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RECENT DEVELOPMENTS REGARDING ANTITRUST LAW
WHOLESALE PRICING WHICH OFFERS DISCOUNTS ONLY IF DISTRIBUTORS FORGO COMPETITORS’ BRANDS DOES NOT VIOLATE THE ANTITRUST LAWS
In Smith Wholesale Company v. R.J. Reynolds Tobacco Co., 477 F.3d 854 (6th Cir. 2007), the United States Circuit Court for the Sixth Circuit held that R.J. Reynolds’ rebate programs did not violate the antitrust laws, even though they had the effect of forcing wholesalers to stop selling other brands of cigarettes in order to obtain substantial rebates.
Smith involved a claim by tobacco wholesalers that R.J. Reynolds’ rebate programs violated the antitrust laws. Following the tobacco industry’s "master settlement" in 1998, sales of the cheapest cigarettes (which the cigarette industry refers to as "fourth tier brands") skyrocketed. These increased sales of forth tier brands came at the expense of the market share of traditional cigarette companies such as R.J. Reynolds, which did not sell fourth tier brands. In an attempt to regain market share, R.J. Reynolds created a rebate program in which the rebates on R.J. Reynolds’ second and third tier cigarettes increased as R.J. Reynolds’ share of a wholesaler’s total sales of "discount brands" increased. Since R.J. Reynolds did not sell fourth tier brands, wholesalers who had substantial fourth tier sales could not qualify for significant rebates. Wholesalers therefore sued, claiming that R.J. Reynolds’ rebate program constituted price discrimination in violation of the antitrust laws.
Specifically, the wholesalers claimed that, since they operated in markets where there was a large demand for fourth tier brands, and since R.J. Reynolds did not manufacture fourth tier brands, the wholesalers could never qualify for substantial rebates.
The trial court granted R.J. Reynolds’ motion for summary judgment, finding that the discounts were available to all wholesalers. The trial court observed that the fact that certain wholesalers did not qualify for the larger discounts did not violate the antitrust laws, since those wholesalers could have qualified if they met the program’s requirements. In affirming the dismissal, the Sixth Circuit noted that the discounts were not based solely on volume. As a result, they were available to all wholesalers, even small ones. Since the discounts were functionally available to all wholesalers, the Sixth Circuit found that summary judgment was appropriate.
Phil Kircher, the chair of Cozen O’Connor’s antitrust practice group, noted that the Sixth Circuit explicitly held that the fact that wholesalers might have to make unpalatable business choices in order to obtain the maximum discount did not result in an antitrust violation. Indeed, Kircher said that the Sixth Circuit seemed unmoved by the possibility that the economics of the industry would prevent any rational wholesaler in certain geographic areas from doing what was necessary to obtain the maximum discount. Given the Sixth Circuit’s admonition that the antitrust laws protect competition, rather than competitors, Kircher advises his clients that a carefully constructed rebate program can often pass antitrust scrutiny, even if it results in unequal outcomes for some customers.
RECENT DEVELOPMENTS REGARDING COPYRIGHTS
COPYRIGHT CLAIMS DO NOT NECESSARILY PREEMPT "LOOK AND FEEL" TRADE DRESS CLAIMS UNDER THE LANHAM ACT
In Blue Nile, Inc. v. Ice.com, Inc., ___ F. Supp.2d ___, 2007 WL 172613 (W.D. Wash. Jan. 18, 2007), the United States District Court for the Western District of Washington held that copyright claims do not necessarily preempt Lanham Act claims alleging that a defendant has misappropriated the "look and feel" of a website.
Blue Nile involved a company’s claim that a competitor had copied its website. The plaintiff alleged both that the competitor had literally copied certain pages of its website on which the plaintiff had obtained a copyright, and that the competitor had misappropriated the "look and feel" of the website as a whole. The defendant moved to dismiss the "look and feel" claims under the Lanham Act, arguing that those claims were duplicative of (and therefore preempted by) the copyright claims.
The Blue Nile Court rejected the argument that there could be no difference between a copywritten web page and the "look and feel" of a website. Instead, the Court found that whether there was any additional content to the "look and feel" of a website was fact specific, and could not be decided without discovery. The Court therefore allowed both claims to proceed.
John Soltys, a member in Cozen O’Connor’s Seattle office, commented that the Blue Nile Court was clearly unwilling to dismiss what it viewed as a novel claim. Soltys said that, even though the Blue Nile Court wanted to give the plaintiff the opportunity to develop what the Court thought were novel claims, Court did dismiss some of the plaintiff’s state law claims. As a result, Soltys observed that, while creative plaintiffs can often assert novel and overlapping (or even potentially conflicting) theories of liability, courts will eventually reign in their "creativity." Soltys also remarked that many claims, especially intellectual property claims, are easier to plead than to prove.
RECENT DEVELOPMENTS REGARDING PRE-COMPLAINT INVESTIGATIONS
POST-ACCIDENT DEMONSTRATIVE VIDEOS ARE NOT NECESSARILY PROTECTED
In Myer v. Niterain Coach Company, Inc., 2007 WL 686357 (W.D. Wash. March 2, 2007), the United States District Court for the Western District of Washington held that a post-accident videotape of a demonstration of the creation of the product at issue was not privileged, and had to be turned over in discovery.
Myer involved a tour bus which had been configured for bunk beds. Originally, the bus had three rows of bunk beds, one above the other. At some point, one of the rows of bunk beds was removed. During a trip, the upper bunk collapsed onto the lower bunk, injuring the people in both bunks. Before suit was filed, the bus company’s safety director made a videotape of the maintenance foreman showing how he had converted the bunk beds from a three bunk into a two bunk configuration. After suit was filed, and the safety director testified about the existence of the videotape, the plaintiffs demanded a copy. The bus company refused, claiming that the tape was privileged.
After reviewing the facts, the Myer court held that the videotape was not entitled to work-product protection. The Court reached this conclusion because it believed that the tape had been made during the bus company’s routine investigation into the accident, rather than in anticipation of litigation. Central to the Court’s reasoning was the fact that the bus company had not turned the matter over to counsel at the time it made the videotape. If the bus company had not involved counsel, the Court reasoned, it did not anticipate litigation. Although the bus company had alerted its insurer, the Myer court said that an insurance company’s routine investigation would not trigger work-product protection. Since the bus company had only reported an accident, rather than an actual or potential lawsuit, to its insurer, the Court held that the videotape was part of a routine accident investigation.
Jennifer Brown, a member in Cozen O’Connor’s Seattle office, observed that Myer is a good example of the benefits of getting counsel involved at the outset of any investigation. Not only can experienced counsel assist in the investigation (both because they can identify consulting experts, and because they know the most likely avenues of attack for potential plaintiffs), but courts are more likely to find that work-product protection is applicable if counsel is involved. Brown said that, while involving outside counsel does add an additional expense, forgoing such an expense often turns out to be penny-wise but pound foolish.
RECENT DEVELOPMENTS REGARDING PRODUCTS LIABILITY
THE RISK/UTILITY TEST APPLIES TO "SIMPLE PRODUCTS"
In Calles v. Scripto-Tokai Corp., ___ N.E.2d ___, 2007 WL 495315 (Ill. Feb. 16, 2007), the Illinois Supreme Court held that the risk/utility test, as well as the consumer expectations test, applies to all products, even simple ones.
Calles involved a house fire that started when a three year old played with a utility lighter (a "butane match" designed to substitute for kitchen matches and the like). The mother sued, claiming that the utility lighter should have been child resistant. While admitting that she was aware that utility lighters could be dangerous (and would start fires) if they fell into children’s hands, the mother claimed that a child lock could have been incorporated into the utility lighter. In its defense, the manufacturer pointed out that child locks were not required on utility lighters at the time this particular lighter was manufactured. The manufacturer further argued that the government had not required child locks because its scientists were concerned that safety locks would increase the risk of "flashbacks," in which gas would build up even though the lighter would not ignite, and that these flashbacks might be more dangerous than the risk of children playing with the utility lighter.
The Illinois Supreme Court first observed that the consumer expectations test was an objective one, which focused on the purchaser’s expectations. In this case, the Illinois Supreme Court found that the consumer was the adult who purchased the utility lighter, rather than the child who ultimately (and improperly) used it. The Illinois Supreme Court reached this conclusion because, even though it was foreseeable that children would use the utility lighter, adults (and not children) were expected to purchase the lighter. While the Illinois Supreme Court held that children could be expected to use the utility lighter, it concluded the average consumer would expect the utility lighter to do exactly what it did – start a fire. As a result, the Illinois Supreme Court held that the plaintiff could not prevail under the consumer expectations test, since the utility lighter met the expectations of the average consumer.
After finding that the plaintiff could not prevail under the consumer expectations test, the Illinois Supreme Court noted that a product also had to pass the risk/utility test. The risk/utility test is necessary, according to the Illinois Supreme Court, because in many instances a consumer will not know how safe a product can be made. The risk/utility test therefore requires the manufacturer to make the product in the safest way practical, even if a consumer might not expect such a level of safety. Although the manufacturer urged the Court to adopt a per se rule that simple products did not have to meet the risk/utility test, the Illinois Supreme Court refused to adopt such a rule. In refusing to adopt a per se rule, the Court said that the proposed per se rule would absolve manufacturers of liability for guarding against dangers even in cases when it was feasible, and inexpensive, to do so. As a result, the Illinois Supreme Court held that the application of the general rule that a manufacturer does not have to guard against open and obvious dangers provided adequate protection.
Edward Ordonez, a member in Cozen O’Connor’s Chicago office, commented that the Illinois Supreme Court seemed reluctant to carve out exceptions to the general product liability rules for specific products. While the application of a general rule might not yield the correct result in all cases, Ordonez noted that consistency has its benefits. Specifically, Ordonez said that, so long as courts clearly and consistently apply products liability rules, manufacturers can adjust their behavior accordingly.
RECENT DEVELOPMENTS REGARDING PUNITIVE DAMAGES
PUNITIVE DAMAGES CANNOT BE USED TO PUNISH A DEFENDANT’S CONDUCT TOWARDS NON-PARTIES
In Philip Morris USA v. Williams, 127 S. Ct. 1057 (2007), the United States Supreme Court held that a jury could not impose a punitive damages award to punish a defendant’s conduct towards third parties.
Philip Morris involved a smoker’s estate’s claim that Philip Morris had deceived the smoker into believing that smoking was safe. The jury agreed that Philip Morris had deceived the smoker, and awarded damages. The state-court jury also awarded punitive damages (which were almost 100 times greater than the actual damages) in order to punish Philip Morris. Although the trial court reduced the punitive damages award, the state appellate court reinstated the full amount, finding that Philip Morris’ conduct had been reprehensible.
Philip Morris appealed to the Supreme Court, arguing that the jury had improperly tried to punish Philip Morris for the harm Philip Morris had allegedly caused to other smokers, who had not sued. The Supreme Court reversed, and held that allowing a jury to punish a defendant for harming people who were not before the court violated due process. The Supreme Court reached this holding because allowing the jury to punish a defendant for harming people who were not before the court deprived the defendant of the ability to argue (or to introduce evidence showing) that the unnamed people were either not harmed, or voluntarily accepted the risk of harm. Additionally, the Supreme Court said that allowing a particular jury to punish a defendant for harming people who were not before the court would lead to the possibility that different juries would punish the same defendant for harming the same people.
Tia Ghattas, a member in Cozen O’Connor’s Chicago office who specializes in defending against punitive damage claims, observed that the Supreme Court was clearly troubled by the specter of "runaway" punitive damage awards. Ghattas also noted that Philip Morris was only successful on its second trip to the United States Supreme Court. While Ghattas said that it is always more satisfying to win the first time around, a diligent defense can often overcome significant hurdles in the long run.
RECENT DEVELOPMENTS REGARDING SECURITIES
DELAWARE CHANCERY COURT ALLOWS DERIVATIVE ACTIONS FOR IMPROPER BACKDATING OF STOCK OPTIONS
In Ryan v. Gifford, 2007 WL416162 (Del Ch. Ct. Feb. 6, 2007), the Delaware Chancery Court permitted a shareholder to bring a derivative action against the board of a company that had issued backdated stock options.
Ryan involved grants of stock options to a company’s founder. After the Wall Street Journal published an article about backdating, Merrill Lynch issued a report analyzing the stock options granted to insiders at many different companies. The Merrill Lynch report suggested that the only way stock options could have been consistently granted at such low trading prices was if they had been backdated. A shareholder then sued, alleging that the board had breached its duty of loyalty, and the requirements of the stock option plan that required the strike price to be at least the current value of the stock, by backdating the options.
The defendants initially asked the Delaware Chancery Court to stay its proceedings because other derivative actions had previously been filed in Federal Court in California. Since the company was incorporated in Delaware, the Delaware Chancery Court refused to do so. The Delaware Chancery Court also refused to dismiss the suit on forum non convenience grounds, finding that the presence of witnesses and documents in California did not rise to the level of hardship that would enable a Delaware corporation to transfer a case out of Delaware. Finally, the Gifford Court held that the alleged fraudulent concealment of the backdating tolled the statute of limitations until the plaintiff knew, or should have known, that the options were backdated.
Sean Bellew, a member in Cozen O’Connor’s Wilmington office, was not surprised that the Ryan Court refused to stay its proceedings, since the Delaware Chancery Court has long viewed itself as having the final say on the governance of Delaware corporations, and the law surrounding the backdating of options has not yet been developed. Bellew suggested that the Delaware Chancery Court therefore wished to take control of early backdating cases, and issue opinions that could be applied by other courts. Bellew was also not surprised that the Ryan Court allowed the derivative suit to proceed even though the CEO had not yet exercised the options in question, since requiring a plaintiff to wait until the CEO exercised his options would only postpone the inevitable suit. Requiring a plaintiff to wait until backdated options were exercised before bringing suit could also lead to multiple suits if several option holders exercised their options at different times. Since the Delaware Chancery Court strives to streamline litigation whenever possible, Bellew said that the Ryan Court’s decision made perfect sense.
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