GBS: Hemphill on Antitrust Analysis

Columbia Law Professor C. Scott Hemphill gave this year’s Milton Handler lecture to the Antitrust and Trade Regulation Committee of the Association of the Bar of the City of New York in April. His subject was “Collusive and Exclusive Settlements of Intellectual Property Litigation. The lecture is to be published in the Columbia Business Law Review, and what looks like the final PDF version has been posted to SSRN. The lecture draws a line connecting two recent high-profile issues involving “exclusive” settlements of IP cases, and asks whether antitrust law ought to care about them. His two examples are the Google Books settlement and recent “pay-to-delay” settlements in which a drug-patent owner pays off a generics maker to drop a lawsuit challenging the patent’s validity. Both parts are interesting; I’d like to focus here on the Google Books half.

Hemphill steers a middle course between the settlement’s antitrust skeptics and its antitrust defenders, making three and a half points. His first is that the settlement’s “de facto exclusivity” is by itself not an antitrust issue unless it “makes it harder for later entrants to achieve digital distribution of orphan works.” Here, his reasoning largely parallels Einer Elhauge’s defense of the settlement, which argues that multiple features of the settlement are likely to make it easier, not harder, for others to develop their own digital book platforms and to bring currently orphaned works to the public.

As a good scholar, though, Hemphill immediately asks what the implications would be if he were wrong about these effects. This leads him to consider the “fallback argument” of settlement proponents, which he terms “the ‘one is better than none’ argument.” After reading through the scholarly debate and explaining the ways in which the “one is better than none” formulation oversimplifies nuanced positions on both sides of the debate, Hemphill gives a new reading of antitrust law’s take on the issue:

The one is better than none view is an incomplete statement of antitrust law. Although, as noted above, antitrust enforcers cannot always insist upon a structure that is more competitive than the status quo offered by the parties to an agreement, sometimes they can. When presented with a joint venture that has some procompetitive and some anticompetitive features, an antitrust enforcer must consider whether there is a less restrictive way to achieve the procompetitive effect. As then-Judge Sotomayor put it, “a restraint that is unnecessary to achieve a joint venture’s efficiency-enhancing benefits may not be justified based on those benefits.” The insistence on utilizing a less restrictive alternative, where available, is shared by courts and enforcement agencies. In other words, we are not always forced to accept the bitter with the sweet.

This leads Hemphill to consider whether a judge considering a class-action settlement should reach the antitrust framing that might try to distinguish between bitter and sweet. His answer is “no.” The inquiry under Rule 23, he argues, should focus on class members, not consumers:

Even if consumers are harmed, they are generally outside the concern of Rule 23(e). (On this view, the benefits that the settlement brings to consumers should be ignored too.) Therefore, one could accept the argument that the settlement raises the cost of new entry, and yet approve the settlement on the ground that this effect does no harm to class members.

In a footnote that also offers a useful reading of several other class action settlements, Hemphill explains why keeping the antitrust analysis out of the class-action approval stage doesn’t mean ignoring the antitrust issues entirely.

Moreover, even in an antitrust case, the court may resist engaging in a full antitrust analysis at the settlement stage. For example, in Grunin, the court concluded that although “a court cannot lend its approval to any contract or agreement that violates the antitrust laws,” it would decline to approve the settlement on antitrust grounds only if the alleged illegality were “a legal certainty” or “illegal per se,” conditions not present there. Id. at 123–24. To undertake a full antitrust analysis in the settlement of a non-antitrust class action seems even further afield. The point here is not that the Department of Justice is wrong to raise antitrust objections—its authority under 28 U.S.C. § 517 to file a statement of interest is broad— but that the district court’s review is comparatively narrow.

This is a short paper—Hemphill gives the Google Books settlement a total of fifteen pages—but I found it interesting and helpful.