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 22.214.171.124., 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 126.96.36.199.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.
Robert E. FreitasFreitas Angell & Weinberg LLP
On March 6, 2016, in Amphastar Pharmaceuticals Inc. v. Momenta Pharmaceuticals, Inc., 2017 WL 876260, ___F.3d___ (1st Cir. 2017), the First Circuit held that the Noerr-Pennington doctrine does not immunize alleged misrepresentations by Sandoz Inc. and Momenta Pharmaceuticals, Inc. to the United States Pharmacopeial Convention (“USP”), a non-governmental standard-setting organization “charged with ensuring the quality of drugs.” Id. at *1. Amphastar alleged that “the defendants, in violation of a duty imposed by the USP, knowingly failed to disclose to the standard-setting body that a proposed method for testing generic enoxaparin might be covered by Momenta’s pending patent application.” Id. Amphastar also alleged that “[t]he USP, in reliance on the defendants’ misrepresentations, adopted the method, and the Food and Drug Administration (‘FDA’) required Amphastar to comply with it.” Id.
The defendants claimed that Momenta opposed the adoption of the method. See Brief for Defendants-Appellees at 7-8; 49. They also argued that the complaint “does not include an allegation that Momenta agreed not to enforce its patent,” id. at 33 n.16, and claimed that “Momenta made no commitment to the USP to license its technology, [and did not] agree to waive enforcement of its valid patent rights.” See id. According to Amphastar, these arguments were based on documents of which the district court took judicial notice in connection with the defendants’ motion to dismiss. Accordingly, Amphastar contended, it was improper for the court of appeals to consider the facts contained in the documents for their truth. Reply Brief for Plaintiffs-Appellants at 13-15.
Following adoption of the standard, the defendants sued Amphastar for infringement of United States Patent No. 7,575,886 (“’886 patent”), and obtained a temporary restraining order and a preliminary injunction. 2017 WL 876260 at* 1. The preliminary injunction was ultimately vacated, but it prevented Amphastar from selling generic enoxaparin for approximately three months. Id.
Sandoz and Momenta previously entered into a collaboration agreement that granted Sandoz an exclusive license to the then unissued ’886 patent. The collaboration agreement “created heavy incentives to ensure that Sandoz remained the sole provider of generic enoxaparin, including milestone and profit share payments to Momenta.” Id. Remaining the only generic entrant would allow Sandoz to price enoxaparin at close to brand levels. Id.
Amphastar alleged that the defendants violated Section 2 of the Sherman Act by failing to disclose Momenta’s pending patent application while the USP was “considering standards for enoxaparin, including a testing method to determine whether the relevant criteria have been met.” Id., at *2. The USP eventually adopted a testing standard known as Method <207>. Id. The First Circuit noted that “[f]ederal law requires that pharmaceutical products comply with applicable USP standards. See 21 U.S.C. § 351(b),” id., but a FDA bulletin cited by the defendants provides that “[w]hile [Method] <207> will provide the official test for 1,6-Anhydro Derivative, manufacturers are always permitted to use alternative tests.” See Brief for Defendants-Appellees at 7-8. See also id. at 8. In the related patent litigation, “the Solicitor General confirmed that ‘FDA does not, in fact, require defendants to use Momenta’s patented invention to meet the USP standard.’” See id. at 9. During colloquy in oral argument before the Federal Circuit, “Amphastar’s counsel conceded that Method <207> is not mandatory.” See id. at 9-10; 45. Momenta claims that it uses a different method. See id. at 25. See also id. at 43-44 (quoting the official USP bulletin announcing Method <207>) (“While General Chapter <207> will provide the official test for 1,6-Anhydro Derivative, manufacturers are always permitted to use alternative tests in accordance with Section 6.30 of USP General Notices in USP 32-NF-27, ‘Alternative and Harmonized Methods and Procedures.’”) (emphasis deleted).
The First Circuit stated that the USP has a policy requiring “all members and participants in the standard-setting process to disclose any potential conflicts of interest, including intellectual property rights.” Id. An interrogatory answer provided by Amphastar in the patent case, asserted, however, that “Sponsor-held intellectual property rights” must be disclosed, see Brief for Defendants-Appellees at 49 n.24, a distinction that could be important, depending on how Momenta’s arguments regarding the position it took during the standard-setting process are resolved. Consistent with usual SSO procedures, the USP staff “typically reviews these conflict of interest policies at the beginning of panel meetings.” 2017 WL 876260 at *2. Momenta was represented on the USP enoxaparin panels by an employee who was later named as an inventor on the ’886 patent, and Sandoz was also a participant in the panel discussions. Id.
The defendants did not disclose the application that resulted in the ’886 patent during the USP standard-setting process. The ’886 patent was issued in August 2009, and the USP approved and adopted Method <207> in December 2009, making Method <207> “the official test method that the FDA required of Amphastar to test … its enoxaparin in order to obtain and maintain its generic enoxaparin approval.” Id. Sandoz was first to receive FDA approval to sell generic enoxaparin, in July 2010. Id.
Two days after Amphastar received approval to sell generic enoxaparin in September 2011, the defendants filed their lawsuit claiming infringement of the ’886 patent. Id. In October 2011, the district court issued a TRO and a preliminary injunction. Id. The injunction was stayed, and then vacated by the Federal Circuit in January 2012. Id. See Momenta Pharm., Inc. v. Amphastar Pharm., Inc., 686 F.3d 1348, 1352, 1361 (Fed. Cir. 2012).
The district court dismissed Amphastar’s complaint on the basis of the Noerr –Pennington doctrine. Id. The injuries claimed by Amphastar resulted from the injunction, and “arise from the FDA’s purported adoption of the 207 Method,” and Amphastar’s claims were therefore barred by Noerr-Pennington. Id. The district court rejected Amphastar’s argument that misrepresentations to the USP deprived the defendants of Noerr-Penington immunity. Id.
The defendants argued on appeal that the Noerr-Pennington doctrine defeated Amphastar’s claim because the only harm alleged by Amphastar was based on the filing of the patent infringement lawsuit. See Brief for Defendants-Appellees at 19-20. They argued that the case presented a question governed by Federal Circuit law under Nobelpharma AB v. Implant Innovations, Inc., 141 F.3d 1059, 1068 (Fed. Cir. 1998) (en banc), which asserts that Federal Circuit law applies to “all antitrust claims premised on the bringing of a patent infringement suit.” While the defendants argued that the Noerr-Pennington doctrine protected the petitioning activity involved in the infringement lawsuit, they “expressly declined to take the position that Noerr-Pennington separately immunizes their conduct before the USP.” Id. at *3. See also Brief for Defendants-Appellees at 35 (“Defendants do not contend that all—or even any—“petitioning” to an SSO is per se beyond the reach of the antitrust laws.”).The defendants also did not rely on the FDA’s “alleged adoption of Method 207 in support of their immunity argument.” 2017 WL 876260 at *3. Although the district court may have based its decision in the defendants’ favor, in part, on the role of the FDA, the defendants did not present a theory based on the involvement of the FDA in the district court, and did not point to “any direct petitioning activity” before the FDA on appeal. Id.
The First Circuit noted that Nobelpharma’s conclusion that Federal Circuit law controls “all antitrust claims premised on the bringing of a patent infringement suit” is “not binding” on the First Circuit. Id. The court also determined that “in any event, the present dispute involves conduct before a private SSO, not patent prosecution or any other issue within the Federal Circuit’s exclusive jurisdiction,” and applied First Circuit law, further commenting that “the parties have failed to demonstrate any meaningful difference between our own law and that of the Federal Circuit on the issues relevant to this appeal.” See id. n.2.
Relying on Allied Tube & Conduit Corp. v. Indian Head, Inc., 486 U.S. 492, 500 (1988), the First Circuit observed that “the Supreme Court has held that petitioning of a private SSO, like the USP, generally does not trigger Noerr-Pennington protection. Id. The court of appeals found it unnecessary to “decide whether ‘the context and nature of the activity’ at issue [was] sufficiently distinct from that addressed in Allied Tube to warrant a different result.” 2017 WL 876260, at *3. Recognizing what it called “a well-established exception for knowing ‘[m]isrepresentations,’ at least in the administrative and adjudicatory contexts,” the First Circuit found Amphastar’s allegations sufficient to support a conclusion that intentional misrepresentations were made. Id. (citing Cal. Motor Transp. Co. v. Trucking Unlimited, 404 U.S. 508, 513 (1972) and Allied Tube, 486 U.S. at 500).
The defendants’ primary argument was that, “regardless of whether Noerr-Pennington applies to their conduct during the standard-setting process, the doctrine precludes Amphastar from recovering damages resulting from the TRO and injunction issued in the infringement suit.” Id., at *4. “This argument,” the court of appeals said, “conflates the alleged antitrust violation with the damages caused by that violation.” Id.
The First Circuit stated that “[c]ourts have recognized that ‘[t]here is an important difference, for purposes of the Noerr-Pennington doctrine, between using litigation … as a basis of antitrust liability and awarding damages for efforts to use the courts to carry out private cartel agreements.” Id. For this proposition, the court of appeals cited two cases, Premier Elec. Constr. Co. v. Nat’l Elec. Contractors Ass’n, Inc., 814 F.2d 358, 374 (7th Cir. 1987) and McGuire Oil Co. v. Mapco, Inc., 958 F.2d 1552, 1561 (11th Cir. 1992), both cases decided before the Supreme Court’s Professional Real Estate Investors decision. See Professional Real Estate Investors, Inc. v. Columbia Pictures Indus., Inc., 508 U.S. 49 (1993).
Premier Electric asserted that “[t]he proposition that the first amendment precludes the award of the costs of litigation as damages implies the startling result that fee-shifting rules are unconstitutional.” 814 F.2d at 373. Proceeding from that point, the court concluded that “[s]o long as the violation of the Sherman Act may be established without regard to point of view embodied in the ‘petitioning’ activity, the Constitution does not prevent the assignment as damages of the full injury inflicted.” Id.
The Seventh Circuit also asserted that “[t]he award as damages of the expenses incurred in resisting litigation has support in the Supreme Court’s decisions,” citing Walker Process Equipment, Inc. v. Food Machinery & Chemical Corp., 382 U.S. 172 (1965) and United States v. Singer Manufacturing Co., 374 U.S. 174 (1963). This is a questionable proposition.
The Supreme Court stated the issue presented in Walker Process as follows:
The question before us is whether the maintenance and enforcement of a patent obtained by fraud on the Patent Office may be the basis of an action under § 2 of the Sherman Act, and therefore subject to a treble damage claim by an injured party under § 4 of the Clayton Act.
The Supreme Court stated the issue presented in Walker Process as follows:
The question before us is whether the maintenance and enforcement of a patent obtained by fraud on the Patent Office may be the basis of an action under § 2 of the Sherman Act, and therefore subject to a treble damage claim by an injured party under § 4 of the Clayton Act.
The question before us is whether the maintenance and enforcement of a patent obtained by fraud on the Patent Office may be the basis of an action under § 2 of the Sherman Act, and therefore subject to a treble damage claim by an injured party under § 4 of the Clayton Act.
374 U.S. at 173 (footnotes omitted). See also id. at 175 (“Both Walker and the United States, which appears as amicus curiae, argue that if Food Machinery obtained its patent by fraud and thereafter used the patent to exclude Walker from the market through ‘threats of suit’ and prosecution of this infringement suit, such proof would establish a prima facie violation of § 2 of the Sherman Act.”). The assertion of the fraudulently procured patent was the essence of the violation alleged, so the case appears to fall on the other side of the line drawn by the Seventh Circuit. Noerr is not cited in Singer, and Pennington had not been decided when Singer was decided. Singer, a government case, did not involve damages alleged to result from litigation.
Premier Electric has a focus that makes a simple damages/violation dichotomy an unlikely basis for understanding the case. Premier Electric involved a situation in which a union and a trade association entered into an agreement requiring the union to obtain, in any collective bargaining agreement with a contractor that was not a member of the trade association, a commitment that the company would contribute 1% of its gross payroll to a fund established by the agreement between the union and the trade association. The lawsuits in issue in Premier Electric were for the enforcement of the antitrust plaintiff’s agreement to pay the 1%.
The Fund’s suits in the courts of Illinois did not ask the court to enforce a law or a regulatory victory. The Fund wanted the court to enforce a private contract. The Fund invoked a rule of decision created by the Association and the Union. It was not a petition for a favorable rule of law; it was not an effort to implement an existing rule of law; it was an unvarnished effort to enforce a private price-fixing agreement. The first amendment does not protect efforts to enforce private cartels, in court or out. Cf. National Society of Professional Engineers v. United States, 435 U.S. 679, 697–99, 98 S.Ct. 1355, 1368–69, 55 L.Ed.2d 637 (1978). If the effort inflicted injury, § 4 of the Clayton Act supplies a damages remedy.
The Fund’s suits in the courts of Illinois did not ask the court to enforce a law or a regulatory victory. The Fund wanted the court to enforce a private contract. The Fund invoked a rule of decision created by the Association and the Union. It was not a petition for a favorable rule of law; it was not an effort to implement an existing rule of law; it was an unvarnished effort to enforce a private price-fixing agreement. The first amendment does not protect efforts to enforce private cartels, in court or out. Cf. National Society of Professional Engineers v. United States, 435 U.S. 679, 697–99, 98 S.Ct. 1355, 1368–69, 55 L.Ed.2d 637 (1978). If the effort inflicted injury, § 4 of the Clayton Act supplies a damages remedy.
814 F.2d at 376. Unlike Premier Electric, Amphastar did not involve the “use [of] the courts to carry out private cartel agreements.” See 2017 WL 876260 at *4.
McGuire did no more than read narrowly and distinguish Premier Electric: “The Seventh Circuit held that the award of trebled litigation costs incurred in defending a lawsuit designed to enforce a price-fixing conspiracy did not violate the Noerr–Pennington doctrine. Mapco contends that Premier is analogous to this case. We disagree.” 958 F.2d at 1561. The court said that “adherence to the Seventh Circuit’s opinion in Premier might permit us to use the costs incurred by Mapco in defense of plaintiffs’ AMFMA claim as a measure of their antitrust injury, our analysis here stops short of the antitrust injury inquiry.” Id. In a footnote to this passage, the Eleventh Circuit noted that it “express[ed] no opinion as to whether we should in fact adhere to the reasoning of the Seventh Circuit on the issue of litigative costs as a source of antitrust injury.” Id. at 1561 n.13.
The Amphastar court also observed that “[t]he mere existence of a lawsuit does not retroactively immunize prior anticompetitive conduct.” 2017 WL 876260 at *4. The defendants expressed agreement with that concept, and it does not seem especially useful in addressing the matters in issue in Amphastar. See Brief for Defendants-Appellees at 37 n.19 (“the FTC asserts that Noerr-Pennington does not ‘automatically protect unethical or deceptive conduct before a standard-setting body’ (FTC Br. 8) and ‘does not shield the defendants’ allegedly deceptive conduct [simply] because they later filed a patent infringement lawsuit.’ FTC Br. 2, 11. Defendants do not disagree.”). The defendants’ point was that their litigation conduct could not be the made the basis for a damage claim, not that the filing of the lawsuit immunized prior conduct.
The briefs submitted by the parties suggest fundamental differences on the interpretation of the relevant facts that make it difficult to assess the appropriateness of the First Circuit’s distinction between “the alleged antitrust violation [and] the damages caused by that violation,” and limit the extent to which Amphastar might make a significant doctrinal contribution. Broad adoption of a violation/damages dichotomy would inappropriately undercut the Noerr-Pennington doctrine, while a narrow focus on the existence of potentially protected litigation conduct might frustrate the proper analysis of cases such as Amphastar in which the plaintiffs’ liability theory is said not to rest on litigation conduct.
Lee BrandJenny PalmerSimpson Thacher & Bartlett LLP
On December 30, 2016, the Eleventh Circuit rejected a claim by Colombian company Procaps S.A. (“Procaps”) that a joint venture agreement between Procaps and its Canadian partner Patheon, Inc. (“Patheon”) violated Section 1 of the Sherman Act. Procaps S.A. v. Patheon, Inc., No. 15-15326, 2016 WL 7487726 (11th Cir. Dec. 30, 2016) (“Procaps”). The Eleventh Circuit’s decision reinforces the distinction between true antitrust claims and more traditional contract disputes. The court ultimately found this suit to be an instance of the latter because Procaps could establish neither concerted action in restraint of trade nor actual anticompetitive effects.
Procaps and Patheon both develop softgels for use in prescription drugs, over-the-counter drugs, and nutritional supplements. However, Procaps’ strengths lie in manufacturing and intellectual property whereas Patheon’s are in marketing. Procaps at *2. In January 2012, The companies entered into a joint venture agreement (“Collaboration Agreement”) to combine their complementary capabilities in the United States softgel market, where neither had succeeded on its own. The Collaboration Agreement prohibited Procaps and Patheon from independently competing in the covered market. Id. at *1-2. As the district court put it, the companies agreed to allocate customers and territories. Procaps S.A. v. Patheon, Inc., 36 F. Supp. 3d 1306, 1311 (S.D. Fla. 2014) (“Procaps I”). Later that year, Patheon acquired Banner Pharmacaps (“Banner”), another player in the softgel market that shared Procaps’ strong manufacturing capabilities. Procaps at *3. Upon learning about the acquisition, Procaps independently determined that the joint venture now violated antitrust law, refused to further participate in it, and filed suit. Thereafter, Patheon offered to terminate the Collaboration Agreement but Procaps refused. Id. at *3.
Procaps filed suit in the Southern District of Florida, alleging that the Banner acquisition had transformed the legitimate joint venture into a horizontal market allocation in restraint of trade, in violation of Section 1 of the Sherman Act. Procaps I at 1312. Rejecting this claim, the district court granted summary judgment in favor of Patheon, holding that the Collaboration Agreement alone was sufficient to meet the concerted action requirement of Section 1, but that the Rule of Reason applied and Procaps had not shown “actual anticompetitive effects” sufficient to survive summary judgment. Id. at 1312-13.
On appeal, Procaps argued that the district court should have applied the per se rule, but, claimed that it had shown sufficient anticompetitive effects under the Rule of Reason. The Eleventh Circuit affirmed the district court’s result, and rejected Procaps’ antitrust claim on two independent grounds: (1) as a foundational matter, there was no concerted action in the Collaboration Agreement or otherwise, and (2) the per se rule did not apply and Procaps had not shown actual anticompetitive effects under the Rule of Reason.
Although Section 1 of the Sherman Act prohibits “[e]very contract, combination . . . , or conspiracy, in restraint of trade . . . ,” 15 U.S.C. § 1, the Supreme Court has explained that the statute forbids only unreasonable restraints of trade. Am. Needle, Inc. v. Nat’l Football League, 560 U.S. 183, 189 (2010). To state a Section 1 claim, a plaintiff must show concerted action between two or more parties—“a conscious commitment to a common scheme designed to achieve an unlawful objective,” Monsanto Co. v. Spray-Rite Serv. Corp., 465 U.S. 752, 768 (1984), and establish that the result of the concerted action is an unreasonable restraint of trade.
Opposing summary judgment, Procaps argued—and the district court held—that the Collaboration Agreement created concerted action between the parties since the agreement required Patheon to remove Banner from the market. Procaps at *5-6. But the Eleventh Circuit reasoned that Patheon alone removed Banner from the market because Procaps refused to participate in the Collaboration Agreement when it learned of the Banner acquisition. The court of appeals also rejected Procaps’ argument that the mere existence of the Collaboration Agreement satisfied the concerted action requirement following the Banner acquisition. Indeed, the court pointed out that had the acquisition transformed the Collaboration Agreement into an unlawful restraint of trade, Procaps itself, as a party to that agreement, would have been liable to another softgel company’s antitrust claim. Id. at *5.
The Eleventh Circuit also explained that there could not have been any post-acquisition concerted action between Patheon and Banner. Under longstanding Supreme Court precedent, a company and its wholly owned subsidiary share a “singular economic interest” and are thus “legally incapable of conspiring for purposes of a Section 1 claim.” Procaps at *6 (citing Copperweld Corp. v. Indep. Tube Corp., 467 U.S. 752, 769-70 (1984)). Due to this “basic hornbook law,” any claim about a post-merger conspiracy between these entities was “dead in the water.” Procaps at *6. (Procaps did not challenge the acquisition itself or any pre-acquisition conduct between Patheon and Banner.)
In short, because Patheon acted independently in acquiring and constraining Banner, there was no concerted action between two parties and thus no restraint of trade under Section 1.
Generally, courts evaluate Section 1 claims under the Rule of Reason rather than the per se rule, which only applies to agreements “so plainly anticompetitive that no elaborate study of the industry is needed to establish their illegality.” Nat’l Soc. Of Prof’l Eng’rs. v. United States, 435 U.S. 679, 692 (1978). On appeal, Procaps argued that the Collaboration Agreement was precisely such an agreement, a horizontal market allocation between competitors like the one found per se unlawful by the Supreme Court in Palmer v. BRG of Georgia, Inc., 498 U.S. 46 (1990). In Palmer, two bar review providers in Georgia had agreed not to enter each other’s geographical markets and thereby effectively raised the price of bar review classes. Id. at 46-47. But the Eleventh Circuit distinguished Palmer, noting that here, the Collaboration Agreement had a procompetitive purpose acknowledged by Procaps itself, and that Procaps had shown no evidence of resulting price increases. Although the Collaboration Agreement was capable of classification as a horizontal market allocation, that fact alone did not require application of the per se rule. Procaps at *7. Moreover, because the effects of the agreement were “far from readily apparent,” the quick look doctrine did not alternatively justify less fulsome analysis than the Rule of Reason typically requires. Id. at *7 n.3.
To show an anticompetitive effect under the Rule of Reason, a plaintiff must establish either that (1) the restraint had an “actual detrimental effect” on competition or (2) the restraint had the potential for genuine anticompetitive effects and the conspirators had market power in the relevant market. Procaps at *7 (citing Levine v. Cent. Florida Med. Affiliates, Inc., 72 F.3d 1538, 1551 (11th Cir. 1996)). Detrimental effects on competition can include reduction of output, increase in price, or deterioration in quality. Jacobs v. Tempur-Pedic Int’l, Inc., 626 F.3d 1327, 1339 (11th Cir. 2010). Plaintiffs must point to specific facts to demonstrate detrimental effects, with “mere conclusory assertions” not being sufficient. Procaps at *8. To meet this burden, Procaps provided emails showing that potential customers were precluded from receiving bids from Banner, internal Patheon documents showing that Banner assets were removed from a large share of the target market, and expert economic and industry testimony that removing Banner from the market would both raise prices and damage Banner.
The Eleventh Circuit found this evidence insufficient. Procaps failed to present any specific facts showing anticompetitive harm because it presented no evidence of an actual reduction in output, increase in price, or deterioration in quality. Procaps at *8. Its expert economist relied on “hypothetical supply and demand curves that one might expect to find in any first-year economics textbook,” and its industry expert could not point to any harm to competition, only harm to a competitor (Banner). Id. As in cases decided in other circuits, showing actual harm only to a specific competitor did not suffice. See, e.g., Doctor’s Hosp. of Jefferson, Inc. v. Se. Med. All., Inc., 123 F.3d 301, 311 (5th Cir. 1997) (holding that alleged injury to a competitor was insufficient to establish harm to competition); Capital Imaging Assocs., P.C. v. Mohawk Valley Med. Assocs., Inc., 996 F.2d 537, 543 (2d Cir. 1993) (putting the initial burden on the plaintiff to show “that the challenged action has had an actual adverse effect on competition as a whole in the relevant market; to prove it has been harmed as an individual competitor will not suffice”); Bhan v. NME Hosps., Inc., 929 F.2d 1404, 1414 (9th Cir. 1991) (noting that proof “that one nurse anesthetist no longer works at one hospital . . . is not enough to demonstrate actual detrimental effects on competition”).
Finally, the Eleventh Circuit found that the Supreme Court’s decision in FTC v. Indiana Fed’n of Dentists, 476 U.S. 447 (1986) (“IFD”) did not change this result. In IFD, the Supreme Court held that the dental association’s concerted refusal to supply x-rays to insurers was illegal, even absent proof that the refusal resulted in higher prices. Id. at 460-61. In Procaps, the Eleventh Circuit pointed out that IFD did not weaken the requirement to show actual anticompetitive effects under the Rule of Reason. For one, it was a quick look case, making a detailed analysis of anticompetitive effects unnecessary. Moreover, the FTC established that the challenged policy was “rendering insurers entirely unable to obtain x rays in some locales.” See Procaps at *10. This actual impact independently established anticompetitive effect and obviated the need to show a price increase.
The Ninth Circuit recently emphasized that “anecdotal speculation and supposition are not a substitute for evidence” and “evidence decoupled from harm to competition—the bellwether of antitrust—is insufficient to defeat summary judgment.” Aerotec Int’l, Inc. v. Honeywell Int’l, Inc., 836 F.3d 1171 (9th Cir. Sept. 9, 2016). The Eleventh Circuit’s Procaps opinion echoes this pronouncement, demonstrating that plaintiffs cannot easily turn what “is essentially a breach of contract case” into an antitrust claim. Procaps at *10. Here, the collaboration was failing; Patheon and Procaps had submitted forty-three bids but won only two projects, and Patheon had begun to question its partnership with Procaps. Procaps I at 1315. Indeed, after Procaps challenged the Banner acquisition and refused to participate further in the collaboration, Patheon repeatedly offered to terminate the agreement. In such circumstances, where the parties have essentially abandoned any common objective, a legitimate contract between them will not transform independent decisions into concerted action. Additionally, while such a situation may harm a particular competitor, harm to a competitor is not sufficient proof of actual anticompetitive effects. Procaps’ Section 1 claim was “intrinsically hopeless because” Procaps “merely dress[ed] up in antitrust garb what [was], at best, a business tort or contract violation.” Procaps at *10 (quoting Stop & Shop Supermarket Co. v. Blue Cross & Blue Shield of R.I., 373 F.3d 57, 69 (1st Cir. 2004)).
Jonathan Mincer Caitlyn Chacon Simpson Thacher & Bartlett LLP
For the second time in as many months, a federal appellate court agreed with the geographic market definition of the Federal Trade Commission (“FTC”) in a hospital merger case and therefore reversed a district court decision denying the FTC a preliminary injunction. Following a win in the Third Circuit on September 27, 2016 regarding a proposed hospital merger in central Pennsylvania, FTC v. Penn State Hershey Medical Center, 838 F.3d 327 (3d Cir. 2016), the FTC prevailed in the Seventh Circuit on October 31, 2016 regarding a similar proposed merger in Chicago’s northern suburbs.
On June 20, 2016, Judge Jorge Alonso of the Northern District of Illinois denied the FTC’s motion to preliminarily enjoin the proposed merger between Advocate Health Care Network and NorthShore University HealthSystem pending completion of an FTC administrative trial on the merits. FTC v. Advocate Health Care, No. 15 C 11473, 2016 WL 3387163 (N.D. Ill. June 20, 2016).
The district court’s 13-page decision rested largely on geographic market definition. The district court found that the FTC’s economic expert, Dr. Steven Tenn, had improperly excluded “destination hospitals”—academic medical centers and other hospitals that attract patients at long distances—because there was no economic or commercial basis for distinguishing “destination hospitals” and “the evidence [wa]s equivocal” whether non-destination general acute care hospitals, or community hospitals, draw patients from smaller geographic areas. Id. at *4. The district court also faulted Dr. Tenn for including in the market only hospitals that competed with both merging parties, rather than just one, finding that he “simply assume[d] the answer” to his market definition inquiry. Id. at *5.
The Seventh Circuit unanimously reversed the district court’s decision, finding that the district court made clear factual errors in its geographic market analysis. FTC v. Advocate Health Care Network, No. 16-2492, 2016 WL 6407247 (7th Cir. Oct. 31, 2016). The district court’s “central error” was misunderstanding the well-established hypothetical monopolist test. Id. at *9. The test is iterative, finding a geographic market based on the smallest region in which a hypothetical monopolist could raise prices above competitive levels. If a selected region fails the test—because a competitive constraint from outside the region would prevent the hypothetical monopolist from raising prices—the region is expanded until it qualifies as a geographic market. According to the Seventh Circuit, the district court mistook the iterative nature of the test for circularity and did not otherwise explain how Dr. Tenn’s test results were incorrect. Id.
The Seventh Circuit found that the district court made three additional clear factual errors in its geographic market analysis. First, the district court failed to recognize the economic and commercial basis for distinguishing between destination hospitals and community hospitals like the merging parties’. Witnesses, including NorthShore’s CEO, had consistently used the term “academic medical center” and recognized that such a facility provided complex services for which patients were willing to travel longer than to receive general acute care, which they could obtain at a community hospital. Id. at *9-10.
Second, the district court overlooked evidence that most patients prefer to receive general acute care services closer to home. While the district court cited a long string of testimonial evidence for the proposition that the evidence was “equivocal” on patients’ preferences, the Seventh Circuit found that most of the cited testimony addressed medical care broadly, not general acute care specifically. The Seventh Circuit found that the evidence on general acute care was strong and unequivocal: patients seek hospital care in their local communities. For example, 73 percent of patients living in the FTC’s proposed geographic market received hospital care there, 80 percent of those patients drive less than 20 minutes or 15 miles to their chosen hospital, and 95 percent of those patients drive 30 miles or less (the north-to-south length of the FTC’s proposed market). Id. at *10.
Finally, the district court improperly focused on the patients who leave a proposed geographic market for care rather than on the patients who remain. The Seventh Circuit explained that insurers, not patients, are the most relevant customers in this market because insurers cover most hospital costs. While diversion ratios showed that the unavailability of patients’ first-choice hospital would cause many of them to turn to hospitals outside the proposed geographic market, insurers would not have that option. In fact, insurance executives “testified unequivocally that it would be difficult or impossible to market a network to employers in metropolitan Chicago that excludes both” merging parties. Id. at *2. Therefore, insurers would be subject to the merging parties’ market power post-merger. Id. at *11.
Like the Third Circuit’s decision in Penn State Hershey, this Seventh Circuit decision provides judicial support for the FTC’s analytical framework in hospital merger cases, though it of course leaves open the possibility of challenging the FTC’s application of its framework—such as the hypothetical monopolist test—to the facts of a particular case.
Elizabeth C. PritzkerPritzker Levine LLP
On January 3, 2017, the Ninth Circuit Court of Appeals issued its much anticipated decision in Briseno v. ConAgra Foods, Inc., 844 F.3d 1121 (9th Cir. 2017). The Court held that plaintiffs seeking class certification in a consumer action alleging that ConAgra deceptively and misleadingly marketed its cooking oils, made from genetically-modified organisms (GMOs), as “100% Natural,” need not demonstrate “that there is an ‘administratively feasible’ means of identifying absent class members.” Id. at 1124-25.
In so ruling, the Ninth Circuit in Briseno explicitly declined to follow the Third Circuit’s holding in Carrera v. Bayer Corp., 727 F.3d 300 (3d Cir. 2013), which does require class plaintiffs to demonstrate “administrative feasibility” as a prerequisite to class certification. Briseno’s holding is consistent with decisions from the Sixth, Seventh and Eighth Circuits. These circuits also do not require proof of an administratively feasible way to identify members of the proposed classes as part of the Rule 23 analysis. See Briseno, 844 F.3d at 1127 (citing Sandusky Wellness Ctr., LLC, v. Medtox Sci., Inc., 821 F.3d 992 (8th Cir. 2016); Rikos v. Procter & Gamble Co., 799 F.3d 497 (6th Cir. 2015); Mullins v. Direct Digital, LLC, 795 F.3d 654 (7th Cir. 2015)).
The Briseno plaintiffs are consumers who purchased Wesson-brand cooking oils labeled 100% Natural. Plaintiffs argue that the “100% Natural” label is false or misleading because Wesson oils are made from bioengineered ingredients (GMOs) that Plaintiffs contend are “not natural.” The case was filed in the Central District of California. Plaintiffs asserted state-law consumer claims against ConAgra in eleven states, and plaintiffs sought to certify eleven state classes under Rule 23. ConAgra opposed class certification, arguing (among other things) that there would be no administratively feasible way to identify class members of the proposed classes because consumers would not be able to reliably identify themselves as class members.
U.S. District Court Judge Margaret Morrow acknowledged that the Third Circuit had refused certification in similar circumstances, but declined in joining in that circuit’s reasons to deny certification, finding that, at the class certification stage, it was sufficient that the class was defined by an objective criterion: whether class members purchased Wesson oil (which universally carried the “100% Natural” label on all of its bottles) during the class period. See Briseno, 844 F.3d at 1123-24. Judge Morrow ultimately granted plaintiffs’ motion and certified eleven statewide classes under Fed. R. Civ. P. 23(b)(3). Ibid. ConAgra appealed.
In parting company with the Third Circuit, the Ninth Circuit opinion held:
[a] separate administrative feasibility prerequisite to class certification is not compatible with the language of Rule 23. Further, Rule 23’s enumerated criteria already address the policy concerns that have motivated some courts to adopt a separate administrative feasibility requirement, and do so without undermining the balance of interests struck by the Supreme Court, Congress, and the other contributors to the Rule.
[a] separate administrative feasibility prerequisite to class certification is not compatible with the language of Rule 23. Further, Rule 23’s enumerated criteria already address the policy concerns that have motivated some courts to adopt a separate administrative feasibility requirement, and do so without undermining the balance of interests struck by the Supreme Court, Congress, and the other contributors to the Rule.
Briseno, 844 F.3d at 1123.
The Ninth Circuit considered each reason cited in the Third Circuit’s Carrera opinion for requiring administrative feasibility. One such rationale was the need for an administratively feasible mechanism to ensure that the district court’s compliance with Rule 23’s requirement for class notice “does not compromise the efficiencies Rule 23(b)(3) was designed to achieve.” Briseno, 844 F.3d at 1127(citing Carrera, 727 F.3d at 307).
“But,” the Ninth Circuit held, “Rule 23(b)(3) already contains a specific, enumerated mechanism to achieve that goal: the manageability criterion of the superiority requirement.” Briseno, 844 F.3d at 1128. “Adopting a freestanding administrative feasibility requirement instead of assessing manageability as one component of the superiority inquiry would also have practical consequences inconsistent with the policies embodied in Rule 23,” the Court held. Id. As the Court went on to explain:
Rule 23(b)(3) calls for a comparative assessment of the costs and benefits of class adjudication, including the availability of ‘other methods’ for resolving the controversy. By contrast, as the Seventh Circuit has emphasized, a standalone administrative feasibility requirement would invite courts to consider the administrative burdens of class litigation ‘in a vacuum.’ [Citation omitted]. The difference in approach would often be outcome determinative for cases like this one, in which administrative feasibility would be difficult to demonstrate but in which there may be no realistic alternative to class treatment. [Citation omitted]. Class actions involving inexpensive consumer goods in particular would likely fail at the outset if administrative feasibility were a freestanding prerequisite to certification.
Rule 23(b)(3) calls for a comparative assessment of the costs and benefits of class adjudication, including the availability of ‘other methods’ for resolving the controversy. By contrast, as the Seventh Circuit has emphasized, a standalone administrative feasibility requirement would invite courts to consider the administrative burdens of class litigation ‘in a vacuum.’ [Citation omitted]. The difference in approach would often be outcome determinative for cases like this one, in which administrative feasibility would be difficult to demonstrate but in which there may be no realistic alternative to class treatment. [Citation omitted]. Class actions involving inexpensive consumer goods in particular would likely fail at the outset if administrative feasibility were a freestanding prerequisite to certification.
Id. at 1128-29.
The Ninth Circuit also noted that Rule 23’s authors “opted not to make the potential administrative burdens of a class action dispositive and instead directed courts to balance the benefits of class adjudication against its costs.” Briseno, 844 F.3d at 1128. The Court declined to substitute its judgment for that of the Rule’s authors. Ibid.
Turning specifically to the issue of class notice, the Ninth Circuit reiterated that “Rule 23 requires only ‘the best notice practicable under the circumstances, including individual notice to all members who can be identified through reasonable efforts. Fed. R. Civ. P. 23(c)(2)(B). In other words, ‘[t]he rule does not insist on actual notice to all class members in all cases, and recognizes it might be impossible to identify some class members for purposes of actual notice. [Citation omitted].” Briseno, 844 F.3d at 1129 (italics in original). Denying class certification due to inability to identify all class members would interfere with, and could not be reconciled with, the Ninth Circuit’s longstanding cy pres jurisprudence, the Court held. Ibid. Cy pres allows for class remedies even if some or even all potential claimants cannot be identified.
The Ninth Circuit dismissed assertions that requiring that individual class members be reasonably identifiable pre-certification would eliminate illegitimate claims, dilute the recovery of legitimate claimants, or interfere with defendants’ due process rights to “raise individual challenges and defenses to claims.” Carrera, 727 F.3d at 307. Claims administrators, auditing processes, sampling for fraud detection, and other techniques “tailored by the parties and the court” have long been successful in avoiding or minimizing fraudulent claims, the Court reasoned. Briseno, 844 F.3d at 1130. And, defendants “will have similar opportunities to individually challenge the claims of absent members if and when they file claims for damages.” Id. at 1131.
“In summary,” the Ninth Circuit concluded, “the language of Rule 23 neither provides nor implies that demonstrating an administratively feasible way to identify class members is a prerequisite to class certification, and the policy concerns that have motivated the Third Circuit to adopt a separately articulated requirement are already addressed by the Rule. We therefore join the Sixth, Seventh and Eighth Circuits in declining to adopt an administrative feasibility requirement.” Briseno, at 1133.
David M. GoldsteinOrrick Herrington & Sutcliffe LLP
On December 22, 2016, Judge Thomas N. O’Neill of the Eastern District of Pennsylvania unsealed an order certifying a class of “[a]ll persons and entities in [36 non-Western states and the District of Columbia] who purchased fresh agaricus mushrooms directly from an [Eastern Mushroom Marketing Cooperative (EMMC)] member or one of its co-conspirators or its owned or controlled affiliates, agents or subsidiaries . . . .” In re Mushroom Direct Purchaser Litig., No. 2:06-cv-00620-TON, ECF 791 (Nov. 22, 2016), at 1. The court’s decision is notable for several reasons, including its analysis of impact and damages in what the court is treating as a rule of reason case involving an alleged horizontal and vertical price-fixing conspiracy.
The class representatives—food wholesalers, grocery stores and food processors—allege that EMMC and its members violated the antitrust laws in two ways with respect to fresh agaricus (white, crimini and portabella) mushrooms. First, the plaintiffs claim that EMMC and its members circulated price lists and pricing policies, including minimum prices, for mushroom sales by distributors to the retail, wholesale, and food service markets. Id. at 7-9. Second, the plaintiffs assert that the defendants, through EMMC, controlled the supply of mushrooms by prohibiting mushroom production at certain farms they purchased or leased. Id. at 9-10.
The defendants argued that evidence showed a lack of adherence to EMMC’s pricing policies and that the alleged supply control program was of no consequence. Id. at 8-10. They also asserted that before adopting the challenged programs they had relied on the advice of counsel that EMMC was properly formed in accordance with the Capper-Volstead Act. Id. at 5 n.7. The court explained that it previously rejected the Capper-Volstead defense, even though in a prior proceeding the Department of Justice concluded that EMMC was organized pursuant to the Act. Id. The court also pointed out that EMMC and the DOJ had entered into a consent judgment regarding the alleged supply control conduct. Id. at 9, n.9.
The plaintiffs’ expert opined that the non-Western United States constituted a geographic market for the mushrooms at issue. Id. at 10. Anticipating likely arguments based on Comcast v. Behrend, 133 S. Ct. 1426 (2013), he opined that (1) the minimum pricing policies resulted in an amount of classwide aggregate damages, and (2) that the supply control agreement resulted in a separately calculable amount of aggregate damages. Id. The defendants’ expert challenged the plaintiffs’ geographic market, and opined that impact could not be demonstrated on a classwide basis and that a formulaic approach to damages could not be constructed. Id. at 10-11. One defense expert argued that the plaintiffs’ expert failed to demonstrate that all class members sustained antitrust injury, that buyer-specific factors affected pricing, and that a properly defined market would include the entire United States and imports. Id. at 11-12.
The court found Rule 23(a)’s requirements of numerosity and commonality to be easily met. Id. at 15-17. In response to the defendants’ typicality and adequacy challenges, the court dismissed a class representative it concluded was an indirect purchaser and placed limits on claims asserted by a class representative that is a group purchasing association. Id. at 29-40. However, the court allowed a “mom and pop” class representative, which sold in a small portion of the non-Western United States geographic market, to remain in the case. Id. at 40-43.
The defendants attacked ascertainability by arguing that the scope and breadth of the alleged direct purchaser class mandated individual inquiries to determine whether each class member was truly a direct purchaser or fell within the “cost-plus,” “co-conspirator,” or “owned or controlled” exceptions to Illinois Brick’s bar on damages for indirect purchasers. Id. at 17-28. The plaintiffs countered that because both the growers and the distributors were involved in the alleged conspiracy, there were no complicating factors involving pass-on and the potential for duplicative recovery. Id. at 24. The court was not persuaded by the plaintiffs’ argument, explaining that further evidence was needed regarding the relationships among growers, distributors, and EMMC, and also whether all of the relevant distributors had been named as defendants. Id. At the same time, the court ruled that this did not defeat ascertainability, which was addressed by the class definition. Id. at 26. In drawing that line, the court made clear that the plaintiffs must demonstrate that the defendants from which they purchased were integrated growers/distributors, or explain how the claimed purchases satisfy an Illinois Brick exception. Id. at 27-28.
The court then found that the plaintiffs demonstrated that common issues will predominate under Rule 23(b)(3). The court quickly found that common issues predominate as to whether the defendants violated the antitrust laws through their pricing and supply agreements. Id. at 45-46. The court’s analysis of impact was more complicated, as it had previously ruled that because the plaintiffs allege a horizontal and vertical price-fixing conspiracy—not just a horizontal conspiracy—“plaintiffs’ proposed proof of impact . . . must be considered through the lens of the rule of reason.” Id. at 46-49. The court rejected application of the Bogosian shortcut (see Bogosian v. Gulf Oil Corp., 561 F.3d 434 (3d Cir. 1977)), because it was persuaded that in the Third Circuit the shortcut applies only to per se violations. Id. at 49-51. The court was nonetheless persuaded that common issues predominate with respect to the nature of the alleged conspiracy and the structure of the market—including the commoditized nature of agaricus mushrooms, the alleged geographic market, and the vertical relationships among growers and distributors. Id. at 51-67.
The court also relied on the plaintiffs’ expert’s pricing regression analysis, which he used to conclude there was common impact. Id. at 70-71. Relying on In re Plastic Additives, No. 03-2038, 2010 WL 3431837, at *15 (E.D. Pa. Aug. 21, 2010), the defendants challenged the regression on the ground that it generated an “average overcharge,” which “is legally insufficient to meet the requirement of proving fact of damage for every class member . . . .” Id. at 71. The court agreed with the general point, but found that, in contrast to Plastic Additives, plaintiffs’ expert supported his opinion by running the regression for each class member for which the defendants had produced transaction data, and the percentage that were impacted was high enough (although the exact percentage is redacted from the publicly available opinion). Id. at 72-74. The court agreed with the plaintiffs that the possibility of uninjured class members does not foreclose a finding of predominance, citing Kleen Products and Tyson Foods, and rejected the defendants’ argument that the regression was insufficient because it used only the data produced by 11 of the 27 defendants, the reasonably available data. Id. at 74-76.
The plaintiffs’ expert also performed a before and after price comparison showing a range of price increases for some class members. (The specific ranges and percentage of class members are redacted). Id. at 77. The defendants levied several criticisms: the fact some paid price increases does not mean all did; there was a lack of control variables; there was a “cherry picking” problem. Id. at 77-78. Although the court agreed that “at trial, plaintiffs must show that they experienced price increases that resulted from anticompetitive conduct,” quoting In re Blood Reagents Antitrust Litig., No. 09-2081, 2015 WL 6123211, at *32 (E.D. Pa. Oct. 19, 2015), it concluded the regression analysis and report were sufficient at the class certification stage. Id. at 78.
The court also found that the plaintiffs met their burden to demonstrate the predominance of common questions with respect to damages based on their expert’s separate damages calculations for the alleged price-fixing and supply control schemes. Id. at 80-84. In addition to disagreeing with the defendants’ argument that aggregate damages are not sufficient at the class certification, the court rejected the defendants’ Comcast argument that the plaintiffs’ damages model did not quantify the impact of the various alleged vertical agreements between growers and their distributors, according to the defendants, a fatal flaw if an alleged agreement did not exist or did not harm competition. Id. at 82-83. The court distinguished Comcast on the ground that in Comcast the court rejected three of the plaintiffs’ four liability theories at the class certification stage, and the damages model could not be disaggregated in a way that would create support for the remaining theory of liability. Id. at 83-84. That was not the situation in Mushrooms because both the price-fixing and supply control theories were still in the case, and the plaintiffs’ theory regarding all of the various vertical agreements matched their model, at least at the class certification stage. Id.
The court has ordered the parties to submit an agreed-upon class notice plan and proposed form of class notice. The defendants have filed a motion for reconsideration.
Jason BusseyCarolyn HillSimpson Thacher & Bartlett LLP
On March 31, 2016, Judge Rakoff of the federal district court for the Southern District of New York denied a motion to dismiss an antitrust lawsuit brought against Travis Kalanick, the founder of Uber Technologies Inc. (“Uber”). Meyer v. Kalanick, 174 F. Supp. 3d 817 (S.D.N.Y. 2016). The plaintiff, Spencer Meyer, an Uber passenger, alleged that Kalanick, as the “architect” of Uber’s pricing model, had orchestrated and facilitated vertical and horizontal conspiracies with its drivers. Perhaps to avoid an arbitration provision, Meyer did not name Uber as a party to the action. Nor did he name Uber as a co-conspirator in his complaint, although the district court ultimately treated it as one.
Uber brands itself as a technology company. It provides a platform through which a rider can connect with private drivers, but it does not itself employ those drivers. Instead, it connects independent contractor “driver-partners” with passengers. Those driver-partners sign up with Uber by agreeing to Uber’s terms of service, which include an agreement to accept Uber’s pricing. Uber sets prices algorithmically using a formula that accounts for the ride’s timing and mileage. If demand is high, Uber’s algorithm multiplies the base fare. In theory, a driver may depart from Uber’s set prices, but there is no simple way to do so in the app. Id. at 822 n.3.
Meyer claimed that by creating this business model, Kalanick orchestrated and facilitated a horizontal and vertical conspiracy that violated Section 1 of the Sherman Act and Section 340 of New York’s Donnelly Act. Id. at 819-20. Specifically, Meyer alleged that Kalanick both architected a horizontal price-fixing conspiracy among Uber’s drivers and participated in that conspiracy as an infrequent Uber driver himself. In his motion to dismiss, Kalanick argued that, even accepting the well-pleaded allegations of the complaint, there could have been no conspiracy because each individual driver indisputably made an independent decision to drive for Uber and entered into a legal, independent agreement with Uber. Kalanick also noted the logistical and practical impossibilities of Meyer’s proposed conspiracy, arguing that it would be “physically impossible” for the drivers to have entered into any conspiracy, given that they were scattered all over the country and had never been in contact with each other. As explained below, the court ultimately disagreed and denied Kalanick’s motion to dismiss.
Antitrust courts have traditionally distinguished between horizontal and vertical conspiracies for various purposes. Id. at 822. Horizontal conspiracies involve agreements among competitors, while vertical conspiracies involve agreements between two firms at different levels of the supply chain. In general, horizontal agreements among competitors to fix prices are per se illegal. See Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877, 886, 906 (2007). Vertical resale price maintenance agreements were also traditionally deemed per se illegal, see, e.g., Dr. Miles Med. Co. v. John D. Park & Sons Co., 220 U.S. 373, 405 (1911), but they have been judged under the rule of reason under federal law since 2007. See Leegin, 551 U.S. at 877 (overruling Dr. Miles, 220 U.S. at 303). A resale price maintenance agreement is a reseller’s agreement with a manufacturer that the reseller will not sell the manufacturer’s products below a certain price. See Leegin, 551 U.S. at 886.
Horizontal agreements, or agreements among competitors, “involve coordination between competitors at the same level of a market structure.” United States v. Apple, Inc., 791 F.3d 290, 313 (2d Cir. 2015). In some circumstances, a defendant may be held liable as an organizer of a horizontal conspiracy even if it was not itself among the competitors participating in the conspiracy. For example, a defendant might facilitate a horizontal conspiracy by asking competitors to agree to a restrictive pricing agreement to which they would not have agreed unless they were certain their competitors would not undercut them. See generally id. Meyer argued that Kalanick had done precisely that by orchestrating Uber’s business model. See Meyer, 174 F. Supp. 3d at 817.
In considering this argument, the Meyer court cited Interstate Circuit, where the Supreme Court held that movie distributors formed a horizontal conspiracy by accepting a movie theater’s terms of service, which included pricing restrictions. Interstate Circ. v. United States, 306 U.S. 208, 208 (1939). Because each distributor knew every other distributor had received the same terms, their collective acceptance of the terms constituted an unlawful conspiracy. Id. The court also cited the recent Apple case, in which the Second Circuit affirmed a decision holding Apple per se liable for coordinating an e-book pricing conspiracy among publishers. Apple, 791 F.3d at 297-98.
Apple involved an agreement between Apple and various publishers to set prices for e-books. Id. The pricing system was designed to allow publishers to charge more than $9.99, the price set by Amazon, for certain popular books. Id. While the Second Circuit recognized that not every pricing agreement put forth by a company that seeks to bind various competitors constitutes an unlawful horizontal conspiracy, it concluded that it was reasonable to infer that the publishers’ agreement to Apple’s terms was not the result of their independent business decisions but rather evinced an intent to conspire. See Apple, 791 F.3d at 315. In large part, the court’s analysis rested on the fact that the only reason the publishers would agree to Apple’s terms would be if they could use those terms as leverage to change their pricing agreement with Amazon. Id.
The Meyer court concluded that—given the early stage of the case—the plaintiff had sufficiently alleged the existence of the sort of conspiracy challenged in Interstate Circuit and Apple. See Meyer, 174 F. Supp. 3d at 824. The court emphasized Meyer’s allegations that drivers agreed to charge the fares Uber dictated to them because they were confident that other Uber drivers would not be able to undercut that pricing model. Id. It concluded that these allegations were sufficient to state a claim. Id. The court also accepted as sufficient Meyer’s allegations that Kalanick organized and facilitated the agreements. Id. Finally, the court concluded that the pricing protections provided by Uber’s terms of service plausibly constituted a motive to conspire. Id. The court reserved for a later stage any questions regarding other potential reasons drivers might have agreed to Uber’s terms. Id. at 824-25.
In drawing its conclusion that Meyer had sufficiently pleaded a horizontal conspiracy, the court emphasized that conspiracy doctrine is inherently flexible and that “the agreements that form the essence of the misconduct are not to be judged by technical niceties but by practical realities.” Id. at 824. The court therefore rejected Kalanick’s argument that the conspiracy was “physically impossible,” noting that thanks to technological advances, individuals could now enter into a conspiracy anywhere thanks to the “magic of smartphone technology.” Id. The court also concluded that Meyer’s allegations that Uber coordinated get-togethers among drivers and that it had agreed to raise fares in response to driver complaints further supported his claims. Id. Kalanick argued that he did not support these higher rates, but the court declined to resolve that factual assertion at the motion to dismiss stage. Id. at 825 n.4.
Finally, the court rejected Kalanick’s argument that the Supreme Court’s recent holding in Leegin should control its analysis. Leegin held that price-setting agreements between manufacturers and retailers should be judged under the rule of reason. See Leegin, 551 U.S. at 886. The Meyer court found Leegin inapposite for a number of reasons. Meyer, 174 F. Supp. 3d at 826. For example, the Leegin Court noted that resale price maintenance agreements can help prevent free riders. Leegin, 551 U.S. at 890-91. The Meyer court noted that Kalanick had made no argument that Uber drivers might freeride if there was no pricing agreement. Meyer, 174 F. Supp. 3d at 826. Furthermore—and more basically—the court noted that Uber does not actually sell anything to drivers that is resold to riders. Id. As a result, the court concluded that Leegin’s analysis was inapplicable.
The court also found that Meyer sufficiently alleged a vertical conspiracy between each driver and Kalanick, although it noted that Meyer’s vertical conspiracy allegations were “much more sparse” than his horizontal conspiracy allegations. Under the rule of reason, a court considering a vertical conspiracy “weighs all of the circumstances of a case in deciding whether a restrictive practice should be prohibited as imposing an unreasonable restraint on competition.” Jacobs v. Tempur-Pedic Intern., Inc., 626 F.3d 1327, 1333-34 (11th Cir. 2010) (quoting Cont’l T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 49 (1977)). The analysis involves a three-step process. See United States v. Am. Express Co., 838 F.3d 179, 194-96 (2d Cir. 2016). A plaintiff first bears the burden of alleging facts suggesting that the defendant’s conduct had either an actual anticompetitive adverse effect on a market, or that the defendant had sufficient market power to potentially cause an adverse effect on competition, and that its challenged behavior could harm competition in the market. Id. If a plaintiff clears this hurdle, the defendant may “offer evidence of any procompetitive effects of the restraint at issue.” Id. at 195. If the defendant succeeds, the burden shifts back to the plaintiff, who must demonstrate that the procompetitive benefits “could have been achieved through less restrictive means.” Id.
Before applying the burden-shifting framework, however, a court must identify the relevant geographic and product market. A geographic market must “correspond to the commercial realities of the industry,” and may be as small as a city or as large as a national market. See Brown Shoe Co. v. United States, 370 U.S. 294, 337 (1962); Xtreme Caged Combat v. Cage Fury Fighting Championships, No. CIV.A. 14-5159, 2015 WL 3444274, at *7 (E.D. Pa. May 29, 2015). While the geographic market should be reasonably easy to define in Meyer, the product market will be significantly more contentious. To define a product market, a plaintiff must “reference . . . ‘reasonable interchangeability’ and ‘cross-elasticity of demand.’” Babyage.com, Inc. v. Toys “‘R” Us, Inc., 558 F. Supp. 2d 575, 580 (E.D. Pa. 2008). “Two products are ‘reasonably interchangeable’ if consumers can use each for the same purpose. ‘Cross-elasticity of demand’ refers to the relationship between the price of one product and the demand of another.” Id. at 580 n.2. Markets are, in short, defined by considering “the uses to which the product is put by consumers in general.” Jacobs, 626 F.3d at 1337 (quoting Maris Distrib. Co. v. Anheuser-Busch, Inc., 302 F.3d 1207, 1221 (11th Cir. 2002)).
The relevant product market can be a subset of a larger market. Jacobs, 626 F.3d at 1337. One supposedly simple way to identify the relevant market for any given product is to consider “[t]he smallest set of products (including that very product, of course) such that a hypothetical firm selling all of those products with no competition could profitably impose a small but significant and nontransitory increase in price.” Babyage.com, 558 F. Supp. 2d at 580-81. This definition, provided by the 1992 Department of Justice Guidelines, incorporates both reasonable interchangeability and cross-elasticity of demand. Id. at 581. Courts also consider a number of other factors in determining what the relevant product markets are, including “industry or public recognition of the submarket as a separate economic entity, the product’s peculiar characteristics and uses, unique production facilities, distinct customers, distinct prices, sensitivity to price changes, and specialized vendors.” Jacobs, 626 F.3d at 1337 (quoting Brown Shoe, 370 U.S. at 325).
Meyer defined a nationwide geographic market and a “mobile app-generated ride-share service” product market. Meyer, 174 F.3d at 827. Although Kalanick did not challenge the geographic market definition, he argued that the product market definition was too narrow, as it excluded taxis, public transportation, and even walking. Id. Judge Rakoff glibly suggested in his order denying the motion to dismiss that if the defense team truly believed walking was reasonably interchangeable with taxis and Uber, it was welcome to walk to court in the future. Id. More seriously, the court acknowledged that “[o]ne could argue [market definition] either way” and emphasized that resolving the question would likely require expert testimony and a trial. Id. at 828. The court concluded, however, that Meyer had pled a product market definition that was sufficient at the motion to dismiss stage.
With regard to anticompetitive effects, the court concluded that Meyer had adequately pled sufficient facts. Meyer, 174 F. Supp. 3d at 828. Specifically, Meyer alleged that Uber’s pricing scheme restrained competition by decreasing output and had already forced one competitor (Sidecar) out of the market. Kalanick argued that Uber’s business model permits it to deliver an innovative product and increase consumer choice, among other benefits. While Judge Rakoff acknowledged those benefits, he concluded that their relative weight must be judged by a factfinder and could not be resolved on a motion to dismiss. Id. He therefore denied the motion to dismiss.
Although the Meyer complaint survived a motion to dismiss, a number of questions remain open, including questions about market definition and the procompetitive benefits of Uber’s business model. Whether Uber’s business model constitutes an illegal conspiracy will also be resolved. The remaining questions will have significant implications not only for transportation services companies like Uber and Lyft, but also for other young sharing economy companies.
First, the parties will have to resolve questions about market definition. The Meyer complaint alleges that Uber’s market is nationwide, but Uber operates only in selected cities. For example, Uber does not operate in Saint Louis or Austin. The parties did not heavily litigate the geographic market issue at the motion to dismiss stage, but it may play a more significant role later in the case.
Defining the product market will be far more challenging. The complaint alleges that the market was the “mobile app-generated ride-share service market,” of which Uber allegedly held about an 80% share. In his motion to dismiss papers, Kalanick argued that this market definition was “woefully” over-narrow, given that it excluded public and private transportation options, including busses, subways, taxis, personal vehicle uses, and even walking. The market definition questions will have significant implications for other sharing economy companies. At issue is whether sharing economy companies’ markets include the traditional markets they disrupt. For some companies, market definition could be the difference between tremendous market power and virtually none.
Second, the parties will address the question of whether the procompetitive benefits of Uber’s business model outweigh any anticompetitive effects. For example, Meyer argued that Uber’s pricing model allows drivers to charge higher fares than they would absent the protections of the Uber model. Kalanick, in contrast, argued that Uber’s terms of service were independent agreements between Uber and each individual driver, and that the only true anticompetitive effect Meyer’s complaint alleged was that Uber’s pricing algorithm increased prices during times of high demand. Kalanick argued that because these price increases create an increase in supply, they by definition cannot constitute anticompetitive effects. Expert testimony will be important to the resolution of this issue.
The Meyer court may never reach those questions. After the motion to dismiss was denied, Uber was joined as a party and sought to enforce an arbitration provision contained in its terms of service. On July 29, 2016, the district court refused to compel arbitration, concluding that Meyer had not actually accepted the terms of service and lacked adequate notice of their existence. Uber filed an interlocutory appeal, which is currently before the Second Circuit. The case is stayed pending the outcome of that appeal.
Geoffrey T. HoltzMorgan Lewis & Bockius LLP
On January 12, 2017, the Ninth Circuit issued a decision in In re Apple iPhone Antitrust Litigation, 2017 WL 117153 (9th Cir., Jan. 12, 2017), that refines the determination of a “direct” versus an “indirect” purchaser under the Sherman Act. The plaintiffs are purchasers of iPhone “apps” from Apple’s “iTunes” site or “App Store.” The complaint alleges that Apple has monopolized and attempted to monopolize the market for iPhone apps through its prohibition of independent app developers selling their apps through channels other than the App Store, and that the purchasers in turn paid Apple supra-competitive prices for apps.
When a customer buys an app from Apple, it pays the full purchase price, including Apple’s 30% commission, directly to Apple. Apple collects the entire purchase price and pays the developer after the sale. The issue on appeal was whether the purchasers bought the apps from the third-party developers — which would make them indirect purchasers and deprive them of standing under the Sherman Act pursuant to Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977) — or from Apple, which would make them direct purchasers with standing to sue.
The district court dismissed the complaint, finding the plaintiffs to be indirect purchasers. It reasoned that the 30% commission about which the plaintiffs complain is not a fixed fee, but a cost passed-on to consumers by the independent software developers. As such, any injury to the plaintiffs is an indirect effect resulting from the software developers’ own costs.
The Ninth Circuit reversed. It framed the question as “whether Apple is a manufacturer or producer, or whether it is a distributor.” Id. at *7. Under Illinois Brick and related cases, “if Apple is a manufacturer or producer from whom Plaintiffs purchased indirectly, Plaintiffs do not have standing. But if Apple is a distributor from whom Plaintiffs purchased directly, Plaintiffs do have standing.” Id. Apple argued that it was akin to the owner of a shopping mall that “leases physical space to various stores.” Id. at *8. But the Court rejected this analogy, observing that third-party iPhone app developers do not have their own “stores,” and, indeed, part of the alleged anti-competitive behavior is that Apple specifically forbids developers from selling through their own “stores” but instead requires them to sell iPhone apps only through Apple’s App Store. Id. The plaintiffs thus have standing as direct purchasers from Apple.
In reaching its conclusion, the Ninth Circuit disagreed with the Eighth Circuit’s decision in Campos v. Ticketmaster Corp., 140 F.3d 1166 (8th Cir. 1998), in which the court concluded that purchasers of concert tickets from Ticketmaster were indirect purchasers because the distribution agreements between Ticketmaster and the concert promoters “absorbed or passed on all or part of the monopoly overcharge.” 2017 WL 117153, at *8. The test in the Eighth Circuit was framed as whether the “purchaser is one who bears some portion of a monopoly overcharge only by virtue of an antecedent transaction between the monopolist and another, independent purchaser.” 140 F.3d at 1169. The Ninth Circuit adopted a different test.
Given the growing popularity of electronic marketplaces from which consumers can purchase “apps” or software, or even more traditional products, from a single source, the characterization of consumers as “direct” or “indirect” purchasers has significant implications for potential antitrust litigation. Given the split among the circuits as to how this question should be framed and analyzed, there is likely to be additional litigation and refinement of the appropriate “test,” and perhaps eventual Supreme Court intervention.
On January 26, 2017, Apple filed a petition for rehearing or rehearing en banc. Apple argues that the panel decision “throws antitrust standing law into disarray,” and conflicts with Illinois Brick, In re ATM Fee Antitrust Litigation, 686 F.3d 741 (9th Cir. 2012), and other Ninth Circuit decisions. Apple also criticized the panel for “unnecessarily announc[ing] a circuit split” by relying on the dissenting opinion in Campos.
On January 3, 2017, the Southern District of California issued the first of two orders addressing motions to dismiss complaints alleging a conspiracy, in violation of the Sherman Act and state antitrust laws, among packagers of canned seafood including tuna, clams, crab, mackerel, oysters, salmon, sardines, and shrimp in the multidistrict litigation known as In Re: Packaged Seafood Products Antitrust Litigation, 2017 WL 35571 (S.D. Cal., Jan. 3, 2017). The motions considered by the court raised various issues. See id. at *1-2.
The court first addressed whether the allegations regarding a conspiracy to fix tuna prices supported a broader claim covering other types of seafood. The defendants argued that “not a single Plaintiff has even attempted to allege any collusive conduct regarding any type of packaged seafood product other than tuna.” Id. at *5. The plaintiffs responded that conspiracy allegations need not be framed “with the precision of a diamond cutter,” citing In re Capacitors Antitrust Litig., 106 F. Supp. 3d 1051, 1063 (N.D. Cal. 2015), and they pointed to various external facts suggesting a more inclusive seafood category. Id. The court held that under Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) and Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007), the complaints failed to assert facts sufficient to support a claim of a conspiracy to fix seafood prices for products other than canned tuna. “A conspiracy requires an agreement, and Plaintiffs have not alleged any agreement—inferential or direct—between the Defendants to fix prices across the entire packaged seafood industry.” Id. at *6. The court therefore dismissed the claims regarding a more inclusive “packaged seafood” conspiracy. Id. at *7.
The court then considered whether the complaints stated a viable tuna claim. The defendants argued that the plaintiffs’ allegations regarding a Department of Justice investigation carry “no weight” in the evaluation of the sufficiency of the plaintiffs’ allegations. Id. The plaintiffs claimed that “at the very least government investigations may bolster the sufficiency of additional conspiracy allegations.” Id. The court “recognize[d] the limitations of and caution required in relying on a pending investigation to support the validity of an alleged conspiracy, but nonetheless agree[d] with Plaintiffs that a pending investigation may bolster additional allegations.” Id. While “it would be improper to draw a conclusion that a pending government investigation on its own supplies sufficient factual material to survive a 12(b)(6) motion to dismiss, the court considered it “perfectly permissible to take as true the fact that a government investigation has been instituted, and that therefore at least several individuals within the governmental chain of command thought certain facts warranted further inquiry into a potential criminal conspiracy.” Id. at *8. “[S]upported by the additional allegations that several Defendants have admitted to receiving criminal subpoenas, and of a DOJ press release regarding an abandoned merger between CotS and Bumble Bee which noted that the Antitrust Division’s ‘investigation convinced us—and the parties knew or should have known from the get go—that the market is not functioning competitively today, and further consolidation would only make things worse[,]’,” the court concluded that it “may validly consider the pending DOJ investigation in concert with Plaintiffs’ other allegations.” Id. (citations omitted).
The defendants argued that the allegations of the complaints amount to nothing more than non-actionable parallel conduct, that mere opportunities to collude do not support an inference of conspiracy, and that the foreign and domestic investigations and asserted conduct cannot support claims of a plausible tuna-specific conspiracy under Twombly. The court disagreed.
The court first observed that the three major brands lowering the standard tuna can size from 6 ounces to 5 ounces without any corresponding change in price after a speech by the Bumble Bee CEO of one did not support a plausible conspiracy allegation under Twombly and Iqbal because it was equally possible they all simply realized they could profit more from smaller can sizes. Id. at 10. However, the court determined that a near-simultaneous price increase after meetings of senior management for the three brands, along with other coordinated activities, were sufficient under Twombly and Iqbal. The court observed that “the similarity, and corresponding equipoise between innocuous and conspiratorial inferences, is partially removed by the alleged agreement and tighter timeline during which the relevant communications occurred.” Id. Finally, the court held that allegations of an agreement among the packagers by conference call, confirmed in an email, not to sell tuna that is “FAD-free” (not caught by use of a “Fish Aggregation Device”) sufficiently alleged a per se price-fixing conspiracy. Id. at 10-11. “Taken together, the Court conclude[d] that almost all Plaintiffs have alleged sufficient factual material to nudge their overarching allegations of a conspiracy over the line from possible to plausible.” Id. at 11.
In sum, the Packaged Seafood Products order offers a good example of the analysis and resolution under Twombly and Iqbal of the sufficiency of allegations of conspiracy supported not by a single smoking gun, but by a number of discrete facts that are claimed to — as a whole — indicate a price-fixing conspiracy sufficient to withstand a motion to dismiss.
On January 13, 2017, the Department of Justice and the Federal Trade Commission issued an update to the 1995 Antitrust Guidelines for the Licensing of Intellectual Property. The intellectual property licensing guidelines “explain how the federal antitrust agencies evaluate licensing and related activities involving patents, copyrights, trade secrets and know-how.” The update is described in the press release accompanying the update as “moderniz[ing] the IP Licensing Guidelines . . . so they may continue to play a fundamental role in the agencies’ analysis of the licensing of intellectual property rights and provide guidance to the public and the business community about the agencies’ enforcement approach to intellectual property licensing.” Acting Assistant Attorney General Renata Hesse said “Our modernized IP Licensing Guidelines continue to apply an effects-based analysis that puts the focus on evaluating harm to competition, not on harm to any individual competitor, and support procompetitive intellectual property licensing that can promote innovation.” Outgoing Federal Trade Commission Chairwoman Edith Ramirez commented that, in the update, “the Commission reaffirms its commitment to an economically grounded approach to antitrust analysis of IP licensing.” “A strong and competitive IP licensing system benefits consumers and fosters innovation, by helping to ensure that inventors realize an appropriate return on their investment,” noted Chairwoman Ramirez.
The updated guidelines maintain the three “general principles” embodied in the enforcement policy announced in 1995: “(a) for the purpose of antitrust analysis, the Agencies apply the same analysis to conduct involving intellectual property as to conduct involving other forms of property, taking into account the specific characteristics of a particular property right; (b) the Agencies do not presume that intellectual property creates market power in the antitrust context; and (c) the Agencies recognize that intellectual property licensing allows firms to combine complementary factors of production and is generally procompetitive.”
The press release announcing the update and a link to the Antitrust Guidelines for the Licensing of Intellectual Property can be found at https://www.justice.gov/opa/pr/justice-department-and-federal-trade-commission-announce-updated-international-antitrust.
Also on January 13, 2017, the agencies issued revised Antitrust Guidelines for International Enforcement and Cooperation. The guidelines update the Antitrust Enforcement Guidelines for International Operations issued in 1995, and “provide guidance to businesses engaged in international activities on questions that concern the agencies’ international enforcement policy as well as the agencies’ related investigative tools and cooperation with foreign authorities.” The press release announcing the revision said “[t]he revised guidelines reflect the growing importance of antitrust enforcement in a globalized economy and the agencies’ commitment to cooperating with foreign authorities on both policy and investigative matters.”
“The revisions describe the current practices and methods of analysis the agencies employ when determining whether to initiate and how to conduct investigations of, or enforcement actions against, conduct with an international dimension.” Important changes reported in the press release announcing the revision include:
The press release announcing the issuance of the revised guidelines and a link to the Antitrust Guidelines for International Enforcement and Cooperation can be found at https://www.justice.gov/opa/pr/justice-department-and-federal-trade-commission-announce-updated-international-antitrust.
David GoldsteinOrrick, Herrington & Sutcliffe LLP
In Cathode Ray Tube, Judge Jon S. Tigar recently denied the defendants’ effort to exclude evidence supporting the Direct Action Plaintiffs’ (DAP) “price-ladder theory,” an approach commonly used in price-fixing cases to prove damages across a range of products that were not the direct subject of an agreement to fix prices. In re Cathode Ray Tube (CRT) Antitrust Litig., No. C-07-5944 JST, 2016 WL 6246736 (N.D. Cal. Oct. 26, 2016). The CRT DAPs claim that the defendants agreed to raise prices for 15-inch CRTs, and that the price increase had the effect of raising prices for Larger-Sized CRTs. The defendants argued that the DAPs should not be permitted to pursue damages based on their price-ladder theory for two reasons, both of which the court rejected.
First, the defendants argued that the DAPs were required to prove that the conspiracy had both the effect and purpose of fixing prices, but had no evidence that raising prices for Larger-Sized CRTs was the purpose of the agreements to raise prices for 15-inch CRTs. The court ruled that the defendants were wrong for two reasons. One, the Supreme Court has made clear that “a civil antitrust violation can be established by proof of either an unlawful purpose or an anticompetitive effect.” Id. at *3 (citing United States v. Gypsum, 438 U.S. 422, 436 n.13 (1978) (emphasis added)). Two, whether there was an agreement to fix prices of Larger-Sized CRTs was a question for the jury, and, in any event, the DAPs could pursue a claim based on increased prices for Larger-Sized CRTs if agreements to fix prices of 15-inch CRTs “were a means by which [defendants] distorted the price of Larger-Sized CRTs.” Id.
Second, the defendants argued that the DAPs should be prohibited from pursuing damages based on their price-ladder theory because any such damages are derivative of the conduct of reaching agreements on prices for 15-inch CRTs. The defendants analogized price-ladder damages to umbrella damages, and argued that the Ninth Circuit and other courts have rejected umbrella damages as “unacceptably speculative.”
The court explained that umbrella damages are damages based on sales by a non-conspirator, on the theory that price-fixing among the conspirators affected market prices generally and, therefore, prices charged by non-conspirators. Id. at *4. After discussing the split in authority regarding the recoverability of umbrella damages, the court ruled that any concern that umbrella damages are remote, speculative, complex and potentially duplicative was irrelevant under the circumstances because the DAPs seek price-ladder damages from alleged conspirators, not non-conspirators. Id. at *5.
The court then provided its view that, in any event, Ninth Circuit law does not prohibit umbrella damages where the plaintiffs, like the DAPs, are only one step removed from the defendants in the distribution chain. Id. Judge Tigar pointed out that although in Petroleum Products, the Ninth Circuit “denied standing to sue for umbrella damages where the plaintiffs were several steps removed from the defendants in the distribution chain,” it expressly stated that it was not ruling on “‘whether, in a situation involving a single level of distribution, a single class of direct purchasers from non-conspiring competitors of the defendants can assert claims for damages against price-fixing defendants under an umbrella theory.’” Id. (quoting In re Coordinated Proceedings in Petroleum Prods. Antitrust Litig., 691 F.2d 1335, 1340 (9th Cir. 1982)). Judge Tigar then noted that prior to Petroleum Products some district courts in the Ninth Circuit had allowed plaintiffs to pursue umbrella damages, but since Petroleum Products some have not. Id.
The court focused on—and criticized—the decision in Antoine L. Garabet, M.D., Inc. v. Autonomous Tech. Corp., 116 F. Supp. 2d 1159 (C.D. Cal. 2000), in which the court applied the Associated General Contractors five-part standing test to deny a plaintiff standing to seek umbrella damages. Judge Tigar disagreed with Gabaret’s view that independent pricing decisions of non-conspirators make any resulting injury and damages indirect and speculative, because successful cartels raise the market price for a price-fixed good and not just the price charged by the conspirators. Id. at *6. Judge Tigar also did not agree with Gabaret’s suggestion that umbrella damages implicate Illinois Brick’s concerns regarding pass-on and duplicative recovery for indirect purchasers. Id. at *7. Finally, he disagreed with Gabaret to the extent its ruling was based on the notion that claims for umbrella damages should be brought by the non-conspirator sellers, because those sellers were not harmed by—and, in fact, may have benefitted from—the artificial increase in market prices. Id.
The court issued several other rulings that plaintiffs and defendants in price-fixing cases should keep in mind as they develop evidence supporting their claims and defenses:
Jason BusseyLindsey Bohl Simpson Thacher & Bartlett LLP
On October 6, 2016, a Missouri federal district court denied a motion to dismiss an antitrust lawsuit brought by Uber Technologies Inc. (“Uber”) against the St. Louis Metropolitan Taxicab Commission (“MTC”), rejecting the MTC’s argument that it is a governmental entity entitled to immunity from liability under Section 1 of the Sherman Act. Wallen v. St. Louis Metro. Taxicab Comm’n, No. 4:15CV1432 HEA, 2016 WL 5846825 (E.D. Mo. Oct. 6, 2016) (“Wallen”). The district court relied on N.C. State Bd. of Dental Examiners v. Fed. Trade Comm’n (“N.C. Dental”). There, the Supreme Court held that a non-sovereign governmental agency controlled by participants in the market the agency regulates enjoys immunity from federal antitrust laws only if anticompetitive conduct attributed to the agency furthers a clearly articulated policy of, and was actively supervised by, the State itself. See id. at *3; N.C. Dental, 135 S. Ct. 1101, 1114 (2015). In Wallen, the court found that MTC failed to establish a clearly articulated state policy to displace competition, and therefore denied state action immunity without deciding whether a board comprised of less than one-half active industry participants could be “controlled” under N.C. Dental. Wallen at *4.
States are generally immune from antitrust liability when they directly impose market restraints “as an act of government.” Parker v. Brown, 317 U.S. 341, 352 (1943). When States delegate power to non-sovereign actors such as state trade agencies, however, immunity is not automatic. Under the Court’s holding in California Retail Liquor Dealers Assn. v. Midcal Aluminum, Inc, (“Midcal”), a state law or regulatory scheme cannot provide the basis for antitrust immunity unless, first, the State has articulated a clear policy to allow the anticompetitive conduct, and second, the State provides active supervision of the policy. 445 U.S. 97, 105 (1980).
In 2015, the Supreme Court revisited the state action immunity doctrine in N.C. Dental,135 S. Ct. 1101 (2015). In that case, the North Carolina Dental Board’s principal duty was to create, administer, and enforce a licensing system for dentists. Id. at 1107. The Board, six of whose eight members were practicing dentists, had broad authority over licensees, and it was permitted under the Dental Practice Act to file suit to “perpetually enjoin any person from ... unlawfully practicing dentistry.” Id. at 1107-08. In 2003, the Board began to issue cease-and-desist letters to non-dentists offering teeth-whitening services, a lucrative business that had previously been offered only by licensed dentists. See id. at 1108. The FTC later sued the Board, alleging that its concerted action excluding non-dentists from the market for teeth whitening services in North Carolina violated Section 5 of the Federal Trade Commission Act. Id. at 1108-09. The Board moved to dismiss on the basis of state action immunity. Id.
The question before the Court was whether the Board was entitled to antitrust immunity when it concluded that teeth whitening constituted the practice of dentistry, and enforced that policy by issuing cease-and-desist letters to non-dentist teeth whiteners. Both parties and the Court assumed that the first prong of Midcal (i.e., the clear articulation test) was satisfied by the Board’s broad authority to regulate and license dentistry. Id. at 1110. On the question of active supervision, the Court held that when a controlling number of the decision makers on a state licensing board actively participate in the occupation the board regulates, the board can invoke state-action immunity only if its actions are actively supervised by the state. Id. at 1114. In N.C. Dental, three-fourths of the Board members were practicing dentists, and the Court found that the Board’s efforts to prevent non-dentists from providing teeth-whitening services had not been supervised by the State, so the Board was not entitled to antitrust immunity. Id. Justice Alito’s dissent aptly noted that the Court left open the important question of whether the “controlling number” condition would be satisfied if market participants held only a minority of board seats. Id. at 1123 (Alito, J., dissenting).
The St. Louis-based action began when Uber alleged that the defendants, the MTC and its Commissioners, several of whom are market participants, violated Section 1 of the Sherman Act by blocking UberX from launching in St. Louis through onerous regulations. Wallen at *1. Defendant MTC moved to dismiss the case on the basis of state action immunity. Id. Defendant Taxi Cab companies also moved to dismiss based on failure to state a claim under respondeat superior, and immunity. Id.
MTC argued in support of its motion to dismiss that the clear-articulation requirement from Midcal and Phoebe Putney was met because the Missouri State Legislature expressly delegated to the MTC “the power to license, supervise, regulate, inspect, and limit the number of licenses and permits available to taxicabs.” Defendant MTC and Defendant Commissioners’ Memorandum of Law in Support of their Motion to Dismiss or, in the alternative, Motion for a Judgment on the Pleadings at *7, Wallen v. St. Louis Metro. Taxicab Comm’n, No. 4:15CV1432 HEA, 2015 WL 9942788 (E.D. Mo. 2016). The MTC further argued that because a majority of the seats on the MTC were held by non-participants in the industry, it was not required to establish that state actors had reviewed the actions Uber challenged to qualify for antitrust immunity under N.C. Dental. Id. at *9.
The district court denied the motion to dismiss, finding that the MTC failed to establish that the State, by delegating authority to license and regulate the taxicab industry, clearly articulated a policy to endorse anticompetitive action. Wallen at *4. The court cited N.C. Dental and noted that “Midcal ’s clear articulation requirement is only satisfied ‘where the displacement of competition [is] the inherent, logical, or ordinary result of the exercise of authority delegated by the state legislature.’” Id. at *3 (citing N.C. Dental, 135 S. Ct.at 1111-12 (citing Fed. Trade Comm’n v. Phoebe Putney Health Sys. Inc., 133 S. Ct. 1003, 1011 (2013)). The court acknowledged that the MTC was statutorily authorized to, “[e]xercis[e] primary authority over ... licensing, control and regulations of taxicab services,” as well as “[l]icense, supervise, and regulate any person who engages in the business of transporting passengers in commerce” and “[e]nact a Taxicab Code ... relating to ... licensing, regulation, inspection, and enforcement….” Id. at *4. However, the court found that a close analysis of the MTC’s authority showed that its purpose was “to regulate and oversee vehicles for hire to ensure public safety standards and maintain the integrity of the public transportation system.” Id. The court then held that a “public transportation system that is safe and efficient” was the logical result of the statutory framework, not the “displacement of competition.” Id.
Because the court’s holding was based on the first prong of the Midcal test relating to a clear articulation of state policy, the court did not reach the second question of whether the MTC, made-up of less than a majority of active industry participants, was controlled by market participants and thus required to be actively supervised by the state in order to quality for immunity. See id. In contrast, another recent district court decision applying N.C. Dental to a state medical board in Texas regulating telemedicine first ruled on the “active supervision” prong of the Midcal test. Because the Texas Medical Board failed to show it was subject to active state supervision, the court did not address the clear articulation requirement. See Teladoc, Inc. et al v. Texas Medical Board, et al, at *17-18, No. 1-15-CV-343 RP (W.D. Tex. December 14, 2015).
In Wallen, the court based its ruling denying the defendants’ motion to dismiss on the fact that the MTC’s regulatory authority was not meant to displace competition, despite its authority to license and regulate market participants in commercial transportation. Id. at *4. In N.C. Dental, there was no question that market participants controlled the Board, leaving open the issue of whether a board controlled by less than a majority could be considered “controlling.” See N.C. Dental, 135 S. Ct.at 1123 (Alito, J., dissenting). The Wallen court had an opportunity to address the controlling number issue directly with a board consisting of four market participants and nine members, but the district court instead chose to base its decision on the clear-articulation prong of the Midcal test. See Wallen at *5.
Although the holding in Wallen does not directly reach the controlling number issue, the decision potentially invites more actions from plaintiffs against professional boards that are made up of fewer than half market participants. The decision may also have more far-reaching implications for similar types of challenges brought by Lyft or Uber (and companies with similar models) against state and local boards with mandates to regulate vehicles for hire to ensure safety and efficiency standards. To the extent state actors wish to limit competition from ride-sharing services, they may amend their Board authorizing statutes and regulations to survive the Supreme Court’s clear-articulation test. Of course, state actors that allow prohibitive restrictions to be placed on the popular ride services will likely be held politically accountable by consumers who benefit from the often lower cost options and alternatives to traditional taxicab use. Wallen is just one example of many recent disputes between ride-hailing providers and taxicab companies that have put state legislators in the difficult position of creating a regulatory framework that levels the playing field for competition while at the same time ensuring that consumers are safe.
Robert E. FreitasWeiwei HeFreitas Angell & Weinberg LLP
On September 20, 2016, the Second Circuit vacated a $147,000,000 judgment based on a jury verdict, reversed the district court’s denial of the defendants’ motion to dismiss, and remanded with instructions to dismiss to dismiss the complaint with prejudice in In re: Vitamin C Antitrust Litig., 837 F.3d 175 (2d Cir. 2016). A plaintiff class consisting of U.S. buyers of vitamin C on the international market alleged that Hebei Welcome Pharmaceutical and North China Pharmaceutical Group Corporation, two companies organized under the laws of China, colluded with an entity referred to as both the “Western Medicine Department of the Association of Importers and Exporters of Medicines and Health Products of China” and the “China Chamber of Commerce of Medicines & Health Products Importers & Exporters” (“Chamber”), to “restrict their exports of Vitamin C in order to create a shortage of supply in the international market.” Id. at 180.
The defendants argued “that that they acted pursuant to Chinese regulations regarding vitamin C export pricing and were, in essence, required by the Chinese Government, specifically the Ministry of Commerce of the People’s Republic of China,” to engage in the challenged conduct. Id. They asked the district court to “dismiss the complaint pursuant to the act of state doctrine, the doctrine of foreign sovereign compulsion, and/or principles of international comity.” Id.
The defendants’ position was supported by a brief filed by the Ministry of Commerce. The Second Circuit called MOFCOM’s filing of an amicus curiae brief in support of the defendants’ motion to dismiss “historic,” noting that it was “the first time any entity of the Chinese Government has appeared amicus curiae before any U.S. court.” Id. n.5.
The MOFCOM brief explained that the Chamber is a “Ministry–supervised entity authorized by the Ministry to regulate vitamin C export prices and output levels.” Id. “According to the Ministry, the Chamber was an instrumentality of the State that was required to implement the Ministry’s administrative rules and regulations with respect to the vitamin C trade.” Id. at 181. Its “very purpose is to coordinate and supervise the import and export operations in this business, to maintain business order and protect fair competition, to safeguard the legitimate rights and interests of the state, the trade and the members and to promote the sound development of foreign trade in medicinal items.” Id.
MOFCOM also described a “price verification and chop” (“PVC”) policy that was implemented in 2002 and “in place during the time of the antitrust violations alleged in this case.” Id. at 182.
According to the Ministry, under this system, vitamin C manufacturers were required to submit documentation to the Chamber indicating both the amount and price of vitamin C it intended to export. The Chamber would then “verify” the contract price and affix a “chop,” i.e., a special seal, to the contract, which signaled that the contract had been reviewed and approved by the Chamber. A contract received a chop only if the price of the contract was “at or above the minimum acceptable price set by coordination through the Chamber.” Manufacturers could only export vitamin C if their contracts contained this seal.
Id. at 181-82 (citation omitted). MOFCOM asserted that the defendants “were required to coordinate with other vitamin C manufacturers and agree on the price that the Chamber would use in the PVC regime. In short, the Ministry represented to the district court that all of the vitamin C that was legally exported during the relevant time was required to be sold at industry–wide coordinated prices.” Id. at 182.
The defendants’ motion to dismiss was denied to allow for discovery, and, after discovery, their motion for summary judgment was denied. The district court “accepted the Ministry’s explanation as to its relationship with the Chamber,” but it “decline[d] to defer to the Ministry’s interpretation of Chinese law,” concluding that “the Ministry failed ‘to address critical provisions’ of the PVC regime that ‘undermine[d] [the Ministry’s] interpretation of Chinese law.’” Id. at 182. The district court “determined that ‘Chinese law did not compel Defendants’ anticompetitive conduct’ in any of the relevant time periods,” and denied their motion for summary judgment. Id.
The “central issue” considered by the Second Circuit was “whether principles of international comity required the district court to dismiss the suit.” Id. at 182. The analysis necessary to answer this question required the court to “determine whether Chinese law required Defendants to engage in anticompetitive conduct that violated U.S. antitrust laws.” Id. To do so, the court had to determine “the appropriate level of deference to be afforded a foreign sovereign’s interpretation of its own laws.” Id. The Second Circuit concluded that the district court “erred by concluding that Chinese law did not require Defendants to violate U.S. antitrust law and further erred by not extending adequate deference to the Chinese Government’s proffer of the interpretation of its own laws.” Id. at 182-83.
The Second Circuit reviewed the district court’s refusal to dismiss on international comity grounds for abuse of discretion, with the district court’s determination of foreign law reviewed de novo. Id. at 183. The court considered which “laws and standards control when U.S. antitrust laws are violated by foreign companies that claim to be acting at the express direction or mandate of a foreign government.” Id. at 179. “Specifically,” the court “address[ed] how a federal court should respond when a foreign government, through its official agencies, appears before that court and represents that it has compelled an action that resulted in the violation of U.S. antitrust laws.” Id. Review of the district court’s comity decision required a balancing of “the interests in adjudicating antitrust violations alleged to have harmed those within our jurisdiction with the official acts and interests of a foreign sovereign in respect to economic regulation within its borders.” Id. Importantly, the court concluded that when a foreign government provides “an official statement explicating its own laws and regulations,” as the government of China did in Vitamin C, “we are bound to extend that explication the deference long accorded such proffers received from foreign governments.” Id.
The Second Circuit described comity as “both a principle guiding relations between foreign governments and a legal doctrine by which U.S. courts recognize an individual’s acts under foreign law.” Id. at 183 (citing In re Maxwell Commc’n Corp., 93 F.3d 1036, 1046 (2d Cir. 1996)). “Comity, in the legal sense, is neither a matter of absolute obligation, on the one hand, nor of mere courtesy and good will, upon the other.” Id. (citing Hilton v. Guyot, 159 U.S. 113, 163–64 (1895)). “[I]t is the recognition which one nation allows within its territory to the legislative, executive or judicial acts of another nation, having due regard both to international duty and convenience, and to the rights of its own citizens or of other persons who are under the protection of its laws.” Id. (citing Hilton, 159 U.S. at 163-64).
The Second Circuit applied the multi-factor balancing test set out in Timberlane Lumber Co. v. Bank of Am., 549 F.2d 597 (9th Cir. 1976) and Mannington Mills, Inc. v. Congoleum Corp., 595 F.2d 1287 (3rd Cir. 1979):
(1) Degree of conflict with foreign law or policy; (2) Nationality of the parties, locations or principal places of business of corporations; (3) Relative importance of the alleged violation of conduct here as compared with conduct abroad; (4) The extent to which enforcement by either state can be expected to achieve compliance, the availability of a remedy abroad and the pendency of litigation there; (5) Existence of intent to harm or affect American commerce and its foreseeability; (6) Possible effect upon foreign relations if the court exercises jurisdiction and grants relief; (7) If relief is granted, whether a party will be placed in the position of being forced to perform an act illegal in either country or be under conflicting requirements by both countries; (8) Whether the court can make its order effective; (9) Whether an order for relief would be acceptable in this country if made by the foreign nation under similar circumstances; and (10) Whether a treaty with the affected nations has addressed the issue.
Id. at 184-85. Most of the court’s discussion was focused on the first factor: whether the degree of conflict between the laws of two states rises to the level of a true conflict. The court noted that in Hartford Fire Ins. Co. v. California, 509 U.S. 764 (1993), the Supreme Court had relied on the absence of a “true conflict,” in the sense that compliance with the laws of both countries was impossible, in concluding that there was no basis for a comity-based determination that the exercise of jurisdiction was improper. 837 F.3d at 185.
Critical to the court’s determination of whether a true conflict was present was “the amount of deference that we extend to the Chinese Government’s explanation of its own laws.” Id. at 186. Relying on United States v. Pink, 315 U.S. 203 (1942), the court held that “when a foreign government, acting through counsel or otherwise, directly participates in U.S. court proceedings by providing a sworn evidentiary proffer regarding the construction and effect of its laws and regulations, which is reasonable under the circumstances presented, a U.S. court is bound to defer to those statements.” Id. at 189. “If deference by any measure is to mean anything,” the court said, “it must mean that a U.S. court not embark on a challenge to a foreign government’s official representation to the court regarding its laws or regulations, even if that representation is inconsistent with how those laws might be interpreted under the principles of our legal system.” Id. According deference to the “official statements” provided by MOFCOM, the court determined “that Chinese law required Defendants to engage in activities in China that constituted antitrust violations here in the United States.” Id. at 189-90.
The 2002 Notice that established the PVC system “does not specify how the ‘industry–wide negotiated’ price was set,” but the Second Circuit “defer[red] to the Ministry’s reasonable interpretation that the term means what it suggests—that members of the regulated industry were required to negotiate and agree upon a price.” Id. at 189. “It would be nonsensical to incorporate into a government policy the concept of an ‘industry–wide negotiated’ price and require vitamin C manufacturers to comply with that minimum price point if there were no directive to agree upon such a price.” Id. The court found it “reasonable to view the entire PVC regime as a decentralized means by which the Ministry, through the Chamber, regulated the export of vitamin C by deferring to the manufacturers and adopting their agreed upon price as the minimum export price.” Id. at 190. By thus “directing vitamin C manufacturers to coordinate export prices and quantities and adopting those standards into the regulatory regime, the Chinese Government required Defendants to violate the Sherman Act.” Id.
The court also rejected the district court’s focus on the role the manufacturers played in the establishment of the prices for vitamin C. “[T]he district court erroneously required Defendants to show that the government essentially forced Defendants to price–fix against their will in order to show that there was a true conflict between U.S. antitrust law and Chinese law.” Id. at 191-92. “This demands too much. It is enough that Chinese law actually mandated such action, regardless of whether Defendants benefited from, complied with, or orchestrated the mandate.” Id. at 192. The court accordingly declined “to analyze why China regulated vitamin C in the manner it did and instead focus[ed] on what Chinese law required.” Id.
The Second Circuit similarly refused to consider “whether the Chinese Government actually enforced the PVC regime as applied to vitamin C exports,” concluding that a focus on this question “confuses the question of what Chinese law required with whether the vitamin C regulations were enforced.” Id. Evidence of sales above the agreed price of $3.35/kg was also not relevant in the determination of whether a “true conflict” existed. “Even if Defendants’ specific conduct was not compelled by the 2002 Notice,” a true conflict was present “if compliance with the laws of both countries is impossible.” Id.
The court found the remaining comity factors to weigh “decidedly” in favor of comity-based dismissal. Id. at 193-94.
The plaintiffs petitioned for rehearing and rehearing en banc, and their petition was denied on November 4, 2016.
Geoffrey Holtz Morgan, Lewis & Bockius LLP www.morganlewis.com
The Northern District of California issued an interesting decision on September 30, 2016 that is instructive on the “plus factors” that a complaint must include to state a conspiracy claim under Section 1 of the Sherman Act.
In B & R Supermarkets v. Visa, Inc. et al., Case No. No. C 16-01150 WHA (N.D. Cal.), the plaintiffs — commercial merchants — filed suit against all of the major credit-card networks and most of the major banks alleging a conspiracy to shift liability for fraudulent charges to merchants who failed to upgrade their credit card machines to “EMV chip” technology. Prior to October 2015, credit cards relied entirely on magnetic stripes, and card-issuing banks typically absorbed liability for fraudulent transactions, known as “chargebacks.” In 2015, banks began to roll out credit cards in which an EMV chip was embedded to more efficiently guards against fraud. Starting on October 1, 2015, if a customer presented an EMV chip card, but the merchant failed to use a certified EMV chip card reader to complete the transaction (and instead used the magstripe), the merchant became liable for any chargeback, instituting a so-called Liability Shift. Each of the networks implemented the Liability Shift effective on the same day through changes to their network rules.
The plaintiffs sued under the Sherman Act and Cartwright Act on behalf of a putative class of merchants, claiming the defendants entered into an agreement to impose an important price term on all their merchant members by adopting the same policy shift in liability for fraudulent charges and making it effective on the same day to head off merchants from steering customers to use cards with more lenient terms. The defendants moved to dismiss, arguing that their actions were permissible “parallel conduct” with no agreement to fix prices or foreclose competition. Judge William H. Alsup, District Court Judge for the Northern District of California, observed that an antitrust violation can be pled through circumstantial evidence in the form of “plus factors,” which help distinguish “permissible parallel conduct from impermissible conspiracy.” “Plus factors” are “economic actions and outcomes that are largely inconsistent with unilateral conduct but largely consistent with explicitly coordinated action.”
As to the credit-card networks, the court determined the complaint sufficiently pled “plus factors” by pointing to statements those defendants made about a common practice, that the Liability Shift was carried out differently in the U.S. than an earlier rollout elsewhere, and the adoption of rules that prohibited merchants from “steering” a customer toward a card that might offer more favorable chargeback policies. This was sufficient for a plausible inference of a conspiracy.
As to the issuing banks, however, the court held that the complaint failed to plead sufficient “plus factors.” Mere adoption of a network’s rules by an issuing bank does not amount to an impermissible conspiracy. And even though the issuing banks benefitted from the Liability Shift, the pleaded facts “fail to nudge the allegations as to the issuing-bank defendants from possible to plausible.” The decision provides a good roadmap of the “plus factors” analysis and the amount of evidence that suffices — or not — for an antitrust complaint to survive a motion to dismiss.
Thomas M. Cramer Jason M. Bussey Karen Gift Simpson Thacher & Bartlett LLP www.stblaw.com
On September 30, 2016, Judges Jon S. Tigar and James Donato, both of the Northern District of California, issued rulings in separate cases considering the extent to which the Foreign Trade Antitrust Improvements Act (“FTAIA”) applies to components of finished products manufactured outside of the United States but destined for sale in the United States. 15 U.S.C. § 6a. In re Capacitors Litig., 2016 WL 5724960 (N.D. Cal. Sept. 30, 2016); In re: Cathode Ray Tube (CRT) Antitrust Litig., 2016 WL 5725008 (N.D. Cal. Sept. 30, 2016). Taken together, the opinions provide guidance in two areas. First, both courts treated price-fixed components of finished goods imported into the United States as “imports” excluded from the FTAIA. Second, the opinions demonstrate that application of the “domestic effects” exception to the FTAIA continues to resist bright-line tests: courts will engage in a fact-specific analysis to determine whether the price-fixed components were a “substantial cost component of the finished product” sufficient to have a “direct effect” on U.S. commerce.
“Congress enacted the FTAIA in 1982 in respon[se] to concerns regarding the scope of the broad jurisdictional language in the Sherman Act.” CRT, 2016 WL 5725008 at *2 (quoting United States v. Hui Hsiung, 778 F.3d 738, 751 (9th Cir. 2015) (citations and internal quotation marks omitted)). The FTAIA was intended to remove from the purview of the Sherman Act anticompetitive trade or commerce that causes exclusively foreign injury. Id.; In re Dynamic Random Access Memory (DRAM) Antitrust Litig., 546 F.3d 981, 985 (9th Cir. 2008). “Congress’s goal was to assure American companies that they would not be liable under the Sherman Act for conduct that typically would be considered anticompetitive so long as that conduct adversely affected foreign markets only.” Capacitors, 2016 WL 5724960 at *1. In effect, the FTAIA leaves to foreign authorities the task of addressing anticompetitive behavior that affects only foreign markets. The FTAIA has two carve outs. The statute does not apply to: (i) “import” trade and commerce and (ii) foreign, “nonimport” trade and commerce having a “direct, substantial, and reasonably foreseeable effect” on domestic trade. Id. (quoting Hsiung, 778 F.3d at 754 and 15 U.S.C. § 6a). Where a party seeks damages under the latter theory, they must also show that the domestic effect gave rise to the Sherman Act violation. In the Ninth Circuit, the “import trade” basis for jurisdiction is theoretically straightforward. Hsiung, 778 F.3d at 754-55 (“[N]ot much imagination is required to say that this phrase means precisely what it says.”). It includes, “(1) transactions directly between a United States plaintiff purchaser and a defendant cartel and (2) transactions involving goods manufactured abroad and sold in the United States.” CRT, 2016 WL 5725008 at *2. Yet the analysis becomes trickier when a product is not directly imported into the United States, but is instead a component of another imported product. Complex, too, is FTAIA’s second basis for jurisdiction, known as the “domestic effects” exception.
In Capacitors, both direct and indirect purchasers of capacitors, “a basic building block of electrical devices . . . present in virtually every electronic device in the world,” sued foreign manufacturers alleging a conspiracy to fix the price of the capacitors themselves and “suppress competition.” 2016 WL 5724960 at *1. Given the complex procedural posture, Judge Donato divided summary judgment motions into two “phases.” The court’s September 30th order addressed the first phase, dealing with “the parties’ disagreements about the scope of the import exclusion and proximate cause for the domestic effects exception to the FTAIA.” Id. at *2. CRT involved an alleged decades-long, international conspiracy to fix the prices of cathode ray tubes (“CRTs”), “the primary component of old tube-style televisions and computer monitors.” 2016 WL 5725008 at *1. Defendants moved for summary judgment on the ground that plaintiffs’ claims were “not actionable as a matter of law” under the Sherman Act due to the application of the FTAIA. Id. at *1, *3.
In both cases, the court relied heavily on the Ninth Circuit’s 2015 decision in United States v. Hsiung, 778 F.3d 738 (9th Cir. 2015). Hsiung, a criminal case brought by the U.S. Department of Justice,involved sales of foreign-manufactured TFT-LCD panels “incorporated into finished consumer products ultimately sold in the United States.” Id. at 758. In that case, the Ninth Circuit found that the sales at issue constituted import trade, but it did not resolve the “outer bounds of import trade” because “at least a portion of the transactions . . . involve[d] the heartland situation of the direct importation of foreign goods into the United States.” Id. at 755 n.8. The Ninth Circuit also noted that the sales were both “substantial and had a reasonably foreseeable impact on the United States,” resulting in a “sufficiently ‘direct’” impact on U.S. trade to satisfy the “domestic effects” exception. Id. at 758-59. Thus, Hsiung implied the Sherman Act may still apply to anticompetitive behavior related to components of finished products as either import trade or by satisfying the “domestic effects” exception.
In Capacitors, Judge Donato first considered whether three types of transactions constituted import commerce: those where standalone capacitors were (i) billed to entities in the U.S.; (ii) billed to foreign entities but shipped to the U.S.; and (iii) billed and shipped to a foreign entity. 2016 WL 5724960 at *3-5. The parties agreed the FTAIA did not exclude the first category. The Ninth Circuit in Hsiung had not resolved the second category, but the court found that those transactions also constituted import commerce, because the defendants “knew and intended that the goods would be delivered to the United States,” even if they sent the invoices abroad. Id. at *4. The court ultimately did not resolve the third category of claims, holding only that the FTAIA does not “state or support a per se rule excluding foreign purchasers just because they did their buying abroad,” but also recognizing that prior cases left only “a small opening for plaintiffs to establish proximate cause” for those transactions, which would be addressed during Phase II summary judgment motions. Id. at *6.
Turning to transactions involving not standalone capacitors but rather finished products that incorporate capacitors as component parts, the court again relied on the Ninth Circuit’s decision in Hsiung, which “suggests, without definitively stating” that the transactions “may come within the Sherman Act as either import trade or under the domestic effects exception.” Id. at *7. Despite this guidance, Judge Donato found three principal distinguishing factors between Capacitors and Hsiung. Id.
First, the analysis in Hsiung did not directly apply in Capacitors because, unlike TFT-LCDs, which made up between 30 and 80 percent of the cost of the finished products, “capacitors [were] tiny parts that cost pennies or less to buy, and are unlikely to be a substantial cost component of finished products even when used in volume.” Id. (citing Hsiung, 778 F.3d at 758-59). Second, unlike Capacitors, Hsiung was a criminal case; the government did not seek money damages, so it did not need to show that (and the Ninth Circuit never considered whether) the domestic effects of the conspiracy “gave rise” to the Sherman Act violation (the second prong of the “domestic effects” test). Id. Judge Donato concluded that the issue of whether capacitors manufactured abroad and incorporated abroad into finished products destined for sale in the United States satisfied either the “imports exclusion” or the “direct effects” exception raised unresolved issues of fact, and denied plaintiff’s motion for summary judgment. Id. at *7.
In CRT, Judge Tigar reached more definitive holdings on both the “imports exclusion” and the “domestic effects” exception. Plaintiffs argued that “purchases of CRT Products directly from Defendants (or their subsidiaries and affiliates), which had themselves imported the CRT Products into the United States,” constituted “‘import commerce’ that is not subject to the FTAIA.” 2016 WL 5725008 at *3. Defendants responded by arguing that the purchases were not import commerce because the conspirators did not themselves “physically import the price-fixed good” and because the Plaintiffs “imported finished products containing price-fixed CRTs,” rather than the CRTs themselves. Id. (emphasis in original). The court rejected both arguments. First, the court held that “[i]t is sufficient that a conspiring defendant negotiated to set the price of a good that was imported into the United States, even if that good was sold by another conspirator or imported by someone else.” Id. (citing Hsiung, 778 F.3d at 756). Second, the court found it sufficient that the plaintiffs purchased CRT Products, especially “given that CRTs have no use other than as the primary component of a finished product.” Id. at *4.
Judge Tigar ruled, in the alternative, that the plaintiffs could proceed under the “domestic effects” exception. Here, too the court looked to Hsiung. Id. at *5. Defendants’ central argument was that the effects of sales of CRTs incorporated into finished goods were not sufficiently “direct,” due to the complex nature of the distribution chains underlying finished consumer products. Id. at *4. Judge Tigar broke down Hsiung’s analysis of the directness requirement of prong one of the “domestic effects” exception into three factors:
(1) whether the price-fixed components were substantial cost components of the finished products, (2) whether conspiratorial meetings led to direct negotiations with United States companies (irrespective of whether the location of any meeting was in or out of the United States), and (3) whether it was understood that sales to foreign subsidiaries were destined for the United States. Id. at *5 (citing Hsiung, 778 F.3d at 758). Viewing the evidence most favorably to the plaintiffs, the court found triable issues of fact for all three factors. On the second and third factors, defendants held “hundreds of conspiratorial meetings taking place all over the world,” and were “well aware” that their price-fixing scheme would affect prices in the United States, the “world’s largest market for CRTs.” Id.
Judge Tigar also found a triable issue of fact with respect to the first factor. Id. In contrast to Capacitors, the court considered CRTs to be a “substantial cost component” of finished goods, similar to the TFT-LCDs in Hsiung. Id. Further, unlike Hsiung, Judge Tigar went on to address the second prong of the “domestic effects” exception, finding a triable issue of fact as to whether defendants’ alleged price-fixing scheme “gave rise to” plaintiffs’ antitrust injury “by raising the prices of finished goods they purchased in the United States.” Id. The court thus rejected defendants’ motion for summary judgment, allowing plaintiffs’ Sherman Act claims to proceed.
Examining these two cases sheds light on how courts within the Ninth Circuit treat alleged conspiracies to fix prices of components of finished goods. While Capacitors declined to address the issue, CRT found that importation of price-fixed goods as components of other goods satisfies the “imports exclusion” of the FTAIA for conspiracies to fix prices of the components.
Second, both cases recognized thatprice-fixing of foreign-manufactured components of finished goods sold in the United States can result in Sherman Act violations. But the analysis of whether such price-fixing results in sufficiently “direct effects” on U.S. trade to avoid application of the FTAIA may turn on whether such components are a “substantial cost component” of the finished products.
As neither case reached a final ruling on the merits, it will be worthwhile to keep an eye on their ultimate dispositions to see if the court gives more detailed guidance on both issues.
Aaron M. Sheanin Pearson, Simon & Warshaw, LLP www.pswlaw.com
On September 26, 2016, the U.S. Court of Appeals for the Second Circuit issued an opinion in United States v. American Express Company, Docket No. 15-1672, 2016 WL 5349734, ___ F.3d ___ (2d Cir. Sept. 26, 2016) (“AMEX”), reversing the district court’s judgment and permanent injunction against American Express Company and American Express Travel Related Services Company (collectively, “American Express or “Amex”). The Department of Justice and seventeen States had sued American Express for violating Section 1 of the Sherman Act by entering into agreements with merchants containing nondiscriminatory provisions (“NDPs”). Those NDPs prohibit merchants from offering discounts or non-monetary incentives to customers who use credit cards that are less expensive for merchants to accept. The NDPs also preclude merchants from expressing preferences for any credit card or informing customers about the costs of different credit cards to merchants. After a bench trial, the district court found in plaintiffs’ favor and permanently enjoined American Express from enforcing its NDPs. On appeal, the Second Circuit reversed, finding error in the district court’s focus solely on the interests of merchants at the expense of the interests of cardholders. The Second Circuit directed that judgment be entered in favor of American Express.
The credit-card industry operates as an interdependent, “two-sided market” in which both sides—cardholders and merchants—depend on widespread acceptance and use of a particular credit card by the other. Price changes on either side of the market can result in demand changes on the other. While merchants will decline to accept a credit card if the cost of doing so is too high, cardholders also will not use a credit card that is accepted by too few merchants. Both sides of the market have different interests, with merchants generally seeking lower network fees and cardholders preferring better services, benefits, and rewards that are often funded by those fees. Thus, successful credit-card networks must balance prices on both sides of the market.
American Express has the second largest market share among the four major credit-card networks in the United States. Unlike Visa and MasterCard (which operate as “open-loop” systems in which the issuer, acquirer, and network functions are performed by different actors) American Express operates as a “closed-loop” system, in which it acts as the issuer (responsible for providing cards to, and collecting payments from, cardholders), the acquirer (responsible for merchant acquisition and accepting card transaction data from merchants for verification and processing), and the middleman network. Through the closed-loop system, American Express directly sets the “interchange fee” paid by the acquirer to the issuer for handling transactions with the cardholder, the “merchant-discount fee” paid by the merchant to the acquirer for processing transactions, and the cardholder benefits. American Express charges the same merchant-discount fee for all of its credit cards, regardless of the level of cardholder benefits associated with those cards. American Express’s model primarily depends on merchant-discount fees for revenue. The model benefits both merchants, by providing them with access to customers who tend to spend more per transaction and on an annual basis than users of other credit cards, and customers, by providing them with valuable benefits including a rewards program, customer service, fraud protection, and purchase and return protection.
American Express’s merchant contracts contain NDPs which, as explained above, are designed to prevent merchants from steering their customers into using credit-cards or other forms of payment that are less expensive than more costly Amex cards. The plaintiffs challenged these anti-steering NDPs as unreasonable restraints of trade. After a seven-week bench trial, the district court agreed with the plaintiffs and permanently enjoined American Express from enforcing its NDPs for ten years. The district court’s ruling rested on three critical findings.
First, the relevant market was only the market for network services (e.g., acceptance of the cards by merchant, not for card issuance), despite the two-sided nature of the payment-card platform. Second, American Express held sufficient market power in the market for network services to harm competition. Third, the plaintiffs had proven that the NDPs caused actual anticompetitive effects on inter-brand competition in that they removed the competitive “reward” to networks offering merchants a reduced fee for credit-card acceptance services. The Second Circuit reversed. As an initial matter, the Court explained that the NDPs are vertical restraints between American Express and the merchants, rather than horizontal restraints between competing credit-card networks. The Court noted that vertical restraints, which tend to be imposed by a product-creator on market intermediaries to induce them to promote a consumer’s use of a particular product, often have pro-competitive effects. From this perspective, the Second Circuit then analyzed and rejected each of the district court’s key findings.
Turning to relevant market, the Second Circuit held, “The District Court’s definition of the relevant market in this case is fatal to its conclusion that Amex violated § 1,” because it improperly excluded the second half of the two-sided market, the market for cardholders, from its market definition. In undertaking its relevant market analysis, the district court had relied upon United States v. Visa USA, Inc., 344 F.3d 229 (2d Cir. 2003), which considered whether Visa’s and MasterCard’s exclusionary rules violated the Sherman Act. Those exclusionary rules were horizontal restraints, which prohibited Visa’s and MasterCard’s member banks from issuing cards on the Amex or Discover networks. The Visa court found the relevant market to be the market for payment-card network services in which the sellers were the payment card networks, and the buyers were the merchants and card issuers. The horizontal restraints in Visa had separate anticompetitive effects on the market for network services and the market for cardholders obtaining general-purpose payment cards. In contrast, the Second Circuit found that separately analyzing the effect of Amex’s NDPs on the market for network services from its effect on the market for general-purpose cards ignores the interdependence of the two markets and would penalize legitimate competitive activities in the market for general-purpose cards.
The Second Circuit explained that it defines a relevant market by applying a “hypothetical monopolist test” (“HMT”). Under the HMT, “[a] market is any grouping of sales whose sellers, if unified by a hypothetical cartel or merger, could profitably raise prices significantly above the competitive level. If the sales of other producers substantially constrain the price-increasing ability of the hypothetical cartel, these others are part of the market.” AMEX, 2016 WL 5349734, at *13 (quoting AD/SAT, Div. of Skylight Inc. v. Associated Press, 181 F.3d 216, 228 (2d Cir. 1999)). According to the Second Circuit, the district court failed to apply the HMT to define the relevant market and failed to use the HMT to quantify the change in cardholder behavior that would result from decreased merchant demand for use of the hypothetical monopolist’s network for credit-card transactions. Specifically, the district court did not balance the hypothetical effects on cardholder behavior with those on merchant behavior. Instead, it should have considered the extent to which merchant attrition due to increased merchant-discount fees might cause Amex cardholders to use alternative forms of payment. In essence the district court erred in failing to define the relevant product market as encompassing both sides of the platform, because the market for payment-card network services necessarily affects the market for payment-card issuance.
Next, the Second Circuit rejected the findings below pertaining to market power. The district court had concluded that American Express had sufficient market power to adversely affect competition, based on primarily on its Value Recapture (“VR”) initiatives (a series of fee increases to merchants over five years) and cardholder insistence (cardholders who would shop elsewhere or spend less if they were unable to use their Amex cards). The Second Circuit found error in the district court’s failure to acknowledge that American Express’s fee increases to merchants were linked to its provision of additional benefits to cardholders which were necessary for the company to remain competitive. Similarly, the cardholder insistence analysis was found erroneous. As the Second Circuit explained, cardholder insistence does not result from Amex’s market power, but from providing competitive benefits to cardholders who then use their Amex cards, thereby increasing value to merchants who accept them. Thus the Court held, “so long as Amex’s market share is derived from cardholder satisfaction, there is no reason to intervene and disturb the present functioning of the payment-card industry.” As with the relevant market, the Second Circuit’s analysis of market power rested on the notion that the Amex network was a two-sided platform.
Finally, the Second Circuit rejected the district court’s findings that the NDPs had an actual adverse effect on competition. Again, the district court had found harm to merchants, but did not weigh that harm against the benefits to cardholders in an analysis of the entire relevant market. In fact, the evidence at trial had shown an increase in industry-wide transaction volume as well as substantial improvement in quality of card services, which suggested increased competition in the overall credit-card industry.
John GoheenElizabeth FrenchSimpson Thacher & Bartlett LLPwww.stblaw.com
In Fed. Trade Comm'n v. AT & T Mobility LLC, No. 15-16585, 2016 WL 4501685 (9th Cir. Aug. 29, 2016), a panel of judges on the United States Court of Appeals for the Ninth Circuit held that AT&T is immune from liability under Section 5 the Federal Trade Commission (“FTC”) Act due to the “common carriers” exemption, reversing a district court’s contrary decision and rejecting the FTC and Federal Communications Commission’s (“FCC”) interpretation of that exemption. Under the Ninth Circuit’s opinion, all activities undertaken by a common carrier are shielded from liability, regardless of whether those activities were undertaken in the entity’s capacity as a common carrier. The FTC has the option to petition for a rehearing before the full Ninth Circuit or to seek review by the Supreme Court.
In October 2014, the FTC sued AT&T, alleging that the company engaged in unfair practices by advertising its mobile data contracts as providing unlimited mobile data while failing to disclose that it may significantly slow the service of customers who used more than a set amount of data. The FTC also alleged that AT&T’s conduct was deceptive because AT&T did not disclose, or failed to adequately disclose that it imposed data speed restrictions on unlimited mobile data plan customers who used more than a set amount of data in a given billing cycle.
AT&T moved to dismiss, claiming that it was immune from liability under Section 5 of the FTC under an exemption applicable to “common carriers subject to the Acts to regulate commerce.” 15 U.S.C. § 45(a)(2). The term “common carrier” is not defined in the FTC Act; instead, “Acts to regulate commerce” are defined as the Interstate Commerce Act of 1887, the Communications Act of 1934, and “all Acts amendatory thereof and supplementary thereto.” 15 U.S.C. § 44. The parties did not dispute that AT&T was a “common carrier” with regard to some of its activities. They also agreed that, at the time the FTC sued, AT&T’s provision of mobile data services was not among those activities. AT&T nevertheless argued for a status-based interpretation of the exemption, arguing that, as a common carrier under the Communications Act, all of its conduct was immune from liability under Section 5. In contrast, the FTC advocated for an activity-based approach according to which the exemption applied only to the extent AT&T undertook actions as a common carrier.
While AT&T’s motion to dismiss was pending, the FCC voted to reclassify broadband internet service from an information service (a non-common carrier service) to a telecommunications service (a common carrier service), which also reclassified mobile data service as a common carrier service. The FCC’s vote, which split along party lines, was a response to the push for net neutrality rules to ensure that internet service providers did not throttle data, block content, or implement pay-for-play “fast lanes” to media companies.
In March 2015, Judge Edward M. Chen of the United States District Court for the Northern District of California denied AT&T’s motion to dismiss, finding that the understanding of the FTC Act at the time of its enactment supported an interpretation that the common carrier exemption applied only when an entity engaged in common carrier activities. See Fed. Trade Comm’n v. AT & T Mobility LLC, 87 F. Supp. 3d 1087 (N.D. Cal. 2015) rev’d and remanded, No. 15-16585, 2016 WL 4501685 (9th Cir. Aug. 29, 2016). Although AT&T argued that adopting the FTC’s interpretation would subject it to regulation by both the FTC and FCC, the district court found no conflict between the two sets of regulations. Id. at 1094. The district court also emphasized the potential for undesirable practical implications of a status-based exemption, including the possibility that such a rule would shield entities from Section 5 liability even if they engaged in de minimis common carrier activities. Id. Finally, the district court held that the FCC’s reclassification was only effective prospectively, and thus did not prevent the FTC from bringing suit for AT&T’s past conduct. Id. at 1104.
Following the district court’s decision, the FTC and FCC cemented their agreement that the common carrier exemption was activity-based in a Memorandum of Understanding, which stated that both agencies held the belief that “the scope of the common carrier exemption in the FTC Act does not preclude the FTC from addressing non-common carrier activities engaged in by common carriers.” FCC-FTC Consumer Protection Memorandum of Understanding at 2 (2015).
The Ninth Circuit unanimously reversed the district court’s order, holding that the FTC Act exemption for common carriers was status-based, thereby exempting all activities by such entities, including AT&T. See Fed. Trade Comm'n v. AT & T Mobility LLC, No. 15-16585, 2016 WL 4501685 (9th Cir. Aug. 29, 2016). The court found that the plain language of the FTC Act, read literally and consistently with the other exemptions in the statute, “casts the exemption in terms of status.” Id. at *4.
The court also found that a prior amendment to the FTC Act, which made another exemption clearly activity-based, demonstrated Congressional intent for the common carrier exemption to remain status-based. Id. at *5. Specifically, in 1958, Congress amended the packers and stockyards exemption, which had theretofore applied to “persons, partnerships or corporations subject to the Packers and Stockyards Act” such that it reached only “persons, partnerships, or corporations insofar as they are subject to the Packers and Stockyards Act.” Id. at *5-6. The court found that the addition of “insofar as” for one exemption and not others was a clear indication that the remaining exemptions were to remain status-based, rejecting the FTC’s argument that the 1958 amendment was merely a clarification that the exemption was activities-based. The Ninth Circuit ended its opinion by noting that although the FTC was entitled to Skidmore deference in its interpretation, such deference was unable to overcome the evidence that “point[ed] strongly” in favor of AT&T’s position.” Id. at *8.
The FTC has long expressed concern that the common carrier exemption could be expanded to shield additional conduct from liability. In 2007, the FTC’s own Broadband Connectivity Competition Policy predicted that “[a]s the telecommunications and Internet industries continue to converge, the common carrier exemption is likely to frustrate the FTC’s efforts to combat unfair or deceptive acts and practices and unfair methods of competition in these interconnected markets.” Broadband Connectivity Competition, Policy Fed. Trade Comm’n at 41 (2007), available at http://www. ftc.gov/reports/broadband/v070000report.pdf. But the Ninth Circuit’s holding goes much further than broadband and the FCC’s reclassification of mobile data service to a common carrier service by exempting any common carrier activity from FTC Act liability, simply by virtue of the company’s status as a common carrier. To date, the FTC has not confirmed whether the agency will appeal this limitation on its ability to pursue actions against common carriers who engage in non-common carrier conduct.
Qianwei FuZELLE LLPwww.zelle.com
On August 4, 2016, U.S. District Court Judge Jon S. Tigar issued an opinion denying most of the summary judgment motions filed by the defendants against the direct action plaintiffs (“DAPs”) in In re: Cathode Ray Tube (CRT) Antitrust Litigation (MDL No. 1917) (Doc. 4742). The case involves an alleged long-running conspiracy to fix the prices of cathode ray tubes (“CRTs”), a core component of tube-style screens used in televisions, computer monitors and other specialized applications. In a comprehensive opinion, Judge Tigar analyzed three interrelated legal issues at the center of the common disputes in these motions: antitrust standing, the direct purchaser rule, and principal-agent relationships.
In AGC, the Supreme Court identified five factors to be considered when evaluating antitrust standing: (1) the causal connection between the antitrust violation and the harm to the plaintiff; (2) the nature of the injury; (3) the directness of the injury; (4) the potential for duplicative recovery; and (5) the existence of more direct victims. Assoc. General Contractors of California v. California State Council of Carpenters, 459 U.S. 519, 537-44 (1983) (“AGC”). Of the five AGC factors, the Court noted great weight should be given to the second factor – antitrust injury. Antitrust injury generally requires the plaintiff to have suffered injury in the market in which competition is being restrained (the so-called “market participant requirement”). A narrow exception exists where the plaintiff’s injury is “inextricably intertwined” with the injuries of market participants. Op. 6-7.
The issue is whether the DAPs’ claims fell within the exceptions to the so called “direct purchaser rule” of Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977) and Royal Printing Co. v. Kimberly Clark Corp., 621 F.2d 323 (9th Cir. 1980).
Under federal antitrust law, indirect purchasers do not have standing to sue for damages for price-fixing, whereas direct purchasers are permitted to sue for the entire (treble) amount of the anticompetitive overcharge (trebled). This is referred to as the “direct purchaser rule.” The rule generally bars the use of defensive and offensive pass-on theory. Hanover Shoe, Inc. v. United Shoe Machinery Corp., 392 U.S. 481, 493 (1968); Illinois Brick, 431 U.S. at 730. In his well-articulated opinion, Judge Tigar clarified the two main exceptions to the “direct purchaser rule,” namely, in situations where (1) because of a cost-plus contract or a control relationship, market forces have been superseded, and (2) a control relationship between a direct purchaser and a price-fixer forecloses any realistic possibility of suit by the direct purchaser. Op. at 9.
The court distinguished the “control exception” alluded to in a footnote in Illinois Brick from the control exception set out in Royal Printing. As the court explained, the cost-plus contract exception and the control exception of Illinois Brick are illustrative of the same exception: where market forces have been superseded such that the entire overcharge is passed on to the indirect purchaser. By contrast, under the Royal Printing exception, the control relationship between the price fixer and the direct purchaser forecloses a realistic possibility of suit by the direct purchaser. In such a situation, an exception to the direct purchaser rule is necessary to promote private enforcement and an indirect purchaser has standing to sue for the entire amount of the overcharge. Op. at 9, 13-14.
Judge Tigar further analyzed several specific issues regarding the application of the Royal Printing exception. First, the court stated that the Royal Printing exception is triggered “wherever either the price fixer or the direct purchaser can ‘exercise restraint or direction over, dominate, regulate, . . . command, . . . guide or manage’ the other such that a realistic possibility of suit by the direct purchaser is foreclosed.” Op. at 17-19 (citing In re ATM Fee Antitrust Litig., 686 F.3d 741, 757 (9th Cir. 2012)). Second, the “direction” of control is not dispositive. The Royal Printing exception can apply when control operates upstream – i.e., when the direct purchaser owns/controls the upstream price fixer. Op. 19-21. Furthermore, the Court found that the timing of control is not dispositive. Regardless of whether control exists during the conspiracy and/or at the time of suit, “the ultimate question remains whether the control relationship foreclosed a realistic possibility of suit.” Op. at 21-23.
The court also discussed the impact of principal-agent relationship on antitrust standing. The Court pointed out that whether an individual or entity has standing to sue for damages based on a principal-agent relationship is distinct from whether he, she or it has standing as an indirect purchaser under the control exception from Illinois Brick (i.e., where control supersedes market forces). A purchasing agent without a distinct economic identity in the distribution chain does not have standing to sue. In this context, whether the principal owns or controls the purchasing agent is irrelevant. The court reasoned that the agent does not suffer antitrust injury because it is merely selling purchasing services to the principal, and therefore is not a participant in the market for the price-fixed goods. The court further stated that the other AGC factors also weigh against granting standing to a purchasing agent. Op. at 23-25.
* * *
After setting forth the substantive legal standards, the Court turned to the defendants’ motions.
MARTA is a buying cooperative in the appliance and electronics industry. It allegedly purchased CRTs from the price-fixers on behalf of its members. Judge Tigar held that MARTA lacked standing because it functioned like an agent for its members without a distinct economic identity in the chain of distribution of CRTs. The court noted several facts relating to MARTA’s purchasing behavior: it had no discretion in negotiating the purchasing terms with CRT vendors; it never initiated CRT purchases and never purchased products; it did not maintain an inventory for resale; and its pricing structure resembled an agent that charges a commission for its service. The court found that MARTA also lacked standing because it failed to satisfy the AGC factors. Op. at 25-31.
Judge Tigar rejected the defendants’ argument that injuries suffered by purchasers of CRT finished products were not “inextricably intertwined” with the injuries of those who purchased price-fixed goods themselves (i.e., the finished product manufacturers). The court found sufficient evidence submitted by the DAPs to satisfy the narrow exception to the market-participant-requirement of AGC. Specifically, there was evidence to show that: (i) a CRT made up a substantial and identifiable portion of the cost of the finished product; (ii) a CRT is virtually valueless on its own; (iii) defendants monitored the retail price of CRT finished products and used that information to inform their CRT production and pricing decisions. Op. at 31-33.
The Panasonic defendants contended that the DAPs purchased CRT finished products from Sanyo and thus their claims were barred by the direct purchaser rule. The DAPs argued that the Royal Printing control exception applied because the direct purchaser – Sanyo – was controlled by Panasonic. The court held that there was a genuine dispute of material fact as to whether Panasonic’s control of Sanyo foreclosed a realistic possibility of suit by Sanyo at the time the DAPs filed their claims. The court ruled that the point at which to assess whether a realistic possibility of suit was foreclosed is the time at which the indirect purchasers filed suit. Op. at 33-35.
The alleged conspirator Samsung SDI (“SDI”) sold CRTs to Samsung Electronics Co. (“SEC”), which sold CRT finished products to the DAPs. The defendants argued that the Royal Printing control exception did not apply because there was no actual control of SDI by SEC. The court discussed in great detail the relationship between the two entities and the unique corporate structure of the Samsung Group – a South Korean chaebol. Chaebols are closely knit business groups in South Korean “under the control of a single family or extended family, with key ‘flagship’ firms which are used as the instruments of control of other firms within the group.”
The defendants argued that SEC only has a minority ownership (20%) of SDI and did not control SDI’s board or pricing decisions. The court held that the Royal Printing control exception requires a broader inquiry. The court noted several undisputed facts presented by the DAPs: SEC being the flagship of the Samsung Group with significant influence over SDI; SEC’s past actions for the benefit of SDI; the lack of independent outside directors at SEC and SDI; and both entities being part of the same chaebol. Based on these facts, the court concluded there was a genuine dispute of material fact as to whether SEC controlled SDI within the meaning of the Royal Printing exception. Op. 35-42.
The DAPs purchased CRT finished products from NEC and a joint venture (“NMV”) between NEC and the alleged conspirator Mitsubishi. The court held that the DAPs failed to present any evidence establishing a control relationship between Mitsubishi and NEC. As to NMV, the court rejected the defendants’ argument that Mitsubishi must have sole control over the joint venture in order for the control exception to apply. The court emphasized that the test is whether the amount of control is sufficient to foreclose a realistic possibility of suit by the direct purchaser. Op. at 42-43.
LGE argued that the DAPs’ damage claims for indirect purchases of CRT finished products from direct purchaser LGE on or after July 1, 2001 were barred. LGE ceased manufacturing or selling CRTs when it sold its CRT business on July 1, 2001 to a joint venture (“LPD”) between LGE and Philips (also an alleged conspirator). Therefore, after 2001, LPD was an alleged price fixer, LGE was a direct purchaser, and the DAPs were indirect purchasers. LPD declared bankruptcy in 2006, before the DAPs filed the instant suit. The court held that neither the direction of control nor the timing of control was dispositive. As to LGE’s control of LPD, the fact that the supervisory board of LPD required a unanimous vote to take any action, was held sufficient to establish a genuine issue of material fact. Op. 44-46.
Steven N. Williams Cotchett, Pitre & McCarthy, LLPwww.cpmlegal.com
On August 4, 2016, the United States Court of Appeals for the Seventh Circuit affirmed a district court decision certifying a nationwide class of purchasers of containerboard who alleged that producers and sellers of containerboard colluded to agree on prices, both directly and through mechanisms such as output restrictions. Kleen Prods. LLC v. Int’l Paper Co., 2016 U.S. App. LEXIS 14282 (7th Circuit August 4, 2016).
The direct purchaser class alleged that the defendants agreed to restrict the supply of containerboard by cutting capacity, slowing back production, taking downtime, idling plants, and tightly restricting inventory, and that these actions caused purchasers of containerboard to pay more for containerboard products than they would have in the absence of the illegal agreement. The district court certified a class of direct purchasers from defendants or their subsidiaries or affiliates who purchased between February 15, 2004 and November 8, 2010.
The Seventh Circuit reviewed the evidence presented by the plaintiffs in support of class certification, first noting that the district court was free to consider the views of plaintiffs’ experts because no challenge to them had been brought under Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579 (1993), citing Tyson Foods, Inc. v. Bouaphakeo, 136 S. Ct. 1036, 1049 for the principle that where there is no Daubert challenge, the district court may rely on expert evidence for class certification. The Seventh Circuit also affirmed the district court’s decision not to hold an evidentiary hearing as part of the class certification process, ruling that this was a case-management decision the Court of Appeals had no reason to second guess. 2016 U.S. App. LEXIS 14282, * 7.
Before analyzing the evidence, the Court of Appeals reiterated two points governing its review: first, it noted that nothing in Wal-Mart Stores, Inc. v. Dukes, 564 U.S. 338 (2011) changed the deferential abuse of discretion standard applicable to review of a class certification decision, and second, it reiterated that “Rule 23 does not demand that every issue be common; classes are routinely certified under Rule 23(b)(3) where common questions exist and predominate, even though other individual issues will remain after the class phase.” Id., citing McMahon v. LVNV Funding, 807 F.3d 872, 875-76 (7th Cir. 2015).
Turning to the evidence presented below, the Court focused on the predominance requirement of Rule 23(b)(3), as defendants had conceded typicality, commonality, and adequacy. The Court reviewed basic facts about the containerboard industry. Containerboard is a sheet of heavy paper with a smooth top and bottom, and a fluted layer between the two. It is made in large, expensive mills, and the industry is dominated by vertically integrated producers. Containerboard is a commodity, sold in standardized compositions and weights, with many prices set by price indices published in the periodical Pulp & Paper Week. The Court set forth the market characteristics the parties had submitted to the district court, as well as the competing analyses each side’s experts had submitted.
In analyzing the propriety of class certification, the Court of Appeals stated that “[p]redominance is satisfied when ‘common questions represent a significant aspect of a case and . . . can be resolved for all members of class in a single adjudication.” 2016 U.S. App. LEXIS 14282, * 13-14 (quoting Messner v. Northshore Univ. HealthSystem, 669 F.3d 802, 811 (7th Cir. 2012)). The key issues before the district court were the alleged violation of the antitrust law, and the causal link between that violation and the class’ alleged injury. The issue of damages was set to the side, as “it is well established that the presence of individualized questions regarding damages does not prevent certification under Rule 23(b)(3).” Id. at * 14 (quoting Messner, 669 F.3d at 815).
On the liability issue, the Court ruled that the plaintiffs had made a sufficient showing that there was proof common to all class members that would show the existence of the conspiracy, and that it was not contested that this issue would be proved by evidence common to the class. As to the fact of injury, the Court rejected defendants’ argument that at class certification the plaintiffs were required to show that every class member was impacted by the antitrust violation. The Court repeated its prior statement that “[i]f the [district] court thought that no class can be certified until proof exists that every member has been harmed, it was wrong.” Id. at 19-20 (quoting Suchanek v. Sturm Foods, Inc., 764 F.3d 750, 757 (7th Cir. 2014)). Finding no need for the showing that defendants claimed was necessary, the Court concluded that the essential issue was whether the class could point to common proof that would establish antitrust injury on a classwide basis. The class had done so, including through an expert analysis showing that the containerboard market was conducive to successful collusion because it was highly concentrated, vertically integrated, there were barriers to entry, there was little competition from foreign producers, there were no good substitutes for the product, there was low elasticity of demand, and the product was a standardized, commodity product. Id. at * 21.
Defendants argued that plaintiffs’ market structure analysis was part of the “discredited structure-conduct-performance paradigm,” but the Court rejected this argument as the class had shown more than just market structure; specifically, price increases, a mechanism for price increases, communication channels used by the conspirators, and factors suggesting that cartel discipline could be maintained. Id. This evidence was sufficient to support class treatment of the merits. Id.
Defendants’ next argument was that the class had conflated the market for containerboard (the material) with the market for finished products. The district court had held that the uniform vertical integration in the market made it appropriate to look at finished products, and the Court of Appeals agreed, holding that “[p]urchasers (and we) have no reason to dig inside the defendant companies to evaluate their internal pricing of the raw materials they use in producing the boxes and other products they sell.” Id. at 22.
The Court of Appeals rejected several other challenges to the class’ expert analysis, including the defendants’ argument that the class was engaging in a “trial-by-formula” method that was barred by Wal-Mart. The Court ruled that the class was doing “nothing of the sort,” and that the class’ expert analysis was sufficient even for those class members who may have negotiated individually or had a longer term contract. In those cases, the starting point for negotiations would be higher if the market price for the product was artificially inflated. Id at 24. The Court also rejected defendants’ arguments that the class was obligated to calculate individual damages rather than aggregate damages, as there is no need to “drill down and estimate each individual class member’s damages” at the class certification stage. The allocation of individual damages can be managed individually at a later stage. Id. at 26. The Court stated that “[i]f in the end the Defendants win on the merits, this entire matter will be over in ‘one fell swoop’” while “[i]f Purchasers prevail on the common issues, both liability and aggregate damages will be resolved.” Id. at 26 (quoting William Shakespeare, Macbeth, act 4, sc. 3 l. 220 (David Bevington ed., Pearson Longman 6th ed. 2009).
The Court of Appeals concluded that the class had demonstrated predominance and superiority of class action treatment, and ended its opinion by stating that “the fact that class certification decisions must be supported by evidence does not mean that certification is possible only for a party who can demonstrate that it will win on the merits.”
Elizabeth C. PritzkerPRITZKER LEVINE LLPwww.pritzkerlevine.com
On July 12, 2016, U.S. District Court Judge Timothy Batten granted class certification status to consumers in a multidistrict antitrust action alleging that Delta Airlines and AirTran colluded to implement fees for passengers’ first checked bags. The case, In Re Delta/AirTran Baggage Fee Antitrust Litigation, Case No. 1:09-md-2089-TCB, is pending in the Northern District of Georgia, Atlanta Division.
The lawsuit stretches all the way to 2009 and the early days of checked bag fees. Plaintiffs filed thirteen class-action complaints alleging that the Delta/AirTran first-bag fee was the product of a conspiracy between Delta and AirTran that violated Section 1 of the Sherman Act. The cases were consolidated before Judge Batten by the Judicial Panel on Multidistrict Litigation.
Judge Batten’s memorandum opinion comprehensively goes through the parties’ evidence, expert opinions, Daubert challenges, and the requirements for class certification under FRCP 23. The most contested components of the class certification inquiry addressed by Judge Batten include: the implied requirement of ascertainability; Rule 23(a)(4)’s adequacy requirement; and predominance under Rule 23(b)(3). In Re Delta/AirTran Baggage Fee Antitrust Litigation, 2016 WL 3770957, at *7 (N.D. Ga. June 12, 2016).
As a precis to addressing these Rule 23 elements, Judge Batten first considered arguments by the airlines that some passenger class members may have received “offsets” to their first bag charges in the form of alleged base-fare reductions. According to defendants, the alleged price-fixing conspiracy potentially benefitted passengers to the extent any base-fare reduction received by passengers exceeded the amount of the first bag charge. Judge Batten rejected the argument that the alleged offsets would relieve the airlines of antitrust liability for their alleged price-fixing conduct, on several grounds. First, Judge Batten noted that courts repeatedly have refused to allow defendants accused of price-fixing to argue that their unlawful conduct in some way benefitted plaintiffs. See 2016 WL 3770957, at *22-25, citing among other authorities, United States v. Socony-Vacuum Oil Co., 310 U.S. 150, 226 n.59 (1940) (“Whatever economic justification particular price-fixing agreements may be thought to have, the law does not permit an inquiry to their reasonableness. They are all banned because of their actual or potential threat to the central nervous system of the economy.”); In re Nexium Antitrust Litig., 777 F.3d 9, 27 (1st Cir. 2015) (“[A]ntitrust injury occurs the moment the purchaser incurs an overcharge, whether or not that injury is later offset.”); In re K-Dur Antitrust Litig., No. 01-1652 (JAG), 2007 WL 5302308, at *12 (D.N.J. Jan. 2, 2007) (“[I]f the [plaintiffs] incurred an overcharge based upon the Defendant’s alleged actions, they would be deemed to have suffered an antitrust injury and would be entitled to recover the full amount of the overcharge, regardless of whether they may have benefitted in other ways from the Defendants’ alleged actions.”); and Valley Drug Co. v. Geneva Pharm., Inc., 250 F.3d 1181, 1193 (11th Cir. 2003) (even “those direct purchasers who potentially experienced a net benefit from defendants’ conduct [may] nevertheless bring suit against the defendants to recover their damages in the form of an overcharge.”). Second, Judge Batten held, “[e]ven if base-fare reductions or other offsetting benefits were deemed relevant to the Plaintiffs’ claims…they would go at most to calculation of damages, not the fact of injury.” 2016 WL 3770957, at *28. Third, Judge Batten found that the airlines’ attempt to rely on potential base-fare offsets as a means to defeat class certification and antitrust liability amounted to “little more than a back-door passing-on defense that is foreclosed by the Supreme Court’s decisions in Hanover Shoe and Illinois Brick Co. v. Illinois, 431, U.S. 720 (1977).” Id., at *30. “[A] defendant cannot defeat a finding that the plaintiff suffered antitrust injury and damages by showing that the plaintiff passed on the overcharge to another person or entity,” Judge Batten held. Id., at *31.
The Court then turned to the most contested class certification elements. Addressing the element of ascertainability first, Judge Batten considered Plaintiffs’ evidence that class members can be identified from information and records in the possession of the defendant airlines. This evidence included accounting and passenger itinerary records that identify passenger names, dates of travel, and information about the amounts paid for the itinerary, including base fare, taxes, first-bag charges and other fees. 2016 WL 3770957, at *47-49. In addition, Plaintiffs demonstrated that class members’ own records—such as receipts and bank or credit card statements—and self-identification affidavits could be used to further aid identification of class members in a feasible manner. Id., at *49-50. These identification methods, Judge Batten held, satisfied Rule 23’s requirement that there be an administratively feasible way to identify class members using objective criteria. Id., *51.
Defendants reiterated their benefit offset argument with respect to the Rule 23(a) element of adequacy of representation, asserting that “Plaintiffs cannot adequately represent a class that consists of net winners and losers.” 2016 WL 3770957, at *59. The Court rejected the argument that any offsetting benefit to class members (such as a base-fare reduction) created a fundamental conflict among class members. In doing so, Judge Batten considered and distinguished two Eleventh Circuit opinions, Pickett v. Iowa Beef Processors, 209 F.3d 1276, 1280 (11th Cir. 2000) and Valley Drug, supra, 350 F.3d at 1193-94, concluding that to defeat an adequacy showing, defendants must demonstrate that the benefits allegedly received by plaintiffs were so significant and apparent that class members receiving them effectively had no incentive to see the challenged practice(s) declared unlawful. “For example, in Pickett, 209 F.3d at 1280, a class of cattle producers alleged that certain types of contracts for purchasing cattle violated the federal antitrust laws, but the class ‘include[d] producers who willingly entered into’ the very contracts that were at issue. Under such circumstances, ‘the plaintiffs could not possibly provide adequate representation’ to the whole class.” Id., at *60-61 (internal citations omitted). “Similarly, in Valley Drug, the class was represented by two regional pharmaceutical wholesalers, while the three national wholesalers with the bulk of the antitrust claims had allegedly experienced a net gain from the conduct at issue and had chosen not to bring a suit on their own, suggesting a sharp misalignment of economic interests between the regional and national wholesalers.” Id., at *61. Judge Batten ruled “[t]he facts of Valley Drug and Pickett stand in contrast to those of this case because there the conflict was substantial enough to suggest ‘divergent interests and objectives’ among class members.” Id., at *61-62. “That is not the case where, as here, any base-fee reductions were de minimis and at best incidental to the antitrust overcharge to which Plaintiffs claim they were subjected.” Id., at *62. “This conflict, if one existed, is not so fundamental that it would prevent Plaintiffs from vigorously prosecuting the interests of the class through qualified counsel,” the Court held. Id, at *63.
Judge Batten also found that the Rule 23(b) element of predominance was satisfied. The Court concluded that Plaintiffs had met their burden to show that evidence pertaining to the alleged price-fixing conspiracy was common, in that it “will inevitably focus on Defendants’ conduct and communications and will not vary among class members….” 2016 WL 3770957, at *66. Rejecting Delta’s argument that the imposition of the first-bag fee did not have the same effect on all proposed class members, such as those who paid less in first-bag fees than they received in base-fare reductions, the Court reiterated that it “has already rejected Defendants’ offset and reimbursement arguments, which are insufficient to defeat a finding of predominance as to antitrust impact and damages.” Id., at *69-70. “Antitrust actions involving allegations of price-fixing have frequently [been] held to predominate in the class certification analysis,” Judge Batten noted. Id., at 72 (internal citation omitted). “Here, the analysis and evaluation of Plaintiffs’ proof that Defendants conspired to impose the first-bag fee and that the resulting antitrust violation impacted the class ‘will be done once for the benefit of the class and not repeatedly for each individual member.’” Id. While individualized proof “relevant with respect to the calculation of damages” likely will be present, “the fact that there will necessarily be individualized damages evidence does not preclude Rule 23 certification,” Judge Batten held. Id., at * 73 (citation omitted). Judge Batten’s opinion also is notable for its review of several seminal class certification decisions that were issued during the lengthy period in which briefing was underway on the class certification and related Daubert motions in the Delta/AirTran Baggage Fee Antitrust Litigation, including the Supreme Court decisions in Dukes, Comcast, Amgen and Tyson Foods, the Eleventh Circuit opinions in Electrolux and Carriuolo v. Gen. Motors Co., and numerous decisions by district courts on class certification issues.
Scott LyonScott.firstname.lastname@example.org www.sedgwicklaw.com
In a unanimous opinion, the Federal Trade Commission ruled that an Administrative Law Judge erred when he concluded that the FTC failed to prove that LabMD, a Georgia-based clinical testing laboratory, had engaged in an “unfair or deceptive trade practice” based on inadequate computer security for records containing protected health information (PHI) and sensitive personally identifiable information (PII). In re LabMD (Opinion of Commission), FTC No. 9357 (F.T.C. July 29, 2016). The FTC’s Opinion, written by Chairwoman Edith Ramirez, concluded that the wrong legal standard for unfairness had been applied and that “LabMD’s security practices were unreasonable, lacking even basic precautions to protect the sensitive consumer information maintained on its computer system.” Id., *1. According to the FTC, LabMD’s failures included, but were not limited to: 1) failing to use an intrusion detection system or file integrity monitoring; 2) neglecting to monitor firewall traffic; 3) failing to provide data security training to its employees; and 4) failing to delete any of the 750,000 patient records it had collected between 2008 and 2014, including records culled from its physician-clients’ databases despite never having performed testing for those patients. Id. The Opinion also clarified the FTC’s position on when an inadequate security program is “likely to cause substantial injury to consumers” sufficient to invoke its jurisdiction. Id. Ultimately, the message for businesses was clear: the FTC has jurisdiction pre-emptively to investigate and prosecute inadequate computer security, regardless of whether a breach has occurred.
In February 2008, a security firm named Tiversa discovered that a LabMD billing computer on the Gnutella peer-to-peer file-sharing network was inadvertently sharing an insurance aging report containing PHI and sensitive PII on approximately 9,300 patients, including their names, dates of birth, Social Security numbers, CPT codes for laboratory tests conducted, and in some cases, health insurance company names, addresses, and policy numbers. Id., *2. This file was referred to in the matter as the “1718 File” because it was 1,718 pages long. Id., *3. After locating the 1718 File, the Tiversa researcher used the “browse host” function to reveal 950 other shared files in the “My Documents” directory on the LabMD computer, most of which consisted of music and video files. Id. However, eighteen documents were also being shared at the same time, three of which also contained patient PHI. Id.
Tiversa disclosed its download of the 1718 File to LabMD and offered its remediation services, which LabMD ultimately rejected. Id., *4. Instead, LabMD proceeded to conduct an internal investigation without disclosing the breach to its affected patients. Id. The FTC’s Opinion cites to LabMD’s engagement of an independent security firm to conduct penetration testing and vulnerability mapping on its network. Id. The security firm’s report identified a number of urgent and critical vulnerabilities on four of LabMD’s seven servers and rated the overall security of each server as “poor.” Id. Meanwhile, a Civil Investigative Demand (CID) served on Tiversa’s affiliate, The Privacy Institute, resulted in the production of a spreadsheet of companies Tiversa claimed had exposed the personal information of 100 or more individuals, including LabMD, and a copy of the 1718 File. Id., *32. This led the FTC to open an investigation of LabMD, which resulted in an action against it for failing to implement reasonable security, an alleged “unfair” practice.
In November 2015, Administrative Law Judge D. Michael Chappell dismissed the FTC’s claims following an administrative trial, concluding that the FTC failed to prove that LabMD’s security practices were “likely to cause substantial consumer injury.” Id., *7. Complaint counsel presented substantial expert testimony on the potential injuries that could result from a theft of PHI, including not only identity theft and fraud, but also misdiagnosis and drug interactions caused by a merger of the patient’s actual medical records with the records of the identity thief. Id., *6-7. Rather than consider the threats posed by the practices at the time of the disclosure, the Initial Decision remarked that “the absence of any evidence that any consumer has suffered harm as a result of [LabMD]’s alleged unreasonable data security, even after the passage of many years, undermines the persuasiveness of [the FTC]’s claim that such harm is nevertheless ‘likely’ to occur.” In re LabMD (Initial Decision), FTC No. 9357, *55 (F.T.C. November 13, 2015). Adopting a post-hoc analysis, the Initial Decision concluded that because actual harm had not been demonstrated, the allegedly unreasonable security practices were not “likely” to cause substantial consumer harm. Id., *55-56. The Initial Decision also held that “privacy harms, allegedly arising from an unauthorized exposure of sensitive medical information … unaccompanied by any tangible injury such as monetary harm or health and safety risks, [do] not constitute ‘substantial injury’ within the meaning of Section 5(n).” Id., *88. Claiming that the “substantial consumer injury” required by Section 5(n) could not be satisfied by “hypothetical” or “theoretical” harm or “where the claim is predicated on expert opinion that essentially only theorizes how consumer harm could occur,” Judge Chappell opined that “[f]airness dictates that reality must trump speculation based on mere opinion.” Id., *67.
The FTC’s opinion rejected not only Judge Chappell’s analysis, but also his overly narrow view of what constitutes “harm” in the case of a security breach. According to the FTC, “[w]e conclude that the disclosure of sensitive health or medical information causes additional harms that are neither economic nor physical in nature but are nonetheless real and substantial and thus cognizable under Section 5(n).” In re LabMD (Opinion of Commission), *17. The Commission pointed out that its very first data security case was brought against the pharmaceutical company Eli Lilly, where lax security practices resulted in the inadvertent disclosure of the e-mail addresses of Prozac users. Id., *18. The opinion also identified “established public policies” in both state and federal law protecting sensitive health and medical information from public disclosure, as well as the recognition of privacy harms in tort law that do not require either economic or physical harm. Id., *18-19.
More importantly, the FTC ruled that a showing of “significant risk” of injury is sufficient to satisfy the “likely to cause” standard set forth in the Act. According to Chairwoman Ramirez, Judge Chappell’s post-hoc analysis focusing on the injuries suffered by patients (whom were never notified of the breach) “comes perilously close to reading the term ‘likely’ out of the statute. When evaluating a practice, we judge the likelihood that the practice will cause harm at the time the practice occurred, not on the basis of actual future outcomes. This is particularly true in the data security context. Consumers typically have no way of finding out that their personal information has been part of a data breach.” Id., * 23. The FTC also re-emphasized that it is authorized to act pre-emptively in order to prevent harm, explaining that “Section 5 very clearly has a ‘prophylactic purpose’ and authorizes the Commission to take ‘preemptive action.’ We need not wait for consumers to suffer known harm at the hands of identity thieves.” Id. (citations omitted).
In addition to concluding that LabMD’s inadequate security practices were likely to cause substantial harm to the 750,000 patients in its databases, the Commission also concluded that consumers had no reasonable ability to avoid the resulting harm. Id., *25-26. It noted that most patients were wholly unaware that their records were being collected by LabMD, which obtained them directly from its physician-clients, including records for which no testing was ever performed. Id., *26. LabMD attempted to counter that consumers could mitigate any injury “after the fact,” but the Commission disagreed. Id. According to the Opinion, “[o]ur inquiry centers on whether consumers can avoid harm before it occurs … even assuming arguendo that the ability to mitigate harm does factor into its avoidability, there is nothing LabMD has pointed to that demonstrates mitigation after the fact would have been possible here. Without notice of a breach, consumers can do little to mitigate its harms.” Id. (emphasis in original). The Commission also pointed out that “it may be difficult or impossible to mitigate or avoid further harm, since [consumers] have ‘little, if … any, control over who may access that information’ in the future, and tools such as credit monitoring and fraud alerts cannot foreclose the possibility of future identity theft over a long period of time.” Id.As to the third factor of its analysis (whether countervailing benefits to consumers or to competition outweigh the cost of implementing adequate practices), the FTC pointed to the ubiquity of “free or low cost software tools and hardware devices available for detecting vulnerabilities, including antivirus programs, firewalls, vulnerability scanning tools, intrusion detection devices, penetration testing programs, and file integrity monitoring tools,” as well as free or low-cost availability of IT security training courses and free notifications available from vendors, the Computer Emergency Response Team (CERT), the Open Source Vulnerability Data Base, and the National Institute of Science and Technology. Id., *27. From an operational security standpoint, the FTC concluded that LabMD could have easily implemented access controls based on the “principle of least privilege,” limiting employees’ access to the types of data necessary to perform their particular job functions and preventing employees from installing software such as the LimeWire application without administrative privileges. Id. LabMD could also have purged data for consumers for whom it had never performed testing, as there was no legal obligation for it to retain these data. *27-28.
The FTC’s Final Order required LabMD “to establish, implement, and maintain a comprehensive information security program that is reasonably designed to protect the security and confidentiality of consumers’ personal information” for the next twenty years, with biennial assessments and reporting. The Opinion recognized that while LabMD has ceased operations for the time being, it continues to exist as a corporation and still maintains records on approximately 750,000 consumers. Id., *36. Accordingly, the required information security program need only be appropriate “for the nature and scope of LabMD’s activities.” “[A] reasonable and appropriate information security program for LabMD’s current operations with a computer that is shut down and not connected to the Internet will undoubtedly differ from an appropriate comprehensive information security program if LabMD resumes more active operations.” Id. The Final Order also required LabMD to notify all “individuals whose personal information LabMD has reason to believe was or could have been exposed about the unauthorized disclosure of their personal information” and “notify the health insurance companies for these individuals of the information disclosure.” Id., *35. LabMD has sixty days after service of the Opinion and Final Order to file a petition for review.
The FTC’s authority to regulate the adequacy of computer security practices continues to solidify. The Third Circuit held in 2015 in Wyndham Worldwide Corp. that the FTC can challenge deficient security practices without first issuing regulations advising businesses how to comply with its expectations. Id. at 255. In the reversal of Judge Chappell’s Initial Decision in the LabMD case, the FTC made it clear that its authority would not be confined by an Article III-based standing analysis requiring proof of actual injury after the fact. This pre-emptive investigative and prosecutorial authority could be further tested in cases in which whistleblowers report allegedly lax security practices that have not resulted in a public data breach. For businesses eager to demonstrate their compliance with FTC expectations, the Commission’s LabMD Opinion points to the large body of freely-available consent decrees and prior decisions outlining practices to be avoided, as well as free resources allowing businesses to improve their processes and procedures for little or no cost. When all appeals have been exhausted, the LabMD experience will likely serve as a cautionary tale for others – if it had put a fraction of the effort expended defending itself into preventative improvement of its security processes, it might still be in business today.
Joyce M. ChangCotchett, Pitre & McCarthy, LLPwww.cpmlegal.com
On June 30, 2016, a three-judge panel of the United States Court of Appeals for the Second Circuit unanimously reversed a district court order approving a $7.25 billion antitrust settlement between Visa Inc. and MasterCard Inc. and millions of retailers. In re Payment Card Interchange Fee & Merch. Disc. Antitrust Litig., 2016 U.S. App. LEXIS 12047 (2d Cir. June 30, 2016)(“Payment Card Litigation”). The Court held that some of the class plaintiffs were inadequately represented in violation of Rule 23(a)(4) and the Due Process Clause. The Court’s ruling upended more than a decade of efforts to resolve litigation between the card industry and merchants.
The class action lawsuit, brought on behalf of approximately 12 million merchants nationwide, alleges a conspiracy in violation of Section 1 of the Sherman Act. After nearly ten years of litigation, the parties agreed to a settlement (“Settlement Agreement”) that released all claims in exchange for disparate relief to each of two classes: up to $7.25 billion would be paid to an opt-out class, and a non-opt class would be granted injunctive relief. Payment Card Litigation at *5-6. The district court certified these two settlement-only classes, and approved the settlement as fair and reasonable. Id. at *6. However, numerous objectors and opt-out plaintiffs argued that the class action was improperly certified and that the settlement was unreasonable and inadequate. Id. The Second Circuit Court of Appeals agreed, and vacated the district court’s certification of the class action and reversed the approval of the settlement. Id.
In short, when a Visa or MasterCard credit card transaction is approved, the merchant receives the purchase price minus two fees: the “interchange fee” that the issuing bank charged the acquiring bank and the “merchant discount fee” that the acquiring bank charged the merchant. Id. at *7. Plaintiffs alleged that “the Visa and MasterCard network rules allowed the issuing banks to impose an artificially inflated interchange fee that merchants have little choice but to accept.” Id. at *9. Substantial litigation between the filing of the first consolidated complaint in 2006 through the present resulted in a Settlement Agreement that was approved in December 2013. Id. at *10-11.
The Settlement Agreement divided the plaintiffs into two classes. The first class, the Rule 23(b)(3) class, covered merchants that accepted Visa and/or MasterCard from January 1, 2004 to November 28, 2012. The second class, the Rule 23(b)(2) class, covered merchants that accepted or will accept Visa and/or MasterCard from and after November 28, 2012. Id. at *11. Appellants, including those who opted out from the (b)(3) class and objected to the (b)(2) class, “argue[d] that the (b)(2) class was improperly certified and that the settlement was inadequate and unreasonable” because there was a clear conflict between merchants of the (b)(3) class, which pursued solely monetary relief, and merchants in the (b)(2) class, merchants who sought only injunctive relief. Id. at 15, 22. Specifically, the “former would want to maximize cash compensation for past harm, and the latter would want to maximize restraints on network rules to prevent harm in the future,” creating a clear conflict of interest. Id. at 22. Moreover, “[u]nitary representation of separate classes that claim distinct, competing and conflicting relief creates unacceptable incentives for counsel to trade benefits to one class for benefits to the other in order somehow to reach a settlement.” Id. at 24. The problems associated with unitary representation were exacerbated because members of the worse-off (b)(2) class could not opt-out. Therefore, the Court held, binding the disadvantaged class members – the (b)(2) class – to the Settlement Agreement violated Rule 23(a)(4) and the Due Process Clause.
The rejection of this deal raises the prospect that it will have to be renegotiated, or the case tried, resulting in further litigation that could take many more years to resolve.
Lee F. BergerPaul Hastings LLPwww.paulhastings.com
The California Court of Appeal has revived a thirteen year-old state court class action antitrust litigation (a rarity since the Class Action Fairness Act was enacted in 2004) involving an alleged conspiracy by automobile manufacturers and their Canadian subsidiaries. In re Automobile Antitrust Cases I and II, Case No. A134913 (Cal. Ct. App., 1st Dist., July 5, 2016). The Court of Appeal reversed a trial court’s grant of summary judgment to defendant Ford Motor Company of Canada, Ltd. (“Ford Canada”), but affirmed summary judgment as to defendant Ford Motor Company (“Ford U.S.”). A comparison between the Court of Appeal’s holdings regarding the two Ford entities shows a useful delineation of what is required for plaintiffs to survive summary judgment in a Cartwright Act case. Invitations to meet with competitors, information exchange with competitors, internal corporate discussions of potential actions, and economic motive to conspire are all insufficient. Plaintiffs must present additional direct or substantive evidence of agreement and action taken in response to agreement. The Court of Appeal concluded that the plaintiffs were able to make the required showing for Ford Canada, but not as to Ford U.S.
Plaintiff California car purchasers allege that defendant automobile manufacturers, distributors, and trade associations conspired from 2001 to 2003 to prevent the export of vehicles sold in Canada to the United States. Car makers traditionally sold vehicles to dealers in Canada at a different price than the same vehicle sold in the United States. Given a favorable exchange rate at the time (which made Canadian cars relatively less expensive for U.S. purchasers) and the similarity of vehicles sold in the two countries, arbitrage opportunities existed, and exporters purchased new vehicles in Canada and sold them in the United States for less than dealers in the United States could sell. The car makers had individual anti-export policies in place before 2001, but the plaintiffs alleged that the defendants conspired to maintain and step-up these polices in light of the increased exports.
While most major automobile manufacturers and two trade associations were named as defendants, all but the U.S. and Canadian Ford companies were either dismissed, settled, or went bankrupt. The trial court certified the class, and then granted summary judgment in favor of both Ford U.S. and Ford Canada. The Court of Appeal first decided a key evidentiary issue regarding the admissibility of certain deposition testimony that the parties reached “some consensus” at a trade association meeting. The plaintiffs offered the deposition testimony of Toyota Canada’s general counsel, Pierre Millette, who testified about attending a trade association meeting among defendants, stating “I can remember comments being made that everyone supported the concept of trying to keep the vehicles in Canada,” and that keeping cars in Canada “was simply a concept that there was some consensus on from everyone at the meeting.” The trial court agreed with Ford that this testimony should be excluded, but the Court of Appeal reversed.
Ford first argued that Millette’s statements were inadmissible hearsay, on the basis that Millette’s testimony described out-of-court statements of agreement made by other meeting participants. But the Court of Appeal found that the testimony does not report the statements of others, but instead only Millette’s “general impressions and conclusions based on his participation in the meeting.” Second, the Court of Appeal considered whether Millette’s conclusion that there was general support for keeping vehicles out of Canada was impermissible opinion evidence from a lay witness. The Court of Appeal found that the testimony was admissible lay opinion because it was based on the witness’s personal knowledge and observations, and because Millette could not recall more specific detail about the meeting and therefore “he was testifying at the ‘lowest possible level of abstraction.’”
The Court of Appeal then considered whether the trial court’s entry of summary judgment in favor of Ford U.S. and Ford Canada was proper. To answer that question, citing the California Supreme Court’s decision in Aguilar v. Atlantic Richfield Co., the Court of Appeal considered whether a jury could find that “it is more likely than not – on the evidence presented – that [the Ford entities] entered into an illegal agreement with any other alleged co-conspirator.”
On this basis, the Court of Appeal agreed with the trial court’s entry of summary judgment as to Ford U.S. Specifically, the Court found that communications between Ford U.S. and its subsidiary Ford Canada regarding potential steps to combat cross-border sales did not support finding an illegal agreement under the rule of Copperweld v. Independence Tube, 467 U.S. 752 (1984) in which the United States Supreme Court held that a corporation and its wholly owned subsidiary must be viewed as a single enterprise, and thus incapable of conspiring with each other.
The Court of Appeal further found that while evidence showed that Ford U.S. had the motive to stop cross-border sales, a jury could not infer that Ford U.S. had engaged in a conspiracy with its competitors based on motive alone. Nor is evidence of information-gathering about competitors’ actions to prevent cross-border sales, or an internal email regarding a proposal to contact other car makers about the same, sufficient to show participation in a conspiracy. In the Court of Appeal’s view, there was no evidence from which a reasonable jury could infer that it was more likely than not that Ford U.S. joined a conspiracy.
But the Court of Appeal reached a different outcome as to Ford Canada, finding that plaintiffs had proffered sufficient evidence that a jury could find that Ford Canada had violated the Cartwright Act. The Court of Appeal started by disregarding Ford’s evidence that the defendants had maintained anti-export policies for decades before the alleged conspiracy, on the basis that an agreement among competitors to maintain otherwise lawful polices can constitute a violation of the Cartwright Act, especially when changing industry conditions could create a motive to collude to maintain those policies.
The Court of Appeal then considered the evidence, giving special weight to Millette’s testimony regarding supposed consensus among the industry participants, in conjunction with evidence of: meetings and communications among defendants with the alleged goal of finding an industry-wide solution to the cross-border sales problem; Ford Canada’s and other defendants’ stepped-up anti-export efforts; information sharing among Canadian auto distributors; and defendants’ economic motive to conspire. Taken as a whole, the Court of Appeal concluded that a reasonable jury could find that Ford Canada participated in an unlawful conspiracy.
Notably, much of the evidence that the Court of Appeal considered as contributing to a denial of summary judgment as to Ford Canada was found insufficient as to Ford U.S. – motive to conspire, information sharing, and communications regarding potential meetings. But the Court of Appeal explained that when considering the evidence against Ford Canada as a whole, inclusion of that evidence in addition to more direct evidence of meetings and putative consensus is sufficient to deliver the case to the jury.
Jonathan MincerLindsey BohlSimpson Thacher & Bartlett LLPwww.stblaw.com
On June 16, 2016, a federal magistrate judge recommended denying defendants’ motion to dismiss in a case presenting a number of interesting issues, including issues of first impression, at the intersection of antitrust law, fraud on the FDA, and the Hatch-Waxman Act’s 180-day exclusivity period granted to “first-filers” for FDA approval of generic versions of approved drugs. Meijer, Inc. v. Ranbaxy Inc., No. 15-11828 (D. Mass. Jun. 16, 2016) (unpublished) (“Meijer”). These issues included (1) whether the Food Drug and Cosmetic Act (“FDCA”) precludes antitrust claims predicated on fraud on the FDA; (2) whether a firm can have monopoly power without any sales or profits in the market; and (3) whether the FDA’s regulatory activity can be an intervening factor preventing a finding of proximate cause.
In Meijer, a putative class of direct purchasers alleged that drug manufacturer Ranbaxy violated Section 2 of the Sherman Act by submitting fraudulent applications to the FDA for two generic drugs in order to obtain the statutory 180-day exclusivity period and deter other potential generic drug manufacturers from entering the market. Id. at 8. These fraudulent applications allegedly delayed the FDA’s final approval of Ranbaxy’s drugs for years, as the FDA investigated and eventually entered into a consent decree with Ranbaxy. Id. at 10-11. Meanwhile, Ranbaxy maintained exclusivity for generic drugs including Diovan and Valcyte, delaying Ranbaxy’s and generic competitors’ entry into the market and thereby requiring class members to pay higher prices for drugs they needed.
Courtney A. PalkoBlecher, Collis & Peppermanwww.blechercollins.com
In 2009, the FTC sued Commerce Planet and three of its top officers, including its former president Charles Gugliuzza, under Section 5 of the FTC Act, seeking a permanent injunction and restitution for Commerce Planet’s deceptive and unfair business practices arising from its online marketing of a website-hosting service called “OnlineSupplier.” (Fed. Trade Comm’n v. Commerce Planet, Inc., 815 F.3d 593, 596–97 (9th Cir. 2016); see Compl., Fed. Trade Comm’n v. Commerce Planet, Inc., No. 09-1324 (C.D. Cal. Nov. 10, 2009).
OnlineSupplier was marketed as enabling consumers to make money by selling products online. (Commerce Planet, 815 F.3d at 597.) When consumers signed up for a free “Online Auction Start Kit,” consumers received a 14-day free trial of OnlineSupplier, after which Commerce Planet automatically charged a recurring monthly membership fee to the credit cards of those consumers who failed to affirmatively cancel during the initial trial period. This billing practice is a “negative option.” Many consumers did not realize that they had agreed to buy OnlineSupplier and only learned so when the charge appeared on their credit card. Membership fees ranged from $29.95 to $59.95 per month.
Commerce Planet and two individual defendants immediately settled. Gugliuzza proceeded to trial. (Id. at 597; see Final Judgment against Defendants Aaron Gravitz, Commerce Planet, Inc., and Michael Hill, Fed. Trade Comm’n v. Commerce Planet, Inc., No. 09-1324 (C.D. Cal. Nov. 18, 2009).) Following a 16-day bench trial in 2012, the district court entered an order finding that Commerce Planet had violated the FTC Act, holding Gugliuzza personally liable for Commerce Planet’s unlawful conduct, enjoining Gugliuzza from engaging in similar misconduct, and ordering him to pay $18.2 million in restitution. (Fed. Trade Comm’n v. Commerce Planet, Inc., 878 F. Supp. 2d 1048, 1093 (C.D. Cal. 2012) (Carney, J.) Gugliuzza appealed, challenging the validity of the restitution award, as well as the district court’s liability determination. (Fed. Trade Comm’n v. Commerce Planet, Inc., 815 F.3d 593, 597 (9th Cir. 2016).) Erwin Chemerinsky argued on behalf of Gugliuzza. zIn separate opinions (one published and the other unpublished), the Ninth Circuit (Callahan, Watford, Owens, JJ.) affirmed in part, vacated in part, and remanded. ( Fed. Trade Comm’n v. Commerce Planet, Inc., 815 F.3d 593, 605 (9th Cir. 2016); Fed. Trade Comm’n v. Commerce Planet, Inc., No. 12-57064, --- F. App’x ---, 2016 WL 828326, at *1–2 (9th Cir. Mar. 3, 2016).
I. In Federal Trade Commission v. Commerce Planet, Inc., 815 F.3d 593 (9th Cir. 2016) (Watford, J.), the Ninth Circuit affirmed the validity and amount of the restitution award. Because joint and several liability is permissible, the award need not be limited to the unjust gains each defendant personally received. Nevertheless, the panel vacated the judgment and remanded because the district court judgment against Gugliuzza did not specify that Gugliuzza was jointly and severally liable for Commerce Planet’s restitution obligations. On remand, the district court is to reinstate the $18.2 million restitution award if it holds Gugliuzza jointly and severally liable; otherwise, the award is to be limited to the unjust gains Gugliuzza personally received.
A. First, the panel held that the district court had authority to award restitution under Section 13(b) of the FTC Act. Section 13(b) provides that the FTC “may seek, and after proper proof, the court may issue, a permanent injunction.” (15 U.S.C. § 53(b); see Commerce Planet, 815 F.3d at 598.) Applying Porter v. Warner Holding Co., 328 U.S. 395, 397–98 (1946) and Federal Trade Commission v. Pantron I Corp., 33 F.3d 1088, 1102 (9th Cir. 1994), the Ninth Circuit invoked the scope of the court’s broad inherent equitable powers and held that the FTC Act’s permanent injunction provision authorizes district courts to order payment of restitution in addition to injunctive relief. (Commerce Planet, 815 F.3d at 598–99.)
The Ninth Circuit rejected Gugliuzza’s argument that a separate provision, Section 19(b) of the FTC Act, 15 U.S.C. § 57b(b), eliminates a court’s power to award restitution. Section 19(b) provides that a court may award “the refund of money or return of property [and] the payment of damages” in actions brought to enforce the FTC’s cease-and-desist orders. Remedies in Section 19 “are in addition to, and not in lieu of, any other remedy . . . .” Porter rejected a similar argument.
The Ninth Circuit further held that restitution is not limited to the unjust gains that Gugliuzza personally received. An individual may be held personally liable for restitution of the corporation’s unjust gains provided the requirements for imposing joint and several liability are satisfied. For an individual to be held personally liable for corporate violations of the FTC Act, the FTC must prove that the individual: (1) participated directly in, or had the authority to control, the unlawful acts or practices at issue; and (2) had actual knowledge of the misrepresentations involved, was recklessly indifferent to the truth or falsity of the misrepresentations, or was aware of a high probability of fraud and intentionally avoided learning the truth.
Applying the two-pronged test, the district properly found those requirements were satisfied, and the Ninth Circuit concluded that those findings were adequately supported by the record. Nothing beyond satisfaction of the two-pronged test for personal liability is required to establish joint and several liability for a corporation’s restitution obligations. Accordingly, “[d]efendants held jointly and severally liable for payment of restitution are liable for the unjust gains the defendants collectively received, even if that amount exceeds (as it usually will) what any one defendant pocketed from the unlawful scheme.”
Nor was the Ninth Circuit persuaded by Gugliuzza’s argument that if the district court was authorized to award what amounts to “legal” restitution, then Gugliuzza’s Seventh Amendment right to a jury trial was invoked. Although the Ninth Circuit conceded the Supreme Court may need to reconsider the issue, it held: “For now at least, so long as a court limits an award under § 13(b) to restitutionary relief, the remedy is an equitable one for Seventh Amendment purposes and thus confers no right to a jury trial.”
However, the panel noted that the judgment entered did not hold Gugliuzza jointly and severally liable for Commerce Planet’s restitution obligations. Although the FTC argued that it was a mere oversight, which the Ninth Circuit viewed as plausible under the circumstances, the Ninth Circuit lacked authority to correct any mistake. Therefore, the panel vacated the judgment and remanded to the district court to determine whether to (1) hold Gugliuzza jointly and severally liable with Commerce Planet and thus personally liable for $18.2 million in restitution, or (2) limit the restitution to the unjust gains Gugliuzza personally received. Either way, Gugliuzza is entitled to offset the $522,000 the FTC collected from his settling co-defendants.
B. Second, the panel held that the district court did not abuse its discretion in calculating $18.2 million in restitution. Following the direction of its sister circuits, the Ninth Circuit adopted a two-step burden-shifting framework for calculating the amount of a restitution award under Section 13(b) for a violation of the FTC Act: (1) the FTC bears the burden of proving that the amount it seeks in restitution reasonably approximates defendant’s unjust gains; and (2) the burden then shifts to the defendant to show that the FTC’s figures overstate that amount. Unjust gains are measured by a defendant’s net revenues (i.e., amount consumers paid minus refunds), and any risk of uncertainty at the second step “‘fall[s] on the wrongdoer whose illegal conduct created the uncertainty.’”
The Ninth Circuit concluded that the FTC satisfied its burden by presenting undisputed evidence that Commerce Planet received $36.4 million in net revenues from sales of OnlineSupplier during the relevant time period. Because Commerce Planet made material misrepresentations (failure to adequately disclose the negative option) that were widely disseminated, the FTC was entitled to a presumption that all consumers relied on those misrepresentations.
Gugliuzza failed to present any reliable evidence that the $36.4 million overstated Commerce Planet’s unjust gains. The district court properly refused to consider the expert testimony of Dr. Kenneth Deal, who opined that “not many” of Commerce Planet’s consumers were deceived based on a consumer survey that he did not conduct and which was not shown to have been “‘conducted according to accepted principles.’”
The Ninth Circuit concluded that it was not arbitrary for the district court, in reliance on the FTC’s expert’s testimony that “most” consumers were deceived, to cut the permissible $36.4 million award in half and reduce it to $18.2 million. The district court did not abuse its discretion in conservatively slashing the award to Gugliuzza’s benefit.
II. In a separate unpublished memorandum opinion, Federal Trade Commission v. Commerce Planet, Inc., No. 12-57064, --- F. App’x ---, 2016 WL 828326 (9th Cir. Mar. 3, 2016), the panel rejected Gugliuzza’s challenges as to liability.
Specifically, the panel found that the district court did not err in finding that Commerce Planet violated the FTC Act by engaging in deceptive and unfair practices in marketing OnlineSupplier. The panel rejected Gugliuzza’s contention that Commerce Planet’s conduct was consistent with industry practice, and relying on Federal Trade Commission v. Cement Institute, 333 U.S. 683, 688, 720–21 (1948), held that, in any event, a practice that is standard to a particular industry can still violate the FTC Act. The district court did not abuse its discretion in excluding the testimony of Gugliuzza’s proposed expert to demonstrate a low rate of consumer confusion. Moreover, actual deception is not required; the FTC Act requires only that a practice is likely to deceive, and the district court did not clearly error in finding that consumers were likely to be deceived.
Second, the panel found that the district court did not clearly err in finding Gugliuzza personally liable for Commerce Planet’s violations of the FTC Act. At a minimum, Gugliuzza was recklessly indifferent to the truth or falsity of the misrepresentations, as he discussed customer complaints and “quickly jettisoned” improvements because they “were a disaster” to sales.
Finally, the panel concluded that the advice of counsel defense did not shield Gugliuzza from liability. Advice of counsel is not a valid defense as to knowledge required for individual liability, and even if it were, the district court did not clearly err in finding that Gugliuzza had “‘acted as Commerce Planet’s de facto legal counsel.’”
Accordingly, the district court’s liability determination was affirmed.
On May 23, 2016, the Second Circuit Court of Appeals in Gelboim v. Bank of Am. Corp., 2016 U.S. App. LEXIS 9366 (2nd Cir. May 23, 2016) reversed a 2013 ruling dismissing Appellants’ antitrust claims against sixteen of the world’s largest banks (“the Banks”). Appellants, comprised of various individuals and entities that held diverse financial instruments with the Defendant Banks, alleged that the Banks colluded to depress the London Interbank Offered Rate (“LIBOR”) by violating the rate-setting rules, and that the rate of return associated with the various financial instruments pegged to LIBOR was therefore lowered as a result of the Banks’ manipulation.
The District Court had dismissed the litigation in its entirety on the ground that Appellants failed to demonstrate anticompetitive harm. In re LIBOR-Based Financial Instruments Antitrust Litigation, 935 F. Supp. 2d 666 (2013).The Second Circuit reversed because “(1) horizontal price-fixing constitutes a per se antitrust violation; (2) a plaintiff alleging a per se antitrust violation need not separately plead harm to competition; and (3) a consumer who pays a higher price on account of horizontal price-fixing suffers antitrust injury.” Gelboim at *4.
LIBOR, often referred to as the “most important number in the world,” underpins hundreds of trillions of dollars of transactions, and is used as a component or benchmark in a countless number of business dealings. Id. at *3. A LIBOR increase of merely one percent would have allegedly cost the Banks hundreds of millions of dollars. Id. at *6. Furthermore, as the Banks were still reeling during the relevant time period from the 2007 financial crisis, a high LIBOR rate could potentially signal deteriorating finances to both the public and to regulators. Id.
To that end, Appellants alleged that “the Banks corrupted the LIBOR-setting process and exerted downward pressure on LIBOR to increase profits in individual financial transactions and to project financial health.” Id. at *7. Appellants alleged that the Banks did so by engaging in a horizontal price-fixing conspiracy whereby each participant submitted an artificially low cost of borrowing in order to suppress LIBOR. Id. at *8. Appellants relied on evidence gathered by United States Department of Justice (“DOJ”) investigations, as well as statistics compiled by the DOJ that indicated a conspiracy amongst the Banks beginning in 2007. Id.
In reviewing the grant of a motion of dismiss de novo, the Court of Appeals examined both the existence of an antitrust violation and an antitrust injury in this case – noting that while it ordinarily would not do so, the distinction between the two issues are easily blurred. Id. at *18. Indeed, the Court of Appeals wrote that the lower court’s decision confused the interplay between these two concepts. Id.
First, in order to avoid dismissal, Appellants “had to allege an antitrust violation stemming from the Banks’ transgression of Section One of the Sherman Act.” Id. The Court of Appeals held that Appellants had indeed plausibly alleged an antitrust violation attributable to the Banks because “LIBOR forms a component of the return from various LIBOR-denominated financial instruments, and the fixing of a component of price violates the antitrust laws.” Id. at *20.
Second, the Court of Appeals also found that the Appellants had plausibly alleged antitrust injury – one of two components of antitrust standing – because “[t]hey have identified an ‘illegal anticompetitive practice’ (horizontal price-fixing), have claimed an actual injury placing appellants in a ‘’worse position’ as a consequence’ of the Banks’ conduct, and have demonstrated that their injury is one the antitrust laws were designed to prevent.” Id. at *29 – 30, citing Gatt Communs., Inc. v. PMC Assocs., L.L.C., 711 F.3d 68, 76 (2nd Cir. 2013). The Court of Appeals rejected the lower court’s ruling that since the LIBOR-setting process was a “cooperative endeavor” there could be no anticompetitive harm because “[t]he machinery employed by a combination for price-fixing is immaterial.” Id. at *30. Equally unsound was the lower court’s dismissal on the ground that Appellants failed to plead harm to competition because a “plaintiff need not ‘prove an actual lessening of competition in order to recover.’” Id. at *31 – 32, citing Blue Shield of Va. v. McCready, 457 U.S. 465, 482 (1982). Indeed, “[i]f proof of harm to competition is not a prerequisite for recovery, it follows that allegations pleading harm to competition are not required to withstand a motion to dismiss when the conduct challenged is a per se violation” (emphasis in original). Id. at 32. Although the district court deemed it significant that Appellants could have suffered the same harm under normal circumstances of free competition, the Court of Appeals reasoned that “antitrust law relies on the probability of harm when evaluating per se violations.” Id. at 33- 35, citing Catalano, 446 U.S. at 649 (“[T]he fact that a practice may turn out to be harmless in a particular set of circumstances will not prevent its being declared unlawful per se.”).
The next question bearing on antitrust standing is whether Appellants satisfied the efficient enforcer factors. Id. at *37. The efficient enforcer factors “reflect a concern about whether the putative plaintiff is a property party to perform the office of a private attorney general and thereby vindicate the public interest in antitrust enforcement.” (internal quotations omitted). Id. at *44. Since the District Court did not reach this second component of antitrust standing – a finding that appellants are efficient enforcers of the antitrust laws – the Court of Appeals remanded this issue for the District Court to consider in the first instance.
In the alternative, the Banks had urged affirmance on the ground that appellants did not adequately allege conspiracy, but the Court of Appeals held that “[s]kepticism of a conspiracy’s existence is insufficient to warrant dismissal; ‘a well-pleaded complaint may proceed even if it strikes a savvy judge that actual proof of these facts is improbable, and that a recovery is very remote and unlikely.’” Id. at *46. In any event, the Court of Appeals found that “appellants’ complaints contain numerous allegations that clear[ed] the bar of plausibility” and therefore, rejected this alternative basis offered by the Banks. Id. at *44 – 46.
This appellate decision sets precedent in the Second Circuit that financial benchmarks constitute a price element under U.S. federal antitrust law – even if Defendants were engaged in a joint process, as the Defendant Banks were in this case. The critical allegation is that “the Banks circumvented the LIBOR-setting rules, and that joint process thus turned into collusion.” Id. at *30 – 31.
Steven N. WilliamsCotchett, Pitre & McCarthy, LLPwww.cpmlegal.com
In Harrison v. E.I. Dupont De Nemours & Co., 2016 U.S. Dist. LEXIS 77465, N.D. Cal. case no. 13-cv-1180 (June 13, 2016), the Hon. Beth Labson Freeman denied defendants’ motion to dismiss the indirect purchasers third amended class action complaint.
Plaintiffs alleged that defendants conspired to fix the prices of titanium dioxide sold in the United States. Titanium dioxide is an ingredient used in many products including paint. Plaintiffs, purchasers of “architectural paint,” alleged claims under federal and state antitrust laws, state consumer protection laws, and common law. Plaintiffs claimed that defendants conspired to fix the prices of titanium dioxide, and that they were injured by paying artificially inflated prices for architectural paint of which titanium dioxide was an ingredient. Defendants moved to dismiss the third amended complaint (“TAC”) under Fed. R. Civ. Proc. 12(b)(1) and under Fed. R. Civ. Proc. 12(b)(6). 2016 U.S. Dist. LEXIS, * 3-5.
Defendants’ 12(b)(1) motion was based on their argument that the district court lacked subject matter jurisdiction because the plaintiffs did not have standing. Defendants argued that plaintiffs could not adequately plead that their injury was fairly traceable to the challenged conduct of the defendants, an argument that the district court had accepted in dismissing the plaintiffs’ second amended complaint (“SAC”). In their (“SAC”), plaintiffs alleged that defendants fixed the price of titanium dioxide, that manufacturers of architectural coatings (a broad product category which includes architectural paint) paint paid higher prices as a result, and that those artificially inflated prices were then passed on to plaintiffs and the class. The district court held this insufficient to demonstrate standing because architectural coatings is a broad product category with great variety in the amount of titanium dioxide used in different products. In their SAC, plaintiffs had provided details only about a single product within the category of architectural coatings. The district court rejected this approach as the SAC would have swept up many products into the proposed class for which no allegations had been set forth. In its prior order, the district court also noted its concerns with the plaintiffs’ attempt to include two different levels in the chain of distribution within their class – a merchant class and a consumer class – whose claims would be adverse to each other. Id., * 7-9.
In denying the 12(b)(1) motion, the district court held that these issues were resolved in the TAC, which alleged a single consumer class for purchases of architectural paint only, and which identified particular architectural paint products and, in some cases, the amount of titanium dioxide in the paint products. In addition, plaintiffs provided allegations that titanium dioxide comprised a substantial part of the total cost of architectural paint and that manufacturers of architectural point cannot absorb component cost price increases, but must instead pass these price increases on at rate of almost 100%. The district court rejected defendants’ arguments that these allegations were incorrect, ruling that such arguments were appropriate for class certification or summary judgment but not for a motion to dismiss. Id., * 9-12.
Turning to the 12(b)(6) motion, defendants’ arguments were largely based on the assertion that plaintiffs had failed to satisfy the prudential standing test of Associated General Contractors of California, Inc. v. California State Council of Carpenters (“AGC”), 459 U.S. 519 (1983). In its prior motion to dismiss orders, the district court had held that AGC applied to the plaintiffs’ state law claims and that the plaintiffs had not met that standard. The district court held that the plaintiffs in the TAC had cured the prior deficiencies by, inter alia, narrowing the product market to architectural paint and by adding specific allegations linking that market to the titanium dioxide market, including allegations that titanium dioxide represents a significant part of the total cost of architectural paint and that artificial cost increases for titanium dioxide result in price increases for architectural paint. Further, the risk of duplicative recovery was eliminated by plaintiffs’ decision to only allege a class of consumers and not to pursue claims on behalf of merchants. Id., * 15-18.
The district court rejected the argument that the AGC factors called for dismissal because of the alleged difficulty of calculating damages in indirect purchaser cases due to the need to trace overcharges through the chain of distribution. The district court noted that such concerns are present in every indirect purchaser case, and that potential difficulties in calculating and apportioning damages are not a reason to bar state law indirect purchaser claims. Id. * 19.
Finally, the district court dismissed claims brought under New York’s General Business Law § 349 on the ground that the statute requires pleading of a “deceptive” act, and that plaintiffs’ claims of price-fixing did not constitute a deceptive act. The district court held that deceptive statements made to cover up other illicit conduct was not sufficient to satisfy this requirement. Id. at * 23-24.
Lee F. BergerKristin S. StarrPaul Hastings LLPwww.paulhastings.com
On March 22, 2016, the U.S. Supreme Court affirmed certification of a class under the Fair Labor Standards Act (“FLSA”), ruling that statistical sampling and other forms of “representative evidence” may be used to satisfy the predominance requirement for class certification under Federal Rule of Civil Procedure 23. Tyson Foods, Inc. v. Bouaphakeo et al., No. 14-1146, 577 U.S. ___ (March 22, 2016). Instead of promulgating a broad rule, the Court held that whether such evidence is admissible depends on case-specific factors, particularly emphasizing whether the proffered representative evidence would have been admissible in a case brought by an individual plaintiff.
Plaintiffs in Tyson Foods were employees in the kill, cut, and re-trim departments at Tyson Foods’ pork processing plant. Before and after working on the floor, Tyson required these employees to “don and doff” protective equipment. Tyson allegedly failed to pay employees fully for this donning and doffing time. If the amount of time the employees spent donning and doffing protective equipment, when added to employees’ time working on the floor, exceeded 40 hours, then Tyson would have violated the FLSA by not paying overtime rates for the excess time. Tyson never kept records regarding the amount of “donning and doffing” time for its employees because it treated the time as uncompensated, though it would have been required to track that time if it was compensable.
The employees sued Tyson, claiming that Tyson denied them overtime pay for the uncompensated donning and doffing time under the FLSA and state law. The district court certified the class under Fed. R. Civ. P. 23 and allowed for “collective action” treatment under 29 U.S.C. § 216.
At class certification, Tyson argued that plaintiffs failed to meet the Rule 23(b)(3) predominance requirement because the question of whether any individual class member worked over 40 hours a week including donning and doffing time – that is, whether there was injury-in-fact – predominated over any other common questions. In the absence of individual records, Plaintiffs sought to satisfy the question of injury-in-fact by using a statistical study, based on hundreds of videotaped examples of employees donning and doffing protective equipment, to arrive at an average donning and doffing time, and then added that average amount to the class member’s recorded floor time to determine the total hours worked. Tyson argued that, because donning and doffing time varied for each individual employee based on department and role, using a statistical average was unfair and presumed the answer to the predominance question. The district court certified the class, including reliance on the statistical average to satisfy the predominance requirement.
The jury awarded $2.9 million in unpaid wages to the class, and Tyson appealed. The question on appeal was whether plaintiffs could use statistical evidence to satisfy Rule 23(b)(3)’s predominance requirement regarding injury-in-fact.
The Supreme Court’s 6-2 decision affirmed the use of statistical evidence to satisfy the predominance requirement. First, because Tyson did not maintain time records regarding donning and doffing, plaintiffs were left without alternatives to representative evidence to establish total time worked. Second, the employees in the class were sufficiently similar—they did similar jobs in the same facility—that an average estimate of donning and doffing time was reasonable. Third, Tyson never challenged plaintiffs’ statistical studies under Daubert nor did Tyson introduce its own statistical studies. Fourth, the Court pointed to the action being a FLSA case and precedent allowing the use of representative evidence to prove liability in FLSA cases. See Anderson v. Mt. Clemens Pottery Co., 328 U.S. 680, 686–88 (1946).
One aspect of the Court’s analysis is likely to have long-lasting effects. It reasoned that a court would permit an individual plaintiff to use statistical average evidence to show his donning and doffing time had the employee brought an individual action. If an individual could use such evidence to prove individual injury-in-fact, then so too could he use it to show injury-in-fact as to all class members. On this basis, the Court distinguished Wal-Mart Stores, Inc. v. Dukes, 564 U.S. 338 (2011), another FLSA case in which the court disapproved of “trial by formula.” In Wal-Mart, the Tyson Foods Court reasoned, the proffered statistical evidence was held to obscure substantial differences in the policies employed at Wal-Mart stores because policies differed on a store-by-store basis. The Wal-Mart plaintiffs hoped to select some example stores and apply damages arising from the policies followed at the example stores to all stores. No individual could have relied on such evidence in her own action, so the Court ruled that a class could not rely on the evidence to show injury and damages as to all class members.
Many saw Tyson Foods as the Court’s chance to validate statistical averaging in class certification after Wal-Mart. While some attorneys find that validation, others do not see a dramatic shift.
In antitrust class cases, plaintiffs often rely on expert econometric evidence—in the form of statistical sampling or other representative evidence—to establish liability and calculate damages. Defendants often vigorously challenge the plaintiffs’ models at class certification. Tyson Foods may provide a new framework for evaluating statistical evidence in some cases, while defendants are likely to continue to attack the reliability of plaintiffs’ models and question the ability of the evidence to support injury as to most or all class members.
Additionally, the Court’s emphasis on the fact that Tyson did not challenge the plaintiffs’ experts’ model under Daubert may result in an increase in Daubert motions at the class certification stage.
Practitioners will want to watch for developments on these issues if the Court grants certiorari in Pulaski v. Google (Case No. 15-1101)—a case from the Ninth Circuit holding that class certification may be allowed based on statistical evidence proving damages.
Qianwei FuZelle LLPwww.zelle.com
The Hon. Yvonne Gonzalez Rogers of the United States District Court for the Norther District of California ruled on March 16, 2006 that the sale of an operating business in the relevant industry may not be sufficient proof of an effective withdrawal from a price-fixing conspiracy. In re: Lithium Ion Batteries Antitrust Litig., No. 13-md-2420 YGR, 2016 WL 1054584 (N.D. Cal. Mar. 16, 2016).
The case stems from class allegations of a decade-long global conspiracy to fix prices of lithium ion battery (“LiB”) cells, the electrochemical units of a type of rechargeable batteries widely used in consumer electronics products. Toshiba, one of the alleged conspirators, moved for summary judgment, arguing that plaintiffs’ claims were time-barred because Toshiba ceased LiB cell manufacturing and sales by no later than 2004. Id. at *1.
Beginning in 2003, Toshiba started to consider exiting the industry by liquidating its LiB business and selling the assets of A&T Battery, the subsidiary that manufactured Toshiba’s LiB cells. Toshiba discussed selling its LiB business with multiple cell manufacturers in 2003 and 2004, including several alleged conspirators. On January 27, 2004, Toshiba’s management approved an asset transfer agreement with alleged coconspirator Sanyo for the sale of A&T Battery’s LiB cell manufacturing equipment. On the same day, Toshiba made a public announcement to the Tokyo Stock Exchange that it would “terminate its lithium-ion rechargeable battery business by December 2004.” Toshiba subsequently executed its agreement with Sanyo on July 22, 2004. It also sold certain remaining manufacturing equipment to a non-conspirator and discarded the rest. Id. at *1-2.
The dispute centered on whether Toshiba’s sale of its manufacturing business affirmatively demonstrated its withdrawal from the conspiracy. Toshiba contended that its exit from the LiB industry was clearly communicated to the world ─ including its customers, suppliers, and the alleged coconspirators ─ through direct communications and extensive media coverage. Plaintiffs argued that the acts that Toshiba continued to perform post-2004 were not consistent with a withdrawal from the conspiracy. Notably, Toshiba admittedly stored LiB cells it had manufactured before selling the business and used those cells to manufacture battery packs for use in certain finished products that were sold in Japan for nearly $1 million. In addition, Toshiba remained a member of the Battery Association of Japan, a trade association through which members allegedly exchanged competitive information. Toshiba also retained patents relating to LiB batteries, some of which may have been subject to cross-licensing agreements with certain alleged conspirators. Id. at *2.
The court acknowledged that a defendant’s exit from an industry that is involved in a conspiracy “may constitute effective withdrawal from the conspiracy where the defendant ’retired from the business, severed all ties to the business, and deprived the remaining conspirator group of the services which he provided to the conspiracy.’” However, the sale of an operating business does not automatically establish effective withdrawal. “There must be factual inquiries ─ again, with the burden of proof on the defendants ─ into such subjects as the defendants’ continued financial interest in the business that was sold, some continued participation, or some continued benefit from the alleged conspiracy.” Id. at *4 (citing Morton’s Mkt., Inc. v. Gustafson’s Dairy, Inc., 198 F.3d 823, 839 (11th Cir. 1999) and In re Cathode Ray Tube (CRT) Antitrust Litig., No. 07-5944 SC, 2010 WL 9543295 (N.D. Cal. Feb. 5, 2010)).
Based on evidence presented by the parties, the court found genuine disputes of material fact existed as to whether Toshiba continued to benefit from and participated in the alleged conspiracy. Id. at *4. The parties also contested whether Toshiba fraudulently concealed the conspiracy even with an effective 2004 withdrawal and whether Toshiba could be held liable for post-2004 conduct of alleged coconspirators. The court declined to reach these issues in light of its ruling on the withdrawal defense. Id. at *3.
Joyce ChangCotchett, Pitre & McCarthy, LLPwww.cpmlegal.com
On February 8, 2016, indirect purchaser plaintiffs (“IPPs”) won class status in In Re Optical Disk Drive Antitrust Litigation (Case No. 3:10-md-2143-RS, Dkt. 1783), a multidistrict litigation alleging a nationwide price-fixing conspiracy in the optical disk drive (“ODD”) industry between 2003 and 2008. In re Optical Disk Drive Antitrust Litig., 2016 U.S. Dist. LEXIS 15899 (N.D. Cal. Feb. 8, 2016) (“ODD Antitrust Litigation”). Northern District Judge Richard Seeborg denied IPPs’ motion seeking certification of a nationwide class, but granted the motion applying California’s Cartwright Act to indirect purchasers in 24 states.
ODDs, devices that allow data to be read from (and in some cases, written to) optical discs, have applications in a wide variety of consumer electronic devices and are available both as standalone units for purchase, as well as an incorporated device in other products. Familiar forms of optical disks include CDs, which typically contain music or computer software, and DVDs, which often contain movies or other video content. “In a broad sense, the technology [of optical discs] evolved generationally from CDs to DVDs to Blu-Ray Discs, each with the same progression moving from read-only, to recordable, and then to rewritable.” In re Optical Disk Drive Antitrust Litig., 2014 U.S. Dist. LEXIS 142678, *37 (N.D. Cal. 2014). During the putative class period, the prices of ODDs were generally marked by steep declines. IPPs’ theory is that Defendants were “highly motivated to attempt to slow, or at least stabilize, the inevitable decline in prices.” Id. at *36.
Both direct purchasers (“DPPs”) and IPPs had separately sought class certification in 2014. Judge Seeborg held then, however, that neither group had sufficiently addressed whether their experts had presented a viable methodology for establishing class-wide antitrust injury and damages as required by Comcast Corp. v. Behrend, 133 S.Ct. 1426 (2013). In re Optical Disk Drive Antitrust Litig., 2014 U.S. Dist. LEXIS 142678, *324 (N.D. Cal. 2014). Subsequent to that ruling, the DPPs reached settlement agreements with the remaining defendants. The IPPs entered into settlement agreements with certain defendants, and renewed their motion for class certification as to their remaining claims.
Further analysis from the IPPs’ economic expert, Dr. Kenneth Flamm carried the day on the renewed motion: “Dr. Flamm… has done additional work designed to eliminate any doubt that his methodologies are reliably designed to measure class-wide impact… [he] now offers a ‘more extensive’ cointegration analysis… a new ‘Granger casualty’ analysis… [and] has modified his overcharge regression model in four respects…”. ODD Litigation, 2016 U.S. Dist. LEXIS 15899 at *51-54. IPPs also presented “additional graphic evidence and argument to support their claim that prices paid by Dell and HP effectively served as a ‘floor,’ and that any artificial maintenance of the level of that floor would necessarily impact prices paid by other customers.” Id. at *54. IPPs also narrowed the class definition to exclude certain products from the litigation, as well as limiting the damages period they initially alleged. Id. at *43-44. In doing so, the IPPs contend, “and defendants do not particularly dispute, that the effect of these changes is to remove significant volumes of products to which defendants pointed in their prior motion as reflecting heterogeneity sufficient to defeat class certification.” Id. at *44. Plaintiffs also proposed a subclass consisting of purchasers of products from Dell and HP, the two computer manufacturers most directly affected by the alleged bid-rigging. Id.
Judge Seeborg ruled that the IPPs’ class of individuals who purchased devices containing ODDs had met California law requirements of class-wide injury and pass-through: Dr. Flamm “presented theories that explain why, in his view, class-wide impact would have existed, and he has offered means for testing the data to demonstrate that it did, and to calculate what he believes the overcharges were. Defendants will be free to show why they think Dr. Flamm is wrong, but for purposes of satisfying the requisites of Rule 23, the IPPs have now made an adequate showing of methodology for proving antitrust injury to all or nearly all direct purchasers, on a class-wide basis.” ODD Litigation, 2016 U.S. Dist. LEXISat *59.
Scope of the Class (Due Process and Choice of Law)IPPs sought certification of in the following order of preference: (1) a nationwide class under California law, (2) a class of plaintiffs from 23 states plus the District of Columbia, under California law, or(3) 24 separate classes, under the laws of each of the relevant jurisdictions.
ODD Litigation, 2016 U.S. Dist. LEXIS at *76-77. Since none of the remaining Defendants are based either in California or overseas, Judge Seeborg rejected Defendants’ contention that the application of California offended due process. Id. at *78.
In analyzing choice of law in this case, all parties agreed that the most significant difference in law among the various jurisdictions was whether a particular jurisdiction followed Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977) or was an “Illinois Brick repealer” state. In light of this “true conflict,” the Court needed to determine “which state’s interest would be more impaired if its policy were subordinated to the law of the other state.” See Mazza v. Am. Honda Motor Co., 666 F.3d 581, 589 (9th Cir. 2012). The IPPs argued that the conflict could be disregarded “because non-repealer states have no particular interest in precluding California from applying its laws to provide remedies to anyone injured by antitrust and unfair competition emanating from the state.” ODD Litigation, 2016 U.S. Dist. LEXIS at *79. Defendants contended that California law should not be applied even as to repealer states because “there still exist numerous differences between the California antitrust and unfair competition laws and those in many of the other 24 jurisdictions.” ODD Litigation, 2016 U.S. Dist. LEXIS at *79.
Judge Seeborg ruled that although a nationwide class under California law could not be certified because it would be “too much of a stretch to employ California law as an end run around the limitations those states have elected to impose on standing,” Id. However, he granted the motion as to IPPs in 24 states because, apart from the Illinois Brick conflict, “the potential differences identified between California and some of the other jurisdictions do not appear to stand as true conflicts, or as ones that should not yield to California’s interests.” Id. at *79-80.
Jason BusseyJonathan MincerSimpson Thacher www.stblaw.com
On January 29, 2016, the California Court of Appeal affirmed a ruling granting summary judgment to DirecTV, Inc. (“DirectTV”) in an antitrust lawsuit brought by Basic Your Best Buy, Inc. (“Basic”), one of DirecTV’s authorized retailers from 1996 to 2008. Basic Your Best Buy, Inc. v. DirecTV, Inc., No. B258061 (Cal. Ct. App. Jan. 29, 2016) (unpublished) (“Basic Your Best Buy”).
Basic specialized in advertising DirecTV’s satellite entertainment programming services through nationally distributed Yellow Pages telephone directories. Basic’s operators would attempt to convert into DirecTV subscribers consumers who called toll free numbers owned by Basic. DirecTV paid Basic a flat fee for each subscription thus generated. In March 2007, DirecTV prohibited all of its authorized dealers except Basic and another retailer, Direct Sat TV, from placing directory advertisements. Basic Your Best Buy, No. B258061 at 4.
In 2008, DirecTV notified Basic of its intent to terminate its relationship with Basic pursuant to the termination provision in the parties’ agreements. Basic thereafter spent $2.7 million on DirecTV ads to which it had committed before receiving the notice of termination. Basic expected those ads, as well as previously placed ads, to continue generating sales leads for some time because consumers often retain telephone directories for several years. Numerous DirecTV authorized dealers expressed an interest in buying these sales leads from Basic and two requested, but were denied, DirecTV’s approval to bid on the leads. Ultimately, no authorized dealers bid on Basic’s leads out of concern that, if they did, DirecTV would terminate them as authorized dealers. With no other prospective buyers, Basic was forced to sell the leads to DirecTV at what contended was a below-market price. Id. at 5.
In 2011, Basic sued DirecTV in Los Angeles Superior Court alleging a single cause of action for conspiracy to restrain trade in violation of the Cartwright Act. Basic’s theory was that by prohibiting other authorized dealers from bidding on Basic’s sales leads, DirecTV had monopsonistically restrained competition for such sales leads. As a result, DirecTV was able to purchase the leads for nearly $30 million less than their market value. Id. Altogether, Basic sought $83.7 million in trebled damages.
In 2014, DirecTV moved for summary judgment, arguing that it had not engaged in any restraint of trade. The trial court granted the motion, holding that even though DirecTV marketed its own services to consumers, it was not a horizontal competitor of Basic, so its agreements with other retailers prohibiting them from purchasing Basic’s leads did not constitute horizontal agreements. The court also found no vertical price-fixing agreement and, applying the rule of reason, insufficient evidence of a product market in which Basic allegedly suffered harm. Id. at 15.
The Court of Appeal affirmed the trial court’s grant of summary judgment on similar grounds. The court found that DirecTV was not a horizontal competitor of its alleged co-conspirators—the authorized resellers whom it had prohibited from bidding on Basic’s sales leads—but instead stood in a vertical relationship with them. The court then analyzed whether, despite the vertical relationship, the agreements between DirecTV and its authorized resellers could be considered horizontal restraints, specifically group boycotts, that constituted per se violations of the Cartwright Act.
In holding that the agreements were not horizontal restraints, the court focused on Bert G. Gianelli Distributing Co. v. Beck & Co., 172 Cal. App. 3d 1020 (Cal. Ct. App. 1985),which held that proving a per se illegal group boycott involving a vertical participant requires showing that the restraint was “conceived of and initiated by” the plaintiff’s horizontal competitors, who “used their economic power or position to influence the manufacturer to act, not for its own advantage, but solely for the advantage of those competitors.” Id. at 1042. Here, the Court of Appeal found, DirecTV had allegedly coerced its authorized resellers, rather than the other way around, so there was no per se illegal agreement. Basic Your Best Buy, No. B258061 at 12.
The Court of Appeal also relied on several federal court cases that do not require a showing that the alleged restraint be “conceived of and initiated by” horizontal competitors, but instead, focus on whether the purpose and effect of the alleged conspiracy is horizontal, such as to reduce price competition. See, e.g., Rossi v. Standard Roofing, Inc., 156 F.3d 452, 462 (3d Cir. 1998) (“a conspiracy is horizontal in nature when a number of competitor firms agree with each other and at least one of their common suppliers or manufacturers to eliminate their price-cutting competition”) (emphasis added). One federal case that Gianelli cited involved an agreement initiated, not by a horizontal competitor, but by a manufacturer: “[I]n this situation, . . . the pressure for the most part was exerted vertically [by the manufacturer].” Com-Tel, Inc. v. DuKane, Corp., 669 F.2d 404 (1982). The court in Com-Tel found a horizontal conspiracy, nonetheless, because the “the desired impact (of the restraint was) horizontal,” with the effect of reducing competition without promoting interbrand competition (the usual benefit of vertical restraints). Id. (internal quotation marks omitted). Had the Court of Appeal applied the rule from the federal cases it cited, it may have had a more difficult analysis. That is, by following the rule in Gianelli that an agreement is per se illegal only if it is initiated by horizontal competitors, the Court of Appeal avoided resolving whether, as Basic argued, the purpose and effect of the agreement was to reduce price competition for Basic’s sales leads.
In addition, the court found no horizontal agreement for an independent reason: there was no evidence of an agreement between DirecTV and any horizontal competitor of Basic. The court found that Basic had only one horizontal competitor: Direct Sat TV, the sole entity besides Basic that DirecTV had contractually allowed to utilize directory advertisements. Basic did not allege that Direct Sat TV sought to purchase Basic’s sales leads or that there was an agreement between DirecTV and Direct Sat TV not to do so. Basic Your Best Buy, No. B258061 at 14.As for other authorized resellers, arguably there was a coerced agreement between them and DirecTV, as evidenced by their decision not to bid for Basic’s sales leads after expressing an interest in doing so. But the Court of Appeal interpreted the contractual language between them and DirecTV to be dispositive in establishing that they did not compete horizontally with Basic. The contracts prohibited “utilizing” directory advertisements, which the court, citing Dictionary.com, interpreted as including turning those advertisements “to profitable account.” Accordingly, the court held, these resellers were barred not only from placing directory advertisements, but also from receiving calls generated by such advertisements. Id.
Finally, the Court of Appeal found no triable issue under the rule of reason as to whether there was a vertical restraint of trade. The court explained that Basic had failed to meet the threshold requirement of delineating a relevant market in which it had allegedly suffered harm. Basic had attempted to limit the relevant market to DirecTV sales leads, but its economic expert failed to explain why the relevant market should be limited to a single brand of leads. “There is no analysis to show why DirecTV sales leads are not part of the larger market for cable and satellite sales leads, or entertainment sales leads, or sales leads generally.” Id. at 18. The court ruled that the case was unlike Eastman Kodak Co. v. Image Technical Services, Inc., where the Supreme Court found a relevant market limited to a single brand because customers were locked into using Kodak’s unique replacement parts before Kodak squeezed out independent service providers and began charging higher prices to service parts itself. 504 U.S. 451 (1992). Here, Basic was well aware going into the relationship with DirecTV that DirecTV could control what advertising channels it used and could terminate the relationship for any or no cause. Without providing a cognizable relevant market definition, the court concluded, Basic could not show a vertical restraint. Basic Your Best Buy, No. B258061 at 15.
Basic’s theory represents an attempt to expand the scope of horizontal agreements under the Cartwright Act to include a manufacturer that nominally participates in the same downstream market as the plaintiff. Given federal courts’ rejection of similar arguments, it is unsurprising that both the trial court and Court of Appeal did so here, especially given that California law, as outlined in Gianelli, appears to set a higher bar for establishing manufacturer-distributor group boycotts than do some federal cases.
Lee F. BergerNina GuptaPaul Hastings LLPwww.paulhastings.com
In a decision railing against the anticompetitive effects of overly litigious competitors, the Fourth Circuit emphasized economic realities in affirming summary judgment in favor of a national concert promoter over a regional rival, dismissing monopolization and tying claims. It’s My Party, Inc. v. Live Nation, Inc., 2016 U.S. App. LEXIS 1882 (4th Cir. 2016) (“My Party”).
Plaintiff It’s My Party (“My Party”) and defendant Live Nation are competitors in the live music industry: both promote concerts and operate outdoor amphitheaters. While My Party is a regional player, promoting concerts and working with venues in the Washington, DC, and Baltimore area, Live Nation provides services to artists throughout the United States and has exclusive booking rights at venues across the country. My Party claimed that Live Nation’s conduct foreclosed competition in the concert promotion and venue markets: the market for promoting concerts and the market for concert venues. In both markets, the relevant consumers are performing artists. My Party, 2016 U.S. App. LEXIS, at *6.
The Fourth Circuit first rejected My Party’s monopolization claims by disagreeing with My Party’s market definitions. First, My Party characterized the concert promotion market as national. But the Fourth Circuit explained that the relevant geographic market is the area where the defendant’s customers could turn to alternative suppliers if the defendant raised its prices: here, the area where artists can find alternative promoters if Live Nation raises its prices. Applying this definition, the Fourth Circuit found that promoting shows is localized. An artist performing in Baltimore is unlikely to switch to a promoter based elsewhere, even if the Baltimore promoter charges more. Notably, Live Nation, a national promoter, focuses on local advertising and promotes concerts through regional offices. Id. at *8.
Second, My Party characterized the concert venue market as including major amphitheaters only. Noting that only two venues in the entire Washington-Baltimore area meet this specification, the court said that My Party’s approach is “akin to defining a market to include tennis players who have won more than three Olympic gold medals and finding that only Venus and Serena Williams fit the bill.” Id. at *9. The test for determining whether a product commands a distinct market depends on whether it is “reasonably interchangeable.” Id. at *10. The record contained no evidence demonstrating that amphitheaters comprise their own market and that artists who prefer amphitheaters would not turn to a lower-priced substitute. Id.
Moving to My Party’s tying claims, the court rejected My Party’s arguments that artists who hire Live Nation for their promotion services are compelled to perform at Live Nation’s venue. Instead, the Fourth Circuit found that artists were free to turn down the venue, even if they hired Live Nation for promotion services. The court similarly denied My Party’s second tying claim: that Live Nation only gives artists access to its amphitheaters in other locations if they choose Live Nation’s amphitheater for their Washington-Baltimore concert. The record showed that about one fourth of customers performed at Live Nation amphitheaters in other locations but chose My Party’s venue for their Washington-Baltimore concert.
The panel deferred to the free marketplace and chastised the plaintiff for ignoring “market realities.” Id. at *12. The court took issue with My Party’s market definitions, stating that they were “plainly designed to bolster [My Party’s] monopolization and tying claims by artificially exaggerating [Live Nation’s] market power and shrinking the scope of artists’ choices.” Id. at *6. The panel said My Party’s market definitions “are blind to the basic economics of concert promotion.” Id. at 7.
The Court of Appeals also warned against the anticompetitive consequences that can result from antitrust lawsuits. Lawsuits between competitors, especially, can lead to “an environment of commercial parochialism.” Id. at *33. The panel emphasized that in our increasingly interconnected world, it often makes sense to offer consumers bundled packages, like concert promotion services and a concert venue. If My Party’s view of economic activity took hold, the court warned that the loser would be the consumer, “left with a patchwork of localized monopolies and one-product wonders flourishing at the expense of larger and more diverse competitors.” Id. Rejecting judicial intervention in the free market, the Fourth Circuit ended the opinion with a strong, pro-free-market flourish: “To help prevent antitrust law from being hijacked for such anticompetitive ends, we join the district court in sending this tussle between two rivals back to the marketplace from whence it came.” Id. at *34.
Scott LyonSedgwick LLPwww.sedgwicklaw.com
In In the Matter of LabMD Inc., Docket No. 9357, the Federal Trade Commission’s (“FTC”) unfair data security practices case against LabMD, a clinical testing laboratory, was dismissed by FTC Chief Administrative Law Judge D. Michael Chappell for failing to meet its burden of proving that the healthcare provider’s allegedly deficient security practices caused, or were likely to cause, substantial consumer injury.
LabMD’s primary business consisted of providing tissue sample analysis by pathologists specializing in prostate or bladder cancer. Urologists sent LabMD specimens for analysis from patients throughout the country, by which LabMD came into the possession of protected health information (“PHI”) belonging to thousands of patients.
In February 2008, Tiversa, a security firm based in Philadelphia, Pennsylvania, discovered that a LabMD insurance report was being shared openly by a LabMD billing computer on the Limewire peer-to-peer network when an employee downloaded it along with other personal files. The report (referred to in the matter as the “1718 File”) was found to contain PHI and personally identifiable information (“PII”) of approximately 9,300 patients, including their names, dates of birth, Social Security numbers, codes for laboratory tests conducted, and, in some cases, health insurance company names, addresses, and policy numbers. After discovering that the 1718 File contained patient PHI, Tiversa used the “browse host” function of LimeWire to obtain a list of all other files being shared on the LabMD billing computer. The 1718 File was among 950 other shared files in the “My Documents” directory on the LabMD computer, most of which consisted of music and video files. However, eighteen documents were also being shared at the same time, three of which also contained patient PHI.
Tiversa contacted LabMD in May 2008, disclosed its download of the 1718 File, and offered its remediation services. In July 2008, LabMD rejected Tiversa’s proposal and proceeded to remove the file-sharing software and re-assess its network’s security (although the FTC later claimed that its remediation efforts were also insufficient). In 2009, the FTC served a Civil Investigative Demand on Tiversa’s affiliate, The Privacy Institute. Tiversa responded by producing a spreadsheet of companies which, according to Tiversa, had exposed the personal information of 100 or more individuals. Among the names provided to the FTC was LabMD, together with a copy of the 1718 File. This disclosure led the FTC to open an investigation of LabMD, which ultimately resulted in the action against it for failing to implement reasonable security, an alleged unfair practice.
It is at this point that the parties’ allegations (and consequently Judge Chappell’s Initial Decision) become mired in conspiracy theories. After the FTC began its action against LabMD, the Tiversa forensics analyst who originally found the 1718 File alleged that Tiversa had adopted a business practice of investigating companies on its own initiative in order to identify data security issues. Once a data security vulnerability was identified, the Tiversa analyst claimed that the company would exaggerate how widely erroneously shared files had spread across peer-to-peer networks and then offer its services to cure the purported security issue. There were also allegations that in some cases Tiversa would intentionally misrepresent that files had been discovered at IP addresses associated with known or suspected identity thieves. Tiversa countered that the analyst’s claims were false and motivated by his termination for cause from Tiversa during the pendency of the case against LabMD. Nevertheless, the accusations resulted in a United States House Oversight and Government Affairs Committee investigation into Tiversa and its involvement with governmental entities.
Judge Chappell’s Initial Decision addressed the allegations against Tiversa in great detail, ultimately concluding that the Tiversa analyst (a witness for LabMD) was more credible than the CEO of Tiversa, who was a witness for the FTC. This finding had a profound effect on the outcome of the case, with Judge Chappell wholly discounting the testimony of one of the FTC’s consumer injury experts, reasoning that the expert’s conclusions were based in part on the testimony of Tiversa’s CEO. Judge Chappell also challenged the expert opinions of the FTC’s other consumer injury expert, stating that although he “did not expressly rely on the discredited and unreliable testimony from [Tiversa’s CEO] as to the ‘spread’ of the 1718 File for his opinions on the likelihood of medical identity theft, this evidence was clearly considered … and it cannot be assumed that [the] opinions were not influenced by his review of [the CEO’s] testimony.” Initial Decision, p. 67, footnote 31.
There was also a potential red herring injected into the case, consisting of 40 LabMD paper “day sheets,” 9 patient checks, and 1 money order discovered in the possession of identity thieves in Sacramento, California in 2012. This resulted in a dispute over how the records had travelled from Georgia to California, with the FTC claiming that they must have been downloaded from LabMD’s insecure network, but lacking evidence to prove this theory. Somewhat lost in this swirl of accusations was the crux of the case: that LabMD had (inadvertently but apparently undisputedly) openly shared a file containing PHI of approximately 9,300 patients on an open peer-to-peer network, which the FTC alleged was an unfair practice.
The FTC’s authority relating to data security derives from Section 5(n) of the Federal Trade Commission Act (“FTC Act”), which states that the Commission may declare any act or practice “unfair” 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.” (emphasis added.) The FTC’s complaint alleged that LabMD failed to provide reasonable security because the healthcare provider:
(a) did not develop, implement, or maintain a comprehensive information security program to protect consumers’ personal information;(b) did not use readily available measures to identify commonly known or reasonably foreseeable security risks and vulnerabilities on its networks;(c) did not use adequate measures to prevent employees from accessing personal information not needed to perform their jobs;(d) did not adequately train employees to safeguard personal information;(e) did not require employees, or other users with remote access to the networks, to use common authentication-related security measures;(f) did not maintain and update operating systems of computers and other devices on its networks; and(g) did not employ readily available measures to prevent or detect unauthorized access to personal information on its computer networks.
Judge Chappell began his analysis by citing Congressional reports for the proposition that Section 5(n) of the FTC Act was intended to limit the scope of the FTC’s authority. However, rather than evaluating whether LabMD’s security was unreasonable as alleged, the Initial Decision instead focused solely on the issue of whether “substantial consumer injury” was at stake and accordingly, whether the FTC had jurisdiction over the issue. The decision (a) rejects the FTC’s attempts to support likelihood of harm through surveys of the effect of disclosures of PHI and PII and (b) discounts the potential harm of disclosing patient CPT (current procedural terminology) codes by noting that identity thieves would need to look up the codes on Google or the American Medical Association’s website in order to learn what tests had been performed on specific patients. Instead, the decision goes to great lengths to attack the credibility of the FTC’s claims and evidence, largely by attacking Tiversa and its CEO as the FTC’s proxy.
Although the FTC had presented consumer injury expert witness testimony and survey data to demonstrate that the disclosure of consumer PHI/PII could result in various forms of identity fraud and other harms to consumers, Judge Chappell determined that “the absence of any evidence that any consumer has suffered harm as a result of [LabMD]’s alleged unreasonable data security, even after the passage of many years, undermines the persuasiveness of [the FTC]’s claim that such harm is nevertheless ‘likely’ to occur.” Initial Decision, p. 52. Ultimately, he found persuasive that, because actual harm had not yet resulted from the allegedly unreasonable security practices over the passage of several years, the practices were not “likely” to cause substantial consumer harm. Endorsing a narrow view, supported by the unusual circumstances of the case, Judge Chappell ruled that the “substantial consumer injury” required by Section 5(n) could not be satisfied by “hypothetical” or “theoretical” harm or “where the claim is predicated on expert opinion that essentially only theorizes how consumer harm could occur,” and concluded: “Fairness dictates that reality must trump speculation based on mere opinion.” Id. , p. 52, 64.
THE UNLOCKED VAULT
There is no dispute that a LabMD employee placed a file containing PHI of approximately 9,300 patients in a publicly-shared folder on a billing computer. Anyone with LimeWire or any other Gnutella-based peer-to-peer filesharing software (which was freely available in 2008) could have downloaded any of the 950 files being shared by the LabMD billing computer, including the four containing PHI. From a credential authentication perspective, this is the equivalent of making these confidential files available for download on a public website, without any requirement for a username or password in order to obtain access. It is widely accepted, both in state and federal law, that the types of PHI/PII contained in the 1718 File should not be made publicly available in such a manner, particularly by a healthcare provider subject to HIPPA/HI-TECH’s Security Rule.
The Initial Decision’s analysis focuses solely on whether there was an actual or probable injury after-the-fact based on this specific incident (i.e., the 1718 File being downloaded by a security researcher such as Tiversa), instead of whether the practice itself (i.e., openly sharing a file containing PHI on 9,300 patients on an open peer-to-peer network which could have been downloaded by anyone) caused or was likely to cause substantial consumer injury. Actual or imminent injury is a requirement for standing in civil litigation, but the likelihood of substantial consumer harm is the proper standard for evaluating the FTC’s regulatory authority. In LabMD’s case, there were windfall events that saved the company from a much more disastrous result: (1) the 1718 File was found (so far as currently known) only by Tiversa and not identity thieves, and (2) Tiversa notified LabMD of the exposure shortly after its discovery, which was quickly corrected.
Consider what would have happened if the 1718 File had instead been discovered by an identity thief rather than Tiversa – the outcome would have been different (and likely much worse) for reasons totally unrelated to the security practice itself (i.e., the practice of openly sharing PHI had little or no effect on who actually discovered the file). To evaluate the reasonableness of LabMD’s practices in the first instance based on subsequent circumstances over which it had no control (i.e., the identity of the discoverer) judges the wrongfulness of the act solely by its accidental consequences – effectively, a “no harm, no foul” rule. The effect of the LabMD decision may actually be rather narrow, as it is based on specific and unusual circumstances limiting the likelihood of harm. Other situations with a similar data security issue could well have a different result. Thus, in considering the decision and its likely effect on other matters, the “reasonable security” aspect of the required analysis should be taken into consideration.
The Initial Decision states that “to base unfair conduct liability upon proof of unreasonable data security alone would, on the evidence presented in this case, effectively expand liability to cases involving generalized or theoretical ‘risks’ of future injury, in clear contravention of Congress’ intent, in enacting Section 5(n), to limit liability for unfair conduct to cases of actual or ‘likely’ substantial consumer injury.” Initial Decision, p. 89. The Initial Decision attempts to graft the requirement of actual or imminent harm required in civil litigation onto the scope of the FTC’s authority. This disregards the statute’s inclusion of the terms “likely” and “risk,” which both relate to the possibility or probability that an event may occur. The key issue relating to FTC authority is whether it includes the authority to pre-emptively address unfair trade practices before innocent consumers are harmed, rather than wait until there is actual harm.
LabMD’s storage of the 1718 File in a shared folder on a peer-to-peer network could be analogized to leaving the doors and vault of a bank unlocked when no one was inside – the critical question is whether such an act (or practice) is likely to cause substantial consumer injury. Should the answer be dependent upon whether any money was actually stolen during the months it was left unlocked? Or should it be focused on the existence of the practice itself – that is, leaving the protected assets inside vulnerable so that the only determinative factor between a potential and an actual theft is whether the wrong person checks whether the doors are locked? Does the fact that a thief did not test the doors during that period absolve the bank of otherwise reckless behavior?
By focusing solely on the harm prong, and not addressing the issue of reasonable security, the Initial Decision sidestepped an opportunity to evaluate the issue of what constitutes reasonable security and what puts protected information unreasonably at risk. If the goal is regulation of practices likely to result in harm before the harm occurs, perhaps the focus should be on the conditions existing during the period that the bank was left unlocked (or the practice existed) and, based on those conditions, evaluate whether the practice was reasonable. In the case of data security, the analysis generally includes the type of information that was exposed (i.e., PHI/PII v. public information), how that type of information could be used to harm consumers (i.e.. susceptibility to abuse by identity thieves, extortionists, or others), what measures were taken to safeguard the information from exposure (i.e., was it a complex “hack” of a computer network involving exploitation of zero-day vulnerabilities versus downloading a file from a publicly-available website with no access controls), and what security measures are reasonable under the circumstances (in terms of time, cost, manpower, and other factors). These are among the factors identified by the FTC’s expert but which the Initial Decision declined to consider because of the taint of Tiversa’s involvement. This approach avoided the reasonableness analysis, which is likely to be a factor in future cases without such salacious conspiracy theories.
Complaint Counsel has filed an appeal of the Initial Decision. While the Third Circuit’s opinion in FTC v. Wyndham Worldwide Corp. previously recognized the FTC’s authority to actively challenge deficient cybersecurity practices without first announcing the standards to be implemented, that case involved multiple breaches and actual consequential harm to the customers whose personal information was exposed. At stake now is whether federal courts will similarly scrutinize the scope of the FTC’s authority to pre-emptively challenge deficient security practices without proof of actual consumer harm. An adoption of Judge Chappell’s analysis would substantially limit the FTC in this area to intervene only after consumers are demonstrably injured or such injury is deemed imminent. Unless reversed, the LabMD Initial Decision also could create a perception of the FTC’s vulnerability on the issue of its own authority and lead other companies accused of deficient security practices to challenge the regulatory agency with greater chance for success than before this decision.
By Lori ChangGreenberg Traurig, LLP www.gtlaw.com
The Telephone Consumer Protection Act (“TCPA”) prohibits any person or company from using an “automatic telephone dialing system” to make a call or send a text message for a non-emergency purpose to a mobile number without the recipient’s prior express consent. 47 U.S.C. § 227(b)(1). A person who received such a call in violation of the TCPA may bring a cause of action to recover actual monetary loss or $500 in statutory damages for each violation; if it is found that a defendant willfully or knowingly violated the TCPA, damages may be trebled. Id. § 227(b)(3).
In Campbell-Ewald Co. v. Gomez, 577 U.S. ___ (2016), the plaintiff-respondent Jose Gomez brought a putative class action suit under the TCPA arising out of a single, and allegedly unsolicited, text message sent by the defendant-petitioner Campbell-Ewald Company (“Campbell”), a national marketing agency engaged by the U.S. Navy to develop and implement a recruiting campaign. Mr. Gomez’s maximum recovery against Campbell was $1,500.
Campbell sought to end the dispute by offering Mr. Gomez full relief on his individual claim. Prior to the plaintiff’s deadline to file a motion for class certification, Campbell made an offer of judgment pursuant to Fed. R. Civ. P. 68 to pay Mr. Gomez $1,503 for each alleged text message (subject to proof), his costs (excluding attorneys’ fees, which are not recoverable under the statute), and a proposed stipulated injunction in which Campbell denied liability and agreed it would not send text messages in violation of the TCPA. Mr. Gomez did not accept the offer.
After the Rule 68 offer had lapsed, Campbell moved to dismiss the case for lack of subject matter jurisdiction, arguing that its offer mooted Mr. Gomez’s individual claim by providing complete relief, and therefore, no Article III case or controversy remained. The district court denied the motion, but subsequently granted Campbell summary judgment on other grounds. On appeal, the Ninth Circuit held that “an unaccepted Rule 68 offer of judgment—for the full amount of the named plaintiff’s individual claim and made before the named plaintiff files a motion for class certification—does not moot a class action.” 768 F.3d 871, 875 (9th Cir. 2011).
The United States Supreme Court affirmed, holding that a defendant’s unaccepted Rule 68 offer of judgment “has no force” and “does not moot a plaintiff’s case.” Campbell-Ewald Co. v. Gomez, 577 U.S.___. In adopting Justice Kagan’s dissenting opinion in Genesis HealthCare Corp. v. Symczyk, 569 U.S.__ (2013)—stating that an unaccepted offer of judgment, “like any unaccepted contract offer,” is “a legal nullity”—Justice Ginsburg, writing for the 6-3 majority, explained the Court’s holding was based on “basic principles of contract law,” as follows:
Absent Gomez’s acceptance, Campbell’s settlement offer remained only a proposal, binding neither Campbell nor Gomez. [Citations omitted.] Having rejected Campbell’s settlement bid, and given Campbell’s continuing denial of liability, Gomez gained no entitlement to the relief Campbell previously offered. . . . In short, with no settlement offer still operative, the parties remained adverse; both retained the same stake in the litigation they had at the outset.
The majority opinion rejected Campbell’s reliance on 19th-century railroad tax cases in which the defendants were deemed to have “extinguished” tax claims brought against them by offering to pay the taxes owed and having actually deposited the full amount in a bank in the state’s name. Those cases also rested on California substantive law requiring the state to accept a taxpayer’s full payment—unlike here, where Mr. Gomez was free to reject Campbell’s offer. Accordingly, in the majority’s view, “when the settlement offer Campbell extended to Gomez expired, Gomez remained empty-handed; his TCPA complaint, which Campbell opposed on the merits, stood wholly unsatisfied”; and “[b]ecause Gomez’s individual claim was not made moot by the expired settlement offer, that claim would retain vitality during the time involved in determining whether the case could proceed on behalf of a class.”
Justice Thomas concurred in the judgment only, concluding that “common-law history of tenders,” and not “modern contract law principles,” supported ruling that Campbell’s “mere offers did not deprive the District Court of jurisdiction.”
Chief Justice Roberts in his dissent, joined by Justices Scalia and Alito, viewed the issue as “not whether there is a contract; it is whether there is a case or controversy under Article III,” and “[i]f the defendant is willing to give the plaintiff everything he asks for, there is no case or controversy to adjudicate, and the lawsuit is moot.”
According to the dissent, “[t]his case is straightforward”: “Based on Gomez’s allegations, the maximum that he could recover under the [TCPA] is $1500 per text message, plus the costs of filing suit. Campbell has offered to pay Gomez that amount, but it turns out he wants more. He wants a federal court to say he is right.” The Chief Justice wrote further that “[t]he problem for Gomez is that the federal courts exist to resolve real disputes, not to rule on a plaintiff’s entitlement to relief already there for the taking.”
Also finding support in history, Chief Justice Roberts reasoned that Mr. Gomez could no more ask the district court to “say he is right,” than President George Washington could ask the Supreme Court in 1793 for an advisory opinion on the rights and obligations of the United States with respect to the war between Great Britain and France, in which the Court “politely—but firmly—refused the request.”
On this issue, the dissent concluded that “this case is limited to its facts,” where “[t]he majority holds that an offer of complete relief is insufficient to moot a case,” but “does not say that payment of complete relief leads to the same result.” Indeed, the majority made clear that its decision left open the issue of “whether the result would be different if a defendant deposits the full amount of the plaintiff’s individual claim in an account payable to the plaintiff, and the court then enters judgment for the plaintiff in that amount.”
But while both the majority and dissenting opinions suggest that the case may have been decided differently if Campbell’s offer was accompanied by actual payment, the real issue may have been best summed up by the majority’s determination that “a would-be class representative with a live claim of her own must be accorded a fair opportunity to show that certification is warranted.” As Justice Ginsburg observed, by offering to settle Mr. Gomez’s individual claim, “Campbell sought to avoid a potential adverse decision, one that could expose it to damages a thousand-fold larger than the bid Gomez declined to accept.” Clearly, what was at stake was not the $1,500 or simply a matter of having a federal court rule that Mr. Gomez “is right.”
By Joyce M. Chang, Cotchett, Pitre & McCarthy, LLPwww.cpmlegal.com
California consumers can now challenge whether a farm falsely labeled its herbs as "organic." The California Supreme Court unanimously held in Quesada v. Herb Thyme Farms, Inc. that a state law claim alleging that produce is being intentionally mislabeled as organic is not preempted by federal law regulating organic produce, overturning an appellate court's ruling to the contrary.Quesada v. Herb Thyme Farms, Inc., 62 Cal.4th 298 (2015).
Plaintiff Michelle Quesada ("Quesada") purchased Defendant Herb Thyme's ("Herb Thyme") herbs at a premium under the belief that they were 100 percent organically grown. Herb Thyme’s herbs – both conventionally grown and organically grown – were blended in packages bearing the "Fresh Organic" label. In fact, some Herb Thyme packages labeled as organic contained herbs that were entirely conventionally grown. Plaintiff Quesada's lawsuit challenged as false advertising and unfair competition this practice of selling conventionally grown herbs under an organic label.
While both lower courts found for Herb Thyme, the California Supreme Court disagreed that consumer actions such as Quesada's was preempted either expressly or impliedly by the Organic Foods Act (7 U.S.C. § 6501 et seq.) (the "Act"). Rather, "[w]hen Congress entered the field in 1990, it confined the areas of state law expressly preempted to matters related to certifying production as organic, leaving untouched enforcement against abuse of the label 'organic.'" 62 Cal.4th at 303. Furthermore, one of Congress' "central purpose[s] behind adopting a clear national definition of organic production was to permit consumers to rely on organic labels and curtail fraud." Id. Allowing "prosecution of such fraud… can only serve to deter mislabeling and enhance consumer confidence." Id. at 317. Therefore, state lawsuits such as Quesada's alleging intentional organic mislabeling actually promote and advance, rather than hinder or impair, Congress's purposes and objectives. Id. at 323.
Practitioners expect to see an increase of state law consumer class actions challenging California growers' and sellers' use of the organic label, particularly when the product at issue contains a mixture of conventionally grown produce and organically grown produce.
By Michael L. Spafford, Lee F. Berger and Matthew T. Crossman, Paul Hastings LLPwww.paulhastings.com
On September 9, 2015, Deputy Attorney General Sally Quillian Yates issued to all Department of Justice (“DOJ”) attorneys a memorandum (“Yates Memo”) concerning the department’s handling of corporate investigations and which included an increased focus on individual misconduct and a corresponding decrease in opportunities for individual immunity resulting from corporate resolutions. This material development likely will have a significant impact on the ability of corporations and counsel to ensure that executives fully cooperate in internal investigations.
The Yates Memo also raises a key question for antitrust practitioners: in a world where the government is intent on prosecuting individuals involved in corporate misconduct, does the Antitrust Division’s Leniency Program survive in its current form?
The Yates Memo
In the wake of the financial crisis leading to the "Great Recession" and driven by the DOJ’s failure to prosecute Wall Street executives, many of whom were protected in agreements with their employers, the Yates Memo outlines six key policies seeking to hold individuals accountable in corporate wrongdoing: (i) corporations receive cooperation credit only if the company discloses “all relevant facts about individual misconduct” no matter their position or seniority within the company; (ii) investigations should focus on the individuals involved from the outset of the investigation; (iii) criminal and civil DOJ attorneys should closely coordinate their efforts; (iv) except in “extraordinary circumstances” or through “approved departmental policy,” corporate resolutions will not provide immunity to individuals; (v) DOJ attorneys should have a “clear plan” with regard to investigations of culpable individuals when corporate resolutions are reached; and (vi) for civil investigations, the decision to pursue an individual should be based on a number of factors, including the seriousness of the conduct, whether the misconduct is actionable, and deterrence, rather than solely their ability to pay.
These objectives illustrate a new way forward in the DOJ's pursuit of individual wrongdoing in the corporate context. As a result, companies and counsel must now consider the serious implications of the Yates Memo on the incentives for self-reporting and cooperation.
DOJ Antitrust Division Leniency Program
The modern DOJ Antitrust Leniency Program, introduced in 1978 and significantly revised via amendments in 1993 (Corporate Leniency Policy) and 1994 (Individual Leniency Policy), is a powerful and highly valued tool for DOJ prosecutors pursuing corporate wrongdoing in the antitrust arena. In the words of the DOJ, the Leniency Program is undeniably the “most important investigative tool for detecting cartel activity.” Under the Leniency Program, also known as the amnesty program, a corporation that is first to self-report cartel activity to the Antitrust Division is granted full amnesty from criminal prosecution provided that (i) the Division had not received information about the illegal activity from another source; (ii) the company promptly and effectively terminated its participation; (iii) the company reports the wrongdoing with candor and completeness, and fully cooperates in the DOJ’s investigation; (iv) the confession is a corporate act, as opposed to that of individual executives or officials; (v) where possible, the corporation makes restitution; and (vi) the company did not originate or lead the activity, or coerce others to participate.
Importantly, the grant of full amnesty extends not only to the corporation, but also to all officers, directors, and employees who admit their involvement as part of the corporate disclosure.
While the formal Leniency Program applies only to the first-in conspirator, subsequent cooperating conspirators in practice typically receive greater cooperation credit and employee immunity based on the order in which the corporations self-disclosed their conduct to the DOJ. Before the Yates Memo, the practice had been for each cooperating corporation to enter a plea agreement granting immunity to all officers and employees except for 2-8 individuals, who are “carved out” of the plea agreement and could be subject to prosecution. In most cases, only a portion of the carved-out individuals were ultimately prosecuted.
The Yates Memo May Undermine Antitrust Division Investigations
While the Yates Memo is unlikely to have much effect on the formal application of the Antitrust Division’s Leniency Program, there may be more substantial effects for cooperating conspirators who are not the first to self-report.
The Yates Memo expressly carves out the Corporate Leniency Policy as an “approved departmental policy” from the requirement that DOJ prosecutors “should not agree to a corporate resolution that includes an agreement to dismiss charges against, or provide immunity for, individual officers and employees.” Moreover, one of the primary policy objectives of the Yates Memo – requiring full and complete disclosure of all relevant facts about individuals involved in corporate misconduct – is already built in to the existing Leniency Program framework. Thus, the fundamental objectives of the Yates Memo and the Leniency Program are largely consonant and companies who qualify for amnesty should anticipate no significant changes despite the DOJ’s significant shift in priorities.
The real impact of the Yates Memo in the antitrust arena is instead likely to be felt by companies that – either by not being first in line or not meeting the required criteria – are not eligible for full amnesty. Those companies seeking to negotiate plea agreements with the government may encounter a decidedly new and untested bargaining landscape.
At a fundamental level, the Leniency Program functions because the incentives for cooperating outweigh the punitive effects of non-cooperation. Under the pre-Yates Memo practice, the carve outs and cooperation credit offered to the “second in line” were more favorable, in most cases, than those offered to subsequent cartel participants seeking leniency. Although the fourth or fifth member of the cartel likely faced stiffer penalties, there remained a significant incentive to seek out cooperation credit. But the Yates Memo’s policy barring any individual immunity in plea agreements absent “extraordinary circumstances” or “approved departmental policy,” threatens to foreclose this practice, since the Leniency Program on its face only applies to the first-in conspirator.
The Yates Memo also suggests that the “extraordinary circumstances” exception will be interpreted narrowly by requiring the approval of the Assistant Attorney General for its application. Thus, under a straight-forward interpretation of the Yates Memo, very few antitrust plea agreements, if any, will include immunity for officers or employees. Unfortunately, by reducing the incentives to cooperate, the Yates Memorandum may have the effect of discouraging corporate cooperation from non-amnesty conspirators, especially foreign companies who may place a high value on protection of their officers and employees.
The implementation of the Antitrust Division’s leniency practices have been effective and has resulted in the prosecution of many individuals. It would seem unwise to upset this proven approach by a rigid application of the Yates Memo’s policies. Given the Antitrust Division’s established track record, the Assistant Attorney General may readily agree to Antitrust Division attorneys’ requests for exceptions to the Yates Memo’s ban on employee immunity. But it remains to be seen how this ban will be implemented and what additional hurdles will be required before any exceptions to the Yates Memo will be granted.
The potential disincentive to cooperate also may change the calculation for officers and employees considering whether to cooperate fully in internal investigations. Effective and robust internal investigations rely heavily on the full participation and cooperation of key individuals who witnessed or were potentially involved in the problematic conduct. This cooperation historically has been secured in part through the potential immunity offered through the Leniency Program and plea agreements (with individual counsel for the most culpable individuals typically obtained at some point in the process). If the Yates Memo signals a new approach towards holding individuals more accountable for corporate wrongdoing and creates uncertainty as to whether they can be protected by a corporate plea agreement, employees may be more hesitant to participate in internal investigations out of fear of implicating themselves, or their co-workers, and the resulting prosecutions. Companies also may have to be increasingly sensitive to the manner in which they conduct internal reviews, including ensuring highly rigorous Upjohn advisements that provide sufficient notice and opportunity for potentially implicated employees to obtain independent legal counsel earlier in the process. These challenges may undermine the overall effectiveness and timeliness of internal investigations, thus limiting the quality and completeness of any disclosures ultimately made the DOJ.
While it remains to be seen how the Yates Memo will be implemented, its focus on pursuing individuals involved in corporate wrongdoing could undermine the effectiveness of the Division’s antitrust investigations by forcing a realignment of the incentives for cooperation by companies and individuals not eligible for amnesty under the Antitrust Division’s amnesty program.