Restraint Of Trade

Change Has Come To Federal Antitrust Enforcement

The New York Times today devoted a front-page article to the Obama Administration's move to greater antitrust enforcement, particularly with regard to anticompetitive actions by dominant firms.  The policy move is to be unveiled by Christine A. Varney, the head of the DOJ's antitrust division.

Ms. Varney gave the first speech unveiling the policy today at the Center for American Progress - as Bloomberg reports here. 

She speaks before the United States Chamber of Commerce tomorrow.

In today's speech, Ms. Varney stated that the Bush administration's approach raised too many hurdles to combating monopolistic practices. 

She continued:  "The recent developments in the marketplace should make it clear that we can no longer rely upon the marketplace alone to ensure that competition and consumers will be protected.” 

Hovenkamp on Walker Process and Exclusionary Uses of Patents

As noticed on the Antitrust & Competition Policy Blog, Professor Hovenkamp has written a new piece entitled   "The Walker Process Doctrine: Infringement Lawsuits as Antitrust Violations."

I highly recommend the paper, which is available here:  Download hovenkamp_walker_process.pdf, to practitioners working on cases involving the exclusionary use of patents, as well as anyone studying the issue generally.  Judges should be aware of it too.  It brings some clarity to the analysis.

The issue addressed is how patents may be used in an exclusionary manner to improperly obtain or maintain monopoly power and how antitrust law can address this.  In typical fasion, Hovenkamp avoids getting bogged down in formalistic distinctions and instead stays focused on the harm to competition and how it should be addressed.

For example, some defendants have argued in antitrust cases that, unless the patent allegedly used to obtain monopoly power was obtained by outright fraud on the Patent Office, antitrust law cannot provide a remedy.  Hovenkamp correctly rejects this:

"[I]nfringement actions can also be qualifying exclusionary practices under [section] 2 when they are based on valid patents that are known by the infringement plaintiff to be unenforceable as a result of improprieties in procurement, or on valid patents but where the infringement plaintiff knew or should have known that the infringement defendant was not an infringer."  (p4)

Others have argued that there should be no liability for wielding an improperly-obtained patent, as long as a patent infringement suit was not actually filed.  Hovenkamp points out that patents can be enforced in an exclusionary manner in many ways - not just by filing a lawsuit:

"Of course, one might enforce a fraudulently obtained patent in other ways than by making or threatening infringment actions.  For example, one might simply assert the patent and warn a potential rival to stay out of the market the patent assertedly covers; or one might insist on collecting a royalty for technology allegedly covered by such a patent.  Clearly a patent obtained by fraud could be used in an anticompetitive way falling short of an infringement suit.  Whether such practices are sufficiently exclusionary so as to violate the antitrust laws cannot be stated categorically."  (p10-11)

Finally, Hovenkamp rejects the claim made by some - including in the DDAVP case discussed below - that purchasers of products who were overcharged because of exclusionary uses of patents should not have standing to bring damages claims.  He notes that the DDAVP decision on this point is "odd" and "apparently incorrect."  (fn 102).

 

AAI Releases Antitrust Recommendations

The American Antitrust Institute has published a comprehensive report outlining its policy recommendations for the next administration.

Chapter One of the report - on Cartels - is particularly deserving of attention.  AAI questions, for example, whether the Antitrust Division of the US Department of Justice has been unduly "indifferent or even hostile to private litigation." 

"While it is not uncommon for the FTC to join with the state attorneys general in antitrust prosecutions, we are not aware of a single instance of such an alliance involving the Division and the 'private attorneys general.'  On the contrary, we have heard many informal reports that when private suits are initiated, plaintiffs experience unnecessary delays and blockages initiated by the Division.  Legal impediments are particularly severe in international cartel actions.  We note that some courts have overriden concerns about comity and required foreign antitrust authorities to produce documents held abroad to plaintiffs in private suits.  Yet, the Division typically resists turning over amnesty application documents."  (48.)

We applaud the AAI's focus on the importance of constructive cooperation between the Antitrust Division and private actions, and echo the hope that the next administration will take steps to improve this working relationship - which will benefit consumers in this country and, in an era of increasingly international cartels, other countries as well.

Twombly's "Suspect Circumstances" Standard

Truth on the Market has posted a link to a new working paper from Professors Martin H. Redish and Lee Epstein, which attempts to provide some (much needed) clarity to the post-Twombly pleading standard.

Professors Redish & Epstein argue that Twombly should be read to have instituted a new "suspect circumstances" pleading standard that would apply not just to antitrust cases:

"Under this construction of Rule 8(a), before a pleading may get to the discovery stage it must allege facts sufficient to make a reasonable observer suspicious that unlawful behavior took place, thereby rendering it appropriate to resort to discovery to allow the parties to investigate further."

There is some promise to this "suspect circumstances" formulation, but it is unclear how much clarity it actually provides. 

For example: How suspicious must a reasonable observer be?  Many cases of parallel or near-parallel pricing conduct may raise some suspicion on their face that unlawful collusion has occured, but is "some suspicion" enough or must the pled circumstances be "very suspicious"?

Some have argued that the level of suspicion required to proceed to discovery should be considered in light of the level of burden and expense discovery will require - but this only introduces another level of guesswork and subjectivity into the analysis. 

RPM agreements blossom in Leegin's wake

It is one thing to theorize about the competitive consequences of vertical price-fixing agreements (or resale price maintenance ("RPM")), it is will be quite another to see how these agreements will affect competition and consumers in practice.

RPM agreements are blossoming in the wake of the Supreme Court's 2007 decision in Leegin, which held that they are no longer per se illegal.

The latest example is discussed in a revealing article  in FloorBiz.com:  Anderson Hardwood Floors has recently (and publicly) adopted a RPM policy, whereby dealers must agree to advertise prices at a minimum selling price.  "If an advertiser violates the new policy, the dealer's business relationship with Anderson will be terminated.  Also, if any dealer is found selling Anderson products to another retailer not authorized to sell the brand, that dealer's business relationship and license with Anderson will be immediately suspended."

Anderson's COO indicates that the policy allows retailers to focus on selling the product without worrying about price competition:  "Retailers will tell you traffic is off so they need to maximize every potential sale that walks in the door.  You don't do this by giving profit away and reducing margins..."

Anderson's retailers are reportedly quite happy with the new policy and have embraced their new role as Anderson's eyes on the ground.  Anderson's COO reports that the company is receiving several inquiries a week "from the industry in regards to companies violating the policy."

Reading between the lines, it is apparent that the central target of this RPM agreement and others like it is internet-based companies, who can sell at prices that do not include overhead and other costs.  Those lower costs turn into lower prices, which undoubtedly help consumers in the short-run.  But if they force all brick-and-mortar companies out of business, they may hurt consumers in the long-run.  This, in my mind, is the most significant consequence of Leegin - the blow to internet-based retailers.  The question is whether this blow will actually help consumers in the long run or not.

In turn, this suggests a theoretical point about the relationship between economic theory and antitrust doctrine.  So often, economic theory and scholarship are presented as supremely modernist endeavors - which stand outside of history and steadily evolve and advance, revealing new truths about the nature of markets and competition.  As Exhibit A of this economic modernism, look no further than the recent DOJ Section 2 Report, which bemoans the fact that "stare decisis  inhibits courts from routinely correcting errors or updating the law to reflect the latest advances in economic thinking." (pg 17)

Acknowledging the centrality of the conundrum posed by internet-based retailers to the recent embrace of RPM suggests that Leegin overruled Dr. Miles not because courts finally woke up to the truth of the competitive nature of these agreements, which advances in economic scholarship had finally revealed, but that RPM agreements may - or may not - play a specific role in meeting specific competitive challenges in our current markets, as presently constituted. 

New AII Working Paper - DOJ Cartel Enforcement

The American Antitrust Institute has posted an important new working paper authored by Professor John Connor.

The paper -- available here -- evaluates the effectiveness of efforts by the DOJ's Antitrust Division to detect, punish, and deter price-fixing cartels from 1990-2007 and offers policy suggestions to improve that enforcement.

Professor Connor draws attention to the increasing presence of international cartels and the importance of cooperative, multi-national efforts to address and deter them.  As the paper notes, until the late 1990s, US and EU authorities were responsible for discovering nearly all of the the international cartels that were actually discovered.  However, in recent years, competition authorities worldwide have increasingly shared information about cartel activity and coordinated investigation efforts. 

There is a paradox.  Although monetary penalties imposed by US and non-US authorities have become much higher in recent years, the number of cartels being discovered each year continues to rise, as does the number of price-fixing recidivists.  In other words, both the number of cartels discovered and the size of penalties imposed are increasing.  Nor does it appear this can be explained by increased success in detection alone.  It appears that the absolute number of price-fixing cartels is increasing.

Professor Connor suggests that the explanation for this phenomenon is that even with today's higher penalties, aggregate penalties are still lower than most cartels' expected profits.

One reason this occurs is because of the increasing international character of price-fixing cartels, and the relative thinness (or absence) of public - and just as importantly, private - enforcement in many affected countries.  Even if an international cartel is forced to pay high penalties for its illicit profits in the US, if that cartel can retain most or much of its illicit profits in other countries, then optimal deterrence is not reached. 

In short, the increasingly international character of cartels means deterrence in any individual country is much more difficult.

Deterrence and optimal deterrence are concepts too often overlooked in competition cases - even by US courts.  Professor Connor's paper is an important reminder of the significance of a focus on deterrence in a world where international cartels are an ever-present concern.