Classic antitrust cases

February 23, 2021

Clear Articulation and the Classic Antitrust Case of FTC v. Phoebe Putney Health System

Authors: Luke Hasskamp and Aaron Gott

This article briefly explores the applicability of federal antitrust laws to actions taken by municipalities or other state subdivisions and, specifically, whether they have acted pursuant to a clearly articulated state policy to displace competition in the marketplace.

Federal antitrust laws are designed to prevent anticompetitive conduct in the market. Yet, the Supreme Court long ago held that antitrust laws do not apply against States themselves, even when they take actions with anticompetitive effects. Parker v. Brown, 317 U.S. 341 (1943). The Supreme Court also recognized that this state action immunity applied not only to states but also to municipalities or other state political subdivisions, and even private actors, provided they are acting pursuant to state authority.

Thus, any time a state or local government body is sued for antitrust violations, it will inevitably claim that it is exempt from liability under the state action immunity doctrine.

To obtain this immunity, the defendant will have to show, at the least, that it acted pursuant to a clearly articulated state policy to displace competition. In short, the state had to understand that the authority it was delegating to substate actors would have anticompetitive effects and that it clearly articulated such a policy in its legislative delegation.

But when is a state policy clearly articulated? That is the question the U.S. Supreme Court decided in FTC v. Phoebe Putney Health System, declaring a stricter standard than courts had been applying.

FTC v. Phoebe Putney Health System

Any antitrust lawyer who is drafting a brief on is probably going to cite Phoebe Putney. Those invoking state action immunity will probably downplay its significance and rely more heavily on earlier cases instead. Let’s talk about the case so you can understand how it dramatically raised the bar for defendants seeking immunity.

You don’t have to be an avid antitrust nerd to have noticed that the healthcare industry has undergone a lot of consolidation in recent years, with hospitals merging with or acquiring one another in already limited markets. The FTC challenges a fair number of these transactions because they reduce competition in markets that already have all sorts of competition problems. Phoebe Putney involved one of those challenges.

Phoebe Putney Health System was owned by a public hospital authority created by a city and county in Georgia. The health system owned Memorial Hospital, which was one of two hospitals in the county. The other hospital, Palmyra Hospital, was just two miles away and was owned by national nonprofit healthcare network HCA. Phoebe Putney and HCA reached an agreement for Phoebe Putney to purchase Palmyra, and the hospital authority approved.

The Federal Trade Commission scrutinized this plan and filed suit because the transaction would create a monopoly that substantially lessened competition in the local market for acute-care hospital services.

In defense, Phoebe Putney claimed that it was entitled to state action immunity because, it argued, it had acted pursuant to a clearly articulated state policy to displace competition. Specifically, Georgia state law allowed its political subdivisions to provide health care services through hospital authorities. The law authorized those hospital authorities “all powers necessary or convenient to carry out and effectuate” the law’s purpose, and more specifically granted them authority to acquire hospitals. Phoebe Putney claimed that it was foreseeable to the Georgia legislature that a hospital authority would use this power anticompetitively.

The district court agreed and dismissed the case. And since the case is FTC v. Phoebe Putney and not Phoebe Putney v. FTC, you can surmise that the Eleventh Circuit agreed with the district court. Many courts had been applying this foreseeability standard based on language from earlier Supreme Court cases like City of Columbia v. Omni Outdoor Advertising, and this case was no different. The Eleventh Circuit reasoned here, for example, that the Georgia legislature must have anticipated that granting hospital authorities the power to acquire hospitals would produce anticompetitive effects because “foreseeably, acquisitions could consolidate ownership of competing hospitals, eliminating competition between them.”

But the FTC had a good point: nothing about the rather basic corporate power to acquire a business suggests that a state clearly articulated a state policy allowing public hospital authorities to monopolize entire markets. Indeed, the statute did not even discuss competition. The Supreme Court granted certiorari, and ultimately agreed with the FTC in a rare 9-0 opinion: the Eleventh Circuit, like so many other courts, had been applying clear articulation “too loosely.” As a result, they had sanctioned all sorts of anticompetitive conduct by state and local government entities that the state legislature had not really intended. Federal antitrust policy should not be set aside so easily.

Instead, the defendant’s conduct must be not only foreseeable, but also the “inherent, logical, or ordinary result” of the state scheme. Courts had been seizing on the “foreseeability” language of the Court’s prior decisions while ignoring much of what else it had said:

State law authority to act is not sufficient; the substate governmental entity must show it was delegated the authority to act or regulate anticompetitively
There must be evidence the state affirmatively contemplated that the scheme would displace competition
Where a state’s position is one of mere neutrality to competition, the state cannot be said to have contemplated anticompetitive conduct
Simple permission to play in the market is not authority to act anticompetitively

The Court also addressed two additional arguments. First, Phoebe Putney pointed to Georgia’s certificate of need law as evidence that the Georgia legislature had contemplated the displacement of competition relating to hospitals. (Learn more about certificate of need laws here, here, and here). But the Court rejected this argument because “regulation of an industry, and even the authorization of discrete forms of anticompetitive conduct pursuant to a regulatory structure, does not establish that the State has affirmatively contemplated other forms of anticompetitive conduct that are only tangentially related.”

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February 11, 2021

Waiting for Change—Antitrust in Distribution in Early 2021

by Bona Law PC

Author: Steven J. Cernak

Recently, I was researching antitrust developments in 2020 to update my Antitrust in Distribution and Franchising book. While there were several developments last year, what struck me was the large number of potentially drastic changes to antitrust distribution law that started to play out in 2020 but are continuing into 2021. Whether you think of them as shoes to drop or dogs yet to bark, these three potential changes are the key ones to watch in 2021.

Legislative Changes to the Antitrust Laws?

In the Fall of 2020, the U.S. House Judiciary Committee issued its Majority Report on its lengthy Investigation into Digital Markets. While the bulk of the Report focused on a few big tech companies like Google, Facebook, and Amazon, the Report also recommended that Congress override several “classic antitrust cases” that allegedly misinterpreted antitrust law applicable to all companies. Because we have covered several of those recommendations in detail already (see below), I will just focus on potential applications to distribution here.

First, the Report recommended overriding Trinko, a case that has made refusal to deal claims against monopolists very difficult to bring, as we detail in the next section. In Trinko, the Court practically limited such claims to those that are nearly identical to the claims in Aspen Skiing, namely that the monopolist ended a prior voluntary course of dealing with the plaintiff for no good reason. Might an override of Trinko make it easier for a plaintiff-retailer to object if a monopolist defendant-retailer kicks the plaintiff off the defendant’s platform?

Second, overriding Trinko might also alter one of its more famous holdings, that the mere possession of monopoly power and the ability to impose “high” prices does not violate Sherman Act Section 2. While most states have price gouging laws, Trinko found that charging a “high” price was not “monopolization.” If Congress overrides Trinko—and adopts the broader “abuse of dominance” standard for Section 2 cases, as the Report also recommends — might we end up with a federal price gouging law?

Third, the Report also is concerned about monopolists charging too low a price and recommends overriding Brooke Group and its “recoupment” requirement for successful predatory pricing claims. As we covered previously, the Supreme Court was worried about discouraging low prices for consumers by companies with large market shares and so adopted a two-part test in Brooke Group that is difficult for plaintiffs to meet. Plaintiffs must show very low prices, usually below average variable costs, plus the probability that the defendant later will be able to raise prices to recoup its losses. If Congress overrides the recoupment prong of Brooke Group, might we see less aggressive pricing from companies with high market shares?

Fourth, overriding the recoupment prong also might revive long-dormant primary line price discrimination claims under Robinson-Patman. While there are few Robinson-Patman claims in total today, all of them are secondary line claims: Manufacturer 1 sells the same commodity to Retailer A at a lower price than to Retailer B, who claims an injury to itself and competition. In Brooke Group, the Court looked at primary line discrimination claims and applied the same two-part test for predatory pricing to primary line claims: Manufacturer 1’s lower prices to Retailer A must be below its average variable costs and Manufacturer 1 must be able to later recoup its losses before a court can find harm to competition and Manufacturer 2. Before Brooke Group, the Supreme Court’s test had been the one from the oft-criticized Utah Pie opinion that focused on the defendant’s intent to lower prices for the entire market. If Congress overrides the recoupment prong of Brooke Group, might we see price discrimination claims from manufacturers who cannot, or do not want to, match the lower prices of their competitors?

As of this writing, Sen. Amy Klobuchar has introduced legislation that would drastically change the antitrust laws. While most of the proposed changes relate to merger review, the proposed legislation would expand the definition of “exclusionary conduct” subject to the antitrust laws and create a presumption that such conduct by “dominant firms” is anticompetitive. Might we see changes to the antitrust laws that drastically change how manufacturers, distributors, and retailers deal with one another?

Supreme Court Weighs in on Refusal to Deal Law?

As we have discussed several times (see here, here, and here), the courts are skeptical of claims that a monopolist’s refusal to deal with some other company, usually a competitor, is monopolization. Generally, even a monopolist has no duty to deal with its competitors. One of the few exceptions is when the facts are very close to Aspen Skiing where the Court did find such a violation of a duty to deal.

In Aspen Skiing, the Court found a refusal to deal violation because of what it saw as the defendant’s decision to terminate a “voluntary (and thus presumably profitable) course of dealing” and its “willingness to forego short-term profits to achieve an anti-competitive end.” Many refusal to deal claims flounder because the defendant and plaintiff had never entered any sort of “course of dealing.” But even if that prong is met, many lower court judges, such as then-Judge Gorsuch in the 10^th Circuit’s Novell case, emphasize that a monopolist might “forego short-term profits” but for pro-competitive ends. Those cases, therefore, require a plaintiff to show that defendant’s conduct is “irrational but for its anticompetitive effect.”

The District Court in Viamedia, Inc. v. Comcast Corp. granted defendant’s motion to dismiss the refusal to deal claim, despite termination of a prior voluntary course of dealing, because the “potentially improved efficiency” resulting from the termination showed that the move was not “irrational but for its anticompetitive effect.”

The Seventh Circuit reversed, finding that a plaintiff only must allege that defendant’s termination was “predatory.” As the concurring judge described it, a plaintiff need only allege some anticompetitive goal for the termination. A defendant’s assertion of other, procompetitive, rationales for the conduct was a question for summary judgment, not a motion to dismiss. If allowed to stand, the court’s ruling would make it much easier for refusal to deal plaintiffs to survive to discovery, thereby encouraging more such claims.

Comcast petitioned the Supreme Court for certiorari and in December 2020, the Court sought the views of the Solicitor General. Any response from the Solicitor General could indicate whether the Biden Administration supports any change, large or small, as to how the Court has interpreted the Sherman Act in refusal to deal cases. Might the Court weigh in on refusal to deal monopolization cases and, if so, how would such an opinion affect the chances of new antitrust legislation?

Changes Driven by Amazon?

Of course, we could not post about distribution and antitrust and not mention Amazon. As we discussed earlier, Amazon’s Jeff Bezos was one of several big tech executives who testified at a Fall 2020 Congressional hearing. At the time, we described some potential antitrust claims raised by that testimony and concluded that ones alleging illegal tying or monopolization had the best chance of succeeding—and that even those faced some real questions.

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February 4, 2021

What Happens if Congress Overrides the Classic Antitrust Platform Market Case of American Express?

by Bona Law PC

Authors: Kristen Harris and Steven J. Cernak

As we covered earlier (see here and here), the recent U.S. House Judiciary Committee Majority Report on its Investigation into Digital Markets recommends that Congress override several classic antitrust cases. In particular, the Report recommends “clarifying that cases involving platforms do not require plaintiffs to establish harm to both sets of customers” by overriding Ohio v. American Express. While American Express is of more recent vintage than some of the other Report’s targets, overriding it would change drastically how courts view “platform markets” and, perhaps, competition generally.

Overview of platform markets

To begin, it is helpful to understand what a platform market is. A platform market—sometimes referred to as a two-sided market—is a market where a company’s product or service caters to two or more customer groups and intermediates between its customer groups to create value. Some well-known examples include telephones, Uber, shopping malls, and credit cards.

A key characteristic of platform markets is the existence of indirect network effects. In traditional markets, that is, non-platform markets, the value of the last unit consumed decreases. But in platform markets with indirect network effects, the value of the platform increases as more people consume it. For example, the value of a phone depends on how many other people have phones; if no one else had a phone the value to you would be close to zero. To connect an example to the American Express case, the value of a credit card to the cardholder increases when more merchants accept the card; if no merchant accepted your credit card, its value to you would likely be zero.

Platform markets also carry specific antitrust implications particularly when it comes to the plaintiff’s burden to define the relevant market. Due to the indirect network effects, a price increase (or net harm) to one customer group may correspond to a bigger price decrease (or net benefit) to the other customer group. Depending on whether both customer groups are considered in defining the relevant market, the defendant may or may not be found to have violated the antitrust laws.

Traditionally, plaintiffs have the burden of showing the challenged conduct causes harm to competition in a defined relevant market. If the plaintiff satisfies its prima facie burden, the burden shifts to the defendant to challenge the plaintiff’s market definition or to show efficiency justifications. As the reader may have guessed, this is where the Supreme Court’s American Express decision comes in.

American Express case

Initially, several states sued American Express and two other credit card companies alleging violations of Section 1 of the Sherman Act. American Express was the only defendant that did not settle. The states’ complaint alleged that a “non-discrimination provision” (NDP) in contracts between American Express and its participating merchants unreasonably restricted competition in violation of Section 1. The NDP prohibits merchants from directly or indirectly steering customers to use a particular card, such as Visa or MasterCard, when making a purchase.

The trial court found that platform markets comprise “at least two separate, yet deeply interrelated, markets” and concluded that the relevant market was the “network services market” on the merchant side of the platform and excluded the cardholders. The court found that American Express violated Section 1 because NDPs caused anticompetitive effects on interbrand competition and American Express’ procompetitive justifications did not outweigh the harm to competition.

American Express appealed the district court’s decision arguing that the court got the market definition analysis incorrect. The Second Circuit agreed with American Express, reversed the decision, and held that the court erred in defining the relevant market. Specifically, the court held that the plaintiffs failed to show that NDPs made “all American Express consumers on both sides of the platform . . . worse off overall” and thus failed to satisfy the plaintiff’s prima facie burden to show harm in a properly defined market.

Then, the plaintiffs petitioned the Supreme Court to reverse the Second Circuit.

The key issues before the Supreme Court were whether the relevant market in multi-sided markets should include all sides of the market and if so, whether plaintiffs are required to show net harm in the whole market as part of their prima facie case.

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January 31, 2021

Antitrust Injury and the Classic Antitrust Case of Brunswick Corp v. Pueblo Bowl-O-Mat

by Bona Law PC

photo credit: ginnerobot via photopin cc

Author: Jarod Bona

Antitrust injury is one of the most commonly fought battles in antitrust litigation. It is also one of the least understood antitrust concepts.

No matter what your antitrust theory, it is almost certain that you must satisfy antitrust-injury requirements to win your case. So you ought to have some idea of what it is.

The often-quoted language is that antitrust injury is “injury of the type the antitrust laws were intended to prevent and that flows from that which makes the defendant’s acts unlawful.” You will see this language—or some variation of it—in most court opinions deciding antitrust-injury issues. The language and the analysis are from the Classic Antitrust Case entitled Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., decided by the US Supreme Court in 1977.

For more, you can read our article on the Bona Law website describing antitrust injury.

Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc.

If your antitrust attorney is drafting a brief on your behalf and antitrust injury is in dispute—which is quite likely—he or she will probably cite Brunswick Corp.

Since antitrust injury is synonymous with Brunswick Corp., let’s talk about the actual case for a moment. If you are passionate about bowling-alley markets, you’ll love this case.

If you were around in the 1950s, you probably know that bowling was a big deal. The industry expanded rapidly, which was great for manufacturers of bowling equipment. But sometimes good things come to an end and the bowling industry went into a sharp decline in the early 1960s. These same manufacturers began to have trouble, as bowling alleys starting paying late or not at all for their leased equipment.

A particular bowling-equipment manufacturer—Brunswick Corp—began acquiring and operating defaulted bowling centers when they couldn’t resell the leased equipment. For a period of seven years, Brunswick acquired 222 centers, some that it either disposed of or closed. This buying binge turned it into the largest operator of bowling centers, by far. If you are a fan of The Big Lebowski, you might notice that the Dude spends substantial time at a Brunswick bowling alley.

Brunswick’s buying binge was a problem for a competing bowling-alley operator and competitor, Pueblo Bowl-O-Mat, who sued under the Clayton Act, arguing that certain Brunswick acquisitions in their territory “might substantially lessen competition or tend to create a monopoly.” Without the acquisition, the purchased bowling alleys would have gone out of business, which would have benefited Pueblo, a competitor.

The case eventually made its way to the US Supreme Court, which rejected the Clayton Act claim for lack of antitrust injury. The reason is that even though Pueblo was, indeed, harmed by the acquisition, it wasn’t a harm that the antitrust laws were meant to protect. The acquisition actually increased competition. Absent the acquisition, Pueblo would have gained market share. But with the acquisition, the market included both Pueblo and the bowling alleys that would have left the market—i.e. more competition.

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January 5, 2021

Classic Antitrust Cases: Will Congress Override Brooke Group, Matsushita, and Weyerhaeuser—and Resurrect Utah Pie?

by Bona Law PC

By: Steven J. Cernak

As we described in a prior post, the U.S. House Judiciary Committee Majority Report of its Investigation into Digital Markets included a number of recommendations that went beyond digital markets, including overriding several classic antitrust cases. One of the Report’s recommendations is to make it easier for plaintiffs to bring predatory pricing and buying monopolization cases by overriding the “recoupment prong” in Brooke Group, Matsushita, and Weyerhaeuser. While such action would drastically alter monopolization law, it also might inadvertently (?) revive another classic antitrust case, Utah Pie, and certain Robinson-Patman price discrimination claims long considered dead.

Predatory Pricing Under Brooke Group and Matsushita

We covered Brooke Group and predatory pricing in a prior post and so just summarize it here. Sherman Act Section 2 claims for monopolization can be lodged only against “monopolists” that are “monopolizing,” that is, acting in a way to maintain that monopoly. There is no general test to judge a monopolist’s actions; instead, courts have developed different tests for different actions, including predatory pricing.

Predatory pricing is pricing below some level of cost so as to eliminate competitors in the short run and reduce competition in the long run. The Brooke Group Court established a two-part test for such claims: ”the prices complained of are below an appropriate measure of its rival’s costs … [and the defendant] had a … dangerous probability of recouping its investment in below-cost prices.”

While the Report did not express any concerns about the “below an appropriate measure of costs” prong, its one example (Amazon’s pricing of diapers) just described the pricing as “below cost.” Lower courts have developed a standard that finds prices “below an appropriate measure of costs” only if they are below some measure of the monopolist’s incremental costs, like average variable costs. It is not clear if the Report’s authors want to modify this prong as well.

Under the recoupment prong, a plaintiff must show that the monopolist has the capability to drive out the plaintiff and other competitors plus keep them (and other potential competitors) out so it can later raise prices and “recoup” its losses. Such a showing requires an analysis of the relative strengths of the competitors and the attributes of the market, such as high entry barriers.

The Brooke Group test has been difficult for predatory pricing plaintiffs to meet — as the Supreme Court intended, for two reasons. First, the Court thought it would be difficult for courts to distinguish between competitive low prices and predatorily low ones. Because “cutting prices in order to increase business is often the very essence of competition,” the Court was concerned that an easier test would deter low prices that benefit consumers.

Second, the Court had earlier in Matsushita expressed skepticism that such competitively harmful predatory pricing schemes occurred often: “there is a consensus among commentators that predatory pricing schemes are rarely tried, and even more rarely successful.” As we covered in different prior posts, while Matsushita does concern predatory pricing, its holding is more concerned with the appropriate standard for summary judgment in any antitrust case; because the “consensus” quote has been repeated in nearly every predatory pricing case since Matsushita, however, the Report’s recommendation to override it makes sense.

Weyerhaeuser Extends Recoupment to Predatory Buying and Monopsony

More than a decade after Brooke Group, the Supreme Court in Weyerhaeuser extended its two-part test for predatory pricing by a sell-side monopolist to predatory buying (or overbidding) by a buy-side monopsonist. There, the defendant allegedly purchased 65% of the logs in the region that were a necessary input for lumber. Such alleged overbuying drove up the cost of the input while the price of lumber was going down. These trends led plaintiff, a competing lumber mill, to shut down operations and sue.

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October 13, 2020

Classic Antitrust Cases: Trinko, linkLine and the House Report on Big Tech

by Bona Law PC

Author: Steven J. Cernak

On October 6, 2020, the Antitrust Subcommittee of the U.S. House Judiciary Committee issued its long-anticipated Majority Report of its Investigation of Competition in Digital Markets. As expected, the Report detailed its findings from its investigation of Google, Apple, Facebook, and Amazon along with recommendations for actions for Congress to consider regarding those firms.

In addition, the Report included recommendations for some general legislative changes to the antitrust laws. Included in those recommendations were proposals for Congress to overrule several classic antitrust opinions. Because this blog has summarized several classic antitrust cases over the years (see here and here, for example), we thought we would summarize some of the opinions that now might be on the chopping block. This post concerns two classic Supreme Court opinions on refusal to deal or essential facility monopolization claims, Trinko and linkLine.

House Report on Refusal to Deal and Essential Facilities

The Report’s recommendations for general changes in the antitrust laws included several aimed at increasing enforcement of Sherman Act Section 2’s prohibition of monopolization. In particular, the Report recommended that:

Congress consider revitalizing the “essential facilities” doctrine, or the legal requirement that dominant firms provide access to their infrastructural services or facilities on a nondiscriminatory basis. To clarify the law, Congress should consider overriding judicial decisions that have treated unfavorably essential facilities- and refusal to deal-based theories of harm. (Report, pp. 396-7)

The two judicial opinions listed were Verizon Commc’ns Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398 (2004) and Pacific Bell Telephone Co. v. linkLine Communications, Inc., 555 U.S. 438 (2009).

Trinko

Justice Scalia wrote the Court’s opinion dismissing the plaintiff’s refusal to deal claim. There were no dissents although Justice Stevens, joined by Justices Souter and Thomas, wrote separately to concur in the result but would have dismissed based on lack of standing.

Since the Supreme Court’s 1919 U.S. v. Colgate (250 U.S. 300) decision, courts have found that “in the absence of any purpose to create or maintain a monopoly,” the antitrust laws allow any actor, including a monopolist, “freely to exercise his own independent discretion as to parties with whom he will deal.” Trinko narrowly interpreted the Court’s earlier exceptions to the rule that even a monopolist can choose its own trading partners.

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August 28, 2020

Challenging Class Action Certification and the Classic Antitrust Case of Comcast v. Behrend

by Bona Law PC

Author: Jarod Bona

As an attorney defending an antitrust class action, your job is to get your client out of the case as expeditiously and inexpensively as possible. There are several exit points.

For example, with a little help from the US Supreme Court’s Twombly decision, you might find your way out with a motion to dismiss, asserting (among other potential arguments) that plaintiffs fail to allege sufficient allegations that a conspiracy is plausible. This is usually the first battle.

Next, you could reach a settlement with class-action plaintiffs (and have it approved by the Court). This could happen at any point in the case. Oftentimes, case events that change expectations will prompt a settlement—i.e. a Department of Justice decision to drop an investigation or an indictment.

Third, you might prevail on summary judgment (or at least partial summary judgment). One means to winning on summary judgment is to disqualify plaintiff’s expert with a Daubert motion.

Fourth, you can win at trial.

Fifth, if you lose at trial, it is time to find an appellate lawyer.

So far, these methods to get out of court look just like any other antitrust case (or commercial litigation matter). An attorney defending an antitrust class action, however, has extra way to get its client out of the case: Defeating Class Certification. (like the defendants did in the Lithium Ion Batteries case, which we wrote about here).

Defense attorneys are increasingly turning to class certification as a primary battle point to get their clients out of federal antitrust class actions.

An antitrust class action usually alleges some form conduct that is a per se antitrust violation in which the damages are a small amount for each class member. For example, an antitrust class action plaintiff might allege a price-fixing or market-allocation conspiracy among the major manufacturers in a particular industry. Plaintiffs may allege that the damage is just a few dollars or cents per plaintiff, but collectively the damages are in the millions or tens or hundreds of millions (or more).

Thus, if the Court denies plaintiffs’ motion to certify a class (barring appeal under Rule 23(f)), each individual plaintiff must sue. And since each only has damages of a few dollars or less, litigation just doesn’t make sense. That, in fact, is the point of Federal Rule 23 and class actions generally—to allow relief when the aggregate harm is great but the individual harm is tiny.

[See this article that I co-authored with Carl Hittinger on the private-attorney general purpose of class actions.]

A defendant that can defeat class certification effectively wins the case.

The US Supreme Court made this task easier for attorneys defending antitrust class actions in the 2013 classic antitrust case of Comcast Corporation v. Behrend, written by the late Justice Antonin Scalia.

Back in my DLA Piper days, I wrote about the Comcast case for the Daily Journal shortly after the Supreme Court published it.

This case involved a class action against Comcast that alleged that Comcast’s policy of “clustering” violated Section 1 of the Sherman Act. Clustering is a strategy of concentrating operations within a particular region. Plaintiffs alleged that Comcast would trade cable systems outside of their targeted region for competitor systems within their region. This would limit competition for both parties, by concentrating the market for each region with fewer cable providers.

But that wasn’t the issue the Supreme Court addressed. The Supreme Court in Comcast v. Behrend instead sought to determine whether the district court properly certified the class action under Federal Rule of Civil Procedure, Rule 23(b)(3), which is known as the predominance requirement.

You can read our article about a California antitrust decision rejecting class certification here.

If you want to learn more about how Bona Law approaches the defense of antitrust class action cases, read here.

And if you want to know more about how class-action settlements work as described in the context of the In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, read here.

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February 10, 2020

Hub-and-Spoke Antitrust Conspiracies and the Classic Case of Toys “R” Us v. FTC

by Bona Law PC

Author: Jarod Bona

Like life, sometimes antitrust conspiracies are complicated. Not everything always fits into a neat little package. An articulate soundbite or an attractive infograph isn’t necessarily enough to explain the reality of what is going on.

The paradigm example of an antitrust conspiracy is the smoke-filled room of competitors with their evil laughs deciding what prices their customers are going to pay, or how they are going to divide up the customers. This is a horizontal conspiracy and is a per se violation of the antitrust laws.

Another, less dramatic, part of the real estate of antitrust law involves manufacturers, distributors, and retailers and the prices they set and the deals they make. This usually relates to vertical agreements and typically invites the more-detailed rule-of-reason analysis by courts. One example of this type of an agreement is a resale-price-maintenance agreement.

But sometimes a conspiracy will include a mixture of parties at different levels of the distribution chain. In other words, the overall agreement or conspiracy may include both horizontal (competitor) relationships and vertical relationships. In some circumstances, everyone in the conspiracy—even those that are not conspiring with any competitors—could be liable for a per se antitrust violation.

As the Ninth Circuit explained in In re Musical Instruments and Equipment Antitrust Violation, “One conspiracy can involve both direct competitors and actors up and down the supply chain, and hence consist of both horizontal and vertical agreements.” (1192). One such hybrid form of conspiracy (there are others) is sometimes called a “hub-and-spoke” conspiracy.

In a hub-and-spoke conspiracy, a hub (which is often a dominant retailer or purchaser) will have identical or similar agreements with several spokes, which are often manufacturers or suppliers. By itself, this is merely a series of vertical agreements, which would be subject to the rule of reason.

But when each of the manufacturers agree among each other to enter the agreements with the hub (the retailer), the several sets of vertical agreements may develop into a single per se antitrust violation. To complete the hub-and-spoke analogy, the retailer is the hub, the manufacturers are the spokes and the agreement among the manufacturers is the wheel that forms around the spokes.

In many instances, the impetus of a hub-and-spoke antitrust conspiracy is a powerful retailer that wants to knock out other retail competition. In the internet age, you might see this with a strong brick-and-mortar retailer that wants to take a hit at e-commerce competitors.

The powerful retailer knows that the several manufacturers need the volume the retailer can deliver, so it has some market power over these retailers. With market power—which translates to negotiating power—you can ask for stuff. Usually what you ask for is better pricing, terms, etc.

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February 1, 2020

Classic Antitrust Cases: Leegin and Resale-Price Maintenance Agreements

by Bona Law PC

Author: Jarod Bona

Some antitrust questions are easy: Is naked 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.

You can read our article about the Colgate exception here: The Colgate Doctrine and Other Alternatives to Resale-Price-Maintenance Agreements.

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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September 29, 2019

Indirect Purchaser Antitrust Lawsuits, Illinois Brick, and Apple v. Pepper (Part 1)

by Bona Law PC

Author: Jarod Bona

Thanks to a 1977 US Supreme Court case called Illinois Brick v. Illinois, class-action-antitrust plaintiff claims may look strange.

You might expect to see named plaintiffs for a class of allegedly injured parties suing defendants (and it is usually multiple defendants) under the federal antitrust laws for damages. And you do see that—those are usually called the “direct purchasers.”

But what is unexpected is that you also often see another separate group of putative class members suing for the same alleged anticompetitive conduct in the same federal court, except they are suing under state antitrust laws—but only some state antitrust laws—for damages. These are usually called the “indirect purchasers.” And they can sue for antitrust damages under the state antitrust laws of what are called the “Illinois Brick repealer states.”

(The indirect purchasers also often sue for injunctive relief under federal antitrust law.).

This doesn’t seem to make much sense. What is going on here?

Good question.

I’ll do my best to explain.

But first, I want to remind you that even though Bona Law represents both plaintiffs and defendants in antitrust litigation, we do not typically represent class action plaintiffs in antitrust cases, and in fact, represent defendants in antitrust class actions. Indeed, this has been a large part of my career, going back to my time at Gibson, Dunn and DLA Piper. So—for that reason—I may be biased on these plaintiff antitrust class action v. defendant issues. That bias could seep into my description and explanations below.

Let’s use an antitrust price-fixing case to illustrate how this works (as many large antitrust class action cases involve price-fixing anyway):

So let’s say that the world figures out that the Antitrust Division of the Department of Justice is investigating three companies, making up an industry, for price-fixing. How did the world figure that out? Well, maybe DOJ obtained criminal indictments or a public company had to make note of it in its SEC filing?

You will then often see a blizzard of antitrust filings in federal courts throughout the country by an industry of antitrust class action plaintiff lawyers. As described above, some of these will be for direct purchasers and some for indirect purchasers.

Simply stated, a direct purchaser is someone that purchased a product directly from a defendant. An indirect purchaser is someone that purchased the product that came from a defendant, but not directly—instead, through some intermediary like a retailer or distributor.

If both direct purchasers and indirect purchasers are part of the same lawsuit or suing a single group of defendants under the same claim, there is this sticky question of, even conceding that there was price-fixing, who was damaged and by how much? That is, the price-fixing may have increased the prices that the direct purchasers literally paid compared to the but-for world without price-fixing, but what if the direct purchasers were retailers or distributors that merely passed along all or some of that overcharge to people that purchased from them (i.e. indirect purchasers)? Then the direct purchasers weren’t really injured or their damages were less than the amount of the overcharge from defendants’ price fixing.

What do you do with that?

Well, in 1968, the Supreme Court in Hanover Shoe, Inc. v. United Shoe Machinery Corp. said you had to ignore that problem. That is, the Supreme Court forbid antitrust defendants from raising as a defense that the direct purchasers had passed on any overcharge.

Okay, well, sometimes if you ignore a problem, it will go away.

But then indirect purchasers began suing under the federal antitrust laws and defendants were thus potentially subject to paying damages twice: Once to direct purchasers that had passed on overcharges (they couldn’t use that as a defense) and a second time to indirect purchasers who had received the overcharge from direct purchasers.

This hardly seemed fair, so the United States Supreme Court in the classic case of Illinois Brick v. Illinois decided in 1977 to put a stop to it: Henceforth, indirect purchasers could no longer sue for damages under the federal antitrust laws. So—again—the Supreme Court essentially said that we were just going to ignore the problem of pass-through from direct purchasers to indirect purchasers.

The Illinois Brick Court actually described three primary reasons for refusing to allow indirect purchaser suits for damages under the federal antitrust laws. First, doing so would allow for more effective enforcement of the antitrust laws (as splitting rewards for the overcharge among two different classes might dilute incentives of one or the other to file federal antitrust claims). Second, prohibiting indirect purchaser federal antitrust claims would avoid complicated damages calculations. And finally, allowing both direct and indirect purchaser federal antitrust claims would create the potential for duplicative damages against defendants.

Maybe now the problem would go away?

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