Regional Focus: California

In this issue, we focus on California because thousands of companies do business in California, and California has its own antitrust statutes that are applied in judicial decisions by both the California state courts and the federal courts. Three recent decisions demonstrate the importance of understanding how the antitrust laws are applied by state and federal courts in California.

The first case is Clayworth v. Pfizer, Inc., in which the California Supreme Court held that the “pass-on” defense is not available to defendants in price-fixing cases brought under California’s Cartwright Act, California’s analogue to the U.S. Sherman Act, when a single level of indirect purchasers sue. Under federal law, indirect purchasers are not allowed to sue, so the “pass-on” defense is not available to defendants. In California, however, indirect purchasers are allowed to sue. The issue in Clayworth was whether defendants can invoke the pass-on defense. The California Supreme Court said “no.” However, if multiple levels of indirect purchasers sue, pass-on issues still may need to be addressed. A more detailed analysis of this decision can be found in our July 13 client alert, available here.

The second case is Bay Guardian Co., Inc. v. New Times Media LLC, in which the California Court of Appeal held that—unlike under federal law—a plaintiff does not need to demonstrate that a defendant can recoup it losses to prove a predatory pricing claim under California’s Unfair Practices Act. In Bay Guardian, one alternative weekly newspaper alleged that its rival had sold below-cost ads. The court concluded that California law focuses on the purpose of the anticompetitive act, rather than potential competitive harm, as do the federal antitrust laws. A copy of the decision can be found here.

Finally, in California ex rel. Brown v. Safeway, Inc., the Ninth Circuit held that a profit-sharing agreement among a number of California grocery store owners was not immunized from antitrust review by the non-statutory labor exemption, because the agreement was not “needed to make the collective-bargaining process work” and did not raise questions ordinarily resolved by application of labor law principles. The court declined to hold the agreement was a per se Sherman Act Section 1 violation, because it was of short duration and did not involve all the firms in the relevant market. The court held, however, that the agreement violated Section 1 under a “quick look” analysis. The court rejected defendants’ argument that driving down compensation to workers is a pro-competitive benefit to consumers cognizable under the antitrust laws. A copy of the decision can be found here.

These cases demonstrate the range of state and federal antitrust issues that state and federal courts in California routinely address. It is critical for businesses operating in California to recognize that the state has its own set of antitrust laws that are not always consistent with (and sometimes are contrary to) the federal antitrust laws.

The Role of Antitrust Law and Analysis in Patent Litigation

The past decade has seen an explosion of patent litigation in the United States and an increased role for antitrust claims and the use of antitrust analysis in patent cases. For intellectual property lawyers, it is important to anticipate the antitrust issues often presented by patentees’ licensing or other conduct and their patent enforcement activities. For antitrust lawyers, it is important to understand the analytical framework for patent misuse and the antitrust counterclaims that may be available.

Antitrust Analysis for Patent Misuse Defenses

Patent misuse can be a powerful defense to a claim of patent infringement. If the defendant prevails on a misuse defense, the patent is rendered unenforceable until the misuse is purged. Senza-Gel Corp. v. Seiffhart, 803 F.2d 661, 668 n.10 (Fed. Cir. 1986). This is true not only as to the defendant, but also as to all others against whom the patentee would try to enforce the patent. This makes the patent misuse defense a potent weapon.

Misuse frequently arises as a result of the patentee’s licensing practices. Several types of licensing conduct have been held to constitute patent misuse or have been alleged in reported cases to be misuse, including: tying patents to unpatented goods, tying patents to patents (package licenses), charging post-expiration royalties, demanding royalties under U.S. patents based on worldwide sales, anticompetitive grantback clauses and field-of-use restrictions, and certain horizontal arrangements that often arise in the context of patent pools and cross-licensing arrangements.

The Federal Circuit has described patent misuse as the patentee’s act of “impermissibly broaden[ing] the ‘physical or temporal scope’ of the patent grant with anticompetitive effect.” Windsurfing Int’l, Inc. v. AMF, Inc., 782 F.2d 995, 1001 (Fed. Cir. 1986) (emphasis added). “To sustain a misuse defense involving a licensing arrangement not held to have been per se anticompetitive by the Supreme Court, a factual determination must reveal that the overall effect of the license tends to restrain competition unlawfully in an appropriately defined relevant market.” Id. at 1001-02 (emphasis added). In August 2010, the Federal Circuit affirmed that patent misuse requires proof of anticompetitive effects resulting from the misuse. Princo Corp. v. Int’l Trade Comm’n, 616 F.3d 1318 (Fed. Cir. 2010). Princo holds, however, that proof of an antitrust violation associated with the use of a patent is not sufficient to establish misuse. “What patent misuse is about, in short, is ‘patent leverage,’ i.e., the use of the patent power to impose overbroad conditions on the use of the patent in suit that are ‘not within the reach of the monopoly granted by the Government.’” Id. at 1331 (quoting Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100, 136-38 (1969)).

This emphasis on anticompetitive effects means that the traditional tools used for antitrust analysis are critical in the evaluation of a patent misuse defense. The only clear exception is when the patentee charges royalties based on post-expiration sales, which continues to be treated as per se unlawful under Brulotte v. Thys Co., 379 U.S. 29 (1964). Prevailing on a patent misuse defense typically requires the rule of reason analysis employed in antitrust cases.

Antitrust Counterclaims in Patent Infringement Cases

Defendants in infringement cases also commonly assert antitrust counterclaims in an effort to level the litigation playing field. The typical claim is a Sherman Act Section 2 claim for monopolization and attempted monopolization. The two main categories of antitrust counterclaims are Walker Process and Handgards claims. A Walker Process claim alleges that the patentee fraudulently procured the patent-in-suit. See Walker Process Equip. v. Food Mach. & Chem. Corp., 382 U.S. 172 (1965). A Walker Process claim is a complement to the inequitable conduct defense to an infringement claim. Rather than using misconduct before the Patent and Trademark Office (PTO) to invalidate a patent, the infringement defendant asserts the knowing enforcement of a fraudulently obtained patent as the predicate anticompetitive conduct supporting a Section 2 claim. Unlike the inequitable conduct defense, Walker Process always requires proof of “knowing and willful” fraud in prosecution. Id. at 177. Prevailing on a Walker Process claim requires not only demonstrating, by clear and convincing evidence, that the patent holder committed fraud on the PTO, but also proving, by a preponderance of the evidence, all of the other elements of a Section 2 claim.

A Handgards claim alleges that the patentee is seeking to enforce the patent even though the patentee learns that the patent is invalid or unenforceable after obtaining the patent. See Handgards, Inc. v. Ethicon, Inc., 601 F.2d 986 (9th Cir. 1979). Under Handgards, if the counterclaimant demonstrates by clear and convincing evidence that the patentee is enforcing the patent with actual knowledge that it is invalid, the sham litigation exception to the Noerr-Pennington immunity doctrine is satisfied. Some courts have applied to Handgards claims the two-part test for sham litigation claims adopted in Professional Real Estate Investors v. Columbia Pictures Industries, 508 U.S. 49 (1993) (PRE).

Under PRE, the counterclaimant must prove that the infringement suit is “objectively baseless in the sense that no reasonable litigant could realistically expect success on the merits” and that by suing the patentee is attempting “‘to interfere directly with the business relationships of a competitor,’ through the ‘use [of] the governmental process – as opposed to the outcome of that process – as an anticompetitive weapon.’” 508 U.S. at 61 (citations omitted). Prevailing on a Handgards claim also requires proving all the other elements of a Section 2 claim.

In addition to Walker Process and Handgards claims, it is becoming common for defendants in infringement cases to assert Section 2 counterclaims, as well as other claims, based on misconduct before standards-setting organizations (SSO). There are two main categories of claims. In the first, an alleged infringer asserts that the patentee engaged in patent holdup by engaging in deceptive conduct in the SSO process so that its patented technology was incorporated into the industry standard, or competition was otherwise restrained. E.g., Rambus, Inc. v. FTC, 522 F.3d 456 (D.C. Cir. 2008). In the second, the alleged infringer asserts that the patentee reneged on a commitment to license its patents on reasonable and non-discriminatory (RAND) terms. E.g., Broadcom Corp. v. Qualcomm, Inc., 501 F.3d 297 (3d Cir. 2007). When asserted under Section 2, both categories of claims require typical antitrust analysis and proof.

Conclusion

The assertion of patent misuses defenses and antitrust counterclaims is now routine in patent litigation. The antitrust issues associated with these defenses and counterclaims, often seen as subsidiary to the patent claims, are frequently at least as complicated and important as the underlying patent litigation. The antitrust-based claims and defenses require the same level of focus and diligence as the patent claims and other defenses.

Regional Developments: United States

Second Circuit Declines to Rehear Cipro Reverse Payment Case. On September 7, 2010, the Second Circuit rejected a petition for rehearing en banc in Ciprofloxacin Hydrochloride Antitrust Litigation. A panel ruling on April 29 had affirmed dismissal of the plaintiffs’ antitrust claims and held that a patent settlement between Bayer (the brand pharmaceutical manufacturer) and Barr (the generic manufacturer) that contemplated a payment for delayed entry by the generic did not violate the Sherman Act, but unusually invited a petition for rehearing en banc. In rejecting the petition, the Second Circuit declined to follow amicus briefs filed by the U.S. DOJ, the FTC and 34 state attorneys general, among others. The decision can be found here. A petition for Supreme Court review was filed in December 2010.

5th Circuit Affirms Dismissal of the Leegin Vertical Price-Fixing Case. On August 17, 2010, three years after the Supreme Court issued its decision in PSKS, Inc. v. Leegin Creative Leather Prods., Inc., overruling Dr. Miles and holding that vertical price restraints are subject to the “rule of reason” not the per se rule, the 5th Circuit affirmed the district court’s dismissal of plaintiff’s case on the merits, holding that: (1) PSKS failed to plausibly define a relevant product market; (2) PSKS’s horizontal restraint claims were barred by the mandate rule, which precludes litigation of newly raised issues on remand; (3) there was “no wheel” in PSKS’s hub-and-spoke conspiracy theory because there were no plausible allegations of agreement among the individual retailers; and (4) there was no “economic logic” to PSKS’s argument that defendant’s position as a “dual-distributor” (i.e., a wholesale supplier and a seller at the retail level of the market) converted its vertical resale price maintenance agreement into horizontal conduct. A copy of the opinion can be found here.

Regional Developments: Europe

Horizontal Agreements. On December 14, 2010, the European Commission adopted new rules governing cooperation agreements between competitors. The main areas of interest are as follows:

  • Standardisation – The rules aim to promote transparency in the licensing costs for intellectual property used in standards. The Commission defines a safe harbor and provides guidance on standardisation agreements that fall outside the safe harbor.
  • Information Exchange – Although the Commission recognizes that information exchange can be “pro-competitive,” it cautions against exchange of information on future pricing and quantities. The new rules clarify how to assess information exchanges for statistical or benchmarking purposes, which may not be aimed at restricting competition.
  • Research and Development (R&D) – The Commission has widened the scope of the exemption for R&D agreements. The exemption now covers “paid for research” agreements where one party finances R&D activities carried out by the other. It also gives parties more scope to jointly exploit the R&D results.

The new rules regarding standardisation and information exchange will come into force as soon they have been published in the Official Journal of the EU, which should take place in the coming days. The new rules governing R&D agreements will come into force on January 1, 2011.

Air Cargo Cartel (Case COMP/39258, Commission Decision of 9/11/2010). On November 9, 2010, the European Commission fined 11 airlines €799 million for participation in a price-fixing cartel from 1999 to 2006, which affected cargo services within the European Economic area (EEA). In setting the fines, the Commission considered the sales of the companies in the market, the serious nature of the infringement and the EEA-wide scope and duration of the cartel. All carriers were granted a 50% reduction on sales between the EEA and third countries because part of the harm fell outside the EEA. Further reductions were granted to certain airlines to reflect their marginal involvement, for cooperating with the Commission and to ensure that the fine imposed on any airline did not exceed the cap of 10% of turnover. However, the Commission rejected applications for reductions based on inability to pay and imposed a 50% increase on SAS, which had previously been fined for participation in another cartel. There are several pending damages actions before national courts. The decision has not been published yet. The text of the Commission’s press release can be found here.

Regional Developments: Asia

NDRC Releases Draft Special Provisions on Penalties Against Price Violation. On July 13, 2010, China’s National Development and Reform Commission (NDRC), the agency responsible for price cartel enforcement, released the Draft Special Provisions on Penalties Against Price Violations During the Period of Abnormal Price fluctuation for public consultation. The Special Provisions would give the NDRC the power to respond quickly to suspected price fixing, but would apply only during “special” circumstances, namely, abnormal price fluctuations in important commodities that may significantly affect everyday life or industry production. They would apply only to a limited range of prohibited conduct—price collusion, false rumors of price increases, malicious withholding of goods and price increases producing excessive profits. The text of the Special Provisions can be found here.

MOFCOM Addresses Divestiture of Assets or Business During Implementation of Concentrations Between Undertakings. On July 5, 2010, China’s Ministry of Commerce (MOFCOM) released the Provisional Provisions on Divestiture of Assets or Business During Implementation of Concentrations Between Undertakings (the Divestiture Provisions) with immediate effect. The Divestiture Provisions were enacted to ensure the smooth divestiture of assets or business by firms with a divestiture obligation pursuant to a MOFCOM decision. The text of the Divestiture Provisions can be found here.

Hong Kong Publishes New Competition Bill. Hong Kong’s new Competition Bill was published and gazetted on July 2, 2010. The Bill aims to prohibit and deter anticompetitive conduct that has the object or effect of preventing, restricting or distorting competition in three major areas: (i) agreements and concerted practices (including mergers); (ii) abuse of market power; and (iii) separately, certain telecommunications mergers. The Bill provides an independent Competition Commission, and a Competition Tribunal (a division of the High Court) will be established. The Bill was tabled before the Legislative Council on July 14, 2010, but the Bill’s committee has not yet been formed. The text of the Bill can be found here.

Events and Articles

Recent Events

November 2010

IBA Asia Pacific Forum Antitrust Enforcement
Tokyo, Japan – November 17-19, 2010
Philippe Rincazaux participated in a panel discussion on the growing themes of antitrust enforcement in the region with a particular focus on abuse of dominance and cartel enforcement.

Directors Roundtable
Washington, DC – November 12, 2010
Orrick partners Ted Henneberry and Jay Jurata discussed recent antitrust and competition issues of importance to directors and officers as part of a panel featuring Richard Feinstein, Director of Competition at the FTC.

ICN Merger Workshop
Rome, Italy – November 3-5, 2010
Orrick partner Ted Henneberry participated in the Italian Competition Authority’s 2010 Merger Workshop, which focused on merger enforcement trends, economic analysis in merger review and merger investigations.

ABA-IBA Training Program
New Delhi, India – November 1-2, 2010
Orrick partner David Smutny participated in a training program for the Competition Commission of India staff. Topics discussed included Merger Process, Cross-Border M&A, Cartels, Transparency/Procedural Fairness, Sectoral Regulations and Competition, Antitrust and the Internet, and Dominance/Unilateral Conduct.

October 2010

Association Francaise des Juristes d’Entreprise
Paris, France – October 18, 2010
Orrick partner Philippe Rincazaux participated in a panel on “Consequences of the Akzo Judgment” at a conference for the French Association of In-House Counsels.

IBA Annual Conference
Vancouver, Canada – October 3-8, 2010
Orrick partner Philippe Rincazaux co-chaired a workshop on “Unilateral Conduct—The Law of Discounts and Loyalty Rebates in the EU, U.S. and Elsewhere.”

September 2010

State Bar of California Annual Meeting
Monterey, CA – September 24, 2010
Orrick partner Robert Rosenfeld was a speaker at the 83rd State Bar of California Annual Meeting in Monterey

IBA Antitrust Conference
Florence, Italy – September 17-18, 2010
Orrick partner Philippe Rincazaux moderated a panel discussion on the latest developments in cartel investigations in Europe and the United States.

August 2010

Ramifications of American Needle, Inc. v. NFL
San Francisco, CA – August 4, 2010
Orrick partner Stephen Bomse participated on a panel with FTC Commissioner Tom Rosch and others for the Antitrust Section of the Bar Association of San Francisco. The panelists discussed the impact of American Needle on joint ventures.

Recent Antitrust and Competition Publications

Key Ruling on Legal and Professional Privilege, Antitrust and Competition Alert, September 2010, by Douglas Lahnborg and Matthew Rose
California Supreme Court Denies Pass-On Defense in Price-Fixing Cases, Antitrust and Competition Alert, July 2010, by David Goldstein, Richard Goldstein, Robert Reznick and Howard Ullman

The European Union General Court rules on AstraZeneca v. Commission, Antitrust and Competition Alert, July 2010, by Douglas Lahnborg

Threading the American Needle: Is There Still Room for a Unitary Action Doctrine in Antitrust Cases Involving Joint Ventures?, Competition Policy International, June 2010, by Stephen Bomse

Private Damages Actions in the EU, 2010 Competition and Antitrust Review, Summer 2010, by Douglas Lahnborg and Wessen Jazrawi

Most Favored Nations Clauses in Health Care: Are They Legal or Not?, The Price Point, Summer 2010, by Scott Westrich

European Commission Adopts Revised Block Exemption for Vertical Restraints, The Price Point, Summer 2010, by Douglas Lahnborg and Elizabeth Turner

Get to Know: Stephen Bomse

Stephen Bomse, a partner in Orrick’s San Francisco office, is a member of the Litigation Group specializing in antitrust litigation. He is widely regarded as one of the nation’s leading antitrust lawyers, having tried cases throughout the United States involving multibillion-dollar claims while also maintaining a significant appellate practice, including his successful representation of Weyerhaeuser Company in a major Section 2 case before the United States Supreme Court.

Mr. Bomse also represents clients from around the world in other types of complex commercial litigation, both at the trial and the appellate level. Mr. Bomse and his partner Larry Popofsky were counsel for GTE Sylvania in the landmark U.S. Supreme Court case of GTE Sylvania v. Continental T.V., 433 U.S. 36 (1977), which is widely credited with changing the direction of American antitrust law both in the area of vertical restraints and, and, more generally, by reorienting U.S. competition policy in favor of its current economic-based approach to the analysis of competition issues.

Among the many other companies for whom Mr. Bomse has handled significant antitrust matters are: Visa U.S.A., Sony Corporation, 3M, Coca-Cola, Pacific Gas & Electric, Sara Lee Corporation, Levi Strauss & Co., American Home Foods, SunTrust Banks, Miller Brewing and Weyerhaeuser Company.

Mr. Bomse recently conducted a series of seminars in Taiwan addressing current antitrust issues of importance to international companies. He is the author of numerous antitrust and competition articles, including, most recently, Threading the American Needle: Is There Still Room for a Unitary Action Doctrine in Antitrust Cases Involving Joint Ventures?, published by Competition Policy International.

Before joining Orrick, Mr. Bomse was a shareholder at Heller Ehrman LLP where he served for many years as a member of its Management and Policy Committee, and headed up both the Litigation Department and the firm’s Global Competition Practice.