This article reviews developments in vertical restraints law in the United States since 1 June 2017, the most important of which, the Supreme Court's decision in State of Ohio v American Express Co,
The past year saw no reported decisions analysing minimum resale price maintenance (RPM) claims under either federal or state antitrust laws. The United States District Court for the District of Connecticut had occasion, however, in Connecticut Fine Wine & Spirits, LLC v Harris
Non-price restraints on distribution
Channel and territorial restraints
In decisions analysing restraints on the channel into which distributors resell products and on the geographic area in which products can be resold, courts applied the rule of reason to dismiss claims under Section 1 of the Sherman Act.
The United States District Court for the Eastern District of New York considered in Abbott Labs v Adelphia Supply USA
The court dismissed the claim. It was undisputed that Abbott lacked market power, and the court therefore considered whether H&H adequately alleged that the policy had actual anticompetitive effects. The court rejected conclusory allegations that the policy removed competitive pressure on the market as a whole and thereby led to increased prices,
In a decision upholding a manufacturer's export prohibition, Baar v Jaguar Land Rover N Am, LLC,
In the Supreme Court's first consideration of vertical restraints since Leegin
American Express (Amex) prohibits merchants with which it has agreements from informing a customer that the merchant may prefer another card (Visa, MasterCard or Discover) and 'steering' the customer to use that card. The fee Amex charges a merchant is typically higher than that charged by other credit card networks, and Amex deemed these anti-steering provisions, called non-discrimination provisions (NDPs), necessary to preserve its premium brand positioning. The government, joined by a number of states, challenged the NDPs on the ground that they unreasonably restricted merchants from offering lower-priced card alternatives to customers. Following a trial on the merits, the district court agreed, holding that the NDPs violated section 1 under the rule of reason.
The Supreme Court granted the states' petition for certiorari and ruled, five-to-four, in favour of Amex. In an opinion by Justice Thomas, the court began its analysis by observing that, as a vertical restraint, the NDPs were subject to evaluation under the rule of reason.
The court confined its attention to whether the plaintiffs had carried their initial burden of proving substantial anticompetitive effects. Noting that anticompetitive effects could be proved through either direct or indirect evidence, the court observed that plaintiffs had relied exclusively on direct evidence. Direct evidence, according to the court, would be proof of actual detrimental effects in the relevant market, such as 'reduced output, increased prices, or decreased quality'.
Relying exclusively on economic literature, the court deemed credit card networks 'two-sided platforms' and held that 'courts must include both sides of the platform – merchants and cardholders – when defining the credit-card market'.
The court held that plaintiffs had failed to prove anticompetitive effects in the relevant market. First, there was no proof that the price of credit card transactions was 'higher than the price one would expect to find in a competitive market'.
In dissent, Justice Breyer took issue with much of the majority's analysis, including its view that a relevant market has to be defined even when actual adverse competitive effects are proved. According to Justice Breyer, evidence of anticompetitive effects is, standing alone, proof of market power, and there is no need 'to require a separate showing of market definition and market power under such circumstances'.
The American Express decision is significant for multiple reasons. We will mention three of them:
• recognition of allocation of the burden of proof in a vertical case;
• rejection of truncated analysis in a vertical case; and
• recognition of a two-sided transaction platform as a single relevant market.
First, the Supreme Court recognised the burden of proof allocation in vertical rule of reason cases that has long been settled in the lower federal courts. The plaintiff must first prove that the restraint has caused anticompetitive effects in a relevant market. The defendant may then introduce evidence of the pro-competitive justifications for the restraint, and the plaintiff may thereafter introduce evidence that the defendant's competitive goals could be achieved by less restrictive alternatives.
Second, the court's decision eliminates any possibility that proof of a section 1 violation in a vertical case can be established without definition of the relevant market and full rule of reason analysis. In its discussion of the rule of reason in FTC v Actavis, Inc,
Drawing upon truncated rule of reason analysis applied by the Supreme Court in FTC v Indiana Federation of Dentists,
Third, the Supreme Court's decision establishes that a two-sided transaction platform constitutes a single market, foreclosing treatment of either side of the platform as an independent market. While this is one of the few cases to have addressed two-sided markets,
[B]ecause the relevant question is a comparison between reality and a hypothetical state of affairs, to require actual proof of reduced output [caused by the restraint] is often to require the impossible – tantamount to saying that the Sherman Act does not apply at all.
Non-price restraints on purchasing
In two appellate decisions, courts looked at whether plaintiffs in tying cases had shown foreclosure in the tied product market, reaching different conclusions.
The Court of Appeals for the Tenth Circuit considered in Healy v Cox Communs, Inc (In re Cox Enters)
Affirming the district court, the court of appeals held that more than this was required. It held that the plaintiffs had to demonstrate that the revenue flowed from an unlawful tie and that the tie was 'the reason its [Cox's] customers leased set-top boxes from Cox'.
In contrast to no foreclosure in the market for the tied product in Healy, the Court of Appeals for the Sixth Circuit held in Cates v Crystal Clear Techs, LLC
Exclusive dealing arrangements
Antitrust challenges to exclusive dealing arrangements remain a constant in the courts. The principal targets in the cases discussed below are manufacturer agreements with distributors that are claimed to block competitor access to downstream markets.
Pure exclusive dealing
In a case challenging exclusive dealing agreements between Carfax, Inc, on the one hand, and used car listing websites and car manufacturers, on the other hand, Maxon Hyundai Mazda v Carfax, Inc,
The United States District Court for the District of Delaware considered in GN Netcom, Inc v Plantronics, Inc
Plantronics argued that its exclusive dealing arrangements had no adverse competitive effects, because there was no evidence that end-users felt coerced into buying Plantronics headsets or were otherwise unable to acquire alternate brands, including GN headsets.
Even though the evidence showed that GN had its own distribution network, GN pointed to foreclosure of 47 per cent of the market as a result of Plantronics' exclusive dealing arrangements. Because there remained a question as to whether other avenues of distribution open to GN – either through direct sales to end users or sales to end users through non-Plantronics distributors – were 'practical or feasible'
Another manufacturer's exclusive dealing arrangement with distributors was reviewed by the same Delaware court in Roxul USA Inc v Armstrong World Indus.
In denying Armstrong's motion to dismiss, the court held that Roxul adequately alleged that Armstrong had wilfully acquired monopoly power in the ceiling tile market through use of the exclusivity agreements. Roxul alleged that alternate distribution channels, such as selling directly to contractors or selling through big-box retailers, were not viable options by which to reach ceiling tile consumers, and the court held that Roxul had adequately alleged that the exclusivity agreements had the effect of substantially foreclosing the market to Armstrong's competitors.
Partial exclusive dealing
A rebate programme was alleged to function as a de facto exclusive dealing arrangement in In re EpePen (Epinephrine Injection, USP) Mktg, Sales Practices & Antitrust Litigation.
Mylan moved to dismiss the complaint on the ground that its sales of EAI devices were above cost and therefore protected under Brooke Group.
The court held that Sanofi had adequately alleged that the probable effect of Mylan's rebate programme would be to foreclose competition in a substantial share of the relevant market, and it rejected Mylan's argument that an exclusive dealing claim could not be based on a single product rebate. To state a viable exclusive dealing claim based on a rebate program, according to Mylan's argument, a plaintiff must allege other exclusionary conduct that produces a substantial foreclosure of completion, such as bundling or tying the rebates to the sale of other products, threatening to terminate supply or imposing long-term agreements.
1 2018 US LEXIS 3845 (2018).
2 255 F Supp. 3d 355 (D Conn. 2017).
3 15 USC Section 1.
4 324 Liquor Corp v Duffy, 479 US 335 (1987).
5 Leegin Creative Leather Prods v PSKS, Inc, 551 US 877 (2007).
6 255 F Supp 3d at 376–78.
7 2017 US Dist LEXIS 205321 (EDNY 2017).
8 Id at *28–31.
9 Id at *33 (citation omitted).
10 2018 US Dist. LEXIS 3867 (DNJ 2018).
11 Id at *4.
12 Id at *14–15 ('consumer preference [for Jaguar vehicles] does not transform an otherwise dynamic market with dozens of interchangeable and cross-elastic products into a single market').
13 Leegin Creative Leather Prods v PSKS, Inc, 551 US 877 (2007).
14 2018 US LEXIS 3845 (2018).
15 United States v American Express Co, 88 F.Supp.3d 143 (EDNY 2015).
16 838 F3d 179 (2d Cir. 2016).
17 2018 US LEXIS 3845, at *17.
19 Id at *18.
22 Id at *19 n.7.
23 Id at *20.
24 Id at *21.
25 Id at *22 (citing B Klein et al, 'Competition in Two-Sided Markets: The Antitrust Economics of Payment Card Interchange Fees', 73 Antitrust L J 571, 580 (2006)).
26 Id at *23-24.
27 Id at *25.
28 Id at *27.
30 Id at *28.
31 Id at *30.
32 Id at *50 (dissent).
33 Id at *52 (dissent).
34 Id at *46 (citation omitted) (dissent).
35 See, eg, Capital Imaging Assocs v Mohawk Valley Medical Assocs, 996 F2d 537, 543 (2d Cir. 1993); Bhan v NME Hospitals, Inc, 929 F2d 1404, 1413 (9th Cir. 1991); US Airways Inc v Sabre Holdings Corp, 2017 US Dist LEXIS 40932, at *9–10 (SDNY 2017).
36 570 US 136 (2013).
37 Id at 159 (citation omitted).
38 Id at 160 (citation omitted).
39 As Judge Posner aptly explained in Valley Liquors v Renfield Imps, 678 F2d 742, 745 (7th Cir. 1982), full-blown rule of reason litigation in a vertical case necessitates 'trundling out the great machinery of antitrust enforcement'.
40 476 US 447, 460–61 (1986).
41 Eg, Geneva Pharmaceuticals Technology Corp v Barr Labs., Inc, 386 F3d 485, 509 (2d Cir. 2004) (vertical restraint case alleging unlawful exclusive dealing arrangement); Republic Tobacco Co v North Atlantic Trading Co, 381 F3d 717, 736-37 (7th Cir. 2004) (recognising that, 'in a proper case alleging vertical restraints, a direct anticompetitive effects analysis could be used to show market power').
42 504 US 451, 477 (1992) ('It is clearly reasonable to infer that Kodak has market power to raise prices and drive out competition in the aftermarkets, since respondents offer direct evidence that Kodak did so.' (footnote omitted)).
43 2018 US LEXIS 3845, at *19 n.7.
44 See US Airways Inc v Sabre Holdings Corp, 2017 US Dist. LEXIS 40932, at *32 (SDNY 2017) ('Amex is one of the few cases that explicitly addresses two-sided markets').
45 See id at *23–34 (defendant provided computer services allowing airlines and other travel providers to distribute schedule, fare and booking information to travel agents, but jury found that the travel agent side of the platform and the airline side of the market were not interdependent for purposes of claim by airline that defendant charged it supra-competitive prices).
46 2018 US LEXIS 3845 at *64–65 (dissent).
47 871 F3d 1093 (10th Cir. 2017).
48 Id at 1106.
49 Id at 1109.
50 Id at 1111–12 (citing Jefferson Parish Hospital Dist No. 2 v Hyde, 466 US 2 (1984)).
51 874 F3d 530 (6th Cir. 2017).
52 Id at 535.
53 2018 US App. LEXIS 15466 (2d Cir. 2018).
54 Id at *8.
55 15 USC Section 2.
56 278 F Supp 3d 824 (D Del 2017).
57 Id at 829.
58 Id at 830 (quoting United States v Dentsply Int'l, Inc, 399 F3d 181, 191 (3d Cir. 2005)).
59 Id at 829 (quoting Dentsply Int'l, 399 F3d at 196).
60 Id at 831 (quoting Dentsply Int'l, 399 F3d at 193).
61 2018 US Dist. LEXIS 21513 (D Del 2018).
62 Id at *15–16.
63 Id at *16–17.
64 2017 US Dist LEXIS 209710 (D Kan 2017).
65 Brooke Group, Ltd v Brown & Williamson Tobacco Corp, 509 US 209 (1993).
66 2017 US Dist LEXIS 209710, at *37 (citing Dial Corp v News Corp, 165 F Supp 3d 25 (SDNY 2016)).
67 Id at *39.
68 Id at *44.
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