(September 1, 2009)

Dan Mogin has been chosen by the United States District Court for the Southern District of California to serve as a Lawyer Representative for a three-year term through 2012.

Lawyer Representatives’ duties include participating in the annual Ninth Circuit Judicial Conference, the annual District Conference of the Southern District, regular meetings of Lawyer Representatives in the Southern District and public events at the District Court, as well as various special projects.

The Hatch-Waxman Act was enacted in 1984 to promote generics while preserving a financial incentive for research and development through patent extension. Likewise, the patent laws are designed to promote innovation and invention by granting a limited term monopoly. The antitrust laws are designed to promote competition so that market participants, including businesses and ordinary consumers, have economic choices and receive better goods and services at the lowest economic cost (economic cost includes a normal profit or rate of return). In other words, antitrust tries to enhance efficiency and innovation by protecting completion and markets. Consider those policies in the context of the current congressional debate over health care reform: We need to reduce health care costs, prescription drugs are big part of those costs; generic drugs are typically priced significantly less than their branded (patented) counterparts. Health care, patent and antitrust laws came into conflict on June 22, when the Supreme Court refused to grant review in an antitrust case involving “pay for delay” or “reverse payments” by a brand name pharmaceutical company to a generic-drug maker to keep a competing generic drug off the market. There have been a number of these cases in recent years involving payments by branded drug companies to potential generic competitors to stay out of the market that occur in the context of patent settlements arising under the Hatch-Waxman Act. Notably, the patent holder pays the alleged infringer. In turn, the alleged infringer agrees not to challenge the validity of the patent or market the generic version of the drug until the patent expires.

In re Ciprofloxacin Hydrochloride Antitrust Litigation, 544 F.3d 1323 (Fed. Cir. 2008), involved an antitrust challenge to millions of dollars in payments made by Bayer, the manufacturer and patent holder of Cipro, a powerful antibiotic, to generic-maker Barr Laboratories Inc. Bayer’s patent expired in December 2003 and its FDA-granted marketing exclusivity extension expired six months later. Pursuant to the Hatch-Waxman Act, in October 1991, Barr filed an abbreviated new drug application for a generic version of Cipro. Barr did not certify that its product did not infringe Bayer’s patent. Rather, Barr said that Bayer’s patent was invalid and unenforceable because it was obvious, double patenting and procured by inequitable conduct or fraud on the Patent and Trademark Office. Bayer sued Barr for patent infringement. Barr counterclaimed for a declaratory judgment that Bayer’s patent was invalid and unenforceable and that Barr’s generic version would not infringe. Just before trial, Bayer and Barr and certain others entered into a series of agreements. Abbreviated, the agreements provided that Barr would not challenge the validity or enforceability of the patent and would not market its generic until after the patent expired. In exchange, Bayer agreed to pay Barr an initial $49 million and subsequent payments totaling $398 million. Thereafter, four other companies filed abbreviated new drug application s for generic versions of Cipro. Bayer sued each of them for infringement. The issue of inequitable conduct was not adjudicated in any of the actions. Bayer defeated two challenges to the validity of its patent on summary judgment. The validity of the patent was upheld after a bench trial in another case.

Direct and indirect purchasers of Cipro and advocacy groups filed antitrust actions challenging the Bayer-Barr reverse payment agreements. They alleged that the agreements constituted an illegal market allocation in restraint of trade in violation of Sections 1 and 2 of the Sherman Act and various state antitrust and consumer protection laws. The district court denied the plaintiffs’ motion for partial summary judgment that the agreements were per se unlawful. The plaintiffs then amended their complaint to add a state law antitrust claim under Walker Process Equipment Inc. v. Food Machinery & Chemical Corp., 382 U.S. 172 (1965), alleging that Bayer unlawfully monopolized the ciprofloxacin market by enforcing a patent obtained by inequitable conduct or fraud on the Patent and Trademark Office and sham litigation in enforcing the Cipro patent against Barr. The parties filed cross-motions for summary judgment regarding whether the agreements had anti-competitive effects The district court denied the plaintiffs’ motion and granted Bayer’s and the generic defendants’ motion. The court determined that any adverse effects on competition stemming from the reverse payment agreements were within the exclusionary zone of the patent, and therefore could not be redressed by antitrust law. Bayer also filed a motion to dismiss the state law Walker Process claim as pre-empted by federal patent law. The district court agreed that the claim was pre-empted because the plaintiffs alleged no theory did not depend on a showing of misconduct before the Patent and Trademark Office and that there was no separate allegation of marketplace misconduct. The district court also reasoned that Bayer’s success in its litigation against the four other generic companies foreclosed any argument that its lawsuits were shams. Because the appeal was deemed to arise under the patent laws, it was heard by the Federal Circuit. The Federal Circuit has a reputation as being hostile to antitrust claims generally and as determined to erode the rights of market participants. It held that a settlement agreement between a patent holder and a party accused of infringement cannot violate antitrust laws so long as the patent litigation was not a sham or otherwise baseless, and the settlement does not impose restrictions on the alleged infringer beyond the scope of the patent. It further relied on the sanctity of settlement agreements and essentially ruled that the courts’ needs for finality and encouragement of settlements trumps the markets’ needs for freedom from adverse competitive effects.

The Cipro decision and similar ones in other pay-to-delay cases stand for the proposition that an agreement between competitors that might be per se unlawful if struck in another context is made lawful, if not fully immunized, by the fact that it was struck as part of the settlement of a patent dispute. Further, the court’s refusal to allow scrutiny of settlements between potential competitors to see if they comply with the public’s need for competitive markets. Another view is that patent law, which involves the creation of limited property rights for public purposes automatically trumps antitrust law. Once again, judicial attitudes toward antitrust enforcement, particularly at the Supreme Court level, are less than consistent with competitive markets. The Rehnquist court’s antitrust decisions shaped our health care system and paved the way for the enormous rise in market power by insurers at the expense of patients and rewarding efficiency rather than lobbying prowess. More recently, the Roberts court has radically altered longstanding antitrust precedents, particularly hampering enforcement by market participants.

In contrast to most of the federal courts, the FTC has been aggressive in its approach to reverse payment cases. Notably, the day after the Supreme Court announced its refusal to review the Federal Circuit’s Cipro decision, in a speech before the Center for American Progress in Washington, D.C., Jon Leibowitz, chair of the FTC, said that an internal analysis projected that stopping collusive “pay-for-delay” settlements between brand and generic pharmaceutical firms would save consumers $3.5 billion a year and also reap significant savings for the federal government, which pays approximately one-third of all prescription drug costs. Leibowitz urged Congress to pass pending legislation to ban or restrict such anticompetitive patent settlements, as a way to control prescription drug costs, restore the benefits of generic competition, and help pay for health care reform.” From my perspective … the decision about whether to restrict pay-for-delay settlements should be simple,” Leibowitz said. “On the one hand, you have savings to American consumers of $35 billion or more over 10 years – about $12 billion of which would be savings to the federal government – and the prospect of helping to pay for health care reform as well as the ability to set a clear national standard to stop anticompetitive conduct. On the other hand, you have a permissive legal regime that allows competitors to make collusive deals on the backs of consumers.” Leibowitz stated that “eliminating these [pay-for-delay] deals is one of the Federal Trade Commission’s highest priorities.”

The Obama administration has indicated that “antitrust must be among the frontline issues in the government’s broader response to the distressed economy” and that “antitrust authorities – as key members of the government’s economic recovery team – will … need to be prepared to take action.” In light of current judicial attitudes, however, that they may well have a very tough row to hoe and health care may be the skirmish lines.

Dan Mogin, managing attorney of The Mogin Law Firm in San Diego, specializes in antitrust, consumer protection, securities/investment and other complex business litigation, including class actions. Mogin also teaches antitrust at University of San Diego School of Law, chaired the Antitrust and Unfair Competition Law Section of the State Bar and co-authored “California Antitrust and Unfair Competition Law.”

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In a first amended complaint filed Thursday in the U.S. District Court for the Eastern District of New York, the plaintiffs, two residents of California, added claims for punitive and compensatory damages.

Their suit against Bayer alleges it markets its Bayer Heart Advantage and Bayer Women’s aspirin products as over-the-counter drug-dietary supplements, even though the inclusion of aspirin in the products requires U.S. Food and Drug Administration approval.

According to the complaint, Bayer is required to obtain FDA approval prior to marketing the products as treatments for heart and bone disease and is specifically prohibited by the California health and safety code from advertising that such drugs have any effect on bone and joint or heart and vascular diseases.

“Bayer’s marketing and sale of the Bayer drugs has thus short-circuited the proper regulatory process and put consumer health and welfare at risk,” the complaint said.

Dan Mogin, an attorney for the plaintiffs, said the amended complaint was filed because under California law, any plaintiff suing under the Consumer Legal Remedies Act cannot allege a claim for damages until at least 30 days have elapsed from the original filing.

The original suit was filed in California Superior Court in November after the plaintiffs, Anne McCabe and Frances Martinez, on behalf of a class of all California consumers who purchased Bayer drug dietary supplement products, sent the pharmaceutical company a letter demanding it stop marketing the drugs as treatments for heart and bone disease and refund their purchases.
On April 15, the suit was transferred to the Eastern District of New York by the Judicial Panel on Multidistrict Litigation, joining more than a dozen cases currently pending in the MDL.

According to the complaint, Bayer is illegally marketing the two aspirin products as drug dietary supplements that are not drugs, and therefore, are not required to undergo premarket clearance by the FDA.

However, because Bayer is labeling Bayer Heart Advantage and Bayer Women’s as combination drug and dietary supplements that are effective to treat bone and heart disease, the products are defined as drugs by law and must be approved, the complaint said.

Neither drug is approved for uses other than pain treatment, and in October, the FDA warned Bayer about the illegal marketing and said it would take enforcement action.

The complaint contends that Bayer’s actions compromise consumer safety because products that are being marketed for preventing or treating heart attacks, heart disease and osteoporosis require a physician’s supervision.
The plaintiffs also claim that the drugs are misbranded because Bayer has failed to adequately disclose significant safety risks associated with the use of its products that combine aspirin with phytosterols, which Bayer’s Health Advantage does, and aspirin with calcium, which Bayer’s Women’s does.
As a result of the unlawful labeling, marketing and advertising alleged in the complaint, Bayer has been able to charge significantly more — including up to six times — for the products than its regular aspirin products, according to the complaint.

Counsel for Bayer could not be reached for comment Friday.

The plaintiffs are represented in this matter by the Mogin Law Firm PC and the Law Offices of Alexander M. Schack.

Bayer is represented in this matter by DLA Piper and Bartlit Beck Herman Palenchar & Scott LLP.

The case is McCabe et al. v. Bayer Healthcare LLC et al., case number: 09-cv-01541, in the U.S. District Court for the Eastern District of New York.
The MDL proceeding is In re: Bayer Corp. Combination Aspirin Products Marketing and Sales Practices Litigation, case number: 09-md-02023, in the U.S. District Court for the Eastern District of New York.

It is an understatement to say the economic and banking crisis, and even the future of capitalism and free markets, have been in the headlines lately. Regulation — governmental control of business behavior — is being discussed to an extent unimaginable in the last 30 years. On March 17, the U.S. House of Representatives Judiciary Committee, Subcommittee on Courts and Competition Policy held hearings on “Too Big to Fail and the Role of Antitrust Law.” The consensus, not surprisingly, was that antitrust had a significant role to play in the economic recovery.

The policy goals of the antitrust or pro-competition laws are to encourage free and open competition in the marketplace, not to regulate. The marketplace is a battleground where numerous interests compete; antitrust tries to ensure a fair fight on a level field. It seeks to eliminate undue market power — the ability to control prices or outputs — generally by prohibiting restraints of trade (mostly in the form of collusion between competitors) and monopolization. The goal is for market participants, including businesses and ordinary consumers, to have economic choices and to receive better goods and services at the lowest economic cost (economic cost includes a normal profit or rate of return).

Antitrust is not a form of regulation, nor is it “anything goes” or laissez-faire. It tries to enhance efficiency and innovation by protecting competition but not particular competitors; it is not a small business protection act. Unlike regulation, the antitrust laws do not dictate outputs or prices. Private enforcement of the antitrust laws allows market participants to challenge alleged barriers to effective competition. Antirust seeks to restore competition and protect free markets via the legal process.

The antitrust laws are not intended to punish successful companies simply because of their success or large companies simply because of their size. Because we want consumers to get the best for the least through the free market, only conduct that excludes competitors, stifles innovation, limits supply or raises prices is prohibited. Superior products, prices and management are decidedly not grounds for liability. Because it involves marketplace behavior, however, antitrust has few bright lines. As a result, although Congressional intent is crystal clear, judicial and executive attitudes have vacillated.

The first antitrust economist was also the first free market economist — Adam Smith. It is no coincidence that Smith’s capitalist manifesto, “The Wealth of Nations,” was published in 1776. With tea parties currently in vogue in certain political circles, it is worth noting that the tea originally dumped in Boston Harbor belonged to a crown monopoly, the British East India Co. The founding fathers’ revolt against the monarchy was also a revolt against monopolies; legend has it that freedom from monopoly was among the rights considered for inclusion in early drafts of both the Declaration of Independence and the Bill of Rights. Fittingly, given this history, a long-ago Supreme Court proclaimed that the antitrust laws are the Bill of Rights for the economy.

Smith’s ideas about the political economy of liberty are the philosophical backbone of our antitrust laws. On individual initiative: “in promoting his own interest … an individual intends only his own gain, and is led by an invisible hand; thus promoting the social good.” On cartels: “people of the same trade seldom meet together, even for merriment or diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” On monopoly: “monopolists, by keeping the market constantly understocked, by never fully supplying the effectual demand, sell their commodities much above the natural price, and raise their emoluments, whether they consist in wages or profit, greatly above their natural rate.”

At the turn of the century, powerful combines controlled or monopolized many basic American industries. These were organized as trusts and functioned as holding companies. Trusts facilitated arrangements between firms that would otherwise be competitors. Railroad trusts controlled not just transportation but vast resources like land, timber and mining properties, as well as distribution channels. The Standard Oil Trust controlled the oil business from the wellhead through refining, transportation, shipping, pipelines, tank wagons, distributors, etc. — all in the age before gasoline and the automobile.

As the trusts grew and exercised their monopoly power, prices for basic goods and services rose dramatically. Political scandals resulted when muckrakers exposed the trusts’ cozy relationships with lawmakers.

One reaction to these forces was the rise of the Populist and Progressive political movements, which protested against the power of the trusts. Antitrust was a hot political issue and enjoyed strong public support. In 1890, Sen. John Sherman, an Ohio Republican, introduced and Congress passed the Sherman Act. It was intended to codify and strengthen existing common law unfair competition laws, which have existed since Biblical times.

The Sherman Act remains our basic antitrust law. Government enforcement actions, including criminal penalties, are allowed. The act has two basic sections. The first prohibits concerted action by competitors in restraint of trade, such as price fixing, output restriction between competitors, group boycotts and the like. The second prohibits monopolization or attempts to monopolize, both of which require proof of relevant market and predatory acts to foreclose competition.

The Clayton Act, first enacted in 1914, supplements the Sherman Act. Its primary purposes are to combat price discrimination, control corporate mergers that might tend to create a monopoly or substantially lessen competition, and allow private enforcement of the antitrust laws by injured parties. Congress also passed the Federal Trade Commission Act in 1914 in partial reaction to fears that the federal judiciary was predisposed to hobble effective antitrust enforcement.

Early judicial decisions refused to apply the antitrust laws in the intended manner. In its first case involving the Sherman Act, the Supreme Court refused to apply the statute to the sugar trust that controlled more than 98 percent of the country’s sugar refining capacity. Subsequent judicial decisions also stifled the legislative intent. The Justice Department adopted a policy of non-enforcement.
It was not until trust-buster Teddy Roosevelt attacked the Standard Oil Trust that early antitrust enforcement gained any real traction with the federal judiciary. Although politically overshadowed by Roosevelt, William Howard Taft, a once and future member of the federal judiciary, was an even larger figure in antitrust’s formative years

Judicial attitudes toward antitrust enforcement, particularly at the Supreme Court level, can be tepid. For example, the Supreme Court has repeatedly held that consumer benefit is the paramount goal of our antitrust law. Yet one of its decisions slams the courthouse door on consumers by allowing only “direct purchasers” access to federal court and the Sherman Act. If you buy a can of beans at the grocery store, or a computer at the discount store, you are not a direct purchaser of the product in relation to the manufacturers and distributors, even though you are most assuredly paying a higher price as the antitrust overcharges are passed on through the chain of distribution.

The Rehnquist Court’s decisions eroded the role of juries and trials in antitrust cases and helped shaped our health care system. Perhaps greater trust in competition (and facts) would have staved off the enormous rise in market power by insurers compared to health care providers at the expense of patients, and would have rewarded efficiency rather than lobbying prowess.
More recently, the Roberts Court has radically altered longstanding antitrust precedents. Their decisions have imposed stringent threshold pleading requirements (upsetting over 50 years of Supreme Court precedents), restricted circumstantial evidence, made vertical price-fixing or resale price maintenance more difficult to prove and immunized securities and telecomm markets from antitrust liability, contrary to at least 55 years of the court’s jurisprudence that disfavored implied immunities.

Executive branch antitrust policies change with each administration. FDR vacillated between aggressive antitrust enforcement and government-sponsored industrial cooperation. The Carter administration tackled the AT&T (NYSE: T) and IBM (NYSE: IBM) monopolies and de-regulated the airlines. The Reagan and Bush II administrations had non-enforcement policies, while Bush I was more centrist. The Clinton administration took on the Microsoft (Nasdaq: MSFT) and Intel (Nasdaq: INTC) monopolization cases, but its merger policy was not aggressive. Ironically, in the major merger enforcement case attempted under Bush II, a Reagan-appointed judge ruled against the government.

Economists frequently complain that while the courts profess fealty to economics, they are in fact 20-30 years behind the times. In light of the current Supreme Court’s hostility toward antitrust and the nation’s proclivity to discount competition as remedy in times of economic duress, the Obama administration may well have a very tough row to hoe in antitrust.

That said, we are currently in a crisis of confidence in markets. History has discredited economic regulation in no small part because regulators are frequently captured by the regulated, stifling innovation and entrenching incumbents. Restoring confidence requires a commitment to protect competition. Our antitrust laws do not need to be updated; they need to be enforced.
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Dan Mogin, managing attorney of The Mogin Law Firm PC, specializes in antitrust, consumer protection, securities/investment and other complex business litigation, including class actions. Mogin also teaches antitrust at USD School of Law.

Déjà Vu All Over Again

By Dan Mogin

The lessons of the savings and loan crisis and the junk bond markets resonate in the current financial crisis and the tsunami of litigation that looms ahead. Government agencies, investors, receivers, trustees and other stakeholders who hope to recover losses should look to the experience of the savings and loan crisis of the late 1980s and early 1990s for guidance — and we in California certainly had our share of that experience. On the other hand, it would be folly to adopt the last war’s tactics without due deference to today’s terrain. Some of the important lessons learned in the savings and loan litigation trenches may guide today’s plaintiffs’ counsel.

The savings and loan crisis was provoked by the confluence of bad loan underwriting, fraud and greed, undercapitalization and sweeping changes in the regulatory regime. Newly allowed investments included junk bonds and real estate participations. The savings and loans encountered a financial “perfect storm” buffeted by an economic slowdown and aggravated by the misfeasance and malfeasance. Litigation focused on junk bonds and real estate.

The 1980s market for original issue junk bonds was dominated by the investment bank Drexel Burnham Lambert. Many of Drexel’s clients and colleagues bought California savings and loans and loaded them up with junk bonds; a number of insurance companies, including some high-profile California insurers, did the same. This circle of the junk bond market was alleged as the “Drexel Daisy Chain” and many of its members used the same auditors. Junk bond buyers were told that a well-diversified portfolio of junk bonds minimized default risk and frequent refinancings, albeit with non-cash components, masked problems.

The market was thinly traded and ill-liquid and the mark-to-market rules were not well-enforced. When Congress passed the Financial Institutions Reform, Recovery, and Enforcement Act in late 1989 and Drexel filed for bankruptcy under the weight of criminal investigations and litigation, the junk market cratered as institutions were forced to divest and mark to actual market value. The new savings and loan rules also allowed participation in real estate development. In some cases, real estate was flipped from one straw buyer to another to manipulate valuations in order to forestall defaults and write downs. Charles Keating’s Lincoln Savings was so contaminated that it was referred to as an “accounting factory” and discovery revealed that other institutions had engaged in similar accounting gimmicks.

The corollaries to the causes of today’s crisis are obvious. In the wake of de facto market de-regulation, novel loan products were securitized and sold worldwide: mortgage-backed securities, residential and commercial, collateralized mortgage obligations, principal and interest strips and derivatives, ad infinitum. The loans supporting these instruments, and their inherent risks, were not fully understood.

Rating agencies and accountants did not adequately assess risks and analyze value to reflect true the mark-tomarket values, and default rates were masked by easy money refinancings. Internal valuation and accounting rules appear to have been ignored, misapplied or manipulated, concealing the problems and, as a result, investors and taxpayers incurred huge losses when refinancing and a “rising tide” of home values could no longer sustain the bubble and default risks turn out not to be as represented.

What are the current litigation lessons available from this history? First, there will be litigation by investors in financial institutions who were forced to take writeoffs and writedowns after the music stopped in the mortgagebacked securities markets. Potential targets include directors and officers in mortgage banking institutions, rating agencies, and purchasing institutions; auditors and other professional service providers; and investment banks as broker-dealers and mortgage-backed securities issuers, and others. The institutions themselves may also sue investment banks and any remaining mortgage originators. Mortgage-backed securities issuers may sue institutions and loan servicers who re-structured mortgage pools, perpetuating the bubble. The FDIC may sue directors and officers, auditors, other professionals, brokers, mortgage-backed securities issuers, aggregators and others.

The Economic Stabilization Act of 2008 may complicate some litigation, since many of the potential targets of the FDIC’s litigation are now subject to government ownership and control, although the FDIC has handled such conflicts deftly in the past. Further, the Department of Justice is currently investigating a number of firms and markets, not just mortgage-backed securities, perhaps leading to the reconstitution of the attorney general’s Interagency Bank Fraud Working Group in one form or another.

Reaching past the savings and loan crisis, the Watergate investigations provided tools for claimants. What did they know and when did they know it? How and when did they conceal and cover up? What were the means and methods for insider enrichment? And, finally, in all events, “follow the money.” Timelines that overlay insider actions on top of the prices of the mortgage-backed securities will be valuable tools for investigators. Undoubtedly there will be litigation over individual deals gone bad. Some litigants, however, such as the FDIC and large fiduciary investors with interests in multiple companies and securities, will need to consider a more systemic approach. Investigations into individual deals and cases should be coordinated, and a cross-case database of potential targets developed to assist in identifying trading and other patterns. Certain actors, both institutional and individual, will pop up repeatedly. Once a database is in place, any “hot money” will be reflected in the transactions between them.

Focus on the trading. This applies as much to the mortgage-backed securities and other securities as it does to real estate lending. If past is truly prologue, there will be an inside group — the daisy chain — and concentric circles of subsequent investors. Evidence may be developed showing that investors and institutions furthest from the center were expected to be left holding the bag when the music stopped. Conversely, the closer to the center one is, the more the issue of manipulative trading to establish values for mark-to-market purposes should be seriously investigated. In any event, systemic litigants will need a database that shows trading in the mortgage-backed securities market as a whole.

Litigants will need discovery into “what did they know and when did they know it?” and “how and when did they cover it up?” While the popular mantra is that “no one could have seen this coming,” discovery is likely to yield a contrary result. In the savings and loan crisis, we found that the defendants knew about the problems early on, they usually tried something to at least mitigate the extent of the damage and, when that proved impossible, they tried to conceal the problems or their magnitude.

In these cases, the devil resides in the details and cover-ups are frequently hinted at in the footnotes of financial statements and in extraordinary transactions, ala Keating’s “accounting factory.” Fortunately for investigators, audit workpapers are usually revealing. And, these days, e-mail spiders and similar programs are available to trace e-mail chains.

Finally, in the early days of the savings and loan crisis litigation, systemic plaintiffs contended with significant judicial skepticism over their allegations concerning the junk bond market’s effect on the savings and loans. While the current climate is markedly different from the early 1990s, counsel should be prepared for this possibility. The best strategies include drafting complaints that are well organized and allege detailed evidence and narrow claims, targeted and supportable document discovery and presenting a trial plan early on.

Those who don’t heed history are doomed to repeat it. Thus the new financial crisis litigation will be déjà vu allover again, with some new twists.
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Mogin, managing attorney of the Mogin Law Firm in San Diego, specializes in plaintiffs’ antitrust, consumer protection, investment and complex business and class action litigation.

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The Justice Department is investigating the deal due to concerns that the yet-to-be-approved merger of the world’s top ticket seller and top concert promoter could violate antitrust laws.

Sen. Charles E. Schumer, D-N.Y., wasted no words in questioning the proposed deal Tuesday during a hearing of the Senate’s antitrust subcommittee.

“This is not the American dream, as the companies’ witnesses might have you believe,” Schumer said. “This is monopolistic behavior, plain and simple.”

West Hollywood-based Ticketmaster and Los Angeles-based Live Nation, announced earlier this month their intention to join forces in an all-stock merger. The new company, to be called Live Nation Entertainment, would have a combined value of approximately $2.5 billion.

Gibson, Dunn & Crutcher and Wachtell, Lipton, Rosen & Katz represent Ticketmaster in the matter, and Latham & Watkins counsels Live Nation.

The fate of the proposed merger, which would dramatically reshape the music industry, could offer an early look at how the Obama administration’s Justice Department polices mergers and enforces antitrust laws.

Under the Bush administration, the department’s antitrust division focused on price-fixing schemes by
international cartels and mostly ignored domestic mergers and monopolization issues, antitrust lawyers said.

“The DOJ in the Bush administration was very lax on merger enforcement with a couple of exceptions during the time that Hew [R. Hewitt] Pate was assistant attorney general for antitrust,” said Daniel J. Mogin of the Mogin Law Firm in San Diego. “Other than that, as an observer, I would consider it an historic low point.”

Critics of the Ticketmaster-Live Nation merger claim that due to the immense size and scope of the two
companies, the deal would cause anti-competitive damage on both a horizontal basis, because the two
companies directly compete in the ticket market, and a vertical basis, because they operate on many different levels along the industry supply chain. The companies manage artists, control venues, promote concerts and sell tickets on both the primary and resale markets.

While any Justice Department move to challenge the merger would signal a break from the Bush administration’s hands-off approach, antitrust lawyers said, a challenge based on vertical issues could represent a sea change in antitrust policy.

A generation of antitrust analysis has favored vertical mergers due to the higher efficiencies produced, the lawyers said.

The two companies’ chief executive officers, who testified before the antitrust subcommittees of the Senate Judiciary Committee and the House of Representatives Judiciary Committee this week, portrayed the merger as a necessary step for the music industry’s future in tough economic times.

“I have two choices: I can hope the economy gets better, or I can seek a more proactive approach to protect our employees, reward our shareholders and grow our company,” Live Nation CEO Michael Rapino said Tuesday. “That is the motivation behind this merger.”

Ticketmaster CEO Irving Azoff, who said the deal would eliminate about $40 million in inefficiencies,
characterized his company as a “lightning rod” for unfair criticism. Ticketmaster “take[s] so much heat for what we do, you’d think we’re the IRS,” Azoff said Thursday before the House subcommittee.

The company was investigated for alleged antitrust violations throughout the 1990s.

Azoff’s defense, however, didn’t stop a barrage of criticism from legislators.

Sen. Herbert H. Kohl, D-Wisc., chairman of the Senate’s antitrust subcommittee, said he was “disturbed” by the CEOs’ lack of candor about the merger, while Sen. Orrin G. Hatch of Utah, the subcommittee’s ranking Republican, worried that the vertical merger could hurt competition.

Some legislators on the House subcommittee appeared less confrontational when discussing the merger
Thursday.

The glare on both executives, but particularly Azoff, was magnified by recent reports that people trying to buy tickets through Ticketmaster for a show by rock star Bruce Springsteen were automatically directed to TicketsNow, the company’s resale broker, which was offering more expensive seats even though tickets at the standard rate were still available.

The incident drew outrage from fans and even from Springsteen himself, who along with his manager,
denounced the merger in a letter posted on Springsteen’s Web site.

“The one thing that would make the current ticket situation even worse for the fan than it is now would be Ticketmaster and Live Nation coming up with a single system, thereby returning us to a near monopoly situation in music ticketing,” the Web site read.

Azoff apologized for the incident before both the House and Senate subcommittees, blaming it on a technical glitch.

He went on to say that he would not have acquired TicketsNow if he had been in charge of Ticketmaster at the time the reseller was purchased and that ticketing resales should be banned.

By Robert Iafolla
Daily Journal Staff Writer
www.dailyjournal.com

Dan Mogin is managing attorney for The Mogin Law Firm, which represents entrepreneurial businesses, consumers and investors in antitrust, consumer protection, investment and other types of complex business litigation.

BUSINESS PHILOSOPHY
Essential business philosophy: Always try to do good for others and you’ll wind up doing well for yourself.
Best way to keep a competitive edge: Never rest on your laurels.
Guiding principles: Hard work is its own reward .
Yardsticks of success: Respect of my brethren at the bar.
Goals yet to be achiched: A $1 billion jury verdict.

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Some $96 million in settlement funds from a smokeless tobacco class action in California is being held up by a lone objector. In his complaint, initially filed Jan. 25, in San Francisco Superior Court, Sean Hull argued the settlement “unfairly discriminates” against those who bought fewer than 30 cans of U.S. Smokeless Tobacco in California.

Cy Pres Fund
It all started eight years ago with the class action, Smokeless Tobacco Cases I-IV. A certified class of California smokeless tobacco buyers alleged that U.S. Smokeless Tobacco and related entities, engaged in sales practices that made it possible for the company to monopolize the market for moist smokeless tobacco products in violation of the antitrust and consumer protection laws of the state of California.

According to the plaintiffs, they paid more for U.S. Smokeless Tobacco moist snuff tobacco products than they otherwise would have. The products include Copenhagen, Skoal, Rooster, Red Seal, Bandits, Pouches and Husky.The class period extends from Jan. 1, 1990, to Oct. 17, 2007.

At issue is the cy pres fund, established for small purchasers. Any awards from this group are to be distributed to charitable organizations, rather than the buyers themselves.

$32 Million Legal Fees
Hull contends that procedural safeguards to protect these class members were not followed, and that the settlement “is unfair, inadequate and unreasonable.” “This is an arbitrarily low number to cut off all individual relief altogether,” Hull said in his complaint. In their response, plaintiffs contend that the 30-can minimum was designed to avoid over-compensating “minimal users.”

By requiring cash payments to all class members, they said, “the claim form would have been far more detailed and complicated, which would have deterred claims.” Hull also contends that the attorneys fees sought, amounting to $32 million, are “excessive.”

On March 12, San Francisco Superior Court Judge Richard Kramer rejected the claims, and approved a plan for distribution of the funds and attorneys fees. Hull then appealed to the 1st District Court of Appeal, which is expected to set a hearing date to consider his objection.

“The result was that no payments have been made from the settlement, and won’t be until the appeal is resolved,” said Dan Mogin , who runs the Mogin Law Firm in San Diego and was a co-liaison counsel, along with the San Francisco office of Saveri & Saveri, in the suit, first filed in 2002.

Mogin dismisses the suit as “frivolous.” The plaintiffs are seeking attorneys fees, expenses and unspecified damages, contending that Hull’s arguments are “without merit,” taken “solely for purposes of delay and harassment.”

While U.S. Smokeless Tobacco had denied any wrongdoing in the class action, the parties reached a settlement with the aid of a mediator, Lawrence Kay, a retired justice of the 1st District, working from the offices of ADR Associates in San Francisco. Under the terms of the settlement, claimants may be eligible for amounts ranging from $195 to $585. According  to Mogin, 42,000 individuals have submitted claims for cash payments.

“We are unaware of any consumer class-action settlement in California state court history that has provided class members with the opportunity to recover a higher cash payment through a simple claims process,” Mogin said.
Plaintiffs’ attorneys invested about 35,000 hours in the case, he said, and almost $1 million in out-of-pocket expenses. But, nobody is getting paid until the case is settled, Mogin said.

Hull’s legal counsel, Timothy R. Hanigan and Arthur Carvalho Jr. in the Woodland Hills office of Lang, Hanigan & Carvalho, were not available for comment. Meanwhile, Mogin is overseeing efforts to distribute $40 million in cy pres awards to California legal societies, organizations and charities. Among the groups are the Legal Aid Society of San Diego, the San Diego Volunteer Lawyer Program, University of San Diego Legal Clinics, Bay Area Legal Aid, Bet Tzedek, Legal Aid Foundation of Los Angeles, Volunteer Legal Services Program of San Francisco, California Indian Legal Services and California Rural Legal Assistance Inc.

“This shows that you can combine cy pres with cash claims,” Mogin said. “It is unusual. It tends to be one or the other.”

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In the Smokeless Tobacco Cases I-IV, a certified class of California smokeless tobacco purchasers alleged that U.S. Smokeless Tobacco and related entities (“U.S. Smokeless Tobacco”) engaged in sales practices that made it possible for U.S. Smokeless Tobacco to monopolize the market for moist smokeless tobacco products in violation of the antitrust and consumer protection laws of the state of California. The plaintiffs alleged that, as a result, they paid more for U.S. Smokeless Tobacco moist snuff tobacco products than they would have absent the alleged conduct.

The San Diego County charities and organizations scheduled to receive cy pres awards include the Legal Aid Society of San Diego, San Diego Volunteer Lawyer Program, University of San Diego Legal Clinics, San Diego Food Bank, San Diego Audubon Society and the Injured Marine Semper Fi Fund. Additional legal organizations that partner with Legal Aid Society of San Diego include Bay Area Legal Aid, Bet Tzedek, Legal Aid Foundation of Los Angeles, Volunteer Legal Services Program of San Francisco, East Bay Community Law Center, Western Center of Law & Poverty and Legal Services of Northern  California.  Satewide organizations with San Diego offices and/or presence include California Indian Legal Services, California Rural Legal Assistance Inc., California Trout Inc, CHP 11/99 Foundation, National Wildlife Federation, Sierra Club and Surfrider Foundation.

“As a not-for-profit legal center, we are very grateful to be included in cy pres awards from the Smokeless Tobacco cases,” said Greg Knoll, executive director of the Legal Aid Society of San Diego. “Generally we are restricted due to funding when it comes to pursuing cases of legal and social justice, and cy pres awards like these help to provide us with added flexibility that is critical to our mission and success.
“Dan Mogin and his team of lawyers are truly rare individuals who have a great community heart. We are so fortunate that Dan elects to give back to the community in such a meaningful way.”
At the conclusion of class action cases, it is common to have funds that for a number of reasons cannot be distributed to the class members technically entitled to the funds. The doctrine of “cy pres” allows the court to do the “next best thing” and distribute the remaining funds to one or more charitable organizations. For more information on the Smokeless Tobacco Cases visit californiasmokelesstobaccosettlement.com.

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By Dan Mogin

The lessons of the savings and loan crisis and the junk bond markets resonate in the current financial crisis and the tsunami of litigation that looms ahead. Government agencies, investors, receivers, trustees and other stakeholders who hope to recover losses should look to the experience of the savings and loan crisis of the late 1980s and early 1990s for guidance – and we in California certainly had our share of that experience. On the other hand, it would be folly to adopt the last war’s tactics without due deference to today’s terrain. Some of the important lessons learned in the savings and loan litigation trenches may guide today’s plaintiffs’ counsel.

The savings and loan crisis was provoked by the confluence of bad loan underwriting, fraud and greed, undercapitalization and sweeping changes in the regulatory regime. Newly allowed investments included junk bonds and real estate participations. The savings and loans encountered a financial “perfect storm” buffeted by an economic slowdown and aggravated by the misfeasance and malfeasance. Litigation focused on junk bonds and real estate.

The 1980s market for original issue junk bonds was dominated by the investment bank Drexel Burnham Lambert. Many of Drexel’s clients and colleagues bought California savings and loans and loaded them up with junk bonds; a number of insurance companies, including some high-profile California insurers, did the same. This circle of the junk bond market was alleged as the “Drexel Daisy Chain” and many of its members used the same auditors. Junk bond buyers were told that a well-diversified portfolio of junk bonds minimized default risk and frequent refinancings, albeit with non-cash components, masked problems. The market was thinly traded and ill-liquid and the mark-to-market rules were not well-enforced. When Congress passed the Financial Institutions Reform, Recovery, and Enforcement Act in late 1989 and Drexel filed for bankruptcy under the  weight of criminal investigations and litigation, the junk market cratered as institutions were forced to divest and mark to actual market value.

The new savings and loan rules also allowed participation in real estate development. In some cases, real estate was flipped from one straw buyer to another to manipulate valuations in order to forestall defaults and write downs. Charles Keating’s Lincoln Savings was so contaminated that it was referred to as an “accounting factory” and discovery revealed that other institutions had engaged in similar accounting gimmicks.

The corollaries to the causes of today’s crisis are obvious. In the wake of de facto market deregulation, novel loan products were securitized and sold worldwide: mortgage-backed securities, residential and commercial, collateralized mortgage obligations, principal and interest strips and derivatives, ad infinitum. The loans supporting these instruments, and their inherent risks, were not fully understood. Rating agencies and accountants did not adequately assess risks and analyze value to reflect true the mark-to-market values, and default rates were masked by easy money refinancings. Internal valuation and accounting rules appear to have been ignored, misapplied or manipulated, concealing the problems and, as a result, investors and taxpayers incurred huge losses when refinancing and a “rising tide” of home values could no longer sustain the bubble and default risks turn out not to be as represented.

What are the current litigation lessons available from this history? First, there will be litigation by investors in financial institutions who were forced to take write-offs and write-downs after the music stopped in the mortgage-backed securities markets. Potential targets include directors and officers in mortgage banking institutions, rating agencies, and purchasing institutions; auditors and other professional service providers; and investment banks as broker-dealers and mortgage-backed securities issuers, and others. The institutions themselves may also sue investment banks and any remaining mortgage originators. Mortgage-backed securities issuers may sue institutions and loan servicers who re-structured mortgage pools, perpetuating the bubble. The FDIC may sue directors and officers, auditors, other professionals, brokers, mortgage-backed securities issuers, aggregators and others.

The Economic Stabilization Act of 2008 may complicate some litigation, since many of the potential targets of the FDIC’s litigation are now subject to government ownership and control, although the FDIC has handled such conflicts deftly in the past. Further, the Department of Justice is currently investigating a number of firms and markets, not just mortgage-backed securities, perhaps leading to the reconstitution of the attorney general’s Interagency Bank Fraud Working Group in one form or another.
Reaching past the savings and loan crisis, the Watergate investigations provide tools for claimants. What did they know and when did they know it? How and when did they conceal and cover up? What were the means and methods for insider enrichment? And, finally, in all events, “follow the money.” Timelines that overlay insider actions on top of the prices of the mortgage-backed securities will be valuable tools for investigators. Undoubtedly there will be litigation over individual deals gone bad. Some litigants, however, such as the FDIC and large fiduciary investors with interests in multiple companies and securities, will need to consider a more systemic approach. Investigations into individual deals and cases should be coordinated, and a cross-case database of potential targets developed to assist in identifying trading and other patterns. Certain actors, both institutional and individual, will pop up repeatedly. Once a database is in place, any “hot money” will be reflected in the transactions between them.

Focus on the trading. This applies as much to the mortgage-backed securities and other securities as it does to real estate lending. If past is truly prologue, there will be an inside group – the daisy chain – and concentric circles of subsequent investors. Evidence may be developed showing that investors and institutions furthest from the center were expected to be left holding the bag when the music stopped. Conversely, the closer to the center one is, the more the issue of manipulative trading to establish values for mark-to-market purposes should be seriously investigated. In any event, systemic litigants will need a database that shows trading in the mortgage-backed securities market as a whole.

Litigants will need discovery into “what did they know and when did they know it?” and “how and when did they cover it up?” While the popular mantra is that “no one could have seen this coming,” discovery is likely to yield a contrary result. In the savings and loan crisis, we found that the defendants knew about the problems early on, they usually tried something to at least mitigate the extent of the damage and, when that proved impossible, they tried to conceal the problems or their magnitude. In these cases, the devil resides in the details and coverups are frequently hinted at in the footnotes of financial statements and in extraordinary transactions, ala Keating’s “accounting factory.” Fortunately for investigators, audit workpapers are usually revealing. And, these days, e-mail spiders and similar programs are available to trace e-mail chains.

Finally, in the early days of the savings and loan crisis litigation, systemic plaintiffs contended with significant judicial skepticism over their allegations concerning the junk bond market’s effect on the savings and loans. While the current climate is markedly different from the early 1990s, counsel should be prepared for this possibility. The best strategies include drafting complaints that are well organized and allege detailed evidence and narrow claims, targeted and supportable document discovery and presenting a trial plan early on.

Those who don’t heed history are doomed to repeat it. Thus the new financial crisis litigation will be deja vu all over again, with some new twists.

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Dan Mogin, managing attorney of The Mogin Law Firm in San Diego, specializes in plaintiffs’ antitrust, consumer protection, investment and complex business and class action litigation. He handled numerous savings and loan crisis cases and was part of a core group of “pooled claims counsel” for investor cases pooled with the FDIC and the Resolution Trust Corporation cases that resulted in settlements valued at over $2.5 billion from Drexel, Milken, auditors, directors, officers and other professionals.

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© 2008 Daily Journal Corporation. All rights reserved.

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