NC Dental PictureThe US Supreme Court does not review many antitrust cases. So when they do, it is kind of a big deal for antitrust attorneys around the world.

On Tuesday, the Supreme Court heard oral arguments in North Carolina Board of Dental Examiners v. FTC, which addressed the scope of state-action immunity from antitrust liability. More specifically, the Court is reviewing whether a state licensing board must satisfy both prongs of what is known as the Midcal test to avoid antitrust scrutiny.

The first element, which everyone agrees applies, requires the defendant entity to show that the State “clearly articulated and affirmatively expressed” the challenged anticompetitive act as state policy. The Supreme Court is deciding whether state licensing boards are subject to the second element as well: whether the policy is “actively supervised by the State itself.” Municipalities and other local governments have a free pass from this second element, but private people and entities must satisfy the active supervision requirement.

So what is the big deal? If an entity—state or private—can show that state-action immunity doesn’t apply, it can violate the antitrust laws at will. It can grab consumer surplus for itself; it can exclude competition; it can behave under different rules than everyone else. And monopoly is quite profitable.

In NC Board of Dental Examiners v. FTC, a state-sanctioned dental board—composed of six licensed dentists, one licensed dental hygienist, and one public member—engaged in actions to exclude non-dentist teeth-whitening services. As you might recall, Bona Law filed an amicus brief in this case. You can learn about the case and our amicus brief here. Among other points, we argued that the Supreme Court should analyze the case as the Court outlined in American Needle, by reference to whether the units of competition—the independent decision-makers—are private. They are. We also advocated that the Supreme Court apply an active state supervision requirement with some teeth.

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BlackjackSo here’s an idea. Let me know what you think: A hedge fund or other investment vehicle centered on antitrust analysis.

I’ll explain.

As you might know, I am an antitrust attorney. And I write a blog on antitrust and competition law. So, as you may expect, I follow antitrust developments somewhat obsessively at times. As a result, I have a good sense of the practical antitrust implications of certain cases, investigations, or prospective mergers.

I don’t have a crystal ball or anything. Nor do I have any inside information. And since human beings—judges or agency officials—make the relevant decisions, nobody can actually predict what will happen.

But by now, I can review a complaint or a motion to dismiss or description of facts and have a good sense of the strength and risk of the antitrust issues. I think I also have a decent idea how the major antitrust agencies—the FTC and Department of Justice—focus their priorities and like to resolve investigations, cases, and mergers. Like I said, I can’t predict anything with certainty, but there is a high learning curve for antitrust (probably more than most specialties) and I’ve spent a lot of time and effort climbing that curve.

Enough about me—for now anyway.

Let’s talk about antitrust and company stock performance. The obvious scenario is a merger. Two companies, perhaps competitors, announce a merger or acquisition. It isn’t a dead-on-antitrust-arrival merger between the first and second leading companies in a product and geographic market that is easily defined. Instead, it is the sort of merger where the markets are somewhat complicated, perhaps in flux, and it isn’t entirely clear whether an antitrust agency will challenge it or a court will stop it.

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Resale Price MaintenanceSome antitrust questions are easy: Is price-fixing among competitors a Sherman Act violation? Yes, of course it is.

But there is one issue that is not only a common occurrence but also engenders great controversy among antitrust attorneys and commentators: Is price-fixing between manufacturers and distributors (or retailers) an antitrust violation? This is usually called a resale-price-maintenance agreement and it really isn’t clear if it violates the antitrust laws.

For many years, resale-price maintenance—called RPM by those in the know—was on the list of the most forbidden of antitrust conduct, a per se antitrust violation. It was up there with horizontal price fixing, market allocation, bid rigging, and certain group boycotts and tying arrangements.

There was a way around a violation, known as the Colgate exception, whereby a supplier would unilaterally develop a policy that its product must be sold at a certain price or it would terminate dealers. This well-known exception was based on the idea that, in most situations, companies had no obligation to deal with any particular company and could refuse to deal with distributors if they wanted. Of course, if the supplier entered a contract with the distributor to sell the supplier’s products at certain prices, that was an entirely different story. The antitrust law brought in the cavalry in those cases.

In 2007, the Supreme Court dramatically changed the landscape when it decided Leegin Creative Leather Products, Inc. v. PSKS, Inc. (Kay’s Closet). The question presented to the Supreme Court in Leegin was whether to overrule an almost 100-year old precedent (Dr. Miles Medical Co.) that established the rule that resale-price maintenance was per se illegal under the Sherman Act.

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It dependsOLYMPUS DIGITAL CAMERA. But probably not. Outside of California, courts may enforce these non-compete agreements arising out of an employment contract. Of course, most courts, no matter what the law and state, view them skeptically. In California, however, the policy against these agreements is particularly strong.

A restrictive covenant is often part of an employment agreement that restricts the employee’s actions after leaving employment. They typically prohibit the employee from competing in particular markets for a period of time after leaving the employer, but may also keep the employee from soliciting the company’s customers or even employees after leaving.

They are, unquestionably, restraints on trade. But are they unreasonable restraints on trade? In many states that is the issue—if they are reasonable, a court will enforce them. What does reasonable mean? Again, it depends. But typically, like other restraints on trade, they must usually be narrowly tailored to serve their purpose. They should contain “reasonable” limitations as to time, geographic area, and scope of activity.

The laws, of course, vary from state to state. But as a practical matter, most judges are skeptical. Some courts will actually rewrite the agreements to make them reasonable.

The purpose of these restraints is to offer protection to an employer that must necessarily share trade secrets and sensitive customer or financial information with their employees. The concern is that this information is so sensitive and easily exploited by a competitor that the employer needs the restrictive covenant to keep an employee from leaving and benefiting from the information as a competitor. It also reduces the likelihood of free-riding on training.

Despite these benefits, California law and courts take a hard stand against certain restrictive covenants. The California Supreme Court in Edwards v. Arthur Anderson LLP explained, for example, that “judges assessing the validity of restrictive covenants should determine only whether the covenant restrains a party’s ability to compete and, if so, whether one of the statutory exceptions to Section 16600 applies.” (exceptions include the sale of goodwill or corporate stock of a business).

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MonopolyYou may have noticed Peter Thiel’s provocatively titled article “Competition is for Losers” in the Review section of last weekend’s Wall Street Journal. Since we extol the virtues of competition here at The Antitrust Attorney Blog, perhaps you are bracing yourself for me to rip into his article?

No way! It is a great article. And his discussion is not only a good antitrust primer—without the jargon—but is also absolutely accurate. Thom Lambert at the excellent blog, Truth on the Market, seems to agree.

Of course, you have to read beyond the headline, which is, like most headlines, meant to grab your attention. He makes a lot of great points, from both the macro and micro level. I’ll focus on the micro level here.

Thiel contrasts perfect competition with monopoly. In the typical perfect-competition scenario, many firms will sell the exact same product, like a commodity. The market, at least theoretically, will achieve equilibrium, and there is no market power. The market sets the price. The profits for the sellers are minimal—zero if you are talking about economic profit (which assumes a modest rate of return).

In a typical monopoly market, by contrast, the seller is the primary or only firm that offers the product and can determine its own price and quantity produced (of course, even a monopolist can often reach the edge of its own relevant market by setting a price too high). A monopolist usually has a high-profit margin and very healthy profits.

Of course, perfect competition and monopoly are endpoints on a continuum, with lots of room between.

There is a lot to say about the article, but I am going to limit myself to the micro level—the perspective of the individual business not the overall economy.

Thiel develops the unremarkable proposition that it is much better to go into business as a fancy monopolist than a perfect-competition soldier. Thiel says “If you want to create and capture lasting value, don’t build an undifferentiated commodity business.” That’s right.

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American Needle (Football)When you think about antitrust cases, you usually consider the question—often framed at the motion to dismiss stage as a Twombly inquiry—whether the defendants actually engaged in an antitrust conspiracy.

But, sometimes, the question is whether the defendants are actually capable of conspiring together.

That isn’t a commentary on the intelligence or skills of any particular defendants, but a serious antitrust issue that can—in some instances—create complexity.

So far I’ve been somewhat opaque, so let me illustrate. Let’s say you want to sue a corporation under the antitrust laws, but can’t find another entity they’ve conspired with so you can invoke Section 1 of the Sherman Act (which requires a conspiracy or agreement). How about this: You allege that the corporation conspired with its President, Vice-President, and Treasurer to violate the antitrust laws. Can you do that?

Probably not. In the typical case, a corporation is not legally capable of conspiring with its own officers. The group is considered, for purposes of the antitrust laws, as a “single entity,” which is incapable of conspiring with itself. Of course, the situation is complicated if we aren’t talking about the typical corporate officers, but instead analyzing a case with a corporation and corporate agents (or perhaps in a rare case, even employees) that are acting for their own self-interest and not as a true agent of the corporation. The question, often a complex one, will usually come down to whether there is sufficient separation of economic interests that the law can justify treating them as separate actors.

A lot of tricky issues can arise when dealing with companies and their subsidiaries as well. In Copperweld Corp. v. Independence Tube Corporation, for example, the United States Supreme Court held that the coordinated activities of a parent and its wholly-owned subsidiary are a single enterprise (incapable of conspiring) for purposes of Section 1 of the Sherman Act.

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Dollar signWhen you are a law student, you don’t usually understand that most cases are just one of several business tools that are companies utilize to advance their interests in the marketplace.

You might think that cases are academic-like exercises that reach either trial or some appellate court (perhaps after a motion-to-dismiss or summary-judgment motion). One or the other party or both are seeking justice and will not rest until the case terminates. That’s not a surprise, really, because much of what you do in law school is read such cases. I guess that is why many law students want to become appellate attorneys.

But the reality is that—as much as lawyers like myself like to view the law through an academic lens—a lawsuit or threat of a lawsuit is often just a way for someone to seek leverage. The claim is real and is serious, but litigating the case to termination is usually a last resort. The best result is often a settlement—the earlier the better.

Lawyers don’t like to talk about that much because unless you are on a contingency fee an early settlement means less money for the attorney. But it is the truth; lawyers are not special, really. What we do in litigation is often just another business tool to advance our client’s position in the marketplace. There are exceptions, of course—cases where justice must be done—but most commercial litigation doesn’t fall into that category.

Most of commercial litigation is a negotiating tool.

And an antitrust claim is a particularly large (and effective) bat when it comes to leverage.

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Global AntitrustJust because your company isn’t based in the United States doesn’t mean it can ignore US antitrust law. In this interconnected world, there is a good chance that if you produce something, the United States is a market that matters to your company.

For that reason, I offer five points below that attorneys and leaders for non-U.S. companies should understand about US antitrust law.

But maybe you aren’t from a foreign company? Does that mean you can click away? No. Keep reading. Most of the insights below matter to anyone within the web of US antitrust law.

This article is cross-posted in both English and French at Thibault Schrepel’s outstanding competition blog Le Concurrentialiste

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Antitrust matters to me. It is a big part of how I make my living—as an antitrust attorney. That is why the blog is called (unimaginatively) The Antitrust Attorney Blog. You might be an antitrust lawyer too. And if so, I guess the above question is easy for you to answer.

But if you aren’t an antitrust or competition lawyer, why read about antitrust? Maybe it is interesting to you? If so, then I respect you because you have what I view as a cool interest. You’ve probably been popular your whole life.

It is more likely, however, that antitrust matters to you because it could affect you (or if you are an attorney, your clients). In fact, I receive many calls from both business owners and non-antitrust attorneys because they or their clients may have an antitrust case or want to avoid someone having a case against them.

If you fall into one of those categories, I highly recommend that you attend a webinar that I am presenting on Tuesday, August 26 for Strafford entitled “Detecting Antitrust Red Flags in Business Dealings: Avoiding Costly Pitfalls: Identifying Potential Violations in Competitor, Supplier and Customer Interactions and Business Decisions.” I am honored to have two outstanding antitrust attorneys as co-presenters: Ryan W. Marth of Robins, Kaplan, Miller & Ciresi in Minneapolis, Minnesota and Justin W. Bernick of Hogan Lovells in Washington, DC.

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Aspen MountainsYes, in certain narrow circumstances, refusing to do business with a competitor violates Section 2 of the Sherman Act, which regulates monopolies, attempts at monopoly, and exclusionary conduct.

This probably seems odd—don’t businesses have the freedom to decide whether to do business with someone, especially when that person competes with them? When you walk into a store and see a sign that says, “We have the right to refuse service to anyone,” should you call your friendly antitrust lawyer?

The general rule is, in fact, that antitrust law does NOT prohibit a business from refusing to deal with its competitor. But the refusal-to-deal doctrine is real and can create antitrust liability.

So when do you have to do business with your competitor?

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