by Lee Gesmer | Nov 4, 2008 | Antitrust
The Federal government has two antitrust enforcement authorities – the Antitrust Division of the Department of Justice and the Federal Trade Commission. These two agencies have partially overlapping enforcement authority over civil cases, and they often collaborate in setting antitrust policy. Although the federal courts are the final arbiters of the federal antitrust laws (which are statutory, and therefore originate with Congress), the business community relies heavily on the Justice Department and the FTC to provide their views on the law. Accordingly, from time-to-time the Justice Department and FTC issue detailed joint guidelines. (Examples include: Collaborations Among Competitors, 2000; Antitrust and IP Rights, 2007; and Antitrust Licensing Guidelines, 1995).
The DOJ/FTC joint reports are a big deal – they often include lengthy hearings, prepared testimony and position papers from interested parties, proposed guidelines, revised guidelines, and so on, until (drum role ….) the big day when the final report is issued. And, as a result, these reports are given great weight by the antitrust community – and by that I mean the vast army of antitrust lawyers and economists who endeavor to understand this stuff, harmonize it with court decisions (where possible), and advise their clients on how to behave.
So, it’s no understatement to say that it is an unwelcome surprise when the federal antitrust enforcement agencies can’t agree on the law. Yet, this is what occurred when the Justice Department issued a report entitled “Competition and Monopoly: Single Firm Conduct Under Section 2 of the Sherman Act“. This mammoth, 200-plus page document followed public hearings that took 19 days stretched over a year, and included the the testimony of over 100 witnesses. The Report was finally issued in September 2008, 27 months after this process began. Broadly speaking, the Report addresses the topics of monopolization, predatory pricing, tying arrangements, refusals to deal and exclusive dealing. This is referred to as “single firm conduct” as distinguished from joint action (contracts, combinations or conspiracies) under Section 1 of the Sherman Act.
Needless to say, a Report of this magnitude and gravitas is of great interest; it provides a summary of the law to date on each topic area, discusses the hearing testimony, and then describes the federal enforcers’ views on the topic. Since the law isn’t static, these reports tell the public in which direction the enforcement authorities see the law moving and therefore where to expect enforcement activity However, although the DOJ and the FTC began this project together in June 2006, the DOJ finished alone. Why would this be?
As you may have guessed by now, the FTC disagreed with Justice, and therefore refused to join in the Report. In addition, the FTC Commissioners (those are the top folks at the FTC) issued dissenting “Statements” the same day that DOJ issued its report.
Of course, antitrust enforcement can be highly political. The Executive Branch appoints the Attorney General, who in turn implements the wishes of the President, at least most of the time. Some administrations are tough on antitrust enforcement, and others are better referred to a “anti-antitrust.” The President also appoints the five FTC commissioners, but the appointments are for seven year staggered terms, and no more than three of the commissioners may be from the same party. Traditionally, perhaps in part for these reasons, the FTC has tended to be more politically independent than DOJ. Very few Commissioners serve more than one term, and they typically fade back into academic or consulting practices when their term is up.
With Alberto Gonzalez as Attorney General, and knowing what we know now about how politicized DOJ was during the period that this report was being prepared, one can only wonder what went on behind the scenes during this process. However, law enforcement agencies don’t present their public disagreements in political terms, and here the public debate was conducted on the higher planes of economics and competition law. All four current FTC Commissioners (one seat is vacant) issued dissenting statements. Three of the Commissioners (but not the Chairman, who was more tactful than the others) argued that the DOJ had misstated the law on Section 2 conduct and had proposed legal standards that would, in their words “be a blueprint for radically weakened enforcement of Section 2 of the Sherman Act.” They disagreed on what the law is and what the law should be.
Quoting further from the Statement of the three dissenting Commissioners:
In short the Department’s Report erects a multi-layered protective screen for firms with monopoly or near-monopoly power. As an inevitable consequence, dominant firms would be able to engage in these practices with impunity, regardless of potential foreclosure effects and impact on consumers. Indeed, it appears that the Department intends for this screen to apply even when a firm uses two or more of these practices collectively, instead of just one practice individually.
Strong words from two agencies that the public expects to work out their differences behind closed doors and present a common front to the world.
This post is being published on the eve of the Presidential election. If we have a Democratic President in 2009, the law of Section 2 of the Sherman Act, as described in this Report, could soon become a footnote in American antitrust jurisprudence. However, the authors of the DOJ report, recognizing that acceptance of their views may be short-lived, might not look at the product of their labors so hopelessly. In their view, the Report may lie dormant during a Democratic administration, only to be revived at some unknown future date (perhaps as soon as four years), when its approach to antitrust enforcement returns to favor.
by Lee Gesmer | Oct 18, 2008 | Antitrust
Here’s an interesting web page from Google entitled Facts About the Yahoo-Google Advertising Agreement. There, Google “makes the case” for its proposed deal with Yahoo, which it describes as follows:
On June 12, 2008, Yahoo! and Google announced an agreement that gives Yahoo! the ability to use Google’s search and contextual advertising technology through its AdSense™ for Search and AdSense for Content advertising programs.
Under the agreement, Yahoo! has the option to display Google ads alongside its own natural search results in the U.S. and Canada. In addition, Yahoo! can serve contextually targeted ads on its U.S. and Canadian web properties as well as on its current publisher partner sites. Yahoo! will continue to operate its own search engine, web properties and advertising services.
In addition, Yahoo! and Google agreed to enable interoperability between their respective instant messaging services bringing easier and broader communication to users.
On this web page Google presents a White Paper of sorts, in web format, with links to sections such as “what the deal means for advertisers” and “why the deal is good for competition.”
It’s somewhat unusual for a company under Federal antitrust scrutiny to make a public “pitch” like this, but it’s consistent with Google’s corporate personality, which tends to be more “outward facing” than more conventional corporations.
Here’s the Powerpoint embedded on the Google page:
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.
