With its decision affirming dismissal for lack of subject matter jurisdiction in In re: Monosodium Glutamate Antitrust Litig., 2007 U.S. App. LEXIS 2772 (8th Cir. Feb. 8, 2007) ("MSG"), the Eighth Circuit delivered another setback to foreign plaintiffs intent on using U.S. antitrust laws to redress injuries from wholly foreign purchases allegedly subject to unified global price-fixing conspiracies. MSG is part of a growing body of law applying the Supreme Court's landmark decision in F. Hoffmann-La Roche Ltd. v. Empagran S.A., 542 U.S. 155 (2004) ("Empagran I"), which addressed the applicability of the Sherman Act to foreign purchaser claims under the Foreign Trade Antitrust Improvements Act of 1982 ("FTAIA").

Under the FTAIA, the Sherman Act does not apply to export conduct or wholly-foreign conduct unless two jurisdictional requirements are met: (1) the conduct must have a "direct, substantial, and reasonably foreseeable effect" on U.S. domestic commerce; and (2) the domestic effect must "give rise to" the plaintiff's Sherman Act claim.  Empagran I, 542 U.S. at 162.  The Supreme Court held in Empagran I that where the foreign harm suffered by plaintiff is independent of any adverse domestic effect (e.g., higher prices in the U.S.), no jurisdiction can lie.  Id. at 165.  The Court, however, expressly left open the question whether the Sherman Act might apply to claims "linked to" domestic effects (i.e., claims in which the foreign injury was not independent of the domestic effect).  Id. at 175.

On remand in Empagran, in considering whether a sufficient link existed between the allegedly anticompetitive conduct and the harm to the foreign plaintiffs, the D.C. Circuit held that to prove the requisite nexus between domestic effect and foreign injury, plaintiffs needed to allege more than a mere link between domestic effect and foreign injury.  Rather, the D.C. Circuit held, proximate causation is the appropriate standard.  See Empagran S.A. v. F. Hoffmann-Laroche, Ltd., 417 F.3d 1267, 1271 (D.C. Cir. June 28, 2005), cert. denied, 126 S. Ct. 1043 (2006) ("Empagran II").  In that case, plaintiffs alleged that the defendant vitamin sellers engaged in a global conspiracy to fix the prices for vitamins, leading to higher vitamin prices in the U.S. and independently leading to higher vitamin prices in other countries.  Applying the proximate cause standard, the D.C. Circuit found that plaintiffs had failed to allege sufficiently that the domestic effects cited by plaintiffs -- increased prices in the U.S. -- gave rise to their foreign injury. Specifically, the court found that "while maintaining super-competitive prices in the United States may have facilitated [defendants]' scheme to charge comparable prices abroad, this fact demonstrates at most but-for causation . . . [that] establishes only an indirect connection between the U.S. prices and the prices [plaintiffs] paid when they purchased vitamins abroad."  Id.

Since Empagran I, decisions in global cartel cases have not been kind to foreign plaintiffs, in all but one instance denying jurisdiction under the FTAIA.  See Empagran II; eMag Solutions LLC v. Toda Kogyo Corp., 2005 U.S. Dist. LEXIS 44512 (N.D. Cal. July 20, 2005) (not for citation); Latino Quimica-Amtex S.A. v. Akzo Nobel Chemicals B.V., 2005 U.S. Dist. LEXIS 19788 (S.D.N.Y. Sept. 8, 2005); In re Dynamic Random Access Memory Antitrust Litig., 2006 U.S. Dist. LEXIS 8977 (N.D. Cal. Mar. 1, 2006); In re Intel Microprocessor Antitrust Litig., 452 F. Supp. 2d 555 (D. Del. Sept. 26, 2006); In re Graphite Electrodes Antitrust Litig., 2007 U.S. Dist. LEXIS 3349 (E.D. Penn. Jan. 16, 2007).[1]  MSG continues this trend.

In MSG, the plaintiff-appellants were foreign corporations that purchased monosodium glutamate (MSG) and nucleotides from the defendants in transactions occurring outside the United States. 2007 U.S. App. LEXIS 2772, at *1. They contended that the defendants participated in a global price-fixing and market allocation scheme to increase the worldwide price of MSG and nucleotides, both inside and outside the United States. Plaintiffs claimed that the U.S. market was included within the scheme because the fungible nature and worldwide flow of these products made the domestic and foreign markets interconnected, such that super-competitive prices abroad could be sustained only by maintaining super-competitive prices in the U.S. According to plaintiffs, they purchased overpriced MSG and nucleotides abroad because defendants' inclusion of the domestic market in the conspiracy prevented plaintiffs from buying competitively priced MSG and nucleotides either directly from the U.S. or from arbitrageurs selling MSG or nucleotides imported from the U.S. Id., at *1-*2.

Relying on the D.C. Circuit's decision in Empagran II, the District Court dismissed the complaint with prejudice (on a motion to reconsider defendants' previously denied motion to dismiss), holding that the plaintiffs had not stated a claim under the Sherman Act because they had not shown that the domestic effect of the global price-fixing cartel proximately caused their injuries. 2005 U.S. Dist. LEXIS 39641, at *20 (D. Minn. Oct. 26, 2005).

On appeal, the Eighth Circuit rejected plaintiffs' invitation to part ways with the D.C. Circuit and apply a less direct causation standard. 2007 U.S. App. LEXIS 2772, at *6-*9. The Court observed that principles of prescriptive comity required it "to respect the sovereign authority of foreign nations and to construe ambiguous statutory language in a way that avoids unreasonable interference with such authority." Id., at *6-*7. It went on to conclude that the statutory "gives rise to" language requires a direct or proximate causal relationship and that this standard is in accord with the principles of prescriptive comity, as well as "general antitrust principles, which typically require a more direct causation standard." Id., at *7 (citing, e.g., Associated Gen. Contractors of Cal., Inc. v. Cal. State Council of Carpenters, 459 U.S. 519, 533-35 (1983)).

The Eighth Circuit found that the MSG plaintiffs' "global indivisibility" or "arbitrage" theory of jurisdiction was essentially identical to that presented in Empagran II and did not met the proximate cause standard:

The domestic effects of the price fixing scheme (increased U.S. prices) were not the direct cause of [plaintiffs]' injuries. Rather, it was the foreign effects of the price fixing scheme (increased prices abroad). Although United States prices may have been a necessary part of [defendants]' plan, they were not significant enough to constitute the direct cause of the [plaintiffs]' injuries, as they constituted merely one link in the causal chain. The theory proffered by [plaintiffs] therefore establishes at best only an indirect connection between the domestic prices and the prices paid by [plaintiffs]. While such an indirect connection may be enough to satisfy a "but for" causation standard, it is too remote to satisfy the proximate cause standard.

Id., at *10-*11.

In conclusion, the Eighth Circuit acknowledged plaintiffs' policy argument in support of jurisdiction based on the importance of enforcing the Sherman Act's deterrence goal, but found it "unavailing in light of the dictates of the FTAIA and the considerations of comity." Id., at *11.

Authored By:  Michael W. Scarborough

(415) 774-2963

mscarborough@sheppardmullin.com

In Hydril Co. v. Grant Prideco LP, Fed. Cir., No. 2006-1188, 1/25/07, the Federal Circuit held that a plaintiff may state a Sherman Act section 2 claim when it alleges that the holder of a fraudulently procured patent has directed threats of enforcement to the plaintiff's customers, as opposed to the plaintiff. Hydril sued Grant Prideco on three causes of action: (1) a "Walker-Process" section 2 claim alleging that Grant Prideco monopolized two product markets by enforcing a patent it obtained by fraud on the Patent and Trademark Office; (2) a patent infringement claim regarding a patent Hydril owned; and (3) breach of contract. The court reversed the district court's dismissal of the first two actions and vacated dismissal of the third.

1.Walker-Process Section 2 Claim

In Walker-Process Equipment, Inc. v. Food Machinery & Chemical Corp., 383 U.S. 172 (1965), the Supreme Court "concluded that the enforcement of a patent procured by fraud on the Patent Office may be violative of § 2 of the Sherman Act provided the other elements necessary to a § 2 case are present". 383 U.S. at 174

Hydril makes threaded connections for pipe used in oil and gas wells. Grant Prideco makes and sells drill pipe and pipe connections. Grant Prideco held a patent on a 5 and 7/8 inch diameter pipe connection. Hydril alleged that that the Patent Office would not have issued the patent had Grant Prideco disclosed prior art of which Grant Prideco was aware. Hydril also alleged that Grant Prideco obtained and maintained market power in the relevant markets by threatening to enforce its fraudulently procured patent against other connections makers, drill pipe distributors and end-users. Hydril contended that Grant Prideco's threats were intended and understood to be a threat to refrain from sales of 5 and 7/8 inch drill pipe which, if heeded, would reduce sales of Hydril's Wedge Thread, a tool used to help connect pipes and other conduits. Hydril did not allege that Grant Prideco threatened it with infringement litigation.

The court found the alleged conduct, if established, would constitute Walker-Process fraud. Citing Nobelpharma AB v. Implant Innovations, Inc., 141 F.3d 1059, 1070 (Fed. Cir. 1998), it held the fraud allegations were sufficient because "a fraudulent omission can be just as reprehensible an omission as a fraudulent misrepresentation." A party asserting a patent who is aware of the fraud when bringing an infringement suit exposes the patentee to liability under the antitrust laws. Id.

Reversing the district court's decision, the court held that a Walker-Process claim may be based on enforcement activity directed at the plaintiff's customers, as opposed to the plaintiff. "Threats of patent litigation against customers, based on a fraudulently-procured patent, with a reasonable likelihood that such threats could cause the customers to cease dealing with their supplier, is the kind of economic coercion that the antitrust laws are intended to prevent." The court noted its recent decision in Microchip Technology Inc. v. Chamberlain Group, 441 F.3d 936 (Fed. Cir. 2006), where it held that the jurisdictional test of reasonable apprehension of a patent suit under the Declaratory Judgment Act was not satisfied by threats of enforcement litigation directed at a patentee's customers. Microchip did not require a different conclusion in this case, the court said, because although factually similar, Microchip decided a different question of law.

2. Patent Infringement Claim

Hydril alleged that Grant Prideco breached the parties' "Wedge Agreement" and that Grant Prideco violated Hydril's patent on its Wedge Thread. The Wedge Agreement settled an action Hydril brought against XL Systems Inc. ("XLS") for patent infringement and misappropriation of trade secrets. XLS was an entity Hydril owned and sold to Grant Prideco. Under the Wedge Agreement, Hydril granted Grant Prideco the exclusive right to use Hydril's existing intellectual property and know-how on wedge technology to make large diameter pipe connections. In exchange, Grant Prideco granted Hydril the exclusive right to use XLS' IP and know-how to make small diameter connections. Either party could develop products in the other's field so long as it did so completely independently of the IP and know-how of its existing business. Hydril alleged that Grant Prideco breached the Wedge Agreement by disclosing Hydril's IP and know-how and improperly using it for small diameter connections. Hydril alleged this conduct terminated the Wedge Agreement and that Grant Prideco was infringing Hydril's patent rights because it no longer had a right to use Hydril's patented technology.

The district court rejected Hydril's infringement claim on the ground that a waiver provision in a merger agreement that the parties had signed when Grant Prideco acquired XLS precluded a patent infringement suit for claims "relating to the Agreement" and limited the parties' remedies to breach of contract. The Federal Circuit disagreed with the district court, finding that it was doubtful that the waiver provision covered patent infringement claims. The merger agreement listed 11 types of conduct covered by the waiver, each of which arise out of contract performance, not the patent laws. The court found that without any express provision barring patent claims, it would be inconsistent, given the length and detail of the merger agreement, to exclude them. In addition, the court determined the waiver provision did not apply because Hydril's infringement claim arose solely under the patent statute, not the merger agreement.

3. Breach of Contract Claim

With the federal antitrust and infringement dismissals reversed, the Federal Circuit found it likely that the district court would want to reinstate the state law claim and vacated dismissal of the contract claim.

Authored By:  Heather Cooper

(213) 617-5457

hcooper@sheppardmullin.com

In HDC Medical, Inc., v. Minntech Corporation, 2007 U.S. App. Lexis 1618, __ F.3d __ (8th Cir.), the Eighth Circuit held that HDC had failed to demonstrate that a price difference between two products justified a finding that they were separate products.  Central to the court's decision was HDC's failure to present evidence that single-use and multiple-use dialyzers constituted a separate market or that Minntech's actions were anticompetitive.

Dialyzers are used in dialysis to clear waste products from the body.  Minntech and HDC manufactured competing multiple-use dialyzer machines and disinfectants, known as reprocessing agents, that are used to clean the machines after each use. Minntech had a large share of the multiple-use dialyzer machine market and a corresponding share of the disinfectant market.  In addition to multiple-use dialyzers, companies could also use single-use dialyzers, although these cost approximately 23% more per use than a multiple-use dialyzer.

After the expiration of Minntech's patents covering its disinfectant, HDC introduced a competing disinfectant, which cost 35% less than Minntech's product, and captured approximately 11% of the disinfectant market. Minntech then changed its warranty provisions, so that the use of another company's disinfectant would void the warranty. Minntech also changed the design of the uptake valve, which made the use of HDC's disinfectant more difficult.  Finally, Minntech altered the barcode reader and the corresponding software on its machine in a way which complicated the reading of the barcode on HDC's disinfectant, thereby increasing the record-keeping burden on users of HDC's disinfectant. HDC brought suit, alleging that Minntech had attempted to monopolize the market for multiple-use dialyzer reprocessing agents by tying the warranty of the machine to the use of Minntech's disinfectant and by altering the design of the machines.

The district court had granted Minntech's motion for summary judgment, finding that 1) Minntech had not compelled its customers to use its disinfectant as a condition of using its machine, 2) use of Minntech's disinfectant was not the only viable economic option, and 3) even if HDC had tied the sale of the disinfectant to the use of the machine, HDC did not have sufficient market power in the dialyzer market to give a dangerous probability of success. HDC Medical, Inc. v. Minntech Corporation, 411 F.Supp.2d 1096, 1100-1105 (D.Minn. 2006).  HDC appealed the district court's decision, arguing that the district court had erred in its market definition, as it had included single-use dialyzers in the same relevant product market as multiple-use dialyzers in its determination that Minntech did not have sufficient market power.  HDC argued that multiple-use dialyzers were not in the same product market as single-use dialyzers, because the price of a single-use dialyzer exceeded the price per use of a multiple-use dialyzer.  If the market were defined as multiple-use dialyzers, then Minntech would have approximately 74% and 95% of the market.

The Court of Appeals affirmed the district court's grant of summary judgment, finding that the facts in this case did not warrant a finding of a separate product market. Defining the contours of the product market in this case by the cross-elasticity of demand, the Court noted that HDC did not challenge the district court's finding that single and multiple-use dialyzers have identical uses.  The Court, however, rejected HDC's argument that in this case, the price differences per use between multiple and single-use dialyzers warranted a finding that they were separate products.

Citing the Supreme Court's decision in United States v. Continental Can, 378 U.S. 441, 455 (1964), the Court first held that price differentials could only rarely be the basis of differentiating products, although it could be a relevant factor in certain cases. Although HDC argued that both United States v. Aluminum Co. of America, 377 U.S. 271 (1964) and United States v. Archer-Daniels-Midland Co., 866 F.2d 242, 246 (8th Cir. 1988) supported differentiating between single and multiple-use dialyzers on the basis of price, the Court found that those cases were distinguishable.

In ALCOA, the Supreme Court had found that insulated aluminum and insulated copper cable as used in overhead distribution were separate product markets, despite having similar uses.  The Eighth Circuit, however, distinguished this ALCOA decision from the dialyzer situation, because price had only been one of the factors the Court had used in making its determination.  The Supreme Court had also found that aluminum and copper also had separate customers, as copper tended to be used in larger applications where the brittleness of aluminum made it impractical.

In Archer-Daniels-Midland, the Eighth Circuit had found that the price difference between sugar and high fructose corn syrup indicated that the two products were separate despite identical uses. However, the Court distinguished Archer-Daniels-Midland on the grounds that while in Archer-Daniels-Midland the price difference had been caused by government subsidies, in this case there were no artificial constraints on the prices of single-use dialyzers that warranted differentiating them.  "HDC offered no evidence, other than a substantial price differential, to support the conclusion that single-use dialyzers are a distinct product market from multi-use dialyzers.  Accordingly, we must affirm the district court's grant of summary judgment on HDC's monopolization claim."  Playing a large role in the Court's analysis was testimony from HDC and Minntech executives that their respective companies had lost business to single-use dialyzers.

The Court also rejected HDC's attempted monopolization claims.  The Court rejected HDC's claim that Minntech had attempted to exclude HDC from the market by threatening to cancel the warranty of any purchaser of a Minntech product who used HDC's disinfectant, because Minntech had offered to certify any disinfectant as being compatible so long as the other producer paid for the tests.  In addition, Minntech had argued that it had a legitimate business reason for the restraint, as it needed to ensure that the materials used in the machine would not break it.  The Court held that HDC did not refute this reason, and therefore that the restraint was not anticompetitive.  "'Anticompetitive conduct is conduct without legitimate business purpose that makes sense only because it eliminates competition.' . . . 'When a valid business reason exists for the conduct alleged to be predatory or anti-competitive, that conduct cannot support the inference of a [Sherman Act] violation.'"  (internal citations omitted).

The Court then held that Minntech's other conduct also had legitimate business justifications. Minntech argued that it had altered the uptake valve used for the disinfectant to ensure proper dilution and had changed the barcode reader to make it easier for Minntech's customers to use it.  Although HDC argued that both of these modifications were aimed at excluding Minntech's customers from using HDC's disinfectant, the court found that HDC had failed to offer evidence that Minntech's business justifications were false, and therefore the conduct was not anticompetitive.

The opinion has a number of interesting factors.  The Court affirms the grant of summary judgment, despite the inquiry being fact intensive, which would normally militate against summary judgment.  For example, the district court's opinion noted that single-use dialyzers had significant advantages over multiple-use dialyzers, such as eliminating the need for sterilization and record keeping, which could justify a finding of a separate market.  Thus, the courts find an absence of an issue of material fact despite citing evidence that could potentially go both ways.

In addition, the opinion emphasizes the importance of refuting a defendants business justifications once they have been made.  In little over a page of analysis regarding the attempted monopolization claims, the Court mentions HBC's failure to refute the legitimate business justifications 5 times.  However, the district court's opinion did not frame the issue as a failure to offer evidence rebutting a legitimate business justification, but rather that Minntech's actions did not foreclose the market, because the warranty was not important to customers.  Interestingly, the district court's decision does not use either of the words "justification" or "explanation," while the Court of Appeals decision mentions those words 7 and 2 times, respectfully, in just the portion dealing with attempted monopolization claim.  Therefore, the Court of Appeals' decision appears to be based on a different rationale than the district court's decision.

Authored By:  Christopher Bowen

(202) 772-5348

cbowen@sheppardmullin.com

FTC Testifies Before House of Representatives on Patent Reform

• On February 15, 2007, Suzanne Michel, Deputy Assistant Director for Policy and Coordination in the FTC's Bureau of Competition testified before the House of Representatives' Subcommittee on Courts, the Internet, and Intellectual Property on the subject of patent reform. In this testimony, Ms. Michel noted that patent protection serves many public policies. Patent protection encourages firms to compete in the race to invent new products, eases the ability of innovators to attract funding and develop relationships needed to commercialize inventions, and facilitates the public disclosure of scientific and technical information that can stimulate further scientific progress. However, the testimony noted, competition is also a major spur for innovation and patents of "questionable quality i.e. patents that are too broad or of dubious validity – can harm competition and innovation

The testimony outlined several specific ways in which patents of questionable quality may harm competition and innovation. For example, patents that should not have been granted at all raise the costs of innovation because if a competitor chooses to pursue research and development in the area covered by the patent without a license, it risks expensive, time-consuming, and wasteful litigation with the patent holder. Similarly, follow-on innovation may be deterred if the scope of a patent is broader than it should be because firms may be discouraged from research and development in the areas that the patent improperly covers by the substantial costs and risks of patent infringement litigation. Questionable patents may be particularly problematic in industries characterized by "patent thickets," such as computer hardware and software. In such industries, firms might be confronted with dozens, hundreds, or even thousands of existing patents when trying to produce just one commercial product. In these circumstances, firms may pay licensing fees or royalties for weak patents because there is no economically feasible way to evaluate the claims and possibility of infringement of all of the relevant patents prior to making an investment. Further, firms facing patent thickets may spend resources obtaining "defensive patents," not to protect their own innovation but rather to have bargaining chips to obtain access to others' patents through cross-licenses or to counter allegations of infringement. Such patents may be obtained in response to questionable patents and may be questionable themselves.

To address these problems, the FTC made several recommendations for patent reform in its October 2003 report, To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy. Ms. Michel's testimony elaborated on three key recommendations from this report:

(1)The FTC recommends the creation of a new administrative procedure of post-grant review of patents that allows for meaningful challenges to patent validity by third parties short of federal court litigation. In support of this recommendation, the testimony noted that patent prosecution is ex parte even though third parties in the same field may have relevant information and expertise to the evaluation of a patent application and that patent litigation in federal court is extremely costly and lengthy and is not an option unless the patent owner has threatened the potential challenger with patent infringement litigation. A post-grant opportunity to challenge a patent would be a more efficient way of rooting out questionable patents.

(2)The FTC also recommends that Congress enact legislation to require, as a predicate for liability for willful infringement, either actual written notice of infringement from the patentee or deliberate copying of the patentee's invention, knowing it to be patented. Because a court may award treble damages after finding that patent infringement was undertaken willfully, some firms do not read their competitors' patents out of concern for possibly being subjected to these treble damages. This reluctance to review competitors' patents undermines the public disclosure function of patents, encourages wasteful duplication of effort, delays follow-on innovation that could derive from patent disclosures, and discourages the development of competition. According to the FTC, requiring actual, written notice of infringement or deliberate copying of the patentee's invention, knowing it to be patented, would make firms more likely to look at their competitors' patents while still preserving a viable willfulness doctrine that protects wronged patentees.

(3)The FTC's third key recommendation was to require publication of all patent applications eighteen months after filing. Under current law, patent applicants do not have to publish their applications if they did not seek corresponding foreign patents. Requiring publication of all patent applications eighteen months after filing would increase business certainty, promote rational planning, and reduce the problem of "submarine patents" that surprise the market.

DOJ Requires Mittal Steel to Divest Sparrows Point Steel Mill as Remedy for Mittal's Acquisition of Arcelor After Mittal is Unable to Divest Dofasco

• On August 1, 2006, the Department of Justice filed suit in the U.S. District Court in Washington, D.C. to block Mittal Steel's acquisition of Arcelor as well as a proposed consent decree. Mittal Steel is a steelmaker that manufactures, among other products, finely rolled tin or chrome coated steel sheets known as "Tin Mill Products." These products are used in manufacturing steel cans for packaging a wide range of food and non-food products. Arcelor is also a manufacturer of Tin Mill Products. According to the Department of Justice's complaint, the largest Tin Mill Products manufacturer accounts for 44 percent of Tin Mill Products sold in the Eastern United States, the relevant geographic market. Mittal Steel is the second largest participant in this market with 31 percent, while Arcelor accounts for 2 percent and a subsidiary acquired by Arcelor in February 2006, Dofasco, accounts for 4 percent. The DOJ complains that allowing Mittal Steel to acquire Arcelor would mean that the two largest suppliers of Tin Mill Products in the Eastern United States would account for over 81 percent of the market, remove current constraints on coordination and increase the incentives of the two largest firms to coordinate their behavior.

To remedy these problems, the DOJ's proposed consent decree required Mittal Steel to divest Dofasco. However, the DOJ anticipated the possibility that Mittal might be unable to do so because Arcelor had, in an attempt to defeat Mittal's hostile takeover bid, placed legal title to Dofasco into a Dutch foundation. Thus, in the event that Mittal was unable to divest itself from Dofasco, the proposed consent decree gave the DOJ the right to select for divestiture either Mittal Steel's Sparrows Point mill, located in Baltimore, Maryland, or its Weirton mill, located in Weirton, West Virginia.

As anticipated, Mittal was unable to sell Dofasco. The DOJ has now determined that divestiture of Sparrows Point will most reliably remedy the anticompetitive effects of the acquisition. According to the DOJ, Sparrows Point is a profitable and diversified facility that has the capacity to produce more than 500,000 tons of Tin Mill Products annually. Sparrows Point also operates as an integrated facility that itself produces the steel slabs that are necessary inputs in the manufacture of Tin Mill Products. By contrast, the Weirton mill does not itself produce these steel slabs and would have to develop its own sources of supply for this input on being divested from Mittal. As such, the DOJ feels that divestiture of the Sparrows Point mill would best preserve competition the market for Tin Mill Products in the Eastern United States.