Antitrust

Antitrust enforcement is on the rise after more than a decade of decline, and the epicenter of all that activity is California. One of the largest price rigging cases in years was tried here recently. The state Supreme Court will hear a case grappling with pay-to-delay deals-when a patent holder pays a competitor to keep their product off the market-a subject of national debate. And mega-conglomerate Google is under a slew of antitrust investigations that rival those of Microsoft in the 1990s. Our panel of experts from Northern and Southern California discusses the issues. They are Julian Brew of Kaye Scholer; Kathleen Foote with California Department of Justice; Fredric Nelson of Nixon Peabody; Gary Reback of Carr Ferrell; Joseph Saveri of Lieff Cabraser Heimann & Bernstein; and Richard Williams of Holland & Knight. The roundtable was moderated by California Lawyer and reported by Krishanna DeRita of Barkley Court Reporters.

Moderator: What is new in antitrust litigation?

Reback: The Attorney General of California seems to be very interested in antitrust issues and after some false starts the Obama administration has begun to work aggressively in the antitrust area. Although private antitrust plaintiffs lawyers have had a difficult time in the federal courts because of Supreme Court decisions, they have been able to bring cases in the state courts, which they are doing vigorously in California. Attendance in antitrust conferences is setting all kinds of records.

Nelson: Not only within California is that true, but globally. Our New York office recently hosted a delegation of Chinese lawyers and government officials and they were very interested in talking with American lawyers about our laws and standards.

Foote: There has been greater interest in and validation of state enforcement by the courts and the bar since the Antitrust Modernization Commission's final report. That was the acid test for state AG enforcement on the national level. Since then my colleagues and I have experienced greater interest in and acceptance of the issues that state enforcement presents.

Brew: The cross-border and international enforcement we see is increasingly significant, as well as active enforcement on both federal and state levels. Companies need to be aware that different jurisdictions can have very different rules. There have been a lot of hardcore cartel investigations and prosecutions over the last several years, but recently there has also been activity in other areas, particularly affecting the tech industry, health care, and patent cases. Clients need to be aware that antitrust issues may arise in areas beyond what you typically might think about.

Saveri: The growth of antitrust competition law outside the United States raises the question of the extent to which there is convergence between the U.S. antitrust regime and those elsewhere. Will there be a pull back from the Chicago school, and will we view that as a phase antitrust law went through? Perhaps that means the post-Chicago analysis will become more widespread in the U.S., and the U.S. will move closer to the way people outside the U.S. think about competition law.

Brew: The nature of the tech industry has led to looking outside the typical Chicago market share, pure numbers analysis, looking instead at the impact on innovation, and role of smaller competitors in the market place. Other countries are becoming more involved in this, and there's also ongoing litigation and issues raised in the appellate courts on international enforcement using the Sherman Act, including both its jurisdictional reach and its merits reach.

Reback: The two main enforcers of antitrust laws are the Americans and Europeans. The Chicago school was a phase in American antitrust law that was both very economics oriented and very restrictive. Europe never went through that phase, and the net result is a convergence in our view of conspiracy law. What's unsettled is how to deal with unilateral conduct-attempted monopolization, monopolization, particularly monopoly maintenance. Historically these issues started in the U.S. Indeed, antitrust generally is an American idea that people picked up in other developed nations, adopting a statutory commitment to competition. But Europe, within the last decade, has been more serious about unilateral conduct than we have in the U.S.

Saveri: Europe and other places are perhaps approaching vertical restraints differently than American courts or regulators. Another area where the non-U.S. law is developing is in big, new industrialized economies, like Brazil and India.

Williams: We have a further challenge in the emerging world of state capitalism where government is a participant in the monopolistic industries. Responding to it requires negotiations and diplomacy more than conventional litigation. It's an increasingly big phenomenon for Brazil, India, and Russia.

Nelson: On another point, ten years ago, big law firms didn't usually take plaintiffs' cases in the antitrust field. Now our firm represents an opt-out in the LCD litigation, and it's fun and exciting stuff. I hear stories about the gargantuan sums that large firms are investing in those cases.

Moderator: What is the significance of the antitrust investigations into Google for tech companies and consumers in California? (Editorial note: Ms. Foote and Mr. Brew abstained from participation in this portion of the discussion.)

Reback: The biggest investigation in monopoly issues right now involves Google. It's very similar to the Microsoft case in the 1990s. (United States v. Microsoft Corp., 84 F.Supp.2d 9 (D.D.C. 1999) (findings of fact); 87 F.Supp.2d 30 (D.D.C. 2000) (conclusions of law); 97 F.Supp.2d 59 (D.D.C. 2000)(remedial order); direct appeal denied, 530 U.S. 1301 (2000); aff'd in part and reversed in part, 253 F.3d 34 (D.C.Cir. 2001)(per curiam).)

Google has a strong position in the search sector or market, including both free links and paid advertisements that you see when you conduct a search. Recent controversy over Google's handling of its strong market position has spawned investigations all over the world. Google is currently being investigated by the E.U., the U.S. Federal Trade Commission, at least a half dozen of the leading state enforcers in the U.S., including most prominently the California DOJ. Google is being investigated in Latin America, and emerging economies in Asia, including Korea.

The complainers about Google's conduct come from all over, especially Silicon Valley, but unlike the Microsoft situation, the entertainment industry is very concerned about Google's conduct, and the consumer protection groups in Southern California have put pressure on the federal government. These investigations, which I think will lead to litigation and prosecutions, will have an enormous effect on many California businesses.

Over the next year, we will see a complaint-a statement of objections-in Europe and very interesting actions in the U.S. through a combination of the Federal Trade Commission and these prominent states that have the capacity under our antitrust law to sue parens patriae.

Increasingly the private plaintiffs bar will be involved because of an alleged monopoly, and therefore an overcharge, for search ads. Damages claims for a class action for an overcharge for search advertising would be enormous.

Nelson: An important part of this equation is who is impacted. Google has been vertically integrating travel services, for example, and is doing this in many different areas. Emerging companies providing those same services will be acutely concerned about this investigation and whether Google is favoring itself over its competitors in searches.

Williams: Google has brought some of this upon itself, not just by the success of its search engine but by multiplying the businesses in which it participates. The acquisition of Motorola Mobility takes it into the hardware area. The licensing of the Android operating system with strict conditions places it in our cell phones and lots of other things. The overcharge on search ads. People poaching and whether there is a conspiracy to restrain skilled employees from leaving. This is not the Google of eight years ago. The EU investigation may give us their statement of objections within weeks: That may be the kick-off play for more litigation.

Saveri: Google's acquisition strategy of standard essential patents is an issue with which no one has much experience. The DOJ and others are feeling their way. The acquisitions are going to continue and there will be questions when Google or others acquire companies with substantial patent portfolios: Will they use the acquired patents for anticompetitive purposes? It has enormous impacts on Silicon Valley, competition, innovation, and ultimately consumer welfare. Gary [Reback], if you stack up the allegations and evidence against Microsoft, to what extent are there parallels with Google?

Reback: This looks like an instant replay to me. They both are in information technology, which has strong network effects and first mover advantages. The people in charge of Google, principally Eric Schmidt, understood perfectly the Microsoft game plan because they were victims of it. Google is accused of preferring its results for specialty searches like comparison shopping ahead of competitors' results and imposing penalties on competitors by dropping them off the first page or more. In terms of bad acts, stay tuned. I represent about ten companies in this area. We are principally arguing it is an instant replay. It is the same kind of conduct with the same intention with the same effect.

It will be interesting to see whether the government files suit in the District of Columbia to take advantage of the Microsoft court decision.

Joe [Saveri] mentioned the huge patent portfolio acquisitions by companies and in particular Google's purchase of the group in Motorola that owns tens of thousands of patents. The prevailing "wisdom" in D.C. seems to be that we should allow companies to make these big acquisitions under the theory of mutual assured destruction. Referencing the cold war days, that phrase is repeatedly used as justification for permitting these kind of acquisitions.

This issue has come to a head in the Motorola Mobility situation because Microsoft and Apple have publicly agreed, after urging from the U.S. DOJ, to license their acquired patents on so-called "FRAND" (fair, reasonable and non-discriminatory) terms. Google declined to make that kind of representation, causing continuing tension with the federal government. But in a world of mutual assured destruction among a few big companies, where does that leave the rest of us? Where does that leave the billion dollar companies or the two billion dollar companies that have a lot of technology but don't have 10,000 patents?

Williams: While mutual assured destruction may have prevented a nuclear war between the U.S. and the Soviets, as applied between one big guy and lots of little guys in the patent world, the missiles get fired. Portfolio acquisition can be a defense tool. Various companies have alleged that's why it was necessary for them to buy patents. But it's also an offense tool and can seriously curb innovation by smaller competitors who simply can't afford the chance that the patent protection they need is not sturdy enough to withstand global warfare from one of the big guys.

Nelson: This investigation hopefully will have significant impact on privacy protections and how personal data is handled. Some of the predatory marketing techniques that have been undertaken are likely to come out in this investigation. Hopefully not only in California, but elsewhere, we will have greater protection for our personal information.

Reback: There are similar investigations of Google involving breaches of privacy, including one that the Federal Trade Commission is expected to act on within the next week involving Google's alleged hacking of Apple's Safari privacy settings for the Apple browser. Of particular interest to antitrust lawyers is that conservative senators and others have said, "I really don't want to see the Federal Department of Privacy, so can antitrust enforcement help?" There's a vigorous debate to be had over whether antitrust enforcement is a workable means of ensuring privacy.

Moderator: What trial strategies helped or hindered the DOJ's ultimately successful criminal prosecution of AU Optronics Corp. (United States v. AU Optronics Corp., No. 09-CR-110 (N.D. Cal.).)?

Foote: It was a prosecution against a foreign company in which many key witnesses on both sides spoke English as a second language. That was used as a strategic trial tactic, and we may see more of this if more cartel prosecution of foreign companies takes place. It was used as both a shield and sword by the defense, which argued that words such as "consensus" have very different meanings in different languages. Witness credibility was also questioned when direct testimony was written in advance and submitted in English, but when the individual was cross-examined, they testified in their own language using an interpreter. An interesting DOJ strategy was the use of a summary witness. An FBI agent was put on the stand to pull together all the threads of the conspiracy for the jury to see what had transpired. The most troubling issue for DOJ was the defense theory that "agreement" requires more than your presence at meetings and the conclusions that the other attendees at the meetings might draw from your presence. That was an aggressive defense that ultimately did not work at this level.

Brew: Foreign language is often an issue in global cartel cases, and is significant; though these are hardcore cartel cases with allegations of price fixing agreements, statements made in meetings can be ambiguous. There are ways you can talk about prices and production that are not unlawful. Benchmarking is a good example. Sometimes communications are more ambiguous than their volume might suggest, especially in the high tech industry where the way language is used can be extremely important. A summary witness can potentially gloss over a lot of these issues in a document intensive case with hundreds of thousands of e-mails and may have been helpful for the government.

From the defendant's perspective, this was an extremely risky case to take to trial. Based on the jury's findings, there's potentially a billion dollar fine. It's also risky from the government's perspective because the DOJ hasn't tried one of these cases against a company in at least ten years. They've tried cases against individuals with a mixed record. But this trial demonstrates the power of the government in these cases and the amnesty program that DOJ has had since 1993, which is one of the main reasons they haven't had to try these cases.

Nelson: The defense was put in a very difficult position. They decided not to call any fact witnesses. If they had to call those fact witnesses, they would have had to take the Fifth Amendment, and I don't know which would have been worse. They were making a claim that they attended the Crystal meetings, but didn't agree to fix prices. They claimed they were simply trying to keep tabs on their competition. Where is the evidence to support that without witnesses? Secondly, the government decided to go with the alternate fine provisions, which permitted a fine in excess of the Sherman Act's $100 million cap (see 15 U.S.C. § 2). The government's economist testified that for a very short period of time the damages far exceeded $500 million. They argued that they could prove beyond a reasonable doubt that it's at least $500 million dollars because the economist said it's far greater than that, and so it eased their burden with regard to the damage issues.

Williams: It is not only a rare for the government to have a criminal trial in the antitrust area, but we have not used the trial process for as many extraterritorial cartels as we need to. We are in an increasingly globalized world and yet face a Supreme Court that is reluctant to see an enlargement of extraterritorial jurisdiction. Presently before the Supreme Court is an Alien Tort Statute (28 U.S.C. § 1350) case, Kiobel v. Royal Dutch Shell (621 F.3d 111 (2nd Cir. 2010), cert granted, 132 S.Ct. 472 (2011)(pending as No. 10-1491)), to answer the question: Under what circumstances, if any, may federal courts be a forum for trial of alleged violations of international law that took place outside the nation's borders? One of the principal AU Optronics' defense arguments is that any conduct happened over there in Asia, and really shouldn't be enforced over here.

Saveri: If one were an advocate for a restrictive interpretation of the U.S. antitrust law with respect to jurisdiction, this isn't a particularly good case to establish such a principle. The evidence shows that while many meetings in this case occurred in a number of Asian countries-Japan, Korea, Taiwan-it was clear there were tentacles of the cartel active in the U.S., including in the Bay Area. There was evidence that the targets of the conspiracy were American entities, including Dell, HP, and Apple. The purpose and the intent of the cartel were to fix prices with respect to American purchasers. It's a landmark case.

The trial of multiple defendants is an enormously powerful thing for the government. One only has to establish a very limited link to the conspiratorial activity to prevail, and this case shows that, even with the elevated criminal burdens of proof, these cases can be tried successfully. Juries can understand them, and the government can get convictions.

Brew: A big-ticket argument that may have led them to roll the dice is the issue of foreign conduct. It doesn't seem like a particularly sympathetic argument given how the evidence came out. With respect to the lack of evidence to rebut what happened at the meetings, they tried to fill that with an expert who basically said the proof is in the pudding. Yes they met, but their prices are lower than everyone else. As far as silver bullets, that might have been a good one for the jury but is unlikely to get you too far with an appeal. The issue is not whether you happened to price lower than the other people, but whether your prices would have been lower still if you hadn't had this conduct.

Williams: I've had a number of civil trials for Asian companies from different countries and the powerful sense of an executive is, "I did nothing wrong as I see it in my culture, and I am offended by your arrogance in cramming your crime down my throat." It's powerful and may have had a role in the choice to go to trial.

Foote: We may see more of that with increasing globalization and new enforcement regimes springing up around the world. I'm not certain that there are many, if any, others that will take a case like this to a jury.

Reback: We've been talking about the biggest conspiracy case in quite a while being tied to Silicon Valley. Then there's the Google issue. We'll get to the pay-for-delay issue now playing out in California. So although there are more antitrust lawyers on the East Coast than here, we've got much better things to work on.

Moderator: How will the California Supreme Court's decision over whether "pay for delay" in the Cipro case (In Re Cipro Cases I & II, 134 Cal.Rptr.3d 165 (2011), rev. granted, 137 Cal.Rptr.3d 248 (2012)(pending as No. S198616) constitutes an antitrust violation impact the practice area?

Saveri: Cipro is the short name for a powerful and effective antibiotic called Ciprofloxacin manufactured by the German company Bayer. In the context of the federal statutory scheme, the Hatch-Waxman Act (Pub. L. No. 98-417) provides incentives for an expedited path to get generic competition in the market. There was a piece of patent litigation in Delaware between Bayer and potential generic competitors, including Barr and others. Shortly before the trial was scheduled to begin, an agreement was reached under which Bayer agreed to pay the generics approximately $400 million in exchange for an agreement not to come to market. And the issue is whether that agreement between potential horizontal competitors is a violation of the antitrust law.

But that was just the beginning of a tale of woe from the plaintiffs' perspective in this case. The federal litigation ensued. It proceeded in the Southern District of New York. Summary judgment was granted for the defendants. It was ultimately upheld in the Second Circuit based on a prior decision involving a similar case involving Tamoxifen. This case is part of a larger series of cases involving so called "pay-for-delay" settlements, and there are differing interpretations of the extent to which this is a violation of the federal antitrust law. [See Rene Ciria-Cruz, "Patent Prescriptions," California Lawyer, Aug. 2010.] We are talking about this case right now because there was an indirect purchaser case brought under the California Cartwright Act (Cal. Bus. & Prof Code §§ 1672016761), challenging the Cipro agreement that we filed in San Diego. Ultimately, the San Diego trial court granted summary judgment for the defendants, essentially adopting the Tamoxifen ruling from the Second Circuit (see In re Tamoxifen Citrate Antirsut Litig., 466 F.3d 187 (2nd Cir. 2006)). The summary judgment was subsequently upheld by the Fourth District Court of Appeal. But in the last couple months, the California Supreme Court has granted the petition for review of the plaintiffs, who we represent. The issue before the California Supreme Court is whether this pay-for-delay settlement, in which a brand name manufacturer pays a generic competitor to stay out of the market, is a violation of the Cartwright Act.

Brew: If you have a generic drug manufacturer within the period of the patents, they really aren't a competitor to this product, so it begs the question to describe them that way. The issue courts grapple with in these cases is what to do when litigation raises uncertainty as to the validity of a patent? How can you settle and resolve those cases short of going to judgment, trial, and appeal? You can't try every case. What was of particular concern to the plaintiffs was not the fact that it was settled, but the way it was settled. This was the highest reverse payment settlement that's ever been made. It was a multiple of what the generic drug manufacturer expected to earn by manufacturing the drug had they won. Another bad fact is that right after the settlement, Bayer reportedly raised the price of Cipro some 16 percent to pay for the settlement.

But you can settle cases in many different ways, and they often are all about money. For example, you could have a license for the remaining term of the patent with a high royalty rate. So the issue here really is whether you can settle a case in this fashion that may have the same ultimate financial effect, but also has an impact on consumers. And if a subsequent court looks at it, how does it determine whether this was anticompetitive or a good faith way of settling a particular dispute?

Foote: The remedy is the core of the public policy issue here. The problem in this case, and in all those pay-for-delay cases, is that the solution to keep the second drug off the market and allow the first drug to maintain its monopoly essentially rewards the two disputants at the expense of the public. A licensing or royalty arrangement would split it to some degree between the public and the disputing parties. It has been demonstrated innumerable times that when there are two products the price is lower. If there are more than two, it's lower still.

My office filed a letter brief to the California Supreme Court urging them to look at the issue and not only because the Court of Appeal chose the Tamoxifen standard, which is one that we had argued against in several appellate briefs on a multistate basis in federal court, including in the federal Tamoxifen litigation itself. We also urged the California Supreme Court to consider some of the underlying public policy aspects of the Cartwright Act, which are more consumer protective and more explicit than the Sherman Act.

Williams: Bayer went on to make around $5 billion in sales of Cipro. A good chunk of our prescription medications are paid for through government programs, so the shear significance of billions of dollars multiplied by hundreds of drugs make this an incredibly powerful case and an extraordinary and exciting development for the California Supreme Court to have granted the petition. The Hatch-Waxman Act doesn't make any effort to cap reverse payments. It was simply trying to find a device that would enable generics to get into the marketplace faster. So we've created a monster and the all too easy willingness to look to preemption doctrine both in Tamoxifen and then by the Fourth District is unfortunate, even embarrassing. This is the wrong doctrine to use. There was never enough analysis given to what it means to preempt everything in either the Tamoxifen case or preemption in the Court of Appeal. If you wanted a doctrine, look at the prior proceedings and see if collateral estoppel, res judicata, or something of that sort could be narrowly used. For more than 40 years state courts have had to interpret patents. To say that's preempted and off limits to a state court was a most unfortunate distortion in the path of law, both in the Tamoxifen case and here.

Reback: As a society, we want people to invent and get patents, but it's also important that invalid patents get challenged. But in this situation, the patent holder pays somebody to go away. It is so counterintuitive, and yet there's a lot of federal law supporting it and the state proceedings come after a contentious period in federal antitrust. After repeated failed attempts at the federal level to get the issue before the U.S. Supreme Court, leaving these highly debatable standards in place, we now have action in the most important state court in the country. That the AG's office has weighed in on it asking the Court to render an opinion is enormously important

Moderator: Does the DOJ's settlement with Gunnison Energy Corporation (United States v. SG Interests I Ltd., No. 12-cv-395 (D. Colo., notice of settlement filed Feb. 15, 2012) signal an increase in the use of other statutes, such as the False Claims Act (31 U.S.C. § § 3729-3733) to resolve antitrust claims?

Williams: Antitrust comes around again and again to the same problems, but new solutions are brought to bear. In the '70s, municipalities were tied up with asphalt bid-rigging lawsuits. The division of a market by the bidders, some choosing to participate in a given contest and some choosing to stand aside and take their turn in the next contest was a constant theme and an important antitrust problem for years. It has resurfaced. Tony Gale was the vice president for Gunnison Energy, an oil driller in Western Colorado that bid on thousands of acres under his leadership. He left the company in 2007. Gunnison then sued Tony for violating a non-compete agreement. Tony became a whistleblower and filed a False Claims Act saying that Gunnison and others are making false statements when they bid for new mineral leases on oil and gas in Colorado. They certify that each bid is independent when in fact Gunnison and SB, a Texas based outfit, had negotiated a series of written memoranda setting up a bid program.

The government concluded that it was a classic Sherman Act violation for bid rigging. The Department of Justice brought its civil complaint under both the Sherman Act and the False Claims Act, which allows for treble damages recovery plus civil penalties and attorneys fees. The government was successful and settled with Gunnison and LC.

This is one in a series of similar cases where DOJ has been involved over the past year. Justice used the same combination of the Sherman Act and False Claims Act to resolve a bid rigging for a contract at a Mississippi Oceanography Station Lockheed (United States ex rel. Magee v. Lockheed Martin Corp., No.9-CV-324 (S.D. Miss..)(joint stipulation re dismissal upon settlement filed Oct. 17, 2011)). Another false claims case a couple of months ago involved Egyptian construction contracts that the U.S. financed back in the '90s that were mismanaged (United States ex. rel. Miller v. Bill Harbert Int'l Constr, Inc., No. 95-CV-1231 (D.D.C. order re dismissal pending settlement filed Mar. 20, 2012)). What ultimately brought the matter to conclusion that the judge called a tremendous victory of the government was using a combination of the Sherman Act (15 U.S.C. §§ 17) and the federal False Claims Act. I see a surge in the combination of these two tools, especially now that 30 states have adopted their own False Claims Acts (see Cal. Gov. Code §§ 14650-14656).

Nelson: A surprising aspect about this case is that Gunnison and SGI did not disclose their agreement. Otherwise, they could have made an argument that this agreement was pro-competitive, formed a joint venture and proceeded to bid on that basis.

Williams: There is a procedure if you want to make an open joint bid, and it will be unchallenged. So the mistake was in deciding not to tell anyone and certifying the bid as independent and non-collusive.

Foote: I've seen this in my office with the creation of a Medi-Cal fraud unit and a false claims unit. They are not part of the antitrust section. Our antitrust experience with criminal bid rigging-cases in state court is that when we go to a remote outpost to prosecute local bid riggers, we encounter a very unfriendly jury. The three times we've done that in the last 20 years we've lost. Another drawback to antitrust is that the nature of the agreement can be slippery, whereas when you signed on the dotted line certifying that your bid is uninfluenced by anyone else and it's not true, that's a pretty clear violation. n