Blawgletter®

Supreme Court to Rule in Reverse-Payment Case

Today the Supreme Court granted review in Federal Trade Comm'n v. Watson Pharmaceuticals, No. 12-416 (U.S.), an antitrust case that presents the question of whether section 1 of the Sherman Act bars Competitor A from paying Competitor B to delay rolling out a generic drug that vies for sales with Competitor A's brand-name drug. Posts here and here.

Dewey & LeBouef Tanks; WSJ Says Ethics Rules Killed Firm

Dewey & LeBouef filed for bankruptcy protection on Sunday in Manhattan. It plans to liquidate.

WSJ, meanwhile, printed an item that partly blames "regulation" for Dewey's demise.

E-Books Case Draws WSJ Wrath

Talk about goofy.

Today's WSJ -- The Wall Street Journal -- includes a column that gets antitrust law so wrong you wonder why the paper's pundits, who include those who write the official editorials, bother.

The column in question takes aim at the U.S. Department of Justice's case that calls Apple and five book publishers price-fixers for, well, fixing prices.

As the WSJ so often does when dealing with antitrust law, this item reflects a breed of magical thinking.

It first claims that the e-book cartel couldn't have conspired because they simply applied Apple's standard "agency model" to e-books. That model lets the makers of a good or service -- here, the book-publishers -- set Apple's price. Apple keeps 30 percent of that price.

The writer doesn't seem to have picked up on the fact that the book people didn't use the agency model until they jointly chose to change their model. Adoption of the model resulted not from independent decisions but from a string of secret meetings where the book-makers' top execs agreed on a common plan to keep book prices high. Prices for their books shot back up and have stayed there. Buyers paid more. And Apple got 30 percent of the bigger take.

Can you say price-fixing?

The writer claims that the DOJ lawsuit has HURT competition by giving Amazon cover to . . . lower prices. You read that right. Paying less for e-books hurts competition.

Who does the author cite for that idea? The head of a group that lobbies for people who write books. They of course want high prices for their products, pretty much for the same reason Apple does -- they get a cut, too.

But, wait, there's more.

The writer ends by quoting antitrust guru and prophet Richard Posner, who for many years has taught antitrust law both as a judge on the Seventh Circuit Court of Appeals in Chicago and as a prof at the University of Chicago. The quote has Judge Posner saying that courts may often do a bad job of weighing "efficiency against monopoly". But the e-book case doesn't deal with "monopoly" -- which by its terms ("mono") involves a single firm. No, this case concerns a price-fixing cartel. And the balance in cases like that falls almost always on the side of condemnation.

The irony? The same paper talked with a bunch of antitrust experts and put what they said about United States v. Apple Corporation in an article. The title?

"Critics of E-Books Lawsuit Miss the Mark, Experts Say".

U.S. E-Book Complaint Lays Out "Agency" Pact with Apple

You've likely heard by now that the Antitrust Division of the U.S. Department of Justice sued Apple and a bunch of e-book publishers for fixing prices on, well, e-books.

You can see the complaint here.

The key part comes in paragraph 7, which explains Apple's "agency" plan for thwarting Amazon's effort to cut all e-book prices to $9.99 thus:

The plan -- what Apple proudly described as an "aikido move" -- worked. Over three days in January 2010, each Publisher Defendant [and Apple] entered into a functionally identical agency contract . . . that would go into effect simultaneously in April 2010 and "chang[e] the industry permanently." These "Apple Agency Agreements" conferred on the Publisher Defendants the power to set Apple's retail prices for e-books, while granting Apple the assurance that the Publisher Defendants would raise retail e-book prices at all other e-book outlets, too. Instead of $9.99, electronic versions of bestsellers and newly released titles would be priced according to a set of price tiers contained in each of the Apple Agency Agreements that determined de facto retail e-book prices as a function of the title's hardcover list price. All bestselling and newly released titles bearing a hardcover list price between $25.01 and $35.00, for example, would be priced at $12.99, $14.99, or $16.99, with the retail e-book price increaasing in relation to the hardcover list price.

The tying of the e-book price to the hardcover list price had the effect of letting the publishers leverage their power over list prices in the hardcover realm into the e-book space. So the theory goes.

The DOJ doesn't ask for damages, just declaratory and equitable relief that would get rid of the Apple Agency Agreements.

The move comes months after private parties filed a slew of cases alleging the same section 1 violation of the Sherman Act. And they for sure DO seek damages. Lots of them. Three times lots of them even.

Wireless Goes Haywire

AT&T Wireless tried for T-Mobile in what looks like an attempt at building a bridge too far. Which Blawgletter thought from the get-go.

[Let's ignore for now the thing the editors of our -- and AT&T's -- hometown paper wrote about the FCC's failure to shoo the AT&T/T-Mobile deal through. Let's just say they'd have done better if they'd said we want one of our biggest companies to get even larger because we hope that'll help the local economy. But they instead wrote that the deal would produce more jobs, better service, lower taxes, longer daylight hours, fewer murders, and slower global warming.]

Now we hear that the very most gigantic wireless company, Verizon, just inked a deal with two of the very most titanic cable firms, Comcast, Time Warner, and Bright House, to -- get this -- stop trying to compete for wireless customers!

The cable guys will cede to Verizon the spectrum that belongs to their wireless joint venture, SpectrumCo. In return, Verizon agrees to pay $3.6 billion and to sell subscriptions to Comcast, Time Warner, and Bright House cable.

Can you say "market allocation"?

The fact that these deals happen out in the open doesn't, by the way, make them legal. AT&T's with T-Mobile made front pages, but that didn't stop the Federal Communications Commission from moving to block it.

The WSJ takes the view that the FCC has no business using "antitrust theory from the industrial era" to block the AT&T/T-Mobile deal because, even though the merger would "enhance" AT&T's "market power", giving AT&T more market power "[is] not the same as harming competition."

Alrighty then.

We can trust AT&T to do nothing but good. 

Forgive us for thinking not.

Quote of the Day: Jonathan Weil

We had to save the banks in order to sue them.

Jonathan Weil, "Suing Banks is Next Best Thing to Letting Them Fail", Bloomberg, Sept. 8, 2011 (referring mainly to Federal Housing Finance Agency lawsuit against 17 banks relating to "sale of residential private-label mortgage-backed securities").

DOJ Antitrust Division Sues to Stop AT&T from Gobbling T-Mobile (Update)

Dang. The Antitrust Division has teeth after all.

(Blawgletter called it in March, by the way.)

Per the WSJ, the AD sued to enjoin the deal for AT&T to acquire T-Mobile.

The pact would create the biggest, baddest, anticompetitivest wireless firm in the U.S.

The Division's press release said:

The department’s lawsuit, filed in U.S. District Court for the District of Columbia, seeks to prevent AT&T from acquiring T-Mobile from Deutsche Telekom AG. 

“The combination of AT&T and T-Mobile would result in tens of millions of consumers all across the United States facing higher prices, fewer choices and lower quality products for mobile wireless services,” said Deputy Attorney General James M. Cole.  “Consumers across the country, including those in rural areas and those with lower incomes, benefit from competition among the nation’s wireless carriers, particularly the four remaining national carriers.  This lawsuit seeks to ensure that everyone can continue to receive the benefits of that competition.”

“T-Mobile has been an important source of competition among the national carriers, including through innovation and quality enhancements such as the roll-out of the first nationwide high-speed data network,” said Sharis A. Pozen, Acting Assistant Attorney General in charge of the Department of Justice’s Antitrust Division.  “Unless this merger is blocked, competition and innovation will be reduced, and consumers will suffer.” 

Mobile wireless telecommunications services play a critical role in the way Americans live and work, with more than 300 million feature phones, smart phones, data cards, tablets and other mobile wireless devices in service today.  Four nationwide providers of these services – AT&T, T-Mobile, Sprint and Verizon – account for more than 90 percent of mobile wireless connections.  The proposed acquisition would combine two of those four, eliminating from the market T-Mobile, a firm that historically has been a value provider, offering particularly aggressive pricing. 

According to the complaint, AT&T and T-Mobile compete head to head nationwide, including in 97 of the nation’s largest 100 cellular marketing areas.  They also compete nationwide to attract business and government customers.  AT&T’s acquisition of T-Mobile would eliminate a company that has been a disruptive force through low pricing and innovation by competing aggressively in the mobile wireless telecommunications services marketplace. 

The NYT quoted AT&T as saying it will “vigorously contest this matter in court.”

AT&T's press release says:

We are surprised and disappointed by today’s action, particularly since we have met repeatedly with the Department of Justice and there was no indication from the DOJ that this action was being contemplated.

We plan to ask for an expedited hearing so the enormous benefits of this merger can be fully reviewed. The DOJ has the burden of proving alleged anti-competitive affects and we intend to vigorously contest this matter in court.

At the end of the day, we believe facts will guide any final decision and the facts are clear. This merger will:

• Help solve our nation’s spectrum exhaust situation and improve wireless service for millions.
• Allow AT&T to expand 4G LTE mobile broadband to another 55 million Americans, or 97% of the population;
• Result in billions of additional investment and tens of thousands of jobs, at a time when our nation needs them most. 

We remain confident that this merger is in the best interest of consumers and our country, and the facts will prevail in court.

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If you like Blawgletter, will you please consider recommending us for a spot on the ABA's Blawg 100 list?

Fear, Antitrust, and AT&T

Blawgletter felt in our gut that the AT&T deal with Deutsche Telekom to buy the T-Mobile wireless system would never go through.

Christine Varney, the head of the Antitrust Division in the U.S. Department of Justice, wouldn't stand for it. She threw out a Division report that she saw as too deal-friendly and teamed up with the Federal Trade Commission to make their joint guidelines for judging mergers less deal-friendly.

Neither would Julius Genachowski, chair of the Federal Communications Commission. He's declared himself a friend of consumers and an enemy of too much market power.

Plus just the idea that the biggest wireless firm could gobble up the third-largest in one $39 billion gulp feels so wrong.

News weighs in.

But AT&T''s (and our) home town newspaper, The Dallas Morning News, begs to differ. It came out today in favor of letting AT&T swallow T-Mobile. Its reasons? All revolve around scare-mongering. Behold:

Developing faster and more affordable high-speed networks is to the digital age what railroads, highways, the telephone and electricity were for past generations. Moreover, the ability to move data quickly and affordably is a competitive edge that ultimately translates into thousands of new jobs and more efficient commerce. Today, there are many elements that determine whether mergers are in the public interest. That’s a new-age way of looking at competition — and one that regulators would be wise to factor into their reviews.

So there you go. We need to leave behind "old school" notions of competition and adopt "a new-age way of looking at" it -- the way that focuses on building "high-speed networks" and creating "thousands of new jobs and more efficient commerce" as a result of the merger. Failure to okay the deal would DEPRIVE US OF THE NETWORKS and KILL THOSE JOBS!

Really? How, exactly? A lot of the cost savings come from firing people and closing offices. Thousands of people, dozens of offices. $40 billion worth!

And a stronger AT&T, its number three competitor safely in its belly, will feel less pressure to offer good rates, expand product offerings, and provide good service, which lots of people regard as awful already. Taking the pressure off AT&T to furnish those things will cost jobs . . . and will put more money in AT&T's pockets, mainly at the expense of employees, customers, and suppliers.

What'll happen?

Will the deal pass muster? Put us down as doubtful. We'll likely see a clutch of private antitrust suit against AT&T -- perhaps even one by Sprint -- and very close review by the Antitrust Division and FCC. The pressure may cause a gasket to blow.

But the thing that may undo the pact lies within it.  The Stock Purchase Agreement promises, in the event a Governmental Entity doesn't approve the transaction, that T-Mobile gets a "Termination Transfer" of $3 billion plus "the assets set forth on Annex E". (You'll look in vain in AT&T's Report on Form 8-K for Annex E on the company's website.) The assets consist of "a roaming agreement with Deutsche Telekom on terms favorable to both parties and [a] transfer to Deutsche Telekom [of] certain wireless AWS spectrum that the Company does not need for its initial LTE roll-out." Which T-Mobile may conclude, as it reviews its options, beats going the way of Pacific Bell, Ameritech, and Bell South.

Would the death of the deal make T-Mobile stronger? We suspect so. (And a combination with Sprint would do less harm.)  And we hope the Termination Transfer proves the poison pill it seems. We don't fear it a bit. Doing it old school!

Animating Competition: DOJ Settles Claim Against Lucasfilm for Noncompete Deal with Pixar

How can you hold down the cost of hiring the best talent?

In lots of businesses, the skill, knowledge, and creativity of workers make a crucial difference.  Those traits matter most on the high end of the high-end.  Think law, medicine, engineering, physics, computer science, rocket science, oenology, epistemology, and macrame.  The high-end could hardly exist without these titans.

So what can you do to manage what you have to pay for their services?  Can you agree with firms that compete with you to limit the talent's compensation?  Can you exchange promises not to solicit one another's employees?  Can you, in short, conspire to restrain trade?

Of course not.

That explains why Lucasfilm reached a deal with the Antitrust Division of the U.S. Department of Justice to end the company's pact with Pixar not to compete for digital animators.  In a Complaint it filed as part of the arrangement with Lucasfilm, the Antitrust Division charged that Lucasfilm and Pixar "entered into an agreement not to cold call, not to make courteroffers under certain circumstances, and to provide notification when making employment offers to each other's employees."  Complaint ¶ 2.  The Lucasfilm-Pixar pact, according to the press release, "eliminated important forms of competition to attract highly skilled employees and, overall, significantly diminished competition to the detriment of affected employees who were likely deprived of information and access to better job opportunities."

Pixar -- along with other high-tech companies including Intel and Apple -- reached a similar deal with the DOJ in September.  Post here.

Note that an agreement with a direct competitor to limit rivalry over hiring employees constitues a per se violation of the Sherman Act.  A per se violation doesn't require proof of monopoly power.  So you may not want to beguile yourself with the notion that you comply with antitrust law so long as you don't dominate your market.

Supremes May Kill Class Action Species in Walmart Appeal

The U.S. Supreme Court today granted review of a Ninth Circuit ruling that allowed a class of California women to pursue sex discrimination claims against Walmart.  Order List, Dec. 6, 2010, at 2.

The Ninth Circuit held en banc that the case could move ahead as a class action under Rule 23(b)(2) on the women's claims for injunctive, declaratory, and back pay relief.  The 6-5 court also sent the case back to the district court for a decision on whether the class's claims for punitive damages could proceed on a class basis under Rule 23(b)(2) or 23(b)(3).  Dukes v. Wal-Mart Stores, Inc., 603 F.3d 571 (9th Cir. 2010) (en banc).

The Court's ruling in Dukes will likely settle a split in the courts of appeals over whether and when courts may certify class actions that seek money together with injunctive or declaratory relief.  Some circuit courts, such as the Second and the Ninth, tend to hold that even a claim for big monetary relief can fit within the Rule 23(b)(2) framework so long as the class also seeks serious injunctive and declaratory relief.  Other circuits, notably the Fifth, almost categorically disallow classes where the plaintiffs ask for any cash other than as purely incidental relief.