Category: Antitrust

States Target Infant Formula Price Gouging

There has been a nationwide shortage of infant formula following a recall and temporary closure of a major infant formula manufacturing facility in February 2022. This facility supplied as much as 40% of the nation’s infant formula. In the wake of these events, state attorneys general are on the lookout for unlawful price gouging of infant formula. Sellers of infant formula should make sure that they do not inadvertently run afoul of state price gouging restrictions.

State price gouging laws prohibit price increases above certain thresholds during a period of emergency. Several state governments have recently issued declarations or proclamations that trigger price increase limitations for infant formula, including in California (CA Exec. Order N-10-22, 6/7/2022), Oregon (OR Exec. Procl., 5/13/2022), Colorado (CO Exec. Order D-2022-021, 5/25/2022), New Jersey (NJ Exec. Order No. 296, 5/17/2022), and Kentucky (KY Exec. Order 2022-321, 6/9/2022). Each of these states has a different price gouging restriction. For instance, infant formula sold in California cannot exceed the February 17, 2022 price by more than 10% except in certain limited circumstances. Other states may have a different price increase threshold or a different benchmark date. Multi-state sellers must take care to comply with the restrictions in each state.

Several states, such as Colorado and Nevada, enacted new price gouging laws in the wake of the COVID-19 pandemic. See Colo. Rev. Stat. § 6-1-730; NRS § 598.09235. Enforcers have not had much experience enforcing these statutes, which may mean greater uncertainty for sellers in those states.

Most, but not all states have a price gouging law. In states that do not have a price gouging law, attorneys general will often seek to enforce their state’s unfair or deceptive trade practices act against reports of price gouging. For example, the attorney general of New Mexico, a state without a price gouging law, issued a press release on May 31, 2022 announcing that he is investigating complaints regarding infant formula price gouging. Similar to the COVID-19 pandemic, the infant formula shortage is triggering a variety of different price gouging restrictions in different states at the same time. Navigating the differences from state-to-state can be challenging, particularly in light of the new laws and amended laws that have been recently enacted. Sellers should review their normal pricing practices and make necessary changes to avoid inadvertently running afoul of the restrictions in a particular state.

Article By Leo Caseria and Thomas L. Tyson of Sheppard, Mullin, Richter & Hampton LLP

For more antitrust and trade regulation legal news, click here to visit the National Law Review.

Copyright © 2022, Sheppard Mullin Richter & Hampton LLP.

Constitutionality of FTC’s Structure and Procedures Under SCOTUS Review

Both the Federal Trade Commission (FTC) and the Antitrust Division of the Department of Justice (DOJ) have authority to enforce Section 7 of the Clayton Act by investigating and challenging mergers where the effect of such transaction “may be substantially to lessen competition or tend to create a monopoly.”

However, the enforcement paths of these two federal agencies differ markedly. DOJ pursues all aspects of its enforcement actions in the federal court system. The FTC, on the other hand, only uses the federal district courts to seek injunctive relief, but otherwise follows its own internal administrative process that combines the investigatory, prosecutorial, adjudicative, and appellate functions within a single agency.

Whether a transaction is subjected to DOJ or FTC review is determined by a “clearance” process with no public visibility. To many, including entities in the health care industry—and, in particular, parties to hospital mergers that are now routinely “cleared” to the FTC (exemplified by two recently filed enforcement actions against hospitals in New Jersey and Utah)—this process appears to be arbitrary. It is also particularly daunting because the FTC has not lost an administrative action in over a quarter-century. Because of the one-sided nature and duration of these administrative proceedings, most enforcement actions brought against merging hospitals rise or fall at the injunctive relief stage. This process also appears to embolden the FTC into taking unprecedented actions, including the pursuit of enforcement remedies against parties to abandoned transactions.

However, this may soon change. The Supreme Court of the United States has agreed to hear a case that raises a forceful constitutional challenge to the FTC’s structure and procedures. The Supreme Court recently agreed to combine the briefing schedule of this case with a similar case that successfully challenged the constitutionality of the administrative process of the Securities and Exchange Commission. The outcome of these cases may fundamentally alter the FTC’s enforcement process.

Article By E. John Steren and Patricia M. Wagner of Epstein Becker & Green, P.C.

For more antitrust and trade regulation news, click here to visit the National Law Review.

©2022 Epstein Becker & Green, P.C. All rights reserved.

Antitrust Enforcers’ “Second Listening” Forum On Merger Reform Highlights Issues In The Healthcare Industry

In March of this year the Antitrust Division of the U.S. Department of Justice (“DOJ”) and the Federal Trade Commission (“FTC”) jointly announced a series of “listening forums” that would help gather real world input from participants in key industry segments on possible reforms to the antitrust regulations pertaining to mergers and acquisitions.1 Co-led by DOJ Deputy Assistant Attorney General (“DAAG”) Doha Mekke and FTC Chairperson Lina Khan, the second of the four announced forums, focusing on healthcare, was held on April 14, 2022. 2  In addition to DAAG Mekki and Chairperson Khan, the program included eight panelists that provided perspectives from nurses, doctors, patients, pharmacists and small businesses. 3

DAAG Mekki started off the discussion by reaffirming the antitrust enforcement agencies’ collective commitment that “healthcare markets remain competitive” because it “is essential to our livelihood or the livelihood of the nation.” Mekki referenced ongoing work by the agencies in the healthcare field, including recent DOJ enforcement actions. 4

The healthcare panelists highlighted several ongoing issues in the industry, such as the adverse impact of care due to post-merger hospital staff downsizing that was tied to merger-specific efficiencies, reduced options to tertiary care, higher healthcare costs for patients, and unfair competition in the pharmaceutical and small business markets, and other impacts in the research and labor markets.

Chairperson Khan indicated that the comments resonated with the concerns that the FTC had in the hospital, pharmacy benefits management, and pharmacy industries. Ms. Khan also suggested a renewed interest in examining the potential anticompetitive effects of vertical integration in addition to horizontal mergers and acquisitions, which is consistent with the FTC’s position when it indicated that it wanted to revisit this issue while withdrawing the Vertical Merger Guidelines in 2021. Khan also reaffirmed the importance of examining anticompetitive effects in the labor market. All of these issues, according to Khan, are important in assessing how the antitrust laws can be used to improve the quality of healthcare for patients.

The forum ended with some of the more than two hundred public comments, most of which echoed similar concerns raised by the panelists in addition to concerns such as disparities in hospital-physician group contracting situations and racial disparities in access to healthcare as a result of healthcare system mergers.

Once again, all signs point toward an unprecedented time in antitrust enforcement in the healthcare industry. Accordingly, it is important that healthcare companies revisit, revise, and implement best practices with regard to their respective antitrust compliance programs. A proactive, as opposed to a reactive, approach would provide companies the best risk management strategy. It is also important to engage antitrust counsel early in potential transactions to assess how the antitrust agencies may view the deal.

The DOJ and FTC Listening Forums continue with Media and Entertainment, which was held on April 27, 2022, and the final one on Technology, which will be held on May 12, 2022. Click here to download the alert. 

FOOTNOTES

1    “Forums to focus on markets commonly impacted by mergers: food and agriculture, health care, media and entertainment, and technology,” March 17, 2022, available at: https://www.ftc.gov/news-events/news/press-releases/2022/03/ftc-justice-department-launch-listening-forums-firsthand-effects-mergers-acquisitions

2   See “Antitrust Enforcers’ First ‘Listening Forum’ On Merger Reform Highlights Ongoing Concerns in the Food and Agriculture Industry” May 9, 2022, available at: https://www.polsinelli.com/intelligence/antitrust-forum-highlights-concerns-in-food-and-ag

3 Full transcript of forum available at: https://www.ftc.gov/system/files/ftc_gov/pdf/FTC-DOJ-Listening-Forum-%20Health-Care-Transcript.pdf. It should be noted that Assistant Attorney General Jonathan Kanter did make an appearance at the end of the session, reiterating the importance of this forum.

4    See “DOJ Faces Two Strikeouts in First Health Care Wage-Fixing and ‘No Poach’ Prosecutions,” April 20, 2022, available at: https://www.polsinelli.com/intelligence/doj-faces-two-strikeouts-in-first-health-care

© Polsinelli PC, Polsinelli LLP in California
Article By Arindam Kar with Polsinelli PC.
For more articles about antitrust law, visit the NLR Antitrust law section.

Full Ninth Circuit Removes Unwarranted Hurdles to Class Certification in Big Tuna Antitrust Case

Court delivers a necessary course correction in the law of class certification.

There was reason for optimism in August 2021, when the Ninth Circuit Court of Appeals granted rehearing en banc of a 2-1 decision that would have made it more difficult for antitrust claimants to secure class certification. The three-judge panel in Olean Wholesale Grocery Coop., Inc. v. Bumble Bee Foods LLC, 993 F.3d 774 (9th Cir. 2021) had determined that Federal Rule of Civil Procedure 23(b)(3) required a district court to find that no more than a de minimis number of class members are uninjured before a class may be certified. Having announced this de minimis rule in its opinion, the court then took the unusual step of inviting the parties to argue whether the full court should rehear the issue en banc.

As we wrote last year when en banc rehearing was granted, with its de minimis rule, “the panel really jumped the median strip.” We argued that the rule conflated the question of whether issues common to the class predominate over issues unique to individual class members with the question of how the class is defined and that the Ninth Circuit’s new and unrealistic de minimis requirement erected an unnecessary procedural hurdle to class certification. Other commentators and amici argued that requiring proof that all but a de minimis number of class members are injured requires a determination on the merits, impermissible at the class certification stage.

In welcome news for claimants and attorneys who bring antitrust class actions, the Ninth Circuit sitting en banc decided against the de minimis rule, for all of the foregoing reasons, in Olean Wholesale Grocery Coop., Inc. v. Bumble Bee Foods LLC, No. 19-56514, 2022 U.S. App. LEXIS 9455 (9th Cir. Apr. 8, 2022).

In a thorough review of the requirements for class certification under Rule 23, the Ninth Circuit held that the movant’s burden is to prove the prerequisites of Rule 23 by a preponderance of the evidence, bringing the Ninth Circuit in line with the law in the First, Second, Third, Fifth, and Seventh Circuits. As for the predominance requirement of a Rule 23(b)(3) class, the court cited In re Hydrogen Peroxide Antitrust Litig., 552 F.3d 305, 311 (3d Cir. 2008) as amended (Jan. 16, 2009), to hold that, when assessing whether a plaintiff has proven that a common question related to a central issue in the claim predominates, a district court is limited to resolving whether the evidence establishes that a common question is capable of class-wide resolution, not whether the evidence in fact establishes that plaintiffs would win at trial.”

In rejecting the de minimis rule, the court began with the notion that class-wide proof is not required for all issues. Thus, the need for individualized assessment of a class member’s damages does not preclude a court from certifying a class. It contradicts this notion to require proof of injury of not more than a de minimis number of class members.

The presence of uninjured class members, the court held, does not defeat predominance. Predominance is defeated only where the class members cannot rely on the same body of common evidence to establish the common issue.

The presence of a large number of uninjured class members, however, could require a district court to consider whether the class definition is “fatally overbroad.” The remedy in that case, the court said, is to “redefine the overbroad class to include only those members who can rely on the same body of common evidence to establish the common issue.” “[T]he problem of a potentially ‘over-inclusive’ class,” the court said, “can and often should be solved by refining the class definition rather than by flatly denying class certification on that basis” (citation and internal quotation omitted).

With that, the Ninth Circuit reversed the three-judge panel and affirmed the certification of the classes by U.S. District Judge Janis L. Sammartino of California’s Southern District*, holding that the district court did not abuse its discretion in concluding that the methodology employed—statistical regression analysis and other expert evidence—”was capable of showing that a price-fixing conspiracy caused class-wide antitrust impact.”  [*Judge Sammartino subsequently recused herself and the case was reassigned to Chief Judge Dana Sabraw.]

The 9-2 decision was written by Circuit Judge Sandra S. Ikuta. In a dissenting opinion, Circuit Judge Kenneth K. Lee said as much as a third of the class members were unharmed. This is a “victory to plaintiffs” who will now be able to settle the action without having to prove their case trial, he said.

The suit was brought by direct purchasers of tuna products, indirect purchasers of bulk-sized tuna products, and individual end purchasers against the owners of Bumble Bee Foods LLC (currently in Chapter 11), StarKist Co., and Chicken of the Sea—which sell more than 80 percent of the packaged tuna in the United States. The industry has also been investigated by the Department of Justice in recent years, resulting in criminal guilty pleas by industry executives for participating in a price-fixing conspiracy.

Nothing in Rule 23 suggests that the presence of more than a de minimis number of uninjured class members affects whether questions affecting only individual class members predominate.

The now vacated de minimis rule conflates impact with damages and the predominance inquiry with potential overbreadth in the class definition. The Ninth Circuit’s en banc decision is a model of clear thinking and a welcome course correction in the law of class certification.

Article By Dan Mogin and Jonathan Rubin of MoginRubin

For more antitrust legal news, click here to visit the National Law Review.

© MoginRubin LLP

Apple Smartwatch Antitrust Case Survives, Showing ‘Freedom of Design’ is Not Absolute

Judge Cites ‘Associated’ Anticompetitive Conduct Claims

It’s a case that challenges the limits of the “freedom of design” usually enjoyed by companies accused of product design changes alleged to harm competition. Ordinarily, a design change is not the kind of conduct that runs afoul of the antitrust laws, but on March 21, U.S. Judge Jeffrey S. White from the Northern District of California denied Apple Inc.’s motion to dismiss an antitrust case brought against it by AliveCor Inc. The suit alleges that Apple unlawfully maintained its monopoly in the market for heart rate analysis apps by updating WatchOS, the Apple Watch operating system on which AliveCor’s heart rate analysis app runs. (AliveCor, Inc. v. Apple Inc., No. 21-cv-03958-JSW, N.D. Calif.).

Heart rate analysis apps analyze the user’s heart rate in real time using a sensor close to the user’s wrist and determine whether the user’s heart rate is normal or irregular. The app runs constantly while the device is worn and alerts the user when a situation arises requiring an ECG recording and medical analysis. AliveCor also sells an electrocardiogram-capable wrist band for the Apple Watch and related WatchOS software that analyzes reading from the band. AliveCor claims that its products—the ECG-wristband hardware and software and its heart rate analysis app—“helped change the perception of the Apple Watch from an accessory to a personal health monitoring tool.”

AliveCor calls its heart rate monitoring app “SmartRhythm.” According to AliveCor, when sales of SmartRhythm took off Apple was inspired to announce an update to WatchOS with its own heart monitoring app designed to exclude AliveCor from the U.S. market for WatchOS heart rate analysis apps.

SmartRhythm works by using data from the Apple Watch’s heart rate algorithm. According to the complaint, Apple’s update to WatchOS altered the heart rate algorithm in a way that prevents third-party developers from being able to detect heart rate fluctuations and irregularities. As a result of these changes, SmartRhythm could not provide accurate heart rate analysis, and AliveCor removed it from the market.

Consequently, Apple is a monopolist in the WatchOS heart rate analysis app market, which AliveCor claims Apple is maintaining with exclusionary design changes to WatchOS, in violation of Section 2 of the Sherman Act, California’s Unfair Competition Law, and Section 17200 of California Business and Professions Code.

The court denied Apple’s motion to dismiss AliveCor’s monopolization claim in what it characterized as the “[single brand] aftermarket for WatchOS apps.” Applying the factors enumerated by the court in Newcal Indus., Inc. v. Ikon Office Sol., 513 F.3d 1038, 1044 (9th Cir. 2008), the court found that the WatchOS app aftermarket was wholly derivative from the primary smartwatch market, the alleged restraint applied only to the aftermarket, Apple’s aftermarket power was not obtained through contract terms reached in the primary market, and that competition in the smartwatch market does not discipline anticompetitive practices in the WatchOS app aftermarket. Accordingly, the court ruled that AliveCor’s market definition met the Newcal standards for a “single product” relevant market.

Apple argued that a company that improves a product to the benefit of consumers does not violate antitrust laws “absent some associated anticompetitive conduct,” citing the leading “freedom of design” case of Allied Orthopedic Appliances Inc. v. Tyco Health Care Group LP, 592 F.3d 991, 998-99 (9th Cir. 2010). The court quoted the holding of Allied: “If a monopolist’s design change is an improvement, it is necessarily tolerated by the antitrust laws, unless the monopolist abuses or leverages its monopoly power in some other way when introducing the product.”

Apple argued that its update to WatchOS was purely a design change that benefitted users, with no associated anticompetitive conduct. It observed that AliveCor hadn’t established that consumers use Apple’s app instead of some third-party app, or that Apple rejected any third-party apps, or that no other third-party heart apps are available to Apple Watch users. But the court rejected those arguments, noting that Apple failed to provide any legal authority that would require such allegations.

Apple ignored AliveCor’s allegations that Apple abused or leveraged its monopoly power “in some other way” by changing its heart rate algorithm to make it effectively impossible for third parties to inform a user when to take an ECG. AliveCor contended that Apple’s updated heart rate algorithm, which was pushed out to all earlier Apple Watch models, did not improve user experience. Its purpose was to prevent third parties from identifying irregular heart rates and offering competing apps based on that data. “These allegations present the type of ‘associated conduct’ that makes product design changes cognizable under antitrust law. Plaintiff’s allegations plausibly establish that Apple’s conduct was anticompetitive,” Judge White held. A case management conference set for May 20.

Commentary

It is truly difficult to see how some separate, “associated” conduct by Apple other than its design change to WatchOS violates Section 2. It seems more straightforward to consider the design change itself to be a cognizable anticompetitive act. It may be time to drop the fiction maintained in Allied v. Tyco that design changes are “never” antitrust violations unless accompanied by some “other” conduct. Here, Apple has created the market itself in the form of an OS platform used by millions of consumers who depend on it to access all manner of competing complementary products. Under those circumstances, it should be uncontroversial to hold a platform operator liable under the antitrust laws for design changes that exclude competitors or foreclose participants from the market, without indulging in the fiction of “associated” conduct.

Article By Jonathan Rubin of MoginRubin

For more antitrust legal news, click here to visit the National Law Review.

© MoginRubin LLP

FTC Imposes Record-Setting $10M Fine Against Multistate Auto Dealer, Settling Charges of Racial Discrimination and Unauthorized Charges

On March 31, the FTC and Illinois State Attorney General announced a settlement of charges against a large, multistate auto dealer that allegedly discriminated against black consumers and included illegal junk fees for unwanted “add-ons” in customers’ bills.

Citing violations under the FTC Act, TILA, ECOA, and comparable Illinois laws, the complaint alleged that eight of the dealerships and two general managers of Illinois dealerships tacked on illegal fees for unwanted products to customers’ bills, often at the end of hours-long negotiations. These add-ons were allegedly buried in the consumers’ purchase contracts, which were sometimes upwards of 60-pages long, and sometimes added despite consumers specifically declining the products.

In addition, employees of the auto dealership also allegedly discriminated against black consumers during the process of financing vehicle purchases.  On average, black customers at the dealerships were charged $190 more in interest and paid $99 more for similar add-ons than comparable non-Latino white customers.

The multistate dealer will have to pay $10 million to settle the lawsuit per the stipulated order, the largest monetary judgment ever required in an FTC auto lending case.

Putting it into Practice:  From FTC Chair Lina Khan and Commissioner Rebecca Slaughter, the FTC appears poised to allege violations of the FTC Act’s prohibition on unfair acts or practices in light of discrimination found to be based on disparate treatment or having a disparate impact.  Their statement discusses how discriminatory practices can be evaluated under the FTC’s three-part unfairness test and concludes that such conduct fits squarely into the kind of conduct that can be addressed by the FTC’s unfairness prong.  This joint statement echoes similar announcements by CFPB Director Chopra about the use of unfairness to combat discrimination more broadly (we discussed Director Chopra’s statement and updates to the CFPB’s exam procedures in a recent Consumer Finance and FinTech blog post here).

The size of the financial judgment in this case underscores the seriousness with which the FTC takes discriminatory practices in consumer credit transactions entered into by entities over which they have authority, which includes auto dealerships.  As the FTC becomes increasingly focused on enforcement of key laws to protect consumers against discriminatory conduct, companies should use these latest agency pronouncements as a reason to be on high alert for potential discriminatory outcomes in their business activities, even if unintentional.

Article By Moorari Shah, A.J. S. Dhaliwal, and Katie Daw of Sheppard, Mullin, Richter & Hampton LLP

For more antitrust legal news, click here to visit the National Law Review.

Copyright © 2022, Sheppard Mullin Richter & Hampton LLP.

FDA and FTC Issue Warning Letters to CBD Companies

  • On March 28, 2022, the Food and Drug Administration (FDA) and Federal Trade Commission (FTC) jointly issued seven warning letters to companies marketing cannabidiol (CBD) products with COVID-19 related claims.
  • Specifically, the agencies warned the following companies regarding the promotion of their respective products with claims that they cure, mitigate, treat or prevent COVID-19: Cureganics, Heaven’s Organics LLC, Functional Remedies, LLC D/B/A Synchronicity Hemp Oil, Greenway Herbal Products LLC, CBD Social, UPSY LLC, and Nature’s Highway. Examples of claims include: “Our research suggest that CBD . . . can block SARS-Cov-2 infection at early and even later stages of infection. . .”, “Studies Show CBD Compounds Prevent COVID Cells From Replicating”, and “Can CBD Help with the Fight Against COVID? Some of the worst effects of COVID are caused by inflammation, and CBD is a potent anti-inflammatory.”
  • By way of background, under the Federal Food, Drug, and Cosmetic Act (FD&C Act), products intended to cure, treat, mitigate, or prevent disease are considered drugs and are subject to the requirements that apply to drugs. Therefore, the agencies classified the products as unapproved and misbranded drugs that may not be legally introduced or delivered for introduction into interstate commerce without prior approval from FDA.
  • The letters included a cease-and-desist demand from FTC, prohibiting the companies from making such COVID-19 related claims. The companies were provided with 48 hours to respond with specific steps that were taken to correct the violations.

Article By Food and Drug Law Practice Group at Keller and Heckman LLP

For more food and drug law legal news, click here to visit the National Law Review.

© 2022 Keller and Heckman LLP

SCOTUS Cert Recap: Copyright Act’s Fair Use Defense, ‘Dormant’ Commerce Clause, And Independent And Adequate State Ground Doctrine

On March 28, the Supreme Court agreed to consider the following three questions:

Is a work of art that copies from a prior work but that conveys a different meaning than the prior work necessarily “transformative” for the purpose of the Copyright Act’s fair use defense?

Does California’s Proposition 12 – which requires all pork sold in California to come from pigs housed in compliance with the state’s animal-confinement rules, even pigs raised entirely in other states – violate the Constitution’s Commerce Clause?

Is Arizona Rule of Criminal Procedure 32.1(g), which requires a state prisoner seeking post-conviction relief to identify a “significant change in the law” that would probably have produced a different result in the prisoner’s case, an adequate and independent state-law ground to support a state-court judgment denying post-conviction relief?

 

On March 28, the U.S. Supreme Court added three cases to its docket for next term: one about when a work of art “transforms” a prior work for the purpose of the Copyright Act’s fair use defense, another involving a “dormant” Commerce Clause challenge to a California law that prohibits selling any pork in the state unless the pork comes from pigs housed in compliance with California’s animal-confinement rules, and a third concerning whether the independent and adequate state ground doctrine bars the Court from reviewing an Arizona state-court decision denying a request for post-conviction relief.

The copyright and Commerce Clause cases – which drew four and five cert-stage amicus briefs, respectively – will capture significant attention from businesses and civil litigators and could each produce landmark decisions in their respective areas of law. The case concerning the independent and adequate state ground doctrine will be of greater interest to those who practice in the post-conviction area – where such issues arise with some frequency – but all lawyers who practice before the Supreme Court should watch that case carefully as well, as the doctrine applies to all state-court decisions whatever the subject matter.

When Works Are ‘Transformative’ Under the Copyright Act’s Fair Use Defense

In Andy Warhol Foundation for the Visual Arts v. Goldsmith, the Court will return to a question it confronted last year in Google v. Oracle: When does copying a portion of a copyrighted work constitute protected “fair use” under the Copyright Act?

The notion of “fair use” in the copyright context initially developed as a common-law doctrine to allow borrowing in some situations in order to further the Copyright Act’s general purpose of fostering creativity and innovation. Congress codified that doctrine in 1976, and the Copyright Act now expressly recognizes fair use as a defense and lists four non-exclusive factors courts should consider in determining whether a use is “fair”: 1) the purpose and character of the use, 2) the nature of the copyrighted work, 3) the amount used in relation to the copyrighted work as a whole, and 4) the effect of the use upon the potential market for the copyrighted work.

As the Court explained in Google, the first of these factors – the purpose and character of the use – asks “whether the copier’s use adds something new … altering the copyrighted work with new expression, meaning or message,” and the Court has “used the word ‘transformative’ to describe a copying use that adds something new and important.” This case offers the Court an opportunity to provide further detail on what it means for a work of art to be “transformative” in this sense. It concerns a series of silkscreen prints and pencil illustrations created by Andy Warhol – whose foundation is the petitioner here – based on a 1981 portrait photograph of Prince taken by the respondent, Lynn Goldsmith. The foundation argues that the works are necessarily transformative because they convey a new meaning: namely, that they portray Prince as an “iconic” figure rather than the “vulnerable human being” depicted in Goldsmith’s photograph.

In its decision below, however, the Second Circuit rejected the notion that imbuing a work with a new meaning is necessarily “transformative.” It observed that such a rule would seem to expand fair use to make copyright licensing unnecessary in the “paradigmatically derivative” context of film adaptations – since many movies transform the message of the underlying literary work – and it noted that ascertaining the meaning of artistic works is a subjective endeavor to which judges are typically unsuited. Instead, it held that Warhol’s work is not transformative on the ground that it is “both recognizably deriving from, and retaining the essential elements of, its source material.”

The Supreme Court is now set to review this decision and thereby give litigants and lower courts further guidance on what makes a work that borrows from another sufficiently “transformative.” Copyright practitioners around the country will be closely following what the Court says.

Commerce Clause Limits on States’ Authority to Regulate Commerce

In National Pork Producers Council v. Ross, the Court will consider a challenge to California’s Proposition 12, a law that sets minimum size requirements for pig pens – and that extends those requirements to farmers across the country by making compliance with them a condition of selling pork in California.

The challengers contend that the out-of-state application of these pen-size rules violates the Commerce Clause. They note that, while the Commerce Clause is expressly framed as a grant of authority to Congress, the Supreme Court has long read the Commerce Clause to also implicitly limit states’ regulatory authority. This doctrine, often called the “dormant” Commerce Clause, has a handful of different components, and two are at issue in this case.

The first, known as the extraterritoriality doctrine, has been invoked in a number of Supreme Court decisions but is most prominently associated with the 1980s decisions Brown-Foreman Distillers Corp. v. New York State Liquor Authority and Healy v. Beer Institute. The challengers here argue that under these decisions, a state law per se violates the Commerce Clause if its practical effect is to control conduct beyond the state’s boundaries, and they contend Proposition 12 does so by effectively requiring out-of-state farmers to follow California’s pen-size rules on pain of exclusion from the California market. And California responds that Proposition 12 merely regulates in-state sales, and that any indirect, upstream effects it has on farmers is insufficient to run afoul of the extraterritoriality doctrine.

The second issue concerns the balancing test the Supreme Court articulated in Pike v. Bruce Church, which bars state laws that impose a burden on interstate commerce that “is clearly excessive in relation to the putative local benefits.” Here the parties dispute the significance of Proposition 12’s economic effects and the strength of the interests underlying the law – issues that could become complicated by the motion-to-dismiss posture of the case.

The Court has now agreed to address both of these issues, and whatever the Court decides, its decision will carry implications for the validity of state commercial regulations in a wide variety of industries across the country.

The Scope of the Independent and Adequate State Ground Doctrine

In Cruz v. Arizona, the Court will take up a criminal-law case that presents a recurring issue that arises in both criminal and civil cases alike: When does a state-court decision rest on an independent and adequate state ground such that the U.S. Supreme Court lacks jurisdiction to review the decision?

The case arises from the Supreme Court’s 1994 decision in Simmons v. South Carolina, which held that where a capital defendant’s “future dangerousness is at issue, and state law prohibits the defendant’s release on parole, due process requires that the sentencing jury be informed that the defendant is parole ineligible.” The Arizona Supreme Court later concluded that Simmons was inapplicable in Arizona – on the theory that Arizona law did not universally prohibit capital defendants’ release on parole – but the U.S. Supreme Court overturned that conclusion in Lynch v. Arizona.

Shortly thereafter, Cruz – a capital defendant whose trial and sentencing occurred after Simmons but before Lynch – filed a petition for post-conviction relief in Arizona state court. Because this was not Cruz’s first petition, he sought relief under Arizona Rule of Criminal Procedure 32.1(g), which at the time provided that relief would be available even for successive petitions where there “has been a significant change in the law that if determined to apply to defendant’s case would probably overturn the defendant’s conviction or sentence.”

Cruz argued that Lynch constituted a significant change in the law and that it applied retroactively to render his sentence unlawful. And after the Arizona Supreme Court rejected his claim, he filed a cert. petition arguing that federal law requires applying Lynch retroactively in state post-conviction proceedings. Arizona, meanwhile, countered that the Court would lack jurisdiction under the independent and adequate state ground doctrine: The Arizona Supreme Court’s decision, the state argued, simply concluded that Cruz failed to meet the state-law requirements of Rule 32.1(g).

While the U.S. Supreme Court granted Cruz’s cert. petition, it has limited its consideration to only the question concerning the independent and adequate state ground doctrine. And because its answer to that question could affect jurisdictional rulings in all manner of cases, the case will be of interest to anyone who practices before the Court.

Article By Kian Hudson of Barnes & Thornburg LLP

For more litigation legal news, click here to visit the National Law Review.

© 2022 BARNES & THORNBURG LLP

Cartel Corner | March 2022

INTRODUCTION

The US Department of Justice’s (DOJ) Antitrust Division (Division) has continued to actively investigate and pursue alleged criminal violations of antitrust laws and collusive activity in government procurement. US Attorney General Merrick Garland noted in a March 2022 speech at the ABA Institute on White Collar Crime that the Division ended last fiscal year “with 146 open grand jury investigations—the most in 30years.”[1] As we near the end of the first quarter of 2022, the Division has a record number of criminal cases either in trial or awaiting trial.

In this installment of Cartel Corner, we examine and review recent and significant developments in antitrust criminal enforcement and profile what the Division has highlighted as its key priorities for enforcement. For 2022 and beyond, those priorities are—and likely will remain—identifying and aggressively pursuing alleged violations involving the labor markets, consumer products, government procurement and the generic pharmaceutical industry.

LABOR MARKETS

Criminal investigations and prosecutions in the labor markets continue to be a top priority for the Division. Such enforcement has been gaining momentum since the Division and the Federal Trade Commission (FTC) issued their joint Antitrust Guidance for Human Resources Professionals in 2016 which warned that the DOJ—for the first time— intended to proceed criminally against “naked wage-fixing or no-poach agreements” between horizontal employers. That momentum lifted off in December 2020 and continued throughout 2021, with the Division bringing 12 criminal cases against nine individuals and three companies. Alleged wage-fixing and no-poach agreements have historically been prosecuted in the civil context, meaning fines for companies and individuals.

Several recent developments are worth highlighting. First, in November 2021, a federal court determined for the first time ever that an alleged wage-fixing conspiracy could constitute a per se criminal violation of the Sherman Act. In U.S. v. Jindal, the Division alleged that two former executives of a physical therapist staffing company fixed the wages paid to physical therapists in the Dallas-Ft. Worth area. In denying the defendant’s motions to dismiss, a federal judge in the US District Court for the Eastern District of Texas determined that courts have not limited price-fixing conspiracies to the purchase and sale of goods but have also found them to cover the purchase and sale of services. The court continued, noting that buyers of services included employers in the labor market and that the alleged wage-fixing agreement was another form of price fixing.

Second, the DOJ’s aggressive posture in these cases continued in January 2022 when it charged four home healthcare staffing company owners with allegedly fixing workers’ wages and agreeing not to hire each other’s workers in 2020.

Third, until recently, each of the criminal charges brought by the DOJ have involved healthcare companies. The ability of the DOJ to criminally prosecute alleged non-solicit agreements is being challenged, where motions to dismiss are pending. However, in December 2021, the Division expanded its reach into the aerospace industry, charging a former government contractor and five employees of its suppliers for alleged allocation agreements relating to the hiring of engineers (U.S. v. Patel et al.). The DOJ’s indictment alleges that one of the defendants agreed with suppliers to allocate employees by restricting hiring and recruiting between the companies for almost a decade.

The increased focus and enforcement action relating to labor markets underscores the Biden administration’s stated priorities. For example, in July 2021, President Biden issued an Executive Order “Promoting Competition in the American Economy” which provided wide-ranging guidance and instructions to the federal government to promote and increase competition. One specific, identified initiative involved strengthening of guidance to prevent employers from collaborating to suppress wages, reduce benefits or engage in other anticompetitive practices. With the recent flurry of criminal labor market charges; repeated statements by the Division to the effect that protecting competition in the labor markets continues to be a top priority; the Division’s hosting of a joint workshop with the FTC in December 2021, titled “Making Competition Work: Promoting Competition in the Labor Markets”; and widespread support from the Biden administration, one can expect the Division’s focus on criminal enforcement in the labor markets to be an increasing refrain.

TAKEWAYS

The DOJ’s novel and aggressive stance on expanding Sherman Act criminal violations to include the ways in which companies engage with their workers may not ultimately be sustained by trial or appellate courts. For now, however, the DOJ remains determined to investigate and prosecute alleged “wage-fixing and no-poach” issues.

With the DOJ’s resolute approach changing the landscape of antitrust labor market cases, companies would be prudent to ensure that their compliance programs are up to date and include specific and appropriate guidance on these issues. When considering typical antitrust cartel investigations, the focus has traditionally been on alleged conspiracies relating to pricing, sales, and/or bidding of certain products or in certain geographic areas. The DOJ’s changing attitude toward labor market antitrust issues is a notable shift and may be directed at entirely different segments of a corporate business, including human resources and hiring, in any industry. To address the DOJ’s assertive approach, employers involved in hiring and compensation-related decisions would be well served to receive training addressing these potential antitrust issues.

CONSUMER PRODUCTS

Consumer products have recently been a hotbed of DOJ investigations for antitrust violations. The DOJ has several long-running investigations into a wide range of industries, including broiler chickens, commercial flooring and, most recently, DVDs and Blu-Rays in e-commerce. The latest developments in these investigations reflect the DOJ’s continued, and increasingly heightened, focus on prosecuting companies and high-ranking executives engaged in alleged anticompetitive conduct that directly affects American consumers.

BROILER CHICKENS

The DOJ’s first trial in its ongoing investigation into the $95 billion broiler chicken industry resulted in a hung jury. The lengthy trial began in October 2021, in Denver, against 10 current and former executives from major broiler chicken producers (and came on the heels of a guilty plea obtained by the DOJ earlier in 2021 in a price-fixing case against Pilgrim’s Pride Corp (Pilgrim’s Pride), which resulted in a $107 million criminal fine). The DOJ alleged that the defendants engaged in an overarching price-fixing and bid-rigging scheme for approximately a decade. But after seven weeks of trial, including four days of deliberation, the jurors remained deadlocked, resulting in the judge declaring a mistrial. The result highlights the challenge facing the DOJ in meeting its burden of proof on an alleged conspiracy based largely on documents and without cooperating witnesses.

After the mistrial, the defendants asked the court for a judgment of acquittal. The judge denied that request, and a retrial in the case began in late February 2022. Additionally, the DOJ has other cases in the pipeline in the same long-running investigation, including against broiler-chicken producers Claxton Poultry Farms and Koch Foods, Inc., as well as criminal charges against four additional former Pilgrim’s Pride executives. Trials for those additional corporate and individual defendants are set for October 31, 2022, and July 18, 2022, respectively.

In a related civil action, a federal judge in Illinois gave final approval for a $181 million settlement between six poultry producers and end-user consumers who claimed the companies conspired to fix broiler chicken prices. The deal was reached between the consumer plaintiffs and Peco Foods, Fieldale Farms, George’s, Tyson Foods, Pilgrim’s Pride and Mar-Jac Poultry. Consumers are still pursuing claims against 12 additional poultry companies.

Going forward, the DOJ indicated it will prioritize and pursue more matters that impact competition in agriculture. In fact, the DOJ and the Department of Agriculture (USDA) recently issued a joint statement on their shared commitment to effectively enforcing federal competition laws that protect farmers, ranchers, and other agricultural producers and growers from unfair and anticompetitive practices. As part of their effort to step up enforcement in the agriculture sector, the agencies launched farmerfairness.gov, a new online tool that allows farmers and ranchers to anonymously report potentially unfair and anticompetitive practices in the livestock and poultry sectors. If, after a preliminary review, a complaint raises sufficient concern under antitrust laws, it will be selected for further investigation, and may lead to the opening of a formal investigation.

One area to watch is the cattle civil antitrust litigation. While the DOJ is still in the investigation stage, direct purchaser plaintiffs filed a civil lawsuit against the Big Four meatpacking companies, accusing them of conspiring to drive up the price of beef to make bigger profits by suppressing slaughter volumes and constraining the supply of meat. On February 1, 2022, the proposed class of direct buyers reached a $52.5 million deal with one of the Big Four defendants JBS USA (JBS), which provided both monetary relief to the class, and JBS’s “extensive cooperation” in the buyers’ ongoing litigation against the three remaining nonsettling defendants. The settlement is currently before the US District Court for the District of Minnesota awaiting preliminary approval. It will be interesting to see what next steps the DOJ will take considering the civil litigation, particularly the evidence that will be provided by JBS’s cooperation.

COMMERCIAL FLOORING

Another long-running bid-rigging investigation in the commercial flooring industry resulted in additional indictments last year, as well. To date, the DOJ has indicted three companies and six individuals, including Mr. David’s Flooring International LLC (Mr. David’s), a Chicago-based commercial flooring contractor that pleaded guilty in August 2021. Like the first two companies that the DOJ charged, Mr. David’s was charged for conspiring with other companies—for at least eight years, from 2009 to 2017—to rig bids for commercial flooring by agreeing which company would win the bid and which would submit a complementary, intentionally losing bid. The DOJ also charged Mr. David’s with money laundering for allegedly concealing kickback payments the company made, in exchange for unauthorized discounts, to an account executive for a large flooring manufacturer.

As part of its guilty plea, Mr. David’s agreed to pay at least a $1.2 million criminal fine for its role in the conspiracies. This follows guilty pleas that the DOJ obtained from PCI FlorTech, Inc., in 2019 and Vortex Commercial Flooring in 2020, which resulted in a $150,000 criminal fine and $1.4 million in fines and restitution, respectively.

DVDS AND BLU-RAYS

With the expansion of e-commerce, the DOJ has also been active in prosecuting price-fixing conspiracies for consumer goods in online marketplaces. In 2021, the DOJ charged four individuals, one in June and three in November, with conspiring to fix prices of DVDs and Blu-Ray discs sold through an online marketplace. According to the charges, between November 2017 and October 2019 the defendants agreed to raise and maintain the prices of DVDs and Blu-Ray discs sold in the marketplace’s storefronts, the business addresses of which were located in five different states. The affected sales to customers throughout the United States by the four defendants ranged between $360,000 to $1,100,000. Each of the defendants have pleaded guilty. While the affected sales pale in comparison to large-scale matters like broiler chickens, the DOJ has shown equal willingness to aggressively pursue alleged collusive conduct in smaller and emerging sectors, particularly in online marketplaces.

TAKEAWAYS

Given the long-running nature of the investigations involving broiler chickens and commercial flooring, the change in the US presidential administration seems to have only increased the DOJ’s scrutiny into industries affecting consumer goods. Looking ahead, consumer products will likely remain one of the DOJ’s top priorities. Indeed, while the Biden administration recognizes the strain the pandemic has put on supply chain issues, resulting in higher prices in consumer goods, the White House has also placed the blame on “another culprit”: “dominant corporations in uncompetitive markets taking advantage of their market power to  raise prices.”

The DOJ recently announced an initiative to deter, detect and prosecute those who would exploit supply chain disruptions to engage in collusive conduct. As part of that initiative, the DOJ is prioritizing any existing investigations where competitors may be exploiting supply chain disruptions for illicit profit and is undertaking measures to proactively investigate collusion in industries particularly affected by supply disruptions. The DOJ is also working with authorities in other countries to detect and combat global supply chain collusion.

Those who work in the consumer goods space can expect additional scrutiny and enforcement from the DOJ in the months and years to come, especially in industries that have experienced higher consumer price increases. It is therefore important to have robust compliance programs, including appropriate employee training, in place to address and provide guidance on these issues.

PROCUREMENT

The DOJ’s Procurement Collusion Strike Force (PCSF)—an interagency partnership established in November 2019 to combat antitrust crimes and related fraud involving government procurement and funding—remained a top priority for the Division in 2021. Since its inception in 2019, the PCSF has significantly expanded in scope. The strike force now has offices in 22 federal districts staffed with DOJ trial attorneys, assistant US attorneys and agents from seven national law enforcement partner agencies. The PCSF has trained more than 17,000 special agents, attorneys, prosecutors, investigators, analysts, auditors, data scientists and procurement officials. In addition, in the spring of 2021 the PCSF announced the creation of PCSF Global. The goal of PCSF Global is to build connections with enforcement counterparts around the world and to investigate and prosecute collusion in procurement relating to US government funds spent overseas. The PCSF currently has almost three dozen investigations open domestically and internationally.

Below are a few key highlights from 2021:

PCSF’S RECENT WORK

On October 13, 2021, PCSF Director Daniel Glad delivered a speech recapping the strike force’s recent work and highlighting enforcement priorities, including “set-aside fraud” and collusion targeting infrastructure spending. Set-aside fraud refers to collusion and fraud affecting government programs that are designed to provide opportunities for disadvantaged communities and individuals to participate more fully in public procurement. Glad highlighted the PCSF’s recent investigation into set-aside fraud involving construction contracts in San Antonio. The director also commented that infrastructure will continue to be a focus for the PCSF as federal spending for infrastructure increases. Glad added that while the Sherman Act is the PCSF’s “lodestar,” the strike force’s focus includes prosecuting other crimes that also corrupt the competitive process for obtaining government contracts and funding.

BELGIAN SECURITY SERVICES

On June 25, 2021, a Belgian security services company, G4S Secure Solutions NV (G4S), pled guilty for its role in a conspiracy to rig bids, allocate customers and fix prices for contracts with the US Department of Defense and with the NATO Communications and Information Agency (NCI Agency) to provide security services for military bases and installations in Belgium. The NCI Agency is funded in part by the United States. This was the first international resolution obtained by the PCSF, as well as the PCSF’s first charged matter.

The DOJ alleged that G4S participated in a conspiracy with two competitors to coordinate price increases, submit artificially determined, non-competitive bids and refrain from bidding for certain contracts from spring 2019 through summer 2020. The DOJ further alleged that the conspirators colluded during in-person meetings and via phone, text messages, encrypted messaging applications and email. G4S agreed to pay a $15 million criminal fine. In October 2021, two former employees of G4S also pled guilty to charges relating to the same conspiracy. Both individuals are Belgian nationals residing in Belgium.

The investigation demonstrates that the PCSF is focused on conspiracies that victimize the US government, whether the conspiracies or government activities are based in the United States or abroad. The PCSF remains committed to actively investigating and prosecuting companies and individuals based outside of the United States, such as the defendants here, who distort the competitive process for US government contracts.

NORTH CAROLINA ENGINEERING

In June 2021, a North Carolina engineering firm pled guilty to conspiring to rig bids and defraud the North Carolina Department of Transportation (NCDOT). Contech Engineered Solutions LLC and Brent Brewbaker, one of its former executives, had been indicted in October 2020. They were charged with six counts of bid rigging, conspiracy to commit fraud, mail fraud and wire fraud. The conspiracies, reaching back to at least 2009, involved water drainage systems projects. Contech agreed to pay a criminal fine of $7 million and approximately $1.5 million in restitution to the NCDOT. On February 1, 2022, Brewbaker was convicted by a jury of all six charged counts.

Contech argued that the conspiracy was not a per se violation because Contech and Pomona Pipe Products, its co-conspirator, competed vertically: Contech as the supplier, Pomona Pipe as the reseller. The district court disagreed, holding that Contech and Pomona held themselves out to NCDOT as competitors and, as such, this was bid-rigging subject to the per se analysis.

This matter is precisely the type of case the PCSF was designed to investigate. The PCSF trains law enforcement officers, procurement officials and others across the country “to better deter and detect antitrust crimes affecting government procurement, grant, and program funding.” With more government funding earmarked for infrastructure and an increased budget for the Antitrust Division, the PCSF is likely to increase its footprint at all levels of government.

MINNESOTA CONCRETE 

In September 2021, Minnesota concrete contractor Clarence Olson pled guilty to a bid-rigging charge. Olson and his co-conspirators conspired to rig bids on concrete repair and construction contracts submitted to at least four municipalities in Minnesota, including local governments and school districts in the Minneapolis-St. Paul area. The conspiracy began as early as September 2012 and continued through at least June 2017. Minnesota law required that municipalities obtain two or more quotations from independent bidders before awarding contracts above a certain threshold. According to the plea agreement, at a competitor’s request Olson submitted bid quotes with prices higher than that of the competitor to ensure that Olson would lose the bid.

RISKS BEYOND PRISON AND FINES 

Charges of bid rigging and procurement fraud can have collateral consequences beyond criminal liability. Companies and individuals are subject to state and federal suspension and debarment procedures. A suspension temporarily prevents a company from government contracting and typically lasts until the investigation or subsequent legal proceedings have terminated. If a company pleads guilty or is convicted, it may be debarred—a permanent ban from doing business with a government for a specified time period. The duration of the debarment typically correlates to the severity of the offense. Under federal law, a contractor may be debarred without a conviction if the evidence shows a knowing failure to disclose credible evidence of a criminal violation of federal antitrust law (48 CFR § 9.406-2(b)(vi)(A)).

Moreover, charges filed against affiliated individuals may impute the company when that individual was acting as an agent of the company. Although suspensions and debarments may last for shorter periods of time, the reputational damage may last far longer. If made public, the debarment could also impact a company’s or individual’s ability to do business in the private sector. Suspension and debarment are collateral consequences that the DOJ may consider in the process of investigating and prosecuting a criminal antitrust violation.

THE FUTURE OF THE PCSF 

The first year of the PCSF was dedicated to outreach, education and partnership implementation. The PCSF has now established partnerships with many law enforcement agencies across the country. Beyond domestic interagency investigations, the PCSF has launched initiatives that will expand its reach and target acute problems in government procurement. Investigations initiated by the PCSF have taken time to be investigated (particularly with a global pandemic making certain investigative steps more challenging), but in some instances these investigations have reached the recommendation and/or charging stage. We expect to see additional PCSF cases in the coming year.

PCSF Global: The PCSF has launched PCSF Global, an initiative aimed at fostering partnerships with international enforcement authorities. The US government spends considerable funds abroad, particularly for military contracts. International partners lend their expertise with foreign markets and give the PCSF eyes and ears on the ground abroad.

Set-Aside Fraud: One of the PCSF enforcement priorities is combating fraud in government set-aside programs. Such programs set aside government contracting opportunities for special interest groups such as disabled veterans, small businesses and minority-owned businesses. In January 2021, President Biden signed “Advancing Racial Equity and Support for Underserved Communities Through the Federal Government,” an executive order aimed at increasing equal access to government contracting and procurement opportunities. While the PCSF mandate to combat fraud on set-aside programs existed before the executive order, it is strengthened by the Biden administration’s directive.

Data Analytics Project: The PCSF has hosted webinars attended by data scientists, analysts and auditors focused on using data analytics to detect procurement fraud. Data Analytics Project attorneys have engaged analytics shops to build tools for detecting collusion using bid data. Currently, the Data Analytics Project is focused on US procurement. In light of the PCSF Global initiative, it is possible that international partners will engage with the PCSF to develop cross-border tools.

Criminal Antitrust Anti-Retaliation Act (CAARA): CAARA, the first antitrust-specific whistleblower protection legislation, became law in December 2020. It prohibits employers from retaliating against employees, contractors, subcontractors and agents of employers for reporting antitrust violations or participating in antitrust government proceedings. The Securities and Exchange Commission (SEC), Internal Revenue Service (IRS) and other government agencies saw increased reporting since implementing similar whistleblower protections. CAARA is a tool that can be used to encourage early reporting and cooperation because of the legal protection it offers to whistleblowers, furthering the PCSF’s goals to deter and detect fraud.

GENERICS

For more than seven years, the generic pharmaceutical industry has been caught up in investigations and litigation asking whether the industry has engaged in a conspiracy to violate the antitrust laws.[2] In 2014 the Connecticut attorney general opened a civil investigation into whether manufacturers of generic pharmaceuticals had fixed prices and allocated markets. Shortly thereafter, the DOJ joined the mix, first opening a criminal investigation into these issues and then, a few years later, opening a civil False Claims Act (FCA) investigation into the same conduct. And by 2016, the plaintiffs’ bar had joined the fray, filing the first complaints of what soon became a massive and unwieldy multidistrict litigation (MDL), ultimately consolidated in the United States District Court for the Eastern District of Pennsylvania.

Below, we provide a brief update on this massive MDL and the DOJ investigation that started it.

MULTIDISTRICT LITIGATION: IN RE: GENERICS PHARMACEUTICALS PRICING ANTITRUST LITIGATION, NO. 16-MD-2724 (E. D. PA. 2016)

In re: Generics, the broad and long-running MDL, remains at the center of the pharmaceutical cases this past year. In addition to the governments of 49 states, the District of Columbia, American Samoa, Guam, Puerto Rico, Northern Mariana Island and the US Virgin Islands, the MDL also includes three putative plaintiff classes (direct purchaser, end-payer and indirect reseller plaintiffs), and more than a dozen individual entities (including major retailers, healthcare insurers and even some local governments) that filed opt-out complaints (e.g., The Kroger Co. et al, Humana Inc., and United Healthcare Services, Inc.). At present, the MDL involves at least 85 complaints alleging misconduct regarding more than 285 drugs, 38 manufacturers and 25 individual defendants.

The first civil complaints were filed in 2016, initially encompassing claims concerning just two drugs, digoxin and doxycycline. The Judicial Panel on Multidistrict Litigation later consolidated claims involving other drugs into the MDL. As the litigation has evolved, private plaintiffs and state attorneys general have since filed complaints involving numerous drugs, focusing on an alleged overarching conspiracy to fix prices, rig bids and allocate customers across the generic pharmaceutical industry. The state attorneys general, which have led the expansion of the MDL, have filed three such overarching conspiracy complaints: (1) a June 2018 complaint focused on Heritage Pharmaceuticals; (2) a May 2019 complaint focused on Teva Pharmaceuticals; and (3) a May 2020 complaint focused on dermatology products.  Many plaintiffs are seeking joint and several liability for the alleged overarching conspiracy—the scope of which is unprecedent and untested in antitrust litigation.

In May 2021, US District Judge Cynthia M. Rufe selected the state attorneys general overarching conspiracy complaint centered on over 80 dermatology products to serve as a bellwether case in the MDL. Two drug-specific complaints filed by the direct purchaser and end payer plaintiffs will also proceed as bellwethers. The court originally selected the state attorneys general May 2019 Teva-centric overarching conspiracy complaint as the bellwether. A coalition of 44 state attorneys general led by Connecticut filed the Teva-centric case in May 2019. However, following the DOJ’s August 2020 grand jury indictment of Teva on criminal price-fixing charges (see below), Teva petitioned to have the selection of its case as bellwether overturned. The pharmaceutical companies then sought to have the states’ first filed case, which centered around Heritage Pharmaceuticals, chosen as a replacement bellwether because the case involved a smaller scope and was more manageable to litigate. The states advocated for the May 2020 dermatology action as the bellwether. Despite involving over 80 drugs, the states contended this complaint was more indicative of the alleged conspiracy and their investigation had evolved in the years since the Heritage complaint was filed. Judge Rufe found that “the dermatology action [wa]s more typical of the overarching conspiracy cases than the Heritage-centric action and w[ould] provide overall a more comprehensive view of the positions of more parties in the MDL.”[3]

The bellwether selection was just the first step in what will continue to be a long series of cases. At present, class certification briefing in the drug-specific bellwether cases is scheduled to be completed by mid-October 2023. The district court will schedule hearings on class certification for dates to be determined in November 2023.[4] All motions for summary judgment regarding the states’ bellwether case must be filed by October 16, 2023, and motions for summary judgment regarding the drug-specific bellwether cases must be filed no later than November 16, 2023.[5] Pretrial conferences are not yet scheduled.

CRIMINAL LITIGATION: UNITED STATES V. TEVA PHARMACEUTICALS USA, INC. AND GLENMARK PHARMACEUTICALS, USA (E.D. PA. 2020)

While the MDL has proceeded, the DOJ has continued with its separate criminal investigation. In June 2020, the DOJ indicted Glenmark Pharmaceuticals, USA, alleging that it engaged in a conspiracy to fix prices for pravastatin and other undisclosed drugs from around May 2013 through December 2015. In August 2020, the DOJ filed a superseding indictment naming Teva as an alleged co-conspirator.[6] Glenmark sought to sever the cases to proceed with separate trials, but US District Judge R. Barclay Surrick recently denied that motion and ruled that a joint trial could proceed.[7] In June 2021, the Antitrust Division filed a scheduling order motion seeking a trial date of January 18, 2022; however, counsel for Glenmark and Teva found this date “unrealistic in light of the enormous volume of complex discovery in this case (more than 22 million documents and counting), as well as the backlog of trials in this District due to the pandemic.”[8] To date, no schedule has been set.

GENERIC DRUG COMPANY PENALTIES AND SETTLEMENTS

DOJ Investigations

Nonetheless, the DOJ has already obtained several settlements in both the criminal and civil FCA investigations, including securing several deferred prosecution agreements (DPAs) from the targets of its investigations.[9] In fact, the DOJ’s Antitrust Division and Civil Division have already collected more than $1 billion in penalties as a result of their investigations into the generic drug industry, as detailed below.

Most recently, in October 2021, Taro Pharmaceuticals USA, Inc., Sandoz Inc., and Apotex Corporation agreed to pay $213.2 million, $185 million and $49 million, respectively, to settle alleged False Claims Act violations stemming from conspiracies to fix prices of multiple generic drugs.[10] The Civil Division alleges that the three companies illegally paid and received compensation between 2013 and 2015 resulting from alleged agreements on price, supply and allocation of customers with other generic pharmaceutical manufacturers for 20 generic drugs, including etodolac, nystatin-triamcinolone cream and ointment, benazepril HCTZ and pravastatin. In addition, the companies entered into five-year corporate integrity agreements with the Health and Human Services Office of the Inspector General, which provides oversight for federal healthcare programs like Medicare and Medicaid. These agreements require internal monitoring and price transparency.

Multidistrict Litigation

In connection with the In re: Generics MDL, the first civil settlements with certain plaintiffs were announced in 2021. In June 2021, Teva announced it settled, for $925,000, all claims brought by the state of Mississippi. In November 2021, two US subsidiaries of Sun Pharma—Taro Pharmaceuticals U.S.A., Inc., and Sun Pharmaceutical Industries, Inc.—agreed to pay a total of $85 million to a proposed class of direct purchaser plaintiffs (DPPs) in the MDL. The settlement can be reduced, however, by $10 million if the direct purchasers that opt out of the putative class collectively account for 20% or more of Taro’s and Sun Pharmaceutical Industries, Inc.’s aggregate dollar sales of the generic drugs at issue in the direct purchaser action.

Entity/Individual Date Charges/Resolution Settlement Amount
Jeffrey Glazer and Jason Malek (former Heritage Pharmaceuticals executives) Dec. 2016 Pleaded guilty to conspiring to fix prices, rig bids, and allocate customers for doxycycline hyclate and glyburide. Both awaiting sentencing. TBD
Heritage Pharmaceuticals May 2019 Entered into a DPA with the Antitrust Division to resolve the DOJ’s charges relating to glyburide, a drug used to treat diabetes, agreeing to pay a criminal penalty and cooperate fully with the ongoing criminal investigation. In a separate civil resolution with the Civil Division, Heritage agreed to pay to resolve allegations under the FCA related to the alleged price-fixing conspiracy. $225K criminal penalty and $7.1M civil settlement
Rising Pharmaceuticals Dec. 2019 Entered into a DPA with the Antitrust Division to resolve the DOJ’s charges regarding an alleged conspiracy to fix prices for a hypertension medication. $3.5M criminal fine and civil penalty combined
H. Armando Kellum (former Sandoz executive) Feb. 2020 Pleaded guilty to fixing prices, rigging bids and allocating customers for several drugs, including clobetasol and nystatin triamcinolone cream. Kellum is awaiting sentencing. TBD
Sandoz Inc. Mar. 2020 and Oct. 2021 Agreed to pay a criminal penalty for allegedly conspiring to fix prices on several generic drugs, including, but not limited to, drugs used to treat brain cancer, cystic fibrosis, arthritis and hypertension. Agreed to pay a civil penalty for aiding and receiving compensation prohibited by the Anti-Kickback Statute through arrangements on price, supply, and allocation of customers for drugs such as benazepril HCTZ and clobetasol. $195M criminal penalty and $185M civil settlement
Apotex Corporation May 2020 and Oct. 2021 Agreed to pay a criminal penalty to resolve allegations that it conspired to fix prices for pravastatin. $24.1M criminal penalty and $49M civil settlement
Taro Pharmaceutical USA, Inc. July 2020 and Oct. 2021 Entered into a DPA with the Antitrust Division to resolve the DOJ’s charges regarding an alleged conspiracy related to several drugs with affected sales of over $500 million. $205.6M criminal fine and $213.2M civil penalty

TAKEAWAYS

Although the district court has allowed several cases to proceed past the motion to dismiss stage, it remains unclear if the plaintiffs’ expansive allegations will survive summary judgment and later proceedings. In the months to come, there will continue to be interplay between the criminal trial proceeding against Teva and Glenmark and the civil cases proceeding in the MDL. For example, the MDL court is currently considering whether the DOJ should be allowed to extend a continued stay of depositions in the civil cases of specific individuals it views as “key” to its criminal investigation.

This investigation and litigation has brought significant attention to the generic drug and pharmaceutical industry at large, including increased scrutiny and calls for action by Congress (such as the US House of Representatives Committee on Oversight and Reform’s three-year Drug Pricing Investigation, which culminated in a majority staff report released in December 2021). Several pieces of legislation aimed at reigning in pharmaceutical prices have also been introduced. In all, these investigations and litigation, coupled with the increases in oversight and willingness to investigate by state and federal governments, suggest that the pharmaceutical industry will remain subject to heightened scrutiny of its business practices for many years to come.

CONCLUSION

As we move into the second quarter of 2022, one thing is abundantly clear: The DOJ’s aggressive criminal antitrust enforcement will only continue to increase. The Division ended the last fiscal year with 146 open grand jury investigations—the most in 30 years.[11] President Biden has made competition a priority for his administration.[12] Attorney General Garland has specifically identified “reinvigorating antitrust enforcement” as at the center of the DOJ’s mission.[13] In its FY 2022 budget request, the DOJ requested a 9% increase in spending, amounting to an additional $200 million.[14]

At the same time, there seems to be a shift in tone and approach at the Division. The Division has started to push the boundaries of criminal antitrust enforcement. As noted above, it has pursued naked no-poach agreements criminally, something that it had never done prior to 2020. In recent remarks to the ABA Institute on White Collar Crime, Richard Powers, the US Deputy Assistant Attorney General for Criminal Enforcement in the Division, noted that the Division is also prepared to criminally charge individual executives for violations of Section 2 of the Sherman Act, the provision that prohibits market monopolization—another exceedingly aggressive and controversial approach and something that the Division has not done in decades. To cap it off, the Division has shown a tendency, of late, to take cases to trial, rather than negotiate resolutions. And, it has hired a number of prominent Criminal Division alumni, several with significant trial experience, to help with this effort. All of this suggests that the Division is prepared to stretch the law in places and go the distance to pursue what it views as criminal violations of the antitrust laws.

 

 

ENDNOTES

[1] Attorney General Merrick B. Garland Remarks to the ABA Institute on White Collar Crime, Thursday, March 3, 2022, https://www.justice.gov/opa/speech/attorney-general-merrick-b-garland-delivers-remarks-aba-institute-white-collar-crime

[2] Christopher Rowland, Investigation of generic ‘cartel’ expands to 300 drugs, THE WASHINGTON POST (Dec. 9, 2018), https://www.washingtonpost.com/business/economy/investigation-of-generic-cartel-expands-to-300-drugs/2018/12/09/fb900e80-f708-11e8-863c-9e2f864d47e7_story.html

[3] Pretrial Order No. 171 (Revised Bellwether Selection; Stay of Certain Discovery), MDL 2724 Dkt. 1769 (E.D. Pa. May 7, 2021), at p. 3.

[4] In re: Generics, Pretrial Order No. 188 (Schedule of Further Proceedings in Bellwether Cases), available at https://www.paed.uscourts.gov/documents/MDL/MDL2724/16md2724%20PTO188.pdf

[5] Id.

[6] U.S. v. Teva Pharmaceuticals USA, Inc. and Glenmark Pharmaceuticals, USA, U.S. DEP’T OF JUSTICE (Aug. 25, 2020), https://www.justice.gov/atr/case/us-v-teva-pharmaceuticals-usa-inc

[7] US v. Teva Pharmaceuticals USA, Inc. and Glenmark Pharmaceuticals, USA, No. 20-200 Dkt. 146 (E. D. Pa. Jan. 14, 2022).

[8] Letter from D. Axelrod and K. Stojilkovic to Judge Surrick re: United States v. Glenmark Pharmaceuticals Inc., USA et al., 20-cr-200 (RBS), No. 2:20-cr-00200-RBS Dkt. 94 (June 10, 2021).

[9] Normally, in a cartel investigation, guilty pleas would be used; however, because a guilty plea would bar these companies from participating in certain government healthcare programs, which would effectively terminate business for some of the companies involved and deprive millions of Americans of important, often life-saving medication, the DOJ used DPAs in these settlements.

[10] Pharmaceutical Companies Pay Over $400 Million to Resolve Alleged False Claims Act Liability for Price-Fixing of Generic Drugs, U.S. DEP’T OF JUSTICE
(Oct. 1, 2021), https://www.justice.gov/opa/pr/pharmaceutical-companies-pay-over-400-million-resolve-alleged-false-claims-act-liability

[11] Id.

[12] https://www.whitehouse.gov/briefing-room/speeches-remarks/2021/07/09/remarks-by-president-biden-at-signing-of-an-executive-orderpromoting-competition-in-the-american-economy/

[13] https://www.appropriations.senate.gov/imo/media/doc/Statement%20of%20Attorney%20General%20Merrick%20Garland%20-%20June%209,%2020213.pdf

[14] Id.

© 2022 McDermott Will & Emery

Article By Justin P. Murphy, Paul M. Thompson, Han Cui, Joshua W. Eastby, Anthony S. Ferrara and Alexandra Lewis and Marisa E. Poncia of McDermott Will & Emery

Defense Department Takes Aim at Anticompetitive Mergers in Defense Industry

Government says market concentration poses a national security risk.

In 1990, the Department of Defense could turn to 13 companies to produce tactical missiles, eight to make fixed-wing aircraft, and another eight to build ships. Now there are only three missile and three aircraft makers, and only two surface ship builders. There were eight satellite manufacturers in 1990; today there are only four. Tanks and other tracked vehicles are now made by a single company.

Such market consolidation is potentially harmful for the usual reasons, such as less innovation, higher prices, and a lower level of customer service. But when that customer is the DOD, having only one or a handful of defense equipment makers, suddenly critical military missions, military and civilian lives, and national security are put at risk, “[P]articularly in cases where the existing dominant supplier or suppliers are influenced by an adversary nation ….”

That is the worrisome assessment contained in a report issued by the DOD which is following up on President Biden’s July 2021 executive order, titled “Promoting Competition in the American Economy.” DOD is just one of the agencies now responding with plans to evaluate their respective competitive landscapes and to make recommendations to restore productive rivalries.

If market consolidation suggests harmful anticompetitive conditions, then the defense industry’s merger history should send up multiple flares. “Since the 1990s, the defense sector has consolidated substantially, transitioning from 51 to 5 aerospace and defense prime contractors,” the report says.

DOD offers five general recommendations to increase defense industry competition, saying it should:

  • Strengthen Merger Oversight. When a merger threatens DOD interests, DOD will support the Federal Trade Commission and Department of Justice in antitrust investigations and recommendations involving the defense industry.
  • Address Intellectual Property Limitations. Certain practices surrounding intellectual property and data rights have been used to limit competition in DOD purchasing and to induce “vendor-lock” and other undesirable results. DOD says it will identify its long-term intellectual property needs early in the bidding process. This should ensure that intellectual property is a key factor in evaluating competitive awards, and a negotiation objective in sole-source awards and when contracting with vendors willing to provide the government the intellectual property and rights it needs.
  • Increase New Entrants. To counteract the shrinking list of contractors, DOD says it will work to attract new entrants to the defense marketplace by reducing barriers to entry. This will be accomplished through small business outreach and support. DOD says it will use “acquisition authorities” that will give it the flexibility to adopt and incorporate commercial best practices to reduce barriers and attract new vendors.
  • Increase Opportunities for Small Businesses. DOD will increase small business participation in defense procurement, with an emphasis on increasing competition in priority segments of the defense industry.
  • Implement Sector-Specific Supply Chain Resiliency Plans. DOD calls for greater resilience in the supply chain for five priority sectors: casting and forgings, missiles and munitions, energy storage and batteries, strategic and critical materials, and microelectronics.

In June 2021, Bradley Martin, Ph.D., a retired Navy captain now with the RAND National Security Supply Chain Institute, wrote of the dangers of the defense industry’s shift to practices that make resupply of military equipment “highly questionable” should demand for equipment suddenly spike.

Abrams Main Battle Tank manufactured by General Dynamics, the sole producer of tanks and other tracked combat vehicles for the Department of Defense. Photo from General Dynamics’ website.

“If evaluated solely against meeting steady-state demand, the military operational supply chain works as it should,” Martin wrote. “The problem is not performance relative to incentives. Rather, the problem is that the existing guidance does not lead the system to conduct analyses and make decisions needed to support the highly demanding combat operations likely in a conflict with a major power. As a result, the ability of this system to properly support the joint force in the event of major conflict is at best untested and could be highly problematic.”

Recent Public and Private Actions

In addition to the government’s focus on the overall industry, it has been taking action to address specific instances of alleged and potentially anticompetitive behavior. In one instance, a private class action quickly followed.

In January, the FTC sued to stop Lockheed Martin Corp.’s $4.4 billion acquisition of Aerojet Rocketdyne Holdings Inc., marking the first time in decades the government opposed a defense industry merger. (Read FTC Sues to Torpedo Lockheed’s $4.4 Billion Aerojet Acquisition.)

The FTC noted that Aerojet, which reported more than $2 billion in 2020 revenue, is the last independent U.S. supplier of defense-critical missile propulsion systems. If the deal were to go through, the FTC said, “Lockheed will use its control of Aerojet to harm rival defense contractors and further consolidate multiple markets critical to national security and defense.”

Lockheed leads the pack of the largest defense contractors in the world. It is one of the leading suppliers of missile technology in a concentrated group that includes Raytheon Technologies, Inc., Northrop Grumman Corporation, and The Boeing Company. All are missile system prime contractors to the Department of Defense. The FTC says these companies are intermediaries between the U.S. government and the missile supply chain, including subcontractors like Aerojet.

In December 2021, a federal grand jury in Connecticut returned an indictment charging a former manager of leading aerospace engineering company Pratt & Whitney, Inc., and five executives of outsource engineering suppliers for participating in a long-running conspiracy to restrict the hiring and recruiting of employees among their respective companies. (Read Aerospace Execs Indicted for Conspiracy to Limit Worker Pay and Job Prospects.)

The conspiracy is said to have affected thousands of engineers and other skilled workers in the aerospace industry who perform services in the design, manufacturing, and servicing of aircraft components for both commercial and military purposes. According to the felony indictment, unsealed in U.S. District Court for the District of Connecticut, six individuals conspired with others to allocate employees by agreeing not to hire or solicit professionals from each other’s ranks.

Following the indictment, a jet engine mechanic formerly employed by Pratt & Whitney filed a class action suit in federal court in Connecticut against the company and five outsource engineer suppliers. The plaintiffs seek damages because of the alleged conspiracy to suppress labor costs and hamper employees’ career prospects using illegal no-poach agreements in violation of antitrust laws.

Ukraine Invasion Demonstrates ‘Rapid Escalation’

Combined with Russia’s invasion of Ukraine and the alarming specter of a widening conflict, security supply chain expert Bradley Martin’s assessment that the industry may not be set up to address a spike in demand for military equipment illustrates why the DOD’s plan to improve competition in the defense industry is an urgent one.

“The Ukraine crisis shows that situations can rapidly escalate, potentially leading to situations where spikes in demand might occur in largely unexpected ways,” Martin told the MoginRubin Blog. “If the U.S. had to deal with an expanded conflict in Europe, such as might occur if Russia were to threaten a NATO ally, DOD could reallocate munitions and supplies for some period, but expanding production and inventory over a longer period would be very challenging. This would likely be exactly the kind of conflict where low-standing issues with supply chains would show themselves, sometimes in unexpected ways.”

Defense is just one of several industries seeing increased scrutiny from enforcers. Healthcare also has been a focus of late (see our article regarding FTC’s action to stop a New England hospital merger). The technology sector is getting attention, too. As we wrote in February, chipmaker Nvidia called off its vertical acquisition of Arm Ltd. following an FTC challenge to the deal. A recent Treasury Department report on the alcoholic beverage industry foreshadows greater attention from the FTC and DOJ regarding deals in that sector.

In October the FTC said it was bringing back its policy of routinely restricting anticompetitive mergers, putting “industry on notice” that it will require aggressive acquirers to obtain prior approval “before closing any future transaction affecting each relevant market for which a violation was alleged, for a minimum of 10 years.” The agency is clearly making good on its promise.   

Edited by Tom Hagy for MoginRubin LLP.

© MoginRubin LLP
For more articles about antitrust, visit the NLR Antitrust Law section.