Commerical Disputes Update

By Cozen O'Connor's Commercial Litigation Practice Group

CONTENTS:

Recent developments regarding:

Antitrust law

Copyrights

Pre-Complaint Investigations

Products Liability

Punitive Damages

Securities

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...