Tuesday, December 23, 2008

Antitrust Compliance Policies Can Help Prevent or Limit Liability

Consequences of Antitrust Violations - Each year, a number of companies in the consumer goods and retail industry are indicted or sued for alleged involvement in price fixing, bid rigging, and other antitrust violations. Examples of alleged price-fixing mentioned on this blog include, for example, chocolate manufacturers, packaged ice manufacturers, egg producers, tomato processors, and multiple retailers. On December 16, for example, a sales broker for a major tomato processor pleaded guilty to antitrust and related charges in connection with a price-fixing scheme in which he bribed purchasing agents at Safeway, Kraft, ConAgra, Frito-Lay and other companies to pay artificially inflated prices.

Antitrust violations, if discovered, can be devastating to a corporation, potentially leading to substantial liability, including criminal fines, treble damages, attorneys' fees, and other related costs. Ice manufacturers Reddy Ice and Arctic Glacier, for example, have seen their stock prices drop by over 90% after they publicly disclosed in March 2008 that they were targets of a criminal antitrust investigation.

Compliance Policies - To help avoid antitrust liability, companies should develop and implement proactive antitrust compliance policies and programs that will help prevent and detect violations. The existence of antitrust compliance policies may also be a mitigating factor at sentencing in the event that a company is found guilty of criminal antitrust violations. In order to qualify for a sentencing reduction under the Federal Sentencing Guidelines, a company must have implemented an antitrust compliance policy that meets certain minimum criteria.

To be effective, the antitrust compliance policy should be specifically tailored to the company's business and culture. In addition, the policy should explain the company's commitment to antitrust compliance, provide clear compliance standards, assign responsibility for overseeing compliance to high-level executives, and provide mechanisms to enforce compliance, including consistent disciplinary actions.

Compliance Programs – Simply having a written policy is not enough. Employees – especially sales staff, purchasing staff, and executives – need to be educated on the company's antitrust policy, e.g., through interactive in-person training sessions, and written, internet, or video instruction. Employees should be trained periodically to avoid discussing certain topics with competitors, such as pricing, market share, customer allocation, or boycotts. They should also be educated about situations where antitrust issues are most likely to arise, such as trade association meetings and other industry gatherings, including social gatherings with competitors. And they should be warned of the potential for individual liability under antitrust laws, even if they were ordered by a superior to participate in the antitrust scheme.

Periodic corporate audits can help ensure compliance with antitrust guidelines. Auditors can examine e-mail correspondence and other records of key employees, such as those involved in sales, pricing, or marketing decisions, along with employee interviews. Exit interviews of outgoing employees that include antitrust-related questions can also prove valuable.

In the current economic environment, companies may be tempted to skimp on discretionary spending like the implementation of an antitrust compliance policy. But such short-term savings may lead to future expenses far in excess of the short-term costs. Experienced antitrust counsel can help in developing and implementing appropriate antitrust compliance policies and programs.

In a subsequent post, I will address issues that should be addressed if a company discovers that its employees have committed antitrust violations.

Monday, December 15, 2008

Bankruptcy Filings Up 30 Percent

According to newly released figures from the U.S. Courts, bankruptcy filings in federal courts increased over 30% in fiscal year 2008, which ended September 30. There were 1,042,993 bankruptcy filings this year compared to 801,269 filings last year.

The increase in bankruptcy filings was even more dramatic for business filings, which were up 49% to 38,651, compared to 25,925 in FY 2007. Among these filings were a number of retailers, who face a difficult economic environment. Bankruptcy concerns have led to consumer warnings about buying holiday gift cards at retailers who are not financially strong.

Related posts: Retail Bankruptcies Rise; Sharper Image Closing Retail Stores Amid Rise in Banruptcies

Thursday, December 11, 2008

Whistleblowers in China Sent to Mental Hospital

A number of whistleblowers in one province of China were sent to a mental hospital to keep them quiet, according to a recent New York Times article, citing the Beijing News.

The N.Y. Times reported:

[P]ublic security officials in the city of Xintai in Shandong
Province were said to have been institutionalizing residents who persist in
their personal campaigns to expose corruption or the unfair seizure of their
property. Some people said they were committed for up to two years, and several
of those interviewed said they were forcibly medicated. . . . [M]ost inmates
were released after they agreed to give up their causes.

Retaliation Common: Unfortunately, retaliation against whistleblowers is a common phenomenon. In the United States, whistleblowers are frequently fired or demoted. According to one study of hundreds of whistleblowers, almost 70% of those who reported wrongdoing internally were terminated, while more than 80 % of those who reported wrongdoing to outside entities were terminated. Recent examples of retaliation against whistleblowers in the U.S. include, for example, a TJ Maxx employee fired for reporting on data security problems, a federal prosecutor demoted after reporting that his supervisor mishandled classified material, retaliation against federal air marshals who reported misconduct by other marshals, an FAA employee demoted for reporting safety violations, and my own client who was fired and blacklisted for refusing to participate in and reporting an antitrust conspiracy.

Potential Solutions: While there are some laws in place designed to protect whistleblowers from retaliation, reporting wrongdoing is still a risky proposition, and potential whistleblowers must seriously consider the potential costs and benefits. Some laws, like the False Claims Act, are designed to provide positive incentives to whistleblowers who report fraud against the federal government. Between 1996 and 2005, whistleblowers helped the government recover $9.3 billion under the False Claims Act for health-care related fraud, of which the whistleblowers received over $1 billion.

While affirmative whistleblower incentives in the United States are limited to fraud against the government, some countries offer broader incentives, such as offering whistleblowers a percentage of any criminal antitrust fines imposed.

Although one (inappropriate) government response to whistleblowers is putting them in a mental hospital, I advocate the government providing affirmative rewards to encourage whistleblowers to come forward despite the risk of termination or other forms of retaliation.

Related Posts: Incentives & Disincentives for Insiders to Expose Unlawful Cartels; Kotchen & Low LLP Sues Packaged Ice Manufacturers on Behalf of Former Party Time Ice Executive Martin McNulty; Considerations for Individuals Who Refuse to Participate in Illegal Business Practices.

Tuesday, December 9, 2008

Whole Foods Files Suit Against FTC

Whole Foods Counter-Suit Against the FTC: Whole Foods is pursuing a rare challenge to the FTC: a suit filed in United States District Court in Washington, D.C. alleging due process violations, including prejudgment of the merits and inadequate time to prepare for trial. (See Whole Foods' press release; WSJ story). Whole Foods is also petitioning Congress to seek a change of venue of a trial from the FTC to federal court.

Assertion That Process Is Unfair: Whole Foods' suit challenges an administrative process that Whole Foods believes is unfair: a "home court advantage" for FTC staff attorneys who litigate cases. This home court advantage functions as follows: Before filing a lawsuit, FTC staff attorneys have to present a proposed case to the FTC Commissioners. The majority of the Commissioners then have to approve the staff attorneys' filing a lawsuit. If a majority of the Commissioners approve, the staff attorneys file the suit. In cases challenging mergers – barring a stipulation by the merging parties to delay a merger pending resolution of an FTC challenge (which could take years) – the suit is initially filed in federal court, where the FTC staff attorneys seek injunctive relief (a preliminary injunction). The FTC does not have the authority to enjoin mergers pending resolution of an FTC challenge, which is why it sues initially in federal court. If the staff attorneys are successful in seeking a preliminary injunction in federal court, the merits of a proposed merger are then litigated administratively within the FTC. The case is tried initially before an administrative law judge and then "appealed" to the Commissioners of the FTC. Thus, the same Commissioners who approved filing a suit in the first place, are then charged with reviewing the legality of a merger they initially decided to challenge. That's where the FTC staff attorneys' home court advantage exists.

Defendants' Procedural Advantage: But the FTC staff attorneys (as well as the agency itself) also face a significant disadvantage: a decision by the Commissioners on the legality of a proposed merger can be appealed to any federal appeals court. The parties to a proposed merger can freely forum shop. This ability to forum shop has proven costly to the FTC. For example, after an administrative trial, the FTC found in late 2003 that agreements involving Schering Plough and Upsher-Smith Laboratories violated of the antitrust laws. Schering and Upsher Smith appealed the FTC decision to a favorable jurisdiction: the 11th Circuit Court of Appeals, which overturned the FTC decision and ruled in favor of Schering and Upsher Smith. See Schering-Plough Corp. v. FTC, 402 F.3d 1056 (11th Cir. 2005).

Lobbying Effort: Representatives of Whole Foods are meeting today with members of Congress to consider legislative changes to the process, seeking to change the venue of the proceedings from the FTC to a federal court. Whole Foods has criticized as unfair the FTC's ability to proceed first in an administrative hearing, whereas cases brought by the DOJ are heard initially by federal courts.

Analysis: Whole Foods' challenges to the FTC process are highly unlikely to succeed. The process was created by Congress and has been in place since the 1930s. Whole Foods' goal in pursuing the challenge is likely to seek a settlement with the FTC so that Whole Foods can move beyond the Wild Oats acquisition and re-focus its efforts on growing its business in a difficult economy. As we previously reported here, Whole Foods is currently facing an extraordinarily difficult task: undoing steps that have been taken to combine its assets with Wild Oats. (The combination followed a district court decision denying the FTC staff attorneys' efforts to preliminarily enjoin Whole Foods acquisition of Wild Oats, which was subsequently overturned by the D.C. Circuit Court of Appeals). Whole Foods' CEO, John Mackey, now believes that the organization is worse off having decided to acquire Wild Oats.

Related posts:D.C. Circuit Denies Rehearing; D.C. Circuit Reverses Ruling That Allowed Whole Foods Merger with Wild Oats; Whole Foods Faces Consumer Class Action.

Monday, December 8, 2008

Valassis and News America File Summary Judgment Motions

On December 1, summary judgment motions were filed in Valassis v. News America Marketing, a $1.5 billion antitrust case involving the two dominant companies that sell Free Standing Inserts ("FSIs"), a case originally discussed here.

News America had filed a motion on November 21 to extend the deadline for summary judgment motions and Daubert motions. After the Court held a hearing on the request on December 1, the Court denied the motion, pointing out that the action has been pending for almost three years and that the parties had previously agreed to the December 1 deadline.

News America's summary judgment motion seeks dismissal of all of Valassis' claims, while Valassis seeks partial summary judgment. The briefs and affidavits in support of the motions were filed under seal and therefore unavailable to the public. Valassis also filed sealed motions on December 1 to exclude two of News America's expert reports.

Related post: Valassis' $1.5 Billion Antitrust Suit Against News America Marketing Over FSIs.

Friday, December 5, 2008

Conference Participants Criticize Resale Price Maintenance

Conference on RPM - On December 4, a conference was held in Washington, D.C. on the topic of resale price maintenance ("RPM") by consumer advocates, regulators, and policy experts opposed to RPM.

Minimum RPM has emerged as a hot topic in the wake of the Supreme Court's 2007 ruling in Leegin Creative Leather Products, Inc. v. PSKS, Inc., which held that RPM is no longer illegal per se, but is evaluated under the rule of reason. This has allowed manufacturers to impose minimum resale prices on retailers, and has been very controversial.

Conference participants criticized Leegin's impact on consumers and retailers, and criticized the policy rationale for the decision:

Increased Consumer Prices - The American Antitrust Institute provided specific examples of popular toys and baby products whose prices for consumers increased in price by 20 to 40% in the wake of Leegin, available here.

FTC Commissioner Pamela Jones Harbour cited a 1975 Congressional analysis of RPM under state fair trade laws, which authorized states to authorize RPM within their borders. According to Commissioner Harbour, Congress found that RPM led to substantially higher consumer prices, an increase in sales by less efficient distributors and retailers, decreased entry opportunities, and decreased inter-brand and intra-brand competition, which led Congress to pass the Consumer Goods Pricing Act of 1975 that repealed the state fair trade laws.

Harm to Retailers - The losing party in the Leegin case, Phil Smith – an owner of Kay's Kloset, spoke at the conference, explaining that the Leegin ruling forced him out of business. Almost half of his Mr. Smith's sales were of Leegin products. When Mr. Smith refused to stop offering discounts on Leegin products, Leegin stopped supplying their products to him, and his sales dropped substantially, forcing him out of business. His statement is available here.

Representatives of BabyAge.com (previously discussed here) and eBay also spoke out against Leegin. RPM has had its greatest effect on internet retailers, who tend to discount more aggressively than brick and mortar stores, in part because they generally have a more efficient distribution model. They also argued that the internet offers small retailers an opportunity to compete more effectively with big box stores if they are able to discount aggressively. "In these tough economic times, consumers need retailers competing more than ever to offer them the best prices for their hard-earned money," said Jacob Weiss, President of BabyAge.com.

Little Evidence of Benefits – Proponents of RPM argue that brick and mortar retailers offer customer support and other benefits that internet retailers do not offer. They also argue that RPM promotes inter-brand competition.

Sony recently offered a new justification for resale price maintenance: that it eliminates consumer stress because consumers don't have to worry about whether they can get a better deal from a different retailer.

Conference panelists questioned these arguments, pointing to the lack of empirical evidence of the benefits of RPM to consumers. Further, while Leegin did not make RPM per se lawful, panelists pointed out that, given the uncertainty and costs associated with a rule of reason lawsuit, there are unlikely to be many challenges to RPM practices.

Proposed Legislation - Legislation co-sponsored by Senators Biden and Clinton would reinstate the per se prohibition on such price agreements, and conference participants spoke out in favor of the legislation. See Discount Consumer Protection Act, S. 2261. At least 35 state attorneys general support the legislation, and the Senate is expected to hold hearings on the issue in the upcoming term.

Conference materials and audio recordings are available here. Coverage of the conference by the Wall Street Journal is available here, and a web site on the issue has been set up at http://www.protectconsumerchoice.org/.

Related Posts: WSJ Examines Manufacturers' RPM Practices; FTC's Nine West Order Explores RPM Under Leegin; State RPM Laws and Leegin; Herman Miller Contends That Consent Decree Allows it to Continue Minimum RPM Policy; Developing Legally-Compliant Trade Promotion Management Programs.

Wednesday, November 26, 2008

D.C. Circuit Denies Rehearing of Whole Foods Case

Rehearing En Banc Denied - On November 21, the D.C. Circuit issued an order denying a petition for rehearing en banc of the Whole Foods decision, and issued an amended opinion, which reversed an earlier decision not to enjoin the merger between Whole Foods Markets and Wild Oats, as previously discussed here. The denial of rehearing en banc means that the full court will not reconsider the opinion of the three-judge panel that issued the D.C. Circuit opinion, and the Federal Trade Commission will proceed with hearing the case on the merits.

The Acting Director of the Bureau of Competition at the FTC, David Wales, commented, “the decision rendered by the majority of the appellate panel reaffirms that the proper role of the district court in considering whether to grant the Commission’s request for a preliminary injunction is limited to whether the case raises sufficiently serious and substantial issues so as to make them fair ground for litigation during the full trial on the merits in the administrative proceedings.” He added that “we look forward to presenting our evidence as to why this merger is unlawful and should be undone at the plenary trial in a few months.”

FTC Case to Proceed - The scheduling order in the case, available here, indicates that a hearing on the merits will be held on February 16, 2009. Because of the unusual procedural sequence of events, the merger has already been completed and the assets of the organizations combined, meaning that the putative injunction will be difficult to comply with and enforce, at least in the short term. Assuming that the FTC prevails on the merits, a significant issue in the case will be how to undo the completed merger.

Cautionary Lessons - This case will almost certainly be used as a cautionary tale by antitrust enforcers and lawyers for years to come: parties to a proposed merger will likely be advised to reconsider combining assets even if a district court decides a preliminary injunction to enjoin the merger is not warranted. In the past, parties to a proposed merger treat a preliminary injunction decision as a final decision on the merits, as one inquiry the court must address in deciding whether to enjoin a merger is assessing the likelihood that the merger will ultimately be found by a judge or jury to be anticompetitive. Parties to a proposed merger that are successful at the preliminary injunction stage have typically combined assets following the court’s decision. That is precisely what happened here. Now that the D.C. Circuit has reversed the district court’s preliminary injunction decision, Whole Foods and Wild Oats must grapple with an extraordinarily complicated exercise – undoing the steps that have been taken to combine the two organizations’ assets. Ironically (and unfortunately), this exercise will likely prove to weaken both organizations’ competitive positions, at least in the short term.

Related posts: D.C. Circuit Reverses Ruling That Allowed Whole Foods Merger with Wild Oats; Whole Foods Faces Consumer Class Action.

Wednesday, November 19, 2008

FLOORgraphics v. News America Trial Postponed Until March 2

A couple readers have e-mailed me asking about the trial in Floorgraphics v. News America Marketing, a case related to in-store floor and shelf advertising. Trial was scheduled to start on November 12, but has been postponed until March 2, 2009 because the Judge became unavailable. (Previous posts about the case are available here, here, and here).

The $1.5 billion Valassis v. News America Marketing case related to FSIs, meanwhile, is scheduled for trial in April 2009. (For prior posts click here and here).

Finally, Insignia v. News America Marketing, involving in-store price-based shelf signs, is set for May 1, 2009, as reflected in an October 31 scheduling order. (Prior posts here, here, here, here, and here).

It looks like a busy spring for News America and its attorneys, though the trial date for Insignia and/or Valassis could get pushed back.

Related posts: FLOORgraphics v. News America Trial Pushed to Nov. 12; FLOORgraphics' Suit Against News America Set for Trial October 1; Summary Judgment Motion Denied in FGI v. News America Marketing.

Tuesday, November 18, 2008

Kotchen Addresses Retailer Pricing Strategies at TPMA Conference

On November 10, Kotchen & Low LLP partner Daniel Kotchen spoke at the Trade Promotion Management Association (“TPMA”) conference in Scottsdale, Arizona on the topic of “The Convergence of Law and Business on Retailer Pricing Strategies.”

In his presentation, Mr. Kotchen addressed legal implications related to two business strategies: (1) consumer goods manufacturers’ efforts to influence/control minimum prices set by retailers and (2) manufacturers’ efforts to award discounts and allowances (i.e., “trade funds”) to retailers on the basis of profitability rather than simply on gross sales volume.

A copy of Mr. Kotchen’s presentation can be found here.

Friday, October 31, 2008

Whole Foods Faces Consumer Antitrust Class Action

Class Action Filed - A consumer antitrust class action lawsuit was filed against Whole Foods Market, Inc. earlier this week, alleging that it sold premium, natural, and organic produce at anti-competitive prices after its acquisition of Wild Oats, in violation of Section 7 of the Clayton Act (for an acquisition that substantially lessens competition and tends to create a monopoly), Section 2 of the Sherman Act (for monopolization), Section 1 of the Sherman Act (for entering into an agreement in restraint of trade), and Section 3 of the Clayton Act (for allegedly foreclosing competition in the relevant market). See Kottaras v. Whole Foods Market, Inc., No. 1:08-cv-1832-PLF (D.D.C. filed Oct. 27, 2008).

Although the named plaintiff in the lawsuit is a resident of Glendale, California, the case was filed in federal court in Washington, DC, as a related lawsuit to the Federal Trade Commission's action that opposed the merger. The Kottaras case follows the D.C. Circuit's recent decision finding that the merger between Whole Foods and Wild Oats was likely anti-competitive (previously discussed here).

Courts Had Permitted the Merger - Given the unusual proceedings that have unfolded in the FTC case, some would consider the Kottarras lawsuit unfair or unwarranted. The class action is based on the allegedly anti-competitive merger between Whole Foods and Wild Oats, which was only consummated after two courts denied injunctive relief. The FTC initially challenged the merger on June 5, 2007. The district court denied the FTC's request for a preliminary injunction on August 16, 2007, and the D.C. Circuit denied the FTC's motion for an injunction pending appeal on August 23, 2007. Thus, the merger had the implicit blessing of the district court and the D.C. Circuit, and Whole Foods reasonably anticipated that it would be allowed to proceed with the merger without facing antitrust liability.

Merger Likely Anti-Competitive - On the other hand, the complaint suggests that Whole Foods intended for the merger to be anti-competitive. For example, it quotes Whole Foods' CEO as stating:

[The merger] will self-evidently lessen competition in those markets that we are
competing with Wild Oats in when we are going to intend to close stores. Again,
isn't that true in any of the acquisitions that any of these guys do? One of the
motivations is to eliminate a competitor. I will not deny that. That is one of
the reasons why we are doing this deal. That is one of the reasons we are
willing to pay $18.50 for a company that has lost $60 million in the last six
years. If we can't eliminate those stores then Wild Oats, frankly, isn't worth

(Complaint ¶ 23). Moreover, the D.C. Circuit reversed the lower court's opinion on July 29, 2008, finding that the merger would likely be anti-competitive in certain markets.

Pricing - In the consumer class action, one of the key issues is whether there was a large jump in Whole Foods' pricing in the relevant markets after the merger. If so, such evidence may not only establish civil liability, but will help vindicate the D.C. Circuit's ruling reversing the lower court's denial of injunctive relief.

Related post: D.C. Circuit Reverses Ruling That Allowed Whole Foods' Merger with Wild Oats

Wednesday, October 29, 2008

FTC to Hold Workshops on Resale Price Maintenance

FTC Workshops - The FTC announced yesterday that it will hold a series of public workshops between January and March 2008 about how to distinguish between uses of resale price maintenance ("RPM") that benefit consumers and those that do not.

Topics - The FTC plans to hold four to six RPM workshops, and is accepting requests to participate and public comments until December 12. The FTC plans to address three general subjects:

  1. The legal, economic, and management principles relevant to applying Sections 1 of the Sherman Act and Section 5 of the FTC Act to RPM, including the ability to administer current or potential antitrust or other rules for applying these laws;

  2. The business circumstances regarding the use of RPM that the Commission should examine in the upcoming workshops, including examples of actual conduct; and

  3. Empirical studies or analyses that might provide better guidance and assistance to the business and legal communities regarding RPM enforcement issues.

The FTC's Federal Register notice also asks ten more specific questions, namely:

  1. How should the structure of the market and the market shares of participants be taken into account in analyzing RPM?
  2. Are there other specific market facts or circumstances that might have an impact on the likely competitive effects of RPM under the circumstances described? Without limiting the scope of this question, commenters are specifically invited to comment on the effect on marginal and inframarginal consumers.
  3. What are the business reasons (e.g., management, marketing, financial, etc.) for the use of RPM? Are there alternative business strategies available to achieve the same results? What factors, including any cost savings, entered the decision to use RPM to achieve the desired result?
  4. To what extent does uncertainty regarding the legality of RPM under state law affect the decision to use RPM?
  5. What are the likely procompetitive and anticompetitive effects of RPM under the circumstances described?
  6. What strategies might competitors use to respond to a loss of sales to a firm that uses RPM?
  7. Under what market conditions is the use of RPM likely either to promote or hinder market entry by other manufacturers or retailers?
  8. Are there industries where the use of RPM is prominent?
  9. Are there any original theoretical, analytical or empirical studies on the nature or competitive effects of RPM or alternatives to RPM that should be brought to the attention of the Commission?
  10. What tests or standards should courts or enforcement agencies use in assessing whether particular conduct violates Sections 1 or 5? Commenters are specifically requested to assess whether the test or standard applicable to a particular usage of RPM might vary based on particular market facts or circumstances. Additionally, are there particular market facts and circumstances where the approach established by the Court of Appeals for the District of Columbia Circuit in Polygram Holding, Inc. v. Fed. Trade Comm'n, 416 F. 3d (D.C. Cir. 2005), would or would not be appropriate?

As this blog has discussed previously, the law surrounding resale price maintenance has been unclear ever since the Supreme Court's decision in Leegin Creative Leather Products, Inc. v. PSKS, Inc., 127 S. Ct. 2705 (2007), which held that RPM was subject to the rule of reason rather than the per se rule.

FTC Reports - The FTC will almost certainly publish a report that summarizes issues presented and discussed during the resale price maintenance workshop. FTC reports can help shape the direction of the law, as a litigant may present portions of a report to support its case to a court, which may influence the court's decision. Industry constituents that have a vested interest in the subject matter of an FTC workshop typically retain antitrust counsel to actively participate in the workshop and "give voice" to the constituents throughout the workshop. With respect to resale price maintenance issues, large manufacturers and retailers will certainly be represented during the course of the workshop. For those interested in Kotchen & Low's perspective on resale price maintenance issues, please refer to related blog posts below.

Related posts: WSJ Examines Manufacturers' RPM Practices; FTC's Nine West Order Explores Resale Price Maintenance Under Leegin; State Resale Price Maintenance Laws and Leegin; Herman Miller Contends That Consent Decree Allows it to Continue Minimum Resale Pricing Policy; Developing Legally-Compliant Trade Promotion Management Programs.

Thursday, October 23, 2008

Slotting Allowances Anti-Competitive?

Yesterday, the Antitrust & Competition Policy Blog posted about a recent article by Oystein Foros and Hans Jarle Kind entitled “Do Slotting Allowances Harm Retail Competition?”

Slotting fees - paid by manufacturers to retailers for access to shelf space for their products – have increased significantly in recent years, at the same time that the grocery industry has seen increasing consolidation. The Foros & Kind article examines competing views over whether slotting fees are anti-competitive:

  • One view suggests that the fees are anti-competitive, as up-front payments in the form of slotting fees leads to a higher wholesale price. When retailers pay higher marginal product costs, they are less likely to discount aggressively, and they signal to competitors that they will be a soft competitor on price. This leads competitors to increase prices to end users.

  • The competing view suggests that slotting fees are pro-competitive because they help allocate limited shelf space and address the problem of asymmetric information.

Group Purchasing - Foros and Kind argue that these views fail because they don’t take into account the group purchasing practices that many retailers engage in through co-ops and other group purchasing arrangements, especially in Europe. While retailers band together in negotiating whole prices with retailers, they each set their own retail prices. Within the purchasing group, where each member of the group presumably knows what the purchasing terms are, Foros and Kind suggest that slotting fees are used to dampen competition between rival retailers.

FTC Concerns - In prior years, the Federal Trade Commission has expressed concerns about slotting fees and has convened hearings and published reports on slotting fees, including a 2003 report and a 2001 report. The FTC and antitrust practitioners have expressed two principal concerns involving slotting fees: (1) that the fees represent coordinated – and possibly even collusive – pricing by retailers, and (2) that the fees increase barriers to entry for the introduction of new, innovative products. The principal business rationale for slotting fees is that the fees help defray the cost and business risk of new product introduction – i.e., products that do not have a track record of sales volume. That is, the fees help compensate retailers for betting on the future success of new products with no historical sales volume by including the products in planograms and shelf sets.

Price Discrimination - While substantial attention has been devoted to assessing the antitrust implications of slotting fees, commentators and the government often focus on the relatively simple antitrust issues associated with slotting – i.e., whether the fees are a result of collusion or impede entry of new products – but fail to grapple with a much more complicated issue: whether slotting fees give rise to price discrimination concerns under the Robinson Patman Act. Not all retailers and wholesalers charge slotting fees. Price discrimination concerns arise when a vendor pays slotting fees to one retailer, but not the retailer’s competitor. If the vendor does not reduce its product pricing to the retailer’s competitor by the amount of the slotting fee given to the retailer, paying the retailer’s slotting fee may violate the Robinson-Patman Act. For this reason, we believe that, in assessing the legality of slotting fees under the antitrust laws, the fees must be considered along with other discounts and allowances vendors give retailers and wholesalers.

Pricing Issues - The complicated and often opaque nature of pricing – both retail and wholesale – creates opportunities for antitrust and fraud violations. Kotchen & Low LLP is currently representing a class of state and local governmental entities who paid fraudulently inflated wholesale prices, and is representing classes of grocery retailers and manufacturers who were overcharged for services because of an antitrust conspiracy. In each case, the potential damages are substantial, underscoring the need for vigilance – both by sellers in ensuring their pricing practices comply with the law, and by purchasers in ensuring that they are not paying unlawfully inflated prices. If you have concerns about pricing practices, you should consider contacting an attorney.

Thursday, October 16, 2008

Ninth Circuit Denies Rehearing in Theme Promotions v. News America

The Ninth Circuit issued an order on October 10 denying a motion for rehearing and a suggestion for rehearing en banc in Theme Promotions, Inc. v. News America Marketing, a case I previously discussed here and here.

The denial of the motion for rehearing means that the ruling against News America will likely stand. While News America could file a petition for a writ of certiorari with the Supreme Court, such a cert. petition would be a long shot, not only because the Court grants only a small fraction of such petitions, but also because the case does not appear to present any issues worthy of the Court's consideration.

Related posts: Ninth Circuit Affirms Theme Promotions Award Against News America Marketing; Oral Argument in Theme Promotions v. News.

Monday, October 6, 2008

American Antitrust Institute Issues Transition Report on Competition Policy

AAI Report: The American Antitrust Institute issued a 415-page report on Monday titled "The Next Antitrust Agenda: The American Antitrust Institute's Transition Report on Competition Policy to the 44th President of the United States."

The report offers suggestions to the next administration on legislation and enforcement priorities. It includes chapters about various substantive areas of antitrust laws, including cartels, monopoly, buyer power, and merger policy. For cartels, the report encourages consideration of "offering bounties to whistleblowers, as is already the case for qui tam civil suits," an idea that I have previously advocated here.

There are also chapters devoted to specific industries, including Agriculture, for which the report recommends increased enforcement of merger and conduct rules. Other industries addressed are media, health care, and energy.

Election May Affect Enforcement: How closely the next administration follows the recommendations will depend in part on which candidate prevails in the upcoming election. The Bush administration has been criticized for its lax enforcement of the antitrust laws, and Senator McCain has a long record of support for deregulation.

In its October issue, Inside Counsel examined what the 2008 election means to the in-house bar. While Republicans tend to favor imposing more limitations on the potential liability of corporate defendants who have engaged in tortious activity than Democrats, the magazine suggested that neither Senator McCain nor Senator Obama will take strong positions on the issue, and that Obama may favor corporate defendants more than most Democrats.

Related posts: Incentives and Disincentives for Insiders to Expose Unlawful Cartels; Considerations for Individuals Who Refuse to Participate in Illegal Business Practices.

Sunday, October 5, 2008

Judge Deanell Tacha Honored with Distinguished Service to Justice Award

On Friday, I was home in Lawrence, Kansas to participate in a ceremony in which the 26th Annual Edward J. Devitt Distinguished Service to Justice Award was presented to Tenth Circuit Judge Deanell Reece Tacha.

Speakers at the award ceremony included Kansas Governor Kathleen Sebelius, Supreme Court Justice Samuel Alito, Judge Carolyn King of the Fifth Circuit, Chief Judge Robert Henry of the Tenth Circuit, Judge John Lungstrum of the District of Kansas, Judge Sarah Barker of the Southern District of Indiana, John Tacha, and me.

The Devitt Award honors Article III judges whose careers have been exemplary. Judge Tacha has been a judge on the U.S. Tenth Circuit Court of Appeals since 1985, served on the U.S. Sentencing Commission, chaired the Judicial Division of the ABA, chaired the U.S. Judicial Conference Committee on the Judicial Brach, was President of the American Inns of Court, chaired the Appellate Judges Conference, was a member of the ABA Commission on Women in the Profession, was president of the Kansas University Alumni Association, and has been active in numerous other professional, civic, philanthropic, and cultural organizations.

During the ceremony, I remarked on how inspirational Judge Tacha was, and I read a poem written in honor of the occasion by Kansas Poet Laureate Denise Low:

For a Kansas Judge

For The Honorable Deanell Tacha

Central Plains wind stops for no woman
nor beast—not the cattle nor the sparrows.
Sometimes it carries straight-line rain
and sometimes glistening prisms of mist.
Pawnees and Spanish fought in the winds
and Cheyennes and American soldiers.

West winds blew through council fires
and brick court houses on town squares.
Gravity tugs the wind into whorls, never
easing its grip. These laws do not vary.

Each community learns the same lessons:
how sun returns after winter, how kindness
fosters survival, how the stories circle,
how law holds even the sky in order.

While all of the speakers at the ceremony were very impressive, Judge Henry's speech stood out for its humor, and John Tacha's for his warm personal insights into his wife's accomplishments. The crowd was impressive as well, with numerous judges on hand, along with a number of attorneys, professors, politicians, current and former law clerks, and other persons of note.

An article about the ceremony from the Lawrence Journal World and video of Judge Tacha's acceptance speech is available here.

Wednesday, October 1, 2008

Penn Traffic Settles with SEC Over Premature Recognition of Vendor Allowances

SEC Complaint: The Securities and Exchange Commission ("SEC") filed and settled a complaint against Penn Traffic grocery stores for improperly overstating revenues.

In a complaint filed on September 30, the SEC alleged that Penn Traffic prematurely recognized income from promotional allowances such as slotting fees, rebates, and other vendor allowances, resulting in significantly overstated earnings reports. From 2001 to 2003, Penn Traffic recorded revenue related to promotional allowances before it "earned" the revenue by performing the agreed upon merchandising programs.

The SEC also alleged a separate accounting scheme in which a Penn Traffic subsidiary, Penny Curtis, created fraudulent accounting entries and adjustments in order to meet sales targets set by Penn Traffic.

The SEC announced that Penn Traffic agreed to settle the charges by consenting to the entry of a permanent injunction against violations of certain securities laws, and to certain oversight by an independent examiner. The SEC's case against two executives involved in the alleged wrongdoing is ongoing.

Pressure to Boost Earnings: Penn Traffic filed for bankruptcy in 2003, and there was likely substantial pressure on businesspeople to meet financial targets during the 2001 to 2003 time frame at issue. Prematurely recognizing revenues for one quarter would create a deficit in the following quarter, creating additional pressure to use such unlawful accounting techniques for future quarters.

Similar to Penn Traffic, wholesalers and retailers – including Ahold, K-Mart, Nash Finch, and Fleming (before it filed for bankruptcy) – have faced SEC inquiries and class action lawsuits with respect to the accounting treatment of slotting fees, promotional allowances, and other vendor allowances.

Accounting of Trade Funds: Accounting treatment of trade funds/vendor allowances has evolved since the early 2000s for all industry stakeholders, including manufacturers, wholesalers, and retailers. The Emerging Issues Task Force ("EITF") of the Financial Accounting Standards Board has provided industry guidance as to how to account for trade funds/vendor allowances. Industry stakeholders should review the EITF's guidelines on the accounting of trade funds/vendor allowances, including, for example, EITF Abstract Issue No. 9 ("Accounting for Consideration Given by a Vendor to a Customer") and EITF Abstract Issue No. 02-16 ("Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor").

Related post: Channel-Stuffing Lawsuit Settled for $137.5 M.

Saturday, September 27, 2008

Class Action Filed Against Egg Trade Association

A class action antitrust lawsuit was filed on Thursday against United Egg Producers ("UEP") and other egg producers for alleged price-fixing.

The Wall Street Journal wrote about collusion by the egg producers two days earlier, explaining that the producers defended their actions as being protected by the Capper Volstead Act. The 71-page complaint, available here, asserts that Capper Volstead does not apply to UEP, citing numerous reasons why the Act may not apply. For example, the complaint alleges that UEP is a trade group that does not market the eggs, some members are not producers, many members are vertically integrated, and UEP does not grow, ship, or sell the eggs.

Even though UEP may have legitimately thought that their actions were protected by Capper Volstead Act, and the courts may eventually find that their actions are protected, UEP was pushing the limits of the Act, which have not been clearly defined by case law.

In making business decisions, trade associations and other businesses should take into account the likelihood and potential costs of litigation, even if they believe that they will ultimately prevail on the merits.

The lawsuit is captioned T.K. Ribbing's Family Restaurant v. United Egg Producers, Inc., et al., No. 2:2008cv04653 (E.D. Penn. Sept. 25, 2008).

Related post: Trade Associations Investigated for Possible Antitrust Violations.

Thursday, September 25, 2008

Trade Associations Investigated for Possible Antitrust Violations

Federal prosecutors are examining collusion by egg producers and tomato processors, according to an article in Tuesday’s Wall Street Journal.

Food prices have risen in recent years due to rising energy costs, rising world demand, and drought, and -- for eggs and tomatoes, among other food products – also, in all likelihood, because of collusion. Fresh egg prices are up over 40% over the past year, tomato prices are up 16%, while overall food prices are up 6%.

Possible Collusion Facilitated by a Trade Association: The United Egg Producers is a trade association with over 250 members that compete in the egg industry. According to the Wall Street Journal article, the Association facilitated a scheme designed to increase the domestic prices of eggs. The scheme, as described by the Wall Street Journal, functioned as follows: the United Egg Producers Association arranged for the export of nearly 24 million eggs at below-market prices in late 2006 to early 2007, and again in the spring of 2008. United Egg also reduced the supply of eggs by implementing requirements that producers use larger cages for their hens, and demanded that the producers not build additional cage capacity. Association members adhered to these practices, which resulted in lower egg supplies sold in the United States and higher prices for United States purchasers of eggs.

Federal authorities are also investigating allegations that tomato processors conspired to fix prices, and at least one processor allegedly bribed buyers to pay inflated prices.

The egg producers and tomato processors claim that their coordination is protected by antitrust exemptions such as the Capper Volstead Act, 7 U.S.C. §§ 291-292, which was passed in 1922 to allow farmers to collectively process and market their products. Part of the original intent of the Act was to give farmers greater leverage in bargaining with the much larger corporations that purchased their crops. To enable such collective action, the Act provided agricultural producers an exemption from the antitrust laws in “collectively processing, preparing for market, handling, and marketing . . . such products.” 7 U.S.C. § 291.

An unused provision of the Act tempers the exemption somewhat, at least in theory, providing that the Secretary of Agriculture may issue an order to show cause why a cease and desist order should not be issued if he has reason to believe that an association restrains trade “to such an extent that the price . . . is unduly enhanced by reason thereof.” 7 U.S.C. § 292.

Antitrust Scrutiny of Trade Associations: Historically, trade associations have been scrutinized – and prosecuted – for facilitating anticompetitive practices, such as price fixing, market allocations, or the development of standards to exclude competition. Trade associations often assume substantial legal risk as facilitators of potentially anticompetitive practices. Membership within a trade association often is comprised of competitors within an industry, and associations convene meetings and establish committees that involve competitors working together (or otherwise communicating) to help establish industry guidelines, policies, etc.

Antitrust risk increases substantially when competitors, through a trade association (or otherwise), help establish guidelines, policies, rules, or practices that involve prices charged (or paid to suppliers), the geographic areas in which competitors will compete, the product markets in which competitors will compete, organizations with which competitors will or will not contract, terms upon which technology will be made available to organizations, or other competitively sensitive issues.

Antitrust Counsel: To minimize antitrust risk, trade association activities should be closely monitored by experienced antitrust counsel, such as Kotchen & Low LLP, which has substantial experience in addressing concerns about trade association activities, and is available to consult with trade associations, members of associations, or entities potentially harmed by association activities.

Tuesday, September 16, 2008

Antitrust Implications of Exclusive Deals by Groups of Sports Teams

Exclusive NFL Headwear License: The NFL season kicked off recently, and millions of Americans have begun spending their Sunday afternoons glued to their television sets. The NFL is big business, including the sale of NFL-branded apparel. The Seventh Circuit issued a ruling a couple weeks ago on a case raising an antitrust challenge to the exclusive license of team names and logos for use on hats and other headwear.

Plaintiff American Needle Inc. produces headwear, and had a non-exclusive license to produce headwear for the NFL for over 20 years. In 2001, NFL entered into an exclusive 10-year licensing agreement with Reebok for headwear and for other apparel. American Needle responded by filing an antitrust lawsuit, alleging a combination in restraint of trade in violation of the Sherman Act Section 1 by the NFL, NFL Properties, and the individual NFL teams, along with monopolization in violation of Section 2.

Challenge to Joint Conduct by the NFL and its Teams: The NFL defendants argued that they should be considered a single entity for antitrust purposes, relying on the Supreme Court’s Copperweld decision, which found that a parent and its wholly owned subsidiary are a single entity for antitrust purposes. Subsequent court rulings have gradually extended Copperweld to certain affiliated companies. The Seventh Circuit stated that, when making the single-entity Copperweld determination, courts should examine whether the conduct in question “deprives the marketplace of the independent sources of economic control that competition assumes.”

Examining the evidence, the court found uncontradicted evidence that “the NFL teams share a vital economic interest in collectively promoting NFL football,” pointing out that a single football team cannot produce a football game. Thus, the Seventh Circuit held that the Copperweld exception applied, and that the NFL defendants functioned as a single entity when collectively promoting NFL football by licensing the teams’ intellectual property. It observed that antitrust law encourages cooperation within a business organization to promote competition with competitors, such as other entertainment providers.

The Court cautioned that its ruling was limited, however, and that “[w]e have yet to render a definitive opinion as to whether the teams of a professional sports league can be considered a single entity. . . . The characteristics that sports leagues generally exhibit make the determination difficult. In some contexts, a league seems more aptly described as a single entity immune from antitrust scrutiny, while in others a league appears to be a joint venture between independently owned teams that is subject to review.” See American Needle, Inc. v. Nat’l Football League, __ F.3d __ , 2008 WL 3822782 (7th Cir. 2008).

Big 10 Network: The NFL and its teams are not the only sport entities that are under legal scrutiny. The Big 10 conference and its affiliated schools recently have “pushed the envelope” with respect to the legality of their practices. Roughly two years ago, the conference and the schools started the Big 10 Network, a new network devoted only to Big 10 sports. The conference and schools share in the revenues of the network and, to maximize profits, demanded high fees from cable companies to carry the network. Cable companies across the Midwest have not willingly agreed to the Big 10 and the schools’ fees. In response, the Big 10 and its affiliated schools boycotted any cable company that would not pay their fees. This boycott resulted in a clear anticompetitive effect: a number of Big 10 football and basketball games that had been televised in previous years were not televised last year throughout the Midwest. In antitrust terms, product supply had been reduced.

Fans were outraged, as were we at Kotchen & Low (we are big sports fans, and Daniel Kotchen is an ardent Wisconsin Badger fan). The Big 10 and the schools’ boycott carries substantial legal risk under the antitrust laws: a group boycott accompanied by an anticompetitive effect often violates Section 1 of the Sherman Act. In response to complaints from Big 10 fans, Kotchen & Low was researching and developing an antitrust suit against the Big 10 and its schools on a pro bono basis. The suit would have sought injunctive relief: a court order to televise Big 10 football and basketball games. While such a suit would have required us to overcome the single-entity defense addressed in American Needle, the Big 10 schools would have more trouble than NFL teams describing themselves as a single entity, as each of the Big 10 teams compete with teams from outside of the Big 10. We have stopped working on the case, though, because the Big 10 and cable companies have now come to terms, and the games are back on the air.

Monday, September 15, 2008

Reddy Ice Suspends Sales Executive Because of Antitrust Concerns

Sales Executive Suspended: Reddy Ice announced today that it has suspended its Executive Vice President of Sales & Marketing, Ben Key, because an internal committee's investigation found that he "has likely violated Company policies and is associated with matters that are under investigation."

Ongoing Investigation and Lawsuits: The DOJ Antitrust Division and attorneys general of 19 states and the District of Columbia are currently investigating an alleged antitrust conspiracy in the packaged ice industry. Over 70 class action lawsuits have been filed against Reddy Ice, Home City Ice, and Arctic Glacier for alleged price-fixing. In addition, Kotchen & Low LLP has filed an action on behalf of Marty McNulty, alleging that he was fired and blackballed for his refusal to participate in the unlawful conspiracy. Recent media coverage of Kotchen & Low LLP's lawsuit includes an interview on CBC radio, an article in the Detroit Free Press, and an interview on NPR.

Commentary: While the suspension of the Reddy Ice executive does not constitute an admission of guilt, it suggests that the internal committee was troubled by what they learned about the executive's actions.

Related posts: Kotchen & Low LLP Sues Packaged Ice Manufacturers on Behalf of Former Party Time Ice Executive Martin McNulty;
Considerations for Individuals Who Refuse to Participate in Illegal Business Practices;
Incentives and Disincentives for Insiders Who Expose Unlawful Cartels;
Revelations of DOJ Antitrust Investigation Lead to Over 70 Class Action Lawsuits Against Ice Manufacturers.

Sunday, September 14, 2008

DOJ Monopolization Report Issued, Criticized.

DOJ Section 2 Report Issued: The Department of Justice issued a 215-page report (.pdf) on September 8 entitled: Competition and Monopoly: Single-Firm Conduct Under Section 2 of the Sherman Act.

Perhaps the best known Section 2 monopolization case in the modern era is U.S. v. Microsoft, in which my former boss, David Boies, is often credited with winning the case for the United States government. The Department of Justice retained Mr. Boies to lead the case on behalf of the government, and Mr. Boies’s videotaped deposition of Bill Gates during the litigation helped discredit Microsoft as a corporation and Mr. Gates as a witness. Possibly because of his behavior during the deposition (Mr. Gates appeared recalcitrant and evasive during the deposition), Mr. Gates did not testify at trial. Mr. Boies nonetheless used numerous video clips of Mr. Gates’s deposition to attack the credibility of Microsoft, which proved to be an extraordinarily effective tactic. In preparing witnesses for deposition, many lawyers now use the Bill Gates deposition videotape as an exemplar of how not to act during a deposition.

Monopolization is also an issue in the consumer goods and retail industry, as with category captains and other dominant players in the industry, and industry stakeholders that are impacted by dominant firms should become familiar with monopolization issues.

DOJ Report Seeks to Clarify Standards: The DOJ Report emphasized the desirability of “clear, objective” rules for Section 2 enforcement. The Report addresses single-firm conduct issues, such as exclusive dealing, predatory pricing, tying, bundling, loyalty discounts, and refusals to deal. The DOJ based its Report partly on input it received at a number of hearings about Section 2 that DOJ held beginning in June 2006, including a “broad array of views” presented by “[a]cademics, business people, and antitrust practitioners.” (Report at vii).

Not Binding, But May Be Persuasive: While the DOJ Report is not binding, it may influence at least some courts assessment of single-firm practices subject to a Sherman Act Section 2 challenge. For instance, a colleague of mine who is serving as an economic expert witness in an ongoing antitrust case is currently rewriting his expert report to incorporate aspects of the DOJ’s Report. But the extent to which the DOJ’s Report will be adopted by courts is unclear. Many of the enforcement policies the DOJ enunciates in the Report have been criticized as being too favorable to monopolists, and unsupported by economic or legal justification, including criticism levied against the DOJ by its sister antitrust agency: the Federal Trade Commission.

FTC Criticism: The same day that the DOJ issued its Report, three of the four Commissioners of the Federal Trade Commission issued an 11-page statement that sharply criticized the Report. They questioned the Report in two main respects: (1) the Report is chiefly concerned with lax enforcement of dominant firms rather than protection of consumers; and (2) the Report “overstates the level of legal, economic, and academic consensus regarding Section 2.” Although the fourth Commissioner at the FTC, Chairman Kovacic, did not join the statement of his colleagues, he wrote a separate statement that did not endorse either position, but raised additional concerns about the Report’s shortcomings.

Some commentators have suggested that the Report represents an effort by the administration to perpetuate lackluster antitrust enforcement beyond the upcoming elections. But in the critical statement by three FTC Commissioners – who include a Republican, an Independent, and a Democrat – the Commissioners stated that the FTC “stands ready to fill any Sherman Act enforcement void that might be created if the D[OJ] actually implements the policy decisions expressed in its Report.” Private parties may also help fill any void. My firm, for example, is currently involved in Section 2 cases and will likely help shape the extent to which the DOJ Report is adopted by courts.

Consumer Goods and Retail Industry Monopolization Issues: Section 2 monopolization issues sometimes arise in different areas of the consumer goods and retail industry. For example:

  • Consumer Goods Manufacturers. Consumer packaged goods manufacturers with large maket shares are sometimes designated by retailers as category captains to help retailers manage in-store displays and shelf space for that product category. Manufacturers who abuse their influence with retailers to fraudulently exclude competitors may be liable under Section 2, as in Conwood Co. v. U.S. Tobacco Co., 290 F.3d 768 (6th Cir. 2002), in which the Sixth Circuit affirmed a finding of a Section 2 violation where Conwood alleged that competitor U.S. Tobacco “used its role as category captain and/or manager to exclude competition.” With a recent trend among retailers to limit the skus stocked on shelf (sometimes referred to as “sku rationalization”), there may be greater opportunity for category captains to unfairly exclude competitors, and they should beware of the potential for violating Section 2 when encouraging retailers to exclude competing products.

  • In-Store Advertising. As this blog has frequently discussed, News America Marketing has been accused of acquiring and exercising monopoly power to the detriment of competitors and retailers, and is soon facing trial over its allegedly anti-competitive conduct.

  • Retailers. Retailers are often the victims of monopolization practices (in the context, for instance, of vendor or manufacturer practices) and are not typically subject to monopolization challenges. A retailer’s dominance in a market arises more often in the merger context than in a monopolization context, such as a recent court finding that the Whole Foods – Wild Oats merger gave Whole Foods a dominant share of certain markets.

Conclusion: Stakeholders in the consumer goods and retail industry that themselves are dominant firms or that are impacted by dominant firms should review the DOJ’s Report and become familiar with monopolization and other Sherman Act Section 2 issues for which a stakeholder may be held accountable or for which a stakeholder may rely on to ensure that it’s competing on a level playing field. While aspects of the DOJ’s Report may ultimately not be adopted by courts, the Report nonetheless is a helpful reference to understand the range of antitrust issues that concern single firm conduct under the Sherman Act.

Related Posts: Valassis' $1.5 Billion Antitrust Suit Against News America Marketing Over FSIs; DC Circuit Reverses Ruling That Allowed Whole Foods Merger with Wild Oats.

Tuesday, August 26, 2008

New Blog Web Address

I moved the blog to a new web addresss: http://cpg-retail-litigation.kotchen.com/ Please update your bookmarks accordingly.

Also, I have added the ability to subscribe to this blog by e-mail. Click here or on the link to the right.

Saturday, August 23, 2008

Ninth Circuit Affirms Theme Promotions Award Against News America Marketing

On Wednesday, the U.S. Court of Appeals for the Ninth Circuit affirmed a $3.5 million verdict for Theme Promotions against News America Marketing based on antitrust and other violations. Theme Promotions, Inc. v. News Am. Marketing FSI, __ F.3d __, 2008 WL 3852724 (9th Cir. Aug. 20, 2008) (.pdf as revised Oct. 10, 2008).

Background: Theme Promotions was involved in arranging theme-related promotions that would involve advertising multiple consumer packaged goods companies ("CPGs") in the same themed advertisement (such as a certain brand of cereal with a certain brand of soda). After selling the advertising space to the CPGs, Theme would then purchase free standing inserts ("FSIs") – i.e., coupon booklets often published in Sunday newspapers – in which it would run the advertisements. Although Theme had signed a contract to purchase FSIs from Valassis, News began including and enforcing right of first refusal provisions in its FSI contracts with CPGs to prevent them from participating in special event promotions organized by Theme unless Theme purchased the FSIs News.

Prior Proceedings: Theme challenged News America's right of first refusal provisions as anti-competitive, and asserted that News engaged in unfair business practices. Theme filed suit in 1997. The lower court originally dismissed Theme's claims on a motion for summary judgment, but the Ninth Circuit reversed, reinstating Theme's claims in 2002. See Theme Promotions, Inc. v. News America FSI, 35 Fed. Appx. 463 (9th Cir. 2002). After a three-week trial in August 2005, the jury ruled in favor of Theme. The district court reduced the original damages awarded by the jury, setting aside findings for Theme on intentional interference claims as privileged under the Noerr-Pennington doctrine, and setting aside a negligent interference claim, but entered judgment on the state law antitrust and other claims for $3.5 million.

Appeal to the Ninth Circuit: News appealed, arguing that there was insufficient evidence to support the verdict. Theme cross-appealed, seeking to reinstate some of the damages awarded by the jury but disallowed by the lower court.

The Ninth Circuit affirmed the lower court's ruling, finding that "the jury verdict in favor of Plaintiff was supported by substantial evidence in the record." This is not surprising given the deferential standard of review. It is a victory for Theme, and may provide hope to other advertisers who are facing aggressive competition by News, and to other advertising companies that are currently litigating against News for its anti-competitive practices.

For example, among the issues raised by News was the relevant market definition, which Theme had defined as the sale of FSIs to CPGs. The court found sufficient support for this definition, which may be a good sign for Valassis in its antitrust suit against News over FSIs, previously discussed here and here.

On the other hand, the Ninth Circuit also affirmed the lower court's reversal of certain jury findings for Theme, and upheld the denial of a permanent injunction against News enforcing its right of first refusal provisions. The court held that "News supplied evidence that right of first refusal agreements result from competition between News and Valassis, and that an injunction would only serve to put News at a competitive disadvantage."

The Valassis v. News is now scheduled for April 2009, while Floorgraphics v. News is scheduled for November 2008, and Insignia v. News is scheduled for March 2009.

Related posts: Oral Argument in Theme Promotions v. News; Court Denies Insignia's Request for Documents from Other Litigation Against News.

Thursday, August 21, 2008

Food-Borne Illness Litigation Conference Dec. 4-5

A conference on Food-Borne Illness Litigation is being hosted by the American Conference Institute on December 4-5, 2008 in Phoenix, Arizona.

According to the CDC, there are an estimated 325,000 hospitalizations and 5,000 deaths a year caused by food-borne illnesses, and related litigation has risen significantly in recent years.

The conference aims to offer “advanced strategies for assessing, managing and defending claims of food contamination.” Expected speakers include in-house counsel from food companies and trade associations, epidemiologists, regulators, and litigators.

Click here for more information about the conference. You can also register by contacting Dustin Roades at D.roades@americanconference.com or (212) 352-3220 ext. 227.

Tuesday, August 19, 2008

WSJ Examines Manufacturers’ Resale Price Maintenance Practices

A Wall Street Journal article yesterday focused on manufacturers’ efforts to limit discounting by retailers by enacting and enforcing resale price maintenance restrictions. In the summer of 2007, the Supreme Court issued an important decision that provides significantly more flexibility under federal law for manufacturers to influence retail prices through the use of minimum resale price maintenance policies. In Leegin Creative Leather Products, Inc. v. PSKS, Inc., the Supreme Court held that agreements between manufacturers and retailers that set minimum retail prices would no longer be considered per se illegal under federal antitrust law – i.e., illegal on their face. Rather, these agreements will now be assessed under federal law using a more flexible “rule of reason” analysis, an analysis that incorporates an agreement’s business justifications and market effects. As we have previously discussed here, Leegin will likely spawn new strategies designed to better align retail prices with brand objectives.

On-Line Retailer Discounting Dispute: In the wake of Leegin, the Wall Street Journal article summarizes a dispute involving on-line retailers of maternity and baby products. BabyAge.com and BabyCatalog.com Inc. filed an antitrust lawsuit against six baby-goods manufacturers and the retailer Toys “R” Us Inc., parent company of Babies “R” Us. The plaintiffs’ original complaint (.pdf) was filed in late 2005 and amended in late 2007 (the amended complaint was filed under seal and is not electronically available). The suit alleges that Babies “R” Us monitored competitors’ on-line prices and reported violations of the manufacturers’ minimum pricing rules. This reporting allegedly resulted in the manufacturers discontinuing shipment of products to BabyAge.com and BabyCatalog.com. The suit also alleges that Babies “R” Us canceled orders for one manufacturer’s products until the manufacturer enforced minimum pricing restrictions against on-line retailers. A related class action lawsuit (.pdf) also has been filed against the same defendants in the BabyAge suit.

Other Resale Price Maintenance Updates: In May 2008 attorneys general from 35 states (which have state counterparts to the federal antitrust laws) sent a letter to Congress urging passage of a draft bill (pending in the Judiciary Committee) to reinstate the per se illegal ban on any minimum resale price maintenance strategies. Also in May 2008, as previously reported here, the FTC modified a prior consent decree that precluded Nine West Group Inc. (a women’s shoe manufacturer) from enacting any minimum resale price maintenance strategies. In June 2008, the Third Circuit found in Toledo Mack Sales & Serv. v. Mack Trucks, No. 07-1811, 2008 WL 2420729 (3d Cir. June 17, 2008) (.pdf) that a resale price maintenance program raised a triable issue of fact under the rule of reason, and remanded the case for trial to assess whether complaints by dealers caused the manufacturer to impose and enforce resale price maintenance restrictions, and whether there were anti-competitive effects.

Commentary: While the legality of minimum resale price maintenance strategies following Leegin continues to be debated, manufacturers are increasingly enacting strategies to limit retailers’ ability to discount prices below a minimum price threshold. According to BabyAge.com, nearly 100 of its 465 suppliers now dictate minimum prices. We have also heard from a number of contacts in the industry that restrictions on minimum advertised prices (as well as minimum prices themselves) are becoming increasingly prevalent. Industry stakeholders enacting or affected by resale price maintenance strategies need to be aware of several considerations critical to assessing the legality of the strategies:

  • Unilateral vs. Collusive Action: Both the Supreme Court in Leegin and the FTC in its Nine West order emphasized the anticompetitive risk of a manufacturer enacting – or enforcing – resale price maintenance restrictions at the behest of one or more retailers. A decision to impose or enforce such restrictions should be made by the manufacturer alone, not in response to a retailer that is competing against an aggressive discounter. The BabyAge.com lawsuit (and related class action suit) focuses on the extent to which resale price maintenance strategies were the product of unilateral decisions by the manufacturers or collusive action by the manufacturers and a dominant retailer, Babies “R” Us.
  • Legitimate Business Justification: Under federal law (following Leegin), resale price maintenance restrictions that are unilaterally enacted must be supported by a legitimate business justification – i.e., a justification that enhances a product’s ability to compete on the basis of service, quality, or price. As we have previously written here, examples of legitimate business justifications could include (1) encouraging product support investments, (2) reversing base sales declines, and (3) supporting brand positioning.
  • Anticompetitive Effects: Following Leegin, the legality of a resale price maintenance restriction that is unilaterally enacted and has a legitimate business justification will almost certainly depend on the extent to which the restriction led to higher retail prices throughout a category. Higher retail prices for the majority of product sales within a category may be viewed by a court as an “anticompetitive effect” of a resale price maintenance restriction. A court would balance any such anticompetitive effect against legitimate business justifications to determine the legality under federal law of the strategy.

  • Level Playing Field: Resale price maintenance restrictions should be evenly administered across competing retailers. If a manufacturer enables certain retail outlets – such as club stores, which tend to discount aggressively – to discount below a competing retailer’s minimum price point, the competing retailer will be competitively disadvantaged and may have a viable antitrust claim against the manufacturer.

  • State Antitrust Laws: Many individual states have their own antitrust laws. States tend to follow legal developments of federal antitrust laws, as state antitrust laws tend to be modeled after federal law. Therefore, most states will likely adopt the principles of Leegin in assessing resale price maintenance restrictions. But certain states may reject the Leegin decision and continue to view such restrictions as per se unlawful. Indeed, as previously reported here, in March 2008, attorneys general from New York, Illinois, and Michigan filed a complaint against and entered a consent decree with a chair manufacturer that imposed minimum pricing restrictions with retailers. This action, coupled with the attorneys general letter to Congress (discussed above), suggests that assessment of state laws – and enforcement of the laws by attorneys general – will be an important consideration for stakeholders implementing or affected by resale price maintenance restrictions. A useful chart to assist in understanding applicable state laws governing resale price maintenance is available here.

Conclusion: While resale price maintenance can benefit manufacturers, the complex and evolving nature of the law in this area requires them to think twice – and consult with legal counsel – before imposing minimum prices on retailers.

Related Posts: FTC’s Nine West Order Explores Resale Price Maintenance Under Leegin; State Resale Price Maintenance Laws and Leegin; Herman Miller Contends That Consent Decree Allows it to Continue Minimum Resale Pricing Policy; Developing Legally-Compliant Trade Promotion Management Programs.

Tuesday, August 12, 2008

FLOORgraphics v. News America Trial Date Pushed Back to November 12

The trial between FLOORgraphics, Inc. and News America Marketing has been pushed back from October 1 to November 12.

Trial Postponed: Vacation Plans, Holidays, & Pre-trial Matters - In a letter to the Court, News America Marketing requested the delay, citing "a long-planned European [vacation] trip scheduled for two weeks in September" of one of its trial counsel and his wife, and religious holidays in October. News America also suggested that a number of issues could be addressed pre-trial in order to expedite the trial.

FLOORgraphics responded with a letter opposing the delay, pointing out that there are other holidays in November and December, and that News' trial team has had all summer to prepare for trial, and that only one of News' team of lawyers will be affected by the European vacation. FLOORgraphics also suggested that pre-trial motions could be resolved before October 1.

Over FLOORgraphics' opposition, the Court agreed during an August 1 telephone conference to postpone the trial to November 12.

Over 4 Years to Trial - This lawsuit was filed more than four years ago, in July 2004. While this case has taken longer than average, it is not uncommon for civil lawsuits to take several years before reaching trial. According to official reports, cases in the U.S. District Court for the District of New Jersey took over 30 months between filing and trial. Some courts, such as the Eastern District of Virginia and the Western District of Wisconsin, move cases to trial significantly faster, but the District of New Jersey's time to trial is more typical.

Many litigants lament the delays and costs associated with civil litigation, which is one of the reasons most cases settle before trial and that arbitration has become increasingly popular in recent years. While there are many reasons for the slow nature of civil litigation, more can be done by attorneys and courts to streamline litigation to make it less burdensome on the parties.

Related posts: FLOORgraphics' Suit Against News America Set for Trial October 1; Summary Judgment Motion Denied in FGI v. News America Marketing; Study Ranks Top Venues for Patent Litigation.


The Law Firm of Kotchen & Low LLP - Civil Litigation, Counseling, and Representation Before Government Agencies

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