Antitrust and Distribution Law Blog

North Carolina Revamps Beer Franchising Laws

2012-05-25T12:13:00.002-04:00

On Thursday, May 24, 2012, the North Carolina Senate ratified S 745, a controversial beer distributorship bill that has been debated for over a year in the North Carolina Legislature. The bill, which would alter the decades-old beer distribution regulatory scheme in North Carolina, prohibits suppliers from engaging in price discrimination between wholesalers, except in very limited circumstances. Suppliers may discriminate in servicing retailers, however.

The bill also restricts suppliers' freedom to contract with distributors. A beer supplier cannot alter or terminate a franchise agreement without good cause, and, under the bill, the meaning of "good cause" may not be modified by contract. Plus, if a supplier wrongfully terminates a franchise agreement, he may be liable for monetary damages in addition to injunctive relief. The ratified version of S 745 is more supplier-friendly than previous drafts of the bill, which elicited energetic opposition from numerous major brewers. WRAL.com notes that, after the bill passed the house in a near-unanimous (113-1) vote on Wednesday, legislators attended "The Growler" - an annual event hosted by The North Carolina Beer and Wine Wholesalers. Now that the Senate has ratified S 745, all that remains is for Governor Perdue to sign it into law.

Reminder from State AGs: Resale Price Maintenance May Still Be Per Se Illegal Under State Law

2012-04-19T11:48:00.003-04:00

One of the reoccurring themes at the 2012 Antitrust Spring Meeting was the emphasis placed on resale price maintenance (RPM) by state assistant attorneys general. On more than one occasion, I was reminded that despite the Supreme Court's 2007 ruling that vertical price fixing is not per se illegal under federal antitrust law, see Leegin Creative Leather Products, Inc. v. PSKS, Inc., such agreements still may be per se illegal under state antitrust law.

The most prominent advocate of this position was Bob Hubbard, Assistant Attorney General in New York. New York has a unique statute entitled "Price-fixing prohibited," although the actual text of the statutue says something slightly different. Mr. Hubbard pointed to a number of instances in which the NY AG office treated resale price maintenance as per se illegal under this state after Leegin. The most important of these cases, New York v. Tempur-Pedic, is currently on appeal. The Appellate Division's opinion will be important in determining if NY law is actually more stringent than the Sherman Act.

Perhaps the most surprising discussion of state action against RPM was from Kip Sturgis, Assistant Attorney General for North Carolina. Mr. Sturgis asserted that the North Carolina AG office still considers RPM to be per se illegal under North Carolina law even though North Carolina's antitrust statute has been consistently interpreted to mirror federal antitrust standards. Mr. Sturgis prosecuted a gasoline distributor under a per se theory, shortly after Leegin was decided, but that case settled. Therefore, there is no North Carolina case law supporting (or specifically contradicting) Mr. Sturgis's theory.

Manufacturers and distributors should be aware that state enforcers still care about resale price maintenance. It is not just New York, Maryland and California that are active in this area. Even states that are generally considered pro-business (e.g. North Carolina) may bring resale price maintenance cases. To make sure that your company is in compliance with state (and federal law), it is important to develop a comprehensive and manageable pricing policy.

Womble Carlyle Sponsors Premier High-Growth Conference: MAVA Capital Connection 2012

2012-04-18T17:04:00.001-04:00

Supporting a vibrant investment ecosystem in the Mid-Atlantic region is vital to the American economy. Presented by the Mid-Atlantic Venture Association (MAVA), Capital Connection is one of the nation’s most respected industry conferences. The event brings together high-growth and innovative technology companies with the largest gathering of private financing sources and private equity investors in the country.

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DOJ's E-Book Antitrust Suit Raises Interesting Issues

2012-04-12T10:22:00.002-04:00

This CBS article about how the DOJ may lose the e-book antitrust suit against Apple raises some interesting issues about the government's case.

The basic facts, as I understand it, are as follows: Amazon was selling e-books at a deep discount compared to hardcover books given the lower marginal cost associated with an e-book. Publishers and bookstores were worried these prices were too low. Apple then comes along with its iPad and offers a new "agency" model. Apple would act as a sales agent earning 30% commission, and the publishers were free to set their own resale price. The publishers were then able to convince other retailers to adopt the agency model. The Complaint alleges "Apple facilitated the publisher defendants' collective effort to end retail price competition by coordinating their transition to an agency model across all retailers."

The first question to consider is whether this is a vertical or horizontal arrangement? This is important because vertical price fixing is not per se illegal, although it could violate the rule of reason. Clearly the publishers are in a horizontal relationship with each other, but it seems that Apple was pushing the agency model, and Apple is in a vertical relationship with the publishers. Additionally, Amazon is in a vertical relationship with the publishers.

The relevant line from Steve Jobs biography is:

We told the publishers, "We'll go to the agency model, where you set the price, and we get our 30 percent, and yes, the customer pays a little more, but that's what you want anyway."

They went to Amazon and said, "You're going to sign an agency contract or we're not going to give you the books."

The only potential horizontal agreement in this quote is the unstated agreement between publishers to jointly insist upon the agency model when negotiating with Amazon. Importantly, the CBS article suggests that Apple was not present at meetings between publishers described in the Complaint.

A second question is whether a joint agreement to move to an agency sales model constitutes an agreement as to price? Not all agreements among competitors that affect price constitute per se price fixing.

Another question is how to define the market and measure market power. Do you look at the market for books or e-books? How does competition between competing devices (iPad, Kindle, etc.) impact competitive forces for e-book sales?

At the time the of the alleged conspiracy before the release of the first iPad, Amazon was by far the most dominant e-book retailer. Apple was the upstart. Thus, Apple argues that its activities improved the competitive environment in the face of competition from Amazon.

Matthew Yglasias at Slate argues that we should not be concerned about cartelization among publishers because they are under pressure from shifting technology. The real area of concern is monopolization of the distribution channel (i.e. where Amazon, Apple, Barnes & Noble). In many ways, the activities that DOJ complains about are the result of Apple trying to break into the e-book distribution market that Amazon had dominated.

Another question is how to measure harm to competition. The DOJ is clearly focusing on the higher prices caused by the agency model. But there may be other things to consider. For example, Scott Turrow, president of the Authors Guild, argues that Amazon's pricing was designed to put traditional bookstores out of business. The agency model, however, protects traditional bookstores as well as direct-selling authors.

It will be interesting to see how these issues play out...

DOJ Sues to Stop AT&T and T-Mobile Merger

2011-08-31T13:45:00.002-04:00

The Department of Justice has filed a civil antitrust suit to block AT&T's proposed $39 billion takeover of T-Mobile USA on the grounds that the deal would "substantially lessen competition." The deal would combine the second and fourth largest carriers to create a new market leader in the United States, ahead of current leader Verizon Wireless. Bloomberg reports that AT&T was surprised by the lawsuit and intends to fight so that "the enormous benefits of this merger can be fully reviewed." The DOJ's statement can be found here and the complaint here.

Jay Rogers Writes on Brazil’s New Positive Credit Registry

2011-08-11T14:55:00.001-04:00

GREENVILLE, S.C.—Brazil’s new “Positive Credit Registry” law appears to be an important, and promising, development in the Brazilian credit market. For the first time, the world’s fifth-largest country is allowing the collection and maintenance of positive credit histories of consumers and businesses.

The new law stands to benefit lenders, retailers and consumers alike. Womble Carlyle attorney Jay Rogers has co-authored a new article on the Brazilian Positive Credit Registry for Credit Today.

Brazilian attorneys André de Almeida and Caio Iadocico de Faria Lima of the Almeida law firm in São Paulo, Brazil joined Rogers in writing the article.

Jay Rogers advises U.S. and foreign companies in mergers and acquisitions; corporate and capital structures; dispute resolution, including cross-border arbitration, litigation and mediation; commercial relationships with vendors, customers and lenders; U.S. and foreign Customs matters; immigration issues; and economic development incentives offered by local, state and national governments. He previously practiced in Brazil and Mexico, and is fluent in Portuguese and Spanish. Rogers practices in Womble Carlyle’s Greenville, S.C., office.

Reckless Abandon and the Mongol Rally

2011-07-22T11:30:00.001-04:00

Womble Carlyle is a proud sponsor of Team Reckless Abandon in the Mongol Rally. The Mongol Rally is a diminutive-car road rally that begins in Europe and ends in Ulan Bator, Mongolia. Our support of Team Reckless Abandon benefits Water.Org, a U.S.-based nonprofit organization committed to providing safe drinking water and sanitation to people in developing countries. The organization seeks to create a global awareness of the water supply crisis and to help people respond. They carefully invest donors’ funds in only the highest quality projects through locally-based water development organizations. Water.org’s most prominent spokesperson is the actor Matt Damon.

Follow Team Reckless Abandon, learn more about the race or make a charitable donation at http://www.wcsr.com/mongolrally or on Twitter at http://twitter.com/#mongoliaorbust.

California Court Relies on “Common Sense” in Rejecting Twombley Challenge

2011-07-21T16:49:00.001-04:00

Perhaps there is life for conclusory antitrust claims after Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007). On May 24, the United States District Court for the Central District of California denied a motion to dismiss allegations that Duro Bag Manufacturing Company (“Duro”) put one of its primary competitors−plaintiff Western Pacific Kraft, Inc. (“WPK”)−out of business. WPK−which is also supplied by Duro−alleged that by raising its prices to WPK, and concurrently lowering its own prices to WPK’s customers, Duro violated the California Business and Professions Code provision that prohibits secretly extending special privileges to certain purchasers. In other words, WPK alleges that Duro implemented a “price squeeze.”

Citing Twombly and Ashcroft v. Iqbal, 129 U.S. 1937 (2009), Duro countered that WPK’s allegations did not plead sufficient factual allegations to show that Duro’s price discriminations were “secret.” However, the Court acknowledged that even if Duro informed WPK it would no longer adhere to the old pricing arrangement, it still acted “secretly” by surreptitiously raising its prices to WPK’s customers. The Court also rejected Duro’s argument that WPK failed to adequately allege how it was injured: Because “virtually all of the plaintiff WPK’s major customers began buying paper products directly from defendant Duro,” Duro allegedly effectively ran WPK out of business.

Many would argue that WPK’s allegations are of the “conclusory” nature that Twombly proscribes. Nevertheless, the Court held that WPK’s allegations were sufficiently “plausible” to pass muster. The Court emphasized the need to rely on “judicial experience and common sense” in measuring a Twombly challenge, suggesting that courts should look outside the verbiage of Twombley and Iqbal. Is this “common sense” standard any different than Twombly’s “plausibility” standard? Both seem equally ambiguous. Moving forward, it will be interesting to see if other courts adduce similar reasoning in handling the litany of Twombly challenges that have become a staple in judicial dockets.

Google Investigation

2011-07-21T16:11:00.003-04:00

After months of a rumors about government action against Google, there are reports that government agencies are begining to take action. On June 24, the Wall Street Journal reported that the FTC is primed to serve subpoenas on the internet giant.

A July 19, 2011 Bloomberg article states that DOJ and FTC (the two federal agencies charged with enforcing antitrust law) have agreed to divide responsibilities related to Google. The DOJ will review any planned acquisitions by Google for their possible effects on competition and the FTC will conduct a broad investigation of the company's dominance of Internet search. The European Union and various state Attorney Generals are conducting their own independent investigations.

Google's critics claim that it unfairly utilizes its search engine to advance its own services over those of rival providers. For example, the FairSearch Coalition, an organization of Google competitors, asserts that “Google engages in anti-competitive behavior across many vertical categories of search that harms consumers by restricting the ability of other companies to compete to put the best products in front of Internet users, who should be allowed to pick winners and losers online, not Google.” Google maintains that users can easily locate other service providers on its website, which was “built for users, not websites.”

Policy watchers believe the FTC probe could be the most important antitrust investigation since the Justice Department’s investigation of Microsoft in the 1990s. Since then, however, courts have significantly narrowed the scope of antitrust law. See, e.g., Pac. Bell Tel. Co. v. linkLine Commc’ns, Inc., 555 U.S. 438 (2009); Fed. Trade Comm’n v. Rambus Inc., 522 F.3d 456 (D.C. Cir. 2008), cert. denied 129 U.S. 1318 (2009); Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007); Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007). Therefore, it will be very interesting to see how the Google investigation is resolved. Stay tuned ...

FTC Announces Major Changes to Disclosure Requirements under HSR Antitrust Improvements Act

2011-07-21T14:32:00.002-04:00

On July 7, the Federal Trade Commission (“FTC”) announced major changes to disclosure requirements under the Hart-Scott-Rodino Antitrust Improvements Act (“HSR”). Although intended to reduce the burden on the filing parties by eliminating certain disclosure requirements, the updated rules are likely to increase drastically the expense of HSR filings for most companies. The changes should take effect in mid-August, 30 days after they are published in the Federal Register.

The most significant changes include:

--Introduction of the concept of “associates,” which will now require companies to make disclosures for all “managed” entities;
--Additional requirements for offering memoranda and related materials; and
--Changes to required revenue data, specifically revenues derived from products manufactured outside the United States and sold into the country.

Associates: Perhaps most significantly, the changes to the rules introduce the new concept of “associates,” which the FTC defines to include entities under common management of the acquiring party, as well as all entities controlled or managed by these entities. Under the revised rules, acquiring parties must report information about associates’ significant minority holdings (defined as more than 5 percent, but less than 50 percent) in entities with revenues in North American Industry Classification System (NAICS) codes that overlap with the acquired business.

This change will affect hedge funds and private equity firms, which were not previously required to disclose information about holdings of affiliated companies with no direct involvement in the acquisition. For example, under the old rules two investment funds managed by a single organization would have been treated as separate entities, requiring that competitive information be provided only for companies held by a single fund.

Under the new rules, the acquiring fund would be required to make disclosures for all qualifying companies held by the second fund as well. Although this broader disclosure requirement may aid the FTC in assessing competitive interaction between companies held by commonly managed funds, the burden on the organization to prepare disclosures for each of its individual funds will likely result in significantly increased costs.

Increased Offering Document Requirements: The current rules require submission of documents prepared by or for an officer or director “for the purpose of evaluating or analyzing the acquisition with respect to market shares, competition, competitors, markets, potential for sales growth or expansion into product or geographic markets.” The new Item 4(d) formalizes the FTC’s practice of requiring parties to submit offering memoranda and other materials prepared by investment bankers up to one year before the date of filing. Required submissions include: all Confidential Information Memoranda prepared by or for any officer or director, and all surveys, studies, analyses, and reports prepared for any officer or director (whether for analyzing or evaluating synergies and/or efficiencies, or for analyzing or evaluating market shares, competition, competitors, markets, potential for sales growth, etc.). Item 4(d) will not only increase the cost of preparing HSR filings, but will also require companies to ensure that appropriate preservation policies are in place at the outset of any acquisition activity.

Revenue Data: Under current rules, both base-year (currently 2002) and current year revenue derived from domestic operations must be provided by means of a seven-digit NAICS code; revenue derived from foreign operations need not be reported. The revised rules eliminate the base-year reporting requirements, potentially reducing the disclosure burden for some parties. The revised rules also add a reporting requirement for revenue from products manufactured outside of the United States and sold into the country. This new requirement is likely to create a substantial amount of work for companies with extensive overseas manufacturing operations. In addition, companies must now make revenue disclosures using a more detailed 10-digit NAICS code. Although this latter change may eventually bring more consistency to HSR filings, it will likely create significant short-term burdens as companies are forced to re-categorize revenue.

This post is a reprint of a Womble Carlyle Client Alert written by David Hamilton, Brent Powell and Jacob Hansen. Click here for a printable version of this client alert.

$35 Million Settlement For Baby Products Antitrust Litigation

2011-04-19T15:50:00.002-04:00

So much for Leegin...

As we have mentioned previously in the blog, companies still face real risks with respect to resale price maintenance despite the Supreme Court's 2007 ruling that such policies are not per se illegal. See Leegin Creative Leather Products, Inc. v. PSKS, Inc., 127 S.Ct. 2705 (2007).

A recent $35 million class action settlement involving retail giant Babies R Us is one example of the continued risks. See McDonough v. Toys ‘R’ Us, et al., No. 2:06-cv-0242-AB (E.D. Pa.) and Elliott v. Toys ‘R’ Us, et al., No. 2:09-cv-06151-AB (E.D. Pa.).

In this case plaintiffs alleged that Babies R Us, a dominant retailer of baby products, coerced manufacturers of baby products to adopt resale price maintenance polices that insulated Babies R Us from price competition -- particularly internet retailers. Babies R Us allegedly threatened not to carry the manufacturer's products unless the manufacturers agreed to prevent internet retailers from discounting their products.

The court granted plaintiff's motion to certify the class in July 2009. The court recognized that vertical price restraints are analyzed under the rule of reason, under Leegin, but the court found that plaintiffs could prove their case under the rule of reason because the RPM policies were instituted at the request and direction of a dominant retailer -- rather than as a means for the manufacturers to more effectively compete against each other.

A $35 million settlement agreement was announced in January 2011.

There seem to be two big lessons from this case: (1) RPM policies need to come from the top down -- not from the bottom up; and (2) beware of email communications between manufacturers and retailers.

Make sure you follow your antitrust attorney's advice about the correct way to implement a RPM polices consistent with the Supreme Court's Colgate decision.

Black Friday For Online Poker?

2011-04-19T15:10:00.002-04:00

American Lawyer reports that federal prosectures have inducted 11 people linked to some of the world's largest Web-based poker operations, such as PokerStars, Full Tilt Poker, and Absolute Poker. Forbes reports that the online poker industry generated $30 billion in betting per year with $1.4 billion in revenue.

The crackdown on online poker began when Congress enacted the Unlawful Internet Gambling Enforcement Act in 2006. And in 2009, federal prosecutors in New York seized $34 million in bank accounts associated with popular online poker sites.

Although this blog focuses on antitrust and distribution law, we have occassionally reported on these developments in the online poker industry. For more information about Womble Carlyle's Gaming Law Team, click here.

Websites Report FTC Crack Down On Advertisements That Look Like Fake News Stories While Linking To Advertisements That Look Like Fake News Stories

2011-04-19T14:38:00.009-04:00

Fox News reports that the FTC is cracking down on websites falsely advertising acai berry weight-loss pills. The FTC says the websites are deceiving consumers by emulating real news organizations.

If you have not seen these ads, they look like investigative reporting and often contain tantalizing headlines such as "The HCA Diet Exposed: Miracle Diet or Scam" or "Acai Berry Diet UNCOVERED." For an example, click here.

Dow Jones has a similar story.

The funny thing about the Fox News story is that many of the advertisements on the Fox News website are written in a way that suggests they are news stories, instead of advertisements. For example, the headlines for the advertisements on the Fox News article read: "Is it a scam? We investigated work at home jobs and what we found may shock you!" and "Mom discovers $9 car insurance trick. Auto insurers are scared you will learn this too."

Not to be outdone, the Dow Jones article contains paid-advertising links to the very same Acai Berry websites that are being investigated by the FTC.

Event! Join NC Attorney General Roy Cooper & Womble Carlyle for the CLE Symposium for Top NC Legal Counsel on May 5

2011-04-12T13:49:00.001-04:00

Womble Carlyle CLE Symposium for Top NC Legal Counsel
A full-day CLE event for in-house counsel
May 5, 2011 -- 8:30-4:30 p.m.
10 CLE Sessions, Lunch and Keynote Address by North Carolina Attorney General Roy Cooper

On May 5, Womble Carlyle will offer CLE sessions on such topics as:

political contributions/lobbying

data management

economic development

crisis/catastrophic event planning

employee defection/personnel departures

outsourcing agreements

intellectual property minefields

legal project management

the China market

‘green’ strategies

Event information

Location: Proximity Hotel
704 Green Valley Road
Greensboro, NC 27408
(800) 379-8200
http://www.proximityhotel.com/
Reference this event when booking overnight stay to receive special rate.

RSVP: There is no fee to attend but seating is limited.
Please RSVP by Friday, April 22nd, using one of the following methods:
phone: (336) 433-5699
email: greensbororsvp@wcsr.com

Click here for information on the ten panels that are being offered to top legal counsel in North Carolina.

Register today!

Resale Price Maintenance Remains Per Se Illegal In California

2011-01-14T15:30:00.004-05:00

The California Attorney General announced a settlement agreement that prohibits a cosmetics company from agreeing with its retailers not to sell its products online at prices below the MSRP. In a stipulated court judgment, Bioelements agreed to permanently refrain from fixing resale prices and pay $51,000 in penalties and attorney fees.

Bioelements markets a line of beauty-care products it claims have quasi-medical properties such as reducing wrinkles. Products such as this -- also known as "cosmesceuticals" because they supposedly merge the attributes of cosmetics and pharmaceuticals -- are sometimes the target of investigations by state and federal regulators for overstating their medical benefits. This time, however, the California Attorney General brought suit against Bioelements for vertical price fixing -- also known as resale price maintenance ("RPM").

RPM used to be per se illegal under federal antitrust laws, until the Supreme Court's decision in Leegin Creative Leather v. PSKS. In that case, the Supreme Court held that a manufacturer may reach an agreement with its retailers as to minimum resale price without automatically violating federal antitrust laws. Instead of being per se illegal, such agreements are analyzed under the rule of reason -- a fact specific inquiry that balances the anticompetitive effects and procompetitive benefits of a particular restraint. At the time the Leegin decision was said to have opened the door for all sorts of vertical price fixing agreements between manufacturers and retailers. Such has not been the case, however, because certain states, such as California and New York, have threatened to prosecute such arrangements under state antitrust laws. RPM agreements may still be per se illegal under state antitrust law, even if such agreements are not per se illegal under federal law.

This is what happened in the Bioelements case. The California Attorney General's complaint alleges that Bioelements entered into dozens of "Internet Only Accounts Agreements" with third party companies for the distribution and sale of its products over the Internet. These contracts stated that "Accounts are prohibited from charging more or less than the Manufacturer's Suggested Retail Price (MSRP)."

The Attorney General's press release stated: "Bioelements operated a blatant price fixing scheme by requiring online retailers to sell its products at high prices.... Price manipulation harms consumers, competition and our business community." The United States Supreme Court, however, would disagree with this assertion because in Leegin the Court held that RPM is not always anticompetitive and can have procompetitive benefits. The United States Supreme Court, however, does not have the last say when it comes to interpreting state antitrust law.

Although Bioelements' distribution agreement referred to "MSRP," it was not a lawful Colgate policy. Instead of merely suggesting prices and unilaterally terminating discounting retailers, Bioelements made its retailers "agree" not to sell below MSRP. Thus, the agreement went beyond a unilateral Colgate policy.

Given that Bioelements sells products -- cosmesceuticals -- that are sometimes the target of false advertising investigations, it would not be surprising if the Attorney General discovered the price fixing agreements while investigating false advertising claims. It would be unwise, however, to presume that the Attorney General will only bring vertical price-fixing claims against companies she suspects of false advertising. Since Leegin, regulators have investigated or brought claims against several respected manufacturers -- such as Herman Miller and Toys-R-Us -- for vertical price fixing.

For more information on how to structure pricing and distribution policies that do not violate state and federal antitrust law, contact Jason Hicks or Mark Poovey.

Twombly Plus Leegin Equals Dismissal of Price Fixing Claims By Eleventh Circuit

2010-12-29T09:29:00.007-05:00

On December 2, 2010, the Eleventh Circuit affirmed the dismissal of vertical and horizontal price fixing claims against Tempur-Pedic Intern., Inc. based on plaintiff's failure to allege a plausible relevant product market or horizontal conspiracy. See Jacobs v. Tempur-Pedic Intern., Inc., --- F.3d ---, 2010 WL 4880864 (11th Cir. 2010). The Eleventh Circuit's decision was based on the Supreme Court's rulings in Leegin that vertical price fixing was not per se illegal and Twombly which raised the bar for pleading a cause of action in federal court. Neither of these cases had been decided when plaintiff originally filed its complaint against Temper-Pedic in January 2007. At that time, vertical price fixing was per se illegal and a complaint alleging a horizontal conspiracy did not need to contain detailed facts to overcome a motion to dismiss. The Eleventh Circuit's decision in Jacobs demonstrates how powerful of a shield Twombly and Leegin can be for antitrust defendants in federal court. The dissenting opinion, however, argues that the majority went too far in applying Twombly and Leegin.

Background

Tempur-Pedic manufactures 80-90% of the visco-elastic foam mattresses sold in the United States. Tempu-Pedic sells its mattresses through distributors and directly to consumers through its own website. Tempur-Pedic sets the minimum retail price its distributors can charge, and it adheres to those minimum prices when selling mattresses through its own website.

Plaintiff, a consumer who purchased a Tempur-Pedic mattress, alleges that Tempur-Pedic's enforcement of retail price maintenance agreements with its distributors constitute unlawful vertical price fixing. Plaintiff also alleges that, when selling mattresses directly to consumers via its website, Tempur Pedic is acting as a distributor, and thus its agreement/conspiracy to set prices with other distributors constitutes horizontal price fixing which is per se unlawful.

The Vertical Price Fixing Claim

The majority recognized that Plaintiff's vertical price fixing claim was governed by the rule of reason. (There was no discussion about whether a quick-look analysis or some other truncated analysis should govern the vertical price fixing claims). The majority dismissed the vertical price fixing claim because Plaintiff had not properly alleged that visco-elastic foam mattresses constitute a separate and district relevant submarket from mattresses generally. The crux of this holding is that, under Twombly, an antitrust plaintiff must plead detailed facts "'plausibly suggesting' the relevant submarket's composition." The court explained:

Jacobs's skimpy allegations of the relevant submarket do not meet this obligation. The complaint alleges, without elaboration, that “[v]isco-elastic foam mattresses comprise a relevant product market, or sub-market, separate and distinct from the market for mattresses generally, under the federal antitrust laws.” This conclusional statement merely begs the question of what, exactly, makes foam mattresses comprise this submarket. The complaint provides no factual allegations of the cross-elasticity of demand or other indications of price sensitivity that would indicate whether consumers treat visco-elastic foam mattresses differently than they do mattresses in general. Consumer preferences for visco-elastic foam mattresses versus traditional innerspring mattresses, and the costs associated with their sale, may vary widely, may vary little, or may not vary at all. Jacobs's complaint, however, gives no indication of which of these is the case. The allegations that visco-elastic foam mattresses are more expensive than traditional innerspring mattresses and that visco-elastic foam mattresses have “unique attributes” are similarly of little help. They do not indicate the degree to which consumers prefer visco-elastic foam mattresses to traditional mattresses because of these unique attributes and differences in price. Would, for example, a consumer whose innerspring mattress was due for replacement be more likely to purchase another innerspring mattress or substitute a visco-elastic foam model for it? Are visco-elastic foam mattresses put to different uses (as luxury goods, such as in fine hotels and within higher income brackets) than are traditional mattresses? These types of questions, which our precedent makes clear are crucial to understanding whether a separate market exists, go unanswered in the complaint.
Moreover, 'the broader economic significance of a submarket must be supported by demonstrable empirical evidence.'... While we acknowledge that Jacobs did not have the chance to undertake extensive discovery because this case was dismissed on a Rule 12(b)(6) motion, he nevertheless had the obligation under Twombly to indicate that he could provide evidence plausibly suggesting the definition of the alleged submarket. Such an indication is conspicuously lacking here; in its place is the unsupported assertion that visco-elastic foam mattresses constitute a distinct submarket of the larger mattress market.

The dissenting opinion, on the other hand, argues that "the majority goes too far when it interprets Twombly to require a plaintiff to include actual evidence in the complaint" and the majority's "demand for 'empirical evidence' at this stage of litigation is improper." According to the dissent, "[p]roduct market analysis is detailed and complicated" and "simply cannot be determined on a motion to dismiss." Therefore, the dissent would have accepted as true Plaintiff's "bald" factual allegation that foam mattresses constitute a distinct and relevant submarket without requiring additional facts regarding the "cross-elasticity of demand" for mattresses generally.

(The majority also held that plaintiff failed to allege anticompetitive effects, but this ruling largely flows from the ruling that plaintiff failed to allege that foam mattresses were a separate relevant market because, given Tempur-Pedic's 80-90% market share, it would have had market power if the market was limited to foam mattresses.)

The Horizontal Price Fixing Claim

Plaintiff's horizontal price fixing claim was based on the theory that Tempur-Pedic, acting as a distributor when selling mattresses directly to consumers through its website, entered into a horizontal price fixing agreement with its distributors. Unlike vertical price fixing, horizontal price fixing is per se illegal and, therefore, there is no need to allege or prove a relevant product market. The district court dismissed the horizontal price fixing theory because (1) courts generally treat dual distribution models (i.e. when manufacturers also compete against their distributors by selling directly to consumers) as vertical rather than horizontal in nature; and (2) Plaintiff did not allege a freestanding horizontal agreement among Tempur-Pedic, as a distributor, and its distributors.

The majority noted that the Eleventh Circuit has not established a bright-line rule that all dual distribution models are vertical rather than horizontal. Therefore, the majority based its ruling on the second rationale. In so doing, the majority again applied Twombly and concluded that Plaintiff's allegation that Tempur-Pedic (acting as a distributor) tacitly colluded with its distributors to fix prices was not plausible because it was just as likely that Tempur-Pedic and its distributors were independently acting in their own economic self-interest. (The majority's economic analysis heavily relies on the fact that Tempur-Pedic was a manufacturer and a distributor; therefore, the majority seems to conflate the two rationales articulated by the district court).

Again the dissent argues that the majority's opinion goes too far, explaining:

My judicial experience and common sense leads me to conclude that it is entirely plausible that TPX and its distributors colluded to set prices. Indeed, it is totally implausible that TPX and its distributors set prices independently of each other. Horizontal price-fixing is still a per se violation, and this allegation satisfies the plausibility pleading standard: it is entirely plausible that this uniformity in pricing is the result of collusion rather than market forces. Jacobs has a colorable horizontal price fixing claim, and his horizontal price-fixing claim should have been allowed to proceed.

Conclusion

As a whole, the Eleventh Circuit's decision demonstrates how different judges can come to very different conclusions regarding the "plausibility" of a plaintiff's allegations of conspiracy and relevant market. The majority's opinion shows how difficult a hurdle Twombly and Leegin can be for a price fixing claim. On the other hand, the dissent's opinion shows that application of Twombly and Leegin can differ wildly from judge to judge. Therefore, manufacturers should not take too much comfort in the majority's analysis. Additionally, this case only involved price fixing claims under the Sherman Act. As noted elsewhere in this blog, state law may impose more stringent prohibitions on price fixing than federal law.

FTC Releases Proposed Updates To "Green Guides"

2010-10-08T14:20:00.003-04:00

On October 6, 2010, the Federal Trade Commission released proposed revisions to the guidance it gives marketers to help them avoid making misleading environmental claims -- called the "Green Guides." The original Green Guides were introduced in 1998 and have not been updated since. Over the past 12 years, green marketing claims have increased dramatically, new environmental marketing terms have emerged, and concerns about greenwashing have grown.

“In recent years, businesses have increasingly used ‘green’ marketing to capture consumers’ attention and move Americans toward a more environmentally friendly future. But what companies think green claims mean and what consumers really understand are sometimes two different things,” said FTC Chairman Jon Leibowitz. “The proposed updates to the Green Guides will help businesses better align their product claims with consumer expectations.”

The changes to the “Green Guides” include new guidance on marketers’ use of product certifications and seals of approval, “renewable energy” claims, “renewable materials” claims, and “carbon offset” claims.

The FTC's press release also states:

The revised Guides caution marketers not to make blanket, general claims that a product is “environmentally friendly” or “eco-friendly” because the FTC’s consumer perception study confirms that such claims are likely to suggest that the product has specific and far-reaching environmental benefits. Very few products, if any, have all the attributes consumers seem to perceive from such claims, making these claims nearly impossible to substantiate.

Along with the 229-page text of the proposed revisions, the FTC also published a two-page Green Guide's Summary of Proposal and a webiste which contains links to additional information. The FTC is accepting comments on its proposed revisions to the Green Guides through December 10, 2010.

Womble Carlyle frequently advises clients on how to comply with advertising laws and regulations. Womble Carlyle also has assembled a green practices team to provide experienced knowledgeable guidance to businesses looking to "go green."

Antitrust and Credit Card Steering

2010-10-05T15:31:00.002-04:00

The Department of Justice filed a civil antitrust suit against Visa, Master Card and American Express challenging their policies that prohibit merchants from steering customers to other forms of payment. Credit card companies earn fees from credit card transactions, and these transaction fees are higher on some types of cards than others. (Typically, reward cards charge higher fees). Visa, MasterCard and American Express prohibited merchants from offering discounts to customers who use a cheaper type of credit card (i.e. one with less transaction fees). The Justice Department claims that these restraints prevent "merchants from freely promoting interbrand competition among [credit card] networks by offering customers discounts, other benefits, or information to encourage them to use a less-expensive [credit card] or other payment method."

Visa and Mastercard hare already entered into a settlement agreement with the Department of Justice and have agreed not to prohibit merchants from offering discounts or otherwise steering customers to less expensive types of payment methods.

American Express, who usually charges higher transaction fees, however, vows to fight the DOJ's charges and claims that the settlement agreement gives more market power to Visa and Mastercard because they will be able to steer customers away from American Express. The Wall Street Journal quotes American Express's CEO as saying: "We are confident that courts will recognize the perverse anticompetitive nature of the government's case and that we will continue providing a competitive, superior service to card members and merchants."

Attorney General Eric Holder responded: "Because American Express has refused to change its rules, consumers are being held hostage from receiving the expanded choices and lower prices that they deserve under our settlement. We cannot allow this to stand."

Juiced Advertising or Persecution of the Pomegranate?

2010-09-28T14:07:00.006-04:00

On Monday, September 27, 2010, the FTC brought charges against Pom Wonderful for making false and unsubstantiated claims about the health benefits of their pomegranate juice. The New York Times explains: "Pom Wonderful, the pricey and popular pomegranate juice sold in the distinctly curvaceous bottle, is advertised as helping to reduce the risk of heart disease, prostate cancer and impotence." As explained in their advertising, Pom has spent millions of dollars on medical research. The FTC, however, believes Pom is overstating the results of that research because pomegranate products often show no more efficacy than a placebo.

The FTC's press release states:

“Any consumer who sees POM Wonderful products as a silver bullet against disease has been misled,” said David Vladeck, Director of the FTC’s Bureau of Consumer Protection. “When a company touts scientific research in its advertising, the research must squarely support the claims made. Contrary to POM Wonderful’s advertising, the available scientific information does not prove that POM Juice or POMx effectively treats or prevents these illnesses.”

In response, Pom says it does not claim that its product acts as a drug: "What we do, rather, is communicate, through advertising, the promising science relating to pomegranates. Consumers and their health care providers have a right to know about this research and its results." The New York Times quotes Pom as saying: "Its a shame that the government is unable to understand this fundamental distinction ... and instead is wasting taxpayer resources to persecute the pomegranate."

The FTC's administrative complaint comes on the heels of a lawsuit that Pom filed against the FTC challenging the commission's new rules requiring advertisers to obtain FDA approval before claiming that food, beverages or dietary supplements are useful in preventing disease. Pom argues that FTC's new standards violate its First Amendment free speech rights.

Obama's Antitrust Policy: Speak Loudly and Carry A Big Stick

2010-09-08T14:30:00.004-04:00

Obama's antitrust enforcement (or percieved lack thereof) is the subject of a frontpage story in today's Washington Post. The story begins: "When President Obama took office, he promised to undo eight years of what he called the weakest antitrust enforcement in half a century. Consumer advocates [and businesses] held their breath for a dramatic shift [in antitrust enforcement].... A year and a half later, they're still waiting."

The premise of the article is that the Obama administration has not lived up to his tough rhetoric because DOJ has obtained consent decrees from most of the targets of its investigation and has not brought a case against a corporate titan or blocked a large merger. Instead of litigating cases, DOJ has negotiated consent decrees. Instead of blocking mergers, DOJ has forced the merging companies to make changes, such as spinning of part of their business.

The fact that there is not a lot of litigation does not strike me as proof that DOJ is weak on antitrust enforcement. As the article points out, Obama's selection of Christine Varney and her tough speeches in 2009 "stoked excitement among antitrust advocates--and jangled nerves in the business community." That tough talk (and the economy's slowdown) may have as much to do with the lack of government antitrust litigation than anything else. Businesses are less likely to go forward with a risky merger or transaction if they know there is an aggressive antitrust cop on the beat. And it takes two to tango, as they say. The target of an antitrust investigation has to agree to the consent decree to avoid litigation. Varney is quoted in the article as saying: "I'm happy to litigate. I think everyone knows that." That type of attitude is very effective at the negotiating table.

Unlike Teddy Roosevelt, Obama and Varney do not "speak softly" but the DOJ Antitrust Division does carry a "big stick." If you speak loudly and carry a big stick, you won't have to use it very often.

Scope of Patent Misuse Doctrine Sparks Debate In Federal Circuit

2010-09-02T16:44:00.004-04:00

On August 30, 2010, the Federal Circuit issued an en banc decision in Princo Corporation v. International Trade Commission --- F.3d ---, 2010 WL 3385953 (C.A. Fed. 2010). As described in the concurring opinion, "[t]his case arises at the uneasy intersection of antitrust and patent law, in essence posing the novel question of whether (and if so, to what extent) patentee competitors may enter an agreement regarding the licensing of their patents."

The case involved a patent pool licensed by Philips relating to "Orange Book" standards for encoding data on recordable CDs. Princo licensed these patents from Philips, but then stopped paying license fees and was sued. As a defense, Princo claimed that Philips misused its patents by agreeing with Sony not to license a different patent that would have allowed for the development of an alternate method of encoding data.

The original Federal Circuit panel held that Princo could proceed with its misuse defense. The majority en banc decision, however, held that Princo's patent misuse theory failed for two reasons. First, the majority held that the alleged wrongdoing (suppressing the patents for the potential alternative technology) did not involve the misuse of patents at issue, but rather involved an agreement not to license other patents. The majority viewed the agreement to suppress the competing technology as "unrelated antitrust violation" because it did not involve the use (or leveraging) of the patents at issue. The majority explained:

The misuse must be of the patent in suit. An antitrust offense does not necessarily amount to misuse merely because it involves patented products or products which are the subject of a patented process....

Reduced to its simplest elements, the question in this case comes down to this: When a patentee offers to license a patent, does the patentee misuse that patent by inducing a third party not to license its separate, competitive technology?

The majority concluded that it would not constitute misuse because "[s]uch an agreement would not have the effect of increasing the physical or temporal scope of the patent in suit, and it therefore would not fall within the rationale of the patent misuse doctrine as explicated by the Supreme Court and this court."

Second, the majority held that Princo bore the burden of proving that the agreement to suppress the competing patents had an adverse effect on competition under the rule of reason. The majority declined to apply the "quick-look" analysis, which applies to "naked restraints" where the arrangement is "so plainly anticompetitive that courts need undertake only a cursory examination before imposing antitrust liability." Instead, the majority concluded that agreements not to compete among joint venturers is not a "naked restraint" -- "[p]articularly when the purpose of the joint venture is to set standards for an industry." Princo failed to meet its burden of proving anticompetitive effects under the rule fo reason because Princo had not demonstrated there was a reasonable probability that the competing technology, if available for licensing, would have matured into a competitive force in the data storage technology market.

While the majority opinion takes a narrow view of the patent misuse doctrine, Judges Dyk and Gajarsa wrote a 13 page dissenting opinion which takes a much broader view. The dissent argues that agreements to suppress competing technology may constitute patent misuse if the agreement protected the asserted patents from competition. In other words, patent leveraging is not the only type of patent misuse.

The dissent argued that antitrust laws do not provide an adequate remedy for such an agreement given the undeveloped nature of the competing technology that was suppressed and the strictures of the indirect purchaser rule which limit who has standing to assert an antitrust claim. "Unless the protected patents are held to be unenforceable" under the patent misuse doctrine, the dissent argues, "there will be no adverse consequences to the patent holder for its misconduct nor will the patent misuse be remedied."

The dissent also objected to the majority's application of the rule of reason. The dissent argued that patent misuse is broader than an antitrust violation, but that if there was an antitrust violation, then it will also constitute misuse. Under antitrust analysis, the dissent argued that Princo had satisfied its initial burden of proof by proving an agreement to suppress competing technology. Since this type of agreement is inherently suspect, the dissent would have applied the "quick look" rule of reason. "Competitive harm is thus presumed, and the burden falls on Phillips to come forward with some plausible" justification for the restraint.

The dissent also objected to the majority's requirement that Princo prove a "reasonable probability" that the competing technology would have been commercially viable if it had not been suppressed. The dissent argued:

[T]here is ... no procompetitive benefit from the suppression of potential competition, no matter how remote the possibility of success... [T]he antitrust laws are designed to protect not only full-fledged competition but also nascent competition. It is vitally important to protect competition from being stifled in its infancy. There is great difficulty in predicting commercial viability in the early stages of technological development, and indeed the patent system itself recognizes the importance of protecting technologies that have not yet reached the stage of commercial viability.... In short, it would be inimical to the purposes of the Sherman Act to allow monopolists free reign to squash nascent, albeit unproven, competitors at will--particularly in industries marked by rapid technological advance and frequent paradigm shifts.

The vast difference between the majority and dissenting opinions demonstrates the uncertain nature and scope of the patent misuse doctrine. The majority says not all antitrust violations constitute misuse; the dissent says patent misuse is broader than antitrust law. The majority says the accused infringer (or antitrust plaintiff) bears the burden of proving anticompetitive effects under the rule of reason; the dissent says the patentee (or antitrust defendant) bears the burden of proving procompetitive effects under the quick look analysis. There is supporting caselaw for both positions. The scope of the patent misuse doctrine is sometimes in the eye of the beholder.

The majority's narrow view of patent misuse, however, may not be the last word on this issue. Given the vigorous dissenting opinion (and the vagaries of the patent misuse doctrine in existing caselaw), this is an inviting case for the Supreme Court to review.

New Horizontal Merger Guidelines

2010-08-31T15:55:00.003-04:00

On August 19, 2010, the DOJ and FTC issued new Horizontal Merger Guidelines. The Guidelines were updated to reflect current agency practice. One of the changes in the new Guidelines is less reliance on market shares/concentration and more emphasis on the likely competitive effects of a transaction. The new Guidelines are supposed to be more flexible and fact dependent and less formalistic.

The new Guidelines are the result of a year long project that begain in September 2009. Draft versions of theGuidelines were issued in April, and the agencies held a series of workshops to solicit comments on the draft Guidelines.

Although the FTC's press release claims the new Guidelines will "give businesses a better understanding of how the agencies evaluate proposed mergers," FTC Commissioner Thomas Rosch called the new Guidelines "flawed." He explained: "These guidelines do not describe the way that the Bureau of Competition and enforcement staff at the commission proceed today. They also do not reflect the way that the courts proceed." Commissioner Rosch, however, voted in favor of the new Guidelines because he saw them as an improvement over the old Guidelines.

For our prior coverage of the new Guidelines, go here.

Supreme Court Rules Second Amendment Applies Against States In McDonald v. City of Chicago

2010-06-28T12:00:00.002-04:00

On Monday June 28, 2010, the Supreme Court issued its ruling in McDonald v. City of Chicago.

The issue in the case was whether the Second Amendment private right to bear arms, recognized in Heller, was applicable against States and localities. In Heller, the Court addressed the scope of the Second Amendment as it applies against the federal government (i.e., the handgun ban in Washington, DC), and left open the question of whether the private right to keep and bear arms applies in the same manner against the States.

In McDonald v. City of Chicago, the petitioners challenged a similar hand gun ban in the City of Chicago. They argued that the Second Amendment applied against States and localities by virtue of the Privileges and Immunities Clause and Substantive Due Process Clause in the Fourteenth Amendment. The Seventh Circuit, however, ruled in favor of the City because they were bound by prior decisions of the Supreme Court and Seventh Circuit. In other words, the Seventh Circuit essentially said that it would not strike down Chicago’s hand gun ban until the Supreme Court had overruled its prior case law.

In a 5-4 decision, the Court held that the Second Amendment did apply against the States and localities.

Judge Alito’s plurality opinion held that the Second Amendment applied against the States because it was incorporated into the substantive Due Process Clause of the Fourteenth Amendment. That holding only received 4 votes. Although, Justice Thomas also believed that the Second Amendment applied against the States (thus providing the fifth vote), he thought it did so because of the Privileges and Immunities Clause. Justice Thomas would have overruled the Slaughter House Cases (cases that almost everyone believes were wrongly decided, but virtually no one wants to revisit after 137 years of precedent).

Regardless of the basis for the ruling, five members of the Court agreed that the Second Amendment applies against the States. Therefore, the case was remanded so that the lower court could consider whether Chicago’s hand gun ban violates the Second Amendment. The lower court is expected to rule in favor of petitioners and strike down the hand gun ban. However, certain aspects of the Court’s ruling suggest that less restrictive gun control laws may be allowed under the Second Amendment.

DOJ/FTC Workshop on Updating the Horizontal Merger Guidelines

2009-12-04T14:38:00.004-05:00

On December 3, 2009, the Department of Justice and Federal Trade Commission held a joint public workshop to explore the possibility of updating the Horizontal Merger Guidelines used by both agencies to evaluate potential competitive effects of mergers and acquisitions. Below is a summary of the major points from the workshop's four sessions (which are available for re-play here):

Introduction

In his introduction, Jon Leibowitz (Chairman of FTC) said "we are a long ways from the bad old days" of the Schering brief and Section 2 Guidelines (when the FTC and DOJ disagreed on antitrust policy). Nowadays, he said, FTC and DOJ work well together. Christine Varney (from DOJ) spoke after him, but the only thing she said was "I have no comment on the Comcast/NBC merger."

Carl Shapiro was the moderator of the first panel. He spoke about the need to update the Horizontal Merger Guidelines because: (1) there may be gaps between the Guidelines and actual agency practice; and (2) new economic analysis and evidence may change the way we think about antitrust policy.

There were four major issues discussed: (1) Innovation Competition; (2) Direct Evidence of Competitive Effects, (3) Market Definition, and (4) Unilateral Effects.

Innovation

As for the first issue, everyone agreed that the current Guidelines do a poor job of explaining how to measure harm/benefits to innovation (or how to define an innovation market). The agencies have some experience measuring innovation in the pharma industry, but not in any other context. The consensus was that perhaps the agencies should produce some additional commentary or extremely general guidelines on innovation, but that we simply were not ready for formal Guidelines because no one really knows how to measure innovation.

Direct Evidence / Market Definition / Unilateral Effects

The real debate came during the discussion of the next three issues, all of which “merged” together. Generally speaking, some academics and former government attorneys were in favor of using direct evidence of competitive effects, to the extent it exists (i.e., smoking gun documents from officers and directors of the companies who were to merge; customer surveys; natural experiment data as in the Staples case; or unilateral effects evidence). The academics and former government attorneys thought one could use direct evidence of competitive effects as a way to "back into" the market definition. In other words, if you could prove an effect, then you automatically proved a relevant market--you don’t need to do anything else. If that's true, then what happens to the traditional market definition and the presumptions and safeharbors that go with them?

The private practice attorneys (and a few of the academics) were more skeptical of such an approach. They thought the traditional market definition was essential before you could identify direct evidence of competitive effects. Robert Willig, Professor of Econ at Princeton, said: "Direct evidence without competitive analysis is full of pitfalls for the foolish looking for magic bullets." The folks on this side of the debate said that even if you had direct evidence, the judge/jury will want to know more.

Everyone loved the SSNIP test and had nothing bad to say about it. But some folks thought there were other ways (direct evidence) to prove relevant markets. And there was some discussion of a "variable" SSNIP test in some circumstances.

As for unilateral effects, the panelists seemed to agree that if you did a unilateral effects analysis of differentiated products, then all mergers would look like they would raise prices. But this is not true. Some folks said unilateral effects analysis would cause over-enforcement and prevent mergers that were good for the economy. Others said not to worry because you could rebut the unilateral effects analysis with other evidence.

Conclusion

Everyone seemed to agree that the Guidelines should be revised to address the use of direct evidence of competitive effects and unilateral effects. But there was debate about what the Guidelines should say. Everyone wanted to keep the SSNIP test. And everyone also agreed that any revised Guidelines should be general and flexible (like the current ones).

US Antitrust Policy Enters a New Phase

2009-11-05T12:47:00.003-05:00

Financier Worldwide published an article that I co-authored on recent developments in US antitrust law. You can read the article here.