The Court did expressly note that its holding was limited – addressing the situation before it, rather than every one involving a self-replicating product. “In another case, the article’s self-replication might occur outside the purchaser’s control. Or it might be an incidental step in using the item for another purpose . . . . We need not address here whether or how the doctrine of patent exhaustion would apply in such circumstances.”

I covered the patent exhaustion doctrine previously – see, for example, here, here, and here.

The decision likely has implications in other industries. For example, BSA/The Software Alliance filed a brief arguing that a contrary decision might “facilitate software piracy on a broad scale” because software can be easily duplicated. However, it also noted that a decision that went too in favor of protecting patent rights might unduly encourage nuisance software patent infringement suits.

The opinion, styled Bowman v. Monsanto Co., No. 11-796 (May 13, 2013), is available here.

The plaintiffs were a purported class of distributors of Sara Lee products, and challenged Sara Lee agreements with chain retailers that gave Sara Lee the right to set pricing (to the chain stores) for Sara Lee products. The distributor agreements required the distributors to comply with the terms of the Sara Lee-chain store agreements.

In dismissing the claim, the court first ruled that plaintiffs had not alleged a price-fixing allegation. The court’s discussion is somewhat unclear, but it appears to have rejected an argument that there was some sort of horizontal agreement between and among Sara Lee and the chain stores.

The court then turned to the question of per se unlawful vertical price-fixing, and held that, despite the California Supreme Court’s decision in Mailand v. Burckle, 20 Cal. 3d 367 (1978), following the U.S. Supreme Court’s decision in Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007), “it remains unlikely that the Mailand’s court holding is still applicable . . . .”

The court then rejected the plaintiffs’ rule of reason claim for vertical price fixing.

It is conceivable that the court did not even need to reach the issue.  Unlike the traditional vertical price-fixing scenario, Sara Lee apparently did not agree with its distributors on downstream pricing — it had the power to set the downstream pricing directly.  The distributors were more similar to middlemen or agents than true distributors with pricing authority.

Sara Lee is but one trial court decision, but it is further evidence that California courts will be receptive to arguments based on developments in federal law that vertical price-fixing is not per se unlawful.

(Photo credit: Wikipedia)

It has long been the case that Sherman Act Section 1 Rule of Reason claims as well as Section 2 claims require proof of harm to competition. But the courts, particularly in the Ninth Circuit, have been tightening up on the requirement to plead such harm, as evidenced by the recent case of Orchard Supply Hardware LLC v. Home Depot USA, Inc., 2013 U.S. Dist LEXIS 53214 (Apr. 11, 2013) (Tigar, J).

In Orchard Supply, the plaintiff, a retailer, challenged Home Depot’s alleged agreements with several tool manufacturers to be the exclusive carrier of the manufacturers’ lines of power tools and accessories. The court dismissed the plaintiff’s Rule of Reason claim, although it granted leave to amend.

The complaint’s defect was its failure to allege harm to competition itself. Although the complaint alleged that the exclusives would enable Home Depot to charge higher prices and deprive consumers of choice, this is not enough. As the court held, “[a]llegations that an agreement has the effect of reducing consumers’ choices or increasing prices to consumers does not sufficiently allege an injury to competition.” Id. at *16, quoting Brantley v. NBC Universal, Inc., 675 F.3d 1192, 1202 (9th Cir.), cert. denied, 133 S. Ct. 573 (2012).

In the case of exclusives, if they actually or potentially cause substantial market foreclosure or the exit of competitors, harm to competition may exist. But higher consumer prices do not themselves amount to an actionable antitrust injury.

(Photo credit: Wikipedia)

In Stewart v. Gogo, Inc., 2013 U.S. Dist. LEXIS 51895 (N.D. Cal. Apr. 10, 2013) (Chen, J.), a putative class of airline passengers challenged Gogo’s long-term exclusive contracts to provide Internet access connectivity to various domestic airlines under, among other things, Sherman Act Section 2.

The complaint suggested that Gogo’s exclusive contracts with the airlines effectively operated as a wholesale bar preventing the contracting airline from using an Internet access provider other than Gogo on any of its planes.  However, at oral argument, plaintiffs clarified that the typical Gogo contract binds an airline on an aircraft-by-aircraft basis. In other words, where an airline agreed to have an airplane equipped with Gogo for Internet access, that airplane would use only Gogo’s services (and no other company’s) for the ten years. Thus, conceivably, an airline could have some of its airplanes equipped for Gogo’s services but use a different Internet access provider for its other planes.

In dismissing the complaint (but granting leave to amend), the court found that the relevant market could not be limited to North American aircraft that actually provide Internet access, but must take into account the North American aircraft that could be equipped to provide such access, in which case Gogo has only a 16% market share (not 85% or higher as alleged by plaintiffs who focused only on the North American aircraft actually equipped).

The court noted that Plaintiffs had not made any allegations as to why airplanes that could be equipped should not be included in the full range of selling opportunities reasonably open to a competitor. Plaintiffs did not allege, for example, that there are substantial technological or design barriers to installing a competitor’s Internet connectivity services on such planes, nor did they allege that there are substantial financial barriers which prevent competition for these planes.

Related articles

• Judge says no monopoly on in-flight internet prices, tosses case against GoGo [GigaOM]

(Photo credit: Wikipedia)

Professor Michael Carrier has written a recent op-ed over at arstechnica suggesting that the answer is “yes.”  Highlights:

“To start, [the antitrust agencies] can challenge concerning aggregations of patents . . . . [M]assive patent portfolios can be used offensively and can be valuable because of their size rather than the validity of each patent. These portfolios can have anticompetitive effects, including holdup, raised rivals’ costs, increased price, and reduced innovation.”

“The agencies could also promote transparency. Much troll activity today is hidden beneath a labyrinth of shell companies . . . .  Given this, how could potential targets engage in licensing negotiations or evaluate patent portfolios? The agencies must be able to shine sunlight on this subterranean network, obtaining complete information from patent acquisitions, among other conduct, to determine competitive effects.”

“It seems particularly slippery for trolls to avoid promises made by their predecessors. The agencies could prohibit transfers to trolls that refuse to adhere to promises to keep licensing costs reasonable.”

The article discusses other ideas as well, and also suggests that Section 5 of the FTC Act could be used where “certain trolls have market power in technology (licensing) markets, do not offer non-trivial efficiencies, and cause competitive harm that results in higher prices or reduced innovation for consumers.”

(Note: some people prefer the term “patent assertion entities,” or PAEs, over the term “trolls.”)

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• Op-ed: Antitrust regulators ponder patent trolls – but they need to act
• It’s time to take action against patent trolls and patent privateering
• What Exactly Does Intellectual Ventures Do That Seems to Bother (Some) People?

Washington DC: United States Supreme Court (Photo credit: wallyg)

Within the past two weeks, the U.S. Supreme Court has decided two important cases relevant to antitrust.

First, on March 27, in Comcast Corp. v. Behrend, No. 11-864, the U.S. Supreme Court ruled that a U.S. district court may not certify a class action under Federal Rule of Civil Procedure 23(b)(3) without first determining that damages may properly be awarded on a classwide basis. The Court held that if a damages model fails to attribute supra-competitive prices specifically to the theory of impact, Rule 23(b)(3) cannot authorize class treatment.

Justice Scalia, writing for the majority, cited the Court’s reasoning in Wal-Mart Stores, Inc. v. Dukes as requiring “a determination that Rule 23 is satisfied, even when that requires inquiry into the merits of the claim.” At the class certification stage, “any model supporting a plaintiff’s damages case must be consistent with its liability case.”

In the past, lower courts saw no need for class plaintiffs to tie each theory of antitrust im­pact to a calculation of damages. That, they said, would involve consideration of the merits having no place in the class certification inquiry.  This approach is no longer the law after Comcast.

Time will tell whether Comcast reduces the overall number of class claims presented, or merely leads to more robust expert reports and expert discovery.

Second, on March 19, the Supreme Court held in Standard Fire Ins. Co. v. Knowles, No. 11-1450, that class representatives cannot circumvent the Class Action Fairness Act (CAFA) by stipulating to limit their class damages claim to less than $5 million to keep their case out of federal court. The decision should make it more difficult for plaintiffs to keep their antitrust and other class claims out of federal court by, e.g., so stipulating, and bringing multiple cases/claims, each purportedly under $5 million.

Related articles

• In an Antitrust Class Action, U.S. Supreme Court Holds That Expert’s Damages Study Must Translate the Legal Theory of Harmful Event to Economic Impact of Event

OneTouch Ultra2 is being used by a diabetic patient. (Photo credit: Wikipedia)

In LifeScan, Inc. v. Shasta Technologies, LLC, 2013 U.S. Dist. LEXIS 38677 (N.D. Cal. Mar. 19, 2013), Judge Davila granted plaintiff’s motion for a preliminary injunction to address claims of patent infringement, and addressed whether patent exhaustion doctrine applies to free distribution of product or to discounted distribution of only one component of a product.

I previously covered patent exhaustion doctrine here.  In a nutshell, the patent monopoly is exhausted after a patentee sells the patented invention in whole, or under certain circumstances, in part. (A license to use technology in a certain field of use, however, generally does not trigger the exhaustion doctrine, also known as the first sale doctrine.)

In LifeScan, the plaintiff markets and sells the “OneTouch Ultra System,” a glucose monitoring system. The system is composed of both a meter and disposable test strips. A patent covering “DoubleSure Technology” specifies a method designed to improve the reliability and accuracy of glucose measurements. The technology uses a self-testing strip design using multiple sensors.

Defendants made strips for use in the OneTouch Ultra System (thus prompting the patent suit), and argued that LifeScan’s patent rights were exhausted for two reasons. The court rejected each argument.

First, LifeScan has doctors distribute free OneTouch Ultra kits, comprised of meters and test strips, to diabetic patients. The court held – at least at the preliminary injunction stage – that LifeScan could likely show that this free distribution did not exhaust its patent rights. LifeScan receives no remuneration at the moment it parts with the patented invention. The fact that LifeScan distributes the kits in consideration of patients’ anticipated future repeat purchases of disposable test strips was not enough. According to the court, the common theme running through prior case law – which did not squarely address the issue before the court – was that there must be consideration at the time of the authorized sale in order for the patent exhaustion doctrine to attach.

Second, LifeScan sells OneTouch Ultra meters alone at a reduced price. But this practice too, the court held, likely does not trigger patent exhaustion, because the patent at issue is a method patent that requires both a meter and a test strip for an individual to practice it. “As such, the sale of the meter by itself does not necessarily convey the entire invention of the . . . patent to the purchaser, casting the applicability of exhaustion into doubt.”

The decision reaches the appropriate result – patent rights should not be lost merely because of a novel distribution system, one that is likely pro-competitive because it fosters dissemination of new technology.

Anheuser-Busch pioneered the use of refrigerated railroad cars for transporting beer to a national market. (Photo credit: Wikipedia)

NPR’s Planet Money team had a nice story/podcast last week on the Anheuser-Busch / Grupo Modelo deal and DOJ’s efforts to block it.  Available here.

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• Episode 438: Mavericks, Monopolies And Beer
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Readers of this blog will know that I recently wrote a series of posts on this topic.

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• Top Posts of 2012

“It represents an attitude of more skepticism of the efficiency benefits of merging that are often claimed by the parties in the transaction,” said John Connor, a professor of industrial economics at Purdue University. “There’s been a greater willingness to challenge mergers than there was” in the administration of former President George W. Bush.

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