Interesting Section 2 Developments

Cite this Article
Joshua D. Wright, Interesting Section 2 Developments, Truth on the Market (September 05, 2007),

A pair of interesting antitrust appellate decisions have been released over the past few days involving single firm conduct and Section 2: Cascade Health Solutions v. PeaceHealth (9th Cir.) and Broadcom v. Qualcomm (3rd Cir.).

First, the Ninth Circuit’s decision in Cascade Health Solutions v. PeaceHealth reversed the district court’s Lepage’s based jury instruction in a multi-product bundled discount case and adopted (largely) the AMC recommendation for evaluating such cases.  The AMC Report and Recommendation argued in favor of the following test:

Courts should adopt a three-part test to determine whether bundled discounts or rebates violate Section 2 of the Sherman Act. To prove a violation of Section 2, a plaintiff should be required to show each one of the following elements (as well as other elements of a Section 2 claim): (1) after allocating all discounts and rebates attributable to the entire bundle of products to the competitive product, the defendant sold the competitive product below its incremental cost for the competitive product; (2) the defendant is likely to recoup these short-term losses; and (3) the bundled discount or rebate program has had or is likely to have an adverse effect on competition.

The Ninth Circuit adopts the first prong of this “discount attribution” test but views the second and third prongs as unnecessary because short-term losses are not necessary in a multi-product discount scheme and because it views the third prong as duplicative of the antitrust injury requirement imposed on private plaintiffs generally. 

A few quick reactions on PeaceHealth.  First, the Ninth Circuit’s rejection of the LePage’s standard is an unequivocally good thing and worthy of applause in its own right.  Second, most commentators agree that there are problems with the AMC standard but its widespread adoption would represent significant improvement over Lepage’s.  Third, the Ninth Circuit decision here may be sufficient to produce a circuit split on this issue and persuade the SCOTUS (which has proven its willingness to tangle with tricky antitrust issues) to grant certiorari sooner rather than later.  Fourth, the Ninth Circuit rejected the Ortho standard (which examines whether the plaintiff was an equally efficient producer of the competitive product but could not operate profitably because of the defendant’s pricing) in favor of the “hypothetical” equally efficient competitor standard partially on the grounds that the Ortho rule “might encourage more antitrust litigation than is reasonably necessary to ferret out anticompetitive practices” and was therefore in tension with the Supreme Court’s teachings in Twombly.  Fifth, I must admit that I’ve always had a conceptual problem with the idea that a firm producing goods A & B could exclude a hypothetically equally efficient competitor who was only producing A.  If the rival firm was truly equally efficient, why not produce both goods or for that matter contract with another competitor to produce a bundle?  Sounds like a rather fragile hypothetical rival to me.  And last but certainly not least — it should be noted that TOTM’s own Thom Lambert’s work on bundled discounts is cited throughout the opinion.  Good work Thom!  Of course, they could have also cited your excellent blog posts on the topic!  See, e.g., here here and here.

The second appellate decision is Broadcom v. Qualcomm (WSJ story here).  The Third Circuit overruled a decision from district court in New Jersey granting Qualcomm’s motion to dismiss Broadcom’s antitrust claims (amongst others).   Broadcom did not appeal the rulings on its tying and exclusive dealing claims, but argued that the district court erred in dismissing the monopolization and attempted monopolization counts under Section 2 based on its allegations of abuse of the standard setting process (the Third Circuit also dismissed Broadcom’s monopoly maintenance claim due to lack of standing). 

The heart of the case involves Broadcom’s allegations that Qualcomm promised to license its patents on FRAND terms in order to be included in the UMTS standard and reneged on those promises after its technology was included in the standard, i.e. a “patent hold-up” case.  The Court discusses the FTC actions in Dell, Unocal and Rambus and relies on this set of cases for the proposition that “deceptive conduct” of this type could constitute exclusionary conduct under Section 2 (and Section 5 of the FTC Act).  The key issue was whether Broadcom had stated actionable anticompetitive conduct by alleging that Qualcomm deceived the standard setting bodies into adopting the UMTS standard by commiting to license its WCDMA technology on FRAND terms and subsequently demanding non-FRAND royalties.  Here’s the key paragraph:

We hold that (1) in a consensus-oriented private standard-setting environments, (2) a patent holder’s intentionally false promise to license essential proprietary technology on FRAND terms, (3) coupled with an SDO’s reliance on that promise when including the technology in a standard, and (4) the patent holder’s subsequent breach of that promise, is actionable anticompetitive conduct.

This is a very interesting addition to the “abuse of standard setting” jurisprudence that is beginning to develop and seems to require either deception or an intentionally false promise to license on FRAND terms as part of a “hold up” strategy.  The WSJ story reports that Qualcomm claims to be pleased with the ruling because only two of eight of Broadcom’s claims remain.  Given that the two remaining claims are Section 2 claims with the possibility of treble damages, I am somewhat skeptical of that claim.