The case involves so-called “reverse payment” or “pay-for-delay” patent infringement settlements in which a brand-name pharmaceutical manufacturer pays the allegedly infringing generic manufacturer to settle claims that the generic product infringes the brand-name manufacturer’s patent, in exchange for which the generic agrees not to market its product.  Antitrust enforcement officials and consumer groups argue that such settlements cost consumers billions of dollars per year in the form of higher drug prices. 

The plaintiffs sued Bayer and generic manufacturers of the blockbuster antibiotic Cipro, alleging that Bayer’s payment of hundreds of millions of dollars to the generics in settlement of patent infringement litigation violated the antitrust laws.  The trial court granted summary judgment for the defendants, which a three-judge panel upheld on appeal.

The three-judge panel, however, wrote – some might say reluctantly – that its decision was bound by a prior Second Circuit panel’s opinion upholding a similar patent settlement, In re Tamoxifen Citrate Antitrust Litig., 466 F.3d 187 (2d Cir. 2006).  Tamoxifen held that patent settlements are presumptively lawful, unless the patent holder procured the patent by fraud on the Patent and Trademark Office or brought a baseless patent infringement lawsuit (e.g., because the patent holder knew that the patent was invalid or unenforceable). 

The Cipro panel described the anticompetitive effects of reverse payment settlements, and invited the parties to submit briefs to request rehearing of its decision and whether the Second Circuit sitting en banc should overrule Tamoxifen.  Today, the Second Circuit declined to do so, with only Judge Pooler dissenting, in an opinion.  Judge Pooler voted for rehearing because “the ‘enormous importance’ of the issues that this case raises is beyond dispute,” and “[i]t will be up to the Supreme Court or Congress to resolve” them. 

Legislation to ban or strictly limit these kinds of settlements remains pending in Congress in the forms of S. 369 and H.R. 1706.  Supporters of the legislation continue to try to attach it to various legislative vehicles, and it may be considered again before the end of the year. 

An article detailing the history of reverse-payment antitrust litigation is available here.

In the latest declaration against the bill, the California Assembly last week unanimously passed Senate Joint Resolution 34, urging Congress to defeat H.R. 5034, the Comprehensive Alcohol Regulatory Effectiveness (CARE) Act of 2010.

The CARE Act is a short measure – no more than 450 words, titles included – which would “reaffirm and protect the primary authority of States to regulate alcoholic beverages.”  The Act gives lip service to the bar against states discriminating against out-of-state producers – but only “without justification.”  The Act would eliminate existing law which requires that regulation of out-of-state shipments be only “to the same extent and in the same manner” as in-state production.  The law would also impose a “presumption of validity” upon state law, restricting legal challenges to state laws governing the interstate shipment of alcohol.

The bill would allow states greater leeway to impose protectionist regulations and to block alcohol e-commerce while protecting traditional distributors.  The bill is supported by wholesalers of beer, wine and spirits who seek to protect the “three-tier system” in which wholesalers serve as middlemen between breweries, wineries, and distilleries and retailers.  

In 2005, the Supreme Court, in Granholm v. Heald, struck down laws in New York and Michigan which discriminated against direct shipments from out-of-state producers in favor of those in-state.  Granholm relied on the once dormant Commerce Clause, but the immunity offered by the CARE Act might extend to federal antitrust laws.

The Granholm Court relied heavily upon a July 2003 FTC Staff Report finding that internet wine sales provided “an important alternative to the traditional tightly-regulated, three-tiered system of producers, licensed wholesalers, and retailers.”  The Report concluded that “many states, however, ban or severely restrict the direct shipment of wine to consumers, thereby creating an entry barrier for numerous, particularly small, wineries seeking to sell their products online.”  The Report noted that “states could significantly enhance consumer welfare by allowing the direct shipment of wine,” citing the fact that many wines available to consumers online are not available in local retail outlets, and that competition from online retailers lowers prices.  The Report found no systematic evidence of problems of internet-related shipments to minors.

After much controversy and intense lobbying by merchants and banks, key conferees have announced an agreement that preserves most of the Durbin Amendment and, remarkably, adds a critical and potentially groundbreaking new prohibition aimed at the networks and debit issuing banks.

While the situation remains fluid and things could change, if this agreement holds the merchants have won a huge victory.

In discussing where things currently stand, let’s start with the key provisions regarding debit interchange.

While the Federal Reserve still will be given the power to pass rules regarding debit interchange, those rules will not apply to federal, state and local government program prepaid debit cards.  Reloadable prepaid cards, such as the cards increasingly used by the unbanked, are also exempted.

In another change the definition of “interchange transaction fee” has been changed to prevent the Fed from regulating the fees that banks pay to Visa and other debit networks for membership except to the extent that such fees are used to undermine the interchange regulations.

Lastly, in a potentially significant change,  the Fed can now take fraud prevention costs into account in configuring rules  aimed at capping the amount that merchants will pay  for debit interchange but such costs can only be considered if a bank demonstrates that they are complying with standards established by the Fed to reduce fraud. 

That brings us to the most significant change that came out of the conference.  The initial legislation included a provision that prohibited the card networks from passing rules against merchants from offering discounts to favor one card network over another.  That provision has been removed.

Instead, the agreement includes a provision that directs the Fed to adopt rules that preclude debit network exclusivity that comes about by “contract, requirement, condition, penalty, or otherwise.”  This provision could effectively nullify the partnership agreements between numerous banks – particularly some of the largest banks in the country – and Visa, as those agreements have resulted in an increasing number of debit cards bearing on the Visa and Interlink.

Indeed, the bill’s specific language would appear to permit the Federal Reserve to invalidate (by rule) many existing Visa agreements that effectively require banks to issue either Interlink-only PIN-debit cards or Visa/Interlink only signature/PIN debit cards.  In this respect, the new language in the bill specifically states that “an issuer or payment card network shall not directly or through any agent, processor or licensed member . . . restrict the number of payment card networks on which an electronic debit transaction may be process to (i) 1 such network; or (ii) 2 or more such networks which are owned, controlled or otherwise operated by (I) affiliated persons; or (II) networks affiliated with such issuer.”  One could certainly argue that Interlink is “affiliated” with Visa, as it is, in fact, owned by Visa.  

If this provision is signed into law it could have a groundbreaking impact on the debit market – perhaps even a greater impact than the “interchange rate caps” portion of the bill.  Visa has dominated that market for decades and it has perpetuated that dominance in recent years via de facto or de jure arrangements with many banks that made Visa’s debit network, signature and PIN, their exclusive POS debit networks.  If that ends, competing networks, including MasterCard and the PIN debit competitors such as Star, PULSE, NYCE, Shazam and others may step into the breach.

Combined with substantial reductions in debit interchange such changes may well signal the end of signature debit.  This means that Visa’s days of dominating the debit market may be numbered.

Durbin’s amendment was incorporated into the Senate version of the pending financial reform package by a surprisingly large, bipartisan 64-33 vote last month – thus the vociferous opposition campaign as House and Senate conferees got to work to reconcile the Senate’s version with a House bill that has no provision addressing interchange fees.  The conferees are expected to continue debating the potential curb on fees this week.

Durbin’s amendment requires the Federal Reserve to establish rules requiring that debit card “interchange fees” are “reasonable and proportional” to the costs incurred by an issuer or payment network “with respect to” a transaction.  The Federal Reserve’s rules are to set such levels taking into consideration the fact that the debit cards are an electronic replacement for checks, which clear at par, and the incremental costs of a card transaction.  In contrast, debit card interchange fees currently can amount to 1 percent or more of a card transaction.  Merchants would like these fees reduced to reflect no more than actual processing costs, to ensure, for example, that merchants are not forced to pay for the costs associated with airline frequent flyer points awarded when a customer swipes a “rewards” debit card. 

In response to concerns raised by community banks and credit unions during the drafting of the amendment, Durbin’s amendment expressly carved out from the sections coverage fees paid to card issuers that have assets of $10 billion or less.  According to Senator Durbin, the result is that only 85 financial institutions are covered by the debit interchange fee provision, including just the three largest of America’s over seven thousand credit unions.

 Nevertheless, credit unions and community banks have been at the forefront of the card industry’s efforts to ensure that the Durbin amendment is not included in the final financial reform legislation that emerges from the House-Senate conference process.  As the Washington Post put it, “credit unions and community banks say that [the exemption] isn’t enough in this case, arguing that they will be indirectly affected by any government efforts to curtail the lucrative fees. And they have not been shy in letting lawmakers know,” with a credit union trade association staffer announcing, “[w]e’re really trying to ramp up the noise this week.”

This lobbying and public relations “noise” includes advertisements claiming that the Durbin amendment reflects an effort by merchants to pass on “their” costs of handling debit cards to consumers—and merchants won’t lower prices to reflect their lower cost of card acceptance. The community bankers have gone a step further, claiming the Durbin amendment to be an effort by large retailers to injure small banks, notwithstanding the $10 billion asset exemption.  According to an association spokesperson quoted at a press conference:  “We are under attack by mega retailers so that they can pocket more money. This is about the big getting bigger at the expense of the small.”

Merchants and the public should know within the next few weeks how this Washington drama-by-proxy to protect the fees received by America’s largest debit card issuers turns out.  The true nature of the lobbyists’ “noise” was confirmed by the events across the Atlantic:  on May 28, the European Commission’s Competition Directorate published a notice of a binding commitment by Visa to set debit card interchange fees within several EU countries and crossing intra-Europe boundaries at 0.20 percent for the next four years.   This amount, 80 percent less than paid to Visa debit card issuers by U.S. merchants, reflects a standard developed by several European central banks to ensure that merchants do not pay interchange fees that are greater than the transactional benefits of card acceptance.

There is no evidence that use of this standard, and the reduction in interchange fees it entails, threatens the use of plastic in Europe.

The Senate has approved an amendment to its financial reform bill that curtails the power of the card issuers in significant ways, including requiring that the “interchange fees” charged by banks on fees on debit card transactions be “reasonable and proportional to the actual” costs of processing those transactions, and permitting merchants to offer discounts for cash payments.  Whether those limits are enacted into law, however, remains to be seen since the Senate bill must still be reconciled with the House financial reform bill – which does not contain the amendment.

Interchange fees are set by the credit card networks (Visa, MasterCard, Discover and American Express) to banks that issue those networks’ branded cards.  When a merchant accepts a credit or debit card, it loses a small percentage of each purchase price to the issuer through this fee.  For Visa and MasterCard transactions, which dominate the credit and debit markets, the fees vary from 1.5 to 2 percent of the price for credit card purchases and are approximately 0.75 percent for an average debit card purchase.  These little fees add up to big money: they totaled an estimated $48 billion in 2008.

Merchants have lobbied Congress to limit or eliminate interchange fees for years.  And a federal merchants’ putative class action in New York claims that Visa’s and MasterCard’s interchange fees result from price-fixing in violation of Section One of the Sherman Act.  According to the plaintiffs, Visa and MasterCard set their interchange rates through collusion with their member banks, which compete with each other: that is, price-fixing by competitors with the networks as facilitators.

The Senate has now given the merchants a major win by adopting an amendment by Senator Richard Durbin (D – Ill.) to the financial reform bill.  That amendment passed by a solid bipartisan vote of 64-33 despite fierce lobbying by Visa and MasterCard.

Durbin’s amendment would reform the debit card interchange system in two ways.  First, it would require debit card interchange fees to be “reasonable and proportional” to the issuers’ actual costs.  This provision addresses complaints that interchange fees, while purportedly compensating card-issuing banks for their transaction costs, in fact has steadily climbed out of proportion to such actual costs.  And the networks have continued to raise those rates in the United States at the same time as they have lowered them abroad in the face of foreign regulatory pressure, further fueling complaints that they are higher here than necessary.

Second, the amendment would direct the Federal Reserve System’s Board of Governors to establish standards for assessing whether interchange rates meet the “reasonable and proportional” standard described above.

Small issuers – those with less than $10 billion in assets – are exempt from both provisions above.  This “small bank” exception reportedly would exempt 99 percent of all banks and credit unions.  Thus in effect the interchange provisions of the Durbin amendment would affect only the largest issuers, which make the most money off these fees; 80 percent of the interchange revenue in 2008 went to just ten large banks.

The Durbin amendment would also go beyond interchange to address a trio of practices that have riled merchants for years.  Networks would have to let merchants offer discounts to encourage the use of particular card brands.  For example, Visa could not forbid a supermarket from offering discounts for the use of Discover credit cards (or the signature debit cards of Discover’s subsidiary Pulse).

Networks would also be forced to allow merchants to offer discounts to encourage the use of particular payment forms.  Thus MasterCard would have to allow a store to give discounts for customers paying with cash or check rather than plastic.  And networks would have to allow merchants to set “floor” and “ceiling” limits if they chose.  This is important to merchants because some sales, particularly low-dollar-amount ones, do not yield enough revenue to make them profitable after the merchant pays the interchange fee. 

So what next?  The House of Representatives has not added any provisions like the Durbin amendment to its financial services reform bill.  For the amendment to become law, therefore, it would have to survive the upcoming conference committee in which House and Senate representatives reconcile their different versions of the reform legislation.  It is too early to tell how Durbin’s amendment might fare in that battle.  But for now, merchants are relishing the first major victory that they have had on this issue – whether in court or in Congress – in years.

The Committee has passed S. 148, the “Discount Pricing Consumer Protection Act.”  This bill would reverse the Supreme Court’s decision in Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 887 (2007).  Leegin overruled a 1911 Supreme Court decision holding that resale price maintenance was per se illegal.

Under Leegin, resale price maintenance is judged under the rule of reason.  Under S. 148, resale price maintenance would again be treated as a per se violation.   

A link to the archived webcast of the Senate Judiciary Committee’s markup can be found here. 

On January 13, 2010, the House Judiciary Committee passed similar legislation, H.R. 3190, by voice vote.  

A link to the archived webcast of the House Judiciary Committee’s markup can be found here.  At this time neither the House nor the Senate has scheduled floor action on the respective bills. 

For further information on Leegin repeal legislation, see our earlier posts.

The notice of the hearing can be found here:

http://judiciary.house.gov/hearings/hear_100120.html

In the case below, the Seventh Circuit held that the NFL was a single entity for antitrust purposes – not a group of 32 separate companies that could conspire together. 

            That decision can be found here: 

http://www.ca7.uscourts.gov/tmp/T40LC5H9.pdf

            The Court granted certiorari last June and heard arguments on January 13.  The Subcommittee has not as yet released a witness list for the hearing.

Comcast and NBC Universal announced the $30 billion deal on December 3, 2009.  Because it combines substantial assets in television programming and distribution in one company, the deal will face considerable congressional and regulatory scrutiny.

In addition to the expected Senate hearing, other congressional committees will likely hold similar hearings.  Under the Hart-Scott-Rodino Act, the Department of Justice will review the deal for competitive concerns.  The Federal Communications Commission will consider the communications policy aspects.

Update 01/06/10 – For more information, see today’s Wall Street Journal article on this topic here.

Chairman John Conyers (D.-Mich.) of the House Judiciary Committee described the other major changes the bill makes:   

In addition to simply reauthorizing the license, the bill ambitiously tackles several other issues for consumers, for content owners, and for cable and satellite companies as well. For example, this bill restores the section 119 license to DISH Satellite Network if they serve every market in the United States, even neglected rural markets. The bill also resolves the phantom signal problem that has caused instability and confusion for the cable and content industries, to the detriment of consumers.

In addition, the bill provides an audit right to content owners so they can be sure that they are being fairly compensated for the use of their intellectual property. It significantly increases penalties for copyright infringement under the licenses and updates the licenses to reflect the national digital television transition.

You can find the full text of the House debate here.

You can find the text of the bill as passed by the House here.

The Senate has not yet considered the bill, but it is expected to do so before it adjourns for the year.