Three Antitrust Bills Are Among First Introduced in New Senate Session

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

Senator Herb Kohl (D, Wis.), chairman of the Judiciary Committee's Antitrust, Competition Policy and Consumer Rights Subcommittee, on January 25 introduced three pieces of legislation that would impact the antitrust laws. Each of the measures has been reintroduced in the 112th Congress, after failing to pass in earlier legislative sessions.

Resale Price Fixing

Senator Kohl introduced a bill to restore the rule of per se illegality for minimum resale price fixing. The proposed “Discount Pricing Consumer Protection Act” (S. 75) would reinstate a rule that was overturned by a 5-4 decision of the U.S. Supreme Court in Leegin Creative Leather Products, Inc. v. PSKS, Inc. (2007-1 Trade Cases ¶75,753). Under Leegin, resale price fixing agreements must be judged under the rule of reason.

The measure is identical to legislation introduced in the last two Congresses. It would amend Sec. 1 of the Sherman Act by adding after the first sentence the following:

“Any contract, combination, conspiracy or agreement setting a minimum price below which a product or service cannot be sold by a retailer, wholesaler, or distributor shall violate this Act.”

Senator Kohl first introduced the legislation in 2007, not long after the Supreme Court decision was handed down. “The experience of the last three years since the Leegin decision has begun to confirm our fears regarding the dangers from permitting vertical price fixing,” Senator Kohl said introducing the measure.

“Pay-for-Delay” Pharmaceutical Settlements

Another antitrust measure introduced on January 25 by Senator Kohl is the proposed “Preserve Access to Affordable Generics Act.” The bill (S. 27) is aimed at so-called “pay-for-delay” agreements between brand name and generic drug companies that delay entry of low-cost generic competition.

Under the proposal, agreements under which brand-name drug companies compensate generic drug companies to delay the entry of generic drugs to the market, a practice known as an “exclusion payment settlement,” would be presumed illegal. The FTC would have the authority to challenge such an agreement as a violation of Sec. 5 of the FTC Act, and the drug companies would have an opportunity to convince a judge why the agreement was not anticompetitive.

If an agreement is found illegal, the FTC could assess civil penalties up to three times the profits gained by the drug companies. The current legislation includes changes made by the Judiciary Committee when it approved similar legislation in the 111th Congress.

Railroad Antitrust Exemption

The proposed “Railroad Antitrust Enforcement Act of 2011” (S. 49) would repeal the antitrust exemption enjoyed by freight railroads. The legislation is identical to a bill that was unanimously approved by the Judiciary Committee in the last Congress. That measure was
never voted on by the full Senate.

“Consolidation in the railroad industry in recent years has resulted in only four Class I railroads providing nearly 90 percent of the Nation's freight rail transportation, as measured by revenue,” according to Senator Kohl. “The ill-effects of railroad industry consolidation are exemplified in the case of ‘captive shippers’—industries served by only one railroad. Over the past several years, these captive shippers have faced spiking rail rates.”

The measure would bring railroad mergers and acquisitions under the purview of the Clayton Act, allowing the federal government, state attorneys general, and private parties to file suit to enjoin anticompetitive mergers and acquisitions. Moreover, it would eliminate the exemption that prevents FTC's scrutiny of railroad common carriers and the antitrust exemption for railroad collective ratemaking.

Trade Regulation Tidbits

This posting was written by John W. Arden.

News, updates, and observations:

 A recent article in The Economist magazine asks whether the Obama Administration will back up its “tough talk” on antitrust enforcement (“Return of the Trustbusters,” August 27 print edition). “Companies are likely to find themselves scrutinised at least as intensively as they were under the administration of Bill Clinton, when many senior antitrust officials in the justice department and Federal Trade Commission (FTC) cut their teeth on a celebrated anti-monopoly lawsuit against Microsoft.” While new antitrust chief Christine Varney believes that the Bush Administration’s lax antitrust enforcement contributed directly to the economic crisis, that view is “debatable, to say the least,” according to the article. The Bush Administration did pursue cartel activity enthusiastically, obtaining record convictions, jail sentences, and fines, the story contends. Varney’s efforts to ramp up enforcement will face several obstacles, including the U.S. Supreme Court (which has issued several decisions narrowing trustbusters’ room to maneuver) and the “possible disagreement within Mr. Obama’s cabinet.” Given the “wretched state of the economy,” some administration officials are questioning whether to “risk upsetting the few bits that are growing strongly with gratuitous antitrust cases.” Text of the article appears here.

 On August 17, the American Antitrust Institute filed an amicus brief, urging the U. S. Court of Appeals in New Orleans to adopt a presumption of illegality for resale price maintenance agreements and to overturn the lower court's dismissal of the amended complaint filed in PSKS, Inc. v. Leegin Creative Leather Products, Inc. The brief, which appears here, also argues that the lower court erred in requiring the plaintiff to meet a strict test of market definition. In 2007, the Supreme Court reversed the Court of Appeals’ decision (PSKS, Inc. v. Leegin Creative Leather Products, Inc., 2006-1 Trade Cases ¶75,166), applying the per se rule to uphold an award of $3,975,000 to a retailer that was terminated by its manufacturer for discounting. The high court declared that vertical price restraints are no longer per se illegal, but instead should be evaluated under the rule of reason standard (2007-1 CCH Trade Cases ¶ 75,753).

 Maine’s new privacy law—which prohibits the collection of personal information for marketing purposes from a minor without parental consent and bans “predatory marketing” to minors—is being challenged in a lawsuit brought by media and online companies, including AOL, eBay, and Yahoo. The lawsuit, filed August 26 in the federal district court in Maine, claims that the law violates the First Amendment rights of adults, as well as minors and online operators. The Maine statute (“An Act to Prevent Predatory Marketing Practices Against Minors,” Public Law 230) was signed by the Governor on June 2, 2009, and will take effect on September 12, 2009. Text of the law appears here on the Maine State Legislature’s website. Further details about the law appear in an August 12, 2009 posting on Trade Regulation Talk.

Class Action Approved in Vertical Price Restraint Case Against Babies ‘R’ Us, Manufacturers

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

The federal district court in Philadelphia yesterday granted class certification in an action against retail chain Babies ‘R’ Us, Inc. for allegedly conspiring with manufacturers to inflate prices for certain baby products in violation of federal antitrust law.

The action was brought by 13 consumers, who contended that Babies ‘R’ Us conspired with the manufacturers—such as Peg Perego USA, Inc. and BabyBjorn, AB—also named as defendants in the suit to restrict competition in the markets for strollers, baby carriers, and other baby products, from Internet discounting.

Protection from Internet Discounters

According to the complaining consumers, Babies ‘R’ Us demanded protection from Internet discounters and entered into agreements with the suppliers to combat the problem. As a result, the manufacturers purportedly adopted vertical price restraints and enforced these restraints against Internet retailers. It was also alleged that the manufacturers gave preferential treatment to Babies ‘R’ Us—their biggest customer.

The court certified subclasses that included “Babies ‘R’ Us customers who bought a certain brand and type of baby product during a certain period of time—roughly from 1999 to 2006—because the case involved separate alleged conspiracies. The court did, however, tweak some of the subclass definitions and dismiss some of the claims.

Dismissal of Some Claims

A claim against Kids Line LLC, a manufacturer of baby bedding and accessories, was dismissed without prejudice because the plaintiffs lack standing. None of the plaintiffs bought bedding set from Babies ‘R’ Us. Further, one named plaintiff was dismissed because the subclass for Peg-Perego products was limited to strollers and the named plaintiff bought only a Peg-Perego high chair. Another named plaintiff was dismissed because she bought her BabyBjorn carrier before the subclass period began. She thus fell outside the subclass.

Impact of “Watershed Decisions”

The court recognized “two watershed decisions” that were significant hurdles for the plaintiffs. The first was Leegin Creative Leather Products, Inc. v. PSKS, Inc., 2007-1 CCH Trade Cases ¶ 75,753, 127 S.Ct. 2705 (2007), where the Supreme Court declared that vertical price restraints are not per se illegal anymore but instead are evaluated under a rule of reason standard. Leegin did not preclude the class claims. The court decided that elements of the plaintiffs’ antitrust claims were “capable of proof at trial through evidence that is common to the class rather than individual to its members” as required by the second watershed decision—In re Hydrogen Peroxide Antitrust Litig., 2008-2 CCH Trade Cases ¶76,453, 552 F.3d 305 (3d Cir. 2008).

The Third Circuit's decision in the Hydrogen Peroxide case requires district courts to conduct a rigorous analysis when considering whether to certify a proposed class. According to the district court, before certifying a class courts must make a definitive determination that the requirements of Rule 23 of the Federal Rules of Civil Procedure.

Requirements of Federal Rule of Civil Procedure 23

Despite the tough standard adopted by the Third Circuit, the court concluded that the plaintiffs carried their burden under the numerosity, commonality, typicality, and adequacy requirements of Rule 23(a) and the predominance requirement of Rule 23(b)(3) of the Federal Rules of Civil Procedure. Under Rule 23(b)(3), the plaintiffs showed “that the questions of law or fact common to class members predominate over any questions affecting only individual members.” The court found predominance satisfied for each element of the plaintiffs' antitrust claims.

The plaintiffs also offered a viable method whereby damages can be reasonably estimated based on common evidence, as required by Hydrogen Peroxide.

Notice to Consumers

The plaintiffs were ordered submit a proposed form of notice to class members by August 14, explaining their rights. The defendants will have to file objections to the proposed form of notice by August 28.

The decision in Carol McDonough v. Toys ‘R’ Us, Inc., Civil Action No. 06-0242, will appear at 2009-2 CCH Trade Cases ¶ 76,675.

Congressional Subcommittees Hear Testimony on Vertical Price Fixing, Railroad Exemption

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter, and John W. Arden.

Subcommittees of the U.S. Senate and House Judiciary Committees held hearings May 19 on bills that would, respectively, reinstate the per se rule for resale price maintenance and repeal the antitrust exemption for railroads.

Restoration of Per Se Rule

The Senate Judiciary Committee's Subcommittee on Antitrust, Competition Policy and Consumer Rights held a hearing entitled "The Discount Pricing Consumer Protection Act: Do We Need to Restore the Ban on Vertical Price Fixing?"

The hearing considered the impact of the U.S. Supreme Court decision in Leegin Creative Leather Products, Inc, v. PSKS, Inc. (2007-1 Trade Cases ¶75,753), which requires that resale price maintenance be scrutinized under a rule of reason standard rather than declared per se illegal under federal antitrust.

Senator Herb Kohl (D-Wis.) said in a prepared statement that manufacturers have begun to set minimum retail prices resulting in higher prices for consumers, as a result of Leegin. Kohl introduced the "Discount Pricing Consumer Protection Act" (S. 148) in January 2009 to overturn the decision.

Among the witnesses was FTC Commissioner Pamela Jones Harbour, who reiterated earlier testimony before a House subcommittee on the same issue. Harbour said that Leegin had the effect of legitimizing minimum resale price fixing, which was "contrary to good economic and legal policy" because it subordinated consumer preferences to the interests of manufacturers and merchants of branded consumer goods.

Jim Wilson, the current Chair of the Section of Antitrust Law of the American Bar Association (ABA), also testified. Wilson said that the "[b]ecause the intention and likely impact of the Discount Pricing Consumer Protection Act would be to effectively overturn the Leegin decision and reestablish a rule of per se illegality, the ABA respectful urges Congress not to enact this legislation."

The rule of reason is the proper standard because minimum resale price maintenance “can stimulate interbrand competition and is not so inevitably pernicious as to warrant per se illegality,” he noted.

Todd Cohen, vice president and deputy counsel, government relations, for eBay, observed that the Leegin decision “is beginning to undermine many of the consumer benefits delivered by innovators using the openness of the Internet. Leegin empowers those who want to curtail the ability of small and mid-size online retailers to communicate and offer lower prices to consumers.” Since the decision was issued, there appears to have been an increase in RPM programs that restrict intrabrand price competition, he said.

“For example, a recent report in the Wall Street Journal details how some businesses limit price competition through continually scanning the eBay platform to identify sellers offering their prices at a lower price,” according to Cohen. “They then use a plethora of tools to identify the seller and enforce their minimum prices.”

Stacy John Haigney, attorney for Burlington Coat Factory, testified that off-price retailers like Burlington would never have gotten off the ground in the 1970s if the Leegin rule had been in effect. During that time, department stores “could not legally coerce their suppliers to impose high-pricing structures through the industry . . . However, post-Leegin, there is no practical way to stop such retailer-imposed price-fixing schemes from being put in place.”

Further details on the hearing—including written testimony and a webcast of proceedings—appear here at the Senate Judiciary Committee website.

Repeal of Railroad Antitrust Exemption

Adversaries and supporters of the proposed "Railroad Antitrust Enforcement Act of 2009" squared off at a Congressional hearing regarding the legislation in Washington D.C. The bill, introduced in both the House of Representatives (H.R. 233) and Senate (S. 146), would repeal railroads' antitrust exemption and provide for numerous means to halt "anticompetitive rail conduct."

Speaking to the House Judiciary Committee's Subcommittee on Courts and Competition Policy, Association of American Railroads officials said that the measure would have harmful impacts on railroad customers—and American consumers in general—by severely distorting the relationship between regulation and antitrust laws.

Union Pacific executive J. Michael Hemmer observed that the bill's potential granting of regulatory authority to the FTC created a glaring conflict with the Surface Transportation Board and that the bill’s proposed retroactive effect could lead to antitrust attacks on the continuing operation of every federally approved transaction in rail history. Hemmer added that the legislation should not be considered in isolation.

"If Congress wants to address rail transportation policies," he said, "it should work with colleagues in other committees of jurisdiction to craft a coherent, national rail policy that integrates regulation with antitrust jurisprudence."

In response, the Consumer Federation of America asserted that the legislation was sorely needed because "rampant consolidation" and a lack of regulatory oversight have "allowed railroads to abuse their monopoly pricing power and overcharge consumers and shippers $3 billion per year."

Shippers without rail-competitive options pay 75 percent to 100 percent more for rail shipments compared with similar movements in competitive markets, the CFA reported. Captive shippers' costs have been rising substantially over the past five years.

Speaking on behalf of the ABA Section of Antitrust Law, M. Howard Morse referred to the group’s frequent opposition to industry-specific exemptions from the antitrust laws. This opposition is based on the belief that “antitrust laws are sufficiently flexible to account for particular market circumstances.”

Accordingly, the Antitrust Section encourages Congress to dismantle the exemption for the railroad industry and to consider additional legislation to eliminate antitrust exemptions in other industries.

Written testimony and a webcast of the hearing appear here on the House Judiciary Committee’s website.

Resale Price Fixing Claims Fail After Remand from High Court

This posting was written by Darius Sturmer, Editor of CCH Trade Regulation Reporter.

A leather goods and accessories manufacturer did not engage in unlawful vertical price fixing by terminating a retailer for pricing the manufacturer’s goods below the suggested retail price, the federal district court in Marshall, Texas, has ruled.

The retailer’s suit, which initially succeeded at trial and ultimately led to a U.S. Supreme Court decision removing resale price maintenance from among the types of anticompetitive conduct subject to a per se illegality standard (Leegin Creative Leather Products, Inc. v. PSKS, Inc., 2007-1 Trade Cases ¶75,753) was dismissed.

Relevant Markets

With vertical price fixing no longer deemed per se illegal, the retailer’s claims had to be assessed under the rule of reason, the court explained. However, the retailer failed to surmount the first obstacle in a rule of reason antitrust claim: alleging a valid relevant market.

Neither the “retail market for Brighton women’s accessories” (the manufacturer’s brand) nor the “wholesale sale of brand-name women’s accessories to independent retailers constituted a valid product market. A single brand, no matter how distinctive or unique, could not be its own market, and the retailer’s broader market definition suffered from its own shortcomings.

“Wholesale sale was inappropriate because it did not focus on how any agreement impacted consumers, and inclusion of “brand name in the product market definition was unsupported by any allegations explaining why brand names were important to product interchangeability in the case.

In addition, “women’s accessories grouped together products that were not interchangeable with each other, and “independent retailers improperly limited the relevant market to a subset of retailers without explaining why there was a lack of interchangeability between that subset and other retailers selling exactly the same products, according to the court.

Horizontal Restraint Pleadings

Attempts by the retailer to reattach the per se illegality standard to the claim by asserting a horizontal restraint were inadequate, the court also found. The retailer was barred from claiming that the manufacturer engaged in a per se illegal horizontal price fixing agreement based on the fact that it was also a distributor of its own products.

The retailer failed to raise the theory in the original trial in the case, even though nothing prevented it from doing so. In reversing the trial outcome on the vertical restraint claims, the U.S. Supreme Court had not specifically allowed the retailer to replead allegations it had previously abandoned.

Even if such a claim were permissible, restraints in dual distribution systems—including price fixing agreements—were still analyzed under the rule of reason, rather than held to the per se illegality standard.

“Hub and Spoke” Retailer Cartel

An alternative theory that the manufacturer engaged in per se illegal horizontal price fixing in furtherance of a “hub and spoke retailer cartel also failed as a matter of law, the court determined.

The complaining retailer contended that it would prove that there was a series of agreements between the manufacturer and independent retailers to fix prices of its goods; that the independent retailers formed a cartel with each other and with the manufacturer as a retailer to prevent discounting and price competition; that, in response to pressure from retailers involved in the cartel, the manufacturer enforced its price fixing agreements against discounters to stamp out price competition; and that retailers discussed and came to agreements as to the terms of the price fixing agreements and exceptions.

These allegations were insufficient to plead a hub and spoke conspiracy. No claim was made that retailers agreed to the alleged resale price maintenance among themselves. Without such an allegation, the complaining retailer was missing the requisite wheel in the classic hub and spoke arrangement, the court concluded.

The decision is PSKS, Inc. v. Leegin Creative Leather Products, Inc., 2009-1 Trade Cases ¶76,592.

Maryland Amends Antitrust Law to Make Resale Price Maintenance Per Se Illegal

This posting was written by Darius Sturmer, Editor of CCH Trade Regulation Reporter.

Legislation clarifying that resale price maintenance (RPM), also known as vertical price fixing, remains per se illegal in the State of Maryland was signed into law on April 14 by Governor Martin O’Malley. The measure—Laws of 2009, Chapters 43 and 44—will take effect on October 1, 2009.

Response to Leegin Decision

The amendment to the Maryland Antitrust Act signifies the first legislative action taken to reverse the U.S. Supreme Court's ruling, in Leegin Creative Leather Products, Inc, v. PSKS, Inc. (2007-1 Trade Cases ¶75,753), that RPM should be held to a rule of reason standard rather than declared per se illegal under federal antitrust law.

For Maryland and other states that are statutorily-required to interpret their own antitrust laws in accordance with the prevailing judicial interpretations of federal antitrust law, the High Court’s ruling effectively changed state law as well.

During a Maryland Senate Judiciary Committee hearing on February 25, American Antitrust Institute President Albert Foer argued that the decision to apply the per se rule rather than the rule of reason standard “generally determines who wins an RPM case, and indeed determines whether legitimate cases are even initiated."

Foer contended that use of the rule of reason standard for RPM increases retail prices, primarily victimizing two groups—average retailers and end-use consumers—while protecting profit margins of manufacturers and mass merchandisers. Since the Leegin ruling was delivered, he noted, the practice of setting minimum prices has become far more commonplace.

Federal Legislative Efforts

The Maryland law is not the only initiative being taken to address or even undo the Supreme Court decision. A proposal to restore the rule of per se illegality for vertical agreements to fix minimum prices has been introduced by Sen. Herb Kohl (D-Wis.) in each of the last two sessions of Congress. Hearings on the current “Discount Pricing Consumer Protection Act” (S. 148) will be held in May.

At a meeting of retailers, online merchants, consumer advocates, and antitrust experts in Washington, D.C. last December, representatives from the House Judiciary Committee stated their intention to hold hearings to address the RPM issue this spring.

In February, the FTC began a series of workshops to address the problems of RPM by exploring how to best distinguish between uses of RPM that benefit consumers and those that do not. The next two workshops will be held in Washington, D.C. on May 20 and 21. At these workshops, panels will focus on the history of the practice, empirical evidence on the effects of RPM, and how it should be analyzed under the antitrust laws. Further information regarding these workshops can be found here on the FTC website.

While no other state has considered legislation similar to Maryland’s, more than 30 states took the position that RPM should remain per se illegal, in briefs with the Supreme Court during its consideration of the Leegin case. It is expected that the legislative action by the State of Maryland will prompt at least a few other states to follow its lead.

Pesticide Manufacturers’ Distribution Chain Not Vertical Price Fixing

This posting was written by Darius Sturmer, Editor of CCH Trade Regulation Reporter.

Two manufacturers of pesticides did not illegally conspire with their distributors to set minimum resale prices of certain termiticide products in violation of federal antitrust laws, the U.S. Court of Appeals in Richmond, Virginia, has ruled.

A federal district court’s grant of summary judgment against the Sherman Act claim asserted by a putative class of pest control service providers was affirmed.

The pest control service providers claimed that the manufacturers instituted a manner of distribution in which their termiticides were sold to them, the end consumers, through distributors that acted only as facilitators of the transactions, enabling the manufacturers to set the price at which the termiticides were ultimately resold.

Under the non-exclusive agency agreements that bound the distributors to the manufacturers, the agent-distributors received commissions for the sales they facilitated, but never actually held title to the products. The agreements specified that the manufacturers constituted the sellers of the termiticides to the pest control service providers.

The 1926 U.S. Supreme Court decision—U.S. v. General Electric Co., 272 U.S. 476—permitted manufacturers to lawfully set minimum prices for their products when there was a genuine principal-agent relationship between them and their distributors. Such relationships existed in this case, the court noted.

An argument by the pest control service providers that the General Electric decision was implicitly overruled by more a recent Supreme Court decision involving resale price maintenance—Leegin Creative Leather Products v. PSKS, Inc. (2007-1 Trade Cases ¶75,753)—was rejected. Leegin did not eliminate the agency defense to a claim of resale price maintenance, the appellate court stated.

Unlike General Electric, which addressed what types of relationships constituted agreements to set prices for purposes of the Sherman Act, Leegin instead concerned whether such agreements, once proven, should be considered per se unlawful or evaluated for their reasonableness.

The two cases dealt with separate and distinct issues and different elements of Sec. 1 liability. Thus, no part of Leegin’s reasoning case the slightest bit of doubt on the underpinnings of the rule of General Electric, the court concluded.

An additional argument that the purported agency relationships between the defending manufacturers and their distributors were a sham was also rejected by the appellate court. Factors indicating that the challenged relationships constituted genuine agency included the fact that the manufacturers bore the risk of loss on termiticides until they were delivered into the hands of the end customers, the strong business justifications of the particular manufacturer-distributor arrangements, and the absence of evidence that the supposed agency agreements were the product of coercion.

The March 24 decision is Valuepest.com of Charlotte v. Bayer Corp., 2009-1 Trade Cases ¶76,547.