Bad press. Burdensome and costly document and data collections. Unpredictable outcomes. The sometimes-slow pace of justice. It’s easy to understand why parties often prefer early settlement to fighting a lawsuit through trial and final judgment. But settlement itself is not a risk-free endeavor, especially when the parties involved are competitors. In such circumstances, competitors and their attorneys should take special precautions to ensure their settlement does not present competitive concerns that ultimately could render the parties’ agreement violative of federal, state and/or international antitrust and competition laws.
What’s the Problem?
The U.S. Sherman Act proscribes “contract[s], combination[s] . . . and conspiracy[ies] in restraint of trade.” In particular, the federal antitrust laws make illegal “per se” agreements between competitors that implicate competitively significant variables, such as prices, costs, margins, capacity or supply. Such agreements are unlawful regardless of whether they have potential procompetitive benefits.
That is to say, even if a settlement agreement between competitors promises an end to litigation that is as expensive and burdensome on the court as it is on the individual parties, the litigation backdrop does not provide an excuse for competitors to use their settlement agreements as a vehicle to form anticompetitive agreements. For example, it would be per se unlawful for competitors to include provisions in their settlement agreements dictating the prices of their products or the markets in which the parties respectively could sell their products.
While state and international competition laws don’t necessarily mimic the U.S. federal antitrust laws in all respects, they generally take the same approach that price fixing, supply control, bid rigging and market allocation (i.e., customer, product and geography) are unlawful regardless of whether there are possible procompetitive justifications. Significantly, these kinds of per se unlawful agreements can lead to criminal fines and forward-looking monitorships for companies, and prison sentences and fines for individual actors.
A non-exhaustive list of problematic settlement terms include:
- Price-fixing agreements. It is unlawful for competitors to form agreements to fix, raise, lower, stabilize or otherwise impact market prices. Such agreements are per se unlawful even if competitors purport to have a procompetitive justification – for example, that an agreement to fix prices is somehow a substitute for an otherwise legitimate settlement payment for patent infringement, defamation or tortious interference with a business relationship.
While competitors may believe a fixed price “stabilizes the market” and protects the viability of each competitors’ business going forward, such agreements are still illegal because they prevent prices from responding to market forces (and can drive up prices beyond the competitive level, which hurts consumers).
Agreements to divide product markets, geographies, or individual customers or buyers, or to limit customers’ access to competitor information. Similarly, agreements that restrict competitors’ ability to compete head-on – and thus limit the supply of products available to particular customers in the marketplace – typically constitute per se antitrust violations.
For example, in November 2018, the Federal Trade Commission (FTC) determined that settlement agreements between 1-800 Contacts and 14 of its online competitors, which resulted in limits on the competitors’ advertising in online search results, had the effect of “restrict[ing] the ability of lower cost online sellers to show their ads to consumers” and resulted in “anticompetitive effects on customers and markets.”
1-800 Contact’s competitors had entered into these agreements in order to avoid threatened litigation with 1-800 Contacts after 1-800 Contacts complained that its competitors had purchased search terms that gave them advertising space whenever a potential customer searched for 1-800 Contacts online. The FTC’s decision requires 1-800 Contacts to stop enforcing the unlawful and anticompetitive provisions in its existing agreements with the online competitors and from entering into similar agreements in the future.
“Pay-for-Delay” cases . These types of agreements occur in pharmaceutical settlements where a brand-name drug manufacturer (the plaintiff who initiated the lawsuit by claiming patent infringement) agrees to pay off a generic manufacturer (the defendant) to delay the production and sale of a generic form of the brand-name manufacturer’s drug.
Such agreements can involve cash or non-cash forms of consideration. The FTC has aggressively investigated pay-for-delay cases for nearly two decades on the basis that such agreements between drug manufacturers “effectively block . . . generic drug competition” and cost consumers billions of dollars every year. Since 2013, when the Supreme Court decided FTC v. Actavis, pay-for-delay settlement agreements have been subject to the so-called “rule of reason” (meaning the court weighs the alleged procompetitive benefits of the agreement against any alleged anticompetitive effects).
In the Actavis case, the FTC filed a complaint against a brand-name drug manufacturer, Solvay Pharmaceuticals (now AbbVie Pharmaceuticals), and a generic drug manufacturer, Watson Pharmaceuticals (now a subsidiary of Teva Pharmaceuticals), alleging they entered into an anticompetitive settlement agreement that effectively delayed entry of a popular generic testosterone replacement drug into the market. The FTC eventually settled with both AbbVie and Teva in February 2019, and those settlements prevented the defendants from entering into similar reverse payment agreements for 10 years. See the FTC press release (last visited March 14, 2019). Notably, AbbVie and Teva reached their respective settlements with the FTC just days before trial was set to begin on March 4, 2019.
Despite several recent settlements in their pay-for delay cases, the FTC continues to support legislation to explicitly prohibit these kinds of settlements entirely, regardless of any potential procompetitive benefits. See more on the FTC website (last visited March 14, 2019). One such piece of potential legislation, the Preserve Access to Affordable Generics and Biosimilars Act, was reintroduced by Republican Sen. Chuck Grassley and Democratic Sen. (and presidential hopeful) Amy Klobuchar in December 2018. If enacted, the Act would prohibit brand name drug manufacturers from compensating generic drug manufacturers to delay the entry of generic drugs into the market.
The most likely plaintiffs to file an antitrust lawsuit related to a settlement are the parties’ competitors and direct or indirect customers/consumers, as these are the entities who can allege they suffered economic harm as a result of the unlawful agreements in the settlement.
Minimizing Parties’ Antitrust Risk
For competitors who may be concerned about potential antitrust risks posed by their settlement agreement, one option to minimize their risk is to have the settlement agreement approved by the court where the lawsuit is pending.
Such petitioning for an arguably otherwise anticompetitive outcome can be protected activity under the “Noerr-Pennington” antitrust doctrine. If a court reviews a settlement and issues an order approving the agreement, such an order could provide some, though not guaranteed, protection for the parties if third parties bring antitrust claims in the future. While the order would not prevent third-party competitors, customers or buyers from bringing a lawsuit alleging the settlement agreement was anticompetitive, the litigants can argue that the court’s order constitutes state intervention and sufficiently immunizes the conduct contemplated within the settlement agreement, in part because a judge weighed and approved the settlement agreement provisions.
Second, competitors still may be able to enter into creative and procompetitive agreements that implicate the antitrust laws but are subject to the more relaxed “rule of reason.” Applying the rule of reason, a court will ask whether the relevant agreement has more potential for procompetitive gain than anticompetitive harm. Examples of potential competitor agreements subject to the rule of reason include (1) joint ventures and collaborations for the parties to deliver a new product or service that is not currently available in the market, and (2) distribution agreements that create a vertical relationship between the competitors.
In considering the competitive effects of such an agreement, courts evaluate, inter alia, the competitors’ combined market shares and the anticipated procompetitive benefits and anticompetitive effects of the agreement. Such analysis might include, for example, whether the parties have taken appropriate precautions to firewall competitively sensitive information and prevent anticompetitive spillover effects relating to their joint venture or collaboration. That the proposed agreement was reached in the course of litigation will add an additional layer of complexity for the court to consider.
The antitrust laws are nuanced and complex, and their application to particular circumstances depends on the unique facts at play. Companies and individuals who have questions or concerns about settling disputes with their competitors should consult legal counsel.