by Lee Gesmer | Mar 20, 2006 | Antitrust, Patents
Patents, Antitrust. Suppose that you live in a small farming community, Village 1, that relies entirely on its own members for food supplies. I have the only farm that grows corn. Whenever you come to me to purchase corn I tell you that I will only sell you my corn if you also buy a pound of cauliflower for every pound of corn you purchase. Cauliflower is plentiful, and you don’t want to buy my cauliflower (in fact you don’t even like this vegetable), but since you (and your fellow citizens) need corn you have no choice.
Assume that you move to a new community, Village 2. You still need corn, but you discover that there are several purveyors of corn in your new town. You go to the closest of these, and you discover, to your dismay, that this farmer also insists that if you buy his corn, you must also buy his cauliflower. Before purchasing you check around, and learn that the other corn vendors do not require that you purchase cauliflower as a condition to purchasing corn, and you happily proceed to do business only with them in the future. You later learn, to your satisfaction, that the corn farmer that you first encountered in Village 2 has gone out of business.
Thie simple example illustrates one of the more complex and vexing doctrines of U.S. antitrust law, the doctrine of tying arrangements. At its most simple, this intimidating term means that if you want to buy one product from me, you have to buy another that you may not want at all.
In antitrust parlance, corn is the “tying product,” and cauliflower the “tied product.” The product you don’t want (cauliflower) is “tied” to the product you do want (corn).
In Village 1 the corn farmer had what antitrust types call “market power” – in fact, he had a monopoly. If you wanted corn, you had to get it from him, and because he had a monopoly in corn he had the power to force you to buy his cauliflower as well. U.S antitrust law has long held this practice to be illegal per se, meaning there is no legal justification that would excuse it.
In Village 2, the first corn farmer had no market power at all. Because he foolishly insisted that a purchase of corn be accompanied by a purchase of cauliflower, he was soon out of business. In cases where the seller has no market power in the tying product, anitrust law has almost always found that a tying arrangement is permitted. After all, since the purchaser has the option to go to other sellers, how can the seller who lacks market power harm competition?
All of this seems intuitive and makes perfect sense, but lawyers being what they are nothing is ever this simple. What is the market? In the market, what is market power, and how do you measure it? How much is too much? Are there situations where there is a justification for requiring people who want product A to also buy product B (such as safety or cost efficiencies)? Are products A and B so closely related that they aren’t really separate products at all, but actually one product? These questions, to name just a few, have occupied the minds of judges, lawyers and economists for over one hundred years, and have resulted in enough pages of briefs, decisions and legal and economic treatises to reach from here to Pluto (well, not quite, but you get my point).
The most recent twist on the law of tying arrangements is the Supreme Court’s March 1, 2006 decision in Illinois Tool Works v. Independent Ink, Inc.
In this case the Supreme Court considered the question of whether one who holds a patent in Product A (remember, this is the “tying product” – the one you want) should be presumed to have market power simply by virtue of holding that patent. After all, once you obtain a patent you have a government-granted monopoly in products that incorporate the patent, don’t you? How could there be any doubt that the patent holder has market power?
This argument was accepted for over 40 years [link]. However, the prevailing winds at the all-powerful academic institutions and federal agencies (the antitrust division of the U.S. DOJ and Federal Trade Commission) that influence antitrust policy have shifted, and the Supreme Court decided to catch up with current economic thinking and put an end to the “patent-equals-market-power” presumption. In Illinois Tools the Court reversed this 40 year line of precedents, holding that one challenging a tying arrangement must show power in the relevant market, rather than relying on a mere presumption of power based on patent ownership.
Does this decision make good economic sense? In today’s environment, it probably does. Not only are most patents of little or no value, but in a 21st century economy there often are non infringing alternatives to the patented product that serve as substitutes, robbing the patent holder of market power. The Supreme Court has joined the Justice Department and the Federal Trade Commission [link] in concluding that it is implausible to presume that the owner of a patent possesses market power merely by virtue of the patent. However, because patents have become such an important part of the economy, the case is highly significant, and can be expected to have broad application.
by Lee Gesmer | Mar 8, 2006 | Business Lit. Session, Noncompete Agreements
Noncompete Agreements. Our firm used to write “year in review” articles [link], and I decided it was time for a reprise. Here is a year-in-review summary of the most significant Massachsetts state court cases from late 2004 through calender year 2005 involving the attempted enforcement of noncompete or nonsolicitation contracts. Rather than getting bogged down in the detailed facts of the cases I’ll provide a quick summary of the key facts and legal issues that led to the outcome in each case. The goal is to get a feel for how judges are approaching these kinds of cases – what works and doesn’t work in the state courts when employers are attempting to enforce noncompete/nonsolicitation agreements against former employees.
L-3 Communications v. Reveal Imaging [link] involved a complex series of corporate sales, the result of which was that the defendant-employees were several corporate acquisitions down the road from the companies with whom they had signed their agreements years earlier. Their new employer, who had “acquired” the employees via acquisitions, had failed to require the employees to enter into new agreements. Tough luck for the plaintiffs, as Judge Van Gestel concluded in the Suffolk Business Litigation Session in a decision issued on December 2, 2004. One of the employees had signed a noncompete agreement with a company that wasn’t even a predecessor-in-interest with the plaintiff. Another group of employees had signed noncompetes with a predecessor-in-interest, but unfortunately for the plaintiff they had signed a weaker intervening agreement which provided that it superceded the first agreement. Again, the plaintiff was out of luck, since the superceding agreement didn’t contain a post-employment noncompete provision (it contained a noncompete that only applied during the period of employment). Another noncompete agreement signed by this group of employees was not assigned as part of a sale to the current employer, and therefore was not enforceable.
The corporate purchases and sales in this case, and all of the agreements involved, are quite complex. But, the lesson of this case (and a number of other unreported Superior Court cases) is straightforward: if you buy a company make sure that you don’t expect employees who come with the acquisition to be bound by a pre-existing noncompete unless the employee agrees to assignment of the noncompete. Even better, have the employee sign a new noncompete agreement that states the terms you want enforced, rather than relying on the old agreement.
Accordia v. Academic Risk Resources resulted in two decisions. The first decision [link], on a motion for temporary restraining order, was decided by Judge Margot Botsford in Suffolk Superior Court on January 5, 2005. The second decision [link], on a motion for preliminary injunction, was decided a week later by Judge Nonnie S. Burnes.
This case involved the mass defection of an insurance department of 14 employees, who formed a competing company, followed immediately by a swift, targeted appropriation the former employer’s major clients. All of the employees had agreed in writing not to solicit their employer’s clients.
This was the kind of case that puts smiles on the faces of lawyers trying to enforce noncompete/nonsolicitation agreements, and makes the blood of defense lawyers run cold.
Not only did the department resign en masse, but the employees took Accordia client files with them, and even unilaterally moved one client’s business to the new company. These facts made Judge Botsford see red. Her decision is sprinkled with references to breach of fiduciary duty, “arrogation” of Accordia’s business and unfairness in the defendants’ behavior. Judge Botsford gave the former employes 24 hours to return all of Accordia’s property to it, and enjoined them from providing services to their former clients at Accordia. In other words, she shut them down cold.
However, the former employees got a break a week later when, in a second hearing, Judge Burnes took some of the sting out of the ruling by permitting the former employees to service the clients, but ordered them to put all fees from these services into an escrow account. Not surprisingly, that growing pot of money, which couldn’t be touched by either side, led to a quick settlement.
This case has a least two lessons, both of which are as old as the law itself. First, this is a case study in what not to do when leaving an employer – don’t take the employer’s property; don’t solicit your co-employees while you’re still employed if you’re an officer or executive; don’t resign en mass; and don’t move clients to your new company without written prior permission. The second lesson is that even in a case with facts this extreme what may be abhorrent to one judge may leave the next judge cold. However, Judge Burnes may have had the wisdom of Solomon – by permitting the former employees to service their former customers at Accordia (who may have gone to a third party provider and been lost to both parties, had she maintained the injunction), but ordering fees to be paid into escrow, she created a financial incentive for both sides to settle which, after all, is every judge’s primary goal.
