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

Under Agency Law, Standard Setting Organizations May Be Liable for Antitrust Violations of Their Members

As noted in this recent blog post, in TruePosition, Inc. v. LM Ericsson Telephone Co., No. 11-4574 (E.D. Pa. Oct. 4, 2012), the court held that a Standard Setting Organization (SSO) known as 3GPP may be liable for alleged Sherman Act Section 1 antitrust claims involving the wrongful actions of persons who acted on behalf of the SSO, even when those persons are representatives of the SSO’s corporate members.  (Hat tip to this LinkedIn posting which informed me about the blog post.)

The case involves allegations that defendants conspired to exclude plaintiff’s technology from industry standards (for Long Term Evolution, or LTE, telephone technology).  The SSO argued that the plaintiff’s claims were insufficient because the plaintiff’s theory of liability was one of “acquiescence.”  The SSO characterized the plaintiff’s claims as alleging that the SSO was on notice of the corporate defendants’ alleged misconduct but that the SSO failed to remedy it.  This “inaction,” according to the SSO, did not show the requisite agreement necessary to support a Sherman Act Section 1 claim.

Applying American Society of Mechanical Engineers, Inc. v. Hydrolevel Corp., 456 U.S. 556 (1982), the district court rejected the SSO’s acquiescence argument. 

“As Chairmen of the pertinent 3GPP subcommittees, the Corporate Defendants were agents of 3GPP acting on behalf of 3GPP, even when their actions violated 3GPP’s rules and regulations . . . .  As the facts are set forth in the Amended Complaint, and granting all reasonable inferences to TruePosition, 3GPP is charged with acting through agents whom it has imbued with apparent authority.  Such alleged action involved concerted action.  This is not a case involving mere membership in a standard-setting organiztion . . . .  It is the Corporate Defendants’ alleged unlawful conspiratorial conduct taken with 3GPP’s apparent authority as Chairmen of the relevant committees that makes 3GPP potentially liable for their actions. Under the facts presented in the Amended Complaint, 3GPP cannot consider itself as separate and distinct from the actions of the Corporate Defendants when they were acting with 3GPP’s apparent authority.”

The court also determined that the complaint adequately alleged minimally sufficient facts to plausibly suggest that 3GPP assented to the alleged conspiracy through the corporate defendants’ actions taken with the apparent authority of 3GPP holding leadership positions within its committees.  “This is not a case where most of the alleged unlawful activities were conducted by the Corporate Defendants outside the confines of 3GPP but, rather, the majority of the allegations specifically involve the actions of the Corporate Defendants as Chairmen of 3GPP’s committees thwarting and using its standardization process to disadvantage a competitor.”

The case is a useful reminder that an SSO has potential antitrust exposure for the activities of its members when the members act under color of authority of the SSO.

Do iPads or Tablet Computers Constitute Their Own Product Market?

David Golden has an interesting article in Law360 this week entitled “Interchangeability in the Tablet Product Market.”  (The full article may be behind a paywall.) I had some earlier, preliminary thoughts here.

Why does this issue matter? Because the smaller the relevant market, the higher the participants’ market shares. At the extremes, you may end up with a monopolist (or several monopolists in different markets). Monopolists are subject to special rules of dealing that do not apply to other firms.

David makes the following reasonable points:

  1. Reasonable interchangeability is the touchstone of product market definition.
  2. Product specifications and technical abilities (screen size, storage capacity, etc.) are unlikely (at least in all cases) to capture the concept of reasonable interchangeability from a consumer’s perspective. Instead, it may be more worthwhile to look at product functions (such as the ability to run an operating system, to load and run applications, to browse the Internet, to send e-mail, etc.).
  3. Cost of substitution may also be relevant – if one tablet manufacturer raises prices substantially, will consumers substitute away to other tablets? To other smartphones?
  4. Network effects are one aspect of cost of substitution. Consumers who have all their music, documents, and data tied to one tablet / OS may find it difficult to switch to another one easily, because they want/need to share with others on the same platform.

I think all these points are good ones. David goes on to note that given the diversity of tablets on the market, courts might conclude that there are a number of submarkets. Although David notes some courts have not viewed the concept of “submarkets” favorably, I would go further – many courts have correctly held that the concept has no real meaning. A market is a market, and it must be defined appropriately. Labeling a market as a “submarket” is usually just the equivalent of waving hands.

As far as I know, we haven’t yet seen a case tackle the question of product market definition in the tablet computing area. It’s only a matter of time, though.

 

Law Grad Salaries Down, Automated Legal Analysis Systems Marketed – Evidence of the Effects of Technology on Production and Distribution?

English: The famous red eye of HAL 9000

HAL 9000 (Photo credit: Wikipedia)

Below are two fresh links from the InterTubes, the juxtaposition of which is highly suggestive. What’s the connection, and how do they relate to distribution law? Before answering those questions, let me describe the linked materials.

First, the National Association for Legal Career Professionals (“NALP”) reports that

The median starting salary for new law school graduates from the Class of 2011 fell 5% from that for 2010 and has fallen nearly 17% just since 2009. The mean salary fell 6.5% compared with 2010, and since 2009 the mean has plunged almost 16% according to new research released today from NALP. The research also reveals that the median starting private practice salary fell over 18% from 2010 and since 2009 has fallen an astonishing 35%.

Second, a company called Neota Logic is marketing a technology that it says “solves problems in many fields just as Microsoft Excel solves financial and numerical problems – without programmers, quickly and efficiently.”

In a nutshell, Neota Logic seems to be selling expert systems (maybe something like IBM’s Watson?) that, among other things, can help answer legal questions for companies and law firms. I don’t think Neota Logic can yet replace attorneys altogether. It appears the company is marketing its expert systems more as supplements to human advice rather than as replacements. Nevertheless, this is to some extent likely the shape of things to come.

So, what is the connection between these two links? I suspect that the short-term difficulties in the legal field’s labor market are masking a longer-term trend. The Internet began reshaping and (as some like to say) “dis-intermediating” economic relations in the 1990s. But the effect wasn’t initially perceived because of (a) the dot.com bubble which was quickly followed by (b) the housing bubble. The bubbles – by inflating asset prices – for a time successfully obscured an ongoing and fundamental shift in how goods and services are provided and distributed in the global economy. But that shift is now increasing apparent.  What used to require substantial numbers of people to deliver locally can now be done by smaller numbers of people, often remotely.

That is true even in law. In most law firms, it used to be typical for two lawyers to share one secretary. Now the ratio is more like 5 to 1. Document review used to require dozens of attorneys. Now it can be automated with “smart” software that can search thousands of pages a second. Previously, a technician would need to physically service a lawyer’s computer.  Now software can be updated and fixed remotely by technicians thousands of miles away. Some have thought that the core service provided by lawyers – advice – is unassailable by technology. But given Watson, Neota Logic, and other systems, that may no longer be true (or may not be true forever, at least not entirely).

What does all this have to do with distribution and competition law? Well, maybe not that much, but maybe everything. Amazon, for example, is reportedly working on same-day delivery of products – perhaps the “Holy Grail” of retail. If successful, the system may make life very, very difficult for local retailers, who will lose their immediate delivery advantage. This is just another example of the growing effects of technology (and particularly the Internet) on various distribution and labor markets. Lower prices and better service are likely to result – but at the cost of, in this case, retailing jobs.

For better or for worse, antitrust law generally doesn’t consider such labor force effects when analyzing business arrangements. These effects are likely to only accelerate.

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Is There Too Much Antitrust Enforcement in High Tech Industries?

The Washington Post last week ran an article covering this topic entitled “In Silicon Valley, fast firms and slow regulators.”

The Post quoted Ed Black, president of the Computer & Communications Industry Association, a trade group that supported the Justice Department’s case against Microsoft: “In tech, market definitions are difficult because companies are changing so fast, and that makes antitrust a blunt tool.”

The issue of “over-enforcement” is a perennial one.  But it’s hard to figure out if, as a global matter, over-enforcement really exists.

Let’s stipulate that from the perspective of an omniscient market observer, there is some optimal level of antitrust enforcement, “O.”

The problem is that it is very, very difficult to objectively determine that overall, actual enforcement exceeds (or fails to meet) “O.”

Antitrust issues and cases are highly fact-specific, and often require detailed and painstaking investigation.  That’s part and parcel of enforcement.  And while one can argue that in any given investigation, enforcement is either appropriate or not, it’s quite difficult to say that overall enforcement levels are not optimal.  Only with 20/20 hindsight from some future vantage point is it really feasible to make such a pronouncement.

Dominant firms, all things being equal, tend to think that enforcement is overly robust.  Their competitors naturally tend to disagree.  Although sometimes it is obvious who is right, often it’s not.  That’s what investigations, pretrial proceedings, motions to dismiss, and settlement discussions are for.

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Maybe Technology Will Enable Consumers to Unbundle Cable TV Channels

I recently covered a Ninth Circuit decision that denied consumers the opportunity to insist upon unbundled cable TV channels.  See this post.

Is this the end of the road for unbundling efforts?  Maybe not.  As this recent article suggests, the much-rumored next generation Apple TV may be a truly disruptive technology that enables consumers to unbundle channels and bypass the cable TV companies — or at least bypass them as content providers.  (They still would provide bandwidth.)

I have no idea whether there really is a new Apple TV in the works, or if so, when it might appear.  Nor do I know whether it will be the holy grail of new TV technology.  However, the article does illustrate an important principle: today’s dominant or entrenched market players can be reduced to empty shells by disruptive technology that no one (or almost no one) can foresee.  Remember Kodak and RIM?  In not many more years, they may be nothing more than historical footnotes.  These possibilities must be kept in mind when analyzing antitrust markets and market power issues.  Exactly how to do that is a non-trivial problem.

In the meantime, maybe cable TV companies should learn more about these potential threats; at least some may be caught off guard.

Northern District of California Reiterates That You Can Monopolize a Technology Market

Not every antitrust market is a physical product market.

In Apple, Inc. v. Samsung Electronics Co., Ltd., Case No. 11-CV-01846 (N.D. Cal. May 14, 2012) (Koh, J.), a patent case, the court refused to dismiss Apple’s counterclaims, including a Sherman Act § 2 counterclaim, against Samsung arising out of Samsung’s alleged manipulation of the mobile phone standard-setting process (which alleged resulted in the industry being “locked in” to technology owned and controlled by Samsung). The decision features three holdings of note:

  1. The court rejected Samsung’s argument that Apple had not pled a relevant antitrust market because it alleged monopolization of a technology market, and not a physical product market. Samsung’s argument that only physical product markets are cognizable was novel, but many courts have accepted technology markets as relevant markets. As have the DOJ and the FTC.
  2. The court also rejected Samsung’s argument that Apple had not adequately alleged market or monopoly power. Under Illinois Tool Works, of course, patents do not establish market power. But where a patent is incorporated into an industry standard, and where the standardization of the patented technology prevented the development of other proprietary technologies, the entity that caused the Standard Setting Organization (“SSO”) to adopt its technology may have market power, the court held.
  3. Finally, the court reiterated that an SSO can be used to obtain monopoly power and create anticompetitive effects on the relevant markets.  That can occur in a consensus-oriented private standard-setting environment, when a patent holder’s intentionally false promises to license essential proprietary technology on FRAND (fair, reasonable, and non-discriminatory) terms is coupled with the SSO’s reliance on that promise when including the technology in a standard, and the patent holder subsequently breaches that promise. Allegations of false FRAND commitments are subject to Federal Rule of Civil Procedure 9(b)’s heightened pleading standard, which Apple met.

Moral of the story: a robust and properly-framed SSO manipulation complaint can be difficult (though not impossible) to dismiss.

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