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Antitrust Update

By Kari Santos | Sep. 2, 2009


Roundtable-Antitrust

Sep. 2, 2009

Antitrust Update

An update with Lieff, Cabraser, Heimann & Bernstein; Mintz, Levin, Cohn, Ferris, Glovsky & Popeo; and Perkins Coie.

Antitrust litigation is particularly timely, as the Obama administration has said it will rigorously enforce antitrust laws to maintain competitive markets. Many recent cases, such as In re Hydrogen Peroxide Antitrust Litigation (552 F.3d 305 (3d Cir. 2008)) and Pacific Bell Telephone Co. v. Linkline Communications (129 S.Ct. 1109 (2009)) have also kept antitrust issues in the headlines.

Our panel of experts discusses this along with other topics such as class certification, price fixing, and patent rights as seen through a variety of antitrust cases including McDonough v. Toys "R" Us Inc. (2009 WL 2055168 (E.D. Pa. 2009)); Leegin Creative Leather Products Inc. v PSKS Inc. (551 U.S. 877 (2007)); Quanta Computer v. LG Electronics (128 S.Ct. 2109 (2008)); and Bell Atlantic v. Twombly (550 U.S. 544 (2007)). They are Joseph R. Saveri of Lieff Cabraser Heimann & Bernstein; Robert P. Taylor and Michele Floyd of Mintz, Levin, Cohn, Ferris, Glovsky & Popeo; and Geraldine M. Alexis of Perkins Coie. California Lawyer moderated the roundtable, which was reported by Krishanna DeRita of Barkley Court Reporters.

MODERATOR: Does McDonough v. Toys "R" Us Inc. make the test for winning class certification more rigorous?

FLOYD: Since Rule 23 was amended in 2003, we've been seeing the circuits slowly starting to adopt a more rigorous analysis test. The courts have been more and more willing to examine evidence and actually resolve factual disputes on certification. Toys "R" Us illustrates the pinnacle of that trend. The court took Hydrogen Peroxide at its word, found facts, resolved disputes, rejected expert testimony, and granted certification.

SAVERI: From a plaintiff's perspective Hydrogen Peroxide was a decision that many people thought would represent a real sea change in how the class certification motions are briefed and how they are resolved on the merits. In Hydrogen Peroxide, the Third Circuit overturned class certification by the trial court. In Toys "R" Us, a trial court in the Third Circuit certified the class. Toys "R" Us was not just a horizontal Section One case. It was a decision where, despite Hydrogen Peroxide and any suggestions in the decision about a higher standard that might apply, the judge certified the class. From a plaintiff's perspective, Toys "R" Us is a very positive decision. In more straightforward Section One cases, while Hydrogen Peroxide may indicate a requirement of producing more expert testimony on certain issues, these classes are still going to be certified. Plaintiffs and the defendants frankly can't turn the class certification motion into a trial on the merits.

TAYLOR: Your use of the term "trial on the merits" prompts me to wonder about what happens as the Toys "R" Us case progresses towards trial. Will these findings be treated as findings on the merits as found by the trial court? The findings are probably not going to be binding on a jury, but they may well control the way in which the trial court looks at dispositive motions such as summary judgment motions. I am also curious as to what happens now to the experts whose testimony was rejected by the trial court in connection with the class certification. I have certainly seen cases where the court allowed some testimony as to prior proceedings as admissions of the party offering testimony.

SAVERI: What had once been considered to be procedural motions are turning into a very early litigation of the merits of the claims. That's kind of a mixed bag. If the plaintiffs prevail on these issues on a less-developed record fairly early in the case, it puts defendants in a much more difficult position than they would be otherwise would be. A decision like Hydrogen Peroxide can carry some mixed blessings.

ALEXIS: It will be interesting to see how this all affects the judge's inclination to bifurcate discovery between the class issues and the merits issues because it does seem that these are starting to meld together and the merits issues become relevant to class certification.

FLOYD: I think Toys makes bifurcation more difficult because it's harder to separate the substantive procedural issues now that we have a more rigorous standard. With this new trend the court is going to find a way to balance the procedural and substantive issues, so we don't end up with a quick look on the merits and a game-over situation at the class certification stage.

SAVERI: If the burden is one that requires an extensive factual showing, what that really means is it's going to be difficult to bifurcate discovery. It means substantial merits discovery will have to be taken. You will get very close to essentially completing all the discovery in the case and it seems to me in terms of litigation expenses and efficiencies, that's not necessarily a recipe to reduce litigation or litigation costs with respect to class certification.

TAYLOR: Defendants have usually tried to get as much of the merits of a case as possible into their opposition to a class-certification motion, because the differences between various members of the class relative to the merits of the case provide the best argument for the absence of the dominance of common issues of law and fact. From a defendant's perspective, class certification is enormously important, because as soon as a defendant is facing both a large class and the multiplication-of-damage claims that goes with the opt-out procedure, combined with the inability to procure summary judgment, that case needs to be settled as quickly as possible. So I see this Toys "R" Us case as more a defense-favorable trend in the law than plaintiff-favorable, despite the findings that the judge made in this particular case.

MODERATOR: The Hydrogen Peroxide ruling was in December. Have we seen its impact already on timing tactics, evidentiary record, and all that?

SAVERI: In virtually every case I work on, it is raised as an issue. In terms of results, we haven't seen much difference yet. It's too early to tell, but certainly from a plaintiff's perspective, we feel like we have to continue to develop fairly extensive records on these issues, and to have very well-developed expert reports. It has meant that the plaintiffs are doing their homework and really developing a stronger and more voluminous case on class certification. Now, again, in antitrust cases, which are ordinarily certified, I don't know that that really changes the results very much or will change them very much.

FLOYD: There are a few district court cases including those in the Ninth Circuit district courts that followed a Hydrogen Peroxide-like test before Hydrogen Peroxide was decided. But in those cases, the outcome was predominately certification. So Toys just adds to my curiosity as to how the courts are going to deal with this standard. I think it is fairly uncertain now as to how the standard is going to apply. But at the end of day, I'm not sure that it's going to have a huge impact on whether or not the class gets certified.

ALEXIS: Even if it might change the rules of the game, my experience is that the plaintiffs bar is very adaptable and they will just adapt and will come forward with the evidence that they need. They'll meet the standard and we will just move to another level.

SAVERI: The plaintiffs bar may have done itself a disservice in that it hasn't really stressed what was a historic rationale behind class actions. There's a strong tradition in the line of antitrust cases in particular, and in class actions more generally emphasizing the real value that private enforcement of antitrust laws can bring not only to the litigants, but to the economy as a whole. Even with increased enforcement by the DOJ or the FTC, there's generally under-enforcement of the antitrust law and the class-action device has presented an opportunity over time to remedy that.

MODERATOR: Looking at Pacific Bell Telephone Co. v. Linkline Communications, what are the ramifications of the Supreme Court's finding that price-squeezing claims cannot be considered under the Sherman Act?

ALEXIS: It was established jurisprudence that a price squeeze could be a violation of Section Two of the Sherman Act. Linkline has now said "No." The most significant thing about Linkline is its reliance on Trinko (Law Offices of Curtis V. Trinko v. Bell Atlantic Corp., 305 F.3d 89 (2d Cir. 2002)). The Ninth Circuit subsequently held "We can't follow Cascade Health Solutions v. PeaceHealth (515 F.3d 883 (9th Cir. 2008)) anymore. We have to follow Linkline," and now the question is whether the pricing is predatory. If it's not, there's really nothing you can do about it. (See John Doe 1 v. Abbot Laboratories, 2009 WL 1926322 (9th Cir. 2009).)

SAVERI: There's a part of the Cascade test that talks about how you measure costs in a monopoly leveraging case. That was one of the issues that was part of the appeal and part of the case. The court didn't have to address that because under Linkline it was pretty clear that the defendant should prevail. So I don't think that part of Cascade has been addressed.

FLOYD: The most interesting thing about Linkline is how it is going to apply to other conduct. It addresses a unique type of conduct, but I don't think that Linkline is going to be restricted to a price squeeze.

MODERATOR: How about the Leegin Creative Products Inc. v PSKS Inc. case? I know it was decided in 2007, but are we still feeling the ramifications of the fact that they overturned the per se rule prohibiting vertical-price fixing?

ALEXIS: One of the key issues with Leegin is that it's no longer per se illegal to have vertical price fixing. But it's not per se legal as you said. Then the question is how do you prove that it has an anticompetitive effect? And here is where I've seen the government and the plaintiffs bar again come to the realization of "If we can't just show something is per se illegal, we are going to show it has an anticompetitive effect." You can see that in some of the allegations in Toys "R" Us on class certification.

SAVERI: What Leegin is really about is the classification of the restraint. Is it a per se restraint that is judged under the rule-of-reason or something else? From a plaintiff's perspective, we handle a lot of rule-of-reason cases. They may be more difficult and impose more cost on the plaintiffs, but they are nonetheless cases that can be proved. You can get past summary judgment. You can get classes certified and you can get to a jury. So maybe Leegin changed the landscape, but a number of cases are proceeding as rule-of-reason cases.

TAYLOR: It is easier to see the anticompetitive impact on consumer welfare where you have a manufacturer coercing a group of distributors all to maintain a price than it is where you have a distributor who is trying to coerce the lowest price possible. If that is the form of coercion you are talking about, it is less anticompetitive than the other way around.

FLOYD: Applying Leegin to this type of conduct, if it's a retailer doing the coercion, it's going to be a more difficult battle than if it were the manufacturer.

TAYLOR: If you think back to the decision of the Supreme Court in the early 1980s in the Monsanto case, which made it much tougher for plaintiffs to take advantage of the per se rule in vertical price fixing cases-initially you saw a lot of distributors trying to bring rule-of-reason cases, but that fell by the wayside after a year or so. We haven't seen those cases for 15 years or so. My guess is the same thing is going to happen with Leegin if the decision holds.

MODERATOR: Does using the per se rule in vertical-price maintenance deny manufacturers control over distribution of their product?

ALEXIS: You don't want [a retailer] offering your product in a dingy, crummy place. You want to make sure that you can maintain the image that you are trying to create around your product. And sometimes that even means having a high price just because that gives a certain allure to your product. So to that extent, it's important that the manufacturer be able to perhaps control the price of the ultimate product.

TAYLOR: Since Continental T.V. Inc. v. GTE Sylvania Inc. (433 U.S. 36 (1977)), manufacturers have had the right to control major aspects of distribution and I don't think Leegin changes that. All Leegin really does is to eliminate what in the vast majority of cases were spurious claims by a terminated distributor and allows manufacturers to have rational policies related to their business needs. Leegin was the perfect case to take this issue to the Supreme Court, because it was a couple of young people that created a business where the only way that they could manage to get their product into the marketplace was to make sure that they controlled the way in which it was distributed.

FLOYD: All that Leegin did was take a type of vertical conduct that had been historically per se legal and moved it into the rule-of-reason analysis. It's not per se legal or illegal, but subject to the rule of reason and manufacturers can and still do exercise the control that they feel is appropriate and within the restraints of rule of reason.

MODERATOR: In Bell Atlantic v. Twombly, the Court stated that a pleading must present enough facts to state a claim for relief that is plausible on its face. This seems to reject the former standard that a claim needed to be merely conceivable. In the wake of this ruling are we now avoiding costs associated with groundless claims in which defendants can settle early just to avoid litigation?

SAVERI: Twombly is about pleading standards, and it certainly is a change from the previous cases. But at some level the litigants have adapted. Complaints have gotten a lot longer. More facts are alleged. Generally, in the antitrust context, Twombly has not resulted in wholesale dismissals of antitrust cases. My experience is that it's made it more burdensome at the pleading stage but hasn't affected the ultimate results in many cases that are filed.

TAYLOR: Even before Twombly we were seeing these lengthy complaints in antitrust cases, describing the industry and identifying all the players. The whole idea of notice pleading harkens back to a judicial philosophy in this country that started in the post-war era that once you told the other side what the case is about, the details would all come out in discovery. Then we went through a period when the costs associated with discovery became prohibitive and judges began to see that, "If I just open up the defendant's entire files to the plaintiff, that is going to be one enormously expensive case." If all you've alleged is that the parties are competitors, the defendant is a monopolist and the plaintiff is injured, if that's the only thing on the table, that's not a very good roadmap for the judge.

FLOYD: Twombly noted specifically that part of the rationale underlying the decision was the cost of discovery-particularly in antitrust conspiracy cases. The Supreme Court recently [made] it clear that that standard applies across the board to all pleadings in federal court.

ALEXIS: But I ask you, Joe [Saveri], do you think that Twombly has affected the scope and the amount of pre-filing investigation that a plaintiffs lawyer would do before filing a complaint?

SAVERI: In antitrust cases where lawyers are paid on a contingent basis, they have to choose their cases very carefully. Going into a meritless case may be a recipe for financial disaster. Even in so-called "big document" antitrust cases, judges, magistrate judges, special masters, and lawyers have become fairly sophisticated about managing the cost of discovery. The fact that the pleading standards were arguably low does not necessarily mean that there was discovery abuse. The biggest single effect of Twombly is that it has delayed the proceedings from progressing, because we now spend significant amounts of time fighting about the pleadings.

TAYLOR: I have a strong bias against 12(b)(6) motions, just in general, because they are rarely successful for very long. The plaintiff almost always gets a chance to amend and it gives the plaintiff a chance to think a lot more about the case. From a defense point of view, a 12(b)(6) motion has always struck me, except in the rare case, as a waste of time and actually counterproductive.

MODERATOR: Does Quanta Computer v. LG Electronics indicate that the Court is favoring a free market philosophy over patent holders' rights?

TAYLOR: Patent holders get the right to exclude others from making, using, and selling the patent invention. Going back to the early part of the 20th century, the court has said that the patent owner can slice that patent however it wants. It can say to someone "You can make and not do anything else, or you can use and not do anything else." So there has always been a relative degree of freedom for the patent owner to slice and dice the exclusive right anyway that it chose to do. We have a market-based system for compensating invention in this country. That's the way our patent system works. I don't read Quanta as limiting that right.

SAVERI: And it strikes me as a narrow decision that was written in a way to get all nine votes. There probably could have been a more broad decision of the type you discussed that could have been written. Perhaps that might have been in the mind of some of the justices of the Court that granted cert, but that's not what happened.

ALEXIS: But do you think that the Quanta opinion will result in more antitrust actions under Section Two of the Sherman Act, in response to a party's efforts to expand the scope of its power under its patent?

TAYLOR: It might. One of the concerns that I have thought about is whether or not this exhaustion issue will be picked up for the basis for misuse claims and at least one district court has already said no. The whole area of patent misuse was rampant starting in 1948 when the Supreme Court decided the Morton Salt case (F.T.C. v. Morton Salt, 334 U.S. 37 (1948)) until Congress in '88 put into place the provision in 35 U.S.C. section 271 (d), that basically said that unless the patent owner has market power, a tying arrangement will not be held to be patent misuse. Between those two dates, there was rampant use of the misuse doctrine to make patents unenforceable, and we haven't seen much of that since the late '80s or early '90s. But this exhaustion issue will certainly lead some defendants in patent cases to give it a try.

ALEXIS: Joe [Saveri], Robert [Taylor] has just given you a whole new area of antitrust cases you can pursue.

#280068

Kari Santos

Daily Journal Staff Writer

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