Monday, June 23, 2008

Article Examines Antitrust Division’s Thinking on Attempt to Repeal Amnesty Agreement

Law.com Article Examines DOJ's Thinking - The DOJ Antitrust Division’s often-criticized decision to revoke an amnesty agreement with Stolt-Nielsen shipping company is the subject of a detailed and engaging article in Corporate Counsel, available on law.com, which provides a window into the DOJ’s thinking during the dispute.

Stolt-Nielsen Amnesty Revocation Questioned - A judge found that the DOJ had “no reasonable basis” for canceling the amnesty agreement, and dismissed the indictment of Stolt-Nielsen. The law.com article, however, suggests that the DOJ’s actions were not entirely unreasonable, and provides a detailed look at the progression of the DOJ’s thinking. For example, the DOJ "had obtained evidence that the company had continued its activities until at least as late as the second half of 2002" even though the company had discovered the unlawful activity in March 2002, and the DOJ believed that “the company had not been truthful about its continued participation in the cartel.”

When the revocation of the amnesty agreement was challenged in court, however, Stolt pointed out that the agreement provided amnesty to all conduct prior to the signing of the agreement on January 15, 2003. In addition, one focus of the hearing was the credibility of the government’s witnesses:

[The Judge] questioned why the prosecutors relied on the testimony of "the very co-conspirators whom defendants had reported to the division." He noted their lenient sentences, which ranged from no jail time to four months, compared to
the average sentence of 30 months for antitrust violations. And he spent eight pages of his 35-page ruling detailing his problem with each witness. Some attacked or contradicted each other; some contradicted previous statements they had given to the grand jury or other agencies; and some just changed their stories.

DOJ Remains Convinced - Deputy Assistant Attorney General Scott Hammond stated that Stolt’s behavior after it discovered the wrongdoing was the worst he has seen by a party granted amnesty and “remains convinced that the government was right,” but stated that the division will tighten up the language in its amnesty letters in the future.

Future Fairness - While companies seeking amnesty should carefully scrutinize the terms of any proposed amnesty agreement, it doesn’t appear that their treatment by the DOJ will be unfair as some had feared after the decision to revoke Stolt’s amnesty was initially announced. As a former DOJ trial attorney, and in my dealings with DOJ antitrust attorneys while in private practice (as recently as last week), I have always been impressed with government attorneys’ scrupulous efforts to uphold the rule of law, as well as their passion for their jobs. Sometimes their passion and their desire to punish what they perceive as inequity or wrongdoing can result in overreaching, but the multiple layers of bureaucracy provide strong checks on any overzealous advocacy by government attorneys. As the law.com article shows, Stolt-Nielsen may be the exception that proves the rule.

Law.com also provided a timeline of events and an article about Stolt’s internal investigation.

Related post: Chocolate Makers Allegedly Fixed Prices (mentioning the Stolt-Nielsen case).

Monday, June 16, 2008

Chocolate Antitrust Update: Study Shows That Commodity Price Rises Don’t Justify Chocolate Price Increases



Chocolate Antitrust Litigation - I've posted previously (here, here, here, and here) about In re Chocolate Confectionary Antitrust Litigation, MDL 1935 (M.D. Penn.), in which chocolate makers are accused of conspiring to fix prices. A recent study lends some support these accusations.

Rise in Commodity Prices - Hershey's and other chocolate makers have previously blamed the rise in chocolate prices on the rise in the price of commodities such as sugar, milk, and cocoa. They made a similar argument in a recent court filing (.pdf).

Study Contradicts Chocolate Makers' Justification – The chocolate makers' assertion was analyzed in a recent study by Stine Skov and Casper J. Kaufmann at the Copenhagen Business School, who examined whether the rise in commodity prices justified the price increases.

Skov and Kaufmann found that, from 2004 to 2008, sugar prices increased 0.69%, cocoa 60.65%, and milk 11.73%. Weighing the value of the ingredients in proportion to their percentage in a chocolate bar (Snickers, for example) yields an increase in the total cost of production of 15.75%. The cost of production is only one component of the total cost of selling a chocolate bar, and the total cost of a chocolate bar should rise less than the increase in the cost of production.

But the study found that manufacturers increased the total price of chocolate bars by 38.32% between 2004 and 2008 – more than the double the 15.75% increase in the cost of production. Thus, Skov and Kaufmann concluded that the rise in input prices could not explain the rise in the price of chocolate bars.

While the study is not admissible evidence of the conspiracy, it may bode poorly for the defendants, at least insofar as they hope to defend on similar grounds. (The study's executive summary is available here; the full text here).

Alternative Justifications - In their recent court filing, however, the defendants argued that their conduct would not be unlawful if they had simply followed each others' leads in raising prices without conspiring, as "parallel pricing behavior is both common and expected in the ordinary course of business." Such parallel price increases are most frequent in highly-concentrated industries with only a few players, such as fare increases or sales by the airlines.

Defendants contend that the Plaintiffs' allegations are conclusory and fail to plausibly suggest a price-fixing conspiracy, as required under the Twombly pleading standard. Absent additional evidence, the chocolate makers may have a reasonable argument that the plaintiffs' allegations are inadequate. Presumably, however, the government investigations will reveal evidence of price fixing.

Procedural Developments – An initial case management conference was held on May 29. Defendants requested that the court address a motion to dismiss before granting discovery, and that merits discovery not be permitted until after class certification. The chocolate makers also argued that the products at issue in the complaint are not adequately defined.

By contrast, Plaintiffs requested that they be initially provided with copies of documents that have been provided to government investigators, and that discovery not be bifurcated.

The numerous counsel for the Plaintiffs are fighting for control of the litigation as interim liaison counsel. Briefs in support of motions for appointment as interim liaison counsel were filed June 10.

The proceedings are likely to take time to unfold, though numerous chocolate lovers appear to be following the case with interest.

UPDATE: On July 14, 2008, the court issued this order appointing interim lead and local counsel.

Related Posts: Chocolate Price Fixing Cases Consolidated; Retail Grocery Chains File Suit Against Chocolate Makers; Investigation of Chocolate Makers Goes Global; Chocolate Makers Allegedly Fixed Prices

Friday, June 13, 2008

Retail Drugstore Chains Allege AmEx’s Anti-Steering Provisions Are Anticompetitive


Drugstores Sue AmEx for Antitrust Violations - Retail drugstore chains CVS, Rite Aid, and Walgreens have filed suit against American Express (“AmEx”), alleging that AmEx violated the federal antitrust laws through restrictions it imposed on merchants that accept AmEx credit cards.

Anti-Steering Provisions Allegedly Anticompetitive - AmEx’s contracts with merchants prohibit them from doing anything that would steer customers toward payment cards with lower fees to merchants, including criticizing AmEx cards or promoting or stating a preference for competing cards. In their lawsuits, the retail pharmacies allege that “[t]he purpose and effect of these anti-steering rules was to . . . prevent the merchants from discounting or lowering the price paid by retail customers who use payment products or methods that are less costly to the merchant . . . [and] prevent merchants from truthfully informing retail customers that their use of an AmEx payment card imposes higher costs on the merchant than other payment card products or payment methods and that those higher costs result in higher retail prices to consumers.” (Para. 2) (download Rite Aid Complaint .pdf).

Pratices Allegedly Hurt Consumers - According to the plaintiffs, the result of AmEx’s actions was to force merchants to “raise the prices they charged to all customers . . . in order to cover the high and anticompetitively elevated cost of transactions where the customer used an AmEx payment card.” (Complaint para. 4). Plaintiffs seek treble damages under the Sherman Act, asserting causes of action for monopolization, attempted monopolization, and unreasonable restraint of trade.

Potential Issue - One potential problem in Plaintiffs’ theory is that they could simply have refused to enter into contracts with AmEx altogether, and could choose to only accept less expensive payment options. Plaintiffs’ complaints seek to avoid this problem by alleging that “[i]t was not economically feasible for merchants simply to stop accepting AmEx payment cards.” (Complaint para. 35).

Related Litigation - The drug store chains’ lawsuits were designated as related to a multi-district litigation pending against Visa and Master Card regarding interchange fees. See In re Payment Card Interchange Fee & Merchant-Discount Antitrust Litigation, No. 1:05-md-1720-JG-JO (E.D.N.Y.) (download First Consolidated Amended Class Action Complaint as .pdf). That lawsuit raises some similar facts and issues, but has different defendants (Visa and Master Card) and has a different focus.

A class action lawsuit that more closely mirrors the retail drug chains’ suit (compared to the Visa/Mastercard suit) was previously filed in 2006 against AmEx . That suit challenges AmEx’s anti-steering provisions and seeks only injunctive relief (not monetary damages). See Performance Labs, Inc. v. American Express, No. 06-cv-2974 (S.D. N.Y. Apr. 18, 2006) (download as .pdf).

Pro-Consumer Retail Lawsuits - I admire retailers who are willing to get involved in plaintiff-side litigation to lead efforts to prevent anticompetitive activity, especially where the alleged misconduct results in increased prices to consumers. My firm has been working on one such lawsuit, and is investigating others. Because of the internal politics at in-house legal departments, it can often be difficult for counsel to approve a retailer’s involvement in such lawsuits. The resulting conservative approach often prevents legal departments from maximizing the value of their potential claims.

Future Related Cases? - I would not be surprised to see additional companies file similar suits against AmEx based on the anti-steering provisions, as the potential damages – which are subject to trebling – could be substantial. Parties who opt out of a class action lawsuit are often able to negotiate a higher settlement than class members, making it attractive for parties with large claims to opt out of a suit.

The three drug store cases filed this week are: Rite Aid Corp. v. Am. Express Travel Related Servs. Co., No. 1:2008cv02135 (E.D.N.Y. June 10, 2008) (Gleeson, J.); CVS Pharmacy, Inc. v. Am. Express Travel Related Servs. Co., No. 1:2008cv02136 (E.D.N.Y. June 10, 2008); and Walgreen Co. v. Am. Express Travel Related Servs. Co., No. 1:2008cv02137 (E.D.N.Y. June 10, 2008).

Media reports about the lawsuits are available here and here (subscription required).

Thursday, June 5, 2008

Study Ranks Top Venues for Patent Litigation

A recent study provides valuable insights for those involved in patent litigation.

The study (.pdf), by PricewaterhouseCoopers, compiles data regarding recent patent litigation cases and provides statistical support for the conventional wisdom that patent holders fare better in jury trials, as plaintiffs, and before certain district courts. According to the study:

  • The disparity between jury and bench awards has widened and is likely the contributing factor in the significant increase in use of juries since 1995.
  • Alleged infringers increase their trial success rates slightly as plaintiffs, but have not seen the same increased success in summary judgments.
  • Certain federal district courts (particularly Virginia Eastern, California Central, and Pennsylvania Eastern) continue to be more favorable to patent holders, with shorter time-to-trial, higher success rates, and higher median damages awards.

The report ranks the top 20 district courts for patent-holding plaintiffs, the top 10 of which are:

  1. Virginia Eastern
  2. California Central
  3. Pennsylvania Eastern
  4. Wisconsin Western
  5. Florida Middle
  6. Texas Eastern
  7. Delaware
  8. Texas Southern
  9. New Jersey
  10. Colorado

The study also reflects on certain trends in patent litigation:

  • The number of infringement actions filed rose to 2,896 in 2007, a compound average growth rate (“CAGR”) of 5.8% since 1991.
  • The number of patents granted rose to 183,831 in 2007, a CAGR of 3.8% since 1991.
  • The annual median damages award since 1995 has remained fairly consistent, when adjusted for inflation.
  • Reasonable royalties continue to be the predominant measure of damages awards.
  • Patent holders are successful 37 percent of the time, with a 19 percent win rate in summary judgments and a 57 percent win rate at trial.
  • While the median time-to-trial has been fairly constant since 1995, significant variations arise by jurisdiction, and patent holder success rates tend to decrease with longer time-to-trial, up to a point.
  • 32 percent of summary judgments are appealed, with 59 percent modified or reversed; while 43 percent of trial decisions are appealed, with 67 percent modified or reversed.

While the study appeals to all patent holders / litigants, readers of this blog may be interested in some of these statistics because consumer packaged goods companies (“CPGs”) often patent their products to protect their investments in research and development, and retailers occasionally get involved in patent litigation. The study states that, for the category that appears to encompass CPGs -- “miscellaneous manufactured goods,” the median damages awarded were $1.35 million, and the median time to trial was 2.2 years.

For those CPGs (and others) involved in patent litigation, the study is worthwhile reading, and can aid litigants in making strategic decisions such as where to file infringement lawsuits. For the full report, click here.

Update Aug. 18, 2008: This article in Texas Lawyer today observed that the Eastern District of Texas has slowed substantially in time to trial.

Tuesday, June 3, 2008

Sharper Image Closing All Its Retail Stores Amid Nationwide Rise in Bankruptcies



Sharper Image to Sell Stores - In April, I posted about the rise in retail bankruptcies, including Sharper Image, which filed for Chapter 11 bankruptcy in February. A bankruptcy court has approved Sharper Image's plan to liquidate all of its retail stores, though it will continue to operate through an online store, a catalog, and direct-to-retailer sales.

Decline Began in 2003 - Sharper Image's problems began in 2003 with Consumer Report's criticism of the effectiveness of Sharper Image's Ionic Breeze air purifier. Sharper Image filed an unsuccessful lawsuit against Consumer Reports, and Sharper Image was also targeted by a consumer class action lawsuit that it settled.

Commercial Bankruptcies Rise - Last month, there were 5,233 commercial bankruptcies, a rise of over 46 percent over the year-ago period, according to Reuters. Commercial cases include bankruptcy filings from companies, as well as individuals who indicate they are running a business.

Gift Card Restrictions - For gift card holders, Sharper Image currently requires consumers to buy products worth at least twice the value of the gift card in order to redeem the card. Because gift card holders have unsecured, low-priority claims in bankruptcy proceedings, retailers who declare bankruptcy may refuse to honor gift cards at all in some situations, as mentioned in this story.

Related Post: Retail Bankruptcies Rise

Monday, June 2, 2008

FTC’s Nine West Order Explores Resale Price Maintenance Under Leegin


FTC Order Allows Nine West's RPM - In an order that demonstrates manufacturers' increased ability to impose minimum resale prices on retailers after Leegin, the FTC last month unanimously granted a petition by women's shoe company Nine West to modify a prior order prohibiting it from engaging in resale price maintenance ("RPM").

Prior Order Had Prohibited RPM - In 2000, the FTC alleged that Nine West violated Section 5 of the FTC Act by negotiating RPM agreements with retail stores setting minimum prices for its shoes. Nine West and the FTC entered into a consent order prohibiting Nine West from engaging in any form of resale price maintenance. At the same time, Nine West entered into separate agreements with various states related to those states' antitrust laws.

Leegin - The Supreme Court's recent decision in Leegin Creative Leather Products, Inc. v. PSKS, Inc., 127 S. Ct. 2705 (2007), overturned the prior rule that RPM was per se illegal, a rule that had been articulated in Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911). The Court stated that RPM agreements may be pro-competitive if they promote inter-brand competition. Under the new standard, RPM agreements are analyzed on a case-by-case basis under the rule of reason, evaluating the competitive benefits and harms from RPM agreements.

Rule of Reason Analysis - The FTC analyzed whether the rule of reason analysis under Leegin should be a full-blown inquiry, a truncated inquiry as in FTC v. Indiana Federation of Dentists, or some other form of truncated inquiry. The FTC did not determine which type of inquiry applies to RPM, stating that "RPM agreements ordinarily might be seen by the Court as less intrinsically dangerous than horizontal price-setting arrangements, but not invariably so."

Leegin Factors - In its order, the FTC identified three relevant considerations from Leegin in determining whether RPM was likely to be anti-competitive: (1) whether retailers were the impetus for the adoption of RPM; (2) whether RPM was ubiquitous in the industry; and (3) whether the manufacturer or retailer was the dominant player in the market.

Application of Leegin - In its order, the FTC found that Nine West has "only a modest market share" and that the impetus for RPM is from Nine West itself. The FTC therefore found no likelihood of harm to consumers. The FTC further stated that if there were competitive concern, Nine West could meet its burden by showing pro-competitive effects of its RPM. While Nine West made a "conclusory assertion" of pro-competitive effects, the FTC found that Nine West had not made an adequate showing. The FTC therefore required Nine West to file periodic reports regarding its use of RPM and its effect on prices and output.

State Law Antitrust Implications - The FTC's order did not affect the settlement agreements that had previously been entered into between Nine West and various states. As discussed in more detail in a previous post, state law may or may not follow Leegin. Thus, state antitrust law remains an area of risk for manufacturers wishing to impose minimum prices.

Lessons from Nine West - While the FTC opinion reflects continued uncertainty about how Leegin should be applied, including what form of rule of reason analysis is appropriate, it also provides some guidance to manufacturers on factors the FTC deems important. Manufacturers should be especially cautious if it is likely that the FTC will find that retailers instigated the RPM, that RPM is ubiquitous in the industry, or that the manufacturer is the dominant supplier.

For retailers, the order provides a caution that they cannot be the impetus for the adoption of RPM.

Related Posts: State Resale Price Maintenance Laws and Leegin; Developing Legally-Compliant Trade Promotion Management Programs.

 

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