James Tierney

Partner

Washington, D.C.


Read full biography at www.orrick.com

The former chief of the U.S. Justice Department’s Networks and Technology Enforcement Section (Net Tech), Jim focuses his practice on antitrust and competition law, advocating before federal agencies on behalf of the firm’s global clients in the technology, energy & infrastructure and finance sectors.

Jim is a well-recognized figure inside the Beltway and an accomplished antitrust lawyer, with expansive knowledge of regulatory issues facing the technology and finance sectors.

As Net Tech chief, Jim oversaw all civil antitrust enforcement in the tech and financial services sectors, reviewing, investigating and, when necessary, litigating, every major strategic technology transaction and conduct issue in the past decade. He oversaw civil antitrust enforcement, competition advocacy, and competition policy in the areas of computer hardware and software, high-technology component manufacturing, financial services, securities industries, and professional associations. Jim also led the agency’s cooperation with antitrust and competition authorities worldwide.

Jim is a five-time recipient of the Assistant Attorney General Award of Distinction, and also received the prestigious Roberts Award in 2011 for excellence, leadership and dedication in the enforcement of antitrust laws. Prior to becoming Net Tech’s chief, he served for three years as assistant chief of the Antitrust Division’s Litigation 2 section and was a trial attorney in the agency from 1994 to 2003. He also served in the Antitrust Division’s Professions and Intellectual Property section. He clerked for Washington State Supreme Court Justices James A. Andersen and Fred H. Dore.

Posts by: James J. Tierney

DOJ Publishes Statements Clarifying Its Analysis of No-Poach Agreements – But Questions Remain

Since issuing the DOJ/FTC Antitrust Guidance for Human Resource Professionals in 2016, the DOJ Antitrust Division has remained active in enforcing and commenting on agreements among employers not to compete for hiring employees (“no-poach” agreements). DOJ filed several statements of interest in private antitrust suits involving no-poach provisions to provide guidance to the courts on the proper application of the federal antitrust laws to such restraints. Although the statements of interest provided clarity on the analysis of “naked” no-poach agreements, questions remain about the appropriate standard for analyzing no-poach restraints in franchise agreements.

Naked No-Poach Agreements Are Per Se Unlawful

DOJ recently took the unusual step of filing an unopposed motion to intervene in a class action no-poach settlement to enforce the injunctive relief agreed upon by the parties. The proposed class action alleged that a no-poach agreement between Duke/Duke University Health System and UNC/UNC Health Care System harmed competition for skilled medical labor. The named plaintiff alleged she was denied a lateral move to UNC from Duke because of agreements between senior administrators and deans at the institutions. On May 22 the court approved DOJ’s motion to intervene.

In its statement of interest, DOJ argued that such restrictions on hiring are per se unlawful market-allocation agreements between competing employers. These agreements harm consumers (employees) by depriving them of the benefits of competition that may lead to better wages or terms of employment. A court or agency will not evaluate the competitive effects of a per se unlawful agreement. Unlike such “naked” restraints, agreements that are ancillary to a separate, legitimate competitor collaboration are not considered per se unlawful and are analyzed under the rule of reason. In this case, DOJ argued that Duke had not presented evidence to show that the restraint was ancillary to a legitimate collaboration. DOJ’s analysis of the alleged agreements in its statement further cements the agency’s stance that “naked” no-poach agreements are per se unlawful. DOJ’s statement of interest sends a strong signal that it is actively monitoring no-poach cases and will readily offer its views where a party is making arguments inconsistent with the agency’s interpretation of the law. DOJ’s intervention will also deter the parties from violating the settlement and send a clear signal to others that DOJ will aggressively pursue firms that enter into naked no-poach agreements.

Questions Remain as to the Appropriate Standard for Analyzing Employment Restrictions in Franchise Agreements

Also making their way through the courts are several cases against fast-food chains alleging that franchisor agreements prohibiting poaching among franchisees are unlawful. For example, a complaint against Jimmy John’s alleged that Jimmy John’s orchestrated no-solicitation and no-hire agreements between and among franchisees. Similar claims were made against Auntie Ann’s, Carl’s Jr., Domino’s Pizza and Arby’s, among others, with some food chains settling.

DOJ filed a statement of interest in Harris v. CJ Star, LLC, Richmond v. Bergey Pullman Inc., and Stigar v. Dough Dough, Inc. In its statement, DOJ took the position that most franchisor-franchisee restraints should be analyzed under the rule of reason. It reasoned the agreement was vertical in nature because it is between a franchisor and a franchisee (parties “at different levels of the market structure”). By way of example, DOJ pointed to territorial allocations among franchises that restrict intrabrand competition but increase interbrand competition (i.e. competition among other food chains). Such restraints are evaluated under the rule of reason.

DOJ also argued that where there is “direct competition between a franchisor and its franchisees to hire employees with similar skills, a no-poach agreement between them is correctly characterized as horizontal and, if not ancillary to any legitimate and procompetitive joint venture, would be per se unlawful.” But then DOJ stated that the hub-and-spoke nature of the franchise agreement was an ancillary restraint because “the typical franchise relationship itself is a legitimate business collaboration in which the franchisees operate under the same brand.” According to DOJ, if the no-poach agreements are reasonably necessary to the franchise collaboration and not overbroad, they constitute an ancillary restraint subject to the rule of reason.

By contrast, the Attorney General of Washington took the position in an amicus brief that franchise agreements that “restrict solicitation and hiring among franchisees and a corporate-owned store” should be analyzed as per se unlawful, at least under state law. The AG argued that these agreements have both vertical and horizontal characteristics. Given the horizontal component, the AG took the position that such agreements do not warrant analysis under the more lenient rule of reason. The AG further argued that franchisors have “a heavy burden” in showing that these restraints can be justified as ancillary to a legitimate collaboration. The American Antitrust Institute similarly critiqued DOJ’s approach in a letter. It argued that the franchise no-poach agreements at issue are not ancillary because “[a]greements that have no plausible justifications or cognizable efficiencies are never ancillary” since they “do not hold the promise of procompetitive benefits and are not ‘necessary’ to the broader integration.”

Courts hearing the fast-food cases will have to resolve these conflicting arguments as they consider various motions to dismiss. In late May, a judge refused to grant Domino’s Pizza’s motion to dismiss concerning a no-hire provision that was included in the chain’s franchise agreements. The clause prohibited franchisees from recruiting or hiring other Domino’s franchisee employees without prior written consent. The judge found that plaintiff had sufficiently pled a horizontal restraint between franchisees and did not need to decide at the motion to dismiss stage which standard should ultimately be applied. The court reasoned that more factual development would be needed to decide that issue, unpersuaded by Domino’s Pizza’s reliance on summary judgment and trial decisions that contained a more robust factual record. A recent order by a district court evaluating similar claims against Jimmy John’s highlighted the varying positions emerging, referring to a “dichotomy” between DOJ’s position and the American Antitrust Institute. Although it acknowledged that DOJ is a “titan in this arena,” the court stressed that the agency is “not the ultimate authority on the subject.”

For now, employers that are members of any no-poach agreement with a vertical component should proceed with caution. Although DOJ’s position is favorable to no-poach agreements they deem vertical in nature, questions remain as to whether these agreements warrant per se, quick look, or rule of reason analysis.[1] Courts are proceeding cautiously, and a consensus has not yet emerged. As the court in Jimmy John’s succinctly summarized: “[T]hese questions here are in their infancy, and this battle looks like one that will make its way through the courts for years to come.”

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[1] A “quick look” analysis is used “when the great likelihood of anticompetitive effects can easily be ascertained.” California Dental Assn. v. FTC, 526 U.S. 756, 770 (1999).

Toward Uncharted Waters – The CVS-Aetna Merger

On June 4 – 5, 2019, Judge Richard J. Leon of the U.S. District Court for the District of Columbia held an extraordinary and unprecedented evidentiary hearing to decide whether to enter the proposed Final Judgment in U.S. v. CVS/Aetna requiring the divestiture of Aetna’s Medicare Part D business. Judge Leon has been highly critical of DOJ’s proposed remedy and has disrupted long-established DOJ practices to resolve competitive concerns in merger cases. A decision to reject the Division’s proposed remedy would upend established law, interfere with DOJ’s ability to negotiate merger settlements, and create uncertainty in DOJ’s merger enforcement program.

Procedural History

Following an 11-month investigation, the Antitrust Division on October 10, 2018 filed a lawsuit seeking to enjoin CVS Health Corporation’s $69 billion acquisition of Aetna, Inc. The complaint alleged the transaction would substantially lessen competition for the sale of individual prescription drug plans (“individual PDPs”) in 16 regions in the U.S. Individual PDPs provide Medicare beneficiaries with insurance coverage for their prescription drugs (Medicare Part D). To address the harm alleged in the Complaint, the Division filed a proposed Final Judgment that required CVS to divest Aetna’s nationwide individual PDP business to WellCare Health Plans, Inc.

When settling an antitrust case, DOJ must comply with the Tunney Act, which establishes various procedures the parties must follow, after which the settlement can be submitted to the court to determine whether entry of the proposed Final Judgment “is in the public interest.”[1] Consistent with standard Tunney Act practice, Judge Leon entered an order permitting the parties to close their transaction and requiring CVS to hold separate Aetna’s individual PDP business until the assets are divested to WellCare. Pursuant to Judge Leon’s order, the parties closed their transaction on November 28, 2018, and two days later completed the divestiture to WellCare.

Despite having authorized the parties to close the transaction, Judge Leon became concerned the status quo would not be preserved in the event he subsequently concluded the proposed Final Judgment would not be in the public interest. Judge Leon was very critical of the proposed remedy, which he said involved “about one-tenth of one percent” of the value of the transaction. He also expressed concern that the proposed Final Judgement failed to address potential harm in the market for pharmacy benefit management (“PBM”) services. PBM providers manage pharmacy benefits for health plans and negotiate their drug prices with pharmaceutical companies and retail pharmacies. Specifically, Judge Leon wanted to preserve the option to reject the proposed Final Judgment if he found that DOJ, in failing to allege harm in the PBM market, had drafted the Complaint so narrowly as “to make a mockery of judicial power.”[2]

Judge Leon ordered the parties to explain why CVS should not be required to hold Aetna separate and insulate the management of the two companies during the pendency of the Tunney Act process. DOJ vigorously objected that the court did not have the power to consider possible harm in the PBM market because the complaint did not allege harm in the PBM market and the record before the court did not implicate the judicial mockery standard. Ultimately, CVS diffused the issue when it voluntarily agreed to stop further integration efforts and to preserve the status quo by operating Aetna’s health insurance business as a separate unit from CVS’s businesses.

The Tunney Act requires the publication of the proposed Final Judgment followed by a 60-day public comment period. DOJ received 173 comments about the proposed settlement, many criticizing the remedy. DOJ filed its response to the public comments on February 13, 2019. It concluded that the proposed Final Judgment provides an effective and appropriate remedy for the antitrust violation alleged in the Complaint and is therefore in the public interest. Thereafter, the Division filed a motion requesting that Judge Leon enter the proposed Final Judgment.

Tunney Act Hearing

In most Tunney Act proceedings, courts make their public interest determination based on the Complaint, the terms of the proposed Final Judgment, public comments, and DOJ’s response to the public comments. In rare cases, the court will consider argument from the parties and on very rare occasions will hear from other interested parties. Here, Judge Leon accepted briefs opposing the remedy filed by amici curiae the American Medical Association, AIDS Healthcare Foundation, and Consumer Action and U.S. PIRG. In an unprecedented move, Judge Leon ordered a hearing to take live testimony from witnesses presented by the amici and the parties. In connection with the ordered hearing, Judge Leon directed the parties and amici to submit lists of witnesses and a summary of their testimony and issued the following rulings concerning the conduct of the hearing:

  • From the list submitted by the amici, Judge Leon selected three witnesses: an economic expert, the President of the American Antitrust Institute and the Chief Medical Officer from the AIDS Healthcare Foundation.
  • From the CVS list, Judge Leon selected CVS’s economic expert, Aetna’s Vice President of its Medicare Part D business and CVS’s Chief Transformation Officer.
  • Judge Leon refused to hear testimony from DOJ’s economic expert and WellCare’s Executive Vice President of Clinical Operations and Business Development.
  • Judge Leon ordered that witnesses will not be subject to cross-examination and there would be no opening and closing arguments.
  • Judge Leon overruled DOJ’s objection that the proposed hearing procedures gave the amici the ability to frame the issues and denied the DOJ from meaningful participation in the proceedings.

Over the two-day hearing, Judge Leon heard testimony from the amici’s expert witnesses that WellCare is not a suitable divestiture buyer because: (i) WellCare does not have Aetna’s brand recognition, (ii) WellCare will be dependent on CVS to provide PBM services and (iii) the divestiture itself raises concentration levels in several regions. Judge Leon also heard testimony from two amici witnesses that the merger raises vertical competitive concerns. By combining CVS’s thousands of pharmacies and 92 million PBM members with Aetna’s 22 million insurance customers, the merged firm will have a greater ability and incentive to deny its PBM services to rival health plans or raise the prices for its PBM services to rival plans. After the two-day hearing, Judge Leon indicated that he would accept final briefs and hear closing arguments next month.

What’s Next

The CVS/Aetna merger entered murky waters some months ago and is now headed toward uncharted waters. Pressuring merging parties to hold the two companies separate while the Tunney Act process plays out is unnecessary and unwarranted. Nothing in the Tunney Act bars the parties from consummating their merger, and consumers may be harmed by delaying integration activities that may generate efficiencies. Nor does closing prevent DOJ from obtaining additional relief if necessary. Parties that close before the settlement receives final approval by the court bear the risk the proposed remedy is not in the public interest and therefore may have to make additional concessions to obtain court approval. The Tunney Act evidentiary hearing was also highly unusual and did not give DOJ a fair opportunity to defend its settlement. In particular, DOJ had no cross-examination rights and no opportunity to offer expert testimony to rebut the testimony from the amici’s expert. Also unusual was Judge Leon’s decision to reject testimony from WellCare, even though the amici challenged WellCare’s suitability as a divestiture buyer.

The CVS/Aetna proceeding highlights a tension in the Tunney Act. Judge Leon’s public interest determination is limited by binding D.C. Circuit precedent U.S. v. Microsoft. Under Microsoft, DOJ has considerable discretion to settle antitrust cases and the court’s review is limited to reviewing the proposed remedy in relationship to the allegations in the complaint. A Tunney Act court does not have the authority to inquire into matters outside the scope of the complaint. Judge Leon clearly bristles at playing such a limited role. At a November 29, 2018 status hearing, Judge Leon said that he would not take a “rubber stamp” approach to approving the proposed Final Judgment. Judge Leon’s May 13, 2019 order regarding the Tunney Act hearing noted that Microsoft authorized a Tunney Act court to reject a settlement that makes a “mockery of judicial power.” The court’s actions clearly suggest that DOJ’s failure to allege and remedy harm in the PBM market may satisfy the “judicial mockery” standard.

It remains to be seen if Judge Leon, based on a two-day hearing, will second-guess DOJ’s decision that the merger will not harm competition in the PBM market. Given controlling authority in the D.C. Circuit and the irregularities in the Tunney Act proceeding, Judge Leon may conclude his only option is to enter the proposed Final Judgement. If, on the other hand, he rejects the proposed Final Judgment for failing to address concerns outside the scope of the Complaint, he will likely be overruled by the D.C. Circuit.

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[1] The Antitrust Procedures and Penalties Act, 15 U.S.C. §§16(b)-(h).

[2] U.S. v. Microsoft Corp., 56 F.3d 1448, 1462 (D.C. Cir. 1995).

 

Hell or High Water for Nidec

The phrase “come hell or high water” is said to have originated in the late 1800s in reference to the conditions cattle herders encountered when they trekked from Texas to the Midwest across large prairies in the summer heat and through deep rivers. In the merger context, a hell or high water (HOHW) clause requires a buyer to take all action necessary, including divestitures, to secure approval from competition authorities. On March 8, 2019 Whirlpool Corp. sued Nidec Corp. in the Southern District of New York alleging that Nidec breached its obligations under their Share Purchase Agreement (SPA) to take all actions required to secure antitrust approvals. The case highlights the importance of antitrust risk sharing provisions in merger agreements and how courts interpret HOHW provisions.

The Whirlpool Complaint

On April 24, 2018 Nidec and Whirlpool entered into the SPA for Nidec’s $1.1 billion purchase of Whirlpool’s Embraco compressor business unit. Whirlpool manufactures home appliances and related products. Whirlpool’s Embraco business unit manufactures refrigeration compressors for kitchen refrigerators and freezers and for light commercial uses such as beverage coolers. Nidec manufactures electric motors and related products. Nidec’s Secop business unit is an Embraco competitor that also manufactures refrigeration compressors.

Given the competitive overlap in refrigeration compressors, the parties anticipated the transaction would encounter significant antitrust issues. The SPA contained several provisions that allocated the antitrust risk to Nidec:

  • Conditions to Closing: Nidec agreed to obtain approvals from competition authorities, including approval from the European Commission (EC).
  • HOHW Provision: Nidec agreed to “take any and all actions and do all things necessary, proper or advisable” to obtain all competition approvals. If any competition authority raised objections, Nidec agreed “to hold separate or to divest, license or otherwise dispose of any of the businesses or properties or assets of [Nidec], and of its Affiliates, or [Embraco].”
  • Closing Date: Nidec agreed to secure all antitrust approvals in time for closing on April 24, 2019.

The EC can approve a transaction during a Phase I investigative period if the parties offer remedies sufficient to address any competitive concern. Whirlpool alleges that Nidec prolonged and hindered the EC’s Phase I review of the transaction. Specifically, Whirlpool alleges that Nidec:

  • Failed to make timely submissions to the EC;
  • Wasted valuable time making futile arguments that no remedy should be required; and
  • Submitted a series of five remedies that failed to address the EC’s competitive concerns.

According to Whirlpool, the obvious remedy was to divest all of Secop, a clear-cut remedy that would have addressed all of the EC’s concerns. Nidec, however, refused to offer this remedy, and on November 28, 2018 the EC opened an in-depth, or Phase II, investigation of the transaction. The EC’s press release announcing the in-depth investigation noted that it tested various commitments submitted by Nidec and found that they were insufficient to address the EC’s competitive concerns.

Although Nidec ultimately agreed to divest all of Secop, it continued to prolong and hinder remedy discussions during the Phase II investigation. For example, Nidec (1) delayed responding to the EC’s request for an upfront buyer, (2) failed to effectively market Secop and (3) failed to offer attractive terms to potential buyers.

As of March 8, 2019, the date Whirlpool filed its complaint, Nidec had not reached a deal with a buyer acceptable to the EC. With the April 24, 2019 closing date fast approaching, Whirlpool seeks an order requiring Nidec to meet its HOHW obligations and immediately divest Secop at no minimum price and at whatever terms required to effect an immediate sale. In the alternative, if Nidec fails to sell Secop, Whirlpool seeks the appointment of a trustee fully empowered to immediately sell Secop.

Takeaways

HOHW provisions are not commonly used in merger agreements because they signal to the competition agencies that the parties believe the transaction raises competitive concerns and can provide the agencies significant leverage to extract a remedy. Here, Whirlpool clearly anticipated significant antitrust problems and successfully shifted all risk to Nidec by obtaining a pure HOHW provision that placed no cap on the assets that could be subject to divestiture. It appears from the complaint that rather than honor its HOHW commitment, Nidec took steps to avoid making all necessary divestitures for EC clearance of the transaction.

Whirlpool argues for a strict interpretation of the HOHW provision. Whirlpool would require a buyer to promptly propose a divestiture remedy that no reasonable competition agency could reject. Nidec will likely argue for a more flexible interpretation. It is reasonable to argue no remedy is necessary before offering remedies, and it is reasonable to offer alternative divestiture packages to test a competition agency’s bottom line. There is very little case law on a party’s obligations under a HOHW provision. If Whirlpool and Nidec are unable to settle this dispute before the April 24, 2019 closing date, we may get greater clarity on what constitutes a breach of HOHW provision.

 

The New Madison Approach Goes to Court

On January 11, 2019, the U.S. DOJ Antitrust Division (Division) filed a Notice of Intent to File a Statement of Interest in a lawsuit filed by u-blox against Interdigital in the U.S. District Court for the Southern District of California to obtain a license consistent with Interdigital’s voluntary commitment to license its 2G, 3G and 4G telephony Standard Essential Patents (SEPs) on fair, reasonable, and nondiscriminatory (FRAND) terms. Simultaneous with the filing of its Complaint, u-blox filed a Motion for a Temporary Restraining Order and Preliminary Injunction to prevent Interdigital from further interfering with u-blox’s customer relationships. The Division argued that the Court would benefit from hearing its views on granting a TRO based on u-blox’s claim that Interdigital monopolized the 2G, 3G and 4G cellular technology markets. Intervening in a District Court case is highly unusual and is yet another clear signal that the Division has reversed the Obama Antitrust Division’s antitrust treatment of FRAND violations, despite the disparity between the Division’s current position and numerous well-reasoned U.S. court decisions that have carefully considered these issues and come to precisely the opposite conclusions.

Retro-Jefferson Approach[1]

By way of background, standard setting involves competitors and potential competitors, operating under the auspices of Standard Setting Organizations (SSOs), agreeing on a common standard and incorporating patented technology. Patents that are incorporated into a standard become much more valuable once a standard becomes established and commercially deployed on a widespread level, and it becomes impossible for companies manufacturing devices that incorporate standardized technology to switch to alternative technologies. In these circumstances, patent holders may gain market power and the ability to extract higher royalties than would have been possible before the standard was set. This type of opportunistic conduct is referred to as “patent hold-up.” To address the risk of patent hold-up, many SSOs require patent holders to commit to license their SEPs on FRAND terms. FRAND commitments reduce the risk that SEP holders will exercise market power by extracting exorbitant licensing fees or imposing other more onerous licensing terms. One way to address patent hold-up is through breach of contract and antitrust suits against holders of FRAND-encumbered SEPs.

The Obama Antitrust Division advocated the position that, under appropriate circumstances, the antitrust laws may reach violations of FRAND commitments. This position was, and remains, consistent with applicable legal precedent. For example, in 2007 the Third Circuit recognized in Broadcom v. Qualcomm, 501 F.3d 297, that a SEP-holder’s breach of a FRAND commitment can constitute a violation of Section 2 of the Sherman Act where the SEP-holder makes a false FRAND promise to induce an SSO to include its patents in the standard and later, after companies making devices that incorporate the standard are locked in, demands exorbitant royalties in violation of the FRAND commitment. Numerous other cases similarly stand for the proposition that it is appropriate to apply competition law to the realm of FRAND-encumbered SEPs. See, e.g., Research in Motion v. Motorola, 644 F. Supp. 2d 788 (N.D. Tex. 2008); Microsoft Mobile v. Interdigital, 2016 WL 1464545 (D. Del. Apr. 13, 2016).

The Obama Antitrust Division also took the position that in most cases it is inappropriate to seek injunctive relief in a judicial proceeding or an exclusion order in the U.S. International Trade Commission (ITC) as a remedy for the alleged infringement of a FRAND-encumbered SEP. Injunctions and exclusion orders (or the threat of one) are generally incompatible with a FRAND commitment and unfairly shift bargaining power to the patent holders. In the Obama Antitrust Division’s view, money damages, rather than injunctive or exclusionary relief, are generally the more appropriate remedy. Again, the Obama Antitrust Division’s policy reflected case law recognizing the same principles. See, e.g., Apple v. Motorola, 757 F.3d 1286 (Fed. Cir. 2014).

The Obama Antitrust Division articulated its views on the use of exclusion orders against the infringing use of SEPs in a joint statement issued by the Department of Justice and the U.S. Patent & Trademark Office on January 8, 2013 entitled “Policy Statement on Remedies for Standards-Essential Patents Subject to Voluntary F/RAND Commitments” (Joint Policy Statement). The Joint Policy Statement urged the ITC to consider that “the public interest may preclude issuance of an exclusion order in cases where the infringer is acting within the scope of the patent holder’s F/RAND commitment and is able, and has not refused, to license on F/RAND terms.”

New Madison Approach

The Division is now of the view that the Obama Antitrust Division’s focus on patent implementers and its concerns with hold-up were misplaced, even though many courts and other regulatory bodies around the world have noted the significance of the hold-up problem. The Division currently does not believe that hold-up is an antitrust problem. According to the Division, the more serious risk to competition and innovation is the “hold-out” problem. The hold-out problem arises when companies making products that innovate upon and incorporate the standard threaten to under-invest in the implementation of a standard, or threaten not to take a license at all, until their royalty demands are met. The Division further has questioned the role of antitrust law in regulating the FRAND commitment, even though the Federal Trade Commission (FTC) – and numerous other competition agencies around the world – has engaged in enforcement efforts to curb allegedly anticompetitive SEP licensing practices, many of which are directed at Qualcomm (which is the subject of an ongoing trial between the FTC and Qualcomm in Federal District Court in California).

Assistant Attorney General Makan Delrahim coined the term the “New Madison Approach” to describe his approach to the application of antitrust law to patent rights.[2] The four premises of the New Madison Approach are:

  • The antitrust laws should not be used as a tool to police FRAND commitments that patent holders make to SSOs.
  • To ensure maximum incentives to innovate, SSOs should focus on implementer hold-out, rather than focus on patent hold-up.
  • SSOs and courts should not restrict the right of a patent holder to seek or obtain an injunction or exclusion order.
  • A unilateral and unconditional refusal to license a patent should be considered per se legal.

The Division has taken at least three concrete steps to implement the New Madison Approach. First, it has opened several investigations of potential anticompetitive conduct in SSOs by implementers, for example to exclude alternative technologies. Second, in a December 7, 2018 speech in Palo Alto, California, AAG Delrahim announced that DOJ was withdrawing its support of the Joint Policy Statement. According to AAG Delrahim, the Joint Policy Statement created confusion to the extent it suggests a FRAND commitment creates a compulsory licensing scheme and suggests exclusion orders may not be appropriate in cases of FRAND-encumbered patents. AAG Delrahim noted he would engage with the U.S. Patent & Trademark Office to draft a new statement. Finally, the Division intervened in the u-blox case.

u-blox v. Interdigital

u-blox presents a fact pattern that commonly arises in FRAND cases. Since 2011, u-blox has licensed Interdigital patents that had been declared essential to the 2G, 3G and 4G standards. U-blox relied on Interdigital’s FRAND commitments, and its devices are now allegedly locked into 2G, 3G and 4G cellular technology. u-blox alleges that in its most recent round of negotiations, Interdigital is demanding supra-competitive royalty rates. Among its various claims, u-blox alleges Interdigital breached its contractual obligation to offer its SEPs on FRAND terms and has monopolized the 2G, 3G and 4G technology markets in violation of Section 2 of the Sherman Act. u-blox also alleges that Interdigital threatened its customers to force u-blox to pay excessive, non-FRAND royalties. u-box has asked the court to set a FRAND rate and filed a TRO to prevent Interdigital from interfering with its contractual relationships.

On January 11, 2019, the Division filed its Notice of Intent to explain its views concerning u-blox’s monopolization cause of action. The Division further explained that due to the partial government shutdown, it was unable to submit a brief before the TRO hearing scheduled for January 31, 2019, and asked that the TRO hearing be delayed until after DOJ appropriations have been restored, or in the alternative, to order DOJ to respond. Although not stated in the Notice of Intent, the Division can be expected to argue that it would be improper to grant a TRO based on a claim of monopolization because the antitrust laws should play no role in policing Interdigital’s FRAND commitment where contract or common law remedies are adequate. On January 14, 2019, u-blox responded that it would withdraw reliance on its monopolization claim to support its request for a TRO and instead rely on its breach of contract and other claims.

Implications of the Division’s Intervention in the u-blox Case

The Division’s filing of a Notice of Interest in the u-blox case is highly unusual. The Division rarely intervenes in district court cases, and it may be unprecedented for the Division to intervene at the TRO stage. It is also difficult to explain why the Division chose to intervene on this motion. While u-blox was relying on its antitrust claim, among several other claims, to support its TRO request, u-blox was only seeking an order to prevent Interdigital from interfering with its customer relationships while the court adjudicated its request for a FRAND rate. It is also notable that the Division put its thumb on the scale in the aid of Interdigital, a company that often finds itself in FRAND litigation.

The Division appears to be attempting to aggressively implement the New Madison Approach that the antitrust laws should protect innovators. The Division’s decision to withdraw its assent to the Joint Policy Statement appears to have been a clear signal to the ITC that it is free to grant an exclusion order in SEP cases. The Division’s intervention in the u-blox case is a clear signal that it is willing to intervene at the district court level to advance its view that the antitrust laws are not an appropriate vehicle to enforce FRAND commitments where there are adequate remedies sounding in contract or other common law theories.

To date, the Division has used speeches to make policy arguments that the antitrust laws should not be used to enforce FRAND commitments. If the Division ever gets the opportunity to present its views to a district court, watch to see what legal arguments it can marshal to support its policy position. Also watch to see whether the Division attempts to participate in other FRAND cases.

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[1] Assistant Attorney General Makan Delrahim coined the phrase in his March 16, 2018 speech at the University of Pennsylvania entitled “The ‘New Madison’ Approach to Antitrust and Intellectual Property Law” based on the initial understanding of patent rights held by Thomas Jefferson, the first patent examiner of the U.S. (and a former president and principal author of the Declaration of Independence). AAG Delrahim describes the retro-Jefferson view of patents as conferring too much power on patent holders at the expense of patent implementers and that such power should be constrained by the antitrust laws or Standard Setting Organizations.

[2] The term “New Madison Approach” is based on the understanding of intellectual property rights held by James Madison, the principal drafter of the U.S. Constitution. Madison believed strong IP protections were necessary to encourage innovation and technological progress.

FTC Sues Louisiana Appraisers for Price Fixing

Close-up Of Person Hand Filling Real Estate Appraisal Form With House Model At Desk FTC Sues Louisiana Appraisers for Price Fixing

On May 31, 2017, the FTC filed an administrative complaint alleging that the Louisiana Real Estate Appraisers Board (“Board”), a state agency controlled by real estate appraisers, violated Section 5 of the FTC Act by fixing real estate appraisal fees paid by appraisal management companies (“AMCs”). AMCs act as agents for lenders in arranging real estate appraisals and are licensed and regulated by the Board.  The FTC alleges that the Board required AMCs to pay appraisal fees that are equal to or exceed the median fees identified in survey reports commissioned and published by the Board.  This action represents the FTC’s first enforcement action against a state agency since its victory in North Carolina State Board of Dental Examiners v. FTC, 135 S.Ct. 1101 (2015).  An administrative trial is scheduled to begin on January 30, 2018.

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DOJ and FTC Stand Their Ground on Comity Policy Despite Second Circuit’s Decision in Vitamin C Case

International Flags on poles DOJ and FTC Stand Their Ground on Comity Policy Despite 2d Circuit’s Decision in Vitamin C Case

Last September, we discussed the U.S. Court of Appeals for the Second Circuit’s opinion in In re Vitamin C Antitrust Litigation vacating a $147 million judgment against Chinese vitamin C manufacturers based on the doctrine of international comity.  That case stemmed from allegations that the defendants illegally fixed the price and output levels of vitamin C that they exported to the United States.  In reversing the district court’s decision to deny the defendants’ motion to dismiss, the Second Circuit held that the district court should have deferred to the Chinese government’s explanation that Chinese law compelled the defendants to coordinate the price and output of vitamin C.

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District Court Tosses Last Remaining Plaintiffs in Aluminum Warehousing Antitrust Litigation

District Court Tosses Last Remaining Plaintiffs in Aluminum Warehousing Antitrust Litigation Aluminum Picure of Industrial Warehouse with Aluminum Sheets

Judge Katherine Forrest of the Southern District of New York recently dismissed another set of complaints in what she described as “the next chapter in the saga” of the In re Aluminum Warehousing Antitrust Litigation cases, No. 13-md-024710-KBF (S.D.N.Y. Nov. 30, 2016).  Referring to her previous October 5, 2016 ruling, which dismissed claims asserted by certain first-level purchasers of aluminum products, Judge Forrest found (in a ruling dated November 30, 2016) that the remaining complaints by additional first-level purchasers were equally defective because they too failed to establish antitrust injury. The October 5, 2016 ruling, in turn, substantially relied on the Second Circuit’s August 9, 2016 opinion, which affirmed dismissal of claims brought by indirect purchasers of aluminum or aluminum products.  Broadly, the various complaints alleged that aluminum futures traders, banks, and others conspired to manipulate the warehouse storage costs of aluminum, resulting in higher prices in the market for physical aluminum.

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DOJ and FTC Set Possible Criminal Liability Trap for HR Professionals

DOJ FTC October 20, 2016 release Antitrust Guidance for Human Resource Professionals application of antitrust laws to employee hiring and compensation criminal liabilty trap for HR professionals

In an October surprise, the DOJ and FTC (collectively, the “Agencies”) released guidance for HR professionals on the application of the antitrust laws to employee hiring and compensation.  The Agencies’ October 20, 2016 release, Antitrust Guidance for Human Resource Professionals, announced that “naked” agreements among employers not to poach each other’s employees and to fix wages and other terms of employment are per se illegal.  Critically, for the first time, the Agencies warn that such agreements could result in criminal prosecution against individual HR professionals, other company executives, as well as the company.  This Guidance, coupled with repeated requests to approach the Agencies to report such agreements, signals a significant shift in enforcement focus for the Agencies, including a further move to individual prosecutions, particularly when taken together with last year’s DOJ Yates Memorandum calling for more emphasis on individual executive liability.

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Purported “Direct Purchaser” Claims Dismissed for Lack of Antitrust Injury in Aluminum Warehousing Antitrust Litigation

Second Circuit Dismissal of Claims Indirect Purchasers In re Aluminum Warehousing Antitrust Litigation

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).

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Are Patent Rights Poised for a Resurgence?

Patent Rights Resurgence Word Cloud

Partners Alex Okuliar and Jim Tierney recently published a piece in the National Law Journal entitled Are Patent Rights Poised for a Resurgence?  They argue that after several years of retrenchment, economic trends in the US and China, as well as developments at the federal agencies and US courts, could signal a return to stronger protections for patent owners. Follow the link to the article.