Article originally published 27th June 2006.
Yesterday the Supreme Court agreed to hear appeals in two significant antitrust cases — Bell Atlantic v. Twombley, Case No. 05-1126 (2006), and Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., Case No. 05-381 (2006) — but denied the Federal Trade Commission’s petition for certiorari in its case against pharmaceutical manufacturer Schering-Plough. FTC v. Schering-Plough, Case No. 05-273 (2006).
In Bell Atlantic v. Twombley, the Court will decide whether allegations of parallel conduct by defendants, coupled with a simple assertion that such conduct is the result of a conspiracy, states a claim under Section 1 of the Sherman Act. In the decision below, the Second Circuit held that it does, despite the fact that it is settled law that parallel conduct alone does not entitle the plaintiff to relief.
The Second Circuit’s holding conflicts with decisions of the First, Sixth, and Tenth Circuits, which require plaintiffs pleading a claim under Section 1 to allege facts that, if true, would support a claim of conspiracy. According to the law of the other Circuits, in the absence of direct evidence of a conspiracy, a plaintiff seeking damages for a violation of Section 1 based on parallel conduct must present evidence that tends to exclude the possibility that the alleged conspirators acted independently. Such additional facts — commonly known as “plus factors” — usually involve a showing that the defendants’ behavior would not be rational if they were not acting collusively. Under the “plus factor” standard, a plaintiff is not required at the pleading stage to describe every aspect of the asserted conspiracy, but it must allege some facts suggesting conspiracy before it can proceed to the discovery process. The Bell Atlantic defendants, as well as many amici, contend that the Second Circuit’s lowered pleading standard will invite frivolous litigation and impose significant burdens on the courts and private businesses.
Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co. concerns conduct known as “predatory bidding” — deliberately bidding up the price of inputs in order to prevent competitors from procuring sufficient supplies to manufacture finished products. The question presented by the case is whether the legal standard for predatory pricing claims under Section 2 of the Sherman Act also applies to “predatory bidding” claims. The standard for predatory pricing was set by the Supreme Court in Brook Group Ltd. v. Brown & Williamson Tobacco Corp., where the Court held that a plaintiff alleging predatory pricing must prove (1) that the defendant suffered a short term loss by virtue of its pricing, and (2) that it had a dangerous probability of recouping its loss in the long term once competition was eliminated.
In its decision below, the Ninth Circuit concluded that predatory bidding cases were distinguishable from predatory pricing cases because, unlike predatory pricing, predatory bidding does not result in lower prices to the end consumer. Therefore, the Ninth Circuit held that the two-part Brook Group test was inapplicable to predatory bidding claims and instead created its own test. Under the Ninth Circuit’s rule, a defendant engages in anticompetitive predatory bidding if it pays “a higher price than necessary” in order to prevent a plaintiff from obtaining necessary inputs “at a fair price.” The Ninth Circuit test has been criticized for its lack of objective standards and the increased likelihood that beneficial, aggressive, legal competition will be confused with anticompetitive conduct.
The Supreme Court declined to accept the more controversial case of FTC v. Schering-Plough, in which the Court was asked to evaluate the legality of certain types of patent litigation settlements between branded and generic drug manufacturers. The FTC had appealed a decision of the Eleventh Circuit holding that an agreement requiring Schering-Plough to pay Upshur-Smith significant royalties in exchange for Upshur’s forbearance from marketing a generic version of Schering’s patented heart medication did not violate Section 1.The case involved a rare disagreement between the FTC and the Solicitor General, who recommended against certiorari. Although the Solicitor General agreed that the FTC raised “important and complex issues concerning the antitrust treatment of settlements in patent cases, particularly settlements that provide for delayed entry into the market combined with a ‘reverse’ payment from the patent holder to the alleged infringer,” the case did not present an appropriate opportunity for the Court to determine the proper standards for distinguishing legitimate patent settlements from settlements that impermissibly restrain trade in violation of the antitrust laws. Despite the denial of certiorari in this case, the FTC is expected to continue to pursue investigations of patent litigation settlements involving generic drug manufacturers.
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
© Morrison & Foerster LLP. All rights reserved