was no combination of capital, skills, or acts by two or more persons for the purpose of preventing competition — a prerequisite for invoking the Cartwright Act. The only premerger agreement alleged between the defendants was an agreement not to comply with the change of control provision of Asahi’s license agreement, but, according to the court, that agreement was not a Cartwright Act violation because it was not an agreement to restrain competition. Rather, the goal and purpose of this alleged “conspiracy” was to achieve a merger.

Does Asahi eliminate all forms of merger “gun jumping” claims under the Cartwright Act? For example, if premerger entities conspire to fix prices, would such behavior be immune under the theory that the merged firm can set its own prices and is an economically unitary entity that cannot conspire with itself? The Asahi court specifically noted that although the plaintiff alleged that, had it known of Actelion’s true intentions, it could have declared a breach of its licensing agreement with CoTherix and sought injunctive relief, Asahi failed to suggest how it could have successfully enjoined the merger, either as a matter of contract law or under the Cartwright Act. So, in effect, its “injury” was the result of the merger, which was outside the Cartwright Act. The same reasoning may or may not apply to premerger price fixing, which might be considered an injury independent from any merger.  Even if the same reasoning does apply, there likely must be some temporal limiting principle; otherwise the Asahi holding would swallow up the rule against price fixing, and it seems unlikely that the Legislature intended such a result by not including mergers within the scope of the Act.

FTC Sues to Block Long-Term Pharmacy Acquisition

On January 27, the FTC filed an administrative complaint to block the proposed merger of Omnicare, Inc. and PharMerica Corp, the country’s two largest long-term care pharmacies.

According to the FTC, the Kentucky-based Omnicare’s $440 million acquisition would produce a firm with more than half of the U.S. market for pharmacy services at nursing homes and other long-term care facilities.  Patients at such facilities often receive prescriptions from Medicare Part D sponsors, which contract or work with Skilled Nursing Facilities (SNFs) to provide medications.

PharMerica is allegedly Omnicare’s largest and only national competitor.  According to the FTC, the merger would allow the combined company to force sponsors to accept higher prescription prices or risk being barred from offering Part D plans.  That is because to protect the fragile patient population and ensure that they receive the Part D benefits they are entitled to, the federal government requires Part D plans to provide SNF residents with “convenient access” to a network of long-term care pharmacies, such as Omnicare and PharMerica.  This ensures that SNF residents can get their prescription drugs from a long-term care pharmacy that contracts with the residents’ chosen Part D health plan. Health plans that cannot provide their beneficiaries with “convenient access” to long-term care pharmacies risk being barred from offering Medicare Part D health plans.

Due to its substantial market share, the combined firm likely would be a “must have” for Part D health plans, the FTC contends. Losing contracts with a combined Omnicare/PharMerica would put the Part D health plans at serious risk of failing to meet CMS’s “convenient access” standard.  This increased risk would allegedly provide the combined firm with an anticompetitive advantage in negotiating prices it charges Part D health plans for long-term care pharmacy services.

According to the complaint, any drug price increase would eventually be passed along to the government, which subsidizes close to 75% of the costs of Part D plans.

PharMerica has been fighting to resist the deal itself.

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