United States: Busy Times At The FTC

The decline in merger activity has not led to long vacations at the Federal Trade Commission.¹ When the administrations changed and, Timothy Muris replaced Robert Pitofsky as FTC chairman, Muris repeatedly claimed that any changes in antitrust enforcement would be at the margins. "Change at the margins" has turned into filling every bit of space on the page, as the FTC has been more active – especially in challenging alleged anticompetitive conduct – than at any time in the past 20 years.² There are now several cases pending decision before the full FTC, one pending ALJ decision, and two more pending administrative trial. The FTC’s decisions in these cases, and in some recent consent orders, will provide new guidance on antitrust limitations on business activity in at least four areas:

• Antitrust restrictions on the assertion of patent rights;
• Antitrust liability for interactions with state regulators – both in seeking regulatory action, and in complying with regulatory mandates;
• Limitations on the scope of joint ventures; and
• Whether – and how – a merger can be undone after it has been consummated.

This Bulletin summarizes the issues presented in these cases. As the FTC’s decisions come out, we will keep you informed.

In three pending cases, the FTC is challenging the assertion of patent rights as violations of the antitrust laws. While government antitrust challenges to patent claims were once common, the antitrust agencies largely abandoned this enforcement program in the 1980s, famously asking "Whatever Happened to the Nine No-Nos?" For a decade, the answer was that there were no no-nos, but that began changing in the 1990s.³ The level of interest and activity in patent antitrust issues at the FTC has again now increased significantly.

In Schering-Plough, D-9297, one of the two cases now pending decision before the full Commission, the FTC is expected shortly to decide what limitations the antitrust laws place on patent settlements between innovator and generic drug companies.⁴ The FTC has challenged three innovator/generic patent settlements in which the FTC alleged that the innovator drug company paid the generic entrant to stay out of the market.⁵ While the respondents in Abbott and Hoechst settled, the Schering respondents proceeded to trial, and won before an Administrative Law Judge. The FTC is now about to render its first adjudicated decision on the question. Its decision could set out new limitations on terms that can be incorporated in patent settlements—or clear the field for settlements that preserve patent exclusivity based on follow-on patents—or it could be limited to the facts of the case, and provide only limited guidance.

Under the Hatch-Waxman Act, 21 U.S.C. § 355, a firm seeking to manufacture a generic version of a drug coming off NDA exclusivity may submit an Abbreviated New Drug Application ("ANDA") to the FDA. The ANDA applicant must certify that remaining patent(s) (listed by the innovator drug company in the FDA’s "Orange Book") is "invalid or is not infringed by the generic product." The first ANDA filer obtains the exclusive right to market the generic version for 180 days. In August 1995, Upsher-Smith filed an ANDA to manufacture and sell a generic version of Schering’s sustained-release potassium chloride product, K-Dur 20. Schering sued Upsher-Smith for patent infringement, triggering the Hatch-Waxman Act’s 30 month automatic stay.⁶

In June 1997, Schering and Upsher settled the patent suit; Upsher-Smith agreed not to enter the generic market for sustained-release potassium chloride until September 2001, and to licenses five of its pending products (in particular, a niacin product, Niacor), in exchange for payments of approximately $60 million. The FTC challenged this settlement in 2001, alleging that the settlement agreement essentially constituted a payment by Schering to keep Upsher from competing. Schering countered that its payment was (at least in part) for the licenses to other products, including Niacor, even though Schering later abandoned pursuing those products.⁷ The FTC voted unanimously to bring this administrative adjudication, but its ALJ completely rejected the case after an administrative trial, finding that FTC staff failed to prove that Schering’s payments were for delay rather than for other consideration.

The case has been briefed and argued to the full Commission, which now will revisit (with the benefit of a full evidentiary record) its theory that the antitrust laws are violated when innovator drug companies pay generics to settle patent disputes (brought by the innovator company) and delay generic entry. The FTC’s theory has been that these patent settlements are anticompetitive when payments flow "the wrong way," from patent-holder to alleged infringer, and the effect is that competition is delayed. We will see whether the FTC reaches that question, or accepts Schering’s invitation to dispose of the case on the proposition that the Schering-Upsher settlement was misconstrued by the FTC in bringing this case. If the FTC reaches the ultimate question, and affirms its own theory, a Court of Appeals may be called upon to decide whether innovator drug companies violate the antitrust laws by bringing and then settling patent claims against generic entrants, where the effect of the settlement is to defer entry by the generic.

Meanwhile, the Rambus, D-9302 trial began April 30, where the FTC alleges that Rambus, Inc. violated the antitrust laws by proposing a standard for synchronous dynamic random access memory ("SDRAM") to the industry standards body, JEDEC Solid State Technology Association, while keeping secret the fact that Rambus was working to develop, and had patented and filed patent applications on, the specific technologies that were incorporated in its standards proposal. The FTC alleged that Rambus’s nondisclosure to JEDEC violated JEDEC’s rules and procedures, and "conveyed a materially false and misleading impression – namely, that JEDEC, by incorporating into its SDRAM standards technology openly discussed and considered during Rambus’s tenure in the organization, was not at risk of adopting standards that Rambus could later claim to infringe on its patents."⁸ The FTC alleges that this action by Rambus violates the antitrust laws.

The same factual contention was asserted, without the antitrust gloss, by Infineon Technologies in defense of a patent infringement case brought by Rambus. Infineon prevailed at trial, but – after the FTC issued its administrative complaint – a divided panel of the Federal Circuit reversed.⁹ The Federal Circuit majority, based on its understanding of the record evidence, held that "Rambus’s duty to disclose extended only to claims in patents or applications that reasonably might be necessary to practice the standard.…Stated another way, there must be some reasonable expectation [by other JEDEC members] that a license is needed to implement the standard." 318 F.3d at 1100-01. Judge Prost, dissenting, believed that the evidence supported the jury’s implicit finding of a broader duty. Notwithstanding this reversal, FTC staff is continuing to administrative trial. (FTC staff had sought to bypass trial and proceed directly to judgment, arguing that Rambus’s destruction of documents warranted entry of a default judgment. The administrative law judge denied this motion, but entered "rebuttable presumptions" against Rambus.)

Even as Rambus proceeds to trial and FTC staff seeks to overcome the effects of the Federal Circuit’s decision, the FTC voted unanimously to challenge another standards-setting effort – Unocal’s effort to enforce its patent on CARB-II gasoline. Since the CARB-II standard was adopted by the State of California, rather than an industry group, the FTC’s latest case also presses the scope of the Noerr/Pennington doctrine. FTC Chairman Muris has repeatedly emphasized his interest in cutting back the scope of Noerr and State Action immunities, and within the past month the FTC has moved on both fronts. The FTC voted unanimously to accept a consent order in Indiana Household Goods & Warehousemen, Inc., No. 021-0115, challenging an association of household movers that file joint rate tariffs with the State of Indiana, and then charge the tariff rate rather than compete on rates.

The FTC’s Analysis To Aid Public Comment provides an extensive statement of the FTC’s approach to the state action doctrine. The FTC determined that the joint ratemaking was neither "clearly articulated and affirmatively expressed as state policy," nor "actively supervised" by state officials.¹⁰ The FTC identified "the specific elements of an active supervision regime that it will consider in determining whether the active supervision prong of state action is met in future cases": an adequate factual record, a written decision, and "a specific assessment – both qualitative and quantitative – of how the private action comports with the substantive standards established by the state legislature." If the FTC follows through with this program, companies may face the choice of complying with (anticompetitive) state regulation, and thereby risking antitrust enforcement, or refusing to comply with (and perhaps challenging) state regulatory schemes.

In Union Oil Co. of California, D-9305, the FTC alleged that Unocal made misrepresentations to the California Air Resources Board ("CARB"); as a result, CARB unwittingly implemented standards for cleaner-burning gasoline that could only be met by using Unocal’s patented technology, on which Unocal prevailed on infringement claims against refiners of CARB-II gasoline.¹¹ and most refiners of gasoline for sale in California now pay royalties to Unocal – up to $500 million annually, according to the FTC. The FTC alleges that Unocal’s behavior violates the FTC Act, and that Unocal’s allegedly fraudulent behavior is not protected by the Noerr-Pennington doctrine, which exempts petitioning of the government from the conduct violative of the antitrust laws.¹²

Why is Unocal’s advocacy of a standard to a State government agency (even if accompanied by false or misleading statements) not protected by Noerr? According to the FTC’s complaint:

Unocal is not shielded from antitrust liability pursuant to the Noerr-Pennington doctrine for numerous reasons as a matter of law and as a matter of fact including, but not limited to, the following: (i) Unocal’s misrepresentations were made in the course of quasi-adjudicative rulemaking proceedings; (ii) Unocal’s conduct did not constitute petitioning behavior; and (iii) Unocal’s misrepresentations and materially false and misleading statements to Auto/Oil and WSPA, two non-governmental industry groups, were not covered by any petitioning privilege.¹³

The FTC’s complaint asserts that CARB’s proceedings were "quasi-adjudicative"¹⁴ because they were rulemakings; the proposition that Unocal’s conduct was not "petitioning" appears to be unexplained. Given the stakes, this case could easily go to the Court of Appeals or beyond.

FTC Chairman Tim Muris has long made clear his desire to limit Noerr-Pennington and state action immunities.¹⁵ He has created task forces to analyze existing case-law, and has said that "Noerr immunity has been expanded in a manner that potentially harms consumers."¹⁶ He went on to say that "courts have immunized abusive tactics, such as repetitive lawsuits and misrepresentations," and urged the Noerr Task Force to consider the three following proposals: first, adopting a narrow view of immunized petitioning; second, making clear that the Walker Process¹⁷ exception to Noerr immunity extends beyond the Patent and Trademark Office to other administrative proceedings; and third, recognizing an independent exception to Noerr – separate and distinct from the "sham" exception so that misrepresentation is not protected.

The antitrust agencies’ Competitor Collaboration Guidelines may not have succeeded, as much as the agencies intended, to clarify the law of joint ventures. Those Guidelines attempt to encourage joint ventures, even informal ones, that give rise to "efficiency enhancing integrations of economic activity," while at the same time maintaining that conduct that would otherwise constitute per se violations, if outside a joint venture, is still illegal per se.

One challenge to counselors: What’s inside and outside the venture, especially if the venture is not a formally established venture? One response: If sued, assert that everything in the neighborhood is "ancillary" to the venture, and hence inside the rule of reason and outside the scope of the per se rule.

That approach was taken by respondents in Polygram Holding, Inc, D-9298, the "Three Tenors" case. The Three Tenors are Luciano Pavarotti, Placido Domingo and Jose Carreras, and the first "Three Tenors" album, released by Polygram in 1990, was the best selling classical album of all time. The second was released by Warner in 1994 (in response to which Polygram cut price on the original Three Tenors album), and in 1997 the two companies entered into a joint venture to produce and release a third Three Tenors album.

The new album was undisputedly an efficiency enhancing integration of economic activity. After agreeing to release of the third album, Polygram and Warner allegedly (and as found by the Administrative Law Judge) agreed to a 10-week "moratorium" during which they agreed not to discount or advertise the earlier Three Tenors albums. FTC staff asserted that this agreement not to discount the products outside the current venture was not ancillary to the venture, and could be condemned as illegal per se. Polygram contended that the agreement was indeed ancillary; was not unreasonable under the rule of reason; and should not constitute a violation. The ALJ rejected the application of the ancillary restraints directive, holding that "to be ancillary to the joint venture, then, a collateral restraint must be an integral part of the venture, or reasonably necessary to make it work."¹⁸ Since the parties did not agree to the moratorium when they agreed to the venture, but only afterwards, and since (as with the release of the second album) the albums could compete, the ALJ find that the moratorium was not ancillary to the venture. He then found that that the moratorium was per se illegal price fixing and violated the "truncated" rule of reason.

On appeal, while FTC staff continues to maintain (in passing) that the moratorium violated the per se rule, it also argues that the FTC may condemn the moratorium under the "truncated" rule of reason approach adopted by the FTC in Mass. Board (and abandoned by the FTC in California Dental Ass’n).¹⁹ The distinction is that per se violations are conclusively presumed to be anticompetitive (no efficiencies may be shown), while in a truncated analysis the presumption may be rebutted. The FTC has changed its approach to the per se/rule of reason distinction over the years; Three Tenors might be another change in the framework for this analysis. After Three Tenors was argued, the Ninth Circuit decided a similar case, and condemned as illegal per se an agreement by joint ventures fixing the price of what could be construed to be an "ancillary" product.²⁰

The FTC has taken an increasing interest in consummated mergers, even when mergers were reportable and reported under the HSR Act. In October 2001, the FTC challenged the consummated acquisitions by MSC.Software Corporation of Universal Analytics, Inc. and Computerized Structural Analysis & Research Corp. MSC and the FTC settled on the eve of administrative litigation, in August 2002. MSC.Software Corporation, D-9299.

In October 2001, the FTC also challenged the acquisition by Chicago Bridge & Iron Co. of the engineered construction business of Pitt-DesMoines, Inc. Chicago Bridge & Iron Co., D-9300. The matter was tried before an Administrative Law Judge beginning in December 2002, and is awaiting the ALJ’s initial decision. CB&I and Pitt-Des Moines were the nation’s two largest makers of field-erected pressurized and law temperature tanks, used for products such as liquefied natural gas. CB&I acquired Pitt-DesMoines’ competing business after the HSR waiting period expired, but while the FTC was investigating the proposed merger. If the FTC ultimately decides that the merger violates the antitrust laws, it will need to decide what to do about it, since CB&I proceeded to scramble the eggs – knowing all along that the FTC was interested in the merger.²¹

Chairman Muris indicated in March 2003 that the FTC is likely to challenge consummated hospital mergers shortly. As with Chicago Bridge, a final decision by the FTC finding a violation, or a settlement, will involve taking apart merged businesses – the very unscrambling of the eggs that led courts to frustration and Congress to enact the HSR Act in 1976.

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