[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]
LITIGATION AS A PREDATORY PRACTICE
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
INTELLECTUAL PROPERTY,
COMPETITION, AND THE INTERNET
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED TWELFTH CONGRESS
SECOND SESSION
__________
FEBRUARY 17, 2012
__________
Serial No. 112-79
__________
Printed for the use of the Committee on the Judiciary
Available via the World Wide Web: http://judiciary.house.gov
----------
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COMMITTEE ON THE JUDICIARY
LAMAR SMITH, Texas, Chairman
F. JAMES SENSENBRENNER, Jr., JOHN CONYERS, Jr., Michigan
Wisconsin HOWARD L. BERMAN, California
HOWARD COBLE, North Carolina JERROLD NADLER, New York
ELTON GALLEGLY, California ROBERT C. ``BOBBY'' SCOTT,
BOB GOODLATTE, Virginia Virginia
DANIEL E. LUNGREN, California MELVIN L. WATT, North Carolina
STEVE CHABOT, Ohio ZOE LOFGREN, California
DARRELL E. ISSA, California SHEILA JACKSON LEE, Texas
MIKE PENCE, Indiana MAXINE WATERS, California
J. RANDY FORBES, Virginia STEVE COHEN, Tennessee
STEVE KING, Iowa HENRY C. ``HANK'' JOHNSON, Jr.,
TRENT FRANKS, Arizona Georgia
LOUIE GOHMERT, Texas PEDRO R. PIERLUISI, Puerto Rico
JIM JORDAN, Ohio MIKE QUIGLEY, Illinois
TED POE, Texas JUDY CHU, California
JASON CHAFFETZ, Utah TED DEUTCH, Florida
TIM GRIFFIN, Arkansas LINDA T. SANCHEZ, California
TOM MARINO, Pennsylvania JARED POLIS, Colorado
TREY GOWDY, South Carolina
DENNIS ROSS, Florida
SANDY ADAMS, Florida
BEN QUAYLE, Arizona
MARK AMODEI, Nevada
Sean McLaughlin, Majority Chief of Staff and General Counsel
Perry Apelbaum, Minority Staff Director and Chief Counsel
------
Subcommittee on Intellectual Property, Competition, and the Internet
BOB GOODLATTE, Virginia, Chairman
BEN QUAYLE, Arizona, Vice-Chairman
F. JAMES SENSENBRENNER, Jr., MELVIN L. WATT, North Carolina
Wisconsin JOHN CONYERS, Jr., Michigan
HOWARD COBLE, North Carolina HOWARD L. BERMAN, California
STEVE CHABOT, Ohio JUDY CHU, California
DARRELL E. ISSA, California TED DEUTCH, Florida
MIKE PENCE, Indiana LINDA T. SANCHEZ, California
JIM JORDAN, Ohio JERROLD NADLER, New York
TED POE, Texas ZOE LOFGREN, California
JASON CHAFFETZ, Utah SHEILA JACKSON LEE, Texas
TIM GRIFFIN, Arkansas MAXINE WATERS, California
TOM MARINO, Pennsylvania HENRY C. ``HANK'' JOHNSON, Jr.,
SANDY ADAMS, Florida Georgia
MARK AMODEI, Nevada
Blaine Merritt, Chief Counsel
Stephanie Moore, Minority Counsel
C O N T E N T S
----------
FEBRUARY 17, 2012
Page
OPENING STATEMENTS
The Honorable Bob Goodlatte, a Representative in Congress from
the State of Virginia, and Chairman, Subcommittee on
Intellectual Property, Competition, and the Internet........... 1
The Honorable Melvin L. Watt, a Representative in Congress from
the State of North Carolina, and Ranking Member, Subcommittee
on Intellectual Property, Competition, and the Internet........ 3
WITNESSES
The Honorable Christopher B. Saxman, former Delegate, Virginia
House of Delegates
Oral Testimony................................................. 5
Prepared Statement............................................. 7
J. Douglas Richards, Partner, Cohen Milstein
Oral Testimony................................................. 9
Prepared Statement............................................. 11
Marina Lao, Professor of Law, Seton Hall University School of Law
Oral Testimony................................................. 20
Prepared Statement............................................. 21
LITIGATION AS A PREDATORY PRACTICE
----------
FRIDAY, FEBRUARY 17, 2012
House of Representatives,
Subcommittee on Intellectual Property,
Competition, and the Internet,
Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to call, at 9:36 a.m., in
room 2141, Rayburn House Office Building, the Honorable Bob
Goodlatte (Chairman of the Subcommittee) presiding.
Present: Representatives Goodlatte, Quayle, Chabot, Watt,
and Jackson Lee.
Staff present: (Majority) Holt Lackey, Counsel; Olivia Lee,
Clerk; and (Minority) Stephanie Moore, Subcommittee Chief
Counsel.
Mr. Goodlatte. Good morning and welcome to this hearing of
the Subcommittee on Intellectual Property, Competition, and the
Internet. Today's hearing is on litigation as a predatory
practice.
The Judiciary Committee has heard ample evidence this
Congress about the excesses and abuses of America's lawsuit
system. We have heard how runaway litigation distorts our
health care and patent systems. The Constitution Subcommittee
has received testimony showing that our system of discovery in
litigation is unduly costly and that even frivolous lawsuits
too often go unsanctioned.
We have reported several bills to rein in litigation
abuses, including the HEALTH Act, the Smith-Leahy America
Invents Act, and the Lawsuit Abuse Reduction Act.
Today's hearing examines a different aspect of America's
lawsuit problem, the strategic abuse of litigation system as an
anti-competitive tactic. Precisely because our civil justice
system is so expensive and tolerant of tenuous claims,
litigation can be a deadly weapon in the hands of a cartel or
an aspiring monopolist. Litigation can be used to drive up a
competitor's costs, to gain access to a competitor's otherwise
confidential information, and to divert a competitor's
resources away from offering competitive goods and services.
Large companies can impose ruinous legal costs on their
smaller competitors by forcing them to defend against a
lawsuit. The median case in Federal court costs about $20,000
to defend, and, in many cases, the cost is much higher.
A predatory plaintiff controls the scope of the claims in
the suit, and so has the ability to structure its claims and
discovery requests in a way that maximizes costs for the
defendant. And the costs of litigation weigh much heavier on a
small business than a large corporation.
If the claim is merely plausible, then a predatory
plaintiff is entitled to discovery of any matter relevant to
the claims or defenses in the case. A defendant may be forced
to turn over e-mails, business plans, customer lists, and other
sensitive information. The more documents the defendant is
forced to turn over, the higher the costs of the lawsuit. And
the lawsuit forces the defendant to spend time and money on
litigation rather than competing in the marketplace.
For all of these reasons, litigation can be a particularly
effective predatory strategy. Deployed strategically,
litigation can put a competitor out of business, prevent a
competitor from ever entering the market, or force a competitor
to reduce its output.
If a big company succeeds in using litigation to limit
competition, then there is a dangerous probability that it
could profit by raising prices on consumers.
Indeed, strategic litigation can be a more effective means
of eliminating a competitor than tactics like predatory pricing
that have long been banned by the antitrust laws. Predatory
pricing requires a dominant party to sell its products at below
its costs, lowering its profits in the short term in the hope
of realizing monopoly profits after the competitor is
eliminated. With litigation, on the other hand, a party can
seek a monopoly or to eliminate a competitor without having to
lower its own prices.
While a litigation strategy imposes litigation costs on a
predatory plaintiff, it imposes equivalent costs on a target
defendant. The defendant, often a smaller business than the
predatory plaintiff, may be less equipped to bear these costs.
As a predatory tactic, abusive litigation is relatively
cost-effective for the predatory plaintiff and expensive for
the defendant. This is why some commentators have dubbed
abusive litigation a form of ``cheap exclusion.''
But the Supreme Court has created an exemption that
protects abusive anti-competitive litigation from the antitrust
laws. The Noerr-Pennington doctrine was originally formulated
to create an antitrust immunity for citizens exercising their
First Amendment right to petition the legislature. Because
government actions are beyond the scope of antitrust laws, and
because citizens have a right to petition the government to
adopt policies they favor, the Court held that the political
petitioning activities do not violate the antitrust laws.
The Court has since extended this holding to protect all
forms of petitioning the Government, including the filing of a
lawsuit. But the analogy between petitioning the legislature
and petitioning a court is flawed.
Threatening to restrict a frivolous or abusive political
argument could chill free speech and the flow of information,
and raises serious First Amendment questions. But courts have
long put reasonable limits on the types of arguments that a
litigant can make and have long-sanctioned frivolous and
abusive arguments made for improper purposes.
Abuse of process was a tort at common law. Rule 10 of the
Federal Rules of Civil Procedure provides for dismissal of
meritless and implausible claims. Rule 11 provides sanctions
for filings made with an improper purpose. The rules of
evidence prohibit the introduction of evidence based on
hearsay, conjecture, or unreliable methods of expert analysis.
Applying the antitrust laws to prohibit litigation filed
with the anticompetitive intent to monopolize a market or to
unreasonably restrain trade would not harm the public's right
to access the courts for legitimate purposes. Unfortunately,
the courts have liberally applied Noerr-Pennington antitrust
immunity to litigation and have construed the sham litigation
exception to that doctrine very narrowly.
As a result, abusive litigation persists as a predatory
anticompetitive tactic. Today's hearing will explore this
problem and how to address it.
I want to welcome and recognize the Ranking Member of the
Subcommittee, the gentleman from North Carolina, Mr. Watt.
Mr. Watt. Thank you, Mr. Chairman. And I appreciate the
Chairman convening this hearing.
The First Amendment holds a hallowed place in our
Constitution, guaranteeing the right of people to petition the
government. Antitrust laws are also of fundamental importance
in our society. As Justice Thurgood Marshall observed years
ago, ``Antitrust laws are the Magna Carta of free enterprise.
They are as important to the preservation of economic freedom
and our free enterprise system as the Bill of Rights is to the
protection of our fundamental personal freedoms.''
The question here seems to me to be, what happens when a
fundamental personal right conflicts with a fundamental free
enterprise right? Which right is more fundamental and should
take precedence in that event?
Early tensions between these two principles brought into
focus the need for doctrinal adjustments and led to the Noerr-
Pennington immunity.
As we have heard, the Noerr-Pennington doctrine provides
immunity from antitrust liability, the guardian of free
enterprise rights, to individuals and corporations who exercise
their personal rights to petition the Federal or State
Government to take official actions that may impose a restraint
on trade.
As Members of Congress, we often think about the right to
petition the government as protecting lobbying, but Noerr
applies to other areas of First Amendment expression as well.
In litigation, I think we can all imagine the dominant
players in an industry reacting with hostility against a small
player who dares to enter that market. Attempting to drive out
rivals from the opportunity to compete is clearly an abuse of
process and antitrust principles. But it is also too easy to
respond to competitive lawsuits by claiming that the suit is
merely a means to eliminate competition.
If dominant players, the rich and well-represented who can
afford the best legal minds, walked into court on an equal
footing with small players, the poor, the indigent, and the
underrepresented, wouldn't our system of justice in general be
eminently more fair? Or to state the converse, if the small
players, the poor, indigent litigants, walked into court on an
equal footing with dominant players, the rich and well-
represented, wouldn't justice be done a lot more often?
In an effort to constrain dominant players, the Supreme
Court in a 1993 case, Professional Real Estate Investors v.
Columbia Pictures Industries, the so-called PRE case, made an
attempt to constrain the Noerr doctrine to prevent a perversion
of the First Amendment by giving structure to the so-called
sham exception to Noerr immunity.
In subsequent years, however, the PRE test for determining
whether a petition in the litigation context is a sham has
shown signs of ineffectiveness.
I believe it is important to consumers, the economy, and
businesses--small and big--to know how to distinguish
legitimate petition from an anti-competitive effort to
undermine competition. In many ways, unfortunately, this
Judiciary Committee has preoccupied itself with protecting
dominant players from frivolous litigation. So in a sense, this
hearing seems to me to represent a welcome role reversal for
the Committee.
I am particularly interested in hearing from witnesses
their views on the breadth of Noerr-Pennington in the
litigation context, as well as the scope of the sham litigation
exception. Are they currently working in a compatible fashion?
Does one make the other meaningless? Further, should Noerr-
Pennington immunity have parallel application across the
methods available to petition the government? Or is litigation
decisively different?
I appreciate that we have a businessman, a law professor,
and a litigator on our panel, and I believe that we will be
enriched by the diversity of perspectives reflected here today.
The Chairman spoke quite a bit in his opening statement
about abusive litigation. I guess I come kind of from a
different perspective. I have seen a lot of abusive defense of
litigation: stonewalling, failing to give up documents, failing
to allow the justice system. So perhaps our next hearing will
be about that disparity between rich and poor, dominant and
small, and we will get to really trying to level the playing
field in the litigation context, which is really where the
problem exists, in my opinion.
I yield back, Mr. Chairman.
Mr. Goodlatte. I thank the gentleman for his comments. And
I think he will find that this hearing will, indeed, touch on
some of those issues that you describe.
And we welcome all of our witnesses and the contributions
they will make.
But before I introduce them, I would like them, as is the
custom of this Committee, to stand and be sworn.
[Witnesses sworn.]
Mr. Goodlatte. Thank you very much, and please be seated.
Our first witness is Chris Saxman, a former member of the
Virginia House of Delegates. Mr. Saxman's family founded and
runs the Shenandoah Valley Water Company. Mr. Saxman has been
involved in issues facing that industry as a former chairman
and current board member of the International Bottled Water
Association. I look forward to hearing his perspective on this
issue as a policymaker and as a small-business man. And I am
proud to call Mr. Saxman a constituent and friend.
Our second witness, Doug Richards, practices antitrust
class action law and is the managing partner at the New York
office of Cohen Milstein. Before entering private practice, Mr.
Richards served as deputy general counsel of the Commodity
Futures Trading Commission, where he received a special service
award for exemplary accomplishment.
Our third and final witness is Professor Marina Lao of
Seton Hall University School of Law. Professor Lao is a former
attorney with the Department of Justice Antitrust Division, a
member of the advisory board of American Antitrust Institute,
and the former Chair of the section of antitrust and economic
regulation of the Association of American Law Schools.
Professor Lao's article ``Reforming the Noerr-Pennington
Antitrust Immunity Doctrine'' examines the scope of Noerr-
Pennington immunity and offers helpful suggestions for reform.
I would point out to each of the witnesses that there is a
timer on the table in front of you. You have 5 minutes to make
your statements. Your entire statement, written statement, will
be made a part of the record. When the yellow light comes on,
you will have 1 minute to complete your statement. When the red
light comes on, we ask that you wrap up your remarks.
And we will start with Mr. Saxman.
Welcome. Glad to have you up from the Shenandoah Valley.
TESTIMONY OF THE HONORABLE CHRISTOPHER B. SAXMAN, FORMER
DELEGATE, VIRGINIA HOUSE OF DELEGATES
Mr. Saxman. Thank you, Mr. Chairman, and Members of the
Committee.
My name is Chris Saxman. I am a recently retired member of
the Virginia General Assembly, having served the 20th House
District from 2002 to 2010. I grew up in a small family
business, the Shenandoah Valley Water Company, and we have 45
full-time employees for whom we provide health care for the
entire family while paying above-average market wages.
Additionally, I am a past chairman of the International Bottled
Water Association, while currently serving on its board of
directors and executive committee.
In short, Mr. Chairman, I have seen the business world as a
frontline low-skill employee to a bottled water deliveryman to
a manager to an executive. I have been a legislator who has
worked on legislation dealing with just about every aspect of
business, and I have also worked very closely with small mom-
and-pop companies and large global corporations who employ
people in the tens of thousands to improve products, services,
relationships, and industry standards.
Over the course of my life in business and politics, I have
come across a disturbing and pervasive business practice that,
in my opinion, threatens the very foundations of the American
free market capitalist system. In most political debates, I
would be considered a free-market, supply-side adherent;
however, I also believe that, as James Madison said, ``If men
were angels, no government would be necessary.''
A sound economy is not just what one can do in a market but
also what one should do. Government should protect people who
are engaged in commerce just as it should protect the average
citizen. One cannot steal property from another just as one
cannot physically harm or threaten another to gain property or
pleasure.
The issue today before you is predatory litigation or, as I
prefer to call it, legal extortion. I will give you two
examples of which I have become aware in my various capacities.
Number one, a multinational non-American company in my
industry willfully, intentionally, and knowingly breached a
contract with which it had complied for 13 years in order to
gain financially at the expense of an American company with
whom they had had a successful, mutually beneficial 20-year
business relationship. The American company, at the time of the
breach, was .4 percent the size of the North American
subsidiary of a large multinational which broke the contract,
and one one-hundreth the size of its global parent.
The evidence through the trial clearly shows a pattern of
behavior in which the larger company, and its employees,
conspired to steal--my term--steal from the smaller firm that
which it could not gain in the market or would not purchase at
fair market value.
If our biggest competitors decide--I think I am missing
part of my testimony. It is on the backside, Mr. Chairman.
Rather than simply pay the company fair market value for
the business, the larger company figured that it would be
cheaper to take the business via the American court system.
So by forcing the American company to defend its own
property in Federal court and force the American company to
spend millions of dollars in legal fees, the larger company
determined it had nothing to lose.
What is even more disturbing is that the large
multinational forced the smaller company to initiate the
litigation. It is literally a win-win scenario. Even if, after
5 years of expensive and time-consuming litigation, which is
still pending at the appellate level, they lose the case, the
company will either expense it off their books or account it as
an asset purchase ending up with the business they initially
sought.
The large multinational went so far as to investigate the
American company owner's personal and corporate debt load
before it decided to take pre-emptive legal action. They waited
until he was in a weakened condition and then made their move.
The results for the consumer will be a less competitive market.
The broader community will see wealth being transferred out of
the country, lost jobs, lower wages and benefits, and overall
economic decline.
The second case involves the extortion of taxpayer money by
the use of threat of legal action by companies who have
submitted bids to local governments under a legal Request for
Proposal process. In this situation, a company will submit bids
that do not entirely comply with an RFP but will have a bid
price that is much higher than necessary. When that company is
not awarded the RFP, the company will threaten legal action
unless the bidding process is reconsidered. This causes
inordinate delays and, obviously, higher bid awards, because
most local governments cannot afford protracted legal expenses.
Companies know that they have a distinct advantage in this
process--again, in a win-win scenario. They will either win the
bid or get the local government to increase the overall price
in the market, which will naturally be seen in similar bids
throughout the country, and all at taxpayer expense.
So a bid that forces up prices in X county in Virginia will
transfer to Y city in North Carolina due to market realities.
This is a very well-thought-out corporate strategy which, in
conjunction with Federal mandates and accompanying Federal
grants, strikes at the very heart of the problems that
undermines our economy--lack of trust in our governing and
institutional structures.
I can provide specifics upon request, but my interest here
today is to leave you with the impression that there is
something very wrong in our economy. The court system has been
weaponized in the market and is being used against smaller,
weaker companies who cannot withstand the attacks.
[The prepared statement of Mr. Saxman follows:]
Prepared Statement of the Honorable Christopher B. Saxman,
former Delegate, Virginia House of Delegates
Mr. Chairman and members of the Committee,
My name is Chris Saxman. I am a recently retired member of the
Virginia General Assembly having served the 20th House District from
2002-2010. I grew up in a small family business, Shenandoah Valley
Water Company and we have 45 full time employees for whom we provide
health care for the entire family while paying above average market
wages. Additionally, I am a past Chairman of the International Bottled
Water Association while currently serving on its Board of Directors and
Executive Committee.
In short Mr. Chairman, I have seen the business world as a front
line low skill employee to a bottled water deliveryman to a manager to
an executive. I have been a legislator who has worked on legislation
dealing with just about every aspect of business and I have also worked
very closely with small mom and pop companies and large global
corporations who employ people in the tens of thousands to improve
products, services, relationships and industry standards.
Over the course of my life in business and politics, I have come
across a disturbing and pervasive business practice that, in my
opinion, threatens the very foundations of the American Free Market
Capitalist system.
In most political debates I would be considered a free market
supply side adherent; however, I also believe that as James Madison
said ``If men were angels, no government would be necessary.''
A sound economy is not just about what one CAN do in a market but
also what one SHOULD do.
Government should protect people who are engaged in commerce just
as it should protect the average citizen. One cannot steal property
from another just as one cannot physically harm or threaten another to
gain property or pleasure.
The issue before you today is ``predatory litigation'' or as I
prefer to call it ``legal extortion.''
I will give you two examples of which I have become aware in my
various capacities.
1. A multinational non American company, in my industry, willfully,
intentionally and knowingly breached a contract with which it had
complied for 13 years in order to gain financially at the expense of
the American company with whom they had had a successful mutually
beneficial 20 year business relationship. The American company, at the
time of the breach was .4% the size of the North American subsidiary of
the large multinational which broke the contract and .01% the size of
its global parent. The evidence throughout the trial clearly shows a
pattern of behavior in which the larger company, and its employees,
conspired to steal from the smaller firm that which it could not gain
in the market or would not purchase at fair market value. Rather than
simply pay the company fair market value for the business, the larger
company figured that it would be cheaper to take the business via the
American court system. So, by forcing the American company to defend
its own property in federal court and force the American company to
spend millions of dollars in legal fees, the larger company determined
it had nothing to lose. What is even more disturbing is that the large
multinational forced the smaller company to initiate the litigation.
It's literally a win win scenario. Even if, after 5 years of
expensive and time consuming litigation (which is still pending at the
appellate level) they lose the case, the company will either expense it
off their books or account it as an asset purchase ending up with the
business they sought.
The large multinational went so far as to investigate the American
company's owner's personal and corporate debt load before it decided to
take pre-emptive legal action. They waited until he was in a weakened
condition and then made their move.
The results for the consumer will be a less competitive market. The
broader community will see wealth being transferred out of the country,
lost jobs, lower wages and benefits, and overall economic decline.
2. Another case involves the extortion of taxpayer money by the use
of threat of legal action by companies who have submitted bids to local
governments under a legal Request For Proposal process. In this
situation, a company will submit bids that do not comply entirely with
an RFP but will have a bid price that is much higher than necessary.
When that company is not awarded the RFP, the company will threaten
legal action unless the bidding process is reconsidered. This causes
inordinate delays and obviously higher bid awards because most local
governments cannot afford protracted legal expenses. Companies know
that they have a distinct advantage in this process again, in a win win
scenario. They either win the bid or get the local government to
increase the overall price in the market which will naturally be seen
in similar bids throughout the country and all at taxpayer expense. So,
a bid that forces prices up in X County in Virginia will transfer to Y
City in Pennsylvania due to market realities. This is a very well
thought corporate strategy which, in conjunction with federal mandates
and accompanying federal grants, strikes to heart of the problem that
undermines our economy--lack of trust in our governing and
institutional structures.
I can provide specifics upon request but my interest here today is
to leave you with the impression that there is something very wrong in
our economy. The court system has been weaponized in the market and is
being used against smaller, weaker companies who cannot withstand the
attacks.
We are a small family business who is constantly competing with
large multinational corporations for every customer. We live under the
constant threat of predatory litigation. If our biggest competitors
decide to train the full resources of their legal divisions on us, how
can we compete? We just want to be in business to deliver good, safe
and great tasting bottled water to our customers at the best price in
the market. We employ 45 Virginians who share that goal and work hard
every day to make it a reality. But we don't have a team of lawyers on
retainer ready to engage in trench warfare. We want to win in the
marketplace, not the courtroom. I think every small businessman in
America feels the same way.
Imagine my surprise when I learned that the law creates a special
exemption from antitrust, the Noerr-Pennington Doctrine, that protects
these big companies' right to sue my family's business and fellow small
businesses in an attempt to drive us from the market. I don't think it
is right that one of the most effective strategies that our competitors
can adopt to exclude us from the market is also one of the few
exclusionary strategies that enjoys near blanket immunity from the
antitrust law.
We're not afraid of predatory pricing by my rivals. We're not
afraid of anything our competitors can do to us in the market. If the
game is delivering water to our customers at the best price with the
best service, I know we can beat them. We have the best and hardest
working drivers, customer service reps, and sales team in the
Shenandoah Valley. But if the game is a protracted lawsuit, well, we
just can't compete with their lawyers.
The impacts are felt all across society in a subtle but serious
way--people lose health care, jobs are lost and corporate profits are
concentrated and in many cases sent overseas. Unless the law sanctions
this behavior severely, big corporations will continue to engage in it.
Unfortunately, experience teaches that they will not do what they
should do, but what they can get away with. Right now they can abuse
the legal system to weaken smaller competitors like us, and so they do.
The antitrust law should be clarified so that abusive litigation is
punished just as severely as other anticompetitive, predatory
strategies--including by treble damages and, where appropriate,
criminal sanctions.
Thank you Mr. Chairman.
__________
Mr. Goodlatte. Thank you, Mr. Saxman.
Mr. Richards, welcome. You might want to turn on your
microphone there. Thank you.
TESTIMONY OF J. DOUGLAS RICHARDS, PARTNER,
COHEN MILSTEIN
Mr. Richards. Good morning, Chairman Goodlatte, Ranking
Members Watt and Conyers, and Members of the Subcommittee. I am
Doug Richards, and I am managing partner of the New York office
of the law firm of Cohen Milstein Sellers & Toll. My legal
practice focuses mainly on antitrust claims, largely including
antitrust claims arising from unfounded patent litigation.
I have been asked to testify today to share my perspectives
concerning the scope of immunity that one should have from
antitrust liability stemming from use of litigation as a
predatory practice. My perspectives on that question stem from
my experience in having represented plaintiffs in several
antitrust claims during the last 10 years that asserted claims
of sham litigation, arising mainly from defective patents.
I am testifying on my own behalf, and the opinions
expressed are my own.
Thank you for giving me the opportunity to testify about
current legal standards governing antitrust liability stemming
from sham litigation. It is important that the law governing
Noerr-Pennington immunity strike a correct balance between the
need to reward invention by allowing intellectual property
owners to obtain and protect their intellectual property
through litigation, on one hand, and the need to preserve
competition in the face of unfounded intellectual property
claims, on the other.
These antitrust issues often arise when a patent-holder
sues a company alleging patent infringement, such as when a
brand-name pharmaceutical company sues a generic drug company
for infringing its patents and wins or settles the case.
Purchasers of the drug at issue then sometimes bring an
antitrust suit against the brand-name pharmaceutical company,
claiming that the patent litigation was sham litigation,
because the patent was invalid due to fraud on the part of the
patent-holder in obtaining the patent.
I believe that the law is currently out of balance and
effectively immunizes unfounded litigation to too great a
degree from challenge under antitrust law. In several key
respects, legal hurdles that an antitrust plaintiff must clear
in order to pursue antitrust claims based on predatory
litigation have been set too high by the courts. The result is
that dominant corporations are often not held duly accountable
when they bring unfounded intellectual property claims for the
purpose of excluding competitors from the marketplace.
In resolving the tension between goals of antitrust and of
intellectual property, the courts have stacked the deck in
favor of intellectual property rights, even when they are
legally unfounded, and to the detriment of the public's right
to protect itself under antitrust law against unjustified
monopoly prices.
Under the Professional Real Estate Investors case, the core
requirement for antitrust liability arising from a claim of
sham litigation is that the claim must be both objectively and
subjectively baseless. Even from the outset of the analysis in
actual cases, this dichotomy between objective baselessness and
subjective baselessness is often unclear.
Suppose, for example, as is often true in these cases, that
the antitrust plaintiff has uncovered evidence that a patent-
holder actually conducted its own tests, prior to obtaining a
patent, that showed in one way or another that the patent
should not be granted. Does that evidence go to objective
baselessness, subjective baselessness, or both?
If those tests weren't part of the published literature,
defendants often argue they are irrelevant to objective
baselessness, because all they show is what the defendant knew
subjectively, and not what some sort of objective reasonable
person would know. But shouldn't a test of baselessness address
what the defendant actually knew?
There is no sensible reason to divorce the objective
reasonableness inquiry from facts actually known at the time by
the antitrust defendant, if the goal is to deter groundless
claims.
In actual cases, to focus on what was actually known by a
defendant often provides a richer and more reliable guide to
what someone in the position of the antitrust defendant should
have known, than to limit one's focus in the first instance
only to what some purely hypothetical reasonable person would
have known in some hypothetical context.
Even if objective baselessness is required, therefore, what
the defendant actually knew should be one of the most reliable
guides to whether a case was baseless in light of known facts.
Nevertheless, the court in the Professional Real Estate
wrote that only if challenged litigation is objectively
meritless may a court examine the litigant's subjective
motivation. One can reasonably argue that this statement
relates only to evidence of the defendants' subjective
motivation, and not to the defendant's subjective knowledge of
facts.
But the Federal Circuit has not recognized that
distinction, holding instead that facts that only the defendant
itself was aware of prior to filing suit cannot properly be
considered in making the objective reasonableness inquiry.
In cases where the antitrust defendant clearly knew facts
that made the patent invalid, confusion about the fuzzy
distinction between objective and subjective baselessness can
cause courts to turn a blind eye to the clearest and most
compelling evidence that a case had no reasonable basis at all.
I see my time is out, so I will just sum up by saying that
I am in agreement with the fact that there is a need to curtail
the scope of immunity from antitrust liability under the Noerr-
Pennington doctrine.
And I thank you for the opportunity to testify today.
[The prepared statement of Mr. Richards follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
__________
Mr. Goodlatte. Thank you, Mr. Richards.
Professor Lao, welcome. You might want to pull that
microphone closer and turn it on.
TESTIMONY OF MARINA LAO, PROFESSOR OF LAW,
SETON HALL UNIVERSITY SCHOOL OF LAW
Ms. Lao. Good morning, and I apologize for having been a
little bit late. I got lost in this cavernous building, believe
it or not.
Thank you so much for inviting me to participate in this
hearing. I am a law professor at Seton Hall University School
of Law.
My written statement and my testimony today is drawn in
part from an article I had published, entitled ``Reforming the
Noerr-Pennington Antitrust Immunity Doctrine.''
Let me first start out by giving a little bit of context.
In a democracy, citizens have the right to petition the
government. But efforts to influence the government sometimes
have an impact on competition. When that happens, then there is
a tension between the antitrust law and the First Amendment.
The Noerr-Pennington immunity doctrine developed as a result of
that, to try to reconcile and resolve that tension.
The Noerr-Pennington doctrine, as it stands, is sweeping.
But in the early years, it was limited by a sweeping sham
exception. The Noerr-Pennington immunity doctrine applies to
both lobbying the legislature, the executive branch, and to the
petitioning judiciary.
And I think therein lies some of the problem, because
lobbying the legislature is quite different from so-called
petitioning the judiciary, because when we talk about
petitioning the judiciary, we are actually talking about
litigation, filing a lawsuit.
So I am going to start out just by talking a little bit
about litigation and the PRE case, which Mr. Watt had referred
to quite a bit.
As I mentioned earlier, the sham exception at first was
quite broad, and it kept check on the Noerr immunity doctrine.
But in 1993, the Supreme Court decided the PRE case, which
severely restricted the sham exception. Basically, it set forth
a two-pronged test.
First, the plaintiff will have to show that the underlying
case was objectively baseless, in the sense that no reasonable
litigant could have realistically expected success on the
merits. It must then show that the antitrust defendant brought
the lawsuit for the purpose of harming the rival through the
use of the government process, rather than through the outcome
of that process.
Both parts of the test are quite troubling, as I stated
perhaps in more detail in my written statement. And I don't
really have time to go into it at length now.
But I would say that one of the reasons that the objective
test is so troubling is that a case can in fact be objectively
baseless if it is clearly irrational for the person to have
brought the litigation but for the competitive harm that it
could inflict on its rival. But if there is a colorable basis
in law for the lawsuit, we would still say under PRE that this
case fails to pass the objective baselessness test.
In fact, Justices Stevens and O'Connor, who had concurred
in the judgment, disagreed sharply with this reasoning and with
this articulation of the two-pronged test. They raised the
point that you can see how someone could bring a lawsuit, have
it run for 10 years, take two trips to the Court of Appeals and
recover a nominal sum from the defendant. Yet under this PRE
test, this would be called a not objectively baseless lawsuit.
And that is one of the problems.
The second prong is also slightly problematic, because you
would have to show that the defendant brought the suit in
order--for the purpose of harming the competitor through the
use of the process and not for the outcome. But people often do
have mixed motives, and often people do bring a lawsuit to get
the outcome and as well to harm--and to harm the competitor as
well.
So under this definition, it would seem as though the
second test would also not be met. Without a meaningful
doctrinal limit to the immunity doctrine, I think there are
greater risks that dominant firms can bring actions against
smaller companies that I think would not have been rationally
brought, otherwise.
I think as a matter of policy, it would be desirable to
limit Noerr and to perhaps expand the sham exception. The
question is, does the First Amendment allow us to do that?
Various commentators have noted the distinction between
petitioning the legislature and petitioning in the adjudicatory
settings. And I totally agree with that.
I think when we are talking about petitioning the
judiciary, we don't need that much protection. That is because
the judiciary is very, very different. Already, the litigants
are bound by very strict rules when they go into court to
litigate. There are Rule 11 sanctions. There are all kinds of
penalties for litigants, if they do not tell the truth.
So to the extent that all those sanctions and all those
rules are considered constitutional, it is very hard for me to
see why--if you say that you would not allow them to make
misrepresentations, that somehow that might offend the First
Amendment.
I see that I have run out of time. And I will just stop
right here. If you have any questions, I would be happy to take
them. Thank you.
[The prepared statement of Ms. Lao follows:]
Prepared Statement of Marina Lao, Professor of Law,
Seton Hall University School of Law
Thank you for inviting me to participate in this hearing. I am a
law professor at Seton Hall University School of Law specializing in
antitrust law. I am also a member of the Advisory Board of the American
Antitrust Institute (AAI), a former chair of the Section of Antitrust
and Economic Regulation of the Association of American Law Schools
(AALS), and a former attorney at the Department of Justice, Antitrust
Division. My written Statement, and my testimony today, is drawn in
part from an article that I have published entitled ``Reforming the
Noerr-Pennington Antitrust Immunity Doctrine.\1\
---------------------------------------------------------------------------
\1\ Marina Lao, Reforming the Noerr-Pennington Antitrust Immunity
Doctrine, 55 Rutgers L. Rev. 965 (2003).
---------------------------------------------------------------------------
The essence of a representative democracy, protected by the First
Amendment right to petition, is the citizen's right to communicate
their desires, anticompetitively motivated or otherwise, to government
officials. However, when efforts to persuade the government produce
anticompetitive effects (harm to competition), they necessarily impinge
upon federal antitrust law, creating tension between that law and the
First Amendment and related values. The Noerr-Pennington antitrust
immunity doctrine was developed in an effort to resolve that tension.
As originally conceived, the Noerr-Pennington doctrine stood for
the principle that genuine efforts to persuade the government to adopt
a particular course of action are not subject to antitrust scrutiny, no
matter how anticompetitive the petitioner's motive and the action
sought. It originated from two U.S. Supreme Court cases that gave the
doctrine its name: Eastern Railroad President Conference v. Noerr Motor
Freight,\2\ which immunized petitioning the legislature; and United
Mine Workers of America v. Pennington,\3\ which immunized petitioning
the executive branch of the government. About a decade later, in
California Motor Transport Co. v. Trucking Unlimited,\4\ the doctrine
was further extended to petitions to courts (and administrative
agencies acting in an adjudicatory capacity). There is a ``sham''
exception to Noerr: if the petitioning is considered sham, Noerr
immunity would have no application.
---------------------------------------------------------------------------
\2\ 365 U.S. 127 (1961).
\3\ 381 U.S. 657 (1965).
\4\ 404 U.S. 508 (1972).
---------------------------------------------------------------------------
My Statement will focus on the current expansive scope of Noerr,
and the correspondingly narrow sham exception, as it is applied to
judicial petitions. Litigation can be a particularly effective method
of predation.\5\ Even if it is unsuccessful, it may inflict substantial
costs on a competitor and otherwise cause significant competitive harm.
I will also address whether such an expansive interpretation of the
Noerr doctrine, as applied to judicial petitioning, is required under
either the First Amendment right of petition or a statutory
construction of the Sherman Act, and conclude that it is not.
---------------------------------------------------------------------------
\5\ See, e.g., Robert H. Bork, The Antitrust Paradox: A Policy At
War With Itself 347-78; Grip-Pak v. Illinois Tool Works, Inc., 694 F.2d
466 (7th Cir. 1982), cert. denied, 461 U.S. 958 (1983).
---------------------------------------------------------------------------
T2Noerr doctrine as applied to judicial petitions, and the ``sham''
exception. In California Motor Transport, while the Supreme Court
extended the Noerr antitrust immunity doctrine to judicial and quasi-
judicial petitions, it applied a ``sham'' exception for the first time
to deny immunity to the antitrust defendants. It held that the
defendants, who had sought to forestall competition by routinely
opposing their competitors' applications for operating rights in
administrative and judicial proceedings, regardless of the merits of
the cases, were not entitled to Noerr immunity because their
petitioning was ``sham.'' The sham exception, then unclearly defined
and loosely applied to different kinds of improper conduct, served as a
doctrinal limit to the expansive Noerr immunity principle for decades.
In 1993, however, the definition of sham was severely restricted by
the Supreme Court in Professional Real Estate Investors, Inc. v.
Columbia Picture Industries, Inc. (PRE).\6\ Writing for the Court,
Justice Thomas said that, for an underlying lawsuit to be considered
sham, it must be ``objectively baseless in the sense that no reasonable
litigant could realistically expect success on the merits.'' \7\ If
this objective test is met, it must also be shown that the ``baseless
lawsuit conceals `an attempt to interfere directly with the business
relationships of a competitor,' through the `use [of] the governmental
process--as opposed to the outcome of that process--as an
anticompetitive weapon.'' \8\ In other words, the antitrust plaintiff
must prove not only that the earlier lawsuit was objectively baseless
but that the antitrust defendant had brought it merely to harm the
competitor through the process and not for the litigation outcome.
---------------------------------------------------------------------------
\6\ 508 U.S. 49 (1993).
\7\ Id. at 60-61.
\8\ Id. (quoting City of Columbia v. Omni Outdoor Adver. Inc., 499
U.S. 365, 380 (1991)).
---------------------------------------------------------------------------
Both parts of the test are somewhat troubling. As to the objective
component, the Court also said that success in the earlier lawsuit
precludes a finding of objective baselessness (while a lawsuit that is
unsuccessful at every stage of the proceedings is not necessarily
baseless).\9\ This raises the question of how earlier lawsuits that
succeed because of the antitrust defendant's misrepresentations or
fraud upon the court should be treated. Would they be deemed to
automatically fail the ``objectively baseless'' test because a
successful lawsuit, by definition, is not baseless? Or should the
misrepresentation take the judicial petitioning outside the scope of
Noerr? Unfortunately, the Supreme Court in PRE reserved that question
for another day.\10\ As a result, lower court treatment of this issue
has been confusing and inconsistent. Most seem to treat intentional
misrepresentations as a subset of sham but require an additional
showing that those misrepresentations ``infected the core'' of the
claim and the decision, or ``deprived the litigation of its
legitimacy'' before the suit might be considered objectively
baseless.\11\
---------------------------------------------------------------------------
\9\ Id. at 60 n.5.
\10\ Id. at 61 n.6 (``We need not decide here whether and, if so,
to what extent Noerr permits the imposition of antitrust immunity for a
litigant's fraud or other misrepresentations.'').
\11\ See, e.g., Armstrong Surgical Center, Inc. v. Armstrong County
Memorial Hospital, 185 F.3d 154 (3d Cir. 1999) (declining to carve out
a misrepresentation exception); Cheminor Drugs Ltd. V. Ethyl Corp., 168
F.3d 118 (3d Cir. 1999) (declining to recognize a fraud or
misrepresentation exception to Noerr, but treating misrepresentation as
a variant of sham and applying a modified PRE test that requiring a
showing that the misrepresentation ``infected the core'' of the case);
Kottle v. N.W. Kidney Ctrs., 146 F.3d 1056 (9th Cir. 1998) (treating
misrepresentation as a variant of the sham exception but adding the
requirement that the fraud ``deprives litigation of its legitimacy'').
---------------------------------------------------------------------------
Even in the absence of misrepresentations in an earlier suit, the
Court's definition of an objectively baseless suit as one that no
``reasonable litigant could realistically expect success on the
merits'' seems unnecessarily narrow. Under this definition, an earlier
suit would not be defined as objectively baseless even if it is clearly
irrational but for its ability to inflict competitive harm on a rival
(the antitrust plaintiff), so long as the suit has a colorable basis in
law such that a reasonable litigant could expect success on the merits.
It should be noted that former Justices Stevens and O'Connor, who
concurred only on the Court's judgment but not its reasoning, were very
critical of this narrow definition of the objective baselessness test.
They questioned whether a case involving ten years of litigation and
two appeals to recover a dollar from a defendant, for example, would
qualify as an objectively baseless suit under this test.\12\
---------------------------------------------------------------------------
\12\ 508 U.S. at 68.
---------------------------------------------------------------------------
PRE's second prong--the subjective standard--is also problematic.
If the underlying lawsuit is already shown to be objectively baseless
(a threshold prerequisite), it is unclear why the antitrust plaintiff
must further demonstrate that the litigant brought the suit to harm the
competitor through the process of litigation, and not for the outcome.
Proof of objective baselessness, especially as the term is currently
construed, should sufficiently show that the litigant had probably
brought the suit for an improper purpose. It is difficult to imagine
why the litigant would otherwise bring an objectively baseless suit.
Therefore, at best, the subjective test seems superfluous. Moreover,
under a literal reading of this test, if a litigant with an objectively
baseless suit actually seeks to win the suit (most likely aided by
misrepresentations) and not to simply use the process as an
anticompetitve strategy, the subjective test may not be satisfied and
the suit may not be considered sham even if the litigant loses the
underlying suit. Thus, at worst, the subjective test eviscerates the
sham exception.
In the absence of a meaningful doctrinal limit to the expansive
Noerr immunity principle, there are greater risks that dominant firms
could bring action against smaller competitors that they would not have
rationally brought, in order to impose heavy costs on a small rival in
the hope of excluding it from the market, diminishing its ability to
compete on the merits, or deterring entry by other firms.\13\ From a
policy perspective, it would be desirable to limit Noerr to a narrower
sphere of conduct so as to be more responsive to competition concerns.
I believe that it can be done: the First Amendment right of petition
does not call for the expansive interpretation currently given Noerr
(and the corresponding narrow reading of its exceptions), particularly
in the adjudicatory context. Nor is such a broad reading of the
doctrine necessary under a statutory construction of the Sherman Act.
---------------------------------------------------------------------------
\13\ See Grip-Pak v. Illinois Tool Works, Inc.,, 694 F.2d 466, 472
(7th Cir. 1982), cert. denied, 461 U.S. 958 (1983) (``Suppose a
monopolist brought a tort action against a single, tiny competitor; the
action had a colorable basis in law; but in fact the monopolist would
never have brought the suit . . . except that it wanted to use pretrial
discovery to discover its competitor's trade secrets; or hoped that the
competitor would be required to make public disclosure of its potential
liability in the suit and this disclosure would increase the interest
rate that the competitor had to pay for bank financing; or just wanted
to impose heavy legal costs on the competitor in the hope of deterring
entry by other firms.'')
---------------------------------------------------------------------------
Limits of First Amendment protection for judicial petitioning.
There is some uncertainty and confusion over whether Noerr is grounded
on the First Amendment right of petition or on statutory construction.
I will treat the doctrine as based partly on constitutional principles
and partly on statutory interpretation and will analyze its appropriate
scope under both, starting first with the constitutional right of
petition.
Various commentators have noted the distinction between petitioning
in legislative and adjudicatory settings and have argued that Noerr
should be more liberally construed with respect to the former.\14\ I
agree with the distinction and would further suggest that, for
petitioning in the adjudicatory context, the Constitution guarantees
the right of access to courts (and other adjudicatory tribunals) but
not much more. The traditional constitutional argument for tolerance of
some petitioning falsehoods and abuses is that penalizing
misrepresentations may unduly ``chill'' the flow of information to the
government as well as chill the people's exercise of their right to
petition the government.\15\ The concern is that some people may shy
away from making efforts to influence government for fear that the
statements they make or the information they provide may inch over the
line of truth and result in antitrust exposure. But this argument is
more persuasive for petitioning in legislative rather than adjudicatory
spheres.
---------------------------------------------------------------------------
\14\ See, e.g., Bork, supra note ___, at 356; Stephen Calkins,
Developments in Antitrust and the First Amendment: The Disaggregation
of Noerr, 57 Antitrust L.J. 327, 358 (1988).
\15\ See generally Einer Elhauge, Making Sense of Antitrust
Petitioning Immunity, 80 Cal. L. Rev. 1177 (1992).
---------------------------------------------------------------------------
Legislative proceedings are more open and politically oriented than
judicial proceedings and are generally expected to provide a forum for
uninhibited debate. In the legislative process, there is also greater
value placed on the free flow of information to the government.
Legislative bodies are expected to solicit information and hear
arguments from a variety of sources and sort through them before making
decisions. It is also perhaps understood that political lobbying often
involves some slanting of the truth and outright misrepresentations.
Ideally, the greater input from divergent interests will correct,
balance, or compensate for any such inaccuracies. For these reasons,
more protection for petitioning in the legislative process may be
justified.
Our judicial system, in contrast, operates very differently. It is
not a free-for-all forum for unstructured policy debates or the airing
of all grievances; disputes must be litigated in accordance with the
rules and procedures that govern courts. Thus, the concern that less
robust First Amendment protection might ``chill'' debate is arguably
not a real issue in the right to petition in the adjudicatory sphere.
More importantly, our court system is already subject to many
restrictions. They include the imposition of Rule 11 sanctions for the
filing of meritless complaints \16\ and other penalties for various
litigation abuses. For example, legal judgments obtained through fraud
and misrepresentation can be set aside;\17\ perjury is uniformly
punished;\18\ and penalties may be imposed for vexatious judicial
filings.\19\ There are also numerous court-imposed rules governing
judicial proceedings. They range from rules prohibiting or limiting
media coverage of certain trials,\20\ limiting the right of attorneys
to speak in some pending cases,\21\ controlling the use of discovery
documents,\22\ and the like. Unless one is ready to argue that these
existing rules and sanctions are all unconstitutional, which no one has
suggested, it is difficult to see why stripping Noerr immunity off
litigation misconduct would somehow be constitutionally impermissible.
The right of petitioning the courts must, in fact, constitutionally
permit substantial control of the adjudicatory processes.
---------------------------------------------------------------------------
\16\ Fed. R. Civ. P. 11(b)(3).
\17\ Fed. R. Civ. P. 60(b),
\18\ See, e.g., 18 U.S.C. Sec. 1621
\19\ See 28 U.S.C. Sec. 1927
\20\ See, e.g., Bridges v. California, 314 U.S. 252, 271 (1941).
\21\ See, e.g., Gentile v. State Bar of Nevada, 501 U.S. 1030,
1048-51, 1058 (1991).
\22\ See, e.g., Seattle Times Co. v. Rhinehart, 467 U.S. 20, 37
(194)
---------------------------------------------------------------------------
In short, in terms of petitioning the courts, the First Amendment
certainly protects citizens' right of access to courts and other
adjudicatory processes. But it is questionable whether constitutional
protections extend much beyond that. Those using our courts and other
adjudicatory processes are already required to abide by myriad rules
that govern those processes, and misrepresentations and various forms
of improper litigation conduct are already subject to sanctions. An
antitrust rule providing that material misrepresentations to courts,
for example, would not be protected under Noerr, even if the litigant
is genuinely seeking a favorable outcome in litigation, can be no more
offensive to the Constitution than the existing rules that govern court
processes. In other words, it is constitutionally permissible to
recognize a misrepresentation exception to Noerr and to otherwise
liberalize the sham exception in order to limit the scope of Noerr, at
least in the litigation context.
Scope of Noerr protection under statutory construction. Of course,
even if the breadth of the Noerr doctrine is not constitutionally
mandated, whether the Sherman Act itself should be construed to give
the doctrine such an expansive reading (and its exceptions a narrow
reading) is a separate issue. Determining the appropriate parameters of
Noerr as a matter of statutory interpretation is difficult because the
Sherman Act provides no real guidance.
It is often said that federal antitrust law regulates private, not
state, actions that are in restraint of trade.\23\ Therefore, valid
actions taken by the state are not subject to antitrust scrutiny, no
matter how anticompetitive their effect. It then logically follows
that, in a representative democracy, if the government can lawfully
take action that is anticompetitive, private citizens should be free to
urge the government to take those actions.\24\ Accordingly, the Sherman
Act should not be interpreted in a way that would undermine the values
of a democratic system of government, independent of First Amendment
concerns.
---------------------------------------------------------------------------
\23\ See Parker v. Brown, 317 U.S. 341, 350-51 (``We find nothing
in the language of the Sherman Act or in its history which suggests
that its purpose was to restrain a state or its officers or agents from
activities directed by its legislature'').
\24\ See City of Columbia v. Omni Outdoor Adver., 499 U.S. 365, 379
(1991)
---------------------------------------------------------------------------
Defining the statutory scope of Noerr (similar to an analysis under
the First Amendment) requires distinguishing between legislative and
judicial petitioning. The reasons for drawing the distinction are
largely the same as those discussed for the First Amendment, and need
not be reiterated here. The norms of acceptable conduct are decidedly
different for lobbying in more open political settings than they are
for litigating in the court system. As the Supreme Court suggested in
Noerr, in a no-holds-barred fight among competitors in attempting to
influence legislation, some misrepresentations may be inevitable.\25\
That is not the case in judicial proceedings, where adjudicators must
rely on the parties for the information on which a decision will be
based and, therefore, expect the information presented to be
accurate.\26\ Presenting false information in judicial settings
threatens the proper functioning of the system, and there is no reason
to construe the Sherman Act to encourage these acts.
---------------------------------------------------------------------------
\25\ Noerr Motor Freight, 365 U.S. at 144.
\26\ See Clipper Exxpress v. Rocky Mountain Motor Tariff Bureau,
690 F.2d 1240, 1261 (9th Cir. 1982).
---------------------------------------------------------------------------
While the Noerr doctrine should encourage citizen participation in
the political process, there is another value related to a democratic
government that is worth protecting as well--the integrity of
government. The need to protect the judicial system from corruption or
abuse militates against too narrow an interpretation of sham and is a
counterbalance against the reasons for a broad immunity concept.
Proposals for limiting the Noerr doctrine. The wide swath that has
been cut for the petitioning immunity doctrine is unwarranted both
constitutionally and as a matter of statutory construction. It also
poses risks to competition and, ultimately, to consumers. Ideally, the
PRE definition of sham should be liberalized. With respect to the
objective baselessness test, the antitrust plaintiff must usually show,
under current law, that the theory of the earlier suit was so contrary
to existing law that no reasonable person could realistically expect to
win on the merits. It may be better, instead, to require the antitrust
plaintiff to merely show that the bringing of the earlier suit would
not have been brought by a reasonable person were it not for the
anticipated collateral damage that would be inflicted on the smaller
rival sued. For example, if a dominant firm incurs large sums of money
and spends years in litigation, including on appeal, to recover a
nominal amount, it seems that the lawsuit should be considered
objectively baseless despite the fact that the claim might have a
colorable basis in law and the dominant firm ultimately won.
As to the subjective test, I propose eliminating it altogether for
alleged sham in the litigation context. The subjective test is
particularly unsuited for use in litigation settings for reasons that
were addressed earlier.
I would also propose carving out a misrepresentation and fraud
exception to Noerr.
Narrowing the Noerr doctrine (and liberalizing the sham exception)
would promote the competition values that underlie the antitrust laws
and yet not encroach on the constitutional First Amendment right of
petition.
__________
Mr. Goodlatte. Thank you very much.
As time allows, we may do more than one round of questions,
and that might afford you an opportunity to bring out some of
the points in your remarks. And I hope that we can talk about
some of the remedies that might be possible, given the
constraints placed on all of us by the Supreme Court decision,
which, obviously, you have to figure out how to deal with.
And, Mr. Saxman, I have read your testimony, and I know you
didn't get through all of it, so let me ask you a question that
might prompt you to get to some of the points that you had
hoped to get to.
Does a small business have a better chance of competing
with a bigger business in the market or in the courtroom? And
why?
Mr. Saxman. Oh, absolutely in the market, Mr. Chairman. And
thank you for asking us some more questions on that line.
I can compete in the marketplace. When you get to a certain
scale, you can compete against just about anyone in the world,
depending upon your products, your market, and how well you are
continually improving your operations.
But when you are up against a potential multi-year--some
litigation will take 5 to 7 years, once you get through the
entire process, with millions of dollars in legal fees. You are
up against a cost parameter that you just never factor into
your business operations. And with the margins that we deal
with anyway, you are likely to make 10 percent on your money at
the end of the day. So how can you calculate that in as
expected expense, cost of goods, cost of doing business?
And then when you walk into your office every day and you
see the people who are adversely impacted don't even know they
are being adversely impacted, you know, the single mom with two
kids who is trying to put them through school and who is
relying on their health care. If their jobs are gone, their
health care is gone. What are those kids going to be up
against?
That is the human factor that really happens in the
marketplace, because I would rather have my money invested in
the market, developing our products and services, trying to
make more money, provide more benefits for our employees. If we
lose, if the companies in our industry lose, if small
businesses lose, if people lose jobs, they lose wages, they
lose benefits, they lose hope. It is staggering the amount of
decline that can occur.
It is sort of the expression of, how does bankruptcy
happen? Gradually, then suddenly. You don't know how long it is
going to take to fight these lawsuits. And you are just trying
to compete in an honest, open manner.
And these larger companies can conspire, literally
conspire, because they have large legal teams--and that is
perfectly within their rights to do so. But when they weaponize
the legal system against us, to take what is rightfully ours,
they can leverage us--if they brought a lawsuit or forced us to
bring a lawsuit, most companies would throw their hands up and
say, ``I can't bear that cost. It is better for me to just get
out, sell at a lower value, pennies on the dollar, then lose
and lose everything.''
It is quite unfair.
Mr. Goodlatte. Let me ask you this: Do small companies who
are dragged into litigation have to pass those costs onto
consumers? And if they do have to pass those costs on, because
they can be an expensive portion of their profit margin, how do
they do that when they are competing in a competitive market
where other people don't have those costs and, therefore, don't
have to worry about raising their price?
Mr. Saxman. That is where you get into a cost structure,
Mr. Chairman, that is untenable and impossible. There is a
point at which you can't.
There is also a point at which the investment becomes--it
is irrelevant to the effort. It is just not worth it. And when
a person gives up because not--you didn't lose in the
marketplace because your products weren't good, or your
services weren't good, or you didn't train your people, or you
didn't do what you should have done, that goes on in the
business--we do that every day. We wake up with that. We go to
bed with that.
When someone can take it from you, with something you never
even trained yourself to become, and can take it from you, I
consider it a theft and crime. And I think it should be
criminally prevented. They should be prosecuted, not just
penalized financially.
Financially, they can absorb that into their operations, if
they lose. We can't. The cost is too much. I think, personally,
Mr. Chairman, people should go to jail. I think it is
felonious.
Mr. Goodlatte. Let me ask Professor Lao a question.
Isn't litigation fundamentally different from other forms
of First Amendment petitioning? Should the same doctrine that
exempts core speech, like citizens petitioning the legislature,
really apply to litigation?
Ms. Lao. I personally don't think so. I think the First
Amendment right of petition, with respect to litigation, really
only allows access. It means that people will have access to
the court system. You will be able to go and seek redress for
your grievances.
But I don't think misrepresentations and abuse of process
should be given that much tolerance. I can see the need to be a
little bit more tolerant in the lobbying context because the
norms are different. It is understood that in the rough-and-
tumble world of lobbying that there might be, perhaps, the
slanting of the truth or, perhaps, even misrepresentation.
But it doesn't really matter as much, because as a
legislator, you have a lot of sources for information. You can
reach out to different, diverse interests, and then you can
then sort through the information and come to a conclusion.
But in the court system, we have an adversarial system, so
the court does not, the judge does not go out and find the
truth. It has to rely on the two parties to give it the truth.
So I think in that instance, we have to be more careful about
falsehoods and misrepresentations and so forth.
Mr. Goodlatte. Thank you.
The gentleman from North Carolina is recognized.
Mr. Watt. Mr. Chairman, there are so many angles from which
I could approach this. I am having a little trouble sorting
through which one takes precedence.
Mr. Goodlatte. If the turnout remains you and me, we will
be able to ask a lot of questions, so fire away.
Mr. Watt. We will go back and forth, okay.
Mr. Saxman, I guess the problem I am having with your
testimony kind of comes down to this question: Should a court
in civil litigation take into account the relative power,
financial position, or representation of the parties that are
appearing before it? That is the logical extension of what you
seem to be saying.
These people had more power than you. They had more money
than you. They could stay in litigation a lot longer. And I
don't know how a court is going to be able ever to do that.
I mean, I have been advocating that we level the playing
field between powerful and non-powerful throughout my legal
career, but you seem to be taking the court into much, much
deeper waters then I think we are capable of doing.
Maybe you can help me understand that.
Mr. Saxman. Yes, sir. Thank you for the question. And I
certainly agree with you.
Do they have the right to bring lawsuits or action against
us? Absolutely. If it is not legitimate, if it is meant to
constrain us in the marketplace, if it is meant to tie us up,
if they do it in a manner that is not--it is a great question,
because how do you defend yourself in a marketplace when that
is not the market? We are not a law firm. We don't do this.
So if you are out there just doing your own business, and
they want to come in and take your business, for marginal P&L
and quarterly basis, because a regional manager says we got to
have this business, we will go in and breach contracts.
Mr. Watt. What if the circumstances were reversed?
Or maybe I should ask Mr. Richards and Professor Lao, is
there anything in the law that protects litigants from abusive
defense of litigation?
I will give you a couple examples. I mean, I could give you
a bunch of them, because I practiced law for a lot of time. I
mean, I have been in a lot of lawsuits where I was the only
lawyer on the plaintiff's side, six or seven high-powered
lawyers on the other side. They will paper you to death, mostly
civil rights cases.
So I have seen a lot more abuse in actuality, I will give
you another example, since I am talking about my own personal
experience.
I represented Stevie Wonder when he was in his automobile
accident in North Carolina. A simple case, clear liability. No
question, after they scoured the car and made sure that no
drugs or anything were involved. I understood that.
All we were looking for was the insurance company to pay
some modest amount, because the guy who was driving the car,
Stevie, was sitting there blind; he obviously wasn't driving
the car. The guy who was driving the car drove the car right
into the bed of a truck in front of them. Clear liability.
I end up in California taking depositions in the case, just
because the lawyer wanted to meet Stevie Wonder.
Is that abusive?
I mean, this kind of stuff happens all the time in
litigation. He knew his insurance company client was going to
pay him for that trip out there. He wanted his kid to have
Stevie Wonder's, my client's, autograph. And I am saying, why
am I sitting in California for 3 days, waiting on a deposition
in a case where there is clear liability?
This is disparity between the parties. Now how is the court
ever going to take that into account? I go into court, and the
court would laugh at me if I said, you know, this guy took me
all the way to California to take a deposition. He knew he was
going to pay the claim, at some point. But he was on the clock.
He was abusing the process.
People abuse the legal process all the time. And we need
some kind of constraints around it. But I guess my concern here
is I don't--this seems to me to be one of the least of the
problems we ought to be trying to level the playing field on.
You know, I acknowledge that it is a problem, but what is
the solution to it? How do we get past this--I am over my time,
and then I am going to give you some more examples where there
is abuse in the process. Disparities between the parties always
give rise to abuse.
And that is why I was saying in my opening statement, we
have preoccupied ourselves with the little people trying to
find redress in litigation, saying that their class-action
lawsuits, their individual lawsuits, are frivolous. This is a
welcome reversal of our roles, as far as I am concerned. We
ought to be looking out for little people. But I don't know how
you do it, and I don't know what the standard ought to be.
That is the question that this Committee has got--and can
we articulate a different standard that won't just result in
more litigation, more appeals? And if this decision is based on
a constitutional principle, how do we pass a statute that is
going to have any impact on it anyway?
So, go ahead.
Mr. Saxman. Thank you, Congressman. And I certainly
understand, from a non-legal perspective, having not been a
lawyer, in the case that I was aware of that I brought to the
Chairman's attention last year, you had a company in good faith
that brought a contract to another--they were in business
together. For 13 years, they----
Mr. Watt. You see, the problem is, Mr. Saxman, is you want
to individualize this to your case. Our role here, we can't
individualize this to your case. We have to come up with an
articulable, global standard.
So, I mean, I am very sympathetic to your case. Don't get
me wrong. I am not dismissing it. You were probably dealt with
unfairly.
But come on, Mr. Richards, help me. You are in litigation.
Professor, you teach this stuff all the time, help us out.
Mr. Richards. Well, if I may, Ranking Member Watt. All of
the points you are making, I think, are very valid points. I
mean, as a class-action plaintiff's lawyer, I am very
sympathetic to them. I think I try and equalize, level the
playing field, every day of my working career. I think those
kinds of issues are very important.
To a large extent, they are dealt with through procedural
issues, like class actions, Rule 23, efforts on the part of the
Federal Rules Advisory Committee to keep costs down, that kind
of thing. I think all that is good. All of that is better left
in the purview of the Federal Rules Advisory Committee.
What we are talking about, I think, here is a little bit
different. I think there is really an agreement, generally, in
the case law and among all the witnesses, and I think there
would be agreement between both parties, that there is nothing
to be gained from baseless lawsuits.
Mr. Watt. I agree.
Mr. Richards. The real challenge is to find out how you do
find out----
Mr. Watt. Let me go on record saying I agree with that.
Mr. Richards. And I agree with it, too.
How do you decide whether a lawsuit is baseless? And by
what legal standard? That is really the hard part of what we
have here.
And what happened in the Professional Real Estate case is
that the Supreme Court articulated a standard for baselessness,
which when applied in actual practice raises all kinds of
questions and is extremely problematic.
It leaves so much room for debate about what it means that
you wind up with courts going off and doing really uninformed
things, because they are guided by standards that they try to
take seriously, but they are so unclear that they don't know
what----
Mr. Watt. Is it based on the Constitution or is it based on
other----
Mr. Richards. There is certainly a constitutional dimension
to the right to petition your government, and there should be.
But should the right to petition your government include the
right to knowingly lie to your government? Shouldn't there be
an exception for that?
Mr. Watt. If so, I hope you will tell some of the lobbyists
that come see me. [Laughter.]
Mr. Richards. I mean, I think there is more consensus, I
think, about sort of what the exceptions to Noerr-Pennington
should be than I think perhaps is coming across here.
There was an effort on the part of the Federal Trade
Commission a few years ago, which wrote a very fine report
relating to enforcements on the Noerr-Pennington doctrine,
cataloging what the exceptions to the Noerr-Pennington doctrine
are under established law. I think it is an excellent report. I
think it does a good job of sorting through and laying out what
the exceptions are.
One of the exceptions that it provides is an exception for
fraud. And certainly in the patent cases, there is a Supreme
Court case called Walker Process which recognized a long time
ago that there can be an exception for Noerr-Pennington when
you are dealing with fraud on the Patent Office in obtaining a
patent.
So in the cases I am dealing with, there is really no--you
know, courts almost never fail to see that there is a separate
exception to Noerr-Pennington for sham litigation and a
separate exception for fraud. They see that all the time.
The problem, really, or one of the big problems, is that
the Professional Real Estate definition is very murky. And I
think it gives rise to all kinds of problems about what it
means. And when you have a murky standard like that, about
something as fundamental----
Mr. Watt. Do you solve it legislatively?
Mr. Richards. I think it could be solved legislatively.
Mr. Goodlatte. Let me take back my time. We will come back
to you, again, because I am doing a second round here.
Mr. Watt. Go ahead. I yield back.
Mr. Goodlatte. I do want to follow up on your question,
though, because it is right to the point. And that is, what can
we do about this?
So I want to ask each of you, and I will start with
Professor Lao, do any of you believe that there may be room for
a compromise that holds anti-competitive abusers of litigation
accountable while remaining mindful of the concerns that led
the Supreme Court to avoid full Sherman Act liability for
litigation?
For example, could Congress provide for fee shifting if the
court found that the suit was brought for anti-competitive
purposes, not just sham purposes, but anti-competitive
purposes? Or perhaps allow antitrust claims for predatory
litigation to proceed only with Department of Justice or FTC
approval?
Professor Lao?
Pull the microphone closer to you.
Ms. Lao. So that would be a bit of a compromise. You are
stripping it of the Noerr immunity where there is sham, but
then what you are saying is that you would require them, you
would require the antitrust plaintiff, to get an okay from the
government, from the FTC or the Department of Justice?
Mr. Goodlatte. No, it would be a claim for predatory
litigation.
Ms. Lao. Predatory litigation. So----
Mr. Goodlatte. That would be your antitrust claim----
Ms. Lao. Oh, okay.
Mr. Goodlatte [continuing]. Would be that the parties
engaged in predatory litigation, but in order to get around the
Supreme Court decision, could you put a caveat on it that it
has to receive some stamp of approval?
Ms. Lao. That probably goes a little bit beyond what I am
comfortable with. What I am suggesting is simply that, to the
extent that they have gone beyond the bounds of what the First
Amendment is protecting, then we should just take away the
immunity. And when we say we take away the immunity, we are not
imposing liability on them right away. We are just saying that
it is not petitioning. Because it is not petitioning, then you
are going to be subject to the antitrust laws. The antitrust
plaintiff will still have to prove all of the elements of the
antitrust violation.
So in a way, we are not really giving the antitrust
plaintiff anything more than what was his due without the Noerr
immunity doctrine.
But I guess I am quite conservative in that regard.
Mr. Goodlatte. There have been some well-known prominent
judges, like Judge Posner and Judge Bork, who have been critics
of this Supreme Court test. And I am wondering if you think
that--one test is the reasonable litigant test, which you
advocated----
Ms. Lao. Right.
Mr. Goodlatte [continuing]. And a version of which Judge
Posner articulated in the Grip-Pak case. Could you describe
that test?
Ms. Lao. Yes, I like that test very, very much.
The test is an objective test, and what it asks is, would a
rational person have brought this lawsuit if you take away the
anti-competitive harm that it would inflict on the competitor?
So in other words, you are taking away that portion of it, and
you are asking, would a rational person have brought such a
lawsuit?
And if a rational person would not have brought the
lawsuit, then it doesn't matter that the antitrust defendant
actually won that lawsuit.
Judge Posner gave the example of a major firm, a dominant
firm, bringing tort action against a tiny, tiny competitor, in
order to extract certain things, hoping that they will have to
make the disclosure. Once you have to make the disclosure to
the SEC, or whatever, then you are going to see your finance
charges go up when you go to get financing and so forth. So you
are imposing costs, you are using litigation to impose costs on
rivals.
So if you simply look at it and ask, if it weren't for all
of these things, would you spend so much money to litigate,
just to receive a nominal amount? And I believe that is what
Judge Posner was describing as the possible test.
Mr. Goodlatte. Mr. Richards, what do you think about that
test?
Mr. Richards. Well, the problem that I see with that test
is that in lots of situations--take the intellectual property
context that I am most familiar with. When someone brings a
lawsuit on a patent, of course their objective is to take their
competitor out of the market. That is why they are suing on the
patent. Their contention is that that is what that patent
entitles them to obtain.
If you adopt a test that somehow makes that wrongful, you
are undermining the patent laws. You are undermining the whole
purpose of the grant of the patent. So I am not sure that that
standard would really work very well.
I need to think about it. I think you need to----
Mr. Goodlatte. Well, let's ask Professor Lao what she
thinks about your exception to that.
Can that be carved out as an exception, or is that a good
rebuttal to this test?
Ms. Lao. We are talking about patents, right?
I think when we are talking about patents, patents are in a
different category altogether, for that reason. Because when
you do bring a lawsuit, you are trying to exclude the
competitor.
But there is an additional problem with the subjective test
in the PRE case. In the PRE case, the subjective test is that,
if someone brings a lawsuit for the purpose of trying to win
the lawsuit no matter how baseless it is, then it would
automatically not be sham. So you could actually have a very
invalid patent that you know is very, very shaky, and you would
still bring the lawsuit, but it would not be considered sham.
So I don't know how you would deal with something like that.
Mr. Richards. Well, no, because of that, in actual patent
litigation, it is objective baselessness that becomes the main
focus and not the subjective baselessness, which is more or
less a given. I mean, clearly, a subjective intent in a patent
case is to take the competitor out of the markets. So
subjective baselessness becomes not part of----
Mr. Goodlatte. What about the patent case where the patent
is expired but the company has come up with a specious argument
why their rights should be preserved under the patent law? Or
they re-patent with a minute change to the patent----
Mr. Richards. That happens all the time.
Mr. Goodlatte. And they bring litigation against the
competitor to drive them out on that basis?
Mr. Richards. And that happens all the time.
Mr. Goodlatte. Right. So what do we do to stop that abuse?
Mr. Richards. Something that is very disappointing, and you
see over and over and over in these cases, is that people at
the end of the patent life on the chemical compound will come
up with a formulation patent, a patent on a coating that goes
on the pill or something like that, and will get a patent from
the Patent Office based on representations to the Patent Office
about the uniqueness of this coating that are totally bogus.
And then the consequence of that is that you have years of
litigation where the brand-name drug manufacturer is able to
give the generics off the market based on the bogus patent.
And you really need, desperately, in this country a legal
standard to identify the situations in which brand-name drug
manufacturers under those circumstances are held accountable
because the patent claim is unfounded. That is very important.
In the PRE standard does not satisfy that need. It is too
demanding. It is very, very difficult in practice. The
distinction between objective and subjective is very unclear.
Mr. Goodlatte. Thank you.
The Chair recognizes the gentlewoman from Texas, Ms.
Jackson Lee.
Ms. Jackson Lee. I thank the Chairman and the Ranking
Member.
This might be a hearing that we should either have an
opportunity to continue or to expand it at another hearing
going forward. I think it is a very vital question related to
the balance of power. When you talk about a large company or a
company that is making its mark on either the industry or the
invention, and, of course, up against what is a company or a
small company with smaller assets.
So let me just raise an across-the-board question, but
start with Chris Saxman, as to the breadth and depth of the
Noerr-Pennington case. From your perspective, how devastating
is that for small businesses, startups, to thrive?
Mr. Saxman. Thank you, Congresswoman.
When I first brought this to the Chairman's attention--
Congressman Goodlatte is my Congressman--I had no idea what
Noerr-Pennington was. When counsel called me and said, well,
this applies to the Noerr-Pennington doctrine, I said, ``Who is
Nora Pennington?'' I have a daughter named Nora, so I went to
``Nora.''
And then I found out what it was, and that there was an
exemption for companies to do this, I almost had to put my jaw
back on head, because I couldn't understand how you could
exempt--there could be an exemption for people to basically do
what they shouldn't be doing.
And to Congressman Watt's original question, it happens all
the time. People have differing opinions. They go to court.
They settle it. Litigation occurs.
But when the market is adversely impacted, the larger
company moves in and wants to compete, we can compete. If we
have to go to court to justify our existence or our products or
whatever we are doing, and they are exempt from antitrust
protection, that is the problem. That is where the larger
community is being harmed, and that is why antitrust exists in
the first place.
When I was in the legislature, one of the words you always
looked for in legislation that was drawn up were exemptions and
credits. Those are the bells and whistles that said, oh, here
is what they are going for.
And exemptions are a problem. When you exempt people and
corporations or anything from the law, that is the loophole
that creates the problem. That is the bubble that is about to
burst. And that is where----
Ms. Jackson Lee. That is where you have the lopsided scales
of justice, is what you are saying.
Mr. Saxman. And we can't----
Ms. Jackson Lee. You are doing business and in the
courtroom at the same time, fighting more or less not over an
issue or a contractual issue, but fighting over your existence
or whether someone is defining--whether you are violating some
sort of protection that the company has.
Let me go to Professor Lao and just ask: How would you? And
I know we have had this give-and-take. I assume other Members
may have approached some of this.
But how would we reorder that scale of justice with the
underlying premise that, in America, the courts are there
governed by the law to resolve differences. But in this, as I
perceive it, as I have read some of the materials, it looks as
if I am at Wal-Mart and I'm shopping and seeing what the best
deal would be for my company by way of a lawsuit.
Professor, and with the backdrop of Noerr-Pennington?
Ms. Lao. I must say, Congresswoman, that antitrust law does
not take that so much into account. Over the last 20 years or
so, antitrust has become very much of a price theory
discipline. So rightly or wrongly, we look at the effect of
conduct on price and output, rather than on whether it harms a
smaller competitor or not. The Chicago School of thought has
made that change and was started in the 1970's.
I do not count myself as being in that school of thought.
But at the same time, I also do believe that perhaps antitrust
should be guided more by economics, that perhaps we should
leave it to some other discipline to care of the inequalities.
Ms. Jackson Lee. Do you think Noerr-Pennington's reach is
extensive?
Ms. Lao. I'm sorry?
Ms. Jackson Lee. Do you think the Noerr-Pennington case is
extensive in its reach?
Ms. Lao. I think the Noerr-Pennington case is all right
when we are talking about petitioning the legislature or even
the executive branch. But I think Noerr is too broad when we
are applying it to petitioning the judiciary.
When you talk about petitioning the judiciary, we are
really just talking about litigation. When we are talking about
litigation, we are just talking about having the right to have
access to the court system.
Ms. Jackson Lee. Thank you.
Mr. Chairman, would you allow Mr. Richards to answer that
question?
Mr. Goodlatte. Sure.
Mr. Richards?
Ms. Jackson Lee. Thank you.
Mr. Richards. I think one of the ways that I see things
somewhat differently from Professor Lao is that I think if the
standard for an objective case were defined more fairly and
more clearly, I would think that standard could apply to
legislation and lobbying activity. I think the problem is in
the standard.
I think some of what I think goes on is that it works so
poorly in the litigation context that people want it fixed very
desperately, and they think they are more likely to get a fix
if they don't try to address the legislative context. And so
they draw distinctions between them.
But I think if you come up with the right standard, it
should apply to both.
I also would point out that there aren't just two contexts.
There are lots of contexts were Noerr-Pennington applies. It
applies to getting a patent from the Patent and Trademark
Office. It applies to administrative contexts. So there is a
whole range of situations where Noerr-Pennington immunity
applies.
And I personally do not think that the right way to do it
is to say, well, we are going to have one standard applicable
in this context and a different one in this context and a
different in this context and a different one in this context.
The right thing to do would be to try to have a standard that
is very clear, very fair, and that works in all of the contexts
at the same time.
Mr. Goodlatte. The time of the gentlewoman has expired.
Ms. Jackson Lee. Thank you, Mr. Chairman.
Mr. Goodlatte. And I am going to just exercise my
prerogative to follow-up on that question. I'm going turn to
Mr. Chabot in just a second, but I want to follow up on that
question while we are right on it.
Are you saying that somehow that Congress could come up
with a protocol or a scheme or a measure that says that when
you petition the United States Congress for redress of your
grievances, that there is going to be some kind of parity, some
kind of fairness in terms of what different organizations or
different companies or different labor unions put into that
petition? I mean, I don't understand how you would accomplish
that in the legislative context to say you can only do but so
much petitioning of your redress of grievance and beyond that
it becomes an anti-competitive, unfair advantage for your
arguing point of view.
Mr. Richards. Well, the notion of that baselessness, I
think, doesn't apply as well in the legislative context to
begin with.
Mr. Goodlatte. Right. Agreed.
Mr. Richards. But suppose, for example, that someone
obtained legislation based on absolutely false representations
of fact, the consequence of which is that they developed a
monopoly on a particular product, or something like that.
Should nothing be able to be done about that?
That to me would be baseless lobbying activity, which had a
terrible consequence of causing Congress to do something
unknowingly, because they have been deceived, that has terrible
anti-competitive consequences in the marketplace.
I think I should be actionable. I think if you come up with
a good standard that applies the litigation context, it could
apply in the context as well.
Ms. Jackson Lee. Mr. Chairman, before you go, can I ask a
question of you, please?
Mr. Goodlatte. Sure.
Ms. Jackson Lee. I have additional questions. May I submit
them into the record?
Mr. Goodlatte. Absolutely.
Ms. Jackson Lee. And maybe the witnesses will--not maybe,
but the witnesses will be able to respond in writing?
Mr. Goodlatte. We will. In fact, we may have several other
questions that need an answer. We will submit them all to the
witnesses and ask that they respond in writing to anything that
you provide to us, and we may have some ourselves.
Ms. Jackson Lee. I ask unanimous consent, Mr. Chairman.
Thank you.
Mr. Goodlatte. I thank the gentlewoman. And it is so
ordered.
And I am pleased to recognize the gentleman from Ohio, Mr.
Chabot.
Mr. Chabot. Thank you, Mr. Chairman. I will be relatively
brief. I, actually, have an ambassador in the back waiting for
a meeting, that they just brought down.
But my the question is this, from an international
perspective, to the extent that other countries around the
world, either in Europe or in Asia, either have laws which are
applicable to this or have had situations like this come up, is
there any sort of economic disadvantage that the current law
here has to U.S. companies or not? Any of the folks here would
be--Ms. Lao?
Ms. Lao. I am not aware of any.
Mr. Richards. I think the general perception in most other
countries is that they have been behind traditional American
antitrust law and are trying to catch up. So they are certainly
gradually adopting American-type antitrust standards.
And I would suspect that they will, over time, adopt
something like the Noerr-Pennington doctrine. But because
antitrust enforcement has been really not very vibrant,
historically, in other countries, there is a lot there is no
law about as to antitrust law in the other countries. So we are
really way out in the forefront on this.
Ms. Lao. Except the E.C. is becoming extremely aggressive.
Mr. Richards. They have, but I----
Ms. Lao. So then----
Mr. Chabot. Which one was that?
Mr. Richards. The European Community.
Ms. Lao. The European Community.
Mr. Chabot. The European Community has.
Mr. Richards. But have to say, I am not an international
law scholar. I am not sure what the law currently is in the
European Community on Noerr-Pennington. I just don't know.
Mr. Chabot. Mr. Saxman?
Mr. Saxman. Again, I am not an attorney. I don't understand
international law, let alone America law--American law, let
alone international law.
The reality is, though, when international companies are
behaving in a manner that they are not culturally aware of
antitrust is, their behavior is outside of that realm of
thinking. So what they are doing in the marketplace is
predicated on what their cultural philosophy is and economics.
And antitrust is not part of that.
So that is part of the conditions that we feel in the
marketplace every day, when you are up against international
competition.
Mr. Chabot. Okay, thank you very much.
Mr. Chairman, I will yield back.
Mr. Goodlatte. I think the gentleman.
And the Chair recognizes the gentleman from North Carolina
for further questions.
Mr. Watt. Mr. Richards, you have told us a couple times we
need to get to the right standard that would apply across the
board to petitioning in the legislative context, to
petitioning. What is the right standard? I mean, have you
articulated a right standard in your----
Mr. Richards. I have not in my statement. I think it is a
very complex question.
I think you go a long way toward that standard by looking
at what the FTC wrote by way of exceptions to the Noerr-
Pennington doctrine in its report, which I think was 2006. I
think they did a really fine job in that.
I think the problem there, though, is that they really have
to take as a given clear law, and some of the clear law that
they are working with is the Professional Real Estate Investors
case, so they do the best they can with that one, but it is
really unclear.
There are a lot of other contexts though, where they
identify, I think, very appropriately and clearly areas of law
which should not be protected and that should be exceptions,
like ministerial acts, which is also a subject addressed in
Professor Lao's article, and like fraud, another subject
addressed in Professor Lao's article, and in the patent context
in the Walker Process case in the Supreme Court.
There are a lot of places where I think there probably is
something like a consensus on what the rule should be here. I
think one of the biggest problems is not really those areas. It
is the Professional Real Estate Investor standard itself and
this division, this artificial division of objective
baselessness and subjective baselessness, and you having to
address one before you can look at the other, so then you have
to try and figure out which category evidence goes into. And it
is just a mess.
Mr. Watt. So should whatever standard--suppose we got to a
standard, should it apply to not only to the filing of legal
claims? Should it also apply to counterclaims and cross-claims?
Mr. Richards. I think if it applies to a claim, it should
apply to any claim. Certainly, I think there are fewer--there
is less likely to be an antitrust problem with a counterclaim,
because antitrust predators----
Mr. Watt. Somebody in the audience disagrees with you,
because they just sent me a question. Well, I will read the
second part.
An antitrust claim is brought only by a defendant in
reaction to being sued, generally, according to them. If the
sham exception is made easier, the defense by the original
plaintiff to the antitrust claim is made harder. Therefore, it
is easier to use the antitrust counterclaim weapon against the
original plaintiff who decided his grievance warranted seeking
redress in court.
Do you disagree with that?
Mr. Richards. You know, I would disagree with that because,
often, who is the plaintiff and who is the defendant could be a
consequence of things like a plaintiff seeking a declaratory
judgment. If they know there is a controversy coming up, the
plaintiff can just be trying to resolve the controversy so that
it is not a defendant.
Mr. Watt. But you agree whatever standards are the
appropriate standards ought to apply to claim, counterclaim,
cross-claim, legislature, courts, administrative, the whole
gamut?
Mr. Richards. I think a baseless claim as a baseless
claim----
Mr. Watt. Yes, okay.
Mr. Richards. Whether it is a claim or counterclaim.
Mr. Watt. Professor Lao, the same question, right
standard--the first question I asked to Mr. Richards--how would
you articulate the right standard?
Ms. Lao. The right standard, I think that there are many
parts of the standard that need to be changed. I don't know,
if--do you want me to talk about several of them?
So, for instance, Mr. Richards talked about petitions. What
does petition mean? It is something that we haven't actually
talked about.
Well, for instance, I don't think the immunity should apply
to someone who submits a petition where it is really nothing
than just filing a form with the government. And the government
simply does a ministerial task with----
Mr. Watt. Okay, I think I accept your proposition that this
is much easier if it is applied only to the courts. So, I guess
let me accept that.
Ms. Lao. Okay.
Mr. Watt. Let's except out that people who petition
Congress can lie, cheat, steal, beg, borrow, anything. That is
fair game, in our context.
Mr. Goodlatte. Well, let's say they might face some other
consequences, as some lobbyists have, if they engage in----
Mr. Watt. Right, if we did all of that. But in the legal
context----
Ms. Lao. Okay, in the litigation context, okay.
Mr. Watt. In the litigation context.
Ms. Lao. Then I would like to see a couple of things.
First, I would like a fraud and misrepresentation exception
to the Noerr doctrine carved out, so that if you obtained--if
you succeed because of misrepresentation, that shouldn't mean
that the lawsuit is not objectively baseless simply because you
won, because, right now, that is what it is. If you win a
lawsuit, then, by definition, your lawsuit was not objectively
baseless. Now, I think that should be changed.
Mr. Watt. You are saying that I could win a lawsuit and
lose a claim of whether it was--should have been filed?
Ms. Lao. So if I sue you in the underlying lawsuit, and I
make misrepresentations to the court and so forth, and as a
result----
Mr. Watt. I understand the misrepresentations.
Ms. Lao. Right.
Mr. Watt. But suppose I don't misrepresent. I win the
lawsuit. Is there a circumstance under which I should still be
subjected to----
Ms. Lao. I think so. I think so. This goes back to a----
Mr. Watt. What is that circumstance?
Ms. Lao. The Posner standard, Judge Poser's standard says
that we simply look at whether it was a rational thing for the
person to have done. Would a rational person have brought this
lawsuit?
Mr. Watt. I have represented a lot of irrational clients.
[Laughter.]
Ms. Lao. Excuse me?
Mr. Watt. No, I'm serious. I have represented a lot of
irrational clients who would go to substantial expense to right
wrongs without financial consequences. That is a pretty
ambiguous standard, as far as I am concerned. But go ahead.
Ms. Lao. Well, that being Judge Posner. You know that he is
an economics person, right? So what he does is----
Mr. Watt. Well, you can rationalize it on economic basis--
--
Ms. Lao. Right, right. He does it from----
Mr. Watt. But there are a lot of claims that can't be
reduced to the economics of the claim.
Ms. Lao. True. But when we are talking about those claims,
there probably isn't an antitrust angle to it, right? I think
most people who bring lawsuits not for economic reasons but
because they are angry about it or on principle, usually you
are not talking about firms fighting over a patent and so
forth, right?
Mr. Watt. But you are not limiting this exception to just
an antitrust case. I know that is our jurisdiction here, but
whatever standard you come up with, doesn't it have to apply
outside the antitrust context?
Ms. Lao. No, I think I am really just addressing the
antitrust context, because we are talking about the Noerr
exception, right?
Mr. Watt. And aren't you implicitly accepting exactly what
you didn't accept, which is the Chicago theory, that this is
all about the economics of it?
Ms. Lao. Not really, because right now we are really
talking about whether the antitrust plaintiff can bring an
action against an antitrust defendant, alleging that he had
violated Section 2 of the Sherman Act, for instance, right?
So all we are saying is we are opening the door for the
plaintiff to do that. The plaintiff would still have to show
the defendant has market power, that she committed
exclusionary--that he committed exclusionary conduct, and that
there was an anti-competitive effect, and that there was no
business justification.
So we are not really imposing liability when we remove the
shield. All we are saying is that, as a result of that, the
antitrust plaintiff can go ahead as though there was nothing in
its place.
So it is still a very high burden for the plaintiff to
meet.
Mr. Watt. Mr. Chairman, I am well over my time.
Mr. Goodlatte. If you would allow me, I would like to
follow up on what you just said, and my counsel made this
point. It is not about that irrational plaintiff, which you and
I have both had, who are in pursuit of moral justice, if you
will, and will go to whatever lengths to do it. It is about the
rational pursuit, and I think this would relate back to the
case that Mr. Saxman is talking about, where another company in
the business that he is in face with a large competitor, the
rational pursuit of anti-competitive gain that is the key to
the test here.
In other words, the suit would not be rational but for the
anti-competitive motive.
Is that a fair sum-up of the test that you are trying to
apply here? And would that give you some more comfort that we
might have something here?
I like Mr. Richards' baseless test. I agree with you, and I
agree with Professor Lao. I would not try to impose that in
other environments than the judicial environment, and here's
why. In the judicial environment, that small business is there
whether they like it or not. They are fighting for their life,
and it is them against a large entity that is attempting to use
anti-competitive behavior to put them in a very, very difficult
situation, whereas when you are talking about legislation, you
have a multitude of different parties and players and the
likelihood of success.
It does happen where somebody gets something slipped into a
bill. I mean, reform of the rules of Congress so you have more
transparency, less likelihood that an actor could get something
put into legislation that would give them an anti-competitive
advantage, is there. But I think addressing it differently than
you address action in a courtroom, to me, makes sense.
And, therefore, I would like to keep this focused on what
happens in the courts.
I would also like to encourage each of you--we will submit
some questions in writing--to focus on remedies that we could
undertake here in the Congress. It might be changes to the
Federal Rules of Civil Procedure.
I am very interested in this issue, would like to pursue it
further. This hearing has helped to, I think, point out the
difficulties of any broadbrush solution to this. But I do think
there are some narrow things that could make it less attractive
to a business to engage in anticompetitive behavior in the
nature and conduct of the legal proceedings that they
undertake, especially if they are baseless and especially if
they are for the clear purpose of gaining an anti-competitive
advantage.
Anybody want to add anything to that?
Mr. Saxman. No, but I just wanted thank you, Mr. Chairman,
for allowing us to come to you today and talk about what is
going on in the marketplace. It is a very injurious to our
economy, and hopefully we can find remedies to help save a lot
of businesses out there.
Mr. Goodlatte. I thank you.
Does the gentleman from North Carolina have anything he
wants to add?
Mr. Watt. Just to explore a point that my staff is making
with me, that Noerr-Pennington developed as an extension of the
state action doctrine, which says that the state in its
sovereignty can adopt anti-competitive practices if it wants.
So the law should protect one's right to petition the
government to do so.
And I guess just to explore that a little further, I was
reading this article about the gentleman who set up across from
the Super Bowl, or an NFL game. I will just read the facts,
then you will get the drift of where I am going.
Last year an anti-bullying advocate teamed with Best Buy on
what seemed like a promising idea. He would park his bus in
Best Buy's parking lot near the Cowboys Stadium before a game,
and he would host a John Madden videogame tournament. He would
charge participants of the tournament, would teach children
about how to detect and stop bullying.
Arlington police and code enforcement officers asked
Williams--asked the gentleman if he had a permit to be there.
He did not, and he saw no reason why he should, since he was on
private property of Best Buy with the store's express
invitation.
Security officers insisted that he move the bus. It was a
commercial operation located within a so-called clean zone
ordinance, right? So that is the government.
So now a lawsuit has been filed. And the defense is Noerr-
Pennington. This is state action. Of course, this is private
action, too. It is the NFL that he sued that is trying to claim
this defense under Noerr-Pennington.
But the point I think is, we shouldn't lose sight of the
reason--I mean, I would probably be on the other side of the
case with that guy, but Noerr-Pennington, as we understood it,
was designed to allow governments to do certain anti-
competitive things. So we need to be aware of that----
Mr. Goodlatte. If you would yield?
Mr. Watt [continuing]. Maybe not private litigants,
although the NFL is trying to hide behind the city's Noerr-
Pennington defense here.
Mr. Goodlatte. If you would yield, as has been pointed out
with patent laws and so on, we do grant monopolies for a number
of different purposes. In this case, however, I would see a
difference between the city bringing the lawsuit or being sued
and raising the Noerr-Pennington defense and the NFL, because
the city has the right to enforce----
Mr. Watt. The NFL----
Mr. Goodlatte. Well, the city has the right to raise the
ordinance as a defense. And secondly, the individual who has
been aggrieved here, the person promoting anti-bullying, and I
agree with you. I would be very sympathetic to their efforts.
But they have a whole separate course that they can pursue, and
that is to petition the local government to change that law, so
that it is accepting of the time of exception, the use
exception, that they were attempting to make under those
circumstances.
That is different than two private litigants being stuck in
the courtroom together and one of them having brought the other
in for anti-competitive reasons. So if you keep it narrow, I
think maybe we can look for some solutions here.
Mr. Watt. As with most things, Mr. Chairman, what we have
proven today is these issues are a lot more complex than they
appear to be on their surface.
So with that, I will yield back.
Mr. Goodlatte. And with that, I have to agree with that
observation. And I think the gentleman.
And I think all of the witnesses today for your testimony.
Without objection, all Members will have 5 legislative days
to submit to the Chair additional written questions for the
witnesses, which we will forward and ask the witnesses to
respond as promptly as they can so that their answers may be
made a part of the record.
And without objection, all Members will have 5 legislative
days to submit any additional materials for inclusion in the
record.
And with that, I again think the witnesses and declare the
hearing to be--now I have a gavel--the hearing adjourned.
[Whereupon, at 11 a.m., the Subcommittee was adjourned.]