On March 3, the U.S. Court of Appeals for the Federal Circuit sat en banc to consider how to apply the patent misuse doctrine to patent pooling arrangements for standardized technologies, including the significance of evidence of anticompetitive effects such as the blocking the development of new technologies.

At issue in Princo v. U.S. International Trade Commission is whether it was patent misuse for a patent pool established by Philips, Sony and others to both include a potentially blocking patent that was not actually used in the standard and preclude that patent from being licensed outside the pool. 

Philips and Sony agreed to jointly develop a standard for recordable and rewritable compact discs (known as the “Orange Book”).  In developing the standard, they did not jointly develop any technology.  Rather, they used technologies each independently had developed.  In one instance, they chose one of two competing methods.  The Sony patent not chosen was, by some accounts, not commercially feasible.  However, an independent patent analyst believed one claim of the Sony patent could read more generally on the standard and, thus, block Orange Book adopters from practicing the standard.  Therefore, Philips determined to include the Sony patent in the pool, and subjected Sony to the pool’s requirement not to license the patent for use outside the Orange Book standard.

The Commission found Philips’s conduct not to constitute misuse, but a panel of the Federal Circuit reversed that finding, 2-1.  The majority held that an agreement to preempt further development of a competing technology by prohibiting separate licensing of the Sony patent, could constitute patent misuse.  While the alleged agreement may have promoted marketing of the Orange Book, it could have precluded development of the Sony approach in competition to the Orange Book.

From the wide-ranging sprawl of the en banc argument before the 11 judges, it was impossible to divine which way the judges may rule.  But, several key questions emerged:

Should patent misuse rule of reason analysis follow modern antitrust analysis?  Past Federal Circuit cases define misuse as an effort to extend the physical or temporal scope of a patent with anticompetitive effect.  Those cases required a showing of actual anticompetitive effect.  The FTC, as amicus curiae, urged the Federal Circuit to adopt its “quick look” procedure where activities could be considered inherently suspect in their anticompetitive impact and, so, shift the burden of proof to the patent owner to prove countervailing pro-competitive benefits.

But, as the Supreme Court noted in its 2006 decision in Illinois Tool Works v. Independent Ink, patent misuse and antitrust law have become “untwined” over the course of congressional action and recent decisions, and the FTC’s efforts to “re-entwine” the two may not be accepted by the Federal Circuit.  Indeed, one judge suggested that a valid Sherman Act claim based on an agreement to suppress technology may not equate to misuse of the patent. 

Must the alternative technology be commercially viable to support a misuse claim?  The parties disputed factually whether testimony indicated that the withheld Sony method could have succeeded in the market.  Some on the en banc court appeared to disagree with the prior panel decision, and asserted that there could be no anticompetitive effect unless the alternative technology was viable.  However, the FTC brief asserted that such proof should not be necessary, and that an agreement to suppress an alternative technology should be deemed anticompetitive in the absence of pro-competitive justifications.

Must an alleged infringer show individual injury from the anticompetitive effect in order to assert misuse? Several questions focused on whether Princo had actual interest in the withheld Sony patent or had asked Sony for a license.  This raises questions whether misuse should be based on the public interests vested in patents, or concepts more akin to antitrust standing and injury.

From the hour-long argument, it also appeared possible that procedural pitfalls could avert a decision on the merits.  Questions as to whether the issue had been properly presented to the Commission, and whether the state of the record permitted a decision on the merits or required a remand, intimated that the real underlying questions may need to be decided another day.

However, the active tenor of the debate suggests that any opinion will have serious implications both with respect to the future analytical construct for misuse cases, and the potential impact on patent pooling agreements.  As to the former, companies should watch closely to see whether pro-plaintiff burden-shifting approach favored by the FTC prevails, or whether proof of actual anticompetitive effect will continue to be the defendant’s burden.  As to the latter, as a matter of policy, there may be less incentive to create and promote standard technologies through pooling arrangements if pool participants potentially are subject to an obligation to compete against the standard or to allow others to do so through licensing.

The DOJ has issued the companies a “second request” under the Hart-Scott-Rodino Act for additional information on the proposed merger. 

Second requests are rare, and dramatically increase the transaction costs associated with a merger.  Some merger agreements even contain provisions that terminate the merger in the event of a second request.

That doesn’t appear to be the case in the Churchill Downs-Youbet.com merger, however.  Churchill Downs’s CEO recently stated he expects the deal to finish the second quarter of 2010.  Youbet.com has scheduled a special meeting of stockholders on April 6 to vote on the planned merger.

Citing a cost of billions of dollars to consumers, the FTC is challenging “pay-for-delay” reverse settlements in which pharmaceutical companies pay generic drug companies to not make a generic version of a drug.

There are two fronts in this effort.  The FTC is attempting to convince Congress to ban the practice outright, and in the meantime it is litigating two lawsuits opposing the practice on antitrust grounds. 

One lawsuit was filed in February 2008 in the Eastern District of Pennsylvania against Cephalon, Inc., which paid four generic drug companies to stay out of the market of the drug Provigil.  Another case was filed in January 2009 against AndroGel in the U.S. District Court for the Northern District of Georgia.  The AndroGel case has the added element of joint promotional efforts between the defendants and backup supply deals, in addition to a pay-for-delay reverse settlement.

The FTC has already been unsuccessful once in a case involving reverse payments against Schering-Plough Corporation in the Eleventh Circuit, but it hopes that additional factors in the two new cases will bring success.  The Cephalon case has an added claim of attempted monopolization of the market, while the AndroGel case involves co-promotion agreements between competitors.  Neither element was present in the Schering-Plough case.

The FTC released a report on the practice and its effects on U.S. consumers in January of this year entitled “Pay-for-Delay:  How Drug Company Pay-Offs Cost Consumers Billions.”  The FTC estimates that such reverse settlement deals could cost U.S. consumers $3.5 billion a year in higher prices.

The Obama administration has added a proposed ban on these reverse payment settlements to its health care bill in the hope that it will bring cheaper drugs to the market sooner and thus bring down costs.  As Jon Leibowitz, Chairman of the FTC put it, “When drug companies agree not to compete, consumers lose.”

For approval, the DOT required the oneworld alliance to give up four daily landing slots at Heathrow Airport near London.  This requirement represents a much less demanding concession from American Airlines and British Airways than requested for previous immunity applications.  For example, in 2002, the DOT requested that the alliance give up 14 daily landing slots and remove certain routes from the ambit of the antitrust immunity application, i.e., “carve outs,” so that antitrust liability would still apply to those city pairs.

American Airlines and Japan Airlines, which is also a oneworld member, have also applied for antitrust immunity for transpacific routes.  That application is still pending before the DOT.

The parties in The Authors’ Guild, et al. v. Google Inc. are moving for court approval of a class action settlement that would allow Google to provide varying degrees of access to a vast body of information, including subscriptions to its 12-million book library and displaying snippets of out-of-print books that are still covered by copyright.

After informing the parties and two courtrooms full of supporters and objectors that he would not rule on the motion that day, Judge Chin heard a veritable great debate over whether proposed settlement would benefit or harm consumers, authors and publishers.

Supporters of the settlement argued the benefits include public access to books including out-of print books and orphan works, locating rights holders for unclaimed works, and access for the digitally disenfranchised and visually impaired.

Opponents argued the settlement raised a plethora of issues, including raising antitrust concerns, violations of copyright law, and even jurisdictional and notice issues.

The hearing began with arguments from non-party supporters of the settlement. 

Lateef Mtima, Professor at Howard University and Director of the Institute of Technology and Justice, argued that the settlement promoted equality in access to books and libraries and leveled the playing field for the digitally disenfranchised. 

Janet Collum, for Sony Electronics, argues that Sony did not believe the settlement would give Google a competitive advantage because the rights conferred to Google would be non-exclusive and the Book Rights Registry created through the settlement would facilitate identifying unknown rights holders, shrink the pool of unclaimed works and reduce transaction costs for competitors who want to deal with the newly identified rights holders. Collum also argued that Google’s use of the open e-pub book format would foster competition for e-readers and drive demand for e-books and e-readers.

Marc Maurer, President of the National Federation of the Blind, argued that within a specific time of the settlement as many as 10 million books would be available for the blind and Google would create the largest specialized library for the blind.  He cited to the excitement of the visually impaired, many of whom attended the hearing to support the settlement.

Paul Courant, Dean of Libraries of the University of Michigan, argued that the unprecedented level of access to scholarly record which would be possible through the settlement was important for future academic research.  Physical proximity to academic libraries would no longer be necessary to ensure access. Users would be able to gain maximum benefit possible from library collections.

The final non-party supporter was John Morris of the Center for Democracy and Technology. The Center for Democracy and Technology supported the settlement but asked the Court to include provisions in the settlement regarding readers’ privacy.  A similar privacy concern was also raised by opponents to the settlement the Electronic Frontier Foundation, represented by Cindy Cohn and the Electronic Privacy Information Center, represented by Marc Rotenberg.

Following the supporters, the floor was given to some of the numerous opponents to the settlement.

Thomas Rubin, representing Microsoft, raised three points.  First, he claimed the settlement raised a Constitutional issue since only Congress could authorize fundamental changes to Copyright law and the settlement altered Copyright law.  Second, he argued that the settlement went beyond the issues presented by the case, which he described as the authors’ and publishers’ allegations that Google’s showing of snippets of scanned books was a copyright violation.  The settlement, he argued, covered the copying of entire books as opposed to snippets.  Finally, Rubin raised antitrust concerns and said competitors’ complaints were not “sour grapes.”  Analogizing Google to a trucking company that instructs its drivers to drive at 90 miles per hour, he said competitors who follow the speed limit – i.e., by obtaining a license from each rights holder – can’t compete.  Similar competitive concerns were raised by Michael Guzman, representing AT&T.

David Nimmer, representing Amazon.com, argued that the settlement agreement was an infringement on Copyright law and the rights holder’s ability to sit back and enjoy his intellectual property right.

William Cavanaugh of the U.S. Department of Justice stated that although the U.S. applauds the objective of mass digitization, it does not believe that the settlement is an appropriate vehicle.  He characterized the settlement as a “forward-looking commercial transaction” that bore no relation to the alleged harm in the complaint – the display of snippets.  He also argued that the parties were seeking to go beyond settlement of the claims in litigation. The “forward looking commercial transaction” is not purely remedial in nature to address an underlying harm but is rather conferring a benefit on Google it would not otherwise have achieved.  The settlement, Cavanaugh argued, also provides releases for future conduct, which are generally not allowed. 

Cavanaugh explained how the use of Rule 23 and the class action specific “opt out” mechanism was being misused in this context as procedural rules were being used to modify substantive rights.  He re-iterated that an opt-in registry instead of an opt-out would be preferable. Other speakers also expressed preference for an opt-in procedure, including Dr. Irene Pakuscher, speaking for the Government of Germany, Hadrian Katz and Paul Rothstein.

With respect to the antitrust issues, Cavanaugh stated that the Department’s investigation was ongoing.  DOJ has identified a horizontal (price floor) problem in the settlement, but is not able to calculate exact effects of the settlement yet.  The Department did not view giving up the rights of non-available rights holders as reasonably necessary to achieve a pro-competitive outcome.

The parties were given the last word.

Michael Boni, representing the plaintiff Authors’ sub-class, spoke first.  He argued the settlement did not go beyond the issues raised in the case.  When Google initially started its book scanning project, authors and publishers were concerned about the project as a whole and what Google would do with the scanned books.  The injunctive relief they sought was for continued copyright infringements not just Google’s use of snippets.

Boni’s argument was echoed by Bruce Keller, representing the Publishers’ sub-class, who explained that the initial infringement for which Google was sued was the scanning of the work and the settlement was not outside the scope of the pleadings of the case.

Boni urged the Court to apply Rule 23 like in any other class action case and decide if the settlement was a fair and equitable resolution of the case and controversy.  Similarly, Keller argued the settlement was fair and reasonable because it was option-oriented. He emphasized that the standard for approving a settlement is that it be fair and reasonable – not perfect.

Boni also addressed the issue of adequacy of representation by pointing out that there was no fundamental conflict of interest that could shake the adequacy of representation requirements as to the authors sub-class.  He emphasized that there was no deadline for authors to come forward to be part of the registry and no deadline for them to decide to turn their book off from the registry.  He argued that the Registry would have a high success rate of finding parents for the orphan works.

Finally, Daralyn Durie, representing Google, argued that economic interests of rights holders would not be affected by the settlement, and that no one has argued that their economic rights would be affected. Rights holders retain the right to join the registry or pull their books from the registry at any time.  With respect to orphan works, she argued that the works would collect money while the search for rights holders is ongoing and this would provide an additional incentive for rights holders to come forward. 

In response to Judge Chin’s question, Durie explained that the opt-out feature of the registry was essential because there was no other way to create a market for out of print works and find rights holders for orphan works.

With respect to the antitrust concerns raised by opponents, Durie argued that the Sherman Act was first and foremost a consumer welfare statute.  In the absence of a settlement, she said, millions of works would be locked away and one distribution channel or one way to access these otherwise unavailable works was better than none and in line with consumer welfare.  She argued that the settlement did not create barriers to other competitors – the registry would allow competitors to locate and contact authors and negotiate with them.  She claimed that Google has a zero percent market share in e-books and the competitive concerns raised by opponents were speculative.  She argued that if any of these speculative harms came to pass, private plaintiffs and the Department of Justice could assert a claim against Google.

Judge Chin reserved judgment.

The case, Emulex Corp. et al. v. Broadcom Corp. et al., No. SACV 09-1310 JVS (ANx), centers on statements Broadcom allegedly made during a 2009 attempt at a hostile takeover of Emulex, a competing communications technology company. Broadcom allegedly accused Emulex of “underperformance” and “unsatisfactory results” (among other shortcomings), and advised customers not to buy Emulex products.

This antitrust complaint, which Emulex filed in the Central District of California in November 2009, is Emulex’s third effort to recover for Broadcom’s statements. Its first effort was a complaint in California Superior Court alleging common law fraud and interference with contractual relations. Its second effort was a previous complaint in the Central District of California, alleging violations of the Securities Act. Emulex dismissed those cases when Broadcom withdrew its tender offer.Emulex’s current complaint alleges that Broadcom’s disparaging comments were made in order to monopolize an alleged market for a certain type of Ethernet controller in violation of Section 2 of the Sherman Act.

On February 4, 2010, Broadcom moved to dismiss Emulex’s complaint, arguing that the alleged disparagement does not constitute an antitrust violation. Broadcom argues that “[c]ompetitors are expected to say negative things about one another, and thus, in antitrust there is an especially strong policy . . . that the remedy for allegedly offensive speech is ‘more speech.’” Broadcom notes that in some circuits, like the Seventh, disparagement is never an antitrust violation.

Emulex’s case, however, is the Ninth Circuit, which is somewhat more forgiving but not much. Under American Professional Testing Service v. Harcourt Brace Jovanovich Legal & Professional Publication, Inc., 108 F.3d 1147 (9th Cir. 1997), disparaging comments by competitors are protected under a presumption that, unless they pass a six-prong test, they do not cause sufficient injury to competition to violate the antitrust laws. Specifically, the statements must be (1) false, (2) material, (3) likely to induce reasonable reliance, (4) made to buyers who lack knowledge of the subject matter, (5) for prolonged periods, and (6) not reasonably susceptible to neutralization. 108 F.3d at 1152.

Broadcom argues that Emulex’s complaint fails the Harcourt Brace test, and therefore must be dismissed. Broadcom asserts that Emulex fails the third and fourth prongs of reliance and lack of knowledge because “[t]o suggest that stock analysts, technology journalists and ‘industry insiders’ would blindly rely on [Broadcom’s] position . . . discounts reality.” Broadcom also asserts that Emulex fails the final prong – neutralization – because Emulex could easily have neutralized Broadcom’s alleged statements by “educating the market about [Emulex’s] capabilities.” And Broadcom claims that Emulex fails to allege that the statements were provably false or made over a sufficiently long period of time.

Whether the Ninth Circuit will agree with Broadcom remains to be seen. Oral argument on Broadcom’s motion is scheduled for May 17, 2010.

An increasing number of large companies are discovering – as plaintiffs – that the answer is yes.

Many practitioners ascribe to the following paradigm: Antitrust enforcement is an anathema to large companies.  They point to the fact that big companies, like Microsoft, AT&T and Verizon, have repeatedly fought private plaintiffs and antitrust enforcers as defendants/respondents in civil antitrust proceedings.  But if antitrust enforcement represents inefficient, costly and intrusive forays into nullifying acts taken in an otherwise “free market,” why are these same large companies now seeking the assistance of antitrust enforcement?

Microsoft bitterly complains about Google’s dominance in Internet search, and phone companies balk at the market power of cable providers when they challenge them in video-programming and broadband markets.  One can imagine that these big company complainants, who formerly argued that plaintiffs had to satisfy high evidentiary thresholds to succeed in a monopoly maintenance or attempted monopoly case, are now revisiting that position.

Is this ironic?  Should any complaints by these large companies be given any credence in light of these companies’ former hostility to enforcement?  One would think that they should be given the same consideration as any other antitrust complaint.  If these complaints raise facts and economic theories that are consistent with the pro-consumer rationale at the heart of the Sherman Act, enforcers should act upon them.

Practitioners that specialize in antitrust enforcement may find large companies to be unlikely allies, yet still welcome their efforts to act as private attorneys general in the arena of antitrust enforcement, particularly as government enforcement efforts may be constrained in the future by our nation’s large deficit.

The plaintiffs have filed an amended complaint after the U.S. District Court for the Northern District of California twice rejected claims that the relationship between iTunes and iPod products constituted illegal tying.

The amended complaint argues that the relationship between Apple’s iTunes and iPod products constitutes unlawful maintenance of monopoly power and attempted monopolization under the Sherman Act, and also violates various California statutes.

According to the plaintiffs, consumers paid a higher price for iPods than they would have if competing devices had the capability to play songs from the iTunes store.  However, while the plaintiffs claim iPods are the only portable player on which songs purchased from iTunes can be played, such songs can still be played on a non-portable basis (such as directly through a computer, or through a computer linked to a receiver).  This ability of consumers to purchase and play iTunes songs without ever purchasing an iPod is the primary reason the court previously rejected plaintiffs’ tying claims.

It will be interesting to watch whether the plaintiffs’ reformed complaint survives court scrutiny.  This is especially true in light of the plaintiffs’ attempt to pursue monopolization claims against two products that the court has already ruled are not illegally tied.

The weak financial health of St. Vincent’s Hospital has been in the news lately.  News reports indicate that St. Vincent’s, located on Manhattan’s West 12th Street, is again having difficultly meeting its financial obligations.  (St. Vincent’s is no stranger to the bankruptcy process, having gone through a Chapter 11 proceeding in 2005.)

One proposal would have shored up St. Vincent’s financial position by reducing health services and competition.  Continuum Health Care Partners – a health care consortium that operates three Manhattan hospitals, including Roosevelt Hospital (at W. 55th Street), St. Luke’s Hospital (at W. 114th Street) and Beth Israel Medical Center (at E. 16th Street) – proposed acquiring St. Vincent’s and turning it into a strictly outpatient facility.  In other words, Continuum stated that it would shut down St. Vincent’s inpatient, emergency services facility if it were to operate St. Vincent’s.

If Continuum became the operator of St. Vincent’s, it would offer the only hospital services for most of the West Side of Manhattan.  Columbia Presbyterian Hospital, located at West 168th Street — far from downtown or mid-town, would be the only other remaining West Side hospital.  Moreover, if St. Vincent’s ceased offering inpatient services, residents of the lower West Side would have to travel to Roosevelt at 55th Street or across town to Beth Israel in order to receive emergency services.

The Continuum proposal met fierce opposition from political voices, including City Councilwoman Christine Quinn and Congressman Jerry Nadler, as well as advocacy groups for residents on the lower West Side of Manhattan.  Continuum responded by withdrawing its proposal.

Some antitrust practitioners are recommending that if the Continuum renews its proposal that it be scrutinized by antitrust enforcers.  As the proposal indisputably would reduce output in inpatient, emergency services, it appears on its face to constitute a violation of Section 7 of the Clayton Act, the antitrust provision that governs asset purchases.  That statute prohibits transactions that are likely to “substantially lessen competition . . . in any line of commerce . . . in any section of the county.” 

A Continuum purchase of St. Vincent’s, even one that calls for the elimination of St. Vincent’s inpatient, emergency services, could past muster under Section 7 if it can be proven that St. Vincent’s qualifies as a “failing firm.”  Antitrust law characterizes a “failing firm” as one that has no reasonable prospect of reorganization under Chapter 11.  A purchase of a failing firm’s assets is permissible even where the transaction is otherwise anticompetitive when there is no less anticompetitive option available (e.g., no other hospital group that would be willing to purchase the St. Vincent hospital assets, even if the purchase was at a bargain basement price.)

Antitrust enforcers should make sure that St. Vincent’s is truly “failing” before permitting Continuum to acquire the hospital, especially if Continuum seeks to eliminate St. Vincent’s all-important emergency services.  Enforcers may even choose for St. Vincent’s to go through the bankruptcy process again before consenting to such a facially anticompetitive deal.  In this way, they can be assured that St. Vincent’s did not have the wherewithal to reorganize and that there is no other potentially less anticompetitive deal that could be had which would assure the continued operation of emergency services at St. Vincent’s.

Senator Orrin Hatch raised the issue in a letter to the Justice Department in October 2009 in which he complained that the BCS system is an artificial market barrier against smaller schools. Assistant Attorney General Ronald Weich has now responded to Senator Hatch in a letter that the DOJ is considering such a probe into “the current lack of a college football national championship playoff” because it “raises important questions affecting millions of fans, colleges and universities, players and other interested parties.”