Distribution, Competition, and Antitrust / IP Law

Northern District of California Antitrust Roundup

The Roundup

There have been several notable developments in the past few days in antitrust cases in the Northern District of California. I’ll summarize them briefly here.

In In re High-Tech Employee Antitrust Litigation, Case No. 11-CV-02509-LHK, 2012 U.S. Dist. LEXIS 55302 (N.D. Cal. Apr. 18, 2012) (Koh, J.), the court granted in part and denied in part a motion to dismiss in the private case alleging a conspiracy to fix and suppress employee compensation and to restrict employee mobility among high-tech companies. According to plaintiffs, the conspiracy consisted of an interconnected web of express bilateral agreements, each with the active involvement and participation of a company under the control of the late Steve Jobs and/or a company whose board shared at least one member of Apple’s board of directors. From 2005 to 2007, each pair of defendants in a bilateral agreement allegedly entered into nearly identical “Do Not Cold Call” agreements, whereby each company allegedly placed the names of the other company’s employees on a “Do Not Cold Call” list and instructed recruiters not to cold call the employees of the other company.

In its order, the court rejected Defendants’ argument that the plaintiffs had not pled the “who, what, where and when” of an alleged overarching conspiracy. “Plaintiffs here have alleged much more than mere parallel conduct, despite not having any discovery before filing . . . . Plaintiffs’ [complaint] details the actors, effect, victims, location, and timing of the six bilateral agreements between Defendants.” The court also determined that the plaintiffs’ conspiracy theory was plausible in light of basic economic principles, despite the fact that many “pairings” of the companies allegedly involved did not feature Do Not Cold Call arrangements. In the court’s view, “it is plausible to infer that even a single bilateral agreement would have the ripple effect of depressing the mobility and compensation of employees of companies that are not direct parties to the agreement. Plaintiffs’ allegations of six parallel bilateral agreements render the inference of an anticompetitive ripple effect that much more plausible.” The court also determined that plaintiffs had alleged antitrust injury.

The court did dismiss the plaintiff’s California Unfair Competition Law (Bus. and Prof. Code § 17200) claim because higher compensation (in absence of the alleged conspiracy) did not support restitution or disgorgement relief under Section 17200.

In In re Optical Disk Drive Antitrust Litigation, Case No. 3:10-md-2143 RS, 2012 U.S. Dist. LEXIS 55300 (N.D. Cal. Apr. 19, 2012) (Seeborg, J.), the court found that an amended conspiracy complaint alleging a “substantially narrower, and more plausible” conspiracy was adequately pled and survived a motion to dismiss. The amended complaint makes clear that the defendants allegedly fixed the prices only of Optical Disc Drives (“ODDs”), and not also products that contain ODDs. (In a prior order, the court had found that allegations that the defendants fixed prices of ODD-containing products was implausible.) The court also determined, among other things, that purchasers of “external” ODDs, consisting of little more than an internal ODD in a case, are direct purchasers of ODDs and within the Illinois Brick rule.

Finally, in the LCD cases, In re TFT-LCD (Flat Panel) Antitrust Litigation, Case No. 3:07-MD-1827 SI (Apr. 20, 2012) (Illston, J.)., the court split the price-fixing litigation into two stages, following the suggestion of direct purchasers’ counsel. The first stage will focus on whether defendants conspired to raise prices and overcharged direct purchasers; the second stage will be devoted to indirect purchaser claims. Both the direct and indirect purchasers will be able to present conspiracy evidence in the first phase; only the directs will be able to present damages evidence in the first phase.

(See here for prior LCD coverage.)

Here’s the Skinny on the Apple E-Book Case

The Apple e-book case has been front-and-center in the media this last week. For those not following it carefully, here is a quick sketch of the allegations and what’s at stake. (I hasten to emphasize that the government’s allegations are only allegations at this point in time.)

What’s at stake? The pricing of electronic books, or “e-books.” The government (the DOJ antitrust division) alleges that several years ago Amazon lowered e-book pricing dramatically (often to $9.99 per e-book) in connection with its Kindle e-book readers, a move which dissatisfied the book publishers.(*) Other e-book retailers began to match or approach Amazon’s pricing (which the government alleges was profitable).

Who is alleged to have done what? The government alleges that the book publishers and Apple agreed to raise retail e-book prices and to otherwise limit competition in the sale of e-books. The allegations of agreement or conspiracy are important, because absent proof of such, it’s not at all clear that anything unlawful occurred.

What is the nature of the alleged conspiracy? The government alleges that the book publishers agreed to move away from a “wholesale” pricing model, whereby the book or e-book retailer retains retail pricing authority, towards an “agency” model, where the book publishers retain retail pricing authority and the online bookstores are mere “agents.” (According to the government, the wholesale model has prevailed in the book publishing industry for over 100 years.)

What would be the rationale for such an agreement? Again, according to the government, the book publishers wanted to raise e-book pricing. The publishers also allegedly feared Amazon’s e-book pricing spilling over into the hardcopy market. And – again, according to the government – the publishers feared that Amazon’s distribution system would enable it to become a strong rival publisher that could and would deal with authors directly, ultimately threatening the publisher’s business model.

Apple allegedly went along with the plan because under it, Apple would receive a guaranteed and significant 30% commission on books, each of which would presumably be sold at a higher price than otherwise absent the agreement. Apple allegedly communicated with each publisher to coordinate common agreement terms. Relatedly, the government alleges that the book publishers indicated that they would impose the agency model on other retailers and raise e-book prices at all other e-book outlets, too. (Without such a commitment, one presumes that higher pricing only at the Apple online store would not be very effective.)

How did the e-book pricing work? The government alleges that “Apple Agency Agreements” entered into by the book publishers specified price tiers for books tied to hardcopy pricing ranges. Apple also received an “unusual” Most-Favored Nations (“MFN”) clause requiring each publisher to guarantee that it would lower the retail price of each e-book in Apple’s iBookstore to match the lowest price offered by any other retailer, even if the publisher did not control the other retailer’s ultimate consumer price. The government alleges this MFN meant Apple did not have to compete on price at all, while still maintaining its 30% margin.

What is the nature of the government’s evidence? The government alleges, among other things, regular meetings and communications among the publisher defendants; direct discussions and agreements among those defendants; the publisher defendants’ attempts to conceal the “illicit nature” of their communications; parallel pricing or price increases following the April 3, 2010 effective date of the Apple Agency Agreements between each publisher and Apple; and various acts contrary to economic interests (i.e., it would have been contrary to the interests of any single publisher to attempt to impose agency pricing on all of its retailers and then raise its retail e-book prices). The government’s complaint recites many details about alleged communications between the book publishers at high levels, including at the CEO level.

What was the alleged result of the parties’ cooperation? The government contends that e-book pricing went up substantially, from $9.99 per e-book under the Amazon approach to $12.99 or $14.99.

What is the government suing for? Injunctive relief, under Section 1 of the Sherman Act.

What is notable about the relief sought? Although the Complaint reads like a classic conspiracy case, the government is not seeking monetary fines, nor is it exercising its criminal price-fixing authority. Instead, it is seeking only injunctive relief.

Who is left in the suit? Apple, Penguin, and MacMillan. On Wednesday of last week, Hachette, HarperCollins, and Simon & Schuster settled the charges by agreeing to a proposed consent decree. Those publishers have agreed, among other things, not to use the sort of MFN arrangements present in the Apple Agency Agreements.

Are those settling admitting liability? No, and the publishers have also said that the approach with Apple was pro-competitive because it counter-balanced Amazon’s stranglehold on the market.

Are the remaining defendants going to fight the allegations? Presumably. Penguin’s CEO in particular has denied any wrongdoing.  Because the government is seeking only injunctive relief, it’s not clear that a loss-after-litigation would be any worse for the remaining companies than a settlement.

Where is the case pending? In the Southern District of New York, presumably because New York is where the publishers are located.

Is there other related litigation? Yes. Sixteen State Attorneys General have filed suit seeking damages on behalf of consumers. Private class action litigation is also pending.

(*) Hachette Book Group, HarperCollins, Holtzbrinck Publishers (MacMillan), Penguin Group (USA), and Simon & Schuster. The government alleges that these defendants are five of the six largest publishers of trade books in the United States. (Trade books are alleged not to include specialty books such as children’s picture books, academic textbooks, and reference materials.)

TFT-LCD Antitrust Court Addresses Quantum of Proof for Class Impact and Refuses to Exclude Plaintiffs’ Economists

In re: TFT-LCD (Flat Panel) Antitrust Litigation, No. M 07-1827 SI (Feb. 21, 2012) (Illston, J.)

Judge Illston refused to exclude indirect purchaser plaintiffs’ economics experts. In doing so, the Court addressed the necessary quantum of proof for class impact in an indirect purchaser case.

The indirect purchaser plaintiffs indirectly purchased TFT-LCD panels made by the defendants. They allege price-fixing, and seek injunctive relief under federal law and damages under state antitrust law. Plaintiffs retained two experts, Drs. Janet Netz and William Comanor, who concluded that defendants’ alleged cartel increased prices to direct purchasers (by around 12%), who in turn passed on overcharges to indirect purchasers, resulting in some $3 billion in alleged damages.

Defendants argued that the case was not amenable to class treatment, because plaintiffs could not show “with certainty” that class members were impacted. However, the Court rejected this argument. “[P]laintiffs need not be able to articulate the precise degree to which every individual class member was injured; it suffices to show that it was more likely than not that classwide impact occurred.” According to the Court, the nature of the industry rendered defendants’ proposed standard inappropriately strict; plaintiffs asserted that TFT-LCD panels are fungible commodities. “It is therefore unnecessary for plaintiffs to provide evidence of panel-by-panel impact. Rather, plaintiffs may resort to generalized methods of proof.”

In short, the Court held that “[p]laintiffs need not identify the overcharge on each and every panel sold to direct purchasers, and they need not trace that specific overcharge through the manufacturing and retail chains to the ultimate purchaser. The fact that plaintiffs lack perfect proof does not mean that plaintiffs lack any proof at all.”

The Court then addressed defendants’ related argument that the experts’ economic regression analyses, while relevant to damages, cannot be used to establish either impact to direct purchasers or pass-through to indirect purchasers. Because the Court had determined that plaintiffs need not establish, to a certainty, class members’ injuries on an LCD panel-by-panel basis, the Court rejected this argument – at least in its categorical form. “Even if regression models are not enough, standing alone, to establish classwide impact, they may nevertheless be relevant to the issue. A large average overcharge, for example, might make it more likely that every direct purchaser was overcharged to some degree.” The Court declined to preclude the experts from testifying that their models establish impact, but agreed to let defendants renew their objections when the experts’ specific testimony is before the Court.

The Court then turned to, and rejected, defendants’ various specific arguments about the experts’ regression analyses, finding that they did not render the testimony inadmissible under the Daubert standard.

Sony’s Indirect LCD Purchaser Claims Survive Motion to Dismiss on Foreign Trade Antitrust Improvements Act and Other Grounds

In re: TFT-LCD (Flat Panel) Antitrust Litigation, No. M 07-1827 SI (Feb. 15, 2012) (Illston, J.)

Sony filed suit against LG as an indirect purchaser of thin-film transistor liquid-crystal display (“TFT-LCD”) panels. In rejecting LG’s motion to dismiss, Judge Illston ruled that allegations of fraudulent concealment were sufficient to toll the statute of limitations.

Judge Illston also rejected LG’s Foreign Trade Antitrust Improvements Act (“FTAIA”) argument, noting that Sony contended that its purchases fell within the domestic injury exception to the FTAIA because its claims were based solely on purchases made in the U.S. LG countered that Sony’s purchases were foreign – and therefore beyond the Sherman Act’s reach – because Sony took possession outside the U.S. of LCD panels and products it purchased. In rejecting this second LG argument, the Court held that it is the location of the purchase, not the ultimate destination of the LCD products, that determines where the injury occurred. Because Sony alleged domestic purchases (Sony alleged that it agreed to pay and paid inflated prices for LCD panels and products from its U.S. headquarters), the Court concluded that Sony had adequately alleged domestic purchases and domestic injury.

Finally, the Court also rejected LG’s antitrust standing argument and LG’s argument that Sony could not assert a stand-alone claim for unjust enrichment.

T-Mobile’s State Law Claims Dismissed in LCD (Flat Panel) Case

In re: TFT-LCD (Flat Panel) Antitrust Litigation, No. M 07-1827 SI (Feb. 6, 2012) (Illston, J.)

Judge Illston dismissed T-Mobile’s California and New York state law price-fixing claims, ruling that because T-Mobile did not allege that it had made purchases in California or New York, it could not invoke the laws of those states.  Judge Illston refused to dismiss T-Mobile’s allegations against Sanyo, noting that it had already ruled against Sanyo in connection with Motorola Mobility’s substantially identical claims.

 

Personal Jurisdiction Exercised Over Taiwanese Company

In re: TFT-LCD (Flat Panel) Antitrust Litigation, No. C-10-0117 SI (N.D. Cal. Feb. 1, 2012) (Illston, J.)

Judge Illston refused to dismiss on personal jurisdiction grounds an amended complaint brought by Electrogaph Systems, Inc. and Electrograph Technologies Corp. against Mitsui Taiwan.  The Court found that personal jurisdiction was appropriate because plaintiffs had alleged that Mitsui Taiwan “purposefully directed” conspiratorial activities towards the United States.  The Court noted plaintiffs’ evidence puporting to show that Mitsui Taiwan participated in a price-fixing conspiracy which was aimed, at least in part, at an American company.  It also rejected the arguments that Mitsui Taiwan’s actions did not contribute to the effectiveness of the alleged conspiracy in the U.S. and that Mitsui Taiwan’s communications were merely “inter-affiliate” price discussions that could not support personal jurisdiction.

 

Trade Associations and Selling to the Government

I’ll have more to say about trade associations in future posts.  For now, keep in mind that trade associations are collections of competitors that frequently meet together.  Although they often take pro-competitive actions (by improving efficiency, setting industry standards, and communicating with the public about key issues), they also can take actions that prompt antitrust claims (either the conspiracy type, monpolization type, or both).

Trade associations (and everyone else, for that matter) do enjoy an antitrust immunity for government petitioning under the so-called Noerr-Pennington doctrine, which is derived from the First Amendment.  However, what happens when an association’s members sell to the government?

In that case, associations must be extra careful when they lobby.  Some courts have held that Noerr-Pennington doesn’t apply, because selling, not petitioning, is occurring.  To avoid such a result, associations should remind all members that they must act independently in the market when setting prices.  Associations should also focus on broad policy arguments, not pricing, and lobby only relatively senior officials, while staying away from procurement-level personnel and organizations.

 

Minimum Advertised Price Programs

Under federal law, it is no longer per se illegal for a manufacturer to agree on resale prices with its distributor.  State laws still vary, however, and even under federal law the practice can be unlawful under a detailed market analysis that weighs all the pro-competitive and anti-competitive effects of the resale price maintenance.

However, manufacturers and distributors can avoid these complexities if they do not agree on resale prices, but agree on minimum advertised prices.  The distributors are free to set their own prices, but if they want advertising co-op funds (or other benefits), then they cannot advertise lower prices.

I’ll post more on MAP programs in a bit.

 

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