Google Makes Fortune In Ads Off Internet Typos

The print edition of the Greensboro News & Record printed this story via the Washington Post. The article stated: "Google, which runs the largest ad network on the Internet, is making millions of dollars a year by filling otherwise unused Web sites with ads. In many instances, these ad-filled pages appear when users mistype an Internet address, such as 'BistBuy.com'" Google defends its practice, saying it removes sites from its ad network if a trademark owner complains that those sites are confusingly similar. Google's trademark attorney noted: "Unless it is confusing to somebody, trademark law doesn't apply."

HSR Gun-Jumping Case Results in $1.8 Million Fine

WCSR attorneys Tom McLain and Jim Phillips have authored an interesting client alert regarding DOJ's complaint against QUALCOMM and Flarion for gun-jumping under the HSR Act based, in part, on rather standard terms in their merger agreement. The client alert explains:

On April 13, 2006, the US Department of Justice ("DOJ") charged two companies with unlawful premerger coordination in violation of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"). In announcing a case settlement that requires the companies to pay $1.8 million in civil penalties, Thomas O. Barnett, Assistant Attorney General in charge of the DOJ's Antitrust Division, stated that "merging parties must continue to operate independently until the end of the premerger waiting period" under the HSR Act. He added that the DOJ "will vigorously enforce this requirement" against any company that prematurely attempts to assume "operationally control of a business that it is acquiring" (conduct
commonly referred to as "gun-jumping").

The DOJ's complaint charged QUALCOMM Incorporated ("QUALCOMM") and Flarion Technologies Inc. ("Flarion") with gun-jumping based on the terms of their merger agreement and certain conduct by the parties prior to the closing of the transaction. It is noteworthy that the DOJ brought this suit even though it concluded after its HSR premerger review that the proposed merger itself did not raise competitive concerns.

The client alert continues to describe the actions scrutinized by the DOJ, including several negative covenants customarily found in merger and acquisition agreements as well as other actions including coordination of marketing and pricing, the related exchange of information, and assumption of key decision-making.

The client alert concludes:

Typically it is not just one contractual provision or action that creates the problem, but a series of smaller things that ultimately add up to gun-jumping. By working with antitrust counsel, a company involved in a merger or acquisition transaction can develop a plan that properly balances business needs with antitrust concerns.

To read more, click here.

FTC Summary Of Agreements Filed By Generic And Branded Drug Manufacturers And Commissioner Leibowitz's Speech On Pharmaceutical Patent Settlements

The Antitrust Review has a long blog entry entitled Pharmaceutical Patent Settlements & The FTC which discusses: (1) the FTC's press release on Monday summarizing the agreements filed with the FTC by generic and branded drug manufacturers under the Medicare and Prescription Drug Improvement and Modernization Act of 2003; and (2) FTC Commissioner Jon Leibowitz's speech on the same day at the 2nd Annual In-House Counsel's Forum on Pharmaceutical Antitrust. In this speech, Commissioner Leibowitz stated:

[S]tarting in the late 1990s, the Commission began to see pharmaceutical patent settlements in which brand firms paid generics to stay off the market. This conduct stopped, though, after we challenged several such agreements.

Having said that, recent appellate decisions that sanction this type of conduct are threatening the core of Hatch-Waxman. If the Supreme Court -- or Congress -- doesn't reverse this trend, the result could be a substantial increase in drug costs -- and substantial harm to the consumers who pay for these drugs.

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The unquestioned vitality of that statute [Hatch-Waxman], though, is being threatened by the Schering and Tamoxifen decisions.

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Sadly, these appellate decisions are affecting behavior in the market -- we believe adversely. We are seeing far more settlements today that potentially raise competition concerns than before these decisions.

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In addition to seeing more settlements with payments today, we are also seeing another interesting trend. Brand firms are not stopping after settling with the first ANDA-filer; in some instances, they are settling with most or all subsequent filers to guarantee no generic entry by anyone until a date certain -- one that's usually near patent expiration.

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Why are we seeing these settlement trends? First of all, pharmaceutical firms recognize that the Commission's view in Schering is under attack, and thus they believe they have less to fear from potential antitrust enforcement. If I were in-house counsel at a pharmaceutical company, that might be the way I'd view the world too.

Second, the growing threat of authorized generics may diminish a generic's
incentive to fight. If a first-filer believes that the brand will sponsor an authorized generic -- something that many expect today on any significant drug -- the profits to be made in the 180-day exclusivity period are reduced substantially, perhaps even cut in half. So the generic firm's calculus in the fight-versus-settle equation may now be more heavily weighted towards settling.

Rather than gamble on winning in court, a generic may decide that a fixed entry date and guaranteed revenue stream is a better value than rolling the dice. Indeed, by settling under terms that include the brand's promise not to launch an authorized generic -- the generic can even assure itself of some exclusivity down the road.

President Asks Federal And State Regulators To Investigate Illegal Price Manipulation In Gasoline Industry

Today President Bush announced that he is "directing the Department of Justice to work with the FTC and the Energy Department to conduct inquiries into illegal manipulation or cheating related to the current price of gasoline." This is in addition to a previous directive to the FTC to investigate whether there was any manipulation of gasoline supply and prices in the wake of Hurricane Katrina. In conjunction with this announcement, US Attorney General Alberto Gonzales and FTC Commissioner Deborah Platt Majoras issued a letter to all fifty state attorneys general (who have primary authority over price gouging) urging them to vigorously enforce state law "against any anticompetitive, anticonsumer conduct in the petroleum industry." The letter stated: "Consumers around the nation have expressed concerns about what they have perceived as anticompetitive or otherwise unfair conduct by the world's major oil companies."

You can read more about this story here, here, or here.

How Many Chicago School Economists Does It Take To Change A Light Bulb?

The American Antitrust Institute provides this short essay describing some of the best (or worst) antitrust law jokes. The essay was prompted by a speech by Attorney General Alberto R. Gonzales in which he "reported that after a team of researches had worked 'furiously for days,' he could 'confidently report' 'that there are no jokes about antitrust law.'" By the way, the punch line to the joke in the title of this post is: "None. If the light bulb needed changing the market would have already done it."

FTC To Study Competitive Effects Of Authorized Generics Under Hatch-Waxman Act

On March 29, 2006, the FTC announced that it will conduct a study of the use, and likely short- and long-term competitive effects, of authorized generics in the prescription drug marketplace. Pricing and competition in the pharmaceutical industry is one of the hottest topics in antitrust law.

The FTC notice explains:

In certain circumstances, the Hatch-Waxman Act allows the first-filing generic competitor of a branded drug a 180-day marketing exclusivity period. This marketing exclusivity period granted to certain generic first-filers, however, does not preclude competition from "authorized generics" that have an approved New Drug Application (NDA) on file with the FDA. Recently, brand-name drug makers have begun marketing authorized generics at exactly the same time the generic first-filer is beginning its 180-day marketing exclusivity period, leading to questions about the effects of authorized generics on pharmaceutical competition.

The goal of the Commission's study will be to assess the likely short- and long-run effects of market entry by authorized generics on generic drug competition. Among other things, the study will examine actual wholesale prices (including rebates, discounts, etc.) for brand-name and generic drugs, both with and without competition from authorized generics; business reasons that support authorized generic entry; factors relevant to the decisions of generic firms about whether and under what circumstances to seek entry prior to patent expiration; and licensing agreements with authorized generics. The data collected will enable the FTC to advance the understanding of the effects of generic entry on prescription drug prices -- in particular, the role of the 180-day exclusivity period in generic competition prior to patent expiration -- beyond what is available in the economic literature today.

Fourth Circuit Affirms Dismissal Of Antitrust Suit Against Microsoft Under Indirect Purchaser And Antitrust Standing Doctrines

Yesterday the Fourth Circuit affirmed the dismissal of a multidistrict class action antitrust suit brought against Microsoft Corporation by purchasers of Microsoft's operating system and applications. Since plaintiffs did not buy their software directly from Microsoft (but rather bought such software preinstalled on their computers from the original equipment manufacturers), the court concluded that plaintiffs were indirect purchasers who were barred from seeking recovery for illegal pass-through overcharges under the principles of Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977). As an independent reason for the dismissal of plaintiffs claims, the court found that plaintiffs' lacked standing because they did not suffer an antitrust-type injury under the five factor test in American General Contractors v. California State Council of Carpenters, 459 U.S. 519 (1983). The opinion is a good example of how the indirect purchaser doctrine is similar to but conceptually different from the antitrust standing/injury doctrine. The decision can be accessed at this link.

Supreme Court Rejects Presumption Of Market Power In Patent Tying Cases

On March 1, 2006, the Supreme Court issued its much anticipated opinion in Illinois Tool Works, Inc. v. Independent Ink, Inc. The Court reversed several vintage Supreme Court cases, United States v. Loew's, Inc., 371 U.S. 38 (1962) and International Salt Co. v. United States, 332 U.S. 392 (1947), which established a presumption of market power in tying cases from the mere ownership of patent or copyright. In abrogating this market power presumption, the Supreme Court noted: "Because a patent does not necessarily confer market power upon the patentee, in all cases involving a tying arrangement, the plaintiff must prove that the defendant has market power in the tying product."

The Court dismissed Loew's and International Salt as "a vestige of the Court's historical distrust of tying arrangements," which distrust has "substantially diminished" over time. In addition to relying on economic and scholarly criticism, the Court also relied on the Patent Misuse Reform Act and the Department of Justice/Federal Trade Commission's Guidelines for the Licensing of Intellectual Property. Although the Patent Misuse Reform Act was not directly applicable to the antitrust claims at issue, the Court found that the Act "invites the reappraisal of" antitrust doctrine, and that "it would be absurd to assume that" Congress did away with the market power presumption in the patent misuse context but intended the same conduct to constitute a felony under the antitrust laws. The Court's reliance on the Guidelines is also noteworthy because the Guidelines are merely the DOJ/FTC's enforcement policy.

Independent Ink is not likely to have an immediate effect in antitrust law because many of the regional circuits had already rejected the market power presumption. The opinion, however, may highlight the Court's willingness to reverse decades-old precedent when not consistent with a modern view of economics and/or the government's enforcement policies.

Court Narrowly Interprets "Good Cause" Provision Of State Franchise Statute

In Volvo Trademark Holding v. AIS Construction Equipment Corp, -- F. Supp. 2d --, 2006 WL 435973 (February 16, 2006 W.D.N.C.), the Western District of North Carolina addressed the scope and constitutionality of the "good cause" termination provisions of the Arkansas Franchise Practices Act ("AFPA"). Volvo argued that its stated cause for termination -- "Volvoization" (re-engineering and rebranding its brands for sale under the single VOLVO trademark) and "dealer rationalization" (integrating overlapping channels of distribution by utilizing dealers willing and able to offer the entire Volvo line) -- constituted good cause under the AFPA. Volvo's problem, however, was that the AFPA listed eight specific circumstances constituting good cause and "Volvoization" and "dealer rationalization" were not among them. Nevertheless, Volvo argued that "good cause" must include such business decisions and market withdrawls because, if "good cause" was limited to the eight circumstances in the statute, the statute would violate the Dormant Commerce Clause.

The court, however, held that "good cause" under the AFPA is limited to the eight occurrences specifically enumerated in the statute and did not extend to Volvo's stated reasons for termination. Next, the court found that the AFPA's "good cause" provisions, as interpreted by the court, was not per se invalid and did not create an excessive burden on interstate commerce under the Dormant Commerce Clause.

In addition to highlighting the pitfalls of state franchising laws, this case shows the unpredictability of the cannon of constitutional avoidance. Although some courts (including the Supreme Court, see here) have aggressively used this cannon to interpret statutes to avoid constitutional doubts, the Western District of North Carolina interpreted the AFPA without aid of the cannon and addressed the constitutional argument head-on.

Administrative Appeal Saves Client More Than $12 Million In USDA Assessments

Although not directly related to antitrust or distribution law, check out this article describing a recent Womble Carlyle victory.

Should Vertical Minimum Price Fixing Be Subject To The Rule Of Reason Or The Per Se Rule?

The Supreme Court and the Federal Trade Commission consider vertical minimum price fixing to be per se illegal. Many economists and legal commentators, however, have argued that vertical minimum price fixing -- also known as minimum resale price maintenance -- should not be considered per se illegal because, in most cases, such pricing restrictions are pro-competitive. The argument is that minimum resale price mantenance induces downstream retailers to offer additional valuable services to consumers which would not be offered if competing retailers (known in antitrust jargon as "free riders") could expropriate the goodwill and resources built by the other retailer but sell at a lower price.

I recently attended a conference on Product Distribution and Marketing which highlighted this debate between government regulators and academic commentators. Professor Kenneth Elzinga, a distinguished Professor of Economics at The University of Virginia, opened the conference with a compelling argument why vertical minimum price fixing should be subject to the rule of reason. I took Professor Elzinga's Introduction to Economics class as an undergraduate at The University of Virginia.

That afternoon, FTC Commissioner Pamela Jones Harbour spoke in defense of the per se rule against vertical minimum price fixing. She pointed to the research of economist Robert L. Steiner and argued that, in her rather extensive experience enforcing antitrust laws (at both the state and federal level), she believed that the per se rule protected consumers. Commissioner Harbour had the last word on the subject, both literally and figuratively.

For a description of Commissioner Habour's reaction to Justice Thomas's "mis"characterization in Texaco, Inc. v. Dagher that all vertical price fixing is subject to the rule of reason, see this post.

FTC Proposes New Business Opportunity Rule

The FTC has published a Notice of Proposed Rulemaking to promulgate a trade regulation rule governing the sale of business opportunities. Currently, the FTC regulates business opportunities under two laws, the Franchise Rule and the FTC Act. The proposed "Business Opportunity Rule" would eliminate the $500 minimum investment requirement that is in the Franchise Rule, meaning it would apply to all business opportunities even if they have a smaller start-up cost. The proposed rule would require a one-page disclosure addressing five items and would prohibit certain unfair and deceptive practices that are common among fraudulent business opportunity sellers. The FTC is seeking comment on the proposed rule, and the comment period will close June 16, 2006. This is the first trade regulation rule proceeding since 1979. For more information see this link.

Does Dagher Imply That Vertical Minimum Price Fixing Is Subject To The Rule Of Reason?

In Texaco, Inc. v. Dagher, the Supreme Court held that the pricing decisions of a joint venture were not per se illegal horizontal price fixing. In describing the background of the Sherman Act and the Court's approach to price fixing, Justice Thomas stated that in State Oil Co. v. Khan, 522 U.S. 3, (1997), the Court "conclude[ed] that vertical price-fixing arrangements are subject to the rule of reason, not per se liability." Although many economists, antitrust lawyers, and companies may wish this statement were true, State Oil merely held that vertical maximum price fixing was subject to the rule of reason. Vertical minimum price fixing -- also known as minimum resale price maintenance -- is still considered per se illegal by the courts and by the Federal Trade Commission. Justice Thomas's characterization of the State Oil decision, therefore, was missing the word "maximum."

I recently attended a conference on Product Distribution and Marketing, in which one of the speakers suggested that Justice Thomas's mischaracterization of State Oil may have been intentional and forecast the Court's application of the rule of reason to vertical minimum price fixing as well as vertical maximum price fixing.

At that point, FTC Commissioner Pamela Jones Harbour -- who was sitting a few rows in front of me -- spoke up. A supporter of the per se rule, Commissioner Harbour stated that she contacted Justice Thomas's chambers and pointed out that he had mischaracterized the State Oil holding. According to Commissioner Harbour, Justice Thomas's law clerk indicated that the omission of the word "maximum" was not intentional and that Justice Thomas was considering amending his opinion in Dagher.

For a description of the holding in Dagher, see this post.

For a description of a debate between a noted economist and an FTC Commissioner on whether the per se rule should apply to vertical minimum price fixing, see this post.

Issue Of Contract's Validity To Be Considered By Arbitrator

Many distribution and franchise agreements contain arbitration clauses. What happens when a plaintiff seeks to avoid arbitration on the grounds that the underlying agreement is void, illegal, invalid or unenforceable? A recent Supreme Court decision, Buckeye Check Cashing, Inc. v. Cardegna, answers that question in favor of arbitration.

Buckeye, a class action in Florida state courts, involved contracts which contained a standard arbitration clause but also allegedly charged usurious interest. The trial court denied the motion to compel arbitration because the contract was void ab initio. The Florida Supreme Court agreed stating that to enforce an arbitration clause in an illegal agreement "would breathe life into a contract that not only violates state law, but also is criminal in nature."

The United States Supreme Court, however, reversed based on the Federal Arbitration Act and the "rule of severability" from Prima Paint Corp. v. Flood & Conklin Mfg. Co, 388 U.S. 395 (1967). Under Prima Paint, the arbitration agreement is to be treated as a separate agreement; thus "unless the challenge is to the arbitration clause itself, the issue of a contract's validity is considered by the arbitrator in the first instance." The Buckeye Court emphasized that this rule of severabiltiy is part of federal substantive law and applies in state courts when an agreement is subject to the Federal Arbitration Act.

As a law clerk for the 11th Circuit Court of Appeals, I worked on a similar case. See John B. Goodman, Ltd v. THF Construction, Inc, 321 F.3d 1094 (11th Cir. 2003). In that case, the 11th Circuit held that the arbitrator should decide whether a construction contract (containing an arbitration clause) was void ab initio because it was performed by an unlicensed contractor. The Supreme Court's recent decision in Buckeye reaffirms the Eleventh Circuit's analysis in John B. Goodman and strengthens the enforceability of arbitration agreements in state courts.

Supreme Court Holds Pricing Decisions Of A Joint Venture Not Per Se Illegal Horizontal Price Fixing

On February 28, 2006 the Supreme Court held in Texaco, Inc. v. Dagher that the pricing decisions of a legitimate a joint venture -- "an important and increasingly popular form of business organization" -- do not fall within the narrow category of per se unlawful horizontal price fixing.

Section 1 of the Sherman Act prohibits "[e]very contract, combination ... or conspiracy in restraint of trade or commerce among the several States." 15 U.S.C. 1. Although Courts have long recognized that Congress intended to outlaw only unreasonable restraints of trade, some types of agreements are so plainly anticompetitive that no elaborate study is needed to establish their illegality. Horizontal price fixing -- price fixing agreements between two or more competitors -- is an example of conduct which the Court has labeled per se illegal.

The question in Dagher was whether Texaco and Shell Oil could be found per se liable for horizontal price fixing because they set the prices at which their joint venture, known as Equilon, sold its gasoline. Finding that participants in a joint venture are not per se liable for price fixing, the Court explained: "Texaco and Shell Oil did not compete with one another in the relevant market -- namely, the sale of gasoline to service stations in the western United States -- but instead participated in that market jointly through their investments in Equilon. In other words, the pricing policy challenged here amounts to little more than price setting by a single entity -- albeit within the context of a joint venture -- and not a pricing agreement between competing entities with respect to their competing products." Although this was price fixing in a literal sense, the Court held that it was not price fixing in the antitrust sense.

For a discussion of Justice Thomas's characterization of vertical price fixing in Dagher see this post.

Supreme Court Limits Liability for Price Discrimination

On January 10, 2006, the Supreme Court issued its opinion in Volvo Trucks North America, Inc. v. Reeder-Simco GMC, Inc., which limited the circumstances under which a seller may be liable for price discrimination under the Robinson-Patman Act.

Plaintiff, an authorized dealer of Volvo trucks, sold specialty-ordered trucks through a competitive bidding process. Although Plaintiff complained that Volvo gave other Volvo dealers price concessions greater than the concessions Plaintiff typically received, Volvo's stated policy was to provide the same price concession to dealers competing over the same customer.

Reversing the district court and Eighth Circuit, the Supreme Court held that Volvo was not liable for price discrimination because Plaintiff's comparisons fell short of showing price discrimination for the same customer. The Court noted that Plaintiff did not "even attempt to show that the compared dealers were consistently favored vis-a-vis [Plaintiff]." Rather Plaintiff "simply paired occasions in which it competed with non-Volvo dealers for a sale to Customer A with instances in which other Volvo dealers competed with non-Volvo dealers for a sale to Customer B." The Court "declined to permit an inference of competitive injury from evidence of such mix-and-match, manipulable quality." The Court also noted that the primary purpose of antitrust law is interbrand competition, not intrabrand competition.

Although the full extent of the Court's decision in Volvo Trucks remains to be seen, the decision is a victory for manufacturers and franchisors because it makes it more difficult for a dealer-plaintiff to establish price discrimination, especially in a competitive bidding or special order context.

For a more detailed discussion of this case, see this Client Alert.

Introducing the Womble Carlyle Antitrust and Distribution Law Blog

Tomorrow will be the first day for the Womble Carlyle Antitrust and Distribution Law Blog. This blog will comment on recent developments in the areas of antitrust, distribution law, franchise law, advertising laws and regulations, unfair competition, and other types of trade regulation. Of special interest will be the intersection of antitrust and intellectual property, state franchise and dealer protection statutes, and issues related to the efficient and effective distribution and pricing of products. Although the blog will cover national and international developments, additional focus will be given to developments in the Southeast, including the states of Virginia, North Carolina, South Carolina, and Georgia.

Blog authors will include Jason Hicks as well as other members of Womble Carlyle's Antitrust, Distribution, and Franchise Law Practice Group. Womble Carlyle attorneys represent clients in a wide variety of matters involving antitrust and trade regulation at the state, federal, and international levels. Members of this practice group regularly counsel clients and litigate cases involving federal and state antitrust laws, unfair and deceptive trade practices, business torts, advertising laws and regulations, unfair competition laws and trade libel.