Distribution, Competition, and Antitrust / IP Law

Is Antitrust Relevant for Startups, Emerging, and Non-Dominant Firms?

The answer is (surprise!) “yes.”

There are a number of ways in which antitrust law is relevant to emerging and non-dominant companies. Those firms may:

  • Need to deal with the dominant firms in their markets, including by (i) responding to threats or actions by dominant firms to foreclose access to products, services or markets, or (ii) negotiating to acquire or maintain access to needed IP;
  • Need access to standard-essential patents (“SEPs”) and to understand their rights to and under FRAND licenses;
  • Want to exploit and license their own IP and put restrictions on its use without triggering antitrust issues;
  • Want to collaborate with other firms – including (dominant) competitors – in producing products or delivering services (i.e., entering into joint ventures);
  • Want to merge with, acquire, or be acquired by another firm, including a dominant one;
  • Want to impose vertical price or non-price restraints, or offer different customers, dealers or distributors different prices; or
  • Need to respond to a government merger or conduct investigation as a third party.

All of the above issues (and more) require the consideration of antitrust law. This is not to say that, for example, every complaint by an emerging firm against a dominant firm is the nucleus of a valid antitrust claim. There are many considerations – including whether there is harm to competition, whether a party has antitrust standing, and the like – and often there is no claim, just the rough-and-tumble of normal business competition. But it’s always helpful to understand the legal landscape, and to consider whether Congress and the courts have struck the appropriate balance between robust competition and truly exclusionary conduct. And on the defensive end, it’s always a good idea to understand how far you can push restraints.

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.

Can you ever successfully Daubert an antitrust economist?

English: The iPod family with, from the left t...

The iPod family with, from the left to the right : the shuffle 4G, the nano 6G, the classic 6G and the touch 4G (Photo credit: Wikipedia)

It’s really a very difficult thing to do — and query whether it’s worth the effort.  See, e.g., The Apple iPod iTunes Antitrust Litigation, 2014 U.S. Dist. LEXIS 136437 (N.D. Cal. Sept. 26, 2014) (Gonzalez Rogers, J.) (denying Daubert motions all around).  At least that’s true when the economist is a well-known professor at a major university.

The iPod litigation is, by the way, quite interesting . . . the court has refused to grant Apple summary judgment on the claim that an iTunes update caused consumer lock in.  In an earlier summary judgment order, the court found a triable issue of fact as to whether iTunes update 7.0 was a genuine product improvement so as to not be anticompetitive.

Basketball, Surreptitious Recordings, and Antitrust

Donald Sterling — yes, that Donald Sterling — filed an antitrust lawsuit a few days ago against the National Basketball Association.  You can download a copy here: Sterling Antitrust Complaint.

It’s not clear if the complaint has now been mooted — Mr. Sterling apparently filed it after reaching an agreement to sell the Los Angeles Clippers to Steve Ballmer only because the NBA allegedly refused to confirm that it was cancelling the June 3, 2014 owners’ meeting(*) regarding a forced sale of the franchise.

The complaint asserts causes of action for breach of contract and the like.  The gist of the single antitrust claim is that there is a market for ownership of NBA franchises and that a collective decision to force a sale of the Los Angeles Clippers would injure not only Mr. Sterling but also competition in the market.  It would “mak[e] the relevant market unresponsive to consumer preference and to the operation of the free market.”

The complaint seeks at least $1 billion in damages.

The issue raised is an interesting one: can a sports league collectively control its membership?  If the answer is “no,” how far does the principle extend?  Is there a “market” for golf club memberships which cannot be constrained by collective action to vote out a club member for boorish behavior?  What about membership in non-profit associations generally?  If you think these latter restraints are OK, is the limiting principle found in the relevant market definition (i.e., being banned from one golf club out of dozens or hundreds in a metropolitan area isn’t competitively significant)– or somewhere else?

(*) Technically, a meeting of the NBA Board of Governors.

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Trademark Misuse Is ^Almost^ Never an Antitrust Injury

Trademarks are commonly thought to convey no market power. In RJ Machine Co. v. Canada Pipeline Accessories Co., Case No. 1:13-cv-00579-SS (W.D. Tex. Nov. 22, 2013) (Sparks, J.), the court dismissed antitrust claims predicated upon alleged trademark misuse – but interestingly left the door (slightly) open to future claims based on similar conduct.

The case involves flow conditioners in oil pipelines. The defendant had a patent on a type of flow conditioner which expired in 2011. The defendant also obtained a trademark registration for the terms “50E” and “CPA-50E” for certain flow conditioners. Additionally, the defendant allegedly claims the design of its 50E flow conditioner comprises non-functional, distinctive, and protectable trade dress.

The plaintiff (a potential market entrant) claimed that the defendant threatened to sue if the plaintiff advertised or marketed a flow conditioner using the design taught in the expired patent or used the term “50E” to identify its flow conditioner, and brought antitrust and other claims. The court dismissed the antitrust claims because the defendant was allegedly enforcing registered trademarks, and the exercise and enforcement of those marks could not be a “sham” or in “bad faith” under a Noerr-Pennington type analysis.

However, the court did not entirely agree with the defendant that enforcement of trademarks and claimed trade dress can never be considered an antitrust injury because the plaintiff “in order to escape the clutches of an alleged trademark monopoly” can just market its product under a different name. The court noted that

RJ Machine contends the term “50E”, based on the history and development of the market for this product, is the only term consumers associate with this flow conditioner. In addition, according to RJ Machine’s allegations, Canada Pipeline has been able to “lock in” consumers of 50E conditioners because they can only be replaced by flow conditioners with the same 50E design. The anticompetitive argument is even more persuasive when it comes to trade dress. If the 50E design is as functional as RJ Machine alleges, it would be difficult, if not impossible, for RJ Machine to compete in the flow conditioner market without using the same functional design Canada Pipeline is claiming to be its trade dress.

The decision thus leaves open the theoretical possibility that in certain unusual situations, trademark assertion or misuse could lead to antitrust injury.

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

English: Logo for The Home Depot. Category:Bra...

(Photo credit: Wikipedia)

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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It Is Becoming Tougher for Plaintiffs to Allege Harm to Competition

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(Photo credit: Wikipedia)

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.

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