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AAI Asks Third Circuit to Reconsider Product Hopping Decision (Mylan v. Warner Chilcott)

The American Antitrust Institute (AAI) filed an amicus brief asking the full Third Circuit Court of Appeals to rehear a panel decision that sharply restricts the use of the Sherman Act to police anticompetitive “product hopping.”

Product hopping is a scheme by which a brand-name drug manufacturer seeks to prevent or delay FDA-approved generic competition by switching patients to a reformulated version of the drug with little or no additional therapeutic benefit.  The switch typically occurs just before generic entry and often involves removing the original drug from the market.  With prescriptions written for the reformulated drug, pharmacists generally may not substitute the generic. It forces generic firms to apply for new FDA approval to market the reformulated drug, which can take months or years.

The case involves a challenge to product hopping involving the acne medicine Doryx.  The delay in generic entry allegedly cost consumers and insurance companies millions dollars in higher drug prices.  The AAI previously filed a brief requesting that the Third Circuit reverse the district court’s dismissal of the complaint.

The AAI’s new brief argues that the Third Circuit panel of judges erred by assuming that conduct by a monopolist is not anticompetitive unless it completely bars entry into a market. The brief argues that this assumption is inconsistent with the law in the Third Circuit and elsewhere.  It also ignores the reality that generic drug companies cannot meaningfully compete unless they can rely on the automatic substitution of the generic at the pharmacy, which product hopping prevents.

The brief also argues that the panel erred by holding that the defendants lacked monopoly power because there were other acne drugs available.  This was a mistake, according to the brief, for several reasons.  Most notably, the panel ignored the direct evidence of defendants’ monopoly power, namely that generics’ eventual entry significantly lowered the price for consumers of Doryx.

The brief was written by Professor Michael Carrier (an AAI Advisory Board Member), and Richard Brunell (AAI’s Vice President and General Counsel).  They were assisted by Randy Stutz (AAI Associate General Counsel) and Mark Angland (AAI Research Fellow).  A copy of the brief is available here.  AAI’s brief on the merits is available here.

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Working Paper No. 16-02: Abuse of Superior Bargaining Position (ASBP): What Can We Learn from Our Trading Partners?

Neither U.S. antitrust nor other domestic law seems to  provide a realistic remedy for a firm’s abuse of its superior bargaining position (ASBP) vis a vis another, positionally weaker firm, in the absence of recognized market power. Several of our major trading partners do have such a provision in their competition laws and there is enough to be learned from their experience and from investigations by academics and international institutions to warrant a careful examination of this gap in the regulation of vertical relationships to determine how such a provision could be made to work within a distinctively American framework.

This paper by AAI Founder and Senior Fellow Bert Foer advocates a process for the FTC to undertake, beginning with empirical data collection.

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AAI Files Comments on Proposed Update of IP Licensing Guidelines

The American Antitrust Institute (AAI) filed comments today in response to a request by the Antitrust Division (DOJ) and the Federal Trade Commission (FTC) for public comment on the agencies’ proposed update of the DOJ/FTC Antitrust Guidelines for the Licensing of Intellectual Property.

AAI’s comments are broadly supportive of the agencies’ proposed modest update, but urge the agencies to undertake a more fulsome revision that addresses, in particular: (1) issues involving the licensing, enforcement, and acquisition and sale of standard essential patents (SEPs); (2) special problems posed by patent assertion entities (PAEs); and (3) patent settlements.

The AAI recommends that the agencies add a stronger statement of the role of competition and antitrust in promoting innovation.  As the FTC’s 2011 IP Report explains, “The patent system’s exclusive right promotes innovation, but so too does competition, which drives firms to produce new products and services in the hope of obtaining an advantage in the market.  The patent system and the antitrust laws share the fundamental goals of enhancing consumer welfare and promoting innovation.”

The AAI also recommends that the agencies include: a more balanced statement on the legal treatment of refusals to deal; further elaboration of the legal standard for tying, exclusive dealing by monopolists, and abusive enforcement of patents; and additional references to FTC v. Actavis, 133 S. Ct. 2223 (2013).

These comments are part of the AAI’s continuing IP Competition Project, which seeks to ensure an appropriate balance between IP protection and competition to enhance consumer welfare and promote innovation.

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AAI Testifies at Senate Judiciary Committee Hearing on Consolidation and Competition in the U.S. Seed and Agrochemical Industry

AAI President Diana Moss testified at the Senate Judiciary Committee hearing on consolidation in the U.S. seed and agrochemical industry on September 20, 2016. Dr. Moss’s testimony reflects the AAI’s long history of research, education, and advocacy on competition in agriculture and food.

Her testimony unpacked the competitive effects of the proposed mergers of agricultural biotechnology firms Dow-DuPont and Monsanto-Bayer, which would reduce the field of competition in the U.S. traits, seeds, and chemicals markets from the Big 6 to the Big 4.

AAI’s analysis discusses three ways in which the proposed mergers could adversely affect competition: (1) the elimination of head-to-head competition in markets for certain crop seed and chemicals; (2) reduction in competition in agricultural biotechnology innovation markets and reduced opportunities for pro-competitive research and development collaborations; and (3) substantial vertical integration that could produce exclusive packages of traits, seeds, and chemicals that do not “interoperate” with rival products, increasing the risk that smaller innovators cannot get access to technology and other resources needed to compete effectively. Dr. Moss’s testimony can be found here.

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AAI Urges Less Restrictive Approach to Evaluating Circumstantial Evidence in Price Fixing Cases (Valspar Corp. v. DuPont)

The American Antitrust Institute (AAI) urged the Third Circuit Court of Appeals in an amicus brief to reject a district court’s overly restrictive approach for determining whether a price-fixing claim should reach a jury in a circumstantial evidence case.

The case involves allegations by a direct purchaser that titanium dioxide suppliers fixed prices over an 11-year period when they uniformly raised prices some 31 times, well over any increase in costs, despite declining demand and excess capacity.  Although the district court found the titanium dioxide industry was a “text book example” of an industry conducive to price fixing, it granted summary judgment to the defendant because the evidence of coordinated conduct was susceptible to a non-collusive interpretation.

A different federal district court judge overseeing the related class action denied summary judgment on largely the same record.

AAI’s brief explains that the district court stretched to the point of incoherence the rule that merely interdependent oligopoly pricing is not illegal.  The court adopted a misguided approach that apparently requires plaintiffs, in order to get a case to a jury, to have “smoking gun” evidence or internal documents referring to an explicit agreement.

The brief argues that the harmfulness of supracompetitive oligopoly pricing should inform the standards for inferring a price fixing agreement.  With supracompetitive oligopoly pricing becoming increasingly problematic as markets become increasingly concentrated, the “extra ingredient” beyond interdependent, noncompetitive pricing that is required to prove concerted action should not be unduly limited.

The brief points to two principal errors made by the district court.  First, the district court misapplied Matsushita by holding that “ambiguous” evidence is insufficient to defeat summary judgment.  On the contrary, the brief argues that evidence can be sufficient to defeat summary judgment if it would allow a reasonable fact finder to infer that an agreement is more probable than not.

Second, the brief argues that the district court failed to give sufficient weight to plus factors indicative of an express or tacit agreement.  In particular, the court erred in discounting evidence of sharing confidential information about production, demand, and capacity, because the data was aggregated.  Aggregated data, the brief explains, can well serve to facilitate price fixing by reducing pricing uncertainty and “cheating.”

The district court also erred in dismissing evidence that defendants used advance price announcements as signals.  The court thought this was common oligopoly behavior having a legitimate purpose.  However, the brief points out that there was evidence the announcements were intended to be used as signals, and whether there was a legitimate purpose was a disputed issue of fact.

The brief was written by AAI Vice President and General Counsel Richard Brunell, with assistance from AAI Associate General Counsel Randy Stutz, AAI Research Fellow Michael Altebrando, and AAI Intern Jonathan Wright.   The motion for leave are available here.

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Commentary – DC Circuit Upholds FERC’s Rejection of Incumbent Right of First Refusal to Build Transmission in Oklahoma Gas & Electric Co. v. FERC – Decision Promotes Competition in Wholesale Electricity Markets

In a recent decision, the District of Columbia Court of Appeals rejected a challenge to an important reform adopted by the Federal Regulatory Energy Commission (FERC) to promote competition in transmission development.  The court also narrowed the scope of the Mobile-Sierra doctrine, which limits FERC’s ability to reject regulated utilities’ negotiated agreements.  Oklahoma Gas & Elec. Co. v. FERC, No. 14-1281, 2016 WL 3568086 (D.C. Cir. July 1, 2016).  The decision is available here.

In Order No. 1000, FERC adopted a framework of reforms to ensure that nonincumbent transmission developers have the opportunity to participate in the transmission development process.  In particular, public utility transmission providers were required to eliminate federal rights of first refusal from Commission-jurisdictional tariffs and agreements, and to develop not unduly discriminatory qualification criteria and processes governing the submission and evaluation of proposals for new transmission facilities.  FERC found that such rights of first refusal had the potential to deter rival transmission providers from proposing much needed infrastructure reforms, discourage competition within the industry, and potentially drive up the cost of wholesale electricity services.

The DC Circuit upheld FERC’s general authority to regulate transmission rights of first refusal in a prior case.  The issue presented in Oklahoma Gas was whether FERC’s decision requiring the Southwest Power Pool (SPP) to remove the rights of first refusal contained in its membership agreement was inconsistent with the Mobile-Sierra doctrine, which establishes a presumption that a contract rate for wholesale energy is just and reasonable.  The DC Circuit found in FERC’s favor, holding that the Mobile-Sierra doctrine was not applicable to the anticompetitive rights of first refusal, and thus FERC could ban them without having to meet a stringent public-interest standard.

In the decision under review, FERC determined that Mobile-Sierra applies to individualized contract rates, terms, and conditions negotiated freely at arms-length, but not to generally applicable tariff rates, terms and conditions such as those contained in SPP’s membership agreement.  The membership agreement failed the threshold “arms-length” bargaining test, according to FERC, because it is a product of a tariff development process, not contract negotiations between adverse parties.  Indeed, FERC noted that the negotiations that led to the right of first refusal provision were among parties with a common interest in protecting themselves from competition in transmission development.

Moreover, FERC relied on the fact that prospective members of the RTO (including new transmission providers) must sign the agreement, a standardized form contract, with limited room for negotiation.  Any modification to the agreement must be negotiated with all other parties who have entered into the agreement, thus creating a substantial barrier to amending the right of first refusal provision and limiting prospective members’ bargaining power.

The DC Circuit agreed with FERC’s bargaining-test analysis, stating that “even if the Mobile–Sierra doctrine might apply to [the agreement] generally, FERC did not err in determining that the doctrine does not extend to anti-competitive measures that were not arrived at through arms-length bargaining.  In other words, the term must be the product of adversarial negotiations between independent parties pursuing independent interests [for the Mobile-Sierra doctrine to apply].”  Oklahoma Gas, 2016 WL 3568086, at *4.

The court went on to note that just as duress, fraud, and unfair dealing will remove a provision from the ambit of Mobile-Sierra, so will terms arrived at by horizontal competitors with an interest to exclude competition.  Such was the case here, where the right of first refusal created an entry barrier for non-incumbent transmission providers.

In short, the court agreed with FERC that the right of first refusal provision of SPP’s membership agreement worked as an exclusionary device that restricted competition.  Because the process by which the provision was agreed to was not arms-length bargaining, the court held that the “just and reasonable” presumption under Mobile-Sierra did not apply.  By denying the petition for review, the court’s decision leaves in place FERC’s authority to order RTOs and utility companies to remove contract clauses mandating that incumbent utilities have the first opportunity to build new transmission facilities in their respective service areas.

FERC’s order, and the DC Circuit’s decision upholding it, are consistent with the AAI’s long-running advocacy to ensure that incumbent utility control does not stifle transmission development and that the RTO transmission development process promotes competition in wholesale electricity markets.  Transmission development issues have been a topic of AAI’s Annual Energy Roundtable and numerous regulatory and court filings, a complete list of which can be found below.  See, e.g., AAI Joins Electric Co-ops and Public Power in Rehearing Request in New York Transco, LLC (May 1, 2015); AAI Files Comments in FERC’s Proceeding Involving the Transmission Merger of ITC and Entergy (Jan. 22, 2013); AAI Files Comments with the FERC Regarding Allocation of Capacity on New Merchant and Participant-Funded Transmission Projects (Sep. 24, 2012); AAI Comments on FERC’s Transmission Planning and Cost Allocation Rulemaking (Sep. 29, 2010); AAI Files Amicus Brief in New York Regional Interconnect v. FERC (FERC’s obligation to consider competition) (July 28, 2010).

Contacts:
Rick Brunell, Vice President and General Counsel, American Antitrust Institute
(617) 435-6464
rbrunell@antitrustinstitute.org

Diana Moss, President, American Antitrust Institute
(202) 536-3408
dmoss@antitrustinstitute.org

 

List of Transmission Competition Issues:
5/1/15: AAI Joins Electric Co-ops and Public Power in Rehearing Request in New York Transco, LLC, et al
The AAI joined the New York Association of Public Power, National Rural Electric Cooperative Association, and American Public Power Association today in asking the Federal Energy Regulatory Commission to reconsider an order. FERC’s order in New York Transco LLC, et al (FERC Docket No. EC15-45-000) found that the Commission had no jurisdiction under the Federal Power Act (S. 203) to review a transaction involving a joint venture of transmission assets. The request for rehearing highlights the basis for and importance of FERC’s jurisdiction in the important area of interstate commerce.

1/22/13: AAI Files Comments in FERC’s Proceeding Involving the Transmission Merger of ITC and Entergy
Today the AAI filed comments in FERC Docket EC12-145 — the merger of the ITC and Entergy transmission systems. In the comments, the AAI encouraged the Commission to take a closer look at the competitive effects of consolidating transmission.

9/24/12: AAI Files Comments with the FERC Regarding Allocation of Capacity on New Merchant and Participant-Funded Transmission Projects
AAI files comments with the Federal Energy Regulatory Commission Proceeding in the proposed Policy Statement: “Allocation of Capacity on New Merchant Transmission Projects and New Cost-Based, Participant-Funded Transmission Projects; Priority Rights to New Participant-Funded Transmission.”

9/29/10: AAI Comments on FERC’s Transmission Planning and Cost Allocation Rulemaking
AAI today filed comments in FERC’s Notice of Proposed Rulemaking on transmission planning and cost allocation (Docket No. RM10-23). The comments emphasize the importance of crafting policies based on the goal of promoting competitive wholesale electricity markets.

7/28/10: New York Interconnect v. FERC (FERC’s obligation to consider competition)
The AAI filed an amicus brief in the D.C. Circuit Court of Appeals urging the Court to reverse a decision of the Federal Energy Regulatory Commission (FERC) that makes it more difficult for new transmission lines to be built in New York than in other parts of the country with regional transmission organizations.  According to the brief, FERC’s decision fails to appreciate the role of expanded transmission capacity in promoting competitive wholesale generation markets, and fails to take seriously FERC’s role in preventing anticompetitive conduct.  The brief was written by AAI Director of Legal Advocacy Richard Brunell with the help of AAI Vice President Diana Moss.

11/23/09: AAI Comments on FERC’s Electricity Transmission Planning Policy
The AAI filed comments today in the Federal Energy Regulatory Commission’s proceeding involving transmission planning policy. The AAI comments address competitive issues involving transmission planning in wholesale electricity markets, including the importance of more tightly linking the goals of transmission planning and wholesale competition, tradeoffs between technical coordination and anticompetitive coordination, and the importance of considering standard-setting and market structure issues relating to demand-response and Smart Grid technologies.

4/16/09: AAI Jointly Files Intervention with APPA and NRECA in FERC Proceeding Involving Transmission Rules
Today the AAI signed on with the American Public Power Association and the National Rural Electric Cooperative Association in a motion to intervene out of time, saying FERC must consider competitive issues involving transmission rules proposed by the New York Independent System Operator.

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AAI Tells Court to Dismiss State Action Appeal (Teladoc v. Texas Medical Board)

The American Antitrust Institute (AAI) filed an amicus brief in the Fifth Circuit Court of Appeals urging the court to dismiss an appeal of a lower court ruling denying state action “immunity” to the Texas Medical Board in connection with an antitrust challenge to the Board’s rules limiting telemedicine in Texas.  If the court does not dismiss the appeal, AAI’s brief offers guidance on how the “clear articulation” and “active supervision” prongs of the state action defense should be applied to regulatory boards controlled by market participants in light of the Supreme Court’s recent decision in North Carolina State Board of Dental Examiners.

According to the brief, orders rejecting a state action defense should not be automatically appealable under the collateral order doctrine.  Rather, they should be treated like most other interlocutory orders, which can be appealed only under certain conditions, in the court’s discretion.   The brief argues that to the extent Fifth Circuit case law permits automatic appeals of state action denials involving a certain category of public officials, state boards controlled by market participants are not in that category.

If the Court of Appeals decides to hear the appeal, the AAI urges the court to carefully apply the requirement that the State clearly articulate a policy to allow the anticompetitive conduct at issue.  A prior Fifth Circuit decision, relied on by the Board, holds that a board’s general authority to regulate a profession clearly articulates such a policy.  The AAI argues that this case has been effectively overruled, however, and that the requisite legislative intent to displace competition is not clearly articulated in a general grant of authority. The anticompetitive conduct must instead be the “inherent, logical, or ordinary result” of the agency’s authorizing legislation.  The brief expresses doubt as to whether the Board has met that standard, particularly since the Board’s rules seem to ignore a legislative dictate to consider less restrictive alternatives.

As for active supervision, the AAI argues that, in theory, judicial review of agency rules may constitute active supervision if judicial review is sufficiently rigorous and may be readily obtained prior to the rule going into effect.  While there is some prospect that judicial review under Texas law would meet this standard, the brief contends that it is unclear whether such rigorous review would be likely and hence the Board failed to satisfy its burden of proof on this point.
The brief was written by AAI’s Rick Brunell and Randy Stutz, with able assistance from research fellows Michael Altebrando and Kyle Virtue and intern Jonathan Wright.

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AAI and Other Public Interest Groups Urge Supreme Court to Adopt Sensible Rule for Design- Patent Damages (Samsung v. Apple)

The American Antitrust Institute (AAI) filed an amicus brief with other public interest groups urging the Supreme Court to reverse a decision of the Federal Circuit Court of Appeals that unreasonably expands the value of design patents.  The ruling at issue requires that infringers of design patents pay damages in the amount of their total profits on an infringing article (here, smartphones), regardless of whether the design patent contributed to the value of the article, even if the infringement is innocent.

AAI joined Public Knowledge, the Electronic Frontier Foundation, the R Street Institute, and IP Justice to argue that the Federal Circuit ruling makes no sense because it vastly overcompensates design patent holders when a design patent covers only a small component of the overall design of an infringing article or the article is purchased primarily for its functional value.  The brief contends that such overcompensation would likely lead to reduced innovation on products like smartphones because it means that less compensation is available to the innumerable other innovators and patents that contribute to such products’ value.  And it likely will lead to a proliferation of trivial or minor design patents and abusive design-patent litigation by patent assertion entities.

The brief points out that the Federal Circuit’s interpretation of the design-patent damages provision of the Patent Act is not required by a plain reading of the Act and that the interpretation raises serious doubts as to the provision’s constitutionality.

The brief was written by Charles Duan of Public Knowledge.  It is available here.  For further information, contact AAI Vice President and General Counsel Richard Brunell.

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American Antitrust Institute, Food & Water Watch, and National Farmers Union Urge the U.S. Department of Justice to Challenge the Dow-DuPont Merger

In a letter sent today to the Principal Deputy Assistant Attorney General, Renata Hesse, the American Antitrust Institute (AAI), Food & Water Watch (FWW) and National Farmers Union (NFU) urged the U.S. Department of Justice (DOJ) Antitrust Division to challenge the proposed merger of Dow Chemical Co. and DuPont Co.

The letter details the group’s analysis of the proposed merger that would create the largest biotechnology and seed firm in the U.S. The deal would further consolidate an already highly concentrated biotechnology industry and would likely curtail innovation, raise prices, and reduce cultivation choices for farmers, consumers and the food system.

AAI, FWW, and NFU urge the DOJ to critically review the implications of the pending deal. The letter unpacks three major areas of concern, including eliminating head-to-head competition in the corn and soybean markets, reducing vital innovation competition, and creating a large, integrated “platform” of traits, seeds, and chemicals that would make it harder for smaller biotechnology rivals to compete.

The groups point out that aggressive consolidation in agriculture, specifically in the agricultural inputs sector, has changed the landscape for independent crop input companies as well as for independent producers. The current rumored or announced deals—including Dow-DuPont, ChemChina-Syngenta, and Bayer-Monsanto—would be a third wave of consolidation. Two previous merger waves eliminated the majority of small to medium-sized biotechnology R&D firms to create the Big Six—Monsanto, Syngenta, Bayer, DuPont, Dow and BASF.

“Any consolidation among the Big 6 agricultural biotechnology firms should raise significant antitrust concerns. We encourage the DOJ to move to stop it, as it has in other recent and unfixable mergers that would leave only a few large players,” explained AAI’s President, economist Diana Moss.

Investor documents note that elimination of duplicative research and development programs will contribute to the $1.3 billion in cost synergies produced by a merger of Dow’s and DuPont’s agriculture assets. But competitive R&D investments have been “crucial for driving innovation in an industry where the probability of commercial success is relatively low due to the time and cost associated with bringing a trait from research to market,” the letter explains.

“The Department of Justice must block this biotechnology mega-merger that would raise farmers’ prices and severely limit the choices for farmers, consumers and rural communities,” said Food & Water Watch executive director Wenonah Hauter. “Today’s wave of agribusiness and food company mega-mergers is surrendering our food system to a corporate cabal that thwarts our efforts to build an fair and healthy food system.”

The proposed merger would create a powerful duopoly between Dow-DuPont and Monsanto. Together, the two companies would control 76% of the market for corn and 66% of the market for soybeans, giving them the power to charge farmers higher prices and effectively decide which seeds farmers could plant.

“Seed costs are the highest input expense for farmers. While some of the cost can be attributed to more sophisticated technology, we have seen time and again that consolidation and market restructuring has increased the cost of crop inputs. In a lagging farm economy with multi-year trends of low commodity prices, additional cost increases for crop inputs could cripple a lot of family farms in this country,” said NFU President Roger Johnson.

The groups conclude that the proposed Dow-DuPont merger “would be difficult, if not impossible, to remedy.” The letter notes accumulating evidence on failed remedies in other mergers, the difficulty of finding viable buyers for divested assets, and the ineffectiveness of divesting assets to other members of the Big 6 firms.

The letter can be read in its entirety here.

Media Contacts:
American Antitrust Institute: Sarah Frey, 410-897-7028, sfrey@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 Asks Supreme Court to Hear Exhaustion Case (Impression Products, Inc. v. Lexmark International, Inc.)

The American Antitrust Institute (AAI) filed an amicus brief with a group of law professors urging the Supreme Court to grant certiorari and reverse a Federal Circuit Court of Appeals decision that sharply restricts the patent exhaustion doctrine.

The patent exhaustion, or “first sale,” doctrine provides that the authorized sale of a patented product exhausts the patent holder’s patent rights, and prohibits suits against downstream users for patent infringement.

In the case at hand, the district court held that the patent exhaustion doctrine prevented Lexmark, a printer manufacturer, from bringing patent infringement actions against a cartridge remanufacturer for reusing Lexmark toner cartridges obtained from consumers in violation of Lexmark’s “single use” notice.  At the same time, the district court held that patent exhaustion did not apply to Lexmark toner cartridges first sold abroad.

In an en banc decision, the Federal Circuit reversed and reaffirmed its prior decisions holding that the exhaustion doctrine does not apply to “conditional” sales; nor is it triggered when the first authorized sale is outside the United States.  The amicus brief argues that Federal Circuit ruling is inconsistent with recent Supreme Court precedent and threatens to undermine the competitive benefits that the exhaustion doctrine promotes.  In particular, the brief maintains that the “conditional sale” doctrine not only clogs commerce in patented products, but permits manufacturers to sue consumers for willful patent infringement for violating conditions printed on a product package.

The AAI had joined with the professors to file a brief in the Federal Circuit urging the court to uphold the district court’s decision.  It has long recognized the important role the exhaustion doctrine plays in facilitating competition in product markets driven by intellectual property, including aftermarkets.  In 2007, the AAI filed a successful brief in the Supreme Court in Quanta Computer, Inc. v. LG Electronics, Inc. urging the Court to reaffirm a robust application of the doctrine.

The brief was written by Phil Malone and Jef Pearlman of the Stanford Law School intellectual property and innovation clinic.