Antitrust Law Blog

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

Sheppard Mullin — Mon, 25 Jan 2010 17:22:30 -0500

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

Sheppard Mullin — Mon, 25 Jan 2010 16:55:50 -0500

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

Sheppard Mullin — Mon, 25 Jan 2010 16:21:49 -0500

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

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

Sheppard Mullin — Tue, 22 Dec 2009 16:42:31 -0500

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.

European Commission Objects to Oracle-Sun Deal

Sheppard Mullin — Wed, 16 Dec 2009 18:07:23 -0500

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

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

Sheppard Mullin — Wed, 16 Dec 2009 17:51:05 -0500

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

Sheppard Mullin — Wed, 16 Dec 2009 17:33:02 -0500

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

Sheppard Mullin — Wed, 16 Dec 2009 17:09:34 -0500

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

"Per Se" or Not "Per Se" - An Historical "Quick Look" at Minimum RPM Under California Law

Sheppard Mullin — Tue, 10 Nov 2009 15:53:21 -0500

On June 28, 2007, in Leegin Creative Leather Products, Inc. v. PSKS, Inc.,[1] the United States Supreme Court decided in a 5-4 vote to overrule the long-lived rule in Dr. Miles Medical Co. v. John D. Park & Sons Co.[2]The decision in Dr. Miles, issued in 1911, had a long but checkered life. In Dr. Miles, the Court affirmed the sustaining of a demurrer to a bill in equity, and held that it was illegal under Section 1 of the Sherman Act for a manufacturer and its distributors to agree on a minimum price that the distributor must charge for the manufacturer's goods, upon resale.

Leegin followed a series of Supreme Court decisions that have whittled away the use of per se rules in "vertical" antitrust cases (cases involving restraints between two or more parties on different levels of distribution). In 1977, the Court issued a seminal sea-change decision in Continental T.V., Inc. v. GTE Sylvania, Inc.,[3] in which the Court turned to a presumption in favor of the rule of reason, and eliminated the application of per se rules in all non-price vertical restraint cases. The Court determined that the accepted standard for testing whether a practice unreasonably restrains trade in violation of Section 1 of the Sherman Act, is the rule of reason. This standard requires the fact finder to "weigh all of the circumstances of a case." This includes specific information about the relevant business and the restraint's history, nature and effect.[4] The rule of reason distinguishes between restraints with anticompetitive effects that are harmful to consumers, and those with procompetitive effects that are in the consumer's best interest.

In 1988, the Court went on to hold, in Business Electronics Corp. v. Sharp Electronics Corp.,[5] that resort to per se rules is confined to restraints "that would always or almost always tend to restrict competition and decrease output.[6] The Court determined a per se rule is only appropriate after courts have developed considerable experience with the type of restraint at issue. It is only where the court can predict with confidence that the restraint would be invalidated in "all or almost all" instances under the rule of reason, that a per se rule would be appropriate. This will tend to preserve scarce judicial resources.

With Leegin, the Supreme Court closed the circle it drew with Continental T.V., Business Electronics and other decisions such as State Oil v. Khan.[7] Recognizing that there has been considerable insight into the economic analysis relevant to inquiries into minimum resale price agreements ("RPM"), the Court in Leegin stated that currently, "all or almost all" economists and commentators would agree that there are at least some instances where RPM, while degrading intrabrand competition, will have a salutary effect on interbrand competition, and will thus be, on balance, more pro-competitive than anti-competitive.[8] With this experience, the Court found a per se rule is no longer appropriate for RPM, and that the appropriate legal standard is the rule of reason.

Virtually from the moment it was decided, there has been a substantial and growing body of literature on Leegin's reach and significance, particularly as it may apply to state antitrust law.[9] Beginning almost immediately after the Court issued its opinion, legislation has been introduced in Congress to overrule Leegin, and return to the world of Dr. Miles.[10] At last count, 41 state attorneys general, including California, New York and Florida, have written to Congress to express support for the "Discount Pricing and Consumer Protection Act", S. 148, which is currently before the 111th Congress. This legislation would amend the antitrust laws to restore the rule of Dr. Miles that minimum RPM agreements violate the Sherman Act.

California has taken a further step, and has taken the position that Leegin notwithstanding, the California Cartwright Act "explicitly defines" a resale price maintenance agreement as a "trust", and is thus per se unlawful by the terms of the statute itself.[11] This article examines the pros and cons of that position, and concludes that the better rule is exemplified by a venerable maxim of jurisprudence, that predated Dr. Miles by 39 years: "when the reason of a rule ceases, so should the rule itself."

Please click here to read the full article.
Reprinted with permission from the State Bar of California.

Authored By:

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

and

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

[1] 551 U.S. 877 (2007).

[2] Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911).

[3] 433 U.S. 36 (1977). See, Don T. Hibner, Jr. and Andrea B. Hasegawa The Silver Anniversary of an Antitrust Sea-Change: Continental T.V. and Brunswick at Twenty-Five, 11 COMPETITION 27 (2002-2003). Continental T.V. not only transformed vertical non-price restraint doctrine, but also implicitly criticized the approach evident in a number of Supreme Court decisions relating to the use of per se tests to condemn behavior whose economic effects are not immediately clear. The Court noted that early decisions, including Standard Oil Co. of New Jersey v. United States, 221 U.S. 1 (1911) "established the rule of reason as the prevailing standard of analysis." Id. at 60-68. The Continental T.V. Court described the rule of reason analysis as a "demanding standard", and emphasized that any "departure from the rule of reason standard must be based upon demonstrable economic effect rather than … upon formulistic line drawing." 433 U.S. at 59.

[4] 433 U.S. at 49.

[5] 485 U.S. 717 (1988).

[6] 485 U.S. at 726.

[7] 522 U.S. 3 (1997) (holding that the appropriate legal standard for evaluating vertical maximum resale price agreements is the rule of reason, not the per se rule).

[8] 551 U.S. at 900-902.

[9] Thomas Brom, The Price is Right, CALIFORNIA LAWYER (September 1, 2009); Steven G. Mason, The Price is Right, LOS ANGELES LAWYER 29 (April, 2009); M. Russell Wolford, Jr. and Kristen C. Limarzi, The Reach of Leegin: Will the States Resuscitate Dr. Miles? THE ANTITRUST SOURCE (October 2007); Richard A. Dunkin and Allison K. Guernsey, Waiting for the Other Shoe to Drop: Will State Courts Follow Leegin? FRANCHISE LAW JOURNAL 173 (Winter 2008); Paul Gift, Price Fixing and Minimum Resale Price Restrictions Are Two Different Animals, 12 GRAZIADIO BUSINESS REPORT Issue 2 (2009); Michael A. Lindsay, Overview of State RPM, ANTITRUST MAGAZINE (Fall 2007); Frank M. Hinman and Sujal J. Shah, Counseling Clients on Vertical Price Restraints, 23 ANTITRUST MAGAZINE 60 (Summer 2009); Benjamin Klein, Competitive Resale Price Maintenance in the Absence of Free Riding, (to be published in ANTITRUST LAW JOURNAL, Fall 2009).

[10] See, Discount Pricing Consumer Protection Act, S. 148, introduced January 6, 2009 by Senator Herb Kohl (D WI). A substantially similar bill was introduced previously on October 30, 2007, the "Discount Pricing Consumer Protection Act," S. 2261.

[11] Thomas Brom, The Price is Right, supra.

Supreme Court's Linkline and Trinko Decisions Result in Tenth Circuit Dismissal of Section 2 Monopolization Case

Sheppard Mullin — Tue, 10 Nov 2009 15:18:21 -0500

The Tenth Circuit's recent dismissal of Section 2 monopolization and attempted monopolization claims in Four Corners Nephrology Associates, P.C. v. Mercy Medical Center of Durango, -- F.3d ---, 2009 WL 3085882 (10th Cir. Sep. 29, 2009), relied extensively on the Supreme Court's Linkline and Trinko decisions to hold that: (1) a hospital's refusal to allow a physician access to its nephrology facilities does not constitute anticompetitive conduct under Section 2 of the Sherman Act; and (2) the refusal does not constitute an injury of the type the antitrust laws were intended to prevent.

Four Corners involved efforts by a non-profit hospital defendant, Mercy Medical, to establish the hospital's first nephrology practice in Durango, Colorado. Before Mercy's endeavors, the nearest nephrology services were those provided by the plaintiff, Dr. Bevan, in New Mexico, a three-hour round trip for Durango residents. Although Dr. Bevan held consulting privileges at Mercy, the last time he had actually exercised those privileges was back in 1995. After repeated, unsuccessful attempts to persuade Dr. Bevan to establish a practice in Durango, Mercy managed to recruit another nephrologist. Once the new nephrologist was recruited, Dr. Bevan's consulting privileges at Mercy were automatically terminated pursuant to the hospital's bylaws. Upon learning of the termination, Dr. Bevan then sought to be granted full privileges at Mercy, on par with the newly-recruited nephrologist, despite having declined previous invitations from Mercy. When Mercy rejected Dr. Bevan's request and deemed its newly-recruited neprologist the sole provider of nephrology services at Mercy, Dr. Bevan brought suit, alleging that Mercy's actions amounted to an unlawful monopolization and/or attempted monopolization of the market for nephrology services in the Durango area.

The Tenth Circuit affirmed the district court's granting of summary judgment for Mercy, but on two independent grounds not considered by the district court.

First, the Tenth Circuit followed the U.S. Supreme Court's two recent decisions limiting Section 2 liability, Pac. Bell Tel. Co. v. Linkline Commc'ns, Inc., 129 S.Ct. 1109 (2009) and Verizon Commc'ns Inc. v. Law Offices of Curtis v. Trinko, LLP, 540 U.S. 398 (2004), to hold that Mercy's refusal to deal with Dr. Bevan did not constitute anticompetitive conduct within the meaning of Section 2. As the Supreme Court had recently reiterated, the general rule is that a business, even a putative monopolist, has no antitrust duty to deal with its rivals.

The Tenth Circuit also noted that, at times, Dr. Bevan characterized his claim as one for "monopoly leveraging," i.e., Mercy was unlawfully using its monopoly over inpatient nephrology services to inhibit competition in outpatient dialysis services. While noting that some courts before Trinko had held that a monopolist could violate Section 2 by using its monopoly power in one market to achieve a competitive advantage in a second, related market, the Tenth Circuit observed that Trinko had rejected a similar "monopoly leveraging" claim where, as here, the only possible anticompetitive conduct is the refusal-to-deal claim already rejected by the Supreme Court.

Additionally, the court explained, Dr. Bevan's claim could also be characterized as an "essential facilities" claim. But, again, a similar claim was rejected in Trinko, where the Supreme Court held that Verizon's decision to deny a rival access to its own facilities to maximize its own short-term profits reflected "competitive zeal" rather than "anticompetitive malice." In rejecting Dr. Bevan's "essential facilities" claim, the Tenth Circuit acknowledged another Supreme Court decision, Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985), where a firm's unilateral refusal to deal with a competitor did in fact state a Section 2 claim. The Tenth Circuit, however, explained that the more recent decisions in Linkline and Trinko have distinguished Aspen Skiing as applying only in narrow circumstances where a firm terminates a voluntary course of dealing with a competitor, thereby suggesting a willingness to forsake short-term profits to achieve an anticompetitive end.

Second, the Tenth Circuit held that Dr. Bevan failed to allege the requisite antitrust injury, i.e., injury to competition. That is, whatever injury Dr. Bevan may have suffered by Mercy's denial of access was no concern of the antitrust laws, "which protect consumers from suppliers rather than suppliers from each other." Indeed, the Tenth Circuit noted, Dr. Bevan's requested relief amounted to nothing more than asking the court to force Mercy to share its putative monopoly with Dr. Bevan, with no guarantee of increased competition or some other benefit to consumers in Durango. In rejecting the possibility that the court could impose certain terms which would ensure increased competition or some other consumer benefit, the Tenth Circuit again cited to the Supreme Court's admonitions in Linkline and Trinko that courts are ill-equipped to impose price, quantity and other terms of dealing.

Authored by:

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

Technology Sector Comes Under Increased Antitrust Scrutiny

Sheppard Mullin — Tue, 10 Nov 2009 14:30:50 -0500

Earlier this year, in her first speech as Assistant Attorney General in charge of the Department of Justice's (DOJ) Antitrust Division, Christine Varney referred to Americans' growing reliance on high-tech solutions in the home and workplace, and stated that her Department “planned to devote attention to understanding the unique competition-related issues posed by these markets”. See Christine Varney, Vigorous Antitrust Enforcement in This Challenging Era, Speech Before the Center for American Progress (May 11, 2009), available here. Less than six months later, DOJ has reportedly initiated an antitrust investigation into one of the nation's largest technology companies, IBM, and filed a brief detailing its concerns at a proposed book settlement that would allow the creation of a vast digital library by Google. During the same time period, the Federal Trade Commission (FTC) has been investigating the boardroom overlap between Google and Apple with respect to a breach of the prohibition on “interlocking directorates" and the Federal Communication Commission ( FCC) has been investigating the state of competition in the wireless market. Together, these actions may evidence the beginning of a wider trend of antitrust scrutiny of the technology sector.

DOJ's IBM Investigation

In response to alleged "inadequate antitrust oversight" (see id.) during the previous Administration and in light of the comparative approach of the European Commission ("EC") over most of the past decade to monopoly-type cases against U.S. technology companies such as Microsoft and Intel, DOJ has reportedly launched an investigation into possible violations of Section 2 of the Sherman Act by IBM in the mainframe computer market. According to published news reports, the investigation stems from a complaint by the Computer and Communications Industry Association ("CCIA") that alleges that IBM has used its monopoly position to keep competitors out of the marketplace by refusing to license its operating system software to rival manufacturers of mainframe hardware. The CCIA alleges that IBM effectively blocked actual and potential competition by tying its operating system software to its mainframe computer hardware. IBM has reportedly stated that it intends to co-operate with any inquires from DOJ and has previously remarked with respect to an on-going EU investigation that it is "fully entitled to enforce our intellectual property rights and protect investments that we have made in our technologies".

DOJ's Concerns at Google's Digital Library

In mid-September, DOJ submitted a 32-page brief raising a number of antitrust concerns regarding a book settlement agreement that would allow the creation of a vast digital library of out-of-print books by Google. See Statement of Interest of the United States Regarding Proposed Class Settlement in The Authors Guild, Inc. v. Google, Inc., available here. While DOJ acknowledged that the proposed settlement has a number of significant potential benefits, DOJ stated that it also raised two serious antitrust issues.

First, DOJ is concerned that through collective action, the proposed settlement appears to give book publishers the power to restrict price competition among authors and publishers in at least three respects: (1) the creation of an industry-wide revenue-sharing formula at the wholesale level applicable to all works; (2) the setting of default prices and the effective prohibition on discounting by Google at the retail level; and (3) the control of prices for "orphan books" by known publishers and authors with whose books the orphan books likely compete. Although they arise in a unique context, DOJ submits that these features bear an uncomfortably close resemblance to the kinds of horizontal agreements found to be quintessential per se violations of the Sherman Act.

Second, DOJ is concerned that other digital distributors may be effectively precluded from competing with Google in the sale of digital library products and other derivative products to come as a result of Google's de facto exclusivity of the digital rights of the large category books subject to the proposed settlement.

FTC's Investigation of Boardroom Ties Between Google and Apple

In May, it was reported that the FTC was investigating the close boardroom ties between Google and Apple under Section 8 of the Clayton Act, which prohibits the so-called “interlocking directorates” that occur when two competing corporations share one or more directors in common. It was widely considered that the FTC was investigating the extent to which both companies have become "competitors" within the meaning of Section 8 by virtue of their rapidly proliferating product offerings in high-tech markets. For example, Google is developing an operating system for computers based on its existing Chrome web browser, which would compete with Apple’s own Mac OS X operating system. Google has also developed its Android software for cell phones while Apple offers applications for its own iPhone.

Since May, two individuals—each of whom served on the boards of directors of both companies—have resigned directorships. First, Google CEO and chairman Eric Schmidt resigned from Apple’s board in August. Apple director Arthur Levinson then stepped down from Google’s board on October 12. After Mr. Levinson’s resignation was announced, the Chairman of the Federal Trade Commission, Jon Leibowitz, issued a statement remarking that both companies “should be commended for recognizing that overlapping board members between competing companies raise serious antitrust issues and for their willingness to resolve [the FTC’s] concerns”.

FCC's Inquiry of Wireless Competition

Finally, the FCC announced in late August that it would conduct an inquiry into competition in the US wireless industry. In an accompanying press release, the FCC stated that, “Wireless mobility has become central to the economic, civic, and social lives of over 270 million Americans…[and] [t]he FCC is seeking to ensure that competition in the mobile wireless market continues to bring substantial benefits to American consumers”. See FCC Announces Notice of Inquiry on Mobile Wireless Competition (August 27, 2009), available here. It has been widely reported that the FCC inquiry is expected to look at various practices in the industry including exclusivity deals between handset makers and wireless carriers such as Apple's exclusive iPhone deal with AT&T.

Conclusion

It appears that the federal antitrust enforcers may be heeding Ms. Varney's call to take on the mantle of leading enforcement efforts in technology industries, including exploring vertical theories and other new areas of civil enforcement.

Authored by:

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

Sixth Circuit Affirms Dismissal of Travel Agent Commission Antitrust Claims

Sheppard Mullin — Tue, 10 Nov 2009 14:04:16 -0500

On October 2, 2009, the United States Court of Appeals for the Sixth Circuit ruled in favor of defendant airline carriers[1] accused of conspiring to reduce, cap and ultimately eliminate the base commissions paid to travel agents selling defendants’ airline services in In re Travel Agent Commission Antitrust Litigation. The Sixth Circuit’s decision is the latest to embrace the pleading standards of Bell Atlantic Corporation v. Twombly, 550 U.S. 544 (2007) by requiring plaintiffs to plead non-conclusory factual allegations that raise a “plausible suggestion of conspiracy.”

Background

In re Travel Agent Commission Antitrust Litigation was brought by 49 travel agencies that had opted out of a class action in favor of their own joint lawsuit. The travel agents alleged that the defendant airlines entered a conspiracy to eliminate base rate commissions as early as 1995, when several major U.S. airlines announced that they would lower the commissions paid to travel agents. The downward pressure on commission rates persisted when, in 1997, United announced an additional reduction in its base commissions rate that was quickly matched by several other carriers. This alleged “follow-the-leader” trend continued until the Spring of 2002, when the airlines decided to discontinue the once industry-wide practice of paying base commissions for tickets purchased through travel agents.

To try to demonstrate an illicit agreement, the travel agents focused on (i) the deposition testimony of a former airline executive, who stated that “industry consensus” was necessary for the commission cuts to hold; (ii) industry-wide meetings and conferences that afforded defendants an opportunity to conspire; and (iii) a three-hour conference room meeting and a golf outing involving executives of rival airlines.

The United States District Court for the Northern District of Ohio dismissed plaintiffs’ suit on grounds that (i) the claims against United were discharged in bankruptcy proceedings initiated in December 2002 and concluded in January 2006; and (ii) as to the remaining defendants, the Amended Complaint did not set forth sufficient facts to plausibly suggest an illicit agreement. For the reasons set forth below, the Sixth Circuit Court of Appeals affirmed the district court’s decision.

The Sixth Circuit's Opinion

First, the court of appeals addressed plaintiffs’ argument that their claims against United were viable despite its bankruptcy proceedings. To circumvent the hurdle interposed by 11 U.S.C. § 1141(d), which discharges any debt, including liability on a claim, when a plan of reorganization is confirmed by the court, plaintiffs conjured a variance on the “continuing violation” theory of liability articulated in Klehr v. A.O. Smith Corporation, 521 U.S. 179 (1997). Specifically, plaintiffs maintained that upon emerging from bankruptcy, United rejoined the conspiracy by maintaining its zero-commission policy. The court rejected plaintiffs’ theory, noting that it essentially eviscerated any semblance of a bankruptcy limitations period and allowed a plaintiff to “routinely salvage an otherwise untimely claim by asserting that it continues to lose revenue because of past alleged anticompetitive conduct.”

Next, the court considered whether the Amended Complaint contained factual allegations that raised the right to relief above a speculative level as required by Twombly. The crux of the court’s inquiry was whether plaintiffs demonstrated the existence of an illicit agreement. The court concluded that plaintiffs did not satisfy Twombly’s threshold. The very conduct that plaintiffs deemed indicative of an unlawful agreement—i.e., parallel conduct—was equally consistent with “lawful, unchoreographed free-market behavior.” To the extent that the base commission rates were determined through “a common reaction of firms in a concentrated market that recognize their shared economic interests and interdependence with respect to price and output decisions,” such conscious parallelism was “just as much in line with a wide swath of rational and competitive business strategy unilaterally prompted by common perceptions of the market,” rather than furnishing proof of an unlawful agreement.

The court also found that plaintiffs took the executive’s deposition testimony out of context After reviewing the deposition in its entirety, the district court concluded that the airline’s “2001 commission cap was an effort to reduce its internal commission costs, with the ancillary hope that its competitors would follow its lead.” The court noted that the airline’s decision coincided with technological advances in airline ticket purchasing, such as direct purchases on the Internet, that diminished the role of travel agents.

Similarly, the court declined to infer an agreement simply because defendants’ executives had an opportunity to conspire at industry-wide gatherings, reasoning that the Amended Complaint did not identify the conspirators or state when or where the agreement was consummated in anything but conclusory terms. Finally, the court noted that reducing travel agents’ base commissions was hardly inconsistent with defendants’ economic self-interest. To the contrary, “it was simple and inexpensive for a leader airline to innovate and then wait and see, with the hope and expectation that its competitors would institute similar cuts. If the industry did not follow, the leader airline could simply retract the cut.” The court therefore believed that “each defendant had a reasonable, independent economic interest in adopting a competitor’s commission cut rather than to maintain the status quo.”

Authored by:

Jennifer M. Driscoll-Chippendale
(202) 469-4921
JDriscoll-Chippendale@sheppardmullin.com

[1] The following airlines were named as defendants in plaintiffs’ Amended Complaint: Air Canada, Alaska Airlines, Alaska AirGroup, Inc., ATA Airlines, Inc., American Airlines, Inc., America West Airlines, Inc., Continental Airlines Inc., Delta Air Lines, Inc., Hawaiian Airlines, Inc., Horizon Air Industries, Inc., Frontier Airlines, Inc., KLM Royal Dutch Airlines, Northwest Airlines, Inc., United Airlines, Inc., US Airways, Inc. and US Airways Group, Inc.

Debate on Resale Price Maintenance Heats Up

Sheppard Mullin — Tue, 10 Nov 2009 13:10:57 -0500

DOJ Antitrust Division Head Christine Varney Offers Guidance on Leegin and Proposes "Structured Rule of Reason Test" For Evaluating RPM Under State Laws

When the Supreme Court modified the prohibition against resale price maintenance agreements ("RPM") more than two years ago in Leegin Creative Leather Products v. PSKS, Inc., it was not immediately clear how state enforcers and state courts would apply state laws to RPM. 127 S. Ct. 2705 (2007). Thirty-seven State Attorneys General (AGs) had asked the Court in a joint amicus brief to uphold the per se rule which makes all RPM illegal. Since Leegin, some AGs have taken the position that RPM remains per se illegal under some state laws and other states have passed or may pass "Leegin repealer" bills.

In an address delivered on October 7, 2009, the Assistant Attorney General for Antitrust, Christine Varney, offered guidance to state enforcers considering how to apply state laws to RPM in light of Leegin. The speech, entitled "Antitrust Federalism: Enhancing the Federal/State Relationship," was presented at a conference sponsored by the National Association of Attorneys General (NAAG) and Columbia Law School. The conference highlighted revived cooperation between federal and state antitrust enforcers.

Ms. Varney began her speech by discussing the Department of Justice Antitrust Division's interest in strengthening the relationship between it and the AGs. She then asked for help from state enforcers to monitor competition in increasingly concentrated and often local agricultural markets. But Ms. Varney reserved the majority of her time for encouraging convergence of state RPM laws with federal law on RPM. She described this as "one of the most important legal challenges facing State Attorneys General." It is clear, she opined, that under federal law, Leegin calls for a rule of reason inquiry and permits the courts to determine the exact form of that inquiry. On the other hand, she pointed out, when it comes to state laws, some state enforcers and courts are considering whether state laws can be interpreted or applied so that RPM remains per se unlawful.

Without asserting a direct answer to this question herself, Ms. Varney reviewed and offered guidance on the Leegin decision. She recalled the four structural circumstances the Supreme Court identified where RPM is likely to be anticompetitive. These are when RPM is used:

by a manufacturer cartel to identify members that are cheating on a price fixing agreement (manufacturer collusion);
to organize a retailer cartel by coercing manufacturers to eliminate price cutting (retailer collusion);
by a dominant retailer to protect it from retailers with better distribution systems and lower cost structures, forestalling innovation in distribution (retailer exclusion); and
by a manufacturer with market power to give retailers an incentive not to sell products of smaller rivals or new entrants (manufacturer exclusion).

Ms. Varney recalled as well that the Court in Leegin identified five potential procompetitive effects of RPM. RPM can:

increase interbrand competition;
prevent freeriding;
promote competition on customer service;
permit a cost effective alternative to service contracts; and
facilitate market entry for new firms and brands by guaranteeing favorable margins to retailers.

Ms. Varney went on to explain that in Leegin, the Court invited lower courts to devise rules or even presumptions to make the rule of reason a fair and efficient way to prohibit anticompetitive restraints and to promote procompetitive ones. Recognizing that Leegin left questions unanswered, she offered guidance on how the courts might apply a "structured rule of reason analysis" for RPM. Under a structured rule of reason analysis, if a plaintiff establishes the existence of an RPM agreement, the scope of its operation and one of the above likely anticompetitive structural conditions, this might be sufficient, Ms. Varney suggested, to establish a prima facie case that the RPM is illegal. The burden would then shift to the defendant to demonstrate either that the RPM is actually and not just theoretically procompetitive or that the plaintiff's characterization of the market was erroneous.

In rebutting a presumption of illegality, the defendant would have to show, at a minimum, that it adopted RPM to enhance its success in competing with rivals and that RPM was a reasonable means for accomplishing this.

Having proposed an approach to make the rule of reason a "fair and efficient way to prohibit anticompetitive restraints and promote procompetitive ones" as the Supreme Court encouraged, Ms. Varney admitted that she is not ruling out the possibility that a new analytical framework for RPM will not succeed or that the actual uses of RPM could be shown to be almost always harmful. The Division, she said, "looks forward to analyses of any data that becomes available as a result of RPM practices implemented in the wake of Leegin and appreciates that the states will serve as important laboratories for obtaining this data." Urging state enforcers and courts to "keep an open mind," Ms. Varney concluded her appeal for convergence between federal and state law on RPM.

41 State Attorneys General Press Congress to Repeal Leegin and Reinstate Per Se Rule to Prohibit RPM Categorically

Ms. Varney's appeal for convergence on RPM evidently failed to impress most AGs. Three weeks after Ms. Varney's address, on October 27, 2009, 41 AGs, including the AGs of California, New York and Florida, sent Congress a letter urging the passage of Leegin-repealer legislation that would reinstate the per se rule for RPM under federal law. The legislation, "The Discount Consumer Protection Act," S. 148, states "a very clear rule that '[a]any contract, combination, conspiracy or agreement setting a minimum price below which a product or service cannot be sold by a retailer, wholesaler or distributor shall violate this Act.'"

The AGs allege in the letter that "empirical studies show that agreements on minimum resale prices raise consumer prices, often significantly." They state as well that "despite economic theories cited by the Supreme Court about how those agreements could enhance consumer welfare, we are not aware of any empirical study that shows enhanced consumer welfare in the form of services or other customer benefits." The AGs next point to prior experience with authorizing RPM and the impact this had on consumers. Consumers paid significantly more for goods, the AGs recall, during the years of the "fair trade laws" (Miller-Tydings Act of 1937 and the McGuire Act of 1952). Those laws were intended to to protect independent retailers from the price-cutting competition of large chain stores.

Further, the AGs challenge assertions that RPM can have procompetitive effects. They observe in their letter that two years after Leegin, "there remains no evidence that consumers are provided any tangible benefits, let alone benefits that outweigh the higher prices that result from minimum resale price fixing." The AGs urge Congress to take action "to overcome the [Supreme] Court's view that Congress has been silent on and does not care about this issue." In any event, the AGs state, "Congress, not the Court, is better positioned to evaluate the detrimental impact of resale price fixing on consumers and the underlying public policy of the nation's antitrust laws." Finally, the letter concludes, rule of reason treatment of RPM will dramatically chill any private legal challenge. Since Leegin, the letter states, lower courts have dismissed on the pleadings various challenges to RPM.

With forty-one AGs pressing Congress to repeal Leegin on the one hand, and federal enforcers, the Court, and many antitrust practitioners and economists supporting the decision on the other hand, the debate on RPM has heated up. All eyes will be on Congress to see whether, when and how it takes action on the federal law of RPM. In the meantime, the AG's letter gives good reason to believe that, in the eyes of these enforcers, RPM remains illegal per se under many state laws.

Authored by:

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

A Window into Washington: Report on Hearings for S. 1681 and H.R. 3596, Proposed Legislation to End Health Insurers' Antitrust Exemption

Sheppard Mullin — Fri, 23 Oct 2009 08:11:35 -0500

Overview

Congress recently conducted hearings on proposed legislation that would repeal the insurance exemption from the federal antitrust laws, the McCarran-Ferguson Act of 1945, as it relates to the health insurance industry.
Witnesses at the hearings articulated different perspectives on the potential repeal. At one end of the spectrum, there was a call to end the exemption and increase federal oversight of the health insurance industry for the benefit of both competition and consumers. In contrast, at least one witness suggested that repeal would at best maintain status quo in the market or, worse, deter activities that enhance industry efficiency.
On October 21, the House Judiciary Committee voted 20-9 to approve legislation aimed at repealing the antitrust exemption for health insurers. The Committee endorsed a middle-of-the-road approach by including safe harbors that permit joint action for data pooling and actuarial calculations.

On October 8 and 14, 2009, the House Judiciary Committee’s Courts and Competition Policy Subcommittee and the Senate Judiciary Committee, respectively, conducted hearings on proposed legislation eliminating the health insurance industry’s exemption from the federal antirust laws under the McCarran-Ferguson Act of 1945. The proposed legislation, entitled the Health Insurance Industry Antitrust Enforcement Act of 2009, would specifically prohibit price-fixing, bid-rigging and market allocation in the health insurance industry. In his weekly address on October 17, President Barack Obama expressed support for Congress’ review of the antitrust exemption, but did not directly endorse the proposed legislation.

The bill was introduced by Senator Patrick Leahy (D-VT), Chairman of the Senate Judiciary Committee and is co-sponsored by the Senate Majority Leader, Senator Harry Reid (D-NV), as well as Senators Feinstein, Feingold, Schumer, Durbin, Specter and Franken. Although less ambitious than Senator Leahy’s prior attempts to reform McCarran-Ferguson, the bill is of particular significance in the midst of Congress’ health care reform efforts.

Report on Hearing for S. 1681

Witnesses before the Senate Judiciary Committee on October 14 included Senator Reid; Christine Varney, Assistant Attorney General for Antitrust, U.S. Department of Justice (DOJ); J. Robert Hunter, Insurance Director, Consumer Federation of America (CFA); and Dr. Lawrence Powell, Associate Professor and Whitbeck-Beyer Chair of Insurance and Financial Services, University of Arkansas, Little Rock College of Business.

During his testimony, Senator Reid declared that “there is no reason why the insurance companies should have exemption from antitrust law” and added that “to the extent insurance companies need to share information, they should do what other industries have to do and seek prior authorization and guidelines from the Department of Justice.”

Varney stated that the DOJ generally supports the idea of repealing antitrust exemptions but “take[s] no position as to how and when Congress should address this issue.” Noting that the possible justifications for the McCarran-Ferguson Act (such as encouraging state regulation of the insurance business and countering more restrictive antitrust rulings of the past) are no longer valid, Varney added that repealing the Act would allow competition to have a greater role in reforming health and medical malpractice insurance markets than would otherwise be the case. Responding to questions regarding insurers’ data sharing practices, Varney explained that as long as the data does not contain information as to its sources and is not used for price-fixing or market allocation, nothing in the antitrust laws would prevent insurers from sharing loss and risk data.

Hunter testified to CFA’s support for a complete repeal of the antitrust exemption afforded the insurance industry“to unleash the Federal Trade Commission (or a new Consumer Financial Protection Agency) to protect insurance consumers.” In contrast, Powell argued that the limited antitrust exemption provided by McCarran-Ferguson enhances competition in insurance markets and that repealing the exemption would at best maintain the status quo but could also stifle competition to the detriment of consumers. Specifically, Powell expressed concern that a repeal of the Act would prevent insurers from pooling data through independent statistical agents that produce advisory loss costs to aid insurers in the ratemaking process, thereby weakening efficiency and competition in the insurance markets.

Report on Hearing for H.R. 3596

At the hearing held on October 8 by the House Judiciary Committee’s Courts and Competition Policy Subcommittee, H.R. 3596 was introduced by Subcommittee Chairman Hank Johnson (D-GA) as a first in a cycle of hearings on “an antitrust system for the 21^st century.” This hearing featured testimony from Ilene Knable Gotts, Esq., Chair of the American Bar Association (ABA) Section of Antitrust Law; Dr. Peter J. Mandell, Former President of the California Orthopedic Association and David Balto, Esq., Senior Follow at the Center for American Progress.

Gotts emphasized the ABA’s consistent support of McCarran-Ferguson reform, which currently exempts the industry insurance from antitrust laws. She testified that the ABA considers such industry-specific exemptions unnecessary because of the simplicity and flexibility of the Sherman Act, which allows courts considerable discretion to apply the law based on the unique facts and circumstances of a particular case. The ABA advocates that the antitrust exemption in McCarran-Ferguson be repealed and replaced with “safe harbor” protections (currently absent from the proposed bill) that would permit insurance companies to cooperate with respect to certain procompetitive activities, such as collecting past loss-experience data, developing standardized policy forms and participating in voluntary joint-underwriting agreements—provided that the insurers’ conduct does not unreasonably restrain competition in the relevant market.

According to the testimony of Dr. Mandel, H.R. 3596 falls short of addressing the real source of anticompetitive practices in the health insurance market, namely, the concentration of the market and the “virtual monopoly” of certain large insurance carriers.

Balto declared the health insurance market “severely dysfunctional” from both a competition and consumer protection perspective, due in part to regulatory neglect. Balto called for the bill to “go further” by allowing greater congressional oversight of health insurance markets and antitrust enforcers to reinvigorate enforcement against anticompetitive conduct by health insurers. More specifically, Balto recommended that the Federal Trade Commission and U.S. Department of Justice, Antitrust Division establish stronger standards for health insurance merger enforcement.

America’s Health Insurance Plans, a lobbying group, was invited to testify, but instead submitted a statement critical of the bill. Similarly, ranking committee member Howard Coble (R-NC) - later echoed by Senator Orrin Hatch (R-UT) - noted that state regulators actively regulate the health insurance industry and expressed concern that the proposed legislation may be the beginning of a broader attempt to repeal McCarran Ferguson for all insurance providers.

The October 8 and 14 hearings are only two of many steps to reform both the McCarran-Ferguson Act and the market for health care services, and more constituents are expected to weigh in as Congress reviews the bill.

Update: On October 21, the House Judiciary Committee voted 20-9 to approve legislation aimed at repealing antitrust exemptions for health insurers. This legislation includes three safe harbors that would permit joint action by insurers for the purpose of (i) collecting, compiling or disseminating historical loss data; (ii) determining a loss development factor applicable to historical loss data; and (iii) performing actuarial services, provided that doing so does not involve a restraint of trade. Senate Democratic leaders have stated that they will push for a similar provision to be included in healthcare overhaul legislation.

Authored by:

Donald Klawiter
(202) 469-4922
dklawiter@sheppardmullin.com

and

Jennifer Driscoll-Chippendale
(202) 469-4921
jdriscoll@sheppardmullin.com

and

Malika Levarlet
(202) 772-5331
mlevarlet@sheppardmullin.com

EC Declines to Follow DOJ's Lead, Opens In-Depth Investigation of Oracle-Sun Deal

Sheppard Mullin — Mon, 12 Oct 2009 18:56:32 -0500

On September 3, 2009, the European Commission ("EC") announced that it was opening an in-depth investigation under the EU Merger Regulation of Oracle Corporation's proposed acquisition of Sun Microsystems. This announcement came despite the Department of Justice's ("DOJ") extended review and approval of the same deal without conditions in late August, in addition to DOJ's recent signaling of tougher merger review standards and closer cooperation with European competition authorities.

While DOJ's extended review is understood to have focused on the licensing of Java open-source software, Neelie Kroes, EC's Competition Commissioner, stated that Brussels wanted to look more closely at the impact on the database software business of Oracle, one of the leaders in that market, acquiring control of MySQL, an open source database product that was acquired by Sun last year. "The Commission has to examine very carefully the effects on competition in Europe when the world's leading proprietary database company proposes to take over the world's leading open source database company."

The EC's initial investigation confirmed that the database market is highly concentrated with three main competitors of proprietary databases – Oracle, IBM and Microsoft – controlling approximately 85% of the market in terms of revenue. The EC is concerned that the Oracle databases and Sun's MySQL compete directly in many sectors of the database market and that MySQL is widely expected to represent a greater competitive constraint as it becomes increasingly functional. The EC is also worried that the open source nature of Sun's MySQL might not fully eliminate the potential for anti-competitive effects and wants to investigate a number of issues, including Oracle's incentive to further develop MySQL as an open source database.

The EC's decision, in general, and the nature of the EC's concerns, in particular, has caused some concerns with industry observers who have highlighted that MySGL generated revenues of only €17m ($24m) in Europe last year, and its roughly $70m of annual sales make it only the 14th-largest database software maker.

Nonetheless, the EC's investigation appears to respond to claims from Oracle rivals that the software maker would have little incentive to continue developing a product that could ultimately be prove disruptive to its core business. Ms Kroes explained:

[The EC] has an obligation to ensure that customers would not face reduced choice or higher prices as a result of this takeover. Databases are a key element of company IT systems. In the current economic context, all companies are looking for cost-effective IT solutions, and systems based on open-source software are increasingly emerging as viable alternatives to proprietary solutions. The Commission has to ensure that such alternatives would continue to be available.

The EC's decision to open an in-depth inquiry does not prejudge the final result of its investigation. The EC now has until January 19, 2010, to take a final decision and may consider (1) structural commitments – such as the divestment of MySGL; or (2) behavioral conditions – such as the continued licensing and development of MySGL software.

Authored by:

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

Court Dismisses Claims Against Shippers Under Twombly And The Filed Rate Doctrine

Sheppard Mullin — Mon, 12 Oct 2009 18:11:32 -0500

On August 18, 2009, the District Court for the Western District of Washington dismissed with leave to amend an MDL action against shippers for violation of Section 1 of the Sherman Act, 15 U.S.C. § 1, based on allegations that the shippers colluded to simultaneously increase fuel surcharges, illegally shared vessel capacity, and conspired not to enter into extra-tariff rate agreements with customers. In re Hawaiian and Guamanian Cabotage Antitrust Litig., No. 08-md-1972 TSZ (“Pacific Shipping MDL”), Order No. 5 (W.D. Wa., Aug. 18, 2009) (“Slip Op.”).

Background

Plaintiffs were individuals or entities that allegedly directly purchased from the defendants shipping services on ocean routes between the continental United States and Hawaii, Guam or both between October 11, 1999 and May 31, 2008. Defendants were alleged to control 96% of the trade between the U.S. west coast and Hawaii and 100% of the trade between the west coast and Guam. Trade between domestic United Sates ports, such as that alleged in the case, is subject to “significant legal and regulatory barriers to entry” and “is not a contestable market,” which, by contrast, would be one characterized by relatively easy and cost-free entry and exit with little or no sunk costs. Slip Op. at 2 (quoting Matson Navigation Co. v. Fed. Maritime Comm’n, 959 F.2d 1039, 1047 (D.C. Cir. 1992)).

The defendants were members of various industry trade associations. They also provided data on container size and quantities, as well as cargo quantities, weights, and volumes to the Port of Import Export Reporting Service (“PIERS”) but no allegations were made that they supplied any pricing data to PIERS. Id. at 3. Pursuant to regulations, defendants were required to file their rates with the Surface Transportation Board (“STB”) except as to certain statutorily exempt cargo, or cargo carried pursuant to separate written agreements with specific shippers whereby both sides waive their statutory rights. Plaintiffs alleged that defendants colluded not to enter into “extra-tariff agreements” which would be confidential and thus would inhibit the defendants’ ability to “police each other’s conduct.” Id.

Plaintiffs further alleged that defendants also imposed fuel surcharges in lockstep 29 different times since October 1999, which far outpaced the rising cost of bunker fuel, and that defendants’ parallel pricing bore no correlation to their actual, individual costs, which vary by carrier. Id. Plaintiffs thus inferred that these surcharges were set pursuant to illegal agreements. Id. at 3-4. Finally, plaintiffs alleged that defendants’ agreements to share vessel capacity also violated the antitrust laws. Id. at 4.

The Complaint Pled Nothing More than “Parallel Conduct and Bare Assertion of Conspiracy” and thus Failed the Twombly and Rule 8 Pleading Standards

The Court first analyzed the complaint under the standards set forth in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), and its progeny. The Court noted that a valid antitrust complaint “must contain enough fact to raise a reasonable expectation that discovery will reveal evidence of illegal agreement” by offering “more than labels and conclusions” and “a formulaic recitation of the elements of a cause of action.” Id. at 5 (quoting Twombly, 550 U.S. at 555-57).

The Court noted that plaintiffs relied on the following factual allegations to support their complaint: (i) information exchanges through participation in trade associations and the like; (ii) evidence of antitrust violations in a different ocean trade route revealed by the Department of Justice’s (“DOJ”) investigation which led to several guilty pleas, some of which concerned one of the defendants’ executives; and (iii) parallel conduct in a concentrated and incontestable market. Slip Op. at 6.

With respect to the first set of factual allegations, the Court noted what sets cases surviving motions to dismiss under Twombly apart is the “inclusion of specific allegations concerning time, place, and person versus general allusions to ‘secret meetings,’ ‘communications,’ or ‘agreements.’” Id. These would include allegations of “direct evidence of an agreement to fix prices,” such as specific communications between the defendants. Id. at 12. The plaintiffs, however, only alleged that, because the defendants belonged to certain trade organizations, they had the “opportunity” to meet and collude. Id. at 7. They offered “no particulars concerning the locations or dates of any meetings,” did not “identify any individual who might have been involved in any illicit communications,” and made “no attempt to compare the timing of trade association meetings and fuel surcharge increases.” Id. Plaintiffs’ general allegations of membership in trade associations were insufficient to carry their burden.

Turning to the DOJ’s investigation of an unrelated shipping route, the Court dismissed plaintiffs’ reliance on guilty pleas entered by some executives of one of the defendants because only one of those individuals was alleged to have any involvement in the Hawaii and Guam routes. Further, plaintiffs had failed to allege that the charges against this person or his guilty plea had anything to do with the shipping trade routes involved in this case. Id. at 8-9 (plaintiffs “provide no link between the Puerto Rico and Hawaii or Guam markets”). Moreover, plaintiffs failed to establish that the same persons involved in the DOJ’s investigation and pleas had pricing responsibilities for both markets. Id. at 9.

The Court also rejected plaintiffs’ allegations of parallel conduct. The Court noted that Twombly and its progeny have identified certain types of factual allegations that would survive a motion to dismiss, “including direct evidence of an agreement or communications between defendants and descriptions of historical pricing practices suggesting a lack of precedent and no discernable reason for change other than conspiracy.” Id. at 10. The Court found that plaintiffs had not identified any specific communications or agreements; did not provide any data concerning pricing practices predating the alleged period of the violation; and failed to link the lockstep fuel surcharges to anything but “the type of parallel conduct generally present in a homogeneous market.” Id. at 11. The Court further observed that price watching is inherent in a tariff system that statutorily requires carriers to publish their common carrier rates. Id. at 11. Accordingly, neither the individual allegations nor the factual allegations as a whole established anything other than parallel conduct. Id. at 14.

The Consolidated Complaint Implicated the Filed Rate Doctrine and Plaintiffs Failed to Allege Facts Showing that Either of the Statutory Exceptions Applied to Their Claims

Turning next to the filed rate doctrine, the Court explained that, the Supreme Court provided four reasons in Keogh v. Chicago & N.W. Ry. Co., 260 U.S. 156 (1922) for its decision that the “doctrine precludes monetary relief for antitrust and similar claims relating to tariffs or schedules filed with a federal regulatory agency:” (1) plaintiff could not establish the requisite injury because the carrier is required to charge and the shipper is required to pay to filed rate; (2) Congress delegated to a regulatory agency the authority to determine whether a filed rate was reasonable, and plaintiff’s claims would essentially seek a remedy contrary to the agency’s decision; (3) the law prohibits discrimination by carriers, and so plaintiff could not be awarded monetary damages which effectively would “operate to give him preference over his trade competitors; and (4) alleged damages rested on speculation as to what rate would have been in effect but for the alleged anticompetitive conduct, and that any lower rates would inure to the benefit of the plaintiff rather than his customers or the ultimate consumer. Slip Op. at 14-15.

The Court noted that pursuant to Interstate Commerce Commission Termination Act of 1995, tariffs must be filed with the STB for movement of household goods or for transportation or service in noncontiguous domestic trade. Id. at 20. Moreover, a carrier may not charge a different rate than specified in the tariff. Id. The STB has jurisdiction over any claim that a filed tariff or “related rule or practice” is unreasonable. Id. The only exceptions are “(i) if the items being shipped [in such trade] constitute bulk cargo, forest products, recycled metal scrap, waste paper or paper waste, . . . and (ii) if the carrier and the shipper have entered into a contract concerning ‘specified services under specified rates and conductions’ for cargo other than household goods, and they have expressly waived in writing ‘any or all rights and remedies under [the statute].’” Id. at 21.

Plaintiffs first argued that the doctrine is inapplicable because defendants have not proven that they properly filed their rates and thus could not rely on improperly filed rates as a defense. Id. The Court rejected that argument observing that “neither procedural irregularity nor unreasonableness nullifies a filed rate.” Id. (quoting Sec. Servs., Inc. v. Kmart Corp., 511 U.S. 431 (1994)). Nor did plaintiffs allege any deficiencies in defendants’ tariffs that would void the file rates. Id. at 22. Indeed, they alleged no irregularities in defendants’ filed rates. Id. at 21.

The Court also dismissed plaintiffs’ second argument that defendants have failed to prove that the cargo was subject to rate regulations (i.e., that it was not exempt from rate filing). Here, plaintiffs identified four entities with the words “Trees” and “Woods” in their names but did not indicate “what cargo was shipped by any of these companies,” instead implying that the cargo was trees or wood. Id. at 22. The Court concluded that“[w]hether such trees or woods would qualify as ‘forest products’ or be otherwise excluded from tariffs was not pleaded or briefed and remains unclear.” Id. The Court also rejected plaintiffs’ attempt to place the burden on the defendants to prove a negative. Id.

Other Claims Also Implicated the Filed Rate Doctrine

Finally, the Court held that defendants’ “non-rate activities” – namely, their vessel capacity sharing agreements and their purported refusal to enter into extra-tariff rate agreements – also implicated the filed rate doctrine because the gist of these claims was that, but for these activities the price of shipping would have been lower. Id. at 25. The Court further noted that plaintiffs were merely identifying factors “that might or might not have influenced defendants’ rates” and so “[p]laintiffs’ claims are more appropriately addressed to the STB.” Id. at 26.

Authored by:
Mona Solouki
(415) 774-3210
MSolouki@sheppardmullin.com

Air Cargo Class Action to Proceed -- District Court Overrules Twombly Dismissal Recommendation

Sheppard Mullin — Mon, 12 Oct 2009 17:54:52 -0500

On August 21, 2009, Judge John Gleeson of the United States District Court for the Eastern District of New York overruled a magistrate judge’s recommendation to dismiss antitrust and other claims asserted in a multi-district putative class action against domestic and foreign airlines that provide airfreight-shipping services. See In Re Air Cargo Shipping Services Antitrust Litigation, 06-MD-1775 (JG) (VVP) (MDL No. 1775) (the “Opinion”). The Air Cargo case arises from investigations into the air cargo industry by competition authorities around the globe. Plaintiffs are direct and indirect domestic and foreign purchasers of airfreight shipping services who purportedly paid uncompetitive fees as a result of price-fixing carried out by, inter alia, the defendants’ concerted imposition of surcharges.

The defendants filed a motion to dismiss plaintiffs’ complaint, including the Sherman Act antitrust claims that plaintiffs asserted in five of the seven counts and, on September 26, 2008, Judge Viktor V. Pohorelsky responded to those motions with an 86-page Report and Recommendation. At the time, nine of the defendants had entered guilty pleas in the United States to resolve claims relating to their participation in an alleged price-fixing conspiracy, and had agreed to pay fines ranging from $50 to $350 million dollars. Nonetheless, the magistrate judge recommended the dismissal of the Sherman Act claims without prejudice and with leave to replead, and also recommended the dismissal, with prejudice, of plaintiffs’ claims under state antitrust statutes and common law, state consumer protection and unfair competition statutes, and claims arising under European antitrust law. Specifically, relying on the standards established by the United States Supreme Court in Bell Atlantic v. Twombly, 550 U.S. 544 (2007) and its recent progeny, the magistrate judge determined that the “the plaintiffs here have failed to give enough specifics to support a plausible conspiracy.” See Report and Recommendation at 13. In particular, the court held that plaintiffs’ general allegations, without supporting details, that there were “meetings,” “secret meetings,” “communications,” and “joint agreements” entered into “at the highest levels” and “in various venues” were insufficient and failed to provide each defendant with fair notice of the specific claims against it. Id. at 14-15.

On review by the district court, Judge Gleeson rejected nearly all of the objections to the Report and Recommendation, but overruled the magistrate judge’s determination to dismiss plaintiffs’ Sherman Act claims with leave to replead because the district court disagreed that plaintiffs’ allegations failed to allege enough specifics to support a plausible conspiracy, or failed to give the defendants sufficient notice of the claims against them. The district court concluded that the allegations summarized in the Report and Recommendation establish plausible grounds to infer an agreement among the defendants to artificially inflate the prices of airfreight shipping services and provide sufficient notice of the claims against the defendants. The district court noted the “the facts have changed significantly” since the Report and Recommendation issued, because the number of defendants that have pled guilty had risen to 15, and three more defendants had entered the Department of Justice’s leniency program in connection with criminal charges of fixing prices on air cargo shipments. The district court held that the admissions of price-fixing by so many of the defendants are “suggestive enough to render a § 1 conspiracy plausible.” Opinion at 2, citing Twombly, 550 U.S. at 556.

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

EC Launches Consultation on Distribution Rules

Sheppard Mullin — Thu, 03 Sep 2009 13:36:26 -0500

I. Summary

On July 28, 2009, the European Commission (EC) launched a formal consultation on the EU rules applicable to distribution agreements. The current key legislation expires on May 31, 2010, and the intention appears to be to adopt the new rules before the end of this year. These proposals are important to both suppliers and retailers and affect both physical and online distribution. While the EC believes the current economic effects-based rules introduced in 1999 work well and do not need substantial change, it has published a revised draft Regulation and Guidelines that contain some important changes and clarifications from the existing law, in particular, with respect to internet sales, resale price maintenance, and purchasing power of large retailers.

II. Internet Sales

The EC seeks to strike a balance between allowing European consumers to take advantage of cross-border purchasing and protecting distributors who invest in marketing and promotion from other distributors who may "free-ride" on those efforts. The EC's draft Guidelines include significant new guidance in this area.

In particular, the EC makes a distinction between "active" sales in which a distributor actively approaches individual customers and "passive" sales in which a distributor responds to unsolicited requests from customers. If territories or customer groups are exclusively allocated to different distributors, restrictions on "active sales" will be permitted. However, restrictions on passive sales will be treated as "hard core" restrictions considered so serious that their presence in a distribution agreement will prevent the agreement from benefiting from exemption under the draft Regulation.

Accordingly, it is particularly important for suppliers of branded products to know which restrictions they may want to place on internet selling by their distributors will be regarded as restrictions on passive sales. The draft Guidelines prove some examples of such "hardcore restrictions":

Preventing customers in another territory from viewing their website or automatically to reroute such customers to the manufacturer's or another distributor's website;
Terminating internet transactions if credit card details reveal an address outside the distributor's territory;
Limiting the proportion of overall sales made over the internet – though a minimum value or volume of non-internet sales may be imposed; and,
Requiring a distributor to pay a higher price for products intended to be resold by the distributor online than for products intended to be resold off-line.

However, suppliers may impose quality standards for internet selling and those using selective distribution can require distributors to have a physical shop or showroom before engaging in online distribution.

III. Resale Price Maintenance

There is increased emphasis in the draft Guidelines on the possibility of arguing that "hard core" restrictions not exempted under the draft regulation can nevertheless be exempted under Article 81(3) of the EC Treaty based on their generation of efficiencies. The most striking example of this is the new guidance setting out the circumstances in which fixed or minimum resale price maintenance may be exempted, a possibility that is not even considered in the current Guidelines.

While the draft Guidelines explain the possible negative effects of RPM, they also refer to a number of specific cases where RPM may generate pro-competitive benefits that meet the efficiency standard of Article 81(3).

RPM may be necessary to introduce a new product or enter into a market based on the theory that temporary RPM will induce retailers to invest in promotional efforts in order to generate and develop demand for the product;
RPM may also be authorized in franchise systems to coordinate a short-term low price campaign (between 2 to 6 weeks in most cases); and,
RPM may be necessary to avoid the loss leading brand practices of large retailers.

IV. Purchasing Power of Large Retailers

The EC is concerned at the increased buyer power of large retailers such as supermarkets and other big distribution chains and believes the current 30% market share "safe-harbor" threshold which currently applies only to the supplier's market share does not adequately address the potential anticompetitive effects resulting from restrictions requested and obtained by these large distributors. Accordingly, it proposes that the market shares of both supplier and buyer would be required not to exceed 30% "on any of the relevant markets affected by the agreement" to benefit from the exemption provided by the Regulation, i.e. the supplier's share of the market it supplies the buyer, and the buyer's share of the market where it resells.

Beyond an individual market share of 30%, distribution agreements would not benefit from the exemption and the parties would need to self-assess the compatibility of their agreement under the strict EU competition rules.

V. Other Proposed Changes

A. Upfront Access Payments
The draft Guidelines also contain new sections on "upfront access payments" and "category management" agreements. Upfront access payments are exempted up to the 30% market share thresholds discussed above. Even above these market shares, the EC recognizes that upfront access payments can contribute to an efficient allocation of shelf space for new products and prevent suppliers from free-riding on distributors' promotional efforts. However, the EC also highlights the risk of anti-competitive foreclosure of other distributors or suppliers and collusion between distributors.

B. Category Management Agreements
Similarly, "category management agreements" under which the distributor entrusts the supplier with the marketing of a particular product category will be exempted up to the 30% market share test. When this does not apply, the EC recognizes that such agreements also lead to economies of scale but also raise the risks of anticompetitive foreclosure of other suppliers and possible collusion between suppliers or distributors.

VI. Conclusion

The EC's proposal, if adopted, would largely continue the EU's unique competition rules governing distribution agreements between suppliers and retailers. The consultation process runs until September 28, 2009, and will determine the EU's distribution rules until June 2020. It is very much in the interests of companies and business organizations to contribute to this debate by ensuring that their particular concerns and needs are considered by the EC and possibly reflected in the final version of the rules.

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

What a Babies "R" Us' Class Action Lawsuit Can Teach Us About Successful Distribution Strategies for the Current Legal and Economic Climate

Sheppard Mullin — Thu, 03 Sep 2009 12:46:55 -0500

Despite two 2007 Supreme Court decisions that make it more difficult to sue under federal antitrust laws for vertical price restraints, on July 15, 2009, a federal judge in Philadelphia granted class certification to a complaint alleging that Babies "R" Us ("BRU") coerced manufacturers of high-end baby products into preventing Internet dealers from discounting their products. McDonough et al. v. Toys "R" Us Inc. et al., No. 06-0242, 2009 WL 2055168 (E.D. Pa. July 15, 2009).

The Babies "R" Us Lawsuit

In BRU, plaintiff consumers filed a complaint in 2002 claiming that they had paid inflated prices at BRU for certain baby products pursuant to an alleged violation of Section 1 of the Sherman Act. Section 1 requires proof that the defendant was a party to a contract, combination or conspiracy, and that this conspiracy unreasonably restrained trade. Several Internet baby product retailers made similar allegations against BRU in a companion case that survived a motion to dismiss. See BabyAge.com v. Toys R Us, et al., No. 05-6792 (E.D. Pa. May 19, 2008).

Starting in 1996 with a small number of stores, BRU currently has more than 260 stores across the country. As BRU grew, however, the number of small specialty baby products retailers shrunk. Between 1996 and 2002, the number of smaller baby product retailers dwindled from 2,700 to 600. BRU thus became the dominant retailer of baby products. BRU's stiffest competition comes from Internet retailers who, with lower operating costs, can offer deep discounts.

Plaintiffs allege that BRU demanded protection from Internet discounting and threatened not to carry certain manufacturers' products unless the manufacturer agreed to prevent Internet retailers from discounting them. Manufacturers allegedly were forced to acquiesce because BRU was their largest and most important customer. To prevent Internet discounting, manufacturers applied various tools. These included MSRP policies prohibiting retailers who want to continue to sell the manufacturer's product from selling below the MSRP. Another tool was a dealer selection policy banning Internet-only retailers from selling the manufacturers' products altogether. Plaintiff's evidence included a statement of the founder of Regal Lager, the distributor of popular BabyBjörn products, about BRU: "It's hard to say no when they have over 50% of our business!" According to plaintiffs, the alleged conspiracy between BRU and baby product manufacturers unreasonably restrained trade because BRU was able to and did charge higher prices because other retailers were prevented from discounting.

BRU's unsuccessful motion to dismiss and plaintiffs' successful motion for class certification are significant because they demonstrate that two 2007 Supreme Court precedents still leave room for some vertical price restraint claims to move forward. In Bell Atlantic v. Twombly, the Court heightened the legal standards for pleading a conspiracy, requiring that a plaintiff make a statement that offers enough factual matter to suggest a right to relief. That statement must have enough "heft" to show a pleader is entitled to relief. 127 S. Ct. 1955 at 1966, 1964 (2007). Second, in Leegin Creative Leather Products, Inc. v. PSKS, Inc., 127 S.Ct. 2705 (2007), the Court held that minimum resale price maintenance agreements ("RPM") are no longer per se or presumptively illegal under federal law, but rather should be evaluated under the rule of reason, a standard that requires proof the agreement has unreasonably restrained competition. (See author's prior blog articles about the Supreme Court decision and the decision on the renewed case against Leegin). Determining the reasonableness of a restraint generally entails a detailed evaluation of the its history, nature and effect, who instigated it, whether the businesses involved have market power, and whether there are any procompetitive business justifications for the restraint. Such an evaluation typically requires substantial resources. Thus, some legal practitioners and commentators believed Leegin and Twombly could effectively quell a large number of federal vertical price restraint claims.

BRU demonstrates, however, that some vertical price restraint claims may still go all the way to judgment on the merits. On a motion to dismiss, Judge Brody of the United States District Court for the Eastern District of Pennsylvania held the BRU plaintiffs' allegations and evidence were hefty enough to meet Twombly's stricter pleading standards. As to Leegin's hurdles, Judge Brody found that BRU's alleged conduct preventing Internet discounting, taken as true, would support a finding that BRU unreasonably restrained competition. She noted that the Supreme Court in Leegin did not hold that RPM agreements are per se lawful. Rather, the Court held that RPM agreements should be evaluated on a case by case basis under the rule of reason. One example where RPM may have anticompetitive effects, the Court noted, is when RPM is abused by a dominant retailer. Elaborating, the Court explained that a dominant retailer might request RPM to forestall innovation in distribution and a manufacturer might consider it has little choice but to accommodate the retailer's demands. 127 S.Ct. 2705 at 2717. The Court noted as well that if there is evidence retailers were the impetus for a vertical price restraint, there is a greater likelihood that the restraint facilitates a retailer cartel or supports a dominant, inefficient retailer. If the dominant retailer has market power, the Court warned, the anticompetitive concerns may be serious.

Judge Brody noted that the Court in Leegin directs lower courts to "be diligent in eliminating [RPM agreements'] anticompetitive uses from the market." Quoting from Leegin, Judge Brody found that when a manufacturer is coerced into using RPM, "the manufacturer does not establish the practice to stimulate services or to promote its brand," but instead "supports a dominant, inefficient retailer." Id. at 2719. The support the Court cited to in making this point, Judge Brody noted, was none other than Toys "R" Us Inc. v. FTC, 221 F.3d 928 (7th Cir. 2000). In that instance, the Seventh Circuit upheld findings that Toys "R" Us Inc., BRU's parent company, coerced toy manufacturers into implementing vertical restraints to hinder competition from warehouse clubs like Costco, BJ's and Sam's Club.

Vertical Price Restraints in the Current Legal and Economic Climate

BRU raises some important points about vertical price restraints and distribution strategies. Relating these to current economic and legal conditions, these include:

Dominant retailers should not pressure manufacturers on resale price and dealer selection matters. A dominant retailer who threatens to stop carrying a manufacturer's products unless the manufacturer agrees to prevent discounting exposes itself to serious antitrust risk; a court could find that it was for an anticompetitive purpose, as the court found in BRU. If a dominant retailer or one or more competing manufacturers urges a manufacturer to adopt an MSRP policy, it is likely for an anticompetitive purpose. On the other hand, an MSRP restraint adopted by a manufacturer unilaterally, in the exercise of its independent discretion, with no horizontal aspect, may be lawful in the appropriate circumstances.
Options other than price cuts. In the current economic climate, many retailers are trying to capture sales by lowering their prices, decreasing their profit margins. In many product categories, only the most efficient retailers with the lowest operating costs and those with the most innovative marketing strategies may survive. A few alternatives to competing solely on price include:

o Convince consumers to invest in quality over quantity. Retailers in the United States may consider promoting among consumers the mind-set that with fewer dollars to spend, consumers should be investing in quality, practical, durable, "timeless" or "classic" pieces, rather than spend their dollars on less expensive products of inferior quality. Manufacturers can lead the way and offer cooperative marketing funding and other trade fund programs.

o Pursue symbiotic, cross-promotional offers. An example of this is Lucky Brands' recent "Buy Two Tank Tops, Get a Week of Complimentary Yoga Classes" promotion. Window advertisements have lured new customers inside Lucky stores to purchase tank tops they will wear to yoga class, as well as other items that may have caught their eye while inside the store. The yoga studio benefits because some students who exhaust their complimentary classes, having become familiar with the studio and "hooked" on yoga, will purchase additional classes.

o Look North to Increase Sales. Last winter, the Canadian government implemented more lenient rules for vertical price restraints, among other amendments to the country's competition laws. Experts have said that Canada is weathering the financial crisis better than the United States, and the Bank of Canada declared late June that Canada's recession is over. It found that consumer spending increased in the second quarter of 2010, surpassing expectations, and that consumer confidence is high. With a surging exchange rate as well, manufacturers and retailers may benefit from focusing on increasing sales in Canada and other markets.

Manufacturers that have not issued MSRP policies before may wish to consider doing so now. If retailers discount too deeply, manufacturers may see the value of their brands, trademarks and images depreciate, and lose the return on their investment in protecting their value. Even if at first blush it seems unreasonable to expect retailers to adhere to a policy that prevents discounting at a time when almost everyone has lowered prices, an MSRP may still be feasible. A manufacturer can explain to dealers individually that an MSRP policy will help more retailers survive as their competition will be subject to the same terms and conditions. This will allow retailers to compete on non-price features such as service, selection, convenience, ambience, and innovative advertising and marketing programs.
Requirement of Concerted Action. In BRU, plaintiffs alleged a conspiracy between a single, dominant retailer and certain manufacturers to prevent discounting by Internet dealers. When a manufacturer chose to suspend its MSRP policy, BRU cut orders for that manufacturer's products. When a manufacturer independently adopts a purely unilateral MSRP policy and enforces it unilaterally and evenly, without taking direction from or acquiescing to other retailers or manufacturers, a plaintiff may not satisfy the concerted action requirement. Thus, even though RPM agreements can be lawful under federal law, a purely unilateral and independently enforced MSRP policy is the safest approach to regulating minimum resale prices.
State v. Federal Law. Individual states have their own antitrust laws. Most states follow federal antitrust law developments, but not all. Leegin did not change state laws prohibiting RPM. Thirty-seven states submitted a joint amicus brief in Leegin. California did not, but its enforcement officials may nevertheless believe that RPM remains per se illegal under California law, despite Leegin. New York's officials take the position that New York laws prohibits RPM. Further, Maryland has enacted legislation expressly repealing Leegin. Other states may or may not follow suit.
Congress Could Repeal Leegin and Reinstate the Per Se Rule Against RPM. There are two congressional proposals to reverse Leegin. One of these is the Johnson-Conyers bill, H.R. 3190. On July 30, 2009, the House Judiciary Committee's Courts and Competition Policy Subcommittee approved H.R. 3190. Senator Herb Kohl (D-Wis.), just months after Leegin was decided, introduced a bill to restore the per se rule of illegality for RPM. S. 2261. He introduced a subsequent bill to preserve the initiative, S. 148. The House and Senate have held subcommittee hearings on these initiatives, but it is not yet known whether or when this legislation will move forward.
Disparate pricing and other preferential treatment. Preferential treatment provided to some dealers, such as brick and mortar dealers, over others can violate other federal and state antitrust and unfair competition laws, including the federal Robinson-Patman Act. The RPA prohibits price discrimination (meaning any difference in price) where certain circumstances are met, as well as discriminatory promotional allowances and services.

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

Ninth Circuit Finds That New Home Buyer Plaintiffs Fail To Satisfy Per Se Tying Element That Amount Of Commerce Not Be "Insubstantial""Zero Foreclosure" Is Less Than "De Minimus."

Sheppard Mullin — Thu, 03 Sep 2009 12:21:46 -0500

Buyers of newly constructed homes in the Boise, Idaho, area filed a federal antitrust class action, alleging that realtors representing owners of undeveloped property tied the sale of the undeveloped lots to realtors’ services and commissions that included the new homes constructed on the lots by contractors, as well at the value of the lot. Plaintiffs claimed that the practice was a per se unlawful tying arrangement under Section 1 of The Sherman Act.

Plaintiffs' real gripe was that the price they had paid included real estate commissions to the developers' agents. They had purchased a lot and a finished home from the home-builder for a total price that included costs, commissions, and the like. What the plaintiffs called the tied product was really part of the additional cost of building on a lot in a subdivision that the buyers had chosen.

The District Court certified a class consisting of all buyers who (1) bought undeveloped lots in subdivisions where the realtors had exclusive marketing rights on behalf of the owner-developers; and (2) were required to build a house on the lot in order to purchase the lot; and (3) were required to pay the realtors a commission based on the cost of the house plus the cost of the lot.

The District Court identified the "tying product" as the sale of undeveloped lots. The "tied product" was the realtors' services, i.e. commissions based on the total value of the developed lots. The realtor defendants moved for summary judgment.

The District Court granted the motion, and held that the plaintiffs had failed to show that the alleged tie "affects a not insubstantial volume of commerce in the tied product market." In an opinion by Judge Pamela Ann Rymer, the Court of Appeals for the Ninth Circuit affirmed, holding that the District Court correctly applied the doctrine of "zero foreclosure" when it granted summary judgment to defendant realtors. Blough v. Holland Realty, Inc. (9th Cir. July 27, 2009), No. 08-35536.

The court noted that under the law of illegal tying arrangements, a tying arrangement may be condemned as a per se violation, if three prongs are met: (1) the defendant tied together the sale of two distinct products or services; (2) the defendant possesses enough economic power in the tying product market to coerce its customer into the purchase of an unwanted tied product; and (3) the tying arrangement affects a "not insubstantial amount of commerce" in the market for the tied product.

The court noted that it was only the "third prong" that was at issue in the case. Where plaintiffs "came a cropper" was that there was no evidentiary showing that any of the plaintiffs would otherwise have bought the service allegedly tied to their purchases from any other seller. The court found that there was no market for listing and referral services for buyers of this type of newly constructed home in a development. Where there is no market for the tied product, there is no competition to be foreclosed. Thus, “zero foreclosure” meant that plaintiffs could not show that the third element of tying, which requires an effect on a “not insubstantial amount of commerce,” had been met. The court cited with approval the recent decision from the Seventh Circuit in Reifert S. Cent. Wis. MLS Corp., 450 F. 3d 312, 317-18 (7th Cir. 2006).

Other realtors had not been foreclosed from any potential customers seeking their services. Quoting from Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 16 (1984), Judge Rymer wrote:

When a purchaser is "forced" to buy a product he would not have otherwise bought, even from another seller, in the tied product market, there can be no adverse impact on competition because no portion of the market which would otherwise have been available to other sellers has been foreclosed.

As the Court of Appeals affirmed the narrow ruling of the District Court that there was "zero foreclosure" under the third prong of the elements of an illegal tying arrangement, there was no discussion given to the presence or absence of the other elements of a tying arrangement. Rather, Judge Rymer noted that the court was "assuming (without deciding) that Buyers meet the first two prongs of the test for a per se unlawful tying arrangement." In Souza v. Estate of Bishop, 821 Fd. 1332 (9th Cir. 1987), the court held that the alleged tie of single family residences to leased property in Hawaii involved only a single product, namely a home on a lot. The Souza court held that as a matter of law, the sale of a home in conjunction with the lease of a lot cannot be a tying arrangement, and that an argument to the contrary "defies reason." 821 F.2d at 1335. Similarly, it could be well argued under Jefferson Parish that there may be a substantial number of undeveloped lots in the Boise area, upon which homes could be constructed, or even, in these economic times, recently built but unsold, or even foreclosed homes that would be found to be sufficiently close substitutes such that the defendant realtors could not be said to have "appreciable economic power" in a properly defined relevant market.

But in Blough, the "third prong" analysis sufficed -- after all, "zero foreclosure," by definition, is something less than "di minimus," even if not "much ado about nothing."

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

and

Thomas D. Nevins
(415) 434-9100
TNevins@sheppardmullin.com