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April 2014

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As Silicon Valley continues to monitor the European Union's investigation of Google, antitrust experts are also examining the impact of other critical decisions in the field. Those include the future of antitrust class actions, the recent U.S. Supreme Court ruling in FTC v. Actavis, and significant decisions interpreting the Foreign Trade Antitrust Improvements Act. California Lawyer met for an update with Marie L. Fiala of Sidley Austin; John R. Foote of Nixon Peabody; Brendan P. Glackin of Lieff Cabraser Heimann & Bernstein; Gary L. Reback of Carr & Ferrell; and Joseph J. Tabacco Jr. of Berman DeValerio. The roundtable was moderated by California Lawyer and reported by Balinda Dunlap of Barkley Court Reporters.

Moderator: What impacts do you see from the decision in FTC v. Actavis?

Joseph Tabacco: The Supreme Court has finally set a test, of sorts, for so-called reverse-payment litigation. Some circuits said that agreements where the branded company pays the generic are per se illegal. Other circuits said there's no problem; the branded company has a patent and can settle a dispute as it sees fit. Finally, in FTC v Actavis, Inc. (133 S.Ct. 2223 (2013)), the Supreme Court said that, depending on the size of the payment, the antitrust laws could be implicated. A way for courts to analyze this is to create a modified quick-look test. So the ruling could increase cases filed challenging reverse payment agreements where plaintiff pays defendant. There's a post-Actavis case pending right now involving the drug Nexium before Judge William Young in Boston that addresses whether the payment is significant enough to trigger an antitrust ruling under the test that Justice Stephen Breyer enunciated in Actavis. (See In re Nexium (Esomeprazole) Antitrust Litig., No. 12-MD-02409 (D.Mass).)

Gary Reback: Joe [Tabacco], can I ask you a question about these cases? There were predictions after the Supreme Court ruled that it was going to be the end of "pay to delay." The Supreme Court didn't take the FTC's position completely, making these things illegal per se, but the speculation was the risk was high enough that the problem would go away. Has the problem gone away?

Tabacco: There's too much money involved with blockbuster drugs. After we were involved in the Cardizem litigation (In re Cardizem CD Antitrust Litig., 332 F. 3d 896 (6th Cir. 2003) in the 1990s, I predicted - incorrectly - that this would be the last time that somebody would try this. Just the opposite has been true. Lawyers will attempt to craft ways around this decision, and it's going to be tougher for plaintiffs because there will be more sophisticated efforts to work around the Supreme Court test.

Marie Fiala: The ruling in Actavis is going to be difficult and unwieldy to implement. When the patent holder has a lawful monopoly, the question under the rule of reason becomes: Is the patent valid such that the patent holder had the right to exclude a competitor or, put otherwise, does the reverse payment reflect the risk that the patent is invalid? I don't know how one tests the reasonableness of the payment without testing the validity of the patent itself, in effect embedding a patent case in the antitrust case. And I am not aware that any court has tried to do that yet.

John Foote: These are going to be difficult cases, especially since the Supreme Court rejected the FTC's request to condone "quick look" analysis. They will be expensive for both sides, and there will be a lot of uncertainty about the outcome, which should motivate parties either to settle, or not bring the cases at all.

Moderator: Are there upcoming cases where Actavis will have implications?

Tabacco: The generic drug cases are such a sui generis type of case and the Hatch-Waxman Act (Pub.L. No. 98-417) is so precise that it won't have broad implications. When we talk about monopolization and rule of reason, perhaps there's some guidance that somebody could take from Judge Breyer's opinion, but I think he was attempting to give a roadmap on how to resolve these cases.

Fiala: Unfortunately, the "roadmap" consists only of reciting the rule of reason, without much in the way of guidance. There's currently a debate about whether Actavis applies to non-monetary settlements, with at least one court holding it does not. (See In re Lamictal Direct Purchase Antitrust Litig., 2014 WL 282755 (D.N.J.).) I suspect parties are looking at alternative ways to structure settlements that don't involve out-of-pocket monetary payments.

Moderator: What are the impacts of recent antitrust rulings involving Wal-Mart, Amgen, and Comcast?

Brendan Glackin: When the Supreme Court decided Wal-Mart Stores, Inc. v. Dukes (131 S.Ct. 2541 (2011)), it seemed like this case might have a huge impact on antitrust class actions. I don't think it did, because the Court's analysis was so focused on the lack of a single common issue under Rule 23(a), which doesn't tend to be a problem in antitrust cases.

Comcast Corp. v. Behrend (133 S. Ct. 1426 (2013)) was also a case focused on an unusual problem: multiple theories of harm, some class-wide and some not, but all possibly reflected in the same damages model. So while, as with Wal-Mart, there was a great uproar when it was decided, I don't know that we've seen cases not being certified as class actions that we think otherwise would have been certified.

The main impact of Comcast and Wal-Mart has been to increase the desire of courts and plaintiffs to be sure that they have made a great record on class certification. This has mostly affected timing. Nowadays plaintiffs, courts, and defendants are more likely to expect major data analysis before class certification.

Amgen (Amgen v. Connecticut Ret. Plans and Trust, (133 S. Ct. 1184 (2013)) makes a conceptual point that is very powerful, which is that in deciding whether a class can be certified, an inquiry into the strength of the evidence needs to be made only if a failure in the plaintiffs' proof is going to lead to multiple individual actions.

Fiala: There's no question that plaintiffs and the courts are approaching class certification differently. Ten years ago, I was counsel for one of the defendants in the Visa Check/MasterMoney antitrust litigation. The New York district court certified a class based on a very superficial analysis of the plaintiffs' expert opinion, and it went up to the Second Circuit, where Judge (now Justice) Sonia Sotomayor found that the class could be certified because the methodology was not fatally flawed, the theory of antitrust injury was "not unknown," and "defendants do not contend that no plaintiff could ever recover under that theory." (See In re Visa Check/MasterMoney Antitrust Litig., 280 F.3d 124, 136 (2nd Cir. 2001).)

Contrast that with courts taking the "rigorous analysis" admonition very seriously after Comcast. There have been at least two circuit court decisions reversing lower-court class certification decisions. One is In re Rail Freight Fuel Surcharge Antitrust Litig., (725 F.3d 244 (D.C. Cir. 2013)), where the panel looked hard at the plaintiffs' damages regression model and concluded it was not good enough. And in a recent decision out of the Sixth Circuit, In re VHS of Michigan, Inc., (No. 13-0013 (6th Cir. opn. filed Jan. 6, 2014)), the court also vacated a class certification order and directed the district court to reconsider in light of Comcast. Plaintiffs in High-Tech Employee Antitrust Litig. (2013 WL 5770992 (N.D. Cal.)) went through two rounds of certification briefing. The judge wrote an 86-page opinion meticulously analyzing the documentary evidence, plaintiffs' two expert opinions, and multiple regression analyses, and cut back the class definition. The difference in approach puts more of a premium on retaining the right experts and doing a thorough analysis.

Moderator: Shifting a significant burden to plaintiffs?

Tabacco: It depends on the type of case you're talking about. With a straight horizontal price-fixing case, those will continue to be certified with relative ease with a basic showing that there was an agreement to affect a price. On the other hand, if you get into more esoteric antitrust class actions where you're attempting to show some kind of market exclusion conduct that's more difficult to measure, that's when you're going to start to bump up against the Comcast issues. These cases are going to get more expensive to litigate before they get cheaper. It's a great time to be an antitrust expert.

Glackin: In none of these cases did the decision by the appellate court amount to a decision that a class couldn't be certified. In Rail Freight and Comcast, the plaintiffs are continuing to seek certification on remand. And in the VHS case, on remand the district court reinstated class certification in March.

Foote: There are going to be a lot of "second looks" at certification. There's a milk price-fixing case in the Southeast, in which the judge has flipped back and forth on whether that class would be certified. (See In re Southeastern Milk Antitrust Litig., No. 08-MD-1000 (E. D. Tenn.).) What we're likely to see, as judges make rulings on class certification motions, is that both sides are educated by those rulings and are then able to bring a new certification motion or to seek to decertify.

Reback: Recently, some critics have argued that these class actions don't add a lot to antitrust enforcement, and that has animated the courts to make it more difficult to bring class action cases. In California, there have been a number of class action cases where the government did next to nothing, and the burden is carried by the plaintiffs bar for antitrust enforcement. Do you have views about that?

Tabacco: Government resources are limited. Even when they do get involved in criminal price-fixing cases, they'll oftentimes negotiate a plea that's really specifically designed not to enhance the ability of the private bar to rely on the plea agreement.

Fiala: Defendants' interests must be balanced with a desire for private enforcement. The risks of going to trial in a class action are so great as to often induce a defendant to settle even if the merits are strong. So the Supreme Court and now the circuit courts are recognizing that for defendants, there needs to be a high bar before a class claim can go forward.

Foote: Another factor in the equation of antitrust enforcement is that there's been an unprecedented level of plaintiffs opting out in the last ten years, especially large corporate opt-out plaintiffs. We saw that in the DRAM litigation (In re Dynamic Random Access Memory (DRAM) Antitrust Litig., No. 02-MD-1486 (N.D. Cal.)), the SRAM litigation (In re Static Random Access Memory (SRAM) Antitrust Litig., No. 07-MD-1819 (N.D. Cal.)) and the LCD litigation (In re TFT-LCD (Flat Panel) Antitrust Litig., (No. 07-MD-1827 (N.D. Cal.)). Many big companies are choosing to pursue their own claims, and that's another form of private enforcement that adds to the mix.

Glackin: I greatly admire what the Department of Justice does, but I think they would agree there is a role for private enforcement. Assistant Attorney General Bill Baer of the U.S. Department of Justice recently spoke at the 2014 European Competition Forum and reminded the audience of the crucial role treble damages play in deterring violators and compensating victims.

Moderator: What are some important developments of the past year under the Foreign Trade Antitrust Improvements Act (15 U.S.C. §6a)?

Foote: The last year or so has brought several significant decisions interpreting the FTAIA. For a long time the courts had been unanimous that it was a jurisdictional statute, so FTAIA challenges were decided early on and by the judge. Then courts started to see that maybe it's not jurisdictional, maybe it's a merits limitation. The trend has been that way. The Third Circuit has ruled that way (Animal Science Products, Inc. v. China Minmetals Corp., 654 F.3d 462 (3d Cir. 2011)), and the Seventh Circuit has ruled that way (Minn-Chem, Inc. v. Agrium, Inc., 683 F.3d 845 (7th Cir. 2012). Judge Susan Illston in the LCD litigation thought the case law was so convincing that she decided that the FTAIA was a merits question, even though the Ninth Circuit had not yet done so. (See In re TFT-LCD (Flat Panel) Antitrust Litig., 822 F. Supp. 2d 953 (N.D. Cal. 2011).) Unless the Supreme Court reverses that trend, the FTAIA is going to be a merits-based test, and then it becomes a jury issue as opposed to a judge issue, and it's not decided until later on instead of upfront, the way subject matter jurisdiction issues would be decided.

That really set the stage for what happened with the Motorola case, in which it became a summary judgment issue and Judge Illston ruled that there was a question of fact that precluded summary judgment. (See In re TFT-LCD (Flat Panel) Antitrust Litig., 2012 WL 3276932 (N.D. Cal. 2012).) When the case was transferred for trial to the Illinois court where it had originally been filed, Judge Joan Gottschall decided that there was not a question of fact and ruled as a matter of law that the FTAIA barred some of Motorola's claims. (Motorola Mobility, Inc. v. AU Optronics Corp., 2014 WL 258154 (N.D. Ill.).) I think that just demonstrates that judges can come out differently when you get into those kind of determinations.

Fiala: Judge Gottschall found that Judge Illston's FTAIA ruling was clear error in that the harm from the alleged violation was felt offshore even if pricing decisions were made in the U.S. If it is a foreign seller and the economic effect of the alleged antitrust conduct is felt by a buyer or by a class of people in a foreign jurisdiction, that's not something the U.S. antitrust laws are going to concern themselves with.

Glackin: I'll jump in and say that reversal is not just evidence of the fact that two judges can disagree about something, but also evidence of the fact that this is one of the worst-drafted statutes in the United States Code.

Fiala: Agreed on the latter.

Glackin: It is almost impossible to understand, and much of the problem has arisen from the fact that, if you read the statute strictly, this requirement of proximate cause is not in there. What happened is the Supreme Court in Empagran (F. Hoffmann-La Roche Ltd. v. Empagran S.A., 542 U.S. 155 (2004)) realized that without some requirement of a causal link between the claim and the effect on U.S. commerce, the statute would never bar the claims of a foreign plaintiff as long as the defendants could have reasonably foreseen some unconnected harm in the United States.

Moderator: Why did that change things?

Glackin: Before Empagran and the prominence of the FTAIA, courts relied on traditional doctrines of comity, forum non conveniens, and extraterritoriality to control access of foreign antitrust plaintiffs to United States courts. Empagran gave the FTAIA new prominence, and the FTAIA also seemed more powerful because it is a statute, as opposed to judicially created. It also purports to state a clear rule, even if anybody who practices this area of law would say it is not actually a clear rule. I think all these factors have contributed to its increased currency in the last ten years.

Foote: One interesting FTAIA issue on which there really is very little guidance is how it applies to indirect purchaser claims under state law. I am not aware of any circuit court decisions on that issue, and it is something that the courts are ultimately going to have to grapple with and make some kind of decision. I am aware of only one state that's addressed this question. There's a New York decision that says that the FTAIA should define the outer limits of the New York statute, although the New York statute doesn't necessarily reach as far as the FTAIA would allow. (See Global Reinsurance Corp. v. Equitas Ltd., 18 N.Y.3d 722 (2012).) So that's an upcoming issue on which I think we are going to see some interesting decisions.

I know that when we were going to trial in the LCD case, the parties really grappled with jury instructions addressing the extraterritorial reach of the state indirect purchaser statutes.

Fiala: Do you have any predictions on how California might handle that question?

Foote: Predictions? I don't know. If California looks to the New York case, I believe there had to be a clear nexus between the conspiracy and an adverse effect on competition within New York, which isn't too different from the FTAIA, but New York refused to just adopt the FTAIA and apply it to its statute.

Moderator: Are there any other cases that have relevance, in terms of class action certifications? What are your thoughts on the recent argument in Halliburton?

Foote: Halliburton was a securities case, a fraud-on-the-market case. (See Halliburton Co. v. Erica P. John Fund, Inc., 718 F.3d 423 (5th Cir.), cert. granted, 134 S.Ct. 636 (2013).) At oral argument, the Supreme Court seemed reluctant to take on the fraud-on-the-market theory directly and overturn a longstanding precedent, and instead seemed to be suggesting that it could limit fraud-on-the-market cases by means of class certification if it required that the class show an overall significant impact on the stock price. If the class couldn't show that, then there wasn't the kind of impact necessary for certification. So it's another example of restricting class certification to cut back on claims that the Court really doesn't like but doesn't want to overturn where there is a longstanding precedent.

Glackin: While it seems from the Court's questions that there may be some modification to Basic (Basic, Inc. v. Levinson 485 U.S. 224 (1988)), it does seem like Basic is going to survive. I think that demonstrates that there's still a view in the Supreme Court that class actions serve a purpose.

Moderator: What thoughts do you have about monopolization and the Sherman Act and tech companies in Silicon Valley?

Reback: The biggest case going in this area is the European Union investigation of Google for search manipulation. And the allegation is that Google manipulates its search results by giving better placement to its own properties than it does to those of its rivals. The European Union started an investigation of Google in 2010. The FTC started one thereafter and closed it without taking any action. But the EU steamed ahead and did a big investigation and found in terms of what they call "preliminary conclusions" that Google was, in fact, a "dominant company" (what we mean by "monopoly") and that it was abusing its dominant position.

I think there are two basic questions. One is: What does this say about antitrust enforcement in the United States more generally? And given that we now have a case that shows the complete arc of monopoly behavior and shows, just as traditional economic theory would predict, that monopoly raises prices, does this cause us to rethink where we have been going with monopolization since the Verizon v. Trinko case (Verizon Communications Inc. v. Law Offices of Curtis V. Trinko LLP, 540 U.S. 398 (2004)). Will it cause us to become more sensitive to monopolization issues in the United States? I think not, but I'd be interested in the views of the group.

Fiala: I am not going to defend the FTC's decision because I find it incomprehensible that they would not pursue a company with Google's practices and dominance and a market capitalization significantly larger than Microsoft's was when the Department of Justice launched its challenges.

Reback: As a result of public pressure, Google felt it had to publish its settlement proposal. The premise behind the settlement proposal is that in circumstances in which Google shows its own results, it would also show rivals' results.

Taken in its simplest form, it's not much of a remedy, unless the rivals get lower prices into the equation. Nevertheless, EU Commissioner Joaquin Almunia goes around saying "Stop criticizing me. I got a lot more than the FTC did."

If there's no government enforcement of monopolization issues in the United States, where do we go with Section 2 of the Sherman Act? Do we just give up on the issue of monopolization?

Tabacco: I am probably showing my age, but I started in the antitrust division working on U.S. v. IBM, a case filed on the last days of the Johnson administration that sat in the courthouse inactive for years before the court scheduled it for pretrial conference. It was dismissed in the early days of the Reagan administration, after the bench trial had concluded but before the District Court had issued a ruling. (For a brief history of this litigation, see United States v. Int'l Bus. Machs. Corp., 857 F.Supp. 1089 (S.D.N.Y. 1994).) So to suggest that politics is divorced from Section 2 enforcement defies history. We know from Microsoft and AT&T that it takes an enormous amount of political capital for these mega cases to get the Justice Department's attention. In this environment you're not going to see the Justice Department stepping up in high profile cases. I am pessimistic about the immediate future of Section 2 enforcement.

Glackin: There's a disproportionate faith in the power of the invisible hand in American antitrust jurisprudence. And it is unfortunate because the invisible hand, as demonstrated in the Google case, depends on good information.

The quality of antitrust jurisprudence about information economics in this country is not high. There's an ocean of economic theory about the importance of information, but that theory has yet to be fully incorporated in the jurisprudence.

Reback: There is some literature in Europe about the withholding or obscuring of price comparison information in the context of product shopping. That's part of the reason I raised the Google matter. What does it take to convince someone there is no invisible hand?

Glackin: Well, a different scenario that I am more familiar with is the oligopoly context. And in that context, again, there's this faith that barring the existence of a "classic" cartel, the invisible hand of the marketplace is going to force even very large producers to offer competitive prices, and whether it's ten firms, 15 firms, 20 firms doesn't matter.

As a matter of fact, it does matter. In a highly concentrated market, even a small amount of information exchanged among the companies, publicly or privately, can allow them to coordinate prices above competitive levels - in other words, fix prices. But the jurisprudence right now is not friendly to claims against oligopolists based on information exchange.

Moderator: Brendan [Glackin], could you elaborate on your point about Google providing information in a new way on which there's not much jurisprudence?

Glackin: With respect to the Google case, everyone believes now that you can go on the Internet and instantly find the best price for something. But what consumers don't know is that the search engines can be manipulated and are being manipulated. Economists have shown that even what seems like a small increase in what are called search costs can have a great effect on behavior. So it is an information economics issue, but perhaps only at a broad level.

Fiala: A lot of Google's practices are just old-fashioned exclusion. You don't need information theory to understand Google's exclusive arrangements with advertisers, or its prevention of advertisers from porting their ads to other websites, or its cross-subsidizing development of its Android operating system and using that to monopolize mobile search.

These are practices that you could have seen in the railroad industry in the 1800s. You don't require sophisticated information economic analysis to understand why these practices are harmful to competition. But the day-to-day users of the Google search function don't think about that side of the market and don't care.

Glackin: Gary [Reback], is one reason there might be a difference in the enforcement here versus in Europe the prospect of a First Amendment defense?

Reback: Google has raised First Amendment issues. The theory behind this defense is that while Google has been telling you for 20 years that the search results are objective results, they are really protected subjective speech. I haven't heard that argument in the last couple of years, because the legal decisions on commercial speech just won't support it. That theory was never articulated by the FTC or any Commissioner as a justification for doing nothing.

Glackin: When you ask why there are not a lot of Section 2 cases, a great example of why they are hard is Comcast. Those are only problems that would arise in a Section 2 case. In a Section 1 case, there's in general one theory of harm: the agreement. A monopolist, by contrast, has multifarious ways to affect prices and affect competitors, at different levels, and it is the whole suite of options that are available to a monopolist that makes monopoly power so dangerous. It also makes private enforcement cases hard, because it is harder to isolate and measure the impact of the illegal conduct.

Tabacco: Do you think, Gary [Reback], that we'll ever get to a point where the jurisprudence will start to shift away from strict requirements for definitions of the relevant market?

Reback: Yes, there is considerable literature suggesting that a focus on market definition is a diversion from the real issue. The basic notion is that if I can show that a company is raising price while excluding competition, the company couldn't do that without market power in a relevant market. So we can waste time asking these market definition questions we've already answered by answering the ultimate question. But how will we ever get there if no cases are ever brought? There has to be, as you suggested, a strong crusader who could stand up to political pressure. And that's hard to imagine in today's world.

Fiala: Changing topics, any thoughts on the United States v. Bazaarvoice decision here in the Northern District, (2014 WL 203966 (N.D.Cal.)), where Judge William H. Orrick found that Bazaarvoice had unlawfully acquired its main competitor, PowerReviews? (These are online platforms for product and service reviews.) It's in the remedy phase, and the government has just proposed an onerous set of remedies requiring Bazaarvoice to provide support including trade secret R&D to whichever company ends up buying the divested PowerReviews business unit supposedly to put the buyer on a footing where it can compete more effectively with Bazaarvoice.

Reback: If I recall, the two parties were so small they did not file a notification under the Hart-Scott-Rodino Act (15 U.S.C. §18a).

Fiala: That's correct. It was noteworthy that it was below the HSR reporting thresholds, which I'm guessing is causing alarm among companies that might have felt safe because their transaction was small.

Reback: Yes, on one hand, particularly in technology companies, a company might be very valuable in a way that's not reflected in its stock price. We just had Facebook buy a company with no revenue for $19 billion. So we in the Valley have been urging the government for a long time to look at deals that have enormous significance but don't meet the filing thresholds because the thresholds don't speak to the right issues. Of course, the bad news is that the government can beat the daylights out of two little companies, but the government can't seem to bring a case against a big company. That's the challenge for antitrust enforcement. Companies get big quickly.

Fiala: And make a lot of campaign contributions.

Reback: They all do now, that's part of being a big company in Silicon Valley. You set up a Washington presence very early and get very good people in your Washington office. And the future of antitrust law is really made there, and not in the courts, unfortunately.

Tabacco: You don't have to look any further than the Northern District with all these electronics cases, where it is apparent that it is much easier for conspirators to violate the antitrust laws than to worry about enforcement. And I suppose literally the jury is still out as to whether or not that business model will change.

Moderator: Are there any other issues you wanted to raise in conclusion?

Foote: We have talked about the lack of government enforcement in the monopolization area, but there is uncertainty on the government's part about winning those cases and so it's reluctant to start them. They are different from most of the cartel cases where they have the leniency program and someone's coming to them with evidence. Also, there's a recognition over the last 15 or 20 years that a lot of monopolization cases had been built on what I would call hard competition and statements made in the context of competition that are misinterpreted in front of juries, and I have defended a few of those cases.

When discovery reveals emails that talk about destroying competitors, a lot of that is the way people talk, and those can be easily misused in a monopolization case, especially if it is a competitor case. In one experience I had where the client lost a monopolization case built on evidence of anticompetitive intent rather than actions, the company ultimately was vindicated by the Supreme Court. So there's another side to the reluctance to enforce monopolization cases, both by the government and private parties. n

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