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Recent Competition Advocacy by Attorneys General

Emily Myers, Antitrust Counsel

Emily Myers, Antitrust and Special Projects Counsel
An important part of the antitrust enforcement efforts by Attorneys General is competition advocacy. This article summarizes several recent competition advocacy efforts, both multistate and single state.

Thirty-Four States File Amicus Brief Urging Review En Banc of Cipro Decision.

Thirty-four states[1] filed a brief with the Court of Appeals for the Second Circuit urging the court to rehear, en banc, the decision by a panel of the Second Circuit in Arkansas Carpenters Health & Welfare Fund v. Bayer AG (In re Ciprofloxacin Hydrochloride Antitrust Litigation) (“Cipro”). The panel affirmed the district court’s grant of summary judgment for defendants, stating that it was bound by its earlier decision in Joblove v. Barr Laboratories, Inc. (In re Tamoxifen Citrate Antitrust Litigation) (“Tamoxifen”), 466 F.3d 187 (2d Cir. 2006). The Cipro Court recognized, however, that there are compelling reasons to revisit Tamoxifen and invited Appellants to petition for rehearing en banc.

The states’ amicus brief, filed in support of Appellants, urged the court to rehear the case en banc because it presents a question of exceptional importance. So-called “reverse payments” involve a settlement of a patent dispute between a manufacturer of a brand name drug and its generic challenger under which the generic manufacturer receives payment and agrees to stay out of the market for some period of time. The Attorneys General noted that the Second Circuit’s decision in Tamoxifen, on which it relied to dismiss the Cipro case, has been criticized by many commenters. Specifically, the states noted that one of the assumptions of the Tamoxifen court, that a brand manufacturer could not buy off all potential competitors, has been proven false in King Drug Co. v. Cephalon, No. 6-cv-1797, 2010 WL 1221793, at *4 (E.D. Pa. Mar. 29, 2010). The states also noted a split in the treatment of these agreements in several judicial circuits, which the Supreme Court has not yet addressed.

Seventeen States File Comments in U.S. Department of Justice Agriculture Hearings

Seventeen Attorneys General[2] filed comments in connection with a series of hearings being held around the country by the U.S. Department of Justice and the U.S. Department of Agriculture. The comments addressed competition issues in the seed, rail shipping, livestock and dairy markets.

With respect to seeds, the comments noted that the rapid acceptance of patented transgenic traits for seed germplasm “coincided with a trend towards concentration within the industry, so that today five multi-national companies own the most commercially successful trait technologies for crops.” Crop yields have risen, but seed prices have risen even more steeply. The comments recommended that federal and state antitrust enforcers explore possible changes in existing law and policy applicable to this industry.

The comments next addressed competitive issues in grain shipping. Consolidation of railroads over the past decade has meant that grain shippers have paid increasingly higher prices than other shippers, because many shippers are “captives” of a single railroad. In addition, railroads enjoy an exemption from the antitrust laws for certain activities. The comments stated, “The absence of antitrust protection and resulting abuse of monopoly power has imposed an enormous cost on shippers,” and recommended “repeal of railroad antitrust exemptions paired with effective regulatory reform to prevent abuse of captive shippers served by a dominant railroad.”

With respect to livestock markets, including beef, hogs and chicken, the comments note the increased vertical integration of these markets, as packers seek captive supplies, either through ownership of animals, or through forward contracts that guarantee them a supply. “A concentrated buyers market in such a perishable product as fed cattle is highly susceptible to abuse of buyer power.” The comments recommend increased enforcement of the Packers and Stockyards Act by state and federal antitrust authorities as well as the Grain Inspection, Packers and Stockyards Administration.

Finally, the comments addressed the dairy industry. Noting the decreasing prices received by milk producers, the increased concentration in the industry, a complex state regulatory structure that may facilitate price discrimination, and the antitrust exemption for certain agricultural cooperatives included in the Capper-Volstead Act, the comments recommended that “the Capper-Volstead Act and particularly the current milk pricing scheme promulgated pursuant to the Agricultural Marketing Agreement Act, 7 U.S.C. §§ 601-14, 671 74; 7 C.F.R. §§ 1000-1199, be reviewed to ensure that they continue to protect and benefit farmers as originally intended.”

California

Preservation of Value of Divestiture in Waste-Hauling Mergerh

A year ago, the California Attorney General and the U.S. Department of Justice (DOJ) investigated the merger of two large waste hauling companies, Allied and Republic. As part of the settlement permitting consummation of the merger, the state and the DOJ required the merging companies to divest the Potrero Hills Sanitary Landfill in Suisun, Calif. This landfill accepts most of the Bay Area’s waste, and was therefore a key competitive asset.

After the settlement was reached and the transaction consummated, environmental and recycling groups sought in both state and federal court to enforce a 1984 county ballot initiative, Measure E, which severely limited the amount of out-of-county waste that may be disposed of in Solano County. The measure had never been enforced because of Commerce Clause concerns. The Attorney General’s office filed amicus briefs in both state and federal court urging the court to deny enforcement of Measure E, which would reduce the amount of out-of-county trash processed at the landfill from 600,000 tons annually to 95,000 tons.

The Attorney General argued that if the volume of trash processed at the Potrero Hills facility was drastically limited, it would no longer provide effective competition to other landfills in the area, and prices to consumers would rise. “During his investigation of the merger, the Attorney General determined that Republic’s Potrero Hills facility competed directly with two landfills owned by Allied. He concluded that absent the divestiture of Potrero Hills, the merger of Republic and Allied would result in substantially-lessened competition in the disposal of municipal solid waste and increased prices for the disposal of such waste.” The waste-disposal market has significant barriers to entry and the proximity of waste disposal facilities to the point of origin of the waste is important, because transportation costs are high. The amicus brief concluded, “If Measure E were to be enforced, the carefully calibrated consent judgment’s goals will be weakened by deeply discounting the value of the divestiture in one of the major markets targeted in the consent judgment.”

Missouri

Amicus on Exclusionary Conducth

In a private antitrust class action, plaintiff medical centers alleged several forms of exclusionary conduct on the part of a manufacturer of catheters. The medical center joined a group purchasing organization (GPO), which was a short-term exclusive dealing arrangement that could be terminated with 60 days notice. Under the GPO, the hospital received bundled discounts and loyalty discounts on certain products. The district court held that there was no anticompetitive effect because the medical center voluntarily joined the GPO to reduce its costs. The plaintiff appealed to the Eighth Circuit. The Missouri Attorney General filed an amicus brief addressing how the anticompetitive effects of exclusive dealing practices should be analyzed in the context of a monopolization claim.

The brief defines exclusionary conduct as conduct that tends to impair the opportunities of rivals and either does not further competition on the merits or does so in an unnecessarily restrictive way. Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585, 605 n. 32 (1985). Although the exclusionary practices alleged here could be benign in many circumstances, the district court did not ‘test this conduct in accordance with current judicial standards or economic analysis.”

The brief analyzed the “loyalty rebates” in the GPO contracts, under which the manufacturer provided substantial rebates conditioned on purchases of large percentages of catheter requirements. The state argued that “where a discount--or the threat of losing it—is so great as to govern purchasing decisions, it serves to “lockup” those customers and function as de facto exclusive dealing.” In this case, the court below did not “fully assess the effect of the loyalty discounts on the market and whether there remained sufficient uncommitted share for competition.”

The amicus brief next turned to bundled discounts, where a firm “sells a bundle of goods or services for a lower price than the seller charges for the goods or services purchased individually.” Cascade Health Solutions v. PeaceHealth, 515 F. 3d 883, 894 (9th Cir. 2008). Although product bundling is “ubiquitous in modern commerce,” when the seller offering the bundled discount is a monopolist, the practice may have anticompetitive effects. First, a bundled discount may exclude equally efficient rivals because they do not produce as broad a product line. Second, the monopoly power that the seller has in the product may be used to maintain or expand market share in the product for which there is competition. Third, where the seller has monopoly power, the “discount” offered by a bundle may be illusory, since the firm can control pricing of the monopoly product.

The state recommended that the court of appeals remand the case, instructing the district court to evaluate the cumulative competitive effects of bundled rebates based on exclusive contracting terms and on percentage of sales across product lines. The state urged the court to look at the “market realities” rather than the written agreements. Finally, the state urged the court to examine the “actual impact of the exclusionary practices and the amount of foreclosure caused in the relevant market.”

Ohio

Amicus Brief on Interpretation of the Valentine Act

In a collection action filed against it by Google, myTriggers, an Ohio company, asserted counterclaims under Ohio’s antitrust statute, the Valentine Act. In its answer to the counterclaims, Google argued that 1) the Valentine Act is preempted by the Communications Decency Act (CDA); and 2) the Valentine Act does not apply to unilateral conduct. The Attorney General filed an amicus brief to address these two issues.

The CDA provides two separate types of protection for internet service providers who remove offensive material. First, the internet service provider is not deemed to be a publisher or speaker of material provided by another. Second, immunity is provided for an internet service provider who restricts access to content that is “obscene, lewd, lascivious, filthy, excessively violent, harassing or otherwise objectionable.” Google argued that the CDA immunizes “Internet search providers’ decisions relating to inclusion or exclusion of information provided by third parties, including advertisers.” The state argued that Google’s interpretation of its ability to restrict material was far too broad, and that it violated the statutory construction canon of ejusdem generis, under which more general words following more specific ones are interpreted as similar to the words that precede them. In this case, the content excluded by Google was not obscene, violent or harassing in any way.

Turning to the application of the Valentine Act to unilateral conduct, the state argued that the prescription against “trusts” in the act encompassed the common law meaning of the word, which included monopolies, as “combinations” of the capital of the company’s shareholders. The state cited State v. Standard Oil, in which the state challenged Standard Oil as an unlawful trust and prevailed. In that case, the court held that Standard Oil was “a combination whereby many separate interests being united under one management, form a virtual monopoly” and ordered the company dissolved. The state noted that as recently as 2005, in Johnson v. Microsoft Corp., 106 Ohio St. 3d 278 (Ohio 2005), the Ohio Supreme Court had held that “the Valentine Act, not the [Consumer Sales Practices Act] provides the exclusive remedy for engaging in monopolistic pricing practices in Ohio.”

Pennsylvania

Objection to Title Insurance Rate Increase

The Title Insurance Rating Board of Pennsylvania (TIRBOP), a group comprising almost every title insurer in Pennsylvania, submitted a proposed rate increase to the Pennsylvania Department of Insurance. The rate changes, while lowering rates for some transactions, were on average a four percent increase. In addition, TIRBOP proposed to increase the cost of a Closing Service Letter from a flat rate of $35.00 to $75.00.

The Pennsylvania Attorney General retained Keith J. Crocker and Andrew N. Kleit of the Pennsylvania State University to analyze the rate request. Professors Crocker and Kleit filed objections with the Department of Insurance on behalf of the Attorney General. The objections noted that the title insurance industry is characterized by “reverse competition” in which title insurers do not seek to compete for the patronage of the consumer (home buyer) but rather seek to influence the choice of the lawyer, lender or realtor involved in the transaction, who recommends a title insurer to the ultimate consumer. The ultimate consumer does not receive lower prices and better service as a result of competition, but the gatekeeper may receive benefits from the title insurer. In these circumstances, the title insurers are dispersing their profits through their efforts to win referrals from gatekeepers. In addition, the payment for title searches is based on the value of the transaction, even though the cost of performing the search is essentially the same regardless of the price of the property.

TIRBOP argued that the title insurance industry was in decline, citing a low level of profit. The Attorney General’s objection noted that there has been significant entry into the title agent market in Pennsylvania, doubling the number of title agents over the past decade. The Attorney General’s office urged the insurance commissioner to deny the rate revision request and to undertake research as to actual costs of title searches, which would indicate whether reduced profits are the result of wasteful reverse competition or of actual cost increases. TIRBOP subsequently withdrew its rate request and the insurance commissioner is in the process of collecting data on actual costs of title services.


[1] Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Illinois, Iowa, Kentucky, Maine, Maryland, Massachusetts, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Mexico, Ohio, Oklahoma, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, West Virginia, and Wyoming

[2] Montana, Iowa, Arizona, Delaware, Louisiana, Maine, Maryland, Mississippi, New Hampshire, New Mexico, Ohio, Oklahoma, Oregon, South Dakota, Tennessee, Vermont, and West Virginia

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