Matt King
Dara Levinson
Mark Pepple
Sadie Sage
Lauren Sancken
Angela Wishaar
CASE STUDY #2
- ADDITIONAL FACTS
ABC and XYZ have three other competitors in the domestic custom medical accounting market: Premier, very expensive at three times the cost of Medsoft programs; Basic, an enhanced basic accounting program; and MNO, which is close in price and quality to ABC and MNO. ABC and XYZ each have 25% of the domestic market, and a combined 50% of the domestic market.
There were no other agreements between ABC and XYZ. Furthermore, everyone is aware of the Medsoft deal. Medsoft officers and employees are employed by Medsoft, and not ABC or XYZ. ABC and XYZ are owned by private investors. The Medsoft agreement between the two allows ABC and XYZ to gain much greater market knowledge and competitive intelligence than they otherwise would have had. They both know all elements sales and marketing (like endorsement programs, sales targets, pricing, incentives, etc.); and this allows them to fix foreign price and target foreign markets.
The special reserve fund has been used to schmooze successfully, but not to obtain direct government contracts. While the US government does not endorse Medsoft programs, it does encourage healthcare providers to use accounting systems to reduce Medicaid and Medicare fraud. The schmooze money has not been used to persuade government officials to pass legislation making thing more difficult for competitors. Nor does any of thisencouragement violate foreign law.
Switching accounting programs would be difficult, expensive, and time consuming – requiring new training, cost codes, special loading and new licensing expenses. Thus, once a consumer purchases the product, he is effectively locked in. There are also high barriers to entering the market, and most healthcare providers prefer to go with established players.
ABC and XYZ offer their programs in the same 15 foreign countries. Premier is the only domestic company that competes with Medsoft internationally. The international market has many small players. Medsoft has a small (5%) but growing share of the foreign market, and Premier, due to its high price, also has a small market share.
Any price increase by the foreign providers would not be a direct function of the accounting software, which forms only a small percentage of total operating costs. Price increases have not affected the relationship between foreign providers and domestic providers, nor stopped foreign providers from referring to American colleagues.
- STATEMENT OF THE ISSUES
Whether there exists a Sherman I violation. Specifically, whether there is a per se violation where two firms conspire to fix prices abroad and potentially segment their market, and whether there is a per se violation where two firms share key strategic information domestically, but do not blatantly fix prices, and potentially segment their market. Furthermore, whether the sharing of key strategic information is illegal under rule of reason analysis.
Whether there exists a Sherman II violation. Specifically, whether a single-brand market definition applies where there is extremely low cross-elasticity of demand, and whether raising prices for existing customers who are locked into that brand constitutes bad conduct that violates Sherman II.
Whether foreign plaintiffs would have standing to bring suit in the United States. Specifically, whether any combination between ABC and XYZ creates direct and foreseeable consequences in the domestic market, and whether injury abroad is dependent upon such injury in the United States.
Whether ABC and XYZ would be immune to any antitrust violation caused by the use of a special reserve to influence government employees based on the political action doctrine.
III.SUMMARY OF CONCLUSIONS AND RATIONALE
There may be a Sherman I violation. In foreign markets, there was price fixing, and potentially an illegal segmentation of the market. Those violations would be per se illegal. Moreover, there may also be price fixing and illegal segmentation in the domestic market. Even if there is not, the sharing of intelligence and market information could be illegal under rule of reason analysis.
There is some legal exposure to a Sherman II claim. The low cross-elasticity of demand and the way that buyers are locked into ABC and XYZ products could lead a court to find that ABC and XYZ operate single-brand market monopolies. They have abused that power by pricing like monopolists. From a business and intuitive standpoint, however, this seems nonsensical. Nevertheless, there seems to be at least some legal exposure to Sherman II violations in foreign markets. Domestically, there should not be exposure because ABC and XYZ have not priced monopolistically.
Foreign plaintiffs may have standing to bring claims in the United States. Prospective plaintiffs could argue that their injury abroad was dependent upon the formation of a combination in the United States that included information sharing, possible price fixing, and possible market segmentation. That information sharing, price fixing, and market segmentation was a necessary condition for the action in foreign markets.
ABC, XYZ, and Medsoft cannot use the political action doctrine to exempt themselves from any antitrust liability that may exist as a result of their government schmoozing. The companies’ actions cannot be accurately categorized as petitioning the government, as required by the Noerr-Pennington doctrine. They have been attempting to influence frontline government employees; this type of conduct is not a combination that attempts to affect legislation.
IV.ANALYSIS
A. MEDSOFT COULD VIOLATE SHERMAN 1
The creation of Medsoft likely qualifies as a Sherman I violation, (however, if we had more information on this issue, our answer might be different). Sherman I says that “[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is hereby declared to be illegal.” Sherman I. ABC and XYZ, two horizontal competitors in the healthcare software accounting market, agreed to create Medsoft Marketing, a company that sells their products exclusively worldwide, and within the US has the exclusive right to sell their products.
Currently, Sherman I claims can be classified as either a per se violation, or a rule of reason violation. There are three types of per se violation: 1) price fixing; 2) market division; and 3) boycotts.
This section determines whether there are Sherman I violations irrespective of any jurisdictional issues foreign persons may face when bringing suit in the United States. Whether such foreign persons have jurisdiction will be discussed further in section III. However, whatever hurdles a foreign plaintiff may face, a domestic plaintiff, whether consumer or competitor or the United States, should have no problem bringing a suit.
1. The Per Se Violation
When considering a per se claim, the court will only consider the action of the defendant. Hence, in a per se case, market share does not matter. U.S. v.Addyston Pipe. Addyston Pipe dealt with bid rigging in the pipe industry. In the case, the defendants had only 30% of the market, but the court still deemed the agreement a violation. Id. Nor does the reasonableness of the price matter in a per se violation. Id. Again in Addyston Pipe, the price charged was reasonable. But the Supreme Court concluded that the reasonableness of the price does not matter, and that the action was illegal on its face. Thus, a per se claim looks only at the behavior of the defendant, and the circumstances of the situation do not matter.
Applying this to our fact pattern in the domestic market, we find that the behavior of ABC and XYZ is not a boycott. However, it could (again, depending on missing facts) constitute either a market division or price fixing agreement – both of which are per se illegal.
In order to determine if this was an illegal market division, we would need to know about the marketing plans of the entities, as well as actual marketing data. It is possible that Medsoft has divided ABC and XYZ geographically (each company takes a region/state/half of the country, etc), by price (all price points below a certain amount go to one or the other), type of healthcare provider (i.e. hospital v. primary care), or product/brand (dividing the product among the sales force). We just don’t know enough now, so we cannot make any further pronouncement on whether this constitutes a per se violation in the form of market division. These potential violations could occur domestically or abroad.
It is also possible that this could qualify as a price fixing arrangement in the domestic market. The two entities are sharing all their marketing information, the sales people at Medsoft (probably) are acquainted with marketing and pricing plans for each entity, and also the competitive information both ABC and XYZ. This shared information would make price fixing easy; and, in fact, the close relationship between the two, and particularly the fact that the marketing is done by the same entity, which is fixing prices internationally, would make domestic price fixing plausible. However, we do not have enough information to really say whether price fixing is happening.
In the foreign market, the per se analysis is slightly different. As mentioned above, the boycotting and market division analysis are the same (however, again, depending on the facts, this could be different). But in foreign markets there is little doubt that price fixing is occurring. ABC, XYZ, and Medsoft are blatantly using their combination to set prices in foreign markets. This action is definitely the type of conduct that is forbidden by Sherman I.
2. The Rule of Reason Violation
If the court does not find a per se violation, they would undertake a rule of reason analysis. In a rule of reason evaluation, the court performs an exhaustive examination of market factors; or, the court can perform a truncated rule of reason. Essentially, the court will look at the market power of each; the procompetitive aspects versus the anticompetitive aspects; the purpose, less restrictive means, and the plus factors.
Applying these factors to our facts, we find that the agreement between ABC and XYZ to create Medsoft could give rise to legal exposure. The agreement gives ABC and XYZ a 50% market share, and as discussed, infrasection B, the companies have even more market power due to the low cross-elasticity of demand in their market. It also has anticompetitive effects. To start, it eliminates direct competition between ABC and XYZ. In the foreign market, it directly eliminates competition. In the domestic market, the intelligence and marketing information sharing could also lead to this anticompetitive effect. Likewise, the intelligence and marketing informing sharing gives ABC and XYZ an unfair advantage over competitors; these advantages include not having to compete with each other, exclusivity of information, greater volume, and greater market share. Further, there are obvious less restrictive means available. For instance, the companies could share information only in regards to foreign markets, or hire independent marketing firms (particularly for their work in the United States). Plus factors do not appear to be relevant here because the agreement to form Medsoft is common knowledge. To the extent they do apply, Medsoft’s legal fund seems extremely relevant. ABC and XYZ contribute to the fund (through their sales) and the prosecution of license and copyright infringements is therefore jointly funded. This legal action is not at all related to Medsoft’s stated marketing purpose. This is clear evidence of a domestic combination. Moreover, the fund could also intimidate consumers and other competitors, and thus be considered a restraint of trade. Hence, under both a rule of reason and a quick look analysis, the agreement would likely be an illegal restraint of trade. (We caution that these answers may change with further information).
Despite these factors pointing to an illegal combination, if Medsoft, ABC and XYZ are found to be a single entity, there is no antitrust violation. Under the single entity doctrine if the combination is considered a single entity, there cannot be a Sherman I violation. American Needle. Similar to the NFL in American Needle v. NFL, ABC and XYZ have created a special marketing entity. The reasons for the creation are also similar – efficiency, volume, elimination of duplicative marketing and expenses. In deciding whether this is a single entity, a court looks at commonality of interest. Courts will also examine whether the “conduct in question deprives the marketplace of the independent sources of economic control that competition assumes.” American Needle.
In this situation, Medsoft, ABC and XYZ are probably not a single entity. Both ABC and XYZ retain control over their domestic product pricing. Also, they are only two players in the market – and not the entire market like the NFL. Additionally, there is big difference between a sports league and the software market. The NFL depends on competition; it would be impossible to have a National Football League without teams to play each other. In this case, it is not necessary for ABC and XYZ to act together in forming Medsoft. Thus, ABC, XYZ and Medsoft will not be protected by the single entity defense.
In sum, ABC and XYZ do face legal exposure in the creation of Medsoft. A Sherman I action is possible, and could be successful. ABC and XYZ are horizontal competitors who have entered into an agreement that necessarily affects trade, and most likely could be characterized as a restraint of trade. Depending on the facts, there could be a per se violation or a rule of reason violation in the domestic market. In the foreign market, there is almost assuredly a per se violation.
- SHERMAN 2 VIOLATION
A violation of Section 2 of the Sherman Act occurs where a person monopolizes, attempts to monopolize, or conspires to monopolize. While Sherman 1 is mostly indifferent to market power, Sherman 2 is all about market power. That being said, a monopoly is not per se illegal. That is, the fact that an entity dominates a field does not in itself establish a violation of Sherman 2. Rather, to illegally monopolize, the entity must engage in some reprehensible or anti-competitive conduct to establish or maintain the monopoly. For a Sherman 2 attempting to monopolize violation, however, a person acts illegally when it intends to monopolize and its actions threaten to produce a dangerous probability of achieving monopoly. Swift & Co. v. United States, 196 U.S. 375, 396 (1905). To make life (somewhat) simpler, this memorandum will apply Sherman 2 to the foreign and domestic markets separately.
1.There Might Be a Sherman 2 Violation in Foreign Markets
The first step in determining if a Sherman 2 violation has occurred is to define the relevant market. In this case, the narrowest possible market is the ABC and XYZ brands themselves. The broadest reasonably possible market is all accounting software.
Based primarily on the low cross-elasticity of demand, and Eastman Kodak Co. v. Image Technical Services, Inc., the relevant market for ABC and XYZ is likely very narrow. That is not to say the companies do not have any competition abroad. In each of the 15 languages and currencies that they operate in, they face many small competitors. Additionally, of the competitors ABC and XYZ face in the United States, Premier also competes against them in foreign markets. Indeed, ABC and XYZ maintain only a 5% market share of all potential users in foreign markets. All potential users, however, is far broader than the relevant market. That is clearly evidenced by the cross-elasticity of demand at the current price.
The fact that monthly charges have doubled since Medsoft’s creation strongly suggests that there is low cross-elasticity of demand. Foreign companies, in the face of massive price increases, have not jumped off the ABC and XYZ bandwagons. That indicates that either alternatives are not available, or some other exit barriers exist. As already discussed, there are alternative products on the market could conceivably switch to. Therefore, the reason companies have stayed with ABC and XYZ products must be that there are barriers that keep them from switching products. It appears that this is actually the case. Once a buyer purchases ABC or XYZ software, they are essentially locked in. Switching to competing software would require new personnel training, new cost codes, special cost loading, the cost of the new software license, and data conversion. All in all, the switch would be extremely expensive and take 4 to 6 weeks to implement. For this reason, ABC and XYZ face extremely minimal competition once a buyer purchases their product. ABC and XYZ have simply not yet charged the price that forces buyer to switch products. This is particularly significant considering there has been a 100% increase and the SSNIP test generally only tests increases of 5-10%.