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Washington-The Supreme Court last week, ruling in the final two of a trio of antitrust challenges this term, significantly raised the bar for those attempting to prove anti-competitive behavior by joint ventures and certain patent holders. The high court decisions, said antitrust litigators and scholars, reflected a court trying, in one case, to “catch up” with current economic thinking, and in another case, to “clean up” a lower court ruling that put at risk a widely used business arrangement. And depending on which side of the courtroom one sits, the justices’ rulings either enhanced competition and efficiencies in the marketplace or encouraged anti-competitive conduct likely to harm consumers and small businesses. Of the three antitrust decisions this term, the two with the most significant impact are the two decided last week: Texaco Inc. and Shell Oil Co. v. Dagher, nos. 04-805 and 04-814 (combined for decision), and Illinois Tool Works Inc. v. Independent Ink, No. 04-1329. The third case, decided on Jan. 10, was Volvo Trucks North America Inc. v. Reeder-Simco GMC Inc., No. 04-05, a decision with narrower application, according to antitrust experts. The high court has not taken many antitrust cases for decision in recent terms. Three in one term is a significant number, said some experts, but does not necessarily imply a renewed interest in this area of the law. “I don’t think [the number of cases this term] is an indication that the court feels the need to be taking more antitrust cases or the need to do more in this area,” said W. Stephen Smith, co-chairman of the antitrust practice at Morrison & Foerster, who filed an amicus brief on behalf of the American Bankers Association supporting Texaco and Shell. “I think the court looks at cases on the individual merits. Whether they take three, like they did this term, one or five, depends on the individual merits.” Antitrust scholar Michael Carrier of Rutgers School of Law-Camden, agreed, adding that the questions coming to the justices are “teed up” by the facts of the individual cases. But, he noted, the justices are less hesitant in the antitrust area than in other areas of the law to revisit old decisions because of changes in antitrust philosophy from generation to generation, which was particularly evident in the Illinois Tool case. The justices answered very important questions, if not the most important questions, pending in antitrust law today, said antitrust experts. The Texaco/Shell ruling, involving joint ventures and price-fixing, has “implications for a wide range of businesses and a wide range of conduct,” said Smith, adding, “There are tens of thousands of joint ventures and alliances in the U.S.” And Illinois Tool, involving market power and tying arrangements, will be significant, he explained, “because patents, and intellectual property more generally, are now such an important part of the economy. So many businesses’ core assets these days are patents. It has broad application, though not as broad as Texaco.” A pricing venture From 1998 until 2002, Texaco and Shell collaborated in a joint venture, called Equilon Enterprises, to refine and sell gasoline in the western United States. The joint venture was approved by the Federal Trade Commission. The gas was not to be sold under Equilon’s name, but under the original Texaco and Shell brand names. Equilon set a single wholesale price for both the Texaco- and Shell-brand gasoline. Several independent Texaco and Shell service station dealers, including Fouad Dagher, challenged the pricing practice in a lawsuit filed in 1999. They claimed that Texaco and Shell, by unifying gasoline prices under the two brands, were engaged in price-fixing-a per se violation of Section 1 of the Sherman Act. For antitrust purposes, they argued that this arrangement was no different than if Texaco and Shell, as entirely separate companies, got together and decided to sell gasoline at the same price. The high court granted review to determine “the extent to which the per se rule against price fixing applies to an important and increasingly popular form of business organization, the joint venture,” wrote Justice Clarence Thomas in the court’s unanimous opinion. Ruling against the dealers, Thomas said that per se liability is reserved for “only those agreements that are ‘so plainly anticompetitive that no elaborate study of the industry is needed to establish their illegality,’” citing to National Soc. Of Professional Engineers v. U.S., 435 U.S. 679 (1978). This was not such an agreement, he said, because Texaco and Shell did not compete in the relevant market-sale of gasoline to service stations in the western U.S.-but instead participated in that market jointly through their investments in Equilon. This type of joint venture, he said, is regarded as a single firm competing with other sellers in the market. “As such, though Equilon’s pricing policy may be price fixing in a literal sense, it is not price fixing in the antitrust sense,” he wrote, reversing the contrary ruling by the 9th U.S. Circuit Court of Appeals. “The case is important because before the 9th Circuit decision, the general understanding of the business community and antitrust bar was that when two firms integrated their operations in a joint venture like the Shell-Texaco venture here, that combined entity would have the ability to set prices for their products,” said Smith of Morrison & Foerster. “The 9th Circuit decision created a very serious cloud of uncertainty for both existing joint ventures, formed like Shell-Texaco, and, in addition, a cloud for companies in the process of or thinking about forming new joint ventures,” Smith said. “For someone like me, during this interim period, we were having to counsel clients this was a legal risk you have to think about if you have a structure that may raise these issues.” Smith said that the decision does three things. It reaffirms that per se antitrust liability applies only to narrow categories of conduct, such as overt price-fixing between two unrelated competitors. It also gives parties to integrated joint ventures certainty that they can price their products in the same manner as a single firm. And it clarifies that antitrust liability under the “ancillary restraints doctrine” will apply only to nonventure activities, thereby eliminating another source of uncertainty for joint venture participants. Daniel Shulman of Minneapolis’ Gray, Plant, Mooty, Mooty & Bennett, counsel to the Dagher class, called the decision “disappointing,” but narrowly drawn. “Our clients paid hugely inflated prices for gasoline because of this and to some extent, the public paid as well,” Shulman said. “[Texaco and Shell] got away with it. “What this case says for the future is rather than attacking the particular pricing practices of the joint venture, you have to attack the venture itself as an illegal venture. We would do that next time.” Tool time Illinois Tool also involved Section 1 of the Sherman Act. Illinois Tool Works Inc.’s Trident division makes printing systems made up of patented ink-jet printheads and non-patented inks for the printheads. In its licensing agreements, Trident conditions-or ties-the sale of its patented printheads on the purchase of its unpatented inks. Independent Ink Inc. makes and sells ink that can be used in Trident printheads and allegedly at a substantially lower cost. It charged that Trident engaged in illegal tying in violation of Section 1 of the Sherman Act. One of the most difficult and costly tasks facing a plaintiff who alleges that a defendant has violated antitrust laws by illegally tying together two products is to show that the defendant has market power in the “tying” product. But the Supreme Court has applied a presumption of market power in patent and copyright “tying” cases since its 1947 ruling in International Salt Co. v. U.S., 332 U.S. 392, and again in 1962 in U.S. v. Loews, 371 U.S. 38. Independent Ink won in the U.S. Court of Appeals for the Federal Circuit, which relied on that presumption of market power. In the 1950s and 1960s, antitrust law was hostile to patents, said Rutger’s Carrier. “Patents were viewed as monopolies and a lot of activity viewed today as not presenting any difficulty at all was struck down as bad or seemed like a monopoly,” he said. “The fallacy in that is revealed when you apply the economic approach: You see a patent does not necessarily correlate with a monopoly. When I have a patent, I can exclude others from using my particular invention, which is not the same thing as telling consumers they have no other choice in the marketplace.” Conducting a “fresh” re-examination of tying arrangements during the last 50 years or so, the high court, led by Justice John Paul Stevens, concluded that many tying arrangements, even those involving patents and so-called requirement ties (you buy my printer, then you must buy my ink), are fully consistent with a free, competitive market. “Congress, the antitrust enforcement agencies, and most economists have all reached the conclusion that a patent does not necessarily confer market power upon the patentee,” said Stevens. “Today we reach the same conclusion, and therefore hold that in all cases involving a tying arrangement, the plaintiff must prove that the defendant has market power in the tying product.” Because Independent Ink had relied on the court’s prior opinions, he directed the district court to give the company a fair chance to prove market power. “What this case does is say the fact a good is patented doesn’t mean special rules apply,” said Illinois Tool’s counsel, Andrew Pincus of the Washington office of Chicago’s Mayer, Brown & Rowe. “It really lifts a special burden these old cases had imposed on intellectual property which didn’t make sense today. “There’s been a real evolution in the last 90 years or so in thinking about tying,” he added. “All this does is put things on an equal footing.” The “big question left open” is how difficult will it be to prove market power, said Independent Ink’s counsel, Kathleen Sullivan, of counsel to the Redwood Shores, Calif., office of Los Angeles-based Quinn Emanuel Urquhart Oliver & Hedges. She added that the elimination of the presumption still leaves lots of other ways for plaintiffs to prove it. “We thought we won three big points here: We get to go back to district court to prove market power; Justice Stevens said requirement ties may well be anti-competitive in a large number of circumstances and price discrimination may well be proof of market power,” Sullivan said. “Since we think these patent-requirement ties are generally imposed to price discriminate, that may be helpful for us on remand and for many other plaintiffs. Our take is defendants shouldn’t go out and start tying like crazy.”

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