Category: Antitrust

Pennsylvania Federal Court Declines to Preliminarily Enjoin FTC Rule Banning Non-Competes

Earlier today (July 23, 2024), Judge Hodge in the U.S. District Court for the Eastern District of Pennsylvania denied a tree care company’s motion to stay the effective date and preliminarily enjoin the Federal Trade Commission’s (“FTC”) proposed final rule (“Final Rule”) banning nearly all non-competes. ATS Tree Services, LLC v. Federal Trade Commission, No. 2:24-cv-01743-KBH (E.D. Pa.). The decision comes in the wake of the U.S. District Court for the Northern District of Texas’ July 3, 2024 ruling to the contrary in Ryan LLC v. Federal Trade Commission, No. 3:24-cv-00986-E, which stayed the Final Rule’s effective date as to the plaintiffs in that case, but had no nationwide effect.

The Pennsylvania Court’s Decision

The Pennsylvania court denied Plaintiff ATS Tree Services, LLC’s (“ATS”) request for a preliminary injunction based on its conclusion that the company failed to establish that it (i) would suffer irreparable harm if injunctive relief was not issued; and had a reasonable likelihood of succeeding on the merits of its claims.

ATS argued it would be harmed by incurring “nonrecoverable efforts to comply” with the Rule, and by losing “the contractual benefits from its existing non-compete agreements.” ATS described its nonrecoverable compliance costs as: costs associated with notifying its twelve employees of the change in accordance with the Rule’s notice provision; the costs and efforts to “review and modify [its] business strategy”; and the unquantifiable costs and efforts of altering its specialized training program. But court found these either insufficient or too speculative to support injunctive relief. ATS further argued it would face the risk that its employees would leave and transfer confidential information to direct competitors. The court found these risks too speculative.

ATS also unsuccessfully argued that it would succeed on the merits because, it asserted, the FTC lacks substantive rulemaking authority under its enabling statute, the FTC exceeded its authority, and Congress unconstitutionally delegated legislative power to the FTC. The court rejected each argument. The court further found that the “major questions doctrine” did not apply, because the Final Rule falls within the FTC’s core mandate, and the FTC has previously used its Section 6(g) rulemaking power in similar ways to the Final Rule.

Looking Forward

The Pennsylvania court’s decision did not analyze the Ryan decision, which reached contrary conclusions. It is likely that the dispute will ascend to the Third and Fifth Circuits, respectively. Notably, the Ryan court has indicated that it intends to issue a final judgment on the merits by August 30, 2024, which is likely to be appealed, and the Final Rule is scheduled to become effective by September 4, 2024.

© 2024 Proskauer Rose LLP.
For more news on the Eastern District of Pennsylvania’s decision in ATS Tree Services, LLC v. Federal Trade Commission, visit the NLR Antitrust Trade Regulation section.

Be Careful What You Write: What a Heavily Redacted Antitrust Complaint Teaches Us About Creating Problematic Documents in Transactions

The Federal Trade Commission (FTC) recently filed a complaint in the U.S. District Court for the Southern District of Texas to stop Tempur Sealy’s proposed acquisition of Mattress Firm. See Federal Trade Comm’n v. Tempur Sealy Int’l, Inc. and Mattress Firm Group Inc., Case No. 4:24-cv-02508 (S.D. Tex. Jul. 2, 2024). On the same day, the FTC also commenced an administrative proceeding in its own court to block the transaction. See In re Tempur Sealy Int’l, Inc. and Mattress Firm Group Inc., Docket No. 9433 (FTC Jul. 2, 2024). According to the complaints, Tempur Sealy is the world’s largest mattress supplier and Mattress Firm is the largest mattress retailer in the United States. Vertical mergers between manufacturers and retailers can often produce procompetitive benefits, but this transaction struck the FTC as anticompetitive. The FTC’s principal concern appears to be that Tempur Sealy would shut off its rivals’ access to Mattress Firm.

Supporting the FTC’s decision to sue, Federal Trade Commissioner Melissa Holyoak said, “Despite the increased likelihood of procompetitive effects from vertical mergers, they may still result in harm in some circumstances. Consistent with these well-established economic principles, I vote in favor of filing this complaint based upon the substantial evidence generated by staff’s thorough investigation, especially the parties’ own ordinary-course documents. I have reason to believe that the effect of Tempur Sealy’s acquisition of Mattress Firm ‘may be to substantially lessen competition.’” (Emphasis added).

What exactly was in these ordinary course documents that caused Holyoak to believe this merger violates Section 7 of the Clayton Act and Section 5 of the FTC Act? The short answer is we don’t know. The complaints, which extensively quote some documents, are heavily redacted and the documents themselves, even in redacted form, are not attached to the complaints. Nor would we expect the documents to be attached, as they likely contain competitively sensitive information that ordinarily would not be on the public record. Rather than speculate about the documents themselves, let’s use the allegations in the FTC’s complaints as a tool to remind ourselves how documents are used in antitrust investigations and how lawyers and clients can work together to reduce the likelihood that potentially problematic documents are created.

  1. What’s an “ordinary course” document? As the name suggests, an ordinary course document is one that is created by the parties in the course of their ordinary business activities. It may be a routinely issued report, an email or text exchange by two employees, Slack messages, a slide deck, board minutes or any other form of written communication. Antitrust regulators routinely use these documents to gain insight into how the parties see themselves in relation to the competition, the rationale for a transaction, and how the parties view the likely competitive effects of a transaction. Often regulators will place more emphasis on communications from senior leadership in a corporation as those individuals may have greater knowledge of the transaction and have more authority to “speak” for an entity than lower-level employees. Regulators will use these documents not only to support their own theories and claims, but also to contradict the parties’ advocacy about the procompetitive aspects of a deal.
  2. How does the government obtain these ordinary course documents? In the case of the Tempur Sealy/Mattress Firm transaction and other high dollar value transactions, the parties were required to file Hart-Scott-Rodino (HSR) premerger notification forms. When an HSR filing is required, the parties must produce documents that discuss the transaction in relation to certain specific topics, such as competition, competitors, markets, and market shares. These documents are usually not ordinary course documents as they were created specifically for the deal but are nevertheless critical in the regulators’ review of potential competitive issues. Documents routinely produced in the HSR process, such as Confidential Information Memoranda (CIM) and Management Presentations, may contain statements that could create potential antitrust concerns. Clients should recognize that even the smallest of things in a CIM or Management Presentation have the potential to create big problems, as government regulators will read every page of what is submitted to them. For example, assume that an HSR filing contains a 100-page deck intended to serve as a Management Presentation, and one page of that deck contains a sentence that says: “We [seller] are the dominant player in our industry and we face minimal competition.” The rest of the deck might be completely innocuous, but depending on the circumstances, that one sentence has the potential to ignite regulators’ interest.Some transactions, such as Tempur Sealy/Mattress Firm, undergo a Second Request process after HSR is filed. A Second Request is an extensive subpoena requesting documents and data from the parties that goes far beyond the HSR process. The Second Request process is what likely turned up the “ordinary course” documents mentioned in Holyoak’s statement. This included text messages. See, e.g., Paragraph 108 of the federal complaint and Paragraph 99 of the administrative complaint. Judging from the amount of redacted material referenced in the complaints, the FTC appears to believe there are many documents that portray this transaction in an anticompetitive light.

    Clients should also be aware that the government’s authority to review and investigate transactions is not limited to only those transactions that require HSR filings; the government’s authority extends to any transaction that impacts competition in the United States. In addition to HSR filings, the government learns about deals through a variety of sources, such as press reports and third party complaints from customers or competitors. Accordingly, our views about document creation extend to all transactions, not just those requiring HSR premerger notification.

  3. Document creation in transactions is a team sport. That means lawyers and clients should work together as a team to minimize the creation of potentially harmful documents. The team should also include investment bankers and other advisors who are generating documents that analyze the transaction. In ideal circumstances, clients will involve experienced antitrust lawyers early on to understand: 1) whether the transaction potentially raises substantive antitrust concerns, such as when two direct competitors combine; 2) if the transaction will require HSR notification; and 3) whether or not HSR is required, what are the guardrails or best practices the client should observe. Recognizing that we don’t always operate in ideal circumstances and lawyers may only become involved after certain documents are created, lawyers should nevertheless remain vigilant about documents from the time they become involved in a deal. Coaching clients and their advisors about document creation best practices is always critically important.
  4. What are some best practices? Lawyers should proactively educate their clients on what to say (or not say) about the transaction and which words or phrases may be particularly susceptible to raising potential antitrust concerns. For example, words like “dominate” and “control” in relation to competition and competitors may create problems, as could market share statistics that overstate a seller’s prominence in a particular industry. Lawyers should also review drafts of documents such as CIMs, Management Presentations, and teasers to ensure that they are free of harmful verbiage.
  5. Expect statements to be misunderstood or taken out of context: Reading the Tempur Sealy/Mattress Firm complaints, two things are clear: 1) the government relied on portions of documents to support its allegations; and 2) the context of many of the quoted statements is unknown. It may be the case that some of the statements the FTC found important become less important when the entire document is reviewed and the context of the statement is made clear. Relatedly, there may be other documents not referenced in the complaints that indicate the transaction has procompetitive benefits. Allegations in a complaint are just that – allegations – and the evidence that emerges as the case progresses may or may not support those allegations. That being said, parties are wise to follow the best practices above. Similarly, they are also wise to avoid making exaggerated statements or statements intended to be humorous. These statements may be misunderstood by government regulators who do not know the specific industry or its players as well as clients do.
  6. Follow the general principle of “less is more” when it comes to document creation. Many transactions seem to move at lightning speed, but a moment of self-reflection can be very valuable. Ask yourself: do I need to write this, and if I do, what’s the best way to say it? Some organizations are more document-intensive than others, and there may be other reasons, unrelated to antitrust considerations, that require certain documentation. But in general, more documents are probably created than are truly necessary and more documents create the potential for more problems. Regardless, the key is to remember emails, texts, Slack messages, and slide decks may be read not only by their intended recipients but also by government antitrust regulators.
Copyright ©2024 Nelson Mullins Riley & Scarborough LLP
For more news on Antitrust Complaints, visit the NLR Antitrust Trade & Regulation section.

What is Market Manipulation?

The financial market is supposed to be a place where investors put their hard-earned money to work. Market manipulation disrupts the playing field, undermining the integrity of financial systems and causing a great deal of harm to investors. Between 2020 and 2022, the United States recovered $2.7 billion from market manipulation incidents.

What Does Market Manipulation Mean?

The stock market thrives on constant movement as part of a healthy financial ecosystem. However, when someone artificially exploits the supply and demand for securities, the stock market sees a shift in the pricing and value of certain stocks. Market manipulation is an attempt to take advantage of those shifts with insider information, or create false ups and downs to turn a profit. A simple example might be spreading misinformation about a stock in order to cause its price to rise or fall.

How Market Manipulation Works

Market manipulation disrupts the natural flow of supply and demand in a security. For example, a person may attempt to manipulate the stock market in their favor by engaging in a series of transactions designed to make it look like there is a flurry of activity around their stock. This illusion prompts others to buy into such stock, convinced that the company is on the rise because of this artificial energy. This way, the person who began the market manipulation ends up in a better position.

Who Manipulates Stocks?

The stock market is manipulated by any number of bad actors. Investors, company leadership, and anyone who buys and sells securities may attempt to partake in market manipulation.

Why is Market Manipulation Illegal?

If the stock market naturally ebbs and flows, and people are always seeking to profit from it, why is market manipulation illegal?

The answer lies in the importance of honest trading practices and consumer trust. Market manipulation is a method of misleading investors, usually by spreading false information or artificially adjusting prices. Just as you should not sell someone a house by claiming that it has six stories when it is really a shack, similarly you should not manipulate security prices to scam investors.

Who Investigates Market Manipulation?

The US Department of Justice’s Market Integrity and Major Frauds Division (MIMF) investigates claims of securities fraud and market manipulation. The MIMF Division prosecutors can bring criminal charges as well as civil claims for damages against those accused of market manipulation. They utilize data analysis tools and traditional law enforcement techniques to identify and prosecute instances of securities fraud, manipulation, spoofing, insider trading, and more.

How Big Players Manipulate the Stock Market

While more smaller and highly liquid stocks or widely traded securities, are most susceptible to market manipulation, major players can influence the stock market in significant ways. Large financial institutions like Goldman Sachs or Morgan Stanley have a massive hold on how the overall market moves. The 2008 financial crisis is a reminder of how securitization and risky trading of mortgage-backed securities played such a role and led to a ripple effect throughout the market.

Market Manipulation Examples

Stock market manipulation is only limited by the bounds of human ingenuity. Unfortunately, there are a number of ways scam artists attempt to manipulate the market. We have outlined common market manipulation schemes that have emerged over the years:

CRYPTOCURRENCY MARKET MANIPULATION

Although cryptocurrency is less regulated than other investments, it can still be subject to market manipulation. The legal classification of crypto assets as securities is still debatable. However, an August 2023 ruling in Manhattan federal court stated that all cryptocurrencies should be considered securities, regardless of the context in which they are sold. The SEC guidelines on the subject, meanwhile, have hinged on whether or not the particular blockchain is sufficiently decentralized.

The ICO, or Initial Coin Offering, is usually the area where cryptocurrency market manipulation occurs. Crypto is particularly vulnerable to the spread of misinformation on social media, the use of celebrities to artificially inflate an ICO’s value, and pump-and-dump schemes.

HEDGE FUNDS MARKET MANIPULATION

The 2021 GameStop scenario highlighted the upper hand hedge funds often have in the market. In this case, a group of individuals met online and attempted to manipulate the market. Retail investors on Reddit collectively purchased the stock in large quantities after being concerned about the alleged short selling by hedge funds that could devalue GameStop. This surge in buying pressure forced hedge funds to buy back their shares for more money to cover their short sales. However, in the long run, many hedge fund managers profited from the massively increased prices.

FUTURES MARKET MANIPULATION

Attempting to create monopoly power, or “cornering the market” is the primary method of futures market manipulation. This strategy involves a major player artificially creating scarcity in the market by buying up available assets, along with a large stake in a futures contract for delivery at a later date. This is followed by the player refusing to sell at anything except their own price, creating a squeeze on investors who need to buy contracts to fulfill their delivery obligations. Because the futures market hinges upon upcoming deliverables, it forces short sellers to buy contracts at inflated prices from the dominant player.

CROSS-MARKET MANIPULATION

Cross-market manipulation has become more prevalent in recent years, as technology allows trades to happen in real-time and with a higher frequency. Cross-market manipulation is the effort to trade in one venue with the goal of affecting the price of the same security or financial instrument in another market. Cross-market manipulation is also known as inter-trading venue manipulation.

CHURNING MARKET MANIPULATION

Churning is an illegal practice designed to create the illusion of activity and generate commission fees. It involves an excessive amount of trading in a brokerage account solely to generate commissions for the broker from each sale, and not for the client’s benefit.

WHAT IS SPOOFING MARKET MANIPULATION?

Order spoofing, or spoofing, is a method of market manipulation designed to generate interest in a security. One or more players place multiple buy or sell orders on a stock to adjust its price, only to cancel them once other traders accordingly adjust their activities. Thus, the bids are “spoofs,” and therefore, never meant to be followed through.

WHAT IS COORDINATED PRICE MANIPULATION IN THE STOCK MARKET?

Coordinated price manipulation involves agreements between competitors to artificially inflate or deflate stock market prices. For instance, short selling, while legal on its own as a strategy, can cross the line into market manipulation by generating fear around securities to unnaturally lower its price.

WHAT IS LAYERING MARKET MANIPULATION?

Layering is a form of spoofing that involves placing a series of orders designed to be eventually canceled. However, in layering market manipulation efforts, the bids are all placed at different price points, setting the market price somewhere in the middle of the fake trades. This way, the manipulator achieves a better understanding of the market price based on their fake activity, and can trade on the other side of the market to turn in a profit while canceling extraneous offers.

FRONT-RUNNING MARKET MANIPULATION

Front running is often done by an individual broker who has insider information about a future development that will impact stock price. For example, a broker who is ordered to sell a large amount of stock instead goes to their own account before executing the trade and dumps their stock in the same company, now knowing the market price is predicted to plummet. Here, the broker has “run out in front” of natural market fluctuations to illegally sell their stock.

SHORT SELLING MARKET MANIPULATION

Short selling can become market manipulation in the event of cross-market manipulation or coordinated price manipulation.

Naked short selling is the illegal practice of selling shares in an asset before acquiring them, or ensuring that they can in fact be purchased or acquired. The goal here is the same as in usual shorting; however, in short selling, shares must be borrowed before they can be offered to other investors.

PUMP-AND-DUMP SCHEMES

Pump-and-dump schemes typically involve spreading misinformation about a stock in order to “pump up” a frenzy of orders and investments. The perpetrators then “dump” their stocks at the new and artificially inflated price point. The Securities and Exchange Commission (SEC) warns that microcap securities are particularly vulnerable to pump-and-dump schemes because of limited publicly available information.

How Do You Tell if a Stock is Being Manipulated?

Opportunities for market manipulation have become more widespread with mobile trading apps, AI algorithms and bot activity enabling trading to happen in the blink of an eye from anywhere. Traders must examine stock market activity more thoroughly, keeping an eye out for possible warning signs of market manipulation:

  • Unlikely performance compared to company indexes: The stock market cannot tell the full picture of a company’s well-being. It is better to compare market prices against other metrics like revenue, growth potential, and capitalization. When a company’s stock prices remain low even as other signs point to growth, it may be a sign that artificial market activity is at play.
  • Fake news on social media: The spread of bot-led accounts designed to appear like genuine human activity on social media points toward the potential for misinformation. False information often plays a key role in market manipulation and price-adjusting efforts.
  • Flurries of activity: Churning, spoofing, and layering all involve sudden onsets of orders not related to genuine developments. A sudden rush can indicate that a stock is being manipulated. Likewise, a large volume of activity without matching price action can be a warning sign of wash trading.

How Do You Stop Market Manipulation?

Here are some tips to protect yourself from stock market manipulators:

  • Understand your risk appetite and ensure you have an exit strategy for your investments
  • Verify claims that seem too good to be true
  • Avoid excessively large bids or “limited time offers”
  • Review your account activity on a regular basis and report any suspicious activity in your account

SEC MARKET MANIPULATION

The SEC runs the Office of the Whistleblower, which allows whistleblowers to come forward to anonymously report market manipulation. The SEC Office of the Whistleblower has awarded over $1 billion to whistleblowers who have shared information leading to a recovery after a stock market manipulation scheme.

CFTC MARKET MANIPULATION

The Commodity Futures Trading Commission (CFTC) relies heavily on tips and whistleblower information to ensure fair trading practices in the commodity and futures markets. The CFTC Whistleblower Program offers rewards for information as well as protection against retaliation.

How Do You Prove Market Manipulation?

A whistleblower attorney can be your strongest ally to help you gather proof of market manipulation, including:

  • Proof of intent to defraud: Emails, text messages, social media posts, and sworn testimonies to private conversations
  • Refutation of legitimate business purposes: Internal memos, monthly reports, notes from meetings, staff emails, etc. to show that the suspicious activity was not in pursuit of legitimate business purposes
  • Records of trades, monthly account statements, canceled checks, wire transfers, stock transfers, and more: All of these documents can help present a bigger financial picture to illustrate the motive to manipulate market prices

What Are the Consequences of Market Manipulation?

Market manipulation undermines fair and stable markets, and erodes investors’ trust in financial systems. When investors fear manipulation, they may become less confident and willing to invest in diverse portfolios. Market manipulation also creates an uneven playing field, hurting fair competition when scam artists profit at the expense of investors who may lose savings and watch their assets dissolve.

Rewards for Reporting Market Manipulation

You may qualify as a protected whistleblower under the following statutes:

How Are Whistleblowers Protected After Reporting Market Manipulation?

Whistleblowers can anonymously report suspected market manipulation through the SEC Whistleblower Program and have their identity redacted even from Freedom of Information Act (FOIA) requests. Whistleblowers who have been retaliated against by their employers can sue for the following actions:

  • Reinstatement to former seniority level
  • Payment of double back pay, with interest
  • Payment of front pay, in cases where reinstatement is not possible
  • Attorney fees and legal costs
  • Additional damages

Biggest Market Manipulation Cases

New market manipulation cases are constantly coming to light, as whistleblowers step forward to reveal wrongdoings in the stock market. Some of the biggest market manipulation settlements include:

  • $1.186 billion against Glencore International AG: The CFTC ordered Glencore to pay $1.186 billion to settle accusations that the energy and commodities trading firm strategically manipulated at least four US-based S&P Global Platts physical oil benchmarks from 2007 to 2018.
  • $920 million from JP Morgan for spoofing: The 2020 settlement ordered JP Morgan Chase to pay $920.2 million to settle allegations of at least eight years of spoofing in precious metals and US Treasury futures contracts.
  • $249 million from Morgan Stanley and former executive Pawan Passi: In 2024, the SEC charged Morgan Stanley and its former executive Pawan Passi for executing block trades and acting on insider information. The firm agreed to pay $249 million to settle allegations of multi-year wrongdoing.

What is the SEC Doing about Market Manipulation?

The SEC relies on tips from whistleblowers to take out insider trading rings, spoofing attempts, pump-and-dump schemes, and other kinds of market manipulation attempts. If you have information about such tactics, you may be able to take part in the SEC Whistleblower Program. A whistleblower lawyer with Tycko & Zavareei LLP can help make sure your claim is as strong as possible before you bring it to the SEC. Remember, information once reported is no longer eligible for a reward.

Market Manipulation: FAQs

IS MARKET MANIPULATION ILLEGAL?

Yes. While everyone wants to “get ahead” on the stock market, manipulating the market is an illegal activity that can result in criminal penalties like jail time, as well as the imposition of civil fines and damages.

WHAT IS A REAL-LIFE EXAMPLE OF MARKET MANIPULATION?

One of the most notorious examples of market manipulation is the 2001 Enron scandal. When the energy company was found to have altered and misrepresented financial statements to inflate its stock price, it went bankrupt and multiple executives were indicted for the fraud.

WHO DOES MARKET MANIPULATION HURT?

Market manipulation hurts investors who lose money on investments that are either illegitimate or inaccurately represented. At the same time, its negative impact may also be felt throughout the economy, the 2008-2009 Great Recession being a case in point.

WHAT IS THE DIFFERENCE BETWEEN MARKET ABUSE AND MARKET MANIPULATION?

Market manipulation is a specific tactic within the larger issue of market abuse. Market manipulation focuses on artificially controlling prices to secure unearned profit, whereas market abuse encompasses various schemes with the aim of disadvantaging investors for personal gain.

© 2024 by Tycko & Zavareei LLP
For more news on Market Manipulation, visit the NLR Criminal Law & Business Crimes section.

Federal Court Enjoins Federal Trade Commission’s Rule Prohibiting Non-Competition Agreements (US)

In January 2023, the U.S. Federal Trade Commission (FTC) proposed a sweeping rule that, with limited exceptions (such as for highly compensated executives or in connection with the sale of a business), would prohibit employers from entering into post-employment non-competition arrangements with workers. (See our post here.) Under the proposed rule, an agreement between an employer and a worker – not just employees, but also independent contractors, interns, and even volunteers – that would prevent the worker from seeking or accepting employment, or from operating a business, after the conclusion of the worker’s working relationship with the employer would be unlawful. As proposed, the rule not only applied prospectively, but invalidated previously entered-into non-competition arrangements. After a notice-and-comment period, the FTC issued the “Final Rule” on April 23, 2024 and it is scheduled to go into effect September 4, 2024.

As expected, the FTC’s Final Rule immediately generated legal challenges. Among the arguments advanced by those opposing the Final Rule were that the FTC lacks legal authority to regulate unfair methods of competition, that the FTC’s actions violated the “major questions doctrine” because the FTC’s actions lacked authorization from Congress, and that the FTC’s actions constituted an unconstitutional delegation of legislative power.

On July 3, Judge Ada Brown of the United States District Court for the Northern District of Texas issued the first ruling in these pending challenges to the Final Rule (Ryan LLC v. Federal Trade Commission). In her 33-page decision, Judge Brown preliminarily enjoined the Final Rule from going into effect on September 4, 2024 but only with respect to the Plaintiffs in the action—consisting of one private business (Ryan, LLC), the U.S. Chamber of Commerce, the Longview, Texas Chamber of Commerce, and two trade organizations (Business Roundtable and the Texas Association of Business)—and signaled that the Final Rule is unlikely to pass final judicial review on the merits for a number of reasons.

First and foremost, Judge Brown found unconvincing the FTC’s explanation that it was authorized to publish the Final Rule under its broad powers to prevent unfair methods of competition. In its briefing, the FTC argued that it is an unfair method of competition for persons to enter or enforce non-compete agreements, and that the powers entrusted to the FTC empower the agency to make substantive rules precluding unfair competition. The court rejected this argument. Although Judge Brown acknowledged that the FTC has the authority to make certain “housekeeping” rules dealing with unfair or deceptive practices, the FTC Act does not “expressly grant the [FTC] authority to promulgate substantive rules regarding unfair methods of competition.” Because agencies only have “the powers that Congress grants through a textual commitment of authority” and Congress has not expressly delegated substantive rulemaking to the FTC to regulate unfair competition, the court found that the FTC exceeded its authority in enacting the Final Rule.

Although the first reason was by itself sufficient to find that the Plaintiffs had established a likelihood of success on the merits, the court also found that the FTC’s rulemaking was arbitrary and capricious: “[The Final Rule] imposes a one-size-fits-all approach with no end date,” and thus lacks a rational connection between the agency’s goal of preventing unfair competition and the “categorical ban” it adopted without “targeting specific, harmful non-competes.” The court specifically noted the FTC’s failure to consider any alternatives to a blanket ban on non-competes, failure to consider the potential “pro-competitive justifications” of such covenants, and failure to differentiate the effect of non-competes among different types and classes of workers.

The court also had little trouble finding that the Final Rule would result in irreparable harm to the Plaintiffs, agreeing that its implementation would “announce open season” for poaching workers and increase the risk that departing workers would take valuable intellectual property and proprietary methods to competitors. The operational cost of complying with a likely invalid rule and the nonrecoverable financial costs associated with complying with the Final Rule before its effective date were sufficient to demonstrate a significant risk of irreparable harm. Thus, finding that the injury to the Plaintiffs and the public interest would be great if the court were not to enjoin the rule, the court granted the Plaintiffs preliminary injunctive relief and stayed the Final Rule’s effective date as to the Plaintiffs. The court would not, however, grant nationwide injunctive relief and limited its preliminary injunction and the stay of the Final Rule’s effective date to the Plaintiffs before the court. However, Judge Brown noted that she “intends to enter a merits disposition on th[e] action on or before August 30, 2024,” a decision likely to convert the preliminary injunction to permanent relief. Between this initial blow to the Final Rule and the pendency of other lawsuits in Texas and Pennsylvania attacking the Final Rule, the chances of the FTC’s non-compete ban going into effect appear to be in serious jeopardy. We’ll continue to monitor and update with further developments.

© Copyright 2024 Squire Patton Boggs (US) LLP
For more news on Legal Challenges to FTC Noncompete Rule, visit the NLR Antitrust Trade Regulation section.

China’s Supreme People’s Court Releases Two Recent Patent-Related Typical Anti-Monopoly Cases

On June 24, 2024, China’s Supreme People’s Court (SPC) released five recent typical anti-monopoly cases, two of which relate to patents. The SPC stated that the cases were released so that Courts can “correctly apply the revised Anti-Monopoly Law and accurately understand the new judicial interpretation of anti-monopoly civil litigation issued today, fairly and efficiently hear monopoly cases, ensure the correct implementation of the Anti-Monopoly Law, and maintain fair competition in the market.”

Explanations from the SPC regarding the two cases follows:

Case No.:【案号】（2020）最高法知民终1140号

[Basic facts of the case] Yang XX Pharmaceutical Group Co., Ltd. and its subsidiaries (collectively referred to as Yang) are the manufacturers of the anti-allergic drug desloratadine citrate tablets with the trade name “Beixue.” Hefei Yi XX Pharmaceutical Co., Ltd. owns the relevant patents for desloratadine citrate. The company and its subsidiaries and affiliated companies (collectively referred to as Yi) are the only suppliers of the desloratadine citrate API required for the production of “Beixue”. In addition to producing desloratadine citrate API, Yi also produces desloratadine citrate hard capsules. Yi and Yang are both the supply and demand parties of the desloratadine citrate API involved in the case, and are also competitors in desloratadine citrate preparations. Yang believed that Yi used its dominant position in the market of desloratadine citrate API to restrict Yang to only purchase the API involved in the case from it, significantly raised the price of the API involved in the case, and threatened to stop supplying the API involved in the case to force Yang to accept other commercial arrangements unrelated to the API transaction involved, causing huge losses to Yang and therefore constituting an abuse of market dominance. Yang requested that Yi stop abusing its market dominance and compensate Yang for losses and reasonable expenses of 100 million RMB. The court of first instance found that Yi had abused its market dominance by restricting transactions, setting unfair high prices, and attaching unreasonable transaction conditions, and ordered it to immediately stop the above-mentioned behaviors and compensate Yang more than 68 million RMB. Both parties were dissatisfied and appealed to the Supreme People’s Court.

The Supreme People’s Court held in the second instance that Yi has a dominant market position in the desloratadine citrate API market in China, but its dominant market position has been weakened to a certain extent due to the strong indirect competition constraints from the downstream second-generation antihistamine preparation market. Based on the existing evidence, it is difficult to determine that it has abused its dominant market position. First, desloratadine citrate falls within the scope of protection of Yi’s patent rights. The time and scope of Yi’s restriction that Yang can only purchase the patented API involved in the case from it do not exceed the scope of the legitimate exercise of patent rights, and the resulting market blocking effect does not exceed the statutory exclusive scope of patent rights, so it does not constitute a restricted transaction behavior that abuses the dominant market position. Second, considering the internal rate of return after the price increase and the matching degree of price and economic value, it is more likely that the initial price of the patented API involved in the case is a promotional price, and the subsequent large price increase is likely to be a reasonable adjustment from the promotional price to the normal price. The fact that the price increase is significantly higher than the cost increase is not enough to determine that there is an unfair high-price behavior that abuses the dominant market position. Third, the existing evidence is insufficient to prove that Yi has explicitly or implicitly bundled the sales of the patented API involved in the case with unrelated products, so it is difficult to determine that there is an act of attaching unreasonable transaction conditions. Therefore, the judgment was revoked and the first-instance judgment was changed to dismiss Yang’s lawsuit request.

[Typical Significance] This case is the first monopoly civil lawsuit in China involving raw material pharmaceuticals. The judgment clarified the consideration of indirect competition constraints from the downstream market when judging the market dominance of intermediate input operators, the relationship between the market blocking effect of limited trading behavior and the statutory exclusive scope of patent rights, and the basic ideas and specific methods for judging unfair high prices. It has positive significance for promoting the accurate application of the Anti-Monopoly Law and effectively maintaining fair competition in the pharmaceutical market.

【案号】（2021）最高法知民终1482号

[Basic facts of the case] Ningbo XX Magnetics Co., Ltd. is an enterprise engaged in the production of sintered NdFeB materials in Ningbo, Zhejiang Province. A Japanese metal company has more than 600 sintered NdFeB patents in the field of rare earth materials worldwide. After licensing eight companies in China to implement its patented technology, it decided not to add new licensees. From March 2014 to March 2015, Ningbo XX Magnetics Co., Ltd. repeatedly requested a license from the Japanese metal company but was rejected. Therefore, it filed a lawsuit in December 2014, requesting that the Japanese metal company stop the abuse of market dominance such as refusal to trade and compensate Ningbo XX Magnetics Co., Ltd. for economic losses of 7 million RMB. The court of first instance determined that the Japanese metal company had a dominant position in the patent licensing market for essential patents for sintered NdFeB and that its refusal to trade had no legitimate reason. Therefore, it ordered the Japanese metal company to stop abusing its market dominance by refusing to trade and compensate Ningbo XX Magnetics Co., Ltd. for economic losses of 4.9 million RMB. The Japanese metal company was dissatisfied with the decision and filed an appeal.

The Supreme People’s Court held in the second instance that the evidence in this case was insufficient to prove that the sintered NdFeB patent of a Japanese metal company was irreplaceable, nor was it sufficient to prove that there was an independent licensing market for patents necessary for the production of sintered NdFeB. Therefore, it was difficult to determine that the relevant market in this case was the patent licensing market for patents necessary for the production of sintered NdFeB owned by the Japanese metal company. In this case, based on the demand substitution of sintered NdFeB material production technology, the relevant market in this case should be defined as the global sintered NdFeB material production technology market, including patented technologies and non-patented technologies with close substitution. Given that sintered NdFeB material production technology is used to produce sintered NdFeB materials, and the market share of sintered NdFeB materials (products) and other conditions can more accurately and conveniently reflect the market conditions of sintered NdFeB production technology, the market power of the technology owner in the relevant market involved in the case can be evaluated through the market share of the sintered NdFeB material market. Taking into account the evidence in the case, the Japanese metal company does not have a dominant position in the global sintered NdFeB material production technology market. Therefore, the court ruled to revoke the first-instance judgment and dismiss the lawsuit filed by the Ningbo magnetic company.

[Typical Significance] This case is a typical case in which intellectual property rights and antitrust are intertwined, and has received widespread attention. The second-instance judgment properly handled the relationship between the exercise of patent rights and antitrust, and through scientific and reasonable definition of the relevant market, revised the judgment in accordance with the law to determine that the foreign right holder’s refusal to license the patent involved did not constitute monopoly behavior. The judgment in this case demonstrates the judicial concept of Chinese courts to equally protect the legitimate rights and interests of Chinese and foreign parties and the trial ideas of antitrust cases involving intellectual property abuse in accordance with the law, and actively responded to the concerns of the industry at home and abroad.

The original text including three additional cases is available here (Chinese only).

© 2024 Schwegman, Lundberg & Woessner, P.A. All Rights Reserved.
For more news on Chinese Patent Litigation, the NLR Intellectual Property section.

FTC: Three Enforcement Actions and a Ruling

In today’s digital landscape, the exchange of personal information has become ubiquitous, often without consumers fully comprehending the extent of its implications.

The recent actions undertaken by the Federal Trade Commission (FTC) shine a light on the intricate web of data extraction and mishandling that pervades our online interactions. From the seemingly innocuous permission requests of game apps to the purported protection promises of security software, consumers find themselves at the mercy of data practices that blur the lines between consent and exploitation.

The FTC’s proposed settlements with companies like X-Mode Social (“X Mode”) and InMarket, two data aggregators, and Avast, a security software company, underscores the need for businesses to appropriately secure and limit the use of consumer data, including previously considered innocuous information such as browsing and location data. In a world where personal information serves as currency, ensuring consumer privacy compliance has never been more critical – or posed such a commercial risk for failing to get it right.

X-Mode and InMarket Settlements: The proposed settlements with X-Mode and InMarket concern numerous allegations based on the mishandling of consumers’ location data. Both companies supposedly collected precise location data through their own mobile apps and those of third parties (through software development kits).  X-Mode is alleged to have sold precise location data (advertised as being 70% accurate within 20 meters or less) linked to timestamps and unique persistent identifiers (i.e., names, email addresses, etc.) of its consumers to private government contractors without obtaining proper consent. Plotting this data on a map makes it easy to reveal each person’s movements over time.

InMarket purportedly utilized location data to cross-reference such data with points of interest to sort consumers into particularized audience segments for targeted advertising purposes without adequately informing consumers – examples of audience segments include parents of preschoolers, Christian church attendees, and “wealthy and not healthy,” among other groupings.

Avast Settlement: Avast, a security software company, allegedly sold granular and re-identifiable browsing information of its consumers despite assuring consumers it would protect their privacy. Avast allegedly collected extensive browsing data of its consumers through its antivirus software and browser extensions while ensuring its consumers that their browsing data would only be used in aggregated and anonymous form. The data collected by Avast revealed visits to various websites that could be attributed to particular people and allowed for inferences to be drawn about such individuals – examples include academic papers on symptoms of breast cancer, education courses on tax exemptions, government jobs in Fort Meade, Maryland with a salary over $100,000, links to FAFSA applications and directions from one location to another, among others.

Sensitivity of Browsing and Location Data

It is important to note that none of the underlying datasets in question contained traditional types of personally identifiable information (e.g., name, identification numbers, physical descriptions, etc.) (“PII”). Even still, the three proposed settlements by the FTC underscore the sensitive nature of browsing and location data due to the insights such data reveals, such as religious beliefs, health conditions, and financial status, and the ease with which the insights can be linked to certain individuals.

In the digital age, the amount of data available about individuals online and collected by various companies makes the re-identification of individuals easier every day. Even when traditional PII is not included in a data set, by linking sufficient data points, a profile or understanding of an individual can be created. When such profile is then linked to an identifier (such as username, phone number, or email address provided when downloading an app or setting up an account on an app) and cross-referenced with various publicly available data, such as name, email, phone number or content on social media sites, it can allow for deep insights into an individual. Despite the absence of traditional types of PII, such data poses significant privacy risks due to the potential for re-identification and the intimate details about individuals’ lives that it can divulge.

The FTC emphasizes the imperative for companies to recognize and treat browsing and location data as sensitive information and implement appropriate robust safeguards to protect consumer privacy. This is especially true when the data set includes information with the precision of those cited by the FTC in its proposed settlements.

Accountability and Consent

With browsing and location data, there is also a concern that the consumer may not be fully aware of how their data is used. For instance, Avast claimed to protect consumers’ browsing data and then sold that very same browsing information, often without notice to consumers. When Avast did inform customers of their practices, the FTC claims it deceptively stated any sharing would be “anonymous and aggregated.” Similarly, X-Mode claimed it would use location data for ad-personalization and location-based analytics. Consumers were unaware such location data was also sold to government contractors.

The FTC has recognized that a company may need to process an individual’s information to provide them with services or products requested by the individual. The FTC also holds that such processing does not mean the company is then free to collect, access, use, or transfer that information for other purposes (e.g., marketing, profiling, background screening, etc.). Essentially, purpose matters. As the FTC explains, a flashlight app provider cannot collect, use, store, or share a user’s precise geolocation data, or a tax preparation service cannot use a customer’s information to market other products or services.

If companies want to use consumer personal information for purposes other than providing the requested product or services, the FTC states that companies should inform consumers of such uses and obtain consent to do so.

The FTC aims to hold companies accountable for their data-handling practices and ensure that consumers are provided with meaningful consent mechanisms. Companies should handle consumer data only for the purposes for which data was collected and honor their privacy promises to consumers. The proposed settlements emphasize the importance of transparency, accountability, meaningful consent, and the prioritization of consumer privacy in companies’ data handling practices.

Implementing and Maintaining Safeguards

Data, especially specific data that provide insights and inferences about individuals, is extremely valuable to companies, but it is that same data that exposes such individuals’ privacy. Companies that sell or share information sometimes include limitations for the use of the data, but not all contracts have such restrictions or sufficient restrictions to safeguard individuals’ privacy.

For instance, the FTC alleges that some of Avast’s underlying contracts did not prohibit the re-identification of Avast’s users. Where Avast’s underlying contracts prohibited re-identification, the FTC alleges that purchasers of the data were still able to match Avast users’ browsing data with information from other sources if the information was not “personally identifiable.” Avast also failed to audit or confirm that purchasers of data complied with its prohibitions.

The proposed complaint against X-Mode recognized that at least twice, X-Mode sold location data to purchasers who violated restrictions in X-Mode’s contracts by reselling the data they bought from X-Mode to companies further downstream. The X-Mode example shows that even when restrictions are included in contracts, they may not prevent misuse by subsequent downstream parties.

Ongoing Commitment to Privacy Protection:

The FTC stresses the importance of obtaining informed consent before collecting or disclosing consumers’ sensitive data, as such data can violate consumer privacy and expose them to various harms, including stigma and discrimination. While privacy notices, consent, and contractual restrictions are important, the FTC emphasizes they need to be backed up by action. Accordingly, the FTC’s proposed orders require companies to design, implement, maintain, and document safeguards to protect the personal information they handle, especially when it is sensitive in nature.

What Does a Company Need To Do?

Given the recent enforcement actions by the FTC, companies should:

  1. Consider the data it collects and whether such data is needed to provide the services and products requested by the consumer and/or a legitimate business need in support of providing such services and products (e.g., billing, ongoing technical support, shipping);
  2. Consider browsing and location data as sensitive personal information;
  3. Accurately inform consumers of the types of personal information collected by the company, its uses, and parties to whom it discloses the personal information;
  4. Collect, store, use, or share consumers’ sensitive personal information (including browser and location data) only with such consumers’ informed consent;
  5. Limit the use of consumers’ personal information solely to the purposes for which it was collected and not market, sell, or monetize consumers’ personal information beyond such purpose;
  6. Design, Implement, maintain, document, and adhere to safeguards that actually maintain consumers’ privacy; and
  7. Audit and inspect service providers and third-party companies downstream with whom consumers’ data is shared to confirm they are (a) adhering to and complying with contractual restrictions and (b) implementing appropriate safeguards to protect such consumer data.
© 2024 Ward and Smith, P.A.. All Rights Reserved.
For more on the FTC, visit the NLR Communications, Media & Internet section.

What the FTC’s Rule Banning Non-Competes Means for Healthcare

The FTC unveiled its long-awaited final rule banning most non-compete agreements during a live broadcast of a Commission meeting on April 23, 2024. The proposed rule, which was first announced in January 2023, underwent an extensive public comment process in which approximately 26,000 comments were received. According to the FTC, approximately 25,000 of these comments supported a total ban on non-competes. While there was some expectation that the final rule would be less aggressive than the proposed rule, that turned out not to be the case. By late summer 2024, most employers, except for non-profit organizations, will not be able to enforce or obtain non-competes in the U.S. except in extremely narrow circumstances. The new rule will take effect 120 days after it is published in the Federal Register. Assuming the rule is published this week, we can expect it to take effect by late August. That is, of course, if a court does not enjoin the rule first. Shortly after the rule was announced on April 23, the U.S. Chamber of Commerce stated its intention to sue the FTC. U.S. Chamber to Sue FTC Over Unlawful Power Grab on Noncompete Agreements Ban | U.S. Chamber of Commerce (uschamber.com) The first lawsuit challenging the new rule was filed on April 23, Ryan, LLC v. Federal Trade Commission, Case No. 3:24cv986 (N.D. Tex. Apr. 23, 2024). Among other relief, the Ryan suit seeks to have the rule vacated and set aside. There are significant legal questions concerning whether the FTC has the authority to take this action by rulemaking or whether this is best left to the legislative process. While some U.S. states have banned non-competes, many U.S. states have not banned them.

As written, the rule will have profound effects on virtually every industry, especially health care, where non-competes are common in physician and mid-level practitioner employment agreements. As several Commissioners indicated during the April 23 meeting, they are particularly concerned about non-competes in health care and believe this rule will save approximately $74-194 billion in reduced spending on physician services over the next decade.

Following is Nelson Mullins’ quick take on what health care employers need to know:

  1. The rule does not apply to non-profits. The basis for the rule making is Section 5 of the FTC Act, which doesn’t apply to non-profits. So, a non-profit health system that has non-competes with physicians or other workers is not impacted by the rule. Be aware, though, that the FTC may be looking to test whether some non-profit health systems are really operating as true non-profits. Tax exempt status alone will not be enough. We believe, however, that given significant and quantifiable charitable benefits that most non-profit systems provide, the FTC may be hard pressed to find a good test case within the non-profit health care industry.
  2. For all others, the rule bans all non-compete agreements for any worker, regardless of title, job function, or compensation, after the effective date. Thus, a for-profit health system or for-profit physician practice that uses non-competes will be significantly limited. The only non-competes that will be allowed to remain in force are non-competes for “Senior Executives” that were entered into before the rule becomes effective.
  3. The rule will take effect 120 days after it is published in the Federal Register. This will likely occur this week, so we expect the effective date to be approximately August 20, 2024.
  4. The rule rescinds existing non-competes for all workers who are not “Senior Executives.”
  5. “Senior Executive” is a narrowly-defined term meaning:
    1. a person in a policy making position; and
    2. who was paid at least $151,164 in the prior year.
  6. Existing non-competes for Senior Executives are not rescinded. New non-competes with Senior Executives entered into prior to the effective date are still allowed. However, no new non-competes with Senior Executives may be entered into after the effective date.
  7. “Policy-making position” means: President, CEO, or equivalent, or other person who has policy making authority, i.e., decisions that control a significant aspect of a business entity. Most clinicians will not meet the definition of “Senior Executive.”
  8. Non-senior executives who are now under a non-compete must be given notice by the effective date that their non-compete will not be, and cannot legally be, enforced. Model language for the notice is in the rule.
Copyright ©2024 Nelson Mullins Riley & Scarborough LLP
by: Denise M. Gunter, Carrie A. Hanger, Candace S. Friel of Nelson Mullins
For more news on the Implications of the FTC Noncompete Ban on Healthcare, visit the NLR Health Law & Managed Care section.

FTC Issues Report to Congress Highlighting Collaboration with State Attorneys General

On April 10, 2024, the Federal Trade Commission issued a report to Congress on the agency’s collaboration with state attorneys general highlighting current cooperative law enforcement efforts, best practices to ensure continued collaboration and legislative recommendations to enhance such efforts.

The report, directed by the FTC Collaboration Act of 2021, “Working Together to Protect Consumers: A Study and Recommendations on FTC Collaboration with the State Attorneys General” makes legislative recommendations that would enhance these efforts, including reinstating the Commission’s authority to seek money for defrauded consumers and providing it with the independent authority to seek civil penalties.

“Today’s consumer protection challenges require an all-hands-on-deck response, and our report details how the FTC is working closely with state enforcers to share information, stop fraud, and ensure fairness in the marketplace,” said FTC attorney Samuel Levine, Director of the Bureau of Consumer Protection. “We look forward to seeking new opportunities to strengthen these ties and confront the challenges of the future.”

In June 2023, the Commission announced a request for public information (RFI) seeking public comments and suggestions on ways it can work more effectively with state AGs to help educate consumers about, and protect them from, potential fraud. After reviewing and analyzing the comments received, the agency developed the report to Congress issued today. The report is divided into three sections: 1) The FTC’s Existing Collaborative Efforts with State
Attorneys General to Prevent, Publicize, and Penalize Frauds and Scams; 2) Recommended Best Practices to Enhance Collaboration; and 3) Legislative Recommendations to Enhance Collaboration Efforts.

The first section lays out the roles and responsibilities of the FTC and state AGs in protecting consumers from frauds and scams, provides an overview of their respective law enforcement authority, and discusses how federal and state enforcers share their information and expertise to facilitate effective communication and cooperation. It also provides a breakdown of the FTC’s
structure and a description of the Consumer Sentinel consumer complaint database, the largest such information-sharing network in the United States.

The second section details best practices used to enhance strong information-sharing between the FTC and its state law enforcement partners, discusses how the Commission coordinates joint and parallel enforcement actions with state AGs and other state consumer protection agencies, and presents ideas on expanding the sharing of expertise and technical resources between agencies.

Finally, the third section stresses the legislative need to restore the FTC’s Section 13(b) authority to seek equitable monetary refunds for injured consumers, presents ways to enhance collaboration and conserve resources by providing the FTC with the independent authority to seek civil penalties, and describes the agency’s need for clear authority to pursue legal actions against those who assist and facilitate unfair or deceptive acts or practices.

The Commission vote approving the report to Congress was 3-0-2, with Commissioners Melissa Holyoak and Andrew N. Ferguson not participating. Chair Lina M. Khan issued a separate statement, in which she was joined by Commissioners Rebecca Kelly Slaughter and Alvaro M. Bedoya. Commissioner Slaughter also issued a separate statement.

© 2024 Hinch Newman LLP
For more news on FTC’s collaboration with state attorneys, visit the NLR Antitrust & Trade Regulation section.

Regeneron v Novartis and Vetter: Walker Process Client Update

In an appeal that attracted a dozen amici, including the Department of Justice, the Federal Trade Commission, five states, and the District of Columbia, the Second Circuit gave the Walker Process antitrust doctrine a shot in the arm in a patent dispute related to pre-filled syringes (“PFSs”) used for injection of anti-VEGF biologic medicines into patients’ eyeballs (i.e., intravitreal injections).1 Under Walker Process Equip., Inc. v. Food Mach. & Chem. Corp., 382 U.S. 172, 177 (1965), patentees who obtain patents through fraudulent behavior or inequitable conduct can be liable under the Sherman Antitrust Act. In a complaint filed in the Northern District of New York, Regeneron alleged Novartis and Vetter committed a Walker Process violation by obtaining and asserting patents for PFSs. The Second Circuit held that the district court made a mistake by dismissing Regeneron’s suit because it focused on the functional similarities in the markets for anti-VEGF medicines in PFSs and vials. In reversing, the Second Circuit held that the correct approach must focus on an economic market analysis rather than a functional market analysis, and that Regeneron’s complaint plausibly alleged that anti-VEGF PFSs constituted their own economic product market. As the amicus interest signals, the decision may have significant implications, both for the blockbuster market for anti-VEGF medicines and, more broadly, for defining the markets for different pharmaceutical methods of administration.

In its complaint, Regeneron alleges that in 2005, it had contracted with Vetter, a company providing pharmaceutical filling services, to collaborate on a PFS for its blockbuster anti-VEGF product, EYLEA.2 It alleges that its agreement with Vetter granted Regeneron ownership in any patent related to EYLEA PFSs. Id. Notwithstanding its agreement with Regeneron, Vetter later entered into a confidential agreement with Novartis to develop a PFS for anti-VEGF biologics, which are used to treat macular degeneration and other retinal conditions. Id. Indeed, both parties agree on the benefits of PFSs for patients and providers of anti-VEGF medicines—ease in administration, improved safety, and greater efficiency—compared to vials, which must be used to fill a separate syringe.3 Novartis has an anti-VEGF biologic, LUCENTIS, which Genentech markets in the United States.

Regeneron alleges that Vetter contributed to Novartis’s invention of U.S. Patent No. 9,220,631 (the “’631 Patent”) and that Novartis concealed Vetter’s contribution to inventorship from the PTO to avoid alerting Regeneron to its contractual violations. Id. Concealing inventorship from the PTO can constitute inequitable conduct and form the basis for a Walker Process claim. (Regeneron also alleges Novartis improperly withheld key prior art references from the PTO during prosecution.) Novartis’s resulting ’631 Patent specifically claims EYLEA’s active ingredient as a treatment for use in Novartis’s patented syringe.4 Regeneron contends that the defendants’ pattern of conduct delayed its entry into the PFS market, resulting in significant damages.5 Regeneron also alleges that, after the ’631 Patent issued, Vetter leaned on it in contract negotiations to enter a long-term deal and to agree not to challenge the validity of the ’631 Patent.6 Novartis sued Regeneron on the ’631 Patent in the ITC and the Northern District of New York in 2020, and there is a pending Federal Circuit appeal regarding the validity of the patent.7

The Second Circuit held that “the district court improperly concluded that Regeneron failed to plead adequately the existence of a distinct anti-VEGF PFS market because it… placed improper weight on the functional, rather than economic, similarities between anti-VEGF PFSs and vials.”8 Rather than look to the functional similarities in the markets for PFSs and vials (i.e., same drug, same medical condition), the Second Circuit held that the proper analysis was economic. That is, whether products are “reasonably interchangeable by consumers for the same purposes,” as assessed by examining “sufficient cross-elasticity of demand.”9 Regeneron’s complaint alleges that physicians transferred 80% of patients from vials to PFSs when they were offered for LUCENTIS. The Second Circuit found Regeneron’s allegation adequately pled a hypothetical monopoly market by pleading that the physicians’ switching behavior showed that a “small, but significant, price increase in the PFS version would not cause physicians to substitute the vial version for PFS.”10

Second, the Second Circuit held that the district court was wrong to decide that an antitrust market cannot be coextensive with a patent’s scope. Instead, “once an antitrust plaintiff has demonstrated that [1] a patent was obtained through fraud, it must [2] separately explain how the fraudulently obtained patent enabled the defendants to achieve market power within the relevant market.”11 Regeneron’s allegations regarding inventorship and improperly withheld prior art satisfied the “fraudulently obtained” prong of the test.12 Next, the Second Circuit found that Regeneron’s complaint adequately pled the “market power” prong, crediting Regenoron’s allegation that Novartis and Vetter attempted to use the ’631 patent to coerce Regeneron into a long-term exclusive PFS filling relationship and demanding other modifications to Regeneron and Vetter’s 2005 agreement.13

Why the Decision Matters

The Second Circuit’s decision stands out for two reasons. First, anti-VEGF biologics are a big business for innovator companies, biosimilar makers, and government payers. EYLEA’s total revenue for 2023 was nearly $5.9 billion.14 Roche, which through its subsidiary Genentech commercializes LUCENTIS in the US, reported $460 million CHF in 2023 revenue, down from approximately $1 billion CHF in 2022 after entry from two biosimilars, with more pending.15 Biosimilars referencing EYLEA are also pending FDA approval or in clinical trials.16 Government payers are naturally interested in age-related macular degeneration (AMD) medications: among Americans over 65, the CDC estimates that approximately 1.3 million have vision-threatening AMD, with another 10.9 million having milder AMD.17 Indeed, the state amici’s brief supporting Regeneron noted the states’ interest in the markets for AMD drugs.18

Second, and more broadly, a product’s presentation or method of administration—pill vs. liquid; standard vs. extended release; IV vs. subcutaneous injection—has major implications for patients, providers, and product lifecycle. Different methods of administration may expand a product’s commercial reach and, as this case shows, provide additional patent protection (and possibly market exclusivity). Antitrust scrutiny directed to narrowly defined markets for methods of administration—here PFSs—is noteworthy. The amicus brief from the DoJ and FTC makes clear that it is supporting neither side and “take[s] no position as to whether the complaint adequately pleads a relevant antitrust market or states an antitrust claim.”19 However, the Federal government’s amicus brief also stated that the district court erred in its decision, and the brief’s analysis of the proper market definition parallels the reasoning ultimately adopted by the Second Circuit.20

This decision relates to a motion to dismiss under Rule 12(b)(6), where the court only looks for a plausible, well-pled complaint. Novartis will have its day in court at the summary judgment and trial stages, where Regeneron will owe a higher burden of proof. However, antitrust claims are powerful tools because they carry the monetary risk of treble damages as well as the possibility of scrutiny from regulators. These risks must be weighed, not just by outside counsel and CLOs, but by CEOs and boards of directors.

Footnotes

[1] See Regeneron Pharm., Inc. v. Novartis Pharma AG et al., No. 22-427, slip op. at 1 (March 18, 2024). As the Second Circuit explains, “[t]he products in question are prescription medications used to treat the overproduction of vascular endothelial growth factor (‘VEGF’), a naturally occurring protein that, if overproduced, can lead to various eye disorders and, in some cases, to permanent blindness.”

[2] Slip op. at 9

[3] Id. at 8-9

[4] See ’631 Patent at Claim 12

[5] See slip op. at 10-11.

[6] Id. at 13-14.

[7] Id. at 15-16.

[8] Id. at 19.

[9] Id. at 20-21 (citing Brown Shoe Co. v. United States, 370 U.S. 294 (1962) and United States v. Am. Express. Co., 838 F.3d 179 (2d Cir. 2016)).

[10] Slip op. at 26; see, e.g., Am. Express, 838 F.3d at 199 (small but significant non-transitory increase in price (“SSNIP”) may demonstrate that the proposed market is relevant market).

[11] Slip op. at 30(citing Walker Process, 382 U.S. at 177).

[12] Id. at 30-31.

[13] Id. at 31-32. In addition to reversing the district court’s decision on the antitrust claim, the Second Circuit reversed the court’s dismissal of Regeneron’s claim for tortious interference with contract as time barred, crediting Regeneron’s equitable estoppel arguments.

[14] “Regeneron Reports Fourth Quarter and Full Year 2023 Financial and Operating Results,” Feb. 2, 2024, https://investor.regeneron.com/news-releases/news-release-details/regeneron-reports-fourth-quarter-and-full-year-2023-financial (last visited March 20, 2024).

[15] “Roche Finance Report 2023,” at 16, https://assets.roche.com/f/176343/x/3b1fb647e2/fb23e.pdf (last visited March 20, 2024).

[16] See, e.g., “New and Upcoming biosimilar launches,” at 6 https://www.cardinalhealth.com/content/dam/corp/web/documents/Report/cardinal-health-biosimilar-launches.pdf (last visited March 20, 2024).

[17] See “Prevalence of Age-Related Macular Degeneration (AMD), at Table 1, https://www.cdc.gov/visionhealth/vehss/estimates/amd-prevalence.html (last visited March 20, 2024).

[18] See Brief of Amici Curiae Nevada, District of Columbia, Illinois, Louisiana, Minnesota, and New Mexico as Amicus Curiae in Support of Plaintiff-Appellant, Regeneron Pharmaceuticals, Inc., Case 22-427, Dkt. 106 at 2.

[19] See Brief for the United States and the Federal Trade Commission as Amici Curiae in Support of Neither Party, Case 22-427, Dkt. 90 at 1.

[20] Id. at 12.

© Polsinelli PC, Polsinelli LLP in California
For more news on Patent Law, visit the NLR Intellectual Property law section.

The Antitrust Investigator Will See You Now: What Healthcare And Pharma Should Expect In A World Of Enhanced Antitrust Scrutiny

Highlights

  • Healthcare entities should expect heightened government scrutiny of mergers, acquisitions, and business behaviors that could be construed as restricting competition in healthcare and pharma
  • The FTC, DOJ, and HHS have advanced a “whole-of-government approach,” including data sharing, cooperative enforcement, and enhanced antitrust training
  • Businesses should take note of practices that are likely to trigger investigatory and enforcement actions

According to media reports, the Department of Justice (DOJ) has opened an antitrust investigation into UnitedHealth Group, which is the owner of the United States’ largest health insurer, UnitedHealthcare. The focus of the inquiry appears to be the relationship between the UnitedHealthcare insurance plan and one of its health services divisions, Optum, and the potential impact on rivals and consumers.

While tech giants have grabbed most of the headlines when it comes to enhanced antitrust scrutiny, this new matter is the DOJ’s second antitrust investigation into UnitedHealth Group in recent years, giving teeth to the administration’s claim that it has an aggressive antitrust policy in the healthcare sector.

In another example of increased antitrust scrutiny, the Federal Trade Commission (FTC) recently announced a new initiative in partnership with the DOJ and Department of Health and Human Services (HHS) to address what they consider to be the effects of anticompetitive behavior in the healthcare and pharmaceutical spaces. According to the government, these new efforts are aimed at lowering consumer costs and will include “partnering on new initiatives which include a joint Request for Information to seek input on how private-equity and other corporations’ control of health care is impacting Americans.”

Although interagency cooperation is the focus of the recent push to ramp up antitrust investigations and enforcement, each agency will still spearheaded their own regulatory activity.

Federal Trade Commission

FTC Chair Lina Khan has made it clear that her agency will devote more resources to enforcement in the healthcare industry, and emphasized that “safeguarding fair competition and rooting out unlawful business practices in health care markets is a top priority for the FTC.” In furtherance of these priorities, the commission has recently taken the following actions:

  • Orange Book Policy: The FTC challenged more than 100 patents held by pharmaceutical companies that they claim are inaccurately or improperly listed in the FDA’s Orange Book. The commission also released a policy statement explaining its renewed focus on Orange Book infractions.
  • Proposed Non-compete Rule: The FTC presented a new rule that would place a ban on non-compete clauses in employee contracts.

U.S. Department of Justice

Jonathan Kanter, Assistant Attorney General of the DOJ’s Antitrust Division, highlighted the division’s emphasis on the healthcare space when he said, “we are committed to weeding out anticompetitive practices and market consolidation that hinder Americans’ access to quality care at affordable rates, or deprive health care workers of fair wages and opportunity.” The following are just a few examples of how the DOJ has implemented this renewed focus:

  • Criminal Penalties: Recently, the DOJ’s Antitrust Division successfully secured a deferred prosecution agreement against Teva Pharmaceuticals, obtaining the largest monetary penalty ever (over $200 million) against a purely domestic producer that was allegedly operating an antitrust cartel.
  • Blocked Mergers: The Antitrust Division filed a suit to stop Aon plc’s $30 billion proposal to acquire Willis Towers Watson, two of the three largest brokers of health insurance and retirement benefits consulting. The companies later ceased their pursuit of the merger.

U.S. Department of Health and Human Services

HHS Secretary Xavier Becerra made his agency’s priorities clear when he recently stated that “the Biden-Harris Administration remains laser-focused on increasing access to high-quality, affordable health care for all Americans, like by making hearing aids available for sale over the counter and lowering prescription drug costs through the Inflation Reduction Act.” The department’s initiatives have included:

  • Ownership Transparency: For the first time, HHS, via the Centers for Medicare & Medicaid Services, made ownership data available on federal qualified health centers and rural health clinics on data.cms.gov. HHS hopes the release of this data will help catalyze enforcement actions by identifying common ownership.
  • Medicare Advantage Marketing: HHS also announced new efforts to crack down on what it considers “predatory marketing” that seeks to steer patients towards Medicare Advantage plans that “may not best meet their needs.”

Takeaways

In light of the government’s renewed focus on increased competition, expanded enforcement actions, access to quality care, more affordable services and products, and transparency of ownership in the healthcare and pharmaceutical industries, legal and compliance departments should consider being proactive about conducting thorough reviews of current practices. This is particularly true for mergers and acquisitions, competitive strategies, and pricing decisions, which are the business activities most likely to conflict with these recently energized regulatory bodies. Even healthcare providers with stellar compliance programs should expect to receive more frequent and targeted requests for information from enforcement authorities about their business partners, payors, and marketing practices.

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For more news on Antitrust Enforcement in the Healthcare Sector, visit the NLR Health Law & Managed Care section.