Distribution, Competition, and Antitrust / IP Law

Can Computers Conspire to Fix Prices?

English: The famous red eye of HAL 9000

The famous red eye of HAL 9000 (Photo credit: Wikipedia)

Strange as it sounds, maybe we’re getting closer to the day we have to seriously consider liability for computer conspiracies.

On April 6, David Topkins, a former executive of an e-commerce seller of posters, prints and framed art agreed to plead guilty for conspiring to fix the prices of posters sold online.  Given the ongoing DOJ investigation, details are sketchy, but according to the DOJ press release,

Topkins and his co-conspirators agreed to fix the prices of certain posters sold in the United States through Amazon Marketplace.  To implement their agreements, the defendant and his co-conspirators adopted specific pricing algorithms for the sale of certain posters with the goal of coordinating changes to their respective prices and wrote computer code that instructed algorithm-based software to set prices in conformity with this agreement.

 Apparently the computers weren’t completely in control — but what if they are?  According to a recent paper, that time may be coming:

The development of self-learning and independent computers has long captured our imagination. The HAL 9000 computer, in the 1968 film, 2001: A Space Odyssey, for example, assured, “I am putting myself to the fullest possible use, which is all I think that any conscious entity can ever hope to do.” Machine learning raises many challenging legal and ethical questions as to the relationship between man and machine, humans’ control — or lack of it — over machines, and accountability for machine activities.

While these issues have long captivated our interest, few would envision the day when these developments (and the legal and ethical challenges raised by them) would become an antitrust issue. Sophisticated computers are central to the competitiveness of present and future markets. With the accelerating development of AI, they are set to change the competitive landscape and the nature of competitive restraints. As pricing mechanisms shift to computer pricing algorithms, so too will the types of collusion. We are shifting from the world where executives expressly collude in smoke-filled hotel rooms to a world where pricing algorithms continually monitor and adjust to each other’s prices and market data.

Our paper addresses these developments and considers the application of competition law to an advanced ‘computerised trade environment.’ After discussing the way in which computerised technology is changing the competitive landscape, we explore four scenarios where AI can foster anticompetitive collusion and the legal and ethical challenges each scenario raises.

Ariel Ezrachi & Maurice E. Stucke, AI & Collusion (Apr. 8, 2015).

SCOTUS Holds Natural Gas Act Does Not Preempt State Law Antitrust Claims

In Oneok, Inc. v. Learjet, Inc., Case No. 13-271 (Apr. 21, 2015), the U.S. Supreme Court held that the Natural Gas Act did not preempt retail customers’ state law antitrust claims against interstate gas pipeline operators for price manipulation.

Historically, the gas industry in the United States has been divided into three segments: (i) natural gas producers, (ii) interstate pipelines that ship the gas from gas fields to distant markets, and (iii) local gas distributors.  In the 1920s, Congress enacted the Natural Gas Act to regulate interstate gas shipments.  The Act created a regulator, now known as the Federal Energy Regulatory Commission (“FERC”), which has jurisdiction (including rate-setting authority) over interstate gas transportation.

Over time, the interstate gas pipelines were deregulated, with FERC adopting an approach that relied on the competitive marketplace, rather than classical regulatory rate-setting, as the main mechanism for keeping wholesale natural gas rates at a reasonable level.  The interstate pipeline operators also began to ship gas directly to retail consumers for direct consumption rather than resale.  FERC does not regulate retail rates.

In Oneok, a group of these retail customers claimed that they overpaid for natural gas due to the interstate pipelines’ alleged manipulation of certain natural gas price indices.  The Ninth Circuit held that their state law claims were not preempted by the Natural Gas Act.  The Supreme Court affirmed.

The pipelines (supported by the Solicitor General) did not argue that the Natural Gas Act expressly preempted state antitrust laws.  Nor did they argue that compliance with those laws would conflict with the Act.  Instead, they argued that the Natural Gas Act preempted the field of state regulation.  The Supreme Court rejected field preemption, noting that “where (as here) a state law can be applied to nonjurisdictional as well as jurisdictional sales, we must proceed cautiously, finding pre-emption only where detailed examination convinces us that a matter falls within the pre-empted field as defined by our precedents.”

In determining whether state law is preempted, the Court focused on the “target” at which the state law “aims.”  This focus on the “target” of state law is appropriate, the Court held, because the question of preemption cannot be resolved by looking only to the physical activity that a state regulates.  “After all, a single physical action, such as reporting a price to a specialized journal, could be the subject of many different laws – including tax laws, disclosure laws, and others . . . . no one could claim that FERC’s regulation of this physical activity for purposes of wholesale rates forecloses every other form of state regulation that affects those rates.”  In Oneok, the state lawsuits were directed at practices affecting retail natural gas rates – which are “firmly on the States’ side of [the] dividing line.”  “Antitrust laws, like blue sky laws, are not aimed at natural-gas companies in particular, but rather all businesses in the marketplace . . . . .  This broad applicability of state antitrust law supports a finding of no pre-emption here.”

Because the case was presented to the Court as raising the issue of field preemption, the Court did not resolve conflict of law issues.  “To the extent any conflicts arise between state antitrust law proceedings and the federal rate-setting process, the doctrine of [conflict] preemption should prove sufficient to address them.”

Justice Thomas concurred in the Court’s judgment, but wrote separately to question the continuing vitality of implied preemption doctrines.  Justice Scalia and Chief Justice Roberts dissented, noting that the Natural Gas Act makes exclusive FERC’s powers in general, not just its rate-setting power in particular.  “The Act does not give the Commission the power to aim at particular effects; it gives it the power to regulate particular activities.  When the Commission regulates those activities, it may consider their effects on all parts of the gas trade, not just on wholesale sales.”  In the dissent’s view, the test for preemption in this setting is whether the matter on which the State asserts the right to act is in any way regulated by federal statute.  “Because the Commission’s exclusive authority extends to the conduct challenged here, state antitrust regulation of that conduct is preempted.”

Motorola’s FTAIA Quest Ends With a Whimper in the Seventh Circuit

Deutsch: Motorola M3888 ca. 2000

Deutsch: Motorola M3888 ca. 2000 (Photo credit: Wikipedia)

On November 26, 2014, the Seventh Circuit (Posner, J.) issued its order upon rehearing of Motorola Mobility LLC v. AU Optronics Corp. (Case No. 14-8003). Motorola still effectively lost the appeal, but the Court’s more circumspect reasoning means that the decision doesn’t have nearly the same significance as Judge Posner’s initial decision.

In a nutshell, Motorola’s foreign subsidiaries bought LCD panels overseas, which were allegedly subject to a price-fixing cartel. The subsidiaries assembled mobile phones and sold and shipped the phones to Motorola in the U.S. Motorola sued in federal court in the U.S. for overcharges from the alleged conspiracy.

On rehearing, the Seventh Circuit applied the Foreign Trade Antitrust Improvements Act (“FTAIA”), and assumed that the FTAIA’s first requirement – that the alleged cartel had a direct, substantial, and reasonably foreseeable effect on domestic (U.S.) commerce – was met.

But, the Court held, Motorola’s claims foundered on the FTAIA’s other requirement, namely that the domestic effect give rise to Motorola’s Sherman Act claims. The Court refused to view Motorola as a single entity, insisting that “[h]aving submitted to foreign law, the subsidiaries must seek relief for restraints of trade under the law either of the countries in which they are incorporated or do business or the countries in which their victimizers are incorporated or do business. The parent has no right to seek relief on their behalf in the United States.”  Motorola’s foreign subsidiaries, the direct purchasers from the makers of the LCD panels, “are legally distinct foreign entities and Motorola cannot impute to itself the harm suffered by them.”
Even if Motorola and its subsidiaries were viewed as a single entity, the Court continued, that entity “would have been injured abroad when ‘it’ purchased the price-fixed components,” and thus would not have been injured in U.S. commerce.

The Court went out of its way – at the request of the Justice Department and the FTC – to hold that a ruling against Motorola would not interfere with criminal and injunctive remedies sought by the government against antitrust violations of foreign companies.

So Motorola still lost, but it lost because it decided to do business through subsidiaries abroad, and in the Court’s view, was forced to live with that choice for all purposes. Had Motorola decided to buy parts directly from Asian manufacturers, the result of the case may have been very different. While it is true that there are strong reasons why multinational corporations decide to do business through often complex chains of subsidiaries, that is a choice they make, and does not relate to or reflect any fundamental principle of antitrust law. And it is for that reason the recent decision ends not with a bang, but with a whimper – it merely follows principles of corporate law to what many might argue is a plausible if not obvious endpoint.

Is the NCAA a Cartel?

English: National Collegiate Athletic Associat...

The usually good Planet Money program has an excellent recent podcast setting forth the arguments for and against the NCAA [National Collegiate Athletic Association] being an unlawful cartel.

N.D. Cal. Just Opened the Damages Umbrella

English: Opened umbrella

(Photo credit: Wikipedia)

In County of San Mateo v. CSL, Limited, Case No. 3:10-cv-05686-JSC (N.D. Cal. Aug. 20, 2014) (Corley, M.J.), the Northern District of California held that California’s antitrust law, the Cartwright Act, allows the recovery of umbrella damages.  If the decision stands or is upheld, it could stimulate a new wave of antitrust litigation.

Umbrella damages are damages due to overcharges paid to non-conspirators who raise their prices because they are protected by the cartel’s price “umbrella.”  Federal courts, including the Ninth Circuit, have predominantly held that such damages are too speculative to be recovered.

In CSL, Magistrate Judge Corley held that the federal courts’ reasoning — which derives from the Illinois Brick doctrine which bars indirect purchaser claims under the Sherman Act — is not applicable to the Cartwright Act, which does allow for indirect purchaser suits.  The case reaches a conclusion opposite to that of the court in In re TFT-LCD (Flat Panel) Antitrust Litigation, 2012 WL 6708866 (N.D. Cal. Dec. 26, 2012).

It will be very interesting to see how this decision holds up.  It is a boon to antitrust plaintiffs, and a problem for antitrust defendants.

A copy of the decision is attached.

Order – Doc 146 – Cnty San Mateo vs CSL – 10cv05686

Collusion Regarding Terms of Medical Resident Employment?

Did you ever wonder why teaching hospitals can conduct their medical residency “match” program?  And why they can share data and use it to help set wages for residents?  And why the match program effectively forbids salary negotiation?  The apparent result is that medical residents’ wages have remained flat for about 40 years.

Slate has the story — including the explanation for the above phenomenon, an antitrust exemption granted by Congress.  Discuss among yourselves the wisdom of that exemption.

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A Rare Challenge to a Class Action Settlement . . . From a Named Plaintiff

One of the named class plaintiffs in the high-tech employee antitrust case has filed an objection to the proposed class settlement.  The plaintiff, Mr. Michael Devine, analogized the approximately $300 million settlement (worth approximately 10% of alleged damages) to a “shoplifter . . . caught on video stealing a $400 iPad from the Apple Store” and a resulting settlement of $40, with the shoplifter keeping the iPad and making no admission of wrongdoing.

Objections by named plaintiffs are quite rare — though a single objection, even by a named plaintiff, is unlikely to carry the day.

The New York Times has the details here.


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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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