Yesterday, the FTC filed suit in the U.S. District Court for the District of Columbia against Cephalon arising from its settlement of patent cases relating to Provigil (but not against the generic drug manufacturers).  According to the FTC press release:

According to the Commission’s complaint, … Cephalon entered into agreements with four generic drug manufacturers that each planned to sell a generic version of Provigil. Each of these companies had challenged the only remaining patent covering Provigil, one relating to the size of particles used in the product. The complaint charges that Cephalon was able to induce each of the generic companies to abandon its patent challenge and agree to refrain from selling a generic version of Provigil until 2012 by agreeing to pay the companies a total amount in excess of $200 million. In so doing, Cephalon achieved a result that assertion of its patent rights alone could not.

…

The court action filed today concerns conduct by Cepahlon to prevent lower-cost generic competition to one of its key products, the branded prescription drug Provigil. Provigil is approved to treat excessive sleepiness in patients with sleep apnea, narcolepsy, and shift-work sleep disorder. With U.S. sales of Provigil totaling over $800 million in 2007, and accounting for more than 40 percent of Cephalon’s total sales, the prospect of generic competition was a major financial threat to the company, the complaint states. Generic entry can significantly reduce the sales of existing branded drugs, and Cephalon knew that it would profit by keeping lower-cost generic alternatives to Provigil off the market, the agency contends.

According to the Commission, by late 2005, generic competition to Provigil appeared imminent. Several years earlier, on the first day permitted by regulation, four companies – Teva Pharmaceuticals USA, Inc. (Teva), Ranbaxy Pharmaceuticals, Inc. (Ranbaxy), Mylan Pharmaceuticals Inc. (Mylan), and Barr Laboratories, Inc. (Barr) – submitted applications with the U.S. Food and Drug Administration (FDA) to market their own generic versions of Provigil. Each company had either designed around, or challenged the validity of, the only remaining patent on Provigil – a narrow formulation patent related to the size of the particles used in the product. Cephalon filed patent litigation against each of the generic companies. By late 2005, however, the patent litigation was still pending and Cephalon, the generic firms, and Wall Street analysts all expected generic Provigil entry in the near term.

Facing the prospect of billions of dollars in lost revenue, Cephalon entered into agreements through which it compensated each of the four generic companies to settle the patent litigation and agree to forgo generic entry until April 2012, the FTC alleges. These agreements contained payments to the generic companies totaling more than $200 million.

Caphalon released a statement:

Cephalon stands by the strength and validity of our PROVIGIL patents and the legal basis for these settlements. We are disappointed that the FTC has determined to challenge these agreements as we believe they fully comply with both the spirit and letter of the antitrust laws. As importantly, our settlements confer a meaningful benefit to U.S. consumers by providing for the entry of generic modafinil three years early. Cephalon is prepared to vigorously defend itself in this matter and expects to prevail.

The FTC’s complaint is available here.  [Update: the case has been assigned to Judge Rosemary M. Collyer.]

Additional coverage is available via the WSJ Health Blog and CNN.

We never have, and never will, give legal advice on this blog. It is not legal advice, however, to suggest that companies do not take legal advice from journalists. In particular, Apple should heed the legal advice of its antitrust lawyers and not Adrian Kingsley-Hughes. In an article titled “Does Apple Have A Monopoly?” he writes:

I think that if Apple is to avoid trouble, the company first needs to acknowledge that it commands a huge market share, and that with that kind of market share comes responsibility.

Before Apple acts on this advice (or not), it would be wise to consult with its own antitrust lawyers. In fact, I will go so far as to suggest that before any company “acknowledge[s] that it commands a huge market share” it consult with its antitrust lawyers.

On a more serious note, this is my favorite part of the article:

While those users with an understanding of iTunes and audio formats know that iTunes doesn’t totally lock you into using iPods forever more, for the average user, getting the tracks out of iTunes and into a form that another player can play is near to impossible.

I think it would be fair to replace “those users with an understanding of iTunes and audio formats ” with “those users who have read the instructions.” When I bought my first iPod several years ago, I knew nothing about iTunes and and virtually nothing about audio formats. After less than 10 minutes with the instruction book and the iTunes help file, I was up to speed.

A few days ago, another lawsuit was filed against Apple for maintaining a monopoly in the digital music market (via slashdot). According to Information Week:

The complaint against Apple claims that the company controls 75% of the online video market, 83% of the online music market, more than 90% of the hard-drive based music player market, and 70% of the Flash-based music player market.

…

The complaint takes issue with Apple’s refusal to support the Windows Media Audio format. “Apple’s iPod is alone among mass-market Digital Music Players in not supporting the WMA format,” it states, noting that America Online, Wal-Mart, Napster, MusicMatch, Best Buy, Yahoo Music, FYE Download Zone, and Virgin Digital all support protected WMA files.

This is based on the proposition that music companies “are generally unwilling to license their music for online sale except in protected formats.” Such assertions look increasingly tenuous as unprotected music becomes more widely available through legitimate channels. Amazon.com, for example, claims to offer “Earth’s biggest selection of a la carte DRM-free MP3 music downloads with more than 2.9 million songs from over 33,000 record labels.” A week ago, Amazon said that Warner Music Group would make its artists’ songs available in the unprotected MP3 format. EMI last year also began offering unprotected music online. And that’s to say nothing of Web sites like Amie Street that have been offering unprotected music from independent artists for even longer.

Apple, for its part, might reasonably claim it doesn’t want to license WMA from Microsoft, a cost the complaint speculates is unlikely to exceed $800,000, or 3 cents per iPod sold in 2005.

But the complaint goes beyond software licensing politics and charges Apple with deliberately designing its iPod hardware to be incompatible with WMA. One of the third-party components in iPods, the Portal Player System-On-A-Chip, supports WMA, according to the complaint. “Apple, however, deliberately designed the iPod’s software so that it would only play a single protected digital format, Apple’s FairPlay-modified AAC format,” the complaint states. “Deliberately disabling a desirable feature of a computer product is known as ‘crippling’ a product, and software that does this is known as ‘crippleware.’ “

More at The Unofficial Apple Weblog (“Here we go again”), MacUser (”People never get tired of suing Apple”) and Apple Unvarnished (”The lawsuit heads off into ridiculousness …“).

Technorati Tags: Apple, iTunes, antitrust

Under Art. 82 of the Treaty, there are essentially three different tests for duties to assist competitors, one for termination, and two for refusals to start de novo supply.

I. Abusive termination under Art. 82 (1) Dominant position (2) Abusive conduct

• Termination
• Harm to downstream competition, usually defined as “eliminating all competition in a neighboring market.”

(3) No objective justification.

II. Abusive refusal to start supplying under Art. 82 (1) Dominant position (2) Abusive conduct

• Refusal to start supplying
• Harm to downstream competition
• Indispensability, i.e., no one could economically replicate the essential facility.

(3) No objective justification.

III. Abusive refusal to start supplying Intellectual Property under Art. 82 (1) Dominant position (2) Abusive conduct

• Refusal to start supplying
• Harm to downstream competition
• Indispensability
• Prevents emergence of a new product, i.e., offering a mere “me too” product is not sufficient.

(3) No objective justification.

One of the most significant aspects of the Microsoft v. Commission decision is the relaxation of the “harm to downstream competition” criterion. In Commercial Solvents (1974), the court required behavior that “risks eliminating all competition.” In Magill (1995), the refusal to license TV listings “exclud[ed] all competition in that market,” and in Bronner (1998), the court required that the conduct “was likely to exclude all competition in the secondary market.” In other words, harm to downstream competition used to require (i) some degree of likelihood; and (ii) a threat to all competition. In Microsoft, the CFI held that the survival of some competition is not a defense, and that the “all competition” language should be replaced with “all effective competition.”

The court lays out the new formulation of the test in paragraphs 331-334.

[331] It follows from the case-law cited above that the refusal by an undertaking holding a dominant position to license a third party to use a product covered by an intellectual property right cannot in itself constitute an abuse of a dominant position within the meaning of Article 82 EC. It is only in exceptional circumstances that the exercise of the exclusive right by the owner of the intellectual property right may give rise to such an abuse. [332] It also follows from that case-law that the following circumstances, in particular, must be considered to be exceptional:

• in the first place, the refusal relates to a product or service indispensable to the exercise of a particular activity on a neighbouring market;
• in the second place, the refusal is of such a kind as to exclude any effective competition on that neighbouring market;
• in the third place, the refusal prevents the appearance of a new product for which there is potential consumer demand.

[333] Once it is established that such circumstances are present, the refusal by the holder of a dominant position to grant a licence may infringe Article 82 EC unless the refusal is objectively justified.

Note how the “any effective competition” language replaced the traditional “all competition” standard. In paragraphs 561-563 the court explains that the apparent change is no departure from past precedent.

[561] The Court finds that Microsoft’s complaint is purely one of terminology and is wholly irrelevant. The expressions ‘risk of elimination of competition’ and ‘likely to eliminate competition’ are used without distinction by the Community judicature to reflect the same idea, namely that Article 82 EC does not apply only from the time when there is no more, or practically no more, competition on the market. If the Commission were required to wait until competitors were eliminated from the market, or until their elimination was sufficiently imminent, before being able to take action under Article 82 EC, that would clearly run counter to the objective of that provision, which is to maintain undistorted competition in the common market and, in particular, to safeguard the competition that still exists on the relevant market. [562] In this case, the Commission had all the more reason to apply Article 82 EC before the elimination of competition on the work group server operating systems market had become a reality because that market is characterised by significant network effects and because the elimination of competition would therefore be difficult to reverse (see recitals 515 to 522 and 533 to the contested decision). [563] Nor is it necessary to demonstrate that all competition on the market would be eliminated. What matters, for the purpose of establishing an infringement of Article 82 EC, is that the refusal at issue is liable to, or is likely to, eliminate all effective competition on the market. It must be made clear that the fact that the competitors of the dominant undertaking retain a marginal presence in certain niches on the market cannot suffice to substantiate the existence of such competition.

I’m not convinced that the difference is merely one of terminology. A threat to “all competition” is of a very different nature than a threat to “any effective competition,” particularly if, at the same time, the probability requirements for the harm to competition are being relaxed. The Microsoft decision, in effect, turns Art. 82 into a full-fledged incipiency statute. The result, in my view, may well be justified in the context of interoperability disclosure and undeniable network effects. But the underlying reasoning would have been more convincing had the court expressly stated its departure from the (very restrictive) “all competition” standard.

Technorati Tags: antitrust, microsoft

According to the AP (via the Washington Post):

EU regulators said Friday they have charged Intel Corp. with monopoly abuse for blocking rival computer chipmaker Advanced Micro Devices Inc.’s access to customers. Intel immediately said its conduct had been lawful and said it welcomed the chance to finally respond to allegations made by its main competitor. The European Commission claimed that Intel gave “substantial rebates” to computer makers for buying most of their x86 computer processing units, or CPUs, from Intel; that it made payments to manufacturers to get them to delay or cancel product lines using AMD chips; and that it sold its own chips below cost on average to strategic server customers on bids against AMD products to try to muscle into that business. It said each of these alone broke EU law by shutting out AMD from the market. Together they amounted to a strategy that damaged the rules of fair play in an effort to keep AMD from eroding Intel’s market leadership, it said. The Commission also considers at this stage of its analysis that the three types of conduct reinforce each other and are part of a single overall anticompetitive strategy,” it said.

Intel has released a statement from Bruce Sewell, Intel’s senior vice president and general counsel:

We are confident that the microprocessor market segment is functioning normally and that Intel’s conduct has been lawful, pro-competitive, and beneficial to consumers. While we would certainly have preferred to avoid the cost and inconvenience of establishing that our competitive conduct in Europe has been lawful, the Commission’s decision to issue a Statement of Objections means that at last Intel will have the opportunity to hear and respond to the allegations made by our primary competitor. The case is based on complaints from a direct competitor rather than customers or consumers. The Commission has an obligation to investigate those complaints. However, a Statement of Objections contains only preliminary allegations and does not itself amount to a finding that there has been a violation of European Union law. Intel will now be given the chance to respond directly to the Commission’s concerns as part of the administrative process. The evidence that this industry is fiercely competitive and working is compelling. When competitors perform and execute the market rewards them. When they falter and under-perform the market responds accordingly.

• The Corporate Crime Reporter reports on a paper by the Hudson Institute’s Irwin Stelzer in which he, according to the report, argues that it “would be folly to abandon or seriously weaken the nation’s antitrust laws.”

• Last week, FTC chairman Deborah Platt Majoras spoke at the American Conference Institute’s Conference on Pharmaceutical Antitrust.  In it, she states that:

going forward, the Commission will work to change the prevailing legal standards for evaluating the antitrust implications of reverse-payment settlements because they have tipped too far in favor of settlement payments to holders of even the “weakest” of patents. It simply cannot be correct, as at least one court ruling implies, that, in the absence of a sham or a fraud, any patent holder that walks into a federal courthouse and files a complaint that alleges that a generic manufacturer has infringed its patent, is then entitled to pay the generic manufacturer any amount of money not to compete with the brand manufacturer for as long as the nominal term of the patent. Put more bluntly, there is no reason to believe that every time that patent holder alleges in a legal complaint that a generic manufacturer has infringed its patent, that the infringement has in fact occurred. Indeed, the empirical evidence is to the contrary. Data show that generic applicants have had nearly a 75 percent success rate in pharmaceutical patent infringement litigation. The challenge for the antitrust enforcement agencies, the courts, and the pharmaceutical industry at large is to devise a workable rule, or set of rules, to distinguish those patent settlements that restrain competition from those that do not. By workable, I mean rules that provide clear standards, promote innovation and efficiency, and can be applied in a cost effective manner.

• At SCOTUSblog, Mark Botti comments on Twombly.

• In addition to holding its Annual Conference on June 21 (with a focus on monopoly and monopolization), the American Antitrust Institute is hosting an “Invitational Symposium on Buyer Power” on June 20.

• The FTC’s Bureau of Economics Director Michael A. Salinger testified on behalf of the FTC today before the U.S. Congress’ Joint Economic Committee.  He “described the FTC’s initiatives to protect competitive markets in the production, distribution, and sale of gasoline through the agency’s comprehensive merger program.”  His prepared testimony is available online.

• Yesterday, the Department of Justice:

filed a civil antitrust lawsuit … in U.S. District Court in Charleston, W.Va., alleging that the Daily Gazette Company and MediaNews Group Inc. (MediaNews) violated the antitrust laws when they entered a series of transactions in May 2004 that resulted in the acquisition by Daily Gazette Company of the Daily Mail newspaper from MediaNews. The Department’s lawsuit seeks an order requiring the parties to undo their transactions and restore the competition that existed before May 2004.

The AP (via Business Week) has an article about this matter and the complaint is posted on DOJ’s website.

Daniel Sokol at the Antitrust & Competition Blog highlighted an interesting paper recently posted on SSRN.  Maurice Stucke of U.S. Department of Justice’s Antitrust Division has authored an article entitled Behavioral Economists at the Gate: Antitrust in the 21st Century.  Stucke notes that antitrust economics accepts, largely unquestioned, rational choice theory (i.e., that ”actors are rational, have willpower, and will act in their own self-interest”).  (Note: all quotes in this post are from the article; footnotes and citations omitted).  As a result:

One uniformly accepted tenet, according to Posner, is that business firms are profit-maximizers, so that “the issue in evaluating the antitrust significance of a particular business practice should be whether it is a means by which a rational profit maximizer can increase its profits at the expense of efficiency.”

In recent years, however, behavioral economists have found

that individuals do not always act in ways the rational choice theories predict. Drawing from the findings of other disciplines, such as psychology, neuroscience, and sociology, behavioral economists note that a sizeable percentage of their test subjects systemically deviate from these rational choice theories’ predicted outcome in several important ways …

The article, “identifies some possible paradoxes and anomalies with respect to antitrust’s merger theories. It appears anecdotally that some corporate behavior is (or is not) occurring that is not readily explainable under antitrust’s rational choice theories.”  As a result, there ”is an empirical question as to the degree the federal antitrust agencies, relying upon their Merger Guidelines, are indeed accurately forecasting the likely competitive effects of mergers today.”

Stucke also recommends five legislative changes “[t]o encourage such post-merger review and to empirically test the Merger Guidelines’ predictive qualities”:

• First, Congress should expressly provide the federal antitrust agencies with subpoena authority for non-public information to conduct such post-merger review.
• Second, Congress should require the federal antitrust agencies to publish their summary findings of any merger subject to a Second Request in which the agency: (i) took no enforcement action; (ii) permitted the merger in part to be consummated pursuant to a consent decree; or (iii) challenged the merger in court, but lost.
• Third, for any successful cartel or monopolization prosecution, Congress should require the agency to report two to five years after the completion of the prosecution the state of competition in that industry, as described above.
• Fourth, Congress should require the federal antitrust agencies to make publicly available a computerized database identifying all civil and criminal antitrust consent decrees, pleas, or litigated actions under section 1 of the Sherman Act.
• Fifth, any publicly held company that seeks to rely on an efficiency defense before the agencies and/or the courts should be required to publicly report its claimed efficiencies in its SEC filings.

The paper is more interesting - and deserving of comment - that this brief summary.  It is worth reading.  Download it while it is hot.

Yesterday, the House held a hearing on House Bill 1902 which would “prohibit brand name drug companies from compensating generic drug companies to delay the entry of a generic drug into the market ….”  The House Committee on Energy and Commerce heard from FTC Commissioner Leibowitz, Mike Wroblewski of Consumers Union, Professor Scott Hemphill (Columbia Law), Phillip Proger of Jones Day, Ted Whitehouse of Willkie Farr, and Bernard Sherman, CEO of Apotex.  The AP (via Forbes.com) has a short article about the hearing.

In other Congressional antitrust news, last week the Senate Judiciary Committee passed Senate Bill 879 which would “amend the Sherman Act to make oil-producing and exporting cartels illegal.”  As Trade Regulation Talk explains, the bill

would allow the federal government to take legal action against foreign states, including members of OPEC, for price fixing and artificially limiting the amount of available oil. … The bill, which would amend the Sherman Act, would clear the way for the federal courts to hear antitrust suits against OPEC, according to Senator Herb Kohl, the bill’s sponsor and chairman of the Judiciary Committee’s Antitrust, Competition Policy and Consumer Rights Subcommittee.