DEREGULATION AND THE DEMISE OF SHAM LITIGATION

1. DEREGULATION AND THE DEMISE OF SHAM LITIGATION EVIDENCE FROM APPELLATE DECISIONS 1972-2006 By Christopher C. Klein

2. Sham Litigation • The use of regulatory agencies or the courts to harass competitors in order to achieve an anticompetitive goal. • Such goals may include • Prevent or delay entry to a market • Prevent or delay expansion by a competitor • Cause a rival to lose sales or exit • Raise rivals’ cost of doing business

3. Sham Litigation and the Sherman Act • The victims of sham litigation may sue the perpetrator for treble damages under the Sherman Antitrust Act, if the alleged sham act • Enforced a conspiracy to fix prices or otherwise lessen competition • Was an attempt to monopolize a market

4. Supreme Court 1961 • In Eastern Railroad Presidents Conference v. Noerr (1961): • Attempts to influence government are immune to challenge under the Sherman Act, unless the attempts are a “mere sham” aimed at disrupting the business relationships of a competitor.

5. Supreme Court 1972 • In California Motor Transport Co. v. Trucking Unlimited (1972): • Litigants guilty of sham litigation are not shielded from antitrust liability • A pattern of claims brought “with or without” probable cause may constitute sham litigation

6. Supreme Court 1993 • In Professional Real Estate Investors v. Columbia Pictures Indus. (1993): • For sham litigation to face antitrust liability it “...must constitute the pursuit of claims so baseless that no reasonable litigant could realistically expect to secure favorable relief.” • Applies only to single acts, not patterns

7. Initial Research Question • Did the Supreme Court’s 1993 decision in PREI alter the frequency or characteristics of antitrust suits on claims of sham litigation?

8. CASE DATA: 1972-2006 • Characteristics of all antitrust suits • on claims of sham litigation • that produced decisions in federal Circuit Courts of Appeal • before and after 1993 • Antitrust suits were identified by searching LEXIS for citations to the Supreme Court’s decisions in California Motor Transport and Prof. Real Estate Investors

9. Trends • The number of cases brought per year generally declined • There is no statistically significant change in frequency around 1993 • A statistically significant break in the trend occurs in the mid-1980s • Why?

10. Initial Trend Analysis • Basic Model • Nt = B1 + B2Trend + B3Trendsq + B4Dy + B5(Dy*Trend) + B6(Dy*Trendsq) + ut • Dy = 1 starting year y • Spline Regression • Nt = B1 + B2Trend + B3Trendsq + B4Ty + B5Tysq + et • Ty is a trend starting in year y

11. Nonlinear Trend, Continuous

12. Nonlinear Trend, 1993 Break

13. Nonlinear Trend, 1986 Break

14. Spline Regression, 1983 Break

15. Trend Analysis 2 • Add • measures of GDP or growth rate • measure of opportunity cost • Nt = B1 + B2Trend + B3Trendsq + B4Dy + B5(Dy*Trend) + B6(Dy*Trendsq) + B7GDPt + B8Primet + ut

16. Nonlinear Trend,1986 Break, Real GDP, Prime Rate

17. Nonlinear Trend, 1986 Break, 3-year Averages: GDP Growth, Prime Rate

18. Linear Trend,1986 Break, 3-year Averages: GDP Growth, Prime Rate

19. Decline of Regulation in 1980s • Staggers Act (1982) removes federal price regulation of railroads and motor carriers • Most states deregulate motor carriers by 1990 • 1983 AT&T divestiture reduced incentive to use local monopoly to block entry in long distance or equipment manufacturing • PURPA (1978) and FERC Order 888 (1986) reform Electric Industry

20. Changes in Venue

21. Industries

22. Relationships

23. Issues in Alleged Sham Litigation

24. Alleged Effects of Sham Acts

25. Conclusion • Declining frequency of antitrust suits on sham litigation claims is more likely the result of regulatory reform than of changes in the case law. • “Deregulation” removed many low cost opportunities to deter entry or harass competitors. • Patents are major source of recent suits.