One of the key factors in the Antitrust Division's recent string of high-profile successes in criminal cartel enforcement undoubtedly has been its Corporate Leniency Program.  Under this program, a corporation and its cooperating executives can receive complete immunity from criminal prosecution if, among other things, they are the first to report valuable information regarding criminal antitrust activity.  In Stolt-Nielsen, S.A. v. United States, 2006 U.S. App. LEXIS 7203 (3^rd Cir. March 23, 2006), a two-judge panel of the Third Circuit (the third judge, now Justice, Alito was elevated to the Supreme Court after argument) reversed a January 2005 district court decision that had permanently enjoined the government from indicting Stolt-Nielsen, S.A., a leading supplier of parcel tanker shipping services, as well as its subsidiary and an individual corporate executive, following the DOJ's revocation of an amnesty agreement with the company under the Corporate Leniency Program.  In holding that federal courts generally cannot enforce immunity agreements pre-indictment, the Third Circuit helped clarify the procedures for enforcing amnesty contracts, but it dodged the question at the heart of the case and decided by the district court, i.e., whether Stolt-Nielsen breached its obligations under its immunity agreement with the DOJ.

This action was originally spawned by collusive trading practices between Stolt-Nielsen and two of its competitors in the parcel tanker shipping industry.  In March 2002, Stolt-Nielsen's general counsel resigned, and in November of that year, filed a complaint against the company alleging that he had advised his superiors of the collusive conduct and resigned after the company failed to take action to resolve the problem.  Shortly thereafter, the company hired a former Deputy Assistant Attorney General in the Antitrust Division to conduct an internal investigation of possible antitrust violations by the company and to advise it regarding any criminal liability.  The investigator was advised that the former general counsel had "raised some antitrust concerns" in early 2002, and that in response Stolt-Nielsen revised its antitrust compliance policy and disseminated it to its employees and competitors.

With the company's permission, the investigator inquired about possible protection for Stolt-Nielsen and its officers under the Antitrust Division's Corporate Leniency Policy.  Under this Policy, the Government agrees "not to charge a firm criminally for the activity being reported" if (in the case of an applicant who comes forward after an investigation has begun) seven conditions are met: (1) the applicant is the first to report the illegal activity; (2) the Government does not, at the time the applicant comes forward, have enough information to sustain a conviction; (3) the applicant, "upon its discovery of the illegal activity being reported, took prompt and effective action to terminate its part in the activity"; (4) the applicant's report is made "with candor and completeness and provides full, continuing and complete cooperation" with the Government's investigation; (5) the applicant confesses to illegal anticompetitive conduct as a corporation and not merely through individual confessions by corporate officers; (6) the applicant makes restitution where possible; and (7) the Government determines that granting leniency to the applicant would "not be unfair to others." See Stolt-Nielsen, 2006 U.S. App. LEXIS 7203, at *4-5.  The officers and directors of the corporation who assist with the investigation are considered for immunity from prosecution on the same basis as if they had come forward individually.

In January 2003, Stolt-Nielsen entered into a fully integrated amnesty agreement with the Antitrust Division providing, subject to the foregoing conditions, that the company would be immune from prosecution for all conduct in furtherance of the conspiracy prior to the date of execution of the agreement.  Pursuant to the agreement, Stolt-Nielsen and its executives provided information that led to guilty pleas by the co-conspirators, resulting in prison sentences for individual executives and fines totaling $62 million.  However, in the weeks following execution of the immunity agreement, the DOJ discovered that Stolt-Nielsen's illegal activity had not ceased upon first report by the former general counsel in early 2002, but in fact had continued until November 2002.  Claiming that the company had not taken "prompt and effective action to terminate its part in the anticompetitive activity being reported upon discovery of the activity," as required by the agreement, the Antitrust Division suspended Stolt-Nielsen's obligations under the agreement in April 2003.  In June 2003, DOJ charged (but did not indict) one of the company's cooperating executives with violating the Sherman Act, and in March 2004 withdrew its grant of conditional leniency to Stolt-Nielsen.

Instead of waiting for indictments, Stolt-Nielsen and the executive filed civil complaints in federal district court demanding enforcement of the immunity agreement and an injunction against the government prohibiting indictments against them.  They argued, among other things, that the immunity agreement was a fully integrated contract that provided amnesty for all illegal conduct prior to January 2003.  The district court agreed and issued the requested injunction. See Stolt-Nielsen, S.A. v. United States, 352 F.Supp.2d 553, 563 (E.D. Pa. 2005).  The court concluded that the DOJ could not unilaterally rescind the agreement without a judicial determination that Stolt-Nielsen and the executive had breached it, an issue appropriate for consideration before indictment "because if an indictment were later determined to have been wrongfully secured, it would be too late to prevent the irreparable consequences."  The Court further found that there had not been a breach of the agreement by virtue of the collusive conduct continuing to November 2002 because (1) the agreement did not specify a discovery date and instead granted amnesty for activity before January 15, 2003, the date on which it was signed; and (2) the government had received the benefit of its bargain, i.e., the evidence used to prosecute the co-conspirators.

The Third Circuit reversed, holding that, with limited exceptions such as those involving First Amendment issues, the executive branch "has exclusive authority and absolute discretion to decide whether to prosecute a case." 2006 U.S. App. LEXIS 7203, at *14.  After analyzing other immunity agreement decisions, the Court concluded that, despite the DOJ's commitment "not to bring any criminal prosecution" against the company, the amnesty agreement only protected against conviction, not indictment and trial. See id., at *19-20 ("This distinction is grounded in the understanding that simply being indicted and forced to stand trial is not generally an injury for constitutional purposes but is rather 'one of the painful obligations of citizenship.')."  Therefore, the Court held, the district court was without authority to enjoin the government from indicting either Stolt-Nielsen or the company executive.  Based on this holding, the Third Circuit left for another day and a future action the underlying question of whether the immunity agreement had been breached, noting that the district court's finding on this point, having been reversed, was not entitled to any preclusive effect. Id., at *28, n.7.

The Third Circuit's decision thus denies observers important guidance as to what may constitute a breach of an immunity agreement under the Antitrust Division's Corporate Leniency Program. Although the Third Circuit's opinion provides helpful clarification as to when and how a defense based on an immunity agreement should be raised—in a post-indictment pre-trial motion—it studiously avoided commentary interpreting the obligations of the Antitrust Division and Stolt-Nielsen under the amnesty agreement.

 

Authored by:
Michael W. Scarborough
415-774-2963
mscarborough@sheppardmullin.com

Eminent domain has become a very hot topic in a wake of recent Supreme Court decisions affirming the rights of municipalities to seize private property through condemnation to benefit commercial developers.  But as far as federal antitrust law is concerned, the Supreme Court held many years ago in Parker v. Brown, 317 U.S. 341 (1943), that states acting in their sovereign capacity were immune from attack under federal antitrust laws, even if they were acting in an overtly anticompetitive fashion.  This state immunity from antitrust exposure has come to be known as "the state action doctrine."  In Commonwealth of Pennsylvania v. Susquehanna Regional, M.D.Pa., No. 1:05-CD-1814 (3/21/06), a federal District Court judge in Pennsylvania was confronted with a collision between eminent domain and state action immunity prompted not by a challenge from a private party, but from the Attorney General of the Commonwealth of Pennsylvania.  The Attorney General alleged that the Susquehanna Area Regional Airport Authority ("SARAA") had violated federal antitrust law by using eminent domain to condemn the site of the only private parking lot servicing Harrison International Airport, thereby eliminating the only competitor to the airport parking operation also run by SARAA.

The District Court began by observing that even though SARAA was clearly acting in an anticompetitive fashion, assuming the truth of the allegations by the Attorney General on a motion to dismiss, such actions were beyond the reach of Federal antitrust law if the state action doctrine applied.  The Court then noted that as state action immunity has evolved, the conduct of a municipality, unlike a state legislature or state executive department, is not automatically immune from Federal antitrust laws, citing Town of Hallie v. City of Eau Claire, 471 U.S. 34, 38 (1985).  Instead, a municipality will only be immune from antitrust challenge if it engaged in the challenged activity pursuant to a clearly expressed state policy which authorized activities with clearly foreseeable anticompetitive effects.  Assuming the state action doctrine did apply, the Court would also then have to examine whether a possible narrow exception to state action immunity, when a municipality acts purely as an ordinary market participant, also existed on the facts of the case.

The Court then turned to the enabling statute pursuant to which SARAA had been created, the Pennsylvania Municipal Authorities Act ("MAA").  The Court concluded that MAA did in fact grant the power of eminent domain, and that as such, anticompetitive effects were obviously a foreseeable result, given that the exercise of the eminent domain power could certainly result in the displacement of competitive facilities.  The Court went on to reject the assertion by the Attorney General that certain additional provisions of the MAA, which seemed designed to prevent interference with existing private commercial enterprises, constituted a waiver of state action immunity.  In this regard, while expressing reservations about the language of the statute, the District Court stated that it was bound by an interpretation of the state law by Pennsylvania's highest court, the Pennsylvania Supreme Court.  Citing Pennsylvania Supreme Court cases, the Court concluded that the Attorney General's argument about certain language seeming to restrict the grant of authority under the MAA was not intended to limit a municipal authority's power to use eminent domain in an anticompetitive fashion. 

Having concluded that state action immunity existed, the Court then turned to the Attorney General's contention that state action immunity should still be denied because SARAA was using its power of eminent domain as a mere "market participant" for the improper purpose of eliminating its only competitor.  The District Court first analyzed United States Supreme Court and Third Circuit authority, and questioned whether such a "market participant" exception to the state action doctrine existed at all.  For purposes of its analysis, the Court simply assumed that some type of market participant exception from state action immunity existed when a municipal authority acts simply as another competitor in the market place.  The Court then concluded that even if such an exception to state action immunity existed, it would be inapplicable here because the action of the municipality which was being challenged was the exercise of eminent domain.  In the Court's view, eminent domain was a power unique to government and its exercise was a fundamentally governmental function.

The Court then observed that, having decided eminent domain was a uniquely governmental function, it would not examine the motives underlying the exercise of eminent domain authority.  Although the Court credited the assertion by the Attorney General that the exercise of eminent domain here was obviously anticompetitive, and intended to be so, the Court refused to create a subjective inquiry into the condemnation process because such an analysis would potentially make all eminent domain proceedings vulnerable to a claim of anticompetitive motive.  He also noted that the purpose for which a property was seized under eminent domain was explicitly one of the factors to be considered during condemnation proceedings in the Pennsylvania state courts under Pennsylvania's condemnation statute, and that the Attorney General had intervened in the State Court condemnation proceedings.  This enabled the Court to close with an expression of considerable concern and skepticism about the motives underlying SARAA's use of eminent domain to eliminate its only parking lot competition, while expressing the hope and confidence that the Pennsylvania state courts would consider potentially anticompetitive motives when they insured that the taking satisfied constitutional requirements of public use and just compensation.

 

Authored by:
David R. Garcia
310-228-3747
drgarcia@sheppardmullin.com

 

California's unfair competition law ("UCL") generally prohibits any "unlawful, unfair or fraudulent" conduct.  Bus. & Prof. Code 17200, et seq. While its liability coverage is quite broad, damages are not available in private actions and remedies in such actions are limited injunctive relief and restitution. For many years, however, some believed that the restitution remedy included disgorgement of profits, whether by reason of the fluid recovery¹ available in California class actions or otherwise. In Kraus v. Trinity Management Services, Inc., 23 Cal. 4^th 116 (2000), however, the California Supreme Court held that fluid recovery was not available to obtain disgorgement in the now defunct UCL nonclass representative actions.² Three years later, the same court held that disgorgement was not an available remedy in UCL individual actions and the only monetary relief available to a private plaintiff was restitution of funds in which the plaintiff had a prior ownership interest.  Korea Supply v. Lockheed Martin, 29 Cal. 4^th 1134 (2003).

The Korea Supply decision, however, expressly left open the issue of whether nonrestitutionary disgorgement of profits would be permitted in UCL class actions. 29 Cal. 4^th at 1152, n. 6. Three recent decisions by three different California Courts of Appeal have now held that disgorgement is not available in UCL class actions, and given a narrow interpretation of what constitutes restitution for purposes of the UCL.

The first is Madrid v. Perot Systems, 130 Cal. App. 4^th 440 (2005) where plaintiffs sought to pursue a class action on behalf of California electricity customers against defendants who managed the electricity grid and provided a computer system to operate it.  There was no money that passed directly from plaintiffs or the class to defendants, but plaintiffs argued that the restitution remedy in the UCL should focus on defendant's gain rather than plaintiff's loss.  The Court rejected this argument holding that, under Korea Supply, restitution means "the return of money to persons from whom it was taken or who had an ownership interest in it." 130 Cal. App. 4^th at 455.

The Madrid court then took up the issue of whether "nonrestitutionary disgorgement" is available in a class action, recognizing this was an "open question" under Korea Supply.  The Court noted that one reason the Kraus court disallowed disgorgement in nonclass representative actions was due process concerns not present in class action.  This point, however, was mentioned in Korea Supply only after the Court first noted the UCL statutory remedy says "restore" and concluded that nonrestitutionary disgorgement resembles damages which are clearly not recoverable under the UCL.  The Madrid court then rejected the fluid recovery argument noting that it could not be used to expand the substantive remedies but only as a method of paying out monetary relief after it has been awarded.

Feitelberg v. Credit Suisse First Boston, LLC, 134 Cal. App. 4^th 997 (2005) and Wayne v. BP Oil Company, 2006 Cal. App. Unpub. LEXIS 2556 (March 27, 2006) followed the Madrid decision in both respects.  Feitelberg involved alleged biased stock research reports to gain favor with investment banks, and Wayne an alleged price manipulation scheme which raised prices to California gasoline consumers.  In neither case did defendants take money directly from plaintiffs, although in Wayne plaintiffs did allege that they had to pay retail gasoline outlets more money because defendant improperly increased the price of crude oil to refiners. The Court concluded, however, this fell short of the "ownership interest" required for UCL restitution stating that "plaintiff has not alleged that he seeks to recover for some benefit he conferred on defendant and for which he has a legal right of recovery. . . ." Slip Op. at p. 8.  The Court then went on to agree with Madrid that disgorgement into a fluid recovery fund is not available in UCL class actions.

The Feitelberg court, by contrast, extensively reviewed the history of the UCL, and the nature of the restitution and disgorgement remedies, before concluding that disgorgement was not an available remedy in a UCL class action.  It emphasized the "to restore" language of the statute (Bus. & Prof. Code § 17203), and that a class action is a procedural vehicle that "does not alter the parties' underlying substantive rights."  Slip. Op. at 19.  It also noted that fluid recovery is just an application of the equitable cy pres doctrine, and only deals with the distribution of the residue of a class action judgment. While the California Supreme Court is yet to be heard from on the issue of whether disgorgement is permitted in a UCL class action, the clear trend in the Courts of Appeals is disallow such recoveries.  Moreover, Madrid, Feitelberg, and Wayne were all decided on demurrer, the California equivalent to a motion to dismiss for failure to state a claim.  Each decision also clearly required that plaintiff have an "ownership" or "vested" interest in the money taken by defendant for the restitution remedy to apply.   Although public prosecutor actions under the UCL are not affected by these decisions, the combination of these decisions and the Proposition 64 reforms is to reduce the utility of the UCL as a private enforcement tool.

1. Fluid recovery, which is authorized by statute in California in class actions, means that any "residue" remaining from defendant's payment of damages after class members have collected their individual shares is paid to the "next best use" rather than returned to defendant.
2. Nonclass representative actions by private parties were abolished by Proposition 64 passed by California voters in November, 2004.

Authored by:
Carlton A. Varner
213-617-4146
cvarner@sheppardmullin.com

Under the Colgate doctrine, a "preannouncement" of unilateral terms and conditions on which a manufacturer will deal and the circumstances under which it will refuse to deal does not involve the element of "agreement" essential under Section 1 of the Sherman Act.  United States v. Colgate & Co., 250 U.S. 300 (1919).  One term and condition may be that the price at which the goods are resold to consumers be no less than a price designated by the manufacturer.  By contrast, an agreement between a manufacturer and a distributor that fixes the minimum resale price to consumers, constitutes illegal minimum resale price fixing, a "per se" or automatic violation of federal and state antitrust laws.

In PSKS, Inc. v. Leegin Creative Leather Products, Inc., No. 04-41243, 2006 U.S. App. LEXIS 6879 (5th Cir. Mar. 20, 2006), defendant Leegin, a manufacturer of women's accessories sold under the brand name Brighton, was ordered to pay $3.6 million in trebled damages to plaintiff PSKS, Inc., a women's clothing and accessories store doing business as Kay's Kloset in the Lewisville, Texas area.  Leegin was ordered to pay another $375,000 for attorneys' fees and costs. The Fifth Circuit, in an unpublished decision, affirmed that the per se standard of liability applies to vertical minimum price fixing and rejected Leegin's argument that a lesser standard of liability, the rule of reason, should apply.  The case also stands as an important lesson to manufacturers implementing manufacturer's suggested resale price ("MSRP") policies.

Like many manufacturers concerned with brand image and product merchandising, Leegin established a MSRP policy which, since the Supreme Court's decision 87 years ago in Colgate, has been sanctioned as a lawful exercise of a manufacturer's right to preannounce the terms and conditions on which it will deal and the circumstances under which it will refuse to deal. But the drafters of Leegin's MSRP policy did not pass the Colgate test.  The policy suggested joint, concerted action to fix minimum resale prices by stating "in order to accomplish this goal, our companies must work together".  The policy again failed to listen to the teachings of Colgate in soliciting agreement from retailers where it stated, "The spirit of our philosophy is that you not make a practice of promoting Brighton 'on sale'…In fact we ask that you exclude Brighton from your 'storewide' sales and that you not attempt to attract consumers into your stores by promoting Brighton sale incentives."

These clauses serve as shining examples of how a policy conceived to benefit from the protection afforded under the Colgate doctrine can, if not drafted and supervised with due care and expertise, swiftly squander that protection.  A MSRP policy that contains statements like Leegin's creates a dangerous inference of concerted unlawful conduct.  That inference creates a genuine issue of fact that a manufacturer has engaged in unlawful price fixing and defeats a motion for summary judgment.

Leegin's implementation of it was also less than stellar. Among the evidence presented to the jury which led to its finding against Leegin was that Leegin's sales representatives assured PSKS' representative that a competitor of PSKS had agreed to Leegin's policy and no longer would discount Brighton products.  In another conversation with PSKS, Leegin's sales representative told PSKS "we don't want people to discount, we want people to sell Brighton at regular price."  Leegin also demanded that signs promoting the sale of Brighton products be removed and threatened the loss of the Brighton product line if they were not.  When PSKS refused to adhere to Leegin's policy, Leegin cut off supply but informed them that the action was subject to review if plaintiff would indicate agreement to adhere to Leegin's policy in the future.

Section 1 of the Sherman Act requires that there be a "contract, combination…or conspiracy" between the manufacturer and other distributors in order to establish a violation.  Independent action is not proscribed.  However, a manufacturer violates Section 1 if it goes beyond mere preannouncement of a MSRP and the simple refusal to deal, and employs "other means" which effect adherence to its minimum resale prices.  United States v. Parke, Davis & Co., 362 U.S. 29, 44 (1960). In Parke, Davis, the Supreme Court determined that an unlawful combination is not just such as arises from a price maintenance agreement, express or implied.  Such a combination also occurs if the manufacturer secures adherence to its suggested prices by means which go beyond its mere declination to sell to a customer that will not observe its announced policy.  Such other means include threats of termination and other coercive actions taken after a distributor fails to conform to a manufacturer's predetermined prices.  See Yentsch v. Texaco, Inc., 630 F.2d 46, 53 (2d Cir. 1980); Carlson Machine Tools, Inc. v. American Tool, Inc., 678 F.2d 1253, 1261 (5^th Cir. 1982).  Leegin's threats to terminate PSKS if it did not comply, assurance that others were adhering to its policy, and repeated solicitations of PSKS' adherence constituted "other means" as meant in Parke, Davis.

Often, a manufacturer may learn that a distributor is not in compliance with its MSRP from another distributor.  In Monsanto, the Supreme Court held that to violate Section 1, "something more" than proof of termination following competitor complaints must be shown to support an inference of concerted action. Monsanto Co. v. Spray-Rite Service Co., 465 U.S. 752, 764 (1984).  Evidence that tends to prove that the termination was effected in furtherance of a conspiracy with other distributors to fix prices satisfies this requirement.  It is thus incumbent upon the manufacturer to be in a position to demonstrate that it acted unilaterally, in its own economic self-interest, when terminating a distributor upon a competitor complaint.  See Big Apple BMW Inc. v. BMW North America, Inc., 974 F.2d 1358, 1363 (3d Cir. 1992) (summary judgment of Section 1 claim overturned where defendant's agent admitted it was the distributors who wanted the plaintiff's dealership application terminated, not the defendant).  While a manufacturer and a distributor can be in agreement, for their independent reasons and apart from an unlawful objective, that a "price-cutter" should be terminated, this is dangerous.  Should the terminated dealer be able to present any evidence of a further agreement on the price to be charged by remaining dealers, a Section 1 claim may succeed. Business Elec. Corp. v. Sharp Elec. Corp., 485 U.S. 717, 726-27 (1988).

PSKS was able to present such evidence. Leegin solicited agreement from retailers to its MSRP policy when it introduced the "Heart Store Program", a marketing initiative designed to provide incentives to retailers.  To become a Heart Store, retailers "had to pledge", the Fifth Circuit wrote, to follow the Brighton Suggested Pricing Policy at all times."  PSKS v. Leegin at LEXIS *3-*4.  No materials concerning the Heart Store Program were filed with the Court, but if they did require that retailers "pledge" to abide by Leegin's MSRP, and some of its distributors were participating in the Heart Store Program, this would constitute direct evidence of a price-fixing agreement and would tend to exclude the possibility that Leegin acted independently in terminating PSKS.

PSKS v. Leegin teaches that it is critical for manufacturers operating MSRP policies to ensure that they are drafted in strict accordance with Colgate, and to reduce contacts with distributors to writing and to a minimum.  The manufacturer should have a single designate, preferably someone from the legal department, handle MSRP matters.  Otherwise, it may unknowingly create evidence that can be used against it that it did "something more" than what Colgate permits.

On appeal, Leegin did not challenge the jury's finding that it entered into price fixing agreements. Most likely, this was because of the amount and weight of PSKS' evidence.  Rather, Leegin challenged the standard of per se illegality.  The Fifth Circuit rejected Leegin's arguments.  It noted that the per se rule standard for minimum vertical price fixing has stood for 95 years since its establishment by the Supreme Court in Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 373 (1911).  The court also rejected Leegin's claim that it fell within one of the few exceptions to the per se rule, finding that the authorities on which Leegin relied were distinguishable and decided before the Supreme Court's more recent decisions reaffirming Dr. Miles. See Business Elec.; Monsanto; and State Oil v. Khan, 522 U.S. 3 (1997).  Likewise, the court rejected Leegin's arguments that the jury was not permitted, in error, to consider either that Leegin's pricing practices were procompetitive or its expert testimony regarding economic conditions.  Neither, the court held, are relevant where the per se rule applies because competitive harm is presumed.

Finally, Leegin also challenged PSKS' showing of antitrust injury, a standing question, and the lower court's calculation of damages.  The Fifth Circuit affirmed that PSKS suffered antitrust injury as PSKS' refusal to follow Leegin's pricing policy resulted in inability to obtain its bestselling and most profitable product line, and that this injury was the type the antitrust laws were intended to prevent. PSKS v. Leegin at LEXIS *9, citing Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477 (1997). The Fifth Circuit found no error in the calculation of damages and declined to revise the jury's award. Leegin's failure to succeed on these issues underscores the need for a manufacturer to be prepared to pass the Colgate test the first time - there may be no re-take.

 

Authored by:
Heather M. Cooper
213-617-5457
hcooper@sheppardmullin.com

 

Under the Noerr-Pennington doctrine, those who petition the government for redress are immune from antitrust liability for that petitioning activity. Protected petitioning activity includes the institution and maintenance of lawsuits. Under the "sham litigation" exception to Noerr-Pennington, however, immunity does not apply to a suit if it: (1) is objectively baseless in the sense that no reasonable litigant could realistically expect success on the merits and (2) conceals an attempt to interfere directly with the business relationships of a competitor, through the use of the litigation process itself, as opposed to the outcome of that process, as an anticompetitive weapon. In a rarity, the Eastern District of Pennsylvania, in In re Wellbutrin SR Antitrust Litg., Nos. 04-5525, 04-5898, 05-396 (E.D.Pa. March 9, 2006), found that patent infringement suits instituted by GlaxoSmithKline ("GSK") were not protected by Noerr-Pennington because they came within the scope of the sham litigation exception.

In 1993, GSK filed a patent application for a depression drug, bupropion, that used a particular sustained release agent known as hydroxypropyl methycellulose ("HPMC"). The patent examiner rejected the application, finding that it was overly broad because it covered any sustained release mechanism for bupropion. GSK amended the application to limit it to only bupropion that used HPMC. In October 1996, the Patent and Trademark Office ("PTO") approved the narrowed application and GSK began marketing the drug under the name Wellbutrin SR.

Beginning in August 1999, several generic drug companies attempted to begin marketing generic versions of Wellbutrin SR, all of which used sustained release agents other than HPMC, by filing what are known as Abbreviated New Drug Applications (ANDA's") with the FDA containing certifications that their generic versions did not infringe GSK's patent. GSK instituted patent infringement suits against all of these ANDA filers within 45 days of these filings. Under the provisions of the Hatch-Waxman Act, the filing of these suits stayed the FDA's approval of the marketing of the generics for thirty months or until GSK's patent was held invalid or not infringed. The plaintiffs in this case alleged that GSK used these infringement suits to extend its monopoly over Wellbutrin SR for the length of the stay in violation of the antitrust laws and that they constituted sham litigation not protected by Noerr-Pennington. GSK filed a motion to dismiss arguing that the plaintiffs could not show that GSK's infringement suits were objectively baseless. The Court held that under the facts alleged by plaintiff and taken to be true for purposes of the motion, GSK's suits were objectively baseless and not entitled to Noerr-Pennington immunity.

GSK's first argument was that its infringement suits could not be considered objectively baseless because, although the generics' drugs used sustained release agents other than HPMC, they may still infringe GSK's patent under the doctrine of equivalents. Under this doctrine, a product that is similar to a patented product or process but contains unimportant and insubstantial differences from what is claimed by the patent that, though actually adding nothing, take the product outside the literal scope of the patent is still considered to infringe the patent. The plaintiffs pointed out that the doctrine of equivalents is limited by the doctrine of prosecution history estoppel. Under this doctrine, if a patentee narrows its patent in response to a rejection of the patentee's original application, the patentee is estopped from later arguing that the subject matter covered by the original broader application is considered equivalent to the narrower patent it holds under the doctrine of equivalents. GSK responded that the law of prosecution history estoppel was unsettled at the time it commenced the suits and thus the narrowing amendments it made to its original patent application did not necessarily mean that GSK could not make a successful case under the doctrine of equivalents.

The Court acknowledged that the law of prosecution history estoppel was indeed unsettled at the time GSK brought its suits. Under the more prevalent approach, a patent holder is estopped from invoking the doctrine of equivalents only if the allegedly infringing product falls within the subject matter specifically excised by the patent holder's narrowing amendments to its patent. Under the competing approach, a patent holder is completely barred from claiming infringement by equivalence if it narrowed its patent in response to a rejection by the PTO. The Court noted, however, that uncertainty in the law by itself did not necessarily mean that GSK had a realistic chance of prevailing on the merits of its suits. Under either of the approaches to prosecution history estoppel, GSK could not claim infringement by equivalence if the generics' drugs fell within the subject matter GSK relinquished by narrowing its patent from its original application. GSK narrowed its claim from all sustained release mechanisms to the specific use of HPMC and thereby relinquished its ability to argue that drugs using other sustained release mechanisms infringed its patent under the doctrine of equivalents. Since this was precisely the claim GSK made in its suits, it had no realistic chance of success on the merits.

GSK further argued that the fact that one of its suits, against Eon Labs, survived summary judgment necessarily meant that its suits were not objectively baseless. The Court noted that controlling authority from the Federal Circuit held that the court hearing the claim that a suit was sham litigation for purposes of Noerr-Pennington immunity must make its own assessment of the objective merits of that suit, regardless of how the suit fared in other courts. Moreover, since the assessment of objective baselessness was based on the "expectations" of a reasonable litigant, the analysis should focus on whether success could be "expected" at the time the suit was brought, not on the results of the suit.

A finding that a suit is objectively baseless for purposes of the sham litigation exception to Noerr-Pennington immunity is rather infrequent. In re Wellbutrin SR Antitrust Litg. demonstrates, however, that Noerr-Pennington immunity for lawsuits is far from assured. More specifically, where the relevant facts indicate that, at the time the suit in question was brought, the suit would likely not conform to the available legal theories, the party instituting suit may be subject to antitrust liability for it even if the relevant law is unsettled. Further, even some level of preliminary success in the challenged suit, such as survival of a motion for summary judgment, does not guarantee that the suit will not be held objectively baseless and stripped of immunity.

 

Authored by:
Anik Banerjee
213-617-4124
abanerjee@sheppardmullin.com

On February 22, the European Commission (the "Commission") published on its website a series of documents setting out a number of proposed amendments to its 2002 Notice on immunity from fines and reduction of fines in cartel cases ("Leniency Notice").¹  The amendments reflect concern about the risk of discovery of corporate statements made to the Commission in the context of its leniency program during civil damages actions in third country jurisdictions.<br><br>

The Commission relies on corporate statements to launch its cartel investigations because they describe a leniency applicant's own involvement, as well as that of other companies, in potential cartel activity. However, while the Commission continues to support efforts to promote effective civil proceedings for damages against cartel participants, it does not want companies which voluntarily cooperate in revealing cartels put in a significantly worse position in respect of civil claims than other cartel members which refuse any cooperation. It believes that the production of corporate statements made to the Commission in civil damage proceedings risks producing produce exactly this result. The Commission commentary to the proposed amendments states: "It could seriously undermine the effectiveness of the Commission’s leniency program and jeopardize the success of our fight against cartels."

 The Commission, therefore, proposes to adopt the following measures in order to protect corporate statements from being used for purposes other than the application of the European competition rules:

 • The recitals of the Leniency Notice will include a clear policy statement from the Commission stating that the disclosure of corporate statements made to the Commission in the context of its leniency program during civil damage proceedings may undermine the effectiveness of the Commission’s fight against cartels.  If necessary, the Commission will intervene as amicus curiae in civil proceedings to make known its views to foreign courts.

• Leniency applicants will be allowed to make their corporate statements in oral form. The Commission will record these statements, and prepare its own transcript of the statement. Applicants will be required to confirm that the transcript is a correct rendering of the oral statement.  This confirmation may be given orally, and will then be recorded.  The transcript will serve as evidence, and, if necessary, be supplemented before the European Community Courts with the original recordings.

 • Access to the Commission's file, including to corporate statements, will be given only for the purposes of administrative and judicial proceedings for the application of Article 81 of the EC Treaty. The Commission will reject requests for any other purpose.

• Interested parties will be allowed access to the corporate statement. However, written corporate statements and transcripts of oral corporate statement can be viewed only at the Commission premises, and interested parties will not be allowed to take mechanical copies of the corporate statements.

• Parties seeking access to corporate statements will be required to sign a document whereby they commit to abide by the provision of Article 15(4) of Commission Regulation (EC) No 773/2004 of 7 April 2004, stating that documents obtained through access to the file may only be used for the purposes of judicial or administrative proceedings for the application of Article 81 of the EC Treaty.

 • If the interested party abuses its right of access to the file, the Commission may seek to sanction such behavior by lodging a complaint with the bar association of the lawyer who was allowed access to the file and/or by seeking a higher fine for the undertaking in question either in the cartel decision, or in subsequent proceedings before the European Community Courts.

The procedure for corporate statements will apply to all new and on-going leniency applications from the date of publication of the amended Leniency Notice in the Official Journal of the European Union. The Commission invited comments on its draft amendments to be submitted by March 20, 2006.

 

Authored by:
Neil Ray
415-774-3269
nray@sheppardmullin.com

 

• On March 6, Mr. J. P. Lambe, Chairman of Ireland's Connacht Oil Promotion Federation was given a six-month suspended sentence by Dublin's Circuit Criminal Court, and ordered to pay a €15,000 (US$18,000) fine over his involvement in a home-heating oil cartel. This is the first criminal conviction for a cartel offence in Europe. Judge Katherine said Mr. Lambe had participated fully in this criminal activity, and was an experienced businessman. She noted that, "[W]ithout his talent, acumen and knowledge, this kind of distortion could probably not have functioned at any significant level." The court heard that, as a result of the cartel's price fixing, customers were paying perhaps 10% more than they would have otherwise, and lost a total of €4.4 million (US$5.3m). A total of twelve companies have been convicted for involvement in the cartel.

• On April 12, the European Commission published a preliminary report which claimed that European businesses and consumers do not benefit from a fully competitive Internal Market in payment cards. The European payment cards industry is sizeable, and provides the means for a significant part of consumer payments in Europe. A total of 23 billion card payments are made annually in the EU with an overall value of €1.35 billion (US$1.6 billion). The report, based on responses from market participants, claims several potential barriers to entry into payment card markets, such as technical obstacles and practices by banks and networks that may raise costs for entrants. The industry, consumers and other interested parties have ten weeks (until June 21, 2006) to submit their views and comments on the Commission's preliminary findings. If the preliminary findings are borne out by this consultation, the Commission will consider action under EC Treaty antitrust rules in individual cases.

• On March 21, the French National Assembly passed legislation which would require Apple to disclose information concerning its anti-copying technology for songs downloaded with iTunes. This would allow competing music players to play songs downloaded with iTunes. The copyright legislation, which will now go to the French upper house, also imposes the concept of “interoperability” on Apple’s rivals. The French law is a response to worries that the exclusive relationship between iPod and iTunes raised potential competition concerns. Apple responded by saying that the proposed law was “state-sponsored piracy,” and, “If this happens, legal music sales will plummet just when legitimate alternatives to piracy are winning over customers.”

• On April 5, the Financial Times reported that the UK's Serious Fraud Office had launched formal criminal proceedings against five generic drugs companies over the alleged price-fixing of medicines supplied to the National Health Service ("NHS"). Nine individuals will also be charged. Losses to the NHS resulting from the alleged price-fixing are alleged to be approximately £150m (US$262m) in a separate, but related, civil action already under way at the High Court in London. Philip Lewis, SFO assistant director, and the controller in charge of the drugs investigation, stated that the case was likely to have "a significant impact on the business culture of this country."

• On April 5, Qualcomm, a leading developer and innovator of Code Division Multiple Access, and other advanced wireless technologies, reported that the Korean offices of Qualcomm Korea, were visited on April 4 by officials of the Korean Fair Trade Commission ("KFTC") seeking information about the business dealings between Qualcomm and the three other companies. Qualcomm stated that the inquiry may be related to communications to the KFTC from a small Korean company with respect to Qualcomm 's distribution of mobile video software solutions that can be used in connection with Qualcomm 's chipsets for wireless phones. The KFTC has not said that the inquiry is related in any way to complaints lodged with the European Commission last year by six companies based outside of Korea.

• On March 30, the Canadian Competition Bureau concluded its examinations of high gasoline prices following Hurricane Katrina and allegations by independent retailers of predation and margin squeezing in the Canadian gasoline industry. Richard J. Taylor, Deputy Commissioner of Competition, Civil Matters Branch, stated: “We have found no evidence of a national conspiracy to fix gasoline prices. Severe damage to North American refining capacity caused by Hurricane Katrina forced gasoline prices to spike in September 2005. This dramatic reduction in supply forced wholesale prices to jump, resulting in higher prices at the pumps.” The Bureau also found no evidence that pricing resulted from an attempt by a group of majors to discipline or eliminate the independent retailers in Ontario and New Brunswick, either through predation or margin squeezing.

• On April 4, the European Commission sent letters of formal notice to 17 Member States for failure to follow or apply the EU gas and electricity directives in liberalizing their energy markets. In the Commission’s view, "[T]he sustainable, competitive and secure supply of energy will not be possible without open, competitive energy markets that enable European companies to compete Europe-wide rather than just being national champions." The Commission identified various concerns such as: the lack of legal unbundling and insufficient managerial separation between electricity and gas transmission and distribution system operators; discriminatory third-party access to networks and insufficiently transparent tariffs; and, the preferential access given in the case of certain long-standing electricity or gas contracts.

• On April 7, the New Zealand High Court imposed record penalties on Koppers Arch Wood Protection (NZ) Limited, and its Australian parent company, Koppers Arch Investments Pty Limited, after the companies admitted participating in a cartel in the wood preservative chemicals industry between 1998 and 2002. The affected part of the industry was worth an estimated NZ$35 million in 2002 (US$21m). The total penalty imposed on the Koppers Arch companies is more than double the previous highest penalty for cartel behavior in New Zealand. The NZ$3.6 million (US$2.2m) comprised NZ$2.85 million (US$1.75m) for price-fixing, and NZ$750,000 (US$461,000) for attempts to exclude a new entrant competitor from the market. $100,000 in costs is also payable to the Commission. Commerce Commission, Chair Paula Rebstock, stated: "This record penalty is a tremendous result and should make others think twice before engaging in this kind of illegal behavior."

• On April 5, it was reported that Finish paper-manufacturer, Stora Enso, had received a letter from the Finnish Competition Authority ("FCA") concerning alleged price collaboration in raw wood procurement in Finland between 1997-2004. For two years, the FCA has been investigating possible cartel behavior between three paper manufacturers - Stora Enso, Metsaeliitto, and UPM Kymmene - following information provided by UPM Kymmene under a leniency application. Following submissions by the companies under investigation, the FCA can refer its findings to the Finnish Market Court, where the companies can be fined up to 10% of their annual turnover.

• On March 30, New Zealand's ANZ National Bank Limited, pleaded guilty in Auckland District Court to forty-five charges of breaching New Zealand's Fair Trading Act by failing to properly disclose fees charged for overseas currency transactions on its credit cards. New Zealand's Fair Trading Act provides for accurate information to be given to consumers, and in sentencing, Judge Hubble said that, [T]here is even more of an obligation [for financial organizations] to ensure that there is openness and frank disclosure, particularly in relation to fees." ANZ National Bank was fined a total of NZ$1.325 million (US$0.8m), and agreed to pay NZ$10 million (US$6.2m) in refunds to customers who made foreign currency transactions on their credit cards. The fine is the highest ever imposed under New Zealand's Fair Trading Act.

• On March 17, the Australian Competition and Consumer Commission ("ACCC") published a consumer guide to cartel conduct. Mr. Graeme Samuel, Chairman of the ACC stated, "Cartels are a scourge on our economy. They can cause prices to be inflated for many goods and services that people buy everyday. Even when the victim of a cartel is a government department or another business, the higher costs will be passed on to taxpayers and consumers." The publication provides information about the four different types of cartel conduct: price fixing, market sharing, bid rigging, and output controls. Mr. Samuel also noted that by their very nature, cartels are secretive agreements ,and they can be difficult to detect: "The ACCC receives tip-offs from firms wishing to take advantage of the ACCC's Immunity Policy, but consumers can also play a role in the fight against cartels." He told consumers to watch out for: prices, discounts or rebates at a number of competitors all suddenly changing to be similar or identical; a sudden, unexplained rise in prices across a number of companies in an area; or, suppliers charging different amounts for a product in different geographic areas.