Regulator

Global News OF RELEVANCE TO Entities & Individuals affected by antitrust issues – FALL 2009, Vol. II, No. 3

IN THIS ISSUE: n Reed Smith in Antitrust History—Page 2 n Reed Smith At The Podium—Page 2 n International Update—Page 3 n Comments on China’s Guidelines on Market Definition—Page 3 n Vertical Restraints Block Exemption and Guidelines in the EU—Page 4 n Is It Time for the European Commission to Start Communicating on Information Exchange?—Page 5 n United States Update—Page 7 n U.S. Legislative Update—Page 7 n Statute Limiting Civil Antitrust Liability for Amnesty Applicants Renewed—Page 8 n FTC Challenges Proposed and Completed Acquisitions in the Health Care Industry— Page 9 n U.S. Supreme Court to Address ‘Single Entity’ Issue—Page 11 n The Third Circuit Tightens the Requirements to Certify a Class—Page 14 n Application of Twombly Standard in State Court Is Uncertain—Page 17 n Does State Action Immunity From Antitrust Laws Extend To Private Contracting Parties?—Page 19 ANTITRUST REGULATOR – FALL 2009 2

Reed Smith in Antitrust History

In 1911, alleging violations of the Sherman Antitrust Act, the United States „„ After successfully defending U.S. Steel from allegations of Sherman Act Government brought the “Great Suit”1 to dissolve the United States Steel violations in United States v. U.S. Steel Corporation,5 David A. Reed also Corporation. David A. Reed, son of firm founder James H. Reed and a future U.S. argued Kellogg Co. v. National Biscuit Co.6 in the U.S. Supreme Court. Senator, successfully defended the world’s first „„ Reed Smith lawyer, Edward T. Tait, served as a member of the Federal Trade billion-dollar corporation in a case that changed Commission from 1956–1960. Did you know that during his tenure as a the face of business in America. Historians have member of the FTC, the Commission was party to no less than seven antitrust noted that if U.S. Steel had been “adjudged cases before the United States Supreme Court?7 a monopoly in restraint of trade, then all big

business was doomed, for the corporation, „„ A Richards Butler8 team successfully argued Sea Containers v. Stena Sealink,9 certainly had sought in every way to meet the first case in which the European Commission 2 fully the requirements of the law.” In a case adopted the “essential facilities” doctrine? that continues to be the bedrock of antitrust jurisprudence, the firm’s rich history, and the Future issues of the Regulator will detail these Daniel I. Booker Partner – Pittsburgh firm’s ongoing relationship with one of its most moments in antitrust history…and many more! Global Regulatory Enforcement valued clients, James H. Reed wrote: ______

My Dear Mr. Carnegie, 1 United States v. U.S. Steel, 251 U.S. 417 (1920).

2 The Great Suit has begun, and I see that you receive honorable mention as one Mary Brignano & J. Tomlinson Fort, Reed Smith: A Law Firm Celebrates 125 Years, 46 (2002).

of the defendants. I presume that you will expect U.S. to look after you…and 3 Brignano 15. Chananya Kunvatanagarn file answer when the proper time comes.3 4 193 U.S. 197 (1904). Associate – Pittsburgh Commercial Litigation Eastern The “Great Suit” is just one of many Reed Smith moments in antitrust history. In 5 251 U.S. 417 (1920). an ongoing series, future issues of the Regulator will feature articles highlighting 6 305 U.S. 111 (1938). Reed Smith moments in antitrust history. Here is a taste of what’s coming up: 7 F.T.C. v. Anheuser-Busch, 363 U.S. 536 (1960); F.T.C. v. Henry Broch & Co., 363 U.S. 166 (1960); F.T.C. v. Simplicity Pattern Co., 360 U.S. 55 (1959); F.T.C. v. Mandel Brothers, Inc., 359 U.S. 385 (1959); F.T.C. v. Standard Oil Co., 355 U.S. 396 (1958); „„ One Reed Smith founding partner, Philander Knox, was U.S. Attorney General Moog Industries v. F.T.C., 355 U.S. 411 (1958); F.T.C. v. National Lead Co., 352 U.S. 419 in the cabinets of Presidents McKinley and Theodore Roosevelt from 1901 to (1957). 1904 and later also a U.S. Senator. Did you know that while Attorney General, 8 Richards Butler merged with Reed Smith in 2007. Mr. Knox argued the seminal case of Northern Securities Co. v. United States,4 9 Commission Decision of 21 December 1993, IV/34.689, 94/19/EC, OJ 1994 L 15/8. in front of the U.S. Supreme Court?

Reed Smith at the Podium…

September 10, 2009: Reed Smith’s Antitrust & Competition team hosted a Organization’s 15th Annual Conference held at Reed Smith’s London office. presentation by the U.S. Department of Justice Antitrust Division on “The new Please contact Marjorie Holmes for more information. antitrust enforcement focus of the Obama administration.” The guest speakers November 6, 2009: Michael Lowenstein will be participating in a Mock were Robert Connolly, Chief of the Antitrust Division’s Philadelphia office, and Argument on “American Needle, Inc. v. National Football League” at the Maribeth Petrizzi, Chief of the Litigation II Section of the Antitrust Division. The First Annual Great Lakes Antitrust Institute’s Hot Topics in a New Age of presentation took place in Reed Smith’s Pittsburgh office. Antitrust Enforcement seminar. Please contact Michael Lowenstein for more September 16–18, 2009: Marjorie Holmes participated in the Women’s information. International Shipping & Trade Association 2009 Diversity and Corporate Social December 3, 2009: The Reed Smith Annual Competition Forum will take place Responsibility Conference on “Regulation in the Current Financial Climate.” at Reed Smith’s London office. The guest speaker will be Sir Gerald Barling, October 7–8, 2009: Katherine Holmes will be speaking at Kaplan Hawksmere’s a judge of the High Court and President of the Competition Appeal Tribunal. Annual Conference for in-house lawyers in London on recent developments in Please contact Katherine Holmes for more information. competition law. Please contact Katherine Holmes for more information.

October 22–23, 2009: Marjorie Holmes will be participating in a panel discussion on “Alliances in Shipping and Aviation” at European Maritime Law ANTITRUST REGULATOR – FALL 2009 3

INTERNATIONAL UPDATE Comments on China’s Guidelines on Market Definition

On 7 July 2009, the Anti-Monopoly Commission under the State Council established concepts of market definition. The Guidelines borrow from this published the “Guidelines on the Definition of a Relevant Market” (the first-hand experience of other jurisdictions and adjust it to China-specific market “Guidelines”). The Guidelines are the culmination of a process of review conditions and stage of economic development. undertaken since publication of the first draft in January 2009, and the first attempt by the Ministry of Commerce (“MOFCOM”) at providing a “scientific and Analysis reasonable” definition to guide China’s Anti-Monopoly Enforcement Agency (the Article 2 of the Guidelines reiterates the function of defining the relevant market “AMEA”) through the process of enforcement and adjudication and render such first found in the earlier draft: process more transparent and certain. The AMEA is a three-pronged structure A scientific and reasonable definition of relevant markets serves a critical role set up by the State Council whereby three important government bodies, in identifying competitors and potential competitors, as well as determining a previously with responsibility for areas now covered by the Antimonopoly Law business operator’s market share and the extent of its concentration. It also (“AML”), were brought together to form China’s enforcement agency and to share serves to identify a business operator’s market position, assisting in analysing in the proper implementation of this new piece of the impact of a business operator’s activities upon market competition, legislation. The three bodies are: (1) MOFCOM, assessing whether a business operator’s behaviour is in violation of the law responsible for handling pre-merger reviews; and the legal liabilities in case of violations etc. (2) the State Administration of Industry and Commerce (“SAIC”), with authority to investigate The Guidelines then set out the factors to be considered when defining a market. anti-monopoly agreements and abuses of market These include the product/service’s characteristics, its application, pricing and dominance excluding price-related agreements sales channels, as well as the geographic area within which different products/ or abuses; and (3) the National Development and services compete. Other factors may be relevant Reform Commission (“NDRC”) which administers depending on the circumstances. For example, in Yvonne Percival the Pricing Law with its provisions on, inter alia, cases involving intellectual property, considerations Counsel – London price fixing, price discrimination and false or such as intellectual property rights, market Shipping misleading pricing. innovation and the technology market are also taken into account. Defining the relevant market is a precondition to a proper analysis of competitive actions and is critical to the process of anti-monopoly enforcement. It follows that According to the Guidelines, the approach to the Guidelines are of considerable importance to the work of the AMEA. market definition should focus on analyzing product substitutability from both demand and supply Background Julian Chen perspectives, with the main focus on demand. Associate – Beijing Despite the central role played by market definition in the analysis of competitive The list of factors to be considered in the context Corporate & Securities behaviour, prior to the AML becoming effective on August 1, 2008, the concept of demand substitutability conforms to standard did not exist in Chinese laws and regulations. At that time, China had no international practice. Here, the most notable amendment to the earlier draft is comprehensive competition legislation, and anti-monopoly filings were dealt the introduction of a new factor, i.e., evidence showing that consumers switch with by MOFCOM and SAIC under the 2006 Provisions on the Acquisition of to other products/geographic areas as a result of a change in price or other Domestic Enterprises by Foreign Investors. The concept of “market definition” competition conditions. By contrast, to increase objectivity and alleviate concern was relatively new and absent from China’s anti-monopoly legal framework. that regulators may simply look to protect famous home-grown brands, the Consequently, filing parties were given the freedom factor of brand loyalty was deleted. Indeed, the need to protect domestic entities to introduce into the review process through and to enable them to enjoy the technological, financial and pricing advantages their submissions the definitions adopted in their associated with size was discussed extensively by lawmakers when debating own jurisdictions. Thus, EU companies used EU China’s readiness for the introduction of modern anti-monopoly legislation. methodology for defining the relevant market and Against the background that China’s ultimate goal is its own development and U.S. companies used U.S. methodology. As a result, the innovation of its own industries, the issue is a sensitive one and has already in practice, prior to the introduction of the AML, pre- manifested itself in the prohibition of Coca-Cola’s takeover of China’s Huiyuan merger filings became no more than a formality and Juice brand. no filings were prohibited or had conditions imposed Chapter III of the Guidelines stipulates the general methods for determining upon them. On the other hand, it provided MOFCOM Richard J. Waite relevant markets. It provides that, though various methods may be applied, and SAIC, now part of the AMEA, the opportunity Associate – London demand substitution shall be applied first followed by supply substitution. to familiarize themselves with internationally- European & Middle East Corporate (continued on page 4) ANTITRUST REGULATOR – FALL 2009 4

Comments on China’s Guidelines on Market Definition—continued from page 3

Demand substitution, in this context, means the extent to which products are is such that a price increase would be profitable. The relevant geographic market interchangeable from a demand perspective. Under Article 6 of the Guidelines, is determined through a similar process. supply substitution means the ability of a business operator to provide interchangeable products that are competitive in the short term without incurring Comparison with EU substantial additional production cost. The Guidelines set out an approach to market definition which closely follows the well-established principles of market definition applied in the EU. This is perhaps Where the market scope is uncertain or is in dispute, the “hypothetical unsurprising since, as mentioned above, the pre-AML regime allowed foreign monopolist test” (or Small but Significant and Non-Transitory Increase in undertakings to make submissions based on their own jurisdictions’ methods Price (‘SSNIP’) test) may be adopted. This involves examination of whether for defining the relevant market. This meant that the Chinese authorities already the hypothetical monopolist would be able to continuously and slightly (for had considerable experience with these principles. The similarity in approach instance, 5–10%) increase the product price during a period of more than will be helpful to EU undertakings in their dealings with the AMEA. However, it one year in circumstances where other sales conditions remain unchanged. does not guarantee that conclusions reached by the AMEA will ultimately be the Any price increase would inevitably result in a degree of lost sales. If the same as those reached by the EC Commission or the different European national hypothetical monopolist can still show profit, only the group of products in competition authorities. question would constitute the relevant product market. If, however, the level of product substitutability is such as to make the price increase unprofitable, The principles discussed in the Guidelines are broadly similar to the EC the substitutable products would also be included in the relevant market. This Commission’s Notice on the definition of relevant market (the “EC Notice”), albeit analysis is then repeated with a larger group of products until the set of products (continued on page 5)

Vertical Restraints Block Exemption and Guidelines in the EU

At the end of July, the European Commission published a draft of its proposed will not be allowed to prevent selective distributors from selling via the new version of the key European regulation Internet. Again, no new law here. regarding the application of antitrust rules „„ The Guidelines restrict the circumstances in which the Commission now to distribution and supply structures and considers commercial agency to apply. Agents typically promote the accompanying guidance—the Vertical sale of goods on behalf of principals without taking title, as opposed to Restraints Block Exemption and Guidelines. distributors who will resell in their own name. Because agents do not The Commission has made few changes, resell, competition law has typically allowed the principal control over the and in many parts has simply incorporated prices at which, and customers to which, agents’ sales are made. The updates to reflect case law of the European Guidelines now promote the (seemingly incorrect) view that the assumption Court since the last version of the exemption of any material risk or cost (e.g., transport costs, maintenance of stocks, Edward S. Miller Partner – London was adopted in 2000. Here are the highlights investment in market specific equipment, premises or training) by the agent European & Middle East Corporate in our view: will mean that he is treated effectively as a reseller.

„„ Some changes are aimed at curbing the activities of powerful buyers (e.g., „„ A surprising new inclusion tucked away at the end of the guidelines is an supermarket chains). So exemption may now not be granted automatically acknowledgement that it may be permissible for a supplier to fix the resale for certain restrictions on competition (exclusivity agreements, non- price of his product in the context of a temporary special offer. Previously, competition undertakings) where the buyer’s market share exceeds 30%. any fixing of resale price would have been considered unlawful. This limited Previously, only the supplier’s market share was relevant in many cases. flexibility (albeit only the view of the Commission) will be of significant use to consumer goods suppliers and franchisors, and is an interesting „„ The revised Guidelines also now deal with other retail distribution counterpoint to current moves in the United States to reverse similar practices—notably, up-front payments and category management. liberalization in this area by the U.S. courts in Leegin Creative Leather However, the Guidelines merely restate existing law in these areas and are Products Inc. v. PSKS Inc.* likely to result in no change to existing practices. ______„„ The Guidelines also confirm the Commission’s enthusiasm for the Internet—making it clear that restrictions on distributors selling outside * 127 S.Ct. 2705 (2007). See discussion of Leegin and proposed new legislation to reverse the decision in Leegin at p. 7 of this issue of the Antitrust Regulator. territory by means of the Internet will not be permitted, and that suppliers ANTITRUST REGULATOR – FALL 2009 5

Comments on China’s Guidelines on Market Definition—continued from page 4 much less detailed. The EC Notice also covers a few areas not discussed in the by competition authorities around the world, the substitutability test is easier Guidelines, such as recognition that a definitive conclusion on market definition for the AMEA to apply in terms of the time framework and complexity of the may not be required in every case, a description of the evidence-gathering analysis required. Considering that the three government bodies which make the process the authorities are likely to take in order to carry out their analysis, and AMEA are understaffed and, in particular, are short of experienced economists recognition that the usual principles need to be applied with care in some cases, to conduct the more complicated hypothetical monopolist test, the Guidelines’ e.g., in the case of primary and secondary markets and chains of substitution. emphasis on substitutability is more suitable to China’s stage of development.

The fact that the Chinese authorities have adopted a similar approach to that Another potential issue will be how the three enforcement bodies manage to followed in the EU means that the EC Notice may be a helpful secondary ensure consistency in the application of market definition. Initiatives to ensure reference point for guidance where the Guidelines are silent or lacking in detail. coordination will be important for the smooth implementation of the Guidelines.

Conclusion

Overall, China’s approach to market definition is in line with common practice in established jurisdictions. Although practitioners and legal scholars expect China to lean towards the hypothetical monopolist test, now widely adopted

Is it time for the European Commission to start communicating on Information Exchange?

Information exchange is extremely topical. It can be both pro- and anti- On a related topic, signalling in the market has also been considered an anti- competitive, depending on the circumstances. On the one hand, the exchange of competitive practice. Where a company announces publicly via the press, or information can be considered a requisite element for the creation of a market; perhaps its own website, its future strategy with regard to pricing or proposed whereas, conversely, it would be extremely anti-competitive where the exchange capacity changes, this could be regarded as a form of information exchange, as is ancillary to an anti-competitive agreement. It is therefore surprising that the competitors could use the information to match that signalled. The Commission Commission has not addressed it in any great may well find that the infringement is more or less severe, depending on the detail from a competition standpoint. relative strength of the company within the market affected and the status of the person within the company who signals the strategies to the market. Definitive direction on the extent to which information exchange is sanctioned under Further aspects affecting the potential finding of anti-competitive behaviour in Article 81 EC Treaty would be welcomed. Many signalling have been brought to our attention by our U.S. colleagues. An argument companies which are looking to exchange that companies have the right to free speech could be quite justly made, together information under agreements, joint ventures or with the fact that legitimate business motives lay behind the announcement. The even on an industry-wide basis, are concerned issue that the authorities therefore need to consider by the extent of the EU Commission’s powers carefully is whether there are other factors that Marjorie K. Holmes to penalize anti-competitive behaviour and could prove a “conscious commitment to a common Partner – London European & Middle East Corporate are desperately seeking guidance.1 The anti-competitive scheme.” European Commission’s Horizontal Guidelines2 Where uncertainty has historically entered are currently in the renewal process. As part of the consultation process, the the frame, is in the distinction between when Commission has been asked to consider information exchange specifically, as information exchange will unlawfully restrict previously they have not given the necessary guidance. competition and when the exchange of information Information exchange is at the heart of Article 81 EC Treaty; as it states that could provide a transparency to the market which Alun J. Jones together with agreements between undertakings and decisions by associations actually benefits the consumer and therefore Trainee – London of undertakings, concerted practices preventing, restricting, or distorting proves to be pro-competitive. On the one hand, European & Middle East Corporate competition are prohibited. It is established that where there is communication transparency could support collusion and or cooperation between parties, through direct or indirect contact, which has as coordination. Knowledge of pricing, capacity and a competitor’s strategy removes its object or effect an influence over how the parties conduct themselves in the the uncertainty which underpins a competitive market. Tacit collusion, it is relevant market, then the elements for establishing a concerted practice exist. argued, is as damaging to competition as coordination agreements and both may Information exchange is a key element of these activities and further, it should be be ancillary to anticompetitive arrangements, such as monitoring compliance noted, can be anti-competitive as a stand-alone infringement when it gives rise to with a cartel. collusive practices. (continued on page 6) ANTITRUST REGULATOR – FALL 2009 6

Is It Time for the European Commission to Start Communicating on Information Exchange?—continued from page 5

Conversely, transparency could be said to be a positive feature of a market. „„ That an independent entity should manage the data Where supply and demand are in equilibrium based on an informed position „„ The data should be more than three months old at the time of dissemination on both sides, from a competition point of view this should lead to efficiencies in supply leading to lower costs—to be passed on to the consumer—and an „„ At least five companies’ data should be aggregated on any point understanding of the products on the market for consumers to be able to make sophisticated choices. New entrants to the market would also be in a position to „„ No individual company’s data should represent more than 25 percent or more challenge incumbents more effectively. on a weighted basis of the statistical point

Uncertainty also exists as a result of the fact that a number of economic factors This advice follows the guidelines the DOJ and FTC established in the health care are recognized by the Commission as relevant to the assessment of where industry. In a number of its business review letters, the Antitrust Division states information exchange systems fit between these two poles. Consequently, the that the proposed information sharing would have pro-competitive effects, with approach to assessment is on a case-by-case basis with no hard-and-fast rules; the costs saved by companies leading to lower prices and increased output to the only policies interpreted from case law and the limited amount of EU guidance is benefit of consumers. available. European case law on the subject is fairly extensive, however in most cases the What has been made clear is that there is certain information, in particular findings are very much based on the individual facts and it is therefore difficult to pricing, costs and volume information, which is considered by competition draw broad principles from these beyond the very basic. Further, in the majority authorities to be far more sensitive in anti-competitive terms, than, for example, of instances, the information exchange is ancillary to other anti-competitive information related to training, technical or safety issues. Instances where a behaviour, in particular cartel activity. contrary position has been taken, such as where benchmarked cost information Another method of assessing the topic could be to examine certain examples has been stated to be potentially pro-competitive, complicates the matter. of information exchange systems which have not been queried by the European A further interesting, and potentially confusing, factor to consider is the different competition authorities. However, when a year’s time lag is seen as the safe approaches taken by the U.S. antitrust authorities as compared to the European harbour in the maritime sector, and at the same time financial markets data is Commission. From a general perspective, it seems that the United States in being provided on a minute-by-minute basis by news services such as Reuters particular is more aware that information production and transparency in a or Bloomberg, it may be understandable that companies with the legitimate market can have pro-competitive effects. For example, Piers and other data objective of reducing costs via an information exchange system are uncertain as collecting agencies publish data on a daily basis. In contrast, under the EU’s to the potential lawful scope of the exchange in the EU and what circumstances Maritime Guidelines, a period of one year was recognized as the acceptable will attract the Commission’s attention. backstop for what could be considered historical individual data for information Accordingly, in the renewal of the Horizontal Guidelines, it is hoped that the exchange purposes. However, information this old is of no value in many sectors. EU will go beyond their present position—where the Maritime Guidelines Unfortunately, the maritime guidelines are being cited in other industry contexts are increasingly being referred to for general guidance as to where and how in the EU. information exchange may be permissible—and draft definitive guidelines on In the United States, the DOJ and FTC have provided guidance and established information exchange to clear up what is currently a grey area in EU law. a “safe harbor” guiding competitors in how lawfully to share information.3 In addition, the Antitrust Division of the DOJ has provided business review letters ______in response to requests for statements of enforcement intentions. These letters are an extremely useful source of information and provide a basis for companies 1 The United States Department of Justice (“DOJ”) and Federal Trade Commission (“FTC”), Statements of Antitrust Enforcement Policy in Health Care (available at http:// to assess whether their proposed exchange structure would be acceptable. For www.ftc.gov/bc/healthcare/industryguide/policy/index.htm) included in Statement example, in relation to a towing and barge services information exchange system, 6 a “safe harbor” for information exchanges among competitors (see Statement 6, available at http://www.ftc.gov/bc/healthcare/industryguide/policy/statement6.htm). with the proposed purposes of reducing costs and improving efficiencies by Pursuant to Statement 6, the DOJ and FTC will not challenge an information exchange establishing benchmarks on certain costs and best practices, the Department of among health care providers to survey prices for health care services or wages, salaries or benefits of health care personnel, provided (1) the survey is managed Justice set out conditions which, if followed, would mean that the Department by a third party; (2) the information collected from the participants is more than would not challenge the system (although it reserved its position with regard to three months old; and (3) information is collected from at least five participants, it is aggregated sufficient such that no individual providers’ data is identifiable. This safe future challenges if the structure turned out to be anti-competitive). In addition harbor has been applied in the U.S. beyond the health care industry. to stating that the information exchange would not include any information on 2 Commission Notice- Guidelines on the applicability of Article 81 of the EC Treaty to pricing, or on new or redeployment of equipment, some of the main conditions horizontal cooperation agreements (2001). imposed by the Department of Justice were: 3 See footnote 1, supra. ANTITRUST REGULATOR – FALL 2009 7

UNITED STATES UPDATE U.S. Legislative Update

2009 has brought a more aggressive enforcement focus on antitrust law. The allege enough facts—i.e., it must have “enough heft”—from which to infer that new chiefs of the Federal Trade Commission (“FTC”) and the Department of the plaintiff has a plausible claim for relief.10 S. 1504 incorporates the standard in Justice (“DOJ”) have announced similar policies of increased enforcement.1 And Conley by express reference to that decision, providing: Congress has followed suit by proposing new antitrust legislation, much of which Except as otherwise expressly provided by an Act of Congress or by an reverses recent Supreme Court precedent and is consistent with recent FTC and amendment to the Federal Rules of Civil Procedure which takes effect after DOJ enforcement policies. the date of enactment of this Act, a federal court shall not dismiss a complaint under rule 12(b)(6) or (e)…, except under the standards set forth by the Resale Price Maintenance Supreme Court of the United States in Conley v. Gibson, 355 U.S. 41 (1957).11 On July 30, a panel of the U.S. House of Representatives passed H.R. 3190, Twombly has been criticized by commentators as setting too high a standard at titled the “Discount Pricing Consumer Protection Act of 2009,” a bill designed to the initial pleading stage, thereby thwarting potentially legitimate claims with reverse the Supreme Court decision in Leegin Creative Leather Products Inc. v. respect to which the defendants hold the evidence. On the other hand, numerous PSKS Inc.2 In Leegin, the Supreme Court held that proponents of Twombly note that the Conley standard is too liberal, thereby resale price maintenance agreements (“RPMs”) “holding up” innocent defendants who face expensive and drawn out discovery. It should be reviewed on a case-by-case basis, remains to be seen whether, and if so when, S. 1504 will pass. If it passes, there departing from longstanding precedent holding likely will be an increase in private antitrust litigation, as private plaintiffs become that RPMs were per se unlawful. H.R. 3190 emboldened by the more aggressive enforcement policy of the FTC and DOJ.12 provides that “[a]ny agreement setting a price below which a product or service cannot be Reverse Payment Settlements sold by a retailer, wholesaler, or distributor On June 3, 2009, Representative Bobby Rush (D-Ill.) introduced H.R. 1706, shall violate section 1 of the Sherman Act referred to as “Protecting Consumer Access to Generic Drugs Act of 2009.”13 [15 U.S.C. 1).”3 The bill was introduced by Diane Green-Kelly The purpose of the bill is “[t]o prohibit brand name drug companies from Partner – Chicago Representative Henry Johnson (D-Ga.), the compensating generic drug companies to delay the entry of a generic drug into Global Regulatory Enforcement chairman of the House Judiciary Committee’s the market, and for other purposes.”14 Such compensation is commonly referred Courts and Competition Policy subcommittee. A to as “reverse payments.” On July 31, 2009, the House Energy and Commerce vote of the full Committee could come as soon as September 2009. This is not committee passed the bill as an amendment to the health care reform bill. the first time members of Congress have tried to pass such a bill, however. On October 30, 2007, Senator Herbert Kohl (D-Wis.) introduced S. 2261, which died Agreements incorporating reverse payments have been a hot button issue in committee. Senator Kohl re-introduced the bill as S. 148 on January 6, 2009, in patent litigation for a number of years. The FTC has vigorously challenged which was referred to the Committee on the Judiciary and is pending.4 such agreements, but the Second, Eleventh and Federal Circuits have upheld them;15 only the Sixth Circuit has held that such agreements are per se illegal.16 Irrespective of whether H.R. 3190 or a similar bill becomes law, companies The challenged agreements are entered into between brand drug companies should be cautioned that notwithstanding the Leegin decision, a number of state and generic drug companies in connection with patent infringement litigation antitrust statutes prohibit RPMs as per se unlawful.5 that is triggered by a generic drug company’s application to the Food and Drug Federal Pleading Standard Administration (“FDA”) for approval of a generic drug under what commonly is known as the Hatch-Waxman Act.17 On July 6, 2009, the DOJ, Antitrust Division, On July 22, 2009, Senator Arlen Specter (D-Pa.) introduced S. 1504 (dubbed the filed a brief in the Second Circuit at the Court’s invitation, taking the view that “Notice Pleading Restoration Act of 2009”), a bill that would reverse the 2007 such agreements should be reviewed under the rule of reason, but should be decision in Bell Atlantic Corp. v. Twombly,6 in which the Supreme Court overturned considered presumptively unlawful—a presumption that may be rebutted by a longstanding precedent governing the standard for notice pleading in Federal showing, inter alia, that the reverse payment is in an amount that corresponds to Rule of Civil Procedure 8(a)(2), as previously set forth in Conley v. Gibson.7 litigation costs and costs of business disruption that the defendant would avoid by In Conley, Justice Black, writing for the Court, held that “[a] complaint should not settling the patent infringement lawsuit.18 be dismissed for failure to state a claim unless it appears beyond doubt that the H.R. 1706 is not the first bill introduced in Congress that is designed to prohibit plaintiff can prove no set of facts in support of his claim which would entitled him reverse payment agreements; similar bills have been introduced (and died) since to relief.”8 Plaintiffs have cited this passage repeatedly in opposition to motions to early 2007, two times in the House of Representatives and three times in the dismiss. However, in a 7–2 decision, the Supreme Court stated in Twombly that Senate.19 the oft-cited “no set of facts” language in Conley “has earned its retirement.”9 Rather, the Court adopted a “plausibility” standard, holding that a complaint must (continued on page 8) ANTITRUST REGULATOR – FALL 2009 8

U.S. Legislative Update—continued from page 7

______standard in Twombly. See In re Air Cargo Shipping Services Antitrust Litigation, Case No. 06-MD-1775 (JG) (VVP), Order dated Aug. 21, 2009. Judge Gleeson wrote: “I see 1 See “More Aggressive Enforcement Policy Announced by New Antitrust Chief Ignores no need to write extensively here about…Twombly… The effects of those decisions Recent Supreme Court Decisions Regarding Section 2, Trinko and linkLine,” Antitrust across the full spectrum of federal cases are still uncertain and the subject of Regulator, Vol. II, No. 2, at 14 (Spring 2009), for a more detailed discussion of the considerable controversy and even pending legislation….” Id. at 1. In holding that the stepped up enforcement policies announced by the new chiefs of the FTC and DOJ. complaint stated a claim under the Sherman Act, Judge Gleeson noted that 15 of the 2 127 S.Ct. 2705 (2007). defendants had pled guilty since the magistrate issued his report and recommendation, and three additional defendants had entered the DOJ leniency program; “the 3 See http://www.govtrack.us/congress/billtext.xpd?bill=h111-3190. admissions of price-fixing by so many of the defendants certainly ‘are suggestive 4 See http://www.govtrack.us/congress/bill.xpd?bill=111-148. enough to render a § 1 conspiracy plausible.’” Id. at 2 (quoting Twombly, 550 U.S. at 556). 5 Some states, including California, Montana, New Hampshire, West Virginia, New York, and New Jersey, consider RPMs to be per se unlawful, or consider such agreements 13 See http://www.govtrack.us/congress/bill.xpd?bill=h111-1706. to be unenforceable. See Cal. Bus. & Prof. Code § 16720(d) & (e) (West 1997 & Supp. 14 Id. 2007) (prohibiting RPMs); Mont. Code Ann. § 30-14-205(h) (2002) (same); N.H. Rev. Stat. Ann. § 356:2 (2002) (same); W. Va. Code § 47-18-(b)(1)(A)(2002) (same); N.Y. 15 See In re Ciprofloxacin Hydrochloride Antitrust Litigation, 544 F.3d 1323 (Fed. Cir. 2008); Gen. Bus. Law § 369-a (McKinney 2003) (RPMs unenforceable); N.J. Stat. Ann § 56:4- In re Tamoxifen Citrate Antitrust Litig., 466 F.3d 187 (2d Cir. 2006); Schering-Plough 1.1 (West 2001) (same). Maryland has a new law, effective October 1, 2009, that Corp. v. FTC, 402 F.3d 1056 (11th Cir. 2005), cert. denied, 126 S.Ct. 2929 (2006); makes RPMs unlawful. MD Code Ann., Com. Law, § 11-204(b)(1). Valley Drug Company v. Geneva Pharmaceuticals, Inc., 344 F.3d 1294, 1308, n.20 (11th Cir. 2003) (applying a rule of reason and noting that the “cost and complexity of 6 127 S.Ct. 1955 (2007). most patent litigation is a familiar problem to the court system” and the “cost savings 7 See http://www.govtrack.us/congress/bill.xpd?bill=h111-1427. of settlement, both to the parties and to the public, are equally widely-recognized”) (citations omitted). 8 355 U.S. 41, 45-46 (1957). 16 See In re Cardizem CD Antitrust Litig., 332 F.3d 896 (6th Cir. 2003). 9 Twombly, 127 S.Ct. at 1969. 17 Pub. L. No. 98-417, 98 Stat. 1585 (1984) (codified as amended at 21 U.S.C. § 355; 10 Id. at 1965-67. U.S.C. § 2201; 35 U.S.C. §§ 156, 271, 282) (hereinafter referred to as the “Hatch- 11 See http://www.govtrack.us/congress/billtext.xpd?bill=s111-1504. Waxman Act”). 12 On August 21, 2009, Judge John Gleeson of the U.S. District Court for the Eastern 18 The DOJ filed the brief in connection with Arkansas Carpenters Health and Welfare District of New York, who is overseeing multidistrict litigation against a number of Fund v. Bayer, AG, Nos. 05-2852-cv, 05-2963-cv (2d Cir.). The DOJ brief is available at major airlines, sustained an objection to the magistrate’s report and recommendation http://www.usdoj-gov/atr/cases/cipro.htm. that the plaintiff’s Sherman Act claims be dismissed for failing to satisfy the plausibility 19 See http://www.govtrack.us/congress/bill.xpd?bill=s111-369&tab=related.

STATUTE LIMITING CIVIL ANTITRUST LIABILITY FOR AMNESTY APPLICANTS RENEWED

On June 19, 2009, President Obama signed into law a bill that extends for Amnesty Program is kept confidential by the Division, the conventional wisdom one year (until June 22, 2010) a provision of the Antitrust Criminal Penalty prior to ACPERA was that amnesty participation in criminal investigations Enhancement and Reform Act of 2004 (“ACPERA”) which limits liability in civil would ultimately be revealed and thereby lead to the onslaught of private suits. “follow-on” actions for amnesty applicants under Therefore, amnesty protection limited to criminal prosecution was insufficient. the Department of Justice (“DOJ”) Antitrust The provision that limits an amnesty applicant’s liability in private actions was Division’s Corporate Leniency Program (the originally enacted as part of ACPERA, which Congress passed at the DOJ’s “Leniency Program”).1 The law provides, inter request to expand the Antitrust Division’s powers to investigate and prosecute alia, that a successful applicant not only is companies and individuals suspected of violating the antitrust laws.3 The original granted amnesty from criminal prosecution, but bill contained a “sunset” provision requiring also limits liability to single (not treble) damages expiration on June 22, 2009 of the provisions that in private actions, and the amnesty applicant limit liability in civil follow-on actions, in the absence avoids joint and several liability (i.e., the applicant of a legislative extension.4 The recent legislation has can only be held liable for the damages that the now extended the ACPERA for one more year. Stephen P. Murphy Partner – Washington, D.C. applicant caused). Global Regulatory Enforcement The sponsors of the recent legislation to extend this The Leniency Program has been extremely provision, Senator Kohl (D-Wis.) and Representative effective for the DOJ Antitrust Division in detecting cartels and prosecuting Johnson (D-Ga.), touted the provision’s benefits in them.2 Under the Corporate Leniency Program, an amnesty applicant can avoid assisting the prosecution efforts of the Division. criminal prosecution for the company and its employees if it confesses its With the sponsors’ strong support, the legislation Andrew C. Bernasconi Associate – Washington, D.C. involvement in an antitrust conspiracy and cooperates with the prosecution. to extend the sunset provision moved quickly Global Regulatory Enforcement Prior to the ACPERA, however, companies had to weigh the benefits of obtaining through Congress. In particular the bill was viewed leniency from criminal prosecution against the consequences of being exposed as a critical component to induce reluctant whistleblowers to avoid potentially to treble damages in follow-on civil actions. Although participation in the cataclysmic treble damage awards. However, even though the Antitrust Division (continued on page 9) ANTITRUST REGULATOR – FALL 2009 9

Statute Limiting Civil Antitrust Liability for Amnesty Applicants Renewed—continued from page 8 was a strong proponent of the bill, the Division did not provide empirical evidence antitrust violations may have occurred should immediately contact in-house to support the high praise the bill received, nor did any of its Congressional counsel and outside counsel to determine whether to conduct an internal sponsors. This lack of data is surprising because presumably it would be investigation. In order to “hold” its place in line as the first amnesty applicant, a beneficial for the Antitrust Division to raise questions post ante with amnesty company is permitted to hold a “marker.” If an internal investigation then reveals participants, to understand their motivation in entering the program and to track unlawful conduct, the company must make a reasoned decision on whether to the recoveries attributable to whistleblowers’ revelations (e.g., as DOJ does by apply for amnesty, because ACPERA provides widespread protection, but only for tracking recoveries resulting from whistleblower complaints initiated under the the first company to apply for amnesty. federal False Claims Act). ______

So what is the impact of the recently-enacted law on companies doing business 1 See P.L. No. 111-30 (June 19, 2009). in the United States? The law—at least for another year—significantly limits 2 See Scott D. Hammond, Address at the 56th Annual Spring Meeting of the ABA Section potential civil damages, but it is relief that only extends to the first company to of Antitrust Law, “Recent Developments, Trends, and Milestones In The Antitrust Division’s Criminal Enforcement Program”, at p. 14 (Mar. 26, 2008) (available at http:// apply for amnesty. Unlike the EU model where varying degrees of protection www.usdoj.gov/atr/public/speeches/232716.htm) (last accessed Aug. 19, 2009). are given to multiple amnesty applicants, the Antitrust Division’s program is 3 See Antitrust Criminal Penalty Enhancement and Reform Act of 2004, P.L. No. 108-237, simple—first or not at all. The Antitrust Division takes the position that second 118 Stat. 661 (H.R. 1086) (signed into law on June 22, 2004). or subsequent entities that apply for amnesty can also obtain significant benefits 4 Id. (e.g., certain discounts off the Sentencing Guidelines range of applicable criminal 5 See Scott D. Hammond, Address at the 54th Annual ABA Section of Antitrust Law Spring Meeting, “Measuring the Value of Second-In Cooperation in Corporate 5 fines), but only the first applicant is eligible for amnesty from criminal penalties. Plea Negotiations” (Mar. 29, 2006) (available at http://www.usdoj.gov/atr/public/ speeches/215514.pdf) (last accessed Aug. 10, 2009). The ACPERA benefits necessarily force companies to act quickly once there is a belief that anticompetitive conduct has occurred. All senior corporate mangers need to be mindful of the “need for speed.” Companies that believe that potential

FTC Challenges Proposed and Completed Acquisitions in The Health care Industry

The Federal Trade Commission (“FTC”) has challenged some proposed and to treat PDA in Europe, but was not yet FDA-approved for treatment of PDA completed acquisitions of interest this summer, three of which have resulted in in the United States. Two days later, Lundbeck raised the price of Indocin to the abandonment of the proposed mergers. $500 per vial, and a few months thereafter (in April 2006), NeoProfen became FDA-approved for the treatment of PDA in the United States. After FDA approval, Lundbeck, Inc. (Pharmaceutical Drugs) Lundbeck offered NeoProfen for sale at $483 per vial. The FTC defeated a motion for summary judgment in a case in which the The FTC noted that despite Lundbeck’s price increases for Indocin, no generics defendant Lundbeck, Inc. (“Lundbeck”) had acquired the rights to two drugs used had entered the market for injectable indomethacin. Further, NeoProfen is an to treat patent ductus arteriosus (“PDA”)1, Indocin Orphan Drug—i.e., a drug that treats rare medical indications that impact only a and NeoProfen, which were alleged to be the only small population.5 The Orphan Drug Act entitles the manufacturer of an Orphan drug therapies available for such treatment in Drug to a seven-year period of marketing exclusivity, thereby ensuring that the United States.2 On July 21, 2009, the federal NeoProfen would be protected against generic entry for at least seven years.6 The district court in Minnesota denied Lundbeck’s FTC asserted that Lundbeck violated the Clayton Act and the FTC Act by acquiring motion for summary judgment which sought to the rights to NeoProfen and willfully maintaining a monopoly in the market for dismiss the FTC’s claims that Lundbeck violated drugs that treat PDA. § 7 of the Clayton Act3 and the FTC Act4 by acquiring the only drugs used to treat PDA. In its motion for summary judgment, Lundbeck first asserted that NeoProfen and Indocin are not in the same market because doctors do not consider them Diane Green-Kelly The facts were as follows: Over an eight month Partner – Chicago to be interchangeable—they distinguish the drugs based on clinical and safety period, Lundbeck had acquired both Indocin and Global Regulatory Enforcement attributes— and argued that doctors do not switch between the drugs based NeoProfen. In August 2005, Lundbeck acquired on price.7 The FTC countered that the differences between the drugs are minor, Indocin (an injectable indomethacin), which at the time was the only drug both treat the same condition, and hospitals typically carry only one, but not available for the treatment of PDA in the United States. Lundbeck immediately both, of the drugs on their formularies. Lundbeck next asserted that it lacked raised the price from $26 per vial to $36 per vial. Four months later, Lundbeck market power because generic entry is imminent, pointing to one manufacturer acquired the rights to NeoProfen, an injectable ibuprofen which had been used (continued on page 10) ANTITRUST REGULATOR – FALL 2009 10

FTC Challenges Proposed and Completed Acquisitions in the Health Care Industry—continued from page 9 that had a generic version of Indocin, but had not entered the market because of existing competitor, HCA, routinely had opposed applications for COPNs, further issues regarding the “way the drug looks.”8 However, no generic equivalent had prolonging the process and decreasing the likelihood of approval. In its complaint, actually entered the market, and the court concluded that there were issues of the FTC sought divestiture of CAI and CSE. fact regarding whether barriers to entry (such as regulatory barriers) prevented Carilion apparently has decided not to litigate the dispute; two weeks after the imminent entry. Therefore, the court denied summary judgment. As of the date FTC issued its complaint, the FTC and Carilion began settlement negotiations. that this article has gone to press, Lundbeck has continued to defend against the According to a joint motion to withdraw the matter from adjudication, Carilion FTC’s claims. agreed to enter into a consent order that “contemplates a remedy that completely Carilion Clinic (Outpatient Clinics) restores the competition that was alleged to have been eliminated by the acquisition.”12 The FTC historically has sought to block acquisitions of hospitals by other hospitals, where the result would be to reduce competition and raise health care Thoratec Corporation (Medical Device) costs. With a renewed focus on reducing health care costs, however, the FTC The FTC has successfully thwarted the proposed $282 million merger of Thoratec appears to have successfully challenged a hospital’s consummated acquisition Corporation (“Thoratec”) and HeartWare International, Inc. (“HeartWare”). On of two outpatient clinics. This is only the second time that the FTC has issued July 28, 2009, the FTC issued its administrative complaint challenging the an administrative complaint challenging a hospital’s acquisition of an outpatient merger. Thoratec is the sole provider of left ventricular devices (“LVADs”), life- clinic; the other time was in 1994 when the FTC challenged a similar acquisition sustaining treatment for patients who are either awaiting a heart transplant, or do in Alaska.9 not qualify for a heart transplant.13 LVADs are surgically implanted heart pumps On July 23, 2009, the FTC filed an administrative complaint against Carilion that support and sustain patients with end-stage heart failure, which typically is a Clinic, a hospital system in Southwest Virginia seeking to reverse the August fatal condition. Thoratec sells two LVADs, which are the only LVADs approved by 2008 acquisitions of two outpatient clinics—the Center for Advanced the FDA for commercial sale in the United States. HeartWare is a small company Imaging (“CAI”) and the Center for Surgical Excellence (“CSE”)—which that had been developing an LVAD, called the HVAD, which is still in clinical trials, provided advanced outpatient imaging services (i.e., MRIs, CT scans, etc.) and but is expected to become FDA-approved by 2012. There are a few other small outpatient surgical services, respectively, in Roanoke, Virginia.10 According companies developing LVADs, but they are significantly behind HeartWare in to the administrative complaint, Carilion controlled approximately 80% of the development and are not likely to be FDA-approved before 2012. The FTC alleged hospital beds in the Roanoke area.11 At the time of the acquisitions, CAI allegedly that Thoratec’s acquisition of HeartWare would stifle competition and innovation, had been in operation as an advanced imaging center for five years, offering noting that Thoratec had already improved its product in response to HeartWare’s fast scheduling, extended hours of operation and fast turnaround time for HVAD. In a July 30, 2009 press release, the FTC stressed that there cannot be reporting to referring physicians. Prior to the acquisitions, Carilion allegedly had health care reform without competition, particularly with respect to medical resisted the increasing competition from CAI and CSE by opposing CAI’s state devices that are life-saving.14 The next day, on July 31, 2009, Thoratec and application for additional MRI equipment and CSE’s request for a Certificate of HeartWare announced that they would terminate the proposed transaction.15 Public Need (“COPN”) to offer outpatient surgical services. According to the complaint, Carilion had itself grown substantially since 1990, largely by acquiring CSL Limited (Plasma-Derivative Proteins) competitors and physician practices. The FTC alleged that Carilion’s acquisitions The FTC also was successful in blocking the $1.3 billion acquisition of Talecris of CAI and CSE left it with only one competitor in the relevant market for imaging Biotherapeutics Holdings Corporation (“Talecris”), the third largest supplier of services, which the FTC defined as extending 15–20 miles around Roanoke and plasma derivative protein therapies, by CSL Limited, the world’s second largest Salem, Va. supplier. According to the FTC complaint, the merger would reduce the number of competitors from three to two for plasma products (Baxter is the other supplier), The FTC asserted that the acquisitions violated the antitrust laws, would lead to and from five to four for other plasma products in what is already a consolidating higher health care costs and reduced incentives to maintain and improve service industry.16 Following the acquisition, CSL allegedly would have more than 50% of and quality of care in Roanoke. The FTC alleged that independent clinics, such the market for certain plasma proteins and more than 80% for others. The FTC as CAI and CSE, compete with Carilion for inclusion in health insurance plans, for complaint notes that the plasma industry has been consolidating substantially patients, and for referring physicians by offering lower prices and better service. since the early 1990s, when there were 13 producers of plasma-derivative Carilion allegedly had improved service at its outpatient facility as a result of products; today there are only five such producers, and two allegedly hold market competition from CSE. Further, after the acquisition, Carilion allegedly increased shares only in the single digits and have a limited ability to expand. Barriers to its fee structure for various services, including increasing the out-of-pocket cost entry allegedly exist because of the need for significant up-front investment, for a brain MRI by 900% (from $40 to $350). The FTC alleged that entry barriers the need for lengthy regulatory approvals and intellectual property relating to prevented competition because of the need to obtain state approval for a COPN, purification and safety. Rather than defend the transaction, CSL and Talecris which could take as much as two years. The FTC noted that Carilion and its sole announced on June 8, 2009 that they would terminate the merger agreement. (continued on page 11) ANTITRUST REGULATOR – FALL 2009 11

FTC Challenges Proposed and Completed Acquisitions in the Health Care Industry—continued from page 10

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1 PDA is a life-threatening condition that affects premature infants soon after birth when 10 In re Carilion, FTC Docket No. 9338, Complaint (July 23, 2009) (hereinafter “In re a duct between the heart chambers does not close. Although PDA sometimes resolves Carilion”), at ¶ 1, available at http://www.ftc.gov/os/adjpro/d9338/index.shtm. on its own, medical treatment sometimes is required. Drug therapy is the preferred 11 Id. ¶ 6. method of treatment; the alternative treatment is surgery. 12 In re Carilion, FTC Docket No. 9338, Amended Joint Motion to Withdraw Matter From 2 See FTC v. Lundbeck, Inc., Case 08-cv-06379-JNE-JJG (D. MN. July 21, 2009) Adjudication, at 1 (Aug. 7, 2009). (hereinafter “Lundbeck”). The State of Minnesota also asserted claims against 13 FTC Press Release, “FTC Challenges Thoratec’s Proposed Acquisition of Lundbeck in the lawsuit for violations of the Clayton Act and Section 2 of the Sherman See HeartWare International” (July 30, 2009) (hereinafter “FTC Press Release”), available Act (monopolization). at http://www.ftc.gov/opa/2009/07/thoratec.shtm. See also In re Thoratec, FTC Docket 3 15 U.S.C. § 18 (2006). 9339, Complaint (July 28, 2009), available at http://www.ftc.gov/os/adjpro/d9339/ 4 15 U.S.C. § 45 (2006). index.shtm. 14 FTC Press Release 5 See 21 CFR 316, et seq. See 15 http://online.wsj.com/article/PR-CO-20090731-911050.html. 6 See id. See 16 , FTC Docket No. 9337, Complaint (May 27, 2009) 7 Lundbeck, at 4. In the Matter of CSL Limited (hereinafter “In re CSL”), at ¶ 2, available at http://www.ftc.gov/os/adjpro/d9337/index. 8 Lundbeck, at 6. shtm. 9 See “Carilion, FTC talks cleared to go forward,” Roanoke News, available at http:// www.roanoke.com/news/roanoke/wb/215161.

U.S. Supreme Court to Address ‘Single Entity’ Issue

On June 29, 2009, the United States Supreme Court granted certiorari in marketed their logos and trademarks for use on various consumer products, American Needle, Inc. v. National Football League et al.1, a case with potentially including headwear, through an entity jointly owned by the member teams, broad implications both inside and beyond the arena of professional sports. This National Football League Properties, Inc. (“NFL Properties”). For many years, case likely will clarify an issue central to the antitrust treatment of professional NFL Properties granted multiple headwear licenses. In 2000, the NFL teams sports leagues: When does a sports league act as a “single entity” incapable authorized NFL Properties to solicit bids from vendors for an exclusive headwear of conspiring under Section 1 of the Sherman license. Reebok Int’l., Ltd. (“Reebok”) won the bidding and was granted an Act and when does it instead act as a group of exclusive headwear license for a ten-year period. independent competitors? One of the prior NFL headwear licensees which had lost its license, American In answering this longstanding question, the Needle, Inc. (“American Needle”), then filed suit against the NFL, NFL Properties, Court also is likely to shed light on several other individual member teams and Reebok, alleging violations of Section 1 and important antitrust issues that extend beyond Section 2 of the Sherman Act. After the NFL defendants moved for summary professional sports, including the reach of the judgment arguing that they were immune from liability as a single entity under Supreme Court’s decision in Copperweld Corp. v. Copperweld, the U.S. District Court for the Northern District of Illinois (Moran, J.) Independence Tube Corp.2 and the antitrust permitted discovery with respect to the “single entity” issue and thereafter MIchael E. Lowenstein treatment of joint ventures, and may provide granted summary judgment in favor of defendants with respect to the Section 1 Partner – Pittsburgh Global Regulatory Enforcement further insight into application of the Court’s claim on the ground that the NFL and the member teams act as a single entity in decision in Bell Atlantic Corp. v. Twombly.3 licensing their intellectual property. After supplemental briefing, the District Court Additionally, because the Court granted certiorari in unusual circumstances— also granted summary judgment in favor of defendants with respect to plaintiff’s with the support of both parties and over the objection of the Solicitor General, monopolization claim under Section 2 of the Sherman Act, concluding that, as DOJ and FTC—this case also may provide an early test of possible differences a single entity, the NFL and its member teams could collectively license their in the Supreme Court’s and the Obama Administration’s approach to antitrust intellectual property to either a single licensee or multiple licensees. issues. The United States Court of Appeals for the Seventh Circuit affirmed in a This article previews this important case. unanimous panel decision.4 The Court of Appeals ruled that whether a professional sports league is a single entity should be decided not only “one Background league at a time” but also “one facet of a league at a time.”5 Applying this The National Football League (“NFL”) is an unincorporated association currently analysis, the Court of Appeals found that the NFL acted as a single entity and comprised of 32 separately owned and operated member teams which annually not as colluding competitors when the NFL awarded an exclusive license of produce a season of “NFL Football” games culminating in the Super Bowl. Since trademarks and logos for headwear to Reebok and did not license American the early 1960s, the NFL and its member clubs have collectively licensed and Needle. The Court of Appeals also affirmed the District Court’s decision that (continued on page 12) ANTITRUST REGULATOR – FALL 2009 12

U.S. Supreme Court to Address ‘Single Entity’ Issue—continued from page 11 the ruling against plaintiff’s Section 1 claim also doomed plaintiff’s claim under to other professional sports. As the Supreme Court pointed out in NCAA v. Section 2.6 Board of Regents12, where the Court found that an agreement among colleges and universities to jointly market television rights violated Section 1, Congress The American Needle case reached the Supreme Court in highly unusual by contrast passed a statute allowing joint marketing of television rights to circumstances. American Needle sought Supreme Court review, arguing that the professional sports leagues. American Needle will argue that this statute would Court of Appeals erred in ruling that the NFL was a single entity on this issue.7 have been unnecessary if the NFL was a single entity. Rather than accept this favorable ruling, the NFL also supported Supreme Court review in an effort to obtain an even broader declaration from the Supreme Court The Solicitor General, DOJ and FTC on behalf of the United States, in opposing that professional sports leagues are highly integrated joint ventures that should the grant of certiorari, took the position that the NFL could properly be viewed be deemed to be single entities for Section 1 purposes, at least with respect to as a single entity for certain narrow purposes such as scheduling and defining core venture functions. The NFL acknowledged that it was an “unusual step” the rules of play. Beyond these narrow issues, the rule of reason should apply. to support certiorari in a case in which it had prevailed below.8 Although both The NFL is pursuing its single entity argument in a case involving an issue— the NFL and American Needle argued in favor of the Supreme Court hearing licensing of trademarks and logos to manufacturers through a common licensing the case, the Solicitor General filed a brief on behalf the United States, joined program—that is outside the narrow scope of what the Solicitor General, DOJ by the Antitrust Division of the Department of Justice and the Federal Trade and FTC believe is appropriate for single entity treatment. If the NFL prevails in Commission, arguing that the Court of Appeals’ application of the single-entity its argument that trademark licensing is part and parcel of the business of pro concept was too expansive and not supported by Supreme Court precedent, football which it conducts as a single entity in competition with other sports but that the case should not be reviewed by the Supreme Court.9 Following this leagues and forms of entertainment, there likely will be few if any exceptions to briefing, as well as amicus briefs by the National Basketball Association and its the rule that the NFL and other sports leagues are single entities.13 licensing arm, NBA Properties, and the National Hockey League in support of the NFL’s position, the Supreme Court granted certiorari. Copperweld, Joint Venture Issues and Twombly The American Needle case arises in the somewhat unique context of sports, in Potentially Significant Issues which, as the court pointed out in NCAA v. Board of Regents, some of the most 14 Single entity issues with respect to sports leagues basic activities can only be carried out jointly. Although this case arises in this context, it likely will illuminate several issues of more general antitrust interest: Whether and to what extent professional sports leagues should be viewed as a single entity has been a fundamental and unresolved issue, not only for the „„ Copperweld. The court’s decision in Copperweld has long stood for NFL, but for all professional sports leagues, with the possible exception of major the proposition that an entity is incapable of conspiring with itself and, league baseball which has an anachronistic but longstanding exemption from specifically, that a parent corporation cannot conspire with its wholly owned the antitrust laws granted nearly a century ago. If the NFL can establish that it subsidiary. Although this basic proposition has been clear, the court in is a single entity, it will free them—and probably other sports leagues—from Copperweld left open and did not consider “under what circumstances, if any” concerns about charges of collusion under Section 1 of the Sherman Act.10 single entity treatment might be appropriate in other contexts.15 In deciding whether and to what extent sports leagues are single entities, the court in Although the merits briefing is scheduled for this fall, based on their papers with American Needle very likely will clarify other issues left open by the court in respect to the petition for certiorari, the NFL defendants will argue that a common Copperweld. licensing program is a core venture function of the highly integrated NFL joint venture and that the NFL should be viewed as a single entity under Copperweld „„ Joint Venture Issues. In illuminating the Copperweld doctrine, American with respect to this function. The NFL defendants also will emphasize that they Needle also will provide further guidance on the antitrust treatment of joint have had the common licensing program for more than 40 years. They will argue ventures. In the first instance, that guidance likely will be with respect to that the certainty of declaring the NFL a single entity with respect to a broad when a joint venture is so highly integrated that it should be treated as a scope of NFL activities is essential to permit the NFL to make the decisions single entity under Copperweld. But even if the court does not rule that the it needs to make in order to function effectively in, and enhance, interbrand NFL should be viewed as a single entity, its decision may shed additional light competition. on the application of Section 1 to joint ventures.

Based on their certiorari papers, petitioner American Needle will argue that the Assuming the court treats the NFL as a lawful joint venture but not a single NFL teams are undisputedly separately owned and that the Supreme Court has entity, it may simply remand for application of the rule of reason. In NCAA v. held since the decision in Radovich v. NFL11 in 1957 that activities of the NFL and Board of Regents, the court held the NCAA’s agreement limiting the sale its member teams are subject to rule-of-reason inquiry under Section 1 of the of television rights unlawful on a “quick look” rule of reason. In Broadcast Sherman Act. They will point out that Congress considered and did not pass four Music, Inc. v. Columbia Broadcasting System, Inc.16, the court held that blanket different bills that would have extended baseball’s historic antitrust exemption licenses to perform copyright musical compositions were not per se unlawful

(continued on page 13) ANTITRUST REGULATOR – FALL 2009 13

U.S. Supreme Court to Address ‘Single Entity’ Issue—continued from page 12

but required analysis under the rule of reason. American Needle will point to light on possible differences in the current Supreme Court’s and Administration’s cases such as Board of Regents and Broadcast Music to argue that if the NFL approaches to antitrust law. is not deemed to be a single entity, the conduct at issue requires and should ______be held unlawful under either a quick-look or full-blown Section 1 rule-of- reason inquiry. 1 U.S. Supreme Court Docket No. 08-661. 2 467 U.S. 752 (1984). 17 In its recent decision in Texaco, Inc. v. Dagher, however, where the court 3 550 U.S. 444 (2007). held that that a lawful joint venture may inherently set a price for its product 4 The Seventh Circuit’s decision, 538 F.3d 736 (7th Cir. 2008), was authored by Judge and that such decisions of a legitimate joint venture are not per se illegal, the Michael Stephen Kanne and joined by Judges Diane S. Sykes and John Michael Tinder. court expressed a willingness to approve joint venture conduct with respect to 5 538 F.3d at 742 core-venture functions. In Dagher, the plaintiff did not press a rule-of-reason 6 Id. at 741–44. claims18 and it is possible that Dagher will not extend beyond the per se issue. 7 Petition for a Writ of Certiorari, filed by American Needle on November 17, 2008. Nevertheless, if the court approves of the NFL’s conduct here, but is unwilling 8 Brief for the NFL Respondents on Petition for a Writ of Certiorari to the United States Court of Appeals for the Seventh Circuit, filed January 21, 2009, at 4. to hold that it is functioning as a single entity, it is possible that the court 9 Brief for the United States as Amicus Curiae, filed May 28, 2009. would conclude that the conduct is lawful or at least that it does not require a 10 Although, as a single entity, the NFL and other sports leagues would still be subject to full-blown rule-of-reason inquiry to be held lawful. Section 2, the lower court rulings in American Needle suggest that if the argument is accepted that a sports league integrates to produce a product in competition with other „„ Twombly. Copperweld and joint venture analysis present different ways for products, the sports leagues will have a strong leg up under Section 2 as well. the American Needle case to be resolved. Each presents its own analytical 11 352 U.S. 445 (1957). and policy challenges for the court. One overarching concern, however, may 12 468 U.S. 85 (1984). be a concern to avoid protracted antitrust litigation, a concern that the court 13 One interesting question is whether the NFL will argue for an absolute rule that it is a

19 single entity for all purposes, or whether it will argue for a more limited rule. As one emphasized in Twombly in the context of a motion to dismiss. If the court important example, will the NFL argue that it is a single entity with respect to labor concludes that the NFL’s conduct should be deemed lawful here, it will be issues? If the NFL was a single entity with respect to labor issues, this could have significant ramifications on the ability to set terms and conditions of employment, such interesting to see if the court reaches its conclusion in a way that would avoid as the ability of the NFL to set a wage scale. The Supreme Court dealt with this issue protracted litigation, particularly discovery, in other cases, and whether the in Brown v. Pro Football, Inc., 518 U.S. 231 (1996), but did so in the context of multi- employer collective bargaining governed by principles of labor law. A ruling that the court grounds its decision in part on such concerns as it did in Twombly. NFL is a single entity with respect to labor issues could alter the balance of power with respect to labor issues in the NFL, for example by rendering moot the possible “outer The approach to antitrust issues of the Supreme Court and the Obama boundaries” of lawful collective activity by multiple employers shielded from antitrust scrutiny by multi-employer bargaining. These boundaries were contemplated but not Administration defined by the Court in Brown. Id. at 250. This case also is potentially important as an early test of perceived differences 14 468 U.S. at 101. on antitrust issues between the Obama Administration and the majority of the 15 467 U.S. at 767. Justices on the Supreme Court. The Court invited the views of the United States 16 441 U.S. 1 (1979). with respect to whether to grant certiorari. In response, the Solicitor General, DOJ 17 547 U.S. 1 (2006). and FTC took the position that the case was not appropriate for certiorari, but 18 Id. at 7. also made clear that they believed the case was incorrectly decided and that the 19 550 U.S. at 558–59. NFL should not be treated as a single entity with respect to common licensing of trademarks and logos. The Supreme Court granted certiorari over this opposition.

Now that the Supreme Court has decided to hear the case, it will have to decide whether it agrees with the Solicitor General and American Needle’s position that the decision was based on a too-expansive reading of the single-entity concept or if it accepts the NFL’s argument for an even more expansive reading. In addition, American Needle will be one of the first antitrust cases in which newly appointed Justice Sotomayor will participate, and will be further illuminating in that respect.

Conclusion

However it is decided, American Needle is very likely to be a watershed in the application of antitrust law to sports leagues on the central question of whether and to what extent sports leagues are single entities. In addition, the case is very likely to provide guidance on issues of more general applicability and to shed ANTITRUST REGULATOR – FALL 2009 14

THE THIRD CIRCUIT TIGHTENS THE REQUIREMENTS TO CERTIFY A CLASS

The Third Circuit’s recent decision in In re Hydrogen Peroxide Antitrust Litigation1 Dow Pharmaceuticals, Inc.11 (“Daubert”). For instance, in Rhodes v. E.I. DuPont (“Hydrogen Peroxide”) signals something of a “sea change” in a district court’s de Nemours & Co.,12 the federal district court in West Virginia found that it “must role in assessing a motion for class certification and the burden placed upon satisfy itself that the facts, data, principles, and methods undergirding the expert plaintiffs to satisfy the requirements of Rule 23 of the Federal Rules of Civil opinions offered in support of class certification are…reliable prior to relying on Procedure. In particular, the most critical part of the holding is with respect to the those opinions during class certification” and, therefore, ordered a preliminary “predominance” requirement of Rule 23(b)(3), applicable to many certification Daubert hearing to “test plaintiffs’ key experts’ methodology and assumptions.”13 decisions, where plaintiffs must now show, by a preponderance of the evidence, The Second Circuit has cautioned that “[a] district judge is to assess all of the that they have a viable methodology for establishing each element of their relevant evidence admitted at the class certification stage and determine whether underlying claims using common available proof. These more exacting standards each Rule 23 requirement has been met, just as the judge would resolve a put the Third Circuit in line with the modern trend in the Second, Fourth, Fifth and dispute about any other threshold prerequisite for continuing a lawsuit.”14 Seventh Circuits. The Fourth, Fifth and Seventh Circuits have made similar rulings. The Fourth A Survey of the Circuits Circuit has held that “while an evaluation of the merits to determine the strength In the Third Circuit, prior to Hydrogen Peroxide, case law addressing plaintiffs’ of plaintiffs’ case is not part of the Rule 23 analysis, burden at the class certification stage, including the predominance requirement, the factors spelled out in Rule 23 must be addressed was inconsistent, at best. Although the Third Circuit pronounced that district through findings, even if they overlap with issues on courts were required to assess whether all of the Rule 23 requirements were met, the merits.”15 In Unger v. Amedisys, Inc.,16 the Fifth plaintiffs only needed to make a “threshold showing.”2 District courts assessing Circuit stated that the district court’s standard of class certification motions were authorized to “make whatever factual and legal proof was “too lax” and the district court must go inquiries [were] necessary” to analyze whether plaintiffs satisfied this relatively “beyond the pleadings” to “understand the claims, low burden.3 Yet, district courts would not “credit [p]laintiffs’ evidence over defenses, relevant facts, and applicable substantive [d]efendants’ or vice versa.”4 According to the law in order to make a meaningful determination of Third Circuit, district courts were not required certification issues.” The Seventh Circuit has held Melissa I. Rubenstein to examine whether plaintiffs could prove the that “a judge should make whatever factual and Associate – Philadelphia allegations in their complaints but, instead, legal inquiries are necessary under Rule 23” and Commercial Litigation Eastern needed only to be “assure[d]” that plaintiffs’ the “judge must make a preliminary inquiry into the attempts to prove their allegations would merits” if necessary to resolve a dispute over a Rule 23 requirement.17 “predominantly involve common issues of fact and law.”5 The Hydrogen Peroxide Decision Hydrogen Peroxide involved claims that manufacturers of hydrogen peroxide In contrast, the standard for class certification and other chemicals engaged in a horizontal conspiracy to fix prices over an Mark L. Weyman in other Circuits has been more rigorous. For Partner – New York eleven-year period. Plaintiffs moved to certify a class of direct purchasers Commercial Litigation Eastern example, the Second Circuit rejected the idea of the chemicals. In connection with the class certification process, as is that only “some showing” that the Rule 23 typically the case, the parties focused on the “predominance” requirement of requirements are satisfied is necessary.6 Instead, the Second Circuit has made Federal Rule 23(b)(3), which requires the court to find, among other things, clear that a district court is obliged to make a determination that every Rule 23 that “questions of law or fact common to class members predominate over any requirement is met “by a preponderance of the evidence.”7 The district court’s questions affecting only individual members.”18 “If proof of the essential elements obligation to assess whether each requirement is met is not diminished in any of the cause of action requires individual treatment, then class certification is way “just because of some or even full overlap of that requirement with a merits unsuitable.”19 issue.”8 The parties in Hydrogen Peroxide submitted expert opinions of economists, Moreover, issues concerning expert witnesses have grown in importance at the who had differing views concerning the nature and structure of the relevant class certification stage. The Second Circuit has held that a district court may market and whether purchasers paid an overcharge for the chemicals as a not rely upon expert testimony to establish a component of Rule 23 “simply result of the alleged conspiracy. The lower court certified the class, holding that [because it is] not fatally flawed.”9 This is consistent with the Eighth Circuit’s plaintiffs were required only to make a threshold showing that antitrust impact decision in Blades v. Monsanto Co.,10 in which the court held that “in ruling on will predominantly involve common proof.20 The district court did not weigh the class certification, a court may be required to resolve disputes concerning the competing expert testimony and instead simply held that plaintiffs’ expert opinion factual setting of a case. This extends to resolution of expert disputes.” With was sufficient to establish the predominance of common issues.21 In particular, respect to the certification process, courts likewise may be called upon to resolve the district court ruled that plaintiffs’ expert proposed reliable methodologies challenges to an expert’s qualifications in accordance with Daubert v. Merrell (continued on page 15) ANTITRUST REGULATOR – FALL 2009 15

The Third Circuit Tightens the Requirements to Certify a Class—continued from page 14 for proving antitrust impact and damages and the expert’s failure to conduct a prove each element of a Section 1 claim under the Sherman Act—that is: (i) a benchmark or regression analysis to test his proposed methodologies was not conspiracy; (ii) harm to competition in a relevant geographic and product market; fatal to plaintiffs’ motion for class certification.22 In other words, the district court (iii) antitrust impact (also known as injury); and (iv) damage. accepted plaintiffs’ expert’s theories for proving impact and damages, but did not In Hydrogen Peroxide, the Third Circuit focused particularly on the element of require plaintiffs to test the theories or show that they would actually work. antitrust impact in connection with the predominance inquiry. The Third Circuit On appeal, the Third Circuit first rejected outright the notion that plaintiffs need ruled that, in addition to considering whether plaintiffs’ impact theory was only make a “threshold showing” that the requirements of Federal Rule 23(b) are plausible on its face, the district court must determine whether it also was met.23 Instead, the Court made clear that Rule 23 requires “rigorous consideration “susceptible to proof at trial through available evidence common to the class.”34 of all of the evidence and arguments.”24 Second, the court held that district If the issue is disputed, as it was in Hydrogen Peroxide, the Third Circuit directed courts “must resolve all factual and legal disputes between the parties, even if that it must be resolved by the district court based on all relevant evidence.35 The they overlap with the merits” and district courts err as a matter of law if they Third Circuit ruled that by failing to consider defendants’ expert opinion, which fail to do so.25 A party’s assurances to the court that “it intends or plans to meet raised “substantial doubts” about whether “common proof would be available for the requirements is insufficient.”26 A district court’s factual determinations that plaintiffs to demonstrate antitrust impact at trial,” the district court in Hydrogen the Rule 23 requirements are met must be supported by a preponderance of the Peroxide erred as a matter of law; therefore, the case was vacated and remanded evidence, which requires the district court to “find that the evidence more likely on the ground that the district court applied an improper standard for evaluating than not establishes each fact necessary to meet the requirements of Rule 23.”27 plaintiffs’ class certification motion.36

Third, the Court ruled that the district court must rigorously examine and weigh Relying on Hydrogen Peroxide, the Third Circuit recently overturned two district expert opinions, which “should not be uncritically accepted as establishing a court decisions granting class certification. In Hohider v. United Parcel Service, Rule 23 requirement.”28 The fact that plaintiffs’ expert’s opinion is not eligible for Inc.,37 the Western District of Pennsylvania certified a class of employees alleging exclusion pursuant to Daubert or for any other reason is not itself a reason for a violations of the Americans with Disability Act (“ADA”) by United Parcel Service. district court to credit plaintiffs’ expert over defendants.29 According to the Third The Third Circuit ruled that the district court failed properly to consider whether Circuit: plaintiffs satisfied the requirements of Federal Rule 23 with respect to each of the substantive elements of plaintiffs’ claim under the ADA.38 In particular, the [T]he district court may be persuaded by the testimony of either (or neither) Third Circuit noted that the district court failed to evaluate “what substantive party’s expert with respect to whether a certification requirement is met. elements are necessary to prove plaintiffs’ theories of discrimination,” including Weighing conflicting expert testimony at the certification stage is not only whether each member of the putative class is a “qualified” individual with a permissible; it may be integral to the rigorous analysis Rule 23 demands.30 disability and whether each member had received a reasonable accommodation The Third Circuit clarified, however, that while a district court’s findings are within the meaning of the ADA.39 The Third Circuit specifically recognized that the conclusive for purposes of class certification, “they do not bind the fact-finder district court’s analysis of the Rule 23 factors necessarily should have touched on the merits.”31 Thus, litigants need not be concerned that an adverse finding of on the merits of the plaintiffs’ claim and the district court’s failure to consider the fact at the class certification stage will become law of the case for purposes of elements of the claim in the context of Rule 23 was reversible error.40 the merits. Likewise, in Nafar v. Hollywood Tanning Systems, Inc.,41 the District of New The Hydrogen Peroxide court also specifically addressed the predominance Jersey certified a nationwide class of consumers who purchased indoor tanning requirement of Rule 23. The Court clarified that “[i]f proof of the essential services from Hollywood Tanning Systems alleging violations of New Jersey’s elements of the cause of action [at issue] requires individual treatment, then class consumer fraud act, among others. The Third Circuit reversed and remanded certification is unsuitable.”32 Accordingly, with respect to the Sherman Act claim because, inter alia, the district court focused solely on the uniformity of the before it, the Hydrogen Peroxide court ruled that the task for plaintiffs at class alleged misrepresentations by Hollywood Tanning Systems concerning the certification is to demonstrate that each element of a claim under Section 1 of the benefits of indoor tanning in connection with the predominance inquiry required Sherman Act is: under Rule 23(b)(3). The district court failed thoroughly to analyze the causation …capable of proof at trial through evidence that is common to the class element of the statutory violation within the context of the Rule 23 inquiry. In rather than individual to its members. Deciding this issue calls for the district particular, the district court did not consider or resolve factual disputes regarding court’s rigorous assessment of the available evidence and the methods or the extent to which class members knew of the health risks associated with the methods by which plaintiffs propose to use the evidence….33 tanning systems at issue and the extent to which such knowledge would have impacted their behavior.42 On remand, the Third Circuit directed the lower court Thus, to satisfy the predominance requirement of Rule 23(b)(3), plaintiffs to consider such evidence, which was key to assessing whether individual issues must establish a viable methodology for using common available evidence to predominate.43 (continued on page 16) ANTITRUST REGULATOR – FALL 2009 16

The Third Circuit Tightens the Requirements to Certify a Class—continued from page 15

Implications On Future Litigation 7 In re Initial Public Offerings Sec. Litig., 471 F.3d at 37. 8 Id. at 41. Hydrogen Peroxide, UPS, and Hollywood Tanning Systems teach that to defeat 9 Id. at 42. certification, defendants must be particularly attuned to plaintiffs’ proffer of 10 400 F.3d 562, 575 (8th Cir. 2005). evidence in support of class certification. Not only is it incumbent on plaintiffs 11 509 U.S. 579 (1993) (setting standards for, and requiring district courts to be the to present a viable methodology for proving each element of a claim by a gatekeepers for, determining the reliability of expert testimony). preponderance of the evidence, but plaintiffs must do so using common available 12 No. 6:06-cv-00530, 2008 WL 2400944 at * 10 (S.D. W. Va. June 11, 2008). evidence. That is, at the time of class certification, the plaintiffs must have 13 Rhodes, 2008 WL 2400944 at * 12; see also Bell v. Ascendant Solutions, Inc., No. “in hand” the evidence upon which they intend to rely to satisfy the Rule 23 Civ. A. 301XC0166N, 2004 WL 1490009 at * 4 (N.D. Tex. July 1, 2004) (granting defendants’ motion to exclude testimony by plaintiffs’ expert in support of motion for requirements. class certification because the expert’s techniques “have not been tested, have not been subject to peer review and publication, and do not enjoy general acceptance As a practical matter, it also is particularly important to draw a distinction within a relevant scientific community”), aff’d Bell v. Ascendant Solutions, Inc., 422 F.3d 307 (5th Cir. 2005). between attacking an expert’s conclusions and attacking an expert’s 14 In re Initial Public Offerings Sec. Litig., 471 F.3d at 42. methodologies and the viability thereof. Poking “holes” in an expert’s results 15 See, e.g., Gariety v. Grant Thornton, LLP, 368 F.3d 356, 366 (4th Cir. 2004). or conclusions alone is not necessarily the most effective way to attempt to 16 401 F.3d 316, 319, 321 (5th Cir. 2005). defeat class certification. Instead, defendants should attempt to show that an 17 Szabo v. Bridgeport Machs., Inc., 240 F.3d 672, 676 (7th Cir. 2001). expert’s methodology is flawed or unreliable because: (i) it will not prove at trial 18 Fed. R. Civ. P. 23(b)(3). what plaintiffs contend it will prove; or (ii) the expert does not have at his or her 19 Newton, 259 F.3d at 172. disposal common available evidence required by the proposed methodology. 20 In re Hydrogen Peroxide Antitrust Litig., 240 F.R.D. 163 (E.D. Pa. 2007). In light of Hydrogen Peroxide, district courts now shoulder an increased 21 Id. at 315. responsibility to resolve all issues of fact that relate to Rule 23 requirements. 22 Id. Accordingly, several changes can be anticipated by litigants. First, given that 23 Id. at 321. district courts are now required rigorously to consider the factual presentations 24 Id. 320–321. by the parties, discovery in aid of class certification can be expected to be more 25 Id at 306, 320. extensive—both by plaintiffs and defendants. The notion of discovery limited 26 Id. at 318. to class certification issues may become a thing of the past. In addition, as a 27 Id. at 320. result of the more extensive discovery process, class certification motions likely 28 Id. at 323. will be made later in the litigation after fact discovery has been completed or 29 Id. at 323; see also Blades, 400 F.3d at 569-70 (affirming denial of class certification, noting that district court denied defendants’ Daubert motion and properly weighed all almost completed. Also, because district courts must now resolve any “battle of expert testimony). the experts,” we can expect that district courts will often require an evidentiary 30 In re Hydrogen Peroxide, 552 F.3d at 323. hearing as part of the certification process. The hearing will enable the district 31 Id. at 318. court judge directly to assess an expert’s credibility and the strength of any 32 Id. at 311. proposed methodologies. 33 Id. at 311–312 (emphasis added). 34 Id. at 325. In sum, the modern trend of more rigorous review of class certification motions 35 Id. has been embraced by the Third Circuit. Although the class certification process 36 Id. at 307, 325 & 332. will be more intensive than in the past, on balance this should lead to better and 37 No. 07-4588, 2009 WL 2183267 (3d Cir. July 29, 2003). more consistent results. 38 Hohider, 2009 WL 2183267 at * 19-20. ______39 Id.

1 552 F.3d 305 (3d Cir. 2009). 40 Id. 2 Winoff Indus., Inc. v. Stone Container Corp. (In re Linerboard Antitrust Litig.), 305 F.3d 41 No. 08-3994, 2009 WL 2386666 (3d Cir. Aug. 5, 2009). 145, 152 (3d Cir. 2002). 42 Nafar, 2009 WL 238666 at * 7. 3 Newton v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 259 F.3d 154, 166 (3d Cir. 2001) 43 Id. (citations omitted). 4 In re Pressure Sensitive Labelstock Antitrust Litig., No. 3:03-MDL-1556, 2007 WL 4150666 at *6 (M.D. Pa. Nov. 19, 2007). 5 In re Linerboard Antitrust Litig., 305 F.3d at 152. 6 Miles v. Merrill Lynch & Co., Inc. (In re Initial Public Offerings Sec. Litig.), 471 F.3d 24, 40 (2d Cir. 2006). ANTITRUST REGULATOR – FALL 2009 17

Application of Twombly Standard in State Court is Uncertain

In Bell Atlantic Corp. v. Twombly,1 the Supreme Court heightened the pleading effect or change the pleading standard adopted by their respective states.10 The standard in an antitrust case when it construed and applied Federal Rule of Supreme Court in Vermont has stated, “we have relied on the Conley standard Civil Procedure 8, which governs the pleading standard “in all civil actions” for over twenty years, and are in no way bound by federal jurisprudence in commenced in federal court. Rule 8 is a gatekeeper setting the standard for interpreting our state pleading rules.”11 Yet others, such as Delaware’s Chancery a complaint that must be satisfied before a claim may proceed and subject a Court, cite Twombly with approval, noting that the “nation’s high court has now defendant to costly discovery. In Twombly, the Supreme Court held that when embraced the pleading principle that Delaware courts have long applied, which alleging an agreement in restraint of trade in violation of Section 1 of the is that a complaint must plead enough facts to Sherman Act, “[c]onclusory allegation[s] of agreement at some unidentified point” plausibly suggest that the plaintiff will ultimately be is not sufficient to satisfy the plaintiff’s pleading obligations.2 The Court clarified entitled to the relief she seeks.”12 that “we do not require heightened fact pleading of specifics, but only enough The impact of Twombly has not gone unnoticed. facts to state a claim to relief that is plausible on its face.”3 Many have criticized Twombly – including Justice Two years after Twombly, the Supreme Court confirmed in Ashcroft v. Iqbal,4 Ginsburg, who concurred in Justice Stevens’ dissent, that the stricter pleading standard articulated in Twombly extends beyond the telling a group of federal judges in June 2009 that antitrust context to all civil cases brought in federal court. While the Twombly the high court “messed up the federal rules” in that federal pleading standard is widely recognized in federal courts (cited by courts decision.13 And the future of Twombly is uncertain; across the country thousands of times), state court application of Twombly Senator Arlen Specter (D-Pa.) has introduced a bill in Efrat Menachemi Associate – New York remains uncertain. For example, to date, New York state courts have not cited Congress titled the “Notice Pleading Restoration Act Commercial Litigation Eastern or discussed Twombly in published opinions; of 2009,” which seeks to require courts to apply the therefore, it is hard to predict whether the new Conley v. Gibson standards to pleadings.14 When introducing the bill, Sen. Specter standard will apply to antitrust cases initiated in said of Twombly: “I think that is an especially unwelcome development at a time New York state courts. when, with the litigating resources of our executive-branch and administrative agencies stretched thin the enforcement of federal antitrust, consumer Before the Supreme Court’s decision in Twombly, protection, civil rights and other laws that benefit the public will fall increasingly many state courts used a traditional notice to private litigants.”15 At least one critic of Twombly has noted that the decision pleading standard.5 In his dissenting opinion has “put a damper on many potential suits, especially in the antitrust arena.”16 in Twombly, Justice Stevens noted that “26 However, subjecting defendants to costly discovery in cases where the plaintiff States and the District of Columbia utilize as lacks sufficient facts often results in a “holdup.” As the Supreme Court noted in Lawrence Kill their standard for dismissal of a complaint the Partner – New York Twombly, “it is one thing to be cautious before dismissing an antitrust complaint very language [of Conley v. Gibson,6] which the Commercial Litigation Eastern in advance of discovery…, but quite another to forget that proceeding to antitrust majority repudiates: whether it appears ‘beyond discovery can be expensive.”17 “[A] district court must retain the power to insist doubt’ that ‘no set of facts’ in support of the claim would entitle the plaintiff to upon some specificity in pleading before allowing a potentially massive factual relief.”7 In New York, for example, Civil Practice Law and Rules (“C.P.L.R.”) 3014 controversy to proceed.”18 requires that “every pleading shall consist of plain and concise statements”— almost identical to Federal Rule of Civil Procedure 8 which requires “a short and While the dispute over Twombly rages in federal court, the question of its plain statement of claims.” applicability in state court has not been answered. A recent case originating in Kansas titled Jackson v. Sprint Nextel Corp.,19 provides a prime illustration of Today, every state has its own antitrust laws which are enforced by their the importance of this question to litigants, because it bounced back and forth respective state attorneys general. Many states also allow a private right of between state and federal court. Depending on which court (state or federal) action. Typically, state antitrust laws are modeled after the federal antitrust actually takes a case may significantly affect whether the complaint will survive laws. In New York, for example, the Donnelly Act is “patterned after the Sherman a motion to dismiss. Sprint Nextel involved a class action where Plaintiffs sued Anti-Trust Act and is generally construed in light of federal precedent.”8 However, Sprint in Kansas state court for alleged violations of the section of the Kansas guidance from federal precedent in this context typically refers to substantive Unfair Trade and Consumer Protection Act dealing with antitrust violations, Kan. issues and provides little guidance as to state court application of procedural Stat. § 50-112, titled “Trusts, combinations and agreements in restraint of trade rules, such as the rules governing pleading standards. and free competition declared unlawful.” Specifically, Plaintiffs alleged that Since the Supreme Court’s decision in Twombly, some courts, including Sprint engaged in a conspiracy to artificially increase prices of text messages Washington State and the District of Columbia, have continued to rely on a liberal in violation of Kansas law. Sprint removed the case to federal court in Kansas notice pleading standard.9 Other state courts, including Colorado, Massachusetts, pursuant to the Class Action Fairness Act of 2005 (“CAFA”).20 The case was then West Virginia and Vermont, have affirmatively stated that Twombly will not transferred by the U.S. Judicial Panel on Multidistrict Litigation to the Northern

(continued on page 18) ANTITRUST REGULATOR – FALL 2009 18

Application of Twombly Standard in State Court Is Uncertain—continued from page 17

District of Illinois for consolidation. Ultimately, however, the case was remanded 11 Colby v. Umbrella, Inc., 955 A.2d 1082, 1087 n.1 (Vt. 2008). back to Kansas state court pursuant to the home-state controversy exception 12 Desimone v. Barrows, 924 A.2d 908, 929 (Del. Ch. 2007). set forth in CAFA.21 The route that the Sprint Nextel case has taken—from state 13 Law360, New York (July 24, 2009), available at http://competition.law360.com/ print_article/113104. court to federal court and back to state court—has subjected it to potentially 14 See article on U.S. Legislative Update at p. 7 of this issue of the Antitrust Regulator. different pleading standards, depending on where it ended up. Indeed, only time 15 Law360, New York (July 24, 2009, available at http://competition.law360.com/print_ will tell whether the forum will make a difference—i.e., whether the Kansas state article/113104 (quoting Jim Scheltema, former Vice President of Regulatory Affairs at court will opt to apply Twombly or a more liberal standard to that antitrust action. Global NAPs Networks Inc.). 16 Id. ______17 Twombly, 550 U.S. at 558 (internal citations omitted). 1 550 U.S. 544 (2007). 18 Id. 2 Id. at 557. 19 Index no. 09 C 2192 (D. Kan). 3 Id. at 570. 20 28 U.S.C. §§ 1332(d), 1453, and 1711-1715. 4 129 S. Ct. 1937 (2009). 21 See 28 U.S.C. § 1332(d)(4)(B) (requiring a court to decline jurisdiction if two-thirds or 5 See Twombly, 550 U.S. at 578. more of the proposed class members and the primary defendants are citizens of the state where the case originated). 6 Conley v. Gibson, 355 U.S. 41 (1957). 7 Twombly, 550 U.S. at 577 (Stevens, J., dissenting). 8 See, e.g., Great Atl. & Pac. Tea Co. v. Town of East Hampton, 997 F. Supp. 240, 352 (E.D.N.Y. 1998). But see People v. Roth, 420 N.E.2d 929, 930 (N.Y. 1982) (interpreting New York law and stating that “the ruling of a Federal court interpreting a Federal Statute has no direct bearing upon a State court’s analysis of an analogous provision enacted by the State Legislature”); State v. Mobil Oil Corp., 344 N.E.2d 357, 359 (N.Y. 1976) (interpreting New York law and stating that “undoubtedly the sweep of Donnelly may be broader than that of Sherman”). And California courts have not bound themselves to federal court interpretations of the Sherman Act when interpreting California’s Cartwright Act. See State ex rel. Van de Kamp v. Texaco, Inc., 762 P.2d 385, 395 (Cal. 1988) (interpretations of federal antitrust law are not controlling in interpreting California antitrust law); Morrison v. Viacom, Inc., 66 Cal. App. 4th 532, 541 n.2 (Cal. Ct. App. 1998) (same). 9 See, e.g., Champagne v. Thurston County, 178 P.3d 936, 945 (Wash. 2008) (noting that Washington follows notice pleading rules and simply requires a ‘concise statement of the claim and the relief sought’”); Warren v. Medlantic Health Group, Inc., 936 A.2d 733, 742 (D.C. 2007) (noting that the “District is a notice pleading jurisdiction”). 10 See, e.g., W. Innovations, Inc. v. Sonitrol Corp., 187 P.3d 1155, 1157-58 (Colo. Ct. App. 2008) (citing Twombly with disapproval and stating that a complaint should not be dismissed “unless it appears beyond doubt that the plaintiff cannot prove facts in support of a claim that would entitle it to relief”); Karlis v. Tradex, No. 073527, 2007 WL 2705572, at *5 (Mass. Super. Ct. Sept. 7, 2007) (noting that Twombly has had no effect on Rule 12(b)(6) law or practice in Massachusetts); Highmark W. Va., Inc. v. Jamie, 655 S.E.2d 509, 513 n.4 (W. Va. 2007) (noting that the “no set of facts” standard expressed in Chapman remains good law despite Twombly). ANTITRUST REGULATOR – FALL 2009 19

Does State Action Immunity From Antitrust Laws Extend To Private Contracting Parties?

The issue raised in the title of this article should interest any private party that doctrine ‘will shelter only the particular anticompetitive acts of private parties contracts with public entities. The immunity would indeed be hollow if such that, in the judgment of the State, actually further state regulatory policies.’”5 contracts could be tangentially attacked by holding the private contracting party Therefore, only anticompetitive conduct of private contracting parties that liable for violations of the antitrust laws, while immunizing the public contracting is “actively supervised” by the state will enjoy state action immunity.6 “This party. On the other hand, private parties should not be free to violate the antitrust requirement exists because absent supervision, ‘there is no realistic assurance laws under the protective cloak of a contract with a public entity. that a private party’s anticompetitive conduct promotes state policy, rather than merely the party’s individual interests.’”7 The court noted that “a state In Lafaro v. New York Cardiothoracic Group, PLLC,1 the issue was raised regarding does not give immunity to those who violate the Sherman Act by authorizing whether the state action immunity that immunizes a public entity’s contracts them to violate it, or by declaring that their action is lawful…[or by] becoming from antitrust scrutiny extends to their private party contracting partners. The a participant in a private agreement or combination by others for restraint of U.S. Court of Appeals for the Second Circuit vacated and remanded an order trade.”8 that dismissed, on the basis of state action immunity, the claims of a group of cardiothoracic surgeons that challenged an exclusive contract between a public The private defendants argued that their conduct was “actively supervised” by hospital and a private group of cardiothoracic the state because they were acting pursuant to a contract with WCHCC. However, surgeons that competed with the plaintiff the Second Circuit noted that, while the complaint alleged that the Agreement surgeons, and the private parties’ conduct itself violated the Sherman Act (which was immunized by the state action pursuant to the contract. doctrine), the complaint also alleged that the private defendants’ conduct violated the grandfather provision of the Agreement, which allegedly protected the State action immunity was established more plaintiffs from anticompetitive behavior. The court noted that if the sole allegation than 60 years ago in Parker v. Brown,2 when had been that the Agreement violated the Sherman Act, state action immunity the Supreme Court held that a state acting in its would immunize the private defendants from such “a ‘tangential attack’ on the sovereign capacity is not subject to the federal operations of WCHCC.”9 However, the additional allegations “of misconduct by the antitrust laws. Further, a state subdivision (such private defendants are not a tangential attack on the authority of the government Diane Green-Kelly as a public corporation operating a hospital) Partner – Chicago entity to enter into anticompetitive agreements, but rather on the authority of the also enjoys state action immunity “when it acts Global Regulatory Enforcement private defendants to act beyond the scope of the agreement with WCHCC….”10 pursuant to a ‘clearly articulated and affirmatively The Second Circuit thus vacated the order dismissing the claims against the expressed’ state policy that authorizes its actions.”3 The “clearly articulated” private defendants and remanded for a factual investigation of whether the standard is met if the subdivision’s anticompetitive conduct is a “foreseeable private defendants were “actively supervised” by WCHCC. consequence” of the state delegation of authority.4 In light of this decision, private parties that enter into exclusive contracts with At issue in Lafaro was an exclusive agreement (the “Agreement”) between two states or their subdivisions should be cognizant that they act strictly pursuant doctors (Lansman and Spielvogel) and their professional services corporation to their contracts. This is especially so where a private contracting party holds (NYCG), on the one hand, and a public benefit corporation (WCHCC) and a position of authority within the public entity and can direct actions, as did Dr. the medical center that it operated (WMC), on the other hand, to provide Lansman in Lafaro. cardiothoracic surgery services at WMC. Prior to execution of the Agreement, plaintiffs Lafaro and Fleisher (both doctors) and their professional services ______corporation Cardiac Surgery Group (“CSG”) had provided cardiothoracic surgery 1 Case 08-4621-cv (2d Cir. July 1, 2009) (hereinafter “Lafaro”). services at WMC. The Agreement grandfathered the plaintiffs, excepting them 2 317 U.S. 341 (1943). from the exclusivity provision. A trigger to the dispute was the fact that Defendant 3 Lafaro, at 5 (quoting City of Lafayette v. La. Power & Light Co., 435 U.S. 389, 410-13 Lansman was the Director of the Department of Cardiothoracic Surgery at (1978 and Town of Hallie v. City of Eau Claire, 471 U.S. 34, 38-40 (1985)). WMC, and he allegedly directed the scheduling of operating rooms, assignment 4 Id. (citing Cine 42nd St. Theater Corp. v. Nederlander Org., Inc., 790 F.2d 1032, 1043 (2d Cir. 1986) (additional citations omitted)). of supporting staff and equipment for heart and lung surgery at WMC to give 5 Id. (citing Elec. Inspectors v. Village of E. Hills, 320 F.3d 110, 124 (2d Cir. 2003) (quoting preference to Lansman, Spielvogel and NYCG—and put the plaintiffs at a Patrick v. Burget, 486 U.S. 94, 100-01 (1988)). competitive disadvantage. Lansman also prevented CSG from hiring a physician’s 6 Id. (citing Cine 42nd St. Theater Corp., 790 F.2d at 1034 (additional citations omitted)). assistant to support plaintiffs in the operating room. The plaintiffs alleged that 7 Id. at 6 (quoting Patrick, 486 U.S. at 101 (describing what is known as the Midcal test)). the Agreement and defendants’ conduct violated Section 1 of the Sherman Act. 8 Id. (quoting Parker, 317 U.S. at 351-52). The district court dismissed the claims against all defendants on grounds of state 9 Id. at 11. action immunity, and the plaintiffs appealed. 10 Id. at 12.

In vacating the order dismissing the private plaintiffs (but not the public entity), the Second Circuit stated that “[w]e have recognized that the state action CONTRIBUTORS TO THIS ISSUE

Andrew C. Bernasconi Edward S. Miller Washington, D.C. London +1 202 414 9280 +44 0(20) 3116 3470 [email protected] [email protected]

Daniel I. Booker Stephen P. Murphy Pittsburgh Washington, D.C. +1 412 288 3132 +1 202 414 9272 [email protected] [email protected]

Julian Chen Yvonne Percival Beijing London +86 10 6535 9532 +44 0(20) 3116 3522 [email protected] [email protected]

Diane Green-Kelly Melissa I. Rubenstein Chicago Philadelphia +1 312 207 6407 +1 215 241 1221 [email protected] [email protected]

Marjorie C. Holmes Richard J. Waite London London +44 0(20) 3116 2986 +44 0(20) 3116 3621 [email protected] [email protected]

Alun J. Jones Mark L. Weyman London New York +44 0(20) 3116 3409 +1 212 205 6090 [email protected] [email protected]

Lawrence Kill New York +1 212 205 6054 [email protected]

Chananya Kunvatanagarn Pittsburgh +1 412 288 7974 [email protected]

Michael E. Lowenstein Pittsburgh +1 412 288 4242 [email protected]

Efrat Menachemi New York +1 212 205 6069 [email protected]

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