Unilateral Conduct Committee E-Bulletin
Issue 56
September 28, 2007

The Unilateral Conduct Committee’s monthly E-Bulletin is intended to offer the antitrust community updates and information on the latest developments relating to monopolization law and policy. If you have any comments or suggestions on the E-Bulletin, please e-mail Jay Modrall, Tanya Dunne, Adam Nyhan, Tracey Topper Gonzalez, Mitchell Stoltz, and Daniel Streeter.

The Sherman Act Section 2 Committee of the American Bar Association's Antitrust Section has changed its name to the Unilateral Conduct Committee. The name change reflects the fact that the Committee's focus extends beyond Section 2 of the Sherman Act to include important competitive issues implicating other statutes or bodies of American law, such as certain intellectual property issues. It also represents the Committee's growing focus on foreign and international law governing single-firm conduct, which has increasing relevance to American antitrust practitioners and their clients.

GEORGIA COURT DISMISSES FORMER EMPLOYEE’S ATTEMPTED MONOPOLIZATION CLAIM AGAINST SECURITY FIRM AND PATENT LAWYER

Carter v. ALK Holdings, Inc., 2007 WL 1655857 (N.D. Ga. June 5, 2007). Defendant ALK Holdings (ALK) does business as ACME Security, a provider of bank security systems. 2007 WL 1655857, at *1. Defendant Michael Hassebrock is ALK’s sole owner. The plaintiff, Randall Carter, is ALK’s former vice president and general manager. Carter alleges that while employed by ALK, but on his own time and with his own resources, he invented a security device. Id. He alleges that Hassebrock and defendant John Doe I, a patent attorney, forced Carter to join them in submitting a patent application for Carter’s security device identifying both Carter and Hassebrock as its inventors. Later, Hassebrock allegedly coerced Carter to assign his invention to ALK, and then fired him. This conduct allegedly constituted attempted monopolization in violation of Section 2 of the Sherman Act, as well as other claims. Id. at *2-*6. The defendants moved to dismiss.

Carter’s theory, according to the Georgia District Court, was that if Carter had not been forced to assign his patent to ALK and the patent had issued, Carter could have practiced or licensed the invention without permission from the defendants. Id. at *5. The court held that Carter had alleged only that the alleged acts prevented him from entering the marketplace had the patent been issued, and not that that those acts harmed competition generally. Id. at *6. Furthermore, the court held that, as the patent had not been issued yet, anyone – including Carter – was free to practice it. Id. The court dismissed the Section 2 claim. Id. at *6.

PENNSYLVANIA COURT DENIES DEFENDANTS’ MOTION TO DISMISS ATTEMPTED MONOPOLIZATION CLAIMS

Caldon, Inc. v. Advanced Measurement & Analysis Group, Inc. , 2007 WL 1656257 (W.D. Pa. June 7, 2007). Plaintiff Caldon, Inc. manufactures and sells ultrasonic flow meters, devices used in nuclear power plants. Defendant Advanced Measurement & Analysis Group, Inc. (AMAG) manufactures a competing line of ultrasonic flow meters, and Defendant Westinghouse Electric Company, LLC, markets AMAG’s products. Caldon brought an action against the defendants for attempted monopolization in violation of Section 2 of the Sherman Act. Defendants moved to dismiss on the grounds that Caldon failed to state a claim.

With respect to market definition and market power, the defendants argued that Caldon’s alleged relevant market was too broad to sustain a claim. Caldon alleged a nationwide market for high accuracy ultrasonic flow meters for the generation of nuclear power. The Pennsylvania District Court held that “the complaint puts the Defendants on notice of the relevant product market,” and denied the motion to dismiss as to that issue.

An attempted monopolization claim under Section 2 must allege that “(1) that the defendant has engaged in predatory or anticompetitive conduct with (2) a specific intent to monopolize and (3) a dangerous probability of achieving monopoly power.” Id. at *10 (citing Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 459 (1993); Queen City Pizza, Inc. v. Domino’s Pizza, Inc., 124 F.3d 430, 442 (3d Cir. 1997)). Caldon’s complaint alleged that: (1) defendants possessed specific intent to destroy Caldon as their only competitor in the relevant market; (2) Westinghouse, on behalf of itself and AMAG, possessed market power sufficient to create a dangerous probability of monopolization of the relevant market; and (3) the defendants’ acts and predatory conduct, when coupled with the specific intent to destroy competition from Caldon in the relevant market, constituted an unlawful attempt to monopolize. Caldon also alleged that the defendants’ acts injured Caldon.

The court held that Caldon had sufficiently stated a claim for attempted monopolization under Section 2 and denied the defendants’ motion to dismiss.

CALIFORNIA COURT DISMISSES SUBSCRIBER’S WALKER PROCESS CLAIM AGAINST NETFLIX

In re Netflix Antitrust Litigation , 2007 WL 1725422 (N.D. Cal., June 14, 1007) . Plaintiff in this putative class action, Dennis Dilbeck, subscribes to defendant, Netflix, an online DVD-rental company. 2007 WL 1725422, at *1. Dilbeck alleged violations of Section 2 of the Sherman Act by Walker Process fraud and violations of California antitrust and unfair competition laws. Id. at *3. Netflix moved to dismiss the antitrust claims. Id. at *1.

The conduct at issue was Netflix’s alleged fraudulent obtainment of patents for methods of ordering DVDs via the Internet and the alleged use of those patents to keep competitors out of the market for online DVD rentals. Id. at *1-*4. Netflix allegedly committed fraud on the US Patent & Trademark Office by failing to disclose prior art. Id. at *1. Dilbeck also alleged that Netflix induced retailers Amazon and Wal-Mart not to enter the market and caused rival Blockbuster to delay its market entry, by threatening to enforce the allegedly fraudulently obtained patents. Id. at *2, *8.

To succeed on a Walker Process claim, the California District Court held, the claimant must show that the defendant actually enforced its fraudulently obtained patent. Proof that the defendant merely procured the patent is not enough. Id. at *7 (citing UnithermFood Sys., Inc. v. Swift Eckrich, Inc., 375 F.3d 1341, 1355 (Fed. Cir. 2004)). The court held that Dilbeck failed to allege enforcement against Wal-Mart and Amazon because he had alleged only that those retailers were aware of Netflix’s patent, not that they based their market entry decisions on that awareness. Id. The court similarly held that Dilbeck’s evidence concerning Blockbuster supported only an inference that Blockbuster was aware of Netflix’s patent, not that Netflix sought to enforce it. Id. at *8. Finding no evidence that Netflix enforced its patents to create or maintain a monopoly, the court dismissed Dilbeck’s Sherman Act claims without prejudice. Id. 

TEXAS COURT DISMISSES WALKER PROCESS CLAIM AGAINST DRILL PIPE MANUFACTURER

Hydril Company, L.P. v. Grant Prideco, L.P. , 2007 WL 1791663 (S.D. Tex. June 19, 2007). The plaintiffs, manufacturers of drill pipe connections, alleged that the defendants, manufacturers of drill pipes and related connections, obtained a patent for finished 5-7/8 inch drill pipe (the 631 Patent) through fraud and misused this patent in violation of Section 2 of the Sherman Act. 2007 WL 1791663, at *1. The defendants moved to dismiss, arguing that the plaintiffs lacked standing to assert an antitrust claim relating to the 631 Patent and that they do not allege proper antitrust injury to support the claim. The Texas District Court stated that standing to pursue an antitrust claim existed only if the plaintiff can show: (1) injury-in-fact; (2) antitrust injury; and (3) proper plaintiff status. Id at *6. The court found that the defendants’ patent was confined to the United States and that the plaintiffs did not compete in the market for 5-7/8 inch drill pipe in the United States. Id. Consequently, the court concluded that the plaintiffs lacked standing, as they failed to allege an injury proximately caused by defendants’ use of the 631 Patent. Id.

The court also held that the lack of competition between the parties in the United States undermined the plaintiffs’ allegations of antitrust injury. Id. at *7. The court rejected the plaintiffs’ argument that they had standing as “potential competitors” of the defendant. The court stated that, while antitrust standing may be established by showing a party’s intention and preparedness to enter a market, the plaintiffs’ “formulaic recitation” of their intention to enter the United States market for 5-7/8 inch drill pipe, without adequate factual support, was insufficient in light of the Supreme Court’s decision in Bell Atl. Corp. v. Twombly, --- U.S. ---, 127 S.Ct.1955, 167 L.Ed.2d (2007). Id.

MINNESOTA COURT DISMISSES CONSPIRACY TO MONOPOLIZE ACTION AGAINST MAJOR CABLE TELEVISION PROVIDERS  

America Channel, LLC v. Time Warner Cable, Inc. , 2007 WL 1892227 (D. Minn. June 28, 2007). The plaintiff, an independent programming network, sued several major cable television providers, alleging that these cable companies refused to deal with independent networks and that they engaged in horizontal market division and other anticompetitive practices. 2007 WL 1892227, at *1 -*2. Based on these allegations, the plaintiff brought, inter alia, a cause of action under Section 2 of the Sherman Act for conspiracy to monopolize (based on the same allegations used for its other claims). Defendants moved to dismiss.

The Minnesota District Court prefaced its analysis of the conspiracy to monopolize claim, citing Concord Boat Corp. v. Brunswick Corp., 207 F.3d 1039, 1060 (8th Cir. 2000), by noting that the plaintiff must establish that (1) the defendants possessed monopoly power in a relevant market and (2) that the defendants willfully acquired or maintained this monopoly power by anticompetitive conduct. Id. at *6. From the outset, the plaintiff must identify relevant product and geographic markets. In this instance, the court found that the plaintiff’s allegations of the relevant geographic market, whereby the plaintiff alleged the relevant market to be multi-channel video programming distributors in the United States, but then pointed to different regional and local markets for the basis of its various claims were contradictory. Id. Thus, the court found that it was left with no cognizable geographic market to consider. Id. In addition, the court noted that the plaintiff failed to identify any markets in which two of the defendants were competitors, thereby barring any claim that these companies engaged in horizontal market division or conspired to monopolize such markets. As a result, the court granted defendants’ 12(b)(6) motion to dismiss. Id. at *7.

NEW JERSEY COURT DENIES MOTION TO DISMISS ANTITRUST CONSPIRACY CLASS ACTION CLAIMS AGAINST HYPODERMIC PRODUCT MAKER  

In re Hypodermic Products Antitrust Litigation , 2007 WL 1959224 (D. N.J. June 29, 2007). The defendant, Becton Dickinson & Company (Becton), manufactures medical devices, including various hypodermic products. Manufacturers sell hypodermic products directly to wholesalers, who, in turn, provide these products to hospitals and other healthcare entities. The prices for these products were set out in form contracts between the healthcare entities and manufacturers negotiated by group purchasing organizations (GPOs) on behalf of the healthcare entities. Becton allegedly controls a dominant share of the relevant market for the hypodermic products at issue. The class action plaintiffs, wholesalers of pharmaceutical and medical devices, including hypodermic products, allege that the defendant engaged, inter alia, in exclusionary conduct that discouraged competition in violation of Section 2 of the Sherman Act. 2007 WL 1959224, at *1. Specifically, the plaintiffs allege that the defendant: (1) imposed unlawful market share purchase requirements on hospitals and other healthcare entities; (2) bundled or tied certain rebates for related and unrelated products with hypodermic products; (3) conspired with GPOs for the purpose of imposing exclusionary contracts; and (4) conspired with other medical device manufacturers to impose rebate penalties on purchasers related to bundled products. Id. at *2-*4. The plaintiffs allege that, as a result of these anticompetitive activities, Becton stifled existing and potential competition in the market for the relevant hypodermic products, which caused the plaintiffs to pay more for these products that they would have absent Becton’s illegal, exclusionary conduct. The defendant moved to dismiss, arguing that the plaintiffs lacked standing to pursue certain claims and did not adequately plead their antitrust claims.

The defendant argued that the plaintiffs lacked standing to assert antitrust claims because the plaintiffs were neither customers nor competitors in some of the relevant markets. Id. at *6. The plaintiffs countered that, although they did not buy all of the products at issue, the defendant’s actions restricted competition in the relevant markets, so that plaintiffs were harmed nonetheless. Id. The New Jersey District Court, quoting Blue Shield of Va. v. McCready, 457 US 465 (1982), agreed with the plaintiffs, noting that a party may suffer an antitrust injury without being a customer or a competitor of the product at issue if there was a significant causal connection such that the harm suffered by the plaintiffs can be said to be “inextricably intertwined” with the alleged anticompetitive conduct. Id. at *6-*8. The court found that the plaintiffs may be able to show that harm to the markets in which they participated was causally connected to the defendant’s unlawful restraint of trade in other markets. Id. at *9.

In regard to the Section 2 claims, the court found that the plaintiffs had successfully pled a relevant market, alleging that the defendant maintained monopoly power over four types of hypodermic products. Id. at *12. The court rejected the defendant’s contention that the plaintiffs must also identify which alleged wrongful conduct took place in regard to each of these four product markets, stating that the plaintiffs’ allegations met the standard of plausibility. Id. The court also rejected the defendant’s argument that the plaintiff failed to adequately allege exclusionary conduct, stating that the plaintiffs’ detailed allegations of anticompetitive agreements stand in sharp contrast to the allegations found to be insufficient in Bell Atl. Corp. v. Twombly, --- U.S. ---, 127 S.Ct.1955, 167 L.Ed.2d (2007). Id. at *14. In addition, the court rejected the defendant’s argument that the plaintiffs’ Section 2 conspiracy to monopolize claim should be dismissed as redundant due to the plaintiffs’ Section 1 anticompetitive conspiracy claim. Id. at *15. The court stated that the although the plaintiffs may fail in proving two conspiracies that are reciprocally distinguishable from and independent of each other, it allowed the plaintiffs claims to proceed so that the plaintiffs may have the benefit of discovery on this issue. Id. at *16.

In a related decision, the court rejected the defendant’s similar arguments in denying its motion to dismiss antitrust claims asserted against the defendant by pharmacies located in New York and Tennessee. In re Hypodermic Products Antitrust Litigation, 2007 WL 1959225 (D. N.J. June 29, 2007). 

COURT OF FIRST INSTANCE CONFIRMS COMMISSION DECISION OF ABUSE OF A DOMINANT POSITION BY GERMAN WASTE MANAGEMENT COMPANY

Case T-151/01Der Grüne Punkt – Duales System Deutschland GmbH v Commission. On May 24, 2007, the Court of First Instance upheld a Commission decision finding that Duales System Deutschland (DSD) had abused its dominant position on the German market for waste packaging management. DSD provides packaging waste recycling services under the trademark “Der Grüne Punkt.”

In the early 1990s, the German government enacted rules for the creation of a waste management system aimed at eliminating or reducing the impact of packaging waste on the environment (the Ordinance). Further to the Ordinance, producers and distributors must collect and recover the packaging waste they generate. They may either collect the packaging waste themselves (“own management system”) or adhere to a system that guarantees the regular collection and recovery of waste (“exemption system”). Both systems are subject to the same recovery rates, which vary according to the type of packaging.

DSD manages the only nationwide collection and recovery system. It ensures the collection, sorting and recovery of the used packaging on behalf of producers and distributors. While DSD manages the system, it outsources the actual operation of the waste collection and sorting to third parties. Manufacturers and distributors participating in DSD’s system may affix DSD’s proprietary trademark the “Der Grüne Punkt” on their packaging. At the material time, the fee DSD charged to its customers was calculated not on the basis of the actual quantity of packaging waste it had recovered but on the basis of the amount of packaging carrying its logo.

Following a number of manufacturer complaints with regard to DSD’s pricing practices, the Commission adopted a decision on April 20, 2001, finding that DSD’s pricing practices constituted an abuse of dominance and required their modification to ensure compliance with Article 82 EC. In particular, DSD was ordered not to charge any license fee for those quantities of packaging carrying the Der Grüne Punkt logo for which DSD’s services had not been used.

On appeal, the Court of First Instance upheld the Commission’s decision, holding that DSD had charged excessive prices to its customers in violation of Article 82(a) EC. In fact, given that it charged its customers for the number of packages with the Der Grüne Punkt logo affixed to it, rather than for the quantity of packaging waste recovered, customers would have to pay DSD for the collection of all of their packaging waste even if they had used their own waste management system or had solicited a competing exemption system to recover their packaging waste. Second, the Court ruled that this system foreclosed competing exemption or own-management systems. Customers would be dissuaded from using their own or third party systems if they had to pay the same license fee to use DSD’s logo independently of how much waste it actually collected.

The Court rejected DSD’s arguments that its conduct was not abusive and was objectively justified. First, it rejected as “economically unrealistic” the argument that any operator could set up competing systems without using the Der Grüne Punkt logo. The Court considered that requiring that the Der Grüne Punkt logo be affixed only to packaging recycled by the DSD system would cause significant additional costs for manufacturers and distributors because (i) they would have to determine already at the manufacturing and distribution stage how much of the packaging would be recycled through the DSD system and competing systems, and (ii) would have to ensure that packaging bearing the Der Grüne Punkt logo would be channeled to consumers only through outlets serviced by DSD and, conversely, that packaging bearing competing logos be channeled to the corresponding outlets.

The Court added that such efforts are in any event likely to be of no effect because, contrary to DSD’s allegations, the Ordinance provides that the final consumer, rather than the manufacturer or the distributor, is entitled to decide on the place of collection of the packaging waste. The place of collection can be at the point of sales in the case of own-management system and at a disposal centre in the vicinity of the consumer in the case of an exemption system. In fact, the Ordinance does not provide for an exclusive use of one system or the other but allows the consumer the option of choosing whether to dispose of the packaging waste at either of these points. Which system will be used is therefore determined at the time when the consumer deposits the waste.

For the same reason, the Court also rejected the argument that the exclusive use of the Der Grüne Punkt logo only by those customers that use DSD’s system is necessary to achieve the goals of the Ordinance, i.e., to indicate whether the final consumer must dispose of the packaging waste at the point of sale in the case of a self management system or at a disposal centre in the case of the exoneration system run by DSD.

The Court furthermore took into account that while self-management and competing exemption systems had emerged in recent years, they still played a marginal role. In any event, the fact that there had been some limited entry during the reference period could not put into question that DSD had abused its dominance.

The Court also rejected the argument that the essential function of the trademark as defined by German and EC Trade mark law would be impaired by the shared use with other providers of waste management. In fact, referring to a judgment by the Kammergericht Berlin on the issue, the Court considered that, in the present case, the essential function of the trademark as defined in the Court’s previous case law is to identify the possibility of having the packaging collected by DSD. It does not, however, give any indication of the quality of the service rendered. It cannot therefore be claimed that allowing for competitors to recover waste on which the Der Grüne Punkt logo is affixed is a disproportionate impairment of the trademark right or in any event an impairment not justified by the need to prevent an abuse of a dominant position of Article 82 EC.

The Court therefore held that the proper functioning of the system was not called into question by the contested decision and that, in any event, such concerns were not sufficient to justify charging a fee for all packaging carrying DSD’s logo even when it is proven that some of the packaging waste was collected by another exemption or self-management system.

The applicant’s assertion that the Commission decision violates the principle of proportionality was rejected on essentially the same grounds. In fact, the alternative proposed by the applicant - to require selective marking for packaging waste not collected by DSD - would be akin to permitting the latter to abuse its dominance.

Finally, the Court also rejected the applicant’s claim that an infringement of Article 82 EC was ruled out because it is entrusted with the operation of services of general economic interest within the meaning of Article 86(2) EC. While it left open the question whether DSD’s business activities could be qualified as such, the Court found that the mere fact that DSD could not be remunerated for services rendered by competing service providers would not under any circumstances threaten its capability to carry out waste collection services under economically acceptable conditions.

INFRINGEMENT PROCEEDINGS CLOSED AGAINST CZECH REPUBLIC

On June 28, 2007, the European Commission terminated an infringement procedure against the Czech Republic for a provision of the Czech Competition Act limiting the Czech Competition Authority’s ability to apply Articles 81 and 82 of the EC Treaty in the electronic communications sector. The provision restricted the applicability of the Competition Act to behaviour in violation of the regulatory framework for electronic communications. Given that Community law envisages parallel application of competition law and ex ante regulation, the Commission reasoned that the provision signified a failure on the part of the Czech Republic to fulfil its obligations arising under the EC Treaty. The Czech Republic subsequently complied with Commission’s request to repeal this legislation (see IP/07/956).

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Jay Modrall
Vice-Chair, Unilateral Conduct Committee
Cleary Gottlieb Steen & Hamilton LLP
Rue de la Loi 57
B-1040 Brussels
+32 (0)2 287 2024
jmodrall@cgsh.com

Adam Nyhan
Constantine | Cannon LLP
450 Lexington Avenue
New York, N.Y. 10017
(212) 350-2772
anyhan@constantinecannon.com

Tanya Dunne
Cleary Gottlieb Steen & Hamilton LLP
Rue de la Loi 57
B-1040 Brussels
+32 (0)2 287 2057
tdunne@cgsh.com

Tracey Topper Gonzalez
Constantine | Cannon LLP
450 Lexington Avenue
New York, N.Y. 10017
(212) 350-2712
tgonzalez@constantinecannon.com

Mitchell Stoltz
Constantine | Cannon LLP
1627 Eye Street NW
Washington, DC 20006
(202) 204-4523
mstoltz@constantinecannon.com

Daniel Streeter
Ross, Dixon & Bell, LLP
5 Park Plaza, Suite 1200
Irvine, CA 92614-8592
(949) 622-2717
dstreeter@rdblaw.com