Competitors of a copier equipment provider, IKON Office Solution ("IKON") alleged that defendant IKON used "fraudulent practices" to secure and lengthen its customer contracts, and thus reducing the ability of competing copier equipment providers to contest for "aftermarket" business.  The district court granted a motion to dismiss pursuant to FRCP 12(b)(6), on the ground that IKON did not have market power over a "unique" product or service, and that any control that it had acquired over its customers was a function of contract, and not market power.  The district court distinguished Eastman Kodak Co. v. Image Technical Services, Inc.,[1] and relied on the decision of the Third Circuit in Queen City Pizza, Inc. v. Domino's Pizza, Inc.[2]  The court held that the parties copier equipment was interchangeable, and thus within the same relevant market.  It was only the defendant's customer contracts that prevented plaintiffs from attempting to gain aftermarket business from defendant's customers.

The Ninth Circuit reversed, and held that pursuant to Kodak, the allegations of market imperfections, and IKON's alleged conduct of fraudulently inducing customers to extend their contracts through amendments, which they could not have reasonably foreseen or perceived, was a closer factual analogy to Kodak, rather than Queen City Pizza.  Thus, there was a genuine issue of fact whether the alleged market power flowed from the contractual terms between defendant and its customers, or from traditional acts of exclusionary conduct, that differentiated the single product market from a broader market of interchangeable, competing products.  Newcal Industries, Inc. v. IKON Office Solution, No. 05-16208, January 23, 2008 (9^th Cir. 2008).

In a first amended complaint, Newcal listed four product markets, which included (1) replacement copier equipment for IKON and GE customers, with "flexed IKON contracts", (2) copier service for these contracts, (3) copier service for Cannon and RICOH brand copier equipment, and (4) copier equipment.  While the court found the latter two markets were implausible, because Newcal did not allege that IKON held market power in the nationwide market for copier equipment leases, it nevertheless stated a claim upon which relief could be granted in replacement copier equipment for IKON and GE flexed IKON contracts, and copier service on these contracts.  In essence, the fraudulent acts that extended the agreements were "Kodak" changes that mutated the relevant market from a competitive product and services market, to a monopolistic aftermarket.  The court held that the first amended complaint properly alleged a relevant market consisting of a derivative aftermarket for replacement equipment.  In Queen City Pizza, the court adapted the Klein & Saft analysis that the relevant market must be viewed as of the time of the formation of a franchise contract, and that the relevant market must therefore include all plausibly foreseeable economic franchise opportunities available to the potential franchisee.[1] While the relevant market analysis set forth in Queen City Pizza has been widely followed in franchise antitrust cases, there is a window of a "Kodak moment" where the factual allegations of a complaint are on "all fours" with Kodak and where there are proper allegations of post contract formation "opportunism", that were not reasonably foreseeable or in contemplation at the time of formation.[2] Here, the allegations of aftermarket opportunism led the Ninth Circuit to conclude that the case read on Kodak, and not on Queen City Pizza.[3] And here, there were purchase and service contracts, but no "franchise."[4]

In an enigmatic and somewhat metaphysical analysis, the court held that allegations of fraudulent contract opportunism warranted the conclusion that the defendant's market power was a function of market imperfection and the lack of substitutability, rather than from a contract itself.  Noting that the new lease on life for the complaint may be somewhat fleeting, the court noted that nothing in its decision, guaranties that – or even speaks of whether – Newcal's complaint will "survive" summary judgment.  Thus, the application of Kodak may indeed be a "Kodak moment."  An issue that may be decided on summary judgment is whether the contract opportunism allegations are such that they could not have been anticipated at the time of formation.  We will see.[5]

Authored by:

Don T. Hibner, Jr.

213.617.4115

dhibner@sheppardmullin.com

FDA regulations provide that anyone can file a "Citizen Petition" to request that the FDA take, or refrain from taking, administrative action based on genuine safety, scientific, or legal concerns.  In recent years, owners of branded drugs approved by the FDA have sometimes filed Citizen Petitions on the eve of FDA approval of generic equivalents.  Such filings are often challenged in Court under the antitrust laws, with the plaintiffs asserting that such filings are simply a sham to delay generic entry and the resultant price competition.

In Louisiana Wholesale Drug Co. v. Sanofi-Aventis, 2008 U.S. Dist. LEXIS 3611 (S.D.N.Y.) the defendant Aventis had a 5 ½ year exclusive marketing rights for the drug Arava in 10 milligram (mg), 20 mg, and 100 mg strengths.  Arava is the branded version of leflunomide, a rheumatoid-arthritis drug.  Several generic manufacturers submitted Abbreviated New Drug Applications ("ANDAs") to the FDA seeking approval to market and sell generic equivalents at the expiration of the Aventis exclusive marketing period.  On the eve of such approval, Aventis filed a Citizen Petition which delayed final approval of the ANDAs.  The FDA denied the petition six months later.

Plaintiff was a wholesaler that purchased drugs, including Arava, from Aventis.  Its Complaint alleged that the Citizen Petition by Aventis was "objectively baseless" and filed simply for the purpose of delaying genetic entry, thereby preserving its ability to charge higher prices for Arava.  It alleged this violated Section 2 of the Sherman Act.  Aventis moved to dismiss the Complaint as barred by Noerr-Pennington immunity, lack of standing, and the failure to sufficiently allege relevant market and market power.  The Court denied the motion.

The Court noted that Noerr-Pennington immunity is not absolute and there is a sham exception.  As set forth by the Supreme Court PRE decision, the sham exception is satisfied when the lawsuit is objectively baseless in that no reasonable litigant could reasonably expect success on the merits, and the baseless suit conceals an attempt to directly interfere with a competitor's business relationships through use of a governmental process.  Professional Real Estate Investors, Inc. v. Columbia Picture Indus., 508 U.S. 49, 60-61 (1993).  Plaintiff alleged, and the FDA record showed, that Aventis' Citizen Petition was grounded on purported violations of labeling regulations by the ANDA applicants.  Specifically, they planned to cross refer to other brands and strengths when they themselves did not manufacture either the drug or strength indicated.  The FDA denied the petition in part because Aventis itself had used such cross references in similar circumstances.  Its petition also did not raise any new health or safety issues, or identify any new FDA regulations on labeling.  The Court found such allegations were sufficient at the pleading stage to satisfy the sham exception and prevent dismissal.

On the standing issue, the Court stated "It is beyond preadventure  …" that the Aventis petition decreased competition…." It rejected defendant's argument that, as a wholesaler rather than a competitor, plaintiff should be denied standing as it was not the most "efficient enforcer" of the antitrust laws.  As a direct purchaser from Aventis, plaintiff had to continue to pay the higher prices for Arava.  This constituted direct injury sufficient for standing.

Finally, on relevant market and market power, the Court held the relevant market was Arava and its generic equivalents was sufficient and consistent with Second Circuit authority.  Geneva Pharm. Tech. Corp. v. Barr Laboratories, Inc., 386 F. 3d 485 (2d Cr. 2006).  It rejected defendant's argument that other anti-rheumatoid treatments should be included, stating that at most this could raise an issue of fact which cannot be resolved in a motion to dismiss.

Authored by:

Carlton A. Varner

(213) 617-4146

cvarner@sheppardmullin.com

On January 28, 2008, the Fourth Circuit Court of Appeals reversed a federal district court decision that had struck down most of the regulations on the sales of alcoholic beverages imposed by the State of Washington in Costco Wholesale Corp. v. Maleng et al., 06-35538,06-35542, 06-35543 (January 29, 2008).  As a result, regulations that Costco Wholesale Corporation alleged were in violation of federal antitrust laws, by limiting competition and causing retailers to charge higher prices, remain intact.

Since the repeal of Prohibition in 1935, the State of Washington's "three-tier" system of manufacturers, distributors, and retailers, prohibits retailers in Washington such as Costco from purchasing alcohol products directly from manufacturers, forcing them instead to purchase from distributors, and prohibiting them from purchasing alcoholic beverages from out-of-state wineries and breweries.

In 2004, Costco filed suit against the Washington State Liquor Control Board, and others, including the then Attorney General of the State of Washington, challenging the following nine restraints on the purchase and sale of alcoholic beverages.

1.  A “price posting” requirement, which requires beer and wine distributors to publicly post wholesale prices.

2.  A "hold" requirement, which requires beer and wine manufacturers and distributors to adhere to their posted prices for at least 30 days.  Together, the first and second challenged restraints are known as the "post-and-hold" restraints.

3.  A “uniform pricing rule”, which requires each brewery and winery to sell alcoholic products at the same price to every distributor. Distributors must also sell products to every retailer at the same price they have posted.

4.  A minimum mark-up provision, which requires distributors and suppliers to price their products at no less than 10% above acquisition costs.

5.  A ban on providing discounts based on volume purchases.

6.  A ban on sales of beer and wine on credit.

7.  A "delivered price" requirement, which requires distributors to sell beer and wine at the same price regardless of whether the retailer pays for freight.

8.  A ban on central warehousing of alcohol products by retailers.

9.  A ban on retailer-to-retailer sales of beer and wine.

A federal district court in Seattle granted summary judgment in favor of Costco, and held that eight of the nine challenged restraints irreconcilably conflict with the Sherman Act provisions of the federal antitrust laws.  The only restraint upheld by the district court was the restraint against retailer-to-retailer sales.  After a trial on defendants' defenses under the Twenty-first Amendment, which provides the states with wide latitude to regulate alcohol sales, the district court ruled that the State of Washington's interests could not prevail over the antitrust laws interests' in promoting competition.  Defendants appealed.

The appeals court affirmed the district court’s rulings that the State of Washington's post-and-hold pricing system was a non-unilateral "hybrid" restraint that was preempted by the antitrust laws, and constituted a per se violation of those laws because it facilitated horizontal collusion among market participants.  The court also affirmed the decision to reject defendants' arguments that its restraints were effective in promoting temperance under the Twenty-first Amendment.

However, based on the principle that the state is immune from antitrust liability when the state unilaterally imposes restraints on competition, except in certain circumstances when those regulations allow market participants to dictate market conditions, the circuit court reversed many of the district court's determinations.  Specifically, the appeals court upheld the State of Washington's regulations requiring uniform pricing, a 10% minimum mark-up, and delivered pricing, as well as the regulations prohibiting volume discounts, credit sales, and central warehousing. 

The court held that each of the foregoing restrictions should be viewed independently of the invalid post-and-hold requirements under the regulation’s severability provision, and that each is a unilateral restraint that is therefore immune from antitrust liability. The court noted that the fact that wholesalers simply comply with rules set by the state (such as those that forbid discounts or credit, or require a minimum mark-up) is not tantamount to an improper “meeting of the minds” among competitors, and any anticompetitive effect is not the result of any concerted action among competitors.  Based on the foregoing, the court held that each of the foregoing restraints is a unilateral restraint that is not preempted by the antitrust laws.

Authored by:

Daniel L. Brown

(212) 332-3879

dbrown@sheppardmullin.com