17 October 2008
Most nations have a single competition authority; this ensures that the national government speaks with one voice on competition issues. Typically, the only exception arises from regulatory bodies that are specific to a particular industry, such as energy, transportation or telecommunications.
The United States, however, has taken a different approach. The Department of Justice (DOJ) — the general law enforcement authority — includes the Antitrust Division, which is responsible for enforcing the antitrust laws. The DOJ is an executive branch agency whose senior officials are appointed by, and serve at the pleasure of, the President. But the DOJ does not enforce the antitrust laws alone. It is joined by the Federal Trade Commission (FTC), an independent agency headed by five commissioners who are appointed by the President but serve until their staggered terms expire. Because it is not part of the executive branch, the FTC has greater political independence than the DOJ. In addition, the FTC’s statutory authority includes general authority to prevent unfair competition, which the FTC has construed as authority to address conduct that may not squarely violate the antitrust laws.
DOJ and FTC jurisdiction overlaps substantially. Although the agencies informally divide industries between them for purposes of merger review and most other enforcement activities, in large part, they enforce the same broadly worded statutes before the same courts, and contribute to the exposition and development of antitrust principles that apply in all industries. Moreover, although the FTC historically has been inclined to follow a somewhat more regulatory and experimental approach, the agencies usually have agreed on the most fundamental of these principles. And, where the two agencies have disagreed sharply on an important issue, they try to reach a common position and submit a single brief to the reviewing court that presents the views of all pertinent US government bodies.
However, twice in the past two years the DOJ and FTC have publicly parted ways on dominant firm-related antitrust issues before the US Supreme Court. These differing approaches suggest a widening gap in enforcement policy, particularly against alleged monopolists, or at least a growing willingness to air their differences in the open.
Schering-Plough — DOJ Argues Against Review of Decision Reversing the FTC
Two years ago, the FTC petitioned the Supreme Court to review the Eleventh Circuit decision in Schering-Plough Corp. v. Federal Trade Commission, which vacated an FTC order.1
The FTC claimed that Schering-Plough Corp. (Schering) settled a patent dispute by paying two generic drug companies—Upsher-Smith Laboratories, Inc. (Upsher) and ESI Lederle Inc. (ESI)—to delay for a number of years the introduction of a generic version of Schering’s brand-name drug for high blood pressure. Schering paid Upsher $60 million to license an Upsher anticholesterol drug and paid ESI $15 million to license some ESI products, $5 million in attorneys’ fees and agreed to pay $10 million if ESI’s competing generic received Food and Drug Administration (FDA) approval by a certain date. Notwithstanding Schering’s evidence that these payments were legitimate licensing fees, the FTC argued that these payments were made to exploit some idiosyncratic features at the intersection of patent protection and drug regulation under United States law.2
For several years, the FTC has been investigating brand name drug company patent settlementsthat involve what the agency calls “reverse payments” by the brand drug company to the allegedly infringing generic company. The FTC’s position is that these payments are a form of market allocation that violates the antitrust laws. In its proceeding against Schering, the FTC found that both agreements provided for payment in exchange for delayed entry of the competing generic drugs. The Eleventh Circuit reversed, however, rejecting the FTC’s view by holding that, when generic manufacturers receive something of value in exchange for delaying research, production or marketing of a drug, reverse payments are not necessarily unlawful. It agreed with Schering, and determined that the sums paid to ESI and Upsher were legitimate licensing fees. The court found that, rather than delaying entry, the settlements allowed Upsher and ESI to begin marketing their generic versions six years and three years, respectively, before the expiration of Schering’s patent.3
In its certiorari petition to the Supreme Court, the FTC contended that the decision conflicted with a Sixth Circuit decision holding that an interim reverse payment settlement was a per se antitrust violation.4
(A conflict among the circuits is an important factor in the Supreme Court’s decision whether to grant certiorari.) According to the FTC, the economic consequences of the reverse payments were significant for consumers. The FTC also tried to argue that the Eleventh Circuit decision had clear negative effects. In the two years preceding it, no generic drug litigation settlement contained both a payment from the brand and an agreement to defer generic entry. After Schering and similar court decisions, however, half of all settlements (14 out of 28) involved such conditions, which the FTC continued to argue were anticompetitive.5
Rather than support review, however, the Solicitor General’s amicus brief to the Supreme Court, filed on behalf of the DOJ, maintained that the Schering case did not present a suitable vehicle to establish the standard for determining when patent settlements are unlawful. The Solicitor General acknowledged that reverse-payment settlements could restrict competition in a way not warranted by the right to exclude under the patent laws. But the Solicitor General did not endorse the FTC’s view broadly condemning almost any reverse payments regardless of the other circumstances of the deal. The Eleventh Circuit had determined that Schering’s payments to ESI and Upsher were bona fide licensing payments and not quid pro quo for delayed market entry, and that the additional $10 million payable to ESI rested on a contingency—FDA approval—that Schering believed unlikely. For the DOJ, these factual twists impeded the formulation of a general rule that could determine effectively when reverse payments should be unlawful. The Solicitor General—whose views on such matters command great respect at the Court—also minimized the conflict with the Sixth Circuit decision. The Supreme Court denied certiorari.
Linkline: DOJ Supports Review in a Private Antitrust Case Over Informal FTC Opposition
On June 23, 2008, the Supreme Court granted certiorari in Pacific Bell Telephone Co. v. LinkLine Communications, Inc., No. 07-512, to determine whether a “prize-squeeze” violates Section 2 of the Sherman Act, as the Ninth Circuit had held.6
the FTC and the DOJ again disagreed on what aspects of monopolization liability warranted review.
Linkline, an Internet service provider (ISP), filed a complaint in 2003 against Pacific Bell, alleging that the company violated Section 2 by charging ISPs a wholesale price that was so high—in relation to the price the defendants charged for retail Internet access—that retail competitors would be effectively foreclosed. A plaintiff asserting a price-squeeze claim usually alleges that a vertically integrated company with market power at the wholesale level is pricing indispensable inputs to competitors at the retail or downstream level so high as to exclude competition at the downstream level. Pacific Bell’s motion for judgment on the pleadings relied on Trinko
, which held that a defendant’s refusal to deal with competing providers was not a viable antitrust claim in light of a regulatory framework that provides for cooperation with rivals.7
Pacific Bell’s motion to dismiss also claimed that Linkline failed to state a claim consistent with Brooke Group
, which set the standard for predatory pricing, and would require in this case that Pacific Bell’s retail pricing be below its costs.8
The district court denied the defendants’ motion for judgment on the pleadings, and later, a motion to dismiss. The Ninth Circuit affirmed after accepting an interlocutory appeal. 48 Antitrust & Competition Review
After Pacific Bell petitioned for a writ of certiorari
, the Solicitor General, representing the DOJ, submitted an amicus curiae brief urging the Supreme Court to review the case.9
In its brief, the Solicitor General argued that Trinko
precluded a claim based solely on an inadequate margin between a defendant’s wholesale and retail prices. Thus, according to the DOJ, the Ninth Circuit was recognizing antitrust claims that involved neither allegations of predatory pricing nor a breach of a duty to deal. A re-evaluation of the price-squeeze claim in light of recent case law was necessary.
The FTC did not join the brief. The FTC’s silence was unusual enough; as noted above, the agencies almost always settle on a common position before the Supreme Court. But in a rare move, the FTC issued a public statement explaining why it disagreed with the DOJ’s support for certiorari
The FTC stated that “[t]he holding of the Ninth Circuit is unquestionably correct, and indeed merely echoes what other courts of appeal have held on the narrow issue presented to the court below: that claims of a predatory price-squeeze in a partially regulated industry remain viable after Trinko
.” The FTC submitted that the regulatory regime in Linkline
was insufficient to restrict Pacific Bell because the retail side was not regulated. The retail price, therefore, could only be constrained by the antitrust laws. The FTC also contended that the Ninth Circuit’s decision was consistent with Brooke Group
because the plaintiffs had pled that consumers paid noncompetitive prices which helped maintain AT&T’s monopoly in the retail DSL-based Internet access market.
Further, the FTC contended that review was particularly inappropriate at the pleadings stage without benefit of a fully developed record. Indeed, the Ninth Circuit’s decision came in the context of an interlocutory appeal, a rare setting for a Supreme Court case. Nonetheless, the Court granted certiorari
and will hear the case in its October 2008 Term.
Schering and Linkline are Exceptions
The FTC and DOJ have disagreed before. The DOJ did not sign onto the FTC’s case in Indiana Federation of Dentists or Superior Court Trial Lawyers
But open dispute between the agencies is not the norm.
The disagreements of late may be due to the DOJ’s less regulatory orientation, which reflects Bush Administration policy. The FTC’s commissioners come from both political parties, and may hold views on antitrust enforcement that conflict with those of the Administration. Indeed, the FTC itself has not always presented a united front to the Supreme Court. For example, in February 2007, Commissioner Pamela Jones Harbour drafted a public letter to the Supreme Court opposing the FTC’s support of the DOJ’s amicus brief in Leegin, which favored overturning per se treatment of resale price maintenance.12
In that case, too, the Court sided with the less regulatory position adopted by DOJ (and the FTC majority).
The divergent approaches of the DOJ and the FTC often cause confusion among market participants, particularly those that conduct some activities subject to antitrust oversight by one agency and some activities subject to oversight by the other. On the larger issues that reach the Supreme Court, however, the agencies historically have avoided the open schisms of recent years.
While future appointments to both agencies could return the DOJ and FTC to their historical consensus on the most basic enforcement issues, open disagreement may just as well become more common. The DOJ recently released its report on single firm conduct following year-long hearings on Section 2 enforcement sponsored by the DOJ and FTC.13
At the start of the hearings in June 2006, the agencies had intended to publish a joint report. Now, the DOJ has released its own report, which clearly states that “the Department remains solely responsible for the contents of this report.” The FTC Commissioners issued statements criticizing the report for, among other things, adopting a standard of liability for unilateral conduct that is more lenient than some courts have imposed. In unusually blunt terms, Commissioners Harbour, Leibowitz and Rosch declared that the FTC “stands ready to fill any Sherman Act enforcement void that might be created if the Department actually implements the policy decisions expressed in its Report.”14
At least with respect to Section 2, the agencies appear to have settled into a substantial divergence of views rather than material consensus.
1 402 F.3d 1056 (11th Cir. 2005).
2 Under the Hatch-Waxman Act (Drug Price Competition and Patent Term Restoration Act, 21 U.S.C. § 355 (2001)), if a drug manufacturer develops a generic that is the bioequivalent of a brand-name patented drug, the generic drug manufacturer does not have to go through costly and time-consuming clinical trials to receive new approval for its drug. The generic drug could receive fast-track approval from the Food & Drug Administration (the “FDA”) if the manufacturer files a “Paragraph IV certification,” which provides that the relevant patent claims of the brand name drug are not infringed, or that they are invalid. A patent holder may sue for infringement in response to a Paragraph IV certification, and obtain judicial resolution of the validity and infringement issues. The patent holder’s claim, whether or not it has merit, triggers an automatic 30-month stay preventing the FDA from approving the generic drug. The first generic to file a Paragraph IV certification also receives a 180-day period of exclusivity before any other company may offer generic equivalents. The structure of the Hatch-Waxman Act thus encourages generic drug manufacturers to challenge drug patents, and encourages brand-name drug manufacturers to both file infringement claims and settle the ensuing patent litigation in a way that forestalls as long as possible any actual sales by the first generic filer.
3 Schering-Plough, 402 F.3d at 1064-1072.
4 In re Cardizem CD Antitrust Litigation, 332 F.3d 896 (2003).
5 Oral Statement of FTC Commissioner Jon Leibowitz, Hearing of the House Subcommittee on Commerce, Trade, and Consumer Protection, Committee on Energy and Commerce. May 2, 2007.
6 The decision below is reported at 503 F.3d 876 (9th Cir. 2007).
7 Verizon Comms. Inc., v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398 (2004).
The divergent approaches of the DOJ and the FTC often cause confusion among market participants, particularly those that conduct some activities subject to antitrust oversight by one agency and some activities subject to oversight by the other. 50 Antitrust & Competition Review
8 Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993).
9 Brief for the United States as Amicus Curiae, Pacific Bell Tel. Co. v. LinkLine Comm’n, Inc.
10 Statement of the Federal Trade Commission: Petition for a Writ of Certiorari in Pacific Tel. Co. d/b/a AT&T California v. LinkLine Comm’n., Inc. (No. 07-512).
11 Federal Trade Commission v. Indiana Federation of Dentists, 476 U.S. 447 (1986), involved a group boycott of insurance arrangements, while in Federal Trade Commission v. Superior Court Trial Lawyers, 493 U.S. 411 (1990), criminal defense attorneys who were paid by the government to represent indigent clients boycotted in order to win a pay raise.
12 Leegin Leather Products, Inc. v. PSKS, Inc., 127 S. Ct. 2705 (2007); see An Open Letter to the Supreme Court from Commissioner Pamela Jones Harbour. February 26, 2007.
13 U.S. Dep’t of Justice, Competition and Monopoly: Single-Firm Conduct Under Section 2 of the Sherman Act (2008). A more extensive review of the DOJ report will be covered in a future issue of the Mayer Brown Antitrust Review.
14 Statement of Commissioners Harbour, Leibowitz, and Rosch on the Issuance of the Section 2 Report by the Department of Justice. September 8, 2008.