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

Allegations of Harm to Competition Caused by Multiple Defendants Can’t be Aggregated

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Earlier this year, I covered the case of Orchard Supply Hardware LLC v. Home Depot USA, Inc. See this post.

On September 19, 2013, the court (the Northern District of California) issued its decision on defendants’ motion to dismiss the plaintiff’s second amended complaint. The court dismissed plaintiff’s antitrust claims against the tool manufacturers (Makita and Milwaukee Electric Tool Corp. (“METCo”)), this time with prejudice.

On its second go-round, the court found that Orchard had alleged harm to competition, because it alleged a distinct product submarket: the market for certain specific professional power tools, as purchased by professional customers. “The market Orchard alleges . . . is defined by a distinct set of products, and within that market Orchard alleges that there is a distinct submarket as indicated by a distinct set of purchasers, sensitive to a distinct price point. Within this submarket, Orchard alleges that the challenged agreements have the effective of totally foreclosing competition. These allegations suffice to outline a defined submarket in which Orchard has pled harm to competition.”

The court rejected defendants’ argument that Orchard had failed to allege harm to competition because it had alleged neither a reduction in the output or quality of goods, and had not demonstrated an increase in price caused by Orchard’s foreclosure from the market. “An antitrust plaintiff need not demonstrate that prices have actually been raised to plead a rule-of-reason claim.”

Nevertheless, the court dismissed the claims against Makita and METCo. Plaintiff alleged that each tool manufacturer had entered into a separate vertical, exclusive agreement with Home Depot. “[I]t is inappropriate to aggregate the two vertical agreements in evaluating whether METCo and Makita’s conduct was anti-competitive. METCo and Makita each separately made an agreement with Home Depot. Orchard does not contend that, taken individually, these contracts have an anticompetitive effect . . . . If an individual supplier could be held liable for the cumulative impact of all suppliers’ conduct, a company would have to investigate what other businesses were doing before it acted in order to make sure its own conduct wasn’t anticompetitive, a burden the antitrust law does not impose.”

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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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It Is Becoming Tougher for Plaintiffs to Allege Harm to Competition

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It has long been the case that Sherman Act Section 1 Rule of Reason claims as well as Section 2 claims require proof of harm to competition. But the courts, particularly in the Ninth Circuit, have been tightening up on the requirement to plead such harm, as evidenced by the recent case of Orchard Supply Hardware LLC v. Home Depot USA, Inc., 2013 U.S. Dist LEXIS 53214 (Apr. 11, 2013) (Tigar, J).

In Orchard Supply, the plaintiff, a retailer, challenged Home Depot’s alleged agreements with several tool manufacturers to be the exclusive carrier of the manufacturers’ lines of power tools and accessories. The court dismissed the plaintiff’s Rule of Reason claim, although it granted leave to amend.

The complaint’s defect was its failure to allege harm to competition itself. Although the complaint alleged that the exclusives would enable Home Depot to charge higher prices and deprive consumers of choice, this is not enough. As the court held, “[a]llegations that an agreement has the effect of reducing consumers’ choices or increasing prices to consumers does not sufficiently allege an injury to competition.” Id. at *16, quoting Brantley v. NBC Universal, Inc., 675 F.3d 1192, 1202 (9th Cir.), cert. denied, 133 S. Ct. 573 (2012).

In the case of exclusives, if they actually or potentially cause substantial market foreclosure or the exit of competitors, harm to competition may exist. But higher consumer prices do not themselves amount to an actionable antitrust injury.

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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Selling Direct to End-Users Does Not Equal Unfair Competition

So the court held in Weco Supply Co., Inc. v. The Sherwin-Williams Co., No. 1:10-CV-00171 AWI BAM (E.D. Cal. May 25, 2012) (Ishii, J.).

The plaintiff, a “jobber” (i.e., a non-exclusive distributor), complained when its supplier began selling directly to its end-user customers. (The supplier argued it did so to preserve the end-users’ business after the distributor began offering other manufacturers’ products.)

The court held that although Sherwin-Williams’ conduct undoubtedly harmed Weco’s commercial interests, a factfinder could not reasonably find that Sherwin-Williams engaged in “unfair competition” under the California Supreme Court’s Cel-Tech standard. Weco presented no evidence tending to show that Sherwin-Williams’ conduct raised the price to consumers, harmed allocative efficiency, or diminished the quality of paint sold. In fact, prices offered by Sherwin-Williams to end-users were lower than the prices offered by Weco. (Nevertheless, Sherwin-Williams’ sales to the end-users were profitable.)

In short, there’s nothing unfair about a manufacturer selling directly to customers in competition with its distributor.  Of course, contractual rights, if they exist, can give rise to particular supplier obligations.

Court Refuses to Dismiss Antitrust Claims in Apple E-Book Case

I previously covered the allegations in the Apple E-Book case here.

Today (May 15), the Southern District of New York (Cote, J.) refused to dismiss the class plaintiffs’ antitrust claims against Apple and the e-book sellers.  See In re: Electronic Books Antitrust Litigation, Case No. 11-MD-2293 (DLC).  In doing so, the court indicated that the plaintiffs’ claims are subject to a per se analysis and not a Rule of Reason treatment. 

The court viewed the alleged conspiracy as fundamentally horizontal in nature, with Apple sitting at the “hub” of a hub and spoke conspiracy. 

Other notable aspects of the decision include:

  1. The court’s determination that the plaintiffs had sufficiently alleged direct evidence of a conspiracy.
  2. The court’s refusal to weigh competing evidence as to whether alternative, non-conspiratorial explanations account for the defendants’ conduct.  If the conspiracy claim is plausible, the court held, it cannot be dismissed.
  3. The court’s relative uninterest in the specific “motivations” of the various defendants.  The complaint plausibly alleged that each defendant (including Apple) shared the basic “twin purposes of raising the price of eBooks and eliminating retail competition even though their motives for joining the conspiracy were different.”
  4. The court’s ruling that even though the alleged agreements did not render all eBook pricing uniform, they were subject to antitrust challenge because the plaintiffs had alleged that the defendants “conspired to eliminate retail price competition and to raise the price of eBooks above the $9.99 price set by Amazon.” (emphasis in original).

Antitrust Issues In Retail Networks Can Be Difficult to Find

According to presenters at a Global Competition Review panel today, antitrust problems in retail networks can be difficult to find.  For the report on the panel, click here (sorry, it may be behind a paywall).

The article reports that according to the panel, antitrust cases in the retail sector are becoming more and more complex, frequently including hub-and-spoke conspiracies and most favored customer cases as well as resale price maintenance (RPM).  The panel included European regulators from Germany’s Federal Cartel Office, France’s Competition Authority, and Belgium’s Competition Council.

At least some panelists advocated for a more interventionist approach when dealing with decreased competition and vertical cartels in the European retail market.

I’m not sure about that conclusion, but I do agree that there are competition and distribution law issues lurking in many retail networks.  See, e.g., the Tempur-Pedic case I reported on earlier today.

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