Unilateral Conduct Committee E-Bulletin
Issue 55
August 31, 2007

The Section 2 Committee’s monthly E-Bulletin is intended to offer the antitrust community updates and information on the latest developments relating to monopolization law and policy. If you have any comments or suggestions on the E-Bulletin, please e-mail Jay Modrall (jmodrall@cgsh.com), Tanya Dunne (tdunne@cgsh.com), Adam Nyhan (anyhan@constantinecannon.com), Tracey Topper Gonzalez (tgonzalez@constantinecannon.com), Mitchell Stoltz (mstoltz@constantinecannon.com), and Daniel Streeter (dstreeter@rdblaw.com).

SIXTH CIRCUIT AFFIRMS SUMMARY JUDGMENT FOR DEFENDANT MANUFACTURER IN ESTROGEN PHARMACEUTICAL CASE

 J.B.D.L. Corp. v. Wyeth-Ayerst Labs., Inc., 2007 WL 1364624 (6th Cir. May 10, 2007). The defendant, Wyeth-Ayerst Labs., Inc. (Wyeth), manufacturers Premarin, a brand-name prescription oral estrogen replacement therapy (ERT). 2007 WL 1364624, at *1. ERTs are used treat women who have had hysterectomies and whose bodies no longer produce estrogen. The plaintiffs in these two consolidated cases were J.B.D.L. Corp. and McHugh Pharmacy Wynnewood, Inc., the named representatives in a certified class of drug wholesalers and retailers that purchased Premarin, and two opt-out plaintiffs. The plaintiffs alleged that Wyeth, a dominant incumbent, used anticompetitive rebates and other contractual arrangements with Managed Care Organizations (MCOs) to limit the growth of a rival oral ERT, Duramed Pharmaceuticals, Inc.’s Cenestin. Id. at *1-3. As a result, the plaintiffs claimed that Wyeth subjected them to increased prices for Premarin. Id. at *1. This conduct allegedly amounted to monopolization in violation of Section 2 of the Sherman Act. The district court granted Wyeth’s motion for summary judgment, holding that the plaintiffs could not causally link Premarin’s price increases to Wyeth’s allegedly anticompetitive conduct. Plaintiffs appealed, and the Court of Appeals affirmed. Id. at *9.

The parties agreed that the relevant product market was for oral ERTs. Id. at 1, n.3. The geographic market was not stated in the decision, but apparently was the United States. The parties also agreed on the following. From 1942 until 1999, Premarin was the only oral ERT in the market. Id. at *1. In 1999, Duramed introduced Cenestin as the market’s second brand. Between 1999 and 2003, over 70% of the oral ERT prescriptions written were for Premarin. Id.

Wyeth allegedly used restrictive contracts with MCOs to limit Cenestin’s distribution. Id. at *2. MCOs are not purchasers. Rather, they decide through the use of formularies – listings of covered medications – which brands may be prescribed for their members. Id. Drug manufacturers therefore seek to be included on MCOs’ formularies. Wyeth allegedly entered into agreements with MCOs under which Wyeth would rebate MCOs for naming Premarin and other Wyeth products in their formularies as exclusive covered brands. Id. Wyeth also allegedly tied the size of the rebates to Wyeth’s market share: a sufficiently low market share would result in the MCOs’ losing all rebates. Id. at *3. Wyeth thus allegedly incentivized MCOs to help it maintain its dominance.

Prior to Cenestin’s 1999 market entry, it was undisputed that Wyeth had raised Premarin’s price an average of 6.7% annually. Id. at *5. After 1999, Wyeth allegedly raised Premarin’s price an average of 15.8% each year. The plaintiffs claimed that the contractual arrangements described above made these higher price increases possible. Id. As evidence of the link between the conduct and the pricing, the plaintiffs offered a strategic analysis document in which Wyeth described various possible market share projections and hypothesized the effect of those scenarios on Premarin’s price. The court disagreed that this created a triable issue, stating that the plaintiffs offered no persuasive reason to infer that the document was evidence of a causal link between market share and price. Id. at *6. The court also noted that one of the plaintiffs’ experts at deposition conceded that the document did not prove a connection between market share and price. Id. at *6-7.

The plaintiffs also cited a statement by Wyeth’s expert that, in setting prices, a drug manufacturer considers the state of competition in the market and the competitive positioning of its own product against that of its rivals. Id. at *8. The court discounted this evidence, however, because the expert ultimately rejected the causal link between market share and pricing that was central to the plaintiffs’ Section 2 claim.

The Court of Appeals thus held that the evidence created no genuine issue of material fact as to the link between market share and Premarin’s pricing. Id. at *9. It affirmed the lower court’s holding that the plaintiffs lacked antitrust standing.

KENTUCKY COURT DENIES MOTION FOR SUMMARY JUDGMENT BROUGHT BY DEFENDANT PRINTER CARTRIDGE MANUFACTURER

Static Control Components, Inc. v. Lexmark International, Inc., 2007 WL 1310134 (E.D. Ky. May 3, 2007). The defendant, Lexmark International, Inc. (Lexmark), is a manufacturer of laser printers and toner cartridges for its printers. 2007 WL 1310135 at *1. Lexmark also sells remanufactured toner cartridges. Lexmark competes in the market for remanufactured cartridges with other companies who purchase parts from suppliers, take used Lexmark toner cartridges, repair and refill them, then re-sell them to end-user customers. Id. Lexmark runs a program that allows customers to buy cartridges at a discount in exchange for agreeing to use the cartridge only once and then to return the cartridge only to Lexmark. Id. at *2. In addition, Lexmark allegedly includes a microchip in its cartridges that prevent them from being remanufactured. After being added to the case through cross-claims by Lexmark, cartridge remanufacturers Wazana Brothers International, Inc. and Pendl Companies, Inc. (the Remanufacturers) asserted their own counterclaims, including that Lexmark monopolized the market for remanufactured Lexmark cartridges through, among other things, its cartridge return program and its use of a microchip designed to prevent remanufacturing. Seeid at *2-4.

The court first considered Lexmark’s argument that it should be shielded from antitrust liability because the allegations against it involved the enforcement of a valid patent. Id. at *6. The court rejected this argument, stating that “holding valid patents might make it more difficult to act in an anticompetitive manner, but it does not, conversely, necessarily preclude an antitrust violation or prevent a finding of anticompetitive behavior.” Id.

In regard to the Remanufacturers’ Section 2 monopolization claims, the court noted that the Remanufacturers must be able to demonstrate (1) the possession of monopoly power in a relevant market and (2) the willful acquisition, maintenance, or use of that power by anti-competitive means. Id. at *13. The court noted further that “the standard for monopoly power is, in fact, very high, and is typically defined by market share.” Id. at *14. The court also explained that where, as in this case, there is an allegation of aftermarket monopolization, the analysis is more complex “because market share data standing alone is not necessarily a reliable proxy for monopoly power.” Id. According to the court, in this situation, there are “special factors to consider” and “it is only when there are ‘significant information and switching costs’ that the ‘link between the primary market and the aftermarket’ is severed for monopolization purposes.” Id (quoting Eastman Kodak Co. v. Image Technical Services, Inc.,, 504 U.S. 451, 473 (1992) and Harrison Aire, Inc. v. Aerostar Int’l, Inc., 423 F.3d 374, 381 (3d Cir. 2005)).

The court determined that the Remanufacturers had presented a triable issue of fact as to whether Lexmark enjoyed monopoly power. Id. at *15. Comparing the case to Eastman Kodak, the court stated that summary judgment was found inappropriate in Eastman Kodak because questions of fact remained as to “supracompetitive pricing, indeterminate lifecycle costs, and high switching costs.” Id. According to the court, the Remanufacturers “submitted evidence that would satisfy three of these [Eastman Kodak] factors: that Lexmark controlled, at a minimum, 75% of the market for remanufactured sales and 80% of the overall market for Lexmark-compatible toner cartridges; that Lexmark was able to charge a higher price for its remanufactured cartridges than the remanufacturers charged; and that determining a life-cycle cost for a printer is nearly impossible.” Id. As a result, the court refused to find that the “market reality was such that Lexmark was not able to gain monopoly power.” Id.

Because Lexmark based its entire Section 2 argument on the issue of monopoly power, the court ended its analysis there, but also noted that there was evidence that Lexmark engaged in its cartridge return program to achieve total control over the remanufactured cartridge market. Id.

The court also considered whether the Remanufacturers properly alleged an antitrust injury. Id. at *16. The court summarized Lexmark’s position as follows: “No antitrust injury can flow from the [cartridge return program], since in the absence of that program, Lexmark would continue to attempt to obtain empty cartridges.” Id. The court rejected this argument for three reasons. First, the court stated that Lexmark’s argument compares analytically distinct injuries – one caused by an antitrust violation and another caused by open competition. Second, the court stated that Lexmark’s argument would require the court to depend on improper speculation that Lexmark is more efficient than its competitors, something the court was not willing to do in regard to a motion for summary judgment. Third, the court stated that Lexmark’s argument fails because it ignores the Remanufacturers’ Section 1 and Clayton Act claims regarding Lexmark’s arrangements with certain cartridge resellers. Id.

PENNSYLVANIA COURT, HOLDING FILED RATE DOCTRINE INAPPLICABLE, REINSTATES PRICE SQUEEZE CLAIM AGAINST ELECTRIC UTILITIES

Borough of Lansdale v. PP&L, Inc., 2007 WL 1461807 (E.D. Pa. May 16, 2007). The plaintiffs, fourteen Pennsylvania boroughs that buy electricity on the wholesale market, sued electric utility PP&L, Inc, and four related companies, alleging antitrust violations and breach of utility rate contracts (tariffs) approved by the Federal Energy Regulatory Commission (FERC). 2007 WL 1461807 at *1. The court granted summary judgment to the defendants on many of the claims, and the plaintiffs moved for reconsideration on the ground of clear error of law and fact. Id.

The plaintiffs had alleged two claims under Section 2 of the Sherman Act. First, they claimed that the defendants monopolized the sale of electricity in the wholesale market available to the plaintiffs. Second, the defendants allegedly created a price squeeze by charging the boroughs substantially higher prices for wholesale electricity than they charged commercial and industrial customers on the retail market. Id. at *2-3. The court’s grant of summary judgment to defendants on both Section 2 claims turned on its decision that the filed rate doctrine barred these claims. Id. The plaintiffs also brought a Sherman Act Section 1 claim and contract claims. The motion for reconsideration concerned only the price squeeze claim, the Section 1 claim and the contract claims.

The court first considered whether the filed rate doctrine barred the price squeeze claim. That doctrine bars suits based on rates that have been filed and approved by federal or state agencies. Id. at *3. The plaintiffs claimed that while FERC approved the defendants’ wholesale rates, a state utility commission approved retail rates. Therefore, they argued, a Section 2 claim based on the “interaction” between the two rates should not be barred by the filed rate doctrine. Id. at 2. In other words, where the alleged anticompetitive activity was not fully under the jurisdiction of either state or federal regulators, the plaintiffs argued that a judicial remedy would not usurp the regulators’ authority. Id. at *4.

With no guidance from the Third Circuit on this issue, the court surveyed decisions from other circuits. The Seventh and Eighth Circuits hold that “price squeeze claims are not barred by the filed rate doctrine” when anticompetitive effects are caused by the interaction of wholesale and retail rates which, taken alone, appear reasonable to regulators. Id. at *5-*6 (citing City of Kirkwood v. Union Electric Co., 671 F.2d 1173 (8th Cir. 1982); City of Mishawaka v. Indiana & Michigan Electric Co., 560 F.2d 1314 (7th Cir. 1977). The First Circuit, in contrast, holds that crafting any kind of relief would require judicial modification of tariffs approved by regulators with superior knowledge of competitive conditions in the industry. Id. at *6 (citing Town of Norwood v. New England Power Co., 202 F.3d 408, 418 (1st Cir. 2000)).

The court noted that the Supreme Court had applied antitrust law to regulated electric utilities in 1973 and held that the trend towards deregulation of that industry since that time warrants a “larger role” for antitrust enforcement. Id. at *8 (citing Otter Tail Power Co. v. United States, 410 U.S. 366 (1973)). Here, the court held, neither FERC nor its state counterpart had jurisdiction over both wholesale and retail electricity rates. Id. at *9. It was therefore possible, in the court’s view, for a utility to manipulate its filings so as to cause a price squeeze. Id. The court also concluded that an award of antitrust damages would not prevent either the state or federal energy regulators from approving or prescribing rates. Id. The court therefore adopted the approach of the Seventh and Eighth Circuits and held that the filed rate doctrine did not bar the plaintiffs’ price squeeze claim, reversing its prior grant of summary judgment for defendants. Id. at *7.

D.C. CIRCUIT DENIES MOTION TO DISMISS LAWSUIT BETWEEN RIVAL ADULT KICKBALL ORGANIZATIONS

WAKA LLC v. DC Kickball, 2007 WL 1549091 (D.D.C. May 25, 2007). The plaintiff, World Adult Kickball Association (WAKA), filed an action for copyright infringement and defamation against defendant DC Kickball, a rival adult kickball organization. 2007 WL 1549091 at *2. WAKA claimed that it had published unique rules for adult kickball and that DC Kickball had illegally copied these rules. DC Kickball filed a counterclaim alleging violations of Section 2 of the Sherman Act claming that WAKA filed a “baseless action for copyright infringement in an attempt to impermissibly expand the scope of protection for their kickball rules.” Id. at *3. Plaintiff moved to dismiss the counterclaims. Id. at *2.

The court analyzed whether DC Kickball had sufficiently alleged an antitrust injury. Id. at *3. DC Kickball alleged that WAKA had brought a baseless action with the intent of unreasonably restraining trade and inhibiting competition in the adult kickball league market. Id. Based on these allegations, the court found that, given the liberal pleading rules, DC Kickball had properly alleged an antitrust injury. Id.

The court went on to discuss the sufficiency of DC Kickball’s Section 2 allegations. Id. at *4. DC Kickball alleged both monopolization and attempted monopolization, arguing that WAKA possesses monopoly power in the relevant market and brought its lawsuit against DC Kickball to inhibit competition. Id. The court noted that DC Kickball’s allegations invoked the sham litigation exception to the Noerr-Pennington doctrine. The court explained that Noerr-Pennington immunity has its limits in that “a plaintiff who pursues a ‘sham’ petition or litigation solely for the purpose of interfering directly with the business relationships of its competitors is not entitled to immunity and may be sued for an antitrust violation.” Id. at *5. Moreover, the court noted, “courts have recognized a ‘sham litigation’ counterclaim as a cognizable cause of action for violation of the Sherman Antitrust Act.” Id.

The court found that DC Kickball had successfully stated a claim within the “sham litigation” exclusion by alleging that WAKA filed a baseless claim with the intent of inhibiting competition. Id. The court also upheld DC Kickball’s attempted monopolization claim, finding that its allegations of WAKA’s market power over the market for organizing and on conducting adult kickball leagues, coupled with the “sham litigation” allegations, sufficiently stated the claim. Id.

After deciding that DC Kickball had alleged enough to survive WAKA’s motion to dismiss the Section 2 counterclaims, the court stayed all proceedings on the counterclaims pending resolution of WAKA’s copyright infringement action. Id. at *6.  

AGENCIES CONCLUDE JOINT HEARINGS ON SECTION 2 POLICY

 On May 1 and May 8, the United States Department of Justice’s Antitrust Division and the United States Federal Trade Commission held the final hearings in their series of twelve on Section 2 policy. These two hearings sought panelists’ concluding thoughts on the highlights of the series. Summaries of all of the hearings, prepared variously by Amanda Wait and Maria DiMoscato of the Commission, Devin Sullivan of Hogan & Hartson and Christina Brown of O’Melveny & Myers, are available here.

COURT OF FIRST INSTANCE UPHOLDS COMMISSION DECISION FINDING AN ABUSE OF A DOMINANT POSITION IN GERMAN WASTE COLLECTION

On May 27, 2007, the CFI confirmed a Commission decision against Der Grüne Punkt-Duales System Deutschland GmbH (Grüne Punkt) for abuse of a dominant position in a pair of judgments (see Case T-289/01 and Case T-151/01). The case concerned the removal of waste packaging from the public waste disposal system—required by German law. Grüne Punkt operated the only nationwide collection service for waste packaging. It negotiated contracts with manufacturers and distributors to affix the Grüne Punkt logo to all materials to be collected, even if participating businesses chose different, regional collectors or an alternate method of waste removal. The Commission found that this mandatory fee obstructed the entry of competitors into the market for waste packaging collection due to the cost associated with using a collector other than Grüne Punkt (see IP/01/584) .

Grüne Punkt lodged an appeal with the CFI to annul the decision. In its two separate judgments on the matter, the CFI upheld the Commission’s decision, maintaining that (i) the Grüne Punkt marking does not retain the important role claimed by Grüne Punkt in its waste collection system and (ii) the mandatory marking system dissuades packaging manufacturers and distributors from selecting competing collectors of waste packaging.

EUROPEAN COMMISSION INITIATES PROCEEDINGS AGAINST GAS SUPPLIERS

On May 11, 2007, the Commission initiated proceedings against ENI Group, an Italian energy company, concerning alleged exclusionary behaviour. 2006 inspections of ENI and ENI subsidiaries in Italy, Austria and Germany yielded evidence of capacity hoarding and strategic underinvestment in the transmission system. This would have the effect of foreclosing competitors—harming competitors and consumers in Italian energy supply markets (see MEMO/07/187) .

The Commission also opened proceedings against RWE Group, a German energy company, concerning possible market foreclosure in North Rhine-Westphalia. Commission investigations of RWE in 2006 led it to suspect the German energy supplier of abusing its dominant position in regional markets for the transport and wholesale supply of gas by obstructing third-party access to its gas transport network. Alleged obstruction entailed artificially high prices charged for access to RWE-operated gas networks, inflation of the transmission system operator’s costs and failure to release transportation capacity to permit customer switching. This would harm consumers by raising the costs of rivals and diminishing the ability of new entrants to access the German gas transport infrastructure (see MEMO/07/186).

COURT OF FIRST INSTANCE HEARS DEUTSCHE TELEKOM APPEAL

On May 5, 2007, the CFI heard Deutsche Telekom AG’s (DT’s) appeal against a Commission decision fining the company €12.6 million for abuse of its dominant position in the German telecommunications market. The Commission found that DT blocked new entrants to the market and prevented the development of competition by charging high prices and blocking competitors’ access to local telephone networks (see Case COMP/C-1/37.451).

At the hearing, DT argued that its prices were approved and fixed by the Bundesnetzagentur—the competent German regulatory authority. It contended that the Commission exceeded its discretion by infringing on the Bundesnetzagentur’s post and telecommunications competency and attempting to correct the way in which contested fees were regulated. If the Commission was not satisfied with the prices fixed by the authority, it would have been more appropriate to file a complaint against Germany and the regulatory authority rather than DT, which is not in a position to change the local access prices. DT further argued that its cost/price discrepancy method was neither appropriate nor sufficient to support the Commission’s view that its final customer fees were anti-competitive, and that the Commission’s method of analyzing the discrepancy was misconceived.

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Jay Modrall
Vice-Chair, Unilateral Conduct Committee
Cleary Gottlieb Steen & Hamilton LLP
Rue de la Loi 57
B-1040 Brussels
+32 (0)2 287 2024
jmodrall@cgsh.com

Adam Nyhan
Constantine | Cannon LLP
450 Lexington Avenue
New York, N.Y. 10017
(212) 350-2772
anyhan@constantinecannon.com

Tanya Dunne
Cleary Gottlieb Steen & Hamilton LLP
Rue de la Loi 57
B-1040 Brussels
+32 (0)2 287 2057
tdunne@cgsh.com

Tracey Topper Gonzalez
Constantine | Cannon LLP
450 Lexington Avenue
New York, N.Y. 10017
(212) 350-2712
tgonzalez@constantinecannon.com

Mitchell Stoltz
Constantine | Cannon LLP
1627 Eye Street NW
Washington, DC 20006
(202) 204-4523
mstoltz@constantinecannon.com

Daniel Streeter
Ross, Dixon & Bell, LLP
5 Park Plaza, Suite 1200
Irvine, CA 92614-8592
(949) 622-2717
dstreeter@rdblaw.com