US Antitrust Policy Enters a New Phase

Financier Worldwide published an article that I co-authored on recent developments in US antitrust law. You can read the article here.

Senate Bill Limiting Reverse Payment Settlements

Reverse payment settlements occur when a brand-name drug manufacturer makes a "reverse" payment to settle a patent dispute with a generic drug manufacturer. In exchange for this payment, the generic drug manufacture agrees to delay its entry into the drug market. These payments are called "reverse" payments because it is the patent-holder/plaintiff that is making a payment to the alleged patent-infringer/defendant.

The FTC has challenged these payments as anticompetitive, with mixed results. See Schering-Plough Corp. v. FTC, 402 F.3d 1056 (11th Cir. 2005) (reversing FTC's ruling that reverse payment settlement agreement was unlawful under Sherman Act). During the Bush administration, the DOJ disagreed with the FTC's position -- a rare split between the two federal agencies charged with enforcing the antitrust laws. The DOJ under the Obama administration, however, has realligend itself with the FTC's position. See DOJ's brief in In re Ciproflaxin Hydrochloride Antitrust Litigation (2nd Circuit). This blog has followed this issue here and here and here.

On October 15, 2009, the Senate Judiciary Committee passed the Preserve Access to Affordable Generics Act, S. 369. The bill originally outlawed all reverse-payment settlements. But the bill was later amended to create a rebutable presumption that reverse-payment settlements were anticompetitive. To overcome this presumption, the drug manufacturer would have to prove by "clear and convincing evidence" that the deal promotes competition. Opponents of the bill argue that the standard for rebutting the presumption should be reduced to the "preponderance of the evidence."

The bill raises some interesting questions. How would these shifting burdens differ from the structured rule of reason analysis that the DOJ has already advocated for analyzing reverse-payment settlements? How would a drug company prove that such a deal was procompetitive? Would it be enough to prove that the reverse-payment was commensurate with the avoided litigation cost? How much in excess of the avoided litigation costs is too much? What role would the underlying merits of the patent dispute play in such an analysis? Would the court have to hold a "little trial" on the patent dispute before deciding the antitrust issue? How does the regulatory framework of the Hatch Waxman Act affect the competitive analysis?

DOJ Proposes Structured Rule of Reason Analysis for RPM

Christine A. Varney, the Assistant Attorney General of the U.S. Department of Justice, gave a speech in which she proposed a “structured rule of reason analysis” for analyzing resale price maintenance. See Christine A. Varney, “Antitrust Federalism: Enhancing Federal/State Cooperation,” Remarks as Prepared for the National Association of Attorneys General (October 7, 2009).

As noted elsewhere on this blog, the law of resale price maintenance has changed dramatically in the last two years. The Supreme Court's 2007 decision that RPM is no longer per se illegal raises the question of how RPM should be analyzed under the rule of reason--a question which no court had the chance to answer during the previous 100 years when RPM was per se illegal. Some courts are addressing the issue now, such as the Eastern District of Pennsylvania case involving retail giant Babies "R" Us. See McDonough et al. v. Toys “R” Us, Inc. et al., No. 06-242, 2009 WL 2055168 (E.D. Pa. July 15, 2009) (certifying class action).

In a speech to the National Association of Attorneys General, Ms. Varney suggested a "structured rule of reason analysis" which creates a presumption of illegality if certain structural conditions are present in the market. Those structural conditions would exist when RPM was used: "(1) by a manufacturer cartel to identify members that are cheating on a price-fixing agreement; (2) when used to organize a retailer cartel by coercing manufacturers to eliminate price cutting; (3) when used by a dominant retailer to protect it from retailers with 'better distribution systems and lower cost structures,' thereby forestalling innovation in distribution; and (4) when used by a manufacturer with market power to give retailers an incentive not to sell the products of smaller rivals or new entrants."

Under Varney's proposal, if a plaintiff established a prima facie case that one of these four structural conditions existed, then the burden of proof "would shift to the defendant to demonstrate either that its RPM policy is actually--not merely theoretically--procompetitive or that the plaintiff's characterizations of the marketplace were erroneous."

In her address to the states Attorneys General, Varney noted that states may not be limited by the per se rule. She explained: "In the wake of Leegin, many states are reevaluating their legal oversight over RPM arrangements and considering whether state law may treat them as per se illegal." As previously noted on this blog, Maryland has already acted on this issue by amending its antitrust laws to specifically state that RPM is per se illegal under Maryland law despite Leegin.

House Acts To Restore Per Se Rule Against Resale Price Maintenance Overruling Recent Supreme Court Decision

On Tuesday, July 30, 2009, the House Judiciary Courts and Competition Policy Subcommittee approved the Discount Pricing Consumer Protection Act of 2009 (HR 3190). The bill would make all resale price maintenance agreements per se illegal under the Sherman Act, thus overruling the Supreme Court’s decision in Leegin Creative Leather Products v. PSKS, Inc., 127 S.Ct. 2705 (2007).

In Leegin, the Supreme Court held that manufacturers may have very good, pro-competitive reasons for establishing minimum resale prices for their goods. For example, minimum resale prices encourage retailers to invest in advertising and promotion, prevent “free-riding” retailers from undermining the marketing efforts of others, and promote interbrand competition, which, the Supreme Court pointed out, is the purpose of the antitrust laws. Given the benefits of resale price maintenance, the Supreme Court held that such agreements are not per se illegal. Rather, such agreements are unlawful only if they constitute unreasonable restraints of trade under the Rule of Reason (a familiar test in antitrust law).

As a result of the Leegin decision, many manufacturers have changed their distribution policies, and some have adopted resale price maintenance agreements which allow them to more effectively market their products and compete against other brands.

The Discount Pricing Consumer Protection Act, however, would return antitrust law to the days when all such agreements were per se illegal, regardless of their procompetitive benefits. The bill provides: “Any agreement setting a price below which a product or service cannot be sold by a retailer, wholesaler, or distributor shall violate section 1 of the Sherman Act (15 U.S.C. 1).” Those twenty-eight words, if enacted into law, would overrule the Supreme Court’s decision in Leegin and the economic literature upon which the Leegin Court relied. Next the bill will be considered by the full Judiciary Committee, which is headed by Rep. John Conyers (D-MI). Although many bills die in committee, this bill is more likely to be considered because Rep. Conyers is a co-sponsor of the bill.

The Senate is considering its own version of the Discount Pricing Consumer Protection Act. S.B. 148. The Senate bill is sponsored by Senator Herb Kohl (D-WI) whose family founded the eponymous retail department store chain. The Senate bill is also likely to receive committee attention because Senator Kohl is the Chairman of the Antitrust, Competition Policy and Consumer Rights Subcommittee.

Constructive Termination Actionable Under New Jersey Franchise Practices Act

The New Jersey Appellate Division has ruled that constructive termination is actionable under the New Jersey Franchise Practices Act. See Maintainco, Inc. v. Mitsubishi Caterpillar Forklift America, Inc., 975 A.2d 510 (N.J. App. 2009).

The Act prohibits a franchisor from "terminating" a francisee without "good cause" and also prohibits the franchisor from imposing "unreasonable standards of performance" on a franchisee. The court held that "termination" also includes the common-law concept of "constructive termination."

The court explained that "rather than directly and unambiguously terminating the plaintiff, [defendant] engaged in a course of conduct geared to forcing out the plaintiff." For example, the defendant expressed its desire to be rid of plaintiff, appointed a second dealer in plaintiff's territory, and gave the second dealer favorable terms and conditions, in the hopes that plaintiff's business would be destroyed. The court held that this constiuted a "constructive termination" of plaintiff's franchise without good cause. The court also held that plaintiff did not have to resign or actually be driven out of business before filing a claim under the NJFPA. It was enough that defendant attempted to constructively terminate plaintiff and that the scheme would have succeeded but for the plaintiff's lawsuit.

House Introduces Bill To Reinstall Per Se Rule Against Resale Price Maintenance

On Monday, July 13, 2009, the Discount Pricing Consumer Protection Act of 2009, H.R. 3190, was introduced in the House of Representatives. The bill would essentially overturn the Supreme Court's 2007 decision in Leegin Creative Leather Products v. PSKS, Inc., 127 S.Ct. 2705 (2007). In that decision, the Court held that minimum vertical price fixing was not per se illegal and rather should be analyzed under the Rule of Reason.

Many thought that the Leegin decision would open the doors for manufacturers to enter into price fixing agreements with their distributors and retailers. Leegin's effect, however, has been muted due to the possibility that the per se rule would still apply under certain state antitrust laws and that Congress would legislatively "overrule" Leegin.

The Discount Pricing Consumer Protection Act would reinstate the per se rule against resale price maintenance agreements in federal court. Importantly, however, Colgate policies would still be lawful under existing Supreme Court precedent. (In a Colgate policy, a manufacturer unilaterally announces that it will not do business with a retailer that sells its products below a certain level. Properly written and implemented, these policies are not illegal under antitrust law because there is no concerted action.).

A similar bill has been introduced in the Senate. The House version was sponsored by Henry Johnson, D-Ga. and Co-Sponsored by Rep. John Conyers, D-MI. The bill has been referred to the House Judiciary Committee.

Maryland Daily Record Article About Leegin Repealer

The Maryland Daily Record published this article about resale price maintenance under Maryland's recently revised Antitrust Laws. The article was written by David Hamilton and Jason Hicks, antitrust and business litigation attorneys at Womble Carlyle. Hamilton and Hicks conclude that Maryland's new law raises the stakes for national manufacturers whose products are sold in Maryland:

Understanding and complying with federal antitrust laws is no longer enough. Beginning Oct. 1, national manufacturers and suppliers will also have to evaluate their policies under Maryland’s more strict standards. Failure to do so may result in the automatic imposition of a treble damages award under Maryland law.

Follow these links for more information about the Supreme Court's approach to price fixing, how businesses can protect themselves with a Colgate policy, Maryland's "Leegin Repealer," and how Congress may overrule Leegin and reinstate the per se rule with respect to federal antitrust law.

Feds Freeze Accounts of On-Line Poker Players

The Wall Street Journal reports that the US Attorney for the Southern District of New York has frozen or seized $34 million in bank accounts belonging to 27,000 on-line poker players. The accounts are managed by Allied Systems, Inc. and Account Services, which handle transactions for several popular online poker sites. In 2006, Congress passed a law making it illegal for banks to process payments for unlawful Internet gambling. These gambling web sites were already considered illegal by the U.S. government, but it was hard to prevent the off shore sites from operating without going after the credit card companies and banks that handled the transactions. Others, however, say that the law is unclear with respect to on-line poker. Some argue that poker is a game of skill, not a game of chance, and therefore legal under the traditional three-pronged definition of gambling (i.e., 1. consideration, 2. chance, 3. prize). Last year, House Representative Barney Frank introduced a bill that would legalize and regulate Internet gambling.

Google Investigation Reflects Increased Antitrust Enforcement By Government Regulators

The Wall Street Journal and New York Times have reported that the Justice Department has set formal demands, known as civil investigative demands or CIDs, to Google and book publishers regarding a deal that would allow Google to post millions of books online. Google has been scanning out-of-print books since 2004 and was sued for copyright infringement by the Authors Guild and the Association of American Publishers. Google settled the lawsuit last year, and part of the settlement agreement allowed Google to use the out-of-print books in exchange for payments to publishers and authors. Critics claim that the deal gives Google broad copyright immunity and prevents competitors from entering the market for digital titles. Others applaud the deal because it will expand digital access to books. The Justice Department CIDs reflect a broader interest by government regulators into antitrust law, especially in the technology industry. Google and other tech companies are the subject of other government investigations including:

• Whether tech companies agreed not to poach each other's workers;
• The overlap of directors on Apple's and Google's boards; and
• The sufficiency of standards on behavioral advertising.

The Wall Street Journal reports that "People close to Google say the company considers the investigations part of a broader push by new antitrust regulators to step up scrutiny of the technology industry after a lull during the Bush administration." This increase in antitrust scrutiny may not be limited to Google or the technology industry. There are signs that antitrust regulators, as well as state and federal lawmakers, are taking an increased interest in antitrust enforcement in a variety of industries. This increase in antitrust enforcement comes on the heels of a variety of decisions that have limited remedies for private plaintiffs under federal antitrust law.

Fourth Circuit Says Leegin Did Not Implicity Overrule Colgate

On March 24, 2009, the Fourth Circuit issued a ruling in Valuepest.com v. Bayer Corp, Case No. 07-1760 ("Valuepest"), in which the Court affirmed the District Court's grant of summary judgment to defendants. Plaintiffs, who provide pest control services to individual customers, brought a price fixing claim under Section 1 of the Sherman Act against a manufacturer of pesticies for allegedly illegally conspiring with its distributors to set a minimum resale price for certain pesticide products. Defendant argued that its policy did not involve concerted action under Section 1 of the Sherman Act because its distributors were bona fide agents, and thus there was no "agreement" between two separate parties. The principal-agency defense was recognized by the United States Supreme Court in United States v. General Electric Co., 272 U.S. 476 (1926).

The Valuepest court noted that principal-agency relationships do not fall within the purview of Section 1 for the same reasons that "Colgate" policies do not involve concerted action. "Unilateral action by a manufacturer does not suffice to implicate s 1; a manufacturer can, for example, refuse to sell retailers who resell its products for less than the manufacturer's preferred price. See United States v. Colgate & Co., 250 U.S. 300 (1919).

The plaintiffs in Valuepest argued that the Supreme Court's 2007 decision in Leegin Creative Leather Products, Inc. v. PSKS, Ins., 127 S. Ct. 2705 (2007) implicitly overruled the principal-agent defense in General Electric. In Leegin, the Supreme Court held that minimum resale price agreements were no longer per se illegal and were instead governed by the rule of reason. The Valuepest plaintiffs further argued that Leegin required a "generalized inquiry into market power and procompetitive beneifts even where a genuine agency relationship exists" and thus there is no agreement. The Fourth Circuit, however, rejected this argument, stating:

Plaintiffs' argument conflates the distinction between the two elements required to prove liabiltiy under s 1. General Electric concerned the first necessary element of s 1 liabiltiy--the existence of an agreement. Where a manufacturer sells its products through its genuine agents, there is no 'contract combination,' or 'conspiracy,' and thus no basis for antitrust liabiltiy. 15 U.S.C. s 1. At issue in Leegin was an entirely different question regarding the second element of s 1 liabilty that applies when an agreement has been proven: should that agreement be considered per se unlawful or should it be analyzed under the rule of reason? The two cases dealt with separate and distinct issues, and thus no part of Leegin's reasoning casts the slightest bit of doubt on the underpinnings of the rule of General Electric.

The same thing can be said for Colgate. Like the principal-agency relationships under General Electric, Colgate policies do not violate section 1 of the Sherman Act because when a manufacturer unilaterally terminates a discounting retailer there is no "contract, combination" or "conspiracy" between the two parties. The reasoning behind the Valuepest decision confirms that Leegin did not implicitly overrule Colgate.

The importance of Colgate and General Electric has resurfaced because several states have indicated that they still consider RPM to be per se illegal. In fact, Maryland recently amended its state antitrust laws to make it clear that RPM agreements were per se illegal in Maryland. And Congress is considering similar legislation with respect to the Sherman Act. (See here and here). These efforts to "overrule" Leegin should not affect Colgate policies because such policies are not "agreements" to begin with. Therefore, you never get to the question of whether the agreement should be considered per se unlawful or analyzed under the rule of reason.

The Fourth Circuit's decision in Valuepest was not surprising. But it is a nice reminder that the classic defenses to vertical price fixing are still available in the post-Leegin world.

Bye Bye Bargains? Congressional Hearings On Repealing Leegin

The House Judiciary Committee recently held a hearing entitled "Bye Bye Bargains? Retail Price Fixing, the Leegin Decision, and Its Impact on Consumer Prices." The committee heard testimony from several antitrust lawyers, including FTC Commissioner Pamela Jones Harbour, about whether Congress should overrule the Supreme Court's 2007 Leegin decision and reinstate the per se rule against resale price maintenance ("RPM"). Maryland has already enacted such a law with respect to its state antitrust laws. This hearing came within a few weeks of the Justice Department announcing a more aggressive approach to enforcing antitrust laws.

DOJ Signals More Aggressive Antitrust Enforcement By Withdrawing September 2008 Report On Monopolization

On May 11, 2009, Assistant Attorney General Christine A. Varney, Chief of the DOJ's Antitrust Division announced a policy shift in the Department of Justice regarding single-firm conduct under Section 2 of the Sherman Act. In her speech, Varney announced that the DOJ was withdrawing its report Competition and Monopoly: Single-Firm Conduct Under Section 2 of the Sherman Act, which had been unveiled during the last few months of the Bush Administration.

Varney explained that the DOJ, under the Obama administration, believed the report "misses the mark" because it "raise[d] the hurdles to government antitrust enforcement." She explained that the report "characterize[d] a dominant firm's ability to act efficiently as a core concern in evaluating any possible anticompetitive impact of its conduct." Although this is an important aspect of the analysis under Section 2 of the Sherman Act, Varney stated that the report "goes too far in evaluating the importance of preserving possible efficiencies and understates the importance of redressing exclusionary and predatory acts that result in harm to competition, distort markets, and increase barriers to entry." Varney said the repudiation of the report represents "a shift in philosophy and the clearest way to let everyone know that the Antitrust Division will be aggressively pursuing cases where monopolists try to use their dominance in the marketplace to stifle competition and harm consumers."

There is no doubt that Varney's speech is part of a larger effort by the Department of Justice to "reinvigorate" its antitrust enforcement policies, which some say were too lax during the prior administration. What this will mean for antitrust law, however, is yet to be seen. The Department of Justice may be more willing to bring cases, but the scope of the antitrust laws is determined by the courts--not the DOJ.

However, given the cost of responding to and defending a DOJ investigation, businesses should not simply view Varney's speech as a symbolic gesture. A recent headline in the US News and World Report reads: "Obama's New Antitrust Rules Have Big, Powerful Companies Sweating." This begs the question: who is a "big, powerful company"? Market definition and identification of monopoly power are just as (if not more) important issues in an antitrust case than whether the alleged monopolist misused its monopoly power. Varney's speech did not address those issues. The question is not whether "big, powerful companies" should be worried. Of course they should. The real question is whether your company is big and powerful enough to be worried.

Judicial Empathy

I wrote an op-ed column that was recently published by the Daily Progress, the newspaper in my hometown of Charlottesville, Virginia. Given that President Obama nominated Sonia Sotomayor as his first Supreme Court justice today, I am re-printing my op-ed column here. The focus of this column was President Obama's use of the word "empathy" when describing his ideal judge. "Policy," however, may be the buzz word for Judge Sotomayor's confirmation hearing given her off-hand comment that "policy" is made at the court of appeals.

Judicial Empathy

When describing what he would look for in a Supreme Court Justice, President Obama said that he viewed empathy “as an essential ingredient for arriving at just decisions and outcomes.”

What did he mean by “empathy”? Some complain that it is a code word for a liberal, activist judge. Others rejoice that it is a code word for a liberal, activist judge. I think it means neither. Put aside, for a moment, that the words “liberal” and “activist” are themselves code words whose meanings depend on the person using the words.

If you actually were able to “put aside” your view, then you have exhibited that quality of judicial empathy that I believe the President was describing.

Webster defines empathy as “the experiencing as one’s own the feelings of another.” Dahlia Lithwick of Slate magazine explained that President Obama defined “empathy” in his book, The Audacity of Hope, as “a call to stand in somebody else’s shoes and see through their eyes.” This got me thinking. Legal philosophers have written about judicial empathy (perhaps not in those terms), and I have seen judicial empathy in practice. It is nothing to be ashamed of. It has nothing to do with emotions or favoring one side (or one type of litigant) over another. Rather, judicial empathy is a thought experiment that helps judges make fair, impartial decisions consistent with the rule of law.

My notion of judicial empathy comes from John Rawls’s Theory of Justice, one of the most important works of political philosophy in the twentieth century. At the time I first read Rawls in law school, the only thing I knew about political philosophy was that Hobbes believed life was “solitary, poor, nasty, brutish and short,” while Rousseau believed “man is born free.” I failed to realize that their discussion of the state of nature was designed as a through experiment to uncover the foundations of law and government. What underlying rules would persons in the state of nature agree upon to govern themselves? The answer to that question, according to social contract theory, is the justification for government and the underpinnings of the law.

Rawls took this thought experiment one step further by asking what would persons in the “original position” agree was a fair way to organize society? Persons in Rawls’s original position were placed behind a “veil of ignorance” which prevented them from knowing any of the individual characteristics about themselves. If you stepped behind the veil of ignorance, you would be unaware of your own talents, religion, gender, race, class, or abilities.

What type of rules would you want if you were in this original position behind the veil of ignorance? You would want rules that were fair to everyone since you would not know where you may end up after the veil of ignorance was lifted. You would want a basic set of minimum rights and privileges that all people could enjoy. And you would want everyone to have the opportunity to make the most of what they had been given, whatever that may be—remember if you are behind the veil of ignorance, you don’t know what your specific circumstances might be.

My idea of judicial empathy involves a similar thought experiment. The empathetic judge imagines herself to be in the shoes of the litigants, but she does not know in whose shoes she is standing. The resulting decision is simultaneously impartial and empathetic. Judicial empathy is not arbitrary. To the contrary, judicial empathy demands fealty to the rule of law because one of the things we would agree upon, behind the veil of ignorance, is that the law should be consistent, uniform and predictable.

Although I read Rawls in law school, I learned much more about the practice of judicial empathy when I served as a law clerk for two federal judges. Both of these judges were Republican appointees, but I doubt they would object if I complimented them on their judicial empathy. Although their rulings were always based on legal precedent, their decision-making process was not necessarily mechanical. After fully considering the arguments of both sides, these judges would make decisions that were impartial and fair. Although I do not profess to know everything went on inside their heads, I believe that their impartiality and fairness resulted from their ability to empathize with both sides without favoring either side. This is what I believe the President meant when he described “empathy” as a desirable characteristic in a judge.

I hope neither of the judges for whom I clerked take offense when I suggest they decided cases behind the “veil of ignorance.” Sometimes ignorance is a good thing.

Jason C. Hicks lives in Charlottesville, Virginia and is an attorney at Womble Carlyle Sandridge & Rice, PLLC. Jason was a law clerk for Judge Samuel G. Wilson in the Western District of Virginia in Roanoke, Virginia and Judge Susan H. Black on the Eleventh Circuit Court of Appeals in Jacksonville, Florida.

Maryland's Leegin Repealer

On April 14, 2009, Maryland enacted a law designed to counter a recent United States Supreme Court decision that made it easier for manufacturers to require their retailers to charge a minimum price for their goods. Unlike the current federal law, the new Maryland law treats any agreement that establishes a minimum resale price for goods or services as a per se antitrust violation of the Maryland Antitrust Act (MD. COM'L LAW CODE ANN. 11-204(a).) This per se rule once was the rule everywhere because, for nearly 100 years, the federal Sherman Act was interpreted to prohibit minimum vertical price fixing, also known as resale price maintenance.

The universal per se approach changed, however, in June 2007 when the Supreme Court held in Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007), that minimum vertical price fixing was not per se illegal but rather should be analyzed under the "rule of reason." The rule of reason is a multifaceted balancing test that analyzes whether an agreement constitutes an "unreasonable" restraint on trade. Generally speaking, under the rule of reason, a restraint is not "unreasonable" (and thus illegal under federal antitrust law) unless the parties to the agreement have "market power" which, again, generally speaking, is defined as something more than a 30% market share for a given market.

Given these generalities, it became a popular notion that the Leegin decision had opened the door for manufacturers to set a minimum resale price for their goods. More thoughtful lawyers, however, realized that resale price maintenance agreements were still risky because state antitrust laws could be more restrictive than federal antitrust laws and because legislatures could "overrule" the Leegin decision by passing special legislation outlawing minimum resale price maintenance. That is exactly what happened in Maryland.

The Maryland bill, which goes into effect October 1, 2009, amends the Maryland Antitrust Act to specifically state that "a contract, combination, or conspiracy that establishes a minimum price below which a retailer, wholesaler, or distributor may not sell a commodity or service is an unreasonable restraint of trade or commerce" for purposes of the Maryland Antitrust Act. See Maryland Senate Bill 239 (repealing and reenacting, with amendments, MD. COM'L LAW CODE ANN., Section 11-204). The accompanying notes to the bill recognize that the Maryland Antitrust Act previously had been interpreted to be consistent with federal antitrust law. By enacting this bill, however, Maryland is departing from federal law, specifically the Supreme Court's decision in Leegin. Maryland's actions demonstrate why the conservative approach to Leegin is for manufacturers to continue avoiding any "agreements" as to the minimum resale price for their products.

Maryland's new law, however, does not prevent what is known as a Colgate policy. Colgate policies are named after a Supreme Court decision holding that the unilateral termination of a dealer that sold goods below a suggested resale price was not an "agreement" in restraint of trade. See United States v. Colgate, 250 U.S. 300, 307 (1919). The Court's opinion was based on the "contract, combination or conspiracy language in the Sherman Act. Unless there was an agreement between two parties then there was no "contract, combination or conspiracy" and, accordingly, there was no antitrust violation. With a Colgate policy, a manufacturer unilaterally announces suggested resale prices for its products; retailers remain free to sell those products at discounted prices; and, the manufacturer also remains free to unilaterally terminate any discounting retailers. Since there is no agreement between the two parties, Colgate policies were considered lawful under federal antitrust law even before the Supreme Court's decision in Leegin. Maryland's recent revisions to its state antitrust law should not affect Colgate policies because Maryland's Antitrust Law contains the same "contract, combination, or conspiracy" language as the Sherman Act. Therefore, Colgate policies should remain lawful in Maryland. Of course, there is a fine line between a lawful Colgate policy unilaterally announced by a manufacturer and an unlawful "agreement" as to the resale price of goods.

Mack Trucks: Third Circuit Reverses Summary Judgment In Price Fixing Claim Under Rule Of Reason, Applying Leegin

On June 17, 2008, the Third Circuit issued a precedential decision applying the rule of reason to an alleged price fixing conspiracy between a manufacturer of heavy duty trucks and its dealers. See Toledo Mack Sales & Service, Inc. v. Mack Trucks, Inc., --- F.3d --- (3d Cir. 2008). This is one of the first decisions from the Court of Appeals after the Supreme Court's decision in Leegin Creative Leather Prods., Inc. v. PSK, Inc., 127 S. Ct. 2705 (2007). The case demonstrates that price-fixing claims may survive summary judgment, under the rule of reason, if the plaintiff can present evidence that the defendant manufacturer had "market power" and that the dealers/retailers (rather than the manufacturer) were the source of the alleged restraint.

Summary of Toledo Mack Sales & Service

Defendant Mack Trucks manufactured heavy-duty trucks and sold them to dealers across the country for resale. An important aspect of the price of a Mack truck is the transition-specific discount ("sales assistance") that Mack provides to the dealer. The larger the sales assistance, the less the dealer can charge the customer.

Each dealer was given an assigned "Area of Resonsibility" ("AOR"). Although a dealer's AOR was not exclusive (i.e. dealers were free to sell anywhere), Mack adopted an official policy denying sales assistance to out-of-AOR sales. Additionally, plaintiff alleged that this official policy (and unofficial policy of discouraging price competition among dealers) was taken at the bequest of dealers and in aid of the "gentelman's agreement" among dealers not to compete against each other.

Plaintiff was a Mack truck dealer who aggressively competed against other Mack truck dealers. Plaintiff sued Mack claiming that the official policy of denying sales assistance for out-of-AOR sales (and unofficial policy of discouraging price competition among its dealers) was part of an unlawful conspiracy to restrain trade under the Sherman Act and price discrimination under the Robinson Patman Act. The district court granted defendant summary judgment based on the Supreme Court's recent decision in Leegin that price fixing agreements were not per se illegal. The Third Circuit, however, reversed and held that plaintiff produced sufficient evidence under the rule of reason to survive summary judgment.

The Court found that there was evidence of a horizontal agreement among Mack dealers to control prices which would be per se unlawful under the Sherman Act. The Court also found there was evidence of a competition-reducing vertical agreement between Mack and its dealers including Mack's official policy not to provide sales assistance for out-of-AOR sales. The vertical agreements between Mack and its dealers, however, were not per se illegal (after Leegin) even if they supported the illegal horizontal agreements among the dealers. Citing Leegin, the Court held that the rule of reason would apply to a vertical agreement entered upon to facilitate a horizontal cartel among competing retailers.

In determining whether such an agreement was unreasonable under the rule of reason, the Court applied the following four factors that it had previously identified as relevant in a rule of reason case:

"(1) that the defendants contracted, combined or conspired among each other; (2) that the combination or conspiracy produced adverse, anti-competitive effects within the relevant product and geographic markets; (3) that the objects of and the conduct pursuant to that contract or conspiracy were illegal; and (4) that the plaintiffs were injured as a proximate result of that conspiracy."

The Court then identified two additional factors from the Supreme Court's decision in Leegin: (1) whether the source or impetus of the restrain was from the retailers/dealers or from the manufacturer; and (2) whether the manufacturer had market power. Applying these factors, the Court concluded that plaintiff's allegations created jury questions under the rule of reason. First, the Court noted there was evidence that the dealers were the impetus of Mack's policy not to provide sales assistance for out-of-AOR sales and that this policy furthered the dealer's horizontal agreement not to compete on price. Second, the Court noted that plaintiff presented expert testimony that Mack possessed market power in two relevant product and geographic markets for heavy-duty trucks, which in turn, was sufficient evidence that the alleged agreement had anticompetitive effects.

The Court, therefore, reversed the district court's summary judgment ruling and directed that plaintiff's Sherman Act claim be heard by a jury. The Court, however, affirmed dismissal of the Robinson Patman claims because the RPA does not apply in the context of a single sale of a customized good via a competitive bidding process. (In order for there to be price discrimination under the RPA, there must be actual sales at two different prices to two different buyers. Because no sale of a Mack truck took place until after the customer accepts a dealer's bid, the amount of sales assistance Mack provides to a particular dealer is part of an offer to sell -- not a sale. See also Volvo Trucks North America, Inc. v. Reeder-Simco GMC, Inc., 546 U.S. 164 (2006)).

Analysis

Toledo Mack Sales & Service demonstrates that price fixing cases can survive summary judgment even after the Supreme Court's decision in Leegin. A manufacturer (especially one that might have market power in a relevant market) should be careful that its policies and agreements with its dealers do not appear to be in aid of an illegal agreement among its dealers not to compete against each other. As demonstrated in Toledo Mack Sales & Services, a manufacturer that gets caught up in the illegal agreement between its dealers may be liable to a dissatisfied dealer (or at least have to defend itself in a jury trial).

For more information about price fixing after Leegin see this powerpoint presentation.

For a copy of the Third Circuit's decision in Toledo Mack Sales & Service, click here.

The Reshaping of Antitrust

Randy Picker of the University of Chicago Law School has posted a paper entitled "Twombly, Leegin and the Reshaping of Antitrust" on the SSRN website. The article looks at four antiturst cases from the Supreme Court's 2006 Term (Weyerhaeuser, Twombly, Leegin, and Credit Suisse), all of which have been discussed in this blog. Below are a few interesting quotes from the article:

The Court’s 2006 Term was an unusually active one for antitrust as the Court decided four substantial antitrust cases. Each of the cases will undoubtedly attract substantial academic attention. The overall direction of the four cases is reasonably clear: plaintiffs face greater regulatory obstacles to reaching the court system (Credit Suisse), are more likely to get tossed from court without reaching a jury once they get there (Twombly), and will have to work harder to make outsubstantive antitrust liability (Weyerhaeuser and Leegin).

...

Twombly and Leegin are each, in their own ways, blockbusters. Twombly will appear in case after case, as antitrust defendants try to rely on its new tougher rules for FRCP 12(b)(6) motions. Twombly represents a preference for blunt instruments over sharp edges. The central problem confronted by Twombly is discovery run amok. The Court has the tools in its hands to control that by rewriting the discovery
rules and overturning lower court decisions implementing those rules. Twombly suggests that the Court believes that refinement of those rules will fail in controlling discovery and it is willing to pay the price that private plaintiffs will have no good way to get at the best-hidden antitrust conspiracies.

...

Leegin is really a two-issue case: (1) as a matter of first consideration, should contractual minimum RPM be treated as per se illegal or should it instead receive rule-of-reason treatment?; and (2) if rule-of-reason treatment is appropriate, should the Court nonetheless adhere to the result of per se illegality established in Dr. Miles? On the first issue, the Court returned to 1628, the date of Coke upon Littleton, which Dr. Miles cited for the general proposition that restraints on alienation were invalid. The Court seemed skeptical that a nearly 300-year old analysis should have sufficed in 1911 and saw no basis for that nearly a century later (“[t]he general restraint onalienation … tended to evoke policy concerns extraneous to thequestion that controls here”). With the analysis in Dr. Miles itself pushed to the side, the Court then turned to a fresh consideration of the policies at stake in minimum resale price
maintenance. That took the Court to the defining feature of modern antitrust analysis, namely the role of economics in understanding how we should evaluate particular practices. As has been the Court’s pattern in other cases moving practices away from per se illegality and towards rule-of-reason analysis, the Court cited the extensive literature arguing that minimum RPM can have procompetitive benefits.

...

That is a question of stare decisis and Leegin ends up in an all-out fight
over stare decisis in antitrust. That is new: the Court has been overturning old decisions in antitrust for some time and has done so with little stare decisis fanfare. That suggests that the dispute over stare decisis in Leegin is just a convenient forum for the larger dispute over stare decisis that is percolating through a divided Court. I don't have a full-blown theory of stare decisis but I do suggest why the Court has been mistaken to treat stare decisis in statutory cases differently from that in constitutional cases. The Court has made too little of one of its critical tools in shaping statutes, namely, the power to set a default point for subsequent congressional action. Once we treat the Court's decisions as inputs in subsequent lawmaking, there is greater reason to think that the Court should have a uniform approach to stare decisis across the Constitution and statutes.

New Law Review Article On The Relationship Between Patent Law And Antitrust Law

The Spring 2008 volume of the Virginia Journal of Law & Technology will contain an interesting article entitled Patent and Antitrust: Differing Shades of Meaning by Robin Feldman, Professor of Law at U.C. Hastings College of Law. The introductory paragraph asks: "Can a body of case law that grants monopoly opportunities be reconciled with a body of case law that curtails monopolization?" In her conclusion, Professor Feldman states:

The intersection of patent and antitrust has frustrated courts and scholars since the inception of antitrust law more than a century ago. The trend across time has been to try to harmonize the two, most recently in the direction of subsuming patent doctrines under antitrust doctrines. Harmonization in any direction, however, is far more challenging than it has appeared. Difficulties are enhanced by the fact that the two fields use concepts with similar terminology but with differing meanings, contexts, and implications. Understanding these different shades of meaning will be critical for navigating the intersection between patent and antitrust. Trying to slide blithely between the two without understanding the divergences could distort the essence of each.

LEGISLATION PROPOSED TO CURTAIL "ANTICOMPETITIVE" ISP PRACTICES

On May 6, 2008 the U.S. House of Representatives' Subcommittee on Telecommunications and the Internet held a hearing regarding proposed bill H.R.5353, the Internet Freedom Preservation Act of 2008 ("Act"). At the hearing, public witnesses close to the broadband telecommunications industry presented testimony both favoring and opposing the Act.

H.R. 5353, which was proposed in February of 2008, calls for the establishment of federal policy and regulations regarding broadband telecommunication network management practices. Such policies and regulations are intended to ensure freedom to use the Internet for lawful purposes against "unreasonable interference from, or discrimination by, network operators." The Act further charges the Federal Communications Commission with the duty to "conduct proceedings to assess competition, consumer protection, and consumer choice issues relating to broadband Internet access services."

Two days after the hearing, on May 8, 2008, a similar bill, titled the "Internet Freedom and Nondiscrimination Act of 2008" (H.R. 5994) was introduced to the U.S. House of Representatives. This bill is intended to "amend the Clayton Act with respect to competitive and nondiscriminatory access to the Internet." It proscribes certain practices currently in use by some Internet service providers ("ISPs") to the extent that those practices are unreasonable or discriminatory against certain types of Internet content.

The proposed bills have implications for both ISPs and companies using the Internet as a business tool because they have the potential to change the way content is distributed and accessed over the Internet. Currently, ISPs have the option and ability to determine the availability of specific content to their customers. Many commentators believe that the Internet Freedom Preservation Act of 2008 (H.R. 5353) would prevent ISPs from regulating, in any manner, the nature of the content an individual may distribute or access via an ISP’s network. And the Internet Freedom and Nondiscrimination Act (H.R. 5994) directly proscribes certain types of ISP interference with information accessibility.

The proposed legislation stems from a concern that large ISPs have the ability to block and control Internet content distributable and receivable over each providers individual network. Those concerned worry that, unless regulated, these practices may have an anticompetitive result on the broadband industry.

Critics, however, argue that legislation in this area could do more harm than good. One concern is that federal regulation of ISP network management practices will curtail investments in innovation and development of broadband technology, as well as discourage entry into the market.

The Internet Freedom Preservation Act (H.R. 5353), if passed into law, would require the FCC to conduct proceedings to assess, among other things, the current state of competition in the broadband telecommunications market.

In 2007 the Federal Trade Commission ("FTC") reported that its Internet Access Task Force could not come to a consensus with regard to the state of competition in the broadband Internet industry. On one hand, the rapid growth of the industry and the steady decline in service prices are tell-tale signs of a competitive marketplace. On the other hand, others argue that telephone and cable companies have a duopoly on the market, which could potentially allow for abuse of their market power.

State AGs Continue To Prosecute Resale Price Maintenance After Leegin

On March 27, 2008, the U.S. District Court for the Southern District of New York entered a Consent Decree in a case brought by the Attorneys General of New York, Illinois and Michigan against Herman Miller, a seller of high-end office chairs. The Complaint alleged that Herman Miller's suggested retail price policy ("SRP policy") was unlawful price fixing under state and federal antitrust laws. The policy forbade retailers from advertising Herman Miller's furniture below the suggested retail price or lose access to Herman Miller furniture for one year.

(The suggested retail price for Herman Miller's popular Aeron chair (which I used to have in my old office!) is over $900 -- although I have heard that you can purchase an Aeron chair for significantly less ).

In the Consent Decree, Herman Miller agreed to pay $750,000 and agreed not to enter into any agreement with any dealer to fix the resale price at which Herman Miller's chairs are advertised. Herman Miller also agreed not to terminate, suspend or fail to fill orders of any dealer in order to coerce the dealer to adhere to Herman Miller's suggested retail price. The Consent Order, however, provided that: "Herman Miller retains the unilateral right to terminate, suspend, or fail to fill orders of any dealer or reduce the supply of or discriminate in delivery, credit, or other terms provided to any Dealer for lawful business reasons..." This last provision allows Herman Miller to keep its Colgate policy. A Herman Miller representative stated: "It remains our contention that the law says we can have a minimum advertised pricing policy and that we can enforce that unilaterally."

The New York Attorneys General office began investigating Herman Miller in 2003, at which time minimum resale price maintenance was per se illegal under both federal and state antitrust laws. The Complaint and Consent Decree, however, were filed in March 2008. In the interim, the Supreme Court ruled that minimum vertical price fixing was not per se illegal under the Sherman Act. Therefore, at least for purposes of federal antitrust laws, the conduct that the state Attorneys General were challenging was not per se illegal and instead was to be judged under the rule of reason. It is unclear, however, how such conduct will be analyzed under state law. State courts may disagree with Leegin and hold that minimum vertical price fixing is still per se illegal under state antitrust laws. The Herman Miller Consent Decree demonstrates that, at the very least, state Attorneys General are still concerned about and willing to prosecute minimum retail price policies.

Neither the Complaint nor the Consent Decree addressed whether the challenged conduct was to be analyzed under the per se rule or the rule of reason. It is noteworthy that the Complaint did not allege that Herman Miller possessed a large share of the market or otherwise had market power -- nor did it analyze whether the SRP policy promoted competition against other brands of office chairs even if it reduced intrabrand price competition for Herman Miller's chair. The absence of such allegations suggests that the state Attorneys General may consider minimum vertical price fixing to be per se illegal, despite Leegin.

One explanation for this Consent Decree is that the state Attorneys General had already been investigating Herman Miller before the Supreme Court's decision in Leegin, and did not want to give up their investigation without something to show for it. Still the lesson to be learned from this case is that companies (even companies with small market share) need to be careful when dealing with any minimum retail price policy.

To learn more about Leegin, see this PowerPoint Presentation.

FTC Modifies Price-Fixing Consent Order After Leegin

On Tuesday, May 6, 2008, the FTC announced that it had modified a 2000 consent order that settled retail price-fixing charges against shoe seller Nine West. Under the conset order, Nine West was prohibited from penalizing its dealers for selling its goods below retail prices set by Nine West. In 2007, however, the Supreme Court ruled that minimum resale price maintenance was not per se illegal. See Leegin Creative Leather Products, Inc. v. PSKS, Inc. (For a discussion of Leegin see this Power Point presentation). Nine West cited Leegin as the reason why the FTC should modify its 2000 consent order. In granting Nine West's request, the FTC identified the following relevant factors from the Leegin decision:

"One factor is the source of the resale price mainentance program: if retailers were the impetus for the adoption of RPM, that could indicate the existence of a retailer cartel or support for a dominant, ineffecient retailer. A second factor is whether RPM programs were ubiquitous in an industry.... A third factor is whether the practice is likely to increase prices because a manufacturer or retailer is a dominant player in the market in which it competes."

The FTC recognized that the Leegin Court "did not spell out which variation of the rule of reason should be applied to RPM going forward." The analytical options include the elaborate and comprehensive full-blown rule of reason inquiry, a truncated rule of reason analysis as applied by the Supreme Court in FTC v. Indiana Fed'n of Dentists, 476 U.S. 447 (1986), or another type of truncated inquiry into the likely effects of RPM.

The FTC stated that "a truncated analysis ... might be suitable for analyzing minimum resale price maintenance agreements, at least under some circumstances.... The question is whether post-Leegin, RPM can be considered in some circumstances as 'inherently suspect,' and thus a worthy object for the scrutiny under the presumptions and phased inquiries" of a truncated rule-of-reason analysis.

Althought the FTC did not definitively answer that question, the FTC explained: "RPM agreements ordinarily might be seen by the Court as less intrinsically dangerous than horizontal price-setting arrangements, but not invariably so." Therefore, the FTC stated that it will use the relevant factors identified in Leegin as a guidline for determining whether a truncated rule of reason analysis should apply in a given case.

Applying this analysis to Nine West's petition, the FTC stated that "two ways that Nine West can demonstrate that its use of RPM will not harm competition is to show that it lacks market power, and that the impetus for the resale price maintenance is from Nine West itself and not retailers." The FTC conlcuded that Nine West "has only modest market share" in the relevant market; that there was "no evidence of a dominant, ineffecient retailer in the market"; and that Nine West stated that its desire to engage in RPM "is based on its wish to increase the services offered by retailers that sell Nine West products."

Therefore, the FTC granted in part and denied in part Nine West's petition to modify the consent order. In the event Nine West engages in RPM agreements, it must provide to the FTC periodic reports that document the effects of the RPM agreements on Nine West's prices and output. The FTC would then use these reports to analyze Nine West's RPM agreements and challenge them if they appear to be illegal.

Also, the FTC's order does not affect the legality of RPM agreements under state law. As previously noted, it is not clear whether states will follow Leegin or maintain the per se rule under state antitrust law. In 2000, Nine West settled RPM lawsuits with state attorneys general, which settlement agreement contained its own injunctive relief. The FTC order does not affect Nine West's obligations under this state settlement agreement.

Supreme Court Denies Cert In Challenge To Tobacco Master Settlement Agreement

On May 12, 2008, the Supreme Court denied cert. in an antitrust case challenging the tobacco Master Settlement Agreement ("MSA") and its implementing statutes. See Sanders v. Brown, --- S.Ct. ---, No. 07-995 (May 12, 2008). The Ninth Circuit had held (1) that the MSA implementing statutes were not pre-empted by the Sherman Act, (2) that the Noer Pennington immunity doctrine protects a private party from liability for the act of negotiating a settlement with a state entity and any injuries that result directly from valid government action taken on the petitioner's behalf, and (3) that the Parker state-action immunity doctrine protects a state from liability for entering into the MSA and for enacting the implementing statutes. See Sanders v. Brown, 504 F.3d 903 (2007). In its petition for cert, the plaintiff argued that the Ninth Circuit's decision was contrary to the Second Circuit's decision in Freedom Holdings Inc. v. Spitzer, 357 F.3d 205 (2d Cir. 2004). In response, the State of California argued that there was no real circuit split because "the tension among the circuits regarding federal antitrust preemption of the MSA and related state laws is inchohate and likely to be resovlved by the lower courts." As is almost always the case, the Supreme Court offered no explanation for its denial of cert. Click here to read about the Supreme Court's denial of cert in Freedom Holdings.

FTC Announces Revised Proposal For Business Opportunities Rule

In April 2006, the FTC sought comment on a proposed trade regulation rule governing business opportunities that was separate from and more expansive than the FTC franchise disclosure rule. For example, the FTC's franchise disclosure rule applies to opportunities that require a buyer to make a payment of at least $500 within the first six months, but under the inventory exception, voluntary purchases of reasonable amounts of inventory at bona fide wholesale prices do not count toward the $500 threshold. The Business Opportunity Rule, as originally proposed, did not contain such an "inventory exception."

Given the breadth of the original Business Opportunity Rule, many manufacturers and distributors were concerned that it would include traditional distribution networks that were previously exempt from franchise laws. One commenter on the rule feared that it "could be read to cover... product distribution through retail stores simply because the retailer pays for inventory and the manufacturer provides sales training to its retail accounts." We wrote about the issues with the proposed Business Opportunity Rule here, here and here.

On March 18, 2008, the FTC announced a revised notice of proposed rulemaking that modified the proposed Business Opportunity Rule. The revised proposed rule narrows the definition of a "business opportuinty." Among other things, the revised rule excludes from coverage distribution arrangements in which the only required payment is for reasonable amounts of inventory at bona fide wholesale prices. The FTC explained:

The changes to the IPBOR’s definition of “business opportunity” are three-fold. First, the RPBOR definition includes a prong limiting coverage to opportunities for which “the prospective purchaser makes a required payment” for the purchase of the business opportunity. This change will exclude from the definition business relationships in which the only required payment is for inventory at bona fide wholesale prices. Second, the RPBOR definition eliminates two types of “business assistance” that formerly would have triggered the Rule’s strictures and disclosure obligations, namely tracking paymentsand providing training. Third, the RPBOR no longer links the definition of “business opportunity” to the making of an earnings claim. Each of these changes is discussed in detail below.

For businesses that still fall within the revised definition of a "business opportunity," the revised rule streamlines and eliminates some of the disclosure requirements in the original proposed rule. The FTC is accepting comments on the revised Notice of Proposed Rulemaking through May 27, 2008.

If you have further questions about the scope of the revised rule or wish to comment on the revised rule, contact Jason Hicks or the Womble Carlyle attorney with whom you work.

"Preemption, Preemption, Preemption" Says The Supreme Court

As previously mentioned in this blog, there are several high profile preemption cases pending before the Supreme Court this term. Yesterday, the Supreme Court decided three of them -- all in favor of federal preemption of state laws.

In Rowe v. New Hampshire Motor Transport Association, the Court held that Maine's Tobacco Delivery Law (which required carriers to verify that the recipients of tobacco shipments were not minors) was preempted by the Federal Aviation Administration Authorization Act (which prohibits states from regulating prices, routes or services of shipping companies).

In Preston v. Ferrer, the Court held that the Federal Arbitration Act preempted a California law that required an administrative hearing prior to arbitration.

And in Riegel v. Medtronic, the Court found that the Medical Devices Amendment (MDA) preempted state common law tort claims that would impose different or additional requirements than those approved by the FDA.

The following is an excerpt from Womble Carlyle Client Alert explaining the significance of the Riegel decision:

The United States Supreme Court, in Riegel v. Medtronic, sided with the
majority of the federal circuit courts today, holding that federal law
regulating medical devices preempts common law tort actions that would impose
different or additional requirements than those approved by the federal Food and
Drug Administration (“FDA”). This ruling puts to rest a long running dispute
over whether there is federal preemption for medical device product liability
lawsuits, but may have opened the way for an even longer dispute on the scope of
that preemption.

...

Justice Scalia, who delivered the opinion of the Court, broadly confirmed
federal preemption for any state law requirements different from or additional
to those imposed by the FDA on approved medical devices. The Court specifically
declined to adopt a more narrow view (once espoused by the FDA but now
abandoned) that the statute only preempted requirements specific to medical
devices, not requirements of general applicability to all types of products. The
Court’s opinion even suggests that preemption might extend to unfair trade
practice or UCC-based claims, which the FDA had previously declined to say were
preempted. Only one Justice, Justice Ruth Bader Ginsberg disagreed and in her
dissenting opinion accused the majority of "a radical curtailment of state
common-law lawsuits seeking compensation for injuries caused by defectively
designed or labeled medical devices" that was never intended by the Congress.

The opinion leaves open many questions about the scope of federal
preemption of state law claims for FDA-approved medical devices and will likely
be the subject of much debate and litigation.

These case will likely have an impact on preemption analysis far beyond medical devices, tobacco sales, and arbitration. Several preemption cases remain to be decided this term.

Unintended Consequences Of Leegin: No Antitrust Exemption For Baseball?

FTC Commissioner Pamela Jones Harbour wrote an interesting article about the collateral fallout of the Supreme Court's decision in Leegin. As explained here and (in more depth) here, the Leegin Court held that minimum vertical price fixing is not per se illegal, thus reversing the long-standing decision in Dr. Miles.

Commissioner Jones Harbour suggests Leegin may have the following unintended consequences:

First, Leegin potentially revitalizes the state action and Twenty-First
Amendment defenses to price fixing that had been rejected in the Midcal case;
and second, Leegin seems to remove any foundation for Justice Holmes's
exemption of major league baseball from the reach of the antitrust laws.

The Commissioner's first point is that in Midcal the Supreme Court balanced competing state and federal interests. In this particular case, the Court determined that California's interests in producer-controlled vertical minimum price fixing was less substantial than the federal policy of per se prohibition of vertical minimum price fixing. Commissioner Jones Harbour suggests that this balancing test might tip in the other direction now that there is no federal per se rule against vertical minimum price fixing:

When balancing federal verses state sovereign interests, the balance
materially shifts in favor of the states when the rule of reason, rather than a
per se standard, is applied. As state regulators and the industries they
regulate begin to appreciate the implications of Leegin, we may see a new round
of state action and constitutional issues percolating up to the Court.

The Commissioner's second point is that, given the Leegin Court's "loose regard" for stare decisis and its willingness to discard outdated antitrust cases, baseball's antitrust exemption may be the next case to be overruled. In the 1992 decision Federal Baseball Club of Baltimore, Inc. v. National League of Professional Baseball Clubs, Justice Holmes famously found professional baseball games to be "purely state affairs" not within the jurisdictional of the Sherman Act. Since then the Court's jurisprudence has changed such that, if decided today, the Court would not exempt professional baseball from federal antitrust laws. Although the Court has criticized the baseball exemption and called it an "aberration," the Court has twice reaffirmed Federal Baseball based on stare decisis -- leaving the issue to Congress.

(Coincidentally, lawmakers have argued that the baseball antitrust exemption gives them the right to meddle in the game and, for example, hold hearings on steroid use in baseball).

Commissioner Jones Harbour believes that Leegin may portend a successful assault on the baseball exemption: "If the Court has as loose a regard for the reliance interests of baseball club owners as it had for discount merchant investors in Leegin, stare decisis should not constrain the Court."

Although there is much to debate, both of these points are very interesting. I suspect the second issue is more likely to materialize than the first. Litigants who want to avoid outdated (but still binding) precedent will surely use Leegin to support their arguments.

Regulatory Preemption And The Supreme Court

There was an interesting article (State, Federal Powers Collide) in the Wall Street Journal last week about federal agencies enacting new rules that preempt state law. The article explained: "These new initiatives, largely applauded by business interests, affect products including drugs, autos and passenger railcars." Generally speaking, companies prefer a single federal standard to a "patchwork" of differing state guidelines. Additionally, federal preemption can be a defense against state law tort claims.

The article references the following federal agency actions:

--An effort by the EPA to block California and other states from regulating carbon-dioxide emissions.

--A decision by the Consumer Product Safety Commission that its rules on mattress flammability preempt state laws.

--A rule by the FDA regarding warning labels on drugs.

--A Federal Railroad Administration rule that would strengthen safety standards for commuter trains and includes language that preempts efforts by states.

The article failed to mention the preemption issue surrounding the federal Do-Not-Call registry, which I wrote about here.

The article also notes that "the[se] regulatory moves may be trumped by the Supreme Court, which is set to rule on a series of cases related to preemption in the next year or two."

Presumably, the article is referring to Reigel v. Medtronic, Wyeth v. Levine, and Phillip Morris v. Good. The Supreme Court heard oral argument in Reigel on December 4, 2007. This issue is whether the Medical Devices Act preempts state tort claims involving PMA devices. In Wyeth, the Supreme Court is reviewing a Vermont Supreme Court decision involving preemption of state law failure-to-warn claims for prescription drugs. And Phillip Morris involves the interaction of federal and state laws governing the labeling and advertising of cigarettes.

Over the last several years, the Supreme Court heard and decided many important antitrust cases (which were discussed and followed on this blog). Perhaps this will be a big year for preemption jurisprudence.