Expert Roles in Antitrust Litigation
By: Patrick F. Murphy,
Alex Z. Kattamis,
Brian D’Andrade, and
Shukri J. Souri
Appropriate risk management is critical in any litigation. Antitrust litigation matters generally require the expert testimony of economists. Technology experts and advisors also can provide analysis and opinions regarding the technology, market, and product in question. Appropriate technological expertise can bolster the basis for economic models used in antitrust cases, leading to a more relevant and reliable economic analysis, reducing the likelihood of a successful challenge to economic expert testimony.
Antitrust litigation matters often involve highly complex technological issues from product design and manufacturing to how products function and are put into use by consumers in the marketplace. Economists have historically been key expert witnesses in antitrust matters. In fact, former Deputy Assistant Attorney General in the Antitrust Division of the US Department of Justice, William J. Kolasky, has noted that “[b]ecause expert economic testimony is critical to most antitrust disputes, the admissibility of that testimony under Daubert has become a key battleground in many antitrust trials.” In such litigation, economists generally construct economic and financial models as they perform their analyses, which may require assumptions about the technology, market, and product in question.
Guidance from technology experts and advisors can provide valuable support and a strong basis for economic analysis. The recent federal suits and civil multi-district litigation brought against manufacturers of LCD flat panel displays offer an informative example of the role of technology experts. A number of manufacturers were accused of conspiring to raise and fix the prices of TFT-LCD panels and certain products containing those panels for over a decade. A central issue in these cases was estimating the alleged overcharge collected by the various defendants. The testimony of technology experts regarding the assumptions and analyses of economic expert witnesses was influential to the outcome of several trials in these cases.
Background on Antitrust Law
Antitrust laws “prohibit business practices that unreasonably deprive consumers of the benefits of competition, resulting in higher prices for products and services.” Notable federal antitrust statutes are found in the Sherman Act and the Clayton Act. The Sherman Act, for example, states that “[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal” and that “[e]very person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony.”
Certain restraints on trade are known as “Horizontal Restraints.” These include: pricing (agreement among competitors to fix prices), allocation or division of markets between competitors, and refusal to deal to entities outside of the cartel. Other forms of restraints are known as “Vertical Restraints” and include: resale price floor/ceiling, customer/territorial restraints, limiting channel of distribution, exclusive dealing or distributor arrangements, and arrangements tying purchase of products.
Expert Roles and Daubert Challenges
Technology experts and economic experts tend to be assigned distinct roles in antitrust cases. Economics experts may assist in defining a relevant market, identifying and weighing procompetitive and anticompetitive effects of the challenged conduct, and quantifying economic impact and damages. Economics experts may rely on market research, transactional data that may be produced during discovery, and economic modeling.
Technology experts and advisors, on the other hand, may assist in defining relevant products, assessing liability, and explaining technical similarities and differences among products and evaluating technical assumptions related to economic models and damages calculations. Technology experts and advisors may rely on scientific and engineering calculations and models, experiments, and detailed comparisons of technical attributes of products, or other techniques.
A well-known risk related to expert testimony is the exclusion of expert testimony under Daubert or Federal Rule of Evidence (FRE) 702. For an expert to survive a Daubert challenge, the Court must find that: (1) the testimony is based upon sufficient facts or data; (2) the testimony is the product of reliable principles and methods; and (3) the witness has applied the principles and methods reliably to the facts of the case.
A study of Daubert and FRE 702 challenges to economic expert testimony in cases across a broad range of areas of law indicates that 45% of these challenges were successful, in whole, or in part, as shown in Figure 1. For the antitrust litigations studied, 39% of challenges to economic expert testimony were successful. According to the authors of this study, challenges in these antitrust cases mainly targeted the methodology employed by the economist expert and the data that formed the basis of their opinions.
Figure 1. Chart indicating the challenges to economics experts across a broad range of areas of law.
As antitrust laws are applied to increasingly technologically complex products and services, e.g., software, biology, chemistry, or electronics, it is a reasonable conclusion that risks related to understanding and effectively explaining technological issues in antitrust cases will tend to increase.
An expert in the technology at issue can assist in the formation of opinions in antitrust cases to provide a stronger basis for economic analysis as well as assist in the aggregation and analysis of appropriate data. The following three case studies highlight the importance of testimony from technology experts in antitrust cases.
Case Study 1: In re US v Microsoft Corp
The need of technology experts in antitrust cases is clear when the products and technology at issue are highly complex, such as for software. One such instance is the case brought in 1994 by the United States Department of Justice (DOJ) along with 20 states against the Microsoft Corporation under the Sherman Act. Analysis and testimony from technology experts were major components to the litigation strategy on both sides, where a key issue in the case was whether or not the bundling of Microsoft’s Internet Explorer (IE) browser with the Microsoft Windows operation system constituted illegal tying of multiple products. Microsoft asserted that its IE browser was not a separate product from the operating system, but was an integrated feature that could not be removed.
In order to show that Microsoft’s IE “browser product” could in fact be removed from Windows, the DOJ relied on the expert analysis and testimony from a noted computer scientist. The DOJ’s expert developed a computer program to remove the IE browser from Windows, without any degradation of the software performance, and demonstrated this finding at trial. In addition, the DOJ’s expert accused Microsoft of altering Windows via an update that occurred midway through the case in order to make it incompatible with the tools he had developed. The cross examination of this “assertive” and “combative” expert was described in the media as “apparently fruitless” due to the fact that the expert “gave not an inch” to the lawyer for Microsoft.
The tying claim against Microsoft was eventually dropped after the Court of Appeals ruled that the DOJ had failed to establish “a precise definition of browsers” and “a careful definition of the tied good market” at trial. The first issue pertains directly to the technological definition of a “software product” verses “software code” and, according to some observers, the DOJ’s tying claims ultimately failed because the DOJ and the courts did not give sufficient weight to the role of technology (i.e., computer science and software) as compared to the role of economic theory. Observers also have noted that a “disconnect” between trial attorneys and technology experts is not uncommon.
Case Study 2: In re US Gov v AUO
This case study and case study 3 offer contrasting scenarios on how experts have been used in antitrust litigations related to the same products and technologies. Since 2001, there have been a series of criminal and civil litigations involving the manufacturers of thin-film transistor liquid crystal display (TFT-LCD) panels. Such panels are in products such as televisions, computer monitors and mobile devices. In 2010, the DOJ alleged price fixing on TFT-LCD panels, which lead to a number of plea agreements and $900 million in fines. The Taiwanese manufacturer AU Optronics (AUO) was subsequently found guilty by a federal jury, leading to a $500 million fine.
Though the Sherman Act carries a $100 million statutory maximum fine, the alternative fines provision of 18 USC 3571(d) allows for penalties of up to “twice the gross gain or twice the gross loss” associated with the violation. Based on this provision, the DOJ alleged that the AUO’s gains were in excess of $500 million, and sought twice that figure as a penalty. To succeed, the government had to prove those “overcharges” to the jury beyond a reasonable doubt.
The U.S. relied on the economics expert testimony from Dr. Keith Leffler to prove that AUO’s gains were in excess of $500 million. According to Dr. Leffler, to receive $500 million in gains, AUO would have had to apply an overcharge of 2.1 percent, or approximately $4.30 per TFT-LCD panel. Dr. Leffler’s analysis showed that cartel-related overcharges tend to be 15 percent or greater; that margins were actually $53 per panel or higher during the cartel period than in the post-cartel period; and that AUO’s actual total gains were likely greater than $2 billion. AUO’s expert economist, on the other hand, did not find a measurable overcharge attributable to AUO. The cross examination of Dr. Leffler focused on the errors he had admitted to in previous matters, including as an expert witness in a class action antitrust case against Microsoft.
While the jury’s verdict and sentence were affirmed by the U.S. Court of Appeals for the Ninth Circuit, AUO could have challenged the technological bases relied on by Dr. Leffler. For example, the Ninth Circuit’s decision noted that Dr. Leffler’s testimony “created some ambiguity” regarding how TFT-LCD panels that are manufactured by AUO in Taiwan, are then incorporated into finished consumer goods sold in the United States. A technology expert well-versed in the manufacturing processes and requirements for consumer goods could have provided testimony to clarify this issue or could have gathered data via a representative sample to determine the rate at which TFT-LCD panels manufactured by AUO were found in such goods.
Case Study 3: In re TFT LCD (Flat Panel) Antitrust MDL
Following the DOJ cases against the TFT-LCD panel manufacturers, a series of class action cases were filed on behalf of direct purchasers such as Best Buy, Costco, and others. The defendants, including Toshiba and HannStar, among others, formed a joint-defense group consisting of TFT-LCD panel manufacturers. The technology and products at issue were largely the same as in US v AU Optronics Corp, discussed above. Both sides in this litigation relied on economics experts and technology experts.
The plaintiffs relied on an economics expert to calculate the “overcharge” gained by the defendants. The economic analysis was based in part on the producer price index (PPI), an economic statistic collected by the U.S. Bureau of Labor Statistics that measures the average change over time in the selling prices received by domestic producers of goods and services. While there is no PPI for TFT-LCDs panels, economic experts for the plaintiffs relied on the PPI for microprocessors. The plaintiffs’ experts later relied on economic arguments to opine that such TFT-LCD panels were substitutable both in manufacturing and in end-use and therefore suitable for price-fixing conspiracy. The plaintiffs’ economics experts also relied on testimony by a technology expert to support their assumptions. The technology expert opined that TFT-LCD panels were all basically the same and therefore substitutable, and also that microprocessors are similar to TFT-LCD panels.
The defense relied on analysis and testimony by an economics expert who selected several other electronics-based PPIs to calculate a far lower “overcharge” result. The defendants’ economics expert also relied on testimony of a technology expert, who described the variety of technologies and application-specific designs across TFT-LCD panels, and explained how microprocessors and TFT-LCD products are, in fact, not similar in manufacturing and use.
The jury in this case found that plaintiffs did not show that Toshiba participated in a conspiracy to fix the prices of TFT-LCD, but found that plaintiffs did show that HannStar had participated in such a conspiracy (several defendants settled before trial). The jury award was much closer to the amount calculated by the defense's economic experts and was less than one tenth of the $770 million overcharge calculated by the economics expert witnesses for plaintiffs. The overall models employed by the economists on both sides were essentially similar, even according to economists involved in this case, with a key difference being the selection of an appropriate PPI. Testimony from technology expert Dr. Shukri Souri of Exponent was highlighted in the closing arguments for the defense and played a role in the jury’s rejection of the microprocessor PPI as an appropriate proxy for TFT-LCD panel costs.
Appropriate risk management is critical in any litigation. It is particularly more so in antitrust matters or derivative class action lawsuits. Overall, the risks of expert disqualification are disproportionate in antitrust matters and the teaming up of economics and technology experts can play a role in strengthening bases for expert opinions and mitigating litigation risks.