“Sham” Litigation

Date01 December 2017
Published date01 December 2017
“Sham” Litigation: When Can It
Arise and How Can It Be Reduced?
Ioannis Lianos* and Pierre Regibeau
In both the U.S. and the EU, the antitrust category of “sham litigation” (in the U.S.) or “vexatious
litigation” (in the EU) enables a plaintiff, or a defendant in case this action forms part of a counterclaim,
to argue that the introduction of litigation may constitute, under certain conditions, an infringement of
competition law. This naturally leads to the question of what is a workable standard for establishing the
existence of sham litigation, and how it is possible to distinguish between the legitimate use of the
regulatory/litigation process and strategic attempts to use the process in order to restrict competition.
Legal and economic literature, as well as the courts, have struggled to define operational tests enabling
them to determine the boundaries of the “sham”/“vexatious” litigation antitrust category. This article
examines the intellectual underpinnings of this form of abusive/anticompetitive conduct and puts
forward a “mechanism design approach” with the aim to reduce the occurrence of sham litigation.
antitrust, sham litigation, vexatious litigation, abuse of dominance, abuse of regulatory process, Noerr-
Pennington doctrine
I. Introduction
The use of regulatory and litigation processes to inflict harm to competitors and gain competitive
advantage is a well-known strategy employed by business, in particular in highly regulated sectors.
The regulatory and judicial system is often the theatre of intense business conflict, sometimes resulting
from “genuine” disputes between the parties over the interpretation of the law, or the application of the
law to the specific fact pattern, each of the parties seeking to secure governmental action in its favor
but sometimes also, or uniquely, motivate d by the motive of directly harming competi tors. Both
legitimate and strategic attempts to use the regulatory/litigation process may impose costs on com-
petitors, these being costs incurred in order to ensure the defense of their interests in the regulatory/
litigation process, but also costs resulting from delayed application of contractual arrangements or
Professor of Global Competition Law and Public Policy and the Director of the Centre for Law, Economics and Society (CLES)
at UCL Faculty of Laws, London, UK
Imperial College London’s IP Centre, Centre for Law, Economics and Society, UCL Faculty of Laws, London, UK
Corresponding Author:
Ioannis Lianos, Professor of Global Competition Law and Public Policy and the Director of the Centre for Law, Economics and
Society (CLES) at UCL Faculty of Laws, London, WC1E 6BT UK.
Email: i.lianos@ucl.ac.uk
The Antitrust Bulletin
2017, Vol. 62(4) 643-689
ªThe Author(s) 2017
Reprints and permission:
DOI: 10.1177/0003603X17735193
financing, or eventually also delay in entering the market. From this perspective, such costs may affect
competition, as it is possible that the undertaking using the regulatory and litigation processes may be
able, because of these additional costs, to exclude or marginalize its competitor from the market and
therefore charge higher prices, limit output, maintain the status quo price, or diminish innovation. The
fact that the anticompetitive effect result in this case from the use of governmental processes raises
interesting questions as to the boundaries of competition law intervention, should it be considered that
such strategies lead to negative welfare effects or clearly harm the competitive process.
On one side, these strategies may offer a cheap way of nonprice predation (regulatory predation
and/or predatory litigation), as the costs incurred by the predator do not relate to its output or sales,
with the result that the profit sacrifice for a firms with a large market share will be lower than what it
would have incurred, had it opted i nstead for predatory pricing.
This is even more harmful for
competitors if there is some asymmetry in the regulatory/litigation costs incurred by the parties, either
because of an existing differential of (financial) resources, or because of specific competitive circum-
stances, the same litigation expenses increasing “the small producer’s cost per output more than the
large producer’s.”
One the other side, these governmental processes serve various purposes and have
been established regardless of the risk that their use may negatively impact competition. With regard to
the regulatory process, one may think of the possibilities offered to a patent holder to instigate patent-
related legal actions in order to protect his or her patent, such as the action for infringement, the action
for declaration of noninfringement, and the action for annulment (or “invalidity action”); or that of a
pharmaceutical company to submit to the relevant regulatory authority scientific data demonstrating
that its drug is safe and effective for its intended use, in order to get a market authorization. Similarly,
an undertaking may make use of its right to have access to a court in order to secure judicial remedies
protecting a specific right.
Certainly, assessing on a case-by-case basis the welfare effects of each use of the regulatory and
litigation process through some form of sophisticated cost benefit analysis would be too burdensome
and would generate too much uncertainty, chilling the legitimate use of such governmental processes
and thus frustrating their aims. For this reason, in practice, the use of the regulatory and/or litigation
process stays presumptively outside the scope of competition law, through the operation of some form
of antitrust immunity, in both the U.S. and in Europe, this being either explicit, or implicit.
explanations have been advanced as to the intellectual foundation of this immunity. Some have put
forward the idea that this presumption of lawfulness, from the perspective of competition law, derives
from the constitutional protection of fundamental rights whose effectiveness would have been seri-
ously jeopardized if it would have been possible to implement competition law against the simple use
of the regulatory/litigation process designed to provide remedies against violations of these rights.
Others have explained this immunity by “functional process considerations,” in particular the belief
that decisions made by accountable public servants vested with official authority and who do not have
financial interests in restraining competition are presumably compatible with the public interest, this
overriding any possible finding of anticompetitive effect, on the basis of the primacy of the political
process in democratic capitalism.
Sense of Antitrust Petitioning Immunity,80CAL.L.REV. 1177 (1992).
2. Elhauge, supra note 1, at 1177.
3. For instance, in the U.S. this immunity has been established by the jurisprudence of the Supreme Court (the so-called Noerr-
Pennington doctrine).
4. Stephen Calkins, Developments in Antitrust and the First Amendment: The Disaggregation of Noerr,57A
328 (1988); James D. Hurwitz, Abuse of Governmental Processes, the First Amendment, and the Boundaries of Noerr, 74
GEO. L.J. 65, 66 (1985).
5. Elhauge, supra note 1, at 1177 and 1180.
644 The Antitrust Bulletin 62(4)
However, and this is consistent across jurisdictions, the immunity does not cover the abuse of such
regulatory and litigation processes, when these are used for foreign purposes than those they have been
put in place to serve at the first place. Hence, there is a distinction often established with regard to the
application of competition law between the legitimate use of such processes, and what could, more
widely, be considered as an unorthodox use.
This raises questions about the definition of the boundaries distinguishing legitimate use from
uses that may raise competition law concerns. The latter category cannot be as broad as to include all
possible uses of the governmental process as an anticompetitive weapon, as this may englobe also
situations where the undertaking in question has mixed motives and introduces, for instance, litiga-
tion with the aim to protect its rights as well as in order to harm a competitor. Applying competition
law in these circumstances would have the effect to discourage a legitimate use of the regulatory or
litigation process.
Competition law regimes around the world have excluded from the scope of the immunity several
types of use of governmental processes that may constitute an infringement of competition law, under
certain circumstances, these categories relying on broad standards that are subject to interpretation.
Among the various types of use, the category of “sham litigation” or “vexatious litigation” enables a
plaintiff, or a defendant in case this action forms part of a counterclaim, to argue that the introduction
of litigation may constitute, under certain conditions, an infringement of competition law. Such actions
have been a feature of the U.S. antitru st law system for some time,
were introduced in Europe
relatively more recently,
and have expanded in various jurisdictions, in some of them representing
a significant number of cases.
A common characteristic of the way these various competition law
regimes define the category of “sham litigation” or “vexatious litigation” is that, as the U.S. Supreme
Court put it in its seminal jurisprudence on sham litigation City of Columbia v. Omni Outdoor
the main concern is “the use (of) the governmental process as opposed to the outcome
of that process as an anticompetitive weapon.” The restriction of competition flows directly from a
“private” action, as the injury to competition would have happened no matter what the government
official or judge would have decided.
Anticompetitive (predatory or sham) litigation is illegal
because it results in monopolistic or market power rents that arise when actual or potential competition
is limited or eliminated, market prices are maintained at or elevated to otherwise unsustainable levels,
and innovation is diminished.
The foregoing naturally leads to the question of what is a workable standard for establishing the
existence of sham litigation. Legal and economic literature, as well as the courts, in the U.S., in the EU,
and around the world have struggled to define operational tests enabling them to determine the
boundaries of the “sham” and “vexatious” litigation antitrust category. The key piece of evidence
in identifying sham litigation is the absence of genuine interest in receiving judicial relief. Establishing
the genuine motive of the plaintiff, therefore, has been the central issue to much of the case law on
sham litigation in Europe and in the United States. Predatory intent is clearly demonstrated in situa-
tions of misrepresentations of facts or law to tribunals, perjury, fraud or bribery. Some have also
6. KLEIN,supra note 1.
7. See,e.g., Simonetta Vezzoso, Towards an EU Doctrine of Anticompetitive IP-Related Litigation,3J.E
PRAC. 521 (2012).
8. See World Intellectual Property Organization (WIPO), Committee on Development and Intellectual Property (CDIP), Study
on the Anti-Competitive Enforcement of Intellectual Property Rights: Sham Litigation, CDIP/9/inf/6 REV (2012) (various
country reports) (hereinafter, WIPO Report).
9. City of Columbia v. Omni Outdoor Advertising, 499 U.S. 365 (1991).
10. In case the defendant did not have any discretion on instigating the action at the first place, in Europe the practice would fall
under the state compulsi on exception and/or it would h ave been possible for the co mplainant to attack direc tly the
anticompetitive state action through the joint use of Article 4(3) TFEU and Articles 101 and/or 102 TFEU.
Lianos and Regibeau 645

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