David M. Goldstein David C. Brownstein Farmer Brownstein Jaeger & Goldstein LLP
On December 7, 2018, the 7th Circuit affirmed an order granting summary judgment for two oligopolist-manufacturers accused of price-fixing in violation of the Sherman Act. The court observed at the outset that oligopolies pose particular “problems” for antitrust law, because firms in oligopolistic markets lack sufficient power to face Sherman Act § 2 scrutiny, and they can tacitly collude to raise prices – that is, without an actual agreement – enabling them to earn supracompetitive profits. In this matter, the court held that the “bountiful circumstantial evidence” plaintiffs developed did not cross the “fine line” from lawful conscious parallelism to an unlawful conspiracy to fix prices.The 7th Circuit’s decision (as did the district court’s decision) closely examines several types of evidence developed by plaintiffs, and provides useful guidance for both plaintiffs and defendants in price-fixing cases, particularly those involving oligopolistic industries. Kleen Prods. LLC v. Georgia-Pacific LLC, No. 17-2808, 2018 U.S. App. LEXIS 34469 (7th Cir. Dec. 7, 2018).
Direct purchasers of containerboard (“Purchasers”) alleged that several manufacturers conspired to increase prices and reduce output from 2004-2010. The 7th Circuit affirmed the district court’s decision certifying a nationwide class of purchasers.Kleen Prods. LLC v. Int’l Paper Co., 831 F.3d 919 (7th Cir. 2016). The class consisted of “All persons that purchased Containerboard Products directly from any of the Defendants or their subsidiaries or affiliates for use or delivery in the United States from at least as early as February 15, 2004 through November 8, 2010.”Id. at 922. Most of the defendants settled with the Purchasers, but Georgia-Pacific LLC and WestRock CP, LLC decided to litigate.
Containerboard is the familiar material used to make corrugated boxes.It is manufactured in large, costly mills that are hard to duplicate given costs of construction and compliance with environmental laws. Georgia-Pacific and WestRock are among the handful of manufacturers that dominate the industry. Demand for containerboard is relatively inelastic because available substitutes are inferior.
From February 2004 to November 2010 prices for containerboard rose dramatically. The defendants attempted to institute price increases on 15 different occasions with traditional “follow-the-leader” price increases within weeks, days or even hours. The increases were sustained nine times. At the same time prices were increasing, containerboard production capacity fell in North America—the plaintiffs’ expert concluded that defendants reduced their production capacity at twice the rate of non-defendants.
During this period, the defendants were in regular communication by phone and at trade association meetings every few days. The record did not reflect the content of these communications, but there was at least some discussion of timing and pricing as a result of interfirm trading of containerboard. Some emails in the record suggest that at times some defendants had advance knowledge of other companies’ proposed price increases. Other statements support the inference that a coordinated plan was in place. As to George-Pacific and WestRock, the evidence included the following:
The court recited the familiar standard that “at the summary judgment stage a § 1 plaintiff’s offer of conspiracy evidence must tend to rule out the possibility that the defendants were acting independently.” *9-10 (citing Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007)). “The Purchasers needed evidence that would allow a trier of fact to nudge the ball over the 50-yard line and rationally to say that the existence of an agreement is more likely than not. Put more directly, they must put on the table “some evidence which, if believed, would support a finding of concerted behavior.” *9-10 (citing Toys “R” Us Inc. v. FTC, 221 F.3d 928, 935 (7th Cir. 2000)). “Viewing the evidence and reasonable inferences in the Purchasers’ favor, we ask whether they have produced any evidence that would rule out the hypothesis that the defendants were engaged in self-interested but lawful oligopolistic behavior during the relevant period.. . . . We conclude that nothing in this record would permit a trier of fact to conclude that the defendants were colluding, rather than behaving in their independent self-interest.”*11-12.
The court explained that structural characteristics of oligopolies such as the containerboard industry make it easier to form a cartel or to follow a leader independently: “a small number of manufacturers, vertical integration, inelastic demand, a standardized commodity product, and high barriers to entry.”*12. The court said that “[b]ecause of the competing inferences that can be drawn from this market structure, the district court properly found that the economic evidence did not tend to exclude the possibility of independent action.”*13-14.
With respect to the 15 specific price increases that the Purchasers relied upon, “[f]ollowing a competitor’s price increases can be consistent with rational self-interest in oligopolies” because simply following the leader when it comes to price can be highly profitable. *14. And doing so independently is not a violation of the antitrust laws.
Some of plaintiffs’ evidence did not fail because it was incapable of supporting an inference of an agreement in an oligopolistic market, but under the circumstances it was insufficient.For example, the court noted “that the Purchasers overstate how coordinated hikes actually were.”*15. Non-defendants led some of the attempts to increase prices, and sometimes companies followed suit more than a month later. Critically, the court said that even increases that followed quickly did little to raise suspicions. The court also dismissed the Purchasers’ allegations that defendants had prior knowledge of price increases as “nothing more than speculation.” For example, the best evidence the Purchasers offered with respect to Georgia-Pacific was a comment an employee made that “the party begins” after a few manufacturers announced an increase.*15-16.
The court also dismissed the Purchasers’ argument that the rising prices during the class period reflected an abrupt change in business practices. The court explained that rather than demonstrating a shift in firm behavior, the Purchasers had demonstrated only changed market conditions, which may have included emerging from the 2008 recession. Also, the manufacturers had attempted to raise prices before the beginning of the class period, which cut against an inference of a conspiracy starting at that time. The court said a further strike against the Purchaser’s case was that only nine of 15 attempted increases worked; this meant a failure rate of 40%. Although 60% succeeded, the court said “that at best this leaves matters in equipoise.”*17-18. Moreover, there was a conspicuous absence of any disciplinary measures taken against cheaters.
The court then turned to the Purchaser’s theory of coordinated reductions in output through mill closures and machine slowdowns. It parsed what kinds of output reductions are more and less probative of an illegal agreement to restrict supply. Conduct that is easily reversed may be consistent with self-interested decision-making.”*18-19. Slowing production is not the same as selling mills or equipment, which can constitute “perilous leading” because it cannot be easily reversed. “Firms take significant risks by reducing their output in an inflexible manner, unless there is an enforceable agreement in place to ensure that competitors will follow suit. . . . . Because perilous leading makes ‘little economic sense’ absent coordination, evidence of less-reversible supply restrictions supports an inference of conspiracy.”*19-20. Here, Georgia-Pacific purchased a new mill, and it explained underutilization as part of its “run-to-demand strategy.”*20. “Far from perilous, had Georgia-Pacific’s efforts not paid off, it could have increased its output quickly. Georgia-Pacific’s supply behavior does not point towards its having a role in any conspiracy.”*21.
The court also discounted the evidence Purchasers developed on contacts among defendants’ executives by telephone and at trade association meetings. “The Purchasers have no evidence of illicit price-fixing or output restriction deals during their calls or meetings.”*22. And the court was not persuaded by the argument that the frequency of contacts supported the inference of a conspiracy because of the frequency of trading among the firms. “The Purchasers’ speculation about the content of the frequent interfirm contacts is not enough to create a jury issue.”*23.
The court noted that incriminating remarks by employees can support an inference of a conspiracy. As to Georgia-Pacific, Purchasers pointed to a speech in which “Georgia-Pacific’s CEO supposedly suggested that the industry should “say ‘no’ on deals” that, though competitive, are not profitable.”*24. The court was not impressed:“[T]hat is hardly an earthshattering insight, . . . .”*24. “[T]he Purchasers’ noneconomic evidence—even when viewed with the parallel conduct—does not exclude the possibility that Georgia-Pacific acted in a self-interested but permissible way.”*24.
The court devoted a separate discussion to WestRock because any antitrust liability it might have for conduct before 2010 was eliminated due to a bankruptcy proceeding in which WestRock received a discharge. In reviewing the evidence, the court highlighted what it called “the most compelling evidence of collusion” as to WestRock—its supply restrictions. During the class period, the company closed seven of its mills and took other steps to reduce capacity. WestRock said the closures were due to a 2003 restructuring to get rid of inefficient plants, was part of a green marketing plan, and was when it was under the oversight of the bankruptcy court, a creditors’ committee, and financial advisors. Even so, the court said this did not overcome the inference of conspiracy because its “perilous leading”, in which it permanently closed several plants but stayed in the containerboard business, albeit with permanently reduced capacity, risked significant losses. In addition, company emails gave support to the inference of a conspiracy and executives made inculpatory remarks. Although some of this evidence gave the court “pause,” these events took place pre-discharge and therefore were not probative of whether WestRock joined (or rejoined) a conspiracy following its discharge.
The court concluded by explaining that the result in the case was driven by Section 1’s limitation “to anticompetitive agreements and the Supreme Court’s cautions against interfering with individual firm behavior in ways that could inadvertently distort incentives to compete.”*30. Because the evidence did “not tend to exclude the possibility that [defendants] engaged only in tacit collusion,” the 7th Circuit affirmed.*31.
Ian L. Papendick Jeanifer E. Parsigian Winston & Strawn LLP
Finding the lower court’s approach to predominance “at odds with both Supreme Court precedent and the law of our circuit,” the First Circuit recently reversed the grant of class certification in a Sherman Act Section 2 case against Warner Chilcott Limited, the manufacturer of two similar drugs: Asacol and Delzicol. In re Asacol Antitrust Litig., 907 F.3d 42, 45 (1st Cir. 2018). Framing the issue as whether “a class [can] be certified … even though injury-in-fact will be an individual issue, the resolution of which will vary among class members,” the First Circuit analyzed its sister circuits’ jurisprudence on the much-litigated issue and found a general consensus, but identified the Ninth Circuit as an outlier.Id. at 51, 56-57 (quoting Amgen, Inc. v. Connecticut Ret. Plans & Tr. Funds, 568 U.S. 455, 469 (2013)).
The case arose out of Defendant Warner’s decision to replace one of its patented, brand-name drugs—Asacol—with another—Delzicol—which had the same active ingredient, dosage, and price, but came in a capsule, a few months prior to the end of Asacol’s patent protection. Plaintiffs, union-sponsored health benefit plans that paid for brand name drug purchases after the expiration of Asacol’s patent protection, sought to represent a class of all similarly situated indirect purchasers, including individual consumers who purchased the drugs from retail pharmacies.Id. at 46.
Plaintiffs alleged that the change to Delzicol was a pretext to extend the drug’s patent protection and prevent generics from entering the market.Id. at 45. Because of state laws governing the way pharmacists substitute generics for prescription drugs, the creation of a new brand name would prevent generics from appearing as a “reference” drug and inhibit adoption of generic alternatives, which allegedly injured Plaintiffs by requiring them to pay the higher costs of the brand-name drug.Id.
The gravamen of Warner’s appeal, and the First Circuit’s opinion, was the issue of the presence of uninjured class members within the certified class. Based on evidence that some consumers would not substitute away from brand name drugs even if generics were available, the U.S. District Court for the District of Massachusetts’s presumed that approximately ten percent of class members would not have switched to a lower-priced generic, and were thus not injured by the unavailability of a generic.323 F.R.D. 451, 482-83 (D. Mass. 2017). The District Court considered the number of uninjured class members “de minimis” and certified a Rule 23(b)(3) class.Id.Quoting the First Circuit’s decision in In re Nexium Antitrust Litigation, 777 F.3d 9, 21 (1st Cir. 2015), the District Court explained “the need for some individualized determinations at the liability and damages stage does not defeat class certification.”Id. at 482. Also based on its interpretation of Nexium, the District Court accepted Plaintiffs’ position that uninjured class members could be removed with the help of a claims administrator.Id.
On appeal, the First Circuit rejected the lower court’s interpretation of Nexium, clarifying that its holding was only that, in theory, class member testimony regarding injury through pre-trial affidavits, if unrebutted, could satisfy Amgen, by “efficiently and fairly removing the issue of injury in fact from the case for trial.”907 F.3d at 52. In this case, however, because Defendants had stated their intention to challenge any class member affidavits, it was not possible to efficiently and fairly establish injury in fact on a class-wide basis.Id. at 53. The court admonished that Nexium did not “sanction the use of inadmissible hearsay to prove injury to each class member at or after trial …[as] class certification provides no occasion for jettisoning the rules of evidence and procedure, the Seventh Amendment, or the dictate of the Rules Enabling Act.”Id. (citing Tyson Foods, Inc. v. Bouaphakeo, 136 S. Ct. 1036, 1048 (2016)).
The First Circuit followed with a lengthy analysis of the Supreme Court’s holding in Tyson Foods that plaintiffs must present evidence “sufficient to sustain a reasonable jury finding as to” each class member’s injury, along with an analysis of other circuits’ jurisprudence on the question.Id. at 54-57 (quoting Tyson Foods at 1048). Characterizing its sister circuits’ subsequent interpretation of the Tyson Foods decision as “divergent,” the First Circuit nonetheless described general consensus, which it joined, among the Second, Third, Fifth, Eighth, and D.C. Circuits that plaintiff must be able to prove through common evidence that all class members were injured (although noting that the Second and Eighth Circuits approached the question as one of standing, rather than predominance under Rule 23(b)(3)).Id. (citing Denney v. Deutsche Bank AG, 443 F.3d 253, 264 (2d Cir. 2006); In re Hydrogen Peroxide Antitrust Litig., 552 F.3d 305, 311 (3d Cir. 2009); Bell Atl. Corp. v. AT&T Corp., 339 F.3d 294, 302 (5th Cir. 2003); Halvorson v. Auto-Owners Ins. Co., 718 F.3d 773 (8th Cir. 2013); In re Rail Freight Fuel Surcharge Antitrust Litig., 725 F.3d 244, 252 (D.C. Cir. 2013).
The First Circuit concluded that the Seventh and Ninth Circuits, however, have departed from this consensus approach and allowed class certification under Rule 23(b)(3) despite the presence of uninjured class members.Id. at 57 (citing Messner v. Northshore Univ. HealthSystem, 669 F.3d 802, 825 (7th Cir. 2012) (affirming class certification of a damages class with not “a great many” uninjured members); Torres v. Mercer Canyons Inc., 835 F.3d 1125, 1137 (9th Cir. 2016)).
This conclusion appears to have misinterpreted Torres and overlooks other significant Ninth Circuit precedent. Torres arose in the employment context, and while the Ninth Circuit acknowledged that “actual damages will hinge on the amount of harm caused [by defendant’s conduct],” such individualized damages do not defeat class certification. Torres at 1136 (emphasis added).In Torres, all class members had been exposed to the defendant’s allegedly misleading omission—thus, the Ninth Circuit concluded that such proof of the common practice itself would also serve as common evidence of injury, with only individual damages varying.Id. at 1138. In reaching this conclusion, the Torres court drew heavily on its earlier decision in Mazza v. American Honda Motor Company, and contrasted the Torres plaintiffs’ class certification showing to the failure to show common proof in Mazza.Id. (citing Mazza, 666 F.3d 581, 596 (9th Cir. 2012). Unlike in Torres, where all class members had been exposed to the defendant’s alleged unlawful conduct, in Mazza there was no evidence that all class members had been exposed to the alleged misleading advertising and, without such common proof, the Ninth Circuit found it “unreasonable to assume that all class members” were injured, which defeated predominance and class certification. Mazza at 596.
Thus, notwithstanding the First Circuit’s discussion, upon further examination, the Rule 23(b)(3) predominance analysis in the Ninth Circuit is consistent with the majority position discussed in Asacol.
Monica M. Castillo van Panhuys Kesselman Brantly Stockinger LLP
After nearly two years of investigation and litigation, the Federal Trade Commission (“FTC”) blocked the $1.7 billion merger between Tronox Limited (“Tronox”) and National Titanium Dioxide Company Limited (“Cristal”) in late December 2018. The Administrative Court of the FTC ruled in favor of Commission staff, finding that “the planned Acquisition may substantially lessen competition in the relevant market for the sale of chloride TiO2 in North American in violation of Section 7 of the Clayton Act and Section 5 of the FTC Act.” Despite changes in Commission leadership since the start of the investigation, the traditional nature of the markets and historically coordinated market dynamics suggest that the decision will be upheld during de novo review by the Commission. A possibility of settlement also exists, depending on whether Tronox renews the divestiture offer that it attempted to make in late December, on the eve of the administrative ruling.
Unique Procedural Posture
The case is notable for its unique procedural posture.When the FTC voted out Commission staff’s complaint in December 2017, only two sitting Commissioners remained, Acting Chairman Maureen Ohlhausen, a Republican, and Democrat Commissioner, Terrell McSweeny. The Commission’s unanimous vote authorized staff to seek both a preliminary injunction in a United States District Court, as well as to proceed in an administrative hearing before the FTC’s administrative law judge for a full trial on the merits.
In such a circumstance, and absent a hold-separate agreement between the parties and the government stating that the parties will not consummate their deal before adjudication, Commission staff normally seeks a preliminary injunction first, or concurrent to its filing of an administrative complaint. The preliminary injunction hearing typically concludes sooner than a full administrative trial on the merits would, and typically resolves a merger challenge more quickly than a full trial on the merits would.
Here, the parties were initially prevented from consummating their deal because the European Commission’s investigation of the merger had not concluded. Therefore, Commission staff filed its administrative complaint on December 5, 2017, but waited until July 10, 2018 to file its temporary restraining order and preliminary injunction motion in the United States District Court for the District of Columbia, anticipating that the parties would be cleared to consummate their deal by the European Commission as early as July 16, 2018. By then, the parties had extended past the initial closing date stipulated in their merger agreement, the administrative court had heard a full trial on the merits and post-trial briefing was in progress. On August 20, the European Commission cleared the deal.During the preliminary injunction hearing, the FTC and the parties each presented three witnesses and submitted the administrative trial record. On September 12, 2018, Judge McFadden of the District of DC granted the preliminary injunction motion, and in December 2018, administrative law Judge Chappell of the FTC ruled in favor of Commission staff.
The case awaits automatic de novo review by the full Commission, which consists of five new Commissioners, two Democrats and three Republicans, who were confirmed and sworn in in mid-2018.Normally, some of the Commissioners would have been in place during the investigatory stage, and therefore would have evaluated specific evidence, and the strength of the government’s potential suit to block a merger before voting for or against authorizing staff to initiate the complaint. These intertwined workings of the Commission as the investigative and adjudicative body would typically dampen the suspense of waiting for the Commission’s de novo review. Not so here.
Adding to the suspense, the case is currently stayed “for the duration of the shutdown and for an additional five business days thereafter.” Notwithstanding, this case involving a mature market with a history of coordinated behaviors seems likely to survive review.
On the other hand, Tronox may offer divestitures and resolve the FTC’s concerns before the Commission’s decision and its March 2019 merger agreement expiration. In early December, Tronox publicly announced efforts to present a divestiture to the Commission of Cristal’s North American plants to prospective buyer, INEOS, a privately-held chemical manufacturer, in advance of the administrative decision. Such a divestiture could resolve the Commission’s competitive concerns.While the administrative judge declined the request to certify Tronox’s proposed consent decree only days before his ruling, Tronox may well be negotiating this, or other settlement offers, with Commission staff today.
Basis for decision
The Administrative Law Judge for the Federal Trade Commission, D. Michael Chappell, ruled that Commission staff had presented a “strong prima facie” case of coordinated anticompetitive effects in the event of the merger between Tronox and Cristal. Having carried its burden to show market concentration and anticompetitive effects evidence that the merger would “substantially lessen” competition in the chloride titanium dioxide market, Commission staff also persuaded Judge Chappell that Tronox and Cristal failed to show that entry or merger-specific efficiencies would lessen any such anti-competitive effects.
Prevailing on market definition and concentration numbers appears to have been dispositive to the outcome in this case. Judge Chappell adopted Commission staff’s allegations that sulfate-processed titanium dioxide occupies a different market than chloride-processed titanium dioxide, which predominates in North America. The court also accepted market share estimates that suggest that this 5 to 4 merger would result in market dominance and even market shares for Tronox/Cristal, and current market leader, Chemours, who would own about 35% to 40% of the chloride titanium dioxide market each. Finally, elimination of the only privately-held titanium dioxide competitor in North America, Cristal, also proved troubling as the court suggested that Tronox, Chemours, Kronos and Venator would be better able to monitor one another’s pricing and capacity given the required public disclosures.
Titanium Dioxide Industry Generally
Titanium dioxide is a prevalent white pigment used in paper, paint, industrial coating, and plastics manufacturing for color, brightness and opacity. Titanium dioxide resists discoloration and UV radiation. Paints or coatings and plastics manufacturers are predominant customers in North America, making up about 85% of titanium dioxide consumed in North America.Other customers include paper, ink, food, cosmetic and pharmaceutical manufacturers.
Customers must optimize their manufacturing to either chloride or sulfate titanium. In North America, the predominant standard is chloride titanium dioxide. The chloride titanium dioxide manufacturing process is newer, more efficient, more environmentally friendly, and produces a higher quality product. The chloride process imparts a bluer tint to titanium dioxide, while the sulfate process imparts a yellower tint. The chemical composition of chloride titanium dioxide differs from that of sulfate titanium dioxide, and the products differ in their durability. All titanium dioxide slurry (a product used in the coatings industry) purchased in North America is chloride titanium dioxide.
The titanium dioxide industry has been the subject of numerous accusations of coordination and price fixing in the past. Most recently, the court in Valspar Corp. v. EI DuPont de Nemours & Co, 873 F. 3d 185 (3d Cir. 2017) found that the titanium dioxide industry was an oligopoly “primed for anticompetitive interdependence” and is characterized by “substantial barriers to entry.”
Players in the North American Titanium Dioxide Market
Tronox, headquartered in Stamford, Connecticut, and has a North American titanium dioxide business of about $410 million annually. Its sole manufacturing operation in the United States is located in Hamilton, Mississippi.All of Tronox’s plants produce titanium dioxide through a chloride process. Tronox proposed to acquire Cristal, the only privately-held titanium dioxide producer in North America.
Cristal is headquartered in Jeddah, Saudi Arabia, is held by several entities including TASNEE, Gulf Investment Corporation, and an undisclosed private investor. Cristal’s manufacturing in North America occurs in Ashtabula, Ohio. 80% of Cristal’s titanium dioxide production is through the chloride process and its titanium dioxide sold in North America is chloride processed.
The court recognized only three other meaningful players in North America – Chemours, Kronos and Venator – and a de minimis 0.5% share for Chinese titanium dioxide. Chemours is currently largest titanium dioxide producer in North America, with plants in Mississippi, Tennessee, and Mexico, and a market share of about 35% to 40%. All of Chemours’s production is of chloride titanium dioxide.
Kronos operates a titanium dioxide plant in Canada, along with a joint venture plant in Louisiana that it co-operates with Venator. Venator is a spin-off of Huntsman, and is the smallest producer in North America. It’s only plant in the region is the Louisiana joint venture. While not a focus of the court’s decision, the competitive significance of Venator’s market presence as the fifth player may be limited given that its participation depends on cooperation and shared capital costs with its competitor, Kronos.
The court found that the merger would have made Tronox the second largest titanium dioxide producer in North America, giving it shares roughly equal to market leader, Chemours, or between 35% to 40% market share.Moreover, the court adopted the government expert’s opinions regarding HHI and change in HHI, 3000 and 700, respectively, which are supportive of a prima facie case under the Merger Guidelines.
Chloride Titanium Dioxide Market
The court also adopted findings describing the product market as containing only titanium dioxide made via the chloride process, effectively eliminating Tronox’s arguments that sulfate titanium dioxide exports could ameliorate anticompetitive effects. Evidence supporting this finding included contemporaneous business documents describing chloride titanium dioxide as a separate market, customer testimony regarding the non-substitutability of sulfate titanium dioxide, and testimony that one significant coatings customer, Sherwin Williams, did not substitute sulfate titanium dioxide even in the face of a 40% price difference between chloride and sulfate titanium dioxide.
Significantly, the court clarified that a customer’s theoretical ability to switch to a product was not the test of product market, but rather whether a market could “reasonably substitute” in the face of a 5% or greater price increase, the so-called small but significant non-transitory increase in price (SSNIP) described in the Merger Guidelines.
North American Market
The government also prevailed in persuading the administrative court that the geographic market was North America. Judge Chappell cited party admissions that prices differed by regions and were higher in North America. In addition, the court adopted findings that arbitrage imposed prohibitive costs, with duties alone increasing costs by more than 5%. The court also dismissed the notion that arbitrage was possible, citing minimal exports, 3%, and long lead times.
Coordinated Effects Likely
The administrative court found coordinated effects likely given the commodity nature of chloride titanium dioxide.Citing various precedents, the court held that the homogeneity of products, and ease of monitoring rendered coordination more likely than in non-homogenous markets.In addition, Judge Chappell gave weight to documents and testimonies describing “mutually recognized interdependence,” or the impact of competitor pricing behavior across the market.
While not specifically mentioned, the Third Circuit’s finding that there had been 31 separate instances of parallel price announcements over 11 years in the North American chloride titanium dioxide market in the Valspar case supports the ALJ’s findings.
Finally, Judge Chappell found the parties’ rebuttals to Commission staff’s prima facie case unavailing. While Tronox posited Lomon Billions, among others, as potential Chinese entrants who could replace lost competition, customer and party statements about the inferior quality of Chinese titanium dioxide, and the difficulty of chloride titanium dioxide manufacturing persuaded the court that timely and sufficient entry was unlikely. Moreover, the court found claimed efficiencies disconnected to benefits to the North American market.
Harrison (Buzz) Frahn Wyatt Honse Raul Duran
Simpson Thacher & Bartlett LLP
On November 7, 2018, the Federal Trade Commission (the “Commission”) affirmed an Administrative Law Judge’s (“ALJ”) ruling that agreements between online retailers barring them from using each other’s trademarks as keywords in paid search engine advertising algorithms violated Section 5 of the Federal Trade Commission Act (“FTC Act”).In the Matter of 1-800 Contacts, Inc., F.T.C. No. 9372 (November 7, 2018) (the “Commission Opinion”). The decision ends, at least at the Commission, proceedings which began in 2016 when the FTC filed an administrative complaint against online contact lens retailer 1-800 Contacts, Inc. (“1-800 Contacts”) alleging that the company had entered into over a dozen trademark litigation settlement agreements with competitors that unlawfully restrained price competition and the availability of truthful, non-misleading advertising online.Commission Opinion at 10. While acknowledging that the case might appear mundane at first glance, the Commission nonetheless emphasized that the case addressed issues of “enormous import” impacting “the very basic institutions of 21st century commerce.”Id. at 1.
Since its inception as a mail-order contact lens business in 1992, 1-800 Contacts has grown into the nation’s leading online retailer of prescription contact lenses.Id. at 3. According to the Commission, the company has maintained its sales lead despite selling an essentially identical product at higher prices than other online retailers by investing heavily in online and traditional marketing and relying on strong brand recognition.Id. at 3-4, 7.
Like many online retailers, 1-800 Contacts and its competitors advertise via sponsored advertising links on internet search engines such as Google, Bing, and Yahoo!Id. at 5-7. In contrast to standard search algorithms, sponsored search advertising allows advertisers to place bids on key terms that will trigger the appearance of the advertisers’ sponsored links in users’ search results.Id. at 5. Relatedly, advertisers may bid on so-called “negative keywords” which ensure their sponsored links do not appear when a user performs a search for a selected word of phrase.Id. at 6 & n.7. For example, a retailer that sells eyeglasses could use the negative keyword “wine glasses” to prevent its ads from appearing in response to searches for that term.Id.
Starting in 2005, 1-800 Contacts began sending cease and desist letters to many of its online competitors alleging, inter alia, trademark infringement based on the retailers’ advertisements appearing in search results in response to searches for 1-800 Contacts’ trademark terms.Id. at 7-8. Critically, the challenged ads did not themselves include 1-800 Contracts trademark terms, but rather appeared in search results because the competitors had bid on 1-800 Contacts’ trademarked terms.Id. 1-800 Contacts eventually sued several of its competitors, and resolved the majority of the suits with settlement agreements (the “Challenged Agreements”) that prohibited 1-800 Contacts and its competitors from using each other’s trademarks, URLS, and variations of marks as search advertising keywords.Id. at 9. The Challenged Agreements, the last of which was entered into in 2013, likewise required the parties to use “negative” keywords to stop their ads from appearing in searches for each other’s trademarks.Id. at 8-9.
In 2016 the FTC filed an administrative complaint (the “Complaint”) against 1-800 Contacts, alleging that the Challenged Agreements unreasonably restrained both price competition in search advertising auctions and the availability of truthful, non-misleading advertising in violation of Section 5 of the FTC Act.Id. at 10. In the FTC’s view, the agreements “prevented the parties from disseminating ads that would have informed consumers that identical products were available at different prices, which reduced price competition among online contact lens retailers and made it costlier for consumers to search prices offered by the retailers.”Id. at 10. Also, the Complaint alleged that the Challenged Agreements “undermined the efficiency of search advertising auctions, distorted the prices in those auctions by eliminating bidders, and degraded the quality of service offered by search engines.”Id. at 10. On October 20, 2017, an ALJ agreed with the FTC and barred 1-800 Contacts from enforcing the disputed contract provisions or entering similar agreements in the future.Id. at 11-12.1-800 Contacts appealed to the Commission.Id.
Reviewing the ALJ’s decision de novo, the Commission evaluated 1-800 Contact’s arguments that the Challenged Agreements are immune from antitrust scrutiny and that, regardless, the restrictions in the agreements are not anticompetitive.Id. at 12.
A. The Agreements Are Not Immune From Antitrust Scrutiny
As a preliminary matter, 1-800 Contacts argued that the Supreme Court’s decision in FTC v. Actavis, Inc., 570 U.S. 136 (2013) bars antitrust challenges to settlement agreements that are “commonplace in form,” and that the Challenged Agreements were “commonplace.” Commission Opinion at 12. The Commission rejected 1-800 Contacts’ argument as reading Actavis too broadly, noting that Actavis “did not state a general rule that removes settlement agreements from antitrust scrutiny, but rather characterized two specific types of settlements as commonplace, and made it clear that the form of the settlement alone is not what subjects an agreement to antitrust scrutiny.”Id. at 13.
But even if 1-800 Contacts’ interpretation of Actavis were correct, the Commission reasoned, the agreements at issue would still be subject to antitrust scrutiny because they were not “commonplace.” Rather than simply addressing the potential for consumer confusion in the advertisement itself (like traditional trademark settlements), the agreements eliminated “an entire channel of competitive advertising at the key moment when the consumer is considering a purchase.”Id. at 14. Thus, finding the Challenged Agreements not immune to antitrust scrutiny, the Commission proceeded to the merits of the FTC’s antitrust claims.Id. at 16.
B. The Agreements Violate the FTC Act for Three Independent Reasons
The Complaint alleged violations of Section 5 of the FTC Act, which, like Section 1 of the Sherman Act, imposes a “rule of reason” burden shifting framework.Id. at 16-17 & n.17. Under the rule of reason, a plaintiff must first “prove that the challenged restraint has, or is likely to have, a substantial anticompetitive effect that harms consumers.”Id. at 17. If the plaintiff succeeds, the burden “shifts to the defendant to show a procompetitive rationale for the restraint.”Id. Finally, if such a procompetitive justification is established, the plaintiff must show that it “could be reasonably achieved through less anticompetitive means or that the anticompetitive harms outweigh the procompetitive benefits.”Id.
Applying Supreme Court and FTC precedent, the Commission recognized three independent bases for finding a violation of the FTC Act.
i. The Agreements Violate the Act as “Inherently Suspect” Restraints
The Commission first assessed the Challenged Agreements under the “inherently suspect” mode of analysis outlined in Polygram Holding, Inc., 136 F.T.C. 310, 344 (2003), aff’d, 416 F.3d 29 (D.C. Cir. 2005). Under Polygram, the factfinder assesses whether a restraint has, or is likely to have, anticompetitive effects by looking at the nature of the restraint and considering whether it resembles a practice that has previously been condemned as anticompetitive. Commission Opinion at 18.If it does, Polygram then requires the factfinder to follow a burden-shifting analysis that resembles the rule of reason.Id. at 18-19.
Here, the Commission concluded that the Challenged Agreements “are, in essence, agreements between horizontal competitors to restrict the information provided by advertising to consumers when they search for 1-800 Contacts’ trademark terms and URLs.”Id. at 20. As such, the Commission concluded that the agreements would “raise the cost to consumers of finding the most suitable offering of a product or service” and are therefore inherently suspect.Id.
1. 1-800 Contacts Provided Facially Plausible Procompetitive Justifications
Having found the Challenged Agreements inherently suspect, the Commission next considered whether, under Polygram, 1-800 Contacts had advanced a plausible “link between the challenged restraint and [a] purported justification.”Id. at 22, citing Polygram, 136 F.T.C. at 347. 1-800 Contacts advanced two justifications—the protection of its trademark rights and the avoidance of litigation costs through settlement—and the Commission agreed that both were, in theory, legitimate.Id. at 23.
Hence, following Polygram, the Commission next considered whether the restraints are likely to harm competition by either (1) showing that the anticompetitive effects or procompetitive justifications could have been achieved through less restrictive means; or (2) showing that the restraints are likely in the particular context of the case to harm competition.See id. at 24-25, citing Polygram, 136 F.T.C. at 348-49.
2. Less Anticompetitive Means Exist to Advance Procompetitive Interests, and The Agreements Are Likely to Harm Competition
The Commission determined that 1-800 Contacts’ purported justifications for the Challenged Agreements could have been accomplished through less anticompetitive means. In particular, the Commission identified three alternatives that would avoid litigation costs and achieve the benefits of trademark protection without unduly restricting advertisers.Id. at 27. The three alternatives were: (1) barring competitors from using in their advertisements any text alleged by 1-800 Contacts to cause consumer confusion; (2) requiring clear disclosure in each advertisement of the identity of the competitor; or (3) requiring the competitor to refrain from using confusing or deceptive language in its search ads.Id.
The Commission similarly concluded that the restraints are likely to harm competition in the particular context.Id. at 30. Finding that the volume of searches for 1-800 Contacts’ trademark terms is “significant” and that 1-800 Contacts’ competitors “offer lower prices,” the Commission concluded that the agreements covered the entire landscape of online contact lens retailers and would likely—in fact did—affect contact lens prices and the availability of truthful advertising.Id. at 32-33.
Therefore, because 1-800 Contacts’ procompetitive justifications could be accomplished with less restrictive means, and separately because they were likely to harm competition, the Commission concluded that the FTC had met its burden under Polycorp to show that the Challenged Agreements were inherently suspect.Id. at 29-30, 35-36.
Going one step further, the Commission concluded that because less restrictive alternatives had been identified under the last step of Polycorp, even if the procompetitive justifications set forth by 1-800 Contacts were supported by evidence (as opposed to being merely plausible), the agreements would fail under the third prong of the rule of reason.Id. at 30. The Commission therefore held that the Challenged Agreements violate the FTC Act as inherently suspect restraints. Id at 35-36.
Finally, to round out its analysis the Commission considered the evidence that had been proffered by 1-800 Contacts relating to the two procompetitive justifications, and concluded in both instances that the evidence was insufficient to show that either “ha[s] a basis in fact.”Id. at 36.
ii. Direct Evidence of Anticompetitive Effects Supports Finding a Violation of the Act
As a second, independent basis for finding liability, the Commission determined that the restrictions in the Challenged Agreements satisfy the first prong in the rule of reason analysis based on direct evidence. In particular, the Commission found that the FTC established a prima facie case with “evidence of two anticompetitive effects: the restriction of truthful advertising and an increase in contact lens prices sold online.”Id. at 42.
1-800 Contacts argued that a restriction on truthful advertising could not qualify as an anticompetitive effect.Id. But the Commission disagreed, and noted that the evidence showed that the Challenged Agreements’ requirement to use negative keywords prevented ads from appearing in response to search results and thereby restricted truthful advertising from being provided to consumers.Id. at 43-46. The Commission also found that the FTC had presented direct evidence of a price effect because “insulat[ing] 1-800 Contacts from normal competitive forces and divert[ing] sales from low-priced sellers to a high priced seller is direct evidence of an increase in price.”Id. at 47.
Thus, having found adequate evidence of anticompetitive effects, and relying on its previous analysis with respect to the asserted procompetitive justifications and less restrictive alternatives, the Commission concluded that direct evidence indicated a violation of the FTC Act.Id. at 48-49.
iii. Anticompetitive Effects Relating to Advertising Search Term Auctions Violate the Act
Finally, as a third independent basis for a violation, the Commission concluded that the record revealed a “prima facie case of anticompetitive harm to search engines based on direct evidence.”Id. at 50.Specifically, the Commission found that by agreeing not to bid on each other’s trademark terms, the Challenged Agreements reduce “the number of bidders participating in the auctions.”Id. at 51.Experts from Google and Bing explained that “a reduction in the number of search-advertising auction participants offering relevant ads reduces the price paid by the auction winners and reduces the revenue for the search engine.”Id. The Commission also concluded that the restrictions decreased the quality of the search engines’ product by removing advertisements that would have otherwise been displayed.Id. at 53.Since 1-800 Contacts failed to assert any procompetitive justifications for the anticompetitive effects, the Commission concluded that a violation was established under the first prong of the rule of reason.
Finding that the restraints in the Challenged Agreements violate the FTC Act, the Commission affirmed the ALJ’s order barring 1-800 Contacts “from agreeing with any seller of contact lens products to limit participation in online search advertising auctions (including restricting the use of keywords or requiring the use of negative keywords) or to limit online search advertising.”Id. at 54.
The Commission concluded by recognizing that its decision “evaluated traditional concerns of antitrust law—the anticompetitive harms that flow when rivals agree to restrict truthful advertising and to limit their participation in auctions—in a contemporary context involving online shopping and advertising via internet search engines.”Id. at 59. Concerned that withholding information from consumers “frustrates their ability to compare the prices and offerings of competitors,” it found “that the agreements harm consumers and competition for the online sale of contact lenses.”Id. at 2.On December 10, 1-800 Contacts asked the Commission to stay its order pending a review by a U.S. Court of Appeals. If an appeals court affirms the Commission’s decision, competitors will likely need to avoid limiting consumer access to information in search results when settling disputes.
Robert E. Connolly Law Office of Robert E. Connolly
In Sonner v. Schwabe North America, Inc., __ F.3d. ___, 2018 WL 6786616 (9th Cir. Dec. 26, 2018) the Ninth Circuit reversed a grant of summary judgment in favor of sellers of two nutritional supplements in a consumer class action alleging false advertising claims under California's Unfair Competition Law ("UCL"), and the Consumers Legal Remedies Act ("CLRA"). The Court “clarif[ied] that UCL and CLRA claims are to be analyzed in the same manner as any other claim, and the usual summary judgment rules apply.”
Have you ever wondered whether gingko biloba actually provides the cognitive function benefits (“mental sharpness” and “concentration”) listed on the supplement’s label? “Does not,” said the plaintiff’s expert. “Does too,” said the expert for the defendant who makes and sells the supplement. The plaintiff never challenged the methodology of the defendants’ expert. Because the defendants produced contrary expert evidence, the district court granted summary judgment to the defendants, reasoning that there was “insufficient evidence to allow a reasonable juror to conclude that there is no scientific support for defendant's claims.” Id. at *2.
The Court of Appeals noted that “District courts in our circuit appear to be split on the summary judgment standard that applies to false advertising claims under California’s UCL and CLRA [California Legal Remedies Act].” Id. at *1 (citations omitted). The per curiam opinion noted that to defeat summary judgment, “the nonmoving party must produce evidence of a genuine dispute of material fact that could satisfy its burden at trial.” Id. at *2. The opinion found plaintiff did this by producing expert testimony and other scientific data that gingko biloba has no more an effect on mental sharpness than a placebo. It was not appropriate at the summary judgment stage to require Plaintiff to foreclose the possibility that the gingko biloba possessed the advertised qualities. Id. At summary judgment, Plaintiff had only to show, which she did, a triable issue of material fact.
The district court had applied a more exacting standard—if plaintiff concedes that some qualified experts agree with the claims, then the claims cannot be “literally false” and summary judgment is appropriate. Id at *3. The Ninth Circuit resolved the split stating, “We are unpersuaded by the notion that a plaintiff must not only produce affirmative evidence, but also fatally undermine the defendant’s evidence, in order to proceed to trial.” Id. Accordingly, the Court held that “[w]e see no reason to diverge from the usual summary judgment rules for UCL and CLRA claims.” Id.
Mark F. Ram Cotchett, Pitre & McCarthy, LLP
Contemporary artist Robert Cenedella alleged that five leading New York City museums (the Metropolitan Museum of Art, the Whitney Museum of American Art, the Museum of Modern Art, the Solomon R. Guggenheim Foundation, and the New Museum of Contemporary Art) violated the Sherman Act and New York’s Donnelly Act by conspiring to shut him out of New York City’s contemporary art market.Cenedella v. Metropolitan Museum of Art, 2018 WL 6629408 (S.D.N.Y Dec. 19, 2018). Judge John G. Koeltl of the Southern District of New York dismissed Cenedella’s claims without prejudice.
Cenedella’s work “has been the subject of one-man shows throughout the United States and Europe.”Id. at *1.A 2016 documentary film portrayed him “as a rebel, the anti-Andy Warhol, and an unabashed art world outsider.”Id. He brought the case on behalf of a nationwide class consisting of “at least dozens” of contemporary artists who created artwork “eligible for exhibition in major contemporary art museums in the United States.”Id.
Cenedella alleged the museums entered into a conspiracy with unnamed co-conspirators to “artificially fix, raise, and control prices for contemporary art in the United States and to blackball some producers of contemporary art.”Id. at *2. The unnamed co-conspirators included galleries, auction houses, and private collectors. Id. Cenedella alleged that the conspiracy kept his art out of the five defendant museums, despite the fact his art “is of the quality that would otherwise be show[n] in” the museums. Id. He also claimed that the conspiracy caused his artwork to be artificially undervalued.Id.
Cenedella asserted that the museums have acquisition policies that they follow in acquiring art, but that the policies are not fully disclosed to the public.Id. Naturally, when an artist’s work is displayed in one of the defendant museums, the value of that work increases.Id.
Cenedella alleged that between 2007 and 2013, nearly one-third of solo museum exhibits across the United States featured artists represented by one of five commercial galleries (the “Five Galleries”).Id. Additionally, during this time period, artists represented by the Five Galleries accounted for 45-percent of “single-artist shows” at the Museum of Modern Art, 40-percent of “major shows” at the New Museum, and 90-plus percent of the “major solo exhibitions” at the Guggenheim.Id. Moreover, “select few galleries” provide “financial, logistical, and other support to the museums in putting on exhibitions.”Id.
Cenedella claimed that the above allegations – the defendants not fully disclosing their acquisition policies, the rise in a work’s value once displayed in the museums, the Five Galleries providing many of the defendant museums’ exhibitions, and galleries supporting the museums – suggest a conspiracy, and have anticompetitive effects harmful to him and other artists.Id. More specifically, he alleged that the museums purchase and exhibit primarily the work of artists represented by the Five Galleries, driving up the prices of works by those artists. The value and desirability of these artists’ works continue to rise as the museums continue purchasing and exhibiting these same artists’ works. This, according to Cenedella, appeases the Five Galleries, which become more willing to support the museums, and further benefits the museums by making their collections more valuable and exhibitions more popular.Id.
In sum, Cenedella alleged that the museums agreed to use their power in the art world to make certain artists’ works increasingly valuable, and then continued to draw upon those same artists to their collective benefit.Id. at *3. To carry out this alleged scheme, the museums coordinate with various galleries, auction houses, and private collectors, who are in on the conspiracy. Id. The museums allegedly hid their scheme by not disclosing fully their acquisition policies; Cenedella claims that if the museums fully disclosed their policies, they would have to draw upon a more diverse array of artists to appear in compliance with their policies.Id.
The net effect of the conspiracy, according to Cenedella, is that the alleged conspiracy shuts him and others out from the New York City contemporary art market.Id. He alleged that he and other artists whose works are not purchased by, or displayed in, the defendant museums suffer harm in the form of “artificial depression” in the prices of their works.Id. Put differently, but for the alleged conspiracy, the museums would purchase Cendella’s artwork and that of others, and consequently Cenedella and others would see a rise in the value of their artwork.Id.
The museums moved to dismiss Cenedella’s claims on several grounds, including failure to allege facts sufficient to demonstrate (1) Article III standing, (2) antitrust standing, and (3) a conspiratorial agreement among the defendants.
The court agreed with the museums that Cenedella failed to sufficiently allege Article III standing. In Judge Koeltl’s words, “[i]f the defendants’ alleged conspiracy were enjoined, it is mere speculation that the defendants would begin purchasing the plaintiff’s work.. . .Which artists’ works the defendants purchase is up to the defendants’ discretion. Although the plaintiff assures the Court that his artwork is of a quality that would be shown in the defendant museums if not for the alleged conspiracy, this subjective boast alone cannot substantiate the plaintiff’s claim that enjoining the alleged conspiracy would lead the defendants to begin purchasing his work.”Id. at *4.
The court concluded that Cenedella lacked antitrust standing because he is not an “efficient enforcer” of the antitrust laws.Id. at *4 –7 (citing In re Aluminum Warehousing Antitrust Litig., 833 151, 157 (2d Cir. 2016) and In re Aluminum Warehousing Antitrust Litig., 95 F.Supp.3d 419, 441 (S.D.N.Y 2015)).Courts consider the following factors when deciding whether a private plaintiff “is fit to bring suit” (Cenedella, 2018 WL 6629408 at *4): “(1) the directness or indirectness of the asserted injury; (2) the existence of an identifiable class of persons whose self-interest would normally motivate them to vindicate the public interest in antitrust enforcement; (3) the speculativeness of the alleged injury; and (4) the difficulty of identifying damages and apportioning them among direct and indirect victims so as to avoid duplicative recoveries.” In re Aluminum Warehousing Antitrust Litig., 95 F.Supp.3d at 441.Judge Koeltl found that each factor weighed against Cenedella. First, Cenedella’s asserted injury was indirect: his theory of harm depended upon the “tenuous inference that five museums effectively control the value of not just the art that they purchase and display but the value of all contemporary artwork in New York City.”Cenedella, 2018 WL 6629408 at *6. Second, “the purchasers and museums outside of the conspiracy who pay the inflated prices” would be motivated to enforce the antitrust laws.Id. Third, Cenedella’s claimed injury is “highly speculative:” he “assumes that if the alleged conspiracy did not exist, his work would appear in the defendant museums and become more valuable. This theory depends entirely upon the discretion and subjective tastes of the defendants.”Id.Fourth and finally, Cenedella’s “alleged damages are also highly speculative, and therefore difficult to identify and apportion. . . . [D]etermining how much of the alleged artificial undervaluing of the plaintiff’s artwork is attributable to the defendants, and how much to other factors – such as public taste, the interest of other purchasers, and the opinions of critics and academics – calls for extensive speculation.”Id.
The court agreed with the museums that Cenedella failed to allege a plausible antitrust conspiracy. Cenedella did “not allege direct evidence of an agreement among the defendants.”Id. at *7. And he failed to allege any “plus factors” that would support the conclusion a conspiratorial agreement took place.Id. Rather, Cenedella “provide[d] nothing more than conclusory allegations.[He did] not allege during what time period the conspiracy was formed, or who among the defendants’ employees created the conspiracy. Nor [did he] clarify the extent to which the conspiracy is horizontal versus vertical[.]. . .In short, the plaintiff’s amended complaint is completely devoid of facts indicating who agreed with whom, to what, and when.”Id. The court also concluded that “there is an obvious alternative explanation to the alleged conspiratorial conduct – the defendants simply view works of certain artists, who are often represented by the Five Galleries, as worthy of collecting and showing.”Id. at *8.
While Cenedella may have pleaded an interesting case, Judge Koeltl’s opinion shows the many hurdles a plaintiff with a sniff of anticompetitive harm faces when entering court. Cenedella said in a statement after the dismissal: “This lawsuit was never about me. It has always been about exposing the secrecy and insider dealing of the art world, in which curators, dealers, and donors conspire to profit off of the work of a select few artists, regardless of talent or artistic merit. Almost one-third of all solo museum exhibitions in the United States—and at the Met, MoMA, the Whitney, the Guggenheim, and the New Museum—feature artists represented by just five galleries, out of more than 1,400 galleries in New York City.” Perhaps Cenedella’s intended effects will come to fruition despite his pleading failures.
 The museums also moved to dismiss on the grounds that Cenedella failed to adequately allege (i) a relevant geographic market, and (ii) an adverse effect on competition stemming from the museums’ alleged conspiracy.The Court accepted each of these arguments as grounds for granting the motion to dismiss.This note will not examine these grounds.
 https://www.artforum.com/news/judge-dismisses-100-million-lawsuit-against-nyc-museums-accused-of-rigging-the-art-market-78227 (last accessed Jan. 21, 2019).