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Wednesday, May 31, 2006, 4:28 PM

U.S. Solicitor General Files Brief in FTC/Schering-Plough Case

Pursuant to an invitation from the Supreme Court, the U.S. Solicitor General recently submitted a Brief for the United States as Amicus Curiae in the case of Federal Trade Commission v. Schering-Plough Corporation. The case involves one of the hot issues in antitrust and IP law: whether reverse payments in a pharmaceutical patent settlement agreement constitute a violation of the antitrust laws. As explained more fully below, the Eleventh Circuit ruled that such reverse payments did not, by themselves, violate antitrust laws, the FTC is seeking a petition of certiorari from the Supreme Court, and the Supreme Court asked the Solicitor General for its position. In its brief, the Solicitor General stated that the petition should be denied--a position contrary to that of the FTC.

Schering-Plough produces and markets K-Dur 20, a brand-name drug for treating high blood pressure and congestive heart disease. The drug contains an unpatented potassium chloride encapsulated in an extended release coating protected by Schering-Plough's patent number 4,863,743. This patent expires on September 5, 2006. Schering-Plough sued two of its competitors, Upsher-Smith Laboratories and ESI Lederle, Inc., who proposed to market generic drugs that Schering-Plough alleges would infringe patent number 4,863,743. The two competitors settled with Schering-Plough and the settlement agreement provided that the two competitors would not sell their generic versions until a future date (before the expiration of the patent) and in return Schering Plough would make substantial payments to the two competitors. The FTC challenged the settlement agreements as an unreasonable restraint of trade in violation of the Sherman Act.

The 11th Circuit Court of Appeals ruled in favor of Schering-Plough, finding that the reverse payment cannot be the sole basis of an antitrust violation. The FTC filed a petition for a writ of certiorari from the Supreme Court. The two questions presented by the FTC are as follows: (1) Whether the antitrust laws prohibit a brand name drug patent holder and a prospective generic competitor from settling patent infringement litigation by agreeing that the generic manufacturer will not enter the market before a future date within the term of the patent and that the patent holder will make a substantial payment to the generic manufacturer; and (2) Whether the court of appeals erred in concluding that "substantial evidence" did not support the Federal Trade Commission's factual finding that a payment from a patent holding to an allegedly infringing generic manufacturer was consideration for the generic manufacturer's delayed entry into the market rather than a separate royalty for a license concerning a different product.

The Supreme Court asked for the Solicitor General's views on granting the petition for certiorari. The Solicitor General responded that it was the Government's view that, although the issues are important, the petition for certiorari should be denied because the issue was not squarely addressed by the 11th Circuit and there is no circuit split. The Solicitor General noted:

"[Reverse payment] settlements may pose a risk of restricting competition
in ways that are not justified by a lawful patent, to the detriment of consumers. This case, however, does not present an appropriate opportunity for this Court to determine the proper standards for distinguishing legitimate patent settlements, which further the important goals of encouraging innovation and minimizing unnecessary litigation, from illegitimate settlements that impermissibly restrain trade in violation of the antitrust laws."

Class Action Certified in BAR/BRI Case

At a hearing on May 15, 2006, a judge in the US District Court for the Central District of California certified a class action in the case of Rodriguez v. West Publishing Corp., d/b/a BAR/BRI, and Kaplan, Inc., 05 CV 3222 (C.D. Calif.). The class consists of approximately 300,000 law students who purchased the BAR/BRI full-service bar exam review course between August 1997 and 2006.

According to the complaint, BAR/BRI is the only full-service bar review course in the United States, offering courses for almost all jurisdictions, and Kaplan is the largest provider of preparatory courses for the LSAT. As the complaint alleges, a person desiring to pass the grueling and important bar exam is almost certain to take a full-service bar review course.

The complaint contains three claims or causes of action. The first claim involves an alleged violation of Section 7 of the Clayton Act with regard to BAR/BRI's acquisition of the assets of its direct competitor, West Bar. The complaint alleges that because of this unlawful acquisition, the competition in the full-service bar review course submarket was substantially lessened. The second claim involves an alleged violation of Section 1 of the Sherman Act with regard to BAR/BRI's conspiracy, primarily with Kaplan, to eliminate competition in the full-service bar review market. According to the complaint, BAR/BRI and Kaplan agreed to a market division whereby BAR/BRI agreed to stay out of the LSAT business and Kaplan agreed to stay out of the full-service bar review business. The third and final claim involves an alleged violation of Section 2 of the Sherman Act. The complaint alleges that BAR/BRI has created a monopoly on the full-service bar review course market by agreeing to a market division with Kaplan, by engaging in other anticompetitive activities to preserve and maintain its monopoly, by continuing to charge excessive, supracompetitive prices for its full-service bar review course.

In the interests of full disclosure, I want to note that I am a member of the class, having purchased BAR/BRI's full service bar review course in 2001. Thanks to Sara Decatur, another class member and law school classmate of mine, for alerting me to this case. I expect that nearly all of the associates in any law firm are also members of the class. Unlike many other class members, I was not reimbursed by any law firm for the cost of BAR/BRI because I spent two years clerking for federal judges before joining a law firm. I wonder if the fact that most law firms reimburse attorneys for the cost of BAR/BRI will have any impact on the potential damages? I also wonder whether BAR/BRI is represented by a firm that has attorneys who are members of the class, and if so, whether this presents a conflict?

Tuesday, May 23, 2006, 5:18 PM

Seventh Circuit Rules on "Community of Interests" Under Wisconsin Fair Dealership Law

Like other state franchising laws, the Wisconsin Fair Dealership Law (WFDL) applies to agreements by which a person is granted the right to sell or distribute goods or services or use a trade name "in which there is a community of interest in the business of offering, selling or distributing goods or services." Wisc. Stat. 135.02(3)(a). If applicable, the WFDL prohibits the termination of any dealership agreement without good cause, notice, and an opportunity to cure. In Home Protective Services, Inc. v. ADT Security Services, Inc., 438 F.3d 716 (7th Cir. 2006), the Seventh Circuit affirmed the district court's decision that the WFDL did not apply to the "Authorized Dealer Agreement" between defendant ADT and plaintiff HPS because the parties did not share a "community of interests."

Relationship Between The Parties

ADT -- the leading alarm monitoring company in the US -- markets its products through internal sales and through its relationships with small dealers like HPS. HPS was an ADT dealer from 1996 to 2002 when its relationship with ADT was suddenly terminated. The Authorized Dealer Agreement contained exclusivity and non-compete provisions which prevented HPS from working with any ADT competitors unless ADT first rejected the customer's contract. HPS received a one-time payment of $800 for each customer contract it tendered, and HPS would then install the electronic security system (which bore the ADT logo and met ADT specifications). If the customer renewed the contract, HPS shared in the renewal income. If the customer cancelled or defaulted, HPS paid ADT an attrition chargeback. HPS was required to advertise itself exclusively as an ADT authorized dealer. During the relationship, HPS devoted 95% of its time and derived 95% of its revenues from its ADT business. It spent about 10% of its annual revenues ($32,000 per year) on ADT-specific direct mail advertising.

In 2002, following a corporate restructuring, ADT ended its relationship with 200 of its 700 Authorized Dealers, including HPS. As a result of the termination, HPS claimed that it incurred over $63,000 in one-time losses (including $10,000 worth of ADT promotional materials which it could no longer use) and over $14,000 in recurring monthly losses once it began a less profitable relationship with one of ADT's competitors. HPS sued ADT, alleging that ADT violated the WFDL without providing notice or an opportunity to cure. The district court granted summary judgment in favor of ADT, and the Seventh Circuit affirmed.

The 7th Circuit's Discussion Of The "Community Of Interests" Test (aka The "Over A Barrel" Test)

The Seventh Circuit began its discussion by noting that "there is no bright-line test for determining whether community of interests exists" but the "two primary guideposts" are "(1) continuing financial interest and (2) interdependence, which must be great enough to threaten the financial health of the dealer if the grantor exercises its power to terminate."

Wisconsin courts have identified a long list of factors to consider, which can be "distilled into two highly important questions": "(1) the percentage of revenues and profits the alleged dealer derives from the grantor and (2) the amount of time and money an alleged dealer has sunk into the relationship."

"The ultimate question," explained the court, "is whether the grantor has the alleged dealer 'over a barrel' -- that is, whether it has such great economic power over the dealer that the dealer will be unable to negotiate with the grantor or comparison-shop with other grantors."

Although it was undisputed that HPS derived 95% of its revenue and devoted 95% of its personnel hours to its arrangement with ADT, the court found that "because [HPS] could and did find another grantor to work with, it was not 'over a barrel.'" Although the new relationship was not as profitable, the WFDL provides no protection from that kind of sustainable economic harm. As for HPS's lost investments, the court pointed out that the funds HPS invested in marketing the ADT name over the years may well have been recouped via increased sales during that time, "and the $10,000 in unusable ADT promotional materials it currently has on hand is not sufficient to render it 'over a barrel.'" Lastly, the court noted that HPS was not left with unsaleable inventory or unusable buildings as a fast food franchisor might be.

Since there was no community of interests between the parties, the protections of the WFDL did not apply and the judgment of the district court was affirmed.

Thursday, May 18, 2006, 4:05 PM

Fourth Circuit: Denial of State Action Immunity Not Immediately Appealable

On May 1, 2006, the Fourth Circuit issued this decision in South Carolina State Board of Dentistry v. Federal Trade Commission. This administrative action was brought by the FTC against the SC Board of Dentistry alleging unfair competition by promulgating an emergency regulation that prevented oral hygentists from performing certain services in school settings unless a dentist had first examined a student and prescribed a course of treatment. The Board argued it was immune under the "state action" immunity doctrine of Parker v. Brown. After the FTC refused to grant the protection, the Board brought an interlocutory appeal, arguing that the denial of Parker immunity was a "collateral order" that may be appealed notwithstanding its lack of finality. The Fourth Circuit, however, disagreed and dismissed the appeal for lack of jurisdiction.

The court noted that the circuits are split on whether the denial of Parker protection is an immediately appealable collateral order. The Fifth and Eleventh Circuits have held that it was a collateral order, the Third and Seventh Circuits have suggested the same in dicta, but the Sixth Circuit has held that the denial of Parker protection fails to meet the collateral order requirements. The Fourth Circuit joined the Sixth Circuit, concluding "that the Parker analysis is neither 'completely separate from the merits' nor 'effectively unreviewable' after trial. The Fourth Circuit's decision further divides the existing split among the circuits on this issue.

Monday, May 15, 2006, 2:54 PM

FTC Consent Order Involving A Public Invitation To Collude

On March 14, 2006, the FTC announced a consent order settling FTC's complaint with Valassis Communications, Inc., a leading producer of free-standing newspaper inserts. The FTC complaint alleged that, during Valassis' quarterly earnings conference call, the company's president invited its direct competitor, News America, to join in a scheme to allocate customers and fix prices, thereby ending an ongoing price war between the two companies. Specifically, the company's president stated that Valassis would: (1) abandon its efforts to regain a 50% market share; (2) defend its existing customer base and market share; (3) increase prices above the current market price for current News America customers; and (4) monitor News America's response to its new business strategy. The FTC's Complaint charged that Valassis' conduct was anticompetitive and constituted a violation of section 5 of the FTC Act because, if the invitation had been accepted, it would have resulted in higher prices and reduced output.

In the past, the FTC has used the FTC Act--rather than the Sherman Act--to address "invitations to collude" because such "invitations" may not constitute an "agreement" under the Sherman Act. What is unique about the Valassis case, however, is that the alleged invitation to collude occurred during a public earnings call with securities analysts rather than a private communication between competitors.

"Collusive agreements to fix prices or allocate markets are condemned by the antitrust laws," said Jeffery Schmidt, Director of FTC's Bureau of Competition. "The action taken by the Commission today demonstrates that the FTC will protect consumers by challenging, in appropriate circumstances, invitations to collude before the invitations are accepted and become agreements to fix prices or divide markets."

The Valassis case demonstrates the care that companies must take whenever they disclose (publicly or privately) pricing strategies and market share goals.

Friday, May 12, 2006, 2:05 PM

Will Poker Bots Doom Online Poker?

This article by Tim Harford in the Financial Times (thanks to Truth on the Market) discusses the possibility that poker-bots (computer programs trained to play online poker) will one day play better than all human beings, thus threatening the booming online poker industry. Currently, even a novice human player can beat a poker-bot, but many people think it is only a matter of time before the poker-bots take over. The article states:

"I believe that bots will eventually play better than all human beings," predicts [Darse] Billings. [World Series of Poker champion and computer scientist Chris] Ferguson agrees. "If poker robots had a tenth of the resources that were spent on chess, they'd already have beaten us." Many commentators now fear that the robots will destroy the online game that so enthused their creators in the days of IRC poker. Online poker players are thought to wager more than $250m a day - a tempting incentive to write a software program that could be let loose on unsuspecting "fish" all over the world. A decent poker player can make thousands of dollars a month playing the online game, so what if that player was replaced by an unlimited number of copies of a fiendish computer program? Billings is convinced that the risk of this happening soon has been exaggerated. His own SparBot, an academic project, does not play for money, while he dismisses the other programs as simply not good enough. "The fear of bots is a much bigger problem than the threat of bots. There are dozens of poker robots out there on the internet, but all they are doing is contributing money to everyone else." But he admits that it is only a matter of time before anyone will be able to download a free poker robot that will outplay the world champion. At that point, people may not care to risk money online against unidentified opponents.

Thursday, May 11, 2006, 1:53 PM

Updates On New State And Federal Legislation Affecting The Gaming Industry

As a member of Womble Carlyle's Gaming Law Practice Group, I plan on using this blog to post about issues in the gaming industry even though such issues may not technically fall within the scope of antitrust and distribution law.

The front page of today's Greensboro New & Advance contained a story about efforts in the North Carolina legislature to ban video poker. Under the proposed ban only casinos on federally recognized tribal lands would be able to have video-poker machines. Currently, video-poker machines are allowed, but cannot pay out more than $10 in store credit.

At the federal level, Rep. Bob Goodlatte has proposed legislation to amend the Wire Act to make it clear that its prohibitions include Internet gambling. (The Fifth Circuit has held that the Wire Act only applies to wagering on sporting events, but the Department of Justice continues to assert that it has a broader application). The bill also prohibits a gambling business from accepting certain forms of non-cash payment, including credit cards and electronic transfers, for the transmission of bets and wagers, and provides an enforcement mechanism to address the situation where the gambling business is located offshore but the gambling business used back accounts in the United States.

If you have any questions about the scope of these proposed laws or any other gaming law issue, please feel contact me or any member of Womble Carlyle's Gaming Law Practice Group.

Class Action Antitrust Suit In Auto Industry

The Auto Industry web site is reporting on a class action suit against original equipment manufacturers and part distributors in the automobile industry under the Robinson-Patman Act. The suit alleges that components manufacturers are being forced to sell their products and product lines to large corporate retailers at 50% of the price at which they are selling the same products to independent competitors. Plaintiffs seek to use the "product lines" they purchased as proof of the required "product markets" in their antitrust suit.

For a discussion of the Supreme Court's recent Robinson-Patman Act case, click here.

Changes to Hart-Scott-Rodino Requirements

Womble attorney Thomas McLain has authored this client alert about the FTC's final amendments to the Hart-Scott-Rodino Antitrust Improvements Act of 1976 Rules. The amendments require HSR filers to use the 2002 NAICS data when reporting economic data on the HSR Form. If you would like to discuss filing questions under the HSR Act or other compliance questions, please contact the Womble Carlyle attorney with whom you work or one of the attorneys listed in the client alert.

Thursday, May 04, 2006, 4:29 PM

House Bill on Price Gouging and FTC Website on Oil and Gas Issues

The U.S. House or Rep. approved a bill yesterday that would prohibit price gouging -- at any time -- in the market for gasoline, diesel fuel, crude oil, home heating oil, and biofuels. The bill directs the Federal Trade Commission to define the terms "price gouging" consistent with the traditional unfairness principles under section 5(n) of the FTC Act, as well as the terms "wholesale sale" and "retail sale." The bill authorizes civil enforcement by the FTC and state attorneys general and criminal enforcement by the U.S. Attorney General and Department of Justice. The WSJ reports that a version of this bill is likely to be approved by the Senate. For more information on the bill see this link.

In related news, the FTC debuts an enhanced website dedicated to oil and gasoline related issues. The overview states:

"The Federal Trade Commission maintains competition in the petroleum industry, and has invoked all the powers at its disposal -- including the investigation of possible antitrust violations, the prosecution of cases, the preparation of studies, and advocacy before other government agencies -- to protect consumers from anticompetitive conduct and unfair or deceptive acts or practices in the industry. In doing so, the FTC has assembled vast competition policy and enforcement expertise in matters affecting the production and distribution of gasoline. This website describes the FTC's oversight of the petroleum industry, with special sections on our activities related to merger enforcement, anticompetitive nonmerger activity, and gasoline price data. It also features reports and economic working papers, Congressional testimony, advocacy work, conference proceedings, and studies. Check it often for updates and information on new initiatives."

Beverage Marketers Agree to Halt Sales of Sugared Sodas in Schools

The Wall Street Journal reports that Coca-Cola Co., PepsiCo Inc., and other beverage marketers have agreed to halt sales of sugared sodas in schools. But what is to happen to the bottlers, schools and others in the distribution network that have existing contracts covering these types of sales? According to the WSJ: "Bottlers and schools that sell their beverages will have to renegotiate existing contracts to incorporate the changes. Susan Neely, president and chief executive officer of the ABA [American Beverage Association], said the industry would strive to amend contracts in a way that is 'financially fair to the school and the bottler.'"

Monday, May 01, 2006, 5:38 PM

"The Gecko's Demise Is Portrayed By An Unsavory 'Splat' Sound"

So alleges a complaint filed by Geico against Tri-State Consumer Insurance Company for trademark disparagement. According to the Wall Street Journal, the suit arises from a radio ad in which an English-accented gecko, Geiko's mascot, is struck by a skidding car and then "subsequently struck by another automobile, which 'squishes' the chatty reptile." Tri-State claims the trademark lawsuit is "an assault on humor." The article can also be accessed via Reuters at this link.

More On Gas Prices and Price Gouging

There have been many newspaper stories in the past week about high gas prices and investigations into possible price gouging and price manipulation.

From the Wall Street Journal Weekend Edition:

"Since the 1990s, the FTC has engaged in multiple gas-price investigations, but it has yet to find a case of price manipulation. The last major investigation, which was in 2001 after gasoline in the Midwest was priced at about 30% more than the national average, found that the high prices were primarily a product of refinery production problems, pipeline disruptions, low inventories, and high crude prices."

From NPR Online:

"Big oil companies are making most of their money by producing crude oil. They invested in oil fields when prices were much lower, with the expectation that they could break even at, say, $25 per barrel. Since the market price is now more than $70 a barrel, the extra money is gravy. It's like a farmer who can raise corn for $1.50 a bushel. If the market price is $1.75, he makes a quarter per bushel. If the market price jumps to $2.25, his profits jump as well. (If the market crashes to $1 per bushel, the farmer loses money. That can happen to oil companies as well.) Oil companies, like the farmer, are the beneficiaries of high market prices, but they can no more control those prices than a farmer can dictate what he gets for a bushel of corn.

Critics would say the oil industry is far less competitive than the corn market, which is certainly true. But if oil companies could control the price of crude oil, they would not have allowed the price to fall to $10 a barrel as it did in 1998."


"[T]alk about price-gouging is inane at several levels. If you don't have some sort of monopoly power, gouging is another word for charging the highest price the market will bear, also known as capitalism. This is why the FTC investigation has turned up nothing. What constrains filling stations from marking up gas excessively is not the fear of prosecution but competition from other filling stations....

What none can acknowledge is that higher gas prices in the United States are a good thing. To be sure, oil at $70 a barrel causes hardships for working people and delights some of the world's worst dictators. But cheap gasoline imposes its own costs on society: greenhouse gas emissions, air pollution and its attendant health risks, traffic congestion, and accidents. The ideal way to cope with these externalities would be with higher gas taxes or a carbon tax. But these are politically impossible ideas at the moment--Democrats lost control of Congress in part because they passed a 4-cent-per-gallon tax increase in 1993. The next best solution is the one that has arrived on its own: a high market price for oil, which spurs conservation and substitution. Sustained high prices will bring about behavioral and political changes: energy conservation, public transportation, less exurban sprawl, and eventually the economic viability of alternative fuel sources such as biomass, fuel cells, wind, and solar power, which may one day undermine the power of the oil oligarchs. Are politicians too stupid to understand this, or just smart enough not to say it aloud?"

To read about the President's announcement that federal and state regulators will investigate illegal price manipulation in the gasoline industry, see this post.
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