Munger, Tolles & Olson United States Commercial Law Seminar Masaryk University April 11-21, 2011 Lecture Five: Federal ‘Business Torts: Antitrust and RICO (Racketeer Influenced and Corrupt Organizations Act) Joseph D. Lee Munger, Tolles & Olson LLP Munger, Tolles & Olson ANTITRUST STATUTES pSherman Act, Section 1 nConcerted Action nUnreasonable Restraints of Trade pSherman Act, Section 2 nUnilateral Conduct nMonopolization and Related Offenses pClayton Act, Section 7 nMergers & Acquisitions nJoint Ventures Munger, Tolles & Olson ANTITRUST STATUTES pFTC Act, Section 5 nUnfair Methods of Competition p pRobinson-Patman Act nPrice Discrimination nPromotional Allowances nBrokerage p p Munger, Tolles & Olson RESTRAINTS OF TRADE UNDER SECTION 1 pContract, Combination or Conspiracy nExpress agreement or inference nKey case re horizontal agreement pMatsushita Electric Industrial Co. v. Zenith Radio, 475 U.S. 574 (1986) nKey case re vertical agreement pMonsanto Co. v. Spray-Rite Service Corp. 465 U.S. 752 (1984) n Munger, Tolles & Olson VERTICAL NON-PRICE RESTRAINTS ON DISTRIBUTION pExclusive distributorships nRule of reason – U.S. v. Arnold, Schwinn & Co., 388 U.S. 36J (1967) nTerritorial and customer restrictions nRule of reason – Continental T.V. Inc. v. GTE Sylvania, 433 U.S. 36 (1977) n pFactors nPurpose of restraint nMarket share of supplier p Munger, Tolles & Olson VERTICAL NON-PRICE RESTRAINTS IN PURCHASING pTying Agreements nAgreement to sell product conditioned on purchase of a different product nPer se illegal pSeparate products pSufficient economic power in market for tying product – Jefferson Parish Hosp. District v. Hyde, 466 U.S. 2 (1984) p pRule of reason may be applied if pro-competitive efficiencies –integration nU.S. v. Microsoft Comp., 253 F.3d 34 (D.C. Cir. 2001) – software bundling p pSeparate availability is a defense nPackage discounts nCoercion p Munger, Tolles & Olson SHERMAN ACT SECTION 2 – MONOPOLIZATION AND ATTEMPTED MONOPOLIZATION pMonopolization – willful acquisition of monopoly power p pAttempted monopolization- specific intent to monopolize and dangerous probability of success p pPredatory conduct – not better product or superior business acumen p Munger, Tolles & Olson MONOPOLY POWER pRelevant product market nReasonable interchangeability of use (demand substitutability) nCross elasticity of demand - extent to which consumers will change in response to price increase – Eastman Kodak v. Image Tutorial Services, 504 U.S. 451 (1992) nMerger Guidelines – Effect of small non-transitory price increase – 5% p pRelevant geographic market nArea of effective competition nPrice relationships, transportation costs, governmental licenses, tariffs p pExpert economic analysis p Munger, Tolles & Olson MONOPOLY POWER pMonopolization – 70% = prima facie evidence p pAttempted monopolization: 40 – 50% + p pOther evidence of market power nEntry barriers pNatural advantages pIP rights pBrand name recognition nSize and strength of competitors nPotential competition p Munger, Tolles & Olson PREDATORY CONDUCT pPredatory pricing pRefusals to deal pMonopoly leveraging pSham litigation pNew product introduction p Munger, Tolles & Olson PREDATORY PRICING pBelow “appropriate measure of cost” – average variable or marginal pDefendant must have dangerous probability of recouping losses. Brooke Group Ltd. v. Brain & Williamson, 509 U.S. 209 (1993) pNot predatory if meeting competition pPackage pricing – not predatory if price of package exceeds combined cost of constituent products – Ortho Diagnostics v. Abbott Laboratories, 920 F. Supp. 455 (1996) p p Munger, Tolles & Olson Eastman Kodak case pInitial market: sale of photocopiers pAftermarket: nSale of replacement parts (e.g., toners) nCopier service pCase brought by Independent Service Organizations (“ISO’s”) challenging exclusion from the aftermarket Munger, Tolles & Olson Kodak Case: Alleged Predatory Conduct pIn 1985 and 1986, Kodak implemented a policy of selling replacement parts for micrographic and copying machines only to buyers of Kodak equipment who use Kodak service or repair their own machines. pAs part of the same policy, Kodak sought to limit ISO access to other sources of Kodak parts nKodak and the OEM's agreed that the OEM's would not sell parts that fit Kodak equipment to anyone other than Kodak. nKodak also pressured Kodak equipment owners and independent parts distributors not to sell Kodak parts to ISO's. nIn addition, Kodak took steps to restrict the availability of used machines. Munger, Tolles & Olson Kodak Case: Key Findings pConsumers didn't realize when they purchased Kodak copiers that they were going to be locked in nand would pay supracompetitive prices) nMarket was too complex for most purchasers to do life cycle cost analysis pApplication to Nespresso machines? nEveryone knows that you buy the machine, the coffee capsules are expensive – nAnd that you have to buy from them? Munger, Tolles & Olson RICO Statute pRacketeer Influenced and Corrupt Organizations Act pEnacted in 1970 pNamed for “Little Caesar”? pDesigned to combat organized crime pBoth civil and criminal provisions Munger, Tolles & Olson Elements of a RICO Claim 1.The existence of an enterprise affecting interstate commerce; 2.That the Defendants participated, directly or indirectly, in conducting the affairs of the enterprise; 3.That the Defendants participated through a pattern 4.of racketeering activity Munger, Tolles & Olson “Racketeering Activity” pState felonies punishable by imprisonment of more than a year nmurder nkidnapping nextortion pMore than thirty federal crimes ndrug offenses nobstruction of justice nmail fraud nwire fraud nbribery nsecurities fraud Munger, Tolles & Olson Newcal v. IKON and GE pFive plaintiffs (Newcal et al.) – small copier lessors pTwo defendants: nIKON (leases copiers) nGE (finances leases) pIn 2004, GE acquired portfolio of IKON leases – $985 million pChallenged practice: “flexing” of leases pAlleged markets: nInitial market = initial lease nAftermarket = replacement copiers and service nSubmarket = “flexed” IKON customers pAlleged damages: $350 million (treble damages) Case involves both “aftermarket” and “submarket” Munger, Tolles & Olson Newcal: Procedural History pJune 2004: lawsuit filed nAntitrust claims (Sherman Act § 1, 2) nRICO claims p2005: dismissed by federal District Court pApril 2007: Oral argument in 9th Circuit pJanuary 2008: 9th Circuit reverses pJune 2008: Petition for review to U.S. Supreme Court denied pDecember 2010: new judge assigned in District Court p Munger, Tolles & Olson Newcal: Key Issues pIs there really an “aftermarket” for replacement copiers and service? nHow is that different from the alleged initial market? nOther than start-up companies pIs there really a “submarket” consisting only of IKON customers? nContrast women’s shoes (or children’s shoes) nTurns on supposed fraud/deception pDid customers know they were extending leases? Munger, Tolles & Olson Oh No, Another Lawsuit! pJBC manufactures forks for mountain bikes pJBC forks sell for $400 to $650 each pThere is lots of competition for initial fork sales pJBC forks have proprietary elastomers which you can only buy from JBC nWe sell them to authorized repair shops nPrice is $30; our cost is only $10 nISO’s have tried, and failed, to duplicate the elastomers pWe don’t want replacement elastomers used nDegrades performance nCan cause leaks, other problems Munger, Tolles & Olson BBC v. JBC Lawsuit pAntitrust lawsuit is filed against JBC by 5 independent bike shops (ISO’s) nLead plaintiff is Becca’s Bike Co. (BBC) nAlleges JBC is monopolizing the aftermarket for service and supplies for JBC forks pClaimed damages: $10MM ($30 MM trebled) nOur estimate of damages: $5MM ($15MM trebled) pAnticipated defense cost: $4-5 million nAttorney’s fees nExpert fees pProbability of JBC win: 60% or greater nCase valuation: $15MM x .40 = $6MM pAt least 12 other, smaller ISO’s are potential plaintiffs p Munger, Tolles & Olson ISO’s v. JBC: Settlement Demand pStipulate to injunction mandating that JBC sell elastomers to 5 plaintiff ISO’s nFive year term nPrice to be no more than amount charged to authorized dealers pPay ISO’s damages of $12 million pPublish new policy on website that elastomers will be sold to all qualified ISO’s nArbitrate any dispute over whether particular ISO is qualified pPay attorney’s fees in amount to be negotiated p p