The following summaries describe recent antitrust developments of note. Corporate counsel should be aware of the cases described below when analyzing potential antitrust claims. In addition, a recent FTC rules change may affect decisions in matters pending before the Commission.
Collective Adoption Of Arbitration Clauses Challenged As Unlawful Conspiracy
A class action lawsuit recently filed in the Southern District of New York alleges that eight credit card companies, along with co-conspirators American Express and Wells Fargo, violated the Sherman Act by colluding to impose mandatory arbitration clauses that prohibit class action suits in the terms of their credit card agreements. The complaint claims that the arbitration clauses harm competition by allowing the defendants to obtain a non-price "trade advantage" and injure consumers by depriving them of rights and procedural protections available in the judicial system. The plaintiffs in the case are seven individual credit card holders who claim to represent a class composed of all U.S. holders of general purpose cards issued by the defendants.
According to the complaint, the defendants (which include Bank of America, Capital One Bank, Citibank, and J.P Morgan Chase) hold a significant market share in the "general purpose card market." The plaintiffs allege that general purpose cards are a relevant product market because they differ from other forms of payment, such as cash, checks, and debit cards and other forms of payment often are not a close substitute for a general purpose card. These cards, according to the complaint, are a practical necessity for most consumers, who view the cards as an "indispensable part of everyday life."
The plaintiffs allege that in late 1998 or early 1999, the defendants began communicating with each other and other co-conspirators regarding the use of mandatory arbitration clauses in their card agreements. At the time of these initial communications, only three of the defendants had adopted arbitration clauses. In May 1999, a number of the defendants met and formed the "Arbitration Coalition," the purpose of which was to "defend and foster arbitration and promote the imposition of mandatory clauses." The complaint alleges that the Arbitration Coalition met several times over the next four years to discuss "sharing best practices" and "drafting enforceable arbitration clauses." The result of these meetings, according to the plaintiffs, was the adoption of materially identical mandatory arbitration clauses by the defendants.
The defendants also allegedly formed two additional groups to impose arbitration clauses to eliminate class actions: the "Consumer Class Action Working Group" and the "In-House Counsel Working Group." The Consumer Class Action Working Group allegedly first met in January 2001 to discuss ways of combating consumer class action litigation, including filing countersuits against class action lawyers and suits for abuse of process. The In-House Counsel Working Group provided an opportunity for the defendants to share information concerning their business practices and strategies with respect to compulsory arbitration clauses.
The complaint alleges that the defendants violated Section 1 of the Sherman Act by agreeing to impose and maintain the arbitration clauses, rendering the clauses voidable and unenforceable. The conspiracy allegedly harmed competition among card issuers and resulted in supra-competitive profits by shielding the defendants from legal liability. The complaint also alleges that the defendants violated Section 1 by collectively refusing to deal with any cardholder who refuses to accept arbitration clauses as a term and condition of their cardholder agreement.
DOJ Challenges Non-Compete Clause
On September 2, 2005, the DOJ Antitrust Division issued a complaint and proposed settlement involving two digital jukebox companies - NSM Music Group Ltd. (NSM) and Ecast Inc. (Ecast) - that allegedly entered into an unlawful agreement pursuant to which NSM agreed not to enter the U.S. market with a digital jukebox in competition with Ecast. Digital jukeboxes are the newest generation of coin-operated, music-playing devices that are installed in bars and restaurants across the United States. Instead of playing records or CDs, digital jukeboxes play digital music files and offer consumers a broader selection of music.
According to the complaint, NSM, already a manufacturer of CD jukeboxes, planned to begin offering a digital jukebox in the United States in late 2002. NSM abandoned its plans to enter the U.S. market with its own platform once it reached an agreement with Ecast that it would only manufacture digital jukeboxes incorporating Ecast's platform. According to the DOJ, NSM's release of a third competing digital jukebox platform likely would have stimulated competition and resulted in better products at lower prices. The proposed settlement terminates the parties' noncompete agreement and thereby frees NSM to offer a digital jukebox in the United States.
The complaint and settlement is a useful reminder that, as the Supreme Court held in Palmer v. BRG of Ga., Inc., 498 U.S. 46 (1990), actual competition is not required to render customer or market allocation agreements unlawful. Even where, as was apparently the case here, the noncompete was entered into as part of a larger agreement to provide services or license technology, it will be scrutinized for its competitive effect and potential justifications.
Third Circuit Holds That Hospital's Primary Service Area Not Equivalent To Relevant Geographic Market
The Third Circuit, in a case involving physician hospital privileges, held that a hospital's primary service area does not establish the relevant geographic market for antitrust purposes.
The plaintiff was a Pennsylvania ophthalmologist whose hospital privileges were revoked after he breached several conditions of his appointment. The plaintiff filed suit, claiming that the hospital violated the Sherman Act in a number of ways, including imposing a restraint of trade by prohibiting him from providing information to patients and thus foreclosing him from competing in the market for physician ophthalmic services. Judgment in favor of Lewistown Hospital on all claims was entered after a bench trial.
On appeal, the plaintiff claimed, among other things, that the District Court had erred in concluding that the relevant geographic market for general outpatient cataract surgery was all hospitals and surgical centers performing outpatient cataract surgery within a 30 mile radius of Lewistown, rather than a two-county area proposed by the plaintiff. According to the plaintiff, Lewistown Hospital's primary service area was the relevant geographic market, given Lewistown's isolated location between mountain ranges.
The Third Circuit rejected plaintiff's argument, holding that a primary service area does not equate to the relevant geographic market. According to the court, defining the relevant geographic market by a hospital's primary service area is too limiting, and ignores patients' greater willingness to travel for more important medical procedures. Evidence presented at trial demonstrated that two-thirds of patients living within eight miles of Lewistown Hospital received cataract surgery elsewhere, and that approximately 21% of Lewistown Hospital's patients lived closer to other facilities. The plaintiff's proposed two-county market, comprising Lewistown's primary service area, thus excluded a number of competitors and could not be the relevant geographic market for antitrust purposes.
This case follows numerous hospital merger cases in finding expansive geographic markets, and may be relevant to other antitrust cases where the scope of the relevant geographic market is at issue.
PBM Contracts To Be Analyzed Under Rule Of Reason
The Northern District Court of Illinois, in a decision issued August 12, held that a PBM's arrangements with health plan sponsors are not per se unlawful and should be analyzed under the rule of reason.
North Jackson Pharmacy, an independent retail pharmacy, filed suit against Caremark Rx, a PBM, alleging two violations of Section 1 of the Sherman Act. The first claim asserts a conspiracy among health plan sponsors, using Caremark as their common agent, to fix the prices paid to pharmacies for dispensing prescription drugs to health plan members. The second claim charges a conspiracy between Caremark and other PBMs to fix those same prices.
Caremark filed a Rule 16 motion to narrow the issues for litigation and discovery, arguing that the per se rule did not apply to its agreements with plan sponsors. The court agreed with Caremark and rejected North Jackson's argument that the arrangement between Caremark and plan sponsors was a per se violation of the antitrust laws. According to the court, the services provided by Caremark to plan sponsors is similar to the services provided by a cooperative buying agreement and have efficiency-enhancing potential. The alleged anticompetitive agreements between plan sponsors are ancillary to the agreements between Caremark and the plan sponsors and should thus be analyzed under the rule of reason. The court pointed out that these arrangements might result in lower drug prices for consumers and thus to hold such agreements illegal per se, without careful examination of the agreement's competitive effects, "would seem at odds with the Sherman Act's purpose." Furthermore, any decision regarding the lawfulness of Caremark's arrangements would have far-reaching consequences and warrants a thorough analysis under the rule of reason.
Caremark did not seek to apply the rule of reason to North Jackson's claim that Caremark conspired with other PBMs to fix prices.
FTC Changes Quorum Rule
The Federal Trade Commission (FTC) has amended its rules of practice to allow the agency to act in more matters where, due to vacancies, recusals, or a combination of the two, fewer than three commissioners can participate. On September 2, 2005, the FTC announced an amendment to the definition of "quorum." Rule 4.14(b) previously defined a quorum as a "majority of the members of the Commission." The amendment changes this definition to a majority of the members of the Commission in office and not recused from participating in the matter. Rule 4.14(c) continues to require, for the FTC to act, "the affirmative concurrence of a majority of the participating Commissioners, except where a greater majority is required by statute or rule or where the action is taken pursuant to a valid delegation of authority."
As a result of the amendment, it will be possible for two Commissioners who agree on a particular course of action to authorize an enforcement action when other commissioners are not participating in a matter. This was not possible under the prior rule, where a quorum did not exist when only two Commissioners were available to participate. The rule change is particularly significant under current circumstances. The FTC has only four members at present, and the term of one of the four has expired.
Published October 1, 2005.
