Delay Caused by Court Injunction Is Not "Antitrust Injury"

Thu, 18 Feb 2010 01:53:51 GMT

Plaintiff flunks Twombly-Sprewell "two-step," as the court's judicial notice of admissions adduced during preliminary injunction discovery discloses facts the court found to be inconsistent with plaintiff's theory of the case. RealNetworks, Inc. v. DVD Copy Control Ass'n, 2010-1 Trade Cas. (CCH) Para 76,877 (N.D. Cal. 1/6/10).

Realnetworks, Inc. ("Real") and its subsidiary Realnetworks Home Entertainment, Inc. ("Home") were in the business of developing, manufacturing and selling platforms for the delivery of digital media. Through Home, it developed and distributed several DVD products entitled, "Vegas" and "Facet". It engaged in negotiations with the DVD Copy Control Association ("DVD CCA"), which was a joint venture trade association of which a number of movie studios were members. The purpose of the joint venture was to develop, evaluate and license copy control and related technologies to participants in the DVD industry. The DVD CCA licensed its "Content Scramble System" ("CSS") which provided encryption protection for DVD audio-visual works. The stated purpose of DVD CCA was to prevent the illegal duplication of its member's movies, thus affording intellectual property protection to the manufacturers, producers and writers of such products. Real was unsuccessful in its negotiations with DVD CCA. DVD CCA and its member studios asserted that the CSS license agreement precluded the studios from entering into individual licenses granting the right to Real, and the others, to make digital copies of their respective DVDs.

Real, however, relied in part on a California trial court's ruling that another provider of DVD management technology, Kaleidoscope, did not violate the CSS license agreement by marketing a product that stored DVD content on its service. Accordingly, Real took the position that a CSS license was unnecessary. It planned to launch its "Vegas" product at a technology conference. However, in an attempt to address the studio's concerns about "Vegas", it delayed its launch.

Later in the same month, Real brought an action in the United States District Court for the Northern District of California seeking a declaratory judgment that Real had not, and would not, violate the Digital Millennium Copyright Act ("DMCA"), nor would it be in breach of the CSS license agreement with DVD CCA by manufacturing and distributing its "Vegas" product. On the same day, the studios brought an action in the United States District Court for the Central District of California seeking to enjoin Real from manufacturing, distributing or otherwise trafficking in its products. The studios alleged that Real was violating the DMCA, and had breached the CSS license agreement. The Central District action was transferred to the Northern District, where both cases were deemed related and were consolidated.

The District Court granted the studio's request for a temporary restraining order to restrain Real from manufacturing, distributing or otherwise trafficking in its DVD product. The parties then engaged in discovery, which culminated in a bench trial hearing on the studio's request for the entry of a preliminary injunction. Based upon what the court found to be a demonstration of a strong likelihood of success on the merits, the court granted the requested relief and entered a preliminary injunction.

Meanwhile, Real filed a proposed second amended complaint alleging claims for a group boycott in violation of Section 1 of the Sherman Act, the California Cartwright Act, and the California Unfair Competition Law. The studios and DVD CCA moved to dismiss the claims.

In granting the motion to dismiss, the District Court went into a detailed analysis of the reasons why the court ruled that the plaintiff could not state a claim. First, the court noted that it was not bound to accept as true the conclusions and unwarranted deductions of fact or unreasonable inferences contained in the complaint, citing the Ninth Circuit's decision in Sprewell v. Golden State Warriors, 266 F.3d 979, 988 (9th Cir. 2001). The court noted that it need not accept as true allegations that were contradicted by matters properly subject to the court's judicial notice. The court cited further authority in Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007). The court noted that pursuant to Twombly, it could "begin by identifying pleadings that, because they are no more than conclusions, are not entitled to the assumption of truth." Id. Based upon its citation of Sprewell and Twombly, the court concluded that the plaintiff had failed to allege any anticompetitive conduct that could have caused it any cognizable injury under the antitrust laws.

It also noted that, contrary to the usual case, and certainly to Twombly itself, the court could take notice of the discovery conducted in the case from which it determined that the preliminary injunction should issue. The court noted that its preliminary injunction order included over 19 pages of factual findings. These included admissions that were irreconcilable with allegations of the second amended complaint.

In particular, the court stated that the only cognizable injury suffered by plaintiff was the delay caused to the launch of its DVD product "Vegas", by the entry of the court's preliminary injunction order. Thus, the court concluded that any injury to plaintiff had been caused by its own course of illegal behavior, and the court's resulting injunctive order, rather than any anticompetitive behavior of the defendants. Accordingly, there was no "antitrust injury, and accordingly, no "antitrust standing" that would enable a private plaintiff to meet the standards required by Section 4 of the Clayton Act. See Knevelbaard Dairies v. Kraft Foods, Inc., 232 F.3d 979, 987 (9th Cir. 2000) (quoting Atlantic Richfield Co. v. U.S.A. Petroleum Co., 495 U.S. 328, 334 (1990)).

Next, the court ruled that, to the extent that the defendant studios had engaged in concerted activity and had cooperated with one another in the bringing of the action, such conduct would be Noerr-Pennington protected conduct. Such conduct would not even approach a "sham", as it was highly successful in securing the requested governmental action.

Finally, the court addressed plaintiff's argument that it was a violation of the antitrust laws for the studios to engage in a collective agreement not to license its technology individually. From this point, the plaintiffs argued that the "cartel" would be illegal under the antitrust laws and should be held to be unenforceable. The court decided, however, that the plaintiff's argument was circular, and assumed, contrary to fact, that it was not engaged in a violation of the DMCA, and was not subject to a preliminary injunction.

The court found this argument to be fatally flawed. First, it can only make sense if the antitrust analysis was restricted specifically to the technologies that copied content from CSS-encrypted disks. This assumed an improperly narrowed relevant market, as there was no allegation that the individual studios had refused to negotiate individual licensees for digital copies of its movies. Thus, in discussing plaintiff's "group boycott" claim, the court utilized a rule of reason analysis, at least impliedly, and found that the plaintiff's argument was fatally flawed, as there was no showing of downstream anticompetitive effects in a properly defined relevant market. As plaintiff Real could have negotiated individual agreements with the studios, it could not have suffered antitrust injury as a result of the group refusal to license. The court again concluded that plaintiff Real's only "real" injury stemmed from its own decision to manufacture and traffic in a device that was almost certainly illegal under the DMCA. Thus, "pooling" is not an illegal restraint where the alternative exists in acquiring individual rights through individual negotiations. In summation, and in denying leave to amend on the ground of futility, the court stated:

"The only injury Real has suffered in connection with its RealDVD product is the delay in the products release and accompanying lost profits. This delay is a result of this court's decision to enjoin the distribution of a product which the court has found likely to violate federal law and to breach the terms of Real license agreement with the DVD CCA." Id. at page 12.

The court's dispositive analysis might remind one of a basic tenant of California law, contained in the "Maxims of Jurisprudence" contained in the California Civil Code. Civil Code Section 3517 provides "no one can take advantage of his own wrong."

Authored By:

Don T. Hibner
(213) 617-4115
DHibner@sheppardmullin.com

Second Circuit Court Of Appeals Rules That Antitrust Complaint Satisfies Twombly Pleading Standards

Thu, 18 Feb 2010 01:37:10 GMT

On January 13, 2010, the United States Court of Appeals for the Second Circuit reversed a district court’s dismissal of a class action lawsuit accusing the major record companies of conspiring in violation of the antitrust laws to fix the prices for music purchased on the internet. See Starr v. Sony BMG Music Entertainment, et al., No. 08-5637-cv (2nd Cir., Jan. 13, 2010) (“Starr”). Specifically, applying the heightened pleading standard required by the United States Supreme Court’s decision in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), the Court found that “[t]he present complaint succeeds where Twombly's failed because the complaint alleges specific facts sufficient to plausibly suggest that the parallel conduct alleged was the result of an agreement among the defendants.” While the precise impact of the pleading standard required by Twombly for antitrust cases remains uncertain, for now, the Starr decision will be one that is carefully studied by attorneys bringing, and defending against, antitrust lawsuits.

The Defendants in the Starr case include Sony Corp., Sony BMG Music Entertainment, Bertelsmann Inc., Vivendi’s Universal Music Group, Time Warner Inc., Warner Music Group Corp. (“WMG”), and EMI. The plaintiffs allege that the defendants violated Section 1 of the Sherman Act by conspiring to “restrain the availability and distribution of Internet Music, fix and maintain at artificially high and non-competitive levels the prices at which they sold Internet Music and impose unreasonably restrictive terms in the purchase and use of Internet Music.”

Twenty-eight cases were filed in state and federal courts and consolidated in the Southern District of New York. Plaintiffs allege that the conspiracy was carried out, in part, by way of two joint venture music services launched by some the named defendants “MusicNet” and “Duet” (later renamed “pressplay”). All defendants signed distribution agreements with MusicNet or pressplay and sold music directly to consumers over the Internet through these ventures. Plaintiffs alleged that these joint ventures and instances of parallel conduct by the defendants were sufficient to state a claim under Section 1 of the Sherman Act.

Defendants filed a motion to dismiss the complaint for, among other things, failing to satisfy the Twombly pleading requirements. The district court found that plaintiffs did not challenge the existence or creation of the joint ventures, and thus the operation of the joint ventures did not yield an inference of an illegal agreement, and that plaintiffs’ “bald allegation that the joint ventures were shams is conclusory and implausible.”

The district court also held that defendants’ imposition of unpopular terms and pricing structures was not against defendants’ individual economic self-interest when viewed against the backdrop of widespread music piracy. Finally, the district court rejected plaintiffs’ argument that governmental investigations of the defendants, including an investigation by the Department of Justice (“DOJ”), was a sufficient “antitrust record” to justify the problematic inference against the defendants that “once a criminal, always a criminal,” particularly since the DOJ had closed one of those investigations. Thus, the district court granted defendants’ motion to dismiss the complaint. Plaintiffs appealed.

On appeal, the Second Circuit Court of Appeals first stated that Twombly only requires that a plaintiff allege facts “to raise a reasonable expectation that discovery will reveal evidence of illegal agreement,” and that the critical question is whether the alleged parallel conduct “stem[s] from independent decisions or from an agreement.”

The Second Circuit then held that the following non-conclusory allegations, taken together, sufficiently alleged the plausible existence of an agreement as opposed to independent action.

Defendants control over 80% of the market for music sold online.
All defendants signed distribution agreements with either MusicNet or Duet/Pressplay.
Defendants used most favored nation clauses (MFNs) in their licenses to maintain high fees for songs, and attempted to hide their MFNs because they knew they would attract antitrust scrutiny.
Defendants refused to do business with the second largest Internet music retailer.
An industry commenter had observed that “nobody in their right mind” would want to use the defendants’ services because of unpopular restrictions.
Internet music allowed costs to be eliminated, but no price reductions followed the dramatic cost reductions, “as would be expected in a competitive market.”
Edgar Bronfman, Jr., CEO of WMG, allegedly was quoted stating that pressplay was formed as an effort to stop the “continuing devaluation of music.”
In or about May 2005, all defendants raised wholesale prices from about $0.65 per song to $0.70 per song.
Price-fixing investigations of the defendants were being conducted by the Department of Justice and the New York Attorney General.

The appeals court found that, based on the foregoing factual allegations, the complaint alleges “specific facts sufficient to plausibly suggest that the parallel conduct alleged was the result of an agreement among the defendants.” As to the district court’s refusal to find an inference of conspiracy based on the DOJ and other governmental investigations of defendants, the court found that “defendants cite no case to support the proposition that a civil antitrust complaint must be dismissed because a criminal investigation undertaken by the Department of Justice found no evidence of conspiracy,” and also noted that complaint alleges that the DOJ subsequently launched two new investigations into whether defendants engaged in collusion and price fixing. Finally, the Second Circuit held that the allegations concerning defendants would “plausibly contravene each defendant’s self-interest ‘in the absence of similar behavior by rivals.’” Therefore, plaintiffs had pled an actionable antitrust violation.

While the Second Circuit considered the facts alleged in plaintiffs’ complaint sufficient to permit the court to find “plausible grounds to infer an agreement” as required by Twombly, it is not clear which of these factual allegations nudged the complaint over the Twombly threshold.

Finally, the Second Circuit rejected defendants’ argument that plaintiffs were required to allege facts that tend to exclude independent self-interested conduct as an explanation for defendants’ parallel behavior. In addition, in light of the allegations of parallel conduct, the court held that plaintiff was not required to identify the specific time, place or person related to the conspiracy allegations.

Authored By:

Daniel L. Brown
(212) 634-3095
DBrown@sheppardmullin.com

Supreme Court Weighs Single Entity Treatment for Pro Sports Leagues

Thu, 18 Feb 2010 01:25:37 GMT

On January 13, 2010, the Supreme Court heard oral arguments in American Needle v. National Football League, Case No. 08-661, which concerns whether the teams belonging to the National Football League should be treated as a single entity or as thirty-two independent entities for antitrust purposes. If the former view were to be adopted in this case, the teams in the NFL possibly could enjoy immunity from lawsuits brought under Section 1 of the Sherman Act, which only applies to combinations of two or more entities.

The case arose in 2001 when NFL Properties, a business entity tasked with licensing intellectual property owned by the NFL's member teams, granted one of American Needle's competitors an exclusive license to manufacture headwear bearing teams’ logos and trademarks for all teams in the NFL. American Needle, which had previously had the right to manufacture headwear for one NFL team, lost its contract to do so, and challenged this arrangement as a conspiracy among the teams to restrain trade in violation of Section 1.

The trial court granted summary judgment for the NFL, concluding that "the NFL and the teams act as a single entity in licensing their intellectual property," and are thus immune from Section 1 challenges. The Seventh Circuit affirmed, but sought to limit the precedential impact of its holding, noting that "the question of whether a professional sports league is a single entity should be addressed not only one league at a time, but also one facet of a league at a time." American Needle v. N.F.L., 533 F.3d 736, 742 (7th Cir. 2008).

On certiorari, the NFL advocated an expansion of the Seventh Circuit's holding to confer Section 1 immunity on virtually any joint activity undertaken by its member teams. Central to the NFL's position is Copperweld Corp. v. Independence Tube Corp., 467 U.S. 752 (1984), in which the Supreme Court held that a parent corporation cannot combine with its wholly-owned subsidiary for purposes of Section 1. Like the defendants in Copperweld, the NFL argued, its member teams are so interdependent that agreements among them do not actually reduce competition. Instead, such agreements allow the NFL to compete for audiences against other forms of entertainment.

American Needle argued that, unlike the defendants in Copperweld, the NFL's member teams are independent entities that compete amongst themselves. While some inter-team cooperation may be necessary to produce the NFL's product, i.e. football games, American Needle asserted that each team could be free to license its own intellectual property. Thus, according to American Needle, collective decisions with respect to licensing have the potential to reduce competition and should be susceptible to challenge under Section 1.

Some commentators have stated that a comprehensive victory for the NFL would substantially reduce the bargaining power of individuals and companies that do business with sports leagues, since many of these entities rely upon actual or threatened antitrust lawsuits for leverage. Not surprisingly, prominent amici curiae have lent support to both parties. A number of professional sports organizations, including the National Basketball Association and the National Hockey League, have submitted briefs on behalf of the NFL. Meanwhile, players' associations from all four major sports have supported American Needle.

During oral arguments, some Justices seemed skeptical of the NFL's single entity argument. At one point, Justice Sotomayor told counsel for the NFL, "you are seeking through this ruling what you haven't gotten from Congress: an absolute bar to an antitrust claim." Others probed the NFL's position with hypotheticals about selling houses or farm equipment. When counsel for the NFL rejected these examples as implausible, Justice Roberts responded that, "selling logos is closer to selling houses than it is to playing football." However, the Court's reluctance to award the NFL blanket Section 1 immunity does not necessarily portend a win for American Needle, as a number of intermediate approaches are possible.

The Supreme Court's decision is expected in May or June.

Authored By:

Adrian Lambie
(415) 774-2965
ALambie@sheppardmullin.com

Where There Is An "At-Will," There Is A Way

Thu, 18 Feb 2010 01:06:18 GMT

A market share discount engaged in by an alleged monopolist, coupled with a new product innovation that was not compatible with competitor's products, passes Sherman Act scrutiny. Allied Orthopedic v. Tyco Health Care, 08-56314 (9th Cir. January 6, 2010).

Plaintiffs were a group of hospitals and health care providers that purchased pulse oximetry sensors from defendant Tyco Health Care Group, L.P. ("Tyco"). The complaint alleged violations of Section 1 and Section 2 of the Sherman Act for alleged exclusionary marketing practices, which plaintiffs claimed unlawfully foreclosed competition from generic sensor manufacturers. Plaintiffs also alleged that Tyco introduced a new patented pulse oximetry system, "OxiMax" in order to unlawfully maintain its monopoly in the market for oximetry sensors, in violation of Section 2. The complaint alleged that Tyco willfully designed its new product to be incompatible with generic sensors used by the plaintiffs, thus creating a "lock-in" situation as to existing Tyco "installed-base" customers, thus denying competitive opportunities to plaintiffs.

The district court denied plaintiff's motion for class certification and granted defendant Tyco's motion for summary judgment on both the Section 1 and 2 claims. On January 6, 2010, the Ninth Circuit affirmed.

It was admitted that Tyco was an early entrant into the pulse oximetry market, and had a substantial base of installed monitors, which exceeded that of its competitors. Its technology was protected by a patent which was on the verge of expiration. Accordingly, Tyco allegedly adopted a strategy of developing a new patented sensor design that was incompatible with the products used by the plaintiffs.

In launching its new "OxiMax" product, it notified other equipment manufacturers that all of its products subject to the prior patent would be discontinued. It then offered two types of marketing agreements. The first was a "market-share discount". The second was a "sole source agreement", namely an exclusive dealing contract. As it's name implies, the market share discount plan granted purchasers discounts off list prices if they committed to purchase the same percentage of their products as in the past. Thus, the greater percentage of a customer's requirements that it purchased from Tyco, the greater the discount it would receive under the new OxiMax plan. However, the OxiMax market share discount plan did not obligate any purchases, and was subject to "at-will" cancellation. Similarly, the sole-source agreement was also at-will.

The district court granted defendant Tyco's motion for summary judgment on the ground that as the allegedly restrictive agreements were "at-will", they could not have any foreclosive effect in the market, and were nothing more than an opportunity for customers to purchase at lower prices, thus benefiting purchasers and consumers alike.

The Ninth Circuit affirmed. Citing its previous cases in Omega Environmental, Inc. v. Gilbarco, Inc., 127 F. 3d 1157 (9th Cir. 1997), and Twin City Sportservice, Inc. v. Charles O. Finley & Co., Inc., 676 F. 2d 1291, 1303-04 (9th Cir. 1982), the court held that an exclusive dealing provision that was at-will, could not foreclose competition in a substantial way of any line of commerce. As to both the market-share discount and the sole-source agreements, the court held that because they were at-will, they could not contractually obligate customers to purchase anything from Tyco, and thus could have no foreclosive effect.

The district court also granted summary judgment as to the Section 2 claim. It found that, as a matter of law, the OxiMax design was a "superior and more sophisticated offering", and thus was not subject to anti-competitive effects analysis. The design and introduction of product improvements is legitimate competition on the merits.

Turning the clock back to the "compatible peripheral" IBM cases of the 1970's and 80's, the court noted that the introduction of a superior product, even for exclusionary purposes, was not condemned under the antitrust laws. Rather, the issue was whether the product innovation was a contribution to the art. See California Computer Prods. v. IBM Corp., 613 F. 2d 727, 735 (9th Cir. 1979) and Transamerica Computer Co. v. IBM Corp., 698 F. 2d 1377 (9th Cir. 1983).

Of note, defendant Tyco did not contest, for the purposes of the Ninth Circuit appeal, that it was a monopolist in the pulse oximetry sensor market. Rather, the focus of the dispute was whether Tyco had unlawfully maintained its monopoly power by aftermarket exclusionary conduct. In its analysis, the Ninth Circuit engaged in a form of structured or "quick look" rule of reason inquiry. First, it asked the question whether the innovation was a contribution to knowledge. It noted, but did not decide, that the fact that a patent had issued on the new product was at least "evidence". The more important question asked was whether there was a business justification. The court noted that "as a general rule, courts are properly very skeptical about claims that competition has been harmed by a dominant firm's product design changes." Slip Opinion, p. 409. For this proposition, it cited Berkey Photo, Inc. v. Eastman Kodak Co., 603 F. 2d 263, 281 (2nd Cir. 1979), and the more recent case of United States v. Microsoft Corp., 253 F. 3d 34, 65 (D.C. Cir. 2001). The court held that a design change that improves a product by providing a new benefit to consumers does not violate Section 2, absent some associated and unprivileged anti-competitive conduct. The reduction of manufacturing costs and prices to consumers, coupled with improved performance of the product in the market is a sufficient justification to forego any further effects analysis. The court held that Tyco was under no duty to help its competitors survive or expand. It was immaterial that it designed its product as not to be compatible with rivals. This was not dissimilar to the analysis taken by the United States Supreme Court in Verizon Communications v. Law Offices of Curtis v. Trinko, LLP, 540 U.S. 398 (2004) (limitations on duty of monopolist to deal with rivals). Thus, where there is a consumer benefit from a product improvement, there is no 'technological predation'. See California Computer Prods, 613 F. 2d at 744.

Finally, the court noted a policy reason for the deference given under the antitrust laws for beneficial product improvement designs. The court noted that balancing the consumer benefits of the product innovation with the exclusionary impact on rivals was beyond the expertise or resources of federal courts. Thus, it does not present a factual issue, and is a policy determination. In this regard, it is reminiscent of the early Sherman Act decision in United States v. Trenton Potteries Co., 273 U.S. 392 (1927). There, the Supreme Court recognized that it was beyond its expertise, on a policy basis, to make a determination whether a concerted pricing agreement was "reasonable". Trenton Potteries gave great efficacy to the expansion, during that era, of "per se" rules. Here, however, the district court noted that the issue of Section 2 liability founded on product innovation was not per se lawful, but was subject to a more structured rule of reason analysis. However, it also noted that statements of an innovator's intent to harm a competitor through genuine product improvement are insufficient in themselves to create an issue of fact that warrants a denial of summary judgment, citing Oahu Gas Serv., Inc. v. Pacific Res., Inc., 838 F. 2d 360 (9th Cir. 1988).

It was interesting to note that while defendant Tyco did not contest its monopoly status, the record, as noted by the Ninth Circuit, supported the proposition, again resurrecting the IBM compatible peripheral cases, that a declining market share was contra indicative of current market power. See Transamerica Computer Co. v. IBM Corp., 698 F. 2d 1377 (9th Cir. 1983); Syufy Entertainment v. American Multicinema, 793 F. 2d 990 (9th Cir. 1986).

At-will rules.

Authored By:

Don T. Hibner
(213) 617-4115
DHibner@sheppardmullin.com

District Court Breathes New Life Into Predatory Pricing and Refusal to Deal Claims After Linkline and Trinko

Thu, 18 Feb 2010 00:55:46 GMT

In Safeway Inc. v. Abbott Laboratories, 2010 WL 147988 (N.D. Cal. Jan. 12, 2010), Judge Wilkins of the United States District Court for the Northern District of California denied defendant Abbott Laboratories motion to dismiss predatory pricing and refusal to deal claims set forth in the second amended complaints filed by Direct Purchasers and Abbott's competitor, SmithKline Beecham Corp. ("GSK").

Abbott involves the sale of protease inhibitors ("PIs") which are currently the most effective class of drugs for treating HIV. In 1996, defendant Abbott introduced Norvir, consisting of a patented compound called ritonavir, as a stand-alone PI. After Norvir's release, it was discovered that when used in small quantities with other PIs, it could "boost" the antiviral properties of those other PIs. The use of Norvir in small amounts as a booster, rather than a stand-alone PI, caused sales of Norvir to decline significantly.

In 2000, Abbott introduced Kaletra, a single pill containing the PI lopinavir, as well as a booster quantity of Norvir. Several years later, two of Abbott's competitors (GSK and Bristol-Myers Squibb) introduced two new PIs which were meant to be used in conjunction with booster quantities of Norvir. These new PIs were just as effective as Kaletra, but were assertedly more convenient and caused fewer side effects. As a result of their introduction, Kaletra's market share plummeted.

Soon thereafter, Abbott raised the wholesale price of Norvir by 400%, while keeping the price of Kaletra constant. According to Abbott, this dramatic price increase was implemented in order to align the price of Norvir with the drug's enormous clinical value. Several groups of plaintiffs filed suit in response, alleging that Abbott's price increase was an unlawful attempt to monopolize the "boosted market" for PIs that are prescribed for use with Norvir.

Direct Purchasers alleged that Abbott engaged in predatory pricing with respect to Kaletra and the boosted market. Since Kaletra was a bundled product (containing both lopinavir and Norvir), Direct Purchasers alleged that the "discount attribution" standard set forth in the Ninth Circuit's decision in Cascade Health Solutions v. Peacehealth, 515 F.3d 883 (9th Cir. 2008), controlled. Applying Cascade Health, Direct Purchasers argued that when the full amount of the substantial discount Abbott offers on Kaletra is attributed to lopinavir (the competitive product in the boosted market), the resulting price is below Abbott's average variable cost to produce lopinavir, and so constituted unlawful predatory pricing by Abbott through bundled discounting. The District Court agreed, also finding that Cascade Health did not require that plaintiff plead a dangerous probability of recoupment, which is required in predatory pricing claims involving single products. The District Court also found that the Supreme Court's discussion in Pac. Bell Tel. Co. v. Linkline Commc'ns, Inc., 129 S.Ct. 1109, 1122 (2009), that an upstream monopolist is free to charge whatever wholesale price it would like, was inapplicable dicta as Linkline did not involve predatory pricing of a bundled product where a defendant had a duty to deal.

Both Direct Purchasers and GSK alleged that Abbott's 400% increase in Norvir's price disrupted a longstanding course of dealing, in violation of an antitrust duty to deal. The District Court, while recognizing the general rule that antitrust law imposes no generalized duty to deal, nevertheless relied on the Supreme Court's decisions in Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985), and Verizon Commc'ns Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398 (2004), to hold that liability under the antitrust laws can arise when a defendant voluntarily alters a course of dealing and "anticompetitive malice" motivates the defendant's conduct. The court found that in this case, Abbott had voluntarily engaged in licensing agreements with its competitors, which induced its competitors to rely on Norvir's availability in the market, subject to normal, inflation-level price increases. Plaintiffs had also presented sufficient evidence to suggest that Abbott's sudden, dramatic increase in price may have been motivated by anticompetitive malice.

The court also found that the Direct Purchasers' claim that Abobtt monopolized the boosting market by keeping the price of Norvir at a reasonable level for several years, thereby inducing its competitors to rely on the availability of Norvir on reasonable terms and to forgo development of their own PI boosters, as sufficient to assert "an antitrust theory based on deceptive conduct that induced reliance."

Authored by:

Helen Cho Eckert
(213) 617-4286
HEckert@sheppardmullin.com

Come Together: DOJ Approves Merger of Concert-Industry Giants

Thu, 18 Feb 2010 00:36:49 GMT

The U.S. Department of Justice has approved the merger of the world's biggest concert promoter and the world's biggest ticket-seller.

The DOJ's review of the proposed merger between Live Nation Inc. and Ticketmaster Entertainment Inc. was closely watched as a potential bellwether of the Obama administration's antitrust enforcement policies. Antitrust watchers considered the case telling because it involved a vertical merger. Vertical mergers are generally challenged less often, because it is more difficult to show that competition would diminish when merging companies operate at different stages in the supply chain.

After nearly a year of scrutiny, the DOJ announced on January 25, 2010 that it would approve the merger, subject to several conditions designed to preserve competition in the relevant market: ticketing services for major convert venues. Christine Varney, the DOJ's antitrust division chief, said the government was prepared to litigate to stop the merger, but she expects the conditions imposed on the deal will foster competition among ticketing companies and lead to lower ticket prices for consumers.

"The proposed settlement allows for strong competitors to Ticketmaster, allowing concert venues to have more and better choices for their ticketing needs," Varney said in a statement.

The merger would create a new entity, Live Nation Entertainment Inc., that touches nearly every aspect of the music industry. Live Nation Entertainment would be able to manage artists, book them for performances at venues owned by the company, and sell tickets to those concerts.

Before the union, Ticketmaster and Live Nation were the biggest players in their respective markets. In 2008, according to the DOJ, Ticketmaster provided primary ticketing services to more than 80 percent of major concert venues. That same year, Live Nation captured 33 percent of the market for promoting concerts at major venues, the DOJ said. Live Nation also owned or operated venues representing about 15 percent of capacity all major concert venues in the United States, the DOJ said.

In recent years, both companies expanded the scope of their business. In 2008 Ticketmaster acquired a controlling interest in the artist management firm Front Line Management Group Inc. And Live Nation entered the market for primary ticketing services in late December 2008. Live Nation quickly gained market share from Ticketmaster, according to documents filed by the Justice Department

The two companies announced the merger shortly thereafter, in February 2009. Last month the DOJ, along with 17 state attorneys general, filed a civil antitrust lawsuit in the U.S. District Court in Washington, D.C. to block the merger. United States v. Ticketmaster Entertainment, Inc., et al., 1:10-cv-00139-RMC (D.D.C. filed Jan. 25, 2010). At the same time, the government filed a proposed settlement designed to alleviate the perceived anticompetitive effects of the merger.

The proposed settlement imposes a host of conditions on the merger. These include:

Ticketmaster would be required to license its primary ticketing software to Anschutz Entertainment Group, the nation's second-largest concert promoter.
Ticketmaster would divest certain ticketing assets. Specifically, Ticketmaster must divest Paciolan, a venue-managed platform for selling tickets through the venue's own website. DOJ expects that Paciolan will be acquired by Comcast-Spectacor, L.P., which sells ticketing services, owns 2 major U.S. concert venues and manages several others. DOJ expects that acquisition of the Paciolan business would create another vertically-integrated firm that would compete effectively with the newly merged firm.
The merged entity would be subject to anti-retaliatory provisions. For example, it may not retaliate against venue owners who contract or consider contracting for ticketing services with its competitors.
The merged entity would be prohibited from bundling its ticketing services with performances by artists that the entity manages.
The merged entity must either refrain from using certain ticketing data in its non-ticketing business, or provide that data to other promoters and managers.

While Ticketmaster and Live Nation have accepted the government's terms, the settlement still requires approval from the District Court, which must determine if the proposed final judgment is in "the public interest." 15 U.S.C. § 16(e)(1). Antitrust commentators generally agreed that DOJ was able to wring major concessions from the parties, especially given the difficulties inherent in challenging a vertical merger.

Observers differed, however, in their predictions about the merger's likely competitive effects. The Wall Street Journal cited industry experts who were skeptical that the merger would benefit consumers, pointing out that ticketing companies compete for business with venues, not concert-goers. The Economist, however, predicted that the integration of ticket-selling, promotion and venue-ownership would allow the firm to more accurately discern the true market value of tickets. Tickets that are priced at market value would help eliminate secondary markets like scalpers and online ticket exchanges, the Economist predicted, to the benefit of both artists and fans.

Authored By:

Tyler M. Cunningham
(415) 774-3208
TCunningham@sheppardmullin.com

FTC Chair Calls for Ban to Pay-For-Delay Settlements

Mon, 25 Jan 2010 22:22:30 GMT

On January 13, 2010, the Federal Trade Commission released a study critical of “pay-for-delay” patent litigation settlements by which brand-name drug companies pay generic competitors to keep generic drugs off the market. The same day, the Chairman of the FTC, Jon Leibowitz, and Representatives Chris Van Hollen (D-Md.), Bobby Rush (D-Ill.) and Mary Jo Kilroy (D-Ohio) held a news conference during which they urged Congress to include a provisional banning such settlements in the final health care reform bill.

The FTC study, “Pay-for-Delay: How Drug Company Pay-Offs Cost Consumers Billions,” examined the impact of pay-for-delay settlements over the past six years and found that, on average, such settlements preclude generic entry for 48 months. Agreements containing provisions for payments by the brand-name company to the generic on average precluded generic drug entry for nearly 17 months longer than agreements without payment provisions. According to the study, most of such agreements are still in effect and currently protect at least $20 billion in sales of brand-name drugs from generic competition. In addition, the study projected that pay-for-delay agreements will cost American consumers $35 billion over the next 10 years, or $3.5 billion per year.

Chairman Leibowitz said consumers are forced to pay inflated prices or forgo their medication because of such settlements. “Pay-for-delay deals are a bad prescription for America: when drug companies agree not to compete, consumers lose,” Leibowitz stated. “These are collusive, price-fixing deals,” said Representative Van Hollen. “It means the consumer pays a lot more for their pharmaceuticals.”

Pay-for-delay settlements are an unintended outgrowth of the Hatch-Waxman Act, a 1984 law intended to promote price competition by encouraging generic drug companies to challenge the patents protecting brand-name drugs. Under the Act, the first generic to challenge a brand-name’s patent gains the exclusive right to sell its generic version for six months before other generics can enter the market. But it also gives brand-name companies who sue generic infringers an automatic 30-month stay of generic entry.

Such patent infringement litigation often is settled. A number of the settlements have delayed generic market entry and have involved payments by the brand-name company to the generic, either by direct payments or through agreements by which the generic is paid to provide goods or services. In fiscal year 2009, drug companies entered into 19 settlement agreements that involved both delaying generic entry and compensation from the brand-name to the generic.

The House-passed version of the health care overhaul bill includes a provision authored by Representative Rush that would make pay-for-delay settlements illegal. The Senate version does not address the issue, but Senator Herb Kohn (D-Wis.) has offered an amendment to prohibit such settlements. In addition, nine Democratic senators recently wrote to Senate leaders to urge that the House’s provision be included in the final health care legislation. Van Hollen stated that he thinks the House language has a “very decent chance at getting in the final bill.”

According to the research firm IMS Health, generics account for only about 22 percent of prescription drug spending, although they represent nearly 75 percent of the prescriptions written. That means that 78 percent of drug expenditures goes to the 25 percent of prescriptions written for brand-name drugs. Considering only federal government spending, the Congressional Budget Office estimates that the House provision could save the government $1.8 billion over the next 10 years.

Authored By:

Robert L. Magielnicki
(202) 218-0002
RMagielnicki@sheppardmullin.com

Lower Filing Thresholds for HSR Act Premerger Notifications and Interlocking Directorates Announced

Mon, 25 Jan 2010 21:55:50 GMT

1. Lower Thresholds For HSR Filings

On January 19, 2010, the Federal Trade Commission announced revised, lower thresholds for premerger filings under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The filing thresholds are revised annually, based on the change in gross national product. For the first time, the thresholds have been reduced. They will be effective thirty days after publication in the Federal Register. Publication is expected to occur this week. Thus the new thresholds will most likely become effective late February 2010. Acquisitions that have not closed by the effective date will be subject to the new thresholds. Filing persons must wait a designated period of time, usually 30 days, before completing their transactions. The HSR Act imposes premerger notification and waiting period obligations on transactions over a certain size, where the parties are over a certain size, before those transactions may be completed. Each "person" who is a party to an HSR-reportable deal must file an HSR notification with the Department of Justice Antitrust Division and the Federal Trade Commission.

The thresholds include a Size of Transaction test and a Size of Person test. The Size of Transaction test includes the value of the assets, stock or noncorporate interests (such as partnership or membership interests) being acquired in the deal, and the value of assets, voting securities or noncorporate interests of the target that the acquiring person already holds. In asset deals, the value of the assets is either the acquisition price or the fair market value of the assets, whichever is higher. In stock deals, the value of the stock is determined by the acquisition price or market price, whichever is higher.

The Size of Person test measures the size of the “ultimate parent entity” of the buyer and seller, and the entities the "ultimate parent entity" controls directly or indirectly. The "ultimate parent entity" is an entity or natural person that controls the buyer or seller and is not itself controlled by anyone else, e.g., the entity or natural person that has 50% or more of the voting securities of the buyer or seller. The Act defines "control" in a special way: (1) holding 50 percent or more of the outstanding voting securities of an issuer; (2) in the case of an entity that has no outstanding voting securities, having the right to 50 percent or more of the profits of the entity, or having the right in the event of dissolution to 50 percent or more of the assets of the entity; or (3) having the contractual power presently to designate 50 percent or more of the directors of a corporation, or in the case of unincorporated entities, of individuals exercising similar functions.

The new thresholds are:

Size of Transaction Test

Notification is required if the acquiring person will acquire and hold certain assets, voting securities, and/or interests in non-corporate entities valued at more than $63.4 million.

Size of Person Test

(Transactions valued at more than $253.7 million are not subject to the Size of Person Test and are therefore reportable)

Generally one "person" to the transaction must have at least $126.9 million in total assets or annual net sales, and the other must have at least $12.7 million in total assets or annual net sales.

While the filing thresholds have changed, the filing fees have not. If the value of the transaction is more than $63.4 million but less than $126.9 million, the filing fee is $45,000. The filing fee is $125,000 if the value of the transaction is $126.9 million or more but less than $634.4 million. If the value of the transactions is $ 634.4 million or more, the filing fee is $280,000.

The above rules are general guidelines only and their application may vary depending on the particular transaction.

2. Lower Thresholds For the Prohibition Against Interlocking Directorates

Also on January 19, 2010, the FTC announced new, reduced thresholds for the prohibition in Section 8 of the Clayton Act against interlocking directorates. Section 8 prohibits, with certain exceptions, one person from serving as a director or officer of two competing corporations if two thresholds are met. Applying the new thresholds, competitor corporations are covered by Section 8 if each one has capital, surplus and undivided profits aggregating more than $25,841,000, with the exception that no corporation is covered if the competitive sales of either corporation are less than $2,584,100. As with HSR thresholds, the FTC is required to revise Section 8 thresholds annually based on gross national product. Section 8 thresholds become effective upon publication in the Federal Register, which is expected later this week.

Authored By:

Heather M. Cooper
(213) 617-5457
HCooper@sheppardmullin.com

Spirit of Twombly Exorcises Specter of Revived Aguilar Claims

Mon, 25 Jan 2010 21:21:49 GMT

The Ninth Circuit recently affirmed the dismissal of claims based on the aggregation of petroleum exchange agreements to show alleged "cumulative anticompetitive effects." Gilley Enterprises v. Atlantic Richfield Company, No. 06-056059 (9th Cir. Dec. 2, 2009)."

Plaintiff Gilley filed a class action in 1998 on behalf of himself and a class of wholesale purchases of CARB gasoline in California. CARB gasoline is a cleaner-burning fuel, and if the only formulation of that may be sold in California. The complaint alleged that the defendant major oil producers violated Section 1 of the Sherman Act by entering into a conspiracy to limit the supply of CARB gasoline and to raise CARB gasoline prices.

The allegations were substantially similar to those alleged in Aguilar v. Atlantic v. Richfield Company, a class action suit filed in California Superior Court in 1996. Aguilar was an action brought on behalf of a class of retail purchasers. In Aguilar v. Atlantic Richfield Company, 25 Cal. 4th 826 (2001), the California Supreme Court upheld the affirmance of a grant of summary judgment on the ground that the complaint failed to properly allege an actionable conspiracy. The Court held that the allegations were as consistent with independent action within an oligopolistic interdependent market, as with collusion. Based upon amendments to the California Code of Civil Procedure that brought California summary judgment practice substantially in parallel with federal practice, the Court concluded that the proper standard was that announced by the United States Supreme Court in Matsushita Elec. Industrial Co. v. Zenith Radio, 475 U.S. 574 (1986.). In Aguilar, the defendants produced evidence that the information exchanges, which consisted inter alia of petroleum exchange agreements, was in the individual economic self-interest of each of the participating companies, and was efficient. Accordingly, the interaction was consistent with independent action.

In Gilley, the Court of Appeals for the Ninth Circuit affirmed the District Court's granting of defendants' motion to dismiss plaintiffs' Sherman 1 claim holding that (1)the Aguilar decisions precluded the allegations made in the complaint, and (2) that the defendants' petroleum exchange agreements could not be aggregated to establish market power and cumulative anti-competitive effects. Further, even if the petroleum exchange agreements could be aggregated, the absence of plausible allegations of a conspiracy to limit supply and raise prices eliminated any kind of a connection between the exchange agreements and any anti-competitive effects. Gilley Enterprises v. Atlantic Richfield Co., -06-56059 (9th Cir., December 2, 2009). In so doing, the Ninth Circuit withdrew its prior opinion, filed on April 3, 2009, and reported at 561 F.3d 1004 (9th Cir. 2009).

In essence, the Court held that the conspiracy allegations, to be established through the aggregation of the defendants' individual exchange agreements among each other, could not establish a plausible set of allegations of a conspiracy that would survive the holding of Bell Atlantic Corporation v. Twombly, 550 U.S. 544 (2007). The Ninth Circuit held that: "the breadth of the SAC (second amended complaint) is inconsistent with the spirit of Twombly" 550 U.S. 544. It noted that while Twombly involved an alleged conspiracy based on parallel conduct, parallel conduct without more, only provides an opportunity, and does not satisfy the Matsushita test.

Specifically, plaintiffs failed to allege any set of facts plausibly explaining how petroleum exchange agreements, either individually or in the aggregate, could provide evidence of anti-competitive effects. On an individual basis, a petroleum exchange agreement is efficient between the parties, usually of short duration, or terminable at will, and designed to efficiently reduce transaction and transportation costs that would cause the companies to incur the not inconsiderable costs of geographically transporting petroleum products to disparate refining locations, where necessary. To condemn such exchange agreements as either individually, or in the aggregate, of being "anti-competitive" would more likely than not exacerbate supply availability shortfalls and require additional, and not less, refining capacity to meet consumer expectations and needs.

The plaintiffs aggregation theory is reminiscent of the 1949 decision of the United States Supreme Court in Standard Oil Co. of California v. United States, 337 U.S. 293 (1949) (Standard Stations). Standard Stations enunciated the "quantitative substantiality" test for exclusive dealing contracts under Section 3 of the Clayton Act. While Standard Stations recognized that exclusive dealing contracts could have pro-competitive purposes and effects, and are not presumed to suppress competition, they may also raise antitrust issues of significance where the use of exclusive dealing arrangements will foreclose a substantial share of a market, when the market is concentrated and entry barriers not insignificant. The "quantitative substantiality" test allowed for the aggregation of individual exclusive dealing contracts where similar arrangements were in place by a number of individual participants in the relevant market. Thus, while the foreclosive effect of a single exclusive dealing contract employed by a single dealer might be relatively insignificant, it could raise competition issues where the same practice was employed by a significant number of competing dealers in the same market. There the ability of purchasers to substitute away from the foreclosure is reduced. While the quantitative substantiality principle has not been extended beyond Standard Stations or exclusive dealing and tying arrangements, it was recently brought to mind by the Supreme Court's decision in Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007). In overruling its 1911 decision in Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911), and in holding that resale price maintenance should be examined pursuant to the rule of reason, the Supreme Court recognized that the number of manufacturers that make use of a given practice in a market may suggest the formulation of a truncated "quick look" rule of reason analysis. The aggregation of the market shares of the number of market participants using a given practice is suggested as an example where burden shifting might be an appropriate analytical tool.

However, the rule of "quantitative substantiality" would not make economic sense in the facts of Gilley. No one has suggested, and no one was able to articulate, that a given petroleum exchange agreement would be other than pro-competitive and efficient. Accordingly, the aggregation of a number of pro-competitive and efficient, short term supply agreements cannot, in a cumulative sense, produce an unreasonable restraint, even though engaged in by a number of market firms.

And so it was here. In the spirit of Twombly, the Gilley case suggests no more than the normal operation of traders in an oligopoly market, where the use of substantially similar, efficient, short term contracts would be expected to be the norm and not the exception. Try as they might, the plaintiffs were unsuccessful in resuscitating their Aguilar claims. May they rest in repose.

Authored By:

Don T. Hibner, Jr.
(213) 617-4115
DHibner@sheppardmullin.com

DOJ INVESTIGATING MONSANTO

Thu, 14 Jan 2010 21:35:22 GMT

On January 14, the DOJ announced that it has opened a formal antitrust investigation of the soybean seed industry....

On January 14, the DOJ announced that it has opened a formal antitrust investigation of the soybean seed industry.

Monsanto announced that the DOJ's Antitrust Division sent it a civil investigative demand ("CID) for information on the company's soybean traits business after complaints that Monsanto was trying to limit access to push a new, pricier product instead.

Allegedly, seed dealers, Monsanto's rivals, and others have complained that Monsanto was creating conditions, through contracts with seed dealers and other means, that would unfairly push farmers to buy its new Roundup Ready 2 Yield soybeans and away from the first-generation, lower-priced Roundup Ready beans.

The investigation is noteworthy because the DOJ has stated previously that it would start scrutinizing the agricultural industry and this investigation confirms that the DOJ intends to scrutinize these markets.

Andre Barlow
(202) 589-1834
abarlow@dbmlawgroup.com

FTC Approves Agrium's Purchase of CF

Thu, 14 Jan 2010 21:35:22 GMT

On December 23, 2009, Agrium Inc. agreed to sell a range of assets as part of an agreement with the FTC that will allow Agrium to move forward with its acquisition of competitor CF Industries Holdings, Inc. The proposed consent order settles allegations that the acquisition would have eliminated competition in the market for anhydrous ammonia fertilizer, a product that farmers rely on to grow their crops.

According to the FTC’s complaint, Agrium’s acquisition of CF would have eliminated competition between the two companies in the distribution and sale of anhydrous ammonia in three markets: the Pacific Northwest; East Dubuque, Illinois; and Marseilles, Illinois.

The FTC’s complaint alleges that each of these markets is highly concentrated and the proposed transaction would further increase concentration levels by reducing the number of significant competitors in the Pacific Northwest from two to one, and in the two areas in Illinois from three to two. The complaint further alleges that the proposed transaction likely would increase the prices for anhydrous ammonium fertilizer.

To prevent these price increases, the FTC’s consent order replaces the competition that otherwise would have been lost because of the deal and requires Agrium to:

divest CF’s Ritzville anhydrous ammonia terminal in the Pacific Northwest;
divest its Marseilles anhydrous ammonia terminal in Northern Illinois; and
rescind its rights to market anhydrous ammonia produced by Rentech at Rentech’s East Dubuque manufacturing plant.

According to the consent order, Agrium must divest the Ritzville and Marseilles terminals to Terra Industries, Inc. or another Commission-approved purchaser if Terra is later found to be an unacceptable buyer.

The consent order requires Agrium to maintain the assets to be divested and operate the Ritzville terminal independently until each of the divestitures is completed. The consent order also requires Agrium to provide necessary transition services to Terra or another Commission- approved acquirer. It also allows the FTC to appoint a trustee to divest any assets that Agrium does not sell in a timely manner and to seek civil penalties from Agrium if it fails to comply with the consent agreement. Finally, for 10 years, it requires Agrium to provide advance written notification to the Commission of any intent to acquire any interests or assets related to the distribution and sale of anhydrous ammonia.

The Commission vote approving the proposed consent order was 4-0.

a href="http://www.dbmlawgroup.com/index.php?option=com_content&task=view&id=26&Item
id=67">
Andre Barlow
(202) 589-1834
abarlow@dbmlawgroup.com

DOJ CLEARS CISCO'S ACQUISITION OF STARENT

Thu, 14 Jan 2010 21:35:22 GMT

On December 16, 2009, Cisco announced that the DOJ terminated the mandatory waiting period under the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended, with respect to Cisco's pending acquisition of Starent Networks....

The DOJ chose not to issue a second request to review Cisco’s acquisition of Starent eventhough the acquisition led to increased concentration in the CDMA radio access market for wireless phones. Some analysts characterized the deal as a 3-2 or that the combined firm would have more than 85% of the market.

There are very formidable competitors in this space such as Huawei Technologies, ZTE, Ericsson, NSN, Juniper Networks and Alcatel Lucent. In addition, smaller companies like Dragonwave and Ceragon Networks participate in some areas of this sector. And the entire wireless IP networking market is filled with start-ups. Moreover, Starent did not seem to have sufficient pricing power to concern regulators. That is, though the firm has a commanding 85% of the CDMA market, this is largely the result of supplying industry behemoth Verizon. But Verizon could turn to other providers if Starent’s product deteriorates or prices were to increase post-acquisition. In other words, Verizon has power in this circumstance. In the past, Verizon relied on Starent but there was some information suggesting that Verizon could use other vendors so it does not appear to be the case that Verizon is totally reliant on Starent. Verizon is the primary customer at issue in this investigation so Verizon’s thoughts on the deal are very important to the antitrust review. Verizon was in favor of the deal. Customers in general including Verizon supported the deal. There was also evidence that the telecoms are moving to 4G and away from CDMA so the CDMA market share is not important.

The decision is noteworthy because it demonstrates that the new administration is not simply investigating every merger that raises concentration levels and that the DOJ staff will still end an investigation early if enough facts demonstrate that no remedies would be required for approval.

Andre Barlow
(202) 589-1834
abarlow@dbmlawgroup.com

Second Circuit Affirms Dismissal Of Antitrust Class Action Due To Implied Preclusion By The Securities Laws

Tue, 22 Dec 2009 21:42:31 GMT

In Electronic Trading Group, LLC v. Banc of America Securities LLC (In re Short Sale Antitrust Litigation), 2009 WL 4350035 (2d Cir. Dec. 3, 2009), the United States Court of Appeals for the Second Circuit affirmed the dismissal of a putative antitrust class action against certain financial institutions that serve as “prime brokers” in connection with short sale transactions, on the ground that the federal securities laws precluded application of antitrust law to the matters at hand. This was the first time the Second Circuit applied the considerations for the implied preclusion of antitrust laws by the securities laws outlined by the United States Supreme Court in Credit Suisse Securities (USA) LLC v. Billing, 551 U.S. 264 (2007).

In Short Sale, plaintiff Electronic Trading Group, LLC was a “short seller” of securities. In a “short sale” transaction, the “short seller” identifies securities that he or she believes will drop in market price. The short seller borrows those securities from a broker (prime brokers have the greatest market share), sells the borrowed securities on the open market, purchases replacement securities on the open market, and returns them to the broker — thereby closing the short seller’s position. The short seller’s profit (if any) is the difference between the market price at which she sold the borrowed securities and the market price at which she purchased the replacement securities, less borrowing fees, brokerage fees, interest, and any other charges levied by the broker.

Plaintiff here alleged that prime brokers arbitrarily designated certain securities as “hard-to-borrow,” and then fixed the minimum price of hard-to-borrow lists in violation of Section 1 of the Sherman Act, which caused the short-sellers to pay artificially inflated fees. Defendants moved to dismiss, arguing that plaintiff’s Sherman Act antitrust claims were subject to the doctrine of implied preclusion of antitrust laws by the securities laws. Plaintiff argued, among other things, that no actual or potential conflict necessitates immunity because neither securities law nor antitrust law allow collusive fixing of borrowing fees.

The United States District Court for the Southern District of New York considered defendants’ preclusion argument and held that implied preclusion from antitrust liability precluded plaintiff’s antitrust claims. The Second Circuit explained that the Supreme Court’s decision in Billing sets forth four considerations that must be examined to determine whether the securities laws are “clearly incompatible” with the antitrust laws and thus preclusive of antitrust liability. Those considerations are whether (1) the area of conduct is “squarely within the heartland of securities regulation”; (2) the Securities & Exchange Commission (“SEC”) has authority to regulate the conduct; (3) there is ongoing agency regulation; and (4) a conflict exists between antitrust laws and securities regulation. See Billing, 551 U.S. at 285. The Second Circuit held that the fourth consideration is to be evaluated at the level of the alleged anticompetitive conduct, while the first three considerations should be evaluated at the level “most useful” to the court in avoiding conflict between the securities and antitrust regimes.

As to the first consideration, the area of conduct, the Second Circuit analyzed short selling “at the level of the underlying market activity” (and not at the level of the alleged anticompetitive conduct), and found that “short selling is market activity regulated by the securities law.” As to the second consideration, the authority to regulate, the Second Circuit held that even though no specific SEC provision explicitly references the regulation of borrowing fees, the fact that the SEC has authority to regulate the role of prime brokers and the borrowing fees they charge, weighs in favor of preclusion. Similarly, as to the third consideration, ongoing regulation, the Second Circuit held that ongoing SEC regulation of the role of prime brokers in short selling, in general, weighed in favor of implied preclusion of the antitrust laws (again, even though the SEC has not focused on the regulation of borrowing fees).

Finally, with respect to the fourth consideration, whether a serious conflict exists between antitrust law and securities regulation, the Second Circuit considered the impact of potential antitrust liability on arrangements for borrowing fees. In that regard, the Second Circuit reasoned that because it “is permissible for brokers to communicate about the availability and price of securities,” imposing antitrust liability would create actual and potential conflicts between antitrust laws and securities laws. Actual conflict would arise because antitrust liability would inhibit conduct on the part of prime brokers that the SEC currently permits, namely permissible communications about the availability and price of securities. Thus, the potential for antitrust law damages could result in brokers being more likely to “curb their permissible exchange of information and harm the efficient functioning of the short selling market.” The Court also held that a potential conflict existed because of the possibility that the SEC could at some point in the future regulate the borrowing fees set by prime brokers.

As a result, at least in the Second Circuit, prime brokers who allegedly collude in setting fees to acquire and sell hard-to-borrow securities for short sellers cannot be sued in federal court for violating the Sherman Act.

This article was originally posted on Sheppard Mullin's Corporate and Securities Law blog, which can be found at www.corporatesecuritieslawblog.com

For further information, please contact Dan Brown at (212) 634-3095 or John Stigi at (213) 617-5589.

FTC Sues Intel

Fri, 18 Dec 2009 01:04:11 GMT

On December 16, 2009, the Federal Trade Commission ("FTC") filed an administrative complaint against Intel Corporation ("Intel") alleging that it has engaged in anticompetitive and unfair conduct in order to stifle competition and maintain its monopoly position....

In the complaint, the FTC alleges a number of unfair methods of competition in violation of Section 5 of the FTC Act. The FTC alleges that when its monopoly was threatened, Intel resorted to “unfair methods of competition and unfair practices to block or slow the adoption of competitive products and maintain its monopoly to the detriment of consumers.” Some of the alleged conduct dating back to 1999 include: entering into anticompetitive arrangements with the largest computer manufacturers that were designed to limit or foreclose various original equipment manufacturers’ ("OEMs") use of competitors’ products; punishing OEMs who did not purchase “enough” of Intel’s products by threatening to increase (and actually increasing) prices, ending product and technology collaborations, shutting off supply, and reducing marketing support, while favoring OEMs that purchased all or nearly all of their requirements from Intel; offering market share or volume discounts to selective OEMs in an attempt to foreclose competition in the relevant central processing unit ("CPU") markets; using its position in complementary markets to protect against competitive threats in the relevant CPU markets; inducing suppliers of complementary software and hardware products to eliminate or limit their support of non-Intel CPU products; failing to disclose material information to consumers about the effects of Intel’s redesigned software on the performance of non-Intel CPUs; and pressuring independent software vendors to label their products as compatible with Intel products only, even though competing microprocessor products were compatible as well.

The FTC action is noteworthy because the Commission is attempting to invoke its full authority under Section 5 of the Federal Trade Commission Act ("FTC Act") to pursue anticompetitive conduct. Companies are now on notice that the FTC is willing to exercise its full authority under the broader Section 5 to reach conduct that the Sherman Act may not reach. In a joint statement from Chairman Leibowitz and Commissioner Rosch, they noted that because the courts have limited the reach of antitrust laws giving some anticompetitive conduct a free pass, it is more important than ever for the Commission to actively consider whether it may be appropriate to exercise its full authority under Section 5. While the FTC is clearly broading its authority, Leibowitz and Rosch also made clear that the FTC will enforce Section 5 responsibly as Section 5 is not without boundaries. That being said, the filing of this case demonstrates that the FTC is willing to aggressively go after companies for anticompetitive behavior that may not be reached by the antitrust laws.

Andre Barlow
(202) 589-1834
abarlow@dbmlawgroup.com

European Commission Objects to Oracle-Sun Deal

updates@antitrustlawblog.com (Sheppard Mullin) — Wed, 16 Dec 2009 23:07:23 GMT

On November 9, 2009, the European Commission ("EC") issued a Statement of Objections ("SO") regarding Oracle Corporation's ("Oracle") proposed acquisition of Sun Microsystems, Inc., ("Sun"). The EC opened an in-depth investigation of the deal in September, shortly after the U.S. Department of Justice's Antitrust Division ("DOJ") cleared the proposed transaction. The EC is concerned that the merger will reduce competition in the market for databases. See EC Declines to Follow DOJ's Lead, Opens In-Depth Investigation of Oracle-Sun Deal.

The EC's initial investigation found that the Oracle databases and Sun's MySQL compete directly in many sectors of the database market and that the competitive constraint presented by MySQL is expected to grow as the database becomes increasingly functional. The EC also found that the open source nature of Sun's MySQL might not eliminate fully the potential for anti-competitive effects. Following its in-depth investigation, it appears that the EC has concluded that Oracle will lack the incentive to further develop MySQL as an open source database.

Oracle has stated that it "plans to vigorously oppose the Commission's Statement of Objections" and that the EC's SO "reveals a profound misunderstanding of both database competition and open source dynamics". It argues that the "database market is intensely competitive with at least eight strong players…and three distinct open source vendors", and is "confident" that "[g]iven the lack of any credible theory of competitive harm…will ultimately obtain unconditional clearance of the transaction".

In a rare move, the DOJ issued a statement on the same day defending its decision and stating that it believed customers would still have a variety of choices after the companies merge. "Several factors led the Division to conclude that that the proposed transaction is unlikely to be anticompetitive…there are many open-source and propriety database companies…customers would continue to have choices from a variety of widely accepted database products…[and] there is a large community of developers and users of Sun's open source database with significant expertise in maintaining and improving the software".

An EC spokesman told a daily briefing that he thought that DOJ's comments were unusual, "I cannot recall any instance where the European Commission has ever issued a statement concerning an ongoing investigation in another jurisdiction...We have our methods, they have their". Despite the difference of opinion, DOJ maintains that "the two competition authorities have a strong and cooperative relations" and "remains hopeful that the parties and the EC will reach a speedy resolution that benefits consumers".

It has been reported that Oracle submitted a request for an oral hearing with the EC concerning its objections to the purchase of Sun. The deadline for the EC's final decision is January 27, 2010.

Authored by:

Neil Ray
(619) 338-6595
NRay@sheppardmullin.com

EC Objects to Oracle-Sun Deal

updates@antitrustlawblog.com (Sheppard Mullin) — Wed, 16 Dec 2009 23:07:23 GMT

On November 9, 2009, the European Commission ("EC") issued a Statement of Objections ("SO") regarding Oracle Corporation's ("Oracle") proposed acquisition of Sun Microsystems, Inc., ("Sun"). The EC opened an in-depth investigation of the deal in September, shortly after the US Department of Justice's Antitrust Division ("DOJ") cleared the proposed transaction. The EC is concerned that the merger will reduce competition in the market for databases. See EC Declines to Follow DOJ's Lead, Opens In-Depth Investigation of Oracle-Sun Deal.

Schering-Plough's $41 Billion Acquisition of Merck Clears Antitrust Hurdles With Consent Order

updates@antitrustlawblog.com (Sheppard Mullin) — Wed, 16 Dec 2009 22:51:05 GMT

The Federal Trade Commission announced in October 2009 that it will allow Schering-Plough Corporation's proposed $41.1 billion acquisition of Merck & Co., Inc. to proceed, subject to a consent order requiring the parties to each divest certain interests and assets in businesses where the FTC was concerned the transaction would have substantially reduced competition.

Schering-Plough and Merck are each engaged in the research, development, manufacture, distribution and sale of human pharmaceutical and animal health products. Merck's animal health business is conducted through a joint venture equally owned by Merck and Sanofi-Aventis S.A. The joint venture is called Merial Limited.

Pursuant to an Agreement and Plan of Merger dated March 8, 2009, Schering-Plough proposed to acquire Merck and rename the surviving entity Merck, in a transaction valued at approximately $41.1 billion. According to a complaint the FTC issued on October 29, 2009, the proposed acquisition would combine two of the top four animal health suppliers in the United States.

Relevant Markets Affected by the Proposed Acquisition

The FTC identified several specific relevant markets in which the proposed acquisition would have raised competitive concerns. These include the manufacture and sale of a particular type of drug, a neurokinin 1 or "NK 1" receptor antagonist, used to treat chemotherapy-induced nausea and vomiting and post-operative nausea and vomiting in humans; live and killed poultry vaccines for the prevention or treatment of certain diseases; and cattle gonadotropins (protein hormones).

More particularly, Merck's NK 1 receptor antagonist for chemotheraphy and surgery induced nausea and vomiting, sold under the trademark Emend, is the only drug of its kind approved in the United States. Very few neurokinin 1 receptor antagonists are in development in the U.S. market for the same uses as Emend. At the time Schering-Plough announced its acquisition of Merck, however, Schering-Plough was in the process of licensing its own, newly developed NK 1 receptor antagonist for nausea and vomiting, rolapitant, to a third party.

As to the animal health product relevant markets the FTC identified as of concern, the FTC alleged in its complaint that Merck and Schering-Plough are two of the largest poultry vaccine producers in the country. Together, the companies account for over 75 percent of all poultry vaccine sales in the United States. Three other poultry vaccine suppliers account for the balance of U.S. sales, making for highly concentrated relevant markets, as measured by the Herfindahl-Hirschman Index. Further, Merck and Schering-Plough are two of only three suppliers of cattle gonadotropins in the United States.

The FTC further alleged in its complaint that new entry would not be timely, likely or sufficient to deter or counteract the anticompetitive effects of the transaction, because of the time and cost associated with researching and developing the relevant products, obtaining regulatory approval, and gaining customer approval. Expansion by smaller competitors into the relevant markets would not be timely, likely or sufficient, the FTC stated.

Anticipated Anticompetitive Effects of the Proposed Acquisition

The complaint specified several anticompetitive effects of the proposed acquisition. According to the FTC, the proposed acquisition would eliminate future competition between Merck's Emend and Schering-Plough's rolapitant in the U.S. market, thereby decreasing the likelihood that the combined entity would forgo or delay the launch of rolapitant, and increasing the likelihood that the combined entity would delay or eliminate the additional price competition that would have resulted from rolapitant's entry into the market. In addition, the complaint alleges the proposed transaction would eliminate competition between Merck and Schering-Plough in the animal health product relevant markets identified in the complaint. It would increase the likelihood of the merged entity's exercise of market power in these markets, increase the likelihood and degree of coordination among suppliers in these concentrated markets, reduce the merged entity's incentives to pursue further innovation in these markets, and increase the likelihood that consumers would be forced to pay higher prices for each of the products in these markets. The complaint thus charged Schering-Plough and Merck with violating Section 7 of the Clayton Act and Section 5 of the FTC Act.

Consent Order Remedies Antitrust Concerns

To settle these charges, on October 29, 2009, the FTC, Schering-Plough and Merck entered into a settlement agreement containing a decision and order. According to the decision and order, Merck is required to divest its 50 percent interest in Merial to Sanofi-Aventis, as well as terminate all interests it has in Merial, within ten days after the effective date of the agreement (by November 8, 2009). Merck did so in September 2009, in response to concerns raised by the FTC. Merck must submit all confidential business information related to Merial to Sanofi-Aventi as soon as practicable as well. Neither Schering-Plough nor Merck, nor the surviving entity, may acquire any ownership in Merial either, for a period of ten years from the date of the consent order. As well, the consent agreement requires Schering-Plough to divest its rolapitant product assets and grant rolapitant product licenses to another firm, Opko Health, within ten days of acquiring Merck. The agreement terminates on October 29, 2019. As stated in the FTC's press release announcing the settlement, the consent order "remedies the proposed acquisition's alleged anticompetitive effects and ensures continued competition in these important animal and human health markets."

Authored by:

Heather M. Cooper
(213) 617-5457
HCooper@sheppardmullin.com

U.S. Court Grounds Europe-Japan Air Travel Price-Fixing Case

updates@antitrustlawblog.com (Sheppard Mullin) — Wed, 16 Dec 2009 22:33:02 GMT

On October 16, 2009, Judge Louis H. Pollak of the United States District Court for the Eastern District of Pennsylvania ruled that the Foreign Trade Antitrust Improvements Act of 1982, 15 U.S.C. § 6a ("FTAIA") mandated dismissal of a putative class action brought against foreign airlines Lufthansa, Air France, KLM, and Alitalia under the Sherman Act for allegedly conspiring to fix the price of Europe-to-Japan and Japan-to-Europe passenger air transportation. McLafferty v. Deutsche Lufthansa A.G., CV 08-1706 (E.D. Pa., October 16, 2009).

Plaintiff purported to bring the action on behalf of all persons who, while in the United States, purchased Europe-Japan airplane tickets directly from the defendants. The defendants moved to dismiss the action for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6). In their briefing in support of the motion, the defendants noted their belief that the Court lacked subject matter jurisdiction under the FTAIA, but did not assert this as a basis for dismissal. The Court, citing its continuing duty to ensure that jurisdiction is present and acting sua sponte, ordered supplemental briefing on the application of the FTAIA.

The Court applied the FTAIA's two-step test for determining whether a claim falls outside the jurisdiction of United States antitrust laws. The Court began by applying the FTAIA's first prong, which asks whether the defendants' alleged conduct constituted "trade or commerce (other than import trade or import commerce) with foreign nations." Id. at 4. The Court concluded that the defendants' alleged conduct met this description, rejecting the plaintiff's argument that, because she was in the United States at the time the defendants sold her the tickets, her claim was based on "import trade or commerce." The Court reasoned that a ticket to fly between two foreign countries, "even if purchased from and then delivered to the United States," does not qualify as an import transaction "because the ticket has no value apart from the service it entitles its bearer," and therefore purchasing such a ticket "does not bring any goods or services to the United States." Id. at 7. By contrast, the service provided in the transaction—travel between two or more foreign countries—"is only provided wholly outside the United States." Id.

The Court then proceeded to apply the FTAIA's second prong, asking whether the defendants' conduct involved a "direct, substantial, and reasonably foreseeable" anticompetitive effect on United States commerce. The Court found that this prong was not satisfied, concluding that the plaintiff's alleged injury occurred entirely in a non-U.S. market--the market for Europe-Japan passenger airfare. The Court emphasized that "[t]he fact that the supra competitive prices were paid by persons in the United States does not establish, or even intimate, that the conspiracy directly affected United States commerce." Id. at 10.

Judge Pollack's ruling is the latest in an ongoing struggle by courts to interpret and apply the "inartful" language of the FTAIA. The opinion provides one of the most direct answers to date to what has been an arguably unsettled question—whether a plaintiff's payment of supracompetitive prices while in the United States, for a good or service that is otherwise transacted entirely in foreign markets, is a sufficient "effect" on U.S. commerce to justify U.S. antitrust jurisdiction under the FTAIA.

Authored By:

Dylan Ballard
(415) 774-2914
DBallard@sheppardmullin.com

Strike Three: Plaintiffs Again Fail to Allege Facts of Collusion in Oligopoly Market

updates@antitrustlawblog.com (Sheppard Mullin) — Wed, 16 Dec 2009 22:09:34 GMT

Rather than being "plus factors", allegations of interdependent industry structure simply demonstrate that the challenged conduct of defendant title insurers was as consistent with competition as with collusion. In re California Title Insurance Antitrust Litigation, 2009 U.S. Dist. LEXIS 103407 (N.D. Cal., November 6, 2009). Plaintiffs brought an action against major title insurers and their subsidiaries for engaging in conduct that allegedly violated Section 1 of the Sherman Act, Section 16720 of the California Business and Professions Code, and Section 17200 of the California Unfair Competition Provision in the Business and Professions Code.

Plaintiffs alleged that the defendants conspired to fix title insurance prices in New York, Pennsylvania, Ohio and New Jersey through participation in various title insurance rate-setting organizations in those states. Plaintiffs also alleged that the defendants engaged in a course of conduct involving illegal kickbacks and commissions, which had the effect of maintaining supra-competitive profits in the sale of title insurance. On May 21, 2009, Judge Jeffrey S. White granted defendants' motion to dismiss the first amended complaint, but granted leave to amend.

On November 6, in a not for publication opinion, Judge White found that the second amended complaint was also deficient under the standards set forth in the recent United States Supreme Court decision in Bell Atlantic Corp. v. Twombly, 550 US 544, 555 (2007).

Pursuant to Twombly, plaintiffs must not merely allege conduct that is conceivable, but must allege "enough facts to state a claim to relief that is plausible on its face." (Id. at 570, emphasis added.) A claim has "facial plausibility" when plaintiffs plead factual content that allows the court to draw the reasonable inference that the defendants' conduct is the product of unlawful collusion. However, borrowing pages from the now seminal decisions in Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574 (1986), and Monsanto Co. v. Spray-Rite Service Corp., 465 US 752 (1984), the district court held that the second amended complaint had stopped short of bridging the gap between possibility and plausibility of entitlement to relief. See Twombly, at 556-57.

In order to "nudge their claims across the line from conceivable to plausible" (Twombly at 570), the plaintiffs added industry structure "plus factors". To support their claims that the defendants agreed to fix prices within California, plaintiffs added allegations regarding the defendants' participation in the California Land Title Association and the American Land Title Association. The district court noted that participation by competitors in the same trade organizations is insufficient to establish a conspiracy, citing In re Citric Acid Lit., 996 F.Supp. 951, 958-959 (N.D. Cal. 1998), aff'd, 191 F.3d 1090, 1103 (9th Cir. 1999). The court noted that summary judgment on such a complaint is appropriate, as no inference of conspiracy could be raised from mere participation in the same trade associations. While trade association participation may provide opportunity to discuss rate and output decisions, "… opportunity without more, is not a plausible basis to suggest a conspiracy." Twombly, at 555. (emphasis original) The second amended complaint also included allegations that title insurance premiums in California had remained stable for a number of years. Plaintiffs also alleged that the title insurance market is highly concentrated, and that prices have remained stable, although costs have declined. Finally, as a "plus factor" the plaintiffs alleged that title insurance policies are homogeneous.

Where the plaintiffs "came a cropper" is that the "plus factors" alleged to differentiate the allegations from the deficient first amended complaint, by themselves, are indicia of non-collusive behavior within a lawful oligopoly industry. The question can then be asked "what part of oligopolistic interdependence don't the plaintiffs understand"? See, e.g., Darryl Snider and Irving Scher, "Conscious Parallelism or Conspiracy"?, II ABA SECTION OF ANTITRUST LAW, ISSUES IN COMPETITION LAW AND POLICY 1143 (2008); George A. Hay, "Oligopoly, Shared Monopoly and Antitrust Law", 67 CORNELL L. REV. 439 (1982); George J. Stigler, "A Theory of Oligopoly," 72 J. Pol. Econ. 4 (1964).

All, however, is not lost for the plaintiffs. The district court noted that the allegations were sufficient to state a California Business & Professions Code Section 17200 claim for alleged illegal secret rebates, kickbacks and commissions. These allegations could ring the "illegal prong" of 17200, as such conduct could be a violation of the California Insurance Section 12404. Back to the proverbial drawing board.

Authored By:

Don T. Hibner, Jr.
(213) 617-4115
DHibner@sheppardmullin.com

FTC Allows SCI’s Acquisition of Palm Mortuary With Divestitures

Fri, 11 Dec 2009 19:38:51 GMT

On November 25, 2009, the FTC announced that it approved SCI's acquisition of Palm Mortuary, Inc. ("Palm") as long as it sold a cemetery and funeral home in Las Vegas....

On November 25, 2009, the FTC announced that it approved SCI's acquisition of Palm Mortuary, Inc. ("Palm") as long as it sold a cemetery and funeral home in Las Vegas.

The FTC alleged that Las Vegas has a highly concentrated market for cemetery services, which includes burial plots, opening and closing of graves, memorials, burial vaults, mausoleum spaces, and cemetery maintenance. According to the FTC’s complaint, SCI’s proposed acquisition of Palm would have reduced the number of significant competitors from three to two, and SCI would have controlled 76 percent of the market for funeral services.

The complaint alleges that the transaction would have increased the likelihood that the combined firm could raise prices either unilaterally or through coordinated interaction with its only remaining competitor. Entry of a new competitor in the area is not likely to counteract the alleged anticompetitive effects of the acquisition, due in part to the limited amount of land in Las Vegas that is suitable for cemeteries.

The FTC’s consent order is designed to remedy the anticompetitive effects of the proposed acquisition by requiring SCI to divest Davis Memorial Park, currently its only cemetery in the Las Vegas area, as well as the funeral home on the same property. SCI also will be required to divest the rights to the Davis trade name and the pre-need service contracts associated with the Davis facility as well as another funeral home it owns in the Las Vegas area.

The divestiture must be made to an FTC-approved buyer, and completed within 90 days after SCI acquires Palm. If the FTC finds that the purchaser or manner of the proposed divestiture is unacceptable, SCI must immediately rescind the offer and divest the assets to another FTC-approved buyer within six months from when the order becomes final. The proposed order requires SCI to give prior notice to the Commission before acquiring any interest or assets related to the provision of cemetery services in the Las Vegas area for the next 10 years.

The Commission vote approving the proposed consent order was 4-0.

Robert Doyle
(202) 589-1834
rdoyle@dbmlawgroup.com

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