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Jul. 2, 2015

Antitrust Roundtable

An update with Arnold & Porter; Blecher Collins Pepperman & Joye; Joseph Saveri Law Firm; and Sidley Austin.

Without major federal antitrust rulings on deck this spring, our panel looked at where courts are heading in several areas of the law and how regulators abroad are enforcing antitrust rules. Also of interest to panelists were the Justice Department's continuing prosecutions of numerous auto parts makers and a reported new investigation into clearance agreements that movie studios reach with major theater chains about which will be allowed to show a movie in a given geography. Participants noted the denial of cert in two important potential conflicting cases regarding the Foreign Trade Antitrust Improvements Act (FTAIA), and they addressed whether the definition of market power should change.

California Lawyer met with Daniel Asimow of Arnold & Porter; Maxwell Blecher of Blecher Collins Pepperman & Joye; Peter K. Huston of Sidley Austin; and Joseph Saveri of Joseph Saveri Law Firm. The roundtable was reported by Cherree Peterson of Barkley Court Reporters.

MODERATOR: Let's start with the efficiencies defense to merger challenges. Is it still viable after the Ninth Circuit's ruling in February in St. Lukes, involving the combination of a nonprofit health system in Idaho with a for-profit physician group?

DANIEL ASIMOW: The St. Luke's Hospital decision is an interesting case. (See St. Alphonsus Med. Ctr.-Nampa Inc. v. St. Luke's Health Sys., Ltd., No. 14-25173 (9th Cir. Feb 10, 2015).) It's the Federal Trade Commission prevailing in a hospital merger case first in district court, then in a pretty thoughtful Ninth Circuit opinion. It's interesting in regard to geographic market definition, where the Ninth Circuit agreed the relevant market was limited to primary care physicians in Nampa, Idaho. And I'd say the Ninth Circuit casts some doubt on whether there is an efficiencies defense.

PETER HUSTON: And I think that is characteristic of a view that courts and antitrust agencies have had toward efficiencies. It seems to be very hard these days for any defendant in a merger case to make out an efficiencies defense, even though the antitrust agencies and the courts recognize that a merged firm often can operate more efficiently than the two firms could operate separately which can benefit consumers and competition.

ASIMOW: The Ninth Circuit in this case and federal district Judge [William H.] Orrick in the Bazaarvoice case both said that the efficiencies offered by the defendants were not merger-specific and rejected them on that ground (see United States v. Bazaarvoice (2014 WL 203966 (N.D.Cal.)). So the question going forward is how a defendant in a merger case proves the claimed efficiencies can't be realized in any other way.

JOSEPH SAVERI: That's right, and the preferred remedy still should be divestitures, and I don't think that's changed.

HUSTON: The main issue is - and Commissioner [Joshua D.] Wright at the FTC has commented on this - there is a disparity in the level and standard of proof required in court: Whereas the FTC and DOJ have to show that the merger could be problematic for competition, the merging parties are held to a much higher standard when they're trying to show efficiencies.

MODERATOR: What claims are regulators reportedly making about the Regal, Cinemark, and AMC chains, and what impact do you think they'll have?

SAVERI: They're just getting started. The claims have to do with clearance practices that were subject to some scrutiny a number of years ago but were largely ignored with the growth of multiplex theaters. Now with more building of independent movie houses, it looks like these practices have never really gone away.

MAX BLECHER: Hopefully the government will straighten out the completely ludicrous state of the law. Now, for a clearance to be illegal, there must be an adverse effect on competition. That is, the clearing theater has to be in competition with the theater being cleared so that there is a restraint. But if you have a clearance where there's no effect on competition, then somehow that violates the antitrust law. So, the clearance law stands antitrust on its head. I'm hopeful that the Justice Department will make some sense out of it so clearances that do restrain trade are subject to the Sherman Act. At the end of the day, the large exhibitors always seem to emerge ahead of the smaller competitors. And in today's world with the multiplex where there are 12, 14, sometimes 18 screens to keep busy, this is a serious problem for small operators.

MODERATOR: In another media case, where is the e-book price fixing case before the Second Circuit headed?

BLECHER: If only we knew. The oral argument in the appeal of Judge [Denise] Cote's decision in favor of the government and against Apple appeared to boil down to this: Whether the conduct she reviewed should be judged, as she did, by a per se standard or, as Apple contends, by a rule of reason standard. Of course, at the end of her opinion in the last paragraph she said something like even if I looked at this under the rule of reason, I'd come to the same conclusion. But she did not spell out how she would have dealt with Apple's justifications that by busting up Amazon's monopoly they invigorated the competitive process.

SAVERI: To me it's pretty clear that at least at the publisher level there were horizontal agreements on price, and that's a per se violation of the antitrust laws. I think it's also pretty well established that, even if an entity in a vertical relationship benefits from the conspiracy, that doesn't change the fundamental rule that horizontal agreements among competitors are per se violations.

BLECHER: From your lips to the judge's ears. Of course, Apple has said that the intercession of Leegin has changed that analysis and makes the whole thing vertical because they couldn't have achieved this result without Apple's vertical intervention. (See Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007).)

HUSTON: From listening to the oral argument it seemed pretty clear to me that at least Second Circuit Judge [Dennis] Jacobs was in Apple's camp. Judge [Debra] Livingston, on the other hand, seemed to be in the government's camp, whereas Judge Ray Lohier, it's hard to say. I think most folks might say he's mildly leaning towards Apple's view of things. It's tricky to predict how a court is going to rule. But I guess I can go out on a limb and say there's at least a 50 percent chance that Apple prevails. Judge Jacobs seemed to flip the script on the government. He basically was making Apple out to be a hero who was battling the big bad monopolist, played by Amazon.

BLECHER: I was going to say he wanted to give Apple a Congressional Medal of Honor for busting up Amazon's monopoly under which they charged people $9.99. The price after the agency weighed in was something like $14 or $15. Do you think a ruling for Apple just means a new trial?

HUSTON: Apple's lawyer argued that the government had its shot and chose the wrong standard and therefore the Second Circuit should rule in its favor and be done. I think that's a long shot. Their fallback position was, "at least send us to a different judge," and I don't know if they'll prevail on that.

BLECHER: The real question is if they look at the record, are they going to say, "Is this worth going through another year or two of trial and another appeal?"

MODERATOR: Are there any of the auto parts cases that are especially important to think about?

SAVERI: To me these cases, at least so far, haven't raised any novel antitrust issues or really pushed the antitrust law doctrine one way or the other. I think what's remarkable about the auto parts cases is how many parts in a car have been the subject of cartel activity.

ASIMOW: Yes, we haven't yet seen important decisions about the extra-territorial application of U.S. law, as we did in the LCD cases. Probably the biggest issue percolating right now in these cases is the calculation of fines and whether indirect purchases are included in that or only direct purchases. Of course there are a lot of private cases out there that are getting started, so we may see a lot of litigation in the next few years.

HUSTON: More than 50 individuals have either pled guilty or been indicted, along with 35 companies. And there have been more than $2.5 billion in fines so far. By those measures, it's certainly the largest antitrust investigation in DOJ history. The LCD case, as mammoth as it was, was not nearly as sprawling as auto parts. The LCD crystal conspiracy was one coherent conspiracy. I don't think anyone would argue there is one big grand overarching conspiracy covering all of the implicated auto parts.

MODERATOR: Did some of the same issues come up with respect to international price fixing as came up in the Seventh Circuit ruling in Motorola Mobility?

ASIMOW: Sure. And I think the issues are going to come up in auto parts as we get into the private litigation. In addition to the Seventh Circuit decision (Motorola Mobility v. AU Optronics, 773 F.3d 826 (7th Cir. 2014)), you also have to think about the Ninth Circuit criminal case (U.S. v. Hsiung, 758 F.3d 1074 (9th Cir. 2014)). They're certainly very different in tone. Judge Richard Posner's tone in the Seventh Circuit case is extremely hostile to the private antitrust action. The Ninth Circuit, in the criminal case, is pretty friendly to the government's claims. The Supreme Court just denied certiorari in both cases, so for now these will remain the leading decisions on the FTAIA.

MODERATOR: Are there any of the cartel cases in the EU that you would highlight?

ASIMOW: One that our office has been watching is the Innolux case, which is another LCD case that's before the European Commission. And the issue there is similar to the issue I alluded to with auto parts in the United States. It's how fines are calculated and whether the Commission can look at indirect sales as well as direct sales.

SAVERI: Actually, in a lot of ways, the more interesting things that are going on in Europe are abuse of dominance cases, which are analogous to our Section 2 cases. To me the big important cases are the cases that are going on with Google. There's the first case having to do with price-comparison shopping. The next has to do with Android. And it appears that there's going to be a series of other cases involving Google. Those cases show how different the European approach to enforcement of antitrust law can be in comparison to the U.S.

HUSTON: I'm interested in the trial of the bank trader who has been charged in the UK with being the "ringleader" of the Libor rate rigging scheme. That trial is going on now.

MODERATOR: As markets change and competition shifts, is it time to reconsider the definition of market power?

BLECHER: What started this inquiry was a law review article in the Notre Dame Law Review in November 2014 by Daniel Crane at the University of Michigan. (See 90 Notre Dame L. Rev. 31). The most striking of his statements is that the whole concept of market definition is on its way out and in the very near future, he predicts, it will be dead. He talks about the fact that the courts have butchered the whole area and don't really understand that the inquiry is not about market or market power in the abstract, but about the effect of conduct on competition. He said more and more courts are coming to the realization that this inquiry about market and market power, the metes and bounds definitions of market, is an undertaking that is futile.

I raise this because I think what is seen as reasonably substitutable changes from time to time and from person to person, as does how you define market power. If you have 30 percent, is that enough or do you need 36.7? And does that 6.7 really make a difference in the real world? And now what the courts are saying is to do away with all of that nonsense and go directly to the question and resolve it on what I'm calling the Indiana Dentist approach. (FTC v. Indiana Fed'n of Dentists, 476 U.S. 447, 460 (1986)). And I find that a fascinating development in antitrust law, however late it may be in the day.

ASIMOW: Yes, you certainly do see plaintiffs try to prove market power directly and not inferentially from high market share. But I still think courts want to see a well-defined market. This comes up at the motion to dismiss stage, where cases are dismissed for failure to plead in a plausible relevant market. In fact, I think we're seeing what used to be the evidence you needed to survive summary judgment on market definition becoming the evidence you need now just to state a claim and get by a 12(b)(6) motion.

HUSTON: I think the structural approach to market power, where it is basically inferred from the circumstantial evidence of high market shares in a defined product and geographic market, has been under attack for some years. The clearest evidence of that is the 2010 merger guidelines where both the DOJ and the FTC, with some fanfare, actually demoted or downgraded market definition as something that's important. It used to be that it was definitely the starting point in any merger analysis, and now they say it's just a factor in there somewhere.

MODERATOR: So is the pleading standard set forth in Twombly being abused (see Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007))?

ASIMOW: I don't know about being abused but it is certainly being used. Anecdotally, the rate of dismissals is up. There are some studies that show that the rate of dismissals has gone from the mid 40s to the mid 50s, and perhaps even higher in antitrust cases.

One interesting development is it's being applied certainly in the Northern District of California when plaintiffs now bring a motion to strike affirmative defenses because they don't have any facts and they don't comply with Twombly, and a number of district judges will strike affirmative defenses if they don't have plausible, factual underpinnings. So it is certainly being used. Whether it is getting rid of cases that otherwise would have gone forward and survived summary judgment, I don't know.

SAVERI: It's hard for me to recollect a single case since Twombly where a motion to dismiss was not made, but I don't think it's resulted in more cases being dismissed at the Rule 12 stage. Really, it just prolongs the litigation and makes it expensive for everybody, and I don't really see how it's really advanced the interest of justice.

BLECHER: That doesn't accord with my experience. I agree there's a Twombly motion filed now in every case. It's just a knee-jerk reaction. But I think the leave to amend is illusory. And Twombly has created a significant barrier, especially in cases where there's not a lot of public information available about an industry or participants, or the way it works, or the market shares. And you're doing the best you can based on information from the client.

HUSTON: It seems to me that plaintiffs are doing better lately when it comes to Twombly. For example, in the Evergreen Partner Group case in the First Circuit (Evergreen Partnering Group, Inc. v. Pactiv Corp., 720 F.3d 33 (1st Cir. 2013)), which I think was one of yours Max [Blecher], the district court granted a Twombly motion, but got slapped down by the First Circuit which said no, you did not analyze that motion correctly, so the plaintiffs were back in the ball game. And I've seen other cases, I'm thinking of one here in the Northern District of California, where there was probably a pretty legitimate argument for tossing it out and yet the court allowed it to go forward. And so that leads me to believe that the district courts are not being irresponsible in their use of Twombly and getting rid of meritorious cases.

MODERATOR: How is the use of expert testimony changing in antitrust cases?

ASIMOW: I think there are probably the same issues with experts in antitrust that you have across the board. Daubert challenges are now routinely brought, routinely considered. Experts are held to a more rigorous standard than they once were. It's not enough now just to have an expert report that articulates an opinion. The opinion has to be well grounded and based on sound methodology. This also relates to the topic we were just discussing about pleading an adequate complaint. For a plaintiff to plead an antitrust claim now, you may need to talk to an expert and not just to your client and provide some of the economic analysis in the complaint that in the past could have waited until expert reports were exchanged.

SAVERI: I do think one of the things Twombly has caused is that plaintiffs understand that doing some work with an economist or an expert as part of your pre-filing investigation is frequently money well spent in terms of getting past the pleading requirements.

BLECHER: All of it works against the plaintiff and diminishes the vigor of antitrust enforcement. And that's what Twombly and Daubert are all about. They make it harder to win and discourage people from bringing cases.

MODERATOR: Do the two recent U.S. Supreme Court decisions in Putney Health and North Carolina Dental Examiners involving state action immunity have important implications?

HUSTON: The Supreme Court takes so few antitrust cases, it's interesting to me that they've taken two recently that involve state-action immunity, which is not really in the heartland of antitrust law. But as a result of those cases, which both rejected the state-action-immunity defense, we've already started to see an increase in allegations against state boards. There is a case down in Texas brought by an organization called Teladoc against the state medical board (Teledoc, Inc., et al. v. Texas Medical Board, et al., 1:15-cv-00343-RP (W.D. Tex.). And LegalZoom has filed a case in North Carolina against the State Bar (LegalZoom.Com, Inc. v. North Carolina State Bar, et al., Case No. 1:15-cv-439 (M.D. N.C.)).

ASIMOW: I agree. In the LegalZoom case, the North Carolina Bar took action against somebody selling legal forms online and said that was unauthorized practice of law. A lot of things that bar associations do - as well as medical associations - may potentially be subject to challenge.

BLECHER: I'm gratified to see these recent decisions narrowing the exemption.

MODERATOR: What will be the impact of the state Supreme Court ruling for the plaintiffs in Cipro (In re Ciprofloxacin, 604 F.3d 98 (2015))?

ASIMOW: I don't think Cipro goes that much further than Actavis (see FTC v. Actavis, Inc., 133 S.Ct. 2223 (2013)). Actavis, of course, is the Supreme Court decision from two years ago that rejected the scope of the patent test and has led to quite a bit of litigation over Hatch-Waxman settlements. The Cipro case, which has been knocking around in California forever, was heard by the California Supreme Court this year. The plaintiffs asked the court to go further than Actavis and adopt a quick look or even a modified per se rule about reverse payment settlements. Although some justices did seem interested in that at the argument, they didn't go there.

SAVERI: Putting aside the facts of the case because it involves a species of cash-only reverse payment which is not seen very much today, a straight cash payment, the court did enunciate a structured rule of reason framework. So in a lot of ways while the California Supreme Court adopted the rationale of Actavis, at the same time it addressed a lot of questions that have subsequently come up in federal courts involving the application of Actavis - both in terms of what kind of agreements are reverse payments and how the issues that come up in Hatch-Waxman reverse payments cases are to be adjudicated. Another way Cipro is an anomaly is it's a pre-CAFA class action. If it were brought today, it would be in federal court.

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