“Sham” Litigation

• DOI: 10.1177/0003603X17735193
• Date: 01 December 2017
• Published date: 01 December 2017

Article

“Sham” Litigation: When Can It

Arise and How Can It Be Reduced?

Ioannis Lianos* and Pierre Regibeau

**

Abstract

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.

Keywords

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

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DOI: 10.1177/0003603X17735193

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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.

1

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.”

2

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.

3

Various

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.

4

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.

5

1. CHRISTOPHER C. KLEIN,THE ECONOMICS OF SHAM LITIGATION:CASES,THEORY AND POLICY 15 (1989); Einer Elhauge, Making

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

NTITRUST L.J. 327,

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,

6

were introduced in Europe

relatively more recently,

7

and have expanded in various jurisdictions, in some of them representing

a significant number of cases.

8

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

Advertising,

9

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.

10

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

UR.COMPETITION L. &

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