by Lee Gesmer | Oct 7, 2008 | Antitrust
At least one FTC Commissioner recently stated that he would support an appeal:
As I said earlier, I personally support a petition for certiorari in Rambus. I think the D.C. Circuit’s decision is wrong and given the fact that it rests on important legal principles respecting causation in Section 2 cases. I think its implications are much broader than the standard setting context. The petition is due in mid- November and it is my hope that the Solicitor General weighs in to support us on this important effort.
Section 2 and Standard Setting: Rambus, N-Data & The Role of Causation
J. Thomas Rosch, Commisioner, Federal Trade Commission, Oct. 2, 2008
Click here for an earlier discussion of the D.C. Circuit Court of Appeals’ decision in the FTC/Rambus litigation.
by Lee Gesmer | Aug 4, 2008 | Antitrust
“[Wild Oats] is the only existing company that has the brand and number of stores to be a meaningful springboard for another player to get into this space. Eliminating them means eliminating this threat forever, or almost forever.”
– John P. Mackey, co-founder and chief executive of Whole Foods, in 2007 email to Whole Foods Board Member. Mr. Mackey also posted on Internet message boards under the pseudonym Rahodeb for seven years, ending in 2006
Every man is his own greatest enemy, and as it were his own executioner.
– Sir Thomas Browne, Religio Medici
My wife loves Whole Paycheck. Even though the nearest Paycheck is a 20 minute drive from our home outside of Boston, and the really good (huge) Paycheck is 30 minutes away, she is reluctant to buy fruit or meat anywhere else. Shaws, which is right around the corner? forget it. Roche Bros., the next nearest supermarket? Boxed cereal, if they’re lucky. In fact, half the time my wife calls Paycheck “Bread & Circus,” the name of the original chain which Paycheck acquired in 1992. My soon-to-be 90 year old mother, who lives quite near a Paycheck that began as a Bread & Circus, won’t call it anything else.
When I go to Whole Paycheck, I assume that the minimum charge will be $100. For some reason, it’s almost impossible to get out of Paycheck for less than that. It’s like some obscure law of nature, or a function of consumer brain-washing, or both. At Shaws or Roche Bros., it’s actually an effort to break thirty bucks. But Paycheck, ahhh … The food is so exotic. It’s so beautifully displayed. That $40/pound goat cheese they are taste-sampling is so delicious, and after all, you only live once. For foodies, shopping at Paycheck is almost a religious experience. And by the way, I ain’t no foodie.
The only competition to Paycheck in the greater Boston area that I can think of is Trader Joe’s (which has around 300 stores nationwide), but frankly Paycheck is in a completely different class than Joe’s. In fact, the more I think about it, the more I’m inclined to say that Joe’s competes with Paycheck only when it comes to “dry grocery items” (chips and snacks) and frozen foods, and not in the key areas of meat, fish, bakery goods, fruits and vegetables.
Wild Oats Market? Never shopped there, and never heard of it before its merger with Paycheck last year. According to this site, which maps all Wild Oats locations, the closest Wild Oats stores are in Saugus and Medford, way outside of my family’s travel zone.
Now to antitrust.
Paycheck has a voracious appetite. Since its single-store start in Austin, Texas in 1980, it has swallowed up 15 other natural foods grocery chains, and by early 2007 it operated almost 200 stores nation-wide. Wild Oats operated over 100 stores, and was the U.S.’s second largest “natural foods” chain. In February 2007 Paycheck announced that it would acquire Wild Oats for $65 million, resulting in a natural food store behemoth 300 stores strong. (If you think I’m being facetious, you’re right).
The proposed merger triggered a Hart-Scott-Rodino filing, which gives the Federal Trade Commission the authority to investigate certain mergers and challenge them under Section 7 of the Clayton Act, which prohibits mergers or acquisitions where the effect “may be substantially to lessen competition, or to tend to create a monopoly.”
The FTC did challenge this merger. It’s position, summarized by the D.C. Court of Appeals, was –
. . . Whole Foods and Wild Oats are the two largest operators of . . . premium, natural, and organic supermarkets (“PNOS”). Such stores “focus on high quality perishables, specialty and natural organic produce, prepared foods, meat, fish and bakery goods; generally have high levels of customer services; generally target affluent and well educated customers [and] . . . are mission driven with an emphasis on social and environmental responsibility.” . . . In eighteen cities . . . the merger would create monopolies because Whole Foods and Wild Oats are the only PNOS.
The FTC attempted to block the acquisition pending its proceedings, but the U.S. District Court denied the FTC’s request for a preliminary injunction barring the merger. The D.C. Circuit denied an emergency motion requesting the injunction, pending appeal. With no legal obstacles, the merger was consummated in August 2007.
On July 29, 2008 the U.S. Court of Appeals for the D.C. Circuit issued a 40 page 2-1 decision (including the concurrance) reversing and remanding the case to the District Court.
The critical question on appeal was whether the economic impact of the acquisition should be measured against Paycheck’s core customers, and whether the District Court judge erred by failing to recognize this group as a relevant sub-market worthy of antitrust protection. I prefer to call the Paycheck core customers latte-drinking, Volvo-driving, NPR-listening, Birkenstock-wearing, New York Times-reading, natural/organic food-eating liberals, or “tofu-niks” for short. The District Court judge over-focused on Paycheck’s marginal customers. I prefer to call these customers McDonald’s-eating, Dunkin Donuts Coffee-drinkin, beef-loving, conservatives, or “beef-niks” for short. The tofu-niks shop at Paycheck religiously, and consider Paycheck to be only a step removed from their church or temple; the beef-niks go there to grab a gallon of milk or some apples only when a trip to Star Market is inconvenient. They mumble their response when the cashier gives them the standard Paycheck full eye-contact friendly greeting. 
When it comes to mergers, as in many areas of antitrust law, how you define the market is everything. If Paycheck’s product market was grocery stores that catered mostly to beef-niks, in other words it was basically a conventional supermarket, it didn’t have a large market share and it’s acquisition of Wild Oats was not likely to negatively impact competition. However, if Paycheck and Wild Oats comprised a distinct market that catered to a sub-market of tofu-niks, competition in that “core” market might be threatened by the acquisition, at least in the 18 cities identified by the FTC, and the FTC may have the right to bar the acquisition.
The district court defined the product market broadly to include both groups, and therefore allowed the merger to proceed. The D.C. Circuit disagreed, and held that there is a core group of customers (the tofu-niks), and when this group is considered the market can be defined narrowly. Therefore, the merger was properly challenged by the FTC, and should have been preliminarily enjoined to allow the FTC to conduct a full administrative hearing. To reach this decision the D.C. Circuit’s opinion is filled with the opinions of competing economists, and enough economic jargon to set the average Paycheck customer’s head spinning – “small but significant non-transitory increases in price” or SSNIP, “critical loss analysis” and so forth. And, of course, any opinion by an economist is subject to scathing criticism by another economist, so the decision and dissent are filling with polite academic cross-invectives.
Where does the case go from here, given that the merger was completed almost a year ago? The cage-free hen-hatched, antibiotic-free, hormone-free, omega-3 enriched organic eggs have, so to speak, have been scrambled. (sorry …)
The FTC could, after further administrative proceedings, attempt to force Paycheck to divest itself of the stores where competition was the most affected (some or all of the 18 markets it had identified when it chose to challenge the acquisition) and re-establish competition in those areas. According to the decision, there were a limited number of markets where competition was most affected. However, one wonders how that would be implemented given that the operations of the two companies have been combined, and it may not be possible for Wild Oats to reestablish itself. I suspect that lawyers at both the FTC and at Paychecks’ law firms are scratching their heads in puzzlement. And after all, the FTC doesn’t want to actually hurt former Wild Oats tofu-niks who have converted to Paycheck, does it?
Oh yes, as mentioned, one of the three appellate court judges dissented, arguing that there really isn’t a core market for Paycheck’s customers, and that for purposes of merger analysis the market definition should be all supermarkets, not just “organic” supermarkets. He argued that the economic evidence supported the conclusion that “organic” and “conventional” supermarkets compete for the same customers, and therefore the district court judge’s decision should be affirmed.
Obviously, he doesn’t shop at Whole Paycheck.
Stay hungry.
by Lee Gesmer | Jul 22, 2008 | Antitrust, Technology
Nvidia has filed a Sherman Act complaint against Rambus in federal district court in North Carolina. The allegations appear to echo (copy?) the allegations in the FTC case I reported on recently, where the D.C. Circuit reversed the FTC’s finding of illegal monopolization by Rambus. Can Rambus file a successful motion to dismiss in this new case based on the D.C. Circuit’s decision? Very likely.
Why did Nvidia file this suit? My first thought is that Nvidia was concerned about a statute of limitations problem, and this filing (even if dismissed by the District Court) will allow them to appeal and keep their claims alive during the FTC’s motion for en banc review that is pending before the D.C. Circuit, and during a possible Supreme Court appeal by the FTC. Alternatively, they may be hoping that a district court in the Fourth Circuit (or even the Fourth Circuit itself), will see things differently from the D.C. Circuit, and allow their case to proceed.
by Lee Gesmer | Jul 14, 2008 | Antitrust, Patents, Procedure
The Federal Trade Commission has asked for en banc review of the D. C. Circuit’s decision in the FTC’s Rambus proceeding. I expect this case to be appealed to the Supreme Court, and given the Court’s propensity to accept antitrust cases over the last several years and the importance of this case, the case stands a better-than-average chance of being accepted for review by the Court. Of course better-than-average is still difficult, so the FTC shouldn’t get its printing presses warmed up quite yet.
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The Supreme Court granted review of the Ninth Circuit’s decision in Pacific Bell v. Linkline, and will hear and decide the case next term. The issue in this case, as described in the Pacific Bell’s petition to the Supreme Court, is –
Whether a plaintiff states a claim under Section 2 of the Sherman Act by alleging that the defendant – a vertically integrated retail competitor with an alleged monopoly at the wholesale level but no antitrust duty to provide the wholesale input to competitors – engaged in a “price squeeze” by leaving insufficient margin between wholesale and retail prices to allow the plaintiff to compete.
The Ninth Circuit held that there was an antitrust duty, and Pacific Bell is appealing that ruling. The SCOTUS blog page for this case is here.
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I strongly recommend that patent and antitrust attorneys read Massachusetts U.S. District Judge Stearns’ recent decision in Hertz v. Enterprise Rent-A-Car. (Warning; non-lawyers should steer clear).
Hertz sued Enterprise under the Sherman Antitrust Act. At issue is Enterprise’s patent 7,275,038, an Internet-based computerized transaction system for the car rental business.
Hertz, threatened by the prospective (and then actual) issuance of this patent brought suit for declaratory judgment of non-infringement on a variety of grounds, each of which was considered by Judge Stearns in considering Enterprise’s motion to dismiss.
In this characteristically incisive and well-reasoned decision Judge Stearns addresses a pouporri of legal matters:
- Jurisdictional issues relating to a Walker Process claim antitrust claim (arising from patent invalidity based on fraud on the Patent Office; Walker Process Equip Co., Inc. v. Food Mach. & Chem. Corp., 382 U.S. 172 (1965)).
- The difference between an “amended complaint” and a “supplemental complaint” and its relevance to jurisdictional issues in this case.
- The level of specificity necessary to plead fraud-related claims arising in a patent context.
- The pleading requirements for a claim of tortious interference with advantageous business relations under state law.
- The pleading requirements under M.G.L. c. 93A where the complaint fails to allege that the anticompetitive effects of defendant’s actions were felt primarily and predominantly in Massachusetts.
- Whether there is sufficient case or controversy to support a declaratory judgment action under the Supreme Court’s 2007 decision in MedImmune, Inc. v. Genentech, Inc., 127 S. Ct. 764 (2007), which supplanted the “reasonable apprehension of imminent suit” test with a more lenient standard for declaratory judgment actions in patent cases.
- Whether the patent complaint stated “plausible claims” as required by the Supreme Court the 2007 antitrust decision in Bell Atlantic v. Twombly (and which Judge Stearns held applies to patent-based claims).
Enjoy, legal mavins …..
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When lawyers win a trial they like to publicize their efforts in a “war story” article. After all, one of the best parts of winning is the bragging rights.
These stories often are so self-serving they aren’t worth reading, but I have to recommend the article recently published on the ABA’s “Antitrust Source” website: Defending “The Last Man Standing”: Trench Lessons from the 2008 Criminal Antitrust Trial, United States v. Swanson. The defense lawyers in this case describe in detail how they took on a criminal price fixing conspiracy case brought by the government, and obtained a hung jury after an lengthy trial. The feds declined to retry the case, so this was a de facto win. The article describes all of the problems faced by the defense, which was representing an individual executive, Gary Swanson: witnesses who had pleaded guilty and were testifying for the government; an enormous volume of discovery materials, language issues (Korean), emails that were extremely damaging (at first sight), and more.
by Lee Gesmer | May 22, 2008 | Antitrust, Patents, Technology
The “Rambus litigation” in all its many permutations — Justice Department investigation, FTC proceedings and multiple civil cases — has been documented and commented upon widely. For a recap see Andy Updegrove’s article here. At the heart of the legal controversy is the allegation that during the 1990s Rambus, the owner of key DRAM patents or pending patents that solved the CPU-memory chip “bottleneck” problem, failed to disclose these patents to JEDEC, an important standards-setting organization (“SSO”) to which Rambus belonged. JEDEC, uninformed of the existence of these patents, incorporated the Rambus technology in its standards, which were then widely adopted in the memory chip market.
Because Rambus withheld disclosure of its patents, JEDEC did not have the opportunity to exercise either of the two options open to it when a member disclosed proprietary technology: either choose another technology or negotiate industry-wide favorable licensing terms as a condition of adoption of the standard (so-called “reasonable and non-discriminatory” license fees, or”RAND” royalties). RAND royalties are negotiated and agreed-upon ex ante, that is, before the technology owner’s IP is adopted, and therefore before the technology owner acquires market power by reason of the adoption.
By the time Rambus announced its patents and began demanding royalties (and filing patent infringement suits against companies that refused to pay royalties), Rambus had achieved a technical “lock-in” that made it difficult for the memory chip industry to move to a different technology. Rambus’s lock-in allowed it to obtain a 90% market-share, and demand supracompetitive royalties from companies that were producing JEDEC-compliant memory devices. Rambus has earned several billion dollars in licensing fees to date, and by some estimates its total royalties could reach as high as $11 billion.
The FTC Decision
The Federal Trade Commission brought proceedings against Rambus, and issued a 120 page decision in 2006 holding that Rambus was guilty of monopolization in violation of Section 5 of the FTC Act. The FTC issued a remedial order mandating the maximum royalties that Rambus would be permitted to charge.
The FTC’s key conclusions were:
- In the early 1990s Rambus engaged in a multi-year, intentional campaign to conceal its pending patents from JEDEC, in violation of JEDEC policies that required disclosure from members. Rambus’s actions constituted a “deliberate course of deceptive conduct” and were calculated to mislead JEDEC. Rambus even went to far as to tailor its patent claims to cover parts of the proposed standards. As a result, JEDEC was unaware of the patents and pending applications when it adopted the standard. The FTC emphasized that Rambus’s conduct occurred in the context of an industry standard-setting process, where members had a legitimate expectation of good faith and candor.
- Rambus’s deception was material, and led to JEDEC adopting the Rambus IP in its standards.
- “But for” Rambus’s deception, JEDEC would have either excluded Rambus’s technologies from the DRAM standards, or would have demanded assurances of reasonable royalties before adopting the technologies. The FTC specifically found that alternative technologies were available that would have provided an alternative to the Rambus technologies, had Rambus been unwilling to negotiate RAND royalties.
- Once the standards were adopted and implemented by chip manufacturers the cost and technical obstacles to switching technologies were significant, and as a result the industry was “locked-in” to the Rambus technology.
- As a result of Rambus’s actions, JEDEC’s adoption of the Rambus technology, and the lock-in effect, Rambus acquired monopoly power – a more than 90% market share in the relevant market. The FTC found that the legal requirement of a “causal link” between Rambus’s conduct and its achievement of monopoly power had been established.
- Rambus’s actions allowed it to charge supracompetitive patent royalties, unconstrained by competition. This harm to competition led to reduced output and decreased overall social welfare.
The FTC rejected Rambus’s “inevitability/superiority” argument: that even in the light of full disclosure JEDEC would have standardized on Rambus’s technologies due to their superiority. The FTC also rejected Rambus’s argument that Rambus’s monopoly power was not enduring because there were no barriers to entry to rivals wishing to challenge its monopoly position. The FTC held that the DRAM industry was locked into the JEDEC/Rambus standards due to switching costs and issues of backward compatibility.
Rambus’s Appeal to the D.C. Circuit
Rambus appealed, and the D.C. Circuit reversed the FTC decision on April 22, 2008. However, the D.C. Circuit was severely constrained in its ability to review the FTC decision. While a federal appeals court has the authority, on appeal, to review, de novo, purely legal issues decided by the FTC, the FTC’s factual findings are conclusive if supported by “substantial evidence.” The FTC’s factual findings were extensive; therefore, the path of least resistance for the D.C. Circuit was to focus on “legal” issues.
Rambus and “Antitrust Injury”
The D.C. Circuit took a legally complex and circuitous path to get to what it concluded was the core issue in the case. That process is itself highly questionable — the D.C. Circuit appears to have misapplied the standard of proof for causation in a case of this sort. In essence, the FTC drew legal inferences in favor of Rambus based on the FTC’s inability to analyze Rambus’s conduct within the context of a hypothetical marketplace that never existed because of Rambus’s fraudulent actions.
Using this reasoning, the court narrowed the case to what it considered to be the key “legal” issue: whether Rambus’s deception caused “antitrust injury” by preventing JEDEC from negotiating RAND royalties before adopting the Rambus technology. The answer to this question is critical, since the Supreme Court has repeatedly warned that conduct evaluated under the rule of reason that harms competitors is not enough, alone, to violate the antitrust laws – the conduct must harm competition. However, what constitutes harm to competition, or “antitrust injury” is a perplexing question. Often, this mantra is simplified to mean harm to consumers, who are the beneficiaries of competition. However, this is an oversimplification — the distinction between harm to competitors and harm to competition is as much a question of economic theory as of law. As George Bernard Shaw famously noted, if all economists were laid end to end, they would not reach a conclusion. The idea of federal judges, who are self-taught in economics at best, applying economics wrapped in the suffocating folds of stare decisis would have left Shaw (and probably even Oscar Wilde) without a bon mot.
Here is the Court’s conclusion on this issue:
JEDEC lost only an opportunity to secure a RAND commitment from Rambus. But loss of such a commitment is not a harm to competition from alternative technologies in the relevant markets. . . . Indeed, had JEDEC limited Rambus to reasonable royalties and required it to provide licenses on a nondiscriminatory basis, we would expect less competition from alternative technologies, not more; high prices and constrained output tend to attract competitors, not to repel them.
The D.C. Circuit went on to reject the arguments that (a) “price raising deception” of the sort alleged against Rambus resulting in higher royalty payments to Rambus was competitive harm, and (b) Rambus’ patents put it in a position of monopoly power, and any conduct that permitted a monopolist to avoid restraints on that power must be anticompetitive. As the D.C. Circuit put it, “an otherwise lawful monopolist’s end-run around price constraints, even when deceptive or fraudulent, does not alone present a harm to competition in the monopolized marketplace.”
D.C. Circuit’s Misplaced Reliance on NYNEX v. Discon
In reaching the conclusion that Rambus’s actions did not present a “harm to competition,” the D.C. Circuit relied almost entirely on the Supreme Court’s 1998 decision in NYNEX Corp. v. Discon. However, the NYNEX decision was largely concerned with whether so-called “two firm boycotts,” which is a vertical arrangement (as opposed to a horizontal “group boycott”), should be reviewed under the rule of reason or put in the forbidden “per se” category of antitrust violations. Boycotts – two firm or multifirm — were not at issue in FTC/Rambus, and in its 90 page appellate brief opposing Rambus’ appeal, the FTC didn’t mention the Discon case at all. Indeed, Rambus itself touched on NYNEX v. Discon only in passing in its appeal brief and its reply brief.
The D.C. Circuit’s seized on NYNEX as if it were a drowning man reaching for a life preserver. A secondary issue in NYNEX was the allegation that the defendants were engaged in a complex kickback scheme, a “regulatory fraud,” that allowed them to perpetuate market power. The Supreme Court found that this conduct, although fraudulent and deceptive, did not create a basis upon which to apply the per se rule to an alleged boycott with no horizontal elements. Additionally, the Supreme Court noted that there was competition in the affected market, indicating that although there was harm to the plaintiff, Discon, there was no injury to competition, the sine qua non of an antitrust violation. The Supreme Court noted that “the complaint itself … suggests the presence of other or potential competitors, which fact … could argue against the likelihood of competitive harm . . . entry was easy, perhaps to the point where other firms . . . might have entered that business almost at will.”
The ease of entry by competitors that caused the Supreme Court to suggest the absence of antitrust injury in Discon was not present in FTC/Rambus. As noted above, the FTC found that the industry was “locked-in” to the Rambus technology, and therefore there were no alternatives that could act as a competitive restraint on Rambus’s ability to overprice its patent licenses. Also, as noted, the FTC expressly rejected Rambus’s argument that its monopoly was not “enduring” due to the potential entry of competitors. These “findings of fact” by the FTC were not challenged by the D.C. Circuit, and they distinguish the analysis of the “harm to competition” in NYNEX from the “harm to competition” in the Rambus DRAM market completely.
Finally, the D.C. Circuit’s finding that Rambus’s “price raising” conduct did not give rise to the sort of competitive harm addressed by the antitrust laws was presented without any economic basis or discussion, and appears faulty. By charging supracompetitive royalty rates Rambus raised the cost of a key component of the products the DRAM chips were used in. Under any rationale view of economic theory or antitrust precedent, the higher prices charged by Rambus, given the absence of entrants that could drive down prices, constituted harm to consumers, and therefore “antitrust injury.”
Appeal or Defeat?
The FTC has a number of options open to it: a request for rehearing en bank to the D.C. Circuit, a retrial of some issues at the FTC, a Supreme Court appeal, or no action at all, which would be an admission of defeat.
It appears that this case would be ripe for an appeal (recognizing, of course, that the Supreme Court has discretion to take appeals, and takes very few each year). An appeal, if granted, would allow the Supreme Court to clarify its views on antitrust injury in the context of patent disclosures to a standard-setting organization, something it has never done. An appeal might resolve the many questions that are now outstanding following the D.C. Circuit’s in Rambus. The importance of this to the health of the standards-setting process is almost impossible to overstate.
However, the FTC’s decision to appeal to the U.S. Supreme Court must be informed by the reality that the Supreme Court has overwhelmingly favored antitrust defendants since 2004, and therefore the mathematical odds alone disfavor success on an appeal. However, one would hope that a Supreme Court appeal would allow the Court to make it clear that a deceptive failure to disclose its technology to a standard setting organization, enabling the patentholder, as a result, to charge supracompetitive royalty rates and obtain monopoly power, is exactly the kind of economic behavior that the antitrust laws are designed to prevent.
by Lee Gesmer | Apr 22, 2008 | Antitrust
We have followed the Rambus saga for some time. My last post linked to the Federal Trade Commission’s decision holding that Rambus had engaged in illegal monopolization and linking to an extended discussion by my partner, Andy Updegrove.
Today, the Federal Circuit Court of Appeals reversed the FTC, holding that Rambus was not guilty of monopolization. Decision here. More to follow, as we have a chance to review this decision.
by Lee Gesmer | Jan 12, 2008 | Antitrust, Courts, Patents
When I was a new lawyer, working at Howrey in Washington, D.C, the firm ‘s client, Litton Industries, was sanctioned in the amount of $10 million for discovery misconduct – the failure to produce relevant documents during discovery. But for the sanction, Litton would have been entitled to an award of its costs and attorneys fees in the litigation, which it had won. I suspect, however, that Litton (and Howrey) took this with good graces – Litton had been awarded $277 million in damages. See Litton Systems, Inc. v. AT&T, 91 F.R.D. 574 (S.D. N.Y 1981), aff’d, 700 F.2d 785 (2nd Cir. 1983).
Ironically, the documents in question (which were produced very late but before trial) were ruled inadmissible at trial, and therefore the defendant suffered no prejudice as a result of the late production.
Even though I was not involved in this case while at Howrey, this painful episode for the firm and the lawyers directly involved left a lasting memory upon my young and impressionable mind, and I recalled it as I read about the pickle in which a group of California lawyers have found themselves in the patent case Qualcomm v. Broadcom.
In the Qualcomm case a key issue was whether Qualcomm, which accused Broadcom of patent infringement, had participated in the Joint Video Team (“JVT”), a standards-setting body. Broadcom aggresively sought discovery from Qualcomm on its involvement in JVT, under the theory that had Qualcomm participated in this process, it would have been barred from suing companies which used the Qualcomm technology that was adopted as part of the standard.
Qualcomm denied participation throughout discovery, but Broadcom had a few documents which gave it reason to believe that Qualcomm had participated in JVT. However, while preparing one of their witnesses during trial Qualcomm’s attorneys searched the witnesses’ laptop computer for the first time, and discovered 21 emails that contradicted Qualcomm’s position in the case, but which had not been produced. Even then the Qualcomm lawyers tried to avoid producing these documents (questioning this witness in such a way that she would not disclose their existence), and only on cross-examination of the witness by Broadcom did the truth begin to emerge. To make a long story short, Qualcomm’s case disintegrated during trial, and after trial (which Qualcomm lost), Qualcomm performed a search of its employee’s email archives, only to discover that there were more than 46,000 documents, totalling over 300,000 pages, that Qualcomm had failed to produce.
One can only imagine the feelings of Qualcomm’s outside counsel as this problem was uncovered and the full extent of the problem emerged. At first they tried to coverup the nondisclosure, and when they finally admitted the true facts the lawyers knew that this problem would be pinned on them as well as on their client. Lawyers are responsible, to some extent, for their client’s failure to provide discovery, and the ball and chain fell heavily on Qualcomm’s outside counsel. In fact, the judge found that Qualcomm had intentionally withheld the documents, that this could not have occurred without assistance or deliberate ignorance by its outside attorneys, and that significant sanctions were appropriate. The outside lawyers were hamstrung in their ability to defend their actions, since Qualcomm would not waive the attorney-client privilege.
The judge ordered Qualcomm to pay more than $8.5 million to Broadcom, which amount represented Broadcom’s attorney’s fees and expenses. He also referred several of the Qualcomm lawyers to the California State Bar, for possible sanctions for ethical violations.
What does this case say to lawyers representing clients in the future? In today’s business environment every comany has electronic evidence. In the “old days” a lawyer had only to search her clients’ file cabinets and warehouses to find relevant evidence. In fact, in the Litton/AT&T case discussed above, the hidden evidence was sitting in the desk drawer of an AT&T employee during the entire case. Now, an outside lawyer knows that failing to properly review a client’s electronic files can result not only in financial sanctions against the client, but in serious sanctions against the lawyer as well. This case emphasizes the reality that lawyers must carefully oversee their clients’ electronic discovery, that they cannot rely exclusively on their clients’ assurances, and that they must be alert to any inconsistencies or hints that full production of evidence may not be taking place.
by Lee Gesmer | Dec 19, 2007 | Antitrust
We’re always warning our standards setting clients that U.S. antitrust laws are about more than just money – you can go to jail. After a while, it feels like these warnings lose their force. This recent press release from DOJ is a reminder that a violation of the antitrust laws is both a criminal and a civil violation:
An independent consultant and two executives of Dunlop Oil & Marine Ltd., a manufacturer of marine hose located in Grimsby, United Kingdom, pleaded guilty today and have agreed to serve record-setting prison sentences for participating in a conspiracy to rig bids, fix prices, and allocate market shares of marine hose sold in the United States, . . .
. . . Under the terms of their plea agreements, Whittle has agreed to serve 30 months in jail, Allison has agreed to serve 24 months in jail and Brammar has agreed to serve 20 months in jail. These are the longest prison sentences that foreign national defendants charged with antitrust offenses have agreed to serve in the Division’s history.
‘Nuff said. This is serious stuff. You have to wonder if these guys knew that they were playing with fire until it was too late.
by Lee Gesmer | Oct 17, 2007 | Antitrust
Antitrust. It shouldn’t be a surprise that it might be illegal under the antitrust laws for a company with a 90% marketshare in a key, patented technology to agree as a member of a standards developing organization that it would license its technology on “fair, reasonable and non-discriminatory” (or FRAND) terms if that technology is included in the standard, and then, after adoption, violate that pledge. Nevertheless, a federal district court held that Qualcomm could not be held liable under the antitrust laws under these facts. In an important decision at the intersection of standard-setting and antitrust law the Third Circuit disagreed, reversing the lower court. Andy Updegrove addresses the case (and provides a link to the decision) in his article here, so I’ll defer to his extensive discussion and analysis.
by Lee Gesmer | Jun 29, 2007 | Antitrust
As recently as 1977 virtually all “vertical restraints” were per se illegal under the federal antitrust laws. This included “nonprice” restraints, which are agreements between firms operating at different levels than the manufacturer that restrict the conditions under which firms may resell goods. An example might be a restriction on the locations from which a retailer may sell a manufacturer’s product.
Supreme Court precedent also restricted both vertical “maximum” price restrictions (example: “you may not price this product higher than $12/unit”) and vertical “minimum” price restraints (example: “you may not price this produce at less than $10/unit”).
However, over the last 30 years the Supreme Court has, in effect, withdrawn each of these antitrust prohibitions, holding that these restraints must be subject to the “rule of reason” (requiring an economic examination in every case to determine whether the harms outweigh the benefits), rather than the per se doctrine (per se illegal = automatically illegal; no excuse will do).
In 1977 the Supreme Court dropped the per se rule on “nonprice” restraints in the case of Continental T.V., Inc. v. GTE Sylvania, Inc. I had the pleasure (is there an emoticon for sarcasm?) of writing a Law Review Note on that case: Sylvania and Vertical Restraints on Distribution, 19 Boston College Law Rev. 751 (1978).
Twenty years later, in State Oil Co. v. Khan, the second leg of this three-legged stool was removed when the Supreme Court held that maximum vertical price restraints should not be subject to the per se rule of illegality. In and of itself this was not a big deal, since manufacturers rarely set maximum prices. The real battle, all antitrust lawyers knew, lay with the third, and most controversial, leg of the chair: minimum vertical price-fixing.
Since the 1997 Khan ruling left the per se rule against minimum price restraints intact, for the last ten years it has remained per se illegal for a manufacturer to dictate the minimum price at which a product may be sold. In other words, it has remained per se illegal for a distributor (or a manufacturer that sells directly to retailers) to prevent distributors and retailers from price cutting. Hence, the phrase “manufacturer’s suggested retail price” or “MSRP.” Most likely, you have never seen the phrase “manufacturer’s required retail price.”
Yesterday, in a five to four decision written by Justice Kennedy (often seen as the swing vote on this Court), the Supreme Court overruled the per se rule on vertical minimum price fixing that almost every living American has lived with his or her entire life. In Leegin v. PSKS, Inc., the Court swept away the almost 96-year old per se rule against vertical minimum price fixing, holding that henceforth this practice, too, will be judged under the “rule of reason.”
The rationale behind this ruling? In a nutshell, the Court was convinced that “interbrand” (as opposed to “intrabrand”) competition is sufficient to protect consumers. This leaves the possibility, therefore, that a monopolist, or a manufacturer with overwhelming market power, will still be prevented from vertical minimum price fixing. However, because the practice no longer is per se illegal, proving the harmful impact on competition in any given case will be far more costly, difficult and unpredicatable. It has been observed by one commentator that litigating a rule of reason case is one of the most costly procedures in antitrust law (H. Hovenkamp, The Antitrust Enterprise 105 (2005)). As a result of the Leegin decision, far fewer cases will be brought.
Will this make business happy? Almost certainly it will. We have had countless clients express their dismay over the rule that prevented them from imposing minimum prices on their dealers. This has been even more true as the Internet marketplace has emerged, since sellers can advertise price cuts so easily on the Web. Why should a retailer maintain a storefront and an experienced on-site sales staff when it can be undercut so easily online?
Will this change in the law be good for consumers in the long run, as the Supreme Court majority believes? Measuring the benefits and detriments of a rule such as this in an economy as complex as ours is well near impossible. The Supreme Court’s decision was based entirely on economic theory rather than empirical economic evidence. When considering this one must, of course, recall the oft-quoted comment of John Kenneth Galbraith: “The only function of economic forecasting is to make astrology look respectable.”
What is clear, however, is that a generation of antitrust lawyers will have to learn to change their tune when a client asks: “Can I tell all my distributors (or retailers) that they cannot sell below a specific price?” And keep an eye out for that label – “manufacturer’s required retail price.”
by Lee Gesmer | Aug 9, 2006 | Antitrust
Foundry Networks, Inc. has filed suit against Alcatel in federal court in Delaware. The claims are very similar to the claims in the Rambus litigations. A copy of the complaint is here (pdf file).
Andy Updegrove discusses this case and its similarities to Rambus in his “Son of Rambus” post, here.
by Lee Gesmer | Jul 24, 2006 | Antitrust
It is axiomatic that an entity cannot “conspire” with itself. For example, the Supreme Court has held that a parent corporation and its subsidiary are not capable of an illegal conspiracy under the Sherman Antitrust Act.
Of course, as is true with most legal principles, what looks simple at 30,000 feet altitude becomes more complicated the closer one gets to the ground, and the courts have struggled with the definition of a “single entity” in a variety of contexts.
Dean Williamson of the DOJ Antitrust Division has written an interesting and in-depth paper analyzing the law and economics of this issue. The paper, titled Organization, Control and the Single Entity Defense in Antitrust, is published here.
