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tuesday, october 27, 2015
Volume 254—NO. 81
Expert Analysis
ANTITRUST
Prohibitions on Paying College Athletes
For Use of Images in Video Games
T
he U.S. Court of Appeals for
the Ninth Circuit decided that
rules prohibiting student-athletes from being paid for the
use of their names, images and
likenesses in video games did not violate antitrust law because the amateur
nature of collegiate sports increases
their appeal to consumers, but schools
must be permitted to provide scholarships to student athletes up to the full
cost of attendance.
A district court
ruled that patent infringement settlement agreements between a brandname drug-maker and generic rivals
were not anticompetitive without a
large unjustified reverse ayment.
p
Another district court rejected the
Federal Trade Commission’s challenge
to a proposed combination of a domestic medical equipment sterilization
company with a foreign sterilization
company because the FTC failed to
show that absent the merger, the foreign firm was likely to enter the U.S.
market.
Other recent antitrust developments of note include the Depart-
ELAI KATZ is a partner of Cahill Gordon & Reindel. KOMAL
PATEL, an associate at the firm, assisted in the preparation
of this article.
By
Elai
Katz
ment of Justice’s decision not to
challenge a merger of leading online
travel booking firms and the department’s continued prosecutions of
auto parts cartels.
College Sports
The Ninth Circuit ruled that the
National Collegiate Athletic Association (NCAA) may prohibit compensating student-athletes for use of
their names, images, and likenesses
because amateurism in college sports
had concrete pro-competitive effects
by increasing their appeal to consumers. The district court’s solution,
allowing for relatively small deferred
payments to students, was not as
effective an alternative to accomplish that goal and was vacated by
the Ninth Circuit.
O’Bannon v. NCAA,
2015 WL 5712106, Nos. 14-16601,
17068 (Sept.
30, 2015).
This case was brought by a group
of current and former college
s
tudent-athletes challenging the
NCAA’s rules barring students from
receiving a share of the revenue generated by the sale of licenses to use
their names, images, and likenesses
in video games and game telecasts.
In the absence of the NCAA rules, the
student-athletes claimed, schools
would compete to offer recruits a
share of that licensing revenue.
The district court decided that
the NCAA’s rule violated §1 of the
Sherman Act, and enjoined the NCAA
from prohibiting such payments.
The district court’s order effectively
allowed schools to give student-athletes full scholarships and deferred
compensation but permitted the
NCAA to cap deferred-compensation payments at $5,000 per year
per athlete. The NCAA appealed.
In a 2-1 decision, the Ninth Circuit
vacated the latter part of the district
court’s ruling, allowing the NCAA to
ban these payments in their entirety.
As an initial matter, the Ninth Circuit rejected the NCAA’s arguments
that its rules are exempt from antia
trust scrutiny. The ppellate court
obser ved that Supreme Cour t
.
tuesday, october 27, 2014
p
recedent does not hold that amateurism rules are valid as a matter
of law and instead supports the
application of rule of reason analysis
to NCAA rules. The court affirmed
the lower court’s finding that the
student-plaintiffs met their initial
burden under the rule of reason of
showing that the NCAA’s compensation rules had a significant anticompetitive effect on the college education market, and that the NCAA
demonstrated in response that the
compensation rules served the procompetitive purposes of integrating
academics with athletics and preserving amateurism. The amateur
nature of collegiate sports was
shown to increase their appeal and
drive consumers’ demand.
The appellate panel explained that
under the rule of reason, a restraint
with procompetitive justifications
is invalid only if a substantially less
restrictive alternative is “virtually
as effective” in serving the procompetitive purpose. The court agreed
with the first alternative identified
by the district court, which required
the NCAA to allow schools to grant
players scholarships for attendancerelated costs such as non-required
books, supplies and transportation.
Previous scholarships were capped
at required costs like tuition and
board.
The court found clearly erroneous
the district court’s second remedy,
which permitted deferred payments
up to $5,000 per year for the use of
an athlete’s name, image, and likeness.
“Not paying student-athletes
is precisely what makes them amateurs” and therefore the payment
of even small sums cannot be as
e
ffective in preserving amateurism.
Most of the evidence in the record
compared ermitting smaller payp
ments to larger payments. However,
this evidence answers the wrong
question. The proper inquiry is
whether making small payments to
student-athletes will be as effective
in preserving amateurism and consumer demand as not paying them
at all.
Plaintiffs had not met their
burden.
The majority reasoned that the difference between payments untethered to educational expenses and
non-payment “is a quantum leap”
and, once the line is crossed, there
is “no basis for returning to a rule
of amateurism and no defined stopping point.” In contrast, the dissent
argued that the majority improperly
dismissed testimony establishing
that small amounts of compensa-
A district court rejected the FTC’s challenge to a proposed combination of a
domestic medical equipment sterilization company with a foreign sterilization company.
tion would not significantly impact
consumer demand in college sports,
and that this evidence substantially
supported the district court’s decision to permit compensation up to
$5,000.
Patent Settlements
Employee health benefit plans and
other indirect purchasers of diabetes drugs sold under the brand
name Actos brought suit alleging
that settlement agreements resolv-
ing patent infringement disputes
between the branded drug-maker,
Takeda, and several generic drug
companies, violated antitrust law.
The plaintiffs alleged that generic
entry should have occurred in January 2011, when the patent for the
active ingredient in Actos expired.
Instead, agreements settling lawsuits
involving two other patents (which
claimed methods of using Actos
and were set to expire in 2016) did
not provide for the entry of generic competition until August 2012
and, according to the complaint,
delayed the availability of lower
prices.
The district court dismissed the
complaint for failure to articulate
cognizable anticompetitive effects.
In re Actos End Payor Antitrust Litigation, 2015 WL 5610752, No. 13-CV9244 (RA) (S.D.N.Y. Sept.
22, 2015).
The court’s decision required a
discerning reading of FTC v. Actavis, 133 S.Ct. 2223 (2013), where the
Supreme Court ruled that settlement
agreements between brand-name
and generic drug-makers may violate antitrust law when the branded
company (the patent holder) pays
the generic (the alleged infringer) an
“unexplained large reverse payment”
to resolve the dispute, suggesting
that the patent holder has serious
doubts about the patent’s survival.
The district court concluded that
a patent settlement providing for
an early generic entry date, without more, does not trigger antitrust
scrutiny under Actavis.
The court
focused its inquiry on the competitive effects of the settlements, finding that the “acceleration clauses,”
which permitted prompt entry in
. tuesday, october 27, 2014
case any other generic comes to
market before the agreed upon entry
date, increased competition because
more generics would be on the market if those clauses were triggered.
The court also noted that the FTC
did not challenge the settlements.
The court observed that while
some settlements with non-cash
terms may trigger antitrust scrutiny, such oncerns are not present in
c
the settlement agreements at issue
in this case, where the key terms
included generic entry before patent expiration and accelerated entry
in the event another generic enters
sooner. The court noted that not all
settlements of patent infringement
suits are illegal and that permitting
these claims to proceed would have
expanded the scope of Actavis and
needlessly restricted future patent
settlements.
This opinion should prove instructive not only to parties litigating
“reverse payment” cases, but also
to companies seeking to settle patent disputes without running afoul
of antitrust law.
Sterilization Companies
The FTC sought a preliminary
injunction in district court in Ohio
to block the merger of Steris Corporation and Synergy Health PLC,
the second and third largest medical
equipment sterilization companies
in the world, under the theory that
the firms would have become competitors absent the merger. Steris is
one of two domestic providers of
gamma sterilization services, the
only sterilization method currently
available in the United States that
is effective on high-density, highvolume equipment.
X-ray sterilization is a competitive
alternative to gamma sterilization,
but the method is currently not
available in the United States. Synergy operates the world’s only commercial X-ray sterilization facility in
Switzerland.
The FTC contended that
Synergy was planning to introduce
X-ray sterilization into the U.S. mar
ket but abandoned its efforts after
the merger announcement to avoid
competing with Steris’s gamma facilities.
The “actual potential entrant” doctrine advanced by the FTC seeks to
prevent future lessening of competi-
The Justice Department decided
not to challenge Expedia’s proposed acquisition of Orbitz despite
concerns about the merger of two
of the top three online travel booking providers, because the merger
was not likely to substantially lessen
competition.
tion when a potential entrant (here,
Synergy) merges with a firm already
competing in the market (i.e., Steris).
Under this doctrine, the acquisition
of an “actual potential entrant” violates Section 7 of the Clayton Act
if (1) the relevant market is highly
concentrated; (2) the competitor
“probably” would have entered the
market, (3) its entry would have
had pro-competitive effects, and (4)
there are few other firms that can
enter effectively.
The court stated that the FTC did
not meet its burden to demonstrate
that, absent the merger, “Synergy
probably would have entered the
U.S. contract sterilization market
by building one or more x-ray facilities within a reasonable period of
time.” The court also noted that the
“actual potential entrant” doctrine
has been disfavored by the Supreme
Court.
FTC v. Steris Corp., 2015 WL
5657294, No. 15 CV 1080 (N.D.
Ohio,
Sept. 24, 2015).
Synergy began developing a plan
to enter the U.S. X-ray sterilization
market in April 2013.
To justify the
substantial costs and risks of this
plan, the board would require significant revenue commitments from
customers. However, according to
the court, the evidence showed
that not a single customer was
willing to provide such a commitment. Customers stated that there
was no significant benefit to X-ray
sterilization that would justify the
substantial transition costs and
expressed concern that should one
of Synergy’s facilities experience a
problem there would be no readily available domestic alternative.
The court also noted that after
inputting more accurate figures,
the business model reflected a risky
investment with low returns and produced metrics that were unlikely to
obtain board approval.
The court
determined that Synergy’s board,
which had exclusive authority to
approve large capital expenditures,
would not have approved the plan
to move forward with the U.S. X-ray
project and the project would have
ended regardless of the proposed
merger.
The court found the timing of Synergy’s decision to be highly persuasive. Synergy continued to work on
.
tuesday, october 27, 2014
its plan for four months after the
October 2014 merger announcement.
The court observed that such efforts
were “not a sham to convince the
FTC that Synergy wanted to enter the
market” but instead demonstrated
legitimate efforts by Synergy employees who wanted the project to succeed. Further, Synergy had publicly
disclosed plans to build two X-ray
facilities shortly after the merger
announcement, demonstrating that
it did not view the proposed merger
as an impediment to its plan.
The court reasoned that if the proposed merger was the reason Synergy abandoned its plans to enter
the U.S. market, Synergy would have
stopped working on the project
when it entered merger negotiations
or immediately after the deal was
announced rather than in February
2015. In addition, Synergy would not
have cancelled the project right after
the FTC expressed concerns over the
merger, “as Synergy had to know that
doing so would only have solidified
the FTC’s position.”
The court determined that the
failure to obtain customer commitments and the inability to lower
capital costs were detrimental to
Synergy’s plans and the most significant reasons for terminating its
project.
Absent the merger, these
obstacles would still prevent Synergy from entering the U.S. market. The court concluded that the
proposed merger had “no effect
whatsoever” on Synergy’s plans.
In early October the FTC stated
it would not appeal the district
court’s decision and agreed to withdraw the matter from administrative
adjudication.
Even though the FTC’s challenge
was unsuccessful in this case, practitioners should consider potential
competition issues when evaluating
antitrust risk in mergers.
ing market is “rapidly evolving”
and introducing new participants.
Notably, both Google and TripAdvisor had introduced new online
booking services within the past
18 months.
Online Travel Merger
The Justice Department decided
not to challenge Expedia’s proposed
acquisition of Orbitz despite concerns about the merger of two of the
top three online travel booking providers, because the merger was not
likely to substantially lessen competition.
(See DOJ Press Release, September 16, 2015.) Since Expedia had
purchased another major player in
the industry, Travelocity, just three
weeks prior to announcing the Orbitz
deal, the Justice Department investigated concerns that the merger
would result in only two competitors,
Expedia and Priceline, controlling 95
percent of the online travel booking
market.
After a six month investigation,
the Justice Department found no
evidence that the merger is likely
to result in higher charges for consumers or the companies that list
their services with online travel
websites. The investigation found
that the commissions Expedia
charges to airline, car rental companies and hotels are not likely
to increase post-merger because
many companies either do not list
with Orbitz or receive only a small
source of bookings from Orbitz listings and, as a result, Orbitz has not
had significant impact on Expedia’s
commission charges in recent years.
Additionally, the Justice Department
observed that the online travel book-
Auto Parts Conspiracy
In the latest charges arising from
allegations of widespread bid rigging
in a number of auto parts markets,
three Japanese executives were
indicted for conspiring to rig bids
and fix the prices of automotive body
sealing products sold to auto manufacturers. (See DOJ Press Release,
October 8, 2015.) Automotive body
sealing roducts keep out rain, wind
p
and noises and include trunk lids
and door-side weather-stripping
among other roducts.
p
The Department of Justice stated
that the price-fixed products were
sold to Japan-based auto makers
for installation in vehicles manufactured and sold in the United States.
According to the charges, the three
executives instructed their subordinates to communicate with those at
other companies to allocate sales,
rig bids and fix prices of body sealing products.
The indictment also
alleges that two of the executives
encouraged employees to destroy
evidence of the conspiracy. Thus
far, 58 individuals and 37 companies
have been charged with participating in various auto parts conspiracies and have agreed to pay more
than $2.6 billion in criminal fines.
Reprinted with permission from the October 27, 2015 edition of the NEW YORK
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