Central District of Claifornia Denies Motion to Dismiss Sherman Act Claim Based on Aspen Skiing Theory
Trevor V. Stockinger
Kesselman Brantly Stockinger LLP
On July 14, 2017, Judge Otis D. Wright, II of the Central District of California denied a motion to dismiss concerning, among others, a Sherman Act Section 2 claim based on a duty to deal theory. Packaging Systems v. PRC Desoto International, Inc., 2017 U.S. Dist. LEXIS 109762 (C.D. Cal. July 14, 2017).This opinion is significant because it continues to breathe life into monopolization claims based on Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985), a theory that some have criticized over the years.
This case involved the market for aerospace sealant for use on military and commercial aircraft. Defendants PPG entities manufactured and distributed sealant both at wholesale to resellers and at retail to aircraft maintenance companies as part of injection kits, which made it easier and more efficient to apply the sealant. Since 1976, Plaintiff Packaging Systems purchased sealant at wholesale and sold injection kits with pre-filled sealant. It had purchased and sold injection kits using PPG’s sealant since 2001.
Packaging Systems alleged that over the years, PPG had attempted to “blunt competition,” including by trying to acquire Packaging Systems and telling end-users that non-PPG resellers, like Packaging Systems, were not authorized to repackage PPG sealant. In August 2016, PPG sent a memo to all of its sealant resellers stating that it prohibited the repackaging of its sealant by anyone but PPG-owned resellers. PPG claimed that the policy was necessary to ensure the sealant’s quality for end-users.
Packaging Systems brought suit alleging claims under Sherman Act Section 2 for violation of a duty to deal, the Sherman and Cartwright Acts for tying, California’s price discrimination law, California’s Unfair Competition Law, and interference with prospective economic advantage.
Duty to Deal Claim
Packaging Systems asserted a Sherman Act Section 2 claim based on a violation of an “antitrust duty to deal.” 2017 U.S. Dist. LEXIS 109762 at *10. The court first observed that “[r]efusing to deal with a competitor … is generally not considered anticompetitive….” Id. at *11. And, it acknowledged that Packaging Systems’ theory, based on the Supreme Court’s Aspen Skiing Co., is “at or near the outer boundary of § 2 liability.” Id. at *11 (quoting Verizon Communications Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398, 407 (2004)).
Nonetheless, following Trinko and MetroNet Services Corp. v. Qwest Corp., 383 F.3d 1124 (9th Cir. 2004), the court set out “three facts” “critical” to establishing liability for an “anticompetitive refusal to deal” under Aspen Skiing. 2017 U.S. Dist. LEXIS 109762 at *12. First, the defendant terminated a “prior profitable course of dealing with plaintiff.” Id. Second, the defendant refused to sell to plaintiff even at retail prices. Id. Third, the product that the defendant refused to sell to plaintiff was one it already sold to other customers. Id. at *13.
It noted that the first two factors suggested that the defendant elected to forego short-run benefits because of an interest in reducing competition in the long-run. Id. at *12-13. It further observed that the third factor “ensured that remedying the alleged antitrust violation would not require the Court to create from scratch the terms on which the defendant must deal with the plaintiff….” Id. at *13.
After discussing the three “facts,” the court specifically remarked in a footnote that neither the Supreme Court nor the Ninth Circuit has “expressly stated” that the three facts are “indispensable elements of all § 2 claims arising from a refusal to deal.” Id. at *13 n. 5 (emphasis in original). Nonetheless, the court stated it did not need to resolve the issue because Packaging Systems had plausibly alleged facts supporting each of the three factors.
In reviewing the allegations, the Court appears to have interpreted these three facts broadly. First, it held PPG had engaged in a voluntary, profitable course of conduct with Packaging Systems because it had sold sealant to Packaging Systems since 2001. Id. at *13. It rejected PPG’s argument that PPG’s “periodic comments” to Packaging Systems’ customers that Packaging Systems was not supposed to repackage PPG’s sealant was enough to show PPG always prohibited repackaging. Id. at *13-14 & n.6. Instead, the court said that the allegations evinced that PPG had taken “no real steps to prevent Plaintiff from repackaging” and that “[t]his tacit acceptance of Plaintiff’s repackaging is in principle no different from the joint venture at issue in Aspen Skiing….” Id. at *14.
It held the second factor was met because “PPG is willing to sell sealant to end-users at a particular price but will not sell the same sealant to resellers at the same price – or at any price.” Id. It also rejected PPG’s claims that the policy was necessary to ensure quality. It relied on the allegations that PPG had tolerated repackaging for 15 years without incident and that PPG’s own repackaging resellers were using the same repackaging methods they used before PPG acquired them. Id. at *15. It also noted that PPG’s refusal to discuss specific quality problems with Packaging Systems “adds to the inference” of an anticompetitive motive. Id. at *15 n. 7.
Finally, it held the third factor was met not only because PPG still sold sealant at wholesale to non-repackaging resellers, but also because PPG sold to repackagers, like Packaging Systems, for years. Id. at *15. As a consequence, the Court would not need to develop the remedy from scratch. Id. at *15-16. Thus, the court denied the motion to dismiss.
The Packaging Systems decision suggests that duty to deal violations may still have teeth. This may be the case even where the allegations are somewhat ambiguous and raise defenses. That said, despite its broad reading of the case law and the complaint’s allegations, it is important to note that the court was only addressing the plausibility of the claims on a motion to dismiss. Indeed, the court noted that the claim survives “for now.” Id. at *16. It is likely that many of the arguments raised by the defendant will be addressed anew on summary judgment. Stay tuned.
Sidley Austin LLP
In a five year antitrust battle between two competing manufacturers of telephone headsets, plaintiff GN Netcom navigated the case past a motion to dismiss, defeated defendant Plantronics’ motion for summary judgment and notched a $3 million sanction and favorable jury instruction against Plantronics for spoliation. GN Netcom could not, however, get the case across the finish line. A jury decided the case in Plantronics’s favor after just over an hour of deliberation, denying GN Netcom the hundreds of millions of dollars in damages it sought.
Plantronics, headquartered in Santa Cruz, is the clear industry leader in telephone headsets sold to enterprise end-users, also known as “contact center and office” end-users. It has a market share north of 80%. Headsets are generally not sold directly from manufacturers to these end-users but, rather, through one or two layers of distributors. Plantronics had a “Plantronics Only Distributor” (POD) program that restricted participating distributors from purchasing headsets directly from competitors of Plantronics such as GN Netcom and prohibited the distributors from actively promoting rival brands. The POD program, however, did not prohibit GN Netcom from making sales calls directly to end-users and did not prohibit distributors from selling GN Netcom products when end-users requested them.
GN Netcom sued in federal court in Delaware in 2012, alleging monopolization and attempted monopolization in violation of Section 2 of the Sherman Act, concerted action in restraint of trade in violation of Section 1 of the Sherman Act and Section 3 of the Clayton Act, and state common law tortious interference with business relations.
The Court denied Plantronics’ Motion to Dismiss, finding that: (1) GN Netcom and Plantronics are direct competitors in the relevant market; (2) GN Netcom had adequately pled antitrust injury; (3) GN Netcom’s market definition was adequate for pleading purposes; (4) GN Netcom had adequately alleged anti-competitive conduct; and (5) GN Netcom had adequately pled tortious interference. GN Netcom, Inc. v. Plantronics, Inc., 967 F. Supp. 2d 1082 (D. Del. 2013)).
In 2016, U.S. District Judge Leonard P. Stark sanctioned Plantronics $3 million in light of Plantronics’ “intentional and admitted deletion of emails,” which he held was carried out “in bad faith with the intent to deprive GN from using the information.” GN Netcom, Inc. v. Plantronics, Inc., 2016 U.S. Dist. LEXIS 93299, *41, *48 (D. Del. July 12, 2016). The court also imposed evidentiary sanctions on Plantronics, including a jury instruction that permitted jurors to draw an adverse inference from the document destruction. Id. *48.
Prior to trial, Plantronics moved for summary judgment arguing that all of GN Netcom’s claims should fail because any foreclosing effect of its Plantronics Only Distributor agreements was negated by GN’s ability to access end-users directly. Specifically, it argued that GN Netcom could make sales calls directly to end-users, with delivery effected by any of the hundreds of resellers GN Netcom uses, including the PODs themselves. GN Netcom, Inc. v. Plantronics, Inc., 2017 U.S. Dist. LEXIS 162135at *6(D. Del. Sept. 29, 2017).
On September 29, 2017 the court denied Plantronics’ motion. GN Netcom, Inc. v. Plantronics, Inc., 2017 U.S. Dist. LEXIS 162135(D. Del. Sept. 29, 2017). In its order, the court started by laying out the standard under Third Circuit law:
First, courts must examine whether a plaintiff has shown substantial foreclosure of the market for the relevant product. Substantial foreclosure occurs when the challenged practices . . . severely restrict the market’s ambit. Second, courts must also assess the likely or actual anticompetitive effects of the exclusive dealing arrangement, including whether there was reduced output, increased price, or reduced quality in goods or services.
First, courts must examine whether a plaintiff has shown substantial foreclosure of the market for the relevant product. Substantial foreclosure occurs when the challenged practices . . . severely restrict the market’s ambit. Second, courts must also assess the likely or actual anticompetitive effects of the exclusive dealing arrangement, including whether there was reduced output, increased price, or reduced quality in goods or services.
Id. at *6 (citations and quotations omitted).
The court cautioned that for those attempting to shut down an exclusive dealing allegation, “[t]he mere existence of other avenues of distribution is not enough on its own. Instead, there must be an assessment of the alternative means’ overall significance to the market, and such alternative means must be practical or feasible in the market as it exists and functions.” Id. at *8 (citations and quotations omitted). The court held that Plantronics could only win at summary judgment if a reasonable juror could find only that GN Netcom had adequate, available, viable, and/or effective alternative means of distribution, notwithstanding Plantronics' POD program. While the alternative means did not have to be equivalent to Plantronics’ distribution, it had to be sufficient for GN Netcom to compete. Id. The court found that, “[w]hile a reasonable jury could find that GN is not substantially foreclosed . . . , a jury would not be compelled to make such a finding, meaning there is a genuine dispute of material fact as to whether distribution through PODs is adequately ‘practical or feasible’ for GN.” Id. at *10. The court remarked on the fact that Plantronics Only Distributors actually sold lots of GN Netcom headsets and explained why that did not end the inquiry:
While several major GN resellers are PODs . . . the jury may reasonably find a striking disparity between GN’s share of sales carried out through PODs and those it is able to make through non-PODs. This evidence could reasonably be found to support GN’s claim that PODs naturally convert GN business to Plantronics business over time and that, even though PODs may nominally be permitted to sell GN products, in practice they are supposed to minimize GN sales.
At bottom, Plantronics cannot meet the summary judgment standard to show that the only reasonable conclusion to be drawn from the record is that distribution through PODs is an adequately available, viable, and/or effective means of distribution for GN.
. . .
Ultimately, there is more than some metaphysical doubt as to whether the alternative means of distribution that Plantronics proposes are practical and would pose a real threat to Plantronics’ market share.
At bottom, Plantronics cannot meet the summary judgment standard to show that the only reasonable conclusion to be drawn from the record is that distribution through PODs is an adequately available, viable, and/or effective means of distribution for GN.
. . .
Ultimately, there is more than some metaphysical doubt as to whether the alternative means of distribution that Plantronics proposes are practical and would pose a real threat to Plantronics’ market share.
Id. *11, *13 (citations and quotations omitted).
Having denied Plantronics’ motion for summary judgment, the case proceeded to trial before a jury in Delaware District Court. The trial took place between October 11, 2017 and October 18, 2017. In his summation to the jury, GN Netcom’s counsel, Jeffrey Patterson of K&L Gates, of course argued about the anticompetitive effect of the POD program, liberally referring to the testimony of GN’s economic and damages expert, Professor Einer Elhauge. In addition, he raised the spoliation issue: “why destroy documents? Why were there e-mails deleted in violation of the litigation hold as the Court has found, given the sensitive nature of the issue and the ongoing legal issues? Keep in mind that is after this lawsuit was filed.”
Plantronics’ lawyer, Russell Hayman of McDermott, Will & Emery, in his closing argument, hammered the lack of foreclosure and lack of anticompetitive impact: “They have had five years and five days to find a customer, a consumer. Antitrust law is about protecting all American consumers and the American economy. They have had five years to find an end-user who was impacted in any way to say I didn't know about GN, I couldn't buy GN, I couldn't get GN delivered to me, I had to pay another $10 for my GN headset because of whatever, five years and goose egg, you didn't hear from one.” He argued that the spoliation issue was a “straw man,” a “red herring” designed to distract the jury from what he said was the weakness of GN Netcom’s case.
The case went to the jury on October 18, 2017 and after a quick deliberation, the jury cleared Plantronics on all counts. While the jury found that GN Netcom had proved a relevant market, it had not proved all the elements of any of its claims. GN Netcom has moved for a new trial.
Elizabeth C. Pritzker
Pritzker Levine LLP
On November 20, 2017, U.S. District Court Judge Thomas Durkin declined to dismiss antitrust lawsuits brought by classes of direct and indirect purchases of chicken meat against Koch Foods, Tyson, Perdue and others. The lawsuits claim that the chicken producers have conspired for years to drive up the price of chicken nearly 50 percent. In re Broiler Chicken Antitrust Litigation, 2017 WL 5574376, at *1 (N.D.Ill., Nov. 20, 2017).
The decision is significant in its conclusion that plaintiffs’ allegations regarding defendants’ efforts to decrease poultry production, at various points over many years, in varying amounts, and by various methods, sufficiently alleged that defendants’ conduct was parallel as well as suggestive of a conspiratorial agreement. In re Broiler Chicken Antitrust Litigation, 2017 WL 5574376, at *7-8. Equally significant, the court upheld plaintiffs’ allegations that defendants effectuated their conspiracy, in part, through a conduit – an industry reporting service, known as Agri Stats, that collects production and yield data directly from the defendants’ production facilities. Id., at *16.
Antitrust class actions filed by food distributors and individuals allege that Koch Foods, Tyson, Purdue and other chicken producers, which collectively control 88.8% of the chicken production in the United States, worked together for eight years to reduce production of “broilers” -- chickens raised for meat consumption. Id., at *1-2. The complaints allege that defendants own or tightly control all aspects of producing broilers, including laying eggs; hatching chicks; raising chicks; slaughtering chickens; and processing and distributing meat. Id., at *2. Defendants used their dominant market position, the complaints allege, to perform production cuts in order to drive up chicken prices.
The anticompetitive methods by which defendants allegedly sought to reduce production vary. Defendants purchase their breeder flocks (the chickens that lay the eggs that Defendants raise into broilers) from three “global genetics conglomerates” that account for 98% of broilers raised in the United States – a factor the court found to be indicative of a commodity industry susceptible to agreements that violate antitrust laws. Id., at *2. A primary alleged form of production cuts involved defendants’ alleged agreement to slaughter breeder flocks, a practice plaintiffs allege is “historically unprecedented.” From 2008 to 2013, the complaints allege, defendants collectively slaughtered 10 million breeder chickens, thereby permanently hampering their ability to quickly meet increased demand. Id., at *3-4. Defendants also bought up excess production from competitors, in order to avoid price depression, and increased exports of broilers in order to lift broiler prices in the United States. Id., at *5-6. Additionally, defendants allegedly reported false inflated prices to the primary broiler price index, the Georgia Dock, in order to secure higher prices for their broilers in the spot market and in prospective supply contracts. Id., at *6. Lastly, the complaints allege, defendants used an industry reporting service, known as Agri Stats, to share production and financial information, and police their agreement to restrain production and inflate prices. Id., at *2, 3, 5-6.
Defendants’ Motion to Dismiss
Defendants moved to dismiss the complaints, arguing that plaintiffs failed to plausibly allege a conspiracy, in part, because the alleged anticompetitive conduct among the defendant producers was too varied, both in timing and in methods. Id., at *9. U.S. District Judge Thomas Durkin disagreed, and largely denied the motions to the extent they were directed to plaintiffs’ Sherman Act, Section 1 price-fixing claims.
Initially, Defendants argued that plaintiffs failed to make a threshold showing of parallel conduct necessary to state a conspiracy claim under the Sherman Act. Defendants argued that plaintiffs allege only that some defendants decreased production, at various points over many years, in varying amounts, and by various methods, and that this kind of varied action – occurring “across a lengthy period” – cannot be described as parallel. Id., at *9-10. Citing Supreme Court precedent, Interstate Circuit v. United States, 306 U.S. 208, 227 (1939), and several district court opinions, including In re Plasma-Derivative Protein Therapies Antitrust Litig., 764 F.Supp.2d 991, 1000 (N.D. Ill. 2011), Judge Durkin ruled that simultaneous action is not a requirement for alleging parallel conduct. Id. “Here, Plaintiffs allege two period of production cuts of approximately two years year, in 2008-09 and 2011-12.” Id., at *10.
Further, data from the Department of Agriculture shows broiler production steadily increasing from 2000 until 2008, when production took a plunge. Production then remained steady until 2012, when it began to increase again. Id., at *12. “The fact that defendants are alleged to have taken unprecedented actions in order to cut production twice within a four year period, plausibly indicates that the conspiracy was continuing through 2012, and the momentary production increase was an agreed pause in the production cuts to take full advantage of higher prices,” the court held. Id, at *22.
Defendants also argued that plaintiffs’ allegations do not show parallel conduct because the alleged production cuts are too varied in methods and amounts. Judge Durkin rejected this argument as well. “[T]he courts in this district have not required such uniformity to allege parallel conduct,” the court held. Id., at *10. “It is more than plausible that conspirators would leave the precise means of cutting production up to each conspirator,” the court reasoned, “where multiple options would accomplish the intended goal. Permitting flexibility, where possible, in the means of effectuating price increases, would enable a greater number of producers to participate in the conspiracy, and might help to conceal the collusive nature of their conduct,” the court ruled. Id.
Defendants additionally contested the factual “plus factors” plaintiffs identify in their complaints to support the plausibility of the alleged price-fixing conspiracy. These plus factors include defendants’ use of industry or trade association meetings and public statements as a vehicle to communicate and further the conspiracy, sharing production data through Agri Stats, and an alleged shift among defendants to short-term contracts and purchasers from competitors. Id., at *14.
With respect to the “plus factor” involving trade associations, Defendants argued that plaintiffs’ reliance on opportunities to collude at industry and trade association meetings, and public statements by Defendants’ executives “are insufficient to establish that Defendants reached ‘a meeting of the minds.’” Id., at *14. Judge Durkin held that such allegations must be viewed in context. The court looked to the timing of the trade shows, the fact that defendants made public statements “immediately” thereafter calling for industry-wide production cuts, and then soon after that, both announced and took steps to cut production, as facts that lead to the plausibility of a conspiracy. Id., at *10. Adding to this plausibility, the court held, there was economic evidence that unilateral production cuts would expose a single producer to a loss of market share. “[P]ubicly announced productions cuts,” the court reasoned, “make it more likely that the producer has an agreement from other producers to either cut production as well, or at least to forbear from assuming the vacated market share.” Id, at *15.
Defendants contended that public statements regarding production “‘had purposes wholly apart from conspiracy,’ such as responses to questions from shareholders and the press,” and thus did not make plaintiffs’ conspiracy allegation more plausible. Id., at *15. The court observed that it is “certainly possible for a statement to have multiple purposes or meanings directed at different audiences,” but held that it’s analysis require it to consider “not just the immediate context in which the statements were made, but the larger context of the market and industry actions.” Id. So considered, the court held, plaintiffs sufficiently satisfied their pleading burden to overcome the motion to dismiss on plausibility grounds. Id.
Defendants also argued that the industry reporting service, Agi Stats, was a business “long before the alleged conspiracy period,” and that courts “routinely reject efforts to depict efforts to depict long-standing practices as reflective of a more recent conspiracy.” Id., at *16. But, again, the court noted, this allegation, too, had to be viewed in context. Nowadays, modern technology makes price-fixing possible without phone calls, according to the complaint, which alleges that data sharing via a conduit such as Agri Stats, allowed broiler producers to share their confidential production and pricing information, and to police their conspiracy. The court agreed with plaintiffs that “the information provided by Agri Stats simply facilitated the conspiracy. It was a tool defendants used to help implement their conspiracy. Agri Stats does not have to be a co-conspirator or a secret to play this alleged role, [possibly] unwittingly,” the court held. Id.
Critically for plaintiffs, Judge Durkin also denied another defense argument, that Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007) requires courts to reject plaintiffs’ conspiracy claims “if there are ‘obvious alternative explanation’ for why some individual Defendants would elect to lower output.’” Id., at *17. “But Twombly does not stand for the proposition that the mere existence of an alternative explanation for Defendant’s conduct serves to destroy the plausibility of Plaintiffs’ conspiracy claim,” the Court ruled. Id. “Contrary to Defendants’ argument, the Supreme Court did not intend for courts to weigh the plausibility of a plaintiff’s conspiracy claims against the plausibility of defendants’ alternative explanation for their conduct.” Id.
Here, against plaintiffs’ allegations of conspiracy, Defendants argued that “to the extent plaintiffs have alleged production cuts, the cuts were a product of high feed costs and the Great Recession.” Id., at *18. “Both Plaintiff’s allegation of conspiracy, and Defendants’ innocent explanation, could be described as plausible,” the court found. Id. But, “[b]y asking the Court to choose its [sic] innocent explanations over Plaintiffs’ claims, Defendants are asking the Court to undertake a weighing of evidence that is not appropriate at the pleading stage, and must be rejected.” Id. “Thus, Defendants’ alternative explanations do not undermine the plausibility of Plaintiff’s conspiracy claims,” the court held. Id.
The district court decision in In re Broilers was not a wholesale win for the plaintiffs. The court dismissed certain state law claims – including those asserted under Arkansas and Wisconsin State antitrust and consumer protection laws – finding that those claims were either barred by Illinois Brick, or do not otherwise afford remedies to indirect purchasers for alleged price-fixing activity.
Judge Durkin’s opinion denying motions to dismiss in In re Broilers provides valuable insight into antitrust price-fixing conspiracies alleging concerted action to reduce production or supply in an effort to support or increase prices. Additionally, the decision follows prior Seventh Court precedent, including Swanson v. Citibank, N.A., 614 F.3d 400, 404 (7th Cir. 2010), which holds that “‘[p]lausibility’ in [the legal pleading context under Twombly] does not imply that the district court should decide whose version to believe, or which version is more likely than not…. [I]t is not necessary to stack up inferences side by side and allow the case to go forward only if the plaintiff’s inferences seem more compelling than the opposing inferences.” It also provides guidance on pleading conduit theories of conspiratorial communications.
U.S. Supreme Court Grants Certiorari Review of Second Circuit's American Express Opinion on Market Definition in Credit Card Industry
Harrison (Buzz) Frahn
Elizabeth H. White
Michael R. Morey
Simpson Thacher & Bartlett LLP
In October, the U.S. Supreme Court granted a petition for writ of certiorari submitted by several states in response to the Second Circuit’s September 2016 decision in United States v. American Express Co., 838 F.3d 179 (2d Cir. 2016). The case, Ohio v. American Express Co., No. 16-1454, has the potential to impact the transaction fees that credit card companies charge merchants, which totaled more than $52 billion in 2014, and the prices of everyday goods. The case also may provide the Supreme Court an opportunity to clarify its “rule of reason” jurisprudence applicable to alleged violations of Section 1 of the Sherman Act.
In 2010, the Department of Justice and seventeen states sued American Express Company and American Express Travel Related Services Company (“Amex”) in the U.S. District Court for the Eastern District of New York for alleged violations of Section 1 of the Sherman Act. They alleged that the nondiscriminatory provisions (“NDPs”) that Amex includes in its Amex card acceptability agreements with merchants are unreasonable restraints on trade. The NDPs prohibit merchants from encouraging shoppers to pay with non-Amex credit cards, such as MasterCard or Visa, which impose lower transaction fees on the merchants.
The district court sided with the plaintiffs and permanently enjoined Amex from using these NDPs in its card acceptability agreements with merchants. United States v. American Express Co., No. 10-cv-4496, 2015 WL 1966362, at *1 (E.D.N.Y. Apr. 30, 2015). In ruling against Amex, the district court recognized that the credit card industry operates as an interdependent, “two-sided platform” involving two markets: (1) a market for credit card issuance to consumers by the credit card companies, and (2) a network services market, in which merchants obtain the ability to accept certain credit cards and in exchange pay credit card companies a transaction fee every time a customer uses their cards. United States v. American Express Co., 88 F. Supp. 3d 143, 151 (E.D.N.Y. 2015). Despite the two-sided nature of the platform, however, the district court defined the relevant market in the case to be only the network services market for merchants. Id. Applying the rule of reason doctrine for alleged violations of Section 1 of the Sherman Act, the district court concluded that Amex’s NDPs unreasonably restrained trade because (1) they stifled competition among credit card companies over the transaction fees charged to merchants and (2) Amex failed to establish any procompetitive benefits inuring to merchants or shoppers from the NDPs. Id. at 151-52.
Amex appealed and the Second Circuit reversed the district court’s decision. American Express Co., 838 F.3d 179, 206-07. According to the Second Circuit, the two-sided nature of the credit card industry required broadly defining the relevant market to include both the card issuance market for consumers and the network services market for merchants. Id. at 200. In particular, the Second Circuit concluded that the district court’s market definition was erroneous “because the price charged to merchants necessarily affects cardholder demand, which in turn has a feedback effect on merchant demand (and thus influences the price charged to merchants).” Id.
After redefining the market, the Second Circuit held that the burden of proving that Amex’s NDPs were anticompetitive under the rule of reason doctrine required the plaintiffs to show not just that the NDPs had anticompetitive pricing effects on the merchant side, but also that those anticompetitive effects outweighed any benefits on the cardholder side. Id. at 206-07. Only after satisfying this burden, the Second Circuit reasoned, would the burden shift to Amex to establish procompetitive benefits. Id. Because the plaintiffs failed to carry their burden, the Second Circuit reversed. A more detailed summary of the district court’s and Second Circuit’s opinions can be found in the October 2016 E-Brief.
On June 2, 2017, eleven of the original seventeen state-plaintiffs petitioned for certiorari review of the Second Circuit’s opinion. The question presented is whether, under the rule of reason, the states’ showing that Amex’s NDPs stifle price competition on only the merchant side of the credit card platform—without a showing that those anticompetitive effects outweigh benefits on the cardholder side—suffices to prove anticompetitive effects and therefore shifts to Amex the burden of establishing any procompetitive benefits inuring from the NDPs.
Petitioners made three arguments in favor of certiorari: (1) the need for guidance in applying the rule of reason, (2) conflict between the Second Circuit’s decision and past Supreme Court antitrust guidance, and (3) the issue’s impact on the national economy and consumer welfare. Each will be addressed in turn.
Need for Guidance in Applying the Rule of Reason
Petitioners first argued that certiorari was warranted because of the increasing need for the Supreme Court’s guidance in applying Section 1 of the Sherman Act’s rule of reason doctrine. Petition for Writ of Certiorari (“Pet.”) at 12. They argued that, while the Supreme Court’s recent decisions interpreting Section 1 have addressed the threshold issue of what framework should apply in different cases—the per se rule, quick look doctrine, or rule of reason—“none of the Court’s recent cases has explained how the rule of reason should operate in practice once the Court decides that the rule applies.” Id. at 14-15. A full rule of reason analysis “applies on a restraint-by-restraint basis to distinguish those that ‘may suppress or even destroy competition’ from those that ‘merely regulate and perhaps thereby promote competition.’” Id. at 13 (quoting Bd. of Trade of Chi. v. United States, 246 U.S. 231, 238 (1918)).
According to petitioners, “the Court has provided almost no specifics to assist in deciding concrete cases, leaving lower courts with no clear standards.” Pet. 15 (internal quotation marks omitted). The lack of guidance has “engender[ed] uncertainty for all sides, making a rule-of-reason case one of the most costly procedures in antitrust practice.” Id. at 16 (internal quotation marks omitted). Indeed, petitioners argued that in their case, “[y]ears of litigation that were financed through taxpayer dollars were wasted by the rule of reason’s uncertainties.” Id. at 17.
Amex argued in opposition that the Court’s guidance in applying the rule of reason doctrine was unnecessary because the question presented was fact bound, unlikely to have broad significance for future cases, and had not sufficiently percolated through the lower courts. Brief for American Express in Opposition (“Opp.”) at 26. Amex also argued that the Court has chosen to leave “the particulars” of rule of reason analyses in specific cases “to the lower courts to apply in the varying contexts presented to them.” Id.
Conflict with the Supreme Court’s General Antitrust Guidance
Petitioners also argued that the Second Circuit’s decision “conflicts with general antitrust guidance that th[e] Court has provided.” Pet. 18. In particular, petitioners argued that the Second Circuit’s broad market definition, which included the market for card issuance to consumers and the network services market for merchants, conflicted with the Supreme Court’s applicable market definition test, which analyzes “whether a product or service is ‘reasonably interchangeable’ with the product that is at issue in the specific antitrust case.” Id. at 19 (quoting United States v. Grinnell Corp.,384 U.S. 563, 571 (1966)).
Because Amex’s services to merchants (e.g., Amex card acceptability and imposed transaction fees) are distinct from its services to cardholders (e.g., card issuance, member benefits, fraud protection, etc.), petitioners concluded that the Second Circuit’s definition conflicted with the Supreme Court’s market definition guidance that requires the markets to be “reasonably interchangeable.” Pet. 19-20. Petitioners also asserted that the Second Circuit’s market definition conflicted with Supreme Court precedent, in which the scope of the market in cases involving two-sided or multi-sided platforms was limited to just one side of the platform. Id. at 21-24 (citing Times-Picayune Publ’g Co. v. United States, 345 U.S. 594 (1953) (relevant market included only sales to newspaper advertisers, not to both advertisers and readers) and NCAA v. Bd. of Regents of the Univ. of Okla., 468 U.S. 85 (1984) (relevant market analysis addressed effects of restricting number of college football games aired only on broadcasters, not on broadcasters, viewers, advertisers, and content providers).
Petitioners further argued that by requiring them to demonstrate that the anticompetitive effects on merchants outweighed any benefits to cardholders, the Second Circuit “effectively shifted to the Government the burden of disproving any procompetitive benefits for the anti-steering provisions when identifying their anticompetitive effects.” Pet. 24. This holding, petitioners argued, conflicts with the Supreme Court’s cases providing that the defendant bears the burden of establishing the procompetitive justifications for a restraint once the plaintiff establishes anticompetitive effects. Id. at 24-25(citing FTC v. Actavis, Inc., 133 S. Ct. 2223, 2236 (2013) and Cal. Dental Ass’n, 526 U.S. at 788).
Amex first asserted in response that the Second Circuit’s market definition did not conflict with Supreme Court precedent because the definition accounted for the “commercial realities” posed by the unique nature of the service that Amex and its competitors offer, which is “bringing cardholder customers together with merchant customers for ordinary transactions.” Opp. 14-15. Amex pointed to Supreme Court precedent establishing that “it is appropriate ‘to combin[e] in a single market a number of different products or services whether that combination reflects commercial realities.’” Id. at 16 (quoting Grinnell, 384 U.S. at 572).
Amex also sought to bolster the Second Circuit’s holding by arguing that “[u]nder the rule of reason, a plaintiff always bears the burden to demonstrate competitive harm in ‘the product market as a whole.’” Opp. 23 (quoting Cont’l T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36, 45 (1977). Because the relevant market included services to both merchants and cardholders, “the interdependence of merchant and cardholder demand requires assigning burdens as the court of appeals did.” Opp. 24.
Impact on National Economy and Consumer Welfare
Petitioners finally pointed to the impact of the question presented on the national economy and consumer welfare. Because the U.S. credit card market is the world’s second-largest pool of unsecured debt and involves roughly $2.4 trillion in purchase volume, petitioners argued, “a circuit in New York should not have the final say over the prices of everyday retail transactions across the whole country.” Id. at 25-27. Moreover, petitioners cited to the Court’s recognition that “Congress designed the Sherman Act as a consumer welfare prescription” and argued that Amex’s NDPs have anticompetitive effects that promote economic inefficiencies paid for by consumers. Id. at 30 (quoting Reiter v. Sonotone Corp., 442 U.S. 330, 343 (1979). In particular, petitioners argued that Amex’s NDPs decrease competition between credit card companies on the merchant side because “merchants cannot steer cardholders from high-cost cards to low-cost cards” like Visa and MasterCard, which allows the credit card companies to increase merchant fees, thereby resulting in higher consumer product prices. Pet. 33.
Amex responded that potential impact on the national economy does not justify certiorari review unless there is a legal issue at play. While the Court’s review is sought in many cases involving economic significance, Amex argued, “the Court seeks to hear matters of recurring legal importance.” Opp. 29-30.
On October 16, 2017, the Supreme Court granted certiorari. Notably, the United States, which was the lead plaintiff before the district court and Second Circuit below, filed a brief opposing certiorari, arguing that the question presented did not warrant review because it had not percolated sufficiently throughout the lower courts.
The petition drew a wide variety of amicus briefs—eight in all—from entities and interest groups such as the Retail Litigation Center, Inc., Southwest Airlines Co., and a group of more than two dozen law professors. The widespread interest in this case is likely a result of the fact that two-sided and multi-sided platforms, such as search engines, ride sharing, e-commerce, rental exchanges, and electronic payments, are becoming increasingly common. The Court’s decision may therefore have a broad impact on businesses and consumers alike.
Briefing in the case is expected to get underway in December and conclude early next year.
Harrison Frahn, William Pilon, Steven McLellan
Simpson Thacher & Bartlett LLP
On September 12, 2017, the United States District Court for the Central District of California dismissed an antitrust complaint against Biogen Inc. (“Biogen”) on the grounds that the Plaintiff, Ixchel Pharma, LLC (“Ixchel”), lacked antitrust standing because it had not suffered an injury to competition. Ixchel Pharma, LLC v. Biogen Inc., No. 2:17-00715 WBS EFB, 2017 WL 4012337 (E.D. Cal. Sept. 12, 2017). The District Court’s decision relied on and expanded a recent Third Circuit holding that a pharmaceutical company that out-licensed products, rather than producing or distributing the products themselves, was not injured by conduct that reduced competition in the downstream market for the licensed product.
The Ixchel decision is important, in that it highlights the importance of pleading antitrust injury in cases involving Actavis-type reverse payment settlements in the pharmaceutical market.
Ixchel, a biotechnology company, alleged that it was working to develop a drug to treat a neurological disorder, Friedreich’s ataxia, using the active ingredient dimethyl fumarate (“DMF”). Ixchel, 2017 WL 4012337, at *1. Ixchel did not have the resources to develop the drug on its own, and so it entered into a Collaboration Agreement with Forward Pharma FA ApS (“Forward”) to develop the drug. Id. Based on the agreement, Forward would investigate the feasibility of conducting clinical trials for the drug and, if feasible, conduct and pay for the trials. Id. After the trials, Forward had sole discretion whether or not to seek FDA approval. Id. If FDA approval were sought and obtained, Forward would manage and pay for manufacturing and commercialization of the drug with Ixchel’s assistance, and Ixchel would be entitled to royalties from drug sales. Id.
Biogen marketed the drug Tecfidera, which also used DMF as an active ingredient, to treat a different neurological disorder, multiple sclerosis. Id. Doctors also prescribed Tecfidera “off-label” to treat a variety of other neurological disorders, including Friedrich’s ataxia. Complaint ¶ 19. At the relevant time, Tecfidera was the only FDA-approved drug containing DMF for treating neurological disorders in the United States. Ixchel, 2017 WL 4012337, at *1.
In October 2016, Forward determined that it was feasible to conduct clinical trials for the Ixchel DMF drug. Id. Forward and Ixchel began preparing the drug for clinical trials. Id. However, at the same time, Biogen and Forward were involved in an intellectual property dispute over the ownership of intellectual property rights relating to the use of DMF as a therapeutic. Id. Biogen and Forward settled this dispute in January 2017. Id. As a condition of the settlement, Forward agreed to terminate its contract with Ixchel regarding developing a DMF drug for Friedreich’s ataxia in exchange for a $1.25 billion settlement payment from Biogen. Complaint ¶ 32. Subsequently, Forward terminated its agreement with Ixchel and ceased working with Ixchel on the clinical trials. Ixchel, 2017 WL 4012337, at *2. Ixchel was unable to find a new partner to develop its DMF drug. Id.
Ixchel sued Biogen, claiming that its payment to Forward in exchange for terminating the agreement with Ixchel stifled competition in the market for DMF drugs. Id.
The Antitrust Injury Requirement
The requirement to establish antitrust injury was established by the Supreme Court’s decision in Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 489 (1977). The plaintiffs in Brunswick alleged that Brunswick, the largest manufacturer of bowling equipment, was harming competition by acquiring and operating a number of failing bowling alleys that otherwise would have gone out of business. Id. at 480. The plaintiffs, operators of competing bowling alleys, claimed that they were entitled to damages for the increased profits they would have captured if the bowling alleys acquired by Brunswick had gone out of business. Id. at 481. The plaintiffs won at trial and on appeal to the Third Circuit. Id. at 481-82. However, the Supreme Court unanimously reversed, holding that the plaintiffs must prove “antitrust injury, which is to say injury of the type the antitrust laws were intended to prevent and that flows from that which makes defendants’ acts unlawful. The injury should reflect the anticompetitive effect either of the violation or of anticompetitive acts made possible by the violation.” Id. at 489. The Brunswick Court was concerned with plaintiffs who sought to use the antitrust laws to reduce competition. As the Brunswick Court noted, compensating plaintiffs because competition remained robust would be “inimical to the purposes of [the antitrust] laws.” Id. at 488.
Lower courts have interpreted Brunswick’s antitrust injury requirement to limit standing to consumers and competitors, with a narrow exception for third parties whose injuries are “inextricably intertwined” with the injury to competition. Recently, in Ethypharm S.A. France v. Abbott Laboratories, 707 F.3d 223 (3d Cir. 2013), the Third Circuit addressed the application of the antitrust injury requirement to a foreign pharmaceutical company, Ethypharm. The company agreed to supply Antara, a drug used to lower cholesterol, to a third party, Reliant, for distribution in the United States market. Id. at 226. Their agreement provided that Reliant was responsible for obtaining all regulatory approvals for Antara. Id. Reliant obtained regulatory approval for Antara, but then became involved in a patent dispute over the drug with Abbott Laboratories, which distributed a similar drug. Id. at 227-28. To settle the suit, Reliant agreed to pay royalties to Abbott and agreed to certain restrictions on any assignment of the Antara program. Id. at 228. The restrictions precluded Reliant from selling or assigning its rights to Antara to a number of large pharmaceutical companies, and provided for an increase in the royalties due to Abbott if the Antara program were sold or assigned to any other party. Id. at 228-29.
A few months later, Reliant sold its interests in Antara to a small pharmaceutical company that did not successfully market Antara and subsequently declared bankruptcy. Id. at 229-30. Ethypharm sued Abbott, alleging that the settlement between Abbott and Reliant forced the sale of Antara to an ineffective competitor, which caused the marketing of Antara to fail. Id. at 230. The District Court granted summary judgment for Abbott, holding that Ethypharm had not presented sufficient evidence that Abbott’s allegedly anticompetitive conduct had caused Ethypharm’s injuries. Id. at 231. The Third Circuit affirmed, holding that Ethypharm had failed to establish antitrust injury. The Third Circuit explained that, under Brunswick as interpreted by its own precedent, antitrust injury is “limited to consumers and competitors in the restrained market and to those whose injuries are the means by which the defendants seek to achieve their anticompetitive ends.” Id. at 233. The court reasoned that Ethypharm was not a competitor of Abbott because Reliant, not Ethypharm, was the agreed distributor of Antara in the United States. Id. at 236. Ethypharm, pursuant to its contract with Reliant, did not seek or hold FDA regulatory approval, and thus could not compete in the United States market. Id. The court stressed that its conclusion was not based on “the general arrangement of manufacturer and distributor [being] problematic,” rather “it is the fact that Ethypharm cannot sell Antara in the United States because of legal barriers particular to the pharmaceutical market, barriers that Ethypharm chose not to surmount.” Id. The Third Circuit also rejected Ethypharm’s argument that its alleged injuries were the means by which Abbott sought to achieve its anticompetitive ends for the same reason: because Ethypharm chose not to participate in the United States market. Id.
The Ixchel Court’s Analysis
The District Court in Ixchel began its analysis by noting that under Ninth Circuit precedent, the antitrust plaintiff, Ixchel, must be a participant in the same market as the defendant, Biogen, to satisfy the antitrust injury requirement. Ixchel, 2017 WL 4012337, at *3. From there, the District Court concluded that Ixchel had not suffered an antitrust injury with relatively minimal discussion. The court noted that Ixchel admitted that it was not a current competitor because “Biogen is currently the only company in the world selling any drug in that market.” Id. Relying heavily on the Third Circuit’s decision in Ethypharm, the District Court concluded that Ixchel was not a potential competitor because, as in Ethypharm, “plaintiff and defendant were not competitors in a particular drug market where the plaintiff gave a drug’s manufacturing and development rights to a third party and the third party bore the risk and expense of seeking FDA approval.” Id. In short, the District Court held that, as a matter of law, Ixchel is not a potential competitor in the U.S. drug market because it passed “on to Forward the expense and risk of competing in the U.S. DMF drug market.”
Ixchel also argued, as did the plaintiff in Ethypharm, that it suffered an antitrust injury because “the injury [plaintiff] suffered was inextricably intertwined with the injury the conspirators sought to inflict” and the harm “was a necessary step in effecting the ends of the alleged illegal conspiracy.” Id. Again, the District Court relied on Ethypharm, rejecting Ixchel’s argument because Ixchel “had willfully chosen not to enter the U.S. market for a specific drug and this exception is largely limited to instances where plaintiff and defendant are in the business of selling goods in the same relevant market.” Id. Interestingly, the District Court noted that the “inextricably intertwined” doctrine applies when denying standing would “leave a significant antitrust violation undetected or unremedied,” but did not engage in any analysis of who, if not Ixchel, could bring the claims in this case. Id.
A key difference between Ixchel and Ethypharm that went unremarked by the district court was that the allegedly anticompetitive settlement in Ixchel was similar to a “reverse payment” settlement, where a patent holder pays an alleged infringer to take or keep an infringing product off the market. The Supreme Court recently held in FTC v. Actavis, 133 S. Ct. 2223 (2013) that reverse payment settlements can constitute anticompetitive conduct under certain circumstances. Although not entirely on all fours with the more common brand/generic reverse payment settlements addressed in Actavis, the settlement in Ixchel did bear certain important similarities. Chief among these is the $1.25 billion payment from Biogen, the purported holder of the patent rights, to Forward to purchase Forward’s agreement and cause Forward to back out of its deal with Ixchel and thereby prevent, or at least seriously delay, the launch of a potentially competitive DMF product. In contrast, the settlement in Ethypharm involved a more traditional settlement payment where the alleged infringer agreed to pay royalties to the patent holder on account of continued sales of the product.
Given the Actavis decision, there seems to be some tension between the District Court’s decision in Ixchel and the rationale animating the result in Brunswick. Brunswick imposed an antitrust injury requirement to prevent competitors from using the antitrust laws to reducecompetition. In contrast, Ixchel alleges that the agreement between Biogen and Forward prevented an increase in the number of competitors that otherwise would have resulted. Taking Ixchel’s allegations at face value, they sought to remedy an agreement between two competitors to reduce the number of competing drugs in the market. An agreement between competitors to eliminate one competing product seems to be the exact type of harm that the antitrust laws are intended to prevent. On the other hand, a motivating concern behind Actavis was the bottleneck created under the Hatch-Waxman Act when the ‘first-filer’ generic settles with the branded company and thereby keeps all other generics from being approved. This market effect did not appear to be at issue in Ixchel (or Ethypharm).
The Ixchel decision reflects that courts may interpret the antitrust injury requirement narrowly, often limiting claims to direct participants in the market. Before bringing antitrust claims, plaintiffs will want to carefully evaluate their role in the market to understand whether they can fairly cast themselves as customers or competitors of the defendants for antitrust injury purposes, and to recognize that a licensing arrangement may affect available options and remedies.
Elizabeth C. Pritzker
Pritzker Levine LLP
On August 14, 2017, the Superior Court of California, County of San Francisco granted a motion to certify a class of California self-funded health plans and state agencies in an unpublished opinion in UFCW & Employers Benefit Trust v. Sutter Health, Case No. CGC-14-538451.
UFCW, a healthcare benefits trust, alleges that Sutter Health and its affiliated corporate entities violated California’s Cartwright Act and Unfair Competition Law by illegally inflating hospital pricing and compelling provider networks to enter into anticompetitive healthcare provider agreements. The court granted plaintiffs’ motion for class certification while acknowledging that the “landscape of th[e] case, with its many services, prices, and discounts” presented a “complex economic picture.” Order at 9.
According to plaintiff’s complaint, millions of people in Northern California enroll in group health plans providing access to healthcare services from a select group of healthcare providers (including hospitals) at established rates. The benefits are paid either by the employer or a healthcare benefits trust, such as UFCW. So-called “network vendors” negotiate healthcare providers for the prices of the services and products they sell, and assemble the provers into large provider networks. Plaintiff and similar entities then contract with network vendors to obtain access to their provider networks and, consequently, their negotiated prices for healthcare services. See Order at 1-2.
Sutter is the largest healthcare provider in Northern California. According to plaintiff’s complaint, the five major network vendors in California re Blue Shield of California, Anthem Blue Cross, Aetna, Cigna and United Healthcare. UFCW alleges that Sutter uses its dominant economic power to compel these network vendors to agree to anticompetitive terms in their provider agreements. These agreements contain (1) non-par contracted provisions (or “all or none” provisions), (2) anti-tiering provisions through which Sutter refuses to participate in narrow networks, and (3) provisions that block price transparency. Order at 2. According to UFCW, these agreements constrain the types of provider networks that the network vendors can offer to their customers, and consequently harm UFCW and similarly situated self-funded payors, who must pay substantially inflated prices for their enrollees’ healthcare. Id. UCFW filed a class action alleging these actions by Sutter and its affiliated restrain competition and result in inflated prices for health care services and products, in violation of the Cartwright Act, California’s state antitrust statute.
UFCW moved to certify a class of self-funded health plans that are “citizens of California” or “arms of the State of California” that compensated Sutter for acute care hospital services or ancillary products, from 2003 to the present, at prices set by contracts between Sutter and Aetna, Anthem, Blue Shield, Cigna, and United Healthcare (also known as PacificCare). Order at 2. Before tackling the class certification question under CCP section 382 (California’s equivalent of FRCP 23), the court addressed and rejected Sutter’s efforts to discredit UFCW’s definition of the relevant market. Sutter had attempted to argue that the relevant market is one in which consumers might readily complete for services offered by competing non-Sutter hospitals. See id at 6. The court explained that this characterization ill-described the market plaintiff alleges in this case. Here, ‘[p]atients are not class members,” the Court said. Id. “The market is available to Network Vendors who are ‘in the market’ as it were for networks or collections of services available at hospitals across California. Class members sign up for the choices Network Vendors have been offered (citation omitted).” Id at 7. Thus, “[u]nder plaintiff’s theory of the case, it doesn’t matter if an x-ray is cheaper at a non-Sutter hospital; if plaintiffs are right on the merits, the patient will still go to the (assertedly) more expensive Sutter hospital for the x-ray as a function of the restrains at the hospital level.” Id at 6-7 (italics and parenthetical in original). Within this market, the court held, UCFW “has evidence that Sutter is sufficiently pervasive in the areas over which plaintiffs must have access that it is not possible to have a plan that excludes Sutter. Id.
Turning to the section 382 factors for class certification, the court found the class of over 1500 California self-funded health plans was sufficiently numerous. The Court also found that class members could be ascertained based on available insurance records, even though some “individualized inquiry may be needed to identify some of the class members.” Order at 11. The Court found the class to be sufficiently ascertainable because the potential class members themselves would “be able to determine whether or not why belong in the class.” Order at 10.
Noting that “impact is often the key issue” in antitrust cases, the court went on to address predominance. Order at 15. Plaintiffs’ theory of liability is that “Sutter implemented its anticompetitive scheme through substantially identical contract provisions with Network Vendors that restricted their ability to offer narrow networks, tiered products, and transparency to the self-funded health plans.” Id at 11. The evidence presented by UFCW revealed that “Network Vendors (and, consequently, their self-funded payor members) were subject to the same or substantially similar restrictive contract provisions with Sutter, which consequently inhibited price competition in the marketplace.” Id at 14 (parenthetical in original). “The nature and circumstances of the various provider agreements at issue,” the court found, “raise common factual and legal issues for all self-funded payors who paid for healthcare services under these agreements.” On the issue of impact, the court found “evidence that Sutter’s prices were well above the average in Northern California,” and that “[a]most all class members were subject to those prices.” Id at 15.
The court also found UFCW to be a typical and adequate class plaintiff. “As with other self-funded health plans,” the court held, UCFW “purchased from Sutter at prices set by contract between Sutter and a Network Vendor. The prices were set by contract, with similar pricing across all Network Vendor contracts.” Id at 30. Additionally, the court found, “[a]ll of these prices were impacted by Sutter’s challenged practices, which applied uniformly to all Network Vendors. Id. Although Sutter complained that UFCW’s executive director “doesn’t know much about the suit,” the court did not find this factor disqualifying. Id at 31 (citing In re Processed Egg Prod. Antitrust Litig., 312 F.R.D. 171, 181 (E.D.Pa. 2015) (“as Plaintiffs unabashedly note, ‘A class representative need only possess ‘a minimal degree of knowledge necessary to meet the adequacy standard.’”)).
The court also found the element of superiority was satisfied. “Without the class action thousands of individual suits would be required,” the court held. Order at 32. “Compared to the mass of the possible individual actions, the class action device is superior.” Id.
Much of the court’s opinion (see Order at 15-29) addresses the parties’ competing expert analyses and opinions regarding these positions and whether impact could be proven on a class wide basis. The opinion details the differing economic analyses of the parties, including the expert’s assumptions regarding the relevant market, and the pricing computations and econometric modeling utilized by each side’s experts. “As a matter of econometric and other market analysis,” the court concluded, “it is plausible that either party’s view of the market mechanisms will turn out to be valid. If the jury does not believe that Sutter’s acts illegally constrained competition at the hospital level, or on summary judgment it appears there is no evidence of it, plaintiffs will lose this case.” Order at 20-21. “But in this class certification context,” the court held, “unless Sutter can demonstrate that Sutter’s theory of recovery is infeasible because, for example, it misconstrues the law, I am constrained to follow it.” Id at 21.
Ultimately, the court agreed that based on plaintiffs’ theory of the case, plaintiffs’ expert provided common proof of impact. The court also accepted plaintiffs’ proposed method for calculating an aggregate damages figure for the entire class. The court found that the evidence showed that “Sutter’s prices were well above the average in Northern California” and “[a]lmost all class members were subject to those prices.” Order at 15.
The class certification order in UFCW v. Sutter Health provides a good overview of California state court class certification jurisprudence – this is something of a rarity, as most modern class actions are prosecuted in federal court under CAFA. The case itself may also be “one to watch” for practitioners whose practice areas involve health care mergers, or issues involving potential geographic restraints in the delivery of health care services.
Heather T. Rankie
In a 2-1 decision issued on September 7, 2017, the U.S. Court of Appeals for the Eleventh Circuit reversed dismissal of antitrust and state-law claims brought by automobile body shops against auto insurance companies in Quality Auto Painting Center of Roselle, Inc. v. State Farm Indemnity Co., 870 F.3d 1262 (11th Cir. 2017). The body shops alleged two categories of antitrust violations: (1) horizontal price fixing by setting a “market rate” to benefit insurance companies; and (2) boycott by way of steering insureds away from body shops charging more than the “market rate” by making false or misleading statements about the quality and integrity of such body shops and their work. The body shops also alleged claims for unjust enrichment, quantum meruit, and tortious interference with the shops’ potential business. The majority opinion was authored by Judge Wilson. Judge Anderson concurred in the result of the reversal of the tortious interference claim, and dissented in all other respects.
Horizontal Price Fixing Claim
In addressing the horizontal price fixing claims, the Eleventh Circuit recited the rule that allegations of an inferred agreement must show both “parallel conduct” and “plus factors.” Id. at 1271–72. The court held the body shops plausibly established parallel conduct by alleging the insurance companies utilized the same labor rates and materials costs, as well as employing the same line of tactics to depress those rates and costs. Id. at 1271. The court further held two plus factors supported a plausible inference of an illegal agreement: (1) the presence of “[c]ustomary indications of traditional conspiracy”; and (2) uniform practices. Id. at 1272–74 (alteration in original).
Concerning the first plus factor, the court noted one customary indication of traditional conspiracy is adoption of uniform prices despite variables that would ordinary result in divergent prices. Id. at 1273. As the body shops alleged, the insurance companies utilized State Farm’s market rate, despite variables that would typically result in divergent reimbursement. Such variables included: different market areas, relationships with certain body shops, and the ability to differentiate themselves using higher quality parts and labor. Id. The court held these facts provided a customary indication of traditional conspiracy and contributed to a plausible inference of illegal agreement. Id.
The court also found the second plus factor—uniform practices—supported a finding of illegal agreement. The body shops alleged the insurers required body shops to repair rather than replace faulty parts and to offer concessions or discounts. Id. at 1274. The insurers also made false and misleading statements aimed at forcing compliance with the market rate, such as disparaging the work of non-compliant body shops. Id. The court held that this “collection of tactics” contributed to a plausible inference of an illegal agreement. Id.
The court rejected various arguments against the plausible inference of an illegal agreement. First, the Eleventh Circuit made clear “allegations directly supporting the existence of an agreement, such as form (written or oral) and date of entry, are unnecessary for a plausible claim of horizontal price fixing. In the absence of direct evidence of an agreement, the allegations necessary are those that plausibly establish parallel conduct and further factual enhancement.” Id. at 1274. Second, the court rejected the argument that an agreement to fix a price “ceiling” is not actionable, confirming that agreements to fix maximum prices are per se violations. Id. Third, while the insurance companies argued the plus factors were not properly before the court because their existence was only argued on appeal, the court confirmed the use of the phrase “plus factors” is not necessary to permit the use of such factors on appeal when the body shops had consistently argued the allegations support an inference of illegal agreement. Id.
The majority characterized Judge Anderson’s dissent as “agreeing with the existence of parallel conduct” but “argu[ing] that the proposed plus factors fail to ‘bear the weight attributed to them.’” Id. at 1274 (quoting dissent). Concerning the first plus factor—adoption of uniform prices despite variables that would usually result in divergent prices—Judge Anderson observed that parts necessary for repairs are “ubiquitous, interchangeable, and standardly priced.” Id. at 1284. The majority deemed this as outside “judicial experience” or “common sense,” and also an inference in favor of defendants rather than claimants. Id. at 1275. Judge Anderson also believed the conduct alleged was more akin to “price leadership,” rather than agreement on a particular price, because State Farm’s market rate was not alleged to be a secret and is followed by other insurers. Id. at 1282–84. Concerning the second plus factor—uniformity of tactics related to parts and discounts—the dissent argued these tactics “are among the most common and time-worn methods of increasing corporate profits in any industry” and an inference of prior agreement is not warranted from “the mere fact that several insurance companies adopt policies favoring use of cheaper parts and offering discounts.” Id. at 1285–86. The controlling opinion rejected these arguments, noting they are based on external knowledge about industry practices and “derogat[e] the severity of the tactics alleged in the complaint.” Id. at 1275. For the above reasons, the court reversed dismissal of the body shops’ horizontal price fixing claims.
The court also held the body shops stated a claim for per se violation of boycotting by alleging that the insurers used identical tactics to keep the insureds away from non-compliant shops. Id. at 1276. Judge Anderson dissented, arguing that the tactics were not uniform because insurance companies can choose from an ambit of tactics, analogous to the choice between different transportation types (car, bike, train, etc.). Id. at 1287–88. The majority rejected the analogy because it “belies allegations in the complaint that each tactic was misleading or false” and together the tactics “create an idiosyncrasy, the repetition of which is hardly ‘common.’” Id. at 1276.
State Tort Claims
Finally, the court reversed dismissal of three state tort claims: unjust enrichment, quantum meruit, and tortious interference. The majority disagreed with the district court and the dissent that the body shops’ unjust enrichment claims are based on unsatisfactory bargaining because the body shops knew in advance how much they would be paid. Id. at 1277. The majority held the insurers forced the shops to perform repairs involuntarily at the low market rate, and any dealing between the parties was based on an invalid, unenforceable contract. Id. at 1277–78.The majority further rejected the dissent’s concern that parties could therefore renege on contract terms, because the complaint established no bargaining occurred that could support the existence of an enforceable agreement. Id. at 1278.
As to quantum meruit, the majority held the body shops stated viable claims by alleging receipt of artificial, below reasonable value compensation for their services. Id. at 1278–79. The dissent disagreed because the body shops alleged insurers informed them what they were willing to pay, and the only reasonable expectation from this was that the body shops expected to receive the market rate. Id. at 1293.
As for the tortious interference claims, the court addressed the district court’s concern with the body shops’ “group pleading,” which it believed prevented the shops from tailoring allegations to each state, holding that the allegations were sufficiently tailored to conclude plausibility as to the laws of each state. Id. at 1279. The Eleventh Circuit also held it not fatal that specific allegations were not made as to each defendant or corporate family because uniformity of prices and practices were alleged. Id.
Rafey S. Balabanian and Aaron J. Lawson
Illinois’s Biometric Information Privacy Act (“BIPA”) prohibits – absent informed consent – the collection of “scan[s] of … face geometry.” 740 ILCS 14/10. But the statute expressly does not prohibit the collection of information derived from photographs. Id. Can a scan of face geometry be unlawfully extracted from a photograph? That was the question before the Court in Monroy v. Shutterfly, Inc., 2017 WL 4099846 (N.D. Ill. Sept. 15, 2017). And Monroy, following two other decisions, Rivera v. Google, Inc., 2017 WL 748590 (N.D. Ill. Feb. 24, 2017), and In re Facebook Biometric Info. Privacy Litig., 185 F. Supp. 3d 1155 (N.D. Cal. 2016), concluded that the answer is yes.
Monroy also addressed three other issues that recur frequently in suits under the BIPA: whether a specific application violates the presumption against extraterritoriality, whether a particular application violates the Dormant Commerce Clause, and whether actual damages are required to state a claim under the BIPA. As to the first two issues, the court decided to defer consideration until summary judgment, and as to the latter, the court concluded that actual damages are not required.
I. Scans of Face Geometry
Defendant Shutterfly, Inc., operates a website that allows users to upload, share, and organize digital photos. 2017 WL 4099846, at *1. One feature that Shutterfly offers within this service is the ability to “tag” individuals in photos that are uploaded. Id. In order to make that feature work, Plaintiff Alexander Monroy, alleged, Shutterfly generates and stores “face templates” of individuals who are already tagged in photos uploaded to Shutterfly’s platform, and then compares the faces detected in new photos against that existing database. Id. These face templates, Monroy alleged, consisted of an analysis of “the unique contours of his face and the distances between his eyes, nose and ears.” Id. The process of extracting that data from photographs and generating face templates, Monroy asserted, runs afoul of the BIPA’s prohibition on the collection of scans of face geometry. Id.
Shutterfly’s principal argument was that its creation of face templates from photographs isn’t governed by the BIPA because the collection of any information from a photograph is excluded from the BIPA’s coverage. Id. at *2. A scan of face geometry, Shutterfly argued, had to be collected in person. Id. The Monroy court, like the Rivera and Facebook courts before it, rejected that argument. There was no textual clue, the Court explained, that required limiting the BIPA’s coverage to the in person collection of biometric information. Id. at *3. Furthermore, that kind of limiting construction did not comport with the Illinois legislature’s intent to have the law apply expansively, or its recognition that biometric technology was advancing. Id. at *3-*4. Given the statute’s broad language, and the legislature’s intent, the Court concluded that a scan of face geometry could unlawfully be extracted from a photograph.
That point, it seems, is essentially settled. Monroy, Rivera, and Facebook all reach the same conclusion. Critically, though, no decision addresses what a “scan of … face geometry” actually is. Monroy alleged that Shutterfly’s face templates used information such as the distance between his facial features. From a lay perspective that certainly seems like a scan of face geometry, and Shutterfly’s decision not to contest the sufficiency of those allegations comports with that understanding. But discovery may show that Shutterfly’s algorithms work differently, or that the picture is more nuanced than Monroy alleges. No decision yet has applied the BIPA’s prohibition on the collection of scans of face geometry to a specific method of face recognition technology. That question, it seems, awaits litigants at summary judgment.
II. The Dormant Commerce Clause and Extraterritoriality
Shutterfly also objected that to apply the statute to its face-recognition software would constitute an impermissible application to conduct occurring outside of Illinois. As a statutory matter, Shutterfly invoked Illinois’ presumption against extraterritoriality. As a constitutional matter, Shutterfly urged that application of the BIPA to activity occurring on its California servers would result in Illinois regulating out-of-state conduct in violation of the Dormant Commerce Clause. The court, following the approach taken by Rivera, deferred consideration of these questions until the parties had more fully developed the record. Id. at *8.
That brief ruling (which, as explained below, is almost certainly procedural correct from a procedural standpoint) is likely to be particularly maddening. The crux of the Court’s substantive reasoning appears to have been that it isn’t problematic, at least as a general matter, for Illinois to regulate the collection of biometric information anywhere in the state. Id. at *7. That reasoning makes good sense, though defendants are likely to balk at the consequences.
For instance, Monroy himself is a Florida resident. His connection to Illinois, at least for the purposes of this suit, is that his photo was uploaded—thus enabling Shutterfly’s alleged collection of biometric information—from Chicago. But if no more is required to permit a plaintiff from invoking the BIPA, then nationwide class actions under the BIPA are almost certainly permissible. (Shutterfly will surely argue, as the case proceeds, that any biometric information is harvested on its servers, which may be located around the country. It is not clear from the Monroy court’s discussion that this would be a relevant factual distinction.) From a choice-of-law perspective, at least, a nationwide class-action under an Illinois state law seems problematic, though the Seventh Circuit has repeatedly said that, in the class-action context, choice-of-law questions are best addressed at class certification, not at the motion to dismiss stage. See Morrison v. YTB Int’l, Inc., 649 F.3d 533, 535 (7th Cir. 2011). Morrison also points out that the extraterritoriality analysis contemplated by the Illinois Supreme Court’s decision in Avery v. State Farm Mutual Auto. Insurance Co., 835 N.E.2d 801, 849-55 (Ill. 2006), requires a developed record, and so in the ordinary case won’t be ripe for resolution on the pleadings. Because courts address statutory issues before reaching constitutional issues, defendants wishing to raise extraterritoriality and Dormant Commerce Clause arguments in BIPA cases will need to be prepared to litigate their cases through class certification, if not summary judgment.
The Monroy court’s brief discussion of the Dormant Commerce Clause also likely means that one of the defense bar’s favorite cases to invoke in Internet-related lawsuits can be discarded as obsolete. In American Libraries Ass’n v. Pataki, 969 F. Supp. 160 (S.D.N.Y. 1997), the district court concluded that essentially any state regulation of the Internet is likely to be invalid given the global, interconnected nature of the Internet. The Second Circuit reasoned six years after that that the Internet was likely immune from state-level regulation. Am. Booksellers Found. v. Dean, 342 F.3d 96, 104 (2d Cir. 2003). Though never overruled, those cases have not stood the test of time. Shutterfly invoked those cases in its motion. That the district court in Monroy saw no need even to comment on them speaks volumes about their persuasive value.
III. Actual Damages
Finally, Shutterfly argued, without success, that Monroy’s claim should be dismissed because he had failed to allege any “actual damages.” 2017 WL 4099846, at *8. Whether actual damages are required to state a claim under the BIPA has divided courts. In Illinois, two trial-level courts have concluded that actual damages are not required, while one has disagreed. See Sekura v. Krishna Schaumberg Tan, Inc., 2017 WL 1181420, at *2-*3 (Cir. Ct. Cook Cnty. Feb. 9, 2017) (reviewing debate). An interlocutory appeal is currently pending in the Illinois Appellate Court’s Second District (covering most of northern Illinois), and another interlocutory-appeal petition is currently before the Illinois Appellate Court’s First District (which covers Chicago and Cook County). Hopefully any confusion will be resolved soon.
What is innovative about the Monroy decision, however, is its willingness to entertain the idea that an invasion of privacy is “actual damages. Id. at *9. The court concluded that, as a matter of statutory interpretation, “actual damages” aren’t required under the BIPA, but it left open the door for a holding that an invasion of privacy satisfies this requirement. See also FAA v. Cooper, 566 U.S. 284, 293-94 (2012) (observing that the term “actual damages” has a “chameleon-like quality” such that “[t]he term is sometimes understood to include nonpecuniary harm” but in other contexts “the term has been used or construed more narrowly to authorize damages for only pecuniary harm”). The Illinois decisions all turned on whether pecuniary harm was or was not required. Monroy suggests that that debate may well be beside the point. It will be interesting to see if the Illinois Appellate Courts take Monroy up on this suggestion.
Monroy v. Shutterfly broke little new ground, but its reasoning could have significant consequences in future BIPA litigation. In Monroy, Rivera, and Facebook, two questions of statutory interpretation loom large: (1) What amount of conduct must occur in Illinois for application of the statute to comport with Illinois’s presumption against extraterritoriality, and (2) What type of harm must an individual suffer before they can state a claim under the BIPA? Monroy offers sensible substantive answers to those questions. If those answers hold sway in other cases, litigation will turn to the operation of the technology at issue, a focus that is likely to provide more concrete guidance to companies and consumers moving forward.
Pritzker Levine LLP
On October 18, 2017, the Third Circuit Court of Appeals, in Cottrell v. Alcon Laboratories, et al., Case No. 16-2015, reversed a District Court decision that had dismissed plaintiffs’ entire suit on Article III standing grounds.
In Cottrell, consumers of prescription eye medication allege that manufacturers and distributors of the medication packaged it in such a way as to cause users to waste much of it. The entire action was dismissed by the District Court on the grounds that there was no jurisdiction because, the court found, consumers lacked standing to bring claims of violations of the consumer protection statutes of six states: California, Florida, Illinois, New Jersey, North Carolina and Texas.
Defendants manufacture and distribute prescription eye drop medications used to treat serious medical conditions, including glaucoma, in both brand-name and generic forms. These medications are prepared in liquid form and sold in bottles which contain built-in dropper tips for dispensing the medicine directly into a user’s eye. Plaintiffs are consumers who have been prescribed these eye drops and whom, without these medications, risk blindness or worsening eye sight. Opinion, at 9.
The bottles are pre-packaged with a fixed amount of medication, sold at set prices. The dimensions of the dropper tip dictate the size of the drop dispensed from that bottle. The dropper size is selected solely by defendants and patients do not have the ability to administer less than one full drop into his or her eye or to alter the dropper tip size. Id. at 9.
The Third Circuit noted that a “plethora” of scientific research conducted over the past forty years reveals that an adult has a capacity of approximately 7 to 10 microliters (µL) of fluid per eye. If more than that amount is dispensed into an adult’s eye, the medication is expelled and confers no benefit upon the user, and, in fact, excess medication may enter a patient’s bloodstream via their skin or tear ducts and cause harmful systemic side effects. These studies concluded that the medicinal droppers should therefore administer between 5 to 15 µL per drop in order to safely confer the necessary amount of liquid medication to an adult patient’s eye. Id. at 9.
Plaintiffs allege that defendants manufacture or distribute bottles with large dropper tips so that more fluid is expended with each dose than necessary, thereby wasting a large portion of the medicine. In fact, a 2008 study showed that each defendant’s drop size was more than two to three times the 15 µL recommended size, with some drops being as large as 50 µL. Id. at 10. As a result, they contend, the medications run out more quickly and consumers must pay for more bottles than if the droppers distributed only the necessary microliters of medicine. In one example from the 2008 study which plaintiffs referred to in their complaint, Allergan’s glaucoma drug Alphagan P was sold in a 5 milliliter (mL) bottle, with a large drop size of 43 µL. At that drop size, a patient would go through 18.25 bottles a year if using the medicine as prescribed; three times per day. If the drop size was limited to 16 µL, then a patient would need only 6.46 (or 7) bottles per year. With each bottle having a cost of $104.99 in 2013, the additional costs to patients are significant. Id. at 11-12.
Plaintiffs’ original complaint, filed in September of 2014, alleged that defendants’ manufacture and distribution of these products violated six state consumer protection laws as unfair or unconscionable trade practices. Plaintiffs’ amended complaint was filed in June 2015 in response to the District Court’s order dismissing the original complaint for lack of standing without prejudice to plaintiffs’ ability to cure the deficiencies. The amended complaint cites to scientific literature opining on costs savings by using a smaller drop size and includes charts showing each plaintiff’s relevant expenses. Id. at 14. Defendants again moved to dismiss on the grounds of lack of standing, federal preemption, and failure to state a claim. The District of New Jersey granted the motion and dismissed the action in its entirety, finding plaintiffs lacked standing and did not reach the issues of preemption and sufficiency of plaintiffs’ claims. Id.
Article III Standing Analysis
The Third Circuit Court of Appeal disagreed with the District Court, finding that plaintiffs had met their burden of alleging they had suffered an injury in fact, which was the Article III standing element that the District Court had found plaintiffs failed to establish. Id. at 15.
To sufficiently allege injury in fact, a plaintiff must claim that he or she suffered an invasion of a legally protected interest that is concrete and particularized and actual or imminent, not conjectural or hypothetical. Id. at 17 citing Spokeo, Inc. v. Robins, 136 S.Ct. 1540, 1548 (2016) (quoting Lujan v. Defenders of Wildlife, 504 U.S. 555, 560 (1992). The Court of Appeals noted that “[t]ypically, a plaintiff’s allegations of financial harm will easily satisfy each of these components, as financial harm is a ‘classic’ and ‘paradigmatic form’ of injury in fact”, citing Danvers Motor Co., Inc. v. Ford Motor Co., 432 F.3d 221, 291, 293 (3d Cir. 2005), and was also critical of the District Court for engaging in a generalized abstract discussion which improperly crossed over into a merits analysis. Id. at 17-18. The Third Circuit, in support of its decision, painstakingly addressed each element necessary to confer Article III standing.
1. Invasion of a Legally Protected Interest
The Court of Appeals explained that, in order to conduct the proper analysis to determine whether an injury in fact had incurred, a court must recognize the following: First, whether a plaintiff has alleged an invasion of a legally protected interest “does not hinge on whether the conduct alleged to violate a statute does, as a matter of law, violate the statute.” To undertake an analysis in this manner would improperly “collapse” courts’ evaluation of standing with a Federal Rule of Civil Procedure 12(b)(6) merits evaluation, and every losing claim would be dismissed for lacking standing in the first place. Id. at 19. Second, the Supreme Court “has repeatedly recognized that financial or economic interests are legally protected interests for purposes of [standing].” Id. at 20 [internal citations omitted]. Third, a legally protected interest can arise from the Constitution, from the common law, or “’solely by virtue of statutes creating legal rights, the invasion of which creates standing’”. Id., citing to Lujan, supra, 504 U.S. at 576-578. Fourth, the interest asserted is related to the injury in fact, and is not just a byproduct of the litigation. Id., at 21, citing to Vermont Agency of National Resources v. United States, 529 U.S. 765, 772-73 (2000).
Plaintiffs’ claims, the Court of Appeals found, “fit comfortably” within these categories: plaintiffs’ claim economic interests: the money they had to spend on medication that was impossible to use in a way that would not incur that spending; they seek monetary compensation for defendants’ conduct; and their claims arise from state consumer protection statutes that provide monetary relief to those damaged by the business practices that violate those statutes. Id. at 21.
Defendants’ arguments relied heavily on a recent Seventh Circuit decision, Eike v. Allergan, Inc., 850 F.3d 315 (7th Cir. 2017), that concerned materially identical allegations against many of the same defendants. The Seventh Circuit, like the District of New Jersey, concluded that plaintiffs had failed to allege a legally protected interest and dismissed their claims for lack of Article III standing.
In Cottrell, the Third Circuit opines that the Seventh Circuit got it wrong because it incorrectly focused solely on the “fraudulent” business practices elements of states’ consumer protection statutes, wholly ignoring their unfair or unlawful conduct prongs which also constitute violations, and which the Eike plaintiffs had actually brought their claims under. Id. at 22-26. The Third Circuit also believes that the Eike decision improperly “flips the standing inquiry inside out, morphing it into a test of the legal validity of the plaintiffs’ claims of unlawful conduct.” Id. at 22-23 (“[b]ut as we have already emphasized, a valid claim for relief is not a prerequisite for standing”).
2. Concrete Harm
The next element necessary to effectively plead injury in fact is whether the injury is concrete, meaning it is real, actually exists, and is not abstract. Id., at 26, citing to Spokeo, 136 S.Ct. at 1548. Plaintiffs satisfy this element because they allege that defendants’ violations of the consumer protection statutes caused each plaintiff tangible, economic harm. Id. at 27.
3. Particularized Injury
A third and distinct component of pleading an injury in fact is that the injury must also be particularized, i.e. that each plaintiff be injured in a particular way. Id. at 27. The Court of Appeals held that, because each plaintiff alleges that he or she personally incurred economic harm in purchasing medication that was impossible for him or her to use, “[t]here can be no dispute that this harm is particularized.” Id. at 27.
4. Actual or Imminent Damages
Lastly, the Third Circuit held that the plaintiffs met the fourth element of pleading an injury in fact because the Cottrell plaintiffs sufficiently allege actual or imminent, as opposed to conjectural or hypothetical, damages. The amended complaint proposes two theories to measure plaintiffs’ financial harm: (1) the measure of the cost difference between what they would have paid for their course of medication from smaller tipped bottles and what they actually paid for the larger tipped bottles they bought (called the “pricing theory”); or (2) the value of total overflow from each drop administered that was impossible for them to use (the “reimbursement theory”). Id. at 28. The value of damages works out to be the same under both theories. The Court of Appeal chided the District Court for rejecting the “pricing theory” as being too speculative and for misinterpreting plaintiffs’ explanations of their economic harm. Id. at 28-29. Plaintiffs’ amended complaint, in fact, cites specific examples, the 2008 scientific study, and “numerous other scientific studies”, which support that, if the drop size were limited by changing the size of the dropper, then more doses could be dispensed from a single bottle, and a patient would require less bottles over the course of their treatment. Id. at 29-30. Contrary to the District Court’s determination, this theory does not rely on speculation as to whether defendants would have reduced its bottle sizes and attendant prices. Regardless of whether the cost of the bottles changed, patients would require less of them, thereby saving money. Id. Furthermore, these were injuries plaintiffs allege already occurred, for medication they have already used, and therefore were not conjectural. Id. at 28. As to the reimbursement theory, the District Court rejected it outright because it is not a theory previously recognized in fraud cases. However, the Cottrell plaintiffs did not assert fraudulent conduct as the basis of any of their consumer claims, as discussed above, and therefore this reasoning was not appropriate in the context of the Cottrell case. Id. at 31.
Defendants Falcon, Sandoz, and Akorn, who are generic manufacturers, also raised federal preemption on appeal, arguing that the FDA does not permit them to unilaterally change their bottle droppers without approval, and therefore federal impossibility preemption bars plaintiffs’ claims against them. The generics also argued that preemption applies because the FDA requires generic products to have the same bottle design as their brand name equivalents. The Third Circuit noted that plaintiffs argued in response that that some manufacturers have, in fact, changed their drop volumes over time without seeking FDA approval, and that drop sizes already differ between manufacturers.
The Court of Appeal, however, did not otherwise address the preemption arguments, since the District Court had not reached the issue of preemption in its underlying decision. The Third Circuit remanded the case to the lower court for further disposition.
Spokeo’s multi-factor inquiry introduces a fair amount of ambiguity into the Article III analysis. The Third Circuit opinion in Cottrell adds to an increasing line of cases that provide guidance to what plaintiffs must plead to allege injury in fact in cases that involve intangible injuries, post Spokeo.
Peter Huston and Angelo Suozzi
Sidley Austin LLP
The Third Circuit recently held that evidence of parallel price increases and other circumstantial evidence was insufficient to show a price-fixing conspiracy, but instead indicated legal “conscious parallelism” by competitors. Valspar Corp. v. E. I. DuPont De Nemours & Co., No. 16-1345, 2017 WL 4364317 (3d Cir. Sept. 14, 2017). The key takeaways:
The market for titanium dioxide – a pigment used in paint and other coatings – is characterized by high barriers to entry and dominated by a handful of firms. Id. *1. Valspar, a large-scale purchaser of titanium dioxide, alleged that a group of titanium dioxide suppliers, including DuPont, conspired to increase prices between 2002 and 2013, resulting in unlawful overcharges. Id.
To support its theory, Valspar pointed to 31 announced parallel price increases among the alleged conspirators over the 12-year period. Id. In the absence of direct evidence of a conspiracy, Valspar alleged circumstantial evidence, including that (1) the suppliers participated in meetings and data sharing through an industry association; (2) the suppliers used industry consultants to funnel information among each other; and (3) there were various internal emails among the suppliers discussing discipline, price increases, and market share. Id. *8-9
The District Court for the District of Delaware granted summary judgment in favor of DuPont in 2016, finding that there was no evidence of an actual agreement to fix prices. Valspar Corp. v. E.I. du Pont de Nemours, 152 F. Supp. 3d 234 (D. Del. 2016).
The Third Circuit’s Opinion: “Conscious Parallelism,” Not Conspiratorial Conduct
The appellate court agreed that the 31 parallel price increase announcements were not indicative of a conspiracy. Instead, the price increases were consistent with “conscious parallelism,” which holds that competitors in an oligopolistic market will raise prices in response to rivals’ price increases, if they believe it will maximize industry profits. Id. *5. Since these parallel price increases did not show anything beyond the “mere interdependence” among suppliers typical to an oligopolistic market, the court found that this evidence was insufficient, without more, to create a reasonable inference of a conspiracy. Id.
To establish a conspiracy, Valspar needed to present sufficient evidence to show that the suppliers exchanged assurances of common action or adopted a common plan. Id. *8. The court found that the circumstantial evidence presented by Valspar was weaker than similar evidence in cases where summary judgment had been granted, and in total failed to raise an inference of conspiracy. Id.
First, the participation by DuPont and other competitors in a data sharing program where anonymized data was shared and redistributed by a trade association was insufficient to show a conspiracy because there was no evidence that price information was collected and the data did not allow suppliers to calculate competitors’ market shares. Id. Relatedly, Valspar’s claim that the alleged conspirators used meetings to communicate pricing plans was insufficient because it only showed opportunity to conspire, but not proof of an actual agreement. Id. *9.
Nor was Valspar’s claim that the conspirators used industry consultants to funnel information among each other probative of conspiracy, but instead was consistent with rational behavior in an oligopoly – suppliers would want to obtain as much information as possible about their competitors. Id. *9. Further, although certain emails among competitors that discussed price and market share raised “some suspicion” of anticompetitive conduct in the court’s mind, the court ultimately found that those emails simply showed that suppliers were implementing expected pricing strategies in response to conscious parallelism. Id. Last, certain below-market inter-competitor sales did not support a theory of profit redistribution, as many sales were made in emergency situations or in connection with cross-licensing agreements. Id. *10.
In total, the court found that the evidence was not “close to showing” that a conspiracy was more likely than not, and affirmed the district court’s verdict. Id.
Dissent: “An Unworkable Burden”
In a strongly worded dissent, Judge Stengel (Chief U.S. District Judge for the Eastern District of Pennsylvania, sitting by designation) found that the majority had imposed an “unworkable burden” for plaintiffs seeking to prove an antitrust price-fixing case with circumstantial evidence. Id. *11-12. The dissent analyzed the circumstantial evidence and found that there were sufficient factual issues to send the case to a jury. Id. In particular, the “sheer number” of parallel price increases and inflammatory language in emails among competitors relating to pricing indicated that there was sufficient evidence of conspiracy to survive summary judgment. Id. *13.
Valspar has filed a petition for rehearing en banc before the Third Circuit Court of Appeals.
Opposite Result Reached In Titanium Dioxide Litigation in Maryland
The import given to circumstantial evidence in a price-fixing case involving an oligopolistic market may depend on the forum in which the case is brought.
Prior to filing suit in the case against DuPont, Valspar opted out of a class action suit in the U.S. District Court for the District of Maryland by a class of titanium dioxide purchasers against DuPont and other suppliers. Although faced with substantially the same record as the Delaware District Court in Valspar, the Maryland District Court denied the suppliers’ summary judgment motion in that case, finding – similar to the dissent in Valspar – that the “sheer number of price increases” and the various inter-competitor communications regarding pricing raised “ample evidence” of conspiracy, such that a jury could conclude that the suppliers agreed to raise prices. In re Titanium Dioxide Antitrust Litig., 959 F. Supp. 2d 799 (D. Md. 2013). The parties settled the class action suit before trial.
The Third Circuit’s ruling in Valspar holds that evidence of mere parallel conduct in oligopolistic markets is insufficient, without more, to establish a price-fixing conspiracy. In light of the Valspar opinion, it will become relatively more difficult for a plaintiff in the Third Circuit to successfully establish an antitrust price-fixing claim through purely circumstantial evidence in an oligopolistic market.
The Third Circuit’s opinion also appears to hold plaintiffs to a higher standard in that circuit to come forward with clear, compelling circumstantial evidence when alleging price fixing in an oligopolistic market.
By their nature, however, antitrust price-fixing cases are highly fact-dependent, and antitrust suits may still be brought by plaintiffs based solely on circumstantial evidence. Such evidence may not only include private communications between competitors, but may also include public statements or announcements made by one competitor that lead to action by others. The impact of such emails and public statements will depend on a variety of fact-specific issues, including the specific subjects of the communication and the timing of the communication in relation to the allegedly collusive actions. Depending on the facts, however, circumstantial evidence alone may be sufficient to survive summary judgment and proceed to trial.
Further, it is clear that courts in different circuits may reach different results in assessing whether circumstantial evidence is sufficient, even when faced with the same set of facts, as evidenced by the competing judgments in the Valspar and Titanium Dioxide cases.
Eric W. Buetzow
On September 17, 2017, Judge Bartle of the Eastern District of Pennsylvania granted partial summary judgement to the FTC in its case against Abbvie, maker of the transdermal testosterone therapy drug, AndroGel, while denying cross summary judgment motions by Abbvie and affiliated entities. FTC v. Abbvie Inc., No. 14-5151, slip op. (E.D. Pa. Sept. 17, 2017).
The FTC asserts that Abbvie unlawfully maintained its monopoly in violation of Section 5(a) of the Federal Trade Commission Act (15 U.S.C. § 45(a)) by initiating sham patent litigation against two competitors, Teva and Perrigo, who were primed to introduce generic products into the testosterone gel market to compete with branded AndroGel. Id. at 1-2. Teva and Perrigo had applied to the FDA for approval of their generic versions of the drug, which use different skin “penetration enhancers” but were otherwise similar to AndroGel. Id. at 9. Abbvie then initiated patent infringement suits against both Teva and Perrigo, alleging infringement of Abbvie’s patent for AndroGel—even though the patent did not list those penetration enhancers used by the generics. Id. at 3-9.Under 21 U.S.C. § 355(c)(3)(C), Abbvie’s filing of the infringement actions automatically triggered a 30-month stay of the FDA approval needed for launch of generic products, thus delaying entry of the Teva and Perrigo products into the market where they stood to compete with AndroGel. Id. at 9.
“Objectively Baseless” Sham Litigation
The FTC sought partial summary judgment pertaining to whether Abbvie willfully acquired or maintained monopoly power by filing sham patent infringement litigation against Teva and Perrigo. Id. at 11. Such conduct does not fall within the protections of the Noerr-Pennington doctrine immunizing lawful petitioning activity. Id. Demonstrating that patent infringement actions are a sham, and thus not protected under Noerr-Pennington, involves proving two sub-elements: (1) the lawsuits are objectively baseless; and (2) the defendants subjectively intended to interfere directly with a competitor’s business interests using government process as an anticompetitive weapon. Id. at 12. The FTC and Abbvie cross moved for summary judgement as to the “objectively baseless” element of the sham litigation claim, while Abbvie’s motion also argued that the FTC cannot prove the requisite monopoly power for illegal monopolization. Id.
As stated by the Supreme Court, litigation is objectively baseless if “no reasonable litigant could realistically expect success on the merits,” or if the defendant lacked a “a ‘reasonabl[e] belie[f] that there is a chance that [the] claim may be held valid.” Id. (quoting Prof’l Real Estate Inv’rs, Inc. v. Columbia Pictures Indus., Inc. (“PRE”), 508 U.S. 49, 57, 62-63 (1993)). Abbvie argued that, even though its patent did not expressly include the skin penetration enhancers used in Teva’s and Perrigo’s generic formulations, the patent infringement suits were justifiable based on the doctrine of equivalents, which provides that “[t]he scope of a patent is not limited to its literal terms but instead embraces all equivalents to the claims described.” Id. at 13-14 (quoting Festo Corp. v. Shoketsu Kinzoku Kogyo Kabushiki Co. (“Festo VIII”), 535 U.S. 722, 732 (2002)).
The FTC did not dispute that the penetration enhancers used by Perrigo and Teva were insubstantially different from that used in AndroGel 1% and disclosed in the patent. Rather, the FTC argued that Abbvie was legally precluded from claiming infringement for equivalents under the doctrine of prosecution history estoppel, since the public patent prosecution history clearly and affirmatively demonstrated that Abbvie surrendered any claim of protection for the penetration enhancers used by Teva and Perrigo. Id. at 14.
“Prosecution History Estoppel” Doctrine Precluded the Claimed Basis for Litigation
In general terms, the doctrine of prosecution history estoppel balances rights of patentees with the interest of the public in understanding the limits of the patent so that the public may “be encouraged to pursue innovations, creations, and new ideas beyond the inventor’s exclusive rights.” Id. at 15 (quoting Festo VIII, 535 U.S. at 731-32). The purpose is to hold the patentee to the representations made during the application process and to the inferences that may reasonably be drawn from narrowing amendments made in obtaining the patent. Id.
The first step in determining whether prosecution history estoppel bars defendants from claiming the doctrine of equivalents is for the court to determine that “an amendment filed in the Patent and Trademark Office (“PTO”) has narrowed the literal scope of a claim,” considering the entire application history. Id. at 16-17 (quoting Festo Corp. v. Shoketsu Kinzoku Kogyo Kabushiki Co. (“Festo IX”), 344 F.3d 1359, 1366 (Fed. Cir. 2003)). The court found that through multiple amendments, Abbvie “without question narrowed the claimed penetration enhancers . . . from all penetration enhancers including those used in the Teva and Perrigo products to only isopropyl myristate at a particular concentration [as used in AndroGel].” Id. at 17. Indeed, these amendments occurred after the patent examiner had rejected an initial claim for “all penetration enhancers.” Id.
The second step for applying prosecution history estoppel requires the court to determine that “the reason for that amendment was a substantial one relating to patentability.” Id. at 18. This is initially presumed to be true, but the defendant can overcome this presumption by pointing to objective evidence in the prosecution history record. Id. Abbvie did not contest that at least some of their amendments were made for the purpose of patentability, but instead argued for the “tangential relation” exception; that is, that “the rationale underlying the amendment  bear[s] no more than a tangential relation to the equivalent in question.” Id. at 19. Abbvie asserted that the amendments were intended to only relinquish other penetration enhancers not used by Teva or Perrigo. Id. at 20.
The court forcefully rejected this contention as a groundless “latter-day explanation,” unexpressed anywhere in the application filings, and objectively unreasonable in light of the broad initial rejection by the patent examiner, which the Defendants sought to “have the court ignore.” Id. at 21, 24-28. Defendants, the court found, had plainly disavowed all other penetration enhancers in order to obtain the AndroGel patent. Id. at 24, 28.
Third and finally, the court addressed the scope of the subject matter surrendered by Abbvie’s narrowing amendments. Id. Under Supreme Court precedent, “there is a presumption that the patentee has ‘surrendered all subject matter between the broader and the narrower language.’” Id. at 29 (quoting Festo VIII, 535 U.S. at 740). Finding that Abbvie possessed “no plausible argument” to overcome this presumption, the court concluded that “[p]rosecution history estoppel without question prevents the defendants from claiming that the doctrine of equivalents encompasses the penetration enhancers that they abandoned during the application process.” Id. at 29-30. The court further noted that the relevant law pertaining to sham litigation, the doctrine of equivalents, and prosecution history estoppel was all “well-settled at the time that defendants filed their lawsuits against Teva and Perrigo in 2011.” Id. at 30.
Under these principles, “the patent lawsuits against Teva and Perrigo were without question objectively baseless” the court held, and defendants could not have had “a reasonable belief that they had a chance to prevail.” Id. at 31. Accordingly, the court granted partial summary judgment in favor of the FTC on the objective baselessness element of its sham litigation claim for unlawful monopolization. Id. The court also denied defendants’ motion for summary judgment as to the issue of their monopoly power in the relevant market, stating that genuine disputes of material fact exist as to this “complex issue,” which “will have to await a trial.” Id. at 33.
Sarah Sheridan and Katherine Zhao
Simpson Thacher & Bartlett LLP
On June 26, 2017, in Miranda v. Selig, the Ninth Circuit reaffirmed baseball’s long-standing exemption from federal antitrust laws. 860 F.3d 1237 (9th Cir. 2017). Unlike all other sports—including professional basketball, football, and boxing—baseball enjoys an exemption from federal anti-monopolistic laws such as the Sherman Act. A review of the historical reasoning behind the exemption and an appreciation for the power of stare decisis helps explain this unique carve-out granted to our nation’s pastime.
Major League Baseball (“MLB”) consists of thirty MLB franchises or teams—such as the Los Angeles Dodgers, Boston Red Sox, and New York Yankees. Id. at 1238. In addition to approximately forty baseball players at the major league level, each team employs around 150 to 250 players who compete at the minor league level, known as the “farm system.” Id. MLB teams hope that some of their minor league players will develop into major league players. Id. The minor league players compete in minor league clubs and participate in training programs throughout the year. Id.
MLB requires all franchises to use a Uniform Player Contract, which sets forth the minor league players’ first-season monthly salary, when hiring new players. Id. at 1239. For subsequent years, each minor league player negotiates his salary with the club team. Id. If the parties cannot agree, the player’s salary is based on the same factors used to calculate the first-season salaries. Id. Unlike major league players, minor league players lack the benefit of a union. Id. As such, they must engage in salary negotiations independently. Id. The clubs typically fare much better than the players during these negotiations, as minor leaguers allege that most of them earn less than $7,500 per year, with some earning as little as $3,000 a year. See id. In fact, most minor league players receive no salary for spring training, during which they work fifty to sixty hours per week. Id.
To put the disparity between major and minor league players in perspective, the average annual salary for a major league baseball player is $4.47 million. See MLB salaries 2017: Earnings flatten out, while Clayton Kershaw leads pack, USA Today (Apr. 2, 2017, 10:41 PM), https://www.usatoday.com/story/sports/mlb/2017/04/02/mlb-salaries-payroll-2017/99960994/. By comparison, minor league hockey players averaged salaries of more than $90,000 in 2015. See Brian MacPherson, Minor league hockey players benefit from NHL relationship, Providence J. (Feb. 21, 2015, 11:15 PM), http://www.providencejournal.com/article/20150221/NEWS/ 150229777.
Against this backdrop, a class of minor league players sued the Office of the Commissioner of Baseball, former Commissioner Bud Selig, and all thirty MLB franchises (collectively, the “Owners”) in February 2015. Miranda, 860 F.3d at 1239. The class representatives alleged that they worked fifty to sixty hours per week yet earned less than $10,000 per year between 2010 and 2012. Id. They further alleged that MLB’s hiring and employment policies violate federal antitrust laws by restraining horizontal competition between and among MLB franchises, thereby “artificially and illegally depressing” minor league salaries. Id.; 15 U.S.C. § 1.
In September 2015, the U.S. District Court for the Northern District of California granted the Owners’ 12(b)(6) motion to dismiss, agreeing with the defendants that the minor leaguers failed to state a claim because the business of baseball is exempt from antitrust laws. Miranda, 860 F.3d at 1239. The minor leaguers appealed the decision to the Ninth Circuit. Id. In June of this year, the Ninth Circuit affirmed. Id. at 1240.
In upholding the baseball exemption from antitrust laws, the Ninth Circuit emphasized that it was “bound by Supreme Court and Ninth Circuit precedent upholding the business of baseball’s exemption from federal antitrust laws,” and that “Congress explicitly exempted minor league baseball in the Curt Flood Act of 1998.” Id. at 1239–40. For both reasons, minor leaguers had failed to state a claim. Id. Noting that the exemption “is best understood within its historical context,” the Ninth Circuit reviewed century-old jurisprudence upholding the exemption—including three Supreme Court decisions. Id. at 1240–42.
Baseball was first exempted from federal antitrust laws by the Supreme Court nearly one hundred years ago in Federal Baseball Club of Baltimore v. National League of Professional Baseball Clubs, 259 U.S. 200 (1922). In Federal Baseball, it was alleged that defendants had conspired to monopolize the baseball business by buying up competing clubs and inducing clubs to leave a competing league. Id. at 207. In a five-paragraph decision, the Supreme Court concluded that federal antitrust laws did not apply because “the business is giving exhibitions of baseball, which are purely state affairs,” and therefore any anticompetitive behavior did not constitute “an interference with commerce among the States.” Id. at 208–09. The Court reasoned that in our nation’s pastime, “the transport is a mere incident, not the essential thing.” Id. at 209. The exhibition itself—i.e. the playing of baseball—is the essential thing. Id.
Federal Baseball’s baseball exemptionwas affirmed about thirty years later by the Supreme Court in Toolson v. New York Yankees, 346 U.S. 356 (1953) (per curiam). In a one-paragraph decision, the Supreme Court upheld Federal Baseball, reasoning that “Congress has had the ruling under consideration but has not seen fit to bring such business under these laws by legislation having prospective effect. The business has thus been left for thirty years to develop, on the understanding that it was not subject to existing antitrust legislation.” Id. at 357. The Court concluded that it was the responsibility of Congress to bring baseball within the realm of antitrust laws, if it chooses to do so: “if there are evils in this field which now warrant application to it of the antitrust laws it should be by legislation.” Id. Justice Burton dissented on the grounds that “it is a contradiction in terms to say that the defendants in the cases before us are not now engaged in interstate trade or commerce.” Id. at 358. Justice Burton articulated the interstate nature of organized baseball in 1953:
In the light of organized baseball’s . . . capital investments used in conducting competitions between teams constantly traveling between states, . . . the attendance at its local exhibitions of large audiences often traveling across state lines, its radio and television activities which expand its audiences beyond state lines, its sponsorship of interstate advertising, and its highly organized ‘farm system’ of minor league baseball clubs, . . . it is a contradiction in terms to say that the defendants in the cases before us are not now engaged in interstate trade or commerce as those terms are used in the Constitution of the United States and in the Sherman Act, 15 U.S.C.A. ss 1—7, 15 note.
Id. at 357–58.
Following Toolson, the Supreme Court rejected the application of the baseball exemption to other sports such as professional boxing, United States v. Int’l Boxing Club of N.Y., 348 U.S. 236 (1955), professional football, Radovich v. Nat’l Football League, 352 U.S. 445 (1957), and professional basketball, Haywood v. Nat’l Basketball Ass’n, 401 U.S. 1204 (1971). In each case, the Court held that the Federal Baseball exemption did not extend beyond baseball, reasoning that it was the role of Congress, not the judiciary, to create additional exemptions.
For a third time, in 1972, the Supreme Court granted certiorari “to look once again at this troublesome and unusual situation,” and, albeit reluctantly, again upheld the baseball exemption in Flood v. Kuhn, 407 U.S. 258 (1972). In Flood, Curtis Charles Flood, one of the highest ranking major league outfielders in history, alleged antitrust violations after he was traded to the Philadelphia Phillies without first being consulted. Id. at 265. Flood complained to the Commissioner of Baseball and asked that he be made a free agent so that he could negotiate with any team. Id. Flood’s request was denied. Id.
The Supreme Court in Flood conducted a lengthy review of its prior cases relating to the baseball exemption. See id. at 269–80. The Court also considered the legislative history, noting that after “Toolson more than 50 bills have been introduced in Congress relative to the applicability or nonapplicability of the antitrust laws to baseball. A few of these passed one house or the other. Those that did would have expanded, not restricted, the reserve system’s exemption to other professional league sports.” Id. at 281 (footnote omitted). The Court acknowledged that while professional baseball is a business engaged in interstate commerce, it is “an exception and an anomaly.” Id. at 282. In particular, “Federal Baseball and Toolson have become an aberration confined to baseball.” Id. The Court concluded that “[e]ven though others might regard this as unrealistic, inconsistent, or illogical, . . . the aberration is an established one.” Id. (internal citation and quotation marks omitted). The Flood Court expressed its concern that confusion and retroactivity issues would result if it were to overturn Federal Baseball, and stated that any change should be made by Congress, which would have prospective effect. Id. at 283. Once again, following the principle of stare decisis, the Court left the issue to Congress to resolve:
If there is any inconsistency or illogic in all this, it is an inconsistency and illogic of long standing that is to be remedied by the Congress and not by this Court. . . . Under these circumstances, there is merit in consistency even though some might claim that beneath that consistency is a layer of inconsistency.
If there is any inconsistency or illogic in all this, it is an inconsistency and illogic of long standing that is to be remedied by the Congress and not by this Court. . . . Under these circumstances, there is merit in consistency even though some might claim that beneath that consistency is a layer of inconsistency.
Id. at 284.
After much prodding by the Supreme Court to legislate on the issue, Congress passed the Curt Flood Act in 1998. As noted by the Ninth Circuit in Miranda, the Curt Flood Act established that “the conduct, acts, practices, or agreements of persons in the business of organized professional major league baseball directly relating to or affecting employment of major league baseball players . . . are subject to the antitrust laws.” 15 U.S.C. § 26b(a). The Ninth Circuit pointed out, however, that the Curt Flood Act also “explicitly maintained the baseball exemption for anything related to the employment of minor league baseball players—including the use of reserve clauses—and the relationship between organized professional major and minor league baseball.” Miranda, 860 F.3d at 1242 (citing 15 U.S.C. § 26b(b)(1)–(2)).
Ultimately, the Ninth Circuit held that “[i]n light of Supreme Court precedent, the decisions of our Court, and the Curt Flood Act, minor league baseball falls squarely within the nearly century-old business-of-baseball exemption from federal antitrust laws.” Id. at 1243–44. The Ninth Circuit noted that while the baseball exemption may not be as broad as it once was, “Congress has made clear its intent to maintain the baseball exemption for anything related to the employment of minor league players, the reserve clause as applied to minor league players, and the relationship between major and minor league baseball.” Id. at 1243 (citing 15 U.S.C. § 26b(b)).
A review of Supreme Court precedent surrounding the baseball exemption for nearly a century underscores the power of stare decisis. As the Ninth Circuit observed, “Courts of Appeal must adhere to the controlling decisions of the Supreme Court” and “even at the Supreme Court, stare decisis is the preferred course because it promotes the evenhanded, predictable, and consistent development of legal principles, fosters reliance on judicial decisions, and contributes to the actual and perceived integrity of the judicial process.” Miranda, 860 F.3dat 1242–43 (alteration, citation, and internal quotation marks omitted). The jurisprudence also displays the importance of the separation of powers, as the Supreme Court, due in part to that doctrine, in upholding the exemption reached a result that it described as an illogical and inconsistent “aberration.”
Sonal Mittal Tolman
Wilson Sonsini Goodrich & Rosati
On September 19, 2017, Judge James Donato ruled on D-Link Systems’ motion to dismiss in FTC v. D-Link Sys., 2017 U.S. Dist. LEXIS 152319 (N.D. Cal. Sep. 19, 2017). The Court denied D-Link’s motion to dismiss several deception claims under Section 5 of the FTC Act, while dismissing the FTC’s unfairness claim, and other deception claims, with leave to amend.
D-Link sells routers and IP cameras that it markets as having good data security and safeguards such as “the latest wireless security features to help prevent unauthorized access” and “the best possible encryption.” Id. at *2. The FTC alleges that D-Link’s products were in fact subject to “widely known and reasonably foreseeable risks of unauthorized access” and other security vulnerabilities, that D-Link failed to maintain the confidentiality of the private key it used to validate software updates, and that D-Link failed to deploy “free software, available since at least 2008, to secure users’ mobile app login credentials.” Id.
The FTC filed a complaint against D-Link for deceptive and unfair marketing practices in violation of Section 5 of the FTC Act. Id. at *1. D-Link moved to dismiss the FTC’s claims under Federal Rules of Civil Procedure 12(b)(6), 8(a), and 9(b). Id. at *3. Judge Donato denied D-Link’s motion with respect to three of the FTC’s deception counts, while dismissing two other deception counts with leave to amend. Id. at *6-10. In so doing, Judge Donato held that deception claims under Section 5 are claims that sound in fraud and are therefore subject to the heightened pleading standards of Rule 9(b). Id. at *3-5. Judge Donato also observed that Rule 9(b) might apply to Section 5 unfairness claims in some circumstances, but separately dismissed the FTC’s unfairness count for failure to plead any actual injury to consumers. Id. at *5-6, *14-17.
Rule 9(b) and Section 5
The Ninth Circuit has not yet determined whether Rule 9(b) applies to deception claims under Section 5 of the FTC Act. Id. at *3-*4. The FTC argued that Rule 9(b) should not apply to its deception claims because “[u]nlike the elements of common law fraud, the FTC need not prove scienter, reliance, or injury to establish a § 5 violation.” Id. at *4. The Court found that argument unpersuasive (id.), explaining that “the gravamen of the deception claims is that [D-Link] misled consumers about the data safety and security features of its products,” and because that core allegation sounds in fraud, these claims must meet the pleading standards of Rule 9(b). Id. at *3-*5.
The Court largely relied on the decision in Vess v. Ciba-Geigy Corp. USA, 317 F.3d 1097, 1103-04 (9th Cir. 2003), which requires a claim to meet the heightened pleading standards of Rule 9(b) whenever a defendant is alleged to have engaged in fraudulent conduct, even if fraud is not necessarily an element of the claim. Id. at *3-*4. It observed that Vess articulated this rule in the context of the California Unfair Competition Law (“UCL”), which, like Section 5, prohibits deceptive practices without requiring fraud as an element. Id. at *4. Because Vess and other Ninth Circuit decisions, which found UCL and similar consumer claims rooted in false or misleading statements were subject to Rule 9(b), the Court held Rule 9(b) applies to the FTC’s deception claims in this case. Id. at *4-*5. The Court joins several other district courts that have reached the same conclusion. Id. at *5 (citing FTC v. Lights of Am., Inc., 760 F. Supp. 2d 848, 852-855 (C.D. Cal. Dec. 17, 2010); FTC v. ELH Consulting, LLC, No. CV 12-02246-PHX-FJM, 2013 WL 4759267, at *1 (D. Ariz. Sept. 4, 2013); FTC v. Swish Marketing, No. C-09-03814-RS, 2010 WL 653486, at *2-4 (N.D. Cal. Feb. 22, 2010)).
The Court also considered whether Rule 9(b) applies to the FTC’s unfairness claim. Id. at *5-*6. Although the Court observed there is “little flavor of fraud” in the formal elements of a Section 5 unfairness claim (id. at *5), the FTC expressly stated that “the core facts [of its deception and unfairness claims] overlap, absolutely.” Id. In light of that overlap, the Court found “a distinct possibility that Rule 9(b) might apply to the unfairness claim.” Id. at *6. However, because the Court found that claim did not pass muster under Rule 8, it ultimately held the issue of whether Rule 9(b) applies was “not ripe for resolution” and will depend “how the unfairness claim is stated, if the FTC chooses to amend.” Id.
D-Link challenged the sufficiency of the five deception claims in the FTC’s complaint under Rule 9(b). See id.
Applying Rule 9(b), the Judge Donato found three counts, which allege that D-Link misrepresented the data security and protections its devices provide, state plausible claims because the complaint’s allegations provide the “‘who, what, when, where, and how of the misconduct charged.’” Id. at *7. (citing Ebeid ex rel. United States v. Lungwitz, 616 F.3d 993, 998 (9th Cir. 2010)). For example, The FTC alleges that D-Link’s routers and IP cameras “do not protect against ‘critical and widespread web application vulnerabilities’ identified since 2007, including ‘“hard-coded” user credentials,’ ‘command injection flaws’ and ‘other backdoors.’” Id. at *7. The Court found these allegations sufficiently explain why D-Link’s statements about data security are deceptive. Id. The Court also rejected D-Link’s arguments that Rule 9(b) requires the complaint to identify the exact router and IP camera models with the alleged security flaws and to allege specific consumer reliance on the statements at issue. Id. at *7-*8.
The remaining two deception counts are centered on alleged misrepresentations in promotional materials for IP cameras and graphic user interfaces for routers. Id. at *9. But the only dated exhibit in support of these claims is one brochure for an IP camera that advertises a “surveillance camera” that otherwise “contains no representations at all about digital security.” Id. The complaint alleges other material in support of these counts but fails to identify the dates when any allegedly deceptive statements were made. Id. at *9-*10. Judge Donato therefore held these claims fail under Rule 9(b) and dismissed them with leave to amend. Id. at *9-10.
D-Link raised several broad objections to the FTC’s unfairness claim and challenged the sufficiency of that claim under Rule 8. The Court rejected D-Link’s broad challenges but found the FTC fails to adequately allege any actual consumer injury as needed to state an unfairness claim under Section 5.
D-Link first argued that the FTC lacks regulatory authority over general data security practices. Id. at *10. The Court wrote that this type of challenge “has been consistently rejected by other courts, with good reason.” Id. It explained that Section 5 is intentionally open-ended and that the FTC has broad regulatory authority to prevent unfair practices. Id. at *10-11 (“[T]he fact that data security is not expressly enumerated as within the FTC’s enforcement powers is of no moment to the exercise of its statutory authority.”).D-Link also attempted to argue that the FTC must give persons “fair notice” of standards for data security practices before it can pursue enforcement actions against them through the courts or at the Commission. Id. at *11.
But Judge Donato made clear that “[a]gencies are not required to anticipate problems and promulgate general rules before performing their statutory duties” (id. at *11) and that “to require the FTC in all cases to adopt rules or standards before responding to data security issues faced by consumers is impractical and inconsistent with governing law.” Id. at *12 (citing Sec. & Exch. Comm’n v. Chenery Corp., 332 U.S. 194, 201-02 (1947); NLRB v. Bell Aerospace Co., 416 U.S. 267, 292 (1974)). The Court also rejected D-Link’s third broad challenge to the FTC’s unfairness claim: that the FTC failed to plead a claim because Section 5 applies to current unfair practices while the FTC’s allegations that D-Link “has failed” or “have failed” to take certain actions are pleaded “in the past tense.” Id. at *13. Judge Donato explained that these allegations are best construed as referring to practices that started in the past and continue into the present. Id. at *13-14.
While the Court rejected these broad challenges, it agreed with D-Link that the claim is insufficient under Rule 8. Id. at *14-17. Section 5(n) defines an unfair act or practice as one that “causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition.” 15 U.S.C. § 45(n). The Court held the FTC failed to allege any actual consumer injury in the form of lost money or exposure of sensitive data and therefore failed to state a claim. D-Link Sys., Id. at *14-15.
According to the Court, the FTC failed to identify any specific incident where a consumer’s information was exposed, a device was compromised, or a consumer suffered “even simple annoyance and inconvenience from the alleged security flaws in the [D-Link] devices.” Id. at *15. Rather, the Court found “the sum total of the [FTC’s] harm allegations, … make out a mere possibility of injury at best.” Id. at *14-15. On that note, Judge Donato explained the FTC’s complaint stands in sharp contrast to other data security complaints that have survived motions to dismiss. Id. at *15-16 (citing FTC v. Wyndham Worldwide, 799 F.3d 236 (3d. Cir. 2015), where the complaint alleged theft of the personal information of hundreds of thousands of consumers and over $10.6 million in fraudulent charges).
Judge Donato also observed that if the FTC tied the unfairness claim to the representations that underlie the deception claims, the injury element of its unfairness claim might be more colorable because the purchase of a device that fails to be reasonably secure, or as secure as advertised, “would likely be in the ballpark of a ‘substantial injury.’” Id. at *16. Based on this analysis, the Court dismissed the unfairness claim, while granting the FTC leave to amend. Id. at *17.
Sidley Austin LLP
On September 19, 2017, the Tenth Circuit affirmed the Western District of Oklahoma’s grant of Cox Communications’ (“Cox”) Rule 50(b) judgment as a matter of law motion in a tying case. In re: Cox Enterprises, Inc. (“Cox II”), No. 15-6218, 2017 WL 4127706 (10th Cir. Sept. 19, 2017). In the case below, the jury had found that Cox violated Section 1 of the Sherman Act by illegally tying cable services to cable set-top box rentals. The District Court overturned the jury’s finding. The District Court found that Plaintiffs had not provided sufficient evidence for a jury to find that Cox’s tying arrangement “foreclosed a substantial volume of commerce in Oklahoma City to other sellers or potential sellers of set-top boxes in the market for set-top boxes.” Healy v. Cox Commc’ns, Inc. (“Cox I”), No. 12–ML–2048–C, 2015 WL 7076418, *1 (W.D. Okla. Nov. 12, 2015). The Tenth Circuit, in an opinion authored by Judge Gregory A. Phillips, agreed with the District Court, resting this conclusion on the finding that no other manufacturer sold or even attempted to sell set-top boxes directly to consumers. The Court concluded that the absence of set-top-box competitors meant that this was a “zero-foreclosure” case that presented no antitrust concerns. Cox II at *12.
The case involved a tying claim limited to an Oklahoma City geographic market. In a prior decision, the district court had rejected Plaintiffs’ attempt to certify one class covering multiple geographic markets. Plaintiffs therefore refiled separate complaints for separate geographic markets, and the Oklahoma City case was the first tried. The District Court tried the Cox case over nine days before a jury. The jury found that Plaintiffs had established an illegal tie between cable television and cable set-top boxes. The jury verdict form asked, “Has the alleged tying arrangement foreclosed a substantial volume of commerce in the Oklahoma City subsystem to other sellers or potential sellers of set-top boxes in the market for set-top boxes?” The jury answered yes. District Court Judge Robin J. Cauthron, however, found that there was no basis for that answer and granted Defendant’s motion for judgment as a matter of law. She concluded that Plaintiff failed to offer evidence from which a jury could determine that any other manufacturer wished to sell set-top boxes at retail or that Cox had prevented any other manufacturer from selling set-top boxes at retail. Because of this, there was no evidence that Defendant foreclosed any competition. Cox I at *1. Plaintiffs appealed.
The Tenth Circuit’s decision began by listing a tying claim’s four elements in the Tenth Circuit—“(1) two separate products are involved; (2) the sale or agreement to sell one product is conditioned on the purchase of the other; (3) the seller has sufficient economic power in the tying product market to enable it to restrain trade in the tied product market; and (4) a ‘not insubstantial’ amount of interstate commerce in the tied product is affected.” Cox II at *3. The court explained that the appeal concerned only the fourth element. Id. Cox argued that it did not foreclose competition because the tie did not foreclose any “current or potential competitor” from entering the market for set-top boxes. Plaintiffs contended that they had met this requirement by providing “undisputed evidence that Cox obtained over $200 million in revenues” from renting set-top boxes. Id. The Court pronounced that “Plaintiffs’ argument reflects an outdated view of the law.” Id. The Court then went through a history of tying law, arguing that the law had evolved from per se condemnation of any tie to the new view that some ties might not harm competition and therefore should not be actionable under the Sherman act. The Court concluded that there must be some showing of a substantial potential to foreclose competition in the tied market for there to be a viable tying claim. Id. at *3-5.
The Court found that there were four reasons why Cox’s tie did not harm competition in the market for set-top boxes.
(1) Cox did not manufacture the set-top box. The Court cited Areeda & Hovenkamp for the principle that “a foreclosure is of doubtful significance when the tying seller does not make the tied product but merely purchases it from independent suppliers.” 9 Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law ¶ 1709a (3d ed. 2003).
(2) No manufacturers sold set-top boxes.
(3) Every other cable company had the same business model of renting its set-top boxes to its consumers which “suggests that tying set-top box rentals to premium cable is simply more effective than offering them separately.” (Here, the Court cited to a Second Circuit decision involving Time Warner Cable and the same alleged premium cable—set-top box tie. Kaufman v. Time Warner, 836 F.3d 137 (2nd Cir. 2016).
(4) FCC regulations limited the profits a cable company could make on set-top boxes, thereby decreasing any company’s incentive to try to compete in that market. Id. at *14. Because there was no foreclosure, the Court found that there was no per se tying relationship. It also briefly explained that, even under the rule of reason, there was no tying violation.
Id. at *11-15. The Court concluded by faulting Plaintiffs for ignoring the “goals of antitrust law” by “elevat[ing] form over function” by “fail[ing] to acknowledge the reasoning behind the Supreme Court’s threshold requirements for triggering the per se rule against tying.” Id. at *14. “Instead of explaining why the tie is dangerous despite Cox’s lack of competitors in the set-top box market, Plaintiffs insist that the need to show only that the set-top box rentals accounted for a substantial dollar amount.” Id. The Court found this position unpersuasive, particularly in light of the Supreme Court’s emphasis on “real market analysis” of tying claims.
Judge Mary Beck Briscoe dissented. Her opinion emphasized the need for deference to a jury verdict. Id. at *23. She said that the proper result would be to reverse the district court and remand for a new trial on damages only. It is not clear whether such a trial would allow the possibility for zero damages based on the same zero foreclosure arguments used to support the District Court’s Rule 50 ruling.
On October 3, 2017, Plaintiff Richard Healy filed a petition for rehearing en banc.
Elizabeth C. Pritzker
Pritzker Levine LLP
In In re Google Referrer Header Privacy Litigation, 869 F.3d 737 (9th Cir. Aug. 22, 2017), the Ninth Circuit affirmed an order granting final approval of a cy pres-only settlement of a class action brought by Google search users, alleging that Google violated their privacy by disclosing their Internet search terms to owners of third-party websites.
The central thesis of the case is that Google violated user’s privacy by disclosing their Internet search terms to owners of third-party websites. The alleged privacy violations are based on the Google browser architecture: once users submit search terms to Google search, the browser returns a list of relevant websites. When a user visits a website via Google Search, that website is allegedly privy to the search terms the user originally submitted to Google Search. 869 F.3d at 740. Overlaying this process is Google’s Web History Service, which tracks and stores account holders’ browsing activity on Google’s servers. Id.
Plaintiffs asserted that these browser and storage functions implicated their personal privacy in violation of the Stored Communications Act, Stored Communications Act, 18 U.S.C. § 2701 et seq., and state law. Plaintiffs sought statutory and punitive damages and declaratory and injunctive relief for the alleged privacy violations. Id. at 740.
Following a mediation, but prior to class certification, the parties reached a settlement, which they submitted to the district court for approval in July 2013. The settlement provided that Google would pay a total of $8.5 million and provide information on its website disclosing how user’s search terms are shared with third parties. Id. at 740. Of the $8.5 million, “$3.2 million was set aside for attorneys’ fees, administration costs, and incentive payments to the named plaintiffs,” with the rest "allocated to six cy pres recipients" who would use the money "to promote public awareness and education, and/or to support research, development, and initiatives, related to protecting privacy on the Internet." Id. The district court granted final approval of the settlement, over the objection of certain objectors, in March 2015. Id. at 741. Objectors appealed.
“As an initial matter,” the Ninth Circuit “quickly dispose[d]” of objectors’ argument that the “district court erred by approving a cy-pres only settlement” (id. at 741), that is, a settlement that provides no settlement funds to class members directly but, instead, provides money to non-profit organizations with missions that align with the interests of class members and the claims asserted in the litigation. The Ninth Circuit held that the district court appropriately found the settlement fund – given its size relative to the number of class members nationwide – to be "non-distributable,” and therefore appropriate for a cy pres distribution. Id. at 741-42 (citing Lane v. Facebook, Inc., 696 F.3d 811 (9th Cir. 2012)). The panel also rejected the objectors' argument that a "non-distributable" settlement, by definition, cannot meet the "superiority" element of class certification. Id. at 742. To the contrary:
The two concepts [i.e., cy pres and "superiority"] are not mutually exclusive, since “[w]here recovery on an individual basis would be dwarfed by the cost of litigating on an individual basis, this factor weighs in favor of class certification.” .... The district court did not abuse its discretion in finding the superiority requirement was met because the litigation would otherwise be economically infeasible. This finding dovetails with the rationale for the cy pres-only settlement.
Id. at 742-43 (footnote omitted) (quoting Wolin v. Jaguar Land Rover N. Am., LLC, 617 F.3d 1168, 1175 (9th Cir. 2010)).
The final sections of the opinion address the propriety of the selected cy pres recipients and of the attorneys' fees awarded to class counsel.
The Ninth Circuit affirmed the district court’s finding that each proposed cy pres recipient was an “established organization,” selected because they are “independent,” have a nationwide reach, and “a record of promoting privacy protection on the Internet,” and are “capable of using the funds to educate the class about online privacy risks.” Id. at 743. “Accordingly,” the Ninth Circuit held, “the district court appropriately found that the cy pres distribution addressed the objectives of the Stored Communications Act and furthered the interests of class members.” Id. at 743-44.
One judge dissented from the cy pres portion of the opinion, reasoning that the district court should have more closely vetted the three recipients affiliated with class counsel's alma maters. Id. at 749-51. The majority, however, found no abuse of discretion. Id. at 746-47.
Turning to the issue of attorneys’ fees, the Ninth Circuit held the district court did not abuse its discretion by approving $2.125 million in fees and $21,643.16 in costs. The Ninth Circuit found “no support” for objectors’ view that “the settlement should have been valued at a lower amount for the purposes of calculating attorney’s fees simply because it was cy pres only.” Id. at 747 (citing Lane, 696 F.3d at 818 (acknowledging a 25% fee award that also involved a cy pres-only settlement).) Rather, under the percentage-of-recovery method, the Ninth Circuit observed the requested fee was equal to 25% of the settlement fund – a fee percentage the panel found “hewed closely to that awarded in similar Internet privacy actions.” Id. at 747-48 (citing In re Netflix Privacy Litig., No. 5:11-CV-00379 EJD, 2013 WL 1120801, at *9-10 (N.D. Cal. Mar. 18, 2013); and In re Bluetooth Headset Prod. Liab. Litig., 654 F.3d 935, 942 (9th Cir. 2011) (noting that 25% is the Circuit “benchmark” for a reasonable fee award).) The district court also appropriately cross-checked the requested fees using the lodestar method, the Ninth Circuit held. Id. at 748.
The Ninth Circuit, in In re Google Referrer Header Privacy Litigation, has not paved new ground on the availability of cy pres-only settlements in appropriate cases. Where cost or manageability obstacles make it difficult to provide meaningful monetary settlement relief, pro rata, to class members directly, cy pres allocations to nonprofit organizations with missions that have a close nexus to the legal claims at issue may provide an appropriate class settlement remedy.
Sidley Austin LLP
Civil plaintiffs in Sherman Act cases can only recover damages if they sue within four years after the cause of action accrues, which is generally when the wrongdoer commits an act that injures them. 15 U.S.C. §15b; Zenith Radio Corp. v. Hazeltine Research, Inc., 401 U.S. 321, 338 (1971). For criminal prosecutors the statute of limitations is five years instead of four. 18 U.S.C. § 3282(a) (a defendant cannot be prosecuted unless the indictment is found or the information is instituted within five years after the offense was committed).
The Supreme Court has said that,
Antitrust law provides that, in the case of a ‘continuing violation,’ say a price fixing conspiracy that brings about a series of unlawfully high priced sales over a period of years, “each overt act that is part of the violation and that injures the plaintiff,” e.g. each sale to the plaintiff, “starts the statutory period running again, regardless of the plaintiff's knowledge of the alleged illegality at much earlier times.”
Klehr v. A.O. Smith, 521 U.S. 179, 189 (1997) (quoting 2 P. Areeda & H. Hovenkamp, Antitrust Law ¶ 338b, p. 145 (rev. ed. 1995)).
The Antitrust Division and private plaintiffs often seek to take advantage of this continuing violation doctrine to extend the time in which they can bring an action much later than four or five years after the initial illegal act. Two recent decisions underscore how the continuing violation doctrine may impact statute of limitations defenses in antitrust cases.
United States v. Kemp & Associates, Inc. and Daniel Mannix
The Antitrust Division relied on the continuing violation doctrine in its indictment of an heir location service company and the company’s director of operations for an alleged customer allocation scheme. The District Court for the District of Utah, however, rejected the doctrine and recently dismissed the case. United States v. Kemp & Associates, Inc. and Daniel Mannix, Case No. 16-cr-00403, ECF 97 (Aug. 28, 2017). The government filed the indictment in August of 2016 alleging that the defendants had entered into a customer allocation agreement as early as 1999. The defendants presented evidence that they withdrew from the agreement in July of 2008, over eight years before the indictment. The government alleged, however, that the conspiracy included accepting collusive rates from customers within the five year limitations period, and that payoffs between the conspirators also happened within the five year limitations period.
The court, nevertheless, dismissed the indictment. It held that the scope of the alleged conspiracy was to suppress and eliminate competition by agreeing to allocate customers and found that once the firms agreed to end the agreement, “only routine, administrative consequences of a concluded allocation agreement remained.” Id. at *4. The court stated that the government’s continuing violation theory confused “the results of a conspiracy with actual conduct in furtherance of it.” Id. at *5. It stated that, “[a] conspiracy’s statute of limitations should not be extended ‘indefinitely beyond the period when the unique threats to society posed by a conspiracy are present.” Id. (quoting United States v. Doherty, 867 F.2d 47, 62 (1st Cir. 1989)). According to the court, the ‘unique threat’ identified in the indictment was the alleged customer allocation and that threat ended with the termination of the agreement. Id. The Division dismissed the case, so there will be no appeal.
In re: Pre-Filled Propane Tank Antitrust Litigation
The Eighth Circuit recently addressed the continuing violation doctrine and came to the opposite conclusion from that reached by the court in the Kemp & Associates. In In re: Pre-Filled Propane Tank Antitrust Litigation, 860 F.3d 1059 (8th Cir. 2017), the Eighth Circuit sitting en banc held that in an antitrust conspiracy suit, each allegedly unlawful sale restarts the running of the statute of limitations even if the alleged conspiracy was hatched outside the four-year statute of limitations period and regardless of whether the plaintiff had earlier knowledge of the allegedly illegal conduct. The Court was closely divided with five judges in the majority and four signing on to a sharply worded dissent. The dissent argued that to avoid dismissal plaintiffs are required to show a live, ongoing conspiracy within the limitations period.
The appeal involves claims by direct purchasers of pre-filled propane tanks against the two largest propane tank distributors. Before 2008, defendants filled standard-size tanks with 17 pounds of propane. Plaintiffs allege that, in 2008, defendants colluded to reduce the amount of propane in standard tanks to 15 pounds while keeping prices the same, an effective 13% price increase. Id. at 1062.
Plaintiffs sued in 2014, arguably several years beyond the four-year limitations period. The district court dismissed plaintiffs’ suit as time-barred. A three-judge panel of the Eighth Circuit affirmed. But after rehearing the case en banc, the Eighth Circuit reversed. Relying principally on the Supreme Court’s decision in Klehr, the majority held that, in an antitrust conspiracy, each allegedly unlawful sale restarts the running of the statute of limitations regardless of whether the plaintiff had earlier knowledge of the allegedly illegal conduct. Id. at 1064-68.
The dissenting judges disagreed with the majority’s reliance on Klehr and its application of the continuing violation doctrine to Sherman Act claims. The dissent stressed that Klehr, despite its reference to antitrust law, was a RICO case and that it should not apply in the antitrust context. Id. at 1072. According to the dissent, in order for the continuing violation doctrine to apply in an antitrust case, there must be a live, ongoing conspiracy within the limitations period. Id. at 1072-73. The dissenting judges noted that by empowering private plaintiffs to bring antitrust claims, Congress meant to incentivize prompt action to redress allegedly harmful conduct. “Congress did not intend for plaintiffs to sit back, with fully knowledge of the 2008 conspiracy, and wait six years before finally correcting a public harm.” Id. at 1075.
The decisions in Kemp & Associates and In re: Pre-Filled Propane Tank Antitrust Litigation suggest that the battle over the continuing violation doctrine is not over.
Ninth Circuit Spokeo Decision on Remand Lays the Groundwork for Establishing a Concrete Injury-in-Fact
Rebekah S. Guyon and Breeanna N. Brewer
Greenberg Traurig, LLP
In Robins v. Spokeo, Inc., __ F. 3d __, 2017 WL 3480695 (9th Cir. Aug. 15, 2017), on remand from the Supreme Court, the Ninth Circuit clarified when an intangible injury is “sufficiently concrete” for Article III’s standing requirements.
The Ninth Circuit recognized that in Spokeo, Inc. v. Robins, 136 S. Ct. 1540 (2016) (“Spokeo II”), the Supreme Court made clear that “a plaintiff does not ‘automatically satisfy the injury-in-fact requirement whenever a statute grants a person a statutory right and purports to authorize that person to sue to vindicate that right.’” Robins, 2017 WL 3480695, at *3 (quoting Spokeo II, 136 S. Ct. at 1549). Rather, to establish a “concrete injury” sufficient for Article III standing, “the plaintiff must allege a statutory violation that caused him to suffer some harm that ‘actually exist[s]’ in the world; there must be an injury that is ‘real’ and not ‘abstract’ or merely ‘procedural.’ . . . In other words, even when a statute has allegedly been violated, Article III requires such violation to have caused some real—as opposed to purely legal—harm to the plaintiff.” Robins, 2017 WL 3480695, at *3 (quoting Spokeo II, 136 S. Ct. at 1548-49). Nonetheless, the Ninth Circuit concluded, citing Second Circuit precedent, that under Spokeo II “some statutory violations, alone, do establish concrete harm,” particularly where “‘Congress conferred the procedural right to protect a plaintiff’s concrete interests and where the procedural violation presents ‘a risk of real harm’ to that concrete interest.’” Robins, 2017 WL 3480695, at *4 (quoting Strubel v. Comenity Bank, 842 F.3d 181, 190 (2d Cir. 2016)). Thus, to evaluate whether a plaintiff’s claim of intangible harm is sufficiently “concrete,” a court is to consider: “(1) whether the statutory provisions at issue were established to protect [plaintiff’s] concrete interests (as opposed to procedural rights), and if so, (2) whether the specific procedural violations alleged in this case actually harm, or present a material risk of harm to, such interests.” Robins, 2017 WL 3480695, at *4.
Applying this analysis to Robins’s claims under the Fair Credit Reporting Act, 15 U.S.C. § 1681 et seq. (“FCRA”), the Ninth Circuit found that the purpose of the FRCA was “‘to protect consumers from the transmission of inaccurate information about them’ in consumer reports.” Id. at *4 (quoting Guimond v. Trans Union Credit Info. Co., 45 F.3d 1329, 1333 (9th Cir. 1995)). The Ninth Circuit “ha[d] little difficulty concluding that these interests protected by FRCA’s procedural requirements are ‘real,’ rather than purely legal creations.” Id. The Ninth Circuit noted that consumer reports are important in modern life, and have real-world implications, including on employment decisions, loan application decisions, and home purchases. Id. “The threat to a consumer’s livelihood is caused by the very existence of inaccurate information in his credit report and the likelihood that such information will be important to one of many entities who make use of such reports. Congress could have seen fit to guard against that threat.” Id. The Ninth Circuit also noted that the FCRA protects interests similar to other reputational and privacy interests that have “long been protected in the law,” such as common law prohibitions on the dissemination of private information and libel. Id. at 13-14. Based on Congress’s enactment of the FCRA and the similarity between interests protected under the statute and those that are historically protected at common law, the Ninth Circuit held that the FCRA was crafted to protect consumers’ concrete interests in accurate credit reporting about them. Id. at 5.
Finding the first criteria satisfied, the Ninth Circuit analyzed whether Robins had alleged FCRA violations that actually harmed, or at least actually created a material risk of harm, to his concrete interest in accurate credit reporting about him. Id. Robins alleged that Spokeo prepared and published online an inaccurate credit report about him, which falsely reported his marital status, age, educational background, and employment history. Id. at *6. “His claim thus clearly implicates, at least in some way, [his] concrete interests in truthful credit reporting.” Id. But, the Ninth Circuit held that it was insufficient to allege some inaccurate disclosure of his information alone; rather, the nature of the specific alleged reporting inaccuracies must “raise a real risk of harm to the concrete interests that the FRCA protects.” Id.
The Ninth Circuit found that the false information in the credit report was of the type that is important to employers and others making use of consumer reports. Id. at *7. Robins alleged specific harms from the inaccurate report—the report allegedly harmed “‘[his] employment prospects’ by misrepresenting facts that would be relevant to employers,” causing him “‘anxiety, stress, concern and/or worry about his diminished employment prospects’ as a result.” Id. Even though the false information regarding Robins was not negative (it overstated, rather than understated, his qualifications), the Ninth Circuit reasoned that the false information could still cause prospective employers to question his truthfulness or to believe that he is overqualified for the position sought. Id. Thus, Spokeo’s procedural violation of the FCRA raised a real risk of harm to Robins’s concrete interest in accurate credit reporting protected by the FCRA, and Robins alleged a sufficiently concrete injury. Id.
Finally, the Ninth Circuit rejected Spokeo’s argument under Clapper v. Amnesty Int’l USA, 133 S. Ct. 1138, 1143 (2013), that Robins’s allegations were too speculative to establish concrete injury because they were premised on future harm to his employment prospects. Robins, 2017 WL 3480695,at *7. The Ninth Circuit distinguished Clapper, stating that in Clapper, the allegedly harmful conduct was threatened, but had not occurred, whereas here, the allegedly harmful conduct—inaccurate reports—and the resulting injury had already occurred. Id. at *7-8. Moreover, Clapper did not address the concreteness of intangible injuries like those alleged by Robins. Id.
In sum, in its remand decision from Spokeo II, the Ninth Circuit affirmed that a plaintiff may establish the “concrete injury” requirement of Article III standing where the plaintiff can show both that a federal statute allegedly violated was designed to protect the plaintiff’s concrete interests, and the alleged violation actually harms, or creates a material risk of harm, to those interests.
David M. Goldstein
Orrick Herrington & Sutcliffe LLP
In a decision welcomed by the defense bar, the Second Circuit held that Uber and its former CEO could compel arbitration of an Uber user’s claim alleging that Uber’s software application allowed third-party drivers to unlawfully fix prices. The Second Circuit’s decision provides helpful guidance to companies regarding the types of website disclosures that may be sufficient to put customers on notice of arbitration provisions in their contracts, at least under New York choice of law rules and Second Circuit precedent. Spencer Meyer v. Uber Technologies, Inc., et al., Nos. 16-2750-cv, 16-2752-cv (2d Cir. Aug. 17, 2017).
Plaintiff originally sued only Uber’s former CEO, but the district court granted his motion to join Uber as a necessary party. After the parties began to exchange discovery materials, defendants filed a motion to compel arbitration. The court denied the motion on the grounds that plaintiff did not have reasonably conspicuous notice of the Terms of Service and did not unambiguously assent to the terms. The district court did not reach issues such as waiver and whether the CEO, who was not a signatory, could enforce the arbitration agreement. The Second Circuit granted interlocutory review under 9 U.S.C. § 16 and the district court stayed the case pending the appeal.
Applying the Federal Arbitration Act, the Second Circuit conducted a de novo review and applied the familiar standards for a summary judgment motion based on the undisputed facts before the court, including that plaintiff’s claims were covered by the arbitration provision of the Terms of Service. The Second Circuit agreed with the district court that California law governed the enforceability of the arbitration provision, and that California law and New York law are substantively similar for determining whether parties mutually assented to contact terms. It applied a standard that “only if the undisputed facts establish there is ‘[r]easonably conspicuous notice of the existence of contract terms and unambiguous of assent to those terms’ will we find a contract has been formed.” Op. at 16 (citing Sprecht v. Netscape Commc’ns Corp., 306 F.3 17, 35 (2d Cir. 2002).
The court accepted plaintiff’s representation that he was not aware of the existence of the Terms of Service or the arbitration provision, but in determining whether the provision was “reasonably conspicuous” the court applied the perspective of a “reasonably prudent smartphone user.” Op. at 22. Noting the ubiquity of smartphones, the activities smartphone users engage in, and that text that is highlighted in blue and underlined is a hyperlink to another webpage where additional information is found, the court “conclude[d] that the design of the screen and language used render the notice provided reasonable as a matter of California law.” Op. at 24. The court explained that the screen layout—the opinion includes screenshots of what the screen would have looked like on plaintiff’s Samsung Galaxy S5—as well as the fact that the hyperlink to the Terms of Service was provided simultaneously with enrollment, meant that a “reasonably prudent smartphone user would understand that the terms were connected to the creation of a user account.” The court emphasized that in light of this sort of constructive notice, it does not matter if the user chooses not to read the terms and conditions. Op. at 25-27. The court also rejected plaintiff’s argument that placing the arbitration clause within the Terms and Conditions was a barrier to reasonable notice. Thus, the Uber App provided reasonably conspicuous notice of the Terms of Service as a matter of California law, the court reasoned.
The Second Circuit ruled that although plaintiff’s assent to arbitration was not express, it was unambiguous in light of the objectively reasonable notice of the Terms and Conditions. In other words, the court held, a “reasonable user would have known that by clicking the registration button, he was agreeing to the terms and conditions accessible via the hyperlink, whether he clicked on the hyperlink or not.” Op. at 29. This was buttressed by the fact that the plaintiff had located and downloaded the Uber App, registered for an account, and provided his credit card information to create a forward-looking relationship with Uber—and the payment screen provided clear notice that terms and conditions governed that relationship. The court concluded that as a matter of law, plaintiff agreed to arbitrate his claims with Uber.
Since the facts regarding the arbitration provision and registration process were undisputed, the court did not remand to the district court for a trial on that issue. However, plaintiff had also argued that Uber waived its right to arbitrate by actively litigating the lawsuit. The Second Circuit determined that the waiver issue should be decided by the district court rather than in the arbitration, and for that reason remanded the case to the district court. (Plaintiff asked the Second Circuit to amend the decision to clarify that the district court may consider the issue of whether the payment screen was immediately replaced by a new screen that did not include any hyperlink to Uber’s Terms of Service. The Second Circuit denied the motion but its order clarified that plaintiff may raise the issue in the district court without foreclosing defendants from arguing waiver.)
The Second Circuit’s detailed analysis of both the web screens and the process for registration—as well as including as exhibits the screens evaluated in its decision—may provide guidance to companies that have web-based platforms and contracts for their users. For the plaintiffs’ bar, the decision also provides clarity regarding the types of claims that may or may not survive a motion to compel arbitration in the Second Circuit.
Pritzker Levine, LLP
On July 28, 2017, Judge Lucy H. Koh denied Apple, Inc.’s motion to dismiss plaintiffs’ first amended complaint in Grace v. Apple Inc., 2017 WL 3232464 (N.D. Cal. July 28, 2017), rejecting Apple’s arguments that plaintiffs lacked the requisite Article III standing and finding that plaintiffs sufficiently alleged claims for trespass to chattel and violation of California’s Unfair Competition Law (“UCL”), when Apple disabled FaceTime on iPhones with iOS6 or operating earlier systems.
Plaintiffs allege that Apple intentionally “broke” the FaceTime videoconferencing feature on its iPhone 4 and 4S devices to reduce royalty fees Apple was forced to pay for users to connect with one another via the feature. Apple also allegedly misrepresented to consumers the cause of the “break”, failing to inform them that Apple itself had disabled the feature.
In denying Apple’s motion to dismiss, Judge Koh applied an approach utilized by both the Northern District of California and the Ninth Circuit to confer standing on plaintiffs to assert claims for products they did not purchase so long as the products and the alleged misrepresentations are substantially similar. Her ruling also factually distinguishes decisions from other district courts that dismissed claims arising from temporary disruption of software services (see In re Sony Gaming Networks & Customer Data Security Breach, 996 F.Supp.2d 942 (S.D. Cal. Jan. 21, 2014) and Von Nessi v. XM Satellite Radio Holdings, Inc., 2008 WL 44471115 (D.N.J. Sept. 26, 2003).
All iPhones operate using a mobile operating system known as an iOS. Prior to September 2013 iPhone used iOS6 or an earlier system. The iPhone 4 was the first iPhone device to offer the “FaceTime” feature, which allows users to communicate via video calls. Starting in November 2012, as a result of unrelated patent infringement litigation, Apple’s costs to operate FaceTime (in the form of royalty fees it had to pay to a third party on a per-connection basis) increased substantially; by $3.2million per month. Id. at *2. To avoid the mounting royalty fees, Apple developed a new FaceTime connection system as part of iOS7, released in September of 2013. Id. While the upgrade to iOS7 for iPhone 4 and 4S users was free, it negatively impacted the functionality of their devices, resulting in non-responsiveness, keyboard sluggishness, device crashes, inability to use Wi-Fi or Bluetooth functions and more. Id. Once a user upgraded, Apple made it impossible for them to revert back. Id.
For those iPhone 4 and 4S users that chose not to upgrade to iOS7, Apple had to pay the royalty fees for their FaceTime connections. As a result, plaintiffs allege, Apple decided to “break” FaceTime for iOS6 and earlier operating systems by intentionally causing a digital certificate to prematurely expire on April 16, 2014, causing FaceTime to immediately stop working on the iOS6 iPhone 4 and 4S devices. Apple then misrepresented that FaceTime had stopped working because of a “bug resulting from a device certificate that expired.” Id. at *3.
Plaintiff Christina Grace is an owner of an iPhone 4 smartphone who did not upgrade to iOS7 and therefore is unable to use FaceTime on her device. Id. Plaintiff Ken Potter owns two iPhone 4 devices, one of which he updated to iOS7, which he claimed resulted in lost functionality. Id. Plaintiffs filed a class action complaint, alleging claims for trespass to travel and violation of the California UCL. Apple moved to dismiss on Article III standing and other grounds.
Article III Standing Analysis
Apple argued that plaintiffs lacked Article III standing because they did not suffer an “injury-in-fact” because a user’s ability to use the FaceTime feature “uninterrupted, continuously or error-free” is not a “legally protected interest” under Apple’s iOS Software License Agreement (“Software License”), which Apple argued expressly disclaimed such interruptions or errors. Id. at *6. The Court, in looking at the language of the Software License, was not convinced. The Software License did not indicate that the disclaimer applied to an undefined feature such as FaceTime. Id. at *6-7. And the fact that Apple did explicitly disclaim the continued availability of certain defined “Services” but yet did not similarly disclaim the availability of FaceTime or of the iOS software itself, “cut against Apple’s argument that Apple disclaimed the continued availability of FaceTime” and that “[i]f Apple wished to disclaim the availability of FaceTime or of iOS Software” it would have expressly done so. Id. at *7.
Furthermore, plaintiffs alleged that Apple intentionally and permanently disabled FaceTime on iOS6 and earlier operating systems, not that they suffered an interruption in use. The Court found this permanent unavailability differed from brief interruptions or errors, distinguishing In re Sony Gaming Networks & Customer Data Security Breach, 996 F.Supp.2d 942, 969 (S.D. Cal. Jan. 21, 2014) and Von Nessi v. XM Satellite Radio Holdings Inc., 2008 WL 4447115 (D.N.J. Sept. 26, 2003), which both dismissed alleged injuries from brief disruptions in service. Id. at *7-8.
Apple also argued that plaintiffs lacked standing to bring claims on the use of the iPhone 4S, since neither owned a 4S device and therefore did personally not suffer injuries related to a 4S device. The Court again disagreed with Apple, noting that “[t]he majority of courts in this district and elsewhere in California reject the proposition that a plaintiff cannot suffer an injury in fact based on products that the plaintiff did not buy” and that this district has “consistently applied the ‘substantially similar’ approach when analyzing standing challenges.” Coleman-Anacleto v. Samsung Elecs. Am., Inc. 2016 WL 4729302 (N.D. Cal. Sept. 12, 2016).
The Court found the “substantially similar” approach to be “consistent with the Ninth Circuit’s admonition” that courts not employ “too narrow or technical an approach” to analyzing similar but not identical injuries. Id. at *9, citing Brazil v. Dole Food Co., 2013 WL 5312418 at *4 (N.D. Cal. Sept.23, 2013) (internal citations omitted). The complaint, which alleged that owners of both the iPhone4 and iPhone 4S suffered substantially the same injury (a diminution in the value of the devices as a result of the loss of FaceTime on April 16, 2014, and were substantially similar products, was sufficient for purposes of pleading Article III standing. Id. at *10.
The Court noted that some courts reserve the question of whether a plaintiff can assert claims based upon products they did not buy until a ruling on a motion for class certification. Id. at *8, citing Forcellati v. Hyland’s, Inc., 876 F.Supp.2d 1155, 1161 (C.D. Cal. 2012); Cardenas v. NBTY, Inc., 870 F.Supp. 2d 984, 992 (E. D. Cal. 2012); Clancy v. The Bromley Tea Co., 308 F.R.D. 564, 571 (N.D. Cal. 2013); Miller v. Ghirardelli Chocolate Co., 912 F.Supp.2d 861, 869 (N.D. Cal. 2012).
Trespass to Chattels Analysis
A trespass to chattel claim lies where an intentional interference with the possession of personal property has proximately caused an injury. Id. at *11 (citation omitted). Apple challenged only that the loss of FaceTime caused an injury. Id. California law has held that injury is adequately alleged with respect to a trespass to a computer or similar device where it is plead that the purported trespass (1) caused physical damage to the personal property, (2) impaired the condition, quality or value of the personal property, or (3) deprived plaintiff of the use of personal property for a substantial time. Id. at *11, citing Fields v. Wise Media LLC, 2013 WL 5340490 at *4 (N.D. Cal. Sept. 24, 2013).
Plaintiffs’ allegations that Apple’s decision to permanently disable FaceTime harmed the intended and advertised function of the devices, and that the only alternative, transitioning to iOS7, was not practical and also resulted in loss of functionality, were held to be sufficient to support a claim for trespass to chattel. This alleged harm, the Court found, was more significant than a trespass which resulted in a reduced battery life or consumed more memory (see In re iPhone Application Litigation, 844 F.Supp. 2d 1040, 1069 (N.D. Cal. 2012)), and was “markedly different” from In re Apple & ATTM Antitrust Litigation, 2010 WL 3521965 at *6-7 (N.D. Cal. July 8, 2010) where plaintiffs lost access to their iPhones for a just few days before receiving a free replacement from Apple. Id. at *12.
California Unfair Competition Law Claims
Apple moved to dismiss plaintiffs’ UCL claim on the grounds that plaintiffs lacked statutory standing because they did not suffer an injury, failed to allege an unfair business practice, and were not entitled to any equitable relief.
The Court rejected all three arguments. Plaintiff were found to have alleged that they suffered an economic injury as a result of Apple’s permanently disabling FaceTime because it caused a significant decrease in the value of their iPhone devices. This is in contrast to In re Sony Gaming Networks, where the temporary loss of the ability to use gaming consoles while the PlayStation Network was down was too speculative of an injury, resulting in dismissal. Id. at *13, citing 903 F.Supp.2d at 965.
Plaintiffs also sufficiently alleged the “unfair” prong of the UCL under the balancing test, which both plaintiffs and defendant relied upon. First the Court held that Apple’s argument that plaintiffs’ injury is outweighed by business justifications was deemed not suitable to be resolved on a motion to dismiss. Id. at *15, citing to In re iPhone Application Litigation, supra, 844 F.Supp. at 1073. Second, by alleging that Apple disabled FaceTime to save money, that Apple knew that iOS6 and earlier operating systems users would then be “’basically screwed,’” and that, as a result plaintiffs suffered a diminution in value of their iPhones, the Court held that plaintiffs sufficiently alleged a UCL claim under the unfairness prong. *15.
The Court found Apple similarly unpersuasive with respect to its challenge of plaintiffs’ claims for equitable relief of restitution and injunctive relief under the UCL. Judge Koh held that Apple’s argument that restitution was not available because plaintiffs had no right to “uninterrupted” or “error-free” FaceTime service failed for the same reasons it did under its Article III standing argument. Id. at *15. Plaintiffs also adequately alleged entitlement to injunctive relief, the Court held, because FaceTime was permanently disabled on pre-iOS7 systems and transitioning to iOS7 was not a practical reality for iPhone 4 and 4S users. Id. at *16.
Andrew Hasty, Karen Porter and Jason Bussey
Simpson Thacher & Bartlett, LLP
Plaintiffs face several key strategic considerations in deciding whether to challenge corporate mergers under Section 16 of the Clayton Act or, alternatively, alongside the Federal Trade Commission (“FTC”) under Section 13(b) of the FTC Act. The standards to secure injunctive relief under the two statutes differ. And as two recent district court decisions highlight, a plaintiff’s post-suit ability to recover the costs of litigation—including attorneys’ fees—may, too.
Fee Shifting and the Preliminary Injunction Standards Available to Plaintiffs in Merger Challenges
Under Section 16 of the Clayton Act, plaintiffs who “substantially prevail” on a claim for injunctive relief are entitled to recover “the cost of suit, including a reasonable attorney’s fee.” 15 U.S.C. § 26 (“Section 16”). This means that a wide array of plaintiffs—firms, corporations, associations, individuals, and states—who, under Section 16, successfully block proposed mergers, or reverse those that have already been consummated, are generally entitled to recover their fees and costs. See, e.g., Saint Alphonsus Med. Center—Nampa, Inc. v. St. Luke’s Health System, Ltd., No. 1:12-CV-00560-BLW, 2015 WL 2033088, at *1 (D. Idaho Apr. 29, 2015) (granting plaintiffs’ request for fees under Section 16 because “plaintiffs obtained all the relief they sought—a judicial ruling [ ] requiring S. Luke’s to unwind the Saltzer merger”).
No analogous fee-shifting provision is found within Section 13(b) of the FTC Act, which authorizes the FTC to seek preliminary injunctive relief pending the outcome of its more in-depth administrative review of a proposed merger’s legality. 15 U.S.C. § 53(b) (“Section 13(b)”). Other litigants have the ability to join FTC challenges, but unlike Section 16 of the Clayton Act, the statute does not (on its face) provide fees.
The ability to seek fees after the fact, of course, is not the only (or even most important) difference between the two statutes. Perhaps most critically, the two statutes diverge as to the standard necessary to secure injunctive relief. The two-part “public interest” standard available to the FTC under Section 13(b) is generally understood to be more permissive than the traditional preliminary injunction standard that all other plaintiffs (including the DOJ) must satisfy under Section 16 of the Clayton Act—although the degree of the difference is sometimes debated. Compare FTC v. H.J. Heinz Co., 246 F.3d 708, 714 (D.C. Cir. 2001) (contrasting Section 13(b)’s public interest standard with “the more stringent, traditional ‘equity’ standard for injunctive relief”) (internal quotations omitted) with Penn State Hershey Med. Ctr., 2017 WL 1954398, at *3 (describing the two preliminary injunction standards as only “slightly different”). Indeed, unlike Section 16 plaintiffs—who must show irreparable damage, probability of success on the merits, and that the balance of equities favoring them before courts may award a preliminary injunction—the FTC need only establish that temporary injunctive relief “would be in the public interest [ ] as determined by a weighing of the equities and a consideration of the Commission’s likelihood of success on the merits.” Id.
Diverging Opinions on States’ Ability to Obtain Fees and Costs in FTC Merger Challenges
Whether plaintiffs who successfully joined the FTC in challenging mergers under Section 13(b) of the FTC Act could then (successfully) recover their fees under Section 16 of the Clayton Act was—until this spring—largely an untested question.
In February and May of this year, the United States District Courts for the District of Columbia and Middle District of Pennsylvania each denied requests for fees and costs in connection with Pennsylvania’s efforts to challenge two different mergers under Section 13(b) of the FTC Act (a proposed merger between (i) Staples Inc. and Office Depot, and separately, (ii) Penn State Hershey Medical System and PinnacleHealth Systems). While reaching the same outcome, the two courts relied on different reasoning—with the Middle District of Pennsylvania seemingly leaving open the possibility that plaintiffs in Section 13(b) actions may be able to rely on the Clayton Act’s Section 16(b) in seeking relief.
Last February, Judge Emmet Sullivan of the United States District Court for the District of Columbia denied a request from the Commonwealth of Pennsylvania and District of Columbia to recover fees and costs for their participation in the FTC’s suit to block the proposed merger of Staples, Inc. and Office Depot, Inc. FTC v. Staples, Inc., --- F.Supp.3d ----, 2017 WL 782877, at *1 (D.D.C. Feb. 28, 2017). Emphasizing the different standards for injunctive relief available under Section 16 and Section 13(b), and noting plaintiffs’ “strategic” decision to use Section 13(b)’s “more permissive” test, Judge Sullivan ultimately denied plaintiffs’ request as a matter of law. Id. at *3.
A few months after Judge Sullivan issued his opinion, Judge John Jones of the United States District Court for the Middle District of Pennsylvania similarly denied the Commonwealth of Pennsylvania’s request for fees and costs for its efforts in the FTC’s suit to block the proposed hospital merger between Penn State Hershey Medical System and PinnacleHealth Systems—but for different reasons. FTC v. Penn State Hershey Med. Ctr., No. 1:15-CV-2362, 2017 WL 1954398, at *1 (M.D. Pa. May 11, 2017).
Whereas Judge Sullivan found that Pennsylvania “cannot ride the FTC’s claim to a successful preliminary injunction under the more permissive Section 13(b) standard and then cite that favorable ruling as the sole justification for fee-shifting under the more rigorous Clayton Act standard,” Staples, 2017 WL 72877, at *1, Judge Jones reached the opposite conclusion: a state “who partners with the FTC to argue under Section 13(b) should not be barred from seeking attorney’s fees under Section 16.” Penn State Hershey Med. Ctr., 2017 WL 1954398, at *3.
In Judge Jones’ view, denying Pennsylvania’s Section 16 fee-shift request because plaintiffs’ only relief came pursuant to Section 13(b)’s lesser public interest standard was an “unpersuasive” argument for two key reasons. Id. First, Judge Jones found that “allow[ing] the Commonwealth to pursue its fees and costs under Section 16  despite its partnership with the FTC  comports with [Congress’ intent]” that individual plaintiffs “not bear the very high price of obtaining judicial enforcement of the antitrust laws.” Id. (internal quotations omitted). Second, according to Judge Jones, “to find now that Pennsylvania may not pursue attorney’s fees under Section 16 implicitly encourages duplicative litigation, separate filings, and repetitive arguments.” Id. Ultimately, though, Judge Jones determined that Pennsylvania could not recover its fees and costs because plaintiffs did not “substantially prevail” as required by Section 16. Id. at *8. Rather than receiving relief based on “a determination on the merits of their arguments” as required to “substantially prevail” and recover fees under Section 16, Judge Jones found that plaintiffs “succeeded only in establishing a likelihood of success on the merits at a later stage in litigation—during the upcoming FTC adjudication.” Id.
In contrast to Judge Sullivan’s decision, Judge Jones’ reasoning leaves open the possibility that plaintiffs could successfully seek fees for Section 13(b) litigation under Section 16. But on what facts remains an open question. Pennsylvania has also appealed the matter to the Third Circuit.
Joshua L. Young
Freitas Angell & Weinberg LLP
On June 30, 2017, Judge Beverly Reid O’Connell granted the National Football League’s (“NFL”) motion to dismiss a class action filed on behalf of commercial DirecTV subscribers, such as bar owners, and residential DirecTV subscribers. The court found the NFL’s exclusive deal allowing DirecTV to broadcast out-of-market Sunday afternoon games did not violate Section 1 or Section 2 of the Sherman Act. In re National Football Leagues Sunday Ticket Antitrust Litigation, 2017 WL 3084276 (C.D. Cal. June 30, 2017).
Since 1994, DirecTV has been the exclusive broadcaster of NFL games that would not otherwise be broadcast in a viewer’s geographic market. Id. at *3. During a typical week, six NFL games are broadcast in each geographic television market: Fox and CBS broadcast three games on Sunday afternoon; NBC broadcasts a game on Sunday night; ESPN broadcasts a game on Monday night; and NFL Network broadcasts a game on Thursday night. Id. The only way a viewer can see games that are broadcast outside of the viewer’s geographic market is by subscribing to DirecTV’s NFL Sunday Ticket. Id. For establishments like the Mucky Duck and Gael Pub (“commercial plaintiffs”), an NFL Sunday Ticket subscription can cost between $1,458 and $120,000. Id. For individuals like Robert Gary Lippincott, Jr. and Michael Holinko (“residential plaintiffs”) the cost for the 2015 season was $359.
The commercial and residential plaintiffs alleged that the defendants violated Section 1 of the Sherman Act “by agreeing to restrain competition in the licensing and distribution of live video presentations of NFL games with the purpose and effect of restraining trade and increasing prices paid by consumers and advertisers.” The agreements at issue were the “horizontal” agreements between NFL teams that pooled the teams’ rights to license out-of-market broadcasts and the “vertical” agreement between the NFL and DirecTV. Id. at *6-7. The plaintiffs argued that these agreements should be considered together as an “inseparable web of agreements or a hub-and-spoke conspiracy.” Id. The court disagreed, choosing instead to evaluate the horizontal agreements separately from the vertical agreement, because “where, as here, one alleged conspiracy may involve multiple types of agreements, or different relationships within one agreement, a court is required to break the conspiracy ‘into its constituent parts,’ and analyze ‘the respective vertical and horizontal agreements . . . either under the rule of reason or as violations per se.’” Id. at *8 (quoting In re Musical Instruments & Equip. Antitrust Litig., 798 F.3d 1186, 1192 (9th Cir. 2015)).
Relying on O’Bannon v. NCAA, 802 F.3d 1049, 1069 (9th Cir. 2015), In re Musical Instruments, 798 F.3d at 1191, and NCAA v. Board of Regents, 468 U.S. 85, 101 (1984), the court decided to evaluate “both the horizontal agreements between the NFL teams and the NFL and the vertical agreement between the NFL and DirecTV” under the rule of reason. 2017 WL 3084276 at *8.
Vertical Agreements Between NFL and DirecTV
The court began its analysis of the vertical agreements by considering whether the plaintiffs had antitrust standing. The defendants argued that the plaintiffs had suffered no antitrust injury because “Plaintiffs’ alleged injury—inflated prices for the purchase of live NFL game broadcasts—occurs in a different market than the vertical agreement between DirecTV and the NFL.” Id. at 9. The Court found this distinction to be “two sides of the same coin” because at a consumer level, DirecTV and the plaintiffs participated in the same relevant market, which was the broadcast rights for live video presentations. Id. This gave the plaintiffs “antitrust standing to challenge the vertical agreement between DirecTV and the NFL.” Id.
Next the Court considered whether the plaintiffs had alleged facts indicating that the vertical agreements were anticompetitive, including whether the agreements reduced output and inflated prices. The plaintiffs argued that “the exclusive distributorship between DirecTV and the NFL—limits output, because . . . if Sunday Ticket were not the exclusive method by which out-of-market games could be broadcast, ‘other competitive market options would have increased output further.’” Id. at *9. The defendants countered that before Sunday Ticket existed, viewers were unable to watch out-of-market Sunday afternoon games. Id. The court determined that the plaintiffs’ conception of “output” as the availability to viewers of out-of market Sunday afternoon broadcasts, was incorrect. Id. at *9-10.
The court discussed NCAA v. Board of Regents, which addressed a challenging to a broadcasting plan developed by the NCAA to protect live attendance of college football games. Id. The NCAA’s plan limited the number of games each NCAA institution could televise. Id. at *10. Judge O’Connell identified the limit on output found in NCAA v. Board of Regents as “a limit on the ability to broadcast games at all.” Id. at *11. Here, “there is no limit on output, i.e., no requirement that certain games not be broadcast at all; on the contrary, all NFL Sunday afternoon games are broadcast—there are merely limitations placed on where these games are broadcast and on who may broadcast them.” Id. The court determined “the proper definition of output and, more specifically, limitations on output,” to be “whether the agreement prevents certain games from being broadcast at all.” Id. Under this definition, there was no limit on output.
The plaintiffs also argued that output should be measured by “viewership,” defined as “the availability of viewers to see the games.” Id. Before Sunday Ticket, “viewers would have had access to no more than three NFL Sunday afternoon games broadcast in any given broadcasting market,” but “through Sunday Ticket, viewers may now access as many as thirteen games being played on Sunday afternoons—games which, before Sunday Ticket, would have gone unseen outside of the local broadcast market.” Id. Even if viewership, rather than the ability to broadcast games, was the appropriate measure for assessing output, the plaintiffs’ argument would fail: “because Sunday Ticket has increased access to out-of-market games, it has also increased viewership.” Id. at *12.
The court then rejected the plaintiffs’ argument that the vertical agreement was unlawful because it inflated prices. The “mere fact that DirecTV may be charging inflated prices for Sunday Ticket does not, on its own, constitute harm to competition.” Id. at *12. The plaintiffs’ price inflation allegations were therefore insufficient.
The Court also found several procompetitive aspects of the NFL’s agreement with DirecTV. The exclusive relationship gave DirecTV an incentive to invest in its Sunday Ticket subscription product and make out-of-market NFL games as appealing as possible, including through features such as “Red Zone Channel, DirecTV Fantasy Zone Channel, and NFL.com fantasy.” Id. With the exclusive right to market Sunday Ticket, “DirecTV can create, package, and promote these various products that result in greater fan access and NFL game exposure.” Id.
DirecTV is also periodically required to re-negotiate its agreement with the NFL. Id. The court cited evidence of a competing bid from another broadcaster as evidence that competition is not eliminated. Id. The Court dismissed the Section 1 claims, to the extent they were based on the NFL’s agreement with DirecTV because “Plaintiffs have not satisfied the third element of a section 1 claim under the rule of reason test; without harm to competition, there can be no section 1 violation.” Id.
Horizontal Agreements Between NFL Teams
The court determined that the Sports Broadcasting Act (“SBA”) does not immunize the NFL’s sale of broadcast rights, but nonetheless concluded that the plaintiffs lacked antitrust standing and failed to state a section 1 claim based on the horizontal agreements because the collective agreement between the teams involves“collectively owned” property requiring the NFL and its member teams “to cooperate in order to sell the rights.” Id. at *13 (citing Spinelli v. Nat’l Football League, 96 F. Supp. 3d 81, 114 (S.D.N.Y. 2015)).
“The SBA, enacted in 1961, exempts professional sports from the antitrust laws ‘for joint marketing of television rights.’” Id. (citing NCAA v. Board of Regents, 468 U.S. at 104 n.28). See 15 U.S.C. § 1291. The law applies only to broadcast channels. Id. (citing Kingray, Inc. v. NBA, Inc., 188 F. Supp. 2d 1177, 1187 (S.D. Cal. 2002)). The plaintiffs argued that the SBA did not apply because the NFL teams agreed to broadcast certain games over non-broadcast paid-for satellite television. Id. The defendants respond by pointing out that DirecTV’s “Sunday Ticket merely re-broadcasts coverage that was initially broadcast on free, over-the-air television—namely, CBS and Fox—and, thus, is protected by the SBA.” Id. Considering the “narrow” construction to be given antitrust exemptions, id., the Court agreed with the plaintiffs. “[B]ecause the agreement between the NFL and the NFL teams encompasses both broadcasts on over-the- air television as well as paid-for television, the SBA does not immunize the horizontal agreements between the NFL and the NFL teams.” Id.
Turning to the horizontal agreements between the NFL teams, the court discussed two cases holding that broadcasts of NFL games necessarily involve intellectual property rights owned by multiple entities. The court first discussed Washington v. National Football League, 880 F. Supp. 2d 1004, 1005– 07 (D. Minn. 2012), a case in which former professional football players alleged that the NFL violated the antitrust laws when it refused to grant them the rights to game films and images from the games in which they played. The Washington court explained that because multiple NFL teams were involved in creating the films and images of NFL games, “[t]hese entities must cooperate to produce and sell these images” and thus NFL teams “do not violate the Sherman Act when they market ‘property the teams and the NFL can only collectively own.’” Id. at *13 (quoting Washington, 880 F. Supp. 2d at 1006).
The Court also discussed Spinelli v. National Football League, in which professional photographers alleged that the NFL’s exclusive licensing agreements for professional stock photos violated the Sherman Act. Spinelli held that the agreements did not violate the Sherman Act because “many if not most of the photographs at issue contain intellectual property owned by the NFL and at least one NFL Club” and “without NFL and NFL Club cooperation, licensees would be unable to obtain from any one entity the rights to use photographs of NFL games and events, which exist only by virtue of that cooperation.” Spinelli, 96 F. Supp. 3d at 114.
The court observed that the NFL owns the broadcast rights to NFL games and thus operate differently from Major League Baseball and the National Hockey League, “where the league does not necessarily own the rights to every game broadcast.” 2017 WL 3084276 at *13. “Therefore, unlike the MLB or the NHL, the NFL must be involved in the sale of every game’s broadcast rights; without an agreement between the NFL and its teams, there would be no way to broadcast the game footage.” Id. at *15 (citing Spinelli, 96 F. Supp. 3d at 114 n.14.). “As the Court noted in Spinelli, ‘the pro-competitive benefits of collectively licensing intellectual property rights’ in NFL property ‘are abundantly clear.’” Id. The court thus concluded that “the NFL’s conduct in collectively working with its constituent teams to enter into exclusive broadcast agreements of game footage collectively owned by the NFL and its teams does not violate section 1 of the Sherman Act because it is not an unreasonable restraint on trade.” Id.
After determining that the plaintiffs failed to allege facts indicating that the horizontal agreements constituted a Section 1 violation, the court held that the plaintiffs lacked antitrust standing to “challeng[e] the horizontal agreement between the NFL and its teams because [the plaintiffs were] indirect purchasers.” Id. The court noted the “narrow” exceptions to the Illinois Brick rule, including the “co-conspirator” exception “where an indirect purchaser ‘establishes a price-fixing conspiracy between the manufacturer and the middleman.’” Id. (quoting In re ATM Fee Antitrust Litig., 686 F.3d 741, 749 (9th Cir. 2012)). In In re ATM Fee, the Ninth Circuit found this exception to apply “only when the conspiracy involves setting the price paid by the plaintiffs.” Id. at 16.
Because Plaintiffs are direct purchasers of the games from DirecTV (which DirecTV may only sell as a result of the agreement between DirecTV and the NFL), Plaintiffs have standing to sue for damages arising from the vertical agreement between DirecTV and the NFL (as discussed above). Plaintiffs do not directly purchase Sunday Ticket from the NFL Defendants, however, and the co-conspirator exception does not apply. Accordingly, Plaintiffs do not have standing to sue the NFL Defendants with respect to the horizontal agreements.
Because Plaintiffs are direct purchasers of the games from DirecTV (which DirecTV may only sell as a result of the agreement between DirecTV and the NFL), Plaintiffs have standing to sue for damages arising from the vertical agreement between DirecTV and the NFL (as discussed above). Plaintiffs do not directly purchase Sunday Ticket from the NFL Defendants, however, and the co-conspirator exception does not apply. Accordingly, Plaintiffs do not have standing to sue the NFL Defendants with respect to the horizontal agreements.
Id. at *16.
The Court also considered whether the plaintiffs had pled a relevant market in which the defendants had market power. Id. at 17. The plaintiffs alleged a relevant market comprised of “live video presentations of professional football games” and a submarket for the “broadcast rights for out-of-market games, such as those carried in the NFL Sunday Ticket package.” Id. The defendants argued that the relevant market was improperly defined because it failed to account for the competition out-of-market NFL games face from in-market broadcasts, as well as other sports and entertainment products. Id. The court disagreed, finding that the plaintiffs had properly defined the relevant market. Id. “It appears clear that professional sports attract a unique and specific audience; for instance, many viewers would not believe a Sunday afternoon marathon of NCIS, a syndicated drama, or the live broadcast of a tennis tournament to be a viable alternative to a Denver Broncos football game.” Id.
The Court next determined that the plaintiffs “fail[ed] to show how Defendants have restrained trade within that market or have such significant power as to artificially drive prices up.” Id. The NFL lacked the ability to artificially control out-of-market game pricing because by offering free broadcast games on Sunday afternoons, the NFL gave consumers the choice to “view these free games as alternatives to paid-for out-of-market games, thereby driving market prices down naturally.” Id. at 18. Furthermore, even if out-of-market games were not effective substitutes for in-market games because a given consumer wanted to view only one team’s game, “whoever ultimately owned the rights would always have some ability to artificially control prices, regardless.” Id. “In that case, neither the horizontal agreements between the NFL and the NFL teams nor the vertical agreement between the NFL and DirecTV would affect artificial price inflation; whoever owned the rights to any specific game—whether those rights were obtained through an exclusive distributorship agreement like Sunday Ticket or on the free market —could artificially inflate prices.” Id. at 18.
Finally, the court rejected the plaintiffs’ allegation of a relevant submarket consisting of out-of-market NFL games. Id. at 19. The court noted that a “‘plaintiff may not define a market so as to cover only the practice complained of,’ because ‘this would be circular or at least result-oriented reasoning.’” Id. (quoting Adidas Am., Inc. v. NCAA, 64 F. Supp. 2d 1097, 1102 (D. Kan. 1999)). “Unlike a market consisting of all live broadcasts of NFL games, an out-of-market football broadcast market is a post-hoc narrowing of the relevant market to cover only those products over which Plaintiffs allege that Defendants have control.” Id. The Court was also unconvinced that “out-of-market games would not, by definition, also compete with in-market games.” Id.
Section 2 Monopolization Claim
After dismissing the plaintiffs’ Section 1 claims, the court also rejected the plaintiffs’ claims that the NFL teams and DirecTV had conspired to monopolize the submarket for out-of-market games and that DirecTV had attempted to monopolize the broadcast of out-of-market games. Id. The plaintiffs’ conspiracy to monopolize claim failed because there was no antitrust injury and because the plaintiffs failed to demonstrate a specific intent to monopolize. Id.
Elizabeth C. Pritzker
Pritzker Levine LLP
On July 7, 2017, the Second Circuit Court of Appeals held in In re Petrobras Securities, ___ F.3d ___, 2017 WL 2883874 (2d. Cir. July 7, 2017), that the class certification requirements of Federal Rule of Civil Procedure 23 do not implicitly require that plaintiffs show there is an administratively feasible mechanism for determining whether putative class members fall within the class definition. Id, 2017 WL 2883874 at *9. The decision is important to parties litigating class certification issues in federal courts. By declining “to adopt a heightened administrative feasibility requirement at the class certification stage,” the Second Circuit rejected the approach adopted by courts in the Third Circuit (see, e.g., Byrd v. Aaron’s Inc., 784 F.3d 154, 166 (3d Cir. 2015)), and joined what the Second Circuit described as a “growing consensus that now includes the Sixth, Seventh, Eighth, and Ninth Circuits” on the issue. Id, at *9.
Petrobras is a multinational oil and gas company headquartered in Brazil and majority-owned in the Brazilian government. Petrobras, 2017 WL 2883874 at *1. Plaintiffs’ claims arise out of a conspiracy in which a cartel of contractors and suppliers coordinated with corrupt Petrobras executives to rig bids for major capital expenditures, such as the construction and purchase of oil refineries, at grossly inflated prices. Id., at *2. The profits generated by the scheme were used to pay billions of dollars in bribes and kickbacks to the corrupt executives and to government officials. Id. Additionally, the inflated bid prices artificially increases the carrying value of Petrobras’ assets. Id.
Eventually, Brazil’s Federal Police discovered the scheme during a money laundering investigation, and arrested a number of the individuals involved. Petrobras, 2017 WL 2883874, at *2. The arrests caused Petrobras to make corrective disclosures, and the value of Petrobras’ securities, which are traded on the Brazilian stock exchange, declined precipitously. Id., at *2-3. Plaintiffs are Petrobras investors who filed suit against Petrobras and its underwriters in the District Court for the Southern District of New York, alleging that defendants made false and misleading statements in violation of Section 10(b) of the U.S. Securities Exchange Act, 15 U.S.C. §§ 78a et seq., and the U.S. Securities Act, 15 U.S.C. §§ 77a et seq. Id., at *1, 3.
Because Petrobras securities are not exchanged on any U.S.-based exchange, in order to establish liability under the Exchange or Securities Acts, plaintiffs must show that their securities were acquired in “domestic transactions.” Petrobras, 2017 WL 2883874, at *6 (citing Morrison v. National Australia Bank, Ltd., 561 U.S. 247 (2010)). In light of this requirement, defendants urged the District Court to deny class certification under Federal Rule of Civil Procedure 23(b), arguing that because each class member’s transactions for “markers of domesticity,” plaintiffs cannot show that the class is ascertainable in the sense that class members can be identified reliably and with relative administrative ease. Id, at *6. The District Court agreed that the Morrison decision required plaintiffs’ class definition be limited to class “members [who] purchased Notes in domestic transactions” but nonetheless rejected defendants’ ascertainability arguments. The court certified two classes under Fed. R. Civ. P. 23(b), one asserting claims under the Exchange Act, and the other asserting claims under the Securities Act. Id, at *4, 6. Defendants appealed.
The Second Circuit’s “Ascertainability” Analysis
In rejecting defendants’ argument for a “‘heightened’ ascertainability requirement, under which the any proposed class must be ‘administratively feasible,’ over and above the evident requirement that a class be ‘definite’ and ‘defined by objective criteria” (Petrobras, 2017 WL 2883874, at *8), the Second Circuit considered Rule 23’s stated requirements as well as prior precedent from its own and other circuits.
The Court concluded that the “heightened ascertainability” standard articulated by the Third Circuit, in Byrd, was neither required by nor consistent with Rule 23, for two reasons.
First, the Second Circuit held, while such a standard “appears to duplicate Rule 23’s requirement that district courts consider ‘the likely difficulties in managing a class action,’ (Fed. R. Civ. P. 23(b)(3)(D)),” the redundancy actually ignores Rule 23(b)’s core balancing approach. Petrobras, 2017 WL 2883874, at *11. “Whereas ascertainability is an absolute standard,” the Court held, “manageability is a component of the superiority analysis, which is explicitly comparative in nature: courts must ask whether ‘a class action is superior to other available methods for fairly and efficiently adjudicating the controversy.” Id (italics in original, citations omitted). Heightened ascertainability and superiority considerations could push in opposition directions, the Second Circuit observed, “and challenges of administrative feasibility might be most prevalent in cases in which there may be no realistic alternative to class treatment.” Id. Importing a “heightened ascertainability” standard into Rule 23 destroys the important, comparative analysis provided for in Rule 23(b), the Court held. Id.
Second, according to the Second Circuit, [t]the proposed [heightened] administrative feasibility test also risks encroaching on territory belonging to the predominance requirement, such as classes that require highly individualized determinations of member eligibility.” Petrobras, 2017 WL 2883874, at *11. “Like superiority, predominance is a comparative standard: Rule 23(b)(3) [ ] does not require a plaintiff seeking class certification to prove that each element of her claim is susceptible to classwide proof. What the rule does require is that common questions ‘predominate over any questions affecting only individual [class] members.’” Id (italics in original, citations omitted).
The Second Circuit concluded that “an implied administrative feasibility requirement would be inconsistent with the careful balance struck in Rule 23, which directs courts to weigh the competing interests inherent in any class certification.” Petrobras, 2017 WL 2883874, at *12. In the Second Circuit, unlike the Third Circuit, “the ascertainability requirement….asks districts courts to consider [only] whether a proposed class is defined using objective criteria that establish a membership with definite boundaries.” Id. “This modest threshold requirement will only preclude certification if a proposed class definition is indeterminate in some fundamental way,” the Court held. Id.
These holdings align the Second Circuit with the Sixth, Seventh, Eighth, and Ninth Circuits: each of these circuits have parted ways with the Third Circuit by declining to adopt an administrative feasibility requirement at the class certification stage. See Petrobras, 2017 WL 2883874, at 9 (citing, inter alia: Briseno v. ConAgra Foods, 844 F.3d 1121, 1123 (9th Cir. 2017); Sandusky Wellness Ctr. LLC v. Medtox Sci., Inc., 821 F.2d 992, 005-96 (8th Cir. 2016); Rikos v. Proctor & Gamble Co., 799 F.3d 497, 525 (6th Cir. 2015), cert. denied, ___ U.S. __, 136 S.Ct. 1493 (2016); and Mullins v. Direct Digital, LLC, 795 F.3d 654, 657-58 (7th Cir. 2015), cert denied, ___ U.S. ___, 136 S.Ct. 1161 (2016)).
Class Definition Satisfies Second Circuit Standard for “Ascertainability”
The Second Circuit concluded that the class definition approved by the District Court satisfied the ascertainability standard articulated in its opinion.
“The Classes include persons who acquired specific securities during a specific time period, as long as those acquisitions occurred in domestic transactions.” Petrobras, 2017 WL 2883874, at *12. “These criteria—securities purchases identified by subject matter, timing and location—are clearly objective. The definition is also sufficiently definite: there exists a definite subset of Petrobras Securities holders who purchased those Securities in ‘domestic transactions’ during the bounded class period.” Id. “Finding no error in the district court’s conclusions on this point,” the Second Circuit rejected defendants’ “contention that the classes defined by the district court fail on ascertainability grounds.” Id.
Implications for Future Class Actions
The Second Circuit’s Petrobras decision is not a wholesale win for the plaintiffs. Although the Court upheld the District Court’s class certification order on ascertainability grounds, it vacated the order, in part, and remanded the case for further consideration of whether each putative class member’s need to satisfy the “domestic transaction” element of federal securities laws fully comports with Rule 23 separate, but equally important, predominance requirements. Petrobras, 2017 WL 2883874, at *14-16.
The Second Circuit’s ascertainability ruling will have implications not only for securities class actions, but for class actions generally. In rejecting the Third Circuit’s heightened requirement for ascertainability, the Second Circuit has aligned itself with the Sixth, Seventh, Eighth and Ninth Circuits. Given the split among the circuits as to ascertainability, the Supreme Court may grant certiorari in a case that raises the issue to resolve the conflict.
Intern, Federal Trade Commission
In In re Digital Music Antitrust Litigation, 2017 U.S. Dist. LEXIS 111403 (S.D.N.Y. July 18, 2017), Senior Judge Loretta A. Preska denied the plaintiffs’ motion for certification of a nationwide class of digital music purchasers who challenged an alleged price-fixing conspiracy among music companies, and addressed various issues involving expert testimony submitted by the parties.
The plaintiffs filed a Sherman Act Section 1 complaint against Sony BMG Entertainment, UMG Recordings, Inc., Warner Music Group Corp., Capitol Records, Inc., Capitol-EMI Music, Inc., EMI Group North America, Inc., and Virgin Records America. Id. at *22-24. The defendants produce, license, and distribute music sold online and on compact disks. According to the complaint, the defendants control 80 percent of the market for digital music in the United States. Id. at *25. The plaintiffs alleged that the defendants conspired to restrain trade in and fix the prices of digital music in order to sell CDs at supracompetitive prices. Id.
The plaintiffs attempted to establish a conspiracy by pointing to digital music market conditions, the defendants’ participation in two joint ventures, and the use of most favored nation (“MFN”) clauses in all licensing agreements. Id. at *25-27. The claimed effect of the MFN clauses was to set a wholesale price floor for digital music of $.70 per song. The plaintiffs’ “core allegation” was that the alleged scheme “sustained high prices for Digital Music, which made it less attractive to consumers and hampered the growth of Digital Music services generally.” Id. at *27. The defendants’ motive, according to the plaintiffs, “was to support their ability to charge supracompetitive prices for CDs; they could do so because Digital Music was priced, through the alleged conspiracy, so as to be an unattractive or economically uncompetitive substitute.” Id.
Motions to Exclude
Professor Roger Noll
The court first considered the parties’ respective motions to strike expert testimony. The defendants sought to exclude testimony offered by Professor Roger Noll “on the grounds that it is ‘implausible as a matter of economics and antitrust theory and inconsistent with both the record and evidence and Prof. Noll’s own data and analysis.’” Id. at *34. The defendants’ argument “center[ed] on the contention that Professor Noll has materially changed his theory of liability in the course of this litigation.” Id. According to the defendants, Professor Noll had “alleged that the Defendants had conspired to fix wholesale prices for music downloads,” but his reply declaration “opines that the Defendants conspired to fix the profit margins that Defendants would make on each sale of music downloads sold to online distribution services.” Id. The defendants attributed the alleged change of Professor Noll’s analysis to “a series of admissions during his deposition that allegedly exposed flaws in his methodology.” Id.
The court found the support for the claim of a switch from a price fixing theory to a margin fixing theory “remarkably thin.” Id. In the court’s view, it was “readily apparent” that “none of the statements cited by Defendants aver that the conspiracy took the form of collusion on profit margins.” Id. at *35. The court found it unsurprising “that Professor Noll would cite profit margins as a measure of price collusion because prices and profit margins are inherently related.” Id. “[T]he percentage unit profit margin is the Lerner Index: L = (P-m)/P, where P is price and m is the marginal cost. Hence, if defendants agree to fix the price and if m is a constant, the price-fixing agreement also fixes the profit margin.” Id. (citing Noll Supp. Decl. at 5, Jan. 23, 2017, ECF No. 393). “Accordingly,” the court concluded, “the mere mention of using differences in profit margins to measure the impact and damages of a price-fixing conspiracy between the Defendants does not imply that Professor Noll changed his theory of the liability between the Noll Report and the Noll Reply.” Id. at *35-*36.
The court also determined that the defendants had “ignored the many statements by Professor Noll that are consistent with Plaintiffs’ theory of a price-fixing conspiracy.” Id. at 36. Professor Noll thus “provided a single method to show common proof of the alleged price-fixing conspiracy and one formula for calculating damages, namely, ‘us[ing] the difference in the percentage mark-up of price over marginal cost between digital downloads and the competitive benchmark products (CDs) to measure the anticompetitive effect of collusion on the prices of downloads and to generate a common formula for calculating damages for all digital downloads.’” Id. at *37.
Three of the defendants’ four arguments for the exclusion of Professor Noll’s testimony were predicated on the assumption that he had changed his theory of liability, and were therefore rejected. The fourth argument was that he failed “to account for relevant data concerning varied pricing throughout the class period that undermines Professor Noll’s pass-through regression analysis, in particular by excluding all observations of retail sales at $.99.” Id. at *39. The court concluded that the defendants did not respond to “Professor Noll’s justification for excluding certain price data from the pass-through regression,” and the court therefore “[did] not find a flaw in his methodology serious enough to warrant exclusion.” Id. at *39-*40.
Relying on Comcast Corp. v. Behrend, 133 S. Ct. 1426, 1433 (2013), which requires that “any model supporting a plaintiff’s damages must be consistent with its liability case,” the defendants also argued that Professor Noll based his assessment of liability and damages on a margin fixing theory, in conflict with the plaintiffs’ “wholesale price-floor conspiracy” theory. The court disagreed. Id.
Professor Janusz Ordover
The defendants submitted a supplemental declaration by Professor Janusz Ordover in support of their motion to exclude Professor Noll’s testimony. The plaintiffs moved to strike the supplemental declaration on the basis that it was a rebuttal to Professor Noll, rather than a declaration in support of the defendants’ Daubert motion. They also sought to exclude the supplemental declaration as “unreliable under Daubert.” Id. at *40-*41.
The court concluded that “the entirety of Professor Ordover’s supplemental declaration incorrectly assumes that Professor Noll changed his theory of liability from a conspiracy of price-fixing to margin-fixing.” Id. at *41. The court therefore considered the supplemental declaration little more than “a frivolous strawman” and thus “unreliable under Daubert.” Id. at *41-*42. But the court noted that the plaintiffs did not cite any “authority that would prevent Defendant from supporting a Daubert motion . . . with a declaration from their own expert witness.” Id. at *42. Considering the possibility that the supplemental declaration was an untimely sur-reply, the court denied the motion to strike because its determination that the supplemental declaration is unreliable under Daubert eliminated the possibility of prejudice to the plaintiffs. Id.
The plaintiffs also moved to exclude Professor Ordover’s rebuttal declaration testimony.
They argued that his “assertion that a majority of the proposed class members illegally downloaded Digital Music is unreliable,” taking particular issue with a study commissioned by defendant Sony. Id. at *44-*45. The court found the illegal downloading proposition supported by “a number of authorities” other than the challenged study, including work by Professor Noll. Id. at *45. Moreover, Professor Ordover did not attempt to establish that class members engaged in illegal downloading. His point was “to show why individualized inquiries will be necessary to determine which class members engaged in such illegal downloading in order to offset their damages.” Id. at *45. There being no demonstration that Professor Ordover’s principles or methodology were flawed, Daubert did not provide a basis for a challenge to his analysis. Id. at 46.
The plaintiffs disputed whether “Professor Ordover’s opinion that CDs are not a valid benchmark for Digital Music because of the lack of broadband internet penetration during the class period” applied “specifically to music buyers, who may have had higher adoption rates.” Id. But the court concluded that the plaintiffs “ignore the fact that Professor Ordover is responding to an assertion made by their own expert . . . .” Id. at 46-47. Professor Noll had stated that “for the large majority of consumers who own computers and high-speed Internet connections,” digital music and CDs “are functionally equivalent.” Id. at 47. He further commented that “if a consumer has the necessary electronic devices, a CD and a digital download are functionally equivalent in that either can be converted to the other at a small cost.” Id. “A finding of functional equivalency affects Professor Noll’s analysis in determining whether or not CDs and Digital Music are economic substitutes, thereby helping to define the relevant market.” Id.
Both Professor Ordover and Professor Noll noted low levels of broadband penetration during the early years of the class period. Id. The plaintiffs argument that the rate of broadband penetration for class members was “likely” much higher than the rate for all users went “to the weight of Defendants’ evidence rather than its admissibility and should therefore be left to the trier-of-fact's consideration.” Id. at *47-*48.
Professor Ordover argued that “tiered” or “variable” pricing “would have existed in the but-for world” in which the alleged conspiracy did not exist. Id. at *48. The plaintiffs claimed that Professor Ordover had ignored contrary evidence, but the court noted evidence cited by Professor Ordover, including evidence of “a high degree of price heterogeneity across products in the music world, including CDs, which Professor Noll uses as a benchmark in his model of liability.” Id. at *48-*49. The court concluded that the plaintiffs failed to establish that Professor Ordover’s opinion is unreliable. Id. at *49.
The plaintiffs also challenged testimony by Professor Ordover “that Apple, rather than the Defendants, controlled the price of Digital Music and his pass-through calculations” as unreliable. Id. This, the court concluded, involved nothing more than a dispute about the interpretation of admissible evidence, and thus did not provide a basis for exclusion. Id. at *50-*51. The challenge to Professor Ordover’s “decision to cut off his pass-through regression analysis at $1.00” was rejected because Professor Ordover explained his reasoning and the plaintiffs’ “disagreement” did not provide a basis for exclusion. Id. at *53.
The plaintiffs’ remaining arguments regarding Professor Ordover’s testimony about differences in margins between artists, singles and albums, digital music sold at different prices, and albums with different numbers of tracks were held not to show his testimony unreliable, except as to price variability for digital downloads and albums, for which the defendants relied on the previously rejected argument that Professor Noll had changed his theory. Id. at *55-*59.
Mr. Read, a digital forensics expert, testified that “the only way to determine whether each track was lawfully purchased by a putative class member is to analyze the metadata on the particular track, which would then be compared with the individual’s account information with a specific DSP to determine whether an individual track associated with the account used or owned by each individual proposed class member,” and that none of “the hundreds of available metadata fields associated with the music files produced by the plaintiffs” indicated “the prices paid for each track or each album.” Id. at *59-*60.
The plaintiffs argued that Mr. Read had drawn a legal conclusion about the lawfulness of the purchases, and that the work he performed “is not based on specialized knowledge that will assist the trier of fact.” Id. at *60. The court rejected both arguments. Id. at *60-*66. Mr. Reed addressed “the methodology required to assess whether Plaintiffs’ Digital Music files contain indicia of legitimate purchases,” and his testimony did not “apply the legal standards applicable to class certification to the record evidence.” Id. at *60-*61. The plaintiffs did not “explain how the Court or the jury could convert a Digital Music file into a set of cognizable metadata fields that they could then review to conclude that a Digital Music file was associated with a particular user account for a specific DSP.” Id. at *64. “Mr. Read’s opinion is based on sufficient evidence (i.e., the Plaintiffs’ Digital Music tracks) and reliable methods and principles, including a commonly accepted digital forensic tool, ExifTool, Mr. Read’s years-long experience as a forensic examiner, and the same type of analysis he has employed in IP infringement cases to determine the disputed source of data. Id. at *64-65.
The plaintiffs sought certification of a nationwide injunctive relief class of digital music purchasers pursuant to Rule 23(b)(2) and nine damages classes under the laws of eight states and the District of Columbia pursuant to Rule 23(b)(3). The defendants opposed class certification on various grounds, including typicality and commonality, and the manageability of the class. Id. at *67-*68. The court sided with the defendants and denied class certification.
The court found the proposed class to meet the “implied requirement of ascertainability.” There was sufficient proof of purchase of digital music by the proposed class representatives, and the proposed class has “definite boundaries: those persons who acquired Digital Music during the class period.” Id. at *79-*81. But the plaintiffs’ claim that transaction data “allegedly retained by Apple and other DSPs will render the proposed class members ascertainable if the class is certified” was found insufficient. Id. at *82-*83.
The court found that the plaintiffs failed to satisfy the Rule 23(a) typicality requirement as a result of illegal downloading of music by members of the class. The defendants argued that the plaintiffs cherry-picked class representatives in an attempt to avoid this problem. Id. at *73. Over time, the plaintiffs added 13 class representatives and withdrew 13 others, “in order to find individuals who can both provide proof of music download purchases during the class period and did not engage in illegal downloading.” Id. at *73. The court noted that “the proposed class is filled with members who cannot demonstrate proof of purchase and downloaded music illegally.” Id. at *74. “[M]any proposed class members will be subject to counterclaims for a setoff of Plaintiffs’ damages as a result of having engaged in illegal downloading.” Id.
In Gary Plastic Packaging Corp. v. Merrill Lynch, 903 F. 2d 176, 180 (2d Cir. 1990), the Second Circuit held that class certification is inappropriate when the proposed class representatives are subject to unique defenses. The court held certification is also improper when it is the proposed class members who are subject o unique defenses. Id. at *75-*76. In addition to the language of Rule 23(b)(3), the court considered this conclusion “a necessary backstop to the discovery abuses evident in this litigation, where Plaintiffs have spent years engineering the current set of Class Representatives presumably in order to circumvent the rule in Gary Plastic.” Id. at *75-*76.
The Court denied certification of the proposed Rule 23(b)(2) class because: (1) the plaintiffs made only conclusory allegations that the alleged anticompetitive conduct was ongoing and thus could not show a threat of future harm, and (2) the plaintiffs’ proposed injunction would not provide a remedy for all class members. Professor Noll had acknowledged that “prices in the but-for world of at least some single track downloads would be higher than they are under the alleged conspiracy.” Id. at *85. An injunction would therefore not “inure to the benefit of all indirect-purchaser class members in the form of lower retail prices.” Id. at *85.
The defendants argued that the plaintiffs did not satisfy the Rule 23(b)(3) predominance requirement because “Professor Noll’s model fails to account for price variability in the but-for world.” Id. at *88. Some prices would have been higher than those that resulted from the alleged conspiracy, and “class members who bought music that, in the but-for world, would have been priced above the $.99 retail price cannot claim to have been overcharged for that purchase as a result of the conspiracy.” Id. at *87-*88. Thus “[d]etermining whether any given class member was injured by the alleged conspiracy or, in fact, benefitted from it by paying less for such downloads than he or she otherwise would have, would require analyzing each purchase made by that class member and determining the price at which each such track would have been sold in a world absent the alleged conspiracy. In other words, the prevalence of price variability in the but-for world, which Professor Noll concedes most likely would have existed, would require the Court to perform a host of individualized inquiries regarding price tiers of Digital Music sold during the class period and the purchase histories of each of the millions of proposed class members.” Id. at *88.
The plaintiffs therefore “failed to show that they can prove by common evidence that all class members were injured by the alleged price-fixing conspiracy,” and, if the class were certified, “individual issues related to damage calculations would overwhelm questions common to the class.” Id. at *91-*92.
A further predominance issue was presented by Professor Noll’s use of a uniform pass-through rate. Professor Noll “assumes despite contrary evidence that the retail price is a linear function of the wholesale price, i.e., that causation runs solely from wholesale prices to retail prices,” and his finding of “a uniform 140% pass-through rate” was held unreliable. Professor Noll had examined data only from Apple, although other DSPs accounted for approximately 20% of the track sales for the period for which the defendants provided transaction data. Id. at *94-*95. Evidence suggested that the pass-through rate applicable to WalMart was zero. Id. at *95. “Given the absence of a common pass-through rate, determining the correct pass-through would require conducting separate inquiries for each DSP.” Id. Because Professor Noll’s uniform pass-through rate was not supported by the evidence, his model did not provide a common methodology for assessing injury or damages such that the plaintiffs could establish the predominance of the common issues. Id.
The “unclean hands” issues associated with the illegal downloading of music by class members also defeated predominance. The plaintiffs made various arguments challenging the relevance of unclean hands defenses to the predominance inquiry, but the court held none sufficient to preclude consideration of the defenses. Id. at *97-*106. Given “overwhelming” statistical evidence of the frequency of illegal downloading, the plaintiffs would be required to “devote considerable time to rebut” the unclean hands defenses. Id. at *106-*107. “Considering the scale of illegal downloading of Digital Music that took place during the class period, Defendants’ counterclaims on the basis of unclean hands and individual damage calculations would rapidly become the focus of this litigation,” and the common issues were not shown to predominate. Id. at*108-*109.
Finally, the proposed Rule 23(b)(3) class, which included nine indirect purchaser subclasses, was not certified on the basis that differences in the various state laws would render the classes unmanageable. The court noted differences among the state laws as to both the proof requirements and affirmative defenses, id. at *110-*111, and the possibility that numerous choice of law determinations would be needed. Id. at *111.
The plaintiffs argued that the variations in state law were not a significant obstacle because the laws are to be construed in harmony with federal antitrust law. Id. at *110. The plaintiffs also argued that the variations in state law would “likely fall into a handful of clearly discernible statutory schemes.” Id. at*112. The court was not satisfied with what it called the “conclusory speculation” presented by the plaintiffs, id., and it noted the plaintiffs’ failure to respond to the defendants’ arguments about the differences in the unclean hands defenses under the various state laws or “the need for individualized choice of law determinations.” Id.
Robert E. Freitas
Freitas Angell & Weinberg LLP
In In re Pre-Filled Propane Tank Antitrust Litigation, 860 F.3d 1059 (8th Cir. 2017) (en banc), a 5-4 majority of the Eighth Circuit reversed the dismissal of a Sherman Act Section 1 claim complaint brought by “direct purchasers who bought tanks directly from Defendants for resale.” Id. at 1063. The plaintiffs alleged that the defendants “colluded to decrease the fill level of tanks” and charged “supracompetitive prices . . . throughout the Class Period.” Id.
The running of the limitations period generally “commences on the date the cause of action accrues, that being, the date on which the wrongdoer commits an act that injures the business of another.” Id. at 1063 (citing Varner v. Peterson Farms, 371 F.3d 1011, 1019 (8th Cir. 2004). The Pre-Filled Propane Tank plaintiffs alleged a “continuing violation” of Section 1. Id. A “continuing violation” “restarts the statute of limitations period each time the defendant commits an overt act.” Id. “An overt act has two elements: (1) it must be a new and independent act that is not merely a reaffirmation of a previous act, and (2) it must inflict new and accumulating injury on the plaintiff.” Id. (citing Varner, 371 F.3d at 1019).
The plaintiffs alleged “two types of overt acts within the limitations period: (1) Defendants’ sales to Plaintiffs at artificially inflated prices; and (2) conspiratorial communications between Defendants about pricing and fill levels.” Id. at 1063-64. The court of appeals considered “whether sales at artificially inflated prices are overt acts that restart the statute of limitations,” and “whether Plaintiffs allege a continuing violation exception sufficient to restart the statute of limitations.”
Klehr v. A.O. Smith Corporation, 521 U.S. 179 (1997), stated that “in the case of a ‘continuing violation,’ say, a price-fixing conspiracy that brings about a series of unlawfully high priced sales over a period of years, ‘each overt act that is part of the violation and that injures the plaintiff, e.g., each sale to the plaintiff, ‘starts the statutory period running again, regardless of the plaintiff’s knowledge of the alleged illegality at much earlier times.’” Id. at 189. The defendants argued that Klehr, a RICO case, was not controlling because the quoted language is dicta. 860 F.3d at 1064. Some cases suggest that lower courts are “bound” by Supreme Court dicta. Id. While the idea that lower courts are “bound” by dicta “goes too far,” id., Supreme Court dicta is due appropriate deference. Id. at 1064-65.
“Klehr’s definition of a continuing violation follows longstanding Supreme Court precedent,” id. at 1065, beginning with Hanover Shoe, Inc. v. United Shoe Machinery Corp., 392 U.S. 481 (1968). See also Zenith Radio Corp. v. Hazeltine Research, Inc., 401 U.S. 321 (1971). Moreover, “[e]very other circuit to consider this issue applies Klehr, holding that each sale in a price-fixing conspiracy is an overt act that restarts the statute of limitations. 860 F.3d at 1065-66 (citing Oliver v. SD-3C LLC, 751 F.3d 1081, 1086 (9th Cir. 2014), In re Travel Agent Comm’n Antitrust Litig., 583 F.3d 896, 902 (6th Cir. 2009), In re Cotton Yarn Antitrust Litig., 505 F.3d 274, 290-91 (4th Cir. 2007), and Morton’s Mkt., Inc. v. Gustafson’s Dairy, Inc., 198 F.3d 823, 828 (11th Cir. 1999)).
The Eighth Circuit had applied Klehr to new sales in In re Wholesale Grocery Products Antitrust Litigation, 752 F.3d 728 (8th Cir. 2014). The defendants argued that Wholesale Grocery did not apply because “the anticompetitive nature of the wholesalers’ agreement” was not known until several years after the asset exchange by which the violation was allegedly accomplished.” Id. at 1066. The Eighth Circuit rejected this attempt to distinguish Wholesale Grocery, as “knowledge of anticompetitive conduct is not relevant to the continuing violation analysis.” Id. Klehr stated that “each sale to the plaintiff, starts the statutory period running again, regardless of the plaintiffs’ knowledge of the alleged illegality at much earlier times.” Id. at 1066-67 (citing Klehr, 521 U.S. at 189.
The defendants also relied on Varner v. Peterson Farms, 371 F.3d 1011 (8th Cir. 2004), for the idea that “continued anticompetitive conduct, without more, does not restart the limitations period.” 860 F.3d at 1067. Varner held that “[a]cts that are merely unabated inertial consequences of a single act do not restart the statute of limitations.” Id. (citing Varner, 371 F.3d at1019-20). The court of appeals considered Varner, a tying case, distinguishable. Id.
The court cited Areeda and Hovenkamp for the proposition that “application of the continuing violation doctrine in the antitrust context depends on the nature of the violation and whether it involves a ‘cartel, vertical agreement or refusal to deal, monopolization, or merger.’” Id. (citing P. Areeda & H. Hovenkamp, Antitrust Law: An Analysis of Antitrust Principles and Their Application, ¶ 320c(1) (4th ed. 2016)). The alleged horizontal price-fixing agreement gave the defendants “unlawfully acquired market power to charge an elevated price.” Id. (citing Wholesale Grocery, 752 F.3d at 736). “Each time Defendants used that power (i.e., each sale), they committed an overt act, inflicting new and accumulating injury.” Id.
The court also distinguished Midwestern Machinery Co., Inc. v. Northwest Airlines, Inc., 392 F.3d 265 (8th Cir. 2004), a merger case. Midwestern Machinery noted that “[a] continuing violation theory based on overt acts that further the objectives of an antitrust conspiracy in violation of § 1 of the Sherman Act or that are designed to promote a monopoly in violation of § 2 of that act cannot apply to mergers under § 7 of the Clayton Act.” Id.
The court rejected the defendants’ argument that the Klehr rule “encourages plaintiffs to sleep on their rights.” Id. at 1068. “[T]he Klehr rule does not discourage timely filed suits because a ‘plaintiff cannot use an independent, new predicate act as a bootstrap to recover for injuries caused by other earlier predicate acts that took place outside the limitations period.’” Id. at 1068 (citing Klehr, 521 U.S. at 190). Klehr was thus held controlling.
The court also held that the complaint adequately alleged a continuing violation. The defendants argued that key allegations of the complaint were“impermissibly vague and conclusory.” Id. at 1070. The court observed that the plaintiffs “need not provide specific facts in support of their allegations.” Id. (citing Schaaf v. Residential Funding Corp.,517 F.3d 544, 549 (8th Cir. 2008). All that is required is “sufficient factual information to provide the‘grounds' on which the claim rests, and to raise a right to relief above a speculative level.” Id. With the complaint read “liberally in the light most favorable to” the plaintiffs, the allegations “plausibly give rise to an entitlement to relief.” Id.(citing Eckert v. Titan Tire Corp., 514 F.3d 801, 806 (8th Cir. 2008) and Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)).
The defendants also agued that the allegation that “the propane conspiracy succeeded” made “the maintenance of fill levels and prices mere ‘unabated inertial consequences’ and not overt acts continuing the conspiracy.” Id. The question was not, however, “whether the amended complaint alleges other overt acts in addition to sales to the Plaintiffs; the issue is whether the amended complaint alleges that the conspiracy continued when the sales took place. If so, under Klehr, ‘each sale to the plaintiff,’ is an overt act that restarts the statute of limitations.” Id.
The court also noted that it had “never applied the ‘unabated inertial consequences’ test to a horizontal price-fixing conspiracy, let alone one where Plaintiffs allege that ‘sales pursuant to the conspiracy continued throughout the Class Period,’ and ‘Defendants continued to have regular communications regarding pricing, fill levels, and market allocation until at least late 2010.’” Id. at 1071.
Judge Shepherd, joined in whole or in part by three judges, dissented. He considered the majority opinion to “incorrectly interpret Supreme Court precedent, fail to hold the plaintiffs’ complaint to the plausibility standard of Twombly and Iqbal, and ignore the purposes of the antitrust statute of limitations.” Id. The majority opinion “interprets the antitrust discussion in Klehr completely divorced from the facts and issues confronting the Supreme Court in that case.” Id. In context, according to Judge Shepherd, Klehr requires a live, ongoing conspiracy within the limitations period to survive a motion to dismiss.” Id.
Judge Shepherd stated that the Supreme Court’s comment on antitrust law “served only to illuminate the discussion of tolling RICO claims.” Id. The Supreme Court relied on Areeda and Hovenkamp, which, a few sentences after the sentence quoted by the Court, said “so long as an illegal price-fixing conspiracy was alive, each sale at the fixed price [started the four-year statute of limitation anew].” Id. Therefore sales can restart the limitations period only “so long as an illegal price-fixing conspiracy is alive and ongoing.” Id.
Judge Shepherd saw Hanover Shoe and Zenith Radio as consistent with his analysis. Id. at 1073. Without the requirement of a “live, ongoing conspiracy,” “plaintiffs could sue many years after an antitrust violation occurred and seek damages for subsequent sales without tying the prior antitrust violation to the subsequent sales.” Id. In Judge Shepherd’s view, the allegations of the complaint were not sufficient to meet this standard. Id. at 1073-75.
Judge Shepherd also considered the approach taken by the majority to be “counter to the purposes that underlie the imposition of a limitations period in private antitrust actions.” Id. The majority approach did not encourage timely filing that would limit public harm or provide repose to defendants. Id. Klehr became a “sledgehammer” used “to shatter the antitrust statute of limitations.” Id.
Jessica N. Leal
Freitas Angell & Weinberg LLP
On June 12, 2017, the Supreme Court answered “no” to the question whether federal courts of appeals have jurisdiction under 35 U.S.C. section 1291 to review orders denying class certification after the named plaintiffs have voluntarily dismissed their claims with prejudice. Microsoft Corp. v. Baker, 137 S. Ct. 1702 (2017). Courts of appeals had split on this question. See Berger v. Home Depot USA, Inc., 741 F.3d 1061, 1065 (9th Cir. 2014); Gary Plastic Packaging Corp. v. Merrill Lynch, 903 F.2d 176, 179 (2d Cir. 1990); Camesi v. University of Pittsburgh Medical Center, 729 F.3d 239, 245-47 (3d Cir. 2013); Rhodes v. E.I. du Pont de Nemours & Co., 636 F.3d 88, 100 (4th Cir. 2011). Justice Ginsburg delivered the opinion of the Court, in which Justices Kennedy, Breyer, Sotomayor, and Kagan joined.
Some historical background is helpful. “From the very foundation of our judicial system,” the general rule has been that “the whole case and every matter in controversy in it [must be] decided in a single appeal.” McLish v. Roff, 141 U.S. 661, 665-66 (1891). Section 1291 codified this final-judgment rule, giving the federal courts of appeals jurisdiction over “all final decisions of the district courts of the United States.” 28 U.S.C. § 1291. The statute “preserves the proper balance between trial and appellate courts, minimizes the harassment and delay that would result from repeated interlocutory appeals, and promotes the efficient administration of justice.” 137 S. Ct. at 1712. The Interlocutory Appeals Act of 1958, 28 U.S.C. section 1292(b), created a bi-level “screening procedure” for establishing appellate jurisdiction to review non-final orders. Id. at 1708. “For a party to obtain review under § 1292(b), the district court must certify that the interlocutory order ‘involves a controlling question of law as to which there is substantial ground for difference of opinion and that an immediate appeal from the order may materially advance the ultimate termination of the litigation.’” Id. Only then may the court of appeals “in its discretion, permit an appeal to be taken from such order.” Id.
Before 1978, some courts of appeals were considering class certification denials as appealable final orders under section 1291. These courts applied the “death-knell” doctrine, rationalizing that the refusal to certify a class would “end a lawsuit for all practical purposes because the value of the named plaintiff’s individual claim made it ‘economically imprudent to pursue his lawsuit to a final judgment and [only] then seek appellate review of [the] adverse class determination.’” Id. at 1707. The Supreme Court held in Coopers & Lybrand v. Livesay, 437 U.S. 463 (1978), that the fact an interlocutory order may induce a party to abandon his or her claim before final judgment is not a sufficient reason for considering the order a “final decision” within the meaning of section 1291. Id. at 1708.
Seen as a response to the Coopers & Lybrand decision, Federal Rule of Civil Procedure 23(f) was approved in 1998. Id. at 1709. Rule 23(f) authorized “permissive interlocutory appeal” from adverse class certification orders in the discretion of the court of appeals. “Rule 23(f) ‘departs from the § 1292(b) model,’ for it requires neither district court certification nor adherence to § 1292(b)’s other ‘limiting requirements.’” Id. at 1709. Rule 23(f) did not, however, provide for an appeal as a matter of right. The decision whether to permit interlocutory appeal from an adverse decision was committed to “the sole discretion of the court of appeals.” “Permission is most likely to be granted,” the Committee Note states, “when the certification decision turns on a novel or unsettled question of law,” or when “the decision on certification is likely dispositive of the litigation,” as in a death-knell or reverse death-knell situation. Committee Note on Rule 23(f).
Fast forward to 2007. Microsoft Corporation is sued for an alleged product defect of its Xbox 360 video-game console. Id. at 1710. The Xbox-owner plaintiffs seek class certification in May 2009. In re Microsoft Xbox 360 Scratched Disc Litig., No. C07-1121-JCC, 2009 WL 10219350, at *2 (W.D. Wash. Oct. 5, 2009). The plaintiffs alleged the Xbox devices destroyed game discs during normal playing conditions. Id. at *1. The district court denied class certification, holding that individual issues of damages and causation predominated over common issues. Id. at *6–*7. The plaintiffs petitioned the Ninth Circuit under Rule 23(f) for leave to appeal the class-certification denial, but the Ninth Circuit denied the request. Baker v. Microsoft Corp., 851 F. Supp. 2d 1274, 1276 (W.D. Wash. 2012). Thereafter, the plaintiffs settled their claims individually.
A new lawsuit was filed in the same court in 2011 alleging the same Xbox design defect. Id. at 1275-76. The new plaintiffs argued the class-certification analysis in the earlier case did not control because an intervening change in law overcame the previous certification denial. Id. at 1277-78. The district court disagreed and struck the class allegations. Id. at 1280-81. The plaintiffs petitioned the Ninth Circuit under Rule 23(f) for leave to appeal, arguing interlocutory review was appropriate because the order would “effectively kil[l] the case” as the claims made it “economically irrational to bear the cost of litigating th[e] case to final judgment.” Id. at 1711. The Ninth Circuit denied the petition.
Different options as next steps existed for the plaintiffs at this time. First, the plaintiffs could proceed to litigate their case to final judgment and then appeal. Id. at 1711. Second, the plaintiffs could proceed to litigate their case in hopes the district court would later reverse course and certify the proposed class. Id. Third, the plaintiffs could petition the district court to certify an interlocutory order for appeal pursuant to section 1292(b). Id. Fourth, the plaintiffs could settle their individual claims. Id.
Instead of exercising one of these options, the plaintiffs stipulated to a voluntary dismissal of their claims “with prejudice,” but reserved the right to revive their claims should the district court’s certification denial be reversed. Maintaining that the defendants would have “no right to appeal,” Microsoft stipulated to the dismissal. Id. The district court granted the stipulated dismissal. The plaintiffs thereafter appealed the district court’s interlocutory order striking their class allegations – not the dismissal order – to the Ninth Circuit under section 1291. Id.
On appeal, the Ninth Circuit rejected Microsoft’s argument that the plaintiffs’ dismissal impermissibly circumvented Rule 23(f). Id. at 1711-12. The Ninth Circuit ultimately held the district court had misapplied the comity doctrine and remanded on the question whether a class should be certified. Baker v. Microsoft Corp., 797 F.3d 607, 610 (9th Cir. 2015). Thereafter the Supreme Court granted Microsoft’s petition for a writ of certiorari.
Because the plaintiffs’ voluntary dismissal “subverts the final-judgment rule and the process Congress has established for refining that rule and for determining when non-final orders may be immediately appealed,” the Supreme Court held the tactic “does not give rise to a ‘final decisio[n]’ under §1291.” Id. at 1712-13. The Supreme Court highlighted its recognition that “finality is to be given a practical rather than a technical construction.” Id. at 1712 (quoting Eisen v. Carlisle & Jacquelin, 417 U. S. 156, 170, 171 (1974)). “Repeatedly we have resisted efforts to stretch §1291 to permit appeals of right that would erode the finality principle and disserve its objectives.” Id.
The Court went on to describe the “voluntary-dismissal tactic” as inviting “protracted litigation and piecemeal appeals,” even more so than the death-knell doctrine. Id. at 1713. “Under the death-knell doctrine, a court of appeals could decline to hear an appeal if it determined that the plaintiff ‘ha[d] adequate incentive to continue’ despite the denial of class certification. Appellate courts lack even that authority under [the plaintiffs’] theory. Instead, the decision whether an immediate appeal will lie resides exclusively with the plaintiff; she need only dismiss her claims with prejudice, whereupon she may appeal the district court’s order denying class certification. And, as under the death-knell doctrine, she may exercise that option more than once, stopping and starting the district court proceedings with repeated interlocutory appeals.” Id. (citations omitted).
Rule 23(f) was crafted carefully by rule makers, the Supreme Court said, leaving the sole discretion to the courts of appeals. Id. at 1714. That careful crafting “warrants the Judiciary’s full respect.” Id. (quoting Swint v. Chambers County Comm’n, 514 U. S. 35, 48 (1995)). [E]ven plaintiffs who altogether bypass Rule 23(f) may force an appeal by dismissing their claims with prejudice,” under the plaintiffs’ logic. Id. If such logic were embraced, the Supreme Court said, “Congress[‘] final decision rule would end up a pretty puny one.” Id. at 1715 (quoting Digital Equipment Corp. v. Desktop Direct, Inc., 511 U. S. 863, 872 (1994)).
Because the Court held section 1291 does not provide jurisdiction over the plaintiffs’ attempted appeal, it did not reach the related question of whether courts of appeals have jurisdiction under Article III of the Constitution to review an order denying class certification after the named plaintiffs have voluntarily dismissed their claims with prejudice. Justice Thomas, with whom the Chief Justice and Justice Alito joined, filed an opinion concurring in the judgment because, although he disagreed with the Court’s reading of section 1291, he agreed “that the plaintiffs could not appeal in these circumstances.” Id. at 1716. In Justice Thomas’s view, the plaintiffs “could not appeal because the Court of Appeals lacked jurisdiction under Article III of the Constitution. Whether a dismissal with prejudice is ‘final’ depends on the meaning of §1291, not Rule 23(f). Rule 23(f) says nothing about finality, much less about the finality of an order dismissing individual claims with prejudice.” Id.
Jonathan Y. Mincer
Thomas M. Cramer
Simpson Thacher & Bartlett LLP
On May 30, 2017, the Federal Trade Commission (“FTC”) filed an administrative complaint against the Louisiana Real Estate Appraisers Board, alleging that the Board violated Section 5 of the FTC Act by unreasonably restraining price competition for real estate appraisal services in Louisiana. In re La. Real Estate Appraisers Bd., Docket No. 9374, available at https://www.ftc.gov/system/files/documents/cases/d09374louisianareappraiserscomplaint.pdf. The complaint alleges that the Board cannot rely on the state action doctrine to avoid liability because it is controlled by active market participants, there is no active state supervision, and no federal or state statute requires the Board to act as it did. This complaint attempts to build on the FTC’s recent state-action win against a North Carolina board in the Supreme Court. See N. C. State Bd. of Dental Exam’rs v. FTC, 135 S. Ct. 1101 (2015)(“N.C. Dental”).
The State Action Doctrine and N.C. Dental
The state action doctrine, established by the Supreme Court in Parker v. Brown, 317 U.S. 341 (1943), immunizes certain state action from federal antitrust law. “The doctrine is grounded in and derived from principles of federalism and state sovereignty.” Crosby v. Hosp. Auth. of Valdosta & Lowndes Cty., 93 F.3d 1515, 1521 (11th Cir. 1996). The actions of a state legislature or state supreme court are immune, without further analysis, from federal antitrust law. Hoover v. Ronwin, 466 U.S. 558, 567-68 (1984). A municipality has immunity when it acts pursuant to a clearly articulated state policy. Town of Hallie v. City of Eau Claire, 471 U.S. 34, 40 (1985). And when a state delegates authority to private parties, the private parties’ action is immune only if it is both (1) pursuant to a clearly articulated state policy and (2) actively supervised by the state. Cal. Liquor Dealers Ass’n v. Midcal Aluminum, Inc., 445 U.S. 97, 105 (1980).
In N.C. Dental, the Supreme Court considered whether the actions of the North Carolina State Board of Dental Examiners, which was controlled by active participants in the market it regulated, were required to meet the active supervision requirement—like those of a private party, but unlike those of a municipality. The Court held that active supervision is required. N.C. Dental, 135 S. Ct. at 1110. The Court explained that, although the North Carolina Board is a state agency, “the need for supervision turns not on the formal designation given by States to regulators but on the risk that active market participants will pursue private interests in restraining trade.” Id. at 1114. Since active participants controlled the North Carolina Board, such a risk was present, and active supervision was needed to ensure the board’s actions were pursuant to state policy. Id.
The Court then found that the actions of the Board did not satisfy the active supervision requirement—an issue the Board had not contested. Id. at 1116. The Court explained that active supervision requires that the supervisor not itself be an active market participant, that it “review the substance of the anticompetitive decision, not merely the procedures followed to produce it,” and that it “have the power to veto or modify particular decisions to ensure they accord with state policy.” Id. at 1116-17. In N.C. Dental, Board had prevented non-dentists from providing teeth-whitening services, arguing that this constituted the unlicensed practice of dentistry. Id. at 1108. The Supreme Court concluded that the state statute authorizing the Board to regulate the practice of dentistry did not address teeth whitening, and the state had not otherwise reviewed or concurred with the Board’s actions. Id. at 1116.
The FTC’s Allegations Against the Louisiana Real Estate Appraisers Board
The FTC’s recent complaint in In re Louisiana Real Estate Appraisers Board follows N.C. Dental by challenging the promulgation and enforcement of a November 2013 rule requiring appraisal management companies (“AMCs”) to pay a “‘customary and reasonable’ fee for real estate appraisal services” determined by certain set methods, rather than through market competition. Compl. ¶¶ 1-2. The FTC alleges that the Board’s actions violate federal antitrust law and are not entitled to immunity: the Board is alleged to be controlled by active market participants in the field it regulates, not acting pursuant to federal or state policy, and not actively supervised by the state.
The Louisiana Real Estate Appraisers Board is a state agency that regulates and licenses both appraisers and AMCs. Id. ¶¶ 9, 27. “AMCs act as agents for lenders in arranging for real estate appraisals” provided by appraisers. Id. ¶ 1. The FTC alleges that active market participants control the Board because, by state statute, eight of the Board’s ten members must be licensed appraisers (the other two must be representatives of the lending industry). Id. ¶¶ 10-11, 53.
The FTC also alleges that the Board is not acting pursuant to a clearly articulated state policy or a federal or state statute. The federal Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank”) requires real estate lenders and their agents to compensate appraisers “at a rate that is customary and reasonable for appraisal services performed in the market area of the property being appraised.” Id. ¶ 19. Dodd-Frank contains an antitrust savings clause providing that it does not “modify, impair, or supersede the operation of any of the antitrust laws.” Id. ¶ 20. In 2012, the Louisiana legislature amended its statute governing AMCs to require AMCs to compensate appraisers at a customary and reasonable rate, as provided by Dodd-Frank. Id. ¶ 28. The state statute allegedly “does not require the Board to impose standards for customary and reasonable fee requirements beyond what federal law provides, or to set customary and reasonable fees at any particular level.” Id. And, the FTC alleges, neither Congress nor the Louisiana legislature has otherwise articulated an intention to displace competition in the setting of appraisal fees. Id. ¶¶ 51, 52, 54.
The FTC alleges that the actions of the Board fail the active supervision requirement for state-action immunity because “[i]ndependent state officials have not supervised” its actions. Id. ¶¶ 7, 53.
Finally, the FTC alleges, the Board’s actions violate federal antitrust law. Specifically, the Board—“driven by its apparent dissatisfaction with the free market”—adopted a regulation called Rule 31101, “which specifies how AMCs must comply with the customary and reasonable fee requirement.” Id. ¶ 30. Rule 31101 requires AMCs to pay appraisers rates based only on one of three sources: (1) “third-party fee schedules, studies, or surveys of fees paid by lenders;” (2) “a fee schedule formally adopted by the Board;” or (3) recent rates in the local market, adjusted by (i) the type of property, (ii) the scope of work, (iii) the time in which the appraisal must be performed, (iv) the appraiser’s qualifications, (v) the appraiser’s experience and professional record, and (vi) the appraiser’s work quality. Id. ¶¶ 23, 31.
The FTC alleges that “by its express terms, the Board’s fee regulation unreasonably restrains competition by displacing a marketplace determination of appraisal fees.” Id. ¶ 3. Further, the FTC alleges, the Board’s enforcement of Rule 31101 has unlawfully restrained competition. The Board allegedly commissioned reports “identifying median appraisal fees” in each geographic region of the state, and it has treated these median fees as “a floor for appraisal fees that AMCs must pay appraisers.” Id. ¶¶ 35-36. The Board has fined and suspended licenses of AMCs not paying fees at or above the median fees found in the reports. Id. ¶¶ 37-41.
This complaint marks the FTC’s first enforcement action against a state board since N.C. Dental and is part of the FTC’s new initiative to address anticompetitive local and state occupational licensing regulations. The administrative trial is set to begin on January 30, 2018.
David M. Goldstein
Orrick, Herrington & Sutcliffe LLP
On June 12, 2017, the Ninth Circuit held that the collateral-order doctrine does not allow an immediate interlocutory appeal of an order denying a motion to dismiss based on state-action immunity. SolarCity Corp. v. Salt River Project Agricultural Improvement and Power District, 2017 WL 2508992 (9th Cir. June 12, 2017). In so holding, however, the Ninth Circuit acknowledged a split among the courts of appeals, which could provide the Power District with a basis for a petition for a writ of certiorari.
SolarCity sells and leases rooftop solar-energy panels, which allow customers to reduce the amount of energy they buy from suppliers, including the Power District. SolarCity alleges that, to prevent SolarCity from installing more panels, the Power District adopted a new pricing structure under which any customer who obtains power from his or her own system must pay a prohibitively large penalty. SolarCity alleges that after the new rates took effect, solar panel retailers received 96% fewer applications for new solar-panel systems in the Power District’s territory.
Solar City sued the Power District, asserting that it violated the Sherman Act and the Clayton Act by attempting to maintain a monopoly over the supply of electrical power in its territory. Based on the fact that it is a political subdivision of Arizona, the Power District moved to dismiss under Rule 12(b)(6) arguing, among other things, that it is immune from liability under the federal antitrust laws based on state-action immunity. The district court denied the motion and declined to certify an interlocutory appeal, but the Power District appealed nonetheless.
The Ninth Circuit’s Analysis
The Power District argued that an order denying state-action immunity is immediately appealable under the collateral-order doctrine. The Ninth Circuit briefly summarized the state-action doctrine established in Parker v. Brown, 317 U.S. 341 (1943), explaining that it “counsels against reading the federal antitrust laws to restrict the States’ sovereign capacity to regulate their economies and provide services to their citizens” and that it “also protects local governmental entities if they act pursuant to a clearly articulated and affirmatively expressed state policy to displace competition.” 2017 WL 2508992, at *3 (citing FTC v. Phoebe Putney Health Systems, Inc., 133 S. Ct. 1003, 1007 (2013)).
The Ninth Circuit explained that under the collateral-order doctrine, an interlocutory order—such as an order denying a motion to dismiss—can only be appealed (1) if it “conclusive,” (2) it addresses a question that is “separate from the merits” of the underlying case, and (3) that separate question raises “some particular value of a high order” and evades effective review if not considered immediately. All three requirements must be satisfied for the ruling to be immediately appealable. “The Supreme Court has repeatedly emphasized that these requirements are stringent and that the collateral-order doctrine must remain a narrow exception. Id. at *2 (citations omitted).
The Power District argued that the denial of a motion to dismiss based on state-action immunity is immediately appealable in the same way that the collateral-order doctrine permits an immediate appeal of a denial of a motion to dismiss based on other immunities (e.g., Eleventh Amendment immunity and foreign sovereign immunity, among others). The Ninth Circuit disagreed, reasoning that other immunities that are immediately appealable are immunities from being sued, not immunities from liability. The Court then explained that both it “and the Supreme Court have described state-action immunity as an immunity from liability.” Id. at *4 (citations omitted). Accordingly, an order addressing state-action immunity is analogous to orders denying motions to dismiss under the Noerr-Pennington doctrine and statutory preemption, neither of which is immediately appealable. “In sum, because the state-action doctrine is a defense to liability and not an immunity from suit, the collateral-order doctrine does not give us jurisdiction here.” Id. at *5 (footnotes and citations omitted).
The Court then rejected the Power District’s two counterarguments. The Power District argued that because state-action immunity has constitutional origins, an order denying its application is immediately appealable. The court disagreed, explaining that, for example, Noerr-Pennington immunity is grounded in the First Amendment but an order denying its application is not immediately appealable. Id. at *5. The Power District also argued that an immediate appeal was necessary to avoid litigation that would distract government officials. The court rejected this argument based primarily on Will v. Hallock, 546 U.S. 345 (2006), in which the Supreme Court held that federal agents in a Bivens case could not immediately appeal an order denying their motion to dismiss on the ground that review was necessary to prevent distraction to the government: “the possibility of mere distraction or inconvenience to the Power District does not give us jurisdiction here.” Id. at *6 (footnote omitted).
The Circuit Split
The last section of the Ninth Circuit’s decision—approximately one-fourth of its entire opinion—addresses an acknowledged Circuit split. The Fourth and Sixth Circuits have held that an unsuccessful assertion of state-action immunity fails the second and third parts of the collateral-order test outlined above, and therefore is not immediately appealable. But the Fifth and Eleventh Circuits have held that an unsuccessful assertion of state-action immunity is comparable to an unsuccessful assertion of qualified immunity for government officials or of Eleventh Amendment immunity, both of which are immediately appealable. The Ninth Circuit found the analysis in the Fourth and Sixth Circuit decisions to be more “persuasively and thoroughly reasoned” in light of “the Supreme Court’s “persistent emphasis that the collateral-order doctrine must remain narrow.” Id. at *7 (citations omitted).
On June 20, the Power District filed a motion to stay issuance of the mandate for 90 days so it can file a petition for a writ of certiorari.
Kayla A. Odom
Freitas Angell & Weinberg LLP
Judge Andrew L. Carter of the United States District Court for the Southern District of New York dismissed complaints against a number of Brent crude oil producers, refiners, traders, and affiliates in an order dated June 8, 2017. In re N. Sea Brent Crude Oil Futures Litig., No. 13-md-02475 (ALC), 2017 U.S. Dist. LEXIS 88246, at *11-12 (S.D.N.Y. June 8, 2017). The plaintiffs, representatives of a putative class of futures and derivatives traders (“Trader Plaintiffs”) and a putative class of the owners of landholding and lease-holding interests in United States oil-producing property (“Landowner Plaintiff”), alleged that the defendants conspired to manipulate Brent crude oil prices and the prices for Brent crude oil futures and derivatives contracts traded on the New York Mercantile Exchange (“NYMEX”) and the Intercontinental Exchange (“ICE Futures Europe”) in violation of the Commodity Exchange Act, the Sherman Act, and various state laws. Id. The plaintiffs alleged that the defendants “monopolized the Brent Crude Oil market and entered into unlawful combinations, agreements, and conspiracies to fix and restrain trade in, and intentionally manipulate Brent Crude Oil prices and the prices of Brent Crude Oil futures and derivative contracts.” Id. at *12. Judge Carter dismissed all claims, finding that the plaintiffs failed to state a claim under the Commodities Exchange Act, failed to allege that they suffered any antitrust injury under the Sherman Act, and similarly failed to allege state and common law claims.
Brent crude oil is a variety of light, sweet oil pulled from the North Sea region of Europe, and serves as a benchmark for two-thirds of the world’s internationally-traded crude oil supplies. Id. at *13. Brent crude oil benchmarking is done through methodology employed by price reporting agencies, including the so-called Market-On-Close (“MOC”) methodology by Platts (based in London), where the analysis of market-pricing data is limited to transactions occurring during a half-hour window at the end of the trading day. Information is collected during this period on trades, bids, and offers for contracts for Brent crude oil, and that information is analyzed to determine an assessment of market value. Id. at *14-15. The plaintiffs contended that the pricing assessments for Brent crude oil “are directly linked” to Brent crude oil futures and other derivative contract prices, and thus manipulation of the pricing assessment “has effects that ripple throughout the Brent Crude Oil and futures market.” Id. at *15. The Landowner Plaintiff also alleged that Brent crude oil influences the price of West Texas Intermediate, the other light, sweet crude oil that serves as a major benchmark for the world’s oil prices. Id. at *18.
The plaintiffs alleged that the defendants “conspired to manipulate the Brent crude oil market, including the market for Brent futures and derivatives contracts, by engaging in manipulative conduct and fraudulent physical trades and then deliberately and systematically submitting information about those trades to Platts during the MOC window.” Id. at *18-19. They alleged that manipulative physical trades and reporting manipulated the Platts pricing assessment, and “has effects that ripple throughout the Brent Crude Oil and futures market, impacting a wide variety of derivative and futures contracts on NYMEX and ICE.” Id. at *19. The defendants moved to dismiss the complaints. Id. at *21.
The court agreed with the defendants that the Trader Plaintiffs’ Commodity Exchange Act (“CEA”) claims exceeded the territorial limitations of the statute. Id. at *23. To determine whether the plaintiffs’ CEA claims may be applied extraterritorially, the court applied the two-part test laid out by the Supreme Court in Morrison v. Nat’l Australia Bank Ltd., 561 U.S. 247 (2010), as amplified by the Second Circuit in Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60 (2d Cir. 2012). In re N. Sea Brent Crude Oil Futures Litig., 2017 U.S. Dist. LEXIS 88246, at *24-27.
First, the court found that the CEA “does not contain any statements suggesting that Congress intended the reach of the law to extend to foreign conduct.” Id. at *28. Next, the court examined whether the “focus of congressional concern” in the CEA suggests that extraterritorial application is appropriate—i.e., whether the commodities transaction occurred on a domestic exchange, or if the transaction itself is domestic. Id. at *29 (citing Morrison, 561 U.S. at 267). The court concluded that “while the Trader Plaintiffs may have purchased or sold Brent futures and derivatives on domestic exchanges or otherwise entered into domestic commodities transactions, the crux of their complaints against Defendants does not touch the United States.” Id. at *32. “The Trader Plaintiffs’ claims are based on Defendants’ allegedly manipulative and misleading reporting to Platts in London about physical Brent crude oil transactions conducted entirely outside of the United States that indirectly affected the price of Brent futures and derivatives contracts traded on exchanges.” Id. In addition, the Brent crude oil assessment published by Platts (which the plaintiffs argue was allegedly inaccurate due to the defendants’ manipulative reporting), does not serve as a reference point for pricing of the futures and derivatives contracts available on NYMEX and ICE Futures Europe. Id. at *33. Thus, the court held the Trader Plaintiffs had failed to state a claim under the CEA. Id.
As to the plaintiffs’ Sherman Act claims, the Court answered the threshold question of whether the plaintiffs had antitrust standing. A private antitrust plaintiff is required to demonstrate antitrust standing (in addition to constitutional standing), by showing that it (1) has suffered an antitrust injury and (2) is an “efficient enforcer” of the antitrust laws. Id. at *34-35 (citing Associated Gen. Contractors of Calif., Inc. v. Calif. State Council of Carpenters, 459 U.S. 519, 535 n.31 (1983) and Gelboim v. Bank of Am. Corp., 823 F.3d 759, 770-772 (2d Cir. 2016)). The court did not reach the “efficient enforcer” inquiry as the plaintiffs failed to demonstrate that they suffered “antitrust injury,” that is injury “of the type the antitrust laws were intended to prevent and that flows from that which makes defendants’ acts unlawful.” Id. (quoting Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 489 (1977)).
The court reiterated the rule that generally, only market participants can be said to have suffered antitrust injury, but recognized the narrow exception for parties whose injuries are “inextricably intertwined” with the injuries of market participants such that the “defendant’s anticompetitive scheme hinges on harm to the plaintiff or the plaintiff’s market.” In re N. Sea Brent Crude Oil Futures Litig., 2017 U.S. Dist. LEXIS 88246, at *35 (citing Blue Shield of Virginia v. McCready, 457 U.S. 465, 479-80 (1982) and In re Aluminum Warehousing Antitrust Litig.,833 F.3d 151, 159 (2d Cir. 2016)). The court explained that “sometimes the defendant will corrupt a separate market in order to achieve its illegal ends, in which case the injury suffered can be said to be ‘inextricably intertwined’ with the injury of the ultimate target.” Id. at *36 (quoting In re Aluminum Warehousing Antitrust Litig.,833 F.3d at 161).
The plaintiffs alleged that the defendants conspired to manipulate the price of Brent crude oil by engaging in a variety of “misleading conduct and sham transactions” in the physical oil market and then reporting those transactions to Platts during the MOC window. Id. at *39-40. The defendants did so, the plaintiffs alleged, because the Brent oil producer, refiner, and seller defendants might want to drive up the price of Brent to increase their profits, and because the Platts assessment is incorporated into certain futures and derivatives products traded on NYMEX and ICE Futures Europe (where certain defendants and Trader Plaintiffs trade) and closely correlates with the “ICE Brent Index,” which serves as a benchmark for other Brent products traded on NYMEX and ICE Futures Europe. Id. at *40. While the plaintiffs and defendants offered both broad and narrow definitions of the relevant market, the relevant markets for purposes of the antitrust standing analysis were determined to be “the physical Brent crude oil market and the market for any derivative instrument that directly incorporates Dated Brent as benchmark or pricing element.” Id. at *40-41.
The Landowner Plaintiff did not demonstrate that he participated in a restrained market, either by participating in the physical Brent crude oil market with the defendants, or by virtue of the defendants’ manipulation of the benchmark relevant to his crude oil interests. Id. at *42. The Trader Plaintiffs, while they identified a handful of derivative contracts traded on NYMEX and ICE Futures Europe that incorporated the Platts pricing assessment for Brent crude oil, did not allege that they bought or sold any of the particular derivative contracts. Id. at *43. “This is fatal to their claim.” Id. “Merely participating in the Brent derivatives market, generally, does not give rise to an antitrust injury here because the Trader Plaintiffs have not alleged facts showing anticompetitive harm to the derivatives market as a whole.” Id. at *43-44. For the NYMEX and ICE Futures Europe derivative contracts that did not incorporate the Platts pricing assessment for Brent crude oil, the Trader Plaintiffs could not demonstrate that their injuries are inextricably intertwined with the harm to the defendants’ market participants or “the very means by which” the defendants affected their anticompetitive scheme in the physical Brent crude oil market. Id. at *45-46. This would be “contrary to the Trader Plaintiffs’ theory,” which asserted that the defendants manipulated the price of Brent crude oil by engaging in manipulative and misleading physical oil trades among themselves that would impact the price of certain derivatives. Id. at *46.
The Trader Plaintiffs also failed to allege a claim for unjust enrichment. Id. at *47. Under New York law, a plaintiff must allege that the other party was enriched, at the plaintiff’s expense, “that it is against equity and good conscience to permit the other party to retain what is sought to be recovered[,]” and that there is a “sufficiently close relationship” with the defendant that “could have caused reliance or inducement” by the plaintiff. Id. (citing Georgia Malone & Co. v. Rieder, 19 N.Y.3d 511, 516 (2012) and Mandarin Trading Ltd. v. Wildenstein, 16 N.Y.3d 173, 182 (2011)). The court held that the Trader Plaintiffs “failed to allege a relationship of any kind with the Defendants, let alone one that is ‘sufficiently close’ to have caused reliance or inducement.” Id. at *47. The Trader Plaintiffs did not allege that the defendants were their counterparties on any trades involving Brent futures or derivatives, and thus their unjust enrichment claim was dismissed. Id. at *48.
Lastly, the court dismissed the Landowner Plaintiff’s state law antitrust claims. Id. at *49-52. Judge Carter concluded that “[g]iven the similarities between the private rights of action in Louisiana and federal antitrust law, for the same reasons the Court found that the Landowner Plaintiff did not suffer a federal antitrust injury, the Court also dismisses the Landowner Plaintiff’s claim under the Louisiana antitrust statute for lack of antitrust injury.” Id. at *50-51. The court also held that the Landowner Plaintiff’s factual allegations that he suffered losses tied to suppressed West Texas Intermediate crude oil prices did “not support the conclusory assertion that this alleged loss occurred as a result of Defendants’ ‘unfair or deceptive acts or practices’” because the Landowner Plaintiff was “quite clear” that Brent crude oil does not serve as a benchmark for West Texas Intermediate, but that these two crude oil benchmarks merely have moved in tandem over time. Id. at *51-52.
Bori Celia Ha
University of Texas School of Law
In Kelsey K. v. NFL Enterprises, LLC, No. C 17-00496 WHA, 2017 WL 2311312 (N.D. Cal. May 25, 2017), Judge William Alsup of the Northern District of California considered allegations that the National Football League (“NFL”) and its member teams had committed antitrust violations by allegedly conspiring “‘to fix and suppress the compensation of’ and ‘to eliminate competition among them for’ cheerleaders.” Id. at *2. On May 25, 2017, Judge William Alsup dismissed the complaint under Rule 12(b)(6). The court allowed the plaintiff to seek leave to file an amended complaint. On June 15, 2017, the plaintiff filed a motion for leave to file a first amended complaint; the court has yet to rule on the motion.
The plaintiff Kelsey K. is a former employee of the San Francisco 49ers who worked as a cheerleader on the 49ers’ “Gold Rush Girls” dance team. She asserted putative class claims under the Sherman Act and the Cartwright Act against the NFL and its member teams. The court noted that the complaint asserted “only claims for violations of antitrust law. This is not a lawsuit for violation of wage-and-hour or labor laws. Nor is it a complaint for general maltreatment of cheerleaders.” Id. at *4 (citation omitted). The court concluded that the plaintiff had not met the requirements to state a claim under the Sherman Act or the Cartwright Act. Id.
I. No Conspiracy, Only Parallel Conduct
Mere parallel conduct is not enough to suggest a conspiracy. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556-57 (2007). To distinguish between impermissible conspiracy and permissible parallel conduct, a plaintiff must allege “plus factors,” i.e., “economic actions and outcomes that are largely inconsistent with unilateral conduct but largely consistent with explicitly coordinated action,” that would suggest the defendants conspired. See In re Musical Instruments & Equip. Antitrust Litig., 798 F.3d. 1186, 1193-94 (9th Cir. 2015). A plausible claim of unlawful conduct must include allegations tending to exclude the possibility of independent action. Kelsey K. v. NFL, 2017 WL 2311312, at *5.
First, the court addressed the plaintiff’s allegation that the defendants conspired to suppress compensation for cheerleaders in violation of Section 1 of the Sherman Act. Citing Name.Space, Inc. v. Internet Corp. for Assigned Names & Numbers, 795 F.3d 1124, 1129 (9th Cir. 2015), the court stated that “[a] Section 1 claim requires (1) a contract, combination, or conspiracy (2) intended to unreasonably restrain or harm trade (3) that actually injures competition and (4) harms the plaintiff via the anticompetitive conduct.” The plaintiff asserted that the defendants conspired to suppress the earnings of cheerleaders by “(1) paying them ‘a low, flat wage for each game’ and not paying them for rehearsals or community outreach events; (2) refraining from poaching other teams’ cheerleaders; and (3) prohibiting cheerleaders from seeking employment with other professional cheerleading teams and from discussing their earnings with each other.” Kelsey K., 2017 WL 2311312, at *2.
The plaintiff alleged that senior executives of NFL teams attend numerous meetings throughout the year, including “annual NFL owner meetings, the NFL scouting combine, the NFL Draft, the Super Bowl, the Pro Bowl, trade shows, and even conference calls.” The court determined that “this allegation, taken as true, supports no inference of nefarious purpose or unlawful conduct. Attendance at the aforementioned annual events would have been consistent with simply running the business of the NFL and its member teams, a perfectly legitimate endeavor.” Id., at *3. Judge Alsup held in In re Graphics Processing Units Antitrust Litigation that allegation of the mere opportunity to meet and agree to fix prices due to frequent attendance at the same meetings was not sufficient to plead a conspiracy. 527 F. Supp. 2d 1011,1024 (N.D. Cal. 2007). The plaintiff argued that her complaint pleaded more than mere opportunity to conspire, but instead, pleaded “specific meetings where specific (though unnamed) persons expressly agreed to engage in very specific activities in an effort to collectively suppress wages of a specific set of their respective employees.” Kelsey K., 2017 WL 2311312, at *6. The court disagreed with the plaintiff’s characterization, citing a lack of direct evidence of conspiracy or allegation of any specific meeting. Id., at *7 (“[Plaintiff] describes legitimate NFL meetings and events as opportunities to conspire. Both descriptions are rhetorical spin that beg the most important question, namely, whether there was any conspiracy to begin with.”).
The plaintiff alleged that the defendants conspired to suppress cheerleaders’ earnings by paying a low, flat wage for each game and not paying them for rehearsals or community outreach events. The complaint stated that the Raiders, Buccaneers, and Bengals paid their cheerleaders $125, $100, and $90 per game respectively, and the Bills cheerleaders were not paid for games at all. The court held that “these admissions of non-parallel conduct undercut the very theory asserted by the complaint.” Id., at *8. Accordingly, the court concluded, the complaint “either lacks sufficient supporting factual allegations or alleges facts tending to weigh against a finding of conspiracy.” Id. at *9.
The plaintiff also alleged that the defendants refrained from poaching cheerleaders from other NFL member teams as part of an agreement to suppress earnings. However, the complaint did not state whether poaching would occur in the absence of such an agreement, and in the absence of factual allegations of that nature, the absence of poaching was not meaningful. The court similarly dismissed as conclusory the plaintiff’s allegations that the defendants prohibited cheerleaders from seeking employment with other professional cheerleading teams and discussing their earnings with each other. The court found the complaint insufficient for failing to “answer the basic questions of ‘who, did what, to whom (or with whom), where, and when’ as to these prohibitions imposed on cheerleaders.” Id. at *10.
II. No Allegations of Injury to Plaintiff
The court held that the plaintiff failed to plead that she was injured by the defendants’ alleged conduct and thus plead a necessary component of her Section 1 claim. Although the plaintiff alleged that she was “injured in her business or property by reason of the violations alleged,” the court found this statement “utterly conclusory.” Id. at 11.
III. The Cartwright Act and Interstate Commerce
The court also held that the plaintiff failed plausibly to allege a conspiracy under the Cartwright Act because her “federal and state law antitrust claims are predicated on the same allegations of conspiracy.” Id. at *11.
To determine whether granting leave to amend the complaint would be futile, the court considered the California Supreme Court’s decision in Partee v. San Diego Chargers Football Co., 34 Cal. 3d 378, 380, 385 (1983), holding that “the Cartwright Act is not applicable to the interstate activities of professional football” because the “burden on interstate commerce outweighs the state interests in applying state antitrust laws to that structure.” The court concluded that it was not clear whether Partee applied, since the case at hand involved cheerleaders, not football players, and considered different factual allegations. Kelsey K., 2017 WL 2311312, at *12. Because determining whether Partee applied would be a fact-intensive inquiry, the court held that it was not an appropriate question to address at the complaint stage, and granting leave to amend would not necessarily be futile. Id. Therefore, the court granted the plaintiff leave to amend.
Rafey S. Balabanian
On March 20, 2017, the Ninth Circuit reversed a district court’s decision to dismiss Sarmad Syed’s claim under the Fair Credit Reporting Act, 15 U.S.C. § 1681 et seq., relating to a “Pre-Employment Disclosure and Release” he had signed authorizing a credit check. Syed v. M-I LLC, 853 F.3d 492 (9th Cir. 2017). The court’s opinion addresses a number of important issues that recur in the FCRA context, including standing to sue, a company’s obligations when obtaining authorization to run a pre-employment background check, and the standard for willfulness.
In 2011 Syed sought—and received—employment with M-I, LLC. During the application process he signed a “Pre-Employment Disclosure and Release” form. 853 F.3d at 497. That document did three things: it authorized M-I to run a credit check on Syed, it informed Syed that “the information obtained will be used as one basis for employment or denial of employment,” and it waived M-I’s liability for “any and all liability and claims” concerning the credit check. Id. at 497-98.
Syed’s lawsuit alleged that this form violated 15 U.S.C. § 1681b(b)(2)(A). That provision of the FCRA prohibits a company from “caus[ing] a consumer report to be procured, for employment purposes with respect to any consumer, unless (i) a clear and conspicuous disclosure has been made in writing to the consumer . . . in a document that consists solely of the disclosure, that a consumer report may be obtained for employment purposes.” The provision also requires that the consumer “authorize” the background check and provides that the “authorization may be made on the document” containing the disclosure. Syed argued that the “Pre-Employment Disclosure and Release” form violated this provision because it contained, in addition to the disclosure and authorization, a liability waiver. 853 F.3d at 498. Further, citing to staff opinion letters from the Federal Trade Commission, Syed argued that M-I’s violation was “willful,” and thus sought statutory damages. Id.
The district court rejected Syed’s argument that any violation was willful. 2014 WL 5426862, at *3 (E.D. Cal. Oct. 23, 2014). The court concluded that the statutory language is “less than pellucid” and that the FTC letters did not provide any authoritative guidance. Id. Thus, the court found, M-I’s construction of the FCRA was “objectively reasonable.” Id. at *4. Because the violation wasn’t willful, Syed could recover only actual damages. Since he conceded he had suffered none, the district court dismissed his lawsuit. Id.
The Ninth Circuit Opinion
On appeal, the Ninth Circuit reached three key conclusions: Syed had standing to sue, the statutory text is “unambiguous,” and M-I’s violation of the FCRA was willful.
A. Syed had standing to sue.
Although the district court had not addressed standing, the Ninth Circuit took up the issue in light of the Supreme Court’s intervening guidance in Spokeo, Inc. v. Robins, which held that a statutory violation must give rise to “concrete” injury before a plaintiff can sue for statutory damages. 136 S. Ct. 1540, 1548-50. The Ninth Circuit concluded that Syed met this test. In Syed, the court held that § 1581b(b)(2)(A) “creates a right to information” in the disclosure that a credit check will be made and “a right to privacy” insofar as prospective employees must authorize the credit check, and that a violation of the provision creates “a concrete injury when applicants are deprived of their ability to meaningfully authorize the credit check.” 853 F.3d at 499. Because Syed alleged that he “was not aware that he was signing a waiver authorizing the credit check when he signed” the release form, the court could “fairly infer that Syed was confused by the inclusion of the liability waiver with the disclosure and would not have signed it had it contained a sufficiently clear disclosure.” Id. The court therefore concluded that “Syed was deprived of the right to information and the right to privacy guaranteed by Section 1681b(b)(2)(A).” Id.
B. The statutory language is clear.
Moving to the merits, the Ninth Circuit acknowledged that “neither the Supreme Court nor any circuit court of appeals has addressed whether a prospective employer may satisfy 15 U.S.C. § 1681b(b)(2)(A) by providing a disclosure on a document that also includes a liability waiver.” Id. at 500. Nevertheless, the court held that such a document clearly violated the statute.
M-I argued that the statute isn’t all that clear: Immediately after requiring the disclosure to be made on a standalone document, the statute allows a company to receive authorization to run the credit check on the same document. How could a statute that is internally inconsistent be that clear? Id.
The Ninth Circuit rejected that argument, concluding that “the authorization clause is an express exception to the requirement that the document consist ‘solely of the disclosure.’” Id. Thus, there is no ambiguity or inconsistency. Moreover, the court concluded, M-I’s reading gave no effect to the word “solely” in the statute. Id. at 501. M-I also argued that the statute contains an “implicit” exception for a liability waiver, but the court rejected that argument, reasoning that the inclusion of an explicit exception forecloses the possibility of any implicit exceptions. Id. at 502. The court finally concluded that its reading was consistent with the purposes of the statute: “Congress reasonably could have concluded that permitting the consumer to provide an authorization on the same page as the disclosure would enhance the effectiveness of each clause.” Id. at 501.
Finally, the court rejected M-I’s two alternative arguments. First, the court held that, contrary to M-I’s argument, the liability waiver did not constitute a form of “authorization” that was allowed by the statute. Id. at 502. M-I also made a type of harmless error argument, suggesting that because its disclosure was “clear and conspicuous” as required by law, its failure to otherwise adhere to the law didn’t matter. The Ninth Circuit concluded that the question wasn’t properly presented, but noted that it found M-I’s argument, and the cases it cited in support, “inexplicable.” Id. at 503.
C. M-I’s violation was willful.
After concluding that the statutory language is unambiguous, the court made quick work of the argument that M-I’s violation wasn’t willful. Given the clarity of the statute, the court had no trouble concluding that M-I’s reading of it was “objectively unreasonable.” Id. at 503. The court also rejected M-I’s argument that the lack of guidance from the FTC on the issue saved it. Analogizing to the law of qualified immunity, the court held that authoritative regulatory guidance is unnecessary if the text of the law is clear. Id. at 504.
The court did note, however, that M-I’s unreasonable interpretation of the law did not automatically mean that it willfully violated the statute. But the court nevertheless concluded that M-I had acted recklessly, and therefore willfully. “The term we are called upon to construe,” the court wrote, “is not subject to a range of plausible interpretations.” Id. at 505. Even though an issue of first impression, because this was not a “borderline case,” M-I “ran an unjustifiably high risk of violating the statute.” Id. at 506.
The Ninth Circuit’s decision carries a number of implications going forward. First, regarding standing, the court was willing to broadly conceive of the interests protected by the FCRA, but the court still required some specific allegations about the plaintiff before finding that he had standing to sue. This, however, is not a high bar. Already, Syed has been cited twice in FCRA cases for its discussion of standing principles. In each case, the court found that the plaintiff had standing to sue. Syed also continued a trend of recognizing that invasions of a right to privacy are actionable in federal court, even without consequential damages.
Syed significantly clarifies the law regarding willfulness. The court read the law strictly, with an eye toward greater consumer protection. And, significantly, the court held that a willful violation of the law could be based on the text of the law alone. A company cannot hide behind a lack of guidance from the FTC or the courts. Instead, prospective employers have an affirmative obligation to reasonably interpret the law themselves. Finally, the court made clear that willfulness could be resolved as a matter of law on the basis of objective evidence alone, but left open the possibility that the question might require fact-finding into a defendant’s subjective interpretation of the FCRA or its motivations. Id. at 505 n.7.
Jessica N. Leal
Freitas Angell & Weinberg LLP
In Broadway Grill, Inc. v. VISA Inc., et al., __ F.3d __, 2017 WL 2174549 (9th Cir. 2017), the Ninth Circuit considered “whether plaintiffs may amend their complaint, after a case has been removed to federal court, to change the definition of the class so as to eliminate minimal diversity and thereby divest the federal court of jurisdiction” under the Class Action Fairness Act (“CAFA”). Id. at *1. The court concluded that amendment is not possible, even in light of its earlier creation of a “small exception to the general rule that bars post-removal amendments related to jurisdiction” in Benko v. Quality Loan Service Corp., 789 F.3d 1111 (9th Cir. 2015). 2017 WL 2174549, at *4. The court described “the range of amendments permitted under our prior opinion in Benko . . . ,” as “very narrow.” Id. at *1.
Broadway Grill, a California restaurant, filed a class action in California state court against Visa Inc. and related corporations alleging violations of the Cartwright Act and the Unfair Competition Law “by fixing rates and preventing merchants from applying a surcharge for the use of credit cards.” Id.
The class was described as “all California individuals, businesses and other entities who accepted Visa-branded cards in California since January 1, 2004 . . . .” Id. As described in the original complaint, the class “included both California and non-California citizens.” Id.
Because members of the class as originally described were not citizens of California, and at least one class member had citizenship diverse from that of one defendant, the CAFA minimal diversity requirement was met. See 28 U.S.C. § 1332(d)(2)(A). Visa removed the case to federal court, and Broadway Grill sought remand under 28 U.S.C. § 1332(d)(4), “the so-called ‘local controversy’” exception that applies when “two-thirds of the class members are citizens of the state of filing and a ‘significant’ defendant is a citizen of that state as well.” 2017 WL 2174549, at *1. The district court denied the motion because Broadway Grill failed to satisfy the two-thirds requirement. Id. Broadway Grill then requested leave to amend its complaint to include only California citizens in the class, and thus to defeat minimal diversity. Id.
Jurisdiction is generally determined at the time of removal. The courts of appeals have not permitted post-removal amendments of a complaint to affect the existence of federal jurisdiction outside of an exception articulated in the Ninth Circuit’s Benko opinion. The Benko court permitted amendment “in limited circumstances to add allegations of underlying facts that clarify the nature of the claims for purposes of determining CAFA jurisdiction.” Id. (citing Benko, 789 F.3d at 1117). The specific amendment in Benko “set out the percentage of claims that were against the in-state defendant in order to show it was a ‘significant defendant’ within the CAFA exception to federal jurisdiction.” Id. The district court, relying on Benko, permitted Broadway Grill’s amendment and remanded the case to state court. The defendants appealed the remand order.
Citing the absence of disagreement among the courts of appeals on the question of when the appropriateness of remand must be assessed, the Ninth Circuit stated that “[T]his unanimity seems firmly to establish that plaintiffs’ attempts to amend a complaint after removal to eliminate federal jurisdiction are doomed to failure.” Id. at *2.
Contrary to Benko, where “the amendment did not alter the definition of the class,” id., the amendment proposed by Broadway Grill “changed the definition of the class itself. Instead of being composed of all the merchants in the state of California, regardless of citizenship, the class, as defined in the amended complaint, became exclusively composed of California citizens.” Id. at *3. The proposed amendment was “outside the exception recognized in Benko and thus cannot affect the removability of the action.” Id. “Benko did not . . . strike a new path to permit plaintiffs to amend their class definition, add or remove defendants, or add or remove claims in such a way that would alter the essential jurisdictional analysis.” Id. at *4. See also id. (“Our decision in Benko did not sanction post-removal amendments that change the nature of the claims or the make up of the class.”).
The Ninth Circuit found no “other circuit decisions permitting post-removal amendment of the complaint to affect the existence of federal jurisdiction and certainly none permitting alteration of the make up of the class.” Id. at *3. The court also noted Hargett v. RevClaims, LLC, — F.3d —, 2017 WL 1405034, at *3 (8th Cir. Apr. 14, 2017), in which the Eighth Circuit refused to allow the post-removal narrowing of a class from “Arkansas residents” to “Arkansas citizens.” 2017 WL 2174549, at *3. See also Reece v. AES Corp., 638 F. App’x 755, 775 (10th Cir. 2016) (“post-removal amendments are ineffective to divest a federal court of jurisdiction.”); In Touch Concepts, Inc. v. Cellco P’ship, 788 F.3d 98, 101 (2d Cir. 2015); Cedar Lodge Plantation, L.L.C. v. CSHV Fairway View I, L.L.C., 768 F.3d 425, 429 (5th Cir. 2014) (“Allowing Cedar Lodge to avoid federal jurisdiction through a post-removal amendment wold turn the policy underlying CAFA on its head.”); In re Burlington Northern Santa Fe Ry., Co., 606 F.3d 379, 381 (7th Cir. 2010) (“removal cases present concerns about forum manipulation that counsel against allowing a plaintiff’s post-removal amendments to affect jurisdiction”). The court also cited legislative history indicating that Congress understood that post-removal amendments could not eliminate federal jurisdiction. 2017 WL 2174549 at *3.
Judge Rawlinson dissented. She pointed out that the “thrust of Broadway Grill’s Complaint, before and after amendment, was that the Visa defendants engaged in anticompetitive behavior in setting the rates for interchange fees charged to merchants in violation of California antitrust and unfair competition laws. Id. at *4 (emphasis in original). Broadway Grill, a California corporation that did business only in California, relied solely on alleged violations of California law. Id. No issue regarding the citizenship of the class members was present when the complaint was filed in state court. After removal, Broadway Grill was allowed to amend “to clarify the class of California citizens” under Benko. Id.
“Pre-amendment, the Complaint defined the class as ‘All California individuals, businesses and other entities who accepted Visa-Branded Cards.’ Post-amendment, the Complaint defined the class as ‘All California citizens who are individuals, businesses and other entities who accepted Visa-Branded Cards.’” Id. at *5. “The amendment,” Judge Rawlinson argued, “in no way changed the nature of the action against the Visa defendants. Pre-amendment and post-amendment, the Complaint asserted the exact same claim against the Visa defendants: engaging in anticompetitive behavior through setting the interchange fees charged to California merchants.” Id. The amendment was “entirely consistent” with Benko. Id.
Judge Rawlinson took issue with the majority’s concern that the amendment “changed the definition of the class.” Id. at *5. She argued that this is “exactly the type of change countenanced in Benko–‘information required to determine whether a suit is within the court’s jurisdiction under CAFA.’” Id. (citing Benko, 789 F.3d at 1117). Judge Rawlinson also challenged the idea that the amendment “changed the nature of the action,” pointing out that the case remained “one of alleged anticompetitive behavior in violation of California statutes.” Id. “The description of the class was defined more precisely without in any way expanding or modifying the allegations underlying the asserted cause of action.” Id.
Judge Rawlinson agreed that the cases decided in other circuits were based on “the premise that post-removal amendment to pleadings is prohibited.” Id. She claimed, however, that Benko “expressly and definitively disavowed reliance on this premise.” Id. Judge Rawlinson concluded that “the district court’s ruling fits squarely within . . . Benko.” Id.
Intern, Federal Trade Commission
Student, UC Irvine School of Law
Plaintiff Ryan Perry filed a complaint in the Northern District of Georgia against CNN for a violation of the Video Privacy Protection Act (“VPPA”). Perry claimed that CNN’s iPhone app illegally tracked users’ views of news articles and videos, collected a record of users’ activity without their knowledge or consent, and sent that information to a third-party data analytics company in violation of the VPPA. Perry v. Cable News Network, Inc., 854 F.3d 1336, 1339 (11th Cir. 2017).
Perry sought injunctive relief and statutory and punitive damages. Id. The district court dismissed Perry’s class action complaint, finding that Perry was not a statutory “consumer” under the VPAA, and that the information CNN shared was not “personally identifiable information.” Perry appealed the dismissal to the Eleventh Circuit Court of Appeals. The court of appeals affirmed.
The Eleventh Circuit found that Perry established standing under Article III of the Constitution by alleging a concrete injury under the VPPA. The VPPA creates a cause of action for anyone “aggrieved” by a violation of the VPAA, and the court concluded that “violation of the VPPA constitutes a concrete harm” sufficient to confer standing. Id. The VPPA seeks to “‘preserve personal privacy with respect to the rental, purchase, or delivery of video tapes or similar audio visual materials . . . .”’ Ellis v. Cartoon Network, Inc., 803 F.3d 1251, 1252-53 (quoting 134 Cong. Rec. S5396-08, S. 2361 (May 10, 1988)). The VPPA cause of action for this type of invasion of privacy “has a close relationship to a harm that has traditionally been regarded as providing a basis for a lawsuit in . . . American courts.” Perry, 854 F.3d at 1340-41. See Spokeo, Inc. v. Robins, 136 S. Ct. 1540 (2016).
But the court of appeals concluded that Perry was not a “subscriber” under the VPAA. Under the VPAA, a consumer is “any renter, purchaser, or subscriber of goods or services from a video tape service provider[.]” 18 U.S.C. § 2719(a)(1). Subscribership requires an “ongoing commitment or relationship between the user and the entity which owns and operates the app.” Perry, 854 F.3d at 1341 (quoting Ellis, 803 F.3d at 1257). Perry was not a subscriber under Ellis because he did not demonstrate an ongoing commitment or relationship with CNN. Id. at 1342. In particular, Perry did not establish an account with CNN, did not provide any personal information, did not make any payments, did not become a registered user of CNN or its app, did not receive a CNN ID, did not establish a profile, did not sign up for periodic services or transmissions, and did not make any commitment or establish any relationship that would allow him to have access to exclusive or restricted content. Id.
The Eleventh Circuit further held that Perry’s proposed amended complaint (which would have alleged a subscriber relationship with CNN based on Perry’s relationship with his cable television provider) would be futile because the proposed amendment established a relationship between Perry and his cable television provider, not Perry and CNN. Id. at 1342-43.
Simpson Thacher & Bartlett LLP
On May 3, acting Federal Trade Commission chair Maureen Ohlhausen spoke about the agency’s work during the first 100 days of President Trump’s administration. A “major initiative” she highlighted was the new Economic Liberty Task Force, which primarily seeks to reform local and state occupational licensing regulations that unnecessarily hinder competition. See Remarks of Acting Chairman Maureen K. Ohlhausen: The FTC at 100 [Days] (May 3, 2017), https://www.ftc.gov/system/files/documents/public_statements/1213893/ohlhausen_-_ftc_at_100_days_5-3-17.pdf.
Background on the Economic Liberty Task Force
The Commission created the task force this past February because “occupational licensing has exploded in this country over the last few decades.” Id. While occupational licenses are meant to protect the public, Commissioner Ohlhausen noted that licensing requirements have often become a way for existing providers to exclude potential competitors from entering a market. She cited the fact that the states unanimously require licenses for only 60 of the roughly 1,100 occupations that require licenses in at least one state. In other words, the vast majority of occupations that require a license in at least one state can be performed freely, without any licensing requirement, elsewhere. As Commissioner Ohlhausen explains, this information “suggests that many occupational licenses do not advance public health, safety, or other legitimate public protections.” Jared Meyer, FTC Sets Its Sights On Occupational Licensing, Forbes (Apr. 17, 2017), https://www.forbes.com/sites/jaredmeyer/2017/04/17/ftc-sets-its-sights-on-occupational-licensing/#52cc84d977ae.
The task force’s focus is advocacy: educating state legislators and other interested parties on occupational licensing’s potential anticompetitive effects and working with those parties to reduce, in Commissioner Ohlhausen’s words, “excessive occupational licensing.” But the agency will likely continue to challenge occupational licensing bodies that exceed their authority when warranted, as it did in North Carolina State Board of Dental Examiners v. FTC (“NC Dental”), a case decided by the Supreme Court in 2015. Combined, these efforts seek to raise awareness that occupational licensing requirements may be anticompetitive—and subject to federal antitrust scrutiny.
The Task Force is Part of a Broader Advocacy Initiative
The task force is part of a broader initiative to “expand and strengthen” the FTC’s competition advocacy work. “All too often,” Commissioner Ohlhausen observed, “policymakers across state and federal government hear only from one side when considering new laws or regulations.” The Commission aims to correct that imbalance by “by ensuring that legislators consider consumer interests and consumer concerns.”
The FTC has often weighed in on proposed licensing legislation—whether regarding occupational licensing or other state licensing regimes—when invited by state legislators. For example, in response to an Alaska senator’s request for comments, the FTC and the Department of Justice issued a joint statement in April 2017 in support of Alaska Senate Bill 62, a bill to repeal Alaska’s certificate-of-need (“CON”) laws. See Press Release, Fed. Trade Comm’n, FTC and DOJ Support Reform of Alaska Laws That Limit Competition in the Health Care Sector (Apr. 12, 2017), https://www.ftc.gov/news-events/press-releases/2017/04/ftc-doj-support-reform-alaska-laws-limit-competition-health-care. CON laws were initially intended to keep health care costs low and improve the quality of care by preventing the duplication of services, but the FTC now views them as harmful barriers to entry and innovation. Over the past decade, the FTC and the DOJ have issued similar statements to North Carolina, South Carolina, Virginia, Tennessee and Illinois legislators regarding their CON and Certificate of Public Advantage programs, the latter of which governs cooperative agreements among health care providers.
The launch of the FTC’s new task force suggests that the agency may build on its “decades of experience advocating against harmful licensing” to proactively partner with states, rather than await invitation. Commissioner Ohlhausen’s comments support this approach. She has said that through the task force, the Commission hopes “to have a ‘new level of partnership’ with governors, state attorneys general and others to give competition issues a greater role in regulatory decision-making.” Jimmy Hoover, FTC Chair To Take on Job Licensing With New Task Force, Law360 (Feb. 23, 2017), https://www.law360.com/articles/895025/ftc-chair-to-take-on-job-licensing-with-new-task-force.
The Task Force’s Work Will Be Supplemented By Enforcement Actions Against Anticompetitive Practices
Though “advocacy and partnership will be the primary work” of the task force, Commissioner Ohlhausen cautioned that “the FTC will bring enforcement actions in appropriate cases.” Id. Licensing organizations have sent “letters, warnings, or even fines” to stop new providers from engaging in work the organizations view as protected. These notices can be appropriate when exercised with proper authority. But—as in the case of NC Dental—they may be inconsistent with antitrust laws if they fail to meet the requirements for state-action immunity.
In NC Dental, the North Carolina State Board of Dental Examiners issued at least 47 cease-and-desist letters to non-dentists who offered teeth whitening services, often alleging that the unlicensed practice of dentistry was a crime. See 135 S. Ct. 1101, 1108 (2015). After the FTC filed an administrative complaint, the Board moved to dismiss on state-action immunity grounds. Id. at 1108-09. An administrative law judge denied the motion, and the FTC and the Court of Appeals for the Fourth Circuit affirmed the denial. Id. at 1109.
The Supreme Court held that a “nonsovereign actor controlled by active market participants,” id. at 1110, cannot, under “the two-part test set forth in California Retail Liquor Dealers Ass’n v. Midcal Aluminum, Inc., 445 U.S. 97 (1980),” id. at 1111-12, successfully claim state-action immunity unless the “State has articulated a clear policy to allow the anticompetitive conduct,” and “the State provides active supervision of [the] anticompetitive conduct.” Id. at 1110, 1112 (alterations in original). While acknowledging the “adequacy of supervision” is “context-dependent,” the Court noted an “active” supervisor must “review the substance of the anticompetitive decision,” “have the power to veto or modify particular decisions to ensure they accord with state policy,” and not “itself be an active market participant.” Id. at 1116-17. Applying this test to the Board, the Court concluded that it did not enjoy state-action immunity because practicing dentists controlled the Board, and the Board failed to allege that North Carolina supervised its efforts to prevent non-dentists from offering teeth-whitening services. Id.at 1110, 1116.
Some states have begun to address restrictive occupational licensing in response to NC Dental. In April, Mississippi Governor Phil Bryant signed a bill requiring state approval of new regulations from occupational licensing boards to ensure they are the “least restrictive regulation necessary to protect consumers.” See Occupational Board Compliance Act, 2017 MISS LAWS 1425 (Westlaw). The new law establishes a commission to oversee many of the executive branch’s licensing boards and authorizes it to modify or veto new regulations, providing the “active supervision” required under NC Dental. See id.
The Mississippi commission is not charged with reviewing existing regulations, so it will not fulfill the FTC’s goal of reducing current occupational licensing restrictions. See id. But the law represents a novel approach to deregulation in that it applies to all occupational licensing boards in Mississippi controlled by market participants regardless of industry. It can thus serve as a model for other states seeking to discourage new licensing barriers on a broader scale, rather than industry by industry. See Luke Hilgemann & Russ Latino, Does the Public Need Protection From Rogue Auctioneers?, Wall St. J. (Apr. 28, 2017), https://www.wsj.com/articles/does-the-public-need-protection-from-rogue-auctioneers-1493417388.
With landmark decisions like NC Dental, the FTC’s use of advocacy—rather than enforcement—may seem a slow way to effect state-level change. But, if the Economic Liberty Task Force can encourage comprehensive regulatory reforms like the Mississippi law, “excessive occupational licensing” may be swiftly curtailed. Stay tuned.
Robert E. Freitas
Freitas Angell & Weinberg LLP
On May 19, 2017, Judge Marianne O. Battani of the Eastern District of Michigan issued an order denying motions by Green Tokai Co., Ltd. and Nishikawa Rubber Company, Ltd. and affiliates to dismiss class action complaints filed by automobile dealer and “end payor” indirect purchaser plaintiffs. In re: Automotive Parts Antitrust Litigation, No. 2:16 cv-03402-MOB-MKM (E.D. Mich. May 19, 2017) .
The plaintiffs alleged that Green Tokai and others participated in a “conspiracy to rig bids and fix the prices of Body Sealing Products.” Slip. Op. at 1. Body sealings are “typically made of rubber and trim the doors, hoods, and compartments of Vehicles.” Id. at 2. They “keep noise, debris, and rainwater from entering a Vehicle and control Vehicle vibration and may serve as a design element.” Id. “Nishikawa Rubber agreed to plead guilty and pay a $130 million criminal fine for its role in a conspiracy to fix the prices of and rig the bids for automotive body and sealing products installed in cars sold to U.S. consumers, from at least as early as January 2000 to at least September 2012.” Id. Green Tokai was indicted for its alleged role in the fixing of prices for body sealings. Id.
The complaints alleged that OEMs “install Body Sealings, purchased directly from Defendants, in vehicles as part of the manufacturing process,” and that body sealings are also also “purchased by component manufacturers who then supply such systems to OEMs.” The component manufacturers are “called ‘Tier 1 Manufacturers’ in the industry. Tier 1 Manufacturers supply Body Sealings directly to an OEM.” Id. at 3.
The parties disputed whether the plaintiffs provided allegations sufficient to “establish they indirectly purchased cars with Body Sealing Parts from GTC or its co-conspirators during the Class Period.” Id. at 4. The plaintiffs’ constitutional standing was also contested. Id.
The end payors identified certain Japanese OEMs as “specific targets of the conspiracy,” but the auto dealers did not. Id. The end payors also did not identify the specific vehicles they purchased, and it was apparently agreed that “many ADPs did not purchase their Vehicles from the Japanese OEMs identified by EPPs and were not authorized to do so.” Id. “Based on the absence of identification of the specific models sold by ADPs or purchased by ADPs or EPPs,” Green Tokai sought dismissal of the plaintiffs’ complaints. Id.
The court concluded that the plaintiffs alleged they purchased vehicles containing price-fixed products. The “complaints make clear that [the representative plaintiffs] seek to represent all automobile dealers and all persons or entities who made purchases of Vehicles containing Body Sealings manufactured or sold by Defendants, their subsidiaries or co-conspirators during the class period.” Id. at 5. The plaintiffs alleged “(1) ‘OEMs purchase Body Sealings directly from Defendants’ or indirectly from Tier 1 Manufacturers that purchase Body Sealings directly from Defendants; (2) ‘Body Sealings are installed by [OEMs] in Vehicles as part of the automotive manufacturing process’; and (3) that each End-Payor Plaintiff ‘purchased at least one Body Sealing indirectly from at least one Defendant or its co-conspirator’ as a result.” Id. at 5-6.
The court rejected the argument that the plaintiffs were required to plead that they purchased or leased vehicles “manufactured by specific OEMs that had purchased Body Sealings from the defendants.” Id. at 6. “Therefore, the fact that named [plaintiffs] have confirmed they did not purchase vehicles manufactured by the Japanese OEMs identified in the complaints does not warrant a different outcome.” Id. The court observed that Green Tokai’s “argument builds on matters outside the pleadings, and invites the Court to review the allegations in the complaints in isolation under a heightened standard.” Id. “The Court decline[d] the invitation.” Id.
The court also reiterated its previously stated view that “the identification of certain OEMs in the complaints does not limit the claims to those OEMs.” Id. Prior decisions “make clear that limitation of claims to only those OEMs identified in a guilty plea or used as an illustrative example is inappropriate at this early stage, particularly, where IPPs have not had discovery.” Id. Discovery “may reasonably be expected to reveal that the conspiracy in which the named Defendants participated was significantly broader and had significantly broader effects than what was disclosed in the DOJ indictments and set forth in the Plea Agreement that the Nishikawa Defendants negotiated. Those criminal pleadings are subject to the higher, criminal standards than the civil allegations made in Plaintiffs’ Complaints. Discovery is likely to provide further support for Plaintiffs’ assertion of an industry-wide Body Sealings conspiracy affecting many OEMs.” Id. at 7.
While the defendants “concede[d] that IPPs have alleged that Body Sealing Products follow a traceable physical chain of distribution, they argued “that IPPs have not alleged that the[y] purchased from the three OEMS identified as Defendants’ customers.” Id. at 8. Perceiving “no confusion about what parts IPPs allegedly purchased,” the court distinguished In re Magnesium Oxide Antitrust Litig., No. 10-5943, 2011 WL 5008090 (D. N.J. Oct. 20, 2011), as a case in which “the plaintiffs failed to identify which products they had purchased, and the products were not only produced differently, they had different commercial applications.” Id. In Magnesium Oxide,“without knowing which specific products the plaintiffs purchased, it was ‘impossible to determine whether an increase in their price is the type of injury that furthers the object of the alleged conspiracy.’” Id.
Simpson Thacher & Bartlett LLP
On March 7, 2017, the Southern District of Indiana granted the National Collegiate Athletic Association’s (“NCAA”) motion to dismiss a Sherman Act claim relating to the NCAA’s year-in-residence bylaw, finding the NCAA’s rule presumptively pro-competitive and therefore declining to apply a rule of reason analysis. Deppe v. NCAA,2017 U.S. Dist. LEXIS 31709 (S.D. Ind. Mar. 6, 2017).
The case involved a former “preferred walk-on” punter at Northern Illinois University (“NIU”), Peter Deppe. Deppe “redshirted” during the 2014-15 season, and was told by the NIU special teams coach in August 2014 that he would begin receiving a scholarship in January 2015. The special teams coach left NIU soon thereafter, and the head coach subsequently told Deppe he would not receive a scholarship. Id. at *2. Deppe was granted a release by NIU and sought opportunities with other schools. Id. at *3.
The University of Iowa coaching staff advised Deppe that he would have a place on the team if he would be eligible to play in the 2016-17 football season. NCAA Rule 220.127.116.11., the year-in-residence bylaw, states that “a transfer student from a four-year institution shall not be eligible for intercollegiate competition at a member institution until the student has fulfilled a residence requirement of one full academic year . . . at the certifying institution.” NCAA Bylaw 18.104.22.168.Deppe contacted the NCAA on several occasions, requesting that he be declared eligible to play at Iowa despite the rule, but he was advised that a waiver request could only be made “by an institution to which a student is transferring.” Id. at *4. Three days after Deppe was admitted to Iowa, the Iowa coaches informed Deppe they had decided to pursue another punter who had immediate eligibility, and that Iowa would not pursue a waiver on his behalf. See id. at 4-5. Deppe filed a class action challenging the year-in-residence requirement as an “unreasonable restraint on trade” violative of the Sherman Act. Id.
The court relied on the Seventh Circuit’s decision in Agnew v. National Collegiate Athletic Association, 683 F.3d 328 (7th Cir. 2012), and held that because the NCAA’s eligibility rules provide a “means of fostering competition among amateur athletic teams and are therefore procompetitive because they enhance public interest in intercollegiate activities,” the rule stood up to antitrust scrutiny even without a more searching inquiry and balance of harm against pro-competitive justifications. See Deppe at *10 (citing Nat’l Collegiate Athletic Ass’n v. Bd. of Regents of the Univ. of Okla. 468 U.S. 85, 117 (1984). The court concluded that “eligibility bylaws such as this one are presumptively procompetitive and do not violate the Sherman Act.” Deppe at *11-12. Accordingly, the Court dismissed this allegation with prejudice. Id. at *12.
Deppe is the second action challenging the year-in-residence requirement to be dismissed in the Southern District of Indiana in recent months. See Pugh v. National Collegiate Athletic Association, 2016 WL 5394408 (S.D. Ind. 2016). In Pugh, another case involving a former college football player who was unable to obtain a scholarship for his second year and thus attempted to transfer to an institution which would offer financial aid, the court also relied on Agnew in dismissing a challenge to the year-in-residence requirement. Id. at *6. The NCAA is based in Indianapolis, and the year-in-residence requirement has not yet been reviewed by district courts outside of the Seventh Circuit, where certain NCAA rules, even those relating to athlete eligibility, may receive less deference.
Application of the Sherman Act to NCAA Eligibility Rules
The Sherman Act applies to NCAA regulations. See, e.g., NCAA v. Board of Regents of the University of Oklahoma, 468 U.S. 85, 117 (1984).However, as noted in Deppe, the Supreme Court has held that “most of the regulatory controls of the NCAA are justifiable means of fostering competition among amateur athletic teams and [are] therefore procompetitive because they enhance the public interest in intercollegiate activities.” Id. The courts of appeals have treated the Supreme Court’s apparent blessing of the NCAA amateurism preservation rules with varying levels of deference. For example, while the Seventh Circuit has interpreted the Supreme Court’s guidance as suggesting that challenges to eligibility rules brought under the Sherman Act should generally be dismissed without a detailed analysis, the Ninth Circuit conducts a more searching inquiry and a rule of reason analysis. Compare O’Bannon v. Nat’l Collegiate Athletic Ass’n, 802 F.3d 1049 (9th Cir. 2015) with Agnew v. National Collegiate Athletic Ass’n, 683 F.3d 328 (7th Cir. 2012).
The Seventh Circuit gives NCAA rules, particularly those relating to eligibility requirements, the highest degree of deference, and finds that eligibility rules are presumptively procompetitive and can properly be dismissed “in a twinkling of an eye,” without a detailed analysis. See Agnew at 341. In Agnew, the Seventh Circuit considered a challenge to the NCAA’s prohibition on multi-year scholarships. Id. at 332. While the court acknowledged that the challenged bylaw prohibiting multi-year scholarships was not strictly an eligibility rule, the opinion interpreted NCAA v. Board of Regents as holding that eligibility bylaws are presumptively procompetitive and necessary to preserve amateurism in college sports, and that challenges of them may therefore properly be dismissed at the motion to dismiss stage. See id. at 341-42.
The Seventh Circuitfound the multi-year scholarship rules at issue in Agnew not to be eligibility rules, or to “fit the same mold” as eligibility rules. Id. at 344-45. Instead, the court observed that the rules “seem to be aimed at containing university costs, not preserving the product of college football,” and thus the motion to dismiss the claims could not be granted. See id. Even though Agnew itself did not rule on a challenge to an eligibility related rule, the opinion has been interpreted by district courts in the Seventh Circuit to encourage early dismissal of eligibility-related claims. See, e.g., Pugh at *6; Deppe at *10-12.
A few years after Agnew, the Ninth Circuit considered a challenge to NCAA bylaws prohibiting student athletes from receiving compensation for the use of their names, images, and likeness in O’Bannon v. Nat’l Collegiate Athletic Ass’n, 802 F.3d 1049 (9th Cir. 2015). The Ninth Circuit concluded that under NCAA v. Board of Regents, it was “not bound to conclude that every NCAA rule that somehow relates to amateurism is automatically valid.” Id. The court instead held that “no NCAA rule should be invalidated without a rule of reason analysis.” Id. O’Bannon directly criticizes Agnew, finding that the Seventh Circuit read NCAA v. Board of Regents too broadly when it held that an NCAA bylaw meant to maintain amateurism in college sports should be presumed procompetitive. Id. at 1064. Instead, the Ninth Circuit accepted the Supreme Court’s guidance as “informative with respect to the procompetitive purposes served by the NCAA's amateurism rules,” but ultimately determining that “[t]he amateurism rules’ validity must be proved, not presumed.” Id.
The Ninth Circuit also held that “the mere fact that a rule can be characterized as an ‘eligibility rule’ . . . does not mean the rule is not a restraint of trade; were the law otherwise, the NCAA could insulate its member schools’ relationships with student-athletes from antitrust scrutiny by renaming every rule governing student-athletes an ‘eligibility rule.’” Id. at 1065. After determining that a rule of reason framework was appropriate, the court applied a three-step analysis in which: (1) the plaintiff bears the initial burden of showing that the restraint produces significant anticompetitive effects within a relevant market; (2) if the plaintiff meets this burden, the defendant may come forward with evidence of the restraint’s procompetitive effects; and (3) the plaintiff must then show that any legitimate objectives can be achieved in a substantially less restrictive manner. See id. at 1070. Applying the rule of reason, the court ultimately weighed the anticompetitive effects against the procompetitive justifications, and agreed that the district court correctly identified one less restrictive alternative to the NCAA compensation rules—i.e., allowing NCAA members to give scholarships up to the full cost of attendance—but disagreed with the district court’s other proposed less restrictive alternative of allowing students to receive cash payments unrelated to educational expenses. Id. at 1053.
Outside of the Seventh and Ninth Circuits, other circuit courts have also weighed-in on the level of deference to be afforded to the NCAA in challenges to certain bylaws. Before NCAA v. Board of Regents went to the Supreme Court, the Tenth Circuit ruled that the NCAA’s limits on which college football games could be broadcast were per se unlawful. Board of Regents of University of Oklahoma v National Collegiate Athletic Ass’n, 707 F.2d 1147, 1156 (10th Cir. 1983). Although the Supreme Court’s holding affirmed the result, it did so under the rule of reason instead of a per se analysis. NCAA v. Board of Regents, 468 U.S. at 86. The Third Circuit, like the Seventh, is generally more favorable to the NCAA, and has even held that the NCAA’s eligibility rules are not related to the NCAA’s commercial interests, and thus the Sherman Act does not apply to such rules. Smith v. NCAA, 139 F.3d 180, 185-86 (3d Cir. 1998).
Because of the procompetitive presumption applied to the NCAA eligibility rules in Agnew, the year-in-residence requirement is not likely to be examined on the merits by district courts in the Seventh Circuit. The Southern District of Indiana, in both Pugh and Deppe, directly applied Agnew, finding that “because the challenged bylaw [the year-in-residence requirement] is directly related to eligibility, it is presumptively procompetitive and no further analysis under the Sherman Act is required.” Deppe at*12; Pugh at *6.
The result of these challenges to the NCAA’s year-in-residence requirement might have been different outside of the Seventh Circuit. Even though the requirement seems firmly positioned as an “eligibility” rule, which accordingly should receive the highest degree of deference under NCAA v. Board of Regents, the Ninth Circuit would likely apply a full rule of reason analysis considering any anticompetitive effects, procompetitive justifications, and less restrictive alternatives. A court applying a full rule of reason analysis analysis might find less restrictive alternatives in cases like Deppe and Pugh, where an opportunity to compete at the highest level in one’s chosen sport, a scholarship, or financial aid (and college education) potentially hangs in the balance. Plaintiffs would likely be better served challenging the year-in-residence rule outside of the Seventh Circuit, and it will be interesting to see how actions filed in other circuits impact the current state of the law.
Orrick, Herrington & Sutcliffe LLP
On March 14, 2017, Judge Janis L. Sammartino entered an order granting in part and denying in part the defendants’ motion to dismiss state law claims in In re Packaged Seafood Products Antitrust Litigation, 2017 U.S. Dist. LEXIS 37804 (S.D. Cal. Mar. 14, 2017). The court’s decision addresses important and recurring issues in price-fixing cases asserting state law claims, including the requirements for pleading parent liability, the viability of a California nationwide class, the sufficiency of allegations under the laws of different states, standing under different state laws, and statutes of limitation under various state laws.
Packaged Seafood Products arose from dozens of complaints filed around the county that alleged a conspiracy involving packaged seafood products. The Judicial Panel on Multidistrict Litigation consolidated the cases for pretrial purposes on December 9, 2015. The court divided the plaintiff groups into Direct Action Plaintiffs (DAPs), Direct Purchaser Plaintiffs (DPPs), Indirect Purchaser Commercial Food Preparer Plaintiffs (CFPs), and Indirect Purchaser End Payer Plaintiffs (EPPs). The United States intervened and the parties stipulated to a limited stay of discovery while motions to dismiss proceeded. On January 3, 2017, the court entered an order addressing the plaintiffs’ federal claims under the Sherman Act, and on March 14 the court entered its order regarding state law claims.
The Court’s Rulings
1. Parent Defendant Liability
The court determined that the allegations in most of the complaints sufficiently alleged participation in the conspiracy by corporate parents. Id. at *71-*90. Two of the parent defendants moved to dismiss on the grounds that the complaints failed to allege that they directly participated in the conspiracy. Although many of the plaintiffs’ allegations were too general to support the allegation that the parent companies participated in the conspiracy, the court found that some allegations “plausibly demonstrate that the Parent Defendants directly conspired with their respective subsidiaries.” Id. at *74. This included allegations regarding telephone calls between senior executives and sales personnel to announce collusive price increases, a teleconference during with the parent defendants agreed not to launch certain products, and communications whereby senior executives and sales personnel assured one another that they would not compete regarding the price of tuna to customers. Also, while recognizing that the allegations in a complaint must be directed to each defendant, the court said that at “some level of group pleading is permissible, especially were, as here, the Court is able to discern that these groups, and their actions, include the Parent Defendants.” Id. at *76.
The court rejected the plaintiffs’ attempt to assert claims against the parent defendants based on alter ego and agency theories. Id. at *77-*90. The court found that although the plaintiffs had sufficiently alleged a unity of interest between the corporate parents and their subsidiaries, they failed to plausibly allege that an inequitable result would follow if the corporate veil were not pierced. Id. at *83-*84; *85-*86.The court also ruled that the plaintiffs’ agency allegations were insufficient because they did not plead facts showing how a parent “dominated or controlled” aspects of its subsidiary’s business. Id. at *86-*90.
2. Nationwide California Class
The court ruled that the EPPs could not bring claims under the Cartwright Act and Section 17200 on behalf of a nationwide California class. Id. at *90-*98. The EPPs argued that it is improper to resolve this issue on a motion to dismiss because it requires a choice-of-law analysis. The court disagreed. Id. at *91-*92. It applied the familiar choice-of-law factors—whether there is a conflict, the foreign state’s interest, and which state’s interest is most impaired—to find that allowing a nationwide class under California law would allow indirect purchasers in non-Illinois Brick-repealer states to sue. Since California’s interest in applying its laws to residents of foreign states is “attenuated,” the court dismissed the EPPs’ purported Califoria nationwide class claims. Id. at *92-*98.
3. Twombly/Iqbal Pleading Requirements for State Law Claims
The court conducted a state-by-state analysis of whether the complaints’ allegations satisfied Twomby and Iqbal for the state antitrust, consumer protection, and unjust enrichment claims that were asserted. The court ruled as follows:
a. State Antitrust Laws
The court dismissed the EPPs’ antitrust claims under Arkansas and Illinois law where only Attorney General actions are allowed. Id. at *99-*102. It dismissed the antitrust claims under Rhode Island law that predated 2013, but ruled that the antitrust claims under Oregon’s Illinois Brick-repealer could reach back before the statute was adopted. Id. at *103-*107.
b. State Consumer Protection Laws
The court addressed several recurring arguments that defendants advance in arguing that plaintiffs failed to satisfy the pleading requirements for various state law consumer protection claims. Id. at *107-*145.
• The court granted some motions to dismiss that argued that the plaintiffs were improperly trying to use the state’s consumer protection law to bring an antitrust claim that is not covered by the law (Maine, Illinois, Maine and West Virginia), but rejected the argument as to Missouri, New Hampshire, New Mexico, Oregon and Rhode Island.
• The court rejected the defendants’ argument that the plaintiffs had not pled “unconscionable conduct” as is required in some jurisdictions, such as Arkansas, the District of Columbia, New Mexico, Oregon and Utah.
• For most complaints, the court rejected the argument that the plaintiffs had not pled fraud or an unfair, unlawful or deceptive business practice as is required in states such as California, Illinois, Michigan, Minnesota and Nevada. However, it ruled that the CFPs did not adequately allege fraud under some state’s consumer protection laws, including Michigan and Minnesota.
• The court found that the CFPs’ complaints did not satisfy the requirement in the District of Columbia and Missouri that the plaintiff allege a household, personal or family purpose of the purchases at issue.
• The court ruled that South Carolina’s bar on class actions is procedural and not substantive, and therefore plaintiffs were not precluded from pursuing a class action in federal court that asserts South Carolina state law claims.
c. State Unjust Enrichment Claims
The court first addressed some common issues and then some state-specific issues regarding plaintiffs’ unjust enrichment claims. Id. at *145-*161. First, the court granted the defendants’ motion to dismiss the CFPs’ unjust enrichment claim because they pled the claim generally rather than for specific jurisdictions. Id. at *145-*146. Second, the court also dismissed the EPPs’ unjust enrichment claims where the state’s law otherwise bars indirect-purchaser recovery. Id. at *146-*147. Next, the court addressed claims in states in which the defendants argued allegations of a “direct benefit” are required—which the court found depends on each state’s specific law. The court ruled that the allegations were sufficient to state claims under the laws of Arizona, the District of Columbia, Kansas, Massachusetts, Michigan, North Carolina, Rhode Island, Utah and Wisconsin. The only states where the allegations of a “direct benefit” were insufficient were Florida and Maine. Id. at *148-*158. In the long-running debate about whether California recognizes a cause of action denominated “unjust enrichment,” the court agreed with the plaintiffs that the claim they asserted should be construed as being a claim in “quasi-contract for restitution.” Id. at *159. And the court ruled that plaintiffs’ price-fixing claims sufficed to state an unjust enrichment claims under West Virginia law regardless of whether an express allegation of unconscionability is required for such a claim. Id. at *159-*161.
4. Standing to Prosecute State Law Claims
The court agreed with the defendants that the CFPs lacked Article III standing to bring claims under the laws of states where none of the CFPs purchased any of the seafood at issue in the case. Id. at *161-*162. And the court also ruled that even if the CFPs were allowed to bring state law claims in state court, that did not mean they satisfied Article III standing requirements when they asserted the same state law claims in federal court. Id. at *162-*168.
5. State Law Statutes of Limitation
The court had previously ruled that no plaintiff sufficiently alleged fraudulent concealment with respect to the pre-2011 Sherman Act claims. It followed that earlier ruling with respect to pre-2011 state law claims. The court rejected the plaintiffs’ argument that the “continuing conspiracy” rule applies in the Ninth Circuit, but also rejected the defendants’ argument that the available public information sufficed to put the plaintiffs on notice of the alleged conspiracy. The issue boiled down to whether the relevant state law “discovery” rule, rather than the Sherman Act’s “injury accrual” rule, applied to plaintiffs’ state law claims for purposes of determining when the statutes of limitation began to run. The court found there was no serious disagreement that the discovery rule applies in several states. As to states where there was disagreement, the court made state-by-state determinations that are summarized in a table that appears at pages *212-*214 of the order.
Courtney A. Palko
Baute Crochetiere & Gilford LLP
In Supreme Auto Transport LLC v. Arcelor Mittal, ___ F. Supp. 3d ___, 2017 WL 839484 (N.D. Ill. Mar. 3, 2017), the district court granted the defendants’ motion to dismiss. Id. at *1. The plaintiffs, indirect downstream customers of steel-containing consumer products, alleged that domestic steel manufacturers reduced steel production, resulting in a steel shortage in the U.S. and higher prices of consumer products made with steel. Id.
Supreme Auto originally filed suit in 2008 as the sole plaintiff representing a purported class. Id. The complaint alleged that, between January 2005 and September 2008, the defendants orchestrated a scheme to artificially increase the price of steel through coordinated production cuts. Id. In April 2016, Supreme Auto (based in Michigan) and 15 individual plaintiffs from 10 states filed an amended complaint on behalf of a putative class of indirect purchasers of steel products. Id. In the amended complaint, the plaintiffs alleged that the defendants, large producers of steel in the U.S. market, instituted a plan to improve “industry discipline” and increase prices and profit in the U.S. steel market. Id.
Mittal Steel USA, the predecessor of defendant ArcelorMittal USA, allegedly orchestrated a concerted cutback in steel production with other defendants. Id. The plaintiffs alleged that, as a result of this restraint, steel prices were substantially higher than the defendants’ cost of production, domestic demand exceeded the defendants’ production, and a steel shortage occurred. Id. The plaintiffs alleged that the artificially inflated steel prices were passed on from direct purchasers of steel to the purchasers of a wide range of steel-containing consumer products such as refrigerators, dishwashers, ovens, automobiles, air conditioning units, lawn mowers, and farm and construction equipment. Id. The first amended complaint alleges: (1) violation of state antitrust laws, (2) violation of state consumer protection and unfair competition statutes, and (3) common law unjust enrichment claims under the law of the District of Columbia and all states other than Ohio and Indiana. Id. at *2.
The district court first analyzed whether the plaintiffs had established Article III standing, which it concluded they had as individual plaintiffs. Id. The court declined to address whether Article III posed an obstacle to adjudicating the case as a class action, which would be evaluated on a class basis once the class was properly certified. Id. According to the district court, whether the named plaintiffs could bring claims under the laws of other states and whether plaintiffs were adequate class representatives did not pose Article III barriers to subject matter jurisdiction. Id.
The district court next concluded that the plaintiffs failed to allege antitrust standing. Id. at *2–5. The district court found that Associated General Contractors of California, Inc. v. California State Council of Carpenters, 459 U.S. 519, 537–45 (1983), set forth the governing test (the “AGC test”) for all of the state law antitrust claims, as all of the states either formally apply AGC in their state courts or have indicated that they would follow federal law on this issue. Id. at *2–4. Applying the AGC test to the allegations in the first amended complaint, the court concluded that several of the AGC factors pointed against the existence of a relevant injury, including the causal connection, directness of the injury, and non-speculative damages factors. Id. at *4. To support its conclusion, the court relied on In re Aluminum Warehousing Antitrust Litigation, 833 F.3d 151, 161–62 (2d Cir. 2016), and Loeb Industries, Inc. v. Sumitomo Corp., 306 F.3d 469, 484 (7th Cir. 2002). Id. at *5. The court found that the plaintiffs’ injury was too remote from the alleged misconduct, their damages too speculative, and the defendants’ alleged conduct not likely to be targeted toward downstream purchasers of mixed material retail products. Id.
The court similarly dismissed the plaintiffs’ remaining state law claims under consumer fraud statutes and for common law unjust enrichment for lack of proximate cause. Id. at *5–6. As with the plaintiffs’ failure to allege antitrust injury, the court concluded that the presence of intermediate parties along the supply chain, the commingling of steel with other materials during the manufacturing process, and the absence of plausible evidence of any link between specific products and the defendants’ steel mills meant that the defendants did not legally cause the harm allegedly suffered. Id.
Finally, the court found that the claims by the new named plaintiffs were time-barred, as they accrued no later than September 24, 2008, when Supreme Auto filed the original complaint. Id. at *6–8. The statute of limitations was not tolled because the first amended complaint redefined the steel products in issue to describe “an entirely different universe of plaintiffs.” Id. at *7. Whereas the original complaint referred to “products derived from raw steel,” such as steel bars, rods, and pipes, the amended class description expressly includes retail products in which steel is only one of many component materials, and the chain of manufacturing and distribution may be much longer, more complex, and less easily traceable to the defendants’ steel mills. Id. Accordingly, the court concluded that the plaintiffs’ amended claims were not “substantially similar” to the original claims so as to merit tolling. Id. at *8. The court reasoned that, nearly eight years after the filing of the original complaint, the defendants would be forced to incorporate new and previously unidentified witnesses and evidence into their defenses, including new manufacturers, distributors, and retailers throughout the U.S., and thus the defendants would be unduly prejudiced by tolling. Id.
Supreme Auto’s amended claim was also not subject to tolling. Id. Supreme Auto had represented in discovery that its claim was based solely on its purchase of $171.64 of steel tubing. Id. But six years later, after filing the amended complaint, Supreme Auto supplemented an interrogatory and identified the purchase of two semi-trucks, each costing over $100,000, and stated that the steel tubing was no longer relevant because the “class definition no longer includes steel tubing.” Id.
The court concluded that the amended pleading did not relate back to the original filing because the amendment did not arise from the same conduct, transaction, or occurrence. Id. The amendment “made extensive additions and substitutions to the consumable definition, vastly expanded the universe of potential plaintiffs, and would radically alter the scope and focus of discovery.” Id. The court stated that the defendants would be unduly prejudiced and deprived of fair notice. Id. at *9. In 2008, the defendants were not on notice to preserve or obtain discovery related to the consumer products at issue in the amendment. Id. And the defendants have an interest in certainty and finality, which would be undermined if new plaintiffs were allowed to be added to an eight-year-old case. Id. For these reasons, the court granted the defendants’ motion to dismiss the amended complaint.
Elizabeth H. White
Adam W. Crider
Simpson Thacher & Bartlett LLP
The rise of digital music services such as Pandora and Spotify has led to multiple complications related to the traditional blanket licensing regime established by “performing rights organizations” (“PROs”) like BMI and ASCAP more than 75 years ago. The PROs were given antitrust exemptions to make it easier for holders of copyrights in musical compositions to license their works to the thousands of restaurants, bars, and radio and television stations that wanted to perform these compositions publicly. One such issue arose in 2016 with the headline-grabbing fight over whether music publishers, who had licensed their repertories to BMI and ASCAP, could circumvent those PROs and transact directly with digital music services. That dispute revealed a separate but related disagreement as to the permissible scope of the licenses offered by BMI and ASCAP under the decades-old consent decrees governing their activities. Judge Louis L. Stanton of the District Court for the Southern District of New York addressed this question in a September 2016 declaratory judgment action, holding that the consent decrees permit BMI and ASCAP to offer so-called “fractional” licenses to music. United States v. Broad. Music, Inc., No. 64-cv-03787 (LLS), 2016 WL 4989938 (S.D.N.Y. Sept. 16, 2016) (“BMI”). Judge Stanton rejected the argument of the Department of Justice’s Antitrust Division that licenses instead are required to be “full work” licenses under the consent decrees. Id. at *2-3.
The opinion, which is now on appeal, has implications for PROs and licensees alike. Should Judge Stanton’s decision stand, music licensees will remain exposed to potential copyright infringement claims if they fail to obtain licenses from each of the PROs holding a fractional interest in a composition. On the other hand, if the Second Circuit finds that the consent decrees prohibit fractional licensing, the holders of fractional rights in a composition (for example, one of multiple authors of a song) may be forced to abandon long-standing relationships with PROs in order to aggregate their fractional rights in a single PRO or risk losing the income generated through the PRO’s blanket licensing scheme.
ASCAP and BMI—Antitrust Implications and the Consent Decrees
The American Society of Composers, Authors and Publishers (“ASCAP”), formed in 1914, and Broadcast Music, Inc. (“BMI”), organized in 1939, are the two largest PROs in the United States. These organizations arose out of a practical problem in the market for public performance of copyrighted musical compositions: the impossibility of negotiating an individual license for every public performance of a copyrighted work. To solve this problem, PROs aggregate musical compositions from “thousands of songwriter and music publisher members” and license public performance rights to “millions of songs” to “users such as bar owners, television and radio stations, and internet music distributors,” generally in the form of a blanket license. Statement of the Department of Justice on the Closing of the Antitrust Division’s Review of the ASCAP and BMI Consent Decrees (the “Statement”) at 2. While established for a procompetitive purpose, the blanket licenses “have long raised antitrust concerns” because they “provide at a single price the rights to play many separately owned and competing songs[,] a practice that risks lessening competition” in violation of the Sherman Act § 1. Id. In other words, BMI and ASCAP were alleged to be unlawful monopolies, and the blanket licenses they offered were allegedly illegal price-fixing and an unlawful tying arrangement that injured would-be licensees. See Broadcast Music, Inc. v. CBS, Inc., 441 U.S. 1, 6 (1979).
The potential for anticompetitive conduct led the United States, in 1941, to bring separate antitrust lawsuits against ASCAP and BMI, “alleging that each organization had unlawfully exercised market power through the aggregation of public performance rights in violation of Section 1 of the Sherman Act.” Statement at 2. To resolve these lawsuits, ASCAP and BMI entered into separate consent decrees, which restrict how these organizations license music by, inter alia, requiring that they license, on a nonexclusive basis, all works in their repertories to any user who requests a blanket license. See id. at 6-7. The consent decrees also provide for separate “rate courts,” which are authorized to set the price of a license when a music user and a PRO “are unable to reach a mutually agreeable price.” Id. at 7. ASCAP and BMI are therefore prohibited from engaging in selective licensing of the works in their repertories. Relatedly, copyright holders cannot grant ASCAP and BMI the right to license their works to some users but not others, a practice known as “partial withdrawal.” See Pandora Media, Inc. v. Am. Soc. of Composers, Authors & Publishers, 785 F.3d 73, 77 (2d Cir. 2015) (“As ASCAP is required to license its entire repertory to all eligible users, publishers may not license works to ASCAP for licensing to some eligible users but not others.”). Both ASCAP and BMI have since been “subject to numerous private antitrust suits, one of which resulted in an important Supreme Court decision,” which held that the blanket licenses did not amount to per se illegal price fixing under Sherman Act § 1, in light of the substantial procompetitive benefits these licenses provide and the tight restrictions imposed by the consent decrees. Statement at 7 (discussing Broad. Music, Inc. v. Columbia Broad. Sys., Inc., 441 U.S. 1 (1979)).
The Antitrust Division’s Review and the Problem of “Fractional” Versus “Full Work” Licensing
In June 2014, the Antitrust Division opened an investigation into the “operation and effectiveness” of the consent decrees at the request of ASCAP, BMI and other industry participants, Statement at 2, who believed the consent decrees should be modified in light of the changing dynamics in the music industry, namely the rise of digital music services. Id. at 4. Most significantly, ASCAP, BMI, and music publishers asked the Division to consider whether “the Consent Decrees [should] be modified to allow rights holders to permit ASCAP or BMI to license their performance rights to some music users but not others[.]” Antitrust Consent Decree Review – ASCAP and BMI 2014, available at https://www.justice.gov/atr/ascap-bmi-decree-review; see also Statement at 4. This proposed change stemmed from decisions by ASCAP in 2011 and BMI in 2013 to permit some music publishers to withdraw their consent to license their catalogs to digital music services like Pandora in response to pressure from the publishers, who believed that the blanket licensing fees paid by digital music services “did not reflect the fair market value of their copyrights.” Broad. Music., Inc. v. Pandora Media, Inc., 140 F. Supp. 3d 267, 275, 284 (S.D.N.Y. 2015) (discussing history of partial withdrawal). The Southern District of New York and the Second Circuit later found this “partial withdrawal” of digital licensing rights violated the express terms of the consent decrees. See In re Pandora Media, Inc., No. 12 CIV. 8035 DLC, 2013 WL 5211927 (S.D.N.Y. Sept. 17, 2013), aff'd sub nom. Pandora Media, Inc., 785 F.3d 73; Broad. Music, Inc. v. Pandora Media, Inc., No. 13 CIV. 4037 LLS, 2013 WL 6697788 (S.D.N.Y. Dec. 19, 2013) (collectively, the “Pandora Media” cases).
During the course of its investigation into partial withdrawal, a related issue arose. Specifically, “it became apparent” to the Division “that industry participants had differing understandings” of the nature of the licensing regime permitted under the consent decrees. Namely, ASCAP, BMI and music copyright holders thought the consent decrees permitted ASCAP and BMI to include in their repertories those works for which they were granted “fractional” licenses, while the DOJ and music users took the position that the PROs could only license those compositions for which they had “full work” licenses. Statement at 3. This distinction between fractional and full-work licenses stems from a common practice in the music industry—multiple authors collaborating to create a single composition. See id. at 8.Such jointly created works are typically owned by the authors as tenants-in-common (the default rule in the United States), under which each author has the right to license the full work. Id. However, not all authors hold co-created works as tenants-in-common, but instead may own only the right to license their own fractional share of the composition. Id. If authors of a co-created work who each own only a fractional interest in the work each license their rights to a different PRO, a music user such as a bar or TV station would need a license from each PRO to publicly perform the composition. Id. As the Division noted, “[h]istorically, the industry has largely avoided a definitive determination of whether . . . full-work or fractional licensees [are required] because the vast majority of music users obtain a license from [several PROs] and pay those PROs based on fractional market shares.” Id. at 9.
In light of the music industry’s “differing understandings” regarding whether fractional licensing was permitted under the consent decrees, the Division solicited additional public comments on this issue in 2015. Statement at 10. In response, ASCAP and BMI, without conceding whether the consent decrees permit only full-work licensing, requested that the decrees be modified to permit the organizations to obtain fractional licenses from copyright holders. Id. at 9.
On August 4, 2016, the Division completed its investigation and issued the Statement, which concluded that “the consent decrees must be read to require full work licensing,” meaning that BMI and ASCAP can only license works for which they have obtained permission from all necessary rights holders. Statement at 12. The Division gave at least three reasons in support of the full-work licensing requirement. First, according to the Division, “the plain text of the decrees . . . . require[s]” ASCAP and BMI “to offer users the ability to perform all” works or compositions in their repertories. Id. at 11. A system of fractional licensing, which would require music users like restaurants and radio stations to obtain multiple licenses to perform a single work in order to avoid infringement liability, would run afoul of this requirement. See id. Second, the Division argued that only full-work licensing allows licensees the “immediate use” of covered compositions without the delay associated with individual negotiations, which the Supreme Court has recognized as a primary benefit of the PRO system. Statement at 12. Third, the Division determined that “it would not be in the public interest to modify . . . the consent decrees to permit ASCAP and BMI to offer fractional licenses.” Id. at 13. To do so would “undermine the traditional role of the . . . licenses in providing protection from unintended copyright infringement liability,” “impair the functioning of the market for public performance licensing[,] and potentially reduce the playing of music.” Id. Recognizing “the sharply conflicting views . . . on the question of whether the PROs do or must offer full-work licenses,” the Division stated that it would “not take any enforcement action based on any purported fractional licensing . . . for one year.” Id. at 17. This was an effort to allow PROs to comply with what the Division determined was a full-work licensing requirement.
Finally, the Division decided not to modify the consent decrees to permit music publishers to partially withdraw their consent to license to digital music services “at this time” because the “impact of such partial withdrawal . . . turns significantly” on the scope of the licenses offered by the PROs. Id. at 16-17. In other words, until the PROs conform to a full-work-only licensing regime, the effect of permitting partial withdrawal would be “sufficiently speculative” such that the Division “cannot determine whether . . . [it] would be in the public interest.” Id. at 17.
The Declaratory Judgment Action and Judge Stanton’s Opinion
The threat of enforcement of full-work licensing prompted BMI to seek declaratory relief. In a six-page opinion dated September 16, 2016, Judge Stanton dismantled the Division’s interpretation of the BMI (and, by implication, ASCAP) consent decree. He held that “[t]he Consent Decree does not regulate the elements of the right to perform compositions.” BMI at 4. That is, it “neither bars fractional licensing nor requires full work licensing.” Id. at 6. Accordingly, “[n]othing in the Consent Decree gives support to the Division’s views” that full-work licensing is required. Id. at 3.
Nor did the United States’ reliance on the Pandora Media cases, which concerned partial withdrawal, lend any support to its interpretation, Judge Stanton held. Under the BMI consent decree, BMI is required to grant a license for performance of “‘any, some or all of the compositions in [its] repertory’” based on the licensee’s request. BMI at 5 (quoting Broad. Music, Inc.,2013 WL 6697788, at *3 (quoting BMI Consent Decree, Section XIV)). In that case, “the Consent Decree itself explicitly regulated the conduct” at issue by prohibiting selective licensing of the works in BMI’s repertory. Id. Unlike partial withdrawal, the BMI consent decree “contains no analogous provision concerning . . . fractional versus full-work licensing.” Id. In other words, ASCAP and BMI can grant licenses to works for which they hold only a fractional license without exposing themselves to an enforcement action for violating the consent decrees, while licensees remain vulnerable to infringement claims should they fail to obtain multiple licenses covering public performance rights to an entire composition.
Whether Judge Stanton’s declaration that the consent decrees do not prohibit fractional licensing will stand remains to be seen. The United States filed a notice of appeal in November 2016. The government’s opening brief is currently due May 18, 2017, but it has sought a further 60-day extension to file. United States v. Broadcast Music, Inc., No. 16-3830 (2d Cir.), ECF Nos. 41-42. The government may assert, as it did in the Statement, that full-work licenses are preferable because they minimize the effect of partial withdrawal should it ever be allowed, Statement at 16, an issue that will surely continue to draw much interest. It is unclear, however, whether that position may change under the new administration.