Tag: Antitrust

Spurned by HP Board of Directors, Xerox Gets Hostile, and is Spurned Again

Case raises a unique antitrust question.

Copy equipment giant HP Inc. turned down the much smaller Xerox Holdings Corp.’s acquisition overtures twice in one week as the exchange of statements between corporate leadership grows increasingly hostile. From an anticompetition perspective, the case raises the interesting question of how the “failing firm” defense could come into play.

A deal would bring together the world’s second largest copier company, HP, a company whose leadership position was once so strong that its very brand name, derived from the word “xerographic” in 1938, became a verb used more often than the word “copy” itself. Xerox is also credited with innovations that brought us tools like the mouse and ethernet networks.

But Xerox, which has long since fallen from the top of the copier industry, was met with a flat-out rejection of its offer to get its mojo back by acquiring HP. Xerox offered HP $17.00 in cash and 0.137 Xerox shares for each HP share or $22 per share, or $27 billion overall. Skeptics wondered whether Xerox could execute such a deal, given it is “only” a $9.2 billion business, a third the size of HP. The skeptics were right. On Nov. 17 the HP Board of Directors informed Xerox that its offer was not in the best interests of shareholders as it “significantly undervalues” the HP business.

In its letter to Xerox Vice Chairman and CEO John Visentin, HP wrote that its board was concerned about the “potential impact of outsized debt levels on the combined company’s stock.” While saying it remained “ready to engage” with Xerox to better understand its business and its thinking around a merger, the HP board rejected the bid unanimously.

“We recognize the potential benefits of consolidation, and we are open to exploring whether there is value to be created for HP shareholders through a potential combination with Xerox. However,” the HP letter to Visentin continued, “… we have fundamental questions that need to be addressed in our diligence of Xerox. We note the decline of Xerox’s revenue from $10.2 billion to $9.2 billion (on a trailing 12-month basis) since June 2018, which raises significant questions for us regarding the trajectory of your business and future prospects. In addition, we believe it is critical to engage in a rigorous analysis of the achievable synergies from a potential combination. With substantive engagement from Xerox management and access to diligence information on Xerox, we believe that we can quickly evaluate the merits of a potential transaction.”

Xerox had said it could generate $2.3 billion by selling its 25% share in the joint venture, Fuji Xerox Co., Ltd., to FUJIFILM Holdings Corp. In a Nov. 8, 2019, statement, Xerox also said it was selling to a Fuji Xerox affiliate Xerox’s 51% stake in Xerox International Partners, a joint original-equipment-manufacturer venture between Xerox and Fuji Xerox. The companies also agreed to end the $1 billion lawsuit FUJIFILM filed against Xerox after last year’s terminated merger. “Total after-tax proceeds to Xerox from the transactions, which included accrued but unpaid dividends through closing, are approximately $2.3 billion. Xerox expects to use the proceeds opportunistically to pursue accretive M&A in core and adjacent industries, return capital to shareholders and pay down its $554 million December 2019 debt maturity,” according to Xerox.

Xerox did not take HP’s rejection well.

“We were very surprised that HP’s Board of Directors summarily rejected our compelling proposal ….” Xerox CEO Visentin responded, “claiming our offer ‘significantly undervalues’ HP. Frankly, we are confused by this reasoning in that your own financial advisor, Goldman Sachs & Co., set a $14 price target with a ‘sell’ rating for HP’s stock after you announced your restructuring plan on October 3, 2019. Our offer represents a 57% premium to Goldman’s price target and a 29% premium to HP’s 30-day volume weighted average trading price of $17.” Visentin added that the offer was not, as HP said, “highly conditional” or “uncertain.” “There will be NO financing condition to the completion of our acquisition of HP,” the Xerox CEO said.

Xerox gave HP until today (Monday, Nov. 25) to accept the offer, otherwise it would take the case directly to HP’s shareholders. “The overwhelming support our offer will receive from HP shareholders should resolve any further doubts you have regarding the wisdom of swiftly moving forward to complete the transaction,” Visentin said.

But HP didn’t need the whole weekend. Yesterday, on Sunday, Nov. 24, it rejected Xerox again via a letter signed by HP Chairman and CEO Enrique Lores and HP Board Chair Chip Bergh. They repeated that Xerox is undervaluing the company, adding that Xerox did not address HP’s concerns about Xerox’s ability to raise the cash or handle such a substantial debt burden. Lores and Bergh didn’t seem to appreciate Visentin’s attitude, either.

“It is clear in your aggressive words and actions that Xerox is intent on forcing a potential combination on opportunistic terms and without providing adequate information,” the HP leaders wrote. “When we were in private discussions with you in August and September, we repeatedly raised our questions; you failed to address them and instead walked away, choosing to pursue a hostile approach rather than continue down a more productive path. But these fundamental issues have not gone away, and your now-public urgency to accelerate toward a deal, still without addressing these questions, only heightens our concern about your business and prospects. Accordingly, we must have due diligence to determine whether a Xerox combination has any merit.”

And yet, things had seemed to be going so well. In June, Xerox and HP announced they were expanding their relationship. Xerox was to begin sourcing certain products from HP, many of which used Xerox software, and supplying toner for HP for these and other products. These printers use laser printing technology HP acquired from Samsung in 2017. Xerox and HP also agreed to partner in the Device as a Service (DaaS) market. Xerox said it would sell HP PCs and peripherals to its commercial customers under a DaaS model, and HP would make Xerox cloud-based content management available to its commercial PC customers in the United States.

As the HP leaders said, the relationship started to sour at least as early as August.

HP questions Xerox’s resources and innovation.

HP offered additional specifics as to why it didn’t find the deal attractive:

  • Xerox has missed consensus revenue estimates in four of the last five quarters.
  • Xerox’s revenue has fallen from $10.2 billion to $9.2 billion (on a trailing 12-month basis) since June 2018, and this is expected to continue. Xerox management projects revenue declines of 6% in fiscal 2019.
  • Given how much of the Xerox business is based on contractual revenue, HP is concerned about the decline in customer Total Contract Value (TCV) in excess of revenue declines, which suggests Xerox’s revenues may decline even faster in future years. HP noted that the TCV of enterprise signings (including renewals) in 2018 was down 13.9% in constant currency and Xerox’s churn for 2018 was 18%, both data points which Xerox has stopped providing publicly since the end of 2018.
  • After a review of synergies based on public information and the “limited information” Xerox provided, HP said it does not agree with the value of potential synergies. “[I]t appears that your assumptions include significant savings that are already included in each company’s independently announced cost reduction plans,” HP wrote.
  • When Xerox exited the Fujifilm joint venture, Xerox essentially “mortgaged its future for a short-term cash infusion.” HP feels this has “left a sizeable strategic hole” in the Xerox portfolio.
  • HP also took a shot that has to sting the once-heralded leader of innovation. “[W]e have concerns as to the state of Xerox’s technology resources, research and development pipeline, future product programs, and supply continuity and capability.
  • HP said Xerox has not accessed the great potential of the Asia Pacific market.

The ‘failing firm’ defense

What’s intriguing from an antitrust perspective is how the parties might use the “failing firm” defense in a hostile takeover scenario. The failing firm defense argues that a merger that substantially lessens competition is less harmful to competition than one party’s failure and exit from the market. The defense requires a showing that the acquired company cannot meet its financial obligations, would not be able to successfully reorganize in bankruptcy, has been unsuccessful efforts to elicit other reasonable offers, and is succumbing to the only available purchaser.

We would expect to see that defense raised here given the high post-merger market share and years-long decline of both parties. But how will Xerox make the required showing without the cooperation of HP management? And, in this case the acquirer is arguably the greater “failure” risk of the two firms, making this use of a “failing firm” case a rarity, if not a first.

Copier industry landscape.

Xerox’s global annual revenue was at $20.64 billion in 2011, $19.54 billion in 2014, and $9.83 billion in 2018. It’s now a $9.2 billion company, with revenues generated from a combination of services and equipment. In 2016, Xerox services accounted for roughly a third of the company’s global revenue. From 2012 to 2014 services generated more revenue than technology. That flipped in 2015 when service revenue dropped to a third of prior years.

HP’s net revenue from its printing business was at a high of $29.6 billion in 2008. It fell to $18.26 in 2016 and bounced up to $20.8 billion in 2018.

Worldwide, Canon is the market leader, with 24% of the market. HP is close behind with more than 21% of the market. Xerox has been in the low single digits for the past two years. After Canon and HP, market leaders are Brother (11%), Epson (10%), Kyocera (7%), NEC (5.6%), Ricoh (2.5%). Some 18.5% of the market is attributed to “other” companies.

Statistics provided by Statista based on data from IT Candor. Additional statistics from HP and Xerox.

© MoginRubin LLP

ARTICLE BY Dan Mogin and Jennifer M. Oliver of MoginRubin, edited by Tom Hagy.

Colleges, Students Tell DOJ McGraw-Hill/Cengage Merger Would Create a Textbook Duopoly

Two of the three dominant college textbook publishers – McGraw-Hill Education, Inc. and Cengage Learning Holdings II, Inc – have agreed to merge, creating a virtual duopoly in the college textbook market and setting the stage for a potential antitrust fight with the Antitrust Division of the U.S. Department of Justice. McGraw-Hill and Cengage claim the new company will generate global growth, improve margins, and produce efficiencies that will lead to more affordable education materials for students.

But several student and consumer groups disagree, arguing the merger will lead to decreased competition and higher prices for college textbooks. They also claim the post-merger entity will implement digital strategies (e.g., all-access digital subscriptions) that will: (1) force smaller competitors out of the market; (2) eliminate the secondary textbook market, which provides students a lower cost option for purchasing or renting textbooks; and (3) allow the two dominant publishers to collect and monopolize certain types of student data, including data showing students’ learning styles, students’ understanding of core concepts, students’ need additional assistance, and/or students’ risk of dropping out.

The Scholarly Publishing and Academic Resources Coalition (SPARC) has been one of the loudest critics of the merger. On August 14, 2019, SPARC sent a letter to the DOJ urging it to block the merger, arguing that it will “significantly decrease competition in a market already rife with anti-consumer behavior.”

In its section titled “The Textbook Market is Broken,” SPARC explains that college textbooks are sold in a “captive market” because students are forced to purchase the materials selected by their professors. This system “effectively hands the three major companies who currently dominate the market a blank check to develop expensive materials without regarding the preferences, needs, or financial circumstances of students. The textbook industry’s current state of dysfunction results from years of consolidation, unsustainable practices, and lack of price competition.” SPARC points to textbook pricing as an example of this dysfunction, as prices “have increased 184% over the last two decades — three times the rate of inflation.”

In a separate letter sent to the DOJ at the end of July, U.S. PIRG Education and student leaders from colleges across the country raised similar concerns. Specifically, the students explain they have “directly felt the impacts of skyrocketing textbook prices, further exacerbated by Cengage and McGraw-Hill’s efforts to remove cost-cutting options for students by undermining used book markets,” and that “[t]o maintain profit margins, publishers have put out custom or frequent new editions to make it difficult to find a used book for our classes ….” Citing a rather shocking statistic, the students claimed that “65% of students have skipped buying a book at some point in their college career because of cost despite 94% of them knowing it would hurt their grade.”

The students also identified several specific harms caused by “innovative” digital models employed in the textbook industry:

  • The publishers issue expiring access codes to paid online platforms that students must also use to submit homework and test answers, destroying the used book market;
  • Students cannot sell their materials at the end of the course or keep them or future reference, harming students who already cannot afford books;
  • Automatic billing or so-called “inclusive access” means that students are automatically charged for materials, eliminating their ability to price shop; and
  • Based on contracts proposed at some schools, publishers will continue to raise prices at the same rate that has led to the current affordability crisis.

The potential anticompetitive impacts of this merger are obvious and significant. Assuming the relevant market is the U.S. college textbook market, the merger is between two entities that each control more than 20% of an already highly concentrated market. Under relevant case law and the DOJ’s/FTC’s Horizontal Merger Guidelines, the merger presumptively increases market power for the post-merger entity and violates Section 7 of the Clayton Act. Moreover, the merging entities have made clear they intend to develop an all-access digital subscription service that, if adopted en masse, will likely eliminate both smaller competitors and the secondary market for college textbooks. Finally, by creating a virtual duopoly, the merger increases the likelihood of coordination among rivals. Considering these issues, the DOJ must take a very close look at this merger and implement conditions that address these issues if the merger is approved.

© MoginRubin LLP

ARTICLE BY Timothy Z. LaComb of MoginRubin.
Edited by Tom Hagy for MoginRubin LLP

DOJ Gets Involved in Antitrust Case Against Symantec and Others Over Malware Testing Standards

The U.S. Department of Justice Antitrust Division has inserted itself into a case that questions whether the Anti-Malware Testing Standards Organization, Inc. (AMTSO) and some of its members are creating standards in a manner that violates antitrust laws.

AMTSO says it is exempt from such per se claims by the Standards Development Organization Act of 2004 (SDOA). Symantec Corp., an AMTSO member, says the more flexible “rule of reason” applies – that it must be proven that standards actually undermine competition, which the recommended guidelines do not.

Malware BugNSS Labs, Inc., is an Austin, Texas-based cybersecurity testing company which offers services including “data center intrusion prevention” and “threat detection analytics.”

In addition to Symantec, AMTSO members include widely recognized names like McAfee and Microsoft, as well as names known well in cybersecurity circles: CarbonBlack, CrowdStrike, FireEye, ICSA, and TrendMicro. NSS Labs also is a member, but says it is among a small number of testing service providers. The organization is dominated by product vendors who easily outvote the service providers like NSS, AV-Comparatives, AV-Test and SKD LABS, NSS maintains, claims disputed by the organization.

On Sept. 19, 2018, NSS Labs filed suit in U.S. District Court for the Northern District of California against AMTSO, CrowdStrike (since voluntarily dismissed), Symantec, and ESET, alleging the product companies used their power in AMTSO to control the design of the malware testing standards, “actively conspiring to prevent independent testing that uncovers product deficiencies to prevent consumers from finding out about them.” The industry standard requires a group boycott that restrains trade, NSS Labs argues, hurting service providers (NSS Labs v. CrowdStrike, et al., No. 5:18-cv-05711-BLF, N.D. Calif.).

The case is before U.S. District Judge Beth Labson Freeman in Palo Alto, who has presided over a number of high-profile matters.

AMTSO moved to dismiss NSS Labs’ suit, citing its exemption from per se antitrust claims because of its status as a standards development organization (SDO). Further, it argues that the group is open to anyone and, while there are three times more vendors than testing service providers in the organization, that reflects the market itself.

On June 26, the DOJ Antitrust Division asked the court not to dismiss the case because further evidence is needed to determine whether the exemption under the SDOAA is justified.

AMTSO countered that the primary reason the case should be dismissed has “nothing to do” with the SDOAA. NSS failed to allege that AMTSO participated in any boycott, the organization says. All the group has done is “adopt a voluntary standard and foster debate about its merits, which is not illegal at all, let alone per se illegal,” the group says, adding that the Antitrust Division is asking the court to “eviscerate the SDOAA.”

Symantec first responded to the suit with a public attack on NSS Labs itself, criticizing its methodology and lack of transparency in its testing procedures, as well as the company’s technical capability and it’s “pay to play” model in conducting public tests. NSS Labs’ leadership team includes a former principal engineer in the Office of the Chief Security Architect at Cisco, a former Hewlett-Packard professional who established and managed competitive intelligence network programs, and an information systems management professional who formerly held senior management positions at Deloitte, IBM and Aon Hewitt.

On July 8, Symantec responded to the Antitrust Division’s statement of interest. It argued that the SDOAA does not provide an exemption from antitrust laws. Instead, it offers “a legislative determination that the rule of reason – not the per se rule” to standard setting activities. “That simply means the plaintiff must prove actual harm to competition, rather than relying on an inflexible rule of law,” Symantec says.

The company wrote that the government may have a point, albeit a moot one. “Symantec does not believe so, but perhaps the Division is right that there is a factual question about whether AMTSO’s membership lacks the balance the statute requires for the exclusion from per se analysis to apply,” Symantec says. Either way, the company argues, it doesn’t matter to the motions for dismissal because the per se rule does not apply.

Judge Freeman has set deadlines for disclosures, discovery, expert designations, and Daubert motions, with a trial date of Feb. 7, 2022.

Commentary

The antitrust analysis of standards setting is one of the sharpest of two-edged swords: When it works properly, it reflects a technology-driven process of reaching an industry consensus that often brings commercialization and interoperability of new technologies to market. When it is undermined, however, it reflects concerted action among competitors that agree to exclude disfavored technologies in a way that looks very much like a group boycott, a per se violation of Section 1 of the Sherman Act.

Accordingly, the Standards Development Organization Advancement Act of 2004 (SDOAA) recognizes that, when they are functioning properly, exempting bone fide standards development organizations (SDOs) from liability for per se antitrust violations can promote the pro-competitive standard setting process. But, when do SDOs “function properly”? The answer is entirely procedural, and is embodied in the statutory definition of SDO: an organization that “incorporate[s] the attributes of openness, balance of interests, due process, an appeals process, and consensus … “

The essential claim in the complaint by NSS Labs, therefore, is that the rules and procedures followed by AMTSO do not provide sufficient procedural safeguards to ensure that the organization arrives at a pro-competitive industry consensus rather than a group boycott for the benefit of one or a few industry players dressed in the garb of standard setting.

This is a factual inquiry that cannot be countered by a legal defense that simply declares the defendant is an SDO and, therefore, immune to suit under the statute. Whether the AMTSO is an SDO under the law or not depends on how it conducts itself, the make-up of its members, and its fidelity to the procedural principles embodied in the statute. The plaintiff’s claim is that AMTSO has not followed the procedural principles required to qualify as an SDO under the Act. This is a purely factual issue and, as such, cannot be resolved on a motion to dismiss.

The DOJ should be commended for urging the court to proceed to discovery to adduce the necessary facts to distinguish between legitimate standard setting and an unlawful group boycott and it should continue to be vigilant in the face of SDOs and would-be SODs that might be tempted to use the wrong side of the standard setting sword to commit anticompetitive acts instead of the right side to produce welfare-enhancing industry consensus.

This is particularly true in vital industries like cybersecurity. Government agencies, businesses, and consumers are constantly and increasingly at risk from ever-evolving cyber threats. It is therefore imperative that the cybersecurity market remains competitive to ensure development of the most effective security products.

© MoginRubin LLP
This article was written by Jonathan Rubin and Timothy Z. LaComb of MoginRubin & edited by Tom Hagy for MoginRubin.
For more DOJ Antitrust activities, see the National Law Review Antitrust & Trade Regulation page.

Why Correctly Understanding Antitrust Risk is Crucial to Properly Addressing Brand Dilution in the E-Commerce Age

“Run a Google search for the phrase ‘minimum advertised price policy’ and you will find hundreds of policies, posted on a variety of manufacturers’ websites.  Interest in minimum advertised price (‘MAP’) policies has skyrocketed in recent years.”  That is what one of my colleagues wrote in a prescient article in 2013.[i]  Since 2013, the interest in MAP policies has exploded.  But much of the online guidance regarding MAP policies is misguided and clearly has not been crafted or vetted by antitrust counsel.  Manufacturers should proceed with caution and consult with antitrust counsel before adopting a MAP policy.

  1. What is a MAP Policy?

MAP policies impose restrictions on the price at which a product or service may be advertised without restricting the actual sales price.  In the context of print advertising, MAP policies usually concern only off-site advertising, such as in flyers or brochures.  They do not restrict the in-store advertising or sales price offered at the retailer’s “brick and mortar” locations.  In the context of internet advertising, MAP policies often concern pricing advertised by an internet retailer on its website.  But with internet advertising, the distinction between an advertised price and a sales price is often blurry and requires special attention.

  1. What has been driving all the recent interest in MAP?

The e-commerce boom has been one key driver.  Although e-commerce has been a financial boon for some by allowing products to reach broader audiences and conveniently connecting consumers to highly discounted and diversified products, other manufacturers are concerned that they are losing control over their brands and the advertising of their products.  Once premium branded products might be discounted to the point of being considered cheap.  As margins are squeezed, service may suffer and consumers ultimately lose out.

This phenomenon, and how to address it, has attracted massive recent attention, including from the popular press.  In 2017, the Wall Street Journal published an article headlined, Brands Strike Back:  Seven Strategies to Loosen Amazon’s Grip, reporting that a growing number of brands are pushing back on large online retailers by adopting MAP policies.[ii]  The article reported that instituting MAP policies can be effective in decreasing online discounting.  A recent Forbes article similarly recommended that manufacturers adopt MAP policies in response to the emergence of e-commerce sites.[iii]

  1. Popular Misconceptions About MAP.

Public interest in MAP has been great for drawing attention to the usefulness of MAP policies in addressing brand dilution.  But much of the popular discourse about MAP fails to account for the critical legal considerations attendant to adopting and enforcing a MAP policy, and would steer the unwary into legally risky territory.  For example, a sampling of articles online—which will go unattributed—offer the following characterizations in promoting MAP policies:

  • A “MAP policy is an agreement between manufacturers and distributors or retailers”;
  • In a MAP policy, “authorized sellers agree to the policy and in return, the brand agrees to enforce their pricing”;
  • To prevent “margin erosion,” “manufacturers and retailers work together to set a minimum advertised price”;
  • MAP should be “enforced by both” the manufacturer and reseller; and
  • Brands should “control sellers” through “enforceable agreements.”

These suggestions to implement MAP through an “agreement” or in “cooperation” with resellers, and to use MAP to enforce product pricing, may have intuitive appeal.  And in fact, several MAP templates available online are styled as “agreements” between the manufacturer and reseller.  But be warned—these suggestions, if carried out, could pose significant antitrust risk that could subject companies to serious and expensive liability.  The next section explains why.

  1. Quick Antitrust Legal Guide to MAP.

When most people think of illegal antitrust conspiracies, they think of agreements among competitors to fix prices or restrict competition, which are per se illegal.  But in general, manufacturers also may not require their resellers—either distributors or retailers—to resell at (or above) a set price.  This is known as minimum resale price maintenance (“RPM”) and it is also per seillegal under antitrust laws in several states.

Although RPM may be per se illegal under certain state laws, MAP policies are generally analyzed under a more lenient legal framework called the “rule of reason.”  But a MAP policy must be crafted with care to avoid being treated as RPM.  For example, agreements with resellers concerning the minimum advertised price may be viewed, depending on the circumstances, as actually having the effect of setting the minimum sales price, converting the MAP policy into RPM.  A MAP policy also must be adopted free from any agreement with a manufacturer’s horizontal competitors, which could be found to be an unlawful horizontal conspiracy.  In one prominent example, the Federal Trade Commission (“FTC”) brought an enforcement action against five major competing compact disk (“CD”) distributors challenging their MAP policies as violating federal antitrust laws.[iv]  All five major CD distributors had adopted MAP policies around the same time, allegedly at the urging of retailers, and the policies each prohibited all advertising below a certain price, including in-store advertising.  The FTC viewed the policies under those circumstances as horizontal agreements among the distributors, and thus per se illegal.

  1. Practical Antitrust Pointers for MAP.

Several guiding principles can help minimize antitrust risk in adopting a MAP policy:

  • Advertising Only.  A retailer should remain free to sell a product at any price, so that the restriction on advertising is deemed to be a non-price restraint.  In the context of online sales, adhering to this principle can require special care, as some might try to argue that there is little distinction between an advertised price and a sales price.  MAP policies that concern internet advertising thus often include provisions that allow internet retailers to communicate an actual sales price in a different manner—such as “Call for Pricing” or “Add to Cart to See Price.”
  • No Agreement.  A MAP policy should be drafted as a unilateral policy—i.e., a policy that the manufacturer creates on its own (in consultation with antitrust counsel), without input from or agreement with its own competitors or with its downstream resellers.  The policy should expressly state that it is a unilateral policy that does not constitute an agreement.
  • Broad Application.  Policies that apply to all off-site advertising, no matter the form, are more likely to be upheld than policies that are specifically directed at internet retailers.
  • Clarity.  A MAP policy should be user-friendly and easy to understand.  One best practice is to include a Frequently Asked Questions guide to clarify how the policy works.

Antitrust risk must be kept in mind not just when a MAP policy is created, but throughout its implementation and enforcement.  The manner in which a MAP policy is enforced could risk converting the unilateral policy into conduct that could be viewed as a tacit agreement, even if no written agreement is ever signed.  For example, enlisting or “working with” resellers to enforce the policy, as suggested by articles online, could be viewed as evidence that a manufacturer is coordinating with resellers as part of an overall agreement.  Working with competitors to coordinate strategies for MAP enforcement would also pose significant legal risk.  For that reason, manufacturers that are adopting MAP policies should resist communications with resellers or competitors about MAP and continue to work with antitrust counsel through implementation and enforcement.

To be sure, some may believe that coordination, for example, between manufacturers and retailers, is helpful in stamping out e-commerce discounting.  But even if such coordination between manufacturers and retailers could be effective in addressing such discounting, it carries significant legal risks.  And potentially risky agreements with resellers are not a manufacturer’s only option in addressing how its products are advertised in e-commerce.  Other tools are also available and can be adopted in conjunction with MAP and other policies.  As just one example, a unilateral distribution policy, in which a manufacturer unilaterally suspends resellers that sell through unauthorized e-commerce sites, can be a powerful complement to a MAP policy.  It also may present a more direct way to address the e-commerce channels through which goods are (or are not) sold.  Because such policies do not involve prices, if appropriately created and implemented, U.S. courts are likely to also assess them under the lenient “rule of reason.”  It is therefore unsurprising that such policies are gaining in popularity.  One recent study surveying over 1,000 European retailers found that policies precluding or limiting e-commerce sales are widely in place with approximately 18% of respondents reporting that manufacturers limit their ability to sell through online marketplaces or platforms and 11% reporting that manufacturers restrict their online sales to their own website.[v]

Ultimately, addressing brand dilution is critical in the e-commerce age.  It is also highly fact specific and typically requires custom solutions tailored to a company’s commercial and legal objectives.  Adopting an “off the rack” MAP policy and simply hoping for the best is unwise and could lead to expensive litigation or, worse yet, liability and costly penalties.  But antitrust lawyers are here to help companies navigate the legal landscape to come up with commonsense solutions that work while minimizing legal risk.

[i] Erika L. Amarante, A Roadmap to Minimum Advertised Price Policies, 16 The Franchise Lawyer 4 (2013), https://www.wiggin.com/erika-l-amarante/publications/a-roadmap-to-minimum-advertised-price-policies/.

[ii] Ruth Simon, Brands Strike Back:  Seven Strategies to Loosen Amazon’s Grip, Wall St. J., (Aug. 7, 2017),  https://www.wsj.com/articles/brands-strike-back-seven-strategies-to-loosen-amazons-grip-1502103602.

[iii] Danae Vara Borrell, Why Manufacturers Can’t Afford to Ignore Minimum Advertised Price Policies, Forbes Tech. Council (Oct. 17, 2018), https://www.forbes.com/sites/forbestechcouncil/2018/10/17/why-manufacturers-cant-afford-to-ignore-minimum-advertised-price-policies/#167f8d5417ec.

[iv] See In re Sony Entertainment, Inc., No. C-3971, 2000 WL 1257796 (F.T.C. Aug. 30, 2000).

[v] See European Commission, Final Report on the Ecommerce Sector Inquiry, staff working document paragraph 461, http://ec.europa.eu/competition/antitrust/sector_inquiry_swd_en.pdf.

© 1998-2019 Wiggin and Dana LLP

U.S. Implements President Trump’s Cuba Policy

On Nov. 8, 2017, the U.S. Government announced new regulations in furtherance of the Trump Administration’s policy regarding Cuba.

In June 2017, President Trump published his National Security Presidential Memorandum “Strengthening the Policy of the United States Toward Cuba” (NSPM), which announced modification of U.S. policy with respect to Cuba to target the Cuban military, intelligence, and security agencies.  In the NSPM, President Trump emphasized the need to promote the flow of economic benefits to the Cuban people, rather than to its military.  The NSPM further directed the Commerce, State, and Treasury Departments to take various actions implementing the new policy.

Accordingly, regulations were released this week by the U.S. Department of State, Department of Treasury’s Office of Foreign Assets Control (OFAC), and Department of Commerce’s Bureau of Industry and Security (BIS) to implement the NSPM, and clarify the limitations imposed on U.S. persons wishing to travel to or do business in Cuba.

This post was written by Sonali Dohale, Kara M. Bombach, Yosbel A. Ibarra & Carl A. Fornaris of Greenberg Traurig, LLP. All rights reserved.,©2017
For more Antitrust legal analysis, go to The National Law Review 

U.S. Airways Vs. Sabre: 3 Ways To Prove Healthy Market Competition

Airplane, Sky, U.S. AirwaysAt the heart of any antitrust suit lies the intent to foster healthy competition in the market. But what, exactly, does healthy competition foster? Lower prices, sure. But, more importantly, better products, better services, and more innovative ways to provide them, as well as fair negotiations among vendors.

Successful defense of an antitrust suit starts with proof of healthy competition. A recent battle of the experts in the $134M trial between airline giant, U.S. Airways (recently merged with American Airways), and Sabre Holdings Corp., a trip-planning conglomerate, offered three indicators to successfully prove healthy market competition:

Innovation

In the trial, U.S. Airways claimed Sabre—as part of a conspiracy to increase airfares and damage U.S. Airway’s position in the market—forced it into an unfair, anti-competitive contract in 2006. At the time Sabre, which boasted a large share of the trip-booking market, served as one of the primary sources of airfare data for a massive network of travel agents responsible for a significant portion of U.S. Airways bookings. In the suit, U.S. Airways claimed it had no choice but to contract with Sabre in order to maintain access to this large travel agent network. Sabre’s expert, however, University of Chicago economics professor Kevin Murphy, pointed to U.S. Airway’s plea as the exact type of reasoning that is detrimental to the market, i.e., lack of innovation.

According to Murphy, U.S. Airways could have researched, planned and implemented the creation of a new technical platform, a “bridge” Murphy called it, to the numerous travel agents that would have alleviated the need to utilize Sabre’s connection. In other words, there was opportunity to innovate had U.S. Airways found the cost of the project in conjunction with the end result—which would have alleviated the need to partner with Sabre—more valuable than the contract with Sabre. Motive and opportunity to innovate around stagnant models is a sign of healthy market competition. In addition, the “threat” of creating a new model, as Murphy put it, also has value and would have impacted negotiations.

Negotiation

To further his argument that the Sabre-U.S. Airways contract was the result of healthy competition, Murphy also pointed to the stern negotiations U.S. Airways and Sabre entered into prior to execution of the contract. Witnesses at the trial testified that U.S. Airways took very stern negotiating positions before a final value was agreed upon between the parties. Murphy explained this could not have occurred had Sabre truly possessed the type of anticompetitive market power U.S. Airways claimed. If that had been the case, Sabre would have simply named their price and left U.S. Airways powerless to refuse. Fair bartering among vendors for provision of unique, in-demand services is another indicator of healthy market competition.

Valuation

One of the primary points of contention between U.S. Airways’ expert and economist Murphy was Sabre’s “full content” contracts, a requirement by Sabre that air carriers provide access to any and all fares they offer. U.S. Airways’ expert referred to this as a “no discount” constraint. In other words, if the consumer knows the carrier has previously priced a flight at $200, that prevents the carrier from now telling the consumer—with a straight face, at least—that the true value of the flight is $300 but will be generously offered at a discount for only $200. Full disclosure, according to U.S. Airways, limits the carrier’s ability to alter pricing to suit demand. Murphy, however, explained “full content” actually increases competition because it drives prices down. If consumers have all options available at the time of booking, they will often choose the lowest priced option that suits their need. This is the cornerstone of competition. Full disclosure allows for unfettered comparison shopping and enables the consumer to value all options according to personal preference and necessity. If certain options (which are often not simply the lowest-priced) begin to advance, this spawns innovation among market competitors to match consumer desire and the cycle begins anew: innovation, negotiation, valuation.

ARTICLE BY Annie Dike of IMS ExpertServices

© Copyright 2002-2017 IMS ExpertServices, All Rights Reserved.

Failure to Comply with Hart-Scott-Rodino Act Just Got More Expensive

FTC Hart-Scott-Rodino AntitrustLast November, President Obama signed into law an amendment to the Federal Civil Penalties Inflation Adjustment Act (Sec. 701 of Public Law 114-74). The amendment requires federal agencies to adjust the maximum civil penalties for violations of the laws they enforce no later than July 1, 2016.

On June 29, 2016, the Federal Trade Commission revised its Rule 1.98 to reflect the new higher levels for maximum civil penalties. The new maximums will apply to civil penalties assessed by the FTC after August 1, 2016. They include civil penalties for violations that occurred prior to the effective date. (Going forward, the maximums will be adjusted for inflation each January.)

Of particular significance to corporations that acquire, sell, or merge with other businesses, the penalties for violating the premerger reporting and waiting requirements under the Hart-Scott-Rodino Act have been increased from $16,000 per day to $40,000 per day, an increase of 150%.

As most businesspersons know, under the HSR Act, the parties to mergers and acquisitions that meet the dollar thresholds of the Act and are not otherwise exempt must file a premerger notification form, pay the appropriate fees, and wait 30 days (or possibly more) prior to closing the transaction. Failure to file the required notification or to observe the mandatory waiting period will subject the parties to civil penalties, which are now significantly higher.

Note that for continuing violations of the HSR Act, each day is a separate violation. As a result, the maximum civil penalty may be multiplied by the number of days for each violation of the applicable statute or order. (For example, a company or individual that is required to report but fails to do so for one year would be facing a fine of up to $14.6 million under the new levels.)

But statutory maximums are not automatically imposed. Before levying a civil fine, the Commission considers various factors in determining whether the maximum should be mitigated. Those factors include:

  1. Harm to the public

  2. Benefit to the violator

  3. Good or bad faith of the violator

  4. The violator’s ability to pay

  5. Deterrence of future violations by this violator and others

  6. Vindication of the FTC’s authority

Why does it happen that a company or individual fails to make the required HSR filing? The FTC reports that it frequently sees two specific scenarios:

  1. Company executives who acquire company voting shares through exercising options or warrants may fail to aggregate the value of such shares with the value of the company shares they already hold and therefore do not realize that they have satisfied the HSR size of transaction threshold test.

  2. Sometimes companies or individuals who have qualified for the “investment-only” exemption in the past may erroneously continue to rely on that exemption even though they have become active investors in the company or their holdings in the company have increased above 10%.

Other recurring scenarios can also trip up acquirers. For example, companies may not realize that patent and other IP licenses are in certain circumstances treated as the acquisition of an asset for HSR Act purposes.

ARTICLE BY William M. Hannay of Schiff Hardin LLP

© 2016 Schiff Hardin LLP

Ninth Circuit Rules NCAA Violates Antitrust Law-Strikes Down Proposed Remedy

A three-judge panel of the Ninth Circuit Court of Appeals, in San Francisco, affirmed in part and reversed in part Judge Claudia Wilken’s August 2014 district court decision that NCAA rules restricting payment to athletes violate antitrust laws.

The Ninth Circuit agreed with Judge Wilken’s conclusion that NCAA rules restricting payment to athletes violated antitrust laws and authorized NCAA schools to provide athletic scholarships that cover the full cost of attendance. However, the Ninth Circuit rejected a key component of Judge Wilken’s decision which authorized the payment of $5,000 per year in deferred compensation for the use of individual athletes’ names, images and likenesses.

The opinion, written on behalf of the panel by Judge Jay Bybee, stated,

“NCAA is not above the antitrust laws, and courts cannot and must not shy away from requiring the NCAA to play by the Sherman Act’s rules….In this case, the NCAA’s rules have been more restrictive than necessary to maintain its tradition of amateurism in support of the college sports market.”

A more detailed analysis of the decision and its potential impact will be posted shortly.

Article By Gregg E. Clifton & Benjamin A. Tulis of Jackson Lewis P.C.
Jackson Lewis P.C. © 2015

In Affirming a Preliminary Injunction Against Drug Companies, Second Circuit Finds Coercion in Product Hopping Scheme

In an earlier posting, I wrote about the lawsuit filed on December 10, 2014 by the Attorney General for the State of New York, People of the State of New York v. Actavis, PLC and Forest Laboratories, LLC .1  In that action, New York challenges on antitrust grounds plans by the defendant pharmaceutical companies to cease marketing the drug Namenda IR and substitute in the market-place a newer drug, Namenda XR.  Both drugs are used for the treatment of moderate to advanced Alzheimer’s disease.  Namenda IR and Namenda XR are the brand names for the drug memantine, and defendants have a monopoly for memantine in the United States. On May 22, 2015, the Second Circuit issued an Order affirming a preliminary injunction granted by the United States District Court for the Southern District of New York, enjoining Actavis and Forest Laboratories (“Forest”) from discontinuing the marketing of Namenda IR, and substituting its newer drug Namenda XR.2  The Second Circuit filed an opinion under seal concurrently with the issuance of its Order, allowing the parties to submit proposed redactions by May 26, 2015.  The court of appeals on May 28, 2015 issued a redacted version of its opinion.  At the time of my previous posting on the antitrust suit brought by New York against Actavis and Forest, the Second Circuit had not released it redacted version of its opinion.

In its opinion, the Second Circuit ruled that the district court did not abuse its discretion in granting a preliminary injunction, as sought by New York, precluding the defendants from implementing a marketing scheme known as “product hopping.”  This tactic was a means of maintaining the defendants’ monopoly in the memantine market and precluding competition by generic brands of that drug.  Of critical import to the court of appeals was that defendants relied upon consumer coercion, rather than persuasion on the merits of competing generics.  The coercive aspect of defendants’ marketing scheme violated section 2 of the Sherman Act.3  

The Second Circuit’s ruling in People of the State of New York v. Actavis, PLC and Forest Laboratories, LLC affirming the district court’s preliminary injunction is the first appellate decision to specifically opine on the antitrust implications of product hopping in the pharmaceutical industry.

Background

Forest holds a patent for its brand-name drug Namenda IR, with market exclusivity to expire on July 11, 2015.  On that date, Forest will no longer have market exclusivity for memantine.  Actavis and Forest issued several public statements regarding plans to withdraw Namenda IR from the market, ultimately announcing in June 2014 that Namenda IR would be available for sale until the fall of 2014.  Defendants indicated that upon withdraw Namenda IR from the market in the fall of 2014, its newer drug Namenda XR would be available as a substitute for the treatment of moderate to advanced Alzheimer’s disease.  Defendants took steps to notify physicians and caregivers of the discontinuance of Namenda IR and to contemplate switching from Namenda IR to Namenda RX.

Namenda XR has the same therapeutic effect as Namenda IR.  There is a difference between the two drugs regarding time-release.  Namenda IR is the immediate-release version of that drug, whereas Namenda XR is an extended-release version. Thus, consumers would take Namenda IR twice daily; in contrast, Namenda XR would be taken once daily.  Additionally, Namenda IR is in tablet form, and Namenda XR is in capsule form.

There are implications for generic drug competition in the market for memantine that arise from the marketing plans announced by Actavis and Forest.  In 1984, Congress enacted the Drug Price Competition and Patent Term Restoration Act of 1984, also known as the “Hatch-Waxman Act.”4    That statute provides for dual purposes. On the one hand, Congress allowed a manufacture of a generic drug to use an abbreviated process to obtain approval to market the drug from the Food and Drug Administration (“FDA”).  Provision for an abbreviated process was to encourage price competition from  generic drugs.  The generic drug manufacturer can file an Abbreviated New Drug Application (“ANDA”) provided that the generic drug is “bioequivalent” to a previously approved brand-name drug.  This regulatory approach allows the generic manufacturer to rely on scientific data previously submitted for the brand-name drug to seek approval to market the generic drug.  The ANDA process affords generic manufacturers considerable cost savings, and a shorted period of FDA review.  The other purpose under the Hatch-Waxman Act was to incentivize drug innovation.  To do this, Congress provided that the manufacturer of a brand-name drug can obtain an additional extension of up to five years to the patent term of the drug to compensate for regulatory delay when seeking approval from the FDA for the new brand-name drug.5  Additionally, under amendments to the Hatch-Waxman Act by the Food and Drug Administration Modernization Act of 1997,6 provision was made for six months of non-patent “pediatric exclusivity” for qualifying pediatric research conducted by the drug manufacturer.7

States have drug substitution laws that either mandate or allow the substitution of a generic drug for a prescribed brand-name drug, except where the prescribing physician, or consumer, indicates otherwise. A generic drug that receives approval from the FDA under the ANDA process may be “AB- rated” by the FDA when the generic drug is “therapeutically equivalent” to its brand-name drug counterpart.  A generic drug deemed AB-rated allows a pharmacy, under a state’s substitution laws, to substitute the generic drug for the more expensive brand-name drug.  State substitution laws complement the provisions under the Hatch-Waxman Act which liberalize the drug approval process for generic drugs, to lower drug costs by encouraging greater competition from generic drugs in the market-place.

In the antitrust lawsuit filed by New York against Actavis and Forest, the State Attorney General alleges violations of the Sherman Act8 and state antitrust laws.9  In the action, New York contends that the marketing practice of product hopping that the defendants intend to pursue will have dire consequences for competition from generic drugs for Forest’s Namenda IR that would have occurred upon the expiration of market exclusivity for Namenda IR on July 11, 2015.  This anticompetitive impact will arise, according to New York, as a direct result of defendants’ plans to stop marketing Namenda IR and “force switch” physicians and payors to use Forest’s newer drug Namenda XR prior to loss of market exclusivity for Namenda IR on July 11, 2015.10  New York argues that removal from the market of Namenda IR prior to the loss of market exclusivity for Namenda IR will thwart state substitution laws since generics for the drug Namenda IR will not have been AB- rated for the newer Namenda XR, critical to enable pharmacists to substitute a generic version for the newer drug Namenda XR.  New York contends that defendants’ scheme will thus extend the national monopoly that Forest has for memantine for the term of the patent it has for Namenda XR, to expire in 2029.

In its lawsuit, New York argues that there is no legitimate business justification for the product hopping scheme defendants intend to pursue.  In its amended complaint, the State insists that Manenda XR lacks any meaningful benefits compared with Namenda IR.11  New York accuses the defendants of erecting barriers to entry to thwart competition from makers of the generic form of the drug Namenda IR.  The State contends that steps to force switch the prescribing of Namenda XR would impact negatively on thealready “financially strapped”12 health care system, and on Alzheimer’s patients who “must bear…unwanted costs” and “unnecessary changes to their medical routine.”13

The Second Circuit’s Analysis            

On appeal, the Second Circuit ruled that the district court did not abuse its discretion in granting a preliminary injunction, enjoining Actavis and Forest from discontinuing the marketing of Namenda IR.  Applying a heightened standard under the law in the Second Circuit for review of a preliminary injunction, the court of appeals concluded that New York demonstrated a “substantial likelihood of success on the merits” of its monopolization and attempted monopolization claims under section 2 of the Sherman Act, and has made “a strong showing” that defendants’ conduct “would cause irreparable harm to competition” in the memantine drug market and to consumers.14

The Second Circuit wrote that monopoly power does not, in and of itself, raise an antitrust concern.  To establish a violation of section 2 of the Sherman Act, it must be proved that the defendant not only possessed monopoly power in the relevant market, but that it “willfully acquired or maintained that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.”15  The court of appeals recognized that defendants’ patent on Namenda IR grant them a legal monopoly in the national memantine drug market until July 11, 2015.  Thus, the Second Circuit explained that the issue is whether defendants “willfully sought to maintain or attempted to maintain” that monopoly in violation of section 2.  Citing United States v. Microsoft Corp.16 the court of appeals embraced a rule-of-reason test to determine when a product change violates section 2.  It wrote that generally, courts question assertions that competition is harmed by a dominant firm’s product design changes.  Such design changes can benefit consumers and represent innovation and efficiency. Thus, the court explained that, to be anticompetitive, a dominant firm’s design changes are those that impede competition through means “other than competition on the merits.”17  Relying  on its analysis in Berkey Photo, Inc. v. Eastman Kodak Co.,18 the Second Circuit reasoned that product withdrawal or product improvement, standing alone, is not anticompetitive.  The court wrote that under Berkey Photo, when a monopolist “combines product withdrawal with some other conduct,” such that consumers are “coerced” rather than persuaded based on the merits, and to “impede competition,” such actions are anticompetitive.19  The court of appeals concluded that defendants’ plan to force switch Alzheimer’s patients from taking Namenda IR to the newer drug Namenda XR (for which generic Namenda is not therapeutically equivalent) would impede generic competition by thwarting state substitution laws for generics.  Defendants’ force switch scheme “crosses the line from persuasion to coercion and is anticompetitive.”20  

The Second Circuit agreed with the district court’s view that the pharmaceutical market is unique, and the critical role that state substitution laws play in facilitating price competition between brand-name drugs and generics.  Competition through state substitution laws “is the only cost-efficient means” for generic drugs to compete.21  The court of appeals explained that defendant’s plan to force patients to switch to Namenda XR would preclude generic substitution because generic Namenda IR is not AB-rated to Namenda XR.  The Second Circuit viewed defendants’ plan to force switch consumers to Namenda XR as a practice not based on competition on the merits.  As such, defendants’ scheme was exclusionary, with the anticompetitive “effect of significantly reducing usage of rivals’ products and hence protecting its own monopoly,”22 in violation of section 2 of the Sherman Act.  The court of appeals took note of the record before the lower court indicating the defendants’ own predictions on the effect of its plan to force switch consumers.  Such a scheme would convert, in defendants’ judgment, 80-100 of Namenda IR patients to Namenda XR prior to entry into the market by generic Namenda IR.  Thus, there would be virtually no meaningful market in which generics could compete based on price for Namenda IR.23  The court of appeals also took note of defendants’ own views regarding the very low prospects that consumers would revert back to the generic version of Namenda IR once they were forced to switch to Namenda XR and manufacturers were free to sell the generic version of Namenda IR.24

The Second Circuit rejected the defendants’ procompetitive justifications for its marketing scheme as pretextual.  Relying on the record before the lower court, the court of appeals wrote that there is ample evidence indicating that defendants’ stated intent was to erect barriers to thwart generic competition, and maintain a monopoly in the memantine market.  Defendants argued that their conduct is procompetitive since introducing a new product, like Namenda XR, enhances competition and encouraging product innovation.  The Second Circuit disagreed.  It wrote that while introducing Namenda XR may, standing alone, be procompetitive, there is no competitive justification for withdrawing Namenda IR.25

The Second Circuit also concluded that New York made a strong showing “that competition and consumers will suffer irreparable harm” in the absence of the preliminary injunction awarded by the district court.26

The views and opinions expressed in this article are those of the author, and cannot be attributed to the Office of the Inspector General for the District of Columbia Government.

ARTICLE BY Stuart Silverman of American University Washington College of Law
Copyright American University Washington College of Law

1  Amended Complaint, Case No. 14-CV-7473 (RWS) (S.D.N.Y. filed Dec. 10, 2014).

2 Case No. 14-4624 (2nd Cir. May 22, 2015)

3 15 U.S.C. § 2.  

4 Pub. L. No. 98-417, codified at: 21 U.S.C. § 355, 21 U.S.C. § 2201, and 35 U.S.C. §§ 156, 271, 282.

5 35 U.S.C. § 156.  

6 Pub. L. No. 105-115.

7 35 U.S.C. § 156; 21 U.S.C. § 355a.   

8 15 U.S.C. §§ 1 and 2.  

9   New York State General Business Law §§ 340-47; New York State Executive Law § 63(12).      

10 The district court’s preliminary injunction bars defendants from withdrawing Namenda IR until 30 days after July 11, 2015, the date when generic memantine will first be available in the market.    

11 Amended complaint, par. 78.  

12 Id. at par. 6.  

13 Id. at par. 100.  

14 Slip op. at 28.  

15 Id. at 29, quoting Verizon Commc’ns Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398, 407 (2004) (internal quotation marks and citation omitted).    

16 253 F.3d 34, 58-60 (D.C. Cir. 2001) (en banc).  

17 Slip op. at 32.  

18 603 F.2d 263 (2nd Cir. 1979).  

19 Slip op. at 35-36.  

20 Id. at 37.  

21 Id. at 40-41. 

22 Id. at 40.                  

23 Id. at 39-40.  

24 Id. at 41-42.   

25 Slip op. at 47-49.  

26 Id. at 54.

Auto Insurers Again Seek Dismissal of In RE Auto Body Shop Antitrust Litigation

In early March, the auto insurer defendants in the In re Auto Body Shop Antitrust Litigation renewed their motions seeking the dismissal of plaintiffs’ action, this time directed at plaintiffs’ Second Amended Complaint. The insurer defendants urged the Court to dismiss the action with prejudice, maintaining that, despite three attempts, the plaintiff auto body shops have still failed to include sufficient facts to make their claim of conspiracy plausible.

The action, commenced well over a year ago as A&E Auto Body v. 21st Century Centennial Insurance Co. and subsequently transformed into a multidistrict litigation proceeding (In re Auto Body Shop Antitrust Litigation, MDL 2557) after similar cases were filed in a multitude of states, centers upon a claim that many of the leading auto insurers in the country conspired to reduce rates for the repair of damaged vehicles and to steer insureds away from auto repair shops that refused to accept lower reimbursement rates for their services. The cases were consolidated before Judge Gregory Presnell (M.D. Fla.) in late 2014, and in early 2015 Judge Presnell dismissed plaintiffs’ First Amended Complaint, finding that the plaintiffs had failed to plead an antitrust conspiracy with the degree of specificity required under Bell Atlantic v. Twombly, 550 U.S. 544 (2007).

In February, plaintiffs filed their Second Amended Complaint, seeking to cure the deficiencies in the complaint identified in Judge Presnell’s prior rulings. In March, the defendants filed several new motions to dismiss the action. One group of defendants (including State Farm, Allstate, Progressive and 21st Century) maintained that the plaintiffs’ allegations still failed to include sufficient factual support to plead an actionable antitrust conspiracy, which they described as the “crucial question” in the case. Claiming that the plaintiffs’ allegations demonstrated nothing more than “parallel conduct” towards the plaintiffs, not agreement, these defendants renewed their request to have the action dismissed as to them. Another group of defendants (which includes Hartford, Nationwide and Zurich American) went a step further, arguing that the plaintiffs had failed to allege any material facts specifically about them, despite Judge Presnell’s express instruction in his prior dismissal order in January (without prejudice, on that occasion) that plaintiffs provide detailed allegations about each defendant’s involvement in the alleged conspiracy. Finally, one defendant (Old Republic) filed a separate motion not only seeking dismissal, but sanctions as well, based on the claim that the plaintiffs had been put on notice by the Court that particularized allegations as to each defendant’s alleged conduct was required, and that plaintiffs’ failure to include any additional factual support for their claims against Old Republic was sanctionable conduct.

In late March, the plaintiffs filed an “omnibus” response to all of the defendants’ motions, arguing that dismissal of the case at this juncture was not warranted. Asserting that “the Second Amended Complaint complies in every respect with the Court’s [January] Order,” the plaintiffs urged the Court to permit them to proceed into discovery. Specifically, the plaintiffs maintained that the parallel conduct alleged in the Second Amended Complaint constitutes “circumstantial evidence of conspiracy” and that the Supreme Court has never expressly held how many “plus factors” supporting a claim of conspiracy are required to satisfy a plaintiff’s pleading obligations. Plaintiffs contended, therefore, that they are not required to “set out specific facts establishing the time, place or persons involved in the conspiracy” nor are they required to allege an “express agreement.” Instead, they maintained, their allegations of parallel conduct, coupled with their allegations about the defendants’ collective market share, motive to conspire and opportunity to do so are more than sufficient to meet their pleading obligations.

In early April, the auto insurers filed reply briefs responding to the plaintiffs’ contentions. Perhaps most significantly, those defendants that had argued that the Second Amended Complaint still failed to contain any significant allegations about their specific conduct noted that the plaintiffs’ response had failed to refute that assertion in any meaningful way (“Rather than simply admit that they failed to allege anything against the moving defendants under the Sherman Act…plaintiffs point to allegations against the other defendants….” emphasis in original).

The entire set of motions are now before Judge Presnell for consideration, with the defendants urging the Court to take a “three strikes, you’re out” approach to the plaintiffs’ case. Whether Judge Presnell will adopt defendants’ baseball analogy and dismiss the case, with prejudice, as to all or some of the defendants remains to be seen. What is certain is that this matter will continue to be a significant focus of attention for the entire auto insurance industry over the coming months. Stay tuned.

Authored by James M. Burns of Dickinson Wright PLLC

© Copyright 2015 Dickinson Wright PLLC