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AAI Urges Third Circuit to Reverse Reverse-Payment Decision (In re Wellbutrin XL Antitrust Litigation)

The American Antitrust Institute (AAI) filed an amicus brief in the Third Circuit Court of Appeals in support of plaintiffs’ petition for rehearing and rehearing en banc. The petition seeks review of a decision by a panel of the court upholding summary judgment for defendants and dismissing plaintiffs’ pay-for-delay and sham litigation claims.

One key issue in the case, In re Wellbutrin XR Antitrust Litigation, was whether plaintiffs could show antitrust injury as a result of a reverse payment made by brand manufacturer GlaxoSmithKline (GSK) to generic firm Anchen, given the existence of a “blocking” patent held by another firm (Andryx) that was litigating against Anchen.  The Third Circuit held that plaintiffs failed to show a disputed issue of fact as to whether Anchen would have prevailed in the patent litigation against Andryx.  In so doing, the court held that “risk aversion makes it difficult to use the size of a settlement as a proxy for the brand-name’s likelihood of success in litigation.”

AAI’s amicus brief argues that the court’s “risk aversion” argument is inconsistent with the Supreme Court’s landmark Actavis decision as well as mainstream economics, which treats large publicly held firms like pharmaceutical companies as risk neutral, not risk averse.  AAI cautioned that the panel’s acceptance of an assumption that pharmaceutical companies are risk averse threatens to impede [DM1] reverse-payment cases generally, including those brought by the government.

AAI Advisory Board Member Steve Shadowen wrote AAI’s brief with AAI General Counsel Rick Brunell.

 

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AAI Helps Persuade Third Circuit to Reject Heightened Pleading Requirements in Pay-For-Delay Cases (In re: Lipitor and In re: Effexor XR Antitrust Litigations)

The American Antitrust Institute (AAI) notched another legal victory in its efforts to combat anticompetitive “reverse-payment” settlement agreements.  In reversing the dismissal of complaints challenging settlements involving the brand name drugs Lipitor and Effexor, the Third Circuit followed the recommendations set forth in a pair of amicus briefs filed by AAI with 48 professors, and rejected a heightened pleading standard for reverse-payment claims.  Effexor brief here.  Lipitor brief here.

In the Lipitor case, plaintiffs alleged that brand manufacturer Pfizer entered an anticompetitive reverse-payment settlement with generic challenger Ranbaxy whereby Pfizer dropped its promising litigation against Ranbaxy over a different drug, Accupril, in exchange for Ranbaxy delaying the launch of its generic equivalent to Lipitor. Plaintiffs argued that Pfizer’s agreement to forgive its damages claims in Accupril was a reverse payment worth hundreds of millions of dollars.

The district court dismissed plaintiffs’ reverse-payment claim on the ground that they did not adequately plead a “large” reverse payment in accordance with the showing required by Actavis.  In order to plausibly claim that the reverse payment here was “large,” the district court held that plaintiffs would first have to provide “reliable” monetary estimates of the value of the dropped litigation, including details as to likely damages, probability of success, an estimation of lost profits and other factors.

In the Effexor case, plaintiffs alleged that brand manufacturer Wyeth had entered an unlawful reverse-payment settlement with generic challenger Teva whereby Teva agreed to delay its generic version of Effexor XR in exchange for Wyeth’s agreement not to launch an “authorized generic” version of the drug.  Plaintiffs alleged that the “no AG” promise was worth over $500 million to Teva, but the district court dismissed plaintiffs’ complaint on the ground that it failed to provide a “reliable foundation” that the payment was “large.”  In particular, the district court faulted plaintiffs for relying on “general assumptions” about penetration rates and pricing impacts of generic entry, and failing to plausibly allege that Wyeth would have introduced an authorized generic but for the no-AG agreement.

In its amicus briefs, AAI argued that the district court had improperly demanded the type of evidence that is typically introduced at summary judgment or trial, and had erroneously required plaintiffs to negate justifications that defendants have the burden of establishing.  The briefs argued that it was inappropriate to require that level of evidence at the motion-to-dismiss stage and that the district court’s standard was inconsistent with the Third Circuit’s ruling in King Drug and the Supreme Court’s Actavis decision, both of which involved less detailed allegations than the complaints in Lipitor and Effexor.

The Third Circuit agreed, citing AAI’s amicus brief twice in its opinion.  The court held that the district court’s heightened pleading standard was inconsistent with Twombly, Iqbal, King Drug, and Actavis.  It credited AAI for pointing out that that the district court appeared to require plaintiffs to produce evidence at the pleading stage and used AAI’s brief to support the argument that requiring a heightened level of specificity “would make settlement agreements like th[ese] nearly impossible to challenge because the details of the agreements are closely guarded by the parties entering into them.”

Importantly, the Third Circuit added that a plaintiff need not engage in “special valuation” measures nor provide “detailed economic analysis” to plausibly allege that a reverse payment other than cash is “large.”  Moreover, while a reverse payment must exceed saved litigation costs to be actionable, the court noted that “finely calibrated litigation cost estimates” are unnecessary.  And, the court emphasized that plaintiffs are not required to plead the “net” reverse payment in excess of independent benefits obtained by the brand manufacturer from the settlement.  That is because “Actavis does not require antitrust plaintiffs to come up with possible explanations for the reverse payment and then rebut those explanations in response to a motion to dismiss.”

The Third Circuit also:

  • reversed the district court’s holding that the Effexor defendants’ submission of the settlement agreement to the FTC (as required by law) and the FTC’s failure to challenge it immunized the agreement from antitrust challenge;
  • rejected the Effexor defendants’ argument that the patent court’s approval of the settlement in a consent decree immunized it from antitrust challenge under the Noerr-Pennington doctrine; and
  • reversed the district court’s dismissal of the Lipitor plaintiffs’ Walker Process and sham litigation claims.

AAI’s amicus briefs were written by AAI Advisory Board Members Michael Carrier and Steve Shadowen.

 

 

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What’s the Story Behind Antitrust Reform? Unpacking the “Better Deal”

The Democrats’ “Better Deal,” announced last week, makes competition a national priority. It follows an Executive Order issued in the twilight of the Obama administration that responded to warnings that competition is in decline. While such initiatives at the highest levels of government are new, concern that competition may be struggling in the U.S. is not. Competition and consumer advocates have long encouraged antitrust enforcers and courts to take a firmer hand in enforcing the antitrust laws. They have pushed back against decades of lax enforcement that put too much stock in claims that cost savings and vague consumer benefits could justify anticompetitive mergers and behavior that entrenched the market power of large firms.

There are a few important things to know about the Better Deal. It seeks to capture the attention of voters in the run-up to the 2018 and 2020 elections. Everyone should care deeply about competition. It is central to our market-based system, economic growth, consumer welfare, and innovation. As the American Antitrust Institute’s recent National Competition Policy statement recounts, there is mounting economic evidence that competition is sagging.

Many consumers have already been touched by the consequences of declining competition. Major markets and industries show higher levels of market concentration, which means fewer sellers (and buyers) with more market power. There is growing income and wealth inequality, due largely to powerful firms setting wage rates in labor markets, eroding the bargaining power of workers and making them worse off. Rates of start-ups have also slowed, signaling that fewer entrepreneurial firms are entering markets.

The Better Deal accepts this diagnosis and could serve as a rallying cry for the more robust use of antitrust law in our economy. But its action plan raises questions. The Better Deal proposes new merger standards that would “ensure that regulators carefully scrutinize whether mergers reduce wages, cut jobs, lower product quality, limit access to services, stifle innovation, or hinder the ability of small businesses and entrepreneurs to compete.” Because this notion is so appealing and fundamental, it should not come as a surprise that the existing merger standard is flexible enough to accommodate these concerns. While broadly promoting “consumer welfare,” the existing standard has been interpreted by the antitrust agencies and courts to include the effects of mergers on price, quality and choice, innovation, and workers.

Notably, the government has moved recently to block mergers that would have lowered quality of service (hospitals); reduced incentives to innovate (semi-conductor equipment); and pushed down prices paid to suppliers of important commodities and services (cattlemen, hog farmers, and physicians), thus jeopardizing their livelihoods. Public and private enforcers have also successfully prosecuted illegal agreements by hi-tech firms not to recruit each other’s employees, which directly depress wage rates or salaries.

So the current antitrust toolkit appears to have what is necessary to accomplish what the Better Deal proposes. What is needed is more vigorous enforcement under existing standards to challenge mergers in concentrated markets. More aggressive enforcement should also call out conduct that entrenches dominant firms and raises barriers to entry for smaller innovators.

To be sure, the Better Deal proposes certain tools that would give enforcers a stronger hand in the courts. This includes putting the burden of justifying the largest mergers on the merging companies, rather than requiring the government to prove that a merger is anticompetitive. Strengthening the existing presumption that mergers that unduly concentrate a market are unlawful would be a welcome improvement. On the other hand, the proposal for a new consumer competition advocate to make recommendations to the antitrust agencies adds a murky layer of oversight. And it sends the wrong message. The heads of those law enforcement agencies should be the advocates.

When the existing standard accomplishes much of what the Better Deal constructively proposes, creating new merger standards raises nontrivial risks. Courts would have to sort out how the new standard actually differs from the current law, which would increase uncertainty for enforcers and firms. It could also mean that antitrust enforcers act more like traditional sector regulators (such as in telecommunications and transportation). There are good policy, legal, and procedural reasons why the functions of antitrust enforcers and sector regulators are different.

Finally, there are serious questions about embarking on wholesale change in the U.S. antitrust regime. What is needed right now is assurance that the antitrust laws will be vigorously enforced within the bounds of the mainstream consensus and that political interference from the White House on particular antitrust cases is unacceptable.

The reality is that the antitrust agencies are law enforcers, and the vigor of enforcement directly affects the state of competition in markets and in the economy. The economic and political fallout we now see from decades of lax enforcement is proof positive. And we know the antitrust agencies can be more aggressive in enforcing the law. The late-era Obama Department of Justice in fact embarked on a major enforcement “course correction,” blocking or forcing the abandonment of numerous large mergers in health insurance, food distribution, oil and gas, and other markets. And the courts backed up the government.

More vigorous enforcement would be aided by providing clarity and emphasis as to how the laws can apply to competitive issues that have appeared more recently. This includes the exercise of market power by powerful buyers, abuse of intellectual property to restrict competition, and non-horizontal mergers. The Better Deal’s goal to “re-invigorate and modernize” the antitrust laws is sound. But let’s base constructive antitrust reform on the notion that the laws are flexible and have always incorporated concerns about the creation and abuse of economic power that animate progressive reformers today.

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American Antitrust Institute, Food & Water Watch, and National Farmers Union Say Monsanto-Bayer Merger Puts Competition, Farmers, and Consumers at Risk

Today the American Antitrust Institute (AAI), Food & Water Watch (FWW), and National Farmers Union (NFU) sent a joint letter to the U.S. Department of Justice (DOJ) on the proposed merger between agricultural input giants Bayer AG and Monsanto Co. The three groups offered their in-depth analysis of how the proposed deal would likely harm competition, farmers, and consumers. The letter notes that the merger would complete a sweeping restructuring of the agricultural biotechnology industry, creating the “Big 3” companies where just two years ago, there were six major rivals.

AAI President Diana Moss explained, “The merger substantially eliminates competition across a number of important markets. It could squeeze out smaller rivals and saddle farmers and consumers with higher prices, reduced choice, and less innovation.” Given the merger’s potential adverse effects, the letter encourages the DOJ to be skeptical of any claims that the companies need to be bigger to innovate or that planned cuts to fundamental research will benefit farmers and consumers.

The AAI-FWW-NFU analysis evaluates the effect of the merger on three major markets. One is the market for cottonseed containing genetic “traits,” where Monsanto-Bayer would have shares above 65 percent in several U.S. growing areas. A second includes the markets for crop traits such as herbicide tolerance, insect resistance, and others. A combined Monsanto-Bayer would hold between 58 percent to 97 percent of these markets in cotton, soybeans, and canola. A third concern outlined in the AAI-FWW-NFU letter is the effect of the merger on the market for research and development (R&D). Here, the merger would eliminate important competition between “parallel path” R&D pipelines and could reduce incentives to innovate because of less competitive pressure.

The letter notes that increases in market concentration in some traited cottonseed and crop traits markets far exceed the thresholds in the antitrust agencies’ merger guidelines. The DOJ has blocked a series of recent mergers with similar effects. Such massive scale consolidation in Monsanto-Bayer would create a firm with substantial market power and leave only two firms, or a duopoly, in control of several markets.

Roger Johnson, NFU’s president, pointed out that the merger is likely to affect not only the markets for genetically-modified seed, but also for important non-genetically modified, or “conventional” seed. “Farmers want and deserve choice in what they plant, with seed that is appropriate to their region and climate.” The letter notes that over time, firms have cut back on their conventional seed offerings, making it more difficult and costly for farmers to secure appropriate seed. The Monsanto-Bayer merger could exacerbate this trend.

The letter suggests the DOJ should just say “no” to Monsanto-Bayer. “The DOJ must block this seed mega-merger that would raise farmers’ prices and severely limit the choices for farmers, consumers and rural communities,” said FWW Executive Director Wenonah Hauter. “The wave of mega-mergers sweeping the food and agribusiness sectors is turning over the food system to a corporate cabal that thwarts the movement to build a fair, sustainable and healthy food system.”

With such a small group of firms in the industry, the task of divesting important genomics and seed assets to a buyer that could successfully maintain them would be difficult. A game of “musical chairs” among a dwindling set of market players is not a prescription for healthy, competitive agricultural input markets.

Media Contacts:
American Antitrust Institute
Diana Moss, 720-233-5971, dmoss@antitrustinstitute.org

Food & Water Watch
Kate Fried, 202-683-4905, kfried@fwwatch.org

National Farmers Union
Andrew Jerome, 202-314-3106, ajerome@nfudc.org

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AAI’s Moss Debates Antitrust Immunity on Airline Competition Panel

The Georgetown University Center for Business and Public Policy and Compass Lexecon co-hosted a conference on airline competition on July 17, 2017. Among the issues discussed was antitrust immunity for members of the international airline alliances. Moss’s comments drew on previous empirical work on the costs and benefits of immunity.

Moss suggested that the existing regulatory policy of reviewing grants of immunity be enforced, with periodic reviews requiring market studies and proof of net efficiencies and consumer benefits by the immunized carriers. She also noted that with airline consolidation the U.S. and Europe, alliances are growing more concentrated. Because competition within and between the airline alliances bears importantly on the antitrust immunity question, the costs and benefits of immunity should not be evaluated in a vacuum.

View the presentation.

Download the paper Airline Alliances and Systems Competition. 

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Stutz Testifies on International Competition Policy Before House Antitrust Subcommittee

On June 29, 2017, AAI Associate General Counsel Randy Stutz testified at an oversight hearing of the House Judiciary Committee’s Subcommittee on Regulatory Reform, Commercial and Antitrust Law. The hearing, entitled “Recent Trends in International Enforcement,” focused on a recently published report issued by the U.S. Chamber of Commerce.  Stutz’s prepared testimony on behalf of the AAI is available here.

The Chamber commissioned the report by a panel of international competition and trade experts in response to allegations by U.S. multinationals that foreign competition agencies have been committing due process violations, enforcing their laws in discriminatory ways, and imposing inappropriate extraterritorial remedies. These issues were explored in detail at the AAI’s International Antitrust Roundtable in February 2017. A Summary Report of the roundtable discussion is available here.

The Chamber’s report recommends addressing foreign enforcers’ alleged misuse of competition law by creating a White House working group comprised of multiple representatives from U.S. competition and trade agencies. The working group would examine the interplay between international trade and competition laws and assume responsibility for setting government-wide U.S. policy for addressing international competition issues.

The AAI notes that the report does a good job of laying out a vision for better coordination among trade and competition agencies, but takes exception with the concept of transferring government-wide responsibility for setting international competition policy to a White House working group.

The AAI argues that it is important to distinguish between a foreign enforcer’s bad faith denial of fundamental rights in pursuit of protectionist policies and its good faith disagreements over appropriate antitrust standards.  With respect to good-faith conduct, empowering the U.S. antitrust agencies to cooperate effectively with their foreign counterparts has proven far more effective than aggressive or punitive approaches historically.

The AAI also points out that, while improving coordination among U.S. trade and competition agencies is a laudable goal, it would be a mistake to do so in a way that politicizes international competition enforcement. Putting a political body in charge of international competition policy, and implicitly putting the threat of trade sanctions at the behest of U.S. competitors on the table in all such matters, would send a contradictory and counterproductive message to our trading partners. Other nations likely would respond in kind, and the United States would risk losing its antitrust leadership status in the world. Worst of all, this may imperil the U.S. antitrust agencies’ international cooperation efforts, which have been our most successful means of facilitating substantive and procedural convergence to date.

As an alternative to creating a White House working group with government-wide power to set international competition policy, the AAI believes an inter-agency working group with an appropriate advisory role should be explored.

The AAI also emphasizes that effective international competition policy reform should be broadened to include U.S. businesses’ international interests in their capacity as buyers (and consumers), not solely as rival sellers.  When U.S. victims sue foreign cartels that harm domestic commerce, for example, U.S. courts must not defer to foreign competition agencies’ discriminatory interpretations of their laws that may wrongfully permit harm to U.S. businesses and consumers.  Likewise, when foreign enforcers fail to adequately prosecute foreign cartels, U.S. direct and indirect purchasers, as well as the U.S. government, must be empowered to bring appropriate cases that promote effective deterrence.

The committee hearing and supporting materials can be found here.

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AAI Asks Federal Circuit to Prevent Copyright Overreaching in Software Markets (Oracle v. Google)

The American Antitrust Institute (AAI) has filed an amicus brief in the Federal Circuit arguing for a robust fair use defense in computer software markets, where it is particularly needed to promote innovation and competition.

A long-running dispute between Oracle and Google regarding Google’s use of copyrighted  “headers” in the source code of its Android Operating system is now before the Federal Circuit for a second time.  In developing Android, Google copied 37 “application programming interfaces,” or API packages, from Java SE, an open source programming language developed for desktop computers by Sun Microsystems, which was acquired by Oracle in 2010.  API packages are shortcuts that allow computer programmers to build basic functions into their programs without having to write new code from scratch.

Nothwithstanding that API packages serve essentially functional purposes, and have utility for the programmers who write in Java, Oracle claimed a copyright in the API packages as a work of artistic expression. It sued Google alleging, among other things, copyright infringement.  After a jury found Oracle’s copyrights were infringed, the district court set aside the verdict upon determining that the API packages were not copyrightable as a matter of law. On appeal, the Federal Circuit reversed and remanded for a determination of Google’s fair use defense.  After a jury found Google’s copying was fair use, Oracle appealed again.

The AAI’s brief emphasizes that copyright protection is not a tool for controlling markets, but rather a tool for promoting the progress of science and useful arts. The fair use defense, which shares the pro-innovation and pro-competition goals of the antitrust laws, is designed to intervene when a copyright holder’s gain from exercising the right to exclude is not justifiable in relation to society’s loss from the preemption of innovative uses of copyrighted products that would benefit competition and consumers.

The brief argues that, under the four statutory fair use factors, the “transformativeness” of the allegedly infringing use, and the market impact of the use, are critical determinants.  And uses that unlock new functionalities, new products, new markets, and previously unavailable consumer benefits are not only transformative, but they are also less likely to injure demand for the copyrighted expression.  To the extent they do decrease demand for the copyrighted work, this kind of injury is not cognizable under the Copyright Act if it is attributable to the innovative rather than usurpative impact of the use.

The brief contends that the calculus for providing copyright protection favors the fair use defense in the context of software “interfaces” like the API packages at issue. Barring public access to the building blocks of ubiquitous software programming languages has enormously high costs for society and correspondingly minimal benefit for the goals of copyright, which seeks to protect expressive rather than functional works. Without a broad fair use defense, a copyright owner can hold up software developers much like the owner of standard essential patents can hold up implementers, thwarting or taxing innovative developments that build upon software elements and misappropriating for itself the investments made by programmers in learning those elements.

Finally, the brief cautions that Oracle’s narrow view of the fair use defense would raise substantial barriers to innovation and competition. Oracle’s argument that the use of software elements is not transformative when the elements themselves serve the same purpose in the new work would mean that software interfaces that become industry standards because of their functional value, not their expressive content, could never be subject to fair use. The brief also notes that Oracle’s arguments are internally inconsistent and that Oracle’s claimed market harm is not cognizable under the Copyright Act where it is harm from a transformative use that is not based on the expressive content of the infringed work.

The brief was written by AAI Vice President & General Counsel Rick Brunell, AAI Associate General Counsel Randy Stutz, and AAI Advisory Board Member Shubha Ghosh, who is the Crandall Melvin Professor of Law and Director of the Technology Commercialization Law Program at Syracuse University College of Law.  Assistance was also provided by AAI Research Fellow Mark Angland.

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AAI Supports FTC in Qualcomm Case (FTC v. Qualcomm)

The American Antitrust Institute (AAI) filed an amicus brief in support of the FTC’s monopolization case against Qualcomm.  In a filing in the with federal district court in San Jose, California, the AAI agreed with the FTC that Qualcomm’s motion to dismiss the complaint should be denied.

The FTC’s complaint charges Qualcomm with using anticompetitive tactics to maintain its monopoly in the supply of certain critical types of baseband processors (or “chipsets”), a key semiconductor device that enables cell phones and other mobile devices to connect with cellular networks.

Specifically, the FTC alleges that Qualcomm used its dominance in chipsets to coerce cell phone manufactures (OEMs) like Apple and Samsung to pay excessive royalties to license Qualcomm’s cellular standard essential patents (SEPs), which in turn raises the costs of rival chipmakers.  Qualcomm also extracted exclusive dealing arrangements from Apple, which further solidified Qualcomm’s monopoly.

The complaint indicates that consumers are harmed by Qualcomm’s conduct in two ways.  They are harmed immediately because excessive royalties charged to OEMs are passed along to consumers who pay higher prices for cell phones or receive lower quality devices with fewer features, or both.  And consumers are harmed over the longer term because the foreclosure of rivals reinforces Qualcomm’s chipset monopoly, which allows it to charge supracompetitive “all in” prices for chipsets (chipsets plus royalties) and impairs innovation in mobile technologies.

The FTC asserts that Qualcomm’s conduct constitutes unlawful monopolization under § 2 of the Sherman Act and an unreasonable restraint of trade under § 1 of the Sherman Act.  And the FTC contends that, even if Qualcomm’s conduct does not violate the Sherman Act, it constitutes a “standalone” violation of § 5 of the FTC Act.

The complaint was controversial because it was issued by the FTC at the end of the Obama administration over a dissent by Commissioner Ohlhausen, who is now the acting chairman.  Qualcomm’s motion to dismiss reprises some of the objections raised by Commissioner Ohlhausen, including that: the complaint fails to allege that Qualcomm’s royalty demands for licensing its SEPs are not fair, reasonable, and non-discriminatory (FRAND); it fails to show that any excessive royalties foreclose Qualcomm’s rivals because cell phone manufacturers pay the same royalties whether they buy a Qualcomm or a rival chipset; and to the extent there is foreclosure, the complaint rests on a “price squeeze” theory which is barred by the Supreme Court’s ruling in Pacific Bell v. linkLine.

AAI’s amicus brief addresses each of these points and sets forth the appropriate legal standards for addressing the FTC’s monopolization and “standalone” § 5 claims.  The amicus brief makes the following points, among others:

  • The fact that Qualcomm’s royalties increase (proportionally) with increases in the price of a smart phone due to features that have nothing to do with cellular connectivity (like longer battery life or greater data storage), while Qualcomm’s share of cellular patents declines, is prima facie evidence that its royalties are unreasonable.
  • The complaint’s allegation that Qualcomm is able to obtain elevated royalties by threatening to withhold essential chip supplies if OEMs challenge Qualcomm’s royalty demands in court is well grounded.
  • Raising rivals’ costs can be an effective exclusionary strategy even if the costs nominally apply across the board.
  • linkLine does not bar the complaint even if Qualcomm’s conduct is characterized as a price squeeze, because Qualcomm’s voluntary FRAND commitments create an antitrust “duty to deal.”
  • The government is not required to show “clear evidence” of anticompetitive effect in a monopoly maintenance case. It is enough that a defendant has engaged in anticompetitive conduct that reasonably appears capable of making a significant contribution to maintaining monopoly power.
  • The requisite competitive harm for an unfair methods claim may be less than, or different from, the competitive harm required for a § 2 violation.  Section 5 addresses conduct that could lead to violations of the Sherman or Clayton Acts.  And it is available when the conduct of a monopolist harms competition or the competitive process without regard to its exclusion of rivals, such as when a patent holder breaches a licensing commitment designed to mitigate monopoly power in technology markets that is conferred by the standard-setting process, where the resultant harm is to competition in the markets that use the technology and to the standard-setting process itself.
  • The antitrust laws play a critical role in policing FRAND evasions where harm to competition is evident in technology markets or product markets in which the technology is used.  That role is doubly important where, as the FTC alleges, a standard-setting participant has monopoly power in a product market and it uses that power to evade FRAND constraints and thereby hobble its rivals, entrench its monopoly, and harm millions of consumers.

AAI’s brief was written by AAI Vice President and General Counsel Richard Brunell with assistance from AAI Advisory Board member Eric Fastiff and the Lieff Cabraser firm, who acted as local counsel.  Assistance was also provided by AAI Associate General Counsel Randy Stutz and AAI Research Fellow Mark Angland.

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Antitrust and Inequality: What Antitrust Can and Should Do to Protect Workers

For almost three decades, light-handed enforcement of the U.S. antitrust laws tilted the scales toward allowing consolidation and strategic conduct that was thought to enhance “efficiency.” Justifications for this approach ranged from forcing down costs, to promoting quality control and spurring investment in R&D by large deep-pocketed firms. Over-enforcement was the bogeyman of conservative ideology. Too-vigorous application of the laws threatened to stifle the efficiencies that were expected to flow from mergers and restraints on competition.

This approach is now known to have been misguided. While over-enforcement was assiduously avoided, the sin of under-enforcement was committed on a grand scale. Mounting evidence points to declining competition, increasing market concentration, growing income and wealth inequality, and slowing rates of market entry by start ups. As this story unfolds, the progressive agenda has ascended and conservative economic and business scholars have gone silent, or even signaled interest in being part of the debate over policy responses to declining competition.

The 30-year battle waged on competition by conservative ideology has produced many casualties. One of them is labor. At the most general level, market power is exercised by cutting back on output, which reduces demand for workers. An obsessive focus on squeezing out cost efficiencies through consolidation means streamlining the workforce and laying off workers. Large firms now wield significant market power in buying labor, reducing the bargaining power of workers – even those in collective bargaining units. “Non-compete” agreements among firms in hiring skilled professionals also harms labor. All of this, and more, has worked to widen the inequality gap between labor and capital.

Of course, lax antitrust enforcement is hardly the sole cause of America’s labor and inequality problems. Advances in manufacturing and information technology, further shifts from a manufacturing to a service economy, expanding globalization of trade, and rising levels of education and income in other countries contribute as well. Moreover, there are a host of other statutory and regulatory constraints that affect labor through restrictions on worker mobility and occupational licensing requirements.

It comes as no surprise that inequality is now an economic and political issue. A disenfranchised and disgruntled part of the American labor force embraced Mr. Trump’s brand of conservative populism during the presidential campaign. This group suffers from wage depression, loss of employment benefits, offshoring of jobs to countries with cheaper wage rates, and weakened collective bargaining power. Promises of “America first” and economic nationalism resonated deeply with this group, who continue to wait for Mr. Trump to deliver on his promises to revitalize the U.S. labor force.

Antitrust is an important policy tool for addressing labor and inequality problems. And enforcers have begun to respond. Antitrust investigations have focused on the effects of mergers and abusive conduct on labor markets. For example, the U.S. Department of Justice (DOJ) challenged the recent merger of Tyson Foods and Hillshire Brands, which would have created a powerful purchaser of sows. The DOJ’s condition on the deal was designed to reduce the merged firm’s enhanced ability to push down prices paid to farmers. But for the remedy, the likely abuse of buyer power could have driven farmers from the market.

The government and plaintiffs in civil suits also prevailed in a case involving illegal agreements by hi-tech firms not to recruit each other’s employees. In the merger of health insurers Anthem and Cigna, the DOJ’s case revolved around how the larger insurer could drive down reimbursement rates paid to hospitals and physician practices, making it more difficult to attract labor to the medical professions and early retirement of physicians.

Antitrust has the tools to address labor and inequality problems. But it can and should do more. Enforcers should challenge deals that create powerful buyers that can depress wage rates and force down prices paid to suppliers. Public and private enforcers can pursue alleged bid rigging in auction markets, such as those for cattle, which drives down prices paid for cattle. They can scrutinize conduct that raises entry barriers for smaller innovators in markets like medical devices and online retailing. Enforcers can also block mergers that eliminate important head-to head competition between R&D pipelines that employ scientists and researchers. Finally, enforcers can look even more skeptically at claims that mergers will lower costs (by among other things, reducing employment). By protecting the competitive process, enforcement also promotes market conditions that are conducive to retaining and attracting labor.

How much of the burden for solving the labor and inequality problem should antitrust shoulder? Some propose wholesale changes to the standard underlying the laws in order to make antitrust go further and faster. They would swap out the existing “consumer welfare” standard for a new “public interest” one. A public interest standard would expand the scope of antitrust to directly consider the effects of anticompetitive activities on employment. Scrapping the existing standard in the name of combatting inequality would be shortsighted, for a couple of reasons.

First, a consumer welfare standard already accounts for the distribution of wealth between consumers and firms – a big part of the inequality problem. Antitrust’s focus on price, quality, choice and innovation means that the laws are mindful of taking away from consumers and giving to firms. While consumer welfare was once interpreted as focusing on efficiency (which cares much less about equity), that is no longer the case. The vigorous, consumer-minded enforcement that was the hallmark of the late Obama administration broadly benefitted the public and workers. We need more of that.

Second, proposals to overhaul antitrust raise nontrivial details. How do we define the “public interest?” That standard could include everything that is affected by a merger or abusive conduct: employment, health and safety, and even environmental concerns. A new standard would require significant guidance by the enforcement agencies. It would also take years to develop the case law necessary to establish a reliable precedent for judicial review. Moreover, it raises questions about how an antitrust public interest standard would apply in industries such as telecommunications and energy where regulatory agencies also apply a public interest standard. The uncertainty that a revision in antitrust standard would create could lead to the under-enforcement of antitrust laws that helped create the current crisis of declining competition.

Changing the antitrust standard would therefore be a poor policy choice. There are other policy tools that can and should be harnessed – in concert with antitrust – to tackle labor and inequality problems. This includes tax policy, job retraining programs, economic incentives for small business, and subsidies for higher education. Moreover, statutory changes to the antitrust laws are unlikely under a Trump administration.

So, why all the fuss? These proposals are taking important time away from improving the existing antitrust enterprise and more effectively protecting labor markets. By maintaining competitive markets, antitrust law broadly benefits workers and the public. And enforcement resources can be focused in ways that will particularly help serve the goal of reducing inequality. What we need is creative and proactive enforcement, not to throw the baby out with the bathwater. The Administration’s nominee for chief of the DOJ’s Antitrust Division is a smart, experienced, and thoughtful antitruster – we hope he takes up where the most recent enforcers left off.

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AAI and Consumer Groups Urge Court to Affirm Injunction Blocking Anthem-Cigna Merger (United States v. Anthem)

The American Antitrust Institute joined with numerous consumer groups to file an amicus brief urging the D.C. Circuit Court of Appeals to affirm the district court decision blocking the merger of Anthem and Cigna Corp. The proposed merger would be the largest in the history of the health insurance industry, combining two of the four national carriers.  The AAI has been at the forefront of efforts to block the merger, which the district court found would substantially lessen competition, raise prices, and reduce innovation.

On appeal, Anthem is not challenging the district court’s finding that the merger would have anticompetitive effects, but rather is contending that the court failed to properly consider its efficiencies defense. Specifically, Anthem claims that it would be able to achieve significant savings by reducing reimbursements to health care providers, which would be passed on to national employers that are self-insured and would exceed the higher fees resulting from the elimination of competition between Anthem and Cigna.

The district court rejected Anthem’s defense on the grounds that the supposed medical cost savings were not verified and could be achieved without the merger.  Alternatively, the court found that if the savings were achieved they would undermine the quality of the insurance product offered by Cigna, which emphasizes collaborative relationships with providers to reduce health care expenditures and improve patient health.  The district court also concluded that Anthem’s effort to reduce reimbursements was not an “efficiency” at all, but rather reflected the exercise of market power by a dominant insurer.

The amicus brief agrees with the district court’s conclusions and rejects Anthem’s argument that the demanding standard for proving an efficiencies defense should be relaxed.

The brief also takes issue with Anthem’s contention that the district court rejected a “consumer welfare” standard.  On the contrary, the brief argues that even accepting Anthem’s premise that medical cost savings would be achieved and passed through to employers, it is no bargain for consumers if they come at the expense of reduced options and quality and the myriad consumer benefits that competition spurs.

The appeal is being heard on an expedited basis, and oral argument is scheduled for March 24, 2017.

The brief was spearheaded by AAI Vice President & General Counsel Rick Brunell and AAI Advisor David Balto with Matthew Lane in David Balto’s office.  AAI Advisor George Slover on behalf of Consumers Union also provided significant assistance.  The brief is available here.