The Antitrust Attorney Blog

The Seventh Circuit Explains the “Co-Conspiracy Exception” to the Illinois Brick Rule in Healthcare Antitrust Lawsuit

September 15, 2020 | Bona Law PC

Antitrust law evolves in such a way that opinions from federal appellate courts are always interesting in how they affect the doctrine. But there are a select few judges who earn even closer attention when they write an antitrust opinion. Judge Diane P. Wood of the United States Court of Appeals for the Seventh Circuit is one of those judges.

Update: Justice Amy Coney Barrett is also part of the Seventh Circuit panel for this decision, along with Judge Michael Stephen Kanne.

In Marion Healthcare, LLC v. Becton Dickinson & Company, the Seventh Circuit, through Judge Wood’s opinion, effectively articulates the co-conspiracy exception to the Illinois Brick rule. The opinion is significant not because it marks a departure in the prevailing law, but because it explains it so well. This is an example of an opinion that courts and attorneys will likely cite in the future when this issue comes up.

So I thought it would be helpful to tell you about it.

Indirect Purchasers and Illinois Brick

You might need a little bit of background first. The indirect-purchaser rule—derived from a Supreme Court decision known as Illinois Brick—prohibits indirect-purchaser plaintiffs from suing for damages under federal antitrust law. This typically arises in a class action, but the doctrine isn’t limited to class cases.

We discuss the indirect-purchaser rule in more detail in a two-part article:

Indirect Purchaser Lawsuits, Illinois Brick and Apple v. Pepper (Part 1): This article describes the background and basics of the indirect-purchaser prohibition.
Apple v. Pepper, Indirect Purchaser Antitrust Class Actions, and the Future of Illinois Brick (Part 2): This article describes the Supreme Court’s recent Apple v. Pepper decision and what it means for the future of Illinois Brick and the indirect-purchaser rule.

If you haven’t already read those two articles, go read them and come back. We will wait for you.

Marion Healthcare, LLC v. Becton Dickinson & Company

Healthcare markets are complicated, distorted, and a little bit confusing. The government plays a major role, which distorts markets. In addition, there are so many layers of entities that participate in every aspect of healthcare that the markets aren’t always easy to unpack. And, of course, insurance companies pay much of the costs, but the decisions on spending are a combination of patients, insurance companies, doctors, governments and healthcare facilities, among others.

In this case, plaintiffs are healthcare companies that purchased medical devises from Becton Dickson & Company. But they don’t purchase them directly from Becton. Instead, they and other purchases rely on a GPO to negotiate prices with Becton (and other manufacturers). Once the GPO and manufacturer reach an agreement, the company that needs the supplies can accept or reject it. If they accept it, they actually purchase the product through a distributor (pursuant to the GPO-negotiated contract), who then enters contracts with both the purchaser (the healthcare provider) and the supplier (in this case, Becton).

You might anticipate at this point that figuring out whether the plaintiff is a direct purchaser could get confusing.

In this case, plaintiffs alleged that Becton (the supplier), the GPOs (that negotiated the deal), and the distributors were all part of the conspiracy, engaging in a variety of anticompetitive conduct, including exclusive dealing.

The district court dismissed the case, holding that the conspiracy rule (more on that below) didn’t apply because the case didn’t involve simple vertical price-fixing.

The Seventh Circuit held that the district court erred.

The Co-Conspirator Exception to Illinois Brick

For the Court to apply Illinois Brick, it must determine which entity is the seller and which entity is the direct purchaser. As you might recall, the Supreme Court grappled with this in Apple v. Pepper.

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Antitrust, Antifragility, Blockchain, and the Department of Justice

September 12, 2020 | Bona Law PC

Author: Jarod Bona

I suspect that Antitrust DOJ head Makan Delrahim and I have had a similar reading list lately. And I am not even referring to any sort of antitrust books, like, for example, Steve Cernak’s book on Antitrust in Distribution and Franchising.

Let me explain.

I read, with great interest, a speech that Assistant Attorney General Makan Delraihim delivered on August 27, 2020 to the Conference on Innovation Economics in Evanston, Illinois (well, virtually).

His two topics were blockchain and Nassim Taleb’s concept of antifragility.

As a consistent reader of this blog, I trust that you already know that I am a big fan of Nassim Taleb and, particularly, his book, Antifragile: Things that Gain from Disorder. Indeed, a re-reading of Antifragile inspired an earlier article about Iatrogenics. If you haven’t read Antifragile, you should, right away.

My interest in blockchain, Bitcoin, and other cryptocurrency systems like Ethereum is relatively recent. But—like many before me—a little bit of knowledge has created an insatiable appetite for more. I am making my way down the rabbit hole, as they say.

Let’s dig in and talk about what the Department of Justice thinks about both antifragility and blockchain.

Antifragile

What does the term “antifragile” mean?

You might think that robust is the opposite of fragile. But those of us that have read Taleb know that isn’t true. Something that is fragile is likely to break or weaken from stress, shocks, or variability. If something is robust, it will resist this stress, shock, or variance.

But what you really want during times of stress (or, really, just over time), is antifragility. If you are antifragile, you improve from stress, shocks, and variance, which are inevitable, especially as time passes.

The human body is, in some ways, antifragile. Lifting weights, for example, creates a stressor on the muscles and surrounding tissues, which cause, ultimately, an increase in strength. So make sure you get your deadlifts in this week.

Antifragile is the opposite of fragile and it is better than robustness.

There is a lot more to antifragility than this. Indeed, there is an entire book about it (and, really, a set of books—Incerto). I urge you to read more—it might change your life.

Earnest Hemingway understood antifragility when he said in A Farewell to Arms that “the world breaks everyone and afterward many are strong at the broken places.” The next line is just as important for reasons you will understand if you read Antifragile: “But those that will not break it kills.”

So, what does antifragility have to do with the Department of Justice and antitrust?

Assistant Attorney General Makan, in his speech, emphasized that “the Antitrust Division has made protecting competition in order to advance innovation in the private sector one of our top priorities,” and that the Division wants to “ensure that antitrust law protects competition without standing as an impediment to rapid innovation.”

He then introduced the concept of antifragility and acknowledged that the pandemic can certainly be described as a “shock” producing a “wide array of trauma.” But with that harm comes an opportunity—“if we rise to the challenge of being antifragile, there is also an opportunity for tremendous growth.” More specifically, “[c]ritical innovations and technological developments often result from the kind of extraordinary experimentation the pandemic has made necessary. We have the opportunity to embrace antifragility, to delve into the experimentation and trial and error that drive growth, and to make ourselves better.”

According to AAG Makan, “[o]ur goal at the Antitrust Division is to extend the spirit of innovation beyond our latest efforts to combat the pandemic and protect competition—ultimately, to become antifragile.”

The market system—competition—is, of course, an antifragile system because it improves with variance over time, including shocks and stresses. As problems arise, the market provides solutions. As new preferences arise, the system meets those preferences. As demands for certain products or services decrease, resources move away from those areas. Indeed, the “heart of our national economy has long been faith in the value of competition.” And the purpose of the antitrust laws is to protect that competition.

I am pleased to read the DOJ Antitrust leader expressly affirm those values and I have no doubt that he believes them—you can’t read and quote Taleb and not be affected.

But let’s remember that large central government is not typically the friend of antifragility. Indeed, government interference is more likely to distort incentives and the market’s ability to adjust to stressors. It can also lock-up parts of the system and increase fragility.

When a knocking on your door is followed by a shout of “I am from the government and I am here to help,” your heart should feel fear not relief.

I view the antitrust laws, if applied with restraint, as similar to contract, property, and tort laws. They provide the rules of the game that allow the market to prosper. Failure to apply any of them uniformly or fairly harms the beneficial potential of markets and competition. But over-applying them does the same. Like much of life, sometimes the answer is complicated and doesn’t fit into a single tweet.

Government enforcers can, however, stay on the right track if they have in their mind the rule that doctors often forget: “First, do no harm.” Antitrust enforcement, like medical intervention, can be iatrogenic.

Blockchain, Bitcoin, and Cryptocurrency

The DOJ Antitrust Division’s attorneys have formally educated themselves on blockchain and other technologies. And, like me, once they started learning about it, they probably realized what a big deal it truly is.

My worry, frankly, is that the government is going to somehow screw it up.

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Do We Still Have “Faith in the Value of Competition”?

August 31, 2020 | Bona Law PC

Author: Steven J. Cernak

As I prepare again to teach an antitrust survey course, part of the preparation involves rereading some of the classic foundational U.S. antitrust cases. Many of them make some sweeping statements about how the Sherman Act embodies a national policy to order our entire economy through competition. “The heart of our national economic policy long has been faith in the value of competition” comes from Standard Oil in 1911. The Court went even further in 1958 in Northern Pacific Railway:

The Sherman Act … rests on the premise that the unrestrained interaction of competitive forces will yield the best allocation of our economic resources, the lowest prices, the highest quality and the greatest material progress, while at the same time providing an environment conducive to the preservation of our democratic political and social institutions.

Twenty years later in Professional Engineers, the Court described an argument that asserted competition might be unethical as “nothing less than a frontal assault on the basic policy of the Sherman Act.”

Were such broad statements true then? Do they remain true now? Is the Sherman Act “the Magna Carta of free enterprise” as the Court asserted in Topco in 1972? After all, we have had exemptions, both legislative and court-made, for decades. But even beyond those official exceptions, there are plenty more examples of our frequent desire for experts, not the competitive process, to supersede market outcomes.

One personal anecdote helps illustrate the point. I have been involved in the ABA Antitrust Law Section for decades. The ABA, like any good trade association of competitors, has its own counsel to ensure that it does not run afoul of the antitrust laws. Years ago, however, when my day job was in-house antitrust lawyer at General Motors and my ABA assignment involved antitrust aspects of trade associations, I was asked by the Section to lead a compliance presentation for another ABA group consisting of several law school admission deans.

Our presentation started with the antitrust basics for trade associations: The antitrust laws want to preserve competition among competitors, Sherman Act Section 1 is suspicious of agreements among competitors, trade associations are gatherings of competitors where such agreements can be reached, and law schools compete with each other in various ways, including to attract students.

After about fifteen minutes, one of the deans raised his hand and posed this hypothetical: Some students change schools between first and second year. Such transfers are not good for the student – usually, any issues leading to a transfer go beyond a particular school and the student should try to get help with any underlying concerns. But the transfers also hurt the law schools – after all, we have spent considerable time, effort, and money to make that student one of ours and transfers destroy that investment. So, could this ABA group make it unethical for law schools to solicit, or even accept, most transfer students?

My fellow presenters were taken aback and silent for a few seconds. Had this dean not been listening when we had said a few minutes earlier that agreements not to compete among competing members of a trade association were antitrust violations? Finally, I broke the silence. I did a facepalm and said “D’oh! What a great idea! Why didn’t we think of that? We could have gone to Toyota thirty years ago and said ‘you know, we spent considerable time, effort, and money to make those current Chevy owners ours and you selling to them will just destroy that investment. How about we agree that you will only market to folks who have never purchased a car?’”

It took a few seconds but then the lightbulbs went off over the heads of the audience: Yes, the competitive processes for legal education might be a little different than those for motor vehicles, but that competition still exists and antitrust law is designed to protect it. Any agreements to short-circuit that process by having experts at the competitor-suppliers determine the customer’s best interest would be at least suspect. My GM clients would have understood that my Toyota hypothetical was an antitrust problem. Why didn’t this law school dean?

Was it because the deans saw themselves as “professionals” and so in some way exempt from the need to compete? Perhaps, although the Court made clear in Professional Engineers that any hint of an antitrust exemption for professionals that some saw in Goldfarb was incorrect. Professionals might compete in different ways but the antitrust laws still protect that competition to yield the best results for customers.

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Challenging Class Action Certification and the Classic Antitrust Case of Comcast v. Behrend

August 28, 2020 | Bona Law PC

Author: Jarod Bona

As an attorney defending an antitrust class action, your job is to get your client out of the case as expeditiously and inexpensively as possible. There are several exit points.

For example, with a little help from the US Supreme Court’s Twombly decision, you might find your way out with a motion to dismiss, asserting (among other potential arguments) that plaintiffs fail to allege sufficient allegations that a conspiracy is plausible. This is usually the first battle.

Next, you could reach a settlement with class-action plaintiffs (and have it approved by the Court). This could happen at any point in the case. Oftentimes, case events that change expectations will prompt a settlement—i.e. a Department of Justice decision to drop an investigation or an indictment.

Third, you might prevail on summary judgment (or at least partial summary judgment). One means to winning on summary judgment is to disqualify plaintiff’s expert with a Daubert motion.

Fourth, you can win at trial.

Fifth, if you lose at trial, it is time to find an appellate lawyer.

So far, these methods to get out of court look just like any other antitrust case (or commercial litigation matter). An attorney defending an antitrust class action, however, has extra way to get its client out of the case: Defeating Class Certification. (like the defendants did in the Lithium Ion Batteries case, which we wrote about here).

Defense attorneys are increasingly turning to class certification as a primary battle point to get their clients out of federal antitrust class actions.

An antitrust class action usually alleges some form conduct that is a per se antitrust violation in which the damages are a small amount for each class member. For example, an antitrust class action plaintiff might allege a price-fixing or market-allocation conspiracy among the major manufacturers in a particular industry. Plaintiffs may allege that the damage is just a few dollars or cents per plaintiff, but collectively the damages are in the millions or tens or hundreds of millions (or more).

Thus, if the Court denies plaintiffs’ motion to certify a class (barring appeal under Rule 23(f)), each individual plaintiff must sue. And since each only has damages of a few dollars or less, litigation just doesn’t make sense. That, in fact, is the point of Federal Rule 23 and class actions generally—to allow relief when the aggregate harm is great but the individual harm is tiny.

[See this article that I co-authored with Carl Hittinger on the private-attorney general purpose of class actions.]

A defendant that can defeat class certification effectively wins the case.

The US Supreme Court made this task easier for attorneys defending antitrust class actions in the 2013 classic antitrust case of Comcast Corporation v. Behrend, written by the late Justice Antonin Scalia.

Back in my DLA Piper days, I wrote about the Comcast case for the Daily Journal shortly after the Supreme Court published it.

This case involved a class action against Comcast that alleged that Comcast’s policy of “clustering” violated Section 1 of the Sherman Act. Clustering is a strategy of concentrating operations within a particular region. Plaintiffs alleged that Comcast would trade cable systems outside of their targeted region for competitor systems within their region. This would limit competition for both parties, by concentrating the market for each region with fewer cable providers.

But that wasn’t the issue the Supreme Court addressed. The Supreme Court in Comcast v. Behrend instead sought to determine whether the district court properly certified the class action under Federal Rule of Civil Procedure, Rule 23(b)(3), which is known as the predominance requirement.

You can read our article about a California antitrust decision rejecting class certification here.

If you want to learn more about how Bona Law approaches the defense of antitrust class action cases, read here.

And if you want to know more about how class-action settlements work as described in the context of the In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, read here.

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California Supreme Court Confirms Independent Wrongfulness Requirement for Certain Tortious Interference Claims and Clarifies Section 16600 Standard

August 18, 2020 | Bona Law PC

Author: Jarod Bona

Competitors battle in the marketplace and sometimes battle in the courts. Bona Law is an antitrust and competition boutique law firm, but most people think of the “competition” part of that description as redundant to the antitrust label. That is not a surprise because outside of the United States, most people refer to antitrust law as competition law.

But I view it differently: Antitrust Law is the literal collection of state and federal antitrust laws, including those involving restraints of trade, monopolies, mergers, criminal antitrust, and others. But Competition Law incorporates a wide range of business torts and statutes that make up the practical reality of competitor and marketplace court battles. These include, for example, the Lanham Act, patent laws, unfair competition statutes, tortious interference and others.

Indeed, you will notice that many antitrust complaints also include one or more additional non-antitrust claims. The players in these disputes can sometimes include consumers, for a class action lawsuit. But, for our purposes, we will primarily discuss business players within competition, either competitors or entities up and down the vertical chain of distribution of products or services. So, a court battle could match up two competitors, or perhaps a wholesale distributor and a retailer, for example.

Our job, as antitrust and competition attorneys, is to help clients solve legal problems involving any type of competition issue.

To that end, let me tell you about an important new competition decision. On August 3, 2020, the California Supreme Court issued its decision in Ixchel Pharma, LLC v. Biogen, Inc. that made law for certain tortious interference claims and for California Business and Professions Code section 16600 (which is mostly associated with prohibitions on certain non-compete agreements in California).

Tortious Interference

Tortious interference divides into two different claims: (1) tortious interference with contract and (2) tortious interference with prospective economic relationship (no contract, but maybe one was on the horizon).

For more detail, we describe the elements of tortious interference in California here.

The law (and California Supreme Court) consider tortious interference with contract as a bigger deal than the other kind of tortious interference—they don’t like the idea of breaking up existing contracts. So, in its wisdom, it requires an additional element for tortious interference that doesn’t involve a contract (the prospective-economic-relationship kind): The act of interference must be independently wrongful in some way. Interference by itself is not sufficient—there must be something else wrong with the interference act besides the interference.

But what does it mean for an act to be independently wrongful?

According to the California Supreme Court, “an act is independently wrongful if it is unlawful, that is, if it is proscribed by some constitutional, statutory, regulatory, common law, or other determinable legal standard.” (p. 9, quoting Korea Supply Co. v. Lockheed Martin Corp, 29 Cal.4^th 1134, 1159 (2003)).

A plaintiff need not plead an “independently wrongful act” for a tortious interference with contract, except—for the holding in this new California Supreme Court case (Ixchel).

You can read the decision for the facts, but the question in dispute is whether a plaintiff asserting a claim for tortious interference with contract has to plead an independently wrongful act, if the contract is an at-will contract. An at-will contract is one that either side can terminate at any time, for any or no reason.

The California Supreme Court—in deciding the issue for the first time—acknowledged that a “number of states have adopted” the independent wrongfulness requirement for tortious interference with at-will contracts. (14). And they ultimately agreed with these states.

An at-will contractual relationship is one that has no assurance of future economic relations—because either side may terminate it for any or no reason. That is, neither party has a “legal claim to the continuation of the relationship.” (17). And even though the parties to such a deal may expect it to continue, from the perspective of third parties, “there is no legal basis in either case to expect the continuity of the relationship or to make decisions in reliance on the relationship.” (17).

Just as importantly, the California Supreme Court expressed worry that allowing claims for tortious interference of at-will contracts without an independent wrongfulness requirement would chill legitimate business competition (also a common concern of judges interpreting antitrust laws). The Court didn’t want to create a cause of action for typical aggressive competition.

As a result, the Court held that “to state a claim for interference with an at-will contract by a third party, the plaintiff must allege that the defendant engaged in an independently wrongful act.” (18).

California Business and Professions Code Section 16600

Section 16600: “Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”

This is the famous California law that invalidates most non-compete agreements. Indeed, oftentimes, the most difficult question with these cases is whether California or some other law applies.

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What is the Twombly Motion-to-Dismiss Standard for Antitrust Cases? Comparing the Ninth and Second Circuits

August 15, 2020 | Bona Law PC

Author: Luis Blanquez

As a long-standing antitrust attorney in Europe, making the decision to move from Madrid to San Diego a few years ago to practice law in the U.S. has been a life-changing experience. Both personally and professionally. Learning from other cultures, colleagues, and languages is something I strongly recommend to everyone. It opens your mind and provides you with a different perspective about the world and yourself. And of course, that also applies to the practice of law.

Indeed, when you move to a new jurisdiction you basically become a “newborn” attorney, but with all your past experience in the backpack. That puts you in the best position to approach everything with a “fresh pair of eyes”, which in turn allows you to add value to your team and cases in a unique way.

In that respect, something I noticed during these first years of practicing antitrust law in the U.S. is how district courts, in deciding motions to dismiss cases, disagree on the applicable standard when analyzing antitrust conspiracies. Some apply the summary-judgment or trial-like standard to conspiracy allegations, particularly when confronted with “non-parallel-conduct” cases, despite the fact that a complaint at that stage is constructed without the benefits of discovery. Others misunderstand the language in Twombly about “ruling out the possibility of independent action,”—which is specific to conscious parallelism cases—and they incorrectly add it to the list of pleading requirements.

What is the Biggest Mistake that District Courts Make in Antitrust Cases?

The Antitrust Pleading Standard Is Shifting Back Toward the Plaintiff

TWOMBLY AND THE PLAUSIBILITY STANDARD

For those not familiar with antitrust law, Bell Atlantic Corp. v. Twombly changed the antitrust pleading standards in federal court from one of “extreme permissibility” to the current “plausibility” standard. And that was a big deal because it basically re-defined what Federal Rule of Civil Procedure 8(a)(2) requires for a complaint to survive a motion to dismiss for failure to state a claim upon which relief can be granted under Rule 12(b)(6) FRCP.

In antitrust cases, a claim under Section 1 of the Sherman Act requires (i) a contract, combination, or conspiracy; (ii) an unreasonable restraint of trade in the relevant market; (iii) and antitrust injury.

For the first prong, there are two ways to prove a “contract, combination, or conspiracy”: (i) by direct evidence that shows the existence of an agreement; or (ii) through a combination of parallel conduct and “plus factors,” i.e., “economic actions and outcomes that are largely inconsistent with unilateral conduct but largely consistent with explicitly coordinated action.” In re Musical Instruments & Equip. Antitrust Litig., 798 F.3d 1186, 1194 (9th Cir. 2015).

Second, an unreasonable restraint of trade always involves some sort of antitrust illegal conduct such as fixing prices, allocating customers, a group boycott, or rigging bids, among many others.

Last, in order to survive a motion to dismiss, a complaint also requires antitrust injury. An antitrust plaintiff must show both constitutional standing and antitrust standing. If you want to know more about antitrust injury, we have written extensively on the subject.

The Elements of Antitrust Injury: A Two-Prong Test

Antitrust Injury and the Classic Antitrust Case of Brunswick Corp v. Pueblo Bowl-O-Mat

Here I will just focus on the two ways courts may prove a “contract, combination, or conspiracy”: (i) direct evidence, (ii) or circumstantial evidence and “plus factors”. This is the prong where district courts have been struggling when ruling on their motions to dismiss, mainly because Justice Souter’s opinion in Twombly included some language from the landmark summary-judgment decision (Matsushita) that the Court used to explain why in conscious parallelism cases, plaintiffs’ “offer of conspiracy evidence must tend to rule out the possibility that the defendants were acting independently.”

DIRECT EVIDENCE

Direct evidence in a Section 1 antitrust conspiracy means evidence that is explicit and requires no inferences to establish the conclusion that an agreement exists. In plain English, a “smoking gun” in the form of documents, meetings or defendants’ testimony.

Federal courts around the country have agreed––with very limited exceptions––that whenever a complaint includes such non-conclusory allegations of direct evidence of an agreement, there is no need to go any further on the question of whether such an agreement has been adequately pled. And this is important because it means that allegations of direct evidence of an agreement––if sufficiently detailed––are independently adequate and sufficient alone.

Bottom line, in direct evidence scenarios, there is no need to even carry out the Twombly “plausibility” analysis in the first place. To meet the direct evidence standard the evidence must explicitly support the asserted proposition without requiring any inference. In re Citric Acid Litig., 191 F.3d 1090, 1093 (9th Cir. 1999) (“Citric Acid”)

This is the only threshold that a plaintiff should meet in order to survive a 12(b)(6) motion to dismiss when providing direct evidence.

CIRCUMSTANTIAL EVIDENCE, PARALLEL CONDUCT AND “PLUS FACTORS”

But like everything meaningful in life, things are rarely that straightforward in antitrust law. Thus, in alleging a conspiracy, a plaintiff may present either direct evidence (or if that’s not possible), circumstantial evidence of defendants’ conscious commitment to a common scheme designed to achieve an unlawful objective. This is a mouthful, so let’s try to bring some light to it.

District courts have the power to insist on some degree of specificity in pleading before allowing an antitrust complaint relying on allegations of circumstantial evidence of agreement to proceed. That’s why the Supreme Court in Twombly offered some guidance as to how to properly plead an agreement in parallel conduct cases:

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The End of the Paramount Antitrust Consent Decrees: A Brief Look at Movie History and the Future

August 7, 2020 | Bona Law PC

Author: Steven Madoff

Steven Madoff was an Executive Vice President of Business and Legal Affairs for Paramount Pictures Corporation from 1997-2006.

The recent announcement by the Antitrust Division of the Department of Justice that it is planning to terminate the 70-year-old Paramount Consent Decrees leads to reflection on how culture, business models, the law, and technology intersect and impact one another.

The history of the motion picture business resonates with the evolution (and sometimes revolution) of technology, the industry’s adaptation of its business models to respond to these changes in technology and the impact of these changes and adaptations to cultural transitions and transformations.

Virtually from its birth in the early 20^th century, the motion picture industry attracted the scrutiny of governmental regulators. As early as the 1920’s, the U.S. Justice Department started looking into the trade practices and dominant market share of the Hollywood studios.

The Studio System

In the early 1930’s, the Justice Department found that the major studios were vertically-integrated monopolies that produced the motion pictures, employed the talent (directors, writers, actors) under long-term exclusive contracts, distributed the motion pictures and also owned or controlled many of the theaters that exhibited the movies. This was sometimes called the “studio system.”

Particularly troubling were the studios’ practices of block booking and blind bidding. Block booking is the practice of licensing one feature film or group of feature films on the condition that the licensee-exhibitor will also license another feature film or group of feature films released by the same distributor. Block booking prevents customers from bidding for individual feature films on their own merits. Blind bidding or blind selling is the practice whereby a distributor licenses a feature film before the exhibitor is afforded an opportunity to view it. These practices were particularly onerous when applied against independent theater owners not owned or affiliated with the studio-distributor.

It seemed like the time had come for the government to force the studios to divest their ownership of the exhibition side of the business. But the Depression intervened and the studios convinced President Roosevelt that the country needed a strong studio system to supply movie entertainment to the populous as a relief from tough economic times. President Roosevelt therefore delayed any action requiring the studios to divest their theaters under the goals of the National Industrial Recovery Act.

The Paramount Consent Decrees

But, by 1940, the Department of Justice filed a lawsuit against the studios alleging violations of Sherman 1 and 2—restraint of trade and monopolization. The claims were made against what were then called the Big Five Studios, all of which produced, distributed and exhibited films (MGM, Paramount, RKO, Twentieth Century-Fox and Warner Bros.) and what were called the Little Three studios, which produced and distributed films but did not exhibit them (Columbia, United Arts and Universal).

At the time, Paramount was the largest studio and exhibitor and was first-named in the lawsuit, and so in 1940 when the studios reached a settlement with the Department of Justice, the resulting arrangement became known as the Paramount Consent Decrees.

As part of the Consent Decrees, the Studios were not required to divest their ownership in theaters; however, block booking was dramatically cut back (e.g., no tying of short subjects to feature films and no “packages” in excess of five feature films) and blind bidding was prohibited. The parties agreed to a 3-year period for the Consent Decrees during which the Department of Justice would monitor compliance by the Studios.

By 1946, however, the Department of Justice had determined the Studios were not in compliance and brought the case back to the Federal District Court. After the trial, the Court ruled that the Studios could no longer engage in block booking, but did not require them to divest their ownership in theaters, which the Department of Justice had asked for. Both parties appealed the case, which eventually reached the US Supreme Court.

In a 7-1 decision, written by Justice William O. Douglas, the Court found, among other things, that block booking was a per se violation of Sherman 1 and in remanding the case to the District Court recommended that the Studios be ordered to divest their ownership in theaters. But before the District Court rendered a decision on whether the Studios should divest their theaters, one of the Big Five Studio defendants, RKO Pictures (then controlled by Howard Hughes) decided to sell its theaters. After that, another Big Five Studio defendant, Paramount, sold its theaters.

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Big Tech Hearings: What Do They Tell Us About Amazon and Antitrust?

August 4, 2020 | Bona Law PC

Author: Steven Cernak

The U.S. House Antitrust Subcommittee of the Judiciary Committee’s recent hearings into “big tech” and antitrust were “must see TV” for antitrust attorneys.

Over the five hours of testimony, many interesting questions were asked of the leaders of Apple, Google, Facebook, and Amazon; unfortunately, the format often left little time for answers. Because so many of our clients—manufacturers, retailers, and others—are active in the online retail space, we thought we would focus on Amazon and Jeff Bezos’s statement and answers.

These hearing are not the only antitrust scrutiny that Amazon is receiving. The FTC and the states of California and Washington appear to be investigating the company and its actions. Given all the publicly available information, what did the hearings teach us about the kinds of antitrust claims that might be made against Amazon in any antitrust suit?

Competing with Private Label Goods

Several of the questions involved allegations that Amazon had somehow “stolen” or misused data from some of its manufacturers or third-party sellers to determine which products it would begin to produce as private label goods. Many of these questions grew out of a long Wall Street Journal report in April. Bezos explained that Amazon’s policy is not to use data of an individual seller to make such decisions, although the company continued to investigate possible violations. Also, Bezos clarified that aggregate data, which he defined as data relating to at least two sellers, could be used by Amazon under its policy.

As commentators have pointed out, retailers deciding to sell private label goods along with, or instead of, branded goods is not inherently an antitrust violation; in fact, many retailers like Kroger’s and Costco obtain significant revenue from the practice. Bezos himself pointed out that Amazon’s policy limiting its use of data from the other sellers was “voluntary” and not required by any current law. One of the questions at the hearings hinted at an allegation that Amazon might be in a different position than other retailers, either because of its size or greater access to seller data; unfortunately, inadequate time was given for a response. Any antitrust actions here would need to be able to take on all private label goods sold by large retailers or explain why Amazon’s actions are uniquely anti-competitive.

Predatory Pricing

At least two sets of questions focused on potential “predatory pricing” by Amazon, that is, pricing products so low that competitors are forced out of the market. The first set involved allegations from many years ago that Amazon had drastically lowered prices on diapers to weaken Diapers.com, later renamed Quidsi before Amazon purchased it. In response to questioning, Bezos claimed to be unfamiliar with the details of pricing of one product nearly ten years ago. In the second set, Bezos was asked if Amazon ever priced Echo or Ring or other in-home assistants below cost. He claimed that the price of those products usually was above cost, although sometimes their prices might be below cost during periodic promotions.

As readers of this blog know, current law makes predatory pricing illegal only if a monopolist’s prices are very low, usually defined as below variable costs, and there is a chance that the monopolist can later raise prices to recoup its losses. Certainly, not enough time was spent on the topic during the hearings to address those details in these Amazon examples. Also, other commentators have already disputed the implications from the Quidsi story, describing it as another example of a retailer using a pro-competitive “loss leader” strategy to build customer loyalty to the store. (In fact, it appears that Quidsi was trying to follow that exact strategy itself.) While the questions did not directly lead to evidence of a violation under today’s law, it is possible that these hearings will lead to legislation to alter antitrust law’s current view of such aggressive pricing.

“Bullying” Competitors and Suppliers

Finally, Bezos was asked several times in several ways about Amazon’s treatment of its “partners,” both the manufacturers and third-party retailers who sell to consumers on its marketplace as well as manufacturers who sell directly to Amazon. Many of the questions included quotes from anonymous third parties who felt a need to be on Amazon: “have to work with them,” “we’re stuck,” “nowhere else to go.”

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Iatrogenics, the Sad Tale of Dr. Ignaz Semmelweis, and Antitrust Lawyers

July 26, 2020 | Bona Law PC

Author: Jarod Bona

I bet your first question is “What is iatrogenics?”

Have you ever gone to the doctor for something minor, only to take the prescribed medication and suffer through side effects that are worse than the initial ailment?

Iatrogenics is your net loss in welfare from the doctor. Iatros means healer in Greek. Iatrogenics is the loss caused by the healer.

The Hippocratic Oath, of course, is “first do no harm.” But it doesn’t always work out that way.

This term came up in my re-reading of Antifragile by Nassim Taleb. This is one of my favorite books of all time and I highly recommend that you read it, along with everything else that Taleb writes. And not just because we both advocate for deadlifts.

If you are a fan of Nassim Taleb, you might enjoy our article on Antitrust, Antifragility, Blockchain, and the Departement of Justice.

Dr. Ignaz Semmelweis

Taleb, in Antifragile, tells the story of Austro-Hungarian doctor Ignaz Semmelweis.

In the early to mid-1800’s, treatment by doctors wasn’t, according to Taleb, a net positive—going to the doctor actually increased your chance of death. This is iatrogenics—the healer, if you net the positive and negative, wasn’t good for your health.

Dr. Semmelweis noticed that women giving birth were substantially more likely to die of childbed fever if they were treated by doctors than if they were treated by mid-wives. Semmelweis didn’t figure out exactly why this was, but he did discover that if doctors cleaned their hands and medical instruments with a strong disinfectant, the rate of childbed fever dropped dramatically. The deaths, of course, were coming from the hospital.

You might think that the next part of the story is that people hailed Dr. Semmelweis a hero and the rate of women dying in childbirth fell dramatically from that point in time. Maybe there was a parade.

Sadly, no.

Dr. Semmelweis’s approach worked, but it wasn’t a theory developed by the “experts” and implicit, well, explicit, in his discovery of the disparity in deaths between doctor-treated patients and mid-wife-treated patients was the idea that doctors were harming their patients—killing them, in fact.

Dr. Semmelweis apparently wasn’t polite and passive in his criticism; Taleb points out that Semmelweis, for example, called the doctors “a bunch of criminals.” Semmelweis’s ideas contradicted the conventional wisdom and the people that could change the policy probably didn’t like him. Semmelweis tried to convince doctors and relevant policy makers to change, but they wouldn’t.

This led to despair and depression for Ignaz Semmelweis. And he ended up in an asylum where he died of a hospital fever, in sad irony.

Innovation in Ideas

The lessons from this story are plentiful. Obviously, doctors should wash their hands. And this, of course, is a good example of an iatrogenic situation. But, just as significantly, we must understand that our assumptions and the “experts” are sometimes wrong. And it is critical that we don’t shut out ideas that grow from the bottom up that question the experts, who force their ideas from the top down.

For example, when certain social media websites decided to hide or warn against any information relating to Coronavirus that contradicted the World Health Organization dictates, they created major systematic risks and the potential for situations like that of Dr. Semmelweis’s warnings about washing hands and killing pregnant women. Mandating information flow from the top-down creates a dogma that eliminates the possibility of bottom-up innovation and insights that can improve humanity.

Indeed, the World Health Organization, like many “experts,” and others were wrong, many times over. Wrong isn’t necessarily bad—we can learn from wrong. But forcing a specific perspective or truth on everyone, even if it is the conventional wisdom and or a widespread belief, freezes the current state of science and thinking wherever it is, instead of allowing it to prosper, grow, and progress.

The idea that science uncovers facts is true, but only for a static moment. By contrast, time is dynamic and “facts” change with it.

Think back 20 years, 40 years, 100 years, or 1000 years to what was conventional wisdom and how wrong it was. Also think back to the groups and hierarchies that tried to lock-in those ideas—which at the time were widespread and thought of as the truth or as facts. Think about Galileo.

The foundation of federal antitrust law is that “The heart of our national economy long has been faith in the value of competition.” Allowing competition creates opportunity, from the bottom up, for innovation, along with high quality and low prices, to prosper.

The same is true of ideas. If we create monopolies for ideas, even if they are considered established facts, the quality of our ideas and society will diminish. Innovation will stagnate. The experts are often wrong—let’s not follow them off the cliff, or more accurately, let’s not let them talk us off a cliff while they sit on their perch without skin in the game, preaching.

Iatrogenics Outside of Medicine

Back to Iatrogenics.

A problem that Taleb identifies is that, although mostly discussed in the context of medicine, iatrogenics is not limited to that field. Professionals and others of all walks of like sometimes create more harm than good.

In Antifragile, Taleb includes a handy table that shows interventions of various fields and the resulting iatrogenics/costs. For example—here is something that hits home in California: In Ecology, micromanaging away from forest fires can worsen total risks, by creating larger “big ones.”

Economics is an obvious example where intervention can cause harm—even intervention that appears “good” on the outside. You may agree or disagree, but Taleb cites manipulation of the business cycle, i.e. trying to make the ups and downs disappear, as a major source of fragility, which will lead to deeper crises when they happen.

Taleb cites several examples and they are interesting and persuasive, but he unfortunately leaves out your favorite profession—the antitrust attorney.

Let’s talk about the iatrogenics of antitrust attorneys.

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Can My Farm Cooperative Impose Production Restraints During Covid-19 Without Violating the Antitrust Laws?

July 23, 2020 | Bona Law PC

Author: Aaron Gott and Nick McNamara

As the effects of the ongoing COVID-19 pandemic continue to ripple across all sectors of the economy, agriculture has been hit especially hard. The widespread closure of restaurants combined with the general hit on most Americans’ wallets has precipitated a massive demand shock, which in turn has sent the prices of agricultural products such as corn, soybeans, milk, and fresh produce tumbling. While this may be good news for consumers (at least in the short run), it does not bode so well for farmers, who in recent months have had to resort to dumping milk and culling herds of livestock—practices which are both wasteful and potentially environmentally harmful.

Can farmers work together to mitigate these issues by agreeing, prior to production, to set production caps so that prices may be stabilized, and waste avoided? The answer depends on whether such controls on output are covered by the Capper-Volstead Act’s antitrust exemption for farm cooperatives.

Under normal circumstances, a concerted agreement among horizontal competitors to restrict output is a per se violation of Section 1 of the Sherman Act. But the Capper-Volstead Act, enacted in 1922 amid populist fervor in the agricultural sector, provides a limited antitrust exemption to “[p]ersons engaged in the production of agricultural products as farmers, planters, ranchmen, dairymen, nut or fruit growers.”

You can read a more detailed primer on the Capper-Volstead Act here. But, in brief, the act allows agricultural producers to collectively process, prepare, handle, and market their products. Now, it is important to note again that the exemption applies only to agricultural producers, not processors. This past year, there has been a flurry of antitrust litigation against pork and beef processors who are alleged to have agreed to restrict output, among other things. As discussed in the primer, the Supreme Court has held that a cooperative cannot include processors because they do not fit into the category of “farmers, planters, ranchmen, dairymen, nut or fruit growers.” Thus, only those entities at the most basic level of the food supply chain get to enjoy the exemption.

For producers, the farm cooperative exemption has been interpreted by courts to include a blanket exemption from antitrust liability for price fixing, a practice which also normally incurs per se liability under Section 1 of the Sherman Act. No court has ever directly ruled on the question of whether the exemption applies also to output controls, but there are indications they might find output restrictions outside the narrow confines of the act.

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