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

Book Review: Louis Kaplow’s Competition Policy and Price Fixing

Competition Policy and Price Fixing

Competition Policy and Price Fixing

Undoubtedly you’ve seen television commercials by a well-known insurance company where one character turns to another and says: “you can save 15% or more in 15 minutes.” The other character then replies: “everyone knows that, but did you know . . . .” In antitrust, everyone knows that horizontal price-fixing agreements are per se illegal, while oligopolistic pricing is not. But did you know that there is an argument against this dichotomy? In a recent and thought-provoking book entitled Competition Policy and Price Fixing (Princeton University Press 2013), Harvard professor Louis Kaplow argues that the rule makes little or no sense, and instead urges that the core inquiry of antitrust enforcement be jettisoned in favor of the application of economic tests.

Kaplow begins by outlining various criticisms of the inquiry into price agreements – some of which are familiar. Agreements can be inchoate and hard to detect (even with access to relevant documents). Industry participants can develop means of communicating even if certain statements or techniques are off-limits. Outside observers, including courts and regulators, “are at a disadvantage in determining what is actually happening if parties attempt to be clever and subtle.” Lower courts sometimes infer agreements from communications and certain “plus” or facilitating factors, even where there is no explicit agreement and even though there is no uniformly agreed-upon list of plus factors. And even stating with precision what we mean by the term “agreement” is fraught with definitional, linguistic, and perhaps logical problems.

These problems alone might not justify overturning antitrust law’s somewhat single-minded focus on ferreting out price agreements, but Kaplow thinks that, when combined with another problem, they militate strongly in favor of a different approach. That problem is the “paradox of proof,” which he acknowledges has been noted in the literature but says has never been systematically explored. While in some settings greater ease of coordinated oligopolistic behavior and its resulting harmful effects make liability more likely, in others – where the danger is most serious – liability may become less likely.

The basic reason for the latter result is that, if successful interdependence is sufficiently easy (think about . . . two [competing] gasoline stations [that can see each other’s prices]), then firms may find it unnecessary to rely on communications [to agree on prices] . . . . so that any inference that they in fact did so is less plausible. As a result, evidence that a market is less conducive to successful coordinated oligopolistic pricing may make the inference that firms’ actions included at least some falling within [the rule against price-fixing] more plausible.

(Chapter 6, p. 126.) In other words – price communication (and price agreements) are more likely or at least more plausible in markets that are less susceptible to price agreements having any actual impact. That is the paradox of communications in the context of interdependent or oligopolistic pricing.

If we follow Kaplow’s prescription to eschew focusing on whether competitors entered into a price agreement, what test or tests should we instead apply? The answer, Kaplow says, is to look to economic evidence to distinguish between types of interdependent oligopolistic behavior. Economic theory has no corresponding term to the law’s use of the word “agreement,” but successful oligopolistic interdependence may be a good proxy for what the law is attempting to define. In this view, communications are not the holy grail of liability, but when they occur, they may suggest that competitors expect that communications will be helpful. They also may help to enforce coordinated oligopolistic pricing. The central question becomes “whether the communications at issue . . . are more likely to promote or suppress competition, and modern oligopoly theory offers the best set of tools for undertaking that inquiry . . . .”

To detect coordinated oligopolistic price elevation, then, one would look to market-based evidence, not to the existence of agreements per se. This evidence would consist of pricing patterns, including evidence of price elevations and nonresponsiveness to changes in market conditions. Additionally, regulators or private plaintiffs would look to the existence of facilitating practices – including price communications, advance price announcements, product standardization, cross-ownership of firms, the existence of side payments or most-favored-customer clauses, etc. Also relevant would be the overall conduciveness of the market to coordinated pricing (market structure, concentration, firms’ capacities, price transparency, product heterogeneity, etc.).

Professor Kaplow’s book raises some cogent criticisms of antitrust law’s current approach to price-fixing. While he does address the issue of administrability, I tend to think he overlooks how difficult it might be in practice to fully implement his proposals. Moving regulators and courts to an economic-based analysis is one thing; moving companies and their inside and outside counsel is another. It is difficult enough as it is to counsel companies on antitrust compliance. Repealing the per se prohibition on horizontal price agreements and mandating that counsel explain to their clients ex ante that inter-firm price communications and agreements might sometimes be unlawful, but sometimes might not, depending upon a complex stew of economic concepts and measurements, may just be a bridge too far.

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Lithium Ion Batteries Court Addresses Illinois Brick Exception, Finds Standing for Certain Indirect Purchasers of Component Products

In In re: Lithium Ion Batteries Antitrust Litigation, 2014 U.S. Dist. LEXIS 7516 (N.D. Cal. Jan. 21, 2014) (Gonzalez Rogers, J.), the Northern District of California largely rejected a motion to dismiss an antitrust price-fixing complaint, but held that the plaintiffs had not adequately pled that they fell within a recognized exception to the Illinois Brick rule against indirect purchaser suits.

Lithium ion battery by Varta (Museum Autovisio...

Lithium ion battery by Varta (Museum Autovision Altlußheim, Germany) (Photo credit: Wikipedia)

Under Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977), indirect purchasers lack standing to sue under the federal antitrust laws. There are several exceptions to the Illinois Brick rule, including the so-called Royal Printing exception (see Royal Printing Co. v. Kimberly Clark Corp., 621 F.2d 323 (9th Cir. 1980)). Under Royal Printing, indirect purchasers may sue when, inter alia, a conspiring seller owners or controls the direct purchaser.

In Lithium Ion Batteries, purchasers purchased batteries (not lithium ion battery cells) from “packers,” not from the defendant manufacturers. The court held that the complaint did not adequately allege that the defendants controlled the packers, and that influence over their business was insufficient.

Significantly, the court also rejected defendants’ argument that Royal Printing bars standing for an indirect purchaser who has purchased a price-fixed component (here, battery cells) as part of a finished product (here, batteries) from an entity owned or controlled by a conspirator. Otherwise, “[p]rice-fixers of components of complex goods . . . would be immunized.” In so holding, the court followed two other recent cases from the Northern District of California.  The court gave plaintiffs an opportunity to replead to establish that they satisfy the Royal Printing exception.

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More Evidence that California May No Longer Follow the Per Se Rule in Vertical Pricing Fixing Cases

 In Kaewsawang v. Sara Lee Fresh, Inc., Case No. BC360109 (Cal. Los Angeles Superior Ct. May 6, 2013), the trial court dismissed a challenge to Sara Lee’s pricing practices brought under California’s state antitrust law, the Cartwright Act.

The plaintiffs were a purported class of distributors of Sara Lee products, and challenged Sara Lee agreements with chain retailers that gave Sara Lee the right to set pricing (to the chain stores) for Sara Lee products. The distributor agreements required the distributors to comply with the terms of the Sara Lee-chain store agreements.

In dismissing the claim, the court first ruled that plaintiffs had not alleged a price-fixing allegation. The court’s discussion is somewhat unclear, but it appears to have rejected an argument that there was some sort of horizontal agreement between and among Sara Lee and the chain stores.

The court then turned to the question of per se unlawful vertical price-fixing, and held that, despite the California Supreme Court’s decision in Mailand v. Burckle, 20 Cal. 3d 367 (1978), following the U.S. Supreme Court’s decision in Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007), “it remains unlikely that the Mailand’s court holding is still applicable . . . .”

The court then rejected the plaintiffs’ rule of reason claim for vertical price fixing.

It is conceivable that the court did not even need to reach the issue.  Unlike the traditional vertical price-fixing scenario, Sara Lee apparently did not agree with its distributors on downstream pricing — it had the power to set the downstream pricing directly.  The distributors were more similar to middlemen or agents than true distributors with pricing authority.

Sara Lee is but one trial court decision, but it is further evidence that California courts will be receptive to arguments based on developments in federal law that vertical price-fixing is not per se unlawful.

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When Price Fixing Is Not Price Fixing

Seal of the United States Court of Appeals for...

Seal of the United States Court of Appeals for the Seventh Circuit. (Photo credit: Wikipedia)

According to a recent decision by Judge Posner in the Seventh Circuit in In re Sulfuric Acid Antitrust Litigation, the following scenario is not subject to the per se rule against price fixing:

  1. Companies outside the United States, as an unwanted manufacturing byproduct, produce what is to them a waste chemical for which there is little or no market in their home country.
  2. There is a U.S. market for the chemical and U.S. producers who manufacture it.
  3. The foreign companies have no U.S. distribution network and so sign up the U.S. producers as distributors (giving them exclusive territories), in return for “shutdown” agreements that preclude the U.S. producers from manufacturing their own supplies of the chemical.
  4. Absent the shutdown agreements, there would be an oversupply, and the foreign companies might sell into the U.S. at a loss. They might be willing to do that to avoid the environmental and storage costs they would otherwise incur, but then they could be subject to antidumping proceedings brought by the U.S. manufacturers.

Under these facts, the shutdown agreements are subject to a Rule of Reason analysis, and not the per se rule, so they still could in theory be unlawful. But the fact that the plaintiffs in Sulfuric Acid abandoned a Rule of Reason case suggests that they thought it would be very difficult to win.  After all, the agreements facilitated market entry, which is pro-competitive.

Update: In response to a reader question, there was no agreement on prices in this case.  There was an alleged output agreement, though, and economically the two types of agreements are thought to be equivalent.  An agreement to raise prices will decrease demand and output; an agreement to cut output will raise prices.  The shutdown agreements would tend to raise prices.

In applying the Rule of Reason, Judge Posner noted that this case was unique, “combining such elements as involuntary production and potential antidumping exposure.” He rightly concluded that “[i]t is a bad idea to subject a novel way of doing business (or an old way in a new and previously unexamined context . . . .) to per se treatment under antitrust law.”

However, in reaching his conclusion, Judge Posner made some other remarks which are less persuasive. For one thing, in analogizing the analysis to that of Broadcast Music, Inc. v. Columbia Broadcasting System, Inc., 441 U.S. 1 (1979), which allowed blanket music licenses to be sold, he wrote that the blanket copyright licenses were not a product, new or old, but a “contractual instrument” for marketing music, which was the product. But that seems to beg the question of whether a “contractual instrument” for marketing is an unlawful per se agreement. In the alternative, he suggested that the foreign-supplied chemical could itself be the “new [BMI-type] product.” However, that analysis seems to open the door to an argument that any jointly-sold product is a “new product,” even if it is identical to other commodities being sold.

Additionally, Judge Posner noted that exclusive dealing agreements (where a distributor agrees not to carry competing lines) are not per se illegal, so “what difference should it make that the competing line is produced by the distributor himself?  And so the shutdown agreements might be found to be an innocent species of exclusive dealing.”  There is a looseness to this language that may be exploited in unanticipated ways in future cases.  Two competitors cannot agree to curtail output simply by appointing one as the “distributor” of the other.

In short, the opinion seems like the right result on the facts, but it opens the door to Rule of Reason arguments in the future about other arrangements whose status and pro-competitive effects may be less clear.

Court Approves DOJ Antitrust Settlement with Three E-Book Publishers

Last week the Southern District of New York approved the DOJ’s settlement with Hachette Book Group Inc., HarperCollins Publishers LLC, and Simon & Schuster, Inc. (I previously covered the Apple e-book case here and here.)

Under the Tunney Act, consent settlements with the DOJ are subject to court review and public comment. The three e-book publishers reached a settlement with the DOJ before the Department filed its antitrust suit.

Under the settlement agreements, the publishers must end their e-book agency agreements with Apple within seven days of final judgment. They must also end any contracts with other e-book retailers that prevent them from setting their own prices or include most-favored nation (“MFN”) clauses that guarantee that retail competitors are not receiving better terms. Additionally, under the settlements, distribution provisions limiting retailers’ ability to set e-book pricing are banned for several years.

The DOJ has received hundreds of Tunney Act comments about the settlements. Additionally, Apple, Penguin, and others have filed amicus briefs with the court criticizing one or more aspects of the settlements. Bob Kohn, the founder of eMusic, has been a particularly vocal critic. You may have read about his creative five-page cartoon or graphic novel format brief (which he filed due to the court’s page constraints).

Kohn (and perhaps others) have argued that DOJ essentially accused Amazon of price predation, and that the Apple e-book deals were a lawful and appropriate response to such predation.

Apple, Macmillan, and Penguin remain in the DOJ suit.

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What You Need to Know About the Four Basic Types of Pricing Claims (Part 4)

In the last post, we saw that price information exchanges that do not impact pricing are not unlawful. However, we also saw that such exchanges can facilitate collusion and can provide plaintiffs with evidence supporting a price fixing charge.

A comment to the last post asked about how to structure information exchanges to avoid these potential problems.

In their antitrust healthcare guidelines, DOJ and FTC have provided guidance on this issue. Although the guidance comes in the context of the healthcare industry, there is little or no reason to suspect that the guidance would vary according to industry. Note, however, that DOJ/FTC guidelines are not binding on the courts, which may or may not accept them.

With those caveats out of the way, what do DOJ and FTC say about competitors’ collection or provision of price information? According to DOJ and FTC,

“Participation by competing providers in surveys of prices for health care services, or surveys of salaries, wages or benefits of personnel, does not necessarily raise antitrust concerns. In fact, such surveys can have significant benefits for health care consumers. Providers can use information derived from price and compensation surveys to price their services more competitively and to offer compensation that attracts highly qualified personnel. Purchasers can use price survey information to make more informed decisions when buying health care services.”

DOJ and FTC go on to note that without appropriate safeguards, however, information exchanges among competing providers may facilitate collusion or otherwise reduce competition on prices or compensation, resulting in increased prices, or reduced quality and availability of health care services. “A collusive restriction on the compensation paid to health care employees, for example, could adversely affect the availability of health care personnel.”

DOJ and FTC then articulate a “safety zone” for exchanges of price and cost information among providers that they will not challenge, absent extraordinary circumstances. The safety zone applies to a written survey where:

  1. the survey is managed by a third-party (e.g., a purchaser, government agency, health care consultant, academic institution, or trade association);
  2. the information provided by survey participants is based on data more than 3 months old; and
  3. there are at least five providers reporting data upon which each disseminated statistic is based, no individual provider’s data represents more than 25% on a weighted basis of that statistic, and any information disseminated is sufficiently aggregated such that it would not allow recipients to identify the prices charged or compensation paid by any particular provider.

These conditions are designed to prevent the sort of facilitation of collusion discussed in the last post.

Note that a price information exchange that does not meet these criteria is not automatically unlawful; it just does not enjoy the DOJ/FTC safety zone. But there is little reason to design a program that does not meet the safety zone criteria from the outset.

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What You Need to Know About The Four Basic Types of Pricing Claims (Part 3)

This is the third in a series of posts.  The last post can be found here.

Price information exchanges that do not impact pricing.  Such an exchange by itself is probably not subject to private challenge. See, e.g., Blomkest Fertilizer, Inc. v. Potash Corp. of Sask., Inc., 203 F.3d 1028 (8th Cir. 2000) (price verifications only concerned charges on particular completed sales, not future market prices; no evidence supported inference that the verifications had an impact on price increases; the only evidence was that prices were possibly cut as a result; defense summary judgment affirmed).

Note, however, that a price information exchange could be viewed as a “plus factor” that tends to support an inference of an actual price agreement.  Therefore, it is always advisable to consider the antitrust implications of any exchange of price information before engaging in such an exchange.

What You Need to Know About The Four Basic Types of Pricing Claims (Part 2)

This is the second in a series of posts.  The first can be found here.

Price information exchanges that impact pricing.  Such an exchange is not per se illegal. However, it may be unlawful under a rule of reason analysis. See, e.g., United States v. Container Corp. of America, 393 U.S. 333 (1969).

To successfully challenge such an exchange, it is necessary to prove price impact. This can become complicated. For example, if market pricing is instantaneous and entirely transparent, how would one prove that an agreement to exchange price information has impacted prices? Generally, the less transparent the market pricing is, the more opportunity for a price information exchange to work mischief.

The Airline Tariff Publishing Company (ATP) case is informative and illustrates some of the complexities. In December 1992, DOJ sued eight of the largest U.S. airlines and the Airline Tariff Publishing Company (ATP) for price fixing and for operating ATP, their jointly-owned fare exchange system, in a way that facilitated collusion, in violation of §1 of the Sherman Act.

According to the DOJ, ATP was a complex information exchange system among airlines that was widely and openly operated to disseminate fare information through computer reservation systems and travel agents. ATP provided both a means for the airlines to disseminate fare information to the public and a means for them to engage in essentially a private dialogue on fares.

Again, according to the DOJ, the defendants designed and operated ATP’s computerized fare exchange system in a way that unnecessarily facilitated coordinated interaction among them so that they could (1) communicate more effectively with one another about future fare increases, restrictions, and elimination of discounted fares, (2) establish links between proposed fare changes in one or more city-pair markets and proposed changes in other city-pair markets, (3) monitor each other’s changes, including changes in fares not available for sale, and (4) reduce uncertainty about each other’s pricing intentions.

The ATP case involved “cheap talk”– communication that does not commit firms to a course of action — such as announcing a future price increase but leaving open the option to rescind or revise it before it takes effect. If the terms of agreement are complex (e.g., specifying prices in numerous markets) but there is a common desire to reach agreement, cheap talk can help firms reach a collusive equilibrium.

ATP collected fare information from the airlines and distributed it daily to all the airlines and to the major computer reservation systems (CRSs) that serve travel agents. This arrangement was an efficient instrument for cheap talk.

The case was resolved with a consent decree crafted to ensure that the airline defendants did not continue to use any fare dissemination system in a manner that unnecessarily facilitated price coordination or that enable them to reach specific price-fixing agreements.

Note that the final judgment did not prevent the settling defendants from disseminating currently available fares through ATP, from advertising currently available fares to consumers, or from offering for sale fares good only for future travel. Also, the settling defendants remained free to give consumers general information on impending fare changes.

Next post: a price information exchange that does not impact pricing.

What You Need to Know About the Four Basic Types of Pricing Claims (Part 1)

To every even casual reader of this blog, it is obvious that antitrust and competition law apply to the pricing behavior of competing firms. But what exactly are the danger zones, and what sorts of claims can be brought? In the next few posts, I will provide some basic information about pricing issues and claims. I will focus on horizontal pricing issues (i.e., pricing between and among “horizontally” situated firms which compete with each other).

We can consider four basic types of claims: (i) an actual price-fixing claim, (ii) a claim for a price information exchange that impacts pricing, (iii) a claim regarding a price information exchange that does not impact pricing, and (iv) a claim for parallel pricing behavior. This discussion focuses on the federal Sherman Act, but the California Cartwright Act (and many other states’ laws) is largely similar.

An actual price-fixing claim. This type of claim requires allegation and proof of an actual agreement to fix or set prices. An agreement need not be formal and written; it can be oral and informal. A “wink and a nod” are enough. But there needs to be a meeting of the minds. If competitors enter into such an agreement, it is per se illegal. Pro-competitive justifications, lack of impact, etc. are irrelevant. (Though to get damages in a private suit, you still need to prove damages.)

An agreement can be proven up directly or through circumstantial evidence. If proven circumstantially, the evidence must essentially exclude the possibility that the defendants’ actions are as consistent with independent action as they are with conspiracy. This is the Matsushita summary judgment rule.

Evidence of a price information exchange (next post) can tend to support the inference of a price-fixing agreement, because price information exchange can help defendants to implement, monitor, and enforce a price-fixing agreement. But price information exchange alone does not prove a price-fixing agreement. It is one of several “plus factors” that can help move permissible parallel pricing over the line into the zone of impermissible agreement.

Compare In re Coordinated Pretrial Proceedings in Petroleum Products Antitrust Litigation, 906 F.2d 432 (9th Cir. 1990) (evidence of parallel pricing in a relatively concentrated market, plus evidence that defendants publicly announced, in press releases, their advance pricing decisions, in order to facilitate either interdependent or plainly collusive price coordination, is sufficient to survive a defense motion for summary judgment on a price-fixing claim) with Reserve Supply Corp. v. Owens-Corning Fiberglas Corp., 971 F.2d 37 (7th Cir. 1992) (defendants’ practices of maintaining price lists for products and of announcing price increases 30 to 60 days before their effective date did not amount to an improper information exchange; discounts were widely used in the industry, making the price lists a poor candidate to coordinate pricing; publicly pre-announcing price increases served a legitimate purpose because customers, who were mostly rehandlers and contractors, needed to be able to inform their customers of price increases or to figure such increases into their bidding).

Next post: price information exchanges that impact pricing.

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ATM Users Lack Standing to Challenge Bank ATM Fees

In In re: ATM Fee Antitrust Litigation, No. 10-17354 (9th Cir. July 12, 2012), the Ninth Circuit ruled that consumers (ATM cardholders) could not challenge ATM fees paid by ATM card issuing banks to the owner of the ATMs accessed by the cardholders. Those fees were allegedly fixed by the banks. However, the fees were not directly paid by cardholders, who instead may have paid higher charges passed on by the banks. The cardholders’ claims were, therefore, indirect price-fixing claims, for which the cardholders had no Sherman Act monetary remedy.

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