In the first post in this series, we introduced the concept of joint ventures (“JVs”), outlined why antitrust law applies to their formation and operation, identified the major antitrust issues raised by JVs, and discussed why you should care about these issues. In this installment, we will unpack some of the major antitrust issues surrounding the threshold question of whether or not a JV is a legitimate collaboration. In particular, we will first try to separate the analyses of, on the one hand, JV formation, and on the other, JV operation and structure. Then we will consider whether a JV (i) constitutes a “naked” agreement between or among competitors which is per se unlawful, (ii) presents no significant antitrust issue because there is only a single, integrated entity performing the JV functions, or (iii) involves restraints within the scope of a legitimate collaboration that are virtually per se lawful.
Posts by: Howard Ullman
Joint ventures (“JVs”) can require navigation of a potential minefield of antitrust issues, which we’ll explore in a series of six blog posts beginning with this introductory post. Not all of the law in this area is entirely settled, and there remain ongoing debates about some aspects of the antitrust treatment of JVs. Indeed, arriving at a coherent and unified view of JV law is like putting together a jigsaw puzzle with missing and damaged pieces.
In SOLIDFX, LLC v. Jeppesen Sanderson, Inc., Case Nos. 15-1079 and 15-1097 (opinion available here), the Tenth Circuit aligned itself with the First and Federal Circuits to hold that the invocation of intellectual property rights is a presumptively valid business justification sufficient to rebut a Sherman Act Section 2 refusal to deal claim, but left open some questions about when and how the presumption can (if ever) be rebutted.
On August 9, 2016, the Second Circuit affirmed a district court’s dismissal of claims asserted by two groups of self-proclaimed “indirect purchasers” of aluminum products who alleged that three aluminum futures traders, which had acquired operators of warehouses for aluminum, manipulated a price component for aluminum (warehouse storage costs). The Second Circuit concluded that these “indirect purchasers” did not suffer antitrust injury because they were not participants in the aluminum warehousing market. In re Aluminum Warehousing Antitrust Litig., Nos. 14-3574, 14-3581(2d Cir. Aug. 9, 2016). In the district court, Judge Katherine Forrest recently applied the Second Circuit’s analysis to dismiss similar claims brought by the purported “direct purchasers” of the aluminum because they, too, were not participants in the aluminum warehousing market. In re Aluminum Warehousing Antitrust Litig., No. 13-2481 (S.D.N.Y. Oct. 5, 2016). These two decisions (assuming the district court’s decision is affirmed) should help defendants attack plaintiffs’ efforts to establish antitrust standing in other cases by trying to thread the “inextricably intertwined” needle for market participants that the Supreme Court established in Blue Shield of Virginia v. McCready, 457 U.S. 465 (1982).
Last week, the Ninth Circuit affirmed a summary judgment disposing of numerous antitrust claims brought by an independent servicer against a manufacturer of systems and parts that also provides service. The court emphasized that “[t]his case serves as a reminder that anecdotal speculation and supposition are not a substitute for evidence, and that evidence decoupled from harm to competition—the bellweather of antitrust—is insufficient to defeat summary judgment.” Aerotec Int’l, Inc. v. Honeywell Int’l, Inc., No. 14-15562 (9th Cir. Sept. 9, 2016).
Auxiliary Power Units (“APUs”) power an airplane’s air conditioning, cabin lights and instrumentation. Aerotec International, Inc. (“Aerotec’), a small servicer of APUs, including those manufactured by Honeywell International, Inc. (“Honeywell”), complained that Honeywell had stalled Aerotec’s sales efforts and prevented it from reaching cruising altitude through a variety of alleged anticompetitive conduct.
On September 7, 2016, the Third Circuit ruled that a district court erred in granting a Fed. R. Civ. P. 12(b)(1) motion to dismiss federal antitrust claims for lack of subject matter jurisdiction, because the court conflated the analyses for Article III standing and antitrust standing. Hartig Drug Co. Inc. v. Senju Pharmaceutical Co. Ltd., No. 15-3289 (3d Cir. Sept. 7, 2016).
Hartig Drug Company Inc. (“Hartig”), an Iowa-based drug store chain, sued pharmaceutical manufacturers alleging that they suppressed competition for medicated eyedrops through a variety of means, which resulted in higher prices for the eyedrops. Hartig purchased the eyedrops from a distributor, AmerisourceBergen Drug Corporation (“Amerisource”), which purchased the eyedrops from the manufacturers. Hartig’s claim as an indirect purchaser from the defendant manufacturers was barred by Illinois Brick v. Illinois, 431 U.S. 720 (1977), so it alleged that Amerisource had assigned its claim to Hartwig, which enable Hartwig to sue as a direct purchaser.
The manufacturers filed a Rule 12(b)(1) motion to dismiss for lack of subject matter jurisdiction, and also a Rule 12(b)(6) motion to dismiss for failure to state a claim. For the Rule 12(b)(1) motion, defendants submitted Amerisource’s Distribution Services Agreement (“DSA”) with one of the manufacturers—which was not mentioned in Hartwig’s complaint—to argue that an anti-assignment clause in the DSA prohibited Amerisource from assigning its claim without the defendant’s consent. The District Court accepted that argument and granted the Rule 12(b)(1) motion on the ground that Hartig was actually suing as an indirect purchaser and not as a direct purchaser because the assignment was invalid.
On appeal, several retailers filed an amicus brief arguing that defendant’s anti-assignment argument reached only the issue of antitrust standing, which is different from Article III standing, and the district court erred in ruling that it did not have subject matter jurisdiction. The Third Circuit agreed.
Proving once again that antitrust law protects competition, not competitors, on August 18, 2016 the Sixth Circuit affirmed a decision from the Eastern District of Michigan dismissing a plaintiff’s Sherman Act § 1 predatory pricing complaint for failure to state a claim. The case, Energy Conversion Devices Liquidated Trust et al. v. Trina Solar Ltd. et al., involved allegations by a US-based solar panel manufacturer that its Chinese competitors had conspired to lower their prices in the US to below cost in order to drive the plaintiff out of business.
Energy Conversion conceded that a predatory pricing claim under § 2 of the Sherman Act requires the plaintiff to plead and prove both that the defendant charged below-cost prices, and that the defendant had a reasonable prospect of recouping its investment. But it maintained that for a claim brought under § 1, the second element—recoupment—was not required.
In a recent decision, the Northern District of California denied Chrysler’s motion for summary judgment to defeat a Robinson-Patman Act price discrimination claim. Mathew Enterprise, Inc. v. Chrysler Group LLC, 2016 U.S. Dist. LEXIS 108693 (N.D. Cal. Aug. 2, 2016) (opinion filed August 15, 2016 and available here). The decision serves as a reminder of the relatively low bar for establishing competitive and antitrust injury for Robinson-Patman Act purposes, and counsels in favor of carefully structuring discount programs to avoid any potential litigation down the road.
On August 12, 2016, the Seventh Circuit ruled that a manufacturer’s decision to sell large package products to some retailers but not others does not constitute price discrimination under Section 13(e) of the Robinson-Patman Act. Woodman’s Food Market, Inc. v. Clorox Co. and Clorox Sales Co. (7th Cir. Aug. 12, 2016) (opinion available here). The decision harmonizes Seventh Circuit law with that of other circuits and clarifies that manufacturers do not violate the promotional services or facilities requirements of the Act when they offer bulk products to some but not all purchasers.
Howard Ullman recently published a column in the Association of Business Trial Lawyers Report (Northern California) on a recent Sixth Circuit decision that raises new issues for structuring joint ventures. You can read the full article here.
You know what they say: one man’s price is another man’s bundle. No? Well maybe they should, after this recent decision out of the Third Circuit in Eisai, Inc. v. Sanofi Aventis U.S., LLC involving allegedly exclusionary discounting. The court ultimately found Sanofi’s conduct was not unlawful. But the decision raises questions about how such conduct – a hybrid of price discounts and single-product bundling – will be treated going forward, at least in the Third Circuit.
At issue was Sanofi’s marketing of its anticoagulant drug Lovenox to hospitals through its Lovenox Acute Contract Value Program. Under the Program, hospitals received price discounts based on the total volume of Lovenox they purchased and the proportion of Lovenox in their overall purchase of anticoagulant drugs. A hospital that chose Lovenox for less than 75% of its total purchase of anticoagulants received a flat 1% discount regardless of the volume purchased. But when a hospital’s purchase of Lovenox exceeded that percentage, it would receive an increasingly higher discount based on total volume and percentage share, up to a total of 30% off the wholesale price. A hospital that did not participate in the Program at all was free to purchase Lovenox “off contract” at the wholesale price.
On April 14, 2016, the U.S. Department of Justice and two West Virginia hospitals entered into a consent decree requiring the hospitals to cease allocating territories for marketing their healthcare services. The complaint and consent decree can be viewed here and here. This consent decree follows a similar consent decree that the DOJ entered into with three Michigan hospitals in June 2015, perhaps signaling the DOJ’s increased focused in policing allegedly anticompetitive agreements among hospitals and medical centers.
Members of Orrick’s Life Sciences practice with experience addressing pharmaceutical industry antitrust and IP issues recently published an article analyzing the recent decision of the U.S. Court of Appeals for the Federal Circuit in In re Loestrin, No. 14-2071 (1st Cir. Feb. 22, 2016). In that decision—only the second appellate decision applying the Supreme Court’s seminal 2013 decision in FTC v. Actavis , the First Circuit addresses a few of the antitrust issues surrounding so-called “reverse-payment” settlements of patent infringement litigation between branded and generic drug manufacturers. To read the published article, please click here.
On June 22, 2015, in a 6-3 decision in Kimble et al. v. Marvel Enterprises, LLC, 576 U.S. (2015), the United States Supreme Court reaffirmed its holding in Brulotte v. Thys, 379 U.S. 29 (1964), that it is per se patent misuse for a patentee to charge royalties for the use of its patent after the patent expires. While acknowledging the weak economic underpinnings of Brulotte, the Court relied heavily on stare decisis and Congressional inaction to overrule Brulotte in also declining to do so itself. Although Kimble leaves Brulotte intact, the decision restates the rule of that case and provides practical guidance to avoid its prohibition on post-expiration royalties. Critically, the Court appears to condone the collection of a full royalty for a portfolio of licenses until the last patent in the portfolio expires. In addition, the Court’s reasoning provides guidance as to how patent licensors can draft licenses to isolate the effect of a later finding that patents conveyed under those licenses were previously exhausted.
On June 17, 2015, the U.S. District Court for the Eastern District of Pennsylvania approved a consent order (the “Consent Order”) between the Federal Trade Commission and defendants Cephalon, Inc. and its parent, Teva Pharmaceutical Industries Ltd., resolved long-running antitrust litigation stemming from four “reverse payment” settlements of Hatch-Waxman patent infringement cases involving the branded drug Provigil®. Pursuant to its settlement with the FTC (the “Consent Order”), Cephalon agreed to disgorge $1.2 billion and to limit the terms of any future settlements of Hatch-Waxman cases. The FTC and its Staff have celebrated and promoted the terms of the settlement as setting a new standard for resolving reverse-payment cases. But their enthusiasm may be more wishful thinking than reality, and their speculation that the agreement may exert force on market behavior does not appear to be supported by a fair assessment of the state of the law. First, the restrictions on Cephalon’s ability to enter into settlements of Hatch-Waxman cases exceed anything a court has ever required, and conflict with settlement terms apparently approved in the U.S. Supreme Court’s seminal reverse-payment decision, Federal Trade Commission v. Actavis, 133 S. Ct. 2223 (2013). Second, the FTC’s use of disgorgement as a remedy remains controversial and Cephalon, despite initial opposition, might have voluntarily embraced that remedy as part of a strategy to achieve a global resolution of remaining private litigation. We write to put the Consent Order in perspective, so that industry participants can better assess its meaning.
In late May, the U.S. Court of Appeals for the Second Circuit issued the first appellate decision addressing the pharmaceutical industry practice called by some “product hopping”—a two-step process in which a drug approaching the end of its patent term is withdrawn or made less desirable to customers so that patients will switch to a successor product with more exclusivity remaining. In this way, drug manufacturers may seek to protect sales from generic competition. “Product hopping” cases are often analyzed under the antitrust rules developed to assess claims of “predatory innovation” or related conduct, as exemplified by well-known cases involving Microsoft and Kodak. In this article, just published in Law360, lawyers from Orrick’s Intellectual Property and Antitrust groups weigh in on the Second Circuit’s decision, focusing on aspects of the analysis that may not be applicable in different cases and contexts.
Last week, in In re Cipro Cases I & II, Case No. S198616, the Supreme Court of California adopted the United States Supreme Court’s application of the Rule of Reason to the antitrust analysis of so-called “reverse payment” patent settlements (and rejected plaintiffs’ arguments that settlement payments exceeding the costs of litigation or other services are per se unlawful), but also set forth a specific “structured” Rule of Reason analysis to be applied in analyzing such settlements. A copy of the decision can be found here.
In our last edition, we addressed the first four “no-nos” and their current status under U.S. antitrust law. Here’s a discussion of the remaining five.
In the 1970s, Bruce Wilson, a former deputy assistant attorney general at the U.S. Department of Justice, developed a well known list of nine patent licensing “no-nos.” The somewhat formalistic U.S. antitrust law of the 1970s viewed these licensing practices as generally unlawful, if not per se illegal. In this article, and the previous one, we consider the nine “no-nos” from the perspective of U.S. antitrust law in 2013. Many “no-nos” are no longer automatically unlawful, but it is nevertheless important to understand the issues, because patent licensing practices can still draw fire under the Rule of Reason.
In the 1970s, Bruce Wilson, a former deputy assistant attorney general at the Department of Justice, developed a well-known list of nine patent licensing “no-nos.” The somewhat formalistic U.S. antitrust law of the 1970s viewed these licensing practices as generally unlawful, if not per se illegal. In this article, and in a follow-up article that will be published in the next edition of this newsletter, we will consider the nine “no-nos” from the perspective of U.S. antitrust law in 2013. Many “no-nos” are no longer automatically unlawful, but it is nevertheless important to understand the issues, because patent licensing practices can still draw fire under the Rule of Reason.
So without further ado, here is a discussion of the first four “no-nos” and their current status under U.S. antitrust law.
You have just received notice of a grand jury subpoena duces tecum from the Department of Justice Antitrust Division in connection with a price-fixing investigation. Indeed, the likelihood of doing so may be on the rise. In 2008, the Division had 137 pending grand jury investigations, filed 54 criminal cases and charged 59 individuals and 25 corporations. The Division currently has nearly 150 open cartel investigations. In 2009, the Division collected over $1 billion in criminal fines. And the Obama administration has made clear that it intends to continue pursuing price-fixing conspiracies. What should you do if your company receives a subpoena? Below are 10 practical steps.
1. Inform the company’s key decision-makers
Receiving a grand jury subpoena is a critical event. The company’s key decision-makers should be informed immediately. This is an appropriate time to present a brief overview of the Sherman Act, the DOJ’s authority and the nature, scope and purpose of a criminal investigation.
2. Ensure that no relevant evidence is destroyed
You must take immediate steps to preserve relevant evidence, including both paper and electronic documents, to avoid even the appearance of an unwillingness to cooperate with the investigation, or worse, the obstruction of justice. Therefore, the company and its lawyers should circulate a memorandum or e-mail to the effect that a subpoena has been, or will be, received and that documents relating to prices, price levels, price terms, competitor contacts, etc., should not be destroyed. The memorandum should indicate that document-retention policies that would otherwise call for the destruction of these documents should be suspended. Although at the very outset of an investigation you may not necessarily know all the appropriate recipients of such a memorandum, you can likely identify the more obvious ones (e.g., decision-makers who had any authority relating to pricing, as well as their assistants). As you learn more, there may be good reason to circulate such a memorandum more widely.
3. Retain outside antitrust counsel
Although in-house counsel are often adequately equipped to deal with many aspects of a criminal investigation, outside counsel with experience in antitrust investigations will also likely be required. The general counsel’s office is part of the same corporate management that may be under suspicion by government attorneys. Not only do inhouse counsel face potential personal and professional conflicts if colleagues are implicated, but the numerous demands of the investigation, especially in its critical early stages, can often overwhelm in-house counsel.
4. Consider contacting the DOJ
It is important to contact DOJ to establish an atmosphere of cooperation. You may also learn something about the DOJ’s focus and true interests, especially in negotiating the scope of the subpoena. You will probably want to try to narrow the usually overbroad subpoena or, at least, identify areas of higher priority that can be addressed first. For example, the DOJ may be willing to allow the company to search its headquarters files first and produce them. Then, if the DOJ wants additional documents, but not before, the company would search its offsite locations or branch offices. You should not make any statements to the DOJ about the burden of compliance or the locations, existence or nonexistence of files unless you are absolutely sure that they are accurate.
5. Determine the company’s status and consider the leniency program
Knowing whether your company is a subject or a target of the investigation has important ramifications. You may want to ask whether the company is the subject or a target. Often, the DOJ does not make this determination until late in the investigation, so the fact that a company is classified as a subject may convey a misleading sense of security. Another way to probe the issue is by asking permission for the company’s counsel also to represent individual employees. If the DOJ objects, there is likely a serious issue.
The Antitrust Division has a corporate leniency program, which essentially insulates from criminal liability the first company (and its officers) in a cartel that provides information to the government. Leniency also may eliminate treble-damages exposure in certain civil contexts. The leniency program puts a premium on learning the facts quickly to maximize the company’s possibility to obtain leniency if there has been wrongdoing. You do not want to guess about whether leniency is available. The Antitrust Division is always fishing until they “get” someone, but you can ask: “As we conduct our own investigation, and without suggesting any guilt, should we be considering a leniency application?” If the answer is yes, it is possible to place a “marker” with the DOJ to preserve the company’s position for a limited time while conducting the investigation.
6. Ascertain the key players
Identifying the key players will affect the scope of the file search and determine, at least initially, the universe of information available. Every company has a different organization, but the group must include everyone with pricing authority or input, as well as their assistants and secretaries. The group is likely to include former employees if the investigation relates to events that happened more than a few years ago.
7. Determine the scope of file searches
Once the key players are identified, it becomes possible to identify existing files that must be searched. These files will almost always include pricing files, competitor contact files and significant customer files. Market analyses and reports also will be relevant. But do not overlook other areas of possible interest–including trade association files, telephone logs and travel expense/reimbursement files–which are often the focus of a government investigation.
8. Prepare a memorandum for corporate employees
The existence of an investigation is likely to prompt discussions between and among corporate employees. In addition, the company probably would prefer to designate one or several people to communicate with the DOJ. However, the company and individuals must be scrupulous to avoid even the appearance of interfering with a criminal investigation, witness intimidation or obstruction of justice, which can be prosecuted as separate offenses under 18 U.S.C. §§ 1503, 1505 and 1512(b). In addition, employees’ interests may or may not be totally aligned with that of the company, and they may have Fifth Amendment rights not to testify. Although every company is different, one way to balance these competing interests is to circulate a memorandum from counsel to the effect that an investigation has begun, that counsel is representing the corporation, that individuals may wish to consult their own counsel, that individuals have the right to discuss the case with the government but also have the right to have counsel present if they choose, and that if counsel is indicated, the company will pay the fees. Employees should also be requested to inform corporate counsel of any discussions or contacts with the government.
9. Interview key personnel
You should interview the company’s key personnel, making sure that employees are aware that counsel is representing the corporation, and that the communications are protected by the corporate privilege. But if separate counsel for employees is advisable, you may want to advise the affected employees that the company will provide counsel for them. The interviews should focus on competitor contacts, knowledge of competitors’ pricing and the company’s prices and pricing practices.
10. Determine if competitors or former employees should be contacted
You may want to contact competitors to learn about the government’s investigation, competitors’ negotiations with the government over subpoena scope, etc. Careful consideration should be given to the use of a joint defense agreement to maximize preservation of the attorney-client and other privileges. Former employees also may have valuable information regarding the period of time in question. In fact, it may be essential to talk with them. But care must be taken to ensure that they are aware whom counsel represents. Company executives should refrain from discussing the investigation with others, and particularly with their counterparts at competitors.
Coping with a grand jury antitrust investigation can be a daunting task. But with careful and meticulous preparation and organization, it does not have to be overwhelming.