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Author: Luis Blanquez

Just weeks before our ABA antitrust panel on State Action Immunity takes place in Washington DC, the Ninth Circuit Court of Appeals has allowed SmileDirectClub to proceed against the members of the California Dental Board for antitrust violations, rejecting the board’s immunity claim on active supervision grounds.

At Bona Law we are no stranger to enforcing the federal antitrust laws against anticompetitive conduct enabled by state and local governments. In fact, we filed an amicus curiae brief in the NC Dental case.

Background of the SmileDirectClub Antitrust Saga

This is part of the antitrust group of cases that SmileDirectClub has filed against dental boards in Alabama, Georgia and California.

Rather than teeth-whitening like in NC Dental, the product market in these three cases is teeth-alignment treatments. SmileDirectClub provides cost-effective orthodontic treatments through teledentistry. One of SmileDirectClub’s services is SmileShops. These are physical locations in several states at which they take rapid photographs of a consumer’s mouth. Customers may also use an at-home mouth impression kit, which means that an in-person dental examination is not necessary. Afterwards they send the photographs to the SmileDirectClub lab.

SmileDirectClub connects the customer with a dentist or orthodontist, who is licensed to practice locally but is located off-site (and may be even located out-of-state), who evaluates the model and photographs and creates a treatment plan. If the dentist feels that aligners are appropriate for the patient, she prescribes the aligners and sends them directly to the patient. The patient doesn’t need to visit a traditional dental office for teeth alignment treatment. This results in significant cost savings and greater customer convenience and access.

But the members of the boards of dental examiners in Georgia, Alabama and California have, according to plaintiffs, allegedly conspired to harass the SmileDirectClub parties with unfounded investigations and an intimidation campaign, with hopes of driving them out of the market, while using their government-created power in the marketplace to protect the economic interests of the traditional orthodontia market.

District courts in Alabama and Georgia have allowed all cases to proceed, after the 11th Circuit affirmed. The Alabama case settled in 2021, after that state’s dental board signed a consent decree with the Federal Trade Commission.

The District Court case in California: Sulitzer v. Tippins, case No. 20-55735

In California, by statute, the dental board regulates the practice of dentistry. See Cal. Bus.&Prof. Code §§ 1600–1621. It enforces dental regulations, administers licensing exams, and issues dental licenses and permits. Id. § 1611. The Board is made up of fifteen members: “eight practicing dentists, one registered dental hygienist, one registered dental assistant, and five public members.” Id. § 1601.1(a). Since many of its members compete in the market for teeth-straightening services, they allegedly view SmileDirect as a “competitive threat.”

Plaintiffs alleged that certain members of the Board, motivated by their private desires to stifle competition, mounted an aggressive, anticompetitive campaign of harassment and intimidation designed to drive the SmileDirectClub out of the market. The Complaint contended that these actions violated the Sherman Antitrust Act; the Dormant Commerce Clause; the Equal Protection Clause; the Due Process Clause; and California’s Unfair Competition Law. The dental board defendants moved to dismiss SmileDirectClub’s claims for anticompetitive conduct based on a state-action immunity defense.

The district court rejected defendants’ argument that the state action doctrine applied because the defendants––members and employees of the Dental Board of California—largely made up of traditional dentists and orthodontists who have a financial motive to view the newcomers as competition—could not show that they were actively supervised. The court nevertheless held plaintiffs failed to state a Section 1 claim and ended up dismissing the complaint without prejudice.

SmileDirectClub amended the complaint once, but the district court dismissed again the federal claims and declined to exercise supplemental jurisdiction over the state law claim. This time the court held that SmileDirectClub may have pled enough facts to show the existence of an agreement––by way of a theory of the board’s ratification of the investigation––but surprisingly concluded it was nevertheless insufficient to state a Section 1 claim because the agreement was consistent with its regulatory purpose to undertake their delegated authority as members of the board, and thus was not intended to restrict or restrain competition. Make sure you don’t forget this last sentence. The Ninth Circuit hammers this argument down now in its Opinion.

SmileDirectClub appealed the ruling before the Ninth Circuit

The Case on Appeal: SmileDirectClub and Jeffrey Sulitzer DMD v. Joseph Tippins et al., 9th U.S. Circuit Court of Appeals No. 20-55735

I would strongly suggest you read this opinion. It is absolutely worth your time.

First, the Ninth Circuit concludes that plaintiffs sufficiently alleged anticompetitive concerted action to meet the pleading standards of Federal Rule of Civil Procedure 12(b)(6), although it makes no judgment on the merits of the claims and whether those claims will withstand scrutiny in the next phase of the litigation

It further explains that by requiring plaintiffs to plead facts inconsistent with the Board’s regulatory purpose, the district court applied a standard more appropriate at the summary judgment stage, where § 1 plaintiffs must offer “evidence that tends to exclude the possibility” of lawful independent conduct. This is something many district courts do across the country and which we have been writing about at Bona Law systematically.

Second, the court plainly rejects the broad proposition—offered up by the board members and the district court—that regulatory board members and employees cannot form an anticompetitive conspiracy when acting within their regulatory authority.

In its opinion, the court highlights how the Supreme Court has stressed, “[t]he similarities between agencies controlled by active market participants and private trade associations are not eliminated simply because the former are given a formal designation by the State, vested with a measure of government power, and required to follow some procedural rules.” N.C. State, 574 U.S. at 511.

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Author: Aaron Gott

The most complex, highest stakes litigation in the United States is class action antitrust litigation. And many antitrust cases are litigated as class actions because they involve claims by many consumers of the defendants’ products or services.

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If you are a defendant in a federal class action case, you should know that class certification is an important pivot point in the litigation: once the class is certified, it could be a bet-the-company moment where the risk of a large judgment outweighs any considerations about the merits or your likelihood of successfully defending at trial. The fact that you could appeal class certification after trial, a verdict, and final judgment might be cold comfort. There’s a strong chance you’ll be the only defendant who hasn’t settled by then.

Fortunately, there is good news: the Federal Rules of Civil Procedure allow immediate appeals of class certification orders.

But there is also bad news: the courts of appeals have unfettered discretion to decide your class certification appeal—you must persuade the court why it should consider the case immediately rather than after final judgment, as it usually does.

Here are ten things you should know about immediate appeals of class certification orders under Rule 23(f) if you are a party or counsel involved in a class action in federal district court.

  1. You don’t have much time.

You only have 14 days from the date of the certification order to file a petition for immediate appeal. Fed. R. Civ. P. 23(f). The 14-day time limit is considered jurisdictional. So there are no extensions: you must either file your petition within 14 days or not file it at all. In fact, the U.S. Supreme Court in Nutraceutical v. Lambert recently held that the 14-day deadline cannot be tolled.

That is just two weeks from when you got the news. No extra time for mailing (to the extent you still do that). No extra time for that Memorial Day Weekend, Fourth of July holiday, or Thanksgiving week smack dab in the middle of that 14 days.

Even without intervening holidays, 14 days is not a lot of time to prepare a brief to convince an appellate court to exercise its “unfettered discretion” to hear your appeal.

So, in practice, you should assume the trial court will rule against you on certification and start working on your Rule 23(f) appeal well in advance of the decision. Defendants in most class actions—particularly antitrust class actions like those we focus on at Bona Law—face ruinous joint and several liability that means most defendants prefer not to risk trial regardless of the risk of liability on the merits. It is worth having the insurance of a head start on a 23(f) petition long before the 14-day timer starts ticking.

You should also consider hiring appellate counsel for purposes of the appeal (more on this below).

  1. 23(f) appeals are discretionary and rarely granted.

The U.S. Supreme Court held, back in 1978, that orders denying class certification are not final decisions within the meaning of federal law, and thus are not appealable as a matter of right. After changes from Congress and the Federal Rules of Civil Procedure, Rule 23(f) was created specifically to afford the opportunity for an immediate appeal under at least some circumstances.

But what circumstances qualify for an immediate appeal are up to the judges deciding whether to grant one, as Rule 23(f) appeals are entirely permissive and, in fact, subject to the “unfettered discretion” of the courts of appeals. The committee that drafted Rule 23(f) made sure to highlight this discretion in its notes on the rule.

Thus, a 23(f) petition is a lot like a petition for certiorari to the U.S. Supreme Court. Luckily, a 23(f) petition is much more likely to be granted and a certiorari petition. Though reliable data is hard to come by, the courts of appeal grant around a quarter of all petitions (and they reverse the district court in a little over half the cases in which they grant the petition).

Between a quarter and a third grant about a third of Rule 23(f) petitions, while others appear to exercise their discretion to hear Rule 23(f) appeals much more conservatively.

See below for guidelines on how to convince a court of appeals to take up your 23(f) appeal.

  1. The rules on the form and contents of filing are different than merits appeals

Rule 23(f) petitions vary from typical opening briefs in several respects.

Second, the petition has some specific requirements. You must include the questions presented, the relevant facts, the relief sought, the rule that authorizes the appeal and the reasons why the court should grant it, and a copy of the order. You have only get 20 pages to succinctly state complex facts and make complex legal arguments to convince three judges why they should volunteer to do extra work on top of their already crowded mandatory docket. Use those pages wisely.

Third, while an opposing party may file an answer or cross-petition, you do not automatically have the right to file a reply brief. You can, of course, seek leave to file a sur-reply, but these efforts to get the last word in can sometimes do more harm than good. The best practice is to only do it if it’s necessary to address something new raised by the other side.

Fourth, check the local rules. They might include additional requirements or restrictions relating to 23(f) petitions.

  1. You must convince the court twice over

First, you must convince the court why it should exercise its “unfettered discretion” to take up your appeal.

Then, you often must also convince the court why it should reverse the district court’s order.

Sometimes courts make both decisions in one stroke. If sufficient evidence of error appears on its face, a court of appeals could summarily reverse or affirm the order. See, e.g., CE Design Ltd. v. King Arch. Metals, Inc., 637 F.3d 721 (7th Cir. 2011). Other times, the court will grant the petition and order briefing on the merits.

What this means in practice is that your petition should be compelling in both respects—why the court should grant it and why it should reverse. You should frame the arguments according to the reasons for granting the petition while applying your merits arguments within that framework.

  1. There are several reasons why the court might grant a petition

As explained above, courts of appeals have “unfettered discretion” in deciding whether to grant a petition for review. In practice, however, most courts have set forth a test or series of factors for cases warranting review. Each circuit has developed such a standard or test excerpt the Eight Circuit, which declined to do so.

In the First, Second, and Seventh Circuits, for example, there are two situations warranting review of a class certification order under Rule 23(f):

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Author: Steven J. Cernak

Apologies for the clickbait headline but all antitrust practitioners and policymakers should read Complexity-Minded Antitrust by Nicolas Petit and Thibault Schrepel. In their short article, the authors suggest a potentially radical new way to think about the competition that antitrust law is designed to protect. Written to raise more questions than answers, the article should get us all thinking about some of antitrust’s bedrock principles.

The authors are no strangers to provocative takes on cutting edge antitrust topics. Petit explored similar topics in the context of several big tech companies in his book Big Tech and the Digital Economy: The Moligopoly Scenario, a great read that I reviewed here. Schrepel has been reporting on the facts of blockchain and its implications for the economy and antitrust for years.

The article begins from the premise that neither the neoclassical/Chicago School view of competition nor its Neo-Brandesian critique are adequate to describe at least large swaths of today’s knowledge economy. The neoclassical view and its antitrust rules appear inappropriate for an economy with “unprecedented levels of increasing returns, feedback loops, and technological dynamism.” The Neo-Brandesians recognize those shortcomings, but their solution goes back in time to the “big is bad” theories of the early 20th Century and fails to account for “empirical facts, except those denoting corporate size, dominant shares, and conglomeration.”

The authors’ potential solution? Consider applying complexity science to antitrust. As the authors explain, complexity science studies how “micro-level interactions lead to the emergence of macro-level patterns of behavior.” Complexity focuses on systems and how they adaptively change to the context they create. The article lists applications of the theory to subjects like biology, game theory, and biochemistry.

The authors very briefly describe some of the applications in economics, led by those of economist Brian Arthur, and how those applications view the economy more like an evolving living organism rather than a machine. The authors then tentatively discuss how these concepts might apply to antitrust policy. I found at least three of their explorations intriguing.

First, they suggest that antitrust pay attention not just to the market or meso-level of a competitive system but also to the industry or macro-level and the firm or micro-level. Firms that compete at the market level might not be quite as rivalrous at the industry level. Inside the firm, different divisions might engage in “co-opetition” like WhatsApp and Messenger both cooperating and competing within Meta. (This older American immediately thought of Oldsmobile and Pontiac.) The point is that antitrust should consider if competitive changes at those other two levels might affect the rivalry at the market level.

Second, the authors suggest a different mental model for antitrust authorities. Instead of a physicist or craftsman looking to “reach static and predictable outcomes,” authorities might want to view themselves as a park ranger (per Arthur) or gardener (per Hayek) and look to create the conditions under which the competitive system is most likely to thrive. I think that mental model is consistent with the humility that many of us have been championing for years while still allowing enforcers to do more than throw up their hands and say “it’s too complex for us to do anything.”

Third, the authors suggest that antitrust policy focus more on promoting uncertainty, either instead of or in addition to, rivalry. This suggestion builds on some of Petit’s work in his book. There, he describes how some Big Tech companies seemingly without direct competitors still feel competitive pressure from potential entrants or product/technology shifts that might render their product irrelevant. In some ways, antitrust already captures this idea; after all, the prohibition on price-fixing agreements is a way to force competitors to live with the uncertainty that comes from not knowing how a competitor will price. Should further antitrust restrictions be placed on certain competitors to make them at least feel more vulnerable?

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Author: Jon Cieslak

The U.S. Department of Justice Antitrust Division made waves recently by indicating that it is prepared to bring criminal charges for illegal monopolization, something it has not done in over 40 years.

Speaking at the American Bar Association’s National Institute on White Collar Crime on March 2, Deputy Assistant Attorney General Richard Powers said that, while he was not “making any announcements,” the Antitrust Division was “absolutely” prepared to bring Sherman Act, Section 2 criminal charges. He noted that Congress made violations of both Section 1 (which addresses anticompetitive agreements) and Section 2 a crime, and that the Antitrust Division has previously brought Section 2 charges alongside Section 1 charges “when companies and executives committed flagrant offenses intended to monopolize markets.”

If the Division does bring Section 2 charges, it will not lack for statutory authority. Section 2 of the Sherman Act expressly makes it a felony to “monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations.” 15 U.S.C. § 2.

But with a dearth of previous Section 2 prosecutions—which were usually brought with Section 1 claims in any case—it is hard to know what monopolization conduct the Division might prosecute. After all, the Division does not prosecute all violations of Section 1; it only prosecutes per se violations such as price fixing, bid rigging, and some market allocation agreements, not other anticompetitive agreements that are judged under the rule of reason. Section 2 violations, however, are not so neatly compartmentalized into per se and rule of reason violations.

This could lead defendants to challenge any forthcoming Section 2 charges on Due Process grounds because the statute is unconstitutionally vague about what conduct is illegal. Indeed, some have argued that Section 1 is vulnerable to this same attack—even though courts have substantial experience with Section 1 criminal cases.

The Antitrust Division previously dealt with this potential problem in a different context. When the Division announced that it would begin prosecuting wage fixing and no poaching agreements, which it previously had not prosecuted, it issued guidance to HR professionals about what conduct the Division would prosecute. This approach has been successful so far, as the only court to consider the issue has ruled against a constitutional challenge to the Antitrust Division’s prosecution of a wage fixing agreement.

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Author: Jarod Bona

I believe that Bitcoin is the enemy of tyranny and the greatest invention of the 21st century. Its detractors tend to either not understand Bitcoin or believe that the people are best when they are controlled and manipulated.

Maybe that was a little hyperbolic? I don’t care.

The truth is that I am still learning. I am still crawling through the rabbit hole (a cliché, but one often used in this area) and I recommend that you do the same. The more I learn, the more excited I get about Bitcoin and what it means for our future.

As someone who has made the study of and interaction with competition his career, it is fun to watch a superior competitor to government fiat currency develop.

We had (and still have) gold, but that has its limitations: Mostly, dividing and carrying it.

Blockchain v. Bitcoin

First, an important clarification: The incredible blockchain technology developed from Bitcoin, but many cryptocurrencies now utilize this technology for themselves. And NFTs (non-fungible tokens) are becoming a big deal in certain circles; they utilize blockchains like Ethereum. Bitcoin is on a blockchain, but there are other blockchains out there and other currencies and applications that utilize these blockchains.

To really get it, you must understand the distinction between Bitcoin and everything else that might appear on a blockchain. The blockchain technology is exciting and there are use cases that people are testing all over the world. And others that we can’t even contemplate yet. But there is only one Bitcoin and it is different in kind from everything else. You should read the original Bitcoin white paper by Satashi Nakamoto here to learn more.

The Limited Supply of Bitcoin

Among other more complex reasons, Bitcoin is different because it is programmed such that the number of Bitcoin will never exceed 21 million (and it won’t even reach 21 million for a long time). As far as money is concerned, it is harder than gold (even though it isn’t physical). And there isn’t a central authority (i.e. a Central Bank or any other entity) that can add inflation or otherwise screw around with it.

Go ahead, read that last paragraph again. And try to comprehend how big of a deal this is.

Currencies (even government fiat) work by supply and demand and you would be shocked if you discovered how many new dollars are introduced into the world each year, especially the last couple years. Go ahead and look it up. And it is much more than just the actual cash-money printer. It is Congress and the President adding more debt and the Federal Reserve “stimulating” the economy. Even simple bank loans increase the money supply. Anyway, poke around the internet about this to add a new anxiety to your life.

You don’t have to have a Ph.D. in Economics to understand that dramatically increasing the supply of something can negatively affect its value. And that’s just as true with dollars and other fiat currencies.

Did you know that “Mo Money Mo Problems” by The Notorious B.I.G. is really a ballad about the ravages of increases in the money supply?

Well, I made that up. But it would be a great title for what’s happened with fiat currency.

Network Effects

If you follow antitrust issues, you are now undoubtedly familiar with network effects. There are certain products, services, or platforms (even currencies) that become more valuable to each user, the more users participate. So, for example, if you are building a platform business, the more sellers on your platform, the more useful your platform will be to buyers, and vice-versa. This is one reason why you see so many new platform tech companies burning through money, charging customers as little as possible, sometimes nothing. The game is to win the market, at whatever cost. Then you can start to really monetize. Social media, of course, works the same way. People want to be where others are.

Anyway, Bitcoin also benefits from network effects. As more people use it as a store of value, the more valuable it becomes as a store of value. And while Bitcoin is also a medium of exchange, I think that its current role is much more of a store of value because it is still quite volatile and, frankly, those that understand it don’t really want to spend it as the value has consistently increased—sometimes dramatically—during this current adoption phase (which may continue for years).

Bitcoin as a Censorship-Resistant Medium of Exchange

As a medium of exchange, however, there is a second layer on top of the Bitcoin blockchain called the Lightening Network that makes it even easier for users to exchange bitcoin. And if you go to El Salvador (which has adopted Bitcoin as legal tender), you can utilize the lightening network, through an app, to purchase a McDonald’s Cheeseburger with bitcoin.

In addition, we are beginning to see people take all or parts of their salaries in bitcoin including the mayors of New York City and Miami. A company called Strike allows you to set up a direct deposit of your paycheck in part or in full in bitcoin. And as the government money printing starts to show up even in the official government inflation numbers, more and more people are looking for protection from the currency devaluation, which seems to have no end in sight. Bitcoin offers one possible solution, with its inherently limited supply that no person or entity can change.

Bitcoin (and Ethereum) have also literally saved lives by providing money for people in Ukraine when banks and ATMs weren’t available. And the government of Ukraine has taken in millions of dollars of donations in these cryptocurrencies. This isn’t a surprise as The Human Rights Foundation has long utilized Bitcoin to help those facing tyranny throughout the world.

The reason that Bitcoin is the solution to those under oppression is that it is decentralized such that no government, entity, or person can cancel it or remove people from its network. In that sense, it is censorship resistant. For the antitrust fans out there, not even a group boycott can keep you from using it. This censorship-resistant feature will likely become increasingly important, including in developed countries as banishment, oddly, seems to be in fashion as a method of punishment.

Bitcoin Competes with Government-Backed Currencies like the Dollar

Like any market, there is a market for currency. And the dollar, particularly in the United States, has market power. It is, at least for now, the world’s reserve currency. The dollar still competes well against currencies from other nation-states, despite its dramatic increase in supply, in part because other countries are doing the same thing, often to a much greater extent.

But now that there is an emerging non-government-backed currency, it will be interesting to see what happens. Bitcoin is vastly superior to government currency in many ways, but it has been around for a relatively short time, so many are still skeptical (I personally am not skeptical).

Besides Bitcoin, there are other currencies that will compete with the dollar, including China’s digital currency (which comes—at no extra charge—with high-tech surveillance tools). Bitcoin may not displace the dollar, but it wouldn’t surprise me if it has a major role alongside it, as it is better than the dollar in certain ways. This includes the programmed fixed supply, alongside the fact that people can move Bitcoin across time and space more quickly and cheaply than government-backed currencies. And, of course, its censorship-resistant qualities are becoming more apparent and important on the world stage.

You might begin to see countries, including the United States, adopt their own digital currencies. But don’t be fooled: These currencies will not be censorship resistant and will always be subject to increases in their supply. They are not worthy competitors to Bitcoin and their dystopian qualities could be frightening for those that cherish freedom.

The Environmental Benefits of Bitcoin

The Bitcoin network runs on a proof-of-work system that changes energy to value that can be stored and transferred across time and space. So—like just about everything else human-created in this world—it requires energy. Those that don’t fully understand Bitcoin sometimes target the proof-of-work energy use as a reason to criticize this positive world-changing technology. You can tell what I think by the way I framed that sentence.

But what you don’t hear in these shallow articles by those that don’t truly understand Bitcoin (see, I did it again) is that Bitcoin utilizes energy in such a unique way that the environmental impact is likely to end up as a net positive. Of course, even that is unfair to Bitcoin as we don’t routinely criticize other technologies that use energy. But if you don’t understand something, you tend to fear it and look for flaws. So, I’m not surprised that the Bitcoin luddites get stuck on the energy usage.

Bitcoin mining can be done anywhere and anytime and allows those that mine to convert energy to value in the most flexible of circumstances. These features create positive consequences for energy markets and the environment.

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Author: Luis Blanquez

It is time again for the ABA Antitrust Spring Meeting. In my case, this year is particularly special for two reasons. First, because the meeting is live. While the Zoom meetings have been extremely helpful, I think we (almost) all agree—online conferences just aren’t the same as in person ones. Second, because I will be a speaker in the panel dedicated to state action immunity issues: Is There Anything Left to Smile About?

Below is a brief preview of the State Action Immunity issues I will be discussing.

  1. The State Action Immunity Doctrine: From Parker to Phoebe Putney, City of LaGrange, SmileDirect and Quadvest

The state action immunity doctrine allows certain state and local government activity to avoid antitrust scrutiny. Federal antitrust laws are designed to prevent anticompetitive conduct in the market. Yet, the Supreme Court long ago held that these antitrust laws do not apply against the States themselves, even when they take actions that harm competition. Parker v. Brown, 317 U.S. 341 (1943). Like other judicially imposed exemptions from the antitrust laws, the Supreme Court has held that the Parker doctrine must be narrowly construed.

While the states themselves may adopt and implement policies that depart from the federal antitrust laws, subordinate political subdivisions, including state regulatory boards and municipalities, are not beyond the reach of the antitrust laws by virtue of their status because they are not themselves sovereign. The Supreme Court has recognized that a state legislature or state supreme court acting in its legislative capacity is “the sovereign itself,” whose conduct is exempt from liability under the Sherman Act without need for further inquiry.

But when the activity is not directly that of the state legislature or supreme court but is instead carried out by others pursuant to state authorization, the challenged restraint qualifies for state action exemption only if it is (1) undertaken pursuant to a “clearly articulated and affirmatively expressed” state policy to displace competition, and (2) actively supervised by the state. California Retail Liquor Dealers Ass’n v. Midcal Aluminum, Inc., 445 U.S. 97, 105 (1980).

So, when is then 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. Under this new standard, the defendant’s conduct must be not only foreseeable, but also the “inherent, logical, or ordinary result” of the state scheme.

In the panel we will discuss the different wrinkles under the two Midcal prongs, and how courts all over the country have started to apply the new heightened standard under Phoebe Putney when considering the clear articulation requirement.

  1. A Market Participant Exception is Necessary

At Bona Law we advocate for the establishment of a formal market participant exception, and we expect that the state action exemption will continue to narrow over time.

Indeed, when a state regulates, the market participants compete on the same playing field within the framework of that regulation. But if a commercial actor—public or private—is free of antitrust scrutiny, the federal policy of interstate competition suffers because participants do not play by the same rules. Therefore, state and local market participants must follow the same federal competition rules as their private counterparts.

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As a regular reader of The Antitrust Attorney Blog, you understand that coordinating prices or allocating markets with your competitor is a terrible idea. Doing so is likely to lead to civil litigation and perhaps even criminal penalties.

Price fixing and market allocation agreements are per se antitrust violations. That means they are the worst of the worst of anticompetitive conduct.

There is, however, a limited circumstance in which what would normally be a per se antitrust violation is instead treated under the rule of reason by Courts and government antitrust agencies:

An ancillary restraint.

You shouldn’t put ancillary restraints in your agreements without the help of an antitrust lawyer. That would be like juggling knives that are on fire. You might be able to do it, but if you make a mistake, you won’t like the results.

What is an Ancillary Restraint?

This isn’t an easy question to answer and, in fact, if you can answer it, you will often know whether your restraint will survive antitrust scrutiny.

Let’s back up a little bit.

In a typical situation, if two competitors agree to fix prices or to split a market (perhaps they will agree to limit their competition for each other’s customers), they commit what is called a per se antitrust violation. What that means is that this type of restraint is so consistently anticompetitive that courts won’t even examine the circumstances—it is per se illegal.

Obviously you should avoid committing per se antitrust violations, unless, of course, you want to experience an antitrust blizzard.

Without further context, such a restraint is often called a naked restraint of trade. That doesn’t mean that the cartel meets at a nudist colony; it means that it is an anticompetitive agreement with nothing surrounding it. Such agreements are almost always done to gain supracompetitive profits from the restraint itself.

So what does a non-naked restraint of trade look like? Interesting question. I will answer it, but you have to read through most of this article to get it.

Sometimes two or more parties, even competitors, will put together a joint venture or collaboration that creates what antitrust lawyers often call efficiency. You might normally think of increased efficiency as running more smoothly or at the same or better result with fewer resources.

But when antitrust attorneys use the term “efficiency” or “efficiency enhancing,” they often mean that the venture or combination will create economic value for the marketplace as a whole that wouldn’t exist but for the agreement. The term often comes up in the merger context, as an antitrust analysis of a merger will examine whether the benefits through efficiency and more exceed any potential anticompetitive harm.

An Ancillary-Restraint Example

Sometimes it is easier to understand with an example: Let’s say you have a company called Research that is full of people with PhDs that spend all of their days trying to figure out how to make the world a better place. If someone at Research comes up with a good idea, the company will sometimes manufacture and sell the finished product itself.

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Authors: German Zakharov and Dmitry Domnin

German Zakharov
German Zakharov is a Partner of the Competition/Antitrust and Foreign Direct Investments Practices at ALRUD Law Firm. German supports clients on a wide range of antitrust issues: coordination of merger control transactions with Federal Antimonopoly Service of the Russian Federation (FAS Russia), cartel investigations, advising on distributorship agreements, and analyzing compliance of commercial agreements with antitrust requirements. German represents companies during dawn raids performed by FAS Russia and its territorial subdivisions as well as in court.

Dmitry Domnin Dmitry Domnin is a Senior Attorney of the Competition/Antitrust and Foreign Direct Investments Practices at ALRUD Law Firm. Dmitry advises on a wide range of antimonopoly issues. His experience includes merger control clearance of global M&A/JV transactions. In addition, Dmitry represents clients during the national security clearance of transactions related to the foreign investments in Russia, including investments in strategic industries. Dmitry has experience in assisting clients during antimonopoly cases, in particular cases on abuse of dominance. Dmitry also has experience in preparation and running mock dawn raids. Dmitry advises clients on the various issues related to the antimonopoly risks of vertical agreements, including risks under the legislation of the Eurasian Economic Union.

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Authors: Steven J. Cernak and Luis Blanquez  

As we have discussed in several recent posts, the FTC has made several changes to the merger antitrust review process. This month, the FTC made two more changes, one completely expected and one hinted at in other recent announcements.

HSR Thresholds Updated

As expected — in fact, required by statute — the FTC announced the annual update to various HSR thresholds based on growth in the economy in the last year. The minimum threshold for filings was increased to $101M. Any transactions properly valued at that level or less do NOT trigger any HSR filing requirement. The upper threshold was also increased, this time to $403.9M. Any transaction valued in excess of that level will trigger a filing requirement unless one of several exemptions apply. Transactions valued in between those two amounts will trigger a filing requirement only if the size of the person thresholds are crossed. In short, those thresholds require one of the parties to have annual net sales or total assets exceeding $202M while the other party’s figures exceed $20.2M.

While the FTC announced these new threshold levels this month, they will only become effective thirty days after the official announcement is published in the Federal Register — so, late in February. The FTC has said that it is exploring other, more substantive, changes to the HSR process but none have been announced. As we have discussed previously, HSR’s valuation and exemption rules can be complicated so be sure to reach out to your Bona Law contact for further advice on HSR filing requirements and strategy.

Merger Guidelines to Change?

Earlier in the month, the FTC also announced that it was joining with the DOJ Antitrust Division to consider a complete rewrite of both the Horizontal and Vertical Merger Guidelines. In a virtual conference and a long statement, the agencies announced both the dozens of questions they hope to consider in the coming months and the process for the exercise. Comments and suggestions from the public are welcome until the end of March. The agencies expect to have a draft of new Guidelines shortly thereafter before opening another comment period. They hope to complete the process by the end of 2022.

The Guidelines have been issued by the agencies for decades. They are meant to describe the analysis that the agencies use to evaluate whether any merger or similar transaction violates the antitrust laws. Making the Guidelines public helps merging parties have some idea if their transaction will be challenged by the agencies. While not officially law, they have proven to be highly influential with courts considering such challenges.

The exact changes the agencies will propose are not yet known; however, based on their statements during the announcement and the questions posed to the public for comment, here are some key questions that the agencies will consider and that could lead to drastic changes in merger review:

  • Should new Guidelines further de-emphasize market definition in favor of an approach that tries to directly predict competitive effects?
  • Should presumptions based on market shares or similar measures be strengthened?
  • Should effects on parties other than consumers, like labor and local communities, receive greater emphasis?
  • Should effects on elements other than price, such as product quality and wages, receive greater emphasis?
  • Should some efficiencies, such as lower input prices from suppliers, be seen as reasons to challenge the merger?
  • Should distinctions between horizontal and vertical transactions reflected in the guidelines should be revisited considering trends in the modern economy?

The agencies also seek input on potential updates to the guidelines’ discussion of potential and nascent competitors, which may be key sources of innovation and competition, as well as how to account for key areas of the modern economy like digital markets in the guidelines, which often have characteristics like zero-price products, multi-sided markets, and data aggregation that the current guidelines do not address in detail.

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Court-rejects-Facebook-Motion-to-Dismiss-Antitrust-Amended-Complaint-300x169

Author: Jarod Bona

The FTC filed an antitrust lawsuit against Facebook (now Meta Platforms Inc.). Judge James E. Boasberg dismissed it. The FTC then filed an amended complaint. And the same judge just denied Facebook’s motion to dismiss that complaint.

The FTC alleges that Facebook has a longstanding monopoly in the market for personal social networking (PSN) services and that it unlawfully maintained that monopoly through (1) acquiring competitors and potential competitors; and (2) preventing apps that Facebook viewed as potential competitive threats from working with Facebook’s platform.

The FTC’s first claim asserts that Facebook monopolized the market through (1), above—acquiring companies (especially Instagram and WhatsApp) instead of competing. The FTC’s second claim includes both (1) and (2), the interoperability allegations, and invokes Section 13(b) of the FTC Act, which allows the agency to seek an injunction against an entity that “is violating” or “is about to violate” the antitrust laws.

The Court permitted the FTC to go forward with both claims, but also concluded that the facts from the interoperability allegations happened too long ago to fit into Section 13(b)’s “is violating” or “is about to violate” temporal requirement.

You can read the play-by-play of the opinion elsewhere or, even better, read the actual decision. My purpose with this article is instead to offer some observations about the opinion and broader antitrust litigation issues.

Direct and Indirect Evidence of Monopoly Power

The FTC argues that it has alleged both indirect and direct evidence of Facebook’s monopoly power. But because the Court concluded that the FTC had adequately alleged indirect evidence of Facebook’s monopoly power, it didn’t need to analyze the direct evidence of monopoly power.

The only reason I am bringing this up is because most monopolization cases focus on indirect evidence of monopoly power—i.e. relevant market definitions, market share, barriers to entry, etc.— so many people don’t consider that a plaintiff can also satisfy this element through direct evidence of monopoly power. For example, if a plaintiff can prove that a defendant is engaged in supracompetitive pricing, it is showing direct evidence of monopoly power. And in an antitrust claim against a government entity, the plaintiff may be able to show directly that the public entity is a monopolist as a result of government coercion.

Notably, the Court dismissed the last FTC Complaint against Facebook for failure to allege monopoly power. Here, the Court concludes that “the Amended Complaint alleges far more detailed facts to support its claim that Facebook” has a dominant share of the relevant market for US personal social networking services.

In reaching this conclusion, the Court agreed with the FTC that Facebook’s dominance is durable because of entry barriers, particularly network effects and high switching costs.

Anticompetitive Conduct

The alleged anticompetitive conduct consists of a series of mergers and acquisitions. Within antitrust and competition law, you typically hear about antitrust M&A in the context of Hart-Scott-Rodino filings and direct merger challenges by the FTC or DOJ.

Courts will sometimes conclude that mergers and acquisitions are a means of exclusionary conduct by a monopolist. As in the present case, that can come up when a company that dominates a market confronts a potential competitor and must decide how to respond. Sometimes the monopolist will compete better—reduce prices, improve quality, etc. That’s the way competition works. But in other situations, the monopolist might solve its problem by dipping into its cash or stock and remove the threat to its monopoly profits by buying the nascent competitive threat.

You could also imagine a scenario in which a monopolist engages in exclusionary conduct by going vertical and purchasing either a supplier or customer in a context in which such doing so makes it difficult for the monopolist’s competitors to achieve economies of scale. This can be similar in effect to an exclusive-dealing arrangement.

Harm to Competition

The FTC, of course, must allege harm to competition. The standard harm to competition is an increase in prices or a decrease in quality—which are two sides of the same coin. But these aren’t the only harms to competition that a plaintiff can allege.

Here, of course, the FTC is asserting an antitrust claim centered on purchase of Instagram and WhatsApp, which were free before and after the acquisitions. And the Facebook social network site is, of course, also free.

But the Court concluded that the FTC did, in fact, allege harm to competition. The FTC alleged “a decrease in service quality, lack of innovation, decreased privacy and data protection, excessive advertisements and decreased choice and control with regard ads, and a general lack of consumer choice in the market for such services.” And the FTC emphasized the lower levels of service quality on privacy and data protection resulting from lack of meaningful competition.

The Court accepted these allegations as sufficient harm to competition: “In short, the FTC alleges that even though Facebook’s acquisitions of Instagram and WhatsApp did not lead to higher prices, they did lead to poorer services and less choice for consumers.”

The question of whether less choice is sufficient harm-to-competition to support an antitrust claim has been controversial over the years, but Courts are increasingly permitting it.

Previously Cleared Transactions

Facebook understandably grumbles that the FTC previously cleared through the HSR process the two transactions that it now complains about. But the Court rejects this argument because it says the “HSR Act does not require the FTC to reach a formal determination as to whether the acquisition under review violates the antitrust laws.” And, in fact, an HSR approval expressly reserves the antitrust enforcers the right to take further action. It doesn’t seem fair, but that’s the way it is.

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